BUSINESS

STUDIES

~ CA DIPESH ARORA

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CONTENTS
1. NATURE AND SIGNIFICANCE OF MANAGEMENT

2. PRINCIPLES OF MANAGEMENT

3. BUSINESS ENVIRONMNET

4. PLANNING

5. ORGANIZING

6. STAFFING

7. DIRECTING

8. CONTROLLING

9. FINANCIAL MANAGEMENT

10. FINANCIAL MARKETS

11. MARKETING MANAGEMENT

12. CONSUMER PROTECTION

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 CHAPTER -1

NATURE AND SIGNIFICANCE OF MANAGEMENT

Meaning

Management can be defined as a process of getting things done with the aim of achieving goals
effectively and efficiently.

 Process: It means the primary functions or activities that management performs to get things
done. These functions are planning, organizing, staffing, directing and controlling.
 Effectiveness: effectiveness is concerned with right task, completing activities and achieving
goals. It aims at end results.
 Efficiency: It means doing the task correctly with minimum cost, by using less resource like
money, materials, equipment and people.

Basis Efficiency Effectiveness

Meaning It means doing the task correctly with It means achieving the predetermined goals
minimum cost. on time.
Purpose Minimum waste Achieve target on time
Focus Means Ends

Characteristics of management

1. Goal oriented process

The primary aim of management is to achieve the organizational goal. These goals may be economic or
social. Management integrates the efforts of different individuals in the organization towards achieving
these goals. The success of organization is measured by extent to which the established goals are
achieved.

2. All pervasive

Management is universally applied in all types of organizations whether economic, political or social.
The utilization of management is not restricted to only profit-making firms but also applicable in non-
profit making organizations like NGO’s, charitable trusts, government hospitals, orphanage’s etc.
moreover, our house need to be managed properly.

3. Multidimensional

Management is a complex activity which has three main dimensions. These are:

 Management of work: All organizations exist to perform some task or work. Management
translates the work in terms of goals to be achieved and assigns the means to achieve these
goals. Management makes sure that the work is being carried out effectively and efficiently.

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  Management of people: Human resources or people are the most valuable asset of an
organization. With the help of efficient employees an organization can compete with others
because two organizations have same technological and physical resources but not human
resources due to the fact that most of the employees consider different types of mind and
thinking.
 Management of operations: In order to survive and grow each organization has to provide goods
or services. This requires a production in which inputs are converted in to desired output.
Operations are the activities of production processes like buying inputs, converting them in to
finished goods.
4. Continuous process

Management is an ongoing or never ending activity. Management goes on without breaks or gaps. It
involves continuous handlings of problems and issues. All the functions of management are performed
by all the managers at all the times.

5. Group activity

Management is a team work rather than individual effort. It replaces ‘I’ with ‘we’. An organization
consists of diverse individuals with diverse needs. Each member joins the organization for different
purpose. But, as a member of the organization, they work towards fulfilling the common organizational
goal. The management can’t be performed in isolation.

6. Dynamic function

Management is a dynamic function as it adapts itself to the changing environment. An organization

interacts with its external environment, which consist of various social, economic, technological, legal
and political factors. In order to be successful, an organization must change itself and its goals according
to the needs of the environment.

7. Intangible/invisible/unseen force

Management cannot be seen but its presence can be felt when targets are achieved according to plans,
employees are happy and satisfied and there is orderliness instead of chaos.

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Objectives of management

Objectives are the ends or goals towards which the activities of the business are directed and the
standards against which the performance is measured. Management has to achieve all its objectives in
an effective and efficient manner.

A. Organizational objectives

These objectives are the main objectives, which are required to achieve the economic objectives of the
organization. The managers try to develop and achieve kinds of objectives in all management areas
which lead to reduction in costs and bring maximum prosperity for organization.

 Survival: the basic objective of any organization is survival. Management must strive to ensure
the survival of organization. In order to survive, an organization must earn enough revenues to
cover costs.
 Profit: Management has to ensure that the business makes reasonable profits, which is an
incentive for the continued successful operation of the company. Profit is essential to meet the
cost of business and also cover the business risk.
 Growth: it is important for the business organization to grow and expand their activities. To
remain in the market, management must exploit fully the growth potential of the organization.
Growth of the business can be measured in terms of increase in production, increase in number
of products, sales turnover, capital investment etc.

B. Social objectives

Social objectives of the organization involve consistently creating benefits or economic value for various
constituents of the society. Business organizations are the part of the society. The main social objectives
of organization are:

 Conservation of natural resources

 Using environment friendly methods of production
 Providing financial support to community
 Providing basic amenities like schools and crèches to employees
 Generating employment opportunities to the disadvantaged sections of the society.
 Contribution towards necessary civic activities.
 Providing quality products at reasonable prices.
 Organizing education and health programs.
 Honest and prompt payment of taxes to the government.

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 C. Personal or individual objectives

Personal objectives are related to the employees of the organization. As employees are one of the most
valuable resources of every organization, satisfaction of their objectives is most important because a
satisfied workforce contribute maximum for the organization. In an organization different types of
personalities comes from different backgrounds, cultures, experiences and objectives. Following are the
main objectives of management:

 Competitive salary and perks

 Peer recognition
 Social recognition
 Providing job security
 Recognition of meritorious work
 Hygienic and good working conditions
 Opportunities for training, personal growth and development

Importance of management

A business organization rises to the top because of its quality of management. On the other hand, lack
of proper management results in wastage of time, money and efforts.

1. Achieving group goals

Management tries to reconcile the individual objectives with the goals of the organization. The task of
the manager is to direct the efforts of all the individuals in the common direction of accomplishing
organizational goals.

2. Increases efficiency

The main motive of a manager is to reduce cost and improve productivity with proper utilization of
resources and eliminate wastage. Management always focus to bring efficiency and effectiveness in
activities through better planning, organizing, staffing, directing and controlling.

3. Creates a dynamic organization

All business organizations operate in a constantly changing environment. In order to survive and grow,
the organization has to adopt itself according to the needs of the environment. Employees generally
resist to changes. Management helps people to implement these changes so that the organization is
able to maintain its competitive edge.

4. Achieving personal objectives

Management not only helps in accomplishing the organization goals but also the individual goals of the
employees. With the help of motivation and leadership techniques, management helps individuals to
develop team spirit, cooperation and commitment etc. that help them to attain their personal
objectives.

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 5. Development of society

While achieving the development of organization, management also aims to develop society by giving
due importance to social obligations. Effective management improves living standard of people in the
society by generating employment opportunities, providing better quality goods at a reasonable price,
providing fair wages to workers, adopting new technology, protecting environment from getting
polluted, increasing the wealth of the nation etc.

Management as a science

1. Systematic body of knowledge

Science is a systematic body of knowledge which is developed after years of research and
experimentation. Like science, management is also a systematized body of knowledge that has been
developed over a period of time by management thinkers. So, this feature of science is present in
management.

2. Principles based on experiments and observation

The scientific principles are derived through repeated observations and experiments under controlled
conditions. The result of each experiment can be verified ad definite outcomes can be predicted.

Similarly, management principles have been developed over a period of time and are based on
observations and experiments in different types of organizations. But these principles deal with human
behavior which is unpredictable. So, this characteristic is not present in management.

3. Universal validity

Scientific principles have universal validity and can be applied in all situations and at all times. For
instance, the law of gravitation is applicable in all countries.

The principles of management are also universal in nature but the principles of management are not
exact like scientific principles so their application and use is not universal. So, this characteristic of
science does not fully apply in case of management.

Conclusion: on comparing the characteristic of science with management, we can conclude that
management cannot be considered as pure or perfect or accurate science like physics or chemistry. But
it is an inexact or social science.

Management as an art

1. Existence of theoretical knowledge

Art is based on existence of some theoretical knowledge of concepts and principles. In management too,
there is a lot of literature available in various areas of management.so, this feature is present in
management.

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 2. Personalized application

Art is a personalized concept as everyone applies theoretical knowledge in his own personal way. Every
artist works according to his own personal style. This characteristic of art is also present in management
as every manager has his own unique style of managing things and people, although all managers learn
same management theories and principles.

3. Based on practice and creativity

Practice makes a man perfect. The artist requires constant practice of art to obtain excellence and
perfection. Art can be improved with the help of regular practice. Every art has an element of creativity
and an artist uses his skills and style to produce something that had not existed before. This feature of
art is also present in management. A good manager works through a combination of regular practice,
creativity, imagination, initiative and innovation.

Conclusion: On comparing the characteristics of art with management we find all the characteristics of
art are present in management so we call management as an art of getting things done through people.

Management as a profession

1. Well defined body of knowledge

All professions are based on a well-defined body of knowledge that can be acquired through training
and instructions. Similarly, in management also there is specialized knowledge which is taught in
universities and management institutes. So, this feature of profession is present in management.

2. Restricted entry

No one can enter a profession without going through an examination or through acquiring an
educational degree whereas there is no restriction on appointment of manager, irrespective of the
educational qualifications possessed by him. But now most of the companies prefer to appoint
managers only with MBA degree. So presently, this characteristic is not applicable to the management
but very soon it will be included.

3. Professional association

All professions are associated to a statutory association or institution which regulates entry in the
profession, issues certificate of practice and enforces a code of conduct. Presently, this feature of
profession is not present in management as it is not mandatory for a manager to be a member of any
management association.

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 4. Service motive

The main aim of profession is to serve the clients with dedication whereas main motive of management
is to achieve organizational goal which is generally profit maximization. In order to survive in the
competitive environment, an organization has to fulfill its social obligation along with economic
objectives. So presently, this feature of profession is not cent percent present in management.

5. Ethical code of conduct

Every profession is regulated by a code of conduct which has to be followed by every professional. The
code of conduct means rules and regulations framed to guide the behavior of professionals. Presently,
this feature of profession is not present in management.

Conclusion: On the basis of above discussion, we can say that management is moving fast in the
direction of becoming a profession but presently it cannot be considered as a full-fledged profession.

Levels of management

Levels of management refer to a line of demarcation between various managerial positions in an

organization. The three main levels of management are:

1. Top management

Top level management of a company consists of the senior most executives of the organization. Top
level includes Board of directors, managing directors, general manager, Chief executive officer (CEO),
Chief Financial officer (CFO), Chief Operating Officer (COO), President, Vice-president, chairman and so
on.

Following are the main functions of top management:

 This level establishes the goals of an enterprise.

 This level formulates overall organizational goals and strategies for their achievement.
 This level is responsible for the welfare and survival of the organization.
 They are responsible for all the business activities and their overall impact on the society.
 They are also held responsible for the overall success or failure of the enterprise.
 The top level management arranges resources such as men, money, machine, material etc to
achieve desired objectives.
 The top level management appoints the executives for the middle level.

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 2. Middle level management

Middle level consists of departmental heads like purchase department head, sales department head,
marketing manager, finance manager, executive officers, plant superintendent, personnel manager etc.
following are the main functions of this level:

 To interpret and explain the plans and policies formulated by top level management to lower
level.
 They are responsible for implementing and controlling plans and strategies framed by top
management.
 They ensure that their department has necessary personnel.
 To motivate employees for higher productivity and rewarding them for their better
performance.
 Assign necessary duties and responsibilities to the staff and also arrange needful resources for
the same.
 Reporting the performance, problems, suggestions, and other important data to the top
management.
 Recommending new or revised policies to the top management to improve performance.

3. Supervisory or operational management

Operational management consists of clerk, supervisors, inspectors, accounts officers, sub-departmental

activities etc. The managers at this level are in direct contact with workers.

 Planning day to day activities and issuing orders and instructions to workers.
 Arranging machinery, material tools etc. for workers.
 They ensure proper and safe working conditions of workers.
 They guide and help the middle level management in selection, training, placement and
promotion of employees.
 They encourages the workers to take initiatives and welcome their suggestions and rewrd them
for their suggestions.
 They send reports on work performance to the higher level management.

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Functions of management

1. Planning

Planning is the basic function of management. It determines in advance what to do, how to do it, when
to do, and by whom. It is looking ahead and preparing for the future. It bridges the gap between where
we are and where we want to reach.

2. Organizing

The organizing function examines the activities and resources required to execute the plan. It decides
who will do a particular task, where it will be done and when it will be done. Thus it is the function of
assigning duties, grouping tasks, establishing authority and allocating resources required to carry out a
specific plan.

3. Staffing

Staffing means filling up the various jobs in the organization with competent personnel. This function is
concerned with finding the right person for the right position at the right time. It involves activities like
recruitment, selection, placement, training and development of employees.

4. Directing

Directing is the process of instructing, guiding, motivating, and leading, counseling and coaching of the
employees in the organization so that their efforts result in achievement of organizational objectives.

5. Controlling

This is the management function of monitoring organizational performance towards the

accomplishment of organizational goals. It involves establishing standards of performance, measuring
actual performance, comparing it with standards and taking corrective action if there is any deviation in
the same.

Coordination

Meaning

Coordination refers to synchronizing the efforts by unifying, integrating and harmonizing the activities of
different departments and individuals towards the achievement of common objectives. It is through the
process of coordination that a manager ensures the orderly arrangement of individual and group efforts
to ensure unity of action in order to achieve common objectives.

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Characteristics

1. Integrates group efforts

There is no need for coordination when an individual works in isolation without affecting anyone’s
functioning. But when two or more people work together to achieve common goals, then there is need
to coordinate their efforts in common direction.

2. Ensures unity of action

It leads to unity of action towards the organizational goals. It acts as the binding force between
departments and ensures that all actions are aimed at achieving the goals of the organizations.

3. Continuous process

It is a never ending process. It is carried on by all the managers all the time. Its need is felt at each and
every step in the enterprise. It starts with the planning function and ends with the controlling function.

4. Pervasive function

It is universal in nature. It is needed at all the levels, in all the departments because of interdependence
of various activities. In the absence of coordination, there is overlapping and chaos instead of harmony
and integration of activities.

5. Responsibility of all managers

It is the responsibility of all the managers in the organization. The managers at each level coordinate
their activities so as to perform their duties effectively and efficiently.

6. Deliberate function

A manager has to coordinate the efforts of different people in a conscious and deliberate manner.
Cooperation in the absence of coordination may lead to wasted efforts and coordination without
cooperation may lead to dissatisfaction among employees.

Importance

1. Growth in size

The need of coordination increases when the organization grows in size because in large organization
there is more number of people working. Employees come from different backgrounds, they have
different attitudes, different styles of working, different experiences and objectives.

2. Functional differentiation

The functions of an organization are divided in to departments, divisions or sections. Each unit tries to
perform its mission in isolation from the others. So, there may arise conflict between them.

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 3. Specialization

In modern organization, there is high degree of specialization, arising out of the complexties of modern
technology and diversity of tasks to be performed. That is why coordination is needed to avoid conflict
between the specialists and the other members.

Coordination: The essence of management

 In planning, coordination is required between the master plan of the organization and the plans
of different departments or divisions.
 In organizing, coordination is needed between resources of an enterprise and activities to be
performed.
 In staffing, coordination is needed between skill of employees and jobs assigned to them,
between efficiency of the employees and compensation.
 In directing, coordination is required among superior and subordinates, between orders,
instructions and suggestions.
 In controlling, coordination is needed between planned standards and actual performance.
 Top level managers need to coordinate with their subordinates to ensure that overall policies
for the organization are duly carried out.
 Middle level managers coordinate with both the top level and lower level managers.
 Operational level management coordinates the activities of its workers to ensure that work
proceeds according to plans.

Thus, it can be concluded that coordination is concerned with all the functions of management and
levels of management. Therefore, coordination is called as the essence of management.

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 CHAPTER – 2

PRINCIPLES OF MANAGEMENT
Meaning

A principle is a statement which reflects the fundamental truth about some phenomenon based on
cause and effect relationship. Principles of management are broad and general guidelines for decision-
making and behavior of managers.

Features

1. Universal applicability

The management principles are universal in nature. These principles are universally applicable to all
types of organizations i.e. business as well as non-business. It is applicable at all levels and at all times.
However, the extent of their applicability may vary as per nature and size of the organization.

2. General guidelines

The principles of management act only as guidelines for decision-making and action. However, they do
not provide readymade solutions to all managerial problems. This is so because in real business,
situations are very complex and dynamic and are a result of many factors. The importance of principles
cannot be underestimated because even a small guideline helps to solve a given problem.

3. Practice and experimentation

The principles of management are formed only after deep and thorough research work. They are not
developed automatically or they are not based upon personal feeling of any person. They are derived on
the basis of observation and analysis of events which manager face in actual practice and also after
conducting experimental studies.

4. Flexible

These are flexible in nature i.e. they can be modified by the managers according to the given situation.
These principles can be utilized under varied conditions in different ways. These principles are not a
static or rigid statement.

5. Mainly behavioral

Management principles are mainly behavioral in nature since they are devised to influence behavior of
human beings. Moreover, these principles enable a better understanding of the relationship between
human and physical resources in achieving organizational goals. But these principles may not bring the
desired result due to complex and unpredictable nature of human behavior.

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 6. Cause and effect relationships

Management principles establish a relationship between cause and effect so that they can be used in
similar situations in a large number of cases. When a principle is applied to a particular situation, is
known as cause and the result of application of the principle is called effect. These principles tell the
managers if a particular principle is applied in a given situation, what may be its likely effect.

7. Contingent

Management principles are not absolute or static in nature. Their use is contingent or dependent upon
the prevailing situation at a particular point of time. They must be applied very carefully depending upon
the organizational requirements and situational demands.

Importance

1. Useful insight in to reality

These principles help in increasing managerial efficiency by adding to their knowledgeand ability to
understand the various situations. These principles guide managers to take right decision at the right
time, by improving their knowledge, ability and understanding of managerial abilities. These principles
enable managers to learn from their past mistakes and to save time by solving recurring problems
quickly.

2. Optimum utilization of resources

These principles aim at optimum utilization of all types of resources for the achievement of
organizational goals. By optimum utilization, it means that the resources should be used in such a
manner that they provide maximum benefit with minimum cost.

3. Effective administration

The principles of management act as guidelines for top level management to formulate various
administrative plans and policies. Management principles make administration better by discouraging
personal prejudices and biases. They insist on objectivity and scientific decisions.

4. Scientific decisions

Managers have to take number of decisions every-day to meet changing conditions. So they need to
assess the various resources of organization very carefully so that appropriate decisions can be taken for
the operation of business. These principles enable the managers to approach various problems
systematically and scientifically, leading to timely implementation of right decisions.

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 5. Meeting changing environment requirements

In modern times only those business organizations can survive and grow which can keep pace with
rapidly changing environment. The principles of management train and enable the managers in
implementing the changes in right direction and at right level in the organization. They can be modified
to meet changing requirements of the environment.

6. Fulfilling social responsibility

Business is an organ of the society and makes use of various resources of society, so it must do
something in the interest of the society. Principles of management not only act as guidelines for
accomplishing organizational goals but also guide managers in performing social responsibilities.

FAYOL’S PRINCIPLES OF MANAGEMENT

1. Division of work

According to this principle, the entire work should be divided in to different tasks and instead of
assigning the entire work to one person, one task or work should be assigned to one person according to
his competence, qualification and experience.

When a person is performing a part of the whole job repeatedly, he will become an expert in doing that
and his efficiency level will increase. It is because of this principle that one can find separate
departments for production, marketing, finance, human resource etc.

2. Authority and responsibility

Authority is the right of a superior to give orders to his subordinates and obtain obedience.
Responsibility means obligation to carry out an assigned job on time.

The principle suggests that there should be parity or balance between authority and responsibility.
Granting of authority to a person without matching responsibility can lead to arbitrary and irresponsible
use of authority whereas assigning responsibility without providing necessary authority will make the
subordinates ineffective.

3. Discipline

In management discipline means obedience, respect of authority and complying with the rules and
regulations of the organization. Discipline is essential for smooth running of the organization. It is
required not only on the part of employees but also on the part of the managers. A manager can present
a good example to his subordinates by disciplining himself. According to Fayol, discipline requires good
superiors at all levels, clear and fair agreements and judicious application of penalties.

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 4. Unity of command

This principle states that a subordinate should receive orders or instructions from only one superior at a
time and that subordinate should be accountable to that superior. If a subordinate receives order from
more than one superior at a time, then he will get utterly confused and will not be able to decide that
whose orders must be carried out first.

The superiors whose orders are not executed might become annoyed or develop a feeling of jealousy
and bitterness towards the other superiors. There may also be a problem of conflict among superiors
regarding how the work should be performed. Dual command is a permanent source of conflict.

5. Unity of direction

Unity of direction states that there should be “ONE HEAD AND ONE PLAN” for a group of activities under
the same objective. In other words, the similar activities should be put under one group, there should be
one plan of action for them, and they should be under the control of one particular manager. All persons
in this department must work together to achieve the specified goals in terms of volume of sales. The
efforts of all members of a work unit or a group must be directed towards the achievement of common
goal.

6. Subordination of individual interest to general interest

An organization is superior to its individual employees. The interest of the organization must be given
priority over the interest of the individual employees. The principle calls for reconciliation of individual
interest with organizational interest.

An organization has its own objective whereas an individual employee has his own individual objective
for working in the organization. If the objective of the employees are in the same direction as of the
organization then there is no problem but in case of conflict between individual and organizational goals
then it is the duty of the management to reconcile them and if it is not possible then general interest
must be placed above.

Individual will be able to achieve their goals only when the organization prospers. Therefore, the
interest of the organization must be given priority.

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 7. Remuneration of employees

The principle states that remuneration payable to employees should be fair, equitable and reasonable
so as to give maximum amount of satisfaction to both the employees and the organization. It will create
harmonious relations in the organizations and build up a workforce of contended employees.

If the employees are not remunerated properly for their services rendered to the organization then they
will not do their work with perfect dedication, full honesty and maximum capacity. As a result, the
organization shall have to face failure.

Fair wages should be determined on the basis of nature of work, financial capacity of the organization,
remuneration paid for the similar work in the industry, minimum wages act of the Government etc.

8. Centralization and decentralization

Centralization means the concentration of authority at the top management. On the other hand,
decentralization means sharing of authority at all levels of management. Fayol suggests that an
organization should strive to achieve proper balance between centralization and decentralization. He
feels that top management should keep the authority of taking vital decisions in their own hands,
whereas the operational authority should be given to middle and lower level managers.

The degree of centralization depends upon certain factors such as competence of top management,
ability of subordinates, Size of the organization etc. Small organizations have greater centralization due
to small range of activities. But in case of large organizations there is lesser degree of centralization
because the manager’s order passes through a number of intermediaries to reach the operative
employees.

9. Scalar Chain

Scalar chain refers to the formal lines of authority or chain of superiors from highest to lowest rank. All
managers are linked together in their positions from the highest to the lowest level. Each manager has
subordinates below him and superiors above him. In this way, all managers are linked through a chain.
The principle of scalar chain suggests that there should be clear line of authority from top to bottom
linking managers at all levels.

The scalar chain serves as a chain of command as well as a chain of communication. It is regarded as a
chain of command because orders and instructions issued by higher level managers flow through
intermediate managers before reaching lower level managers. All communication downwards and
upwards in the organization is required to flow through the chain.

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Gang plank

Fayol realized that communication through scalar chain may sometimes involve delays. To avoid delays,
distortion and facilitate quick communication, Fayol suggested the idea of Gang Plank. The Gang plank is
a shorter route in a scalar chain which permits two persons at the same level to communicate directly
with each other. However, the subordinates must inform their respective superiors about the
communication that has been exchanged directly between them.

10. Order

This principle states that in an organization there should be place for everything/ everyone and
everything/everyone should be at their right place. Fayol insists that people and material must be in
suitable places at appropriate times for maximum efficiency. The principle of order is concerned with
proper arrangement of things and placement of people. The persons in the organization must remain in
their allotted places during working hours so that they can be easily contacted whenever necessary.

11. Equity

This principle suggests that managers should be fair and impartial while dealing with the subordinates.
No worker should be unduly favored or punished. All employees in similar position should be treated at
par and their worth should be recognized. Similarly, all employees should get a fair treatment in case of
reward or punishment.

Fayol also did not rule out the use of force or use of stern action. Rather he said that a person who is
shirker by nature or lazy should be dealt strictly to send the message that everyone is equal in the eyes
of management.

12. Stability of tenure of personnel

This principle states that management should remove the feeling of job insecurity from the minds of
employees because if the job of a person is insecure, he will be on lookout for a job elsewhere and
cannot contribute his maximum. Moreover, the period of service in a position should be fixed and
employees should not be moved or rotated from their positions very frequently. It often takes time to
get used to a job.

Stability of tenure is essential to enable employees to become familiar with jobs. Changes may be made
when it is unavoidable, like in case of prolonged illness, retirement or death of an employee.

13. Initiative

The principle states that employees at all levels should be given an opportunity to take initiative in work
related matters. Initiative means eagerness to do some work without being told to do so. The managers
must encourage and boost up the confidence level of his employees to think and put forward a new and
better idea for formulation and execution of plans. It will be possible only when manager sacrifice his
own vanity. Encouraging initiative motivates employees to work better and harder.

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 14. Espirit de corps

Spirit de corps means team spirit or harmony in group effort and mutual understanding among
employees. In order to achieve the best possible results, management should promote team work and
coordination. A manager should replace the feeling of I-with-We while having a conversation with
employees. When there is a team spirit everyone comes forward to help others. Team spirit helps to
develop an atmosphere of mutual trust and understanding. It improves people to do work with full
dedication and improve the quality of work.

Fayol said that only those organizations succeed where all the people work united as a group. It
minimizes the need for use of penalties for defaulting people. Therefore, managers at all levels take
steps to improve team spirit and develop a feeling of belongingness among employees.

SCIENTIFIC MANAGEMENT
Meaning

Scientific management means the application of science to management. It means conducting business
activities according to standardized tools, methods and trained personnel in order to increase the
output improve its quality and reduce the costs and wastes.

Principles

1. Science, not rule of thumb

According to this principle, Taylor stressed that each job performed in the organization should be based
on scientific enquiry and not on intuition, experience and hit and miss methods. Rule of thumb does not
involve thinking before doing.

Rule of thumb means decisions taken by the managers on the basis of subjectivity, prejudice and
intuition whereas scientific decisions are based on cause and effect. The work assigned to any employee
should be observed and analyzed with respect to each element or part and the time involved in it. The
objective of such observation and analysis is to determine the one best way of performing the work and
to determine the standard output.

2. Harmony, not discord

This principle suggests that there should be complete harmony and proper understanding between
management and workers and they should work together for achieving organizational goals. Taylor
insists that there should be complete harmony between the management and workers.

If there is any conflict between management and workers then it will not be beneficial either for
management or workers. Both should realize the importance of each other and feel that they are the
part of the same family. In order to achieve this, Taylor recommended complete mental revolution.

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 3. Co-operation, not individualism

This principle is an extension of harmony, not discord. This principle states that there should be
complete cooperation between management and workers. Instead of individualism or competition,
close cooperation between management and workers is necessary to ensure that workers work is done
in accordance with plans and standards of performance.

To achieve this cooperation, managers should welcome suggestions from employees and reward them if
their suggestion proves to be beneficial for the organization. The manager should take worker in to
confidence while taking important decisions. At the same time workers should resist from going on
strike and making unnecessary demands.

4. Development of workers to greatest efficiency and prosperity

Taylor insisted that due care should be taken while selecting the employees and after selection, they
must be given jobs according to their qualifications, physical, mental and intellectual capabilities. The
selected employees must be sent for training from time to time to improve their skills and work
performance. Efforts should be made to develop each employee to his greatest efficiency.

Techniques

1. Functional foremanship

Taylor suggested that specialization should be introduced at the supervisory level. He recommended
functional foremanship for this. This technique states that the task of supervision is divided in to several
specialized functions and each function is entrusted to a specialist foreman. This technique is an
extension of the principle of division of work or specialization but violates the principle of unity of
command.

In this technique, Taylor advocated separation of planning and execution function. According to Taylor,
foreman should have intelligence, education, tact, grit, judgment, special knowledge, manual dexterity,
energy, honesty and good health. All these qualities cannot be found in a single person, so Taylor
proposed eight specialist foremen, four under each department.

The eight specialist foreman and their functions are as follows:

a. Under planning in charge

 Instruction card Clerk: This foreman is responsible for giving detailed instructions according to
which workers have to perform their jobs.
 Route clerk: the route clerk determines the route of production i.e. sequence to perform various
manual and mechanical operations.
 Time and cost clerk: This foreman fixes the time for starting and completing the jobs and
prepares the cost sheet for each job.
 Disciplinarian: This foreman is responsible to ensure discipline in the work place so that
production targets may be achieved according to predetermined schedule.

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 b. Under production in charge
 Speed boss: He is responsible to ensure timely and accurate completion of job.
 Gang Boss: This foreman is responsible for keeping machines and tools etc. ready for operation
by workers so that there is no delay.
 Repairs boss: This boss ensures proper working conditions of machines and equipment.
 Inspector: He ensures that work done conforms to the standards of quality laid down by the
planning department.

2. Standardization and simplification of work

Standardization is the process of setting standards for every step of business operations. Standards may
be set for process, raw material, time, products, tools, machinery, methods, working conditions etc.
Standardization of products suggest the size, design, shape, quality, weight etc. of the product should be
such that it fulfills the requirements and tastes of the customers.

Standardization can only be achieved if the type and quality of the materials and the method of handling
materials are standardized. In the same manner, tools, equipment, machinery, work methods, working
conditions etc. should be standardized. This helps to reduce wastage of resources, improves the quality
of work, reduces cost of production etc.

3. Work study

Work study is a systematic, objective and critical examination of all factors relating to work so as to
maximize efficiency. It includes the following techniques:

a. Method study

Method study refers to finding out one best way of doing a particular job. There are various methods for
completing a job. Its main objective is to minimize the cost of production and maximize the quality and
satisfaction of customer.

b. Motion study

Motion study is the technique used to study the various movements like lifting, putting objects, sitting,
changing positions etc. of workers while performing a particular task. The objective of motion study is to
identify wasteful or unnecessary movements and eliminate them to determine the best way of doing a
particular job. Through motion study an attempt is made to know whether some elements of a job can
be eliminated, combined or their sequence changed to achieve the necessary rhythm.

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 c. Time study

It determines the standard time taken to perform a well-defined job. Under time study, the job or
operation is divided in to a series of elements and time taken in performing each element of task is
recorded with time measuring devices such as stop watch etc. the standard time is fixed for the whole
task by taking several readings or observations. The objective of time study is to determine the number
of workers to be employed, frame suitable incentive schemes and determine labor costs.

d. Fatigue study

A person is bound to feel physically and mentally tired if he keeps on working without rest for long time.
In such cases, he will not be able to work with full capacity. If he is allowed rest intervals, he will recoup
the energy lost in continuous work and start working with same potential. Fatigue study seeks to
determine the amount and frequency of rest intervals required in completing a task.

4. Differential piece wage system

This concept was introduced in order to attract highly efficient workers. This technique is the strongest
motivator for the workers to reach standard performance because in this technique incentive is directly
linked with productivity. Taylor has suggested two types of piece rates. One is higher piece rate and
other is lower. Higher piece rate for those workers who perform up to or above standard within
standard time and lower piece rate for those workers who produce less than standard output.

5. Mental revolution

It is not possible to implement scientific management unless there is a healthy cooperation between the
workers and the management. Mental revolution means a complete change in the mindset of the
workers and the management towards each other from competition to cooperation. Both parties should
realize the importance of each other and should work with full cooperation. Both should aim for
increase in the profits of the organization. The objectives of mental revolution are:

 To change the mindset or attitude of the workers and management towards one another.
 To achieve full cooperation between workers and management.
 To rule out feeling of suspicion or prejudice from the minds of workers and management to
adopt systematic thinking.

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 Basis F.W.Taylor Henri Fayol
Period 1856-1915 1841-1925
Personality He was a scientist and is known as He was a practitioner and is known as the
‘father of Scientific Management’ ‘father of General management’
Perspective Supervisory or shop floor level Top level management
Concern The techniques and principles These are concerned with management
propounded are concerned with efficiency.
workers efficiency
Emphasis He laid greater emphasis on He laid greater emphasis on the
standardization of work and tools. principles of general management and
functions of management.
Focus He laid focus on increasing productivity His focus was on improving overall
and workers efficiency administration
Major His important contribution was His contribution was development of 14
contribution development of scientific techniques principles of management.
and scientific principles
Basis of These are based on observation and These were formed through personal
formation experimentation experience
Unity of Taylor did not follow this principle and He was a strict follower of this principle.
command stressed on minimum eight bosses
Applicability Applicable in specialized situations Applicable universally
Expression His contribution is expressed as His contribution is expressed as general
scientific management theory of management.
Human element Taylor gave more stress on increase in He gave more importance to human
production element in principles.

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 CHAPTER -3

BUSINESS ENVIRONMENT
Meaning

The term business environment means the sum total of all the factors, forces and institutions which are
external to a business enterprise and beyond its control but which exercise tremendous influence on the
working and growth of the business enterprise.

All the forces, factors and institutions affect the functioning of the business firm and firm has to deal
effectively with them in order to be successful in the long run.

Characteristics

1. Totality of external forces

Business environment is the sum total of all the external forces, factors and institutions which directly or
indirectly affect the business firms.

2. Specific and general forces

Business environment consist of both specific and general forces. Specific forces include investors,
customers, competitors and suppliers which directly affect the functioning of the business enterprise.

But general forces like social, economic, political, legal and technological condition indirectly affect the
operation of a business unit.

3. Inter-relatedness

Various element or parts of business environment are closely inter-related. For example, increased
awareness for health care has raised the demand for diet coke, fat free cooking oil etc.

4. Dynamic nature

Business environment is not static rather it is dynamic in nature i.e. it keeps on changing. Change in
consumer taste and preferences of the consumer, entry of new competitors in the market, change in
technology, change in the government policy etc. are examples of environmental changes.

It is dynamic in the sense that something which is new today, may become outdated or obsolete after
sometime. Therefore, business enterprises have to be highly cautious, alert and adaptable to these
changes.

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 5. Uncertainty

Business environment is very uncertain as it is very difficult to predict future events especially when
environment changes are taking place too frequently as in case of information technology and fashion
industries.

6. Complexities

Business environment is complex as it consists of several inter-related factors which keep on changing.
For example, if there is change in demand for a product or a service, then it is very difficult to know the
impact of political, economic, social, technological and legal forces on such a change.

7. Relativity

Different nations and different regions have different kind of business environment. Thus business
environment is a relative concept.

Importance

It is very important for business enterprise to fully understand their environment and changes occurring
in it. Business firms which know their environment and are ready to adapt to environmental changes
would be successful.

Environment scanning is the process by which organizations monitor their relevant environment to
identify opportunities and threats affecting their business. In other words, complete awareness and
understanding of business environment is known as environment scanning.

1. Identify opportunities and getting first mover advantages

Opportunities mean the positive external trends or changes that will help a company to improve its
performance. Business environment provides lots of opportunities for business enterprises. The
business firms which are able to scan these opportunities at an early stage get maximum benefit and can
leave their competitors behind.

For example, MarutiUdyog became the leader in the small car market because it was the first to
recognize the need for small car in an environment of rising petroleum prices and a large middle class
population in India.

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 2. Identify threats and early warning signals

Threats means the external environment trends and changes that will hinder a firm’s performance.
Business environment along with opportunities provides threats also. The proper knowledge and
understanding about the environment helps the business enterprise to identify the possible threats in
future and acts as early warning signals. Timely understanding of environment helps to make suitable
changes in the enterprise.

For example, the proposal of Tata motors to bring out a small economy car by 2008 is a warning signal
for MarutiUdyog to reduce its costs or to introduce economy models.

3. Tapping useful resources

A business firm obtains various resources or inputs such as machines, tools, capital, material, labouretc
from the environment and converts them in to desired goods and services for the customers and then
supplies its output to the environment. If the business enterprise has a complete awareness and
knowledge of the external environment, it can tap technology, raw materials, financial resources form
the market at reasonable prices and at the right time.

For example, with increase in demand for LCD monitors firms started arranging raw material for LCD
instead of CRT monitors.

4. Coping with rapid changes

Today’s business environment is very dynamic. Changes are taking place very fast and these changes
have tremendous impact on the functioning of business. So, it is essential to understand these changes
as early as possible. Through environment scanning managers can understand and examine these
changes and develop appropriate courses of action to effectively cope with these changes.

For example, google a search engine is continuously improved by its management by adding some
innovation features to remain ahead of changes made by other competing search engines.

5. Assisting in planning and policy formulation

Environment analysis helps identifying threats and opportunities in the market. These can serve the
basis for planning and policy formulation.

For example, ITC planned for new hotels in India after knowing the increase in India’s share of world
tourism.

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 6. Helps in improving performance

Analysis and understanding of business environment helps the business to improve its performance. The
enterprise which continuously monitor and adjust themselves according to the changing business
environment, not only improve their present performance but also continue to succeed in the market
for a longer period. For example, Hindustan Unilever launched small sachets of shampoo according to
the needs of the customers.

Dimensions

1. Economic environment

Economic environment consists of factors like productivity, interest rates, tax rates, gross domestic
product, per capita income, saving rate, investment rate, corporate profits, balance of payments,
disposable income, inflation rate, economic policies of the government etc. The economic environment
exercises strong influence on business because business is an economic institution.

Examples of impact of economic environment on business:

a. Decline in tax rates raises the disposable income of people, which leads to increase in demand
for products.
b. If the government announces to reduce the excise duty on ACs, the sales of business enterprise
manufacturing ACs will rise.
c. In case of construction companies and automobile manufacturers, low interest rates are
beneficial because they result in increased spending by consumers for buying homes and cars.
d. Rise in inflation rates generally result in constraints on business firms because they increase the
cost of raw materials or machinery and payment of wages and salaries to employees.
e. Recent changes in economic and fiscal policy of country have encouraged NRIs and foreign
investors to invest in Indian companies.

2. Social environment

Social environment describes characteristics of the society in which the enterprise exist. Social
environment consist of traditions, customs, rituals, lifestyles, literacy rates, family structure, values,
education systems, demographic trends of population, age compositions, family size, male-female ratio,
rural urban mobility, income distribution, consumer’s consciousness, consumer’s organizations, status of
women and minorities, non-government organizations etc.

The business organization has to analyze and understand the social environment as it determines the
products, services and standards of conduct that are acceptable to society. The nature of goods and
services in demand depends upon the buying habit, income level, education level, customs, tastes,
preferences etc.

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Examples of impact of social environment on business are:

a. The celebration of festivals like Diwali, Id, Christmas, Lohri, Guru parv etc. provides significant
financial opportunities to many businesses like greeting card companies, confectionary or
sweets manufacturers etc.
b. Equal pay to male and female workers for equal work.
c. Demand for reservation in jobs for minorities and women.
d. Increase in the demand for nutritious food, mineral water, gyms etc due to health and fitness
consciousness.
e. Import of animal fat for manufacturing vanaspati ghee was banned by government due to
strong public protest.

3. Technological environment

Technological environment includes the discovery of new methods of producing goods and services and
new procedures and techniques of operating a business. Today the pace of technological change is very
fast. Technological environment has a great impact on business. Therefore, the business enterprise must
closely monitor the changes taking place in the technological environment and move accordingly.

If they ignore technological changes then they cannot survive in the competitive market. Advancement
in technology helps to improve productivity, quality and reduce the cost of production. But introduction
of advance technology requires huge capital investment and skilled manpower.

Examples of impact of technological environment on business:

a. Digital watches resulted in death of traditional watches.

b. Xerox machines damaged carbon paper business.
c. Shift in demand for typewriter to computer based word processors.
d. Cell phones have taken over the market from landline phones.
e. Shopping malls have greatly influenced the retail business in large cities.

4. Political environment

Political environment includes political conditions such as political stability, type of government,
constitution of the country, attitude of the ruling party towards different groups of society, philosophy
of the political parties, ideology of the government, foreign policy of the government, relations of the
country with other countries, profile of political leaders and so on.

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The political environment has tremendous impact on the functioning of the business so business firms
must scan this environment very carefully and adjust themselves according to the changes. Whenever
there is political stability, it increases the confidence of businessman to invest in the long term projects
for the growth and development of the economy.

Examples of impact of political environment on business are:

a. Hyderabad has become the most popular place for information technology industry due to
supportive political climate.
b. Due to change in political scenario, government allowed Coca-Cola, Pepsi-co, IBM and other
MNCs to enter the Indian market.
c. Terrorism in Jammu and Kashmir has badly affected tourism industry in the state.
d. In 1999, when Vajpayee government at the Centre lost the majority support, the share prices in
the stock market crashed immediately.

5. Legal environment

Legal environment includes various legislations passed by the Parliament, Government, court Judgments
etc. The businessman must follow the rules and regulations framed by the government for smooth
running of the business. Non obedience to laws may lead to imposition of heavy penalties and
sometimes even shut down the business.

Examples of impact of legal environment on business are:

a. According to weights and Measures Act 2000, every eatable product must clearly bear a green
dot for vegetarian ingredients and red dot for non-vegetarian ingredients.
b. The Government of India has banned the advertisement of alcoholic products.
c. Mandatory to give statutory warning on the packets of Cigarettes.
d. Deregulation of capital market has made it easy for business enterprise to collect capital from
primary market.
e. Baby food advertisements must inform the potential buyer that mother’s milk is the best.

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Liberalization

Liberalization refers to freeing the Indian business and Industry from all unnecessary government
controls and restrictions so that they can operate more freely.

The Indian companies have been liberalized in the following way:

a. Removal of Industrial licensing except in few.

b. Freedom in taking decisions regarding expansion and contraction of business activities.
c. Freedom to fix the prices of goods and services.
d. Reduction in tax rates and removal of unnecessary controls and regulations in the economy.
e. Removal of restrictions on the movement of goods and services.
f. Simplifying the process of attracting foreign capital and technology.
g. Simplifying the import-export procedure.

Privatization

Privatization means giving greater role to private sector in the nation building process. It means reducing
drastically the role of public sector. In order to execute policy of privatization, the government took
several steps:

a. Disinvestment of public sector which means transferring the public sector enterprises to the
private sector. It results in dilution of the stake of the government in the PSEs.
b. The Board of Industrial and Financial Reconstruction (BIFR) were set up to revive sick public
enterprises suffering loss.

Globalization

Globalization means the integration of various economies of world. Till 1991, Government of India
strictly regulated imports through licensing of imports, tariff restrictions etc. However, the new
economic policy aimed to liberalize foreign trade through the policy of globalization.

For globalization, the government took the following steps:

a. Import liberalization
b. Foreign Exchange regulation act was replaced by Foreign exchange management act.
c. Rationalization of tariff structure
d. Abolition of export duty
e. Reduction in import duty

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Impact of Government policy changes on Business and Industry

The policy of LPG of the government has made a significant impact on the working of Business and
industry.

1. Increasing competition

As a result of economic reforms business houses now face competition not only from existing players
and new local entrants but also from multinational companies. Competition has now become global in
character. It is not confined to country’s boundaries.

2. More demanding customers

Increased competition in the market has widened the choice of customers in purchasing better quality
goods and services. Today, customers become more demanding because they are well informed. To
attract customers many new schemes were made by companies. This has created buyer’s market in the
country.

3. Rapidly changing technological environment

Technology is changing at a very fast rate. The basic reason is increasing competition. The rapidly
changing technological environment requires improvement in machines, equipment, processes,
products and services. Business enterprises have to adopt modern technology and produce world class
products to survive and grow in the market.

4. Necessity for change

Before 1991 business enterprise would follow stable policies for long time but after 1991 the market
forces have become very dynamic, the business enterprises have to modify their existing policies and
operations from time to time.

5. Need for developing human resources

In India there has been a huge shortage of trained personnel with higher competence, skill and training.
So, there is a need for developing human resource. As a result, compensation levels for managerial and
technical services have been raised sharply.

6. Market orientation

Earlier firms were following selling concept i.e. produce first and then go to market for sale but in the
present scenario, there is a shift to marketing concept, where the firms have to study and analyze the
market first to identify customer needs and produce goods accordingly.

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 7. Loss of Budgetary support to Public sector

Before 1991 each and every loss of public sector was to be bear by government by granting funds from
budget. PSEs realized that in order to survive and grow they will have to improve their performance and
generate their own resources otherwise these enterprises have to face disinvestment.

8. Export promotion

The Indian business firms were facing global competition and they need precious foreign exchange to
import raw materials, components and machinery to keep their production lines going. For them
exports has become a matter of survival. The new trade policy has helped them to increase exports.
MRF, Reliance Group, Ceat, Videocon etc. got a great hold in export market.

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 CHAPTER – 4

PLANNING
Meaning

In simple words planning means thinking in advance what is to be done, how it is to be done, when it is
to be done and by whom it is to be done. It bridges the gap between where we are and where we want
to go.

Planning involves setting objectives in advance to be achieved during a given time period, discovering
alternative courses of action to achieve them and selecting the best course of action.

Features/ Characteristics of Planning

1. Planning focuses on Achieving Objectives/ Planning is a Goal Oriented Process

Planning starts with the determination of objectives. We cannot do any planning in the absence of
objectives. Specific goals are set out in the plans along with the activities to be undertaken to achieve
the goals. Planning will become a useless exercise unless it does not positively contribute to the
achievement of pre-determined organizational goals.

2. Planning is a Primary Function of Management

It provides the basis of all other functions of management. All other management functions like
organizing, staffing, directing and controlling are performed within the framework of the plans drawn.
Thus, planning precedes other function.

3. Planning is Pervasive

Planning is required in all types of organizations and at all levels of management. However, the nature
and scope of planning may differ from one level to another.

4. Planning is Continuous

Planning is a ongoing process. Plans are formulated for a specific time period e.g., six months, one year
or two years. At the end of that period, new plans have to be prepared on the basis of new demands
and conditions. Also, as conditions change, old plans have to be revised.

5. Planning is Futuristic/ Forward Looking

Planning means looking ahead and preparing for the future. Managers plan today with a view to flourish
tomorrow. The aim of planning is to meet future events effectively to the best advantage of an
organization. Therefore, planning is regarded as a forward looking function based on forecasting.

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 6. Planning Involves Decision Making

Planning involves choice from among various alternatives. If there is only one way of doing
something then there is no need for planning as there is no choice. Planning cannot be imagined in
the absence of alternatives. Hence, the need for planning arises only when alternatives are
available.

7. Planning is a Mental Exercise

Planning is a mental exercise. It is thinking rather than doing function of management, therefore it is
kept separate from operational activities by F.W.Taylor. Planning requires application of the mind
involving foresight and vision, intelligent imagination and sound judgment.

Importance/Significance of Planning

1. Planning Provides Directions

By stating in advance how work is to be done planning provides direction for action. Planning ensures
that objectives are clearly defined so that they act as a guide for deciding what action should be taken
and in which direction. If objectives are clearly laid down, employees are aware of what the organization
has to do and what they must do to achieve those objectives.

2. Planning reduces the Risk of Uncertainty

Planning is always done for future which is full of uncertainties. No one can say with absolute accuracy
that what is going to happen in future. Uncertainty and change are inevitable or unavoidable and
planning cannot eliminate them. But planning helps the firm to cope up with uncertainty and change.

3. Planning Reduces Overlapping and Wasteful Activities

Planning coordinate the efforts of different divisions, departments and individuals. Since planning
ensures clarity in thoughts and action, work is carried on smoothly without any confusion and
misunderstanding. Useless and redundant activities are minimized or eliminated.

4. Planning Facilitates Decision Making

Decision Making involves searching for various alternative courses of action, evaluating them and
selecting the best one. In planning, targets are set in advance and these targets are indicators on the
basis of which alternative courses of action are considered.

5. Planning Promotes Innovative Ideas

Planning is basically the thinking function of management. It involves looking ahead and preparing for
the future. It induces the management to forecast changes in the business environment and to design
plans to turn them in their favor. Planning provides an opportunity to managers to generate new ideas
for the growth and expansion of business.

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 6. Planning Establishes Standards for Controlling

Controlling involves comparison of actual performance with the planned performance. Planning
provides the objectives or standards against which the actual performance is evaluated. A comparison of
actual performance with the planned results helps to identify the deviations and to take corrective
action to match the actual performance with the planned performance.

Limitations/ Demerits Of Planning

1. Planning Leads to Rigidity/Limited Flexibility

The plans decide the future course of action and it is not possible for the managers to change them.
They have to strictly adhere to the formulated plans irrespective of changes in the environment. This
kind of rigidity or inflexibility may prove to be costly and may not bring positive results for the
organization when the situation changes. It may also discourage individual initiative and creativity.

2. Planning may not Work in Dynamic Environment

The environment in which a business survives is dynamic as there are continuously changes taking place
in economic, social, technological, legal and political environment. Organizations have to adapt
themselves to these changes in order to survive. It becomes quite difficult to forecast the future changes
with absolute accuracy.

3. Planning Reduces Creativity

Planning is an activity which is performed by the top level management. Usually the rest of the members
are required to implement these plans. As a result middle level management and other members are
neither allowed to deviate from plans nor are they granted power to act on their own. Hence, much of
the creativity and initiative in them gets reduced.

4. Planning Involves Huge Costs

Planning is an intellectual process and companies need to hire the professional experts to carry on this
process. Planning should be economical i.e. the cost of planning should not exceed the benefits
expected from it. Management must exercise intelligent judgment in order to balance the expenses
incurred on preparing plans against the benefits derived from them.

5. Planning is a Time Consuming Process

Planning is a lengthy process which might lead to delay in action. Planning consumes a lot of time for
collection, analysis and interpretation of data. Thus, planning is not practicable during emergencies or
crisis when quick or on the spot decisions is required. Sometimes so much is taken in formulating the
plans, as a result of which very less time is left for their implementation.

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 6. Planning does not Guarantee Success

Managers have a tendency to rely on previously tried and tested successful plans. But it is not always
true that a plan which has worked successfully in the past will bring success in the future also as there
are number of unknown factors which may lead to failure of plan in future. So, plans must be
formulated and implemented in the light of changing environment.

7. Lack of Accuracy

Planning is based on forecasts which may not always prove correct. Under planning many assumptions
are made to decide the future course of action. But these assumptions are not always cent percent
correct. When forecasts prove wrong then whole planning will fail which leads to heavy losses.

Planning Process

1. Setting Objectives

The planning process begins with setting up of objectives because all policies, procedures, budgets,
rules, methods and strategies are framed for achieving objectives only. Objective3s are the ends or
results which the management wants to achieve by its operations. The internal as well as external
conditions affecting the organization must be thoroughly analyzed before setting objectives. The
objectives must be reasonable, measurable understandable and specific.

2. Developing Premises

The second step in the planning process is to develop premises. Planning is always done for uncertain
future. Therefore the manager is required to make uncertain assumptions about the future, which are
considered to be the base material upon which plans are to be drawn. These assumptions are called
planning premises.

3. Identifying Alternative Courses of Action

Once objectives are established and assumptions are made, then the next step is to determine
alternative courses of action which may be used to achieve the set objectives. There is hardly any plan
for which alternatives do not exist. Generally, there are many alternatives to achieve the objectives and
the manager must know all the ways to reach the objectives.

4. Evaluating Alternative Courses

In this step various alternative courses of action are evaluated to select the best alternative through
which set objectives can be achieved. The alternatives should be compared in the light of objectives,
cost, and risk, planning premises, benefits, availability of capital, etc. the feasibility and consequences of
each alternative must be scrutinized before a choice is made.

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 5. Selecting an Alternative

This step involves selection of the best alternative. This is the real point of decision making. The best
plan has to be adopted and implemented. The ideal plan would be the most feasible, profitable and with
least negative consequences.

6. Implementing the Plan

This step is concerned with putting the plan into action. For implementing the plans, the managers start
communicating the plans to all the employees very clearly because the employees actually have to carry
on the activities as per specification of plans. Successful implementation of plan requires the
understanding and whole hearted cooperation of all the members of the organization.

7. Follow-up Action

It means to see whether plans are being implemented and activities are performed according to plans.
Planning is an ongoing process so the manager’s job does not get over simply by implementing the plan.
The managers monitor the plan carefully while it is implemented.

Types of Plans

1. Objectives

Objectives are the ends or results which the management seeks to achi8eve by its operations.
Objectives define the future state of affairs (or desired future position) which an organization strives to
achieve. Objectives indicate the destination of the organization. All other4 functions of management
are directed towards the achievement of objectives.

2. Strategy

A strategy is a comprehensive plan prepared for meeting the challenge posed by the activities of
competitors and other environmental forces. It includes three dimensions:

a. Determining long-term objectives.

b. Adopting a particular course of action.
c. Allocating resources necessary to achieve the objectives.

3. Policy

A policy can be defined as a general statement or understanding that guides decision making. In simple
words, it is the organization’s own way of handling the problems. Policies provide a basis for interpreting
strategy. They are guides to managerial action and decisions in the implementation of strategy

4. Procedure

In simple words, a procedure is the plan that determines the sequence of doing any work for achieving
objectives. A procedure is a chronological sequence of steps to be undertaken to enforce a policy and to

38
achieve an objective. Procedures are usually laid down for repetitive work so that same steps are taken
each time the activity is performed.

5. Method

Methods can be defined as standardized ways in which a given task has to be performed. Se3lection of
proper method saves time, money and effort and increases efficiency. A method is more limited in scope
than a procedure. It is one step of a procedure.

6. Rule

Rules are code of conduct. They tell us what is to be done and what is not to be done in specific
situations. A rule provides no scope for discretion and judgment. Rules are to be enforced rigorously or
strictly and there is generally a fine or penalty for violation of rules. Rules are helpful in maintaining
discipline in the organization.

7. Programme

A Programme is a comprehensive plan designed to implement the objectives. It is a combination of

objectives, policies, procedures, rules, resources, etc. it will include the entire gamut of activities as well
as the organization’s policy and how it will contribute to the overall business plan. It is a well-defined
scheme designed to achieve a particular objective.

8. Budget

A budget is a statement of expected results expressed in numerical terms for a definite period of time in
the future. It is a plan of action or blueprint made to achieve pre-determined objectives of various
departments. It may be expressed in time, money or physical units. Budgets can be prepared for various
groups of activities, e.g., production, sales, material, cash, etc.

39
 CHAPTER-5

ORGANISING
Meaning

Organizing can be defined as identifying and grouping various activities in the organization and bringing
together the physical, financial and human resources and establishing most productive relations among
them for the achievement of specific goals.

In other words, organizing is the process of defining and grouping the activities of the enterprise and
establishing authority relationships among them.

Importance/Significance of Organizing

1. Benefits of specialization

In organizing function, the total work is divided into different parts. Such division of work reduces the
work load and enhances the productivity. Efforts are made to place the right man at the right job on the
basis of his ability, knowledge and skill. Repetitive performance of a particular work helps a worker to
gain experience and get specialized in that area.

2. Clarity in Working Relationships

In the organizing function of management the employees are assigned different jobs and managers
clearly define the jobs. The jobs are defined on the written document which is called job description
which explains what exactly has to be done in every job. There is a clearly defined line of communication
and line of authority and responsibility.

3. Optimum Utilization of Resources

In the organization function all jobs are clearly defined and differentiated. The proper allocation of jobs
helps in avoiding overlapping/duplication of work, which helps in avoiding confusion and minimizing the
wastage of resources and efforts.

4. Adaptation to Change

Organizing helps the enterprise to adjust itself according to the changes in business environment by
suitably modifying the organization structure. It also provides stability in the enterprise so that it
continues to survive and grow inspite of changes.

5. Effective Administration

Organizing clarifies jobs/ duties and authority-responsibility relationships. This helps in avoiding
confusion and duplication, and enables proper execution of work. Thus, managing the enterprise
becomes easy and this brings effectiveness in administration.

40
 6. Development of Personnel

Delegation of authority holds a central place in organizing function. In organizing function delegation of
authority is practiced. Effective delegation allows manager to assign works of routine nature to their
employees. The reduction in workload enables the managers to develops new methods and ways of
performing job efficiently.

7. Expansion and Growth

Organizing promotes growth and diversification of an enterprise. It enables a business enterprise to add
more job positions, departments and even diversify their product lines. This helps to increase customer
base, sales and profit.

Organizing Process

1. Identification and Division of Work

The process of organizing begins s with the identification and division of work. The entire work is to be
divided into manageable activities (called job) so that duplication of efforts and resources can be
avoided and the burden of work can be shared among the employees.

2. Departmentalization

The second step in organizing process is to combine/club or group similar or related jobs into larger
units called departments, sections or divisions. This grouping process is known as departmentalization.
Work divided into jobs is combined to facilitate unity of effort. Departments can be created on the
following basis:

a) On the basis of Functions: for example, Finance Department for financing activities, Production
Department for production activities etc.
b) On the basis of Products: for example, Medicine, Textile, Food, Cosmetics, Garments ,Footwear,
etc.
c) On the basis of Territory: for example, East, West, North, etc.

3. Assignment of Duties

After departmentalization the next step is to allocate the work to the employees according to their
experience, skills and competencies. In order to ensure effective performance in an enterprise, is is
essential that a proper match or balance is made between the nature of a job and ability of the
employee responsible for the job.

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 4. Establishing Reporting Relationships

Only assignment of work is to not enough. The next step in organizing process is to establish the
reporting relationship-from whom an employee has to receive orders or instructions and to whom he is
accountable or answerable for the performance of work allocated.

Organization Structure
Organization structure can be defined as the framework within which managerial and operating tasks
are performed. It specifies the relationship between people, work and resources. It allows correlation
and coordination among human, physical and financial resources and this enables a business enterprise
to achieve objectives of the enterprise.

Types of organization structure

Functional Structure

Functional Structure is a type of o0rganisational structure formed by grouping of jobs of similar nature
under major functions and organizing these as a separate department. All departments report to a
coordinate head. For example, in a manufacturi8ng firm, all jobs related to production are grouped in
production department, jobs related to purchase under purchase department, jobs related to finance in
finance department and so on.

Suitability

Functional structure is suitable 9in the following cases:

1. When the size of organization is large and producing one/single line of product or small number
of related products.
2. When the organization has to carry out diversified activities.
3. When the operations of the organization need high degree of specialization.

Advantages/ Merits

1. Functional Specialization

A functional structure leads to functional/occupational specialization since emphasis is placed on

specific functions. This promotes efficiency in utilization of manpower as employees are required to
perform the similar tasks within a department regularly.

2. Better Control and Coordination

It promotes control and coordination within a department because employees perform similar tasks.

3. Efficiency

It helps in increasing managerial and operational efficiency and this results in increased profits.

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 4. Minimizes Costs

It leads to minimum duplication of effort which results in lower costs.

5. Facilitates Training

It makes training of the employees more easy as they are trained in limited range of skill i.e., employees
of marketing dep0artment are given training of marketing techniques only.

Disadvantages/Limitations

1. De-Emphasis on organizational objectives

Under functional structure, more emphasis is given on accomplishing of departmental objectives rather
than overall organizational objectives. It will have adverse effect on the company.

2. Problems in Coordination

It may be difficult to achieve coordination as information has to be exchanged across functionally

differentiated departments.

3. Inter-Departmental Conflicts

It may lead to conflict between two or more departments it their interests are not compatible.

4. Inflexibility

Employees get training of single function only i.e. , the department to which they belongs so they can’t
be shifted to other departments or positions.

5. Difficulty in Fixing Accountability

It becomes difficult to hold a particular department responsible for any problems.

Divisional Structure

Divisional structure is a type of organizational structure comprising of separate business units or

divisions, created on a certain basis, e.g., product manufactured. For example, if a company is producing
cosmetics, medicine, soap, textile, cement, footwear, garments etc. then all the activities related to soap
will be grouped in soap department, all the activities of medicine under medicine department and so on.

Suitability

1. When organizations producing multiple products with distinctive features.

2. When an organizations grows and needs to add more employees, create more departments and
introduce new levels of management.
3. When organizations require product specialization.

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Advantages/Merits

1. Product Specialization

Product specialization helps in the development of varied skills in a divisional head and this prepares him
for higher positions.

2. Greater Accountability

In this structure, each product department is treated as a ‘profit center’ and is accountable for its own
profit and loss.

3. Flexibility and Initiative

It promotes flexibility and initiative because each division functions as an autonomous or independent
unit which leads to faster decision-making.

4. Expansion and Growth

In divisional structure, new divisions can be easily added without interrupting the existing operations.
Thus, it facilitates expansion and growth.

Disadvantages/Limitations

1. Expensive

It may lead to increase in costs because of duplication of resources in various departments since each
division has separate set of similar functions.

2. Conflicts

There may be conflicts among different divisions with reference to allocations of funds. Also, a particular
division may try to maximize its profits at the cost of other divisions.

3. Organizational Interest Ignored

It provides managers with the authority to supervise all activities related to a particular division.
Managers focus on their own product and pay no heed or attention to overall organizational objectives.

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Difference between Functional Structure and Divisional Structure

Basis Functional Structure Divisional Structure

Formation Its formation is based on functions. Its formation is based on product
lines and is supported by functions.
Specialization Its brings functional specialization. It leads to product specialization.
Cost It is economical as compared to It is expensive in terms of cost
divisional structure. because all the resources in
different directions.
Coordination It is difficult to coordinate the Coordination is easy as all functions
activities if an organization is related to a particular product are
producing many products. integrated in one division.
Fixation of Responsibility In this structure, it is very difficult to Under this structure, it is easy to fix
fix the responsibility on a particular the responsibility on a particular
department. department.
Managerial Department Difficult, as manager becomes More scope, autonomy as well as
specialized in one function only. chance to perform multiple
functions help in managerial
development.

Formal Organization

Formal organization can be defined as the organization structure which is designed and established by
the management to achieve organizational goals.

Advantages/Merits of Formal Organization

1. Fixation of Responsibility

It is easy to fix responsibility in case of failures as mutual relationships are clearly defined.

2. Clarity of Duties

In this type of organization, role and duties of each member are clearly defined which help in avoiding
confusion and duplication of work and efforts.

3. Unity of Command

Unity of command is maintained through the scalar chain.

4. Accomplishment of Organizational objectives

Formal organization helps i8n achieving the objectives of the organization by providing a framework
regarding operations to be performed and ensuring that each employee know the role he has to play.

45
 5. Stability

This type of organization provides stability to the organization through policies, procedures, rules and
regulations. Formal organization is long lasting because functioning of various departments continues
despite the leaving of old employees and joining of new hands.

Disadvantages/Demerits of Formal Organization

1. Procedural Delays

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

2. Lack of initiative

Formal organization may not provide adequate recognition to creative talent, since it does not allow any
deviations from rigidly laid down policies.

3. Difficult to Fully Understand Human Relationships

This is because it gives more emphasis on structure and work, rather than on inter-personal
relationships among the employees.

Informal Organization

Interaction among people at work gives rise to a ‘network of relationships among them’ called the
informal organization. Informal organization originates from within the formal organization whwn
people interact beyond their offici8ally defined roles.

Advantages/Merits of Informal Organization

1. Faster Spread of Information

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

2. Fulfills Social Needs

Informal organization helps to fulfill the social needs of the members. This enhances their job
satisfaction since it gives them a sense of belongingness.

3. Fills Inadequacies of Formal Structure

It contributes towards fulfillment of organizational objectives by compensating the limitations of the

formal organization.

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Disadvantages/Limitations of Informal Organization

1. Spreads Rumors

Informal organizations may become a disturbing force when it spreads rumors. This may cause serious
harm to the organization and its management.

2. Resistance to Change

It is very difficult for the management to bring changes in the organization if the informal organization
opposes them.

3. Priority to Group Interests

Informal groups can be harmful to the organization if the norms set by the groups are against the
interests of the organization.

Difference between Formal Organization and Informal Organization

Basis Formal Organization Informal Organization

Formation Formal organization is deliberately Informal organization originates as a
created as a result of company rules result of social interaction among
and regulations. employees.
Authority Authority arises on the basis of Authority arises out of personal
position in management. qualities.
Behaviour of Informal organization, standards of Under informal organization, standards
Members behaviour and performance are of behaviour (group norms) are evolved
prescribed and enforced by by mutual consent among members.
management.
Flow of Under formal organization, Under informal organization, there are
Communication communication flows through scalar no fixed patterns of communication.
chain and the managers prefer Informal can travel from any direction.
written channels for communication. Generally, oral communication takes
place.
Nature It is rigid and stable. It is flexible and unstable.
Leadership Managers are leaders. Leaders may or may not be managers.
They are chosen by the group
members.

Delegation of Authority

Delegation refers to transfer of authority from a superior to a subordinate. Delegation is a pre-requisite

to the efficient functioning of an organization because it enables a manager to use his time on high
priority activities. It also satisfies the subordinates’ need for recognition and provides them with
opportunities to develop and exercise initiative. The person who delegates the authority is called
delegator and the person who receives the authority is known as delegatee.

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Elements of Delegation

1. Responsibility

Responsibility means the obligation of a subordinate to properly perform the assigned duty.
Responsibility arises from a superior subordinate relationship because the subordinate is bound to
perform the duty assigned to him by his superior. Responsibility always flows upwards from a
subordinate to a superior.

2. Authority

Authority means the right of an individual to take necessary decisions and to command his subordinates.
It arises from the established scalar chain which links the various jobs positions and levels o0f an
organization. Authority is required to perform a given responsibility. It always moves downwards from a
superior to a subordinate.

3. Accountability

Accountability means answerability for the final outcome of the assigned work. Authority can be
delegated by a superior to his subordinates but accountability cannot be passed or delegated because it
is absolute in nature. Accountability always flows upwards from a subordinate to a superior.

Comparison of Authority, Responsibility and Accountability

Basis Authority Responsibility Accountability

Meaning Authority means right to Responsibility means Accountability means
take decisions. obligation to perform answerability for the final
the given work. results of the assigned
work.
Delegation Authority can be Responsibility cannot be Accountability cannot be
delegated. delegated completely. delegated at all because
it is absolute.
Flow Authority always flows Responsibility always Accountability always
downwards from a flows upwards from a flows upwards from a
superior to a subordinate. subordinate to a subordinate to a
superior. superior.
Origin It arises from the formal Responsibility arises Accountability originates
position in an organization. from delegation of from responsibility or
authority. task assigned.

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Importance of Delegation

1. Effective Management

Delegation of authority helps a manager to share his work load with his subordinates. It lightens the
burden of work on top executives. By passing routine or minor work to the subordinates, a manager can
devote greater attention on important matters.

2. Employee Development

Delegation of authority provides more opportunities to employees to utilize their talent. It allows them
to develop those necessary skills which help them to perform complex tasks.

3. Motivation of Employees

Delegation is an important instrument to motivate the subordinates. When authority is delegated to the
subordinates, they are encouraged to do their job with greater responsibility. Delegation provides a
feeling of status and recognition to subordinates. Their freedom and job satisfaction increases due to
the authority they enjoy and the rewards they get for better performance.

4. Facilitation of Growth

Delegation facilitates expansion and growth of an organization by providing trained and experienced
personnel to take up leading positions in new ventures or projects.

5. Basis of Management Hierarchy

Delegation of authority establishes superior –subordinate relationships, which are the basis for the
hierarchy of management. Everyone knows who has to report to whom.

6. Better Coordination

The three elements of delegation, namely, authority, responsibility and accountability help to define
powers, duties and answerability attached to the various job positions in an organization. This helps to
avoid overlapping of duties and duplication of efforts.

Centralization And Decentralization

Centralization means concentration or retention of authority for decision-making at top level in the
organization.

Decentralization means systematic delegation of authority through all the levels of management and in
all departments except that which can be exercised only at central points. Decision-making authority is
pushed down the chain of command.

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Importance of Decentralization

1. Develops Initiative Among Subordinates

Decentralization helps the lower level managers to take all those decisions, which are for the
improvement of enterprise, on their own and to develop appropriate solutions for solving different
kinds of difficulties or problems they face.

2. Develop Managerial Talent for the Future

Under decentralization, managers working at middle and lower level learn the art to take independent
decisions. Decentralization provides them a chance to prove their talent by handling various
assignments independently. Such kind of opportunities increases their level of knowledge and
experience at all levels in an organization.

3. Quick Decision Making

In an decentralized organization decision-making is not restricted in few hands only but decision-making
power is entrusted to all the managers who are performing the activities. As a result, more accurate and
quick decisions can be taken as employees are well aware of realities of the situation.

4. Relief to Top Level Management

In a decentralized organization, the authority to take routine operational decisions is delegated to the
middle and lower level management. As a result, top level managers relieve themselves from routine
matters and consequently the work load is reduced.

5. Facilitates Growth

Decentralization provides considerable liberty to managers at lower level. This allows them to do the
work in a manner best suited to their department. When each department is doing its best then the
overall productivity increases and organization is able to generate more revenues which can be used for
growth and expansion purposes.

6. Better Control

Decentralization helps to evaluate the work performance at each level of management. Managers
working at various levels are allowed to take their own decisions and they are personally accountable
for their decisions. They cannot pass the blame to their employees.

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Differentiate Between Delegation and Decentralization of Authority

Basis Delegation Decentralization

Nature/Essentiality Delegation is a mandatory act Decentralization is an optional policy
because no individual can perform and is depends on the discretion of the
all tasks on his own. top managers.
Freedom of Action The superior exercises more There is greater freedom of action due
control over the performance of his to less control by the top management.
subordinates to whom authority is
delegated. Hence, less freedom to
take decisions.
Status Delegation is a process followed to Decentralization is the outcome of the
share tasks and authority. policy decision taken by the top
management.
Scope/Parties Involved The scope of delegation is narrow It has wide scope as it involves
as it is confined to a superior and extension of delegation to the lowest
his immediate subordinate. When level of management. When we
we delegate authority, we multiply decentralize authority, we multiply it by
it by two. many.
Purpose/Significance Its purpose is to reduced or lessens Its purpose is to increase the role and
the burden of the managers, so autonomy (or freedom of action) of
that they can devote greater time lower level managers.
and attention on important
matters.

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 CHAPTER-6

STAFFING
MEANING

Staffing means ‘putting people to jobs’ or ‘’finding the right people for the right job’’. It is the function of
management which is concerned with estimating the manpower requirements of an organization and
includes other functions like recruitment, se3lection, placement, induction, training, development,
promotion, and compensation and performance appraisal. Thus, staffing is concerned with obtaining,
using and maintain a satisfactory and satisfied workforce.

Importance of Staffing

1. Filling the Roles by Obtaining Competent Personnel

Staffing function is required to fill the various job positions. There will be no use of job positions unless
and until these are occupied by competent employees. Staffing helps in discovering and obtaining
competent personnel for various jobs.

2. Higher Performance

Staffing ensures higher performance by putting right person on the right job. For example, in order to
get best results, teachers who are proficient in Business Studies are the right people to be appointed in
the commerce department to teach Business Studies.

3. Continuous Survival and Growth

An organization grows with the efforts of its employees only. By appointing competent and efficient
employees, staffing ensures continuous survival and growth of the organization. Competent and
efficient staff enables an organization to function successfully in the changing environment.

4. Optimum Utilization of Human Resources

Proper staffing enables the organization to acquire required quantity and quality of employees. As a
result, the staffing process facilitates optimum utilization of human resources by avoiding overstaffing
and prevents disruption or stoppage of work by indicating In advance about likely shortage of
employees.

5. Improves Job Satisfaction and Morale

Through objective assessment and by giving fair rewards to the employees for their contributions,
staffing improves job satisfaction and morale of employees.

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Staffing as a Part of Human Resource Management (HRM)

Human resource management (HRM) includes many specialized activities and duties which the human
resource personnel must perform. These are:

1. Recruitment, selection, placement and orientation of employees.

2. Analyzing jobs and collecting information about jobs to prepare job description.
3. Training and development of employees for efficient performance and career growth.
4. Performance appraisals.
5. Developing compensation and incentive plans.
6. Maintain labour relations and union management relations.
7. Ensuring social security for employees and handling their grievances.
8. Dealing with legal procedures.

Staffing Process

1. Estimating Manpower Requirements.

This is the first step in the process of staffing. It is also called manpower planning or human resource
planning. It is concerned with forecasting and determining the number and type of staff required by the
organization in near future. Type refers to specific qualifications, skills, experience, etc. to be possessed
by the employees.

2. Recruitment

After determining the manpower requirements the next step is recruitment. Recruitment starts before
selection. Recruitment is a process of searching for prospective employees and stimulating or
encouraging them to apply for jobs in the organization. The main objective / aim of recruitment is to
create a pool of prospective job candidates. The higher the number of people who apply for a job, the
higher will be possibility of getting a suitable employee.

3. Selection

Selection begins where recruitment ends. It is the process of choosing from among the pool of
prospective candidates who have applied for a job. Many steps involved in the process of employee
selection. These steps are preliminary screening, selection / employment tests, employment/ selection
interview, reference and background checks, selection decision, medical examination, job offer and
contract of employment.

4. Placement and Orientation or Induction

Placement refers to the employee occupying the position or post for which the person has been
selected. In others words, it involves putting the selected candidates on the right job. Orientation refers
to the process of introducing the newly selected employees with their superiors, subordinates and
colleagues and familiarizing them with the rules and policies of the organization.

53
 5. Training and Development

Training and development of the employees is essential in order to improve their skills and to give them
an opportunity to rise at the top. Training can be defined as a process of increasing the knowledge, skills
and abilities of employees for doing a specific job. Development refers to the learning opportunities
designed to help the employees to grow. It involves growth of an individual in all respects like
personality, maturity, etc.

6. Performance Appraisal

Performance appraisal means evaluating an employee’s current and / or past performance asw against
certain pre-determined standards.

7. Promotion and Career Planning

Career planning includes promotion, transfer and demotion of personnel based on their performance
appraisal. Promotion means moving an employee to a higher job position carrying higher
responsibilities, prestige, facilities and pay since he is working efficiently and his approval report is
excellent. Sometimes a worker may not fit into his job in a particular department, then he is transferred
to other department to improve his efficiency.

8. Compensation

Compensation refers to all forms of pay or rewards given to employees. In other words, compensation
means fixing the remuneration payable to employees for their services rendered to the organization.

Recruitment
Recruitment is the process of searching for prospective candidates and inducing or encouraging or
stimulating them to apply for jobs in the organization. The purpose of recruitment is to obtain a
sufficiently large number of qualified candidates so that management can select the most eligible
candidates. Recruitment brings together the job giver (employer) and the job seekers (applicants).
Recruitment can be done either from inside or from outside the organization.

Sources of Recruitment
Internal sources means inviting candidates from within the organization. In case of internal sources of
recruitment, the vacant posts are filled by using existing employees only and no outsiders are permitted
in internal sources.

54
Methods of Internal Sources of Recruitment

1. Transfer

Transfer means shifting of an employee from one job to another or from one department to another or
from one branch to another, without an6y change in the responsibilities, salary and status of the
employee. Only the work place is changed. Transfer is a horizontal shifting of employees.

2. Promotion

Promotion refers to shifting an employee from a lower job position to a higher job position. It includes
higher status, responsibilities, facilities and pay. It is a vertical shifting of an employee. It helps in
improving the motivation, loyalty and satisfaction level of employees.

Advantages/Merits

1. Motivation to Employees to Improve their Performance

Promotion helps to improve the motivation, loyalty and satisfaction level of employees because a
promotion at a higher level may lead to a chain of promotions at5 lower levels in the enterprise.

2. Less Expensive

No time and money has to be spent on advertisements, tests, interviews, etc. because the knowledge
and skills of employees are already known.

3. Simple Process

The internal sources of recruitment are very simple and reliable process as present employees are
already known to the organization and can be evaluated more accurately.

4. A Tool of Training

Transfer is a tool of training for the employees to prepare them for higher jobs.

5. No Over and Under Staffing

Transfer helps to shift the employees from the surplus department to those where there is shortage of
staff.

Limitations/Demerits

1. Not Suitable for a New Organization

A new organization cannot use internal sources of recruitment. Moreover, no organization can fill all its
vacancies through internal sources.

55
 2. Lack of Fresh Talent/Stopping Infusion of New Blood

When vacancies are filled through internal promotions, there is limited choice and the scope for
induction of fresh talent and new blood is reduced.

3. Lack of Competition

In the absence of competition from qualified candidates from outside, employees are likely to expect
automatic promotion by seniority.

4. Low Productivity

Productivity of the organization is reduced due to frequent transfers.

5. Conflict

There may be conflict among the employees who expect promotion to the available vacancies. The
employees who are not promoted may become unhappy and their efficiency may decline.

External Sources of Recruitment

Under external sources of recruitment, the candidates from outside the organization are invited to fill
the vacancies. In other words, when the organization meets its manpower requirements from outside
the organization then it is called external recruitment.

Advantages/Merits

1. Qualified Personnel

Through external sources of recruitment the management can attract qualified and trained persons to
apply for vacant jobs in the organization.

2. Wider Choice

When vacancies are advertised widely, a large number of applicants from outside the organization
apply.

3. Fresh Talent

By using the external sources of recruitment, the organization can obtain fresh and talented candidates.
This means infusion of new blood and modern ideas into the organization.

4. Competitive Spirit or Healthy competition

The existing staff will have to compete with outside candidates for vacancies. They will work hard to
show better performance.

56
Disadvantages/Demerits

1. Dissatisfaction Among Existing Staff

Recruitment from outside may lead to dissatisfaction and frustration among existing employees. They
may feel that their chances of promotion get reduced.

2. Lengthy Process or Time Consuming

Recruiting employees from external sources is a very lengthy process as vacancies are publicized and
organization has to wait for the response of prospective candidates.

3. Expensive Process

Recruitment of candidates through external sources is a very expensive process. It involves considerable
expenditure on advertisement and processing of applicants.

Difference between Internal and External Sources of Recruitment

Basis Internal Sources of Recruitment External Sources of Recruitment

Meaning An internal source means inviting An external source means inviting
candidates from within the candidates from outside the
organization. organization to fill the vacancies.
Time Required It is less time consuming. It requires a lot of time for filling the
vacancies.
Choice Limited choice. Wide choice.
Economy It is less expensive. It is very costly as job vacancy has to be
advertised.
Quality There is restricted choice and In this method, the organization can
scope of fresh talent is reduced. expect to get best and talented
candidates from outside. This means
infusion of new blood and new ideas
into the organization.
Motivation This method motivates the existing This source causes dissatisfaction and
staff it improve their performance frustration among the existing staff.
as chances of getting higher post They may feel that their chances of
for insiders are bright. promotion are reduced.
Competitive spirit Employees are likely to expect The existing staff will have to do
automatic promotion by seniority. compete with outside candidates. They
Thus spirit of competition among will work hard to show better
the employees may be hampered. performance.

57
Methods of External Sources of Recruitment

1. Direct Recruitment or Recruitment at Factory Gate

Under this source, a notice is displayed on the notice board of the organization specifying the details
regarding the jobs available. Job-seekers read it and gather outside the premises of the organization at
the specified date and time and selection is done on the spot. This type of method is generally followed
for casual or temporary vacancies of unskilled or semi-skilled jobs.

2. Casual Callers

Many well-known companies maintain a record of unsolicited or uncalled applicants in their offices.
Such job-seekers cab be a useful source of manpower. Their applicants are taken and kept pending in a
file. Such records if maintained properly can be a useful source of recruitment.

3. Advertisement

Advertisement is the most common and popular method of external recruitment. Whenever a company
wants to inform the public about vacancies, it can issue an advertisement. The company can select the
media of advertisement keeping in mind the requirements o0f job position.

4. Employment Exchanges

Employment exchanges act as middlemen between the job seekers (applicants) and the job providers
(employers or organization) who have vacant job positions. Employment exchanges register the details
of job seekers. Employers inform these exchanges about the vacancies. These exchanges sent names of
suitable candidates to the employers. This is an economical and time saving method of recruitment.

5. Placement Agencies and Management Consultants

Placement agencies provide nationwide service of matching demand and supply of work-force. These
agencies invite bio-data from the job seekers and send them to their suitable clients.

Management consultancy firms help the organization to recruit technical, professional and managerial
personnel. These specialize in middle level and top level executive placements.

6. Campus Recruitment (Educational Institutions)

Colleges and Institutes of Management and Technology have become a popular source of recruitment
for technical, professional and managerial jobs. Many big companies maintain a close link with them to
recruit qualified personnel for various jobs. Companies conduct interviews in educational institutions
and shortlist candidates.

58
 7. Recommendations from Present Employees

Many organizations encourage their employees to recommend the names of their friends, relatives and
other known persons for employment. Such applicants are likely to be good employees because their
background is sufficiently known. Under this method, a type of preliminary screening also takes place as
the employee generally recommends those persons who match the job profile.

8. Labour Contractors

Labour contractors act as middlemen between the labourers and the enterprise. Labour contractors
keep In touch with the labourers in the villages and small towns and bring them to the places where
workers are required. Through labour contractor’s only unskilled and semiskilled labour are recruited.
Labour contractors are ready to supply the required quantity of workers a short notice on payment of
commission.

9. Advertising on Television or Telecasting

The practice of telecasting of vacant posts over TV (Doordarshan and other channels) is gaining
importance these days. The complete information regarding the job, company and qualification required
as publicized.

10. Web Publishing or Internet

These days internet is becoming a common and popular source of recruitment. There are certain
websites specifically designed to provide information about both job seekers and job providers. These
websites are frequently visited a large number of job seekers and companies searching for suitable
employees.

Selection
Selection is the process of identifying and choosing the best person out of a number of prospective
candidates for a job. In other words, it is the process of discovering the most suitable and promising
candidates to fill up the vacant job positions in the enterprise.

Process of Selection

1. Preliminary Screening

On the basis of preliminary screening of application forms, unqualified or unfit candidates are
eliminated. Some companies follow the policies of sending a printed card or letter informing such
applicants the reason as to why their applications could not be considered. Other suitable applicants are
called for the first round of interview known as preliminary interview. The aim of preliminary interview
is to ensure whether the candidates are physically and mentally fit for the job.

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 2. Selection or Employment Tests

Following are the important tests conducted by the enterprises for selection of employees:

(a) Intelligence tests: Intelligence test is conducted to measure the intelligence quotient (I.Q.) or
level of intelligence of the candidate. It is an indicator of a person’s learning ability or the ability
to make decisions and judgments.
(b) Aptitude tests: Aptitude test is a measure of individual potential for learning new skills. Such
test is good indices of a person’s future success score. In other words, aptitude test is conducted
to determine the applicant’s capacity to learn new skills for doing a job well in future.
(c) Personality test: Personality tests provide clues to a person’s emotions, maturity level, attitude,
courage, initiative, self-confidence, honesty, quality of mixing up with others.
(d) Trade or Achievement or Performance test: Trade test measure the existing skills (professional
knowledge and proficiency) of the individual. In other words, trade test is conducted to find out
the skills and abilities possessed by the candidate relating to the job.
(e) Interest Test: Interest test is used to know the pattern of interest or involvement of a person. In
other words, interest test is conducted to determine the type of job in which the candidate has
more interest as compared to other jobs.
3. Employment or Selection Interview

The candidates who pass the employment tests are called for interviews. Interview is a formal, face to
face conversation between the employer and the candidate. The interviewers (selectors) ask job related
and general questions. The way in which a candidate responds to the questions is evaluated.

4. Reference and Background Checks

Generally, in the application form the candidate is asked to give the names and addresses of at least two
responsible person who know him. These persons are known as references. They may be the previous
employer or principle of the school or college attended by the candidate.

5. Selection Decision

The candidates who pass the tests, interviews and reference checks are included in the selection list.
Before making the final decision about selection, the view of the concerned manager (manager
responsible for the performance of the new employee) is considered.

6. Medical Examination

Before giving appointment letter the candidates selected are called for a medical examination. Some
companies appoint their own doctors to do the medical check-up while some companies accept the
medical certificate obtained by a candidate from a qualified physician.

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 7. Job Offer

The candidates who pass the medical examination are given job offer through a letter of appointment. In
the letter of date of joining, terms and condition of job etc. are mentioned. Generally, a reasonable time
is given to the candidates to join the enterprise.

8. Contract of Employment

After the candidate accepts the job offer a written contract of employment is prepared between the
employer and the candidate. The contract of employment contains job title, duties, place and hours of
work, responsibilities, rate of remuneration, leave rules disciplinary procedure, termination procedure,
probation period, etc.

Training and Development

Concept of Training
Training can be defined as a process of increasing the knowledge, skills and abilities of employees for
doing a specific job. It is a process of learning new skills and application of knowledge.

Concept of Development
Development refers to the learning opportunities designed to help the employees to grow. It involves
growth of an individual in all respects like personality, maturity, etc.

Need for Training/ Importance of Training

To the Organization

(a) Training is a systematic learning, always better than hit and trial methods which lead to wastage
of efforts and money.
(b) It enhances employee productivity both in terms of quantity and quality, leading to higher
profits.
(c) Training equips the future manager who can take over in case of emergency.
(d) Training increases employee morale and reduces absenteeism and employee turnover.
(e) It helps in obtaining effective response to fast changing environment.

To the Employees

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

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Basis Training Development
Purpose Its purpose is to make employees Its purpose is to prepare employees
proficient in their present job. for handling higher level of jobs i8n
future.
Orientation of Focus It is a job oriented process. It is a career oriented process.
Duration Short term Long term
Level of Trainees Training is mostly used for non- Development is generally applied to
Involved managerial personnel, i.e., the growth of managerial personnel,
operative employees. i.e., the middle and top level
managers.
Depth of Knowledge Training involves imparting Development involves growth of an
Imparted knowledge and skills for doing a employee in all respects.
particular job.
Initiative in learning In case of training, initiative comes In case of development, initiative
from the employer. comes from the employee.
Method used In training, on-the-job methods of In development, off-the-job methods
training like apprenticeship, of training such as conferences, films,
induction, internship, etc. are case study, vestibule training etc. are
preferred. preferred.
Suitability Training is more suitable for Development is more suitable for
technical staff. managerial staff.

Methods of Training

The various methods of training can be classified into two broad categories:

1. On-the-job Training Methods

2. Off-the-job Training Methods

On-the-job Training Methods

Under these methods, the employee is given training while he is actually working. In other words, it
means “learning while doing”.

Popular on-the-job training methods are:

1. Apprenticeship Training

People who want to enter skilled trades like electricians, plumbers, mechanics, welders, carpenters, etc.
are sent for apprenticeship training. The training period is prescribed (which may vary from 2 to 5 years).
Slow learners may be given additional training. During the training period is stipend is generally paid.
Under apprenticeship training, the trainee or apprentice is put under the guidance of a skilled or master
worker.

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 2. Internship Training

Internship training is a joint Programme of training in which educational institutes and business
enterprises collaborate. The aim of these training is to maintain a good balance between theoretical and
practical knowledge. Under internship training, the educational institutes sent their students to various
organizations so that they can practice the theoretical knowledge acquired by them through educational
institutes. Internship training is popular in medical, accountancy, engineering, lawyer and other
professions.

3. Induction or Orientation Training

It is the process of receiving and welcoming an employee when he first joins the company and giving
him the basic information he needs to settle down quickly and happily and start working.

The purpose of this training Programme is to make the new employee feel at home in the new
environment and generate in him a feeling of belongingness. Proper orientation enables the new
employee to start working efficiently and comfortably on the new job.

Off-the-Job Training Methods

Under these methods, training is given away from the actual work place. In other words, it means
“learning before doing”.

1. Vestibule training

Under this method, an attempt is made to duplicate as closely as possible materials, equipment’s,
methods and conditions as found in real work place. In other words, a duplicate model of workshop is
prepared and instead of using original equipment’s, employees are trained on the dummy model. Expert
trainers are employed to give instructions.

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 Chapter-7

Directing
Meaning

Directing means instructing, guiding, supervising, motivating, leading, counseling and coaching people in
the organization to achieve its objectives.

Characteristics/Features Of Directing

1. Directing Initiates Action

A manager has to perform this function along with planning, organizing, staffing and controlling while
performing his duties in the organization. While other functions prepare a base or setting for action,
directing initiate or start action in the organization.

2. Directing Takes Place at Every Level of Management

Directing is a pervasive function as it is performed by all managers at all levels of the organization.
However, the time spent on directing is comparatively more at the supervisory level of management.

3. Directing is a Continuous Process

Directing is not a onetime activity it is an ongoing process. A manager cannot just rest after issuing
orders and instructions. He must guide, super vise and motivate his subordinates on continuous basis.
He must continuously take steps to ensure that the orders and instructions are carried out properly and
the performance is according to standards.

4. Directing Flows from Top to Bottom

Directing starts from the top level and flows to the bottom level through the organizational hierarchy. A
manager gets instructions from his boss and gives instructions to his subordinates.

Importance Of Directing

1. Initiates Action

Directing helps to initiate action by people in the organization towards achievement of predetermined
objectives. For example, if a supervisor guides his subordinates and clarifies their doubts in performing a
task, it will help them to achieve work targets given to them.

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 2. Integrates Employees’ Efforts

At all levels of organization there are subordinates under managers. The work entrusted to these people
is interrelated. The performance of one individual affects the performance of other. It is necessary to
integrate individual efforts so that organizational objectives can be achieved. Through directing
managers integrates the efforts of subordinates.

3. Guides Employees

Objectives of an organization cannot be achieved unless people working in it are motivated to work
willingly and perform to the best of their abilities. Directing guides employees to fully realize their
potential and capabilities by motivating and providing effective leadership.

4. Facilitates Introduction of Change

These days business environment is changing very rapidly. An organization must adjust itself to the
changes in its environment. Generally, employees resist changes because of fear of adverse effects of
their employment and promotion. In order to remove such fear, employees must be informed about the
need and advantages of such changes. A manager through the medium of directing can shapes the
mindset of the employees in a manner that they accept changes happily.

5. Brings Stability and Balance in the Organization

Directing helps to bring stability in the organization since it fosters cooperation and commitment among
the people. Sometimes there is a clash between individual goals and organizational goals. Directing
helps to settle down these clashes and bring out balance in the organization.

Concept of Supervision
Meaning

The term ‘supervision’ can be understood in the following two ways:

 Super – over and above

 Vision – art5 of seeing objects

Supervision means overseeing what is being done by subordinates and giving instructions to ensure
optimum utilization of resources and achievement of work targets. It is the process of guiding the efforts
of employees and other resources to accomplish the desired objectives.

Functions of a Supervision/Importance of Supervision

1. Maintain Day-to-Day Contact and Friendly Relations with Workers

A good supervisor acts as a guide, friend and philosopher to the workers.

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 2. Link Between Workers and Management

The supervisor acts as a link between management and workers. On the one hand, he communicates
the objectives, policies and decisions of management to workers. On the other hand, he conveys
workers ideas, suggestions and problems to the top management.

3. Maintain Group Unity/Promotes Group Unity

The supervisor plays a key role in maintaining group unity among workers working under him. He
maintains harmony among workers by solving their disputes.

4. Monitoring Performance

A supervisor controls the performance of workers by comparing their performance with the standards
and takes necessary action to ensure that production is done according to the predetermined standards.

5. Scheduling or Planning the Work

The supervisor determines the work schedule to ensure even and steady flow of work. Scheduling
involves laying down the time for starting and completion of various activities.

6. Issuing Orders and Instructions

The supervisor issues a number of orders and instructions to the subordinates for achieving coordination
in his section or unit. He tells them for higher productivity and better quality.

7. Builds Efficient Team of Workers

A skilled and knowledgeable supervisor can build efficient team of workers by providing good on-the-job
training to them.

8. Motivating Workers

The supervisor motivates his subordinates by providing various monetary and non-monetary incentives.
He inspires them for higher productivity and better quality.

9. Feedback

A good supervisor analysis the work performed and gives feedback to the workers. He suggests ways nd
means of developing work skills. The supervisor also prepares and submits reports to the top
management.

10. Maintaining Discipline

The supervisor enforces rules and regulations of the enterprise among his subordinates to maintain
discipline.

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 11. Optimum Utilization of Resources

When the employees are constantly observed then they always use the resources in the best possible
manner which leads to minimum wastage. But in the absence of supervision the resources may get
wasted.

Motivation

Definition
Motivation can be defined as the process of making subordinates to act in a desired manner to achieve
certain organizational goals. Motivation depends upon satisfying needs of people. For example, in order
to get a toy, a child may be prepared to learn a poem.

Features/Characteristics of Motivation

1. Internal Feeling

Motivation is an internal feeling of an individual. The urge, drives, desires, aspirations, striving or needs
of human being which are internal, influence human behaviour.

2. Goal Directed Behaviour

Motivation produces goal directed behaviour. It induces people to behave in such a manner that they
can achieve their goals.

3. Motivation can be either Positive or Negative

Motivation can be positive or negative but the objective of both is to induce the people to work in the
desir4ed manner. Examples of positive motivators are increase in pay, promotion, bonus, respect,
recognition, etc. while negative motivators are stopping increments, warning letter, punishment,
demotion, reprimands, etc.

4. Motivation is a Complex Process

Motivation is a complex process at the individual are heterogeneous in their expectations, perceptions
and reactions. Any type of motivation may not have uniform effect on all the members. Some are
motivated with financial incentives whereas others are motivated with non-financial incentives.

Maslow’s Need Hierarchy Theory of Motivation

This theory was developed by Abraham H. Maslow, an eminent and a famous U.S. psychologist in 1943.
This theory is based on human needs. According to Maslow, a man has innumerable or countless needs.
If one need is satisfied, another need emerges in that place. Abraham H. Maslow proposed that human
needs can be classified into five categories and can be arranged in order of their importance or priority.
This arrangement of human needs according to their priority is called ‘hierarchy of needs’.

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 1. Physiological Needs

In this category, those needs are included which are very essential for survival and maintenance of
human life. Physiological needs are the most basic needs and must be satisfied before all other needs.
These needs include air, water, food, shelter, clothing, sleep and other necessities of life. The
organization satisfies these needs by giving basic salary to the employees.

2. Safety/Security Needs

Once physiological needs are reasonably satisfied, safety or security needs arise. Safety needs include
physical and economic needs. Physical safety includes protection against accidents, illness, fire, wild
animals, extreme weather, dacoity, terrorism and other types of physical dangers. Economic security
means having adequate funds to meet the future physiological needs and come out of physical security
fear or threat.

3. Social/Affiliation/Belongingness Needs

When the above two needs are satisfied, social needs become important. Social needs include need for
love, affection, friendship, companionship, association, etc. The organization satisfies these needs
through informal organization and cordial relations among employees.

4. Esteem or Ego Needs

These include self-esteem and esteem of others. Self-esteem means self-respect, self-confidence,
competence, achievement, knowledge, etc. Esteem of others means reputation, prestige, status, power,
recognition and respect from others. The organization satisfies these needs by offering challenging jobs,
recognition, providing good job titles, etc.

5. Self-Actualization

These needs are the highest level needs in the hierarchy of needs. These are the needs for realizing
one’s full potential, for continued self-development, for being creative. Self- actualization needs refers
to desire to become what one is capable of becoming. The organization satisfies these needs by allowing
the employees to take initiative to become what they are capable of becoming.

Assumptions of Maslow’s Need Hierarchy Theory

a) People’s behaviour is based on their needs. Satisfaction of such needs influences their
behaviour.
b) People’s needs are in a hierarchical order, starting from basic needs to higher level needs.
c) A satisfied need can no longer motivate a person; only next higher level need can motivate him.
d) A person moves to the next higher level need only when the lower need is satisfied.

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Financial and Non-Financial Incentives

Basis Financial Incentives Non-Financial Incentives

1. Meaning Financial incentives are in direct Non-financial incentives are not
and monetary form or measurable in measured in terms of money but
Examples terms of money. Examples: pay and provide physiological and emotional
allowance, profit sharing, stock satisfaction to the employees/managers.
option, bonus, retirement benefits, Examples: status, promotion,
perquisites, etc. recognition, job enrichment, job
security, etc. However, monetary aspect
may also be involved, e.g., promotion
involves payment of extra money.
2. Level of Financial incentives are more suitable Non-financial incentives are more
Employees for lower level of employees because suitable for higher level of employees
money is a means to satisfy their whose needs are not satisfied by money
needs. alone.
3. Needs Financial incentives help to satisfy Non-financial incentives help to satisfy
Satisfied basic physiological needs of physiological, social and esteem needs
employees. of the employees.

Financial Incentives

1. Pay and Allowances

Salary is the basic financial incentive for every employee. It includes basic pay, dearness allowance,
house rent allowance, etc. In some companies, pay hike and allowances are directed linked with the
performance of the employee.

2. Productivity Linked Wage Incentives

Some firms have adopted wage incentive plans where the amount of incentive is linked to productivity
of the worker or the group to which he belongs.

3. Bonus

Bonus is an incentive offered over and above the wages/salary to the employees. It is customary to
distribute bonus to employees every year. The law requires payment of minimum of 8.33% of annual
pay as bonus and it does not prescribe any upper limit.

4. Profit Sharing

Under this scheme, employees are given a share in the profits of the enterprise if the profits exceed the
level fixed by the management and employees jointly. This motivates the employees to work with
greater enthusiasm and devotion to increase the profits of the enterprise so that they can get share in
the increased profits.

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 5. Co-partnership/Stock Option

Under this system, employees are issued company’s shares at a price which is lower than market price.
This creates a feeling of ownership in the employees and encourages them to contribute for the growth
of the company.

6. Retirement Benefits

Most of the companies offer retirement benefits such as provident fund, pension, gratuity, etc. to their
employees. These benefits create a sense of security among employees. Such incentives help in
satisfying safety or security needs of the employees.

7. Perquisites or Perks or Fringe Benefits

In many organizations, perquisites benefits such as rent free accommodation, medical aid, chauffeur
driven car, free education to the children, etc., are offered to employees over and above salary.

Non-Financial Incentives

1. Status

Everybody has a wish for a higher status. Therefore, the employees can be motivated by increasing their
rank or position, by providing furnished room, company car, exclusive parking, personal assistant,
separate stenographer, etc.

2. Organizational Climate

It indicates the characteristics which describe an organization and distinguish one organization from the
other. These characteristics include individual autonomy or freedom, reward orientation, consideration
to employees, risk taking, etc. Such characteristics directly influence the behaviour of individuals in the
organization. Positive approach adopted by management creates better organizational climate whereas
negative approach may spoil the climate.

3. Career Advancement Opportunity

Every individual wants to grow to the higher level in the organization. Managers should provide
opportunities to employees to improve their performance so that they can be promoted to high levels
jobs. Promotion is a strong motivator which induces people to perform to their maximum level.

4. Job Enrichment

Job enrichment is concerned with designing jobs that include greater variety of work content, require
higher level of knowledge and skill. It provides more autonomy, responsibility and opportunity for
personal growth to the employees.

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 5. Employee Recognition Programme

Recognition means acknowledgement with a show of appreciation. In other words, it means giving
special regard or respect to an employee for meritorious performance which satisfy his ego. Whenever
the good efforts or the positive attitudes are shown by the employees then it must be recognized by the
employer in public or in the presence of other employees.

6. Job Security

Job security is an important non- financial incentive for most of the employees. Job security means
permanence and stability of a job. Employees want their job to be secure. They want certain stability
about future income and work so that they do not feel worried on these aspects and work with greater
zeal and enthusiasm. Due to this reason, some people prefer government jobs as compared to private
jobs.

7. Employee Participation

Employment participation means active involvement of employees or their representatives in the

decision making process on issues concerned with them. When decision is taken in consultation with
employees that they follow the decision more sincerely.

8. Employee Empowerment

Empowerment means giving more autonomy and authority to the employees. It makes employees feel
that their jobs are important and they contribute positively by using skills and talents in performing the
job.

Leadership
Leadership can be defined as the process of influencing the behaviour of people by making them strive
voluntarily towards the achievement of organizational goals.

Leadership indicates the ability of an individual to maintain good interpersonal relations with followers
and motivate them to contribute for achieving organizational objectives. The term ‘leader’ emerges
from leadership. An individual who possess qualities of leadership is known as leader.

Depending on the use of authority, leadership styles can be classified into three broad categories-

Autocratic, Democratic and Laissez-faire leadership

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 1. Autocratic or Authoritative or Directive Leadership
(Boss-centered Leadership)

Autocratic style of leadership is one in which a leader gives orders and expects his/her subordinates to
obey those orders.

The autocratic leader exercises complete control over the subordinates. He adopts one way
communication only. This leader is dogmatic i.e., does not change or wish be contradicted. His following
is based on the assumption that reward or punishment both can be given depending upon the result.

Merits/Advantages

a) This leadership style is effective in getting productivity in many situations like a factory where
the supervisor is responsible for production on time and has to ensure labour productivity.
b) It permits quick decision-making. The reason is that the leader himself takes decision for the
whole group.
c) Autocratic leadership style provides strong motivation and satisfaction to the leader who
dictates terms.
d) Less competent subordinates are required at lower level.
e) This style may bring positive results when great speed is required.

Demerits/Disadvantages

a) Frustration, low morale and conflict among subordinates.

b) This style of leadership reduces the initiative level of subordinates.
c) Potential and creativity of subordinates are not utilized.
d) No development of subordinates takes place.

Suitability

a) Subordinates are uneducated, unskilled, lack of knowledge and experience on the part of
subordinates.
b) A company follows fear and punishment disciplinary technique.
c) Leader prefers to be dominant in decision making.

2. Democratic or Participative or Consultative Leadership (Group-Centered Leadership)

Democratic style of leadership is one in which a leader develops action plans and makes decisions in
consultation with his subordinates.

The democratic leader decentralizes authority and allows the subordinates to share his power. He
encourages them to participate in decision-making. Leader follows the majority opinion. He provides
freedom of thinking and expression. He listens to the suggestions, grievances and opinions of the
employees.

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Merits/Advantages

a) Democratic leadership style improves the job satisfaction and morale of subordinates.
b) It improves the decision making ability of subordinates.
c) It develops positive attitude and reduces labour turnover and labour absenteeism.
d) The quality of decision is improved.
e) The leader multiplies his abilities through the contribution of his subordinates.

Demerits/Disadvantages

a) Participate leadership is time-consuming and may result in delays in decision-making.

b) It may not bring positive results when subordinates prefer minimum interaction with the leader.
c) Some leaders may use this style as a way of avoiding responsibility.
d) Consultation with subordinates may be interpreted as sign of incompetence of leader.

Suitability

a) Goal of company is to increase job satisfaction and independence of employees.

b) Employees have accepted the goal of the organization.
c) Leader wants to share decision-making with the subordinates.

3. Laissez-faire or free-rein Leadership (Subordinate-Centered Leadership)

Laissez means- to let/allow and faire means- to do. In laissez-faire leadership, a leader gives a high
degree of freedom to the subordinates to formulate their own objectives and ways to achieve them.
Under this style, leader avoids power. Such a leader does not believe in the use of power unless it is
absolutely essential. The leader is the only to support them and supply them the required information to
complete the assigned task.

Merits/Advantages

a) Free-rein leadership brings positive effect on the job satisfaction and morale of subordinates.
b) Maximum scope for development of followers.
c) Full utilization of the potential of employees.

Demerits/Disadvantages

a) Lack of guidance and support from the leader.

b) Free-rein leadership ignores leader’s contribution in the same way as autocratic style ignores
the contribution of the subordinates.
c) Subordinates may work in different direction and result in chaos.

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Suitability

a) When subordinates are well-trained and highly knowledgeable.

b) When subordinates are self-motivated and ready to assume responsibility.

Basis of Difference Autocratic Style Democratic Style Free-Rein Style

Decision making Leader is the sole Leader makes decision Subordinates themselves
decision-maker. in consultation with make decisions.
subordinates.
Communication One way i.e., downward Two way Free flow of
communication. communication. communication.
Motivation Fear and punishment Reward and Self-direction and self-
Technique (Negative motivation) involvement ( Positive control.
motivation)
Delegation of No delegation Delegation of authority Complete/full/entire
Authority to some extent. delegation of authority.
Focus Task-oriented style, People-oriented style. People-oriented style.
Growth and No scope for initiative Scope for initiative and Full scope for initiative
Development of and creativity ‘I’ style. creativity ‘we style’. and creativity ‘you style’.
Subordinates
Discipline Obedience and order and Interchange of ideas Self-discipline for control.
discipline. and recognition of
human values.

Communication
Communication can be defined as a process of exchange of ideas, facts, feelings, etc. between or among
two or more people to create common or mutual understanding.

The common forms or methods of transmission of the subject matter of communication are-

(a)Spoken words; (b) written words; (c) Diagrams, pictures or graphs and (d) Gestures i.e. like
movement of lips, or the wink of eyes or the waving of hand or by signal.

Elements of Communication Process

1. Sender or Communicator

He is the person who conveys the message to the receiver. Sender may be a manager, a speaker, a
client, a writer or an actor.

2. Message

It is the content or subject matter of communication to be sent to the receiver. It may involve any idea,
suggestion, order, request, grievance, circular, etc.

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 3. Encoding

In this step, the sender translates the message into words, symbols, gestures, drawings, etc. which he
feels will make the receiver understand the message. This is called encoding of message.

4. Media or Communication Channel

It is the route or medium or way through which encoded message is passed by the sender to the
receiver. The common ways of transmission are phone call, e-mail, letter, radio, television, movement of
body parts, etc.

5. Receiver

The person who receives the message is called the receiver. In other words, a receiver is a person for
whom the message is sent. The receiver may be a listener, a reader or an observer.

6. Decoding

Decoding means translating the encoded message into language understandable by the receiver.

7. Feedback

Feedback is the receiver response to the message sent by the sender. It includes all those actions of
receiver indicating that he has received and understood the message of sender. It is necessary to ensure
that the receiver has received the message and understand it in the same sense as the sender intended.

8. Noise

Noise means some disruption or hindrance or interference or obstruction in the communication process.
It can occur at any stage in the process of communication. It reduces the accuracy of communication.

Channels of Communication

A channel of communication is the path through which information is transmitted from sender to
receiver. Two main communication channels are:

 Formal Communication
 Informal Communication

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Basis Formal Communication Informal Communication
Meaning It refers to the communication It refers to the communication which
which flows through official channels takes place without following formal
designed in the organization lines of communication (i.e.,
chart(I.e., through scalar chain). disregarding the levels of authority)
Direction Formal communication flows Informal communication spreads
upwards from a subordinate to throughout the organization with its
superior e.g., application for grant of branches going out in all directions in
leave) or downwards from a superior utter disregard to the levels of
to subordinate e.g., sending notice authority. There is no fixed line of
to attend a meeting) or horizontally communication. So, it is generally
between two departments/ divisions referred to as ‘grapevine’.
e.g., discussion about design Examples: (1) workers chit-chatting in
between production and marketing a canteen about the behaviour of the
managers.) superior. (2) Workers discussing about
rumors that some employees are
likely to be transferred. (3) Two
personal assistants discussing their
bosses during lunch break. (4) Two
employees talking about the
arguments between two managers at
the last meeting. (5) Two employees
discussing over telephone about the
new policy of the company for
penalizing late comers. (6) Two
employers discussing about their
children’s education.
Form Formal communication may be Oral Informal communications are
or Written, but generally recorded generally oral.
and filed in the office.
Speed Slow-time consuming. Fast-time saving.
Authenticity Authentic information. Not authentic-generate rumors.
Objective/Purpose/Aim To achieve organizational goals. To meet personal or social needs of
employees to exchange views or
ideas, which cannot be done through
formal channels.

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Informal Communication-Merits and Limitations

 Grapevine channels may be helpful as they  The grapevine/ informal communication

carry information rapidly. spreads rapidly and sometimes gets
distorted. It is very difficult to detect the
source of such communication.
 It helps in getting quick feedback.  It also generates gossips and rumours
Managers can use the grapevine to know which are not authentic. It may result in
the reactions of subordinates. leakage of confidential information.
 It helps to communicate those matters  Sometimes, informal discussions may
which cannot be discussed through official hamper work environment.
channels.

Classification of Formal Communication

1. Vertical Communication

Vertical communication flows vertically, i.e., upwards or downwards through formal channels. In the
process of downward and upward communications, the principle of ‘scalar chain’ is followed.

a) Downward Communication: It refers to the flow of communication from a superior to

subordinate.
b) Upward Communication: It refers to the flow of communication from a subordinate to superior.

2. Horizontal/Lateral Communication

Horizontal communication means flow of communication between two divisions/departments or

between people of equal rank. The purpose of horizontal communication is to coordinate different
activities of two or more departments.

Formal Communication Network

Communication network indicates the pattern through which communication flows within the
organization. The popular networks of formal communication are:

1. Single Chain Network

In this network, the message flows in a direct vertical line along the scalar chain of command. It can flow
from top to bottom or from bottom to top in a line.

2. Wheel Network

It is the most centralized way of communication. Under wheel network, all communication pass through
one superior, who acts as a central authority like a hub of the wheel.

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 3. Circular Network

In case of circular network, the communication moves in a circle. Each person can communicate with
two persons adjoining him. Communication is very slow in this network.

4. Free Flow Network or All Channel Network

Under this network, there is no restriction on the flow of communication. Every member is allowed to
communicate freely with all other members.

5. Inverted V Network

Under such a network, a subordinate is allowed to communicate with his immediate superior as well as
his superior’s superior.

Grapevine Network

Grapevine or informal communication may follow different types of network. Some of these networks
are given below:

1. Single Strand

In a single strand network, each person communicates to other in a sequence.

2. Gossip Network

Under gossip network, one person communicates to other in a sequence.

3. Probability Network

In probability network, the individual communicates randomly with other individuals.

4. Cluster Network

Under cluster network, an individual communicates with only those individuals whom he/she trusts.
After receiving the information, some of them convey it further to a selected few or rest of them keep it
themselves. This is the most popular network in informal communication.

Barriers to Effective Communication

Semantic/Linguistic Barriers

Semantic barriers are concerned with problems and obstructions in the process of encoding and
decoding of message into words or expressions.

The types of semantic barriers are discussed below:

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 1. Badly Expressed Message

The message to be communicated must be stated in simple and clear words. Sometimes, the intended
meaning may not be conveyed by a manager to his/her subordinates because of use of wrong words,
omission of needed words, inadequate vocabulary, etc.

2. Words or Symbols with Different Meanings

A word or symbol may have different meanings. The receiver is required to understand the meaning of
the word used by the sender in the same sense for which sender has used it. If the meaning of a word is
not understood in the manner in which it is expressed, than a communication error arises.

3. Faulty Translations

Sometimes, the communication originally drafted in one language (e.g., English) need to be translated to
the language understandable to workers (e.g., Hindi). If the translator is nor proficient with both the
languages, communication may be misunderstood.

4. Unclarified Assumptions

Some communications may have certain assumptions which are subject to different interpretations.
Sometimes, the assumptions of the sender and the receiver of message may differ.

5. Technical Jargon or Words

Many specialists like doctors, scientists, engineers, etc. use technical words in their communication,
which may not understood by the listeners. It leads to poor communication.

6. Body Language and Gesture Decoding

The information can be misinterpreted if the sender’s body movements do not match with his verbal
communication.

Psychological/ Emotional Barriers

Psychological barriers are related to the state of mind of both the sender and the receiver of
communication. These barriers arise on account of the emotional and psychological status of the sender
and receiver of the message.

Some of the psychological barriers are:

1. Premature Evaluation

It means deriving conclusions before completion of message. Sometimes receiver evaluates the meaning
of message before the sender completes the message. This type of evaluation may lead to failure of
communication. Such premature evaluation may occur due to prejudice against the communicator.

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 2. Lack of Attention/ Poor Listening

The pre-occupied mind of receiver and the resultant non-listening of message acts as a major
psychological barrier.

3. Loss by Transmission and Poor Retention

Poor retention is another problem. If the people are not attentive or interested they cannot retain the
information for a long time.

4. Distrust

For successful communication, it is necessary that the sender and receiver must trust each other. When
the sender or transmitter and the receiver do not believe each other, the message may not be
understood in its original sense.

Organizational Barriers

These barriers arise because of organizational structure, authority, relationships, rules and regulations.

1. Organizational Policy

Communication hampered if the organizational policy does not support the free flow of communication.

2. Rules and Regulations

Rigid rules and cumbersome or complicated procedures act as a barrier in the way of effective
communication. Communication through the prescribed channels may result in delays.

3. Status

Status of an organizational member is determined by his position in the organization. Generally, people
of higher status do not talk freely with those of lower status. Subordinates at lower levels may hesitate
to talk freely to superiors.

4. Complexity in Organizational Structure

When there are a large number of managerial levels, communication gets delayed and distorted due to
many filtering points.

5. Organizational Facilities

Proper organizational facilities like complaint box, frequent meetings, regular power supply, suggestion
box, social and cultural gathering, etc. are essential for free flow of communication.

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Personal/Individual Barriers

These barriers are related to the personal factors of both the sender and the receiver of communication.

Some of the personal barriers are:

1. Fear of Challenge to Authority

If a superior perceives that a particular message or information may adversely affect his authority, he
may try to withhold or suppress such message or information.

2. Lack of Confidence of Superior on his Subordinates

Process of communication is hampered when superiors do not have faith or confidence on the
competence of his subordinates.

3. Unwillingness to Communicate

A subordinate may not be willing to communicate with the superior if he perceives that it may affect his
interests.

4. Lack of Proper Incentives

If there is no motivation or incentive for communication, the subordinates may not take initiative to
communicate.

Measures to Improve Communication Effectiveness

1. Clarify the Ideas before Communication

The message to be communicated must be clear in the mind of communicator. The message can be
conveyed properly only when it is clear to the communicator himself.

2. Communicate According to the Needs of Receiver

The level of understanding of the receiver should be crystal clear to the sender. A sender should adjust
his communication according to the education and intelligence to the receiver.

3. Consult others before Communicating

Before communicating the message, it is advisable to consult others. Effective communication is the
responsibility of all people in the organization as all have to work towards a common goal.

4. Be Aware of Language, Tone and Content of Message

Language, tone and content of message to be communicated are very important aspect of an effective
communication. The language should be clear, simple and easily understandable.

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 5. Convey Helpful and Valuable Things

Communication is more effective, if message contains something useful for the receiver. So, while
designing the message, it is better to know the needs and interests of people with whom you are
communicating.

6. Consistency of Message

The message to be communicated should always be consistent with the objectives, policies and rules of
the organization. If the new message is contrary to the previous messages, this fact should be stated
clearly so that there is no confusion and chaos in the organization.

7. Be a Good Listener

To make communication process effective, the receiver should listen to the sender’s words patiently,
carefully and attentively. The communicator should try to obtain the complete attention of the receiver.

8. Ensure Proper Feedback

The sender can ensure the success of communication by asking questions about the message conveyed.
The receiver of the message should also be encouraged to respond to the message.

9. Follow up Communication

There should be proper follow up of the information given to the subordinates. This follow up will help
to remove hurdles in the implementation of instructions.

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 CHAPTER-8

CONTROLLING
Meaning

Controlling can be defined as the process of ensuring that actual activities conform to planned activities.
It involves comparison of actual performance with the planned performance and taking suitable
corrective actions, in case of deviations between actual and planned performance.

Nature/Features of Controlling

1. Goal Oriented

Controlling is a goal oriented function as it ensures that resources are used effectively and efficiently for
the accomplishment of organizational goals.

2. Pervasive Function

Controlling is an essential function of every manager. It is applied at all levels of management and in all
organizations (business and non-business). The nature and extent of control may vary according to the
levels of management.

3. Continuous Process

Controlling is a continuous or never-ending process. It continuous throughout the life time of an

organization. The cycle of appraisal of work, comparing with established standards, detecting deviations
and taking corrective actions goes on.

4. Controlling in Both a Backward Looking as well as Forward Looking Function

Controlling is like a post-mortem of past activities to find out deviations from the standards. Therefore,
controlling involves looking back and is called a backward looking function. However, controlling is
forward-looking also because the corrective action initiated by control function aims to improve future
performance.

Importance of Controlling

1. Accomplishing Organizational Goals

Controlling is a goal oriented process. It is through controlling that managers ensure the execution of
plans and the attainment of goals. In the absence of control, activities may not be carried out according
to plans, and the targets may be missed. There may be delay in completing the assigned task and the
desired results may not be accomplished.

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 2. Judging Accuracy of Standards

An efficient control system helps management to judge whether the standards or targets set are
accurate and objective. It keeps a careful check on the changes taking place in the organization and in
the environment and helps to review and revise the standards in the light of such changes.

3. Making Efficient Use of Resources/Optimum Utilization of Resources

Controlling secures best possible use of resources. It ensures that work is performed in accordance with
pre-determined standards in terms of quantity, quality and cost. It helps to prevent misuse and wastage
of resources.

4. Improving Employee Motivation

Controlling provides performance standards for all the employees in the organization. So, employees
know well in advance what they are expected to do and what are the standards of performance on the
basis of which their performance and earn the rewards.

5. Ensuring Order and Discipline

Controlling ensures order and discipline in the organization. It keeps a close and continuous check on
the activities of employees to minimize undesirable activities such as dishonesty, theft, fraud,
corruption, etc.

6. Facilitating Coordination in Action

Controlling facilitates coordination of the activities of different departments. It integrates the complex
activities of the various departments of an organization. It provides unity of direction to all the
departments.

Relationship Between Planning and Controlling

1. Both Planning and Controlling are Interrelated and Interdependent:

(a) Controlling is blind or Aimless without Planning

Planning is essential for controlling. It provides the basis (i.e., standard of performance) for controlling.
Controlling involves comparison of actual performance with certain standards which are provided by
planning. So, when there is no plan, there is no basis of controlling. Thus, controlling is blind or aimless
without planning.

(b) Planning without Controlling is Meaningless or Useless

The controlling function is performed to ensure that the events conform to the plans. Once a plan is
implemented, controlling in necessary to monitor the progress, measure it, identify and analyze
deviations and take corrective action to ensure that planned results are achieved. Therefore, planning is
meaningless without controlling.

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 2. Planning is an intellectual process involving thinking and analysis to prescribe an appropriate
course of action for achieving organizational objectives whereas controlling evaluates whether
decisions have been translated into desired action. Thus, planning is prescriptive and controlling
is evaluative.

3. Planning and Controlling are both Forward Looking as well as Backward Looking

Plans are prepared for future and are based on forecast about future environment. Therefore, planning
is viewed as a forward looking function. On the other hand, controlling is like a post-mortem of past
activities to find out deviations from the standards. In the sense, controlling is viewed as a backward
looking function.

However, planning is also a backward looking function as plans are guided by the past experiences. That
is, plans are formulated in the light of the problems that were identified in the past. Similarly, controlling
is forward looking function also because the corrective action initiated by control function aims to
improve future performance.

Steps in the Controlling Process

1. Setting Performance Standards

The first step in the process of controlling is to establish the standards of performance. Standards are
the yardstick or criteria or target against which actual performance is evaluated. They specify what
should be achieved. Standards can be set in both quantitative as well as qualitative terms.

2. Measurement of Actual Performance

Once the standards of performance are fixed, the next step is the measurement of actual performance.
It means evaluation of the work actually done and the results accomplished. Performance should be
measured in an objective and reliable manner. The various techniques for measuring are personal
observation, sample checking, performance reports, etc. performance must be measured in the same
units in which standards are established.

3. Comparing Actual Performance with Standards

This step involves comparison of actual performance with the standards or planned targets. Such
comparison will reveal the deviations between actual and desired results. Deviation means gap or
difference between actual performance and standard performance.

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 4. Analyzing Deviations

The deviations from the standards are analyzed to identify their causes. While analyzing deviations, it is
important to determine the acceptable/permissible range of deviations and key result areas. Minor
deviations should be ignored. Deviations which are beyond the permissible limit should be reported to
the management.

(a) Critical Point Control

It is neither economical nor easy to keep a check on each and every activity in an organization.
Therefore, control should focus on Key Result Areas (KRAs) which are critical to the success of an
organization. When anything goes wrong in these areas, the entire organization suffers. Therefore,
deviations in key areas of business need to be attended more urgently.

(b) Management by Exception/ Control by exception

There is a common saying, “if you try to control everything you may end up controlling nothing”.
Therefore, only significant deviations which cross the permissible limit should be brought to the notice
of the management. Deviations within the permissible range (i.e., minor deviations) should be ignored
because some deviation in performance is expected in all activities.

5. Taking Corrective Action

The final step in the process of controlling is taking corrective action so that deviations do not occur
again and standards are achieved. This will involves taking certain decisions by the management like
replanning or redrawing of goals or standards, reassignment or classification of duties, etc. it may also
necessitate reforming the process of selection and training of workers and introduction of new
techniques of motivation.

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 CHAPTER-9

FINANCIAL MANAGEMENT

Financial management

Meaning

Financial management is concerned with optimal procurement as well as usage of finance. In other
words it can be defined as planning, organizing, directing and controlling the financial activities of an
organization.

For optimum procurement, different sources of finance are compared in terms of their costs and
associated risks. Similarly, the finance so procured needs to be invested in such a manner that returns
from the investment exceeds the cost at which funds have been procured.

Objectives

The primary objective of financial management is to maximize shareholder’s wealth, which means
maximization of the market value or price of equity shares of the company. Wealth of the shareholders
can be determined by the following formula:

Shareholder’s wealth = No. of shares held X Market price per share

Market price of equity share increases if the benefits from a financial decision exceed the cost involved
since there will be some value addition. Therefore in order to maximize shareholder’s wealth, financial
management must aim at achieving the following particular objectives:

a. Ensuring availability of adequate funds at a reasonable cost

Whenever needed, adequate funds must be obtained at a reasonable cost, keeping the risk under
control so that some value addition takes place.

b. Ensuring effective utilization of such funds

When investment decision is taken, the purpose of financial management is to make sure that benefits
from the investment exceed the cost so that value addition is even higher.

c. Ensuring safety of funds

Financial management must aim at ensuring safety of funds procured by creating reserves, reinvesting
profits etc.

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 d. Avoiding idle finance

Financial management must aim at avoiding idle finance because if excess funds are available, it will
unnecessarily add to the cost and may encourage wasteful expenditure.

Financial decisions
I. Investment decisions

Investment decision relates to how the firm’s funds are invested in different assets so that the firm is
able to earn the highest possible returns on investment.

These decisions can be short term or long term.

a. Long term investment decision (capital budgeting decisions)

The long term investment decision involves committing the finance on a long term basis on fixed assets
or various projects of an organization. Since investment in long term assets is called fixed capital,
therefore, this is also called fixed capital decision. These decisions are crucial due to following reasons:

i. They affect the earning capacity of the firm over the long run.
ii. These decisions normally involve huge outflow of funds.
iii. These decisions affect profitability and growth and competitiveness of the firm in the long
run.
iv. These decisions are irreversible except at a huge cost.

Factors affecting investment or capital budgeting decisions are:

i. Cash flows of the project

Whenever a company is investing huge amount of funds in a project, it expects some regular cash
inflows from that project. Such cash flows should be analyzed properly before investing in that
investment proposal.

ii. Rate of return

The company should compare the rate of return expected from different investment projects. For
example, if there are two projects A and B with a rate of return of 10% and 12% respectively, then
company will definitely prefer the project B

iii. Investment criteria involved

The decision to invest in a particular project involves a number of calculations regarding the amount of
investment, interest rate, cash flows and rate of return. There are different types of capital budgeting
techniques to evaluate investment proposals. These techniques are applied to each proposal before
selecting a particular project.

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 b. Short term investment decision

These decisions relate to the investment in current assets such as cash, stock, debtors etc. These
decisions affect the day-to-day working of the business. These decisions affect the liquidity as well as
profitability of a business because short term assets are more liquid but less profitable.

II. Financing decisions

Financing decisions relate to the quantum of finance to be raised from various long term sources. In
other words, financing decision is concerned with the decision about how much funds are to be raised
from which long term sources i.e. shareholder’s funds or borrowed funds.

Shareholder’s funds refer to share capital, reserves and surpluses and retained earnings. Borrowed
funds refer to finance raised as debentures, public deposits or other forms of debt.

Factors affecting financing decisions are:

i. Cost

The cost of raising funds through different sources is different. A wise finance manager should generally
choose the cheapest source of finance. Debenture is the cheapest source of finance as interest paid on
debenture is a tax deductible expense.

ii. Risk

The risk associated with different sources is different. Debt is cheaper but is more risky for a business
because it is mandatory to pay interest on debt and redeem the principal amount on maturity. Any
default in meeting these commitments may force the business to go in to liquidation.

iii. Flotation cost

Cost of raising funds is called flotation cost. For example, cost of advertising, printing prospectus etc.
Higher the flotation cost, less attractive is the source of finance and vice versa.

iv. Cash flow position

A company with good cash flow position can take the benefits of debt as interest payment and refund of
principal amount can be easily made. However, in case of shortage of cash, equity should be preferred.

v. Level of fixed operating cost

If a business has a high level of fixed operating cost it must opt for lower fixed financing cost. Thus,
lower debt financing is better. On the other hand, more of debt financing is better if the level of fixed
operating cost is less.

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 vi. Control

The control of company lies with the equity shareholders. Debt financing has no such implications. If
existing shareholders want to retain complete control over business then debt should be preferred to
raise further finance.

vii. State of capital market

The condition in capital market plays an important role in financing decision. During the period when
stock market is rising, more people are ready to invest in equity. However, during depression period,
people prefer debentures which are secured and guarantee a fixed rate of interest to the investors.

III. Dividend decisions

Dividend decision relates to how much of the company’s after tax profit is to be distributed among
shareholders and how much of it should be retained in the business to meet investment requirements.

Dividend decision should be taken keeping in view the overall objective of maximizing shareholder’s
wealth. Factors affecting dividend decision are as follows:

i. Earnings

Dividends are paid out of current and past earnings. So, higher earnings will ensure greater dividend
whereas low earning will lead to declaration of low rate of dividend.

ii. Stability of earnings

A company with a stable earning can afford to declare high rate of dividend. On the other hand, a
company stable earning prefers to give low rate of dividend.

iii. Stability of dividend

Many companies follow the policy of ‘stable dividend per share or fixed amount of dividend per share’
as it satisfies the shareholders and help in improving company’s reputation. Small investors and even big
companies and financial institutions prefer to invest in a company with regular and stable dividend
policy.

iv. Growth opportunity

Companies having ample growth opportunities generally pay lesser dividends and retain more money
out of their earnings to finance the required investment. The retained earnings are cheaper source of
finance as compared to other sources.

On the contrary, companies which don’t have any growth plans can pay higher dividend, provided they
have enough earnings and cash.

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 v. Cash flow position

The payment of dividend involves an outflow of cash. So, availability of enough cash in the company is
necessary for distribution of dividend. In situation of surplus cash, company can declare high rate of
dividend. However, in case of shortage of cash, company declare no or very low dividend.

vi. Shareholder’s preference

Before declaring dividend, the preference of shareholders is usually kept in mind. If the company has
large number of retired, old or small shareholder, then it will declare more dividend as such
shareholders expect regular and stable amount of dividend. However, if majority of shareholders are
young and rich, then company may declare less dividends as such shareholder prefer capital gain by
reinvesting the profits of the company.

vii. Taxation policy

The dividend decision also depends upon the taxation policy of the government. In the present taxation
policy, dividend income is tax free for shareholders whereas company has to tax on dividend paid to
shareholders. So, in case of higher dividend distribution tax rate, company prefers to pay less in the form
of dividend and vice-versa.

viii. Stock market reaction

Rate of dividend and market value of the share are directly related to each other. It means if the
dividend is declared at a higher rate, then it leads to increase in the market price of shares whereas low
rate of dividend decreases the market price of the shares.

Financial planning
Meaning

Financial planning can be defined as the process of estimating the future finance requirements of an
organization and specifying the source of funds. In other words, it is the process which helps in
determining the objectives, policies, procedures and budgets to deal with the financial activities of an
enterprise.

Objectives

Financial planning aims to achieve the following twin objectives:

1. To ensure availability of funds whenever required: A proper estimate of funds required for
different purposes and the time at which the funds are required is made. The possible sources of
these funds are also specified.
2. To see that the firm does not raise unnecessary funds: Excess funding is almost as bad as
inadequate funding. In case of surplus cash, financial planning aims to use it in the best possible
manner so that the financial resources are not left idle and don’t unnecessarily adds to the cost.

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Importance

The importance of financial planning is discussed below:

1. It tries to forecast what may happen in future under different business situations.
2. It tries to link the present with the future. It helps in avoiding business shocks and surprises and
helps in preparing a blueprint of an organization’s future preparations relating to finance.
3. It helps in coordinating different functional areas of business.
4. Detailed plans of action prepared under financial planning reduce waste, duplication of efforts,
and gaps in planning.
5. It provides a link between investment and financing decisions on a continuous basis.
6. It enables a company to tackle the uncertainty in respect of the availability and timing of the
funds and helps in smooth functioning of the organization.
7. By spelling out detailed objectives for various business segments, it makes the evaluation of
actual performance better.

Capital structure
Capital structure refers to the proportion of debt and equity used for financing the operations of the
business. In other words, capital structure refers to the mix between owner’s funds and borrowed
funds.

It can be calculated as debt-equity ratio i.e. Debt / Equity or as the proportion of debt in the total capital
i.e. Debt / Debt + equity. The proportion of debt in the total capital is also called financial Leverage.

The factors affecting capital structure decision are as follows:

1. Cash flow position

While deciding the capital structure, future cash flow positions should be kept in mind. If the company
wants to raise debt, it must ensure that sufficient cash flows are expected to meet debt obligations. In
addition to fixed commitments, there must be surplus cash also to meet normal business operations. In
situation of shortage of cash, company should use more of equity.

2. Risk consideration

Use of more debt increases the financial risk of the business. Financial risk means that a company is
unable to meet its fixed financial charges i.e. payment of interest, preference dividend and repayment
of principal amount. Apart from the financial risk, every business has some operating risk or business
risk. Business risk depends upon fixed operating costs. Higher fixed operating costs results in higher
business risk and vice-versa. The total risk depends upon both financial as well as business risk.

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 3. Interest coverage ratio

ICR refers to the number of times earnings before interest and taxes of a company covers the interest
obligation. ICR is calculated as: ICR = EBIT / Interest.

The higher the ratio, the lower is the risk of company failing to meet its interest payment obligations.
However, this ratio is not adequate measure because sometimes a company may have high EBIT but low
cash balance. Along with interest repayment of debt is also equally important.

4. Debt service coverage ratio

Debt service coverage ratio takes care of the deficiencies referred to in the interest coverage ratio. The
cash profits generated by the operations are compared with the total cash required to pay fixed financial
charges.

DSCR = Profit after tax + Interest + Non-cash expenses / preference dividend + Interest payment
obligation

A higher DSCR indicates better ability to meet cash commitments. So, the company’s potential to
increase debt rises.

5. Flotation costs

Cost of raising funds is called flotation cost. For example, cost of advertising, printing prospectus etc.
flotation cost affect the choice of capital structure of a company as higher the flotation costs, less
attractive the source of finance. The cost of raising funds from different sources should be carefully
estimated before making a choice.

6. Tax Rate

Interest on debt is a tax-deductible expense. So, the cost of debt is affected by tax rate. For example,
borrowing at 10% and the tax rate 30%, means the after tax cost of debt is 7%. So, more debt can be
used because it is cheaper. On the contrary, dividend is paid out of after-tax profits. So, it is not tax
deductible.

7. Control

Issue of debt normally does not cause a dilution of management’s control over the business whereas
issue of more equity may reduce the management’s holding in the company. There is a threat of
takeover also. So, if the management of the company is interested in retaining control over the matters
of the business, it will use more debt but only up to a limit.

8. Stock market conditions

The stock market conditions also affect the capital structure of the company. During boom period,
equity shares can be easily issued even at a higher price. However during depression period, a company
may find it difficult to raise equity capital and hence it may opt for debt.

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 9. Return on investment (ROI)

ROI is another crucial factor which helps in deciding the capital structure. If return on investment of the
company is more than the rate of interest, then EPS i.e. profits earned by the equity shareholders
increases. This called trading on equity.

Trading on equity refers to the increase in the profit earned by the equity shareholders due to the
presence of fixed financial charges like interest. Thus the shareholders of the company are likely to gain
with a debt component in the capital employed. Benefits to shareholders will be realized only if the ROI
is greater than the rate of interest on debt.

Fixed capital
The capital invested in fixed or permanent assets such as land and building, plant and machinery,
furniture and fixtures etc. is called fixed assets.

Fixed assets are those assets which are required for permanent use by the company and are not meant
for re-sale. Such assets are not fixed in value but they are required for long term. Similarly, fixed capital
is required for long term period. Therefore, it is raised from long-term sources of finance like shares,
debentures, long-term loans and retained earnings of the business. These are never financed through
short-term sources.

The factors affecting fixed capital requirements are as under:

1. Nature of business

The nature of business has a great impact on the fixed capital requirement of a company. For example, a
manufacturing company needs heavy investment in fixed assets like land, building, plant and machinery
etc. On the other hand, a trading firm requires lower investment in fixed assets since it does not require
purchasing plant and machinery etc.

2. Scale of operations

A company operating at a large scale requires greater fixed capital as compared to a company operating
at a smaller scale. The assets required in large scale organization are very costly and therefore, a large
company needs more fixed capital than a small firm.

3. Choice of technique

The technique of production also affects the requirement of fixed capital. A capital-intensive company
needs more fixed capital as larger investment is required in plant and machinery. However, labor
intensive requires less fixed capital.

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 4. Technology up gradation

Companies in which assets become obsolete sooner, need more fixed capital to purchase such assets.
For example, companies which use assets like computers require higher fixed capital due to continuous
advancement in computer technology. However, if company uses assets which are less affected by
technology, then they need less fixed capital.

5. Growth prospects

A company with higher growth plans needs greater amount of fixed capital as more investment in plant
and machinery is required to increase production capacity. However, companies with less or no growth
prospects require less amount of fixed capital.

6. Diversification

Diversification means running business in more products than only one product. If a company chooses
to diversify its operations, then it requires higher amount of fixed capital. For example, if a brick
manufacturing company starts the business of cement manufacturing, then it will need additional fixed
capital to invest in land and building, plant and machinery etc.

7. Level of collaboration

Certain business firms share each other’s facilities. For example, a bank may use another’s ATM. Such
collaboration or joint ventures reduces the level of investment in fixed assets for each firm. So, the need
of fixed capital is lower.

Working capital
Working capital means the portion of capital investment in short-term assets or current assets of a
company. It can also be defined as excess of current assets over current liabilities.

Current assets refer to those assets, which are more liquid but less profitable than fixed assets. These
assets are expected to get converted in to cash or cash equivalents with in a period of one year.

Current liabilities are those liabilities which are payable with in a period of one year.

The factors affecting the working capital requirements of a business are as follows:

1. Nature of business

The nature of business has a great impact on the requirement of working capital. A trading concern or
retail firm requires less amount of working capital as there is no processing. On the contrary, in
wholesale trading and manufacturing concerns, substantial working capital is required because they
have to convert raw material in to finished goods, sell largely on credit and maintain inventory.

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 2. Scale of operation

There is direct relation between the working capital and the scale of operations. Large companies need
more working capital as their inventory level, debtor etc. are generally high. However, companies
operating at small scale require less working capital due to low level of activity.

3. Business cycle

Working capital requirement is also affected by different phases of business cycle. During boom period,
i.e. when the business is prosperous, more working capital is required due to increase in demand and
sales. However in a period of depression or recession, the demand declines and it affects both the
production and the sale of goods. In such a situation, less working capital is required.

4. Seasonal factors

Companies which produce and sell seasonal goods need large amount of working capital during peak
seasons. For example, a woolen garment company needs more working capital during winters as
compared to summers.

5. Production cycle

Production cycle means the time taken for converting raw material in to finished products. Business
firms having longer production cycle will require greater amount of working capital as their funds get
locked up in the production process for longer period of time. On the other hand, business units with
shorter production cycle need less working capital.

6. Credit allowed

Credit policy refers to average time period for collection of sales proceeds. A company which grants
liberal credit to its customer needs more working capital due to more debtors. However, in case of strict
credit policy, less amount of working capital is required.

7. Level of competition

If the market is highly competitive, a firm may have to maintain higher stocks of finished goods than its
competitors to meet urgent orders from customers so that orders do not go in to the hands of
competitors. Moreover, more credit period has to be allowed on goods sold resulting in higher level of
debtors. So, more working capital is required.

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 CHAPTER-10

FINANCIAL MARKETS
Meaning

A financial market is a market for the creation and exchange of financial assets.

- Creation of financial takes place when a company issues new shares and debentures.
- Exchange of financial assets implies purchase and sale of existing shares, debentures and bonds.

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

Functions of financial markets

1. Mobilization of Savings and Channeling them into the Most Productive Uses

A financial market facilitates the transfer of savings from savers to investors. It offers to savers the
different investments options and thus helps to channelize or invest surplus funds into the most
productive use.

2. Facilitate Price Discovery

Price of anything is determined with the help of the market forces of demand and supply. In the
financial market, the households who save money are suppliers of funds and business firms make
demand. The interaction between them helps to establish price for the financial assets.

3. Provide Liquidity to Financial Assets

Financial market facilitates easy purchase and sale of financial assets. So, it provides liquidity to financial
assets as they can be easily converted into cash whenever necessary.

4. Reduce the Cost of Transaction

A financial market provides a common platform where buyers and sellers can meet. It provides valuable
information about price, cost and availability of securities. It helps in saving time, effort and money of
both buyers and sellers of financial assets.

Meaning of Money Market

Money market is the market for short-term funds which deals in monetary assets whose maturity period
is up to one year, e.g., Treasury bills, commercial paper, call money, etc.

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Features of Money Market

Following are the features of money market:

(a) In this market, low risk, unsecured and short-term debt instruments are issued and activity
traded every day.
(b) It helps in raising short-term funds for meeting shortages of cash and obligations; and the
temporary deployment of excess funds for earning returns.
(c) It has no physical location.
(d) Trade in money market is conducted over the telephone and through internet.
(e) The instruments of money market are highly liquid.
(f) Its major participants are the Reserve Bank of India (RBI), Commercial Banks, Non-Banking
Finance Companies, State Governments, etc.

Instruments of Money Market

1. Treasury Bill (T-Bill)

A treasury bill is an instrument of short-term borrowing issued by the Reserve Bank of India (RBI) on
behalf of the Government of India/Central Government to meet its short-term requirement of funds.
These are negotiable instruments, i.e. , they are freely transferable. They are sold to the banks and
public. They are issued in the form of a promissory note for a period of 14 to 364 days. Treasury bills are
highly liquid and provide assured returns. There is no risk of default. Treasury bills are issued for a
minimum amount of Rs.25, 000 and in multiples thereof. They are also known as ‘Zero Coupon Bonds’.

2. Commercial Paper (CP)

Commercial paper is a short-term unsecured promissory note, having maturity period of 15 days to one
year, issued by large and creditworthy companies to raise short-term funds at lower rates of interest
than the market rates. It is often issued as an alternative to bank borrowings. It is a negotiable
instrument, i.e., it is freely transferable by endorsement and delivery. It is issued to meet short-term
requirement of funds like seasonal and working capital needs. It is sold at a discount and redeemed at
par.

3. Call Money or Loans

Call money is a short-term finance repayable on demand, with a maturity period of one day to a
fortnight (15 days). Call money is a facility under which banks with temporary shortage of cash borrow
funds from other banks having excess of cash. The interest rate paid on call money is called the call rate.
It is a highly fluctuating rate that changes from day –to- day and sometimes even from hour to hour. The
call money transactions are generally conducted over the telephone and the paper work is completed
afterwards.

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 4. Certificate of Deposit (CD)

Certificates of deposit are unsecured, negotiable, short-term instruments in bearer form, issued by
commercial banks and development financial institutions during the period of tightly liquidity (when the
deposit growth of banks is slow but the demand for credit is high). They can be issued to individuals,
corporations, and companies. These help to mobilize a large amount of money for short periods. The
time period of certificates of deposit ranges from 91 days to 1 year.

5. Commercial Bill

A commercial bill is a bill of exchange used to finance the working capital requirements of business
firms. It is a short-term, negotiable, self-liquidity instrument which is used to finance the credit sales of
forms. When goods are sold on credit. The seller (drawer) draws a bill of exchange and buyer (drawee)
accepts it. On being accepted, the bill becomes a marketable instrument and is called a trade bill. If the
seller needs funds before the date of maturity, he can get the bill discounted from the bank.

Meaning of Capital Market

Capital market refers to facilitate and institutional arrangements through which medium-term and long-
term funds, both debt and equity, are raised and invested, whose maturity period is more than one
year.

Features of Capital Market

(a) Capital market consists of a series of channels through which savings of the community are
made available for industrial and commercial enterprises and for the public in general.
(b) It directs savings into their most productive use leading to growth and development of
economy.
(c) Its participants are development banks, commercial banks, stock exchanges, etc.
(d) It has two components-primary market and secondary market.

Types of Capital Market

Primary Market

The primary market refers to the market in which a security is sold for the first time. It is concerned with
the issue of new securities or fresh capital. Therefore, primary market is also known as the New Issues
Market. In this market, the securities are directly issued by the company to the investors.

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Methods of Floatation

1. Offer through Prospectus

This is the most popular or common method of issuing new securities in the primary market by a public
company. In this method, the company wanting to raise capital issues a prospectus to inform and attract
the investors. The prospective investors are invited to apply for the securities through an advertisement
in newspapers and magazines. For this, company also uses services of underwriters or brokers.

2. Offer for Sale

In this method, securities are not issued directly to the public but are offered for sale through
intermediaries like issuing houses or stock brokers. In this case, a company sells the entire lot of
securities at an agreed price to the intermediaries who, in turn, resell them to the investing public at a
higher price.

3. Private Placement

In this method, company sells the securities to some selected institutions investors (like UTI, LIC, GIC.
etc.) and individuals. This method saves the costs of public issue and helps to raise capital more quickly.
Therefore, small companies prefer private placements.

4. Rights Issue

This is a privilege available to existing shareholders to subscribe a new issue of shares. The shareholders
are offered the right to buy new shares in proportion to the existing shares held by them. In this
method, shares are offered at a price which is below the market price. A shareholder is given the right to
accept the offer for himself or assigns a part of all his rights in favor of another person.

5. e-IPO’S

The company which wants to issue securities to the public through the online system of the stock
exchange has to enter into an agreement with the stock exchange for listing its securities to be traded.
This is called an Initial Public Offer (IPO). This initial public offer (IPO) by company is known as e-IPO as it
makes use of electronic technology. SEBI registered brokers are appointed to accept applications and
place order with the company.

Secondary Market

Secondary market is a market for the sale and purchase of existing securities. It is also known as the
stock market or stock exchange. It helps existing investors to disinvest and new investors to enter the
market. Thus, it provides liquidity and marketability to existing securities.

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Basis Primary Market Secondary Market
(New Issue Market) (Stock Exchange)
1. Nature of In primary market, new Secondary market deals with sale and
Securities Traded securities are issued by new and purchase of existing securities only.
existing companies.
2. Transactions/ The company sells securities to In this market, investors exchange
Purpose investors directly or through an ownership of existing securities. The
intermediary. company is not involved at all.
3. Capital Formation There is flow of funds from It does not directly result in capital
savers to investors. It directly formation. It indirectly promotes capital
promotes capital formation. formation by enhancing the liquidity of
securities.
4. Buying/Selling In primary market, only buying In secondary market, both buying and
of securities takes place. selling of securities takes place.
Securities cannot be sold there.
5. Price The management of the Price of securities are determined by
Determination company determines the prices the demand and supply for the
of securities to be issued. securities.
6. Location There is no fixed geographical It is located at a specified places.
location of the market.

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Basis Capital Market Money Market
1. Participants The participants of capital market Its participants are institutional investors
are financial institutions, banks, (RBI, banks, Non-Banking Finance
public and private companies, Company(NBFCs), State Government,
foreign investors, stock Large Corporate Houses, financial
exchanges, exchanges, ordinary institutions, etc.) Individual investors do
retail investors from the public, not participate in money market.
etc.
2. Instruments The main instruments traded in Main instruments are treasury bills, call
Traded the capital market are equity money, commercial paper, trade bills,
shares, preferences shares, etc.
debentures, bonds, etc.
3. Investment Investment in the capital market Investment in money market requires
Outlay does not require a huge financial huge financial outlay as the instruments
outlay as the value of securities is are quite expensive, e.g., Treasury bills
generally long, i.e., Rs. 10 or 100 are available for a minimum amount of
with minimum trading lot of 5, 10 Rs. 25,000 and in multiples thereof.
or 100. So, small investors can
also buy these securities.
4. Duration It deals in medium and long-term Money market deals in short-term
securities (having maturity period securities for a period of less than 1 year.
of more than one year.)
5. Liquidity Capital market securities are Money market instruments enjoy higher
considered liquid because they degree of liquidity as Discount Finance
are marketable on the stock House of India (DFHI) provides a ready
exchanges. But they are less market for them.
liquid as compared to money
market instruments.
6. Safety Capital market instruments are Money market instruments are safe or
riskier both with respect to less risky due to shorter duration of
returns and principal repayment investment and financial soundness of
as issuing companies may fail to the issuers.
perform as per projections and
promoters may defraud
investors.
7. Expected The investment in capital market The instruments of money market yield a
Returns generally yields higher returns for lower return for generally investors due
investors because securities are to short duration.
held for a longer duration. In
addition to interest or dividend,
there is change for earning capital
gains.

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Stock Exchange
A stock exchange is an institution which provides a platform for buying and selling of existing securities.
As a market, the stock exchange facilitates the exchange of a security (shares, debentures etc.) into
money and vice versa. Under the Securities Contracts (Regulation) Act, 1956, the term stock exchange
has been defined as “anybody of individuals, whether incorporated or not, constituted for the purpose
of existing, regulating or controlling the business of buying and selling or dealing in securities.”

Features of Stock Exchange

1. Providing Liquidity and Marketing to Existing Securities

The basic function of a stock exchange is to provide a ready and continuous market for the sale and
purchase of existing securities. It helps in converting an investment into cash and vice versa.

2. Pricing of Securities

A stock exchange helps in determining the prices of various securities on the basis of demand and supply
factors. It makes continuous valuation of securities and quote prices of various securities.

3. Safety of Transaction

The stock exchange exercise stringent rules and regulations o membership and trading practices of the
stock market. This ensures that the investing public gets a safe and fair deal.

4. Contributes to Economic Growth

A stock exchange is a market in which existing securities are purchased and sold. Through this process of
reinvestment and disinvestment, savings get channelized into their most productive investment use and
thus lead to capital formation and economic growth.

5. Spreading of Equity Cult

Stock exchange guides the investors by providing various types of information about the listed
companies. Thus, it plays a vital role in ensuring wider share ownership by regulating new issues, better
trading practices and taking effective steps in educating public about investments.

6. Providing Scope for Speculation

The stock exchange provides sufficient scope within the provisions of law for speculative active 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.

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Trading Procedure on a Stock Exchange

1. Selection of a Brokers

The first step is to select a broker who will buy/sell securities on behalf of the investor. This is necessary
because trading of securities can only be done through SEBI registered brokers who are the members of
a stock exchange. Brokers may be individuals, partnership firms or corporate bodies. The investor has to
sign a broker-client agreement and a client registration form before placing an order to buy or sell
securities. He has also to provide certain other details and information. These include:

 PAN number (This is mandatory)

 Date of birth and address
 Educational qualification and occupation
 Residential status (Indian/NRI)
 Depository account details
 Name of any other broker with whom registered
 Client code number in the client registration form

2. Opening Demat Account

The investor has to open a ‘demat’ account or ‘Beneficial Owner’ (BO) account with a Depository
Participant (DP) for holding and transferring securities in the demat form. He will also have to open a
bank account for cash transactions in the securities market.

3. Placing the Order

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. An order
confirmation slip is issued to the investor by the broker.

4. Executing the Order

The broker then will go on-line and connect to the main stock exchange and match the shares and best
price available. When the shares can be bought or sold at the price mentioned, it will be communicated
to the broker’s terminal and the order will be executed electronically. The broker will issue a trade
confirmation slip to the investor. After the trade has been executed, the broker issues a Contract Note
within 24 hours.

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 5. Settlement

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 the pay-in day. Cash is paid or securities are delivered
on pay-in day, which is before the T+2 day as the deal has to be settled and finalized on the T+2 day. The
settlement cycle is on T+2 day on a rolling settlement basis, w.e.f. 1 st April, 2003. On the T+2 day, the
exchange will deliver the share or make payment to the other broker. This is called the pay-out day.

Define:

1. Dematerialization

All trading in securities is now done through computer terminals. Since all systems are computerized,
buying and selling of securities are settled through an electronic book entry form. This is mainly done to
eliminate problems like theft, fake/ forged transfers, transfer delays and paperwork associated with
share certificates or debentures held in physical form. Dematerialization is a process where securities
held by the investor in the physical form are cancelled and the investor is given an electronic entry or
number so that she / he can hold it is an electronic balance in an account.

2. Depository

Depository is an institution / organization which holds securities (e.g., shares, debentures, bonds,
mutual funds, etc.) in electronic form, in which trading is done. Just like a bank keeps money in safe
custody for customers, a depository also is like a bank and keeps securities in electronic form on behalf
of the investor. In the depository a securities account can be opened, all shares can be deposited, they
can be withdrawn/sold at any time and instruction to deliver or receive shares on behalf of the investor
can be given. It is a technology driven electronic storage system.

SECURITIES AND EXCHANGE BOARD OF INDIA(SEBI)

Objectives of SEBI

The overall objective of SEBI is to protect the interests of investors and to promote the development of,
and regulate the securities market. This may be elaborated as follows:

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

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Functions of SEBI

1. Regulatory Functions
(a) It registers brokers and sub-brokers and other players in the market.
(b) It registers collective investment schemes and mutual funds.
(c) It regulates stock brokers, portfolio exchanges, underwriters and merchant bankers.
(d) It regulates take-over bids by companies.
(e) It levies fee or other changes for carrying out the purposes of the SEBI Act, 1992.
(f) It calls for information by undertaking inspection, conducting enquiries and audits of stock
exchange and intermediaries.
(g) It performs and exercises such powers under Securities Contract Regulations Act, 1956 as may
be delegated by the government of India.

2. Protective Functions
(a) It prohibits fraudulent and unfair practices in the securities market, e.g., price rigging, making
misleading statements in prospectus, manipulations, etc.
(b) It controls insider trading and imposes penalties for such practices.
(c) It promotes fair practices and code of conduct in securities market.

3. Development Functions
(a) It trains intermediaries of the securities market.
(b) It conducts research and publishes information useful to all market participants.
(c) It undertakes measures to develop the capital markets by adopting a flexible approach.

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 CHAPTER – 11

MARKETING MANAGEMENT
Related concepts:

1. Market

The term market refers to actual and potential set of buyers of a product or a service, where the sellers
can approach through various means of communication and transport.

For instance, a person can purchase goods from his residence or office by placing order on telephone or
cell phone or using internet or email.

2. Customer

Customer refers to the people or organization that seeks satisfaction of their needs and wants. T is for
the satisfaction of their needs and wants that they move to markets to buy products and services.

3. Need

The needs refer to the basic human requirements. The needs differ in their importance. Once the basic
needs are satisfied, the human beings move on to satisfy other needs.

4. Marketer

Marketer refers to any person or organization that makes available the product or services and offers
them to the customers with an intention of satisfying their needs and wants.

5. Marketing

Marketing refers to all those activities which facilitate the transfer of goods and services from producers
to the ultimate consumer. It includes many activities that are performed even before goods are
produced and continues even after the sale.

Features of marketing

1. Need and want

The focus of marketing is on identifying and satisfying the needs and wants of individual and groups.
Needs are the basic to human beings while wants are potential satisfiers of needs. The job of marketer is
to identify the needs of target customers and offer products and services that satisfy these needs.

2. Creating a market offering

Market offering refers to providing complete information about the product or service. A good market
offer is created after analyzing the needs and wants of the potential buyers.

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 3. Customer value

While purchasing a product, customer analyses cost and satisfaction derived from it. Customer buys it
only when he perceives that it provides him greatest value for the money.

4. Exchange mechanism

Marketing involves exchange of goods and services for money or valuable consideration. Exchange takes
place when a person obtains the desired product from someone, in return of money or money’s worth.

Difference between marketing and selling

Basis Marketing Selling

Meaning It means identifying customer needs It involves exchange of goods and services
and satisfying them. for money.
Objective It aims to earn profits through It aims at maximization of profits through
maximization of customer’s sales maximization.
satisfaction.
Focus It focuses on the needs of the It focuses on the needs of the seller.
customers.
Scope It has a wider scope and it includes Its scope is limited.
selling also.
Start and end It begins before production and It starts after goods are produced and ends
continues even after sale. with sale.
Emphasis Developing the product as per the Bending the customer according o the
needs of the customer. product.
Strategies It uses integrated marketing efforts. It involves efforts like promotion and
persuasion.

Marketing management philosophies

1. Production concept

This philosophy is based on the belief that consumers favor those products which are widely available at
lower prices. Thus, availability and affordability of the product is considered as the key to success under
production concept. It is believed that profits maximization would be achieved by producing at a large
scale thereby minimizing the cost of production per unit.

2. Product concept

The companies following this philosophy believes that consumer favor those products which offer
superior quality, performance and features. Product concept stresses on quality of production rather
than quantity of production. Product improvement is considered the key to success under the product
concept.

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 3. Selling concept

Those firms following this philosophy believe that customers, if left alone will normally, not purchase
enough of the company’s products. The company must therefore undertake an aggressive selling and
promotional efforts. Through selling concept the company can make a customer buy something even
when the customer has no intention of buying it.

4. Marketing concept

According to this concept, customer satisfaction is the key to the success of any organization in the
market. Under marketing concept, the assumption is that in the long run a firm can achieve its objective
of maximizing profit by identifying and satisfying the needs of present and potential customers than
competitors.

5. The societal marketing concept

The marketing concept concentrates only on the needs of the customers and overlooks wider social
interests like pollution, deforestation; drug abuse etc. in order to survive and grow business must serve
the interest of all stakeholders. Public health and education, environmental protection, employment
generation, poverty eradication etc. are the concerns which business can’t ignore. The companies
following this concept believe in the overall protection of the planet along with customer satisfaction.

Functions of Marketing

1. Gathering and Analyzing Market information

One of the important functions of a marketer is to gather or collect and analyze the market information.
This is necessary to find out the needs of the customers and to take various decisions for the successful
marketing of the products and services. This is important for making an analysis of the available
opportunities and threats as well as strengths and weakness of the organization.

2. Market Planning

After conducting marketing research, the marketer has to develop appropriate marketing plans so that
marketing objectives of the company can be achieved. In order to achieve this marketer will have to
develop suitable plans to increase production and sales, to use promotional tools etc.

3. Product Designing and Development

A product is something which is offered by a business enterprise to customers to satisfy their needs.
Product designing and development is the another important function of marketing. This is concerned
with developing new products and improving the existing products so as to meet the expectations of the
customers.

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 4. Standardization and Grading

Standardization refers to the process of producing goods of predetermined standards so as to achieve

the uniformity and consistency in products. This assures the buyers that goods conform to the
predetermined standards of quality, price and packaging and reduces the need for inspection, testing
and evaluation of the products.

Grading is the process of dividing products into different groups on the basis of their features like size,
quality, shape, etc. it is mainly dine in case of agriculture products like wheat, fruits, vege4tables,
tobacco, rice, etc. Grading ensures that goods belong to a particular quality and helps in realizing higher
prices for high quality products.

5. Packaging and Labeling (discussed later)

6. Branding (discussed later)
7. Customer Support Services

In the highly competiti8ve business environment, customer support services play an important role in
success of marketing. Services such as after sale services, handling customer complaints, providing credit
facilities, maintenance services, technical services, etc. prove very effective in bringing repeat sales and
developing brand loyalty for the product.

8. Pricing of Products (discussed later)

9. Physical Distribution (discussed later)
10. Promotion (discussed later)
11. Transportation (discussed later)
12. Storage or warehousing (discussed later)

Marketing Mix
Marketing mix is a combination of four elements-product, pricing structure, distribution system and
promotional activities to satisfy the needs of an organization’s target markets and at the same time
achieve its marketing objectives.

The four main elements of marketing mix are as under:

(i) Product (ii) Price

(ii) Place (iv) Promotion

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Product
Product is a mixture of tangible and intangible attributes, which are capable of beingexchanged for a
value, with ability to satisfy customer’s needs.

Main Components of Product Mix

Branding

Meaning

Branding is the process of giving a name or a sign or a symbol, etc. to a product. In other words,
branding is the process of assigning a specific name or symbol to the product by which it is to be known
and remembered.

Characteristics/Qualities of a Good Brand Name

1. The brand name should be easy to pronounce, spell and remember, it should be short also.
2. If possible, the brand name should be able to suggest the benefits, uses, purpose, quality or
performance.
3. The brand should be distinctive or unique.
4. The brand name should remain constant for reasonable period of time in order to gain
popularity.
5. The brand name should be selected after considering its meaning in other languages and
cultures.
6. The brand name should be capable of registration and legal protection.
7. Chosen name should have staying power.
8. The brand name should be sufficiently versatile to accommodate new products, which are
added to the product line.

Advantages

To Marketers

1. Product Differentiation

Branding helps an organization in distinguishing its product from that of its competition.

2. Helps in Advertising and Display Programs

With the brand name advertising become more effective as it not only makes people aware about the
features of product but also about brand which can provide these benefits.

3. Differential Pricing

Branding enables the firm to charge higher price for its products than its competitors because if
customers like a brand and become habitual of it, they do not mind paying a little higher price for it.

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 4. Ease in Introduction of New Products

If a new product is introduced under a known brand, it is likely to get an excellent start.

To customers

1. Product Identification

Branding helps the customers in identification of the product.

2. Ensures Quality

Branding ensures a particular level of quality to customers. This builds up confidence of customers and
increases their level of satisfaction.

3. Status Symbol

Some brands become status symbol due to their quality. The consumers of these brands feel proud and
enjoy status.

Packaging

Meaning

Packaging is the process of designing and producing suitable packages for a product. A package is a
wrapper, container or other receptacle used in packing products. For example, liquid materials like
liquor, oil and squash are placed in boxes, tins and cans.

Levels of Packaging

1. Primary packaging

It refers to the product’s immediate packing. The primary package remains till the consumer is ready to
consume the product like plastic packages for socks, package of bathing soap etc.

2. Secondary packaging

It is an additional package, which provides additional layer of protection to the product. The secondary
package is generally thrown when the consumer begins to use the product.

3. Transportation packaging

It refers to further packaging which is used to protect the goods in the process of transportation and
packaging.

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Functions

1. Product identification

Packaging helps in identification of the product. For example, one can easily identify coca cola from its
unique bottle.

2. Product protection

A good package protects the product from damage and deteriorates during transportation, storage,
spoilage, leakage, pilferage, sun, rain, moisture, insects etc.

3. Convenience

Packed goods are very easy to handle and use. If certain handling precautions are required, these can
also be mentioned on the package.

4. Product promotion

Packaging acts as silent salesman as it helps to increase sales. It makes the product attractive and
induces the customers to buy it. Packaged goods are highly suitable for self-service stores.

Labeling

Meaning

Labeling is concerned with designing the label to be put on the package. A label is an important feature
of a product as it provides useful information about the product and its manufacturer. It is used to
provide detailed information like name of the product, name and address of the manufacturer, contents
of the product, weight and measurement of the product, manufacturing and expiry date, directions of
the proper use maximum retail price, statutory warning etc.

Functions

1. Describe the product and specify its contents

Labeling enables the manufacturers to provide complete information about the product such as
instructions for proper use of the product, date of manufacture and expiry, price, contents etc.

2. Identification of the product or brand

Labeling helps in identification of the product from the various products available in the market.

3. Grading of products

Labeling enables the manufacturers to grade the products in to different categories.

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 4. Helps in promotion of products

A carefully designed label can attract attention of the customers and stimulate them to buy the product.
Many labels provide promotional message like, “Chamak aisi, nayi jaisi” of a popular detergent powder.

5. Providing information required by law

Labeling performs the function of providing information required by law. For example, the statutory
warning on the packet of cigarettes, “smoking is injurious to health” and label on the product of the pan
Masala, “Chewing tobacco is injurious to health.”

Price
Price may be defined as the amount of money paid by a buyer in consideration of the purchase of a
product or service. Pricing is the process of fixing the price of a product or service. Pricing plays an
important role in the marketing of goods or service. It is often used as a regulator of the demand of a
product.

Factors affecting price discrimination

1. Pricing objectives

Price of a product is influenced by the pricing objectives of the firm. Generally, the objective of the firm
is profit maximization. If the firm decides to maximize the profits in the short run, it will charge
maximum price for its products. However, if it wants to maximize the profits in the long run, it will
charge lower per unit price so that it can capture larger share of the market and earn higher profits
through increased sales.

2. Product cost

Product cost is one of the important factors affecting the price of the product. It includes the total cost
of the producing, distributing and selling the product. Total cost includes three types of cost- fixed costs,
variable costs and semi variable costs.

Sum total of all these costs sets the minimum level or the floor price at which the products can be sold.
Generally, all companies set a price, which covers the total cost and reasonable profit.

3. The utility and demand

Before the fixing the price of a product, firm must consider utility provided by the product. If the
product is offering higher utility, then firm can easily charge higher prices. However, in case of less utility
products, low prices are fixed. Price is also affected by intensity or price elasticity of demand.

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 4. Extent of competition in the market

If the firm does not face any competition it can enjoy complete freedom in fixing its prices. However, in
case of intense competition, the firm has to consider the price, quality, and features of competitor’s
products.

5. Government and legal regulations

In order to protect public interest against unfair practices, government intervenes and regulates the
price. Government can declare a product as an essential product and regulate its price.

6. Marketing methods used

Price discrimination is also affected by various marketing methods used like distribution system, quality
of salesman employed, degree of advertising, sales promotion efforts, after sales services etc.

Place/ Physical distribution

Physical distribution of products and services is the third important element of marketing mix. Physical
distribution is concerned with physical handling and movements of goods from the place of production
top the place of consumption or use. If the goods are not made available to the customer at the right
place, at the right time, in the right quantity and in the right condition then the consumer will not be
able to buy them.

Channels of distribution

Channels of distribution are a set of firms and individuals that take title, or assist in transferring title, to
particular goods or service as it moves from the producer to the consumers.

In other words, channel of distribution refers to the set of intermediaries or middlemen who help in the
flow of physical product or its ownership from the producer to the consumer.

Types

1. Direct channel/ zero level channel

Direct channel means the arrangement wherein goods are made directly available by the manufacturer
to the consumer without involving any intermediary. For example, internet selling, mail order selling
etc.

2. Indirect channels

When a manufacturer employs one or more intermediary to move goods from the place of production
to the place of consumption, it is known as indirect channel. It can of the following forms:

 One level channel: under this channel, manufacturer employs one intermediary. Manufacturer
sells the goods to one or more retailers who in turn sell these goods to the ultimate consumers.

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  Two level channel: here, two middlemen are involved, namely, wholesaler and retailer. The
manufacturer sells the goods in bulk to wholesaler, who sells in small lots to retailers who then
supply these to the consumers.
 Three level channel: this channel consist of three intermediaries through whom manufacturer
sells goods to the consumers. Under this network, manufacturer uses the service of an agent for
the initial distribution of goods. The agent in turn, supply to wholesalers, who in turn sells to the
retailers and in the end retailer, sells to the final consumers.

Factors determining choice of channel of distribution

1. Product related factors

a. Nature of product

In case of industrial products, direct or short channels are preferred as they are usually technical, costly,
made to order. For consumer products, long channels are preferred as such products are usually
standardized, less expensive less bulky.

b. Perishability

Perishable products are best sold through short channels while non-perishable products are sold
through long channels.

c. Unit value of the product

In case of products having low unit value, long channels are preferred whereas when products to be
distributed are expensive then short channels are preferred.

d. Product complexity

In case of complex products requiring technical advice or guidance, shorter channels are preferred.
However, simple or non-complex products can be sold through long channels.

2. Company characteristics
a. Financial strength

Direct selling involves huge funds to be invested in fixed assets, say, for starting own retail outlets or
engaging large number of sales persons. On the other hand, indirect selling through middlemen does
not involve lot of funds.

b. Degree of control

If the company wants to have tight control over distribution, short channels are used. A company not
desirous of control over distribution can freely employ middlemen.

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 3. Competitive factors

The choice of channel is also affected by the channel selected by competitors in the same industry. If the
competitors have selected a particular channel, say, chemist shops for the sale of shampoo and shaving
cream, the other firm may also like to select the similar channel.

4. Market factors
a. Size of market

In case the number of buyers is small, short channels are used. On the other hand, if the number of
buyers is large, long channels are used.

b. Geographical concentration

If the buyers are concentrated in a limited area, short channels are used. But if the buyers are scattered
over a large area, long channels are used.

c. Size of order

If the size of order is small, as in case of most consumer goods, long channels are preferred. But if the
size of the order is large, short channels may be used.

Components of physical distribution

1. Order processing

Order processing means the time and steps involved between receipt of order form customer and
delivery of goods. The manner in which customer orders are processed determines the level of customer
service. More quickly and accurately the orders are processed greater is the level of customer
satisfaction.

2. Transportation

Transportation refers to the physical movement of goods from the place of production to the place of
consumption. It helps in assembling and dispersing of goods. Transportation brings together the
producers and consumers who are located at different places. It creates place utility by carrying the
goods to the places where they are required. It adds value to the goods by moving them to the plces
where they are required.

3. Warehousing

Warehousing or storage refers to the holding and preservation of goods till they are delivered to the
buyers. Generally, there is a time gap between the production and consumption of goods. During this
period, goods must be stored properly to protect them from any damage which may be caused by ants,
rats, moisture, heat, cold, theft etc.

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 4. Inventory control

Inventory refers to level of stock of goods to be maintained for distribution. Higher the level of
inventory, higher will be the level of service to customers but the cost of carrying the inventories will
also be high because of lot of capital would be tied up in the stock. Any shortage of inventory may lead
to loss of sales. Thus, a balance is to be maintained between cost and customer satisfaction.

Promotion
Promotion refers to the process of informing customers about the products and services of the firm,
their features, prices, uses etc. and persuading them to buy it.

Promotion Mix

Promotion mix refers to combination of promotional tools or methods used by an organization to

achieve its communication objectives. These include:

(i) Advertising (ii) Personal selling

(ii) Sales promotion (iv) publicity and public relations

Advertising

Advertising refers to any paid form of impersonal presentation and promotion of goods, services or idea
by an identified sponsor. It involves dissemination of information about a product, service, idea or
organization to induce people to take actions beneficial to the advertiser. The message which is
disseminated is known as an advertisement.

Advantages

1. Mass reach

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

2. Expressiveness

With the use of latest techniques, graphics and multimedia, advertising has become the most forceful
medium of communication.

3. Enhancing customer satisfaction and confidence

Advertising helps in building confidence among the prospective buyers as they feel more comfortable
and assured about the product quality and hence feel more satisfied.

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 4. Economy

Advertising is very economical mode of communication if large number of people is to be reached.

Because of its wide reach, the total cost of advertising is spread over a large number of people.

5. Introduction of new product

Advertising helps business firms to create awareness among consumers and to gain their acceptance for
new products. It is indispensable for successful launching of new products in the competitive market.

6. Convenience in shopping

Advertising informs customers about the availability of the products, their sources, prices, special
features etc. this knowledge helps the customers to save time and effort involved in shopping.

Objections to advertising

1. Adds to the cost

It is argued that advertising increases the price of the product. Companies spend huge amount of money
on advertising and these expenses are added to the cost and consumer has to pay a higher price for the
product.

This objection is not correct because with advertisements the demand for product increases, which
brings increase in sales and this leads to increase in production. With increase in production the
companies can get the economies of scale which reduces the cost of production.

2. Encouraging sales of inferior products

The advertisement shows all types of products irrespective of their quality. Thorough advertising
anything can be sold in the market.

The objection of sale of inferior goods is not true because inferiority or superiority depends upon one’s
economic status and preference. Everyone cannot afford to buy superior quality costly products but it
does not mean they should not use the product. The lower income group people satisfy their needs with
low cost inferior goods.

3. Confuses the buyer rather than helps

The consumers get confused when they are exposed to so many advertisements in different media. Such
similar claim confuses the buyer and it becomes very difficult for him to take a buying decision.

This objection is not valid because advertisement give wide choice to customers and today’s customer is
smart enough to know and select the most suitable brand for him.

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 4. Undermines social values

Another objection against advertising is that it promotes materialism. Advertising multiplies the needs
of people and tempts them to buy those products which they do not even require. Knowledge about
new products makes them dissatisfied with their present standard of living. It induces them to buy the
latest products.

This criticism is not entirely true. Advertisement helps buyer by informing them about the new products
and improvement made in the existing products. Advertisement only informs the customers, the final
decision to buy or not lies with the customers only.

5. Some advertisements are in bad taste

Another objection against advertisement is that some advertisements are in bad taste. Many
advertisements contain seminude photographs and objectionable words in order to attract customers.

Although some advertisements are in bad tastes, but it cannot be an objection against advertisement.
Whether an advertisement is in good or bad taste is a matter of personal opinion.

Personal selling

Personal selling is the oldest and the most effective promotional tool. In simple words, personal selling
means selling personally. 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 involves face
to face communication between the seller and the buyer.

Qualities of a good salesman

1. Physical qualities

A salesman must have sound health and pleasing personality. He should be free form disease and
disability of all types. A pleasing and charming personality boosts self-confidence. Good grooming,
appropriate dress, neat appearance and a good posture will create good impression on the customers.

2. Mental qualities

A good salesman must possess certain mental qualities such as imagination, foresightedness, strong
memory power, presence of mind and initiative. A salesman who is intelligent enough to understand the
nature of the prospective buyers and perceive their requirements is most likely to be successful.

3. Social qualities

A salesman should be social and have the ability to mix up with people of all types. The practice of
greeting and thanking customers, using polite expressions are necessary for success in personal selling.

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 4. Communication skills

A salesman should possess good communication skills. He should be able to speak freely, clearly and in a
well-pitched voice. He should have the ability to answer questions and overcome objections.

5. Patience

The salesman should not get provoked even under worst situations. He should have adequate patience
to listen to customers and clear their queries.

6. Persistent

Good salesman is persistent. They never give up. They know very well that the job of all salesman is to
finalize the deal.

Basis Advertising Personal selling

Nature of It is an important form of It is a personal form of communication.
communication communication.
Message It transmits same message to all the Message is specific and its adjusted as per
customers. the needs of the customer.
Flexibility Low High
Coverage It reaches to a large number of Only a limited number of people can be
people. contacted.
Cost Its cost per person is low. The cost per person is very high in the case
of personal selling.
Time It can cover the market in a short It takes a lot of time to cover the market.
time.
Media Its important medias are television, Personal selling makes use of sales people to
newspapers, radio, magazines, etc. contact prospective buyers.
Feedback Not immediately available. It provides direct and immediate feedback.
Objective Its objective is to introduce new Its objective is to achieve sales target by
products, fight competition, increase satisfying customers.
sales, enhance image.
Type of It is more useful for the ultimate It is more useful for industrial buyers who
customer consumers, who are large in numbers. are few in numbers.
Removal of It may fail to remove doubts and It can remove doubts and convince
doubts convince customers. customers.

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Sales Promotion

Sales promotion refers to short term incentives, which are designed to encourage the buyers to make
immediate purchase of a product or service.

Sales Promotion Activities/Techniques/Methods/Tools

1. Rebates or price-off offer

Rebate refers to offering the product at a price lower than the original price to clear off the excess
inventory for a limited period of time.

Example: Coke offered 2 liter bottle at Rs.35 only during winter 2004.

2. Discount

It refers to offering products at less than list price. Certain percentage of price is reduced as discount.

Example: Bata’s offer o9f discount up to 50% on its products.

3. Refunds

It refers to refunding a part of price paid by customer on some proof of purchase. It is commonly used
by food product companies, to boost their sales.

Example: The buyers of two packets of a branded detergent powder may be refunded rs. 5 on returning
the empty packages to the dealers.

4. Product combinations

It refers to giving another product as gift along with the purchase of a product.

Example: Toothbrush free with toothpaste.

5. Quantity Gift

It means offering some extra quantity of the product as a gift to the customers.

Example: Buy 3 get 1 free in case of Vivel and Lux Soaps.

6. Instant Draws and Assigned Gift

Under this method, customer is offered schemes like scratch a card to win instant gifts on the purchase
of a product. For example, ‘Burst a Cracker’ scheme of LG to win Mobiles free with TV.

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 7. Lucky Draw

Under this method, customer is given a coupon bearing distinct number on purchase of product and the
lucky winners are decided by draw of lots. The winner is entitled for the gift.

Example: Lucky draw coupon on purchase of a washing machine and win a ‘DVD Player’ offers.

8. Usable Benefit

On purchasing products, some usable benefits are given to customer.

Example: A holiday package of Rs.10, 000 free on purchase of goods worth Rs.40, 000.

9. Full Finance

Under this method, product is sold on installment basis at zero percent rate of interest. For example,
payment of Rs.80, 000 for a bike can be paid as Rs.20, 000 immediately and balance in 20 installments of
Rs.3, 000 each.

10. Sampling

Under this method, many business enterprises distribute free samples of their products to selected
consumers in order to popularize their products. Distribution of samples is generally used for products
of daily use, e.g. , soaps, toothpastes, detergents, tea, perfumes, etc.

11. Contests

There may be consumer’s contest, salesman contest and dealer’s contest. Consumers are required to
write a slogan on the product. It provides new ideas for advertising the product. Contests for salesman
and dealers are also held to induce them to increase the sales of the product. Attractive prizes are given
to the best entries.

Public Relations

Public relations involve a variety of programs to promote and protect a company’s image and its
products in the eyes of public. The term ‘public’ does not mean only customers. It also includes
shareholders, suppliers, bankers, intermediaries, investors, government, etc.

Role/Importance of Public Relations

1. Press Relations

Information about the organization needs to be presented in a positive manner in the press. The public
relations department is in contact with the media to present true facts and a correct picture about the
company.

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 2. Product publicity

New products require special effort to publicize them. The public relations department advises the top
management that the company can draw attention to new products by sponsoring sports and cultural
events like news conferences, seminars and exhibitions.

3. Corporate communication

The image of the company can be promoted through communication with the public and the employees
within the organization. This is usually done with the help of newsletter, annual reports, brochures,
speeches.

4. Lobbying

Public relations professional help the company to maintain a healthy relationship with government
officials and ministers in charge of corporate affairs, industry, finance with respect to policies relating to
business and the economy.

5. Building Awareness

Public relations department can place stories and dramatize the product in the media. This will build
excitement in the market before the product reaches the market or media advertising takes place.

6. Counseling

The public relations department advises the top management that the company can build goodwill by
contributing money and time to certain causes like environment, wildlife, children’s rights, education,
etc.

7. Building credibility

If news about a product comes in the media, it always builds credibility. People believe in the product
since it is in the news.

8. Stimulates Sales Force

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 consumers.

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 CHAPTER – 12

CONSUMER PROTECTION
Concept

Consumer protection has a wide agenda. It aims at:

a. Providing protection to consumers against unscrupulous, exploitative and unfair trade practices
of traders, manufacturers and service providers.
b. Educating consumer about their rights and responsibilities.
c. Providing speedy and inexpensive redressal of their grievances
d. Creating awareness among the consumers so that they organize themselves in the form of
consumer organizations which would protect and promote their interests.

Importance

Consumer protection is important due to the following reasons:

A. From consumer’s point of view

1. Consumer Ignorance

Due to illiteracy and lower level of education, many consumers cannot differentiate between good and
bad products and cannot even read the contents, price, date quality etc. printed on the packets. This
ignorance may give opportunities to some suppliers to cheat the consumers by selling sub-standard
goods and charging exorbitant prices.

2. Unorganized consumers

In developing countries like India, consumers are not organized. There are very few consumer
organizations which are working to protect the interest of consumers. Consumer protection encourages
establishment of more consumer organizations. These organizations can file case on behalf of aggrieved
customers under the consumer protection act.

3. Widespread exploitation of consumers

Although now-a-days consumer is the king of the market, but in fact he is not treated like a king in the
market. Instead he is being cheated and exploited. Some dishonest and greedy businessman use
different unfair trade practices like black marketing, adulteration etc. to cheat and exploit innocent
consumers.

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 B. From the point of view of Businessman
1. Long term interest of the business

In this highly competitive world, business enterprise can exist in the long-run only when they satisfy the
customers. Satisfied customers not only lead to repeat sales but also add new customers by providing
positive feedback about the enterprise. Thus, business enterprise should aim at long-term profit
maximization through customer satisfaction.

2. Business uses society’s resources

Business organization uses various resources, which are supplied by the society. They earn profit by
using society’s resources. So, it is their responsibility to supply such products and services which are in
public interest.

3. Social Responsibility

A business has social responsibility towards various interest groups such as owners, employees,
government, consumers etc. business earn profits by selling goods and providing services to consumers.
Thus, consumers form an important group and like other stakeholders, their interest should be well
taken care of.

4. Moral justification

It is the moral duty of the business to take care of the consumer’s interest and to avoid any form of their
exploitation. Thus, a business must avoid dishonest, exploitative and unfair trade practices such as
adulteration, misleading advertisements, profiteering, unreasonable prices, black-marketing, artificial
scarcity etc.

5. Government intervention

If businessman wants to avoid intervention of the government then they should not involve in unfair
trade practices. Government may take stern action if a businessman involve in exploitative trade
practices and this may spoil the reputation of the company.

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Consumer Rights

1. Right to safety

According to this right, the consumer has the right to be protected against goods and services which are
hazardous to health, life and property. Right to safety is important for safe and secure life. There are
various risks associated with consumption and use of products like food, drugs, toys, pressure cookers,
electrical appliances etc. The consumers have the right to get protection against such risks.

For instance, gas cylinder, if not sealed properly can cause serious injury to life or even death.

2. Right to be informed

According to this right, the consumer has the right to be informed about the quality, quantity, purity,
ingredients, date of manufacture, expiry date, precaution of use, standard and price of goods or service
he intends to purchase etc. therefore, the manufacturer must provide such information on the package
and label of the product. Such information would enable the consumer to intelligently exercise his
decision to buy a product.

3. Right to choose

According to this right, the consumer has the right to choose from a variety of products at competitive
price. This implies that the marketers should offer a wide variety of products in terms of quality, brand,
prices, size etc. and allow the customers to choose from alternative products. The seller should not force
the customer to buy a particular brand.

4. Right to be heard

According to this right, the consumer has the right to file a complaint and to be heard in case of
dissatisfaction with a good or service. Many reputed firms have set up their own consumer service and
grievance cell to listen to consumer’s complaint and take appropriate steps to redress their grievances.

5. Right to seek redressal

According to this right, the consumer has the right to get relief in case of defective goods or deficient
services. This right provides number of reliefs to the consumers including replacement of the product,
removal of defect in the product, compensation paid for any loss or injury suffered by the consumer etc.

6. Right to consumer education

This right states that a consumer has the right to acquire knowledge and skills to be a well-informed
customer. The consumer must be made aware of his rights and remedies available to him in case a
product falls short of claims made by manufacturers or sellers. To promote awareness, Indian
government has taken several measures like campaign of ‘Jago grahak jago’ etc. The Government of
India has included consumer education in the school curriculum and in various university courses.

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Consumer’s Responsibilities

1. Exercise the rights

Consumer must be aware of their own rights. These rights are the abovementioned rights. They must
exercise these rights while buying products and services.

2. Knowledge about the market

Consumer should be aware about various goods and services available in the market so that intelligent
and wise choice can be made.

3. Cautious consumer

The consumer must ask for complete information about the quality, utility, quantity, price etc. of the
product before buying it. Thus, he should not purchase blindly.

4. Quality conscious

The consumer should only buy standardized goods as they provide quality assurance. While purchasing
goods, the consumer must look for standard quality certification like ISI, Agmark, Hallmark, FPO etc. this
will help to eradicate the problems of adulteration and spurious products.

5. Insist on cash memo

A consumer must ask for cash memo on purchase of goods and services as it serves as a proof of
purchase at the time of filing the complaint. No seller can deny for the cash memo.

6. Beware of false advertisement

Consumer should not believe the advertisement blindly because advertisements often exaggerate the
quality or features of goods or services. Therefore they should compare the details of products given in
advertisement with the actual product.

7. Filing compliant

The consumer must file a complaint in an appropriate consumer forum in case of any defect in the
product or deficiency in the service availed. When a consumer ignores his exploitation by traders, he
encourages corrupt business practices.

8. Honesty

A consumer should be honest in his dealings. He should purchase only legal goods and services and
discourage unfair trade practices like black marketing, hoarding etc.

9. Consumer organization

Consumer should form consumer organizations to educate consumers and safeguard their interests.

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Consumer

Under the consumer protection act, 1986 a consumer is defined as

 Any person who buys any goods for a consideration which has been paid or promised, or
partially paid or partly promised, or under any scheme of deferred payment.
 It also includes any user of such goods, when such use is made with the approval of the buyer.
 It does not include a person who obtains goods for re-sale or any commercial purpose.
 Any person who hires or avails of any service, for a consideration which has been paid or
promised or partly paid or partly promised, or under any system of deferred payment.
 It does not include any person who avails services for commercial purposes.

Who are not considered as consumer?

 The person who obtains goods for re-sale or any commercial purpose.
 The person who obtains goods without any consideration.
 The person who uses the goods without the approval of the buyer.
 The person who hires or avails services without any consideration.
 The person who avails services without the approval of the hirer.
 The person who avails services for resale or any commercial purposes.

Who can file a complaint under the consumer protection act, 1986?

A complaint can be filed by

 Any consumer
 Any registered consumer organization
 The central government or any state government
 One or more consumers on behalf of numerous consumers having the same interest.
 A legal heir or representative of a deceased consumer.

Against whom a compliant can be filed?

 The seller, manufacturer or dealer of goods which are defective.

 The provider of services if they are deficient in any manner.

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Remedies/Reliefs available to a consumer

When the consumer court is satisfied about the genuineness of the complaint, it can issue one or more
of the following directives to the accused party:

 To remove the defects in goods or deficiency of services.

 To replace the defective product with a new non-defective product.
 To refund the amount paid to the complainant.
 To pay compensation if the consumer has suffered any loss or injury.
 To pay punitive damages in appropriate circumstances.
 To discontinue the unfair trade practices and not to repeat them in future.
 To stop the sale of hazardous goods from market.
 To withdrew the hazardous goods from sale.
 To stop manufacturing hazardous goods.
 Not to issue misleading advertisements.
 To pay adequate cost to aggrieved party.

Three-tier redressal machinery

1. District forum

State government can form one or more District forum in each district. The salient features are as
under:

 It consists of one president and two other members, one of whom should be a woman member.
 Only those complaints can be filed where the value of goods and services and the compensation
claimed is not more than Rs.20 lakhs.
 If the aggrieved party is not satisfied with the order of the district forum, he can appeal against
the order in the state commission within 30 days of passing the order.
2. State commission

The salient features are as under:

 It consists of one president who either is or has been a judge of the high court and two other
members, one of whom should be a woman member.
 Only those complaints can be filed where the value of goods and services and the compensation
claimed is more than Rs.20 lakhs but less than Rs.1 crore.
 If the aggrieved party is not satisfied with the order of the district forum, he can appeal against
the order in the National commission within 30 days of passing the order.

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 3. National commission

The salient features are as under:

 It consists of one president who either is or has been a judge of the Supreme Court and four
other members, one of whom should be a woman member.
 Only those complaints can be filed where the value of goods and services and the compensation
claimed is more than Rs.1 crore.
 If the aggrieved party is not satisfied with the order of the district forum, he can appeal against
the order in the National commission within 30 days of passing the order.

Consumer Awareness- role of consumer Organizations

Following are the functions performed by the consumer organizations:

 The publish periodicals, brochures, journals, monographs, etc. to inform and educate customers
about their rights, responsibilities and reliefs available.
 They collect data of different products and test them.
 They encourage the consumers to strongly protest against unscrupulous, exploitative and unfair
trade activities.
 They file suits, complaints and writ petitions on behalf of consumers.
 They provide legal assistance to consumers by way of providing aid, legal advice etc. in seeking
legal remedy.
 They arrange talks, seminars, conferences and workshops for the purpose of focusing on the
problems of consumers and finding their solutions.
 They produce films/cassettes on food adulteration. Misuse of drugs and cosmetics etc.
 Taking an initiative in filing cases in consumer courts in the interest of the general public, not
for any individual.

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