Business Studies Part II

Business Studies
Part II
Business Finance and Marketing
Textbook for Class XII
Rationalised 2023-24
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12114 – Business Studies Part II ISBN 81-7450-697-7 (Part I)
Textbook for Class XII 81-7450-756-6 (Part II)
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Foreword
The National Curriculum Framework (NCF), 2005, recommends that
children’s life at school must be linked to their life outside the school.
This principle marks a departure from the legacy of bookish learning
which continues to shape our system and causes a gap between the
school, home and community. The syllabi and textbooks developed on
the basis of NCF signify an attempt to implement this basic idea. They
also attempt to discourage rote learning and the maintenance of sharp
boundaries between different subject areas. We hope these measures will
take us significantly further in the direction of a child-centred system
of education outlined in the National Policy on Education (1986).
The success of this effort depends on the steps that school
principals and teachers will take to encourage children to reflect on
their own learning and to pursue imaginative activities and questions.
We must recognise that, given space, time and freedom, children
generate new knowledge by engaging with the information passed on
to them by adults. Treating the prescribed textbook as the sole basis
of examination is one of the key reasons why other resources and sites
of learning are ignored. Inculcating creativity and initiative is possible
if we perceive and treat children as participants in learning, not as
receivers of a fixed body of knowledge.
These aims imply considerable change in school routines and
mode of functioning. Flexibility in the daily time-table is as necessary
as rigour in implementing the annual calendar so that the required
number of teaching days are actually devoted to teaching. The methods
used for teaching and evaluation will also determine how effective this
textbook proves for making children’s life at school a happy experience,
rather than a source of stress or boredom. Syllabus designers have
tried to address the problem of curricular burden by restructuring and
reorienting knowledge at different stages with greater consideration
for child psychology and the time available for teaching. The textbook
attempts to enhance this endeavour by giving higher priority and space
to opportunities for contemplation and wondering, discussion in small
groups, and activities requiring hands-on experience.
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iv
The National Council of Educational Research and Training (NCERT)

appreciates the hardwork done by the textbook development committee
responsible for this book. We wish to thank the Chairperson of the
advisory group in Social Sciences Professor Hari Vasudevan and the
Chief Advisor for this book, D.P.S. Verma, Professor (Retd.), Delhi School
of Economics, University of Delhi, and Dr. G.L. Tayal, Reader, Ramjas
College, University of Delhi, for guiding the work of this committee.
Several teachers contributed to the development of this textbook; we are
grateful to their principals for making this possible. We are indebted to
the institutions and organisations which have generously permitted us
to draw upon their resources, material and personnel. We are especially
grateful to the members of the National Monitoring Committee, appointed
by the Department of Secondary and Higher Education, Ministry of
Human Resource Development, under the chairpersonship of Professor
Mrinal Miri and Professor. G.P. Deshpande, for their valuable time and
contribution. As an organisation committed to systemic reform and
continuous improvement in the quality of its products, NCERT welcomes
comments and suggestions which will enable us to undertake further
revision and refinement.
Director
New Delhi National Council of Educational
20 November 2006 Research and Training
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Rationalisation of Content in the Textbooks
In view of the COVID-19 pandemic, it is imperative to reduce content

load on students. The National Education Policy 2020, also emphasises
reducing the content load and providing opportunities for experiential
learning with creative mindset. In this background, the NCERT has
undertaken the exercise to rationalise the textbooks across all classes.
Learning Outcomes already developed by the NCERT across classes
have been taken into consideration in this exercise.
Contents of the textbooks have been rationalised in view of the
following:
• Overlapping with similar content included in other subject areas in
the same class
• Similar content included in the lower or higher class in the same
subject
• Difficulty level
• Content, which is easily accessible to students without much
interventions from teachers and can be learned by children through
self-learning or peer-learning
• Content, which is irrelevant in the present context
This present edition, is a reformatted version after carrying out
the changes given above.
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Textbook Development Committee
Chairperson, Advisory Committee for Textbooks in Social Sciences at
Senior Secondary Level
Hari Vasudevan, Professor, Department of History, University of
Calcutta, Kolkata
Chief Advisor
D.P.S. Verma, Retired Professor, Department of Commerce, Delhi School
of Economics, University of Delhi, Delhi.
Advisor
G.L. Tayal, Reader, Ramjas College, University of Delhi, Delhi.
Members
Anand Saxena, Reader, Deen Dayal Upadhyaya College, University of
Delhi, Delhi.
Davinder K. Vaid, Professor, Department of Education in Social Sciences
and Humanities, NCERT, New Delhi.
M.M. Goyal, Reader, PGDAV College, University of Delhi, Delhi.
Narsimha Murthy, Principal, University Post-Graduate College, Subedari,
Anam Konda, Distt. Warangal, Andhra Pradesh.
Pooja Dasani, PGT (Commerce) Convent of Jesus and Mary,
Gol Dakkhana, New Delhi.
R.B. Solanki, Principal, B.R. Ambedkar College, University of Delhi, Delhi.
Ruchi Kakkar, Lecturer, Acharya Narendra Dev College, University of
Delhi, Delhi.
Shruti Bodh Aggarwal, Vice-Principal, Rajkiya Pratibha Vikas Vidyalaya,
Kishanganj, Delhi.
Sumati Verma, Reader, Sri Aurobindo College, University of Delhi, Delhi.
Y.V. Reddy, Reader, Department of Commerce, Goa University, Goa.
Member Coordinator
Minoo Nandrajog, Reader, Department of Education in Social Sciences
and Humanities, NCERT, New Delhi.
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Acknowledgements
The National Council of Educational Research and T raining
acknowledges the valuable contributions of the Textbook Development
Commiteee, which took considerable pain in the development and review
of manuscript as well.
Thanks are due to Savita Sinha Professor and Head, Department
of Education in Social Science for her guidance and constant support
at every stage of the textbook development process. The textbook has
been reworked and updated at appropriate point of time in the context of
recent development in business scenario and the Compaines Act 2013.
The contribution of practcing teacher of Business Studies is also duly
acknowledged for develping e-resourses for QR Codes.
The contribution of APC Office, Administration, Publication Division,
and Secretariat of NCERT are also duly acknowledged for bringing out
the updated textbook of Business Studies.
Note to the Teacher

This textbook is expected to provide a good understanding of the
environment in which a business operates. A manager has to analyse the
complex, dynamic situations in which a business is placed. Therefore,
content enrichment in the form of business news and abstracts of articles
from business journals and magazines has been given as inset material
(boxes). This will encourage students to be observant about all business
activity and discover what is happening in business organisations with
the expectation that they will update their knowledge through the use
of libraries, newspapers, business oriented TV programmes and the
Internet. Various types of questions are given and case problems have
been introduced to test the application of subject knowledge to realistic
business situations.
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Contents
Foreword iii
Chapter 9 Financial Management 215
Chapter 10 Marketing 242
Chapter 11 Consumer Protection 289
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Contents (Part I)
Chapter 1 Nature and Significance of Management 1
Chapter 2 Principles of Management 30
Chapter 3 Business Environment 69
Chapter 4 Planning 91
Chapter 5 Organising 109
Chapter 6 Staffing 139
Chapter 7 Directing 169
Chapter 8 Controlling 201
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chapter
9
Financial Management
Learning Objectives When Tata Steel Acquired Corus
Tata Steel, the biggest steel producer in
After studying this chapter, you
the Indian private sector has acquired
should be able to: Corus, (formerly known as British
Steel) in a deal worth $8.6 billion in
¾¾ explain the meaning of 2007. This makes Tata Steel the fifth
business finance; largest steel producer in the world. A
financial decision of this magnitude
has significant implicitness for both
¾¾ d e s c r i b e f i n a n c i a l
Tata Steel and Corus as well as their
management; employees and shareholders. To mention
some of them:
¾¾ explain the role of financial � Tata Steel raised a debt of over $8
management in our billion to finance the transaction.
enterprise; The deal will be paid for by Tata Steel
UK, a special purpose vehicle (SPV)
¾¾ d i s c u s s o b j e c t i v e s o f set up for the purpose. This SPV
financial management and received funds from Tata Steel routed
how they could be achieved; through a Singapore subsidiary.
Another company of the Tata group,
Tata Sons Ltd., invested $ 1 billion
¾¾ explain the meaning and dollars for preference shares along
importance of financial with Tata Steel which will invest an
planning; equal amount.
� Tata Steel, the acquirer company,
¾¾ state the meaning of capital arranged about 36,500 crores of
structure; rupees to finance the take-over.
� Tata Steel raised this amount through
¾¾ analyse the factors affecting debt or equity or a combination
the choice of an appropriate of both. Some amount came from
capital structure; internal accruals also. This financing
decision affected the capital structure
¾¾ state meaning of fixed capital of Tata Steel.
and working capital; and � Needless to emphasise, decisions
like this affect the future of the
organisation. These decisions are
¾¾ analyse the factors affecting
almost irrevocable after they have been
the requirement of fixed and formalised.
working capital.
Source: The Economic Times
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BUSINESS STUDIES
216
Introduction thus, very crucial for the survival and

growth of a business.
In the above case, these decisions
require careful financial planning,
Financial Management
an understanding of the resultant
capital structure and the riskiness All finance comes at some cost. It
and profitability of the enterprise. All is quite imperative that it needs to
these have a bearing on shareholders be carefully managed. Financial
as well as employees. They require Management is concerned with optimal
an understanding of business procurement as well as the usage of
finance, major financial decision finance. For optimal procurement,
areas, financial risk, and working different available sources of finance
capital requirements of the business. are identified and compared in terms
Finance, as we all know, is essential of their costs and associated risks.
for running a business. Success of Similarly, the finance so procured
business depends on how well finance needs to be invested in a manner that
is invested in assets and operations the returns from the investment exceed
and how timely and cheaply the the cost at which procurement has
finances are arranged, from outside taken place. Financial Management
or from within the business. aims at reducing the cost of funds
procured, keeping the risk under
Meaning of Business Finance control and achieving effective
deployment of such funds. It also
Money required for carrying out aims at ensuring availability of enough
business activities is called business funds whenever required as well as
finance. Almost all business activities avoiding idle finance. Needless to
require some finance. Finance is emphasise, the future of a business
needed to establish a business, to depends a great deal on the quality of
run it, to modernise it, to expand, or its financial management.
diversify it. It is required for buying Importance : The role of financial
a variety of assets, which may be management cannot be over-
tangible like machinery, factories, emphasised, since it has a direct
buildings, offices; or intangible such bearing on the financial health of a
as trademarks, patents, technical business. The financial statements,
expertise, etc. Also, finance is central such as Balance Sheet and Profit
to running the day-to-day operations and Loss Account, reflect a firm’s
of business, like buying material, financial position and its financial
paying bills, salaries, collecting cash health. Almost all items in the financial
from customers, etc. needed at every statements of a business are affected
stage in the life of a business entity. directly or indirectly through some
Availability of adequate finance is, financial management decisions. Some
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Financial Managements
217
prominent examples of the aspects raised by way of debt and/or equity

being affected could be as under: is also a financial management
(i) The size and the composition of decision. The amounts of debt,
fixed assets of the business: For equity share capital, preference
example, a capital budgeting share capital are affected by the
financing decision, which is a part
decision to invest a sum of Rs. 100
of financing management.
crores in fixed assets would raise
the size of fixed assets block by this (v) All items in the Profit and Loss
amount. Account, e.g., Interest, Expense,
Depreciation, etc. : Higher amount
(ii) The quantum of current assets and of debt means higher interest
its break-up into cash, inventory expense in future. Similarly, use
and receivables: With an increase of higher equity may entail higher
in the investment in fixed assets, payment of dividends. Similarly, an
there is a commensurate increase expansion of business which is a
in the working capital requirement. result of capital budgeting decision
The quantum of current assets is likely to affect virtually all items
is also influenced by financial in the profit and loss account of the
management decisions. In addition, business.
decisions about credit and inventory
It can, thus, be stated that the
management affect the amount of
financial statements of a business
debtors and inventory which in
are largely determined by financial
turn affect the total current assets
as well as their composition. management decisions taken earlier.
Similarly, the future financial
(iii) The amount of long-ter m and statements would depend upon past
short- ter m funds to be used: as well as current financial decisions.
Financial management, among
Thus, the overall financial health
others, involves decision about
of a business is determined by the
the proportion of long-term and
quality of its financial management.
short-term funds. An organisation
Good financial management aims at
wanting to have more liquid assets
mobilisation of financial resources at
would raise relatively more amount
a lower cost and deployment of these
on a long-term basis. There is
in most lucrative activities.
a choice between liquidity and
profitability. The underlying
assumption here is that current
Objectives
liabilities cost less than long term The primary aim of financial
liabilities. management is to maximise
(iv) Break-up of long-term financing into shareholders’ wealth, which is referred
debt, equity etc: Of the total long- to as the wealth-maximisation concept.
term finance, the proportions to be The market price of a company’s shares
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BUSINESS STUDIES
218
is linked to the three basic financial some value addition should take place.
decisions which you will study a little All those avenues of investment, modes
later. This is because a company funds of financing, ways of handling various
belong to the shareholders and the components of working capital must
manner in which they are invested and be identified which will ultimately lead
the return earned by them determines to an increase in the price of equity
their market value and price. It means share. It can happen through efficient
maximisation of the market value of decision-making. Decision-making is
equity shares. The market price of efficient if, out of the various available
equity share increases, if the benefit alternatives, the best is selected.
from a decision exceeds the cost
involved. All financial decisions aim at Financial Decisions
ensuring that each decision is efficient
Financial management is concerned
and adds some value. Such value
with the solution of three major issues
additions tend to increase the market
relating to the financial operations
price of shares. Therefore, those
of a firm corresponding to the three
financial decisions are taken which
questions of investment, financing
will ultimately prove gainful from
and divident decision. In a financial
the point of view of the shareholders.
context, it means the selection of
The shareholders gain if the value of
best financing alternative or best
shares in the market increases. Those
investment alternative. The finance
decisions which result in decline in
function, therefore, is concerned
the share price are poor financial
with three broad decisions which are
decisions. Thus, we can say, the
explained below:
objective of financial management is
to maximise the current price of equity
Investment Decision
shares of the company or to maximise
the wealth of owners of the company, A firm’s resources are scarce in
that is, the shareholders. comparison to the uses to which
Therefore, when a decision is taken they can be put. A firm, therefore,
about investment in a new machine, has to choose where to invest these
the aim of financial management resources, so that they are able to earn
is to ensure that benefits from the the highest possible return for their
investment exceed the cost so that investors. The investment decision,
some value addition takes place. therefore, relates to how the firm’s
Similarly, when finance is procured, funds are invested in different assets.
the aim is to reduce the cost so that Investment decision can be long-
the value addition is even higher. term or short-term. A long-term
In fact, in all financial decisions, investment decision is also called a
major or minor, the ultimate objective Capital Budgeting decision. It involves
that guides the decision-maker is that committing the finance on a long-
Ch_9.indd 218 10-08-2022 09:09:51

219
term basis. For example, making decisions) are concerned with the
investment in a new machine to decisions about the levels of cash,
replace an existing one or acquiring inventory and receivables. These
a new fixed asset or opening a new decisions affect the day-to-day
branch, etc. These decisions are very working of a business. These affect
crucial for any business since they the liquidity as well as profitability of a
affect its earning capacity in the long business. Efficient cash management,
run. The size of assets, profitability inventory management and receivables
and competitiveness are all affected by management are essential ingredients
capital budgeting decisions. Moreover, of sound working capital management.
these decisions normally involve
huge amounts of investment and are Factors affecting Capital
irreversible except at a huge cost. Budgeting Decision
Therefore, once made, it is often almost
A number of projects are often available
impossible for a business to wriggle out
to a business to invest in. But each
of such decisions. Therefore, they need
project has to be evaluated carefully
to be taken with utmost care. These
and, depending upon the returns, a
particular project is either selected or
rejected. If there is only one project, its
viability in terms of the rate of return,
viz., investment and its comparability
with the industry’s average is seen.
There are certain factors which affect
capital budgeting decisions.
(a) Cash flows of the project: When
a company takes an investment
decision involving huge amount
it expects to generate some cash
flows over a period. These cash
flows are in the form of a series
Wealth Maximisation Concept
of cash receipts and payments
over the life of an investment.
The amount of these cash flows
decisions must be taken by those who should be carefully analysed before
understand them comprehensively. considering a capital budgeting
A bad capital budgeting decision decision.
normally has the capacity to severely (b) The rate of retur n: The most
damage the financial fortune of a important criterion is the rate
business. Short-ter m investment of return of the project. These
decisions (also called working capital calculations are based on the
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BUSINESS STUDIES
220
expected returns from each whether or not a firm has earned a

proposal and the assessment of profit. Likewise, the borrowed funds
the risk involved. Suppose, there have to be repaid at a fixed time. The
are two projects, A and B (with the risk of default on payment is known
same risk involved), with a rate as financial risk which has to be
of return of 10 per cent and 12 considered by a firm likely to have
per cent, respectively, then under insufficient shareholders to make
normal circumstance, project B these fixed payments. Shareholders’
should be selected. funds, on the other hand, involve no
(c) The investment criteria involved: commitment regarding the payment
The decision to invest in a particular of returns or the repayment of capital.
project involves a number of A firm, therefore, needs to have a
calculations regarding the amount judicious mix of both debt and equity
of investment, interest rate, cash in making financing decisions, which
flows and rate of return. There are may be debt, equity, preference share
different techniques to evaluate capital, and retained earnings.
inv e s t m ent p ro p o sals which The cost of each type of finance has
are known as capital budgeting to be estimated. Some sources may
techniques. These techniques are be cheaper than others. For example,
applied to each proposal before debt is considered to be the cheapest
selecting a particular project. of all the sources, tax deductibility
of interest makes it still cheaper.
Financing Decision Associated risk is also different for
This decision is about the quantum each source, e.g., it is necessary to
of finance to be raised from various pay interest on debt and redeem the
long-term sources. Short-term sources principal amount on maturity. There
are studied under the ‘working capital is no such compulsion to pay any
management’. dividend on equity shares. Thus, there
It involves identification of various is some amount of financial risk in
available sources. The main sources debt financing. The overall financial
of funds for a firm are shareholders’ risk depends upon the proportion of
funds and borrowed funds. The debt in the total capital. The fund
shareholders’ funds refer to the equity raising exercise also costs something.
capital and the retained earnings. This cost is called floatation cost.
Borrowed funds refer to the finance It also must be considered while
raised through debentures or other evaluating different sources. Financing
forms of debt. A firm has to decide the decision is, thus, concerned with the
proportion of funds to be raised from decisions about how much to be raised
either sources, based on their basic from which source. This decision
characteristics. Interest on borrowed determines the overall cost of capital
funds have to be paid regardless of and the financial risk of the enterprise.
Ch_9.indd 220 10-08-2022 09:09:51

221
Financial Decisions
Factors Affecting Financing different. A prudent financial

Decisions manager would normally opt for a
The financing decisions are affected source which is the cheapest.
by various factors. Important among (b) Risk: The risk associated with each
them are as follows: of the sources is different.
(a) Cost: The cost of raising funds (c) Floatation Costs: Higher the floatation
through different sources are cost, less attractive the source.
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BUSINESS STUDIES
222
(d) Cash Flow Position of the Company: the choice of source of fund. During
A stronger cash flow position may the period when stock market is
make debt financing more viable rising, more people invest in equity.
than funding through equity. However, depressed capital market
(e) Fixed Operating Costs: If a business may make issue of equity shares
has high fixed operating costs (e.g., difficult for any company.
building rent, Insurance premium,
Salaries, etc.), It must reduce fixed Dividend Decision
financing costs. Hence, lower debt
financing is better. Similarly, if The third important decision that
every financial manager has to
fixed operating cost is less, more
take relates to the distribution of
of debt financing may be preferred.
dividend. Dividend is that portion
(f) Control Considerations: Issues of of profit which is distributed to
more equity may lead to dilution shareholders. The decision involved
of management’s control over here is how much of the profit earned
the business. Debt financing has by company (after paying tax) is to be
no such implication. Companies distributed to the shareholders and
afraid of a takeover bid would how much of it should be retained
prefer debt to equity. in the business. While the dividend
(g) State of Capital Market: Health of constitutes the current income
the capital market may also affect re-investment as retained earning
India Inc. Issues Bonus Shares and Dividends
Corporate India has opened its purse strings to shareholders with interim
dividends and bonus shares. At least 60 companies have declared interim dividend
or announced plans to do so in the first three weeks of January. In addition, around
12 companies have announced bonus share issues this month, about three times
more than January 2006.
There are range of things that a company can do for maximising shareholder
value and dividend is the most direct and simple form of it. Ideally companies
need to balance it up between paying cash and building value of the stock for total
shareholder returns.
This trend of dividends and bonuses is in synchronisation with the good profits
being posted by companies. It’s a way of rewarding shareholders.
A number of companies have also announced plans of bonus shares for their
shareholders. Most of the companies who have already declared bonus issues or
announced that they would be taking it up in their next board meeting are small or
mid-sized companies.
Source: The Economic Times
Ch_9.indd 222 10-08-2022 09:09:52

223
increases the firm’s future earning the change in earnings is small or

capacity. The extent of retained seen to be temporary in nature.
earnings also influences the financing (d) Growth Opportunities: Companies
decision of the firm. Since the firm having good growth opportunities
does not require funds to the extent retain more money out of their
of re-invested retained earnings, the earnings so as to finance the
decision regarding dividend should required investment. The dividend
be taken keeping in view the overall in growth companies is, therefore,
objective of maximising shareholder’s smaller, than that in the non–
wealth. growth companies.
Factors Affecting Dividend (e) Cash Flow Position: The payment
Decision of dividend involves an outflow of
cash. A company may be earning
How much of the profits earned by a profit but may be short on cash.
company will be distributed as profit Availability of enough cash in
and how much will be retained in the the company is necessary for
business is affected by many factors. declaration of dividend.
Some of the important factors are
(f) Shareholders’ Preference: While
discussed as follows:
declaring dividends, managements
(a) Amount of Earnings: Dividends
must keep in mind the preferences
are paid out of current and past
of the shareholders in this regard. If
earning. Therefore, earnings is a
the shareholders in general desire
major determinant of the decision
that at least a certain amount is
about dividend.
paid as dividend, the companies
(b) Stability Earnings: Other things are likely to declare the same. There
remaining the same, a company are always some shareholders who
having stable earning is in a better depend upon a regular income
position to declare higher dividends. from their investments.
As against this, a company having (g) Taxation Policy: The choice between
unstable earnings is likely to pay the payment of dividend and
smaller dividend. retaining the earnings is, to some
(c) Stability of Dividends: Companies extent, affected by the difference in
generally follow a policy of the tax treatment of dividends and
stabilising dividend per share. The capital gains. If tax on dividend is
increase in dividends is generally higher, it is better to pay less by
made when there is confidence that way of dividends. As compared
their earning potential has gone to this, higher dividends may be
up and not just the earnings of declared if tax rates are relatively
the current year. In other words, lower. Though the dividends are free
dividend per share is not altered if of tax in the hands of shareholders,
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BUSINESS STUDIES
224
a dividend distribution tax is levied Financial Planning

on companies. Thus, under the
present tax policy, shareholders Financial planning is essentially the
are likely to prefer higher dividends. preparation of a financial blueprint of
an organisation’s future operations.
(h) Stock Market Reaction: Investors,
The objective of financial planning
in general, view an increase in
is to ensure that enough funds are
dividend as a good news and
stock prices react positively to it. available at right time. If adequate
Similarly, a decrease in dividend funds are not available the firm will
may have a negative impact on the not be able to honour its commitments
share prices in the stock market. and carry out its plans. On the other
Thus, the possible impact of hand, if excess funds are available, it
dividend policy on the equity share will unnecessarily add to the cost and
price is one of the important factors may encourage wasteful expenditure.
considered by the management It must be kept in mind that financial
while taking a decision about it. planning is not equivalent to, or a
(i) Access to Capital Market: Large and substitute for, financial management.
reputed companies generally have Financial management aims at
easy access to the capital market choosing the best investment and
and, therefore, may depend less financing alternatives by focusing on
on retained earning to finance their costs and benefits. Its objective
their growth. These companies is to increase the shareholders’ wealth.
tend to pay higher dividends than Financial planning on the other
the smaller companies which have hand aims at smooth operations
relatively low access to the market. by focusing on fund requirements
(j) Legal Constraints: Certain and their availability in the light of
provisions of the Companies Act financial decisions. For example, if a
place restrictions on payouts as capital budgeting decisions is taken,
dividend. Such provisions must the operations are likely to be at a
be adhered to while declaring the higher scale. The amount of expenses
dividend. and revenues are likely to increase.
(k) Contractual Constraints: While Financial planning process tries to
granting loans to a company, forecast all the items which are likely
sometimes the lender may impose to undergo changes. It enables the
certain restrictions on the payment management to foresee the fund
of dividends in future. The requirements both the quantum as
companies are required to ensure well as the timing. Likely shortage
that the dividend does not violate and surpluses are forecast so that
the terms of the loan agreement in necessary activities are taken in
this regard. advance to meet those situations.
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225
Thus, financial planning strives to programmes. Short-term planning

achieve the following twin objectives. covers short-term financial plan called
(a) To ensure availability of funds budget.
whenever required: This include Typically, financial planning is
a proper estimation of the funds done for three to five years. For longer
required for different purposes periods it becomes more difficult and
such as for the purchase of long- less useful. Plans made for periods of
term assets or to meet day-to- one year or less are termed as budgets.
day expenses of business etc. Budgets are example of financial
Apart from this, there is a need to planning exercise in greater details.
estimate the time at which these They include detailed plan of action
funds are to be made available. for a period of one year or less.
Financial planning also tries to Financial planning usually begins
specify possible sources of these with the preparation of a sales forecast.
funds. Let us suppose a company is making
(b) To see that the firm does not a financial plan for the next five years.
raise resources unnecessarily: It will start with an estimate of the
Excess funding is almost as bad sales which are likely to happen in
as inadequate funding. Even if the next five years. Based on these,
there is some surplus money, good the financial statements are prepared
financial planning would put it to keeping in mind the requirement
the best possible use so that the of funds for investment in the fixed
financial resources are not left idle capital and working capital. Then the
and don’t unnecessarily add to the expected profits during the period are
cost. estimated so that an idea can be made
of how much of the fund requirements
Thus, a proper matching of funds
can be met internally i.e., through
requirements and their availability
retained earnings (after dividend
is sought to be achieved by financial
payouts). This results in an estimation
planning. This process of estimating
of the requirement for external funds.
the fund requirement of a business
Further, the sources from which the
and specifying the sources of funds
external funds requirement can be
is called financial planning. Financial
met are identified and cash budgets
planning takes into consideration the
are made, incorporating these factors.
growth, performance, investments
and requirement of funds for a given
period. Financial planning includes
Importance
both short-term as well as long-term Financial planning is an important
planning. Long-term planning relates part of overall planning of any business
to long term growth and investment. enterprise. It aims at enabling the
It focuses on capital expenditure company to tackle the uncertainty in
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226
respect of the availability and timing sales is predicted. However, it

of the funds and helps in smooth may happen that the growth rate
functioning of an organisation. The eventually turns out to be 10%
importance of financial planning can or 30%. Many items of expenses
be explained as follows: shall be different in these three
(i) It helps in forecasting what may situations. By preparing a
happen in future under different
blueprint of these three situations
business situations. By doing
the management may decide what
so, it helps the firms to face the
eventual situation in a better way. must be done in each of these
In other words, it makes the firm situations. This preparation of
better prepared to face the future. alternative financial plans to meet
For example, a growth of 20% in different situations is clearly of
Cutting Back on Debt

Even successful businesses have debt, but how much is too much? Learning how
to manage debt is what can put you ahead.
Taking on the right amount of debt can mean the difference between a business
struggling to survive and one that can respond nimbly to changing economic or
market conditions. A number of circumstances may justify acquiring debt. As a
general rule, borrowing makes the most sense when you need to bolster cash flow
or finance growth or expansion. But while debt can provide the leverage you need
to grow, too much debt can strangle your business. So the question is: How much
debt is too much?
The answer, experts say, lies in a careful analysis of your cash flow as well as
your industry. A business that doesn’t grow dies. You’ve got to grow, but you’ve got
to grow within the financial constraints of your business. What is the ideal capital
structure a business needs in its industry to remain viable? The higher the volatility
(in your industry), the less debt you should have. The smaller the volatility, the more
debt you can afford.
Although banks and other financial institutions look for a satisfactory debt-to-
equity ratio before agreeing to make a loan, don’t assume a creditor’s willingness
to extend funds is evidence that your business is in a strong debt position. Some
financial institutions are overzealous lenders, particularly when trying to lure
or hold on to promising business customers. “The bank may be looking more at
collateral than whether the (business’s) earnings are going to come in to justify the
debt service.
To avoid these and other credit pitfalls, it’s up to you to get the financial facts
on your business and make sound borrowing decisions. Unfortunately, many
entrepreneurs fail to recognise how important financial analysis is to running a
successful business. Even business owners who receive detailed financial statements
from their accountants often do not take advantage of the valuable information
contained in the documents.
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227
immense help in running the public deposits etc. These may be

business smoothly. borrowed from banks, other financial
(ii) It helps in avoiding business institutions, debentureholders and
shocks and surprises and helps public.
the company in preparing for the Capital structure refers to the mix
future. between owners and borrowed funds.
These shall be referred as equity and
(iii) If helps in co-ordinating various
debt in the subsequent text. It can
business functions, e.g., sales
be calculated as debt-equity ratio
and production functions, by
providing clear policies and  Debt 
i.e.,  or as the proportion
procedures.  Equity 
(iv) Detailed plans of action prepared
of debt out of the total capital i.e.,
under financial planning reduce
waste, duplication of efforts, and  Debt 
gaps in planning.  Debt + Equity 
.
(v) It tries to link the present with the
Debt and equity differ significantly
future.
in their cost and riskiness for the
(vi) It provid es a lin k between firm. The cost of debt is lower than
investment and financing decisions the cost of equity for a firm because
on a continuous basis. the lender’s risk is lower than the
(vii) By spelling out detailed objectives equity shareholder’s risk, since the
for various business segments, it lender earns an assured return and
makes the evaluation of actual repayment of capital and, therefore,
performance easier. they should require a lower rate of
return. Additionally, interest paid
Capital Structure on debt is a deductible expense for
computation of tax liability whereas
One of the important decisions under dividends are paid out of after-tax
financial management relates to the profit. Increased use of debt, therefore,
financing pattern or the proportion of is likely to lower the over-all cost of
the use of different sources in raising capital of the firm provided that the
funds. On the basis of ownership, the cost of equity remains unaffected.
sources of business finance can be Impact of a change in the debt-equity
broadly classified into two categories ratio upon the earning per share
viz., ‘owners’ funds’ and ‘borrowed is dealt with in detail later in this
funds’. Owners’ funds consist of chapter.
equity share capital, preference share Debt is cheaper but is more risky
capital and reserves and surpluses or for a business because the payment of
retained earnings. Borrowed funds can interest and the return of principal is
be in the form of loans, debentures, obligatory for the business. Any default
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228
in meeting these commitments may Capital structure of a company,

force the business to go into liquidation. thus, affects both the profitability and
There is no such compulsion in case of the financial risk. A capital structure
equity, which is therefore, considered will be said to be optimal when the
riskless for the business. Higher use proportion of debt and equity is
of debt increases the fixed financial such that it results in an increase
charges of a business. As a result, in the value of the equity share. In
increased use of debt increases the other words, all decisions relating to
financial risk of a company. capital structure should emphasise on
Financial risk is the chance that increasing the shareholders’ wealth.
a firm would fail to meet its payment The proportion of debt in the overall
obligations. capital is also called financial leverage.
Example I
Company X Ltd.
Total Funds used Rs. 30 Lakh
Interest rate 10% p.a.
Tax rate 30%
EBIT Rs. 4 Lakh
Debt
Situation I Nil
Situation II Rs. 10 Lakh
Situation III Rs. 20 Lakh
EBIT-EPS Analysis
Situation I Situation II Situation III

EBIT 4,00,000 4,00,000 4,00,000
Interest NIL 1,00,000 2,00,000
EBT 4,00,000 3,00,000 2,00,000
(Earnings before taxes)
Tax 1,20,000 90,000 60,000
EAT 2,80,000 2,10,000 1,40,000
(Earnings after taxes)
No. of shares of Rs.10 3,00,000 2,00,000 1,00,000
EPS 0.93 1.05 1.40
(Earnings per share)
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229
D that company is earning on funds

Financial leverage is computed as employed. The company is earning a
E
D return on investment (RoI)
or D + E when D is the Debt and E is  EBIT 
of 13.33%  × 100 
the Equity. As the financial leverage  Total Investment ,
increases, the cost of funds declines  4Lakh 
 × 100  . This is higher than
because of increased use of cheaper 30Lakh 
debt but the financial risk increases. the 10% interest it is paying on debt
The impact of financial leverage on the
funds. With higher use of debt, this
profitability of a business can be seen
difference between RoI and cost of debt
through EBIT-EPS (Earning before
Interest and Taxes-Earning per Share) increases the EPS. This is a situation
analysis as in the following example. of favourable financial leverage. In
Three situations are considered. such cases, companies often employ
There is no debt in situation-I i.e. more of cheaper debt to enhance the
(unlevered business). Debt of Rs. 10 EPS. Such practice is called Trading
lakh and 20 lakh are assumed in on Equity.
situations-II and III, respectively. All Trading on Equity refers to the
debt is at 10% p.a. increase in profit earned by the equity
The company earns Rs. 0.93 per shareholders due to the presence of
share if it is unlevered. With debt of fixed financial charges like interest.
Rs. 10 lakh its EPS is Rs. 1.05. With Now consider the following case of
a still higher debt of Rs. 20 lakh, its, Company Y. All details are the same
EPS rises to Rs. 1.40. Why is the EPS except that the company is earning
rising with higher debt? It is because a profit before interest and taxes of
the cost of debt is lower than the return Rs. 2 lakh.
Example II
Company Y Ltd.
Situation I Situation II Situation III
EBIT 2,00,000 2,00,000 2,00,000
Interest NIL 1,00,000 2,00,000
EBT 2,00,000 1,00,000 NIL
Tax 60,000 30,000 NIL
EAT 1,40,000 70,000 NIL
No. of shares of Rs.10 3,00,000 2,00,000 1,00,000
EPS 0.47 0.35 NIL
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230
In this example, the EPS of the borrowing. Cash flows must not only
company is falling with increased use cover fixed cash payment obligations
of debt. It is because the Company’s but there must be sufficient buffer
rate of return on investment (RoI) is also. It must be kept in mind that a
less than the cost of debt. The RoI company has cash payment obligations
2Lakh for (i) normal business operations;
for company Y is × 100 , i.e.,
30Lakh (ii) for investment in fixed assets;
6.67%, whereas the interest rate on and (iii) for meeting the debt service
debt is 10%. In such cases, the use commitments i.e., payment of interest
of debt reduces the EPS. This is a and repayment of principal.
situation of unfavourable financial 2. Interest Coverage Ratio (ICR):
leverage. Trading on Equity is clearly The interest coverage ratio refers to
unadvisable in such a situation. the number of times earnings before
Even in case of Company X, interest and taxes of a company covers
reckless use of Trading on Equity is the interest obligation. This may be
not recommended. An increase in debt calculated as follows:
may enhance the EPS but as pointed
EBIT
out earlier, it also raises the financial ICR =
Interest
risk. Ideally, a company must choose
that risk-return combination which The higher the ratio, lower shall
maximises shareholders’ wealth. The be the risk of company failing to
debt-equity mix that achieves it, is the meet its interest payment obligations.
optimum capital structure. However, this ratio is not an adequate
measure. A firm may have a high EBIT
Factors affecting the Choice of
but low cash balance. Apart from
Capital Structure
interest, repayment obligations are
Deciding about the capital structure also relevant.
of a firm involves determining the 3. Debt Service Coverage Ratio
relative proportion of various types (DSCR): Debt Service Coverage Ratio
of funds. This depends on various
takes care of the deficiencies referred
factors. For example, debt requires
to in the Interest Coverage Ratio (ICR).
regular servicing. Interest payment
The cash profits generated by the
and repayment of principal are
obligatory on a business. In addition operations are compared with the total
a company planning to raise debt cash required for the service of the
must have sufficient cash to meet the debt and the preference share capital.
increased outflows because of higher It is calculated as follows:
debt. Similarly, important factors Profit after tax + Depreciation + Interest + Non Cash exp.
which determine the choice of capital Pref. Div + Interest + Repayment obligation
structure are as follows: A higher DSCR indicates better

1. Cash Flow Position: Size of projected ability to meet cash commitments
cash flows must be considered before and consequently, the company’s
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231
potential to increase debt component reason that a company can not use
in its capital structure. debt beyond a point. If debt is used
4. Return on Investment (RoI): If beyond that point, cost of equity may
the RoI of the company is higher, it go up sharply and share price may
can choose to use trading on equity decrease inspite of increased EPS.
to increase its EPS, i.e., its ability to Consequently, for maximisation of
use debt is greater. We have already shareholders’ wealth, debt can be used
observed in Example I that a firm only upto a level.
can use more debt to increase its 8. Floatation Costs: Process of
EPS. However, in Example II, use of raising resources also involves some
higher debt is reducing the EPS. It is cost. Public issue of shares and
because the firm is earning an RoI of debentures requires considerable
only 6.67% which lower than its cost expenditure. Getting a loan from a
of debt. In example I the RoI is 13.33%, financial institution may not cost so
and trading on equity is profitable. much. These considerations may also
It shows that, RoI is an important affect the choice between debt and
determinant of the company’s ability equity and hence the capital structure.
to use Trading on equity and thus the 9. Risk Consideration: As discussed
capital structure. earlier, use of debt increases the
5. Cost of debt: A firm’s ability to financial risk of a business. Financial
borrow at a lower rate increases its risk refers to a position when a
capacity to employ higher debt. Thus, company is unable to meet its fixed
more debt can be used if debt can be financial charges namely interest
raised at a lower rate. payment, preference dividend and
6. Tax Rate: Since interest is a repayment obligations. Apart from
deductible expense, cost of debt is the financial risk, every business
affected by the tax rate. The firms in has some operating risk (also called
our examples are borrowing @ 10%. business risk). Business risk depends
Since the tax rate is 30%, the after upon fixed operating costs. Higher
tax cost of debt is only 7%. A higher fixed operating costs result in higher
tax rate, thus, makes debt relatively business risk and vice-versa. The total
cheaper and increases its attraction risk depends upon both the business
vis-à-vis equity. risk and the financial risk. If a firm’s
7. Cost of Equity: Stock owners business risk is lower, its capacity to
expect a rate of return from the equity use debt is higher and vice-versa.
which is commensurate with the risk 10. Flexibility: If a firm uses its
they are assuming. When a company debt potential to the full, it loses
increases debt, the financial risk flexibility to issue further debt. To
faced by the equity holders, increases. maintain flexibility, it must maintain
Consequently, their desired rate of some borrowing power to take care of
return may increase. It is for this unforeseen circumstances.
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11. Control: Debt normally does business risk of a firm is higher, it can
not cause a dilution of control. A not afford the same financial risk. It
public issue of equity may reduce the should go in for low debt. Thus, the
managements’ holding in the company management must know what the
and make it vulnerable to takeover. industry norms are, whether they are
This factor also influences the choice following them or deviating from them
between debt and equity especially in and adequate justification must be
companies in which the current holding there in both cases.
of management is on a lower side.
12. Regulatory Framework: Every Fixed and Working Capital
company operates within a regulatory Meaning
framework provided by the law e.g.,
Every company needs funds to finance
public issue of shares and debentures
its assets and activities. Investment
have to be made under SEBI
is required to be made in fixed assets
guidelines. Raising funds from banks
and current assets. Fixed assets are
and other financial institutions require
fulfillment of other norms. The relative those which remains in the business
ease with which these norms can, be for more than one year, usually
met or the procedures completed may for much longer, e.g., plant and
also have a bearing upon the choice of machinery, furniture and fixture, land
the source of finance. and building, vehicles, etc.
Decision to invest in fixed assets
13. Stock Market Conditions: If the
must be taken very carefully as the
stock markets are bullish, equity
investment is usually quite large. Such
shares are more easily sold even at
decisions once taken are irrevocable
a higher price. Use of equity is often
except at a huge loss. Such decisions
preferred by companies in such a
are called capital budgeting decisions.
situation. However, during a bearish
Current assets are those assets
phase, a company, may find raising
which, in the normal routine of the
of equity capital more difficult and it
business, get converted into cash or
may opt for debt. Thus, stock market
cash equivalents within one year, e.g.,
conditions often affect the choice
inventories, debtors, bills receivables,
between the two.
etc.
14. Capital Structure of other
Companies: A useful guideline in the Management of Fixed Capital
capital structure planning is the debt- Fixed capital refers to investment in
equity ratios of other companies in long-term assets. Management of fixed
the same industry. There are usually capital involves allocation of firm’s
some industry norms which may help. capital to different projects or assets with
Care however must be taken that the long-term implications for the business.
company does not follow the industry These decisions are called investment
norms blindly. For example, if the decisions or capital budgeting decisions
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233
and affect the growth, profitability and is undertaken. This may involve
risk of the business in the long run. decisions like where to procure
These long-term assets last for more funds from and at what rate of
than one year. interest.
It must be financed through (iii) Risk involved: Fixed capital involves
long-term sources of capital such investment of huge amounts. It
as equity or preference shares, affects the returns of the firm as a
debentures, long-term loans and whole in the long-term. Therefore,
retained earnings of the business. investment decisions involving
Fixed Assets should never be financed fixed capital influence the overall
through short-term sources. business risk complexion of the
Investment in these assets firm.
would also include expenditure on
acquisition, expansion, modernisation (iv) Irreversible decisions: These
and their replacement. These decisions decisions once taken, are not
include purchase of land, building, reversible without incurring heavy
plant and machinery, launching losses. Abandoning a project after
a new product line or investing in heavy investment is made is quite
advanced techniques of production. costly in terms of waste of funds.
Major expenditures such as those Therefore, these decisions should
on advertising campaign or research be taken only after carefully
and development programme having evaluating each detail or else the
long term implications for the firm adverse financial consequences
are also examples of capital budgeting may be very heavy.
decisions. The management of fixed
Factors affecting the Requirement
capital or investment or capital
of Fixed Capital
budgeting decisions are important for
the following reasons: 1. Nature of Business: The type
(i) Long-term growth: These decisions of business has a bearing upon
have bearing on the long-term the fixed capital requirements. For
growth. The funds invested in example, a trading concern needs
long-term assets are likely to yield lower investment in fixed assets
returns in the future. These will compared with a manufacturing
affect the future prospects of the organisation; since it does not require
business. to purchase plant and machinery, etc.
(ii) Large amount of funds involved: 2. Scale of Operations: A larger
These decisions result in a organisation operating at a higher
substantial portion of capital funds scale needs bigger plant, more space
being blocked in long-term projects. etc. and therefore, requires higher
Therefore, these investments are investment in fixed assets when
planned after a detailed analysis compared with the small organisation.
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3. Choice of Technique: Some textile company is diversifying and

organisations are capital intensive starting a cement manufacturing
whereas others are labour intensive. plant. Obviously, its investment in
A capital-intensive organisation fixed capital will increase.
requires higher investment in plant 7. Financing Alternatives: A developed
and machinery as it relies less on financial market may provide leasing
manual labour. The requirement of facilities as an alternative to outright
fixed capital for such organisations purchase. When an asset is taken on
would be higher. Labour intensive lease, the firm pays lease rentals and
organisations on the other hand uses it. By doing so, it avoids huge sums
require less investment in fixed assets. required to purchase it. Availability of
Hence, their fixed capital requirement leasing facilities, thus, may reduce the
is lower. funds required to be invested in fixed
4. Technology Upgradation: In certain assets, thereby reducing the fixed
industries, assets become obsolete capital requirements. Such a strategy
sooner. Consequently, their replace- is specially suitable in high risk lines
ments become due faster. Higher of business.
investment in fixed assets may, 8. Level of Collaboration: At times,
therefore, be required in such cases. certain business organisations share
For example, computers become each other’s facilities. For example,
obsolete faster and are replaced much a bank may use another’s ATM or
sooner than say, furniture. Thus, such some of them may jointly establish a
organisations which use assets which particular facility. This is feasible if the
are prone to obsolescence require scale of operations of each one of them
higher fixed capital to purchase such is not sufficient to make full use of the
assets. facility. Such collaboration reduces
5. Growth Prospects: Higher growth the level of investment in fixed assets
of an organisation generally requires for each one of the participating
higher investment in fixed assets. organisations.
Even when such growth is expected,
a company may choose to create Working Capital
higher capacity in order to meet the
Apart from the investment in fixed
anticipated higher demand quicker.
assets every business organisation
This entails larger investment in fixed
needs to invest in current assets. This
assets and consequently larger fixed investment facilitates smooth day-to-
capital. day operations of the business. Current
6. Diversification: A firm may choose assets are usually more liquid but
to diversify its operations for various contribute less to the profits than fixed
reasons, With diversification, fixed assets. Examples of current assets, in
capital requirements increase e.g., a order of their liquidity, are as under.
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235
1. Cash in hand/Cash at Bank if it can be converted into cash quicker

2. Marketable securities and without reduction in value.
Insufficient investment in current
3. Bills receivable
assets may make it more difficult for
4. Debtors an organisation to meet its payment
5. Finished goods inventory obligations. However, these assets
provide little or low return. Hence, a
6. Work in progress
balance needs to be struck between
7. Raw materials liquidity and profitability.
8. Prepaid expenses Current liabilities are those
These assets, as noted earlier, are payment obligations which are due
expected to get converted into cash for payment within one year; such as
or cash equivalents within a period bills payable, creditors, outstanding
of one year. These provide liquidity to expenses and advances received from
the business. An asset is more liquid customers, etc.
Working Capital Position

“Its been a rather glamorous 18 months, with sales just huge,” says, CFO of PT
Astra International, the US $4 billion in sales Indonesian automaker. Indonesia
was on the growth path again, and a new breed of consumer was eager for a first
vehicle – motorcycles – as well as Astra’s more premium brands of Hondas and
Toyotas. And one of the most beautiful parts of the proposition was that working
capital management seems to be taking care of itself. “Depending on the business,
and counting trade receivables only, we had between eight and 19 days working
capital,” which was manageable given the company’s steady growth. One of the
reasons that working capital had not expanded at the rate of the business was
inventory, or rather the dearth of it. “We were in a market that responded very
strongly to new products,” said the manager “and the presales of products were very
high. We had advanced orders form four to six months, with deposits paid, and this
helped our cash position.” Best of all, as soon as a vehicle was off the assembly line,
it was out to the dealer. “We had low inventory costs and the product lines were
very easy to move.” The salutary role of banks in working capital management was
a result reason that cashflow had improved in his business. Better management
was a result of banking competition that had allowed the company to move from
traditional bankers, the state-owned Indian institutions, to more competitive private
institutions and teh foreign banks that partner with them. These banks had invested
in technology, allowing a visibility over cashflow unheard of few years ago.
http://www.cfoasia.com/archives/200503-02.html
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Some part of current assets is to the organisations which operate on a

usually financed through short-term lower scale.
sources, i.e., current liabilities. The 3. Business Cycle: Different phases of
rest is financed through long-term business cycles affect the requirement
sources and is called net working of working capital by a firm. In
capital. Thus, NWC = CA – CL (i.e. case of a boom, the sales as well as
Current Assets - Current Liabilities.) production are likely to be larger and,
Thus, net working capital may be therefore, larger amount of working
defined as the excess of current assets capital is required. As against this,
over current liabilities. the requirement for working capital
will be lower during the period of
Factors Affecting the Working depression as the sales as well as
Capital Requirements production will be small.
1. Nature of Business: The basic 4. Seasonal Factors: Most business
nature of a business influences the have some seasonality in their
amount of working capital required. operations. In peak season, because of
A trading organisation usually higher level of activity, larger amount
needs a smaller amount of working of working capital is required. As
capital compared to a manufacturing against this, the level of activity as well
organisation. This is because there as the requirement for working capital
is usually no processing. Therefore, will be lower during the lean season.
there is no distinction between raw 5. Production Cycle: Production
materials and finished goods. Sales cycle is the time span between the
can be effected immediately upon receipt of raw material and their
the receipt of materials, sometimes conversion into finished goods. Some
even before that. In a manufacturing businesses have a longer production
business, however, raw material needs cycle while some have a shorter
to be converted into finished goods one. Duration and the length of
before any sales become possible. production cycle, affects the amount
Other factors remaining the same, a of funds required for raw materials
trading business requires less working and expenses. Consequently, working
capital. Similarly, service industries capital requirement is higher in firms
which usually do not have to maintain with longer processing cycle and lower
inventory require less working capital. in firms with shorter processing cycle.
2. Scale of Operations: For organisations 6. Credit Allowed: Different firms
which operate on a higher scale of allow different credit terms to their
operation, the quantum of inventory and customers. These depend upon the
debtors required is generally high. Such level of competition that a firm faces
organisations, therefore, require large as well as the credit worthiness of their
amount of working capital as compared clientele. A liberal credit policy results
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237
in higher amount of debtors, increasing the lead time, larger the quantity of
the requirement of working capital. material to be stored and larger shall
7. Credit Availed: Just as a firm be the amount of working capital
allows credit to its customers it also required.
may get credit from its suppliers. 10. Growth Prospects: If the growth
To the extent it avails the credit potential of a concern is perceived to
on purchases, the working capital be higher, it will require larger amount
requirement is reduced. of working capital so that it is able
8. Operating Efficiency: Firms to meet higher production and sales
manage their operations with varied target whenever required.
degrees of efficiency. For example, 11. Level of Competition: Higher level
a firm managing its raw materials of competitiveness may necessitate
efficiently may be able to manage with larger stocks of finished goods to
a smaller balance. This is reflected
meet urgent orders from customers.
in a higher inventory turnover ratio.
This increases the working capital
Similarly, a better debtors turnover
requirement. Competition may also
ratio may be achieved reducing the
force the firm to extend liberal credit
amount tied up in receivables. Better
terms discussed earlier.
sales effort may reduce the average
time for which finished goods inventory 12. Inflation: With rising prices,
is held. Such efficiencies may reduce larger amounts are required even
the level of raw materials, finished to maintain a constant volume of
goods and debtors resulting in lower production and sales. The working
requirement of working capital. capital requirement of a business
9. Availability of Raw Material: If thus, become higher with higher rate
the raw materials and other required of inflation. It must, however, be noted
materials are available freely and that an inflation rate of 5%, does not
continuously, lower stock levels may mean that every component of working
suffice. If, however, raw materials do capital will change by the same
not have a record of un-interrupted percentage. The actual requirement
availability, higher stock levels may shall depend upon the rates of price
be required. In addition, the time lag change of different components (e.g.,
between the placement of order and raw material, finished goods, labour
the actual receipt of the materials (also cost,) Finished goods as well as their
called lead time) is also relevant. Larger proportion in the total requirement.
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Key Terms
Financial Management Wealth Maximisation Investment Decision
Financing Decision Dividend Decision Capital Budgeting
Working Capital Financial Planning Capital Structure
Trading on Equity
Summary
Business finance: The money required for carrying out business activities is
called business finance. Almost all business activities require some finance.
Finance is needed to establish a business, to run it, to modernise it, to expand,
and diversify it.
Financial Management: Financial Management is concerned with optimal
procurement as well as usage of finance. For optimal procurement, different
available sources of finance are identified and compared in terms of their costs
and associated risks.
Objectives and Financial Decisions The primary aim of financial management
is to maximise shareholders’ wealth which is referred to as the wealth
maximisation concept. The market price of a company’s shares are linked to
the three basic financial decisions
Financial decision-making is concerned with three broad decisions which are
Investment Decision, Financing Decision, Dividend Decision
Financial Planning and Importance Financial planning is essentially

preparation of a financial blueprint of an organisation’s future operations. The
objective of financial planning is to ensure that enough funds are available at
right time.
Financial planning strives to achieve the following twin objectives.
(a) To ensure availability of funds whenever these are required:
(b) To see that the firm does not raise resources unnecessarily:
Financial planning is an important part of overall planning of any business
enterprise. It aims at enabling the company to tackle the uncertainty in respect
of the availability and timing of the funds and helps in smooth functioning of
an organisation.
Capital Structure and Factors One of the important decisions under financial
management relates to the financing pattern or the proportion of the use
of different sources in raising funds. On the basis of ownership, the sources
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239
of business finance can be broadly classified into two categories viz., ‘owners
funds’ and ‘borrowed funds’. Capital structure refers to the mix between owners
and borrowed funds.
Deciding about the capital structure of a firm involves determining the
relative proportion of various types of funds. This depends on various factors
which are: Cash Flow Position, Interest Coverage Ratio (ICR), Debt Service
Coverage Ratio (DSCR), Return on Investment (RoI), Cost of debt, Tax Rate,
Cost of Equity, Floatation Costs, Risk Consideration, Flexibility, Control,
Regulatory Framework, Stock Market Conditions, and Capital Structure of
other Companies.
Fixed and Working Capital Fixed capital refers to investment in long-term

assets. Management of fixed capital involves around allocation of firm’s capital
to different projects or assets with long-term implications for the business.
These decisions are called investment decisions or capital budgeting decisions.
They affect the growth, profitability and risk of the business in the long run.
Factors affecting the Requirement of Fixed Capital are: Nature of Business,
Scale of Operations, Choice of Technique, Technology Upgradation, Growth
Prospects, Diversification, Financing Alternatives and Level of Collaboration.
Apart from the investment in fixed assets, every business organisation
needs to invest in current assets. This investment facilitates smooth day-to-
day operations of the organisation. Current assets are usually more liquid but
contribute less to the profits than fixed assets.
Factors affecting the working capital requirement are: Nature of Business,
Scale of Operations, Business Cycle, Seasonal Factor, Production Cycle, Credit
Allowed, Credit Availed, Operating Efficiency, Availability of Raw Material,
Growth Prospects, Level of competition, and rate of Inflation.
exercises
Very Short Answer Type

1. What is meant by capital structure?
2. Sate the two objectives of financial planning.
3. Name the concept of financial management which increases the return
to equity shareholders due to the presence of fixed financial charges.
4. Amrit is running a ‘transport service’ and earning good returns by
providing this service to industries. Giving reason, state whether the
working capital requirement of the firm will be ‘less’ or ‘more’.
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5. Ramnath is into the business of assembling and selling of televisions.

Recently he has adopted a new policy of purchasing the components on
three months credit and selling the complete product in cash. Will it affect
the requirement of working capital? Give reason in support of your answer.
Short Answer Type
1. What is financial risk? Why does it arise?
2. Define current assets? Give four examples of such assets.
3. What are the main objectives of financial management? Briefly explain.
4. Financial management is based on three broad financial decisions. What
are these?
5. Sunrises Ltd. dealing in readymade garments, is planning to expand
its business operations in order to cater to international market. For
this purpose the company needs additional `80,00,000 for replacing
machines with modern machinery of higher production capacity. The
company wishes to raise the required funds by issuing debentures. The
debt can be issued at an estimated cost of 10%. The EBIT for the previous
year of the company was `8,00,000 and total capital investment was
`1,00,00,000. Suggest whether issue of debenture would be considered
a rational decision by the company. Give reason to justify your answer.
(Ans. No, Cost of Debt (10%) is more than ROI which is 8%).
6. How does working capital affect both the liquidity as well as profitability
of a business?
7. Aval Ltd. is engaged in the business of export of canvas goods and bags. In
the past, the performance of the company had been upto the expectations.
In line with the latest demand in the market, the company decided to
venture into leather goods for which it required specialised machinery.
For this, the Finance Manager Prabhu prepared a financial blueprint
of the organisation’s future operations to estimate the amount of funds
required and the timings with the objective to ensure that enough funds
are available at right time. He also collected the relevant data about the
profit estimates in the coming years. By doing this, he wanted to be sure
about the availability of funds from the internal sources of the business.
For the remaining funds, he is trying to find out alternative sources from
outside.
a. Identify the financial concept discussed in the above paragraph. Also,
state the objectives to be achieved by the use of financial concept so
identified. ( Financial Planning).
b. ‘There is no restriction on payment of dividend by a company’.
Comment. ( Legal & Contractual Constraints)
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241
Long Answer Type

1. What is working capital? Discuss five important determinants of working
capital requirement?
2. “Capital structure decision is essentially optimisation of risk-return
relationship.” Comment.
3. “A capital budgeting decision is capable of changing the financial fortunes
of a business.” Do you agree? Give reasons for your answer?
4. Explain the factors affecting dividend decision?
5. Explain the term ‘Trading on Equity’? Why, when and how it can be used
by company.
6. ‘S’ Limited is manufacturing steel at its plant in India. It is enjoying a
buoyant demand for its products as economic growth is about 7–8 per
cent and the demand for steel is growing. It is planning to set up a new
steel plant to cash on the increased demand. It is estimated that it will
require about `5000 crores to set up and about `500 crores of working
capital to start the new plant.
a. Describe the role and objectives of financial management for this
company.
b. Explain the importance of having a financial plan for this company.
Give an imaginary plan to support your answer.
c. What are the factors which will affect the capital structure of this
company?
d. Keeping in mind that it is a highly capital-intensive sector, what factors
will affect the fixed and working capital. Give reasons in support of
your answer.
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chapter
10
Marketing
Learning Objectives Where Do Companies Do Their Business?
In the Markets or in the Society?
After studying this chapter,
It is an undisputed fact that a company’s survival
you should be able to: does not depend upon its consumers alone, but a
diverse set of stakeholders like the government,
¾¾ explain the meaning of religious leaders, social activists, NGOs, media,
‘marketing’; etc. Hence, earning the satisfaction of these
segments is also as imperative as they add to the
¾¾ distinguish between power of the brand by word of mouth.
‘marketing’ and The social concern adds to the strength of the
‘selling’; brand. Corporates that embraced the deepest
social values, have been successful in building
¾¾ l i s t o u t i m p o r t a n t powerful brand, and, eventually, robust customer
functions of marketing; relationship. The area of corporate social justice
fall under two broad categories. The issues such
¾¾ examine the role of as the nutrition of children, child care, old-age
marketing in the homes, amelioration of hunger, offering aid to
development of an those affected by natural calamities, etc. needing
economy in a firm, instant attention with humanitarian perspective,
to the society and to comes under the first category.
consumers; The issues that contribute to making society a
pleasant place to live in the long run, may be grouped
¾¾ explain the elements of under the second category. The issues which come
marketing-mix; under this category are health awareness and aid,
education, environmental protection, women’s
¾¾ classify products into employment and empowerment, preventing unjust
different categories; discriminations (on the basis of caste, community,
religion, ethnicity, race, and sex), eradication
¾¾ analyse the factors of poverty through employment, preservation
affecting price of a of culture, values, and ethics, contribution to
product; research, etc.
Procter and Gamble’s (P&G) philosophy is that it
¾¾ l i s t o u t t h e t y p e s should lead the industry in implementing a global
of channels of environmental programme. P&G is one of the
distribution; and first companies in the world to actively study the
influence of consumer products on the environment
¾¾ e x p l a i n t h e m a j o r and introduce concentrated products, recycled
tools of promotion, viz. plastic bottles, and refill packages to the industry.
P&G contributes to sustainable development
advertising, personal
and addresses environmental and social issues
selling, sales promotion connected with its products and services.
and publicity.
Source: Adapted from ‘Effective Executive’
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The term marketing has been described pricing are required. All these activities
by different people in different ways. are referred to as marketing activities.
Some people believe that marketing is Thus, ‘merchandising’, ‘selling’ and
same as ‘shopping’. Whenever they go distribution are all parts of a large
out for shopping of certain products or number of activities undertaken by
services, they describe it as marketing. a firm, which are collectively called
There are some other people who marketing.
confuse marketing with ‘selling’ and It may be noted here that marketing
feel that marketing activity starts is not merely a post- production
after a product or service has been activity. It includes many activities
produced. Some people describe it to that are performed even before goods
mean ‘merchandising’ or designing a are actually produced, and continue
product. All these descriptions may be even after the goods have been
partly correct but marketing is a much sold. For example, activities such
broader concept, which is discussed as identification of customer needs,
as follows: collection of information for developing
Traditionally, marketing has been the product, designing suitable product
described in terms of its functions or package and giving it a brand name are
activities. In this respect, marketing performed before commencement of
has been referred to as performance of the actual production. Similarly, many
business activities that direct the flow follow up activities are required for
of goods and services from producers maintaining good customer relations
to consumers. for procuring repeat sale.
As we know, most of the In modern times, emphasis is placed
manufacturing firms do not produce on describing marketing as a social
goods for their own consumption process. It is a process whereby people
but for the consumption or use exchange goods and services for money
by others. Therefore, to move or for something of value to them. Taking
the goods and services from the the social perspective, Phillip Kolter has
producer to consumers, a number of defined marketing as, “a social process
activities, such as product designing by which individual groups obtain what
or merchandising, packaging, they need and want through creating
warehousing, transportation, offerings and freely exchanging products
branding, selling, advertising and and services of value with others”.
“Business is not financial science, it’s about trading, buying and selling. It’s about
creating a product or service so good that people will pay for it.”
— Anta Roddick
“Marketing takes a day to learn. Unfortunately it takes time to master.”
— Philip Kotler
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Understanding Market
In the traditional sense, the term ‘market’ refers to the place where buyers and sellers
gather to enter into transactions involving the exchange of goods and services. It is
in this sense that this term is being used in day to day language, even today. The
other ways in which this term is being used is in the context of a product market
(cotton market, gold or share market), geographic market (national and international
market), type of buyers (consumer market and industrial market) and the quantity
of goods transacted (retail market and wholesale market).
But in modern marketing sense, the term market has a broader meaning. It refers
to a set of actual and potential buyers of a product or service. For example, when a
fashion designer designs a new dress and offers it for exchange, all the people who
are willing to buy and offer some value for it can be stated to be the market for that
dress. Similarly, market for fans or bicycles or electric bulbs or shampoos refers to
all the actual and potential buyers for these products.
Thus, marketing is a social process Needs are basic to human beings

where in people interact with others, and do not pertain to a particular
in order to persuade them to act in product. Wants, on the other hand,
a particular way, say to purchase are culturally defined objects that are
a product or a service, rather than potential satisfiers of needs. In other
forcing them to do so. A careful analysis words, human needs shaped by such
of the definition shows the following factors as culture, personality and
important features of marketing: religion are called wants. A basic need
1. Needs and Wants: The process for food, for example, may take various
of marketing helps individuals and forms such as want for dosa and rice
groups in obtaining what they need for a South Indian and chapatti and
and want. Thus, the primary reason or vegetables for a North Indian person.
motivation for people to engage in the A marketer’s job in an organisation
process of marketing is to satisfy some is to identify needs of the target
of their needs or wants. In other words, customers and develop products and
the focus of the marketing process is services that satisfy such needs.
on satisfaction of the needs and wants 2. Creating a Market Offering: On
of individuals and organisations. the part of the marketers, the effort
A need is a state of felt deprivation involves creation of a ‘market offering.
or feeling of being deprived of Market offering refers to a complete
something. If unsatisfied, it leaves a offer for a product or service, having
person unhappy and uncomfortable. given features like size, quality, taste,
For example, on getting hungry, we etc; at a certain price; available at a
become uncomfortable and start given outlet or location and so on. Let
looking for objects that are capable of us say the offer is for a cell phone,
satisfying our hunger. available in four different versions,
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245
on the basis of certain features such offering the same by giving something
as size of memory, television viewing, in return. For example, a person
internet, camera, etc., for a given price, feeling hungry may get food by offering
say between ` 5,000 and ` 20,000 to give money or some other product
(depending on the model selected), or service in return to someone who
available for sale at say firm’s exclusive is willing to accept the same for food.
shops in and around all metropolitan In the modern world, goods are
cities in the country. A good ‘market produced at different places and are
offer’ is the one which is developed after distributed over a wide geographical
analysing the needs and preferences of area through various middlemen,
the potential buyers. involving exchanges at different levels
3. Customer Value: The process of distribution. Exchange is, therefore,
of marketing facilitates exchange of referred to as the essence of marketing.
products and services between the For any exchange to take place, it is
buyers and the sellers. The buyers, important that the following conditions
however, make buying decisions on are satisfied:
their perceptions of the value of the (i) Involvement of at least two parties
product or service in satisfying their viz., the buyer and the seller.
need, in relation to its cost. A product (ii) Each party should be capable
will be purchased only if it is perceived of offering something of value to
to be giving greatest benefit or value the other. For example, the seller
for the money. The job of a marketer, offers a product and the buyer,
therefore, is to add to the value of the money.
product so that the customers prefer it
(iii) Each party should have the ability
in relation to the competing products
to communicate and deliver the
and decide to purchase it.
product or service. No exchange
4. Exchange Mechanism: The process can take place if the buyers and
of marketing works through the sellers are not able to communicate
exchange mechanism. The individuals with each other or if they can not
(buyers and sellers) obtain what they deliver something of value to
need and want through the process of
the other.
exchange. In other words, the process
of marketing involves exchange of (iv) Each party should have freedom to
products and services for money or accept or reject other party’s offer.
something considered valuable by (v) The parties should be willing to
the people. enter into transaction with each
Exchange refers to the process other. Thus, the acceptance or
through which two or more parties rejection of the offer takes place on
come together to obtain the desired voluntary basis rather than on the
product or service from someone, bases of any compulsion.
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246
The points listed above are the standards of people and providing
necessary conditions for an exchange medication to the sick.
to take place. Whether the exchange
actually takes place or not depends on Marketing Management
the suitability of the act of exchange to Marketing management means
both the parties, whether it makes the management of the marketing function.
parties better off or at least not worse off. In other words, marketing management
Another important point to be refers to planning, organising, directing
noted is that Marketing is not merely a and control of the activities which
business phenomena or confined only facilitate exchange of goods and services
to business organisations. Marketing between producers and consumers or
activities are equally relevant to non- users of products and services. Thus
profit organisations such as hospitals, the focus of marketing management
schools, sports clubs and social and is on achieving desired exchange
religious organisations. It helps these outcomes with the target markets.
organisations in achieving their goals Taking a management perspective, the
such as spreading the message of term marketing has been defined as
family planning, improving the literacy “the process of planning and executing
What can be Marketed?

Physical Products : DVD player, Motor cycle, ipods, Cell phone, Footwear,
Television, Refrigerator.
Services : Insurance, Health Care, Business Process Outsourcing,
Security, Easy Bill service, Financial Services
(Investment),Computer Education, Online Trading.
Ideas : Polio Vaccination, Helpage, Family Planning, Donation of
Blood (Red cross), Donation of money on Flag Day (National
Foundation for Communal Harmony).
Persons : For Election of Candidates for Certain Posts.
Place : ‘Visit Agra – ‘City of Love’, ‘Udaipur – ‘The City of Lakes’,
‘Mysore – The City of Gardens’, ‘When Orisa celebrates,
Eleven the God Join In’.
Events : Sports events (say Olympics, Cricket series), diwali mela,
fashion show, music concert, film festival, elephant race
(Kerala Tourism).
Information : Production packaging and distribution of information by
organisations such as by universities, research organisation,
providing information as market information (marketing
research agencies), technology information.
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the conception, pricing, promotion prospective buyers and persuade

and distribution of ideas, goods and them to buy these products.
services to create exchanges that satisfy Marketing management involves
individual and organisational goals” by performance of various functions
American Management Association, such as analysing and planning the
similarly Philip kotler has defined
marketing activities, implementing
Marketing management as the art and
marketing plans and setting control
science of choosing target markets
mechanism. These functions are
and getting, keeping and growing
to be performed in such a way that
customers through creating, delivering
and communicating superior customer organisation’s objectives are achieved
values of management. at the minimum cost.
A careful analysis of the definition Marketing management generally
reveals that the process of management is related to creation of demand.
of marketing involves: However, in certain situations, the
(i) Choosing a target market, say a manager has to restrict the demand.
manufacturer may choose to make For example, if there is a situation of
readymade garments for children ‘overfull demand’, i.e., the demand
up to the age of 5 years; being more than what the company
(ii) In respect of the target market can or want to handle, (like what
chosen, the focus of the process of the situation in our country was
management is on getting, keeping before the adoption of policies of
as well as growing the customers. liberalisation and globalisation, in
That means the marketer has to early 90’s, in most consumer products
create demand for his products be it automobiles or electronics goods
so that the target customers or other durable products. The job of
purchase the product, keep them marketing mangers, in these situations
satisfied with the firm’s products would be to find ways to reduce the
and also attract more customers demand temporarily by say reducing
to the firm’s products so that the the expenditure on promotion or
firm can grow; and increasing the prices. Similarly, if the
(iii) The mechanism for achieving demand is ‘irregular’, such as in case of
the objective is through creating, seasonal products, (say fans, woollen
developing and communicating clothes) the marketer’s job is to change
superior values for the customers. the time pattern of demand through
That means, the primary job such methods as providing short-term
of a marketing manager is to incentives, to the buyers. Thus, the
create superior values so that marketing management in not only
the customers are attracted to concerned with creating demand but
the products and services and with managing the demand effectively,
communicate these values to the as per the situation in the market.
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Marketing Versus Selling

Many people confuse ‘selling’ for ‘marketing’. They consider these two terms as one
and the same. Marketing refers to a large set of activities of which selling is just one
part. For example, a marketer of televisions, before making the sale, does a lot of
other activities such as planning the type and model of televisions to be produced,
the price at which it would be sold and selecting the distribution outlets at which the
same would be available, etc. In short, marketing involves whole range of activities
relating to planning, pricing, promoting and distributing the products that satisfy
customer’s needs.
The function of selling, on the other hand, is restricted to promotion of goods and
services through salesmanship, advertising, publicity and short-term incentives so
that title of the product is transferred from seller to buyer or in other words product
is converted into cash.
Marketing Management goods started picking up but the

Philosophies number of producers were limited.
As a result, the demand exceeded
In order to achieve desired exchange the supply. Selling was no problem.
outcomes with target markets, it is Anybody who could produce the goods
important to decide what philosophy or was able to sell. The focus of business
thinking should guide the marketing activities was, therefore, on production
efforts of an organisation. An of goods. It was believed that profits
understanding of the philosophy or could be maximised by producing
the concept to be adopted is important at large scale, thereby reducing the
as it determines the emphasis or average cost of production. It was
the weightage to be put on different also assumed that consumers would
factors, in achieving the organisational favour those products which were
objectives. For example, whether the widely available at an affordable price.
marketing efforts of an organisation will Thus, availability and affordability
focus on the product—say designing of the product were considered to
its features etc or on selling techniques be the key to the success of a firm.
or on customer’s needs or the social Therefore, greater emphasis was
concerns. placed on improving the production
The concept or philosophy of and distribution efficiency of the firms.
marketing has evolved over a period
of time, and is discussed as follows. The Product Concept
The Production Concept As a result of emphasis on production
capacity during the earlier days, the
During the earlier days of industrial position of supply increased over
revolution, the demand for industrial period of time. Mere availability and
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249
low price of the product could not advertising, personal selling and sales
ensure increased sale and as such the promotion were considered essential
survival and growth of the firm. Thus, for selling of products. Thus, the focus
with the increase in the supply of the of business firms shifted to pushing
products, customers started looking the sale of products through aggressive
for products which were superior in selling techniques with a view to
quality, performance and features. persuade, lure or coax the buyers
Therefore, the emphasis of the firms to buy the products. Making sale
shifted from quantity of production through any means became important.
to quality of products. The focus of It was assumed that buyers can be
business activity changed to bringing manipulated but what was forgotten
continuous improvement in the quality, was that in the long run what matters
incorporating new features, etc. Thus, most is the customer satisfaction,
product improvement became the key rather than anything else.
to profit maximisation of a firm, under
the concept of product orientation. The Marketing Concept
Marketing orientation implies that
The Selling Concept focus on satisfaction of customer’s
With the passage of time, the marketing needs is the key to the success of
any organisation in the market.
environment underwent further
It assumes that in the long run
change. The increase in the scale of
an organisation can achieve its
business further improved the position
objective of maximisation of profit by
with respect to supply of goods,
identifying the needs of its present
resulting in increased competition
and prospective buyers and satisfying
among sellers. The product quality
them in an effective way. All the
and availability did not ensure the decisions in a firm are taken from
survival and growth of firms because the point of view of the customers. In
of the large number of sellers selling other words, customer’s satisfaction
quality products. This led to greater become the focal point of all decision
importance to attracting and persuading making in the organisation. For
customers to buy the product. The example, what product will be
business philosophy changed. It was produced, with what features and at
assumed that the customers would what price shall it be sold, or where
not buy, or not buy enough, unless shall it be made available for sale will
they are adequately convinced and depend on what do the customers
motivated to do so. Therefore, firms want. If the customers want features
must undertake aggressive selling like double door in a refrigerator or a
and promotional efforts to make separate provision for water cooler in
customers buy their products. The it, the organisation would produce a
use of promotional techniques such as refrigerator with these features, would
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250
price it at a level which the customers (i) I d e n t i f i c a t i o n o f m a r k e t o r

are willing to pay and so on. If all customer who are chosen as the
marketing decisions are taken with target of marketing effort.
this prospective, selling will not be any (ii) Understanding needs and wants
problem. It will automatically follow. of customers in the target market.
The basic role of a firm then is to (iii) Development of products or
‘identify a need and fill it’. The concept services for satisfying needs of
implies that products ad-services are the target market.
bought not merely because of their
(iv) Satisfying needs of target market
quality, packing or brand name,
better than the competitors.
but because they satisfy a specific
need of a customer. A pre-requisite (v) Doing all this at a profit.
for the success of any organisation, Thus, the focus of the marketing
therefore, is to understand and concept is on customer needs and the
respond to customer needs. customer satisfaction becomes the
To sum up, the marketing concept means to achieving the firms’ objective
is based on the following pillars: of maximising profit. The purpose of
Differences in the Marketing Management Philosophies

Philosophies/ Production Product Selling Marketing Societal
Bases Concept Concept Concept Concept Concept
1. Starting Factory Factory Factory Market Market,

Point Society
2. Main Quantity of Quality, Existing Customer Customer

Focus product performance, product needs needs and
features of society’s
product well being
3. Means Availability Product Selling Integrated Integrated

and improve- and marketing marketing
affordability ments promoting
of product
4. Ends Profit through Profit through Profit Profit Profit

volume of product through through through
production quality sales customer customer
volume satisfaction satisfaction
and social
welfare
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marketing is to generate customer to consumers or users in such a way

value at a profit. that maximises the satisfaction of
customers’ needs. From the view point
The Societal Marketing Concept of management function, number of
activities are involved, which have
The marketing concept, as described
been described as below:
in the preceeding section cannot be
considered as adequate if we look 1. Gathering and Analysing Market
at the challenges posed by social Information: One of the important
problems like environmental pollution, functions of a marketer is to gather
deforestation, shortage of resources, and analyse market information. This
population explosion and inflation. It is is necessary to identify the needs
so because any activity which satisfies of the customers and take various
human needs but is detrimental to the decisions for the successful marketing
interests of the society at large cannot of the products and services. This
be justified. The business orientation is important for making an analysis
should, therefore, not be short-sighted of the available opportunities and
to serve only consumers’ needs. It threats as well as strengths and
should also consider large issues of long- weaknesses of the organisation and
term social welfare, as illustrated above. help in deciding what opportunities
The societal marketing concept can best be pursued by it. For example,
holds that the task of any organisation rapid growth is predicted in several
is to identify the needs and wants areas in the Indian economy, say in
of the target market and deliver the the use of the Internet, market for cell
desired satisfaction in an effective phones and several other areas. Which
and efficient manner so that the long- of these areas a particular organisation
should enter, or in which area should
term well-being of the consumers and
it expand, requires a careful scanning
the society is taken care of. Thus,
of the strengths and weaknesses of the
the societal marketing concept is the
organisation, which is done with the
extension of the marketing concept
help of careful market analysis.
as supplemented by the concern for
With the growth of computers,
the long-term welfare of the society.
a new trend has emerged in the
Apart from the customer satisfaction,
collection of market information.
it pays attention to the social, ethical
More and more companies are using
and ecological aspects of marketing.
interactive sites on the internet, to
There are large number of such issues
gather customer views and opinions,
that need to be attended. before taking important business
decisions. One of the popular TV
Functions Of Marketing
News Channel (in Hindi) seeks viewers
Marketing is concerned with exchange choice (through SMS) on which of the
of goods and services from producers given four or five main news stories
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of the day would be broadcasted as and consistency in the output.

detailed story at the prime time, to Standardisation ensures the
ensure that the viewers get to listen buyers that goods conform to the
to the story of their own choice. predetermined standards of quality,
2. Marketing Planning: Another price and packaging and reduces
important activity or area of work of the need for inspection, testing and
a marketer is to develop appropriate evaluation of the products.
marketing plans so that the marketing Grading is the process of
objectives of the organisation can be classification of products into different
achieved. For example a marketer of groups, on the basis of some of its
colour TV, having 10 per cent of the important characteristics such as
current market share in the country, quality, size, etc. Grading is particularly
aims at enhancing his market share necessary for products which are not
to 20 per cent, in the next three years. produced according to predetermined
He will have to develop a complete specifications, such as in the case
marketing plan covering various of agricultural products, say wheat,
important aspects including the plan oranges, etc. Grading ensures that
for increasing the level of production, goods belong to a particular quality
promotion of the products, etc., and and helps in realising higher prices for
specify the action programmes to high quality output.
achieve these objectives. 5. Packaging and Labelling: Packaging
3.Product Designing and refers to designing and developing the
Development: Another important package for the products. Labelling
marketing activity or decision refers to designing and developing the
area relates to product designing label to be put on the package. The
and development. The design of label may vary from a simple tag to
the product contributes to making complex graphics.
the product attractive to the target Packaging and labelling have
customers. A good design can improve become so important in modern day
performance of a product and also marketing that these are considered
give it a competitive advantage in the as the pillars of marketing. Packaging
market. For example, when we plan is important not only for protection
to buy any product say a motorbike, of the products but also serves as
we not only see its features like cost, a promotional tool. Sometimes, the
mileage, but also the design aspects quality of the product is assessed by
like its shape, style, etc. the buyers form packaging. We have
4. Standardisation and Grading: seen that in the success of many of the
Standardisation refers to producing consumer brands in recent times such
goods of predetermined specifications, as Lays or Uncle Chips potato wafers
which helps in achieving uniformity Clinic Plus shampoos, and Colgate
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Toothpaste, etc., packaging has played Customer support services are very
an important role. effective in bringing repeat sales from
6. Branding: A very important decision the customers and developing brand
area for marketing of most consumer loyality for a product.
products is whether to sell the product 8. Pricing of Product: Price of
in its generic name (name of the product refers to the amount of money
category of the product, say Fan, Pen, customers have to pay to obtain a
etc.) or to sell them in a brand name product. Price is an important factor
(such as Pollar Fan or Rottomac Pen). affecting the success or failure of a
Brand name helps in creating product product in the market. The demand
differentiation, i.e., providing basis for for a product or service is related to
distinguishing the product of a firm its price. Generally lower the price,
with that of the competitor, which in higher would be the demand for the
turn, helps in building customer’s product and vice-versa. The marketers
loyality and in promoting its sale. have to properly analyse the factors
The important decision areas in determining the price of a product and
respect of branding include deciding take several crucial decisions in this
the branding strategy, say whether respect, including setting the pricing
each product will be given a separate objectives, determining the pricing
brand name or the same brand name strategies, determining the price and
will be extended to all products of the changing the prices.
company, say Phillips bulbs, tubes 9. Promotion: Promotion of products
and television or Videocon washing and services involves informing the
machine, television, and refrigerator. customers about the firm’s product,
Selection of the brand name plays its features, etc., and persuading
an important role in the success of a them to purchase these products.
product. The four important methods of
7. Customer Support Services: promotion include advertising,
A very important function of the Personal Selling, Publicity and
marketing management relates Sales Promotion. A marketer has
to developing customer support to take several crucial, decisions in
services such as after sales services, respect of promotion of the products
handling customer complaints and services such as deciding the
and adjustments, procuring credit promotion budget, the promotion
services, maintenance services, mix, i.e., the combination of the
technical services and consumer promotional tools that will be use,
information. All these services aim the promotion budget, etc.
at providing maximum satisfaction 10. Physical Distribution: Managing
to the customers, which is the key to physical distribution is another
marketing success in modern days. very important function in the
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marketing of goods and services. 12. Storage or Warehousing:

The two major decision areas under Usually there is a time gap between
this function include (a) decision the production or procurement of
regarding channels of distribution goods and their sale or use. It may
or the marketing intermediaries (like be because of irregular demand for
whole salers, retailers) to be used the products such as in the case
and (b) physical movement of the of woollen garments or raincoats,
product from where it is produced or there may be irregular supply
to a place where it is required by the because of seasonal production such
customers for their consumption or as in the case of agricultural products
use. The important decision areas (sugarcane, rice, wheat, cotton, etc.).
under physical distribution include In order to maintain smooth flow
managing inventory (levels of stock of products in the market, there
of goods), storage and warehousing is a need for proper storage of the
and transportation of goods from one products. Further, there is a need for
place to the other. storage of adequate stock of goods to
11. Transportation: Transportation protect against unavoidable delays in
delivery or to meet out contingencies
involves physical movement of goods
in the demand. In the process of
from one place to the other. As
marketing, the function of storage
generally the users of products,
is performed by different agencies
particularly consumer products
such as manufacturers, wholesalers
are wide spread and geographically
and retailers.
separated from the place these are
produced, it is necessary to move
them to the place where it is needed
Marketing Mix
for consumption or use, For example, The marketing mix consists of various
tea produced in Assam has to be elements, which have broadly been
transported not only within the state classified into four categories, popularly
but to other far off places like Tamil known as four Ps of marketing. These
Nadu, Punjab, Jammu and Kashmir are: (i) Product, (ii) Price, (iii) Place,
and Haryana, Rajasthan, where it is and (iv) Promotion. These are briefly
consumed. discussed as follows:
A marketing firm has to analyse 1. Product: Product means goods
its transportation needs after taking or services or ‘anything of value’,
into consideration various factors which is offered to the market for
such as nature of the product, cost sale. For example, Hindustan lever
and location of target market and
offers number of consumer products
take decisions in respect of mode
like toiletries (Close-Up toothpaste,
of transportation to be chosen and
Lifebuoy soap, etc.), detergent powder
other related aspects.
(Surf, Wheel), food products (Refined
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Vegetable Oil); Tata offers Tata Steel, etc. These aspects are very important,
Trucks, Salt and a large number of particularly in the marketing of
other products; LG electronics offers consumer durable products (like
televisions, refrigerators, colour Automobiles, refrigerators, etc.). The
monitors for computers, etc; Amul important product decisions include
offers a number of food products deciding about the features, quality,
(Amul milk, ghee, butter, cheese, packaging, labelling and branding of
chocolates, etc.). the products.
The concept of product relates 2. Price: Price is the amount of money
to not only the physical product as customers have to pay to obtain
mentioned in the above examples but the product. In case of most of the
also the benefits offered by it from products, level of price affects the level
customer’s view point (for example of their demand. The marketers have
toothpaste is bought for whitening not only to decide about the objectives
teeth, strengthening gums, etc.). of price setting but to analyse the
The concept of product also include factors determining the price and fix a
the extended product or what is price for the firm’s products. Decisions
offered to the customers by way have also to be taken in respect of
of after sales services, handling discounts to customers, traders and
complaints, availability of spare parts credit terms, etc., so that customers
Marketing Mix: Elements
Product Price
Product Mix Price Level
Product Quality Margins
New Product Pricing Policy
Design and Development Pricing Strategies
Packaging Price Change
Labelling
Branding
Place Promotion
Channel Strategy Promotion Mix
Channel Selection Advertising
Channel Conflict Personal Selling
Channel Cooperation Sales Promotion
Physical Distribution Publicity
Public Relations
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perceive the price to be in line with the newspaper, magazines, the objections
value of the product. of customers, etc.).
3. Place: Place or Physical Distribution The success of a market offer will
include activities that make firm’s depend on how well these ingredients
products available to the target are mixed to create superior value for
customers. Important decision areas the customers and simultaneously
in this respect include selection of achieve their sale and profit objectives.
dealers or intermediaries to reach the Let us say a firm would like to achieve
customers, providing support to the necessary volume of sale at a cost that
intermediaries (by way of discounts, will permit a desired level of profit.
But so many alternative mixes can
promotional campaigns, etc.). The
be adopted by a firm to achieve this
intermediaries in turn keep inventory
objectives. The issue before a firm then
of the firm’s products, demonstrate
is to decide what would be the most
them to potential buyers, negotiate
effective combination of elements to
price with buyers, close sales and
achieve the given objectives.
also service the products after the
sale. The other decision areas relate
Products
to managing inventory, storage and
warehousing and transportation of From the customer’s point of view, a
goods from the place it is produced to product is a bundle of utilities, which
the place it is required by the buyers. is purchased because of its capability
4. Promotion: Promotion of products to provide satisfaction of certain need.
and services include activities that A buyer buys a product or service
communicate availability, features, for what it does for her or the benefit
it provides to her. There can be three
merits, etc., of the products to the
types of benefits a customer may
target customers and persuade them to
seek to satisfy from the purchase of a
buy it. Most marketing organisations,
product, viz.,
undertake various promotional
(i) functional benefits,
activities and spend substantial
amount of money on the promotion (ii) psychological benefits, and
of their goods through using number (iii) social benefits.
of tools such as advertising, personal For example, the purchase of a
selling and sales promotion techniques motorcycle provides functional utility
(like price discounts, free samples, of transportation, but at the same
etc.). A large number of decisions time satisfies the need for prestige and
are to be taken in each of the area esteem and provides social benefit by
specified above. For example, in the the way of acceptance from a group,
respect of advertising it is important to by riding a motorbike. Thus, all these
decide about the message, the media aspects should be considered while
to be used (example, print-media– planning for a product.
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Classification of Products 1. Convenience Products: Those

consumer products, which are purchased
Products may broadly be classified
frequently, immediately and with least time
into two categories — (i) consumers’
products, and (ii) industrial products. and efforts are referred to as convenience
The consumer products may further goods. Examples of such products
be classified into different groups, as are cigarettes, ice creams, medicines,
detailed below: newspaper, stationery items toothpaste
etc. These products have low unit-value
Consumer Products and are bought in small qualities.
2. Shopping Products: Shopping
Products, which are purchased by
products are those consumer goods
the ultimate consumers or users for
where buyers devote considerable
satisfying their personal needs and
time, to compare the quality, price,
desires are referred to as consumer
products. For example, soap, edible style, suitability, etc., at several stores,
oil, eatables, textiles, toothpaste, fans, before making final purchase. Some
etc. which we use for our personal and of the examples of shopping products
non-business use are consumer goods. are clothes, shoes, jewellery, furniture,
We can classify the consumer product radio, television, etc.
into the following three categories as 3. Speciality Products: Speciality
here under: products are those consumer goods
Products
Consumer Products Industrial Products
Durability Basis Shopping Efforts Involved
Non- Durable Services Conven- Shopping Speciality

Durable ience Products Products
Products
Classification of Products
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Convenience Products
which have certain special features Durability Of Products

because of which people make special
On the basis of their durability,
efforts in their purchase. These the consumer products have been
products are such, which have reached classified into three categories—
a brand loyalty of the highest order, Durable, Non-durable and Services.
with a significant number of buyers. 1 . N o n - d u r a b l e P r o d u c t s : The
The buyers are willing to spend a lot consumer products which are
of time and efforts on the purchase normally consumed in one or
of such products. For example, if few uses are called non-durable
there is a rare collection of artwork products. For example, products like
or of antiques, some people may be toothpaste, detergents, bathing soap
willing to spend a lot of shopping and stationary products etc. From
effort and travel long distance to buy the marketing point of view, these
such products. In our day-to-day life, products generally command a small
we see people going to a particular margin, should be made available
hair-cutting saloon or restaurant, or in many locations and need to be
heavily advertised.
a tailor. The demand for these goods
is relatively inelastic, i.e., even if the 2. Durable Products: Those tangible
price is increased, the demand does consumer products which normally
survive many years, for example,
not come down.
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Shopping Products
refrigerator, radio, bicycle, sewing Industrial Products

machine and kitchen gadgets are
Industrial products are those products,
referred to as durable products. which are used as inputs in producing
These goods are generally used for other products. The examples of such
a longer period, command a higher products are raw materials, engines,
per unit margin, require greater lubricants, machines, tools, etc. In
personal- selling efforts, guarantees other words, industrial products are
and after sales services, on the part meant for non-personal and business
of the seller. use for producing other products.
3. Services: By services we mean The market for industrial products
those intangible activities, benefits consists of manufacturers, transport
agencies, banks and insurance
which are offered for sale, e.g., dry
companies, mining companies and
cleaning, watch repairs, hair cutting,
public utilities. Industrial products
postal services, services offered by a are those products, which are used as
doctor, an architect and a lawyer. inputs in producing other products.
The examples of such products are
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Speciality Products
raw materials, engines, lubricants, petroleum, iron ore), fish and lumber;
machines, tools, etc. In other words, and (b) manufactured material and
industrial products are meant for parts. These are again of two types –
non-personal and business use for component materials like glass, iron,
producing other products. plastic and component parts such as
The market for industrial products tyre, electric bulb, steering, and battery.
consists of manufacturers, transport (ii) Capital Items: These are such
agencies, banks and insurance goods that are used in the production
companies, mining companies and of finished goods. These include: (a)
public utilities. installations like elevators, mainframe
Computers, and (b) equipments like
Classification Hand Tools, Personal Computer, Fax
The industrial goods are classified Machines, etc.
into the following major categories: (iii) Supplies and Business Services:
(i) Materials and Parts: These include These are short lasting goods and
goods that enter the manufacture’s services that facilitate developing or
products completely. Such goods managing the finished product. These
are of two types: (a) raw material: include: (a) maintenance and repair
including farm products like cotton, items like Paint, Nails, etc., and (b)
sugar cane, oil seed and natural operating supplies like Lubricant,
products such as minerals (say crude Computer Stationary, Writing Paper, etc.
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Industrial Goods
Materials and Capital Items Supplies and

Parts Business Services
Raw Manufactured Installations Equipments Maintanence Operating

Material Material and Parts and Repair Supplies
items
Farm Natural Component Component

Products Products Material Parts
Classification of Industrial Goods
Branding If products were sold by generic

names, it would be very difficult for the
One of the most important decisions
marketers to distinguish their products
that a marketer has to take in the area from that of their competitors. Thus,
of ‘product’ is in respect of branding. most marketers give a name to their
He has to decide whether the firm’s product, which helps in identifying and
products will be marketed under distinguishing their products from the
a brand name or a generic name. competitors’ products. This process of
Generic name refers to the name of giving a name or a sign or a symbol
the whole class of the product. For etc., to a product is called branding.
example, a book, a wristwatch, tyre, The various terms relating to branding
camera, toilet soap, etc. We know are as follows:
that a camera is a lens surrounded 1. Brand: A brand is a name, term, sign,
by plastic or steel from all sides and symbol, design or some combination of
having certain other features such them, used to identify the products—
as a flash gun and so on. Similarly goods or services of one seller or group
book is a bunch of papers, which of sellers and to differentiate them from
are in a bound form, on which some those of the competitors. For example,
useful information about a subject some of the common brands are Bata,
is printed. Thus, all products having Lifebuoy, Dunlop, and Parker. Brand
these characteristics would be called is a comprehensive term, which has
by the generic name such as camera two components—brand name and
or book. brand mark.
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2. Brand Name: That part of a its use. In that case, no other firm can
brand, which can be spoken, is use such name or mark in the country.
called a brand name. In other words, Though branding adds to the cost
brand name is the verbal component e.g., to the cost of packaging, labelling,
of a brand. legal protection, and promotion, it
3. Brand Mark: That part of a provides several advantages to the
brand which can be recognised sellers as well as the consumers.
but which is not utterable is called
brand mark. It appears in the form Characteristics of Good Brand Name
of a symbol, design, distinct colour Choosing the right brand name is
scheme or lettering. not an easy decision. What makes
4. Trade Mark: A brand or part of a this decision important is the fact
brand that is given legal protection that once a brand name is chosen
is called trademark. The protection is and the product is launched in
given against its use by other firms. the market, changing the brand
Thus the firm, which got its brand name is very difficult. So, getting it
registered, gets the exclusive right for right the first time is very essential.
Perspectives of Brands and Branding

Branding is creating a corporate brand identity for consumer, and getting that
brand identity imprinted on the minds of consumer, and this requires brand
positioning and brand management.
A brand today is an entity (product. service, company, person, technology, etc.),
that offers a set of value exchange measures between what the owner/market
seeks and the price he is willing to pay for.
It has always seemed to me that your brand is formed primarily, not by what your
company says about itself, but what the company does.
— Jeff Bezos
A product is something made in a factory; a brand is something that is bought
by the customer. A product can be copied by a competitor; a brand is unique. A
product can be quickly outdated; a successful brand is timeless.
— Stephen King
Your brand’s power lies in dominance. It is better to have 50% of one market,
instead of 10% of five markets.
— Al Ries
Your brand image is primarily an emotional construct. Emotion is probably
always more powerful in swaying people than reason. but people like to be able
to rationalise their choices.
— Drayton Bird
Source: Adopted from Effective Executive, 2006
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Following are some of the considerations, plays a very important role in the
which should be kept in mind while marketing success or failure of many
choosing a brand name. products, particularly the consumer
(i) The brand name should be short, non-durable products. In fact if one
easy to pronounce, spell, recognise makes an analysis of the reasons for
and remember e.g., Ponds, VIP, the success of some of the successful
Rin, Vim, etc. products in the recent past, it can be
(ii) A brand should suggest the noted that packaging has played its
product’s benefits and qualities. due role. For example, it was one of
It should be appropriate to the the important factors in the success of
product’s function. products like Maggie’s Noodles, Uncle
Chips or Crax wafers.
(iii) A brand name should be distinctive.
(iv) The brand name sho u ld b e Levels of Packaging
adaptable to packing or labelling
requirements, to different There can be three different levels of
advertising media and to different packaging. These are as below:
languages. 1. Primary Package: It refers to the
(v) T h e b r a n d n a m e s h o u l d product’s immediate container. In
be sufficiently versatile to some cases, the primary package is
accommodate new products, which kept till the consumer is ready to use
are added to the product line. the product (e.g., plastic packet for
socks); whereas in other cases, it is
(vi) It should be capable of being
kept throughout the entire life of the
registered and protected legally.
product (e.g., a toothpaste tube, a
(vii) Chosen name should have staying match box, etc.).
power i.e., it should not get out
2. Secondary Packaging: It refers to
of date.
additional layers of protection that are
kept till the product is ready for use,
Packaging e.g., a tube of shaving cream usually
One of the most important developments comes in a card board box. When
affecting the business world in consumers start using the shaving
recent years has been in the area of cream, they will dispose off the box
packaging. Many products, which we but retain the primary tube.
thought could never lend themselves 3. Transportation Packaging: It refers
to packing because of their nature, to further packaging components
have been successfully packed e.g., necessary for storage, identification
Pulses, Ghee, Milk, Salt, Cold Drinks, or transportation. For example, a
etc. Packaging refers to the act of toothpaste manufacturer may send the
designing and producing the container goods to retailers in corrugated boxes
or wrapper of a product. Packaging containing 10, 20, or 100 units.
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Levels of Packaging
Importance of Packaging respect of promotion has gone to

packaging.
Packaging has acquired great
significance in the marketing of goods (iii) Innovational Opportunity: Some of
and services, because of following the recent developments in the
reasons: area of packaging have completely
(i) Rising Standards of Health and changed the marketing scene
Sanitation: Becau se o f the in the country. For example,
increasing standards of living milk can now be stored for 4-5
in the country, more and more days without refrigeration in
people have started purchasing the recently developed packing
packed goods as the chances of materials. Similarly, in the area
adulteration in such goods are of pharmaceuticals, soft drinks,
minimised. etc., lots of new innovations have
(ii) Self Service Outlets: The self- come in respect of packaging. As a
service retail outlets are becoming result, the scope for the marketing
very popular, particularly in major of such products has increased.
cities and towns. Because of (iv) Product Differentiation: Packaging
this, some of the traditional role is one of the very important means
assigned to personal selling in of creating product differentiation.
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The colour, size, material, etc., of photograph or typeface may be

package makes real difference in used to attract attention of the
the perception of customers about people at the point of purchase.
the quality of the product. For Sometimes it may work even better
example, by looking at the package than advertising. In self-service
of a product say Paint or Hair Oil, stores, this role of packaging
one can make some guess about becomes all the more important.
quality of the product contained
in it. Labelling
A simple looking but important task
Functions of Packaging in the marketing of goods relates to
As stated above, packaging performs a designing the label to be put on the
number of functions in the marketing package. The label may vary from a
of goods. Some of the important simple tag attached to the product
functions are as follows: (such as in case of local unbranded
(i) Product Identification: Packaging products like sugar, wheat, pulses,
greatly helps in identification etc.) indicating some information
of the products. For example, about the quality or price, to complex
Colgate in red colour, or Ponds graphics that are part of the package,
cream jar can be easily identified like the ones on branded products.
by its package. Lables are useful in providing detailed
information about the product, its
(ii) Product Protection: Packaging
contents, method of use, etc. The
protects the contents of a product
various functions performed by a label
from spoilage, breakage, leakage, are as follows:
pilferage, damage, climatic effect,
etc. This kind of protection 1. Describe the Product and specify
is required during storing, its contents: Let us look at some of the
distribution and transportation labels of the products used by us in our
of the product. day to day life. The label on the package
of a local tea company describes the
(iii) Facilitating Use of the Product: The
company as ‘Mohini Tea Company, an
size and shape of the package ISO 9001:200C Certified Company’; a
should be such that it should be popular brand of Prickly Heat Powder,
convenient to open, handle and describes how the product provides
use for the consumers. Cosmetics, relief from prickly heat and controls
medicines and tubes of toothpastes bacterial growth and infection, giving
are good examples of this. caution forbidding its application on
(iv) Product Promotion: Packaging is cuts and wounds. Package of fast food
also used for promotion purposes. products like ready to eat Dosa, Idli
A startling colour scheme, or Noodles, describe the procedure of
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cooking these products; the Package by some brands under Yellow, red and
of a toothpaste brand lists the ‘Ten Green Label categories.
Teeth and Gum Problems’, which 4. Helps in Promotion of Products:
the product claims to fight with its An important function of label is to
‘Complete Germicheck Formula’; aid in promotion of the products.
the Package of a brand of Coconut A carefully designed label can
Oil describes the product as pure attract attention and give reason
coconut oil with Heena, Amla, Lemon to purchase. We see many product
and specifies how these are good for labels providing promotional
Hair. Thus, one of the most important messages for example, the pack
functions of labels is to describe the of a popular Amla Hair Oil states,
product, its usage, cautions in use, ‘Baalon mein Dum, Life mein Fun’.
etc. and specify its contents. The label on the package of a brand
2. Identification of the Product of Detergent Powder says, ‘keep cloth
o r b r a n d : The other important look good and your machine in top
function performed by labels is condition’. Labels play important
to help in identifying the product role in sales promotional schemes
or brand. For example, the brand launched by companies. For example
name of any product, say Biscuits the label on the package of a Shaving
or Potato Chips imprinted on its Cream mentions, ‘40% Extra Free’ or
package helps us to identify, from package of a toothpaste mentioning,
number of packages, which one is ‘Free Toothbrush Inside’, or ‘Save
our favourite brand. Other common ` 15’.
identification information provided 5. Providing Information Required
by the labels include name and by Law: Another important function
address of the manufacturer, net of labeling is to provide information
weight when packed, manufacturing required by law. For example,
date, maximum retail price and packaged food articles must have list
Batch number. of ingredients declaration regarding
3. Grading of Products: Another vegetarian or non-vegetarian food
important function performed by additives and date of manufacturing
labels is to help grading the products or packing on the label. Such
into different categories. Sometimes information is required on processed
marketers assign different grades to foods, drugs and tobacco products.
indicate different features or quality of In case of hazardous or poisonous
the product. For example, a popular material, appropriate safety-warning
brand of Hair Conditioners comes in need to be put on the label.
different categories for different hair, Thus, labels perform number
say for ‘normal hair’ and for other of important functions relating to
categories. Different type of tea is sold communicating with the potential
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buyers and promoting the sale of Factors affecting Price

the products. Determination
There are number of factors which
Pricing
affect the fixation of the price of a
When a product is bought, some product. Some of the important factors
money is paid for it. This money in this regard are discussed as below:
represent the sum of values that 1. Product cost: One of the most
consumers exchange for the benefit important factor affecting price
of having or using the product and is of a product or service is its cost.
referred to as the price of the product. This includes the cost of producing,
Similarly, money paid for the services distributing and selling the product.
such as fare for the transport service, The cost sets the minimum level or
premium for an insurance policy, and the floor price at which the product
fee to a doctor for his medical advise may be sold. Generally all marketing
represent the price of these services. firms strive to cover all their costs,
Price may therefore be defined as the at least in the long run. In addition,
amount of money paid by a buyer (or they aim at earning a margin of profit
received by a seller) in consideration over and above the costs. In certain
of the purchase of a product or circumstance, for example, at the time
a services. of introducing a new product or while
Pricing occupies an important entering a new market, the products
place in the marketing of goods and may be sold at a price, which does not
services by a firm. No product can cover all the costs. But in the long run,
be launched without a price tag or a firm cannot survive unless at least
at least some guidelines for pricing. all its costs are covered.
Pricing is often used as a regulator of There are broadly three types of
the demand of a product. Generally, costs: viz., Fixed Costs, Variable Costs
if the price of a product is increased, and Semi Variable Costs. Fixed costs
its demand comes down, and are those costs, which do not vary with
vice-versa. the level of activity of a firm say with
Pricing is considered to be an the volume of production or sale. For
effective competitive weapon. In the example, rent of a building or salary
conditions of perfect competition, of a sales manager remains the same
most of the firms compete with each whether 1000 units or 10 units are
other on the basis of this factor. It is produced in a week.
also the single most important factor Those costs which vary in direct
affecting the revenue and profits of a proportion with the level of activity are
firm. Thus, most marketing firms give called variable costs. For example, the
high importance to the fixation of price costs of raw material, labour and power
for their products and services. are directly related with the quantity of
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goods produced. Let us say, if the cost the upper limit where would the price
of wood for manufacturing one chair settle down? This is affected by the
comes to ` 100 the cost of wood for 10 nature and the degree of competition.
chairs would be ` 1000. Obviously, The price will tend to reach the upper
there will be no cost of wood if no chair limit in case there is lesser degree of
is produced. competition while under conditions of
Semi variable costs are those costs free competition, the price will tend to
which vary with the level of activity be set at the lowest level
but not in direct proportion with it. Competitors’ prices and their
For example, compensation of a sales anticipated reactions must be
person may include a fixed salary of considered before fixing the price
say ` 10,000 plus a commission of 5 of a product. Not only the price but
per cent on sales. With an increase the quality and the features of the
in the volume of sales, the total competitive products must be examined
compensation will increase but not in carefully, before fixing the price.
direct proportion with the change in 4. Government and Legal
the volume of sale. Regulations: In order to protect
Total Costs are the sum total of the the interest of public against unfair
fixed, variable and semi-variable costs practices in the field of price fixing,
for the specific level of activity, say Government can intervene and
volume of sales or quantity produced. regulate the price of commodities.
2. The Utility and Demand: While Government can declare a product
the product costs set the lower limits as essential product and regulate
of the price, the utility provided by the its price. For example, the cost of a
product and the intensity of demand of drug manufactured by a company
the buyer sets the upper limit of price, having monopoly in the production
which a buyer would be prepared of the same come to ` 20 per strip
to pay. In fact the price must reflect of ten and the buyer is prepared to
the interest of both the parties to the pay any amount for it, say ` 200.
transaction—the buyer and the seller. In the absence of any competitor,
The buyer may be ready to pay up to the seller may be tempted to extort
the point where the utility from the the maximum amount of ` 200 for
product is at least equal to the sacrifice the drug and intervene to regulate
made in terms of the price paid. The the price. Usually in such a case,
seller would, however, try to at least the Government does not allow the
cover the costs. According to the law of firms to charge such a high price
demand, consumers usually purchase and intervene to regulate the price
more units at a low price than at a of the drug. This can be done by the
high price. Government by declaring the drug as
3. Extent of Competition in the essential commodity and regulating
Market: Between the lower limit and its price.
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5 . P r i c i n g O b j e c t i v e s : Pricing Thus, the price of a firm’s products

objectives are another important factor and services is affected by the pricing
affecting the fixation of the price of a objective of the firm.
product or a service. Generally the 6. Marketing Methods Used: Price
objective is stated to be maximise the fixation process is also affected by
profits. But there is a difference in other elements of marketing such
maximising profit in the short run and as distribution system, quality of
in the long run. If the firm decides to salesmen employed, quality and
maximise profits in the short run, it amount of advertising, sales promotion
would tend to charge maximum price efforts, the type of packaging, product
for its products. But if it is to maximise differentiation, credit facility and
its total profit in the long run, it would customer services provided. For
opt for a lower per unit price so that it example, if a company provides free
can capture larger share of the market home delivery, it has some of flexibility
and earn greater profits through in fixing prices. Similarly, uniqueness
increased sales. of any of the elements mentioned
Apart from profit maximisation, above gives the company a competitive
the pricing objectives of a firm may freedom in fixing prices of its products.
include:
(a) Obtaining Market Share Leadership: Physical Distribution
If a firms objective is to obtain
larger share of the market; it will The fourth important element
keep the price of its products at of marketing mix is the physical
lower levels so that greater number distribution of products and services.
of people are attracted to purchase Through this component of marketing
the products; mix, the goods and services are made
available at right place, at right time
(b) Surviving in a Competitive Market:
to right people without change.
If a firm is facing difficulties in Once goods are manufactured,
surviving in the market because of packaged, branded, priced, and
intense competition or introduction promoted, these must be made
of a more efficient substitute available to customers at the right
by a competitor, it may resort place, in right quantity and at the right
to discounting its products or time. For example, a person convinced
running a promotion campaign to about the quality, etc. of a product, say,
liquidate its stock; and a detergent bar, wants to purchase the
(c) A t t a i n i n g P r o d u c t Q u a l i t y same. He/She goes to a retail outlet and
Leadership: In this case, normally asks for the product. If that product is
higher prices are charged to cover not available in that shop, he/she may
high quality and high cost of purchase some of the alternative brand
research and Development. available. This way a sure sale is lost
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because goods were not available at Components of Physical

the place where the customer wanted Distribution
to purchase. Thus, it is an important The main components of physical
responsibility of the marketers to make distribution are explained as follows:
the product physically available at a 1. Order Processing: In a typical
place where the customers would like buyer-seller relationship, order
them to buy. The physical handling placement is the first step. Products
and movement of goods from place of flow from manufacturers to customers
production to the place of distribution via channel members while orders
is referred to as physical distribution, flow in the reverse direction, from
which is a very important element of customers to the manufacturers. A
marketing mix. good physical distribution system
Physical distribution covers all should provide for an accurate and
the activities required to physically speedy processing of orders, in
move goods from manufacturers to the absence of which, goods would
the customers. Important activities reach the customers late or in wrong
involved in the physical distribution quantity or specifications. This would
include transportation, warehousing, result in customer dissatisfaction,
material handling, and inventory with the danger of loss of business
control. These activities constitute and goodwill.
major components of physical 2. Transportation: Transportation is
distribution. the means of carrying goods and raw
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Nothing Beats Word of Mouth in India

Nothing sways an Indian buyer’s choice more than a word of reassurance from
the people he knows. Even for the purchases like cars, mobile phones and home
loans, majority of the consumers in India rely on the references from their friends
and relatives while making their decisions.
The story is different in developed economies. Take the case of automobiles.
In markets like the US, Canada and Japan, more people are influenced by
conventional advertising by automobile companies, in developing markets like
India, Malaysia and Thailand it’s the neighbour or the colleague who tips the
scales one way or the other. “In case of luxury goods, the psyche of Indians has
always been different. Buying a car is a family decision, so it is only natural that
all the members of the family will talk to all the other users of a similar products,
who they know”, General Motors India director P Balendran said.
When the whole world is going crazy with Internet and mobile marketing, it is
interesting that for Indians it’s still conventional advertising and word of mouth
campaigns that sways their choices. Unlike in the West, Indians come from a very
closely-knit society where people get influenced by their peers, relatives and local
celebrities. People are more than willing to accept a brand if it’s endorsed by their
favourite superstar or is recommended by their close associates.
materials from the point of production Generally larger the number

to the point of sale. It is one of the major of warehouses a firm has, lesser
elements in the physical distribution would be the time taken in serving
of goods. It is important because customers at different locations
unless the goods are physically made but greater would be the cost of
available, the sale cannot be completed. warehousing and vice-versa. Thus
3. Warehousing: Warehousing refers the firm has to strike a balance
to the act of storing and assorting between the cost of warehousing and
products in order to create time the level of customer service.
utility in them. The basic purpose of For products requiring long-
warehousing activities is to arrange term storage (such as agricultural
placement of goods and provide products) the warehouses are
facilities to store them. The need for located near production sites. This
warehousing arises because there helps in minimising the charges on
may be difference between the time a transportation of the goods. On the
product is produced and the time it is other hand, the products which are
required for consumption. Generally bulky and hard to ship (machinery,
the efficiency of a firm in serving its automobiles) as well as perishable
customers will depend on where these products (bakery, meat, vegetables)
warehouses are located and where are are kept at different locations near
these to be delivered. the market.
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4. Inventory Control: Linked to Promotion refers to the use of

warehousing decisions are the communication with the twin objective
inventory decisions which hold key of informing potential customers
to success for many manufacturers, about a product and persuading them
especially those where the per unit to buy it. In other words, promotion
cost is high. A very important decision is an important element of marketing
in respect of inventory is deciding mix by which marketers makes use
about the level of inventory. Higher the of various tools of communication
level of inventory, higher will be the to encourage exchange of goods and
level of service to customers but the services in the market.
cost of carrying the inventory will also
be high because lot of capital would be Promotion Mix
tied up in the stock. Thus, a balance is
Promotion mix refers to combination
to be maintained in respect of the cost
of promotional tools used by an
and customer satisfaction.
organisation to achieve its
communication objectives. Various
Promotion tools of communication are used
A company may produce a good quality by the marketers to inform and
product, price it appropriately and persuade customers about their
make it available at the selling points, firm’s products. These include: (i)
which are convenient to customers. But Advertising, (ii) Personal Selling, (iii)
in spite of all this, the product may not Sales Promotion, and (iv) Publicity.
sell well in the market. There is a need These tools are also called elements
for developing proper communication of promotion mix and can be used
with the market. In the absence of in different combinations, to achieve
communication, the customers would the goals of promotion. For example,
not be able to know about the product consumer goods firms may use
and how it can satisfy their needs and more of advertising through mass
wants or may not be convinced about media while the industrial goods
its utility and benefits. firms may be using more of personal
M C
A U
R ADVERTISING PERSONAL SELLING
S
K T
E O
PUBLIC RELATIONS SALES PROMOTION
T M
E E
R R Promotion Mix
Marketing Communications
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selling. What combination of these individual or company, who

elements is used by a firm will makes the advertising efforts and
depend upon various factors such also bears the cost of it.
as nature of market, nature product,
the promotions budget, objectives Merits of advertising
of promotion, etc. Let us first know
Advertising, as a medium of communi-
about these elements in some details.
cation, has the following merits:
(i) Mass Reach: Advertising is a
Advertising medium through which a large
We generally come across hundreds of number of people can be reached
advertising messages everyday, which over a vast geographical area.
tell us about various products such For example, an advertisement
as toilet soaps, detergent powder, soft message placed in a national daily
reaches lakhs of its subscribers.
drinks and services such as hotels,
insurance policies, etc. (ii) Enhancing Customer Satisfaction
Advertising is perhaps the most and Confidence: A d v e r t i s i n g
commonly used tool of promotion. It is creates confidence amongst
an impersonal form of communication, prospective buyers as they feel
which is paid for by the marketers more comfortable and assured
(sponsors) to promote some goods about the product quality and
or service. The most common modes hence feel more satisfied.
of advertising are ‘newspapers’, (iii) E x p r e s s i v e n e s s : W i t h t h e
‘magazines’, ‘television’, and ‘radio’. developments in art, computer
The important distinguishing features designs, and graphics, advertising
of advertising are as follows: has developed into one of
(i) Paid Form: Advertising is a paid the most forceful medium of
form of communication. That communication. With the special
is, the sponsor has to bear the effects that can be created, even
cost of communicating with the simple products and messages can
prospects. look very attractive.
(ii) Impersonality: There is no direct (iv) Economy: Advertising is a very
face-to-face contact between economical mode of communication
the prospect and the advertiser. if large number of people are to be
It is therefore, referred to as reached. Because of its wide reach,
impersonal method of promotion. the overall cost of advertising
Advertising creates a monologue gets spread over numerous
and not a dialogue. communication links established.
(iii) Identified Sponsor: Advertising As a result the per-unit cost of
is undertaken by some identified reach comes low.
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Objections To Advertising of production comes down as the

total cost is divided by larger number
Though advertising is one of the most
frequently used medium of promotion of units. Thus, the expenditure on
of goods and services, it attracts advertisement adds to the total cost
lot of criticism. The opponents of but the per unit cost comes down,
advertising say that the expenditure which in fact lessens the burden
on advertising is a social waste as it of consumers rather than adding
adds to the cost, multiplies the needs to it.
of people and undermines social 2. Undermines Social Values: Another
values. The proponents, however, important criticism of advertising
argue that advertising is very useful is that it undermines social values
as it increases the reach, brings the and promotes materialism. It breeds
pay unit cost of production down and discontent among people as they come
adds to the growth of the economy. It to know about new products and feel
is therefore, important to examine the dissatisfied with their present state
major criticisms against advertising of affairs. Some advertisements show
and see the extent to which these are new life styles, which don’t find social
true. This is taken up as follows: approval.
1. Adds to Cost: The opponents of This criticism is not entirely true.
advertising argue that advertising Advertisement in fact helps buyers
unnecessarily adds to the cost of by informing them about the new
product, which is ultimately passed products, which may be improvement
on to the buyers in the form of high over the existing products. If the
prices. An advertisement on TV, for
buyers are not informed about these
a few seconds, for example, costs the
products, they may be using inefficient
marketers several lakhs of rupees.
Similarly an advertisement in print products. Further, the job of an
media say in a newspaper or a magazine advertisement is to inform. The final
costs the marketers a large amount of choice to buy or not to buy anyway
money. The money spent adds to the rests with the buyers. They will buy if
cost, which in an important factor in the advertised product satisfies some
fixation of the price of a product. of their needs. They may be motivated
True, advertisement of a product to work harder to be able to purchase
costs lot of money but it helps to these products.
increase the demand for the product 3. Confuses the Buyers: Another
as large number of potential buyers criticism against advertisement is that
come to know about the availability so many products are being advertised
of the products, its features, etc. and which makes similar claims that the
are persuaded to buy it. The increased buyer gets confused as to which one
demand leads to higher production, is true and which one should be relied
which brings with it the economies upon. For example, we may note similar
of scale. As a result, the per unit cost claims of whiteness or stain removing
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abilities in competing brands of of conversation with one or more

detergent powder or claims of whiteness prospective customers for the purpose
of tooth or ‘feelings of freshness’ in of making sales. It is a personal form
competing brands of toothpaste that of communication. Companies appoint
it is sometimes confusing to us as to salespersons to contact prospective
which one to buy. buyers and create awareness
The supporters of advertisement, about the product and develop
however, argue that we are all rational product preferences with the aim of
human beings who make our decisions making sale.
for purchase of products on factors
such as price, style, size, etc. Thus the Features of Personal selling
buyers can clear their confusion by (i) Personal Form: In personal selling
analysing the information provided on a direct face-to-face dialogue takes
the advertisements and other sources place that involves an interactive
before taking a decision to purchase relationship between the seller and
a product. However, this criticism the buyer.
cannot be completely overruled. (ii) Development of Relationship: Personal
4. Encourages Sale of Inferior selling allows a salesperson to
Products: Advertising does not develop personal relationships
distinguish between superior and with the prospective customers,
inferior products and persuade which may become important in
people to purchase even the inferior making sale.
products. Merits of Personal selling
In fact superiority and inferiority
depends on the quality, which is (i) Flexibility: There is lot of flexibility
a relative concept. The desired in personal selling. The sales
level of quality will depend on the presentation can be adjusted
economic status and preferences of to fit the specific needs of the
individual customers.
the target customers. Advertisements
sell products of a given quality and (ii) Direct Feedback: As there is direct
the buyers will buy if it suits their face-to-face communication in
requirements. No advertisement personal selling, it is possible
to take a direct feed back from
should however, make false claim
the customer and to adapt the
about the quality of a product. If a
presentation according to the
firm makes a false claims it can be
needs of the prospects.
prosecuted for the same.
(iii) Minimum Wastage: The wastage
of efforts in personal selling can
Personal Selling
be minimised as company can
Personal selling involves oral decide the target customers before
presentation of message in the form making any contact with them.
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Role Of Personal Selling (iv) Consumer Attention: There is an

opportunity to detect the loss of
Personal selling plays a very important
consumer attention and interest
role in the marketing of goods and
services. The importance of personal in a personal selling situation.
selling to businessmen, customers and This helps a business person in
society may be described as below. successfully completing the sale.
(v) Lasting Relationship: Personal
Importance to Businessmen selling helps to develop lasting
relationship between the sales
Personal selling is a powerful tool for
persons and the customers, which
creating demand for a firm’s products
is very important for achieving the
and increasing their sale. The importance
of personal selling to a business objectives of business.
organisation may be described as follows: (vi) Personal Rapport: Development of
(i) Effective Promotional Tool: Personal personal rapport with customers
selling is very effective promotional increases the competitive strength
tool, which helps in influencing of a business organisation.
the prospects about the merits of (vii) Role in Introduction Stage: Personal
a product and thereby increasing selling plays very important role
its sale. in the introduction stage of a new
(ii) Flexible Tool: Personal selling is product as it helps in persuading
more flexible than other tools of customers about the merits of the
promotion such as advertising and product.
sales promotion. It helps business (viii) Link with Customers: Sales people
persons in adopting their offer in play three different roles, namely
varying purchase situations. persuasive role, service role and
(iii) Minimises Wastage of Efforts: informative role, and thereby link
Compared with other tools of a business firm to its customers.
promotion, the possibility of
wastage of efforts in personal
Importance to Customers
selling is minimum. This helps
the business persons in bringing This role of personal selling becomes
economy in their efforts. more important for the illiterate and
Personal Selling
‘Most people think ‘selling’ is the same as ‘talking’. But the most effective
salespeople know that listening is the most important part of their job.’
—Roy Bartell
‘You don’t close a sale, you open a relationship if you want to build a long-
term, successful enterprise.’
—Patricia Fripp
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rural customers, who do not have the society is fostered, leading to

many other means of getting product more jobs, more incomes and more
information. products and services. That is how
The customers are benefited by economic growth is influenced by
personal selling in the following personal selling.
ways: (ii) Employment Opportunities: Personal
(i) Help in Identifying Needs: Personal selling offers greater income and
selling helps the customers in employment opportunities to the
identifying their needs and wants unemployed youth.
and in knowing how these can best (iii) Career Opportunities: Personal
be satisfied. selling provides attractive career
(ii) L a t e s t M a r k e t I n f o r m a t i o n : with greater opportunities for
Customers get latest market advancement and job satisfaction
information regarding price as well as security, respect, variety,
changes, product availability interest and independence to
and shortages and new product young men and women.
introduction, which help them in (iv) Mobility of Sales People: There is a
taking the purchase decisions in greater degree of mobility in sales
a better way. people, which promote travel and
(iii) Expert Advice: Customers get tourism in the country.
expert advice and guidance in (v) Product Standardisation: Personal
purchasing various goods and selling increases product
services, which help them in standardisation and uniformity
making better purchase. in consumption pattern in a
diverse society.
(iv) Induces Customers: Personal selling
induces customers to purchase
new products that satisfy their Sales Promotion
needs in a better way and thereby Sales promotion refers to short- term
helps in improving their standards incentives, which are designed to
of living.
encourage the buyers to make immediate
purchase of a product or service. These
Importance to Society include all promotional efforts other
Personal selling plays a very productive than advertising, personal selling and
role in the economic progress of a publicity, used by a company to boost
society. The more specific benefits of its sales. Sales promotion activities
personal selling to a society are as include offering cash discounts, sales
follows: contests, free gift offers, and free
(i) Converts Latest Demand: Personal sample distribution. Sales promotion
selling converts latest demand into is usually undertaken to supplement
effective demand. It is through this other promotional efforts such as
cycle that the economic activity in advertising and personal selling.
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Companies use sales promotion tools (ii) Spoils Product Image: Use of sales
specifically designed to promote to promotion tools may affect the
customers (e.g., free samples, discounts, image of a product. The buyers
and contests), tradesmen or middlemen may start feeling that the product
(e.g., cooperative advertising, dealer
is not of good quality or is not
discounts and dealer incentives and
appropriately priced.
contests) and to sales person (e.g.,
bonus, salesmen contests, special
offers). Sales promotions include only Commonly used sales Promotion
those activities that are used to provide activities
short term incentives to boost the sales 1. Rebate: Offering products at special
of a firm. prices, to clear off excess inventory.
Example, a car manufacturer’s offer
Merits of Sales Promotion to sell a particular brand of car at
(i) Attention Value: Sales promotion a discount of ` 10,000, for a limited
activities attract attention of period.
the people because of the use of 2. Discount: Offering products at
incentives. less than list price. Example, a shoe
(ii) Useful in New Product Launch: company’s offer of ‘Discount Up to
Sales promotion tools can be 50%’ or a shirt marketer’s offer of
very effective at the time of ‘50+40% Discount’.
introduction of a new product 3. Refunds: refunding a part of price
in the market. It induces people paid by customer on some proof of
to break away from their regular purchase, say on return of empty foils or
buying behaviour and try the new wrapper. This is commonly used by food
product. product companies, to boost their sales.
(iii) Synergy in Total Promotional 4. Product combinations: Offering
Efforts: Sales promotion activities another product as gift along with the
are designed to supplement the purchase of a product, say offer of a
personal selling and advertising pack of ½ kg of rice with the purchase
efforts used by a firm and add to
of a bag of Aatta (wheat flour), or
the over all effectiveness of the
‘Get 128 KB Memory Card Free with
promotional efforts of a firm.
a Digicam’ or Buy a TV of 25+ and
Get a Vacuum Cleaner Free’ or ‘100
Limitation of Sales Promotion Gm Bottle of Sauce Free With 1 kg
(i) Reflects Crisis: If a firm frequently Detergent.’
rely on sales promotion, it may 5. Quantity gift: Offering extra
give the impression that it is quantity of the product commonly
unable to manage its sales or that used by marketer of toiletry products.
there are no takers of its product. For example, a shaving cream’s offer of
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‘40% extra’ or A Hotel’s offer of “Take ‘Burst a Cracker’ and instantly win a
a 2 Night 3 Days Package At the Hotel refrigerator, Car, T-shirt, Computer,
and Get an extra Night Stay At Just with the purchase of a TV.
` 500” or ‘Buy 2 Get 1 Free’ offer of a 7. Lucky Draw: For example, the offer
marketer of shirts. of a bathing soap to win a gold coin
6. Instant Draws and Assigned on lucky draw coupon for free petrol
Gift: For example, ‘Scratch a Card’ or on purchase of certain quantity of
Sales Promotion
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petrol from given petrol pump or lucky its products, there are other members
draw coupon on purchase of easy of the general public whose voice
undergarment and win a car offer. or opinion is equally important.
8.Usable Benefit: Purchase goods This public may be interested in the
worth ` 3000 and get a holiday company and its product and have
package worth ` 3000 free’ or ‘Get an impact on the business ability to
a Discount Voucher for Accessories achieve its objectives. Thus, it becomes
imperative to manage public opinion
on Apparel Purchase of ` 1000 and
and the company’s relation with the
above.’
public on a regular basis. Therefore,
9. Full finance @ 0%: Many marketers public relations involve a variety of
o f c o ns u m er d u rab les su ch a s programmes designed to promote or
Electronic goods, automobiles etc protect a company’s image and its
offer easy financing schemes such as individual products in the eyes of the
‘24 easy instalments, Eight Up Front public.
and 16 To Be Paid as Post Dated The business relates with a
Cheques’. However, one should be number of groups including suppliers,
careful about the file charges, which shareholders, intermediaries, activist
sometimes is nothing but interest groups, and the government. For
recovered in advance. example, active support of middlemen
10. Sampling: Offer of free sample of is needed if the firm wants to survive
a product, say a detergent powder or in a competitive selling environment.
tooth paste to potential customers at Similarly, consumer activist groups
the time of launch of a new brand. need to be satisfied because they can
11.Contests: Competitive events impose restriction on the sales of the
involving application of skills or firm’s products directly by urging
luck, say salving a quiz or answering customers to refrain from buying them
some questions. or through the imposition of laws. Most
organisations, business or otherwise
nowadays, have a separate department
Public Relations to manage public relations. They may
Managing public opinion of an also utilize the services of any outside
organisation is an important task which public relations agency.
can be performed by the marketing Their main task is to disseminate
department. The business needs to information and build goodwill about
communicate effectively to customers, the business. Concrete steps are to be
suppliers, and dealers, since they are taken to monitor the attitude of the
instrumental in increasing the sales general public and generate positive
and profit. Besides those who come into publicity. They are especially useful
direct contact with the organisation or when there is negative publicity about
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the company or its products. At that as publicity because the engine

time, the situation has to be tackled manufacturer would benefit from
like an emergency to improve public such dissemination of information
image. The public relations department about its achievement by the media
then has to do something drastic so but would not bear any cost for
that damage to company’s images the same. Thus, the two important
is controlled and minimised. They features of publicity are that:
also advise top management to adopt (i) Publicity is an unpaid form of
certain programmes which will add communication. It does not involve
to their public image and ensure that any direct expenditure by the
negative publicity does not take place marketing firm; and
at all. (ii) There is no identified sponsor for
the communication as the message
Role of Public Relations goes as a news item.
The role of public relations can In publicity, as the information
be discussed with respect to the is disseminated by an independent
functions which the department source, e.g., the press in the form of
performs. Public relations itself is an news stories and features, the message
important tool in the hands of the has more credibility than if that comes
marketing department, which can be as a sponsored message in advertising.
used to the advantage of the business. 2. Press release: Information about
The public relations department the organisation needs to be
performs five functions: presented in a positive manner
1. Publicity: P u b l i c i t y i s s i m i l a r in the press. Generating news
to advertising, in the sense requires skill in developing and
that it is a non-personal form researching a story and getting the
of communication. However, as media to accept press releases is a
against advertising it is a non- difficult task. The public relations
paid form of communication. department is in contact with the
Publicity generally takes place media to present true facts and a
when favourable news is presented correct picture about the company.
in the mass media about a Otherwise news can get distorted
product or service. For example, if taken from other sources.
if a manufacturer achieves a 3. C o r p o r a t e c o m m u n i c a t i o n :
breakthrough by developing a The image of the organisation
car engine, which runs on water needs to be promoted through
instead of petrol, and this news communicating with the public
is covered by television or radio and the employees within the
or newspapers in the form of a organisation. This is usually done
news item. It would be termed with the help of newsletter, annual
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reports, brochures, articles and help in promoting public relations

audio-visual materials. Companies and building goodwill.
rely on these materials to reach In addition, maintaining good
and influence their target markets. public relations also helps in achieving
Speeches by the company’s
the following marketing objectives:
executives at a meeting of trade
associations or trade fairs can (a) B u i l d i n g a w a r e n e s s : Public
really boost the company’s image. relations department can place
even interviews with TV channels stories and dramatise the product
and responding to queries from the in the media. This will build
media go a long way in promoting marketplace excitement before
public relations. the product reaches the market
4. Lobbying: The organisation has or media advertising takes
to deal with government officials place. This usually creates a
and different ministers in charge of favourable impression on the
corporate affairs, industry, finance target customer.
with respect to policies relating (b) Building credibility: If news
to business and the economy. about a product comes in the
The government also seeks to media whether print or electronic
maintain a healthy relationship it always lends credibility and
with associations of commerce
people believe in the product since
and industry and solicits the
it is in the news.
opinion of major stakeholders while
formulating industrial, telecom, (c) Stimulates sales force: It becomes
taxation policies, etc. The public easier for the sales force to deal
relations department then has to with the retailers and convince
be really proactive in promoting dealers if they have already heard
or decoding regulations that affect about the product in the news
them. before it is launched. Retailers
5. C o u n s e l l i n g : T h e p u b l i c and dealers also feel it is easier
relations department advises the to sell the product to the ultimate
management on general issues consumer.
which affect the public and the (d) L o w e r s p r o m o t i o n c o s t s :
position the company would like Maintaining good public relations
to the take on a particular issue. costs much less than advertising
The company can build goodwill and direct mail. However, it
by contributing money and time to requires a lot of communication
certain causes like environment,
and interpersonal skills to convince
wildlife, children’s rights, education,
the media to give space or time for
etc. Such cause-related activities
the organisation and its product.
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The major differences between advertising and personal selling are as follows:
Difference between Advertising and Personal Selling
S. Advertising Personal Selling

No.
1. Advertising is an impersonal form of Personal selling is a personal form of

communication. communication.
2. Advertising involves transmission of In personal selling, the sales talk is
standardised messages, i.e., same adjusted keeping view customer’s
message is sent to all the customers background and needs.
in a market segment.
3. Advertising is inflexible as the message Personal selling is highly flexible. as
can’ t be adjusted to the needs of the the message can be adjusted.
buyer.
4. It reaches masses, i.e., a large number Only a limited number of people can
of people can be approached. be contacted because of time and cost
considerations.
5. In advertising the cost per person The cost per person is quite high in
reached is very low. the case of personal selling.
6. Advertising can cover the market in a Personal selling efforts take a lot of
short time. time to cover the entire market.
7. Advertising makes use of mass media Personal selling makes use of sales
such television, radio, newspaper, and staff, which has limited reach.
magazines.
8. Advertising lacks direct feedback. Personal selling provides direct and
Marketing research efforts are needed immediate feed back. Sales persons
to judge customers’ reactions to come to know about the customers’
advertising. reactions immediately.
9. Advertising is more useful in creating Personal selling plays important role
and building interest of the consumers at the awareness stage of decision
in the firms products. making.
10. Advertising is more useful in marketing Personal selling is more helpful in
to the ultimate consumer’s who are selling products to the industrial
large in numbers. buyers or to imtermediaries such as
dealers and retailers who are relatively
few in numbers.
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Key Terms
Marketing Brand Mark Market Packaging
Marketing Management Labelling Marketing Mix
Channels of Distribution Marketing Offering Physical Distribution
Consumer Product Promotion Industrial Product
Promotion Mix Convenience Product Advertising
Shopping Product Personal Selling Speciality Product
Publicity Generic Name Sales Promotion
Brand Brand Name Trade Mark
SUMMARY
In the traditional sense, the term ‘market’ refers to the place where buyers
and sellers gather to enter into transactions involving the exchange of goods
and services. But in modern marketing sense, it refers to a set of actual and
potential buyers of a product or service.
Marketing: The term marketing has been described as performance of business

activities that direct the flow of goods and services from producers to consumers.
Marketing is not merely a post-production activity. It includes many activities
that are performed even before goods are actually produced and continue even
after the goods have been sold.
Functions of Marketing: The important functions of marketing include

Gathering and Analysing Market Information, Marketing Planning, Product
Designing and Development, Standardisation and Grading, Packaging and
Labelling, Branding, Customer Support Services, Pricing of Products, Promotion,
Physical distribution, Transportation, Storage or Warehousing.
Role of Marketing: By adopting marketing orientation, an organisation whether

profit making or non-profit making, can achieve its goals in the most effective
manner. Also marketing acts as a catalyst in the economic development of a
country and helps in raising the standards of living of people.
Marketing Mix is a set of marketing tools that the firm uses to pursue its
marketing objectives in a target market. The variables or elements of marketing
mix have been classified in to four categories, popularly known as four Ps
of marketing viz., Product, Price, Place and Promotion. These elements are
combined to create an offer.
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Product: In common parlance, the word ‘product’, is used to refer only to the
physical or tangible attributes of a product. In marketing, product is a mixture
of tangible and intangible attributes, which are capable of being exchanged
for a value, with ability to satisfy customer needs. It is anything that can be
offered to a market to satisfy a want or need. Products may broadly be classified
into two categories—industrial products and consumers’ products. Products,
which are purchased, by the ultimate consumers or users for satisfying their
personal needs and desires are referred to as consumer products. On the
basis of shopping efforts involved, the products are classified as Convenience
Product, Shopping Products and Speciality Products. On the basis of their
durability, consumer products have been classified into categories—Durable,
Non-durable, and Services.
Those activities, benefits or satisfactions, which are offered for sale, e.g., dry
cleaning, watch repairs, hair cutting, are called services.
Industrial products are those products, which are used as inputs in producing
other products. These are broadly classified in to (i) Materials and Parts, (ii)
Capital Items, and (iii) Supplies and Business Services.
Packaging: The act of designing and producing the container or wrapper

of a product is referred as packaging. There can be three different levels of
packaging viz., Primary package, Secondary packaged, Transport package.
Packaging performs a number of functions in the marketing of goods. Some
of the important functions, include Product identification; Product protection;
Facilitating the use of the product and Promotion of goods and services.
Labelling: A simple looking but important task in the marketing of goods

relates to designing the label to be put on the package. The label may vary
from a simple tag attached to the product to complex graphics that are part
of the package. The most important functions of labels include i) describing
the product ii) help in identifying the product or brand; iii) help in grading the
products into different categories; and aids in promotion of the products.
Pricing: Price may be defined as the amount of money paid by a buyer or

received by a seller in consideration of the purchase of a product or service.
Generally, if the price of a product is increased, its demand comes down, and
vice-versa. Pricing is considered to be an effective competitive weapon. It is also
the single most important factor affecting the revenue and profits of a firm.
The factors affecting price determination are (i) Product Cost (ii) The Utility
and Demand (iii) Competition (iv) Government and Legal regulations and (v)
Marketing Methods Used.
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Physical Distribution: There are two important decisions relating to this aspect-
one regarding physical movement of goods and two, regarding the channels.
Physical Distribution covers all the activities required to physically move
goods from manufacturers to the customers. The main component of physical
distribution are (i) Order Processing; (ii) Transportation; (iii) Warehousing; and
(iv). Inventory Control: Just-in-Time-Inventory.
Promotion: Promotion refers to the use of communication with the twin

objective of informing potential customers about a product and persuading them
to buy it. There are four major tools, or elements of promotion mix, which are
— (i) Advertising, (ii) Personal Selling, (iii) Sales Promotion, and (iv) Publicity.
These tools are used in different combinations to achieve the goals of promotion.
Advertising is the most commonly used tool of promotion. It is an impersonal

form of communication, which is paid for by the marketers (Sponsors) to
promote some goods or service. The merits of advertising, as a medium of
communication, include (i) Mass reach; (ii) Enhancing customer satisfaction
and confidence; (iii) Expressiveness; and (iv) Economy.
The limitations of advertising are that it is (i) less forceful (ii) lacks Feedback (iii)
inflexibility (iv) low effectiveness. The most common Objections to Advertising are
that it (i) adds to cost; (ii) undermines social Values; (iii) confuses the buyers;
and (iv) encourages sale of Inferior Products.
Most of the criticisms against advertising are not fully true. Advertising is
therefore considered an essential function of marketing.
Personal selling involves oral presentation of message in the form of

conversation with one or more prospective customers for the purpose of making
sales. Personal Selling plays important role for the business persons as well
as for the society.
Sales Promotion refers to short-term incentives, which are designed to

encourage the buyers to make immediate purchase of a product service.
These include promotional efforts other than advertising, personal selling
and publicity, used by a company to boost its sales. Commonly used Sales
Promotion Activities include rebate, Discount, refunds, Product Combinations,
Quantity Gift, Instant Draws and Assigned Gift, Lucky Draw, Usable Benefit,
Full Finance @ 0%, sampling, and contests.
Publicity is similar to advertising, in the sense that it is a non-personal form
of communication. However, as against advertising it is a non-paid form
of communication. In publicity, as the information is disseminated by an
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independent source. However, an important limitation of publicity is that as a

medium of promotion, it is not within the control of a marketing firm.
Public Relations: It is about managing organisations image in the eyes of all

stake holders. It has five components publicity, public relations, corporate
communication, lobbying and counselling.
EXERCISES

1. State any two advantages of branding to marketers of goods and services?
2. How does branding help in differential pricing?
3. What is the societal concept of marketing?
4. Enlist the advantages of packaging of consumer products.
5. List five shopping products purchased by you or your family during the
last few months.
6. A marketer of colour TV having 20% of the current market share of the
country aims at enhancing the market share to 50 per cent in next three
years. For achieving this objective he specified an action programme.
Name the function of marketing being discussed above. (Ans. Marketing
planning.)
Short Answer Type

1. What is marketing? What functions does it perform in the process of
exchange of goods and services? Explain.
2. Distinguish between the product concept and production concept of
marketing.
3. Product is a bundle of utilities. Explain.
4. What are industrial products? How are they different from consumer
products? Explain.
5. Distinguish between convenience product and shopping product.
6. Describe the functions of labeling in the marketing of products.
7. Discuss the role of intermediaries in the distribution of consumer
non-durable products.
8. Define advertising? What are its main features? Explain.
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9. Discuss the role of ‘sales promotion’ as an element of promotion mix.

10. As the marketing manager of a big hotel located at an important
tourist destination, what societal concerns would be faced by you and
what steps would you plan to take care of these concerns? Discuss.
11. What information is generally placed on the package of a food product?
Design a label for one of the food products of your choice.
12. For buyers of consumer durable products, what ‘customer care services’
would you plan as a manager of a firm marketing new brand of motorcycle.
Discuss.
Long Answer Type

1. What is marketing concept? How does it help in the effective marketing
ofgoods and services.
2. What is marketing mix? What are its main elements? Explain.
3. How does branding help in creating product differentiation? Does it help
in marketing of goods and services? Explain.
4. What are the factors affecting determination of the price of a product or
service? Explain.
5. Explain the major activities involved in the physical distribution of
products.
6. ‘Expenditure on advertising is a social waste.’ Do you agree? Discuss.
7. Distinguish between advertising and personal selling.
8. Explain the factors determining the choice of channel of distribution.
Project Work
Identify a product or service for a new launch for attracting potential
consumers for your product. Prepare a project file to—
(a) Advertise the product or service selected.
(b) Write a Press Release for the launch of new product or service.
(c) Publicity of your product as a PR tool.
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chapter
11
Consumer Protection
Banks Responsible for Failed
Transactions and No Cash in ATMs
In a landmark consumer forum judgement,

Learning Objectives now, if you do not get money from ATMs, it
would be considered as deficiency of services
After studying this on part of bank,.On May 4, 2017, a petition in
chapter, you should be the Consumer Forum in Raipur was filed where
able to: the complainant submitted photos and video
recording of three failed ATM transactions due
to non-availability of cash bank’s ATMs.
¾¾ state the importance of In front of the forum, the bank argued
consumer protection; that ATM runs with Internet connectivity, so
at the time when users use ATM, he/she is
not directly the bank client. Hence, if the said
¾¾ briefly explain legal money not withdrawn from the ATM, then it
framework for consumer cannot be termed as a deficiency in service.
protection in India; The forum rejected the bank’s logic
completely. The petitioner has presented
photo and video recording at the time of
¾¾ d e s c r i b e c o n s u m e r withdrawal as evidence in front of forum.
Forum acknowledged that the consumers at
rights in India;
various times go to ATM to withdrawn money
every time the message of ‘cash not available’
is the lack in service.
¾¾ briefly describe the ways The forum accepted the petition. After
and means of consumer hearing the arguments of both the parties, the
protection; and forum ordered that if the bank will not provide
ATM service to the customer, then it will be
considered a reduction in service Consumer
Forum imposed a fine of Rs. 2,500 on the bank
including Rs1,500 as compensation for mental
harassment and Rs1,000 for legal expenses
for non-availability of cash in its ATMs as
deficiency in bank services.
Source:http://dailypost.in/news/
consumer-forum-fines-sbi-ignoring-
customers/, 2017.
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Introduction cheated and is exposed to many risks

and health problems.
Each one of us is a consumer in one
Can business afford to ignore the
way or another. It is important for us
to be an aware and informed consumer interests of consumers? The market
of goods and services available to us in forces have changed from a seller
the market.The above case is just one market i.e., the earlier approach of
of the examples of the many problems caveat emptor which means Let the
that consumers face in the purchase, buyer beware, to a consumer market
use and consumption of goods and i.e., caveat venditor which implies
services. But, very few consumers Let the seller beware. A consumer
are aware of their rights given to is said to be a KING in the free
them by the Consumer Protection market economy. Hence, consumer
Act 2019. The Consumer Protection protection has significance for both
Act 20192019 has replaced the Act consumers and business alike. Under
1986 and seeks to widen its scope in the Consumer Protection Act 2019, the
addressing consumer concerns. Government of India has conferred a
Have you ever thought what legal protection to safeguard interests
would be the plight of consumers if of a consumer.
adequate protection is not provided
to them? With growing competition Importance of Consumer Protection
and in an attempt to increase The concept of consumer protection
their sales and market share,
is to safeguard the interests of the
manufacturers, sellers and service-
consumers. It adopts measures to
providers may be tempted to engage
protect consumers from unethical
in unscrupulous, exploitative and
malpractices by businesses and
unfair trade practices like defective
and unsafe products, adulteration, provide a swift redressal of their
false and misleading advertising, grievances with regard to:
hoarding, black-marketing, etc. 1. Sale of adulterated goods such as
This means that a consumer might adding inferior substances to the
be exposed to risks due to unsafe product being sold.
products, might suffer from bad 2. Sale of counterfeit goods such as
health due to adulterated food selling a product of lesser value
products, might be cheated because than the real product.
of misleading advertisements or sale
of spurious products, might have 3. Sale of sub-standard goods such
to pay a higher price when sellers as the sale of products that do
engage in overpricing, hoarding or not meet the prescribed quality
black-marketing, etc. As a result, standards.
consumer becomes unsafe, feels 4. Sale of duplicate goods.
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291
5. Use of malfunctioning weights and from various types of exploitation and

measures that lead to underweight should complain about it. Consumer
of products. protection has a wide scope. It not only
6. Black marketing and hoarding that includes educating consumers about
eventually leads to scarcity of the their rights and responsibilities, but
product and well as a rise in the also helps in getting their grievances
price of the same. redressed. It not only requires a judicial
machinery for protecting the interests
7. Overcharging a product, i.e.,
charging a product above its of consumers but also requires the
Maximum Retail Price. consumers to be united and form
themselves into consumer associations
8. Supplying of defective goods. for protection and promotion of their
9. Advertisements that are interests.
misleading, i.e., advertisements
that falsely claim a product or a From Consumers’ point of view
service to be shown as superior The importance of consumer protection
quality, grade or standard when from the consumers’ point of view can
not in real. be understood from the following
10. Supply of inferior services, i.e., points:
quality of service lesser than the (i) Consumer Ignorance: In the
condition agreed. light of widespread ignorance
of consumers about their rights
Need for Consumer Protection and reliefs available to them, it
The need for consumer protection arises becomes necessary to educate
from the need to protect consumers from them about the same so as to
the loss or injury or other prevailing achieve consumer awareness.
malpractices and to ensure: (ii) U n o r g a n i s e d C o n s u m e r s :
1. Physical safety of a consumer. Consumers need to be organised
2. Access to information. in the form of consumer
organisations which would
3. Corporate Social Responsibility
to provide quality and quantity of take care of their interests.
goods at fair prices. Though, in India, we do have
4. Consumer satisfaction. consumer organisations which
are working in this direction,
5. Social justice and Trusteeship
adequate protection is required
6. Survival and the Growth of
to be given to consumers till
businesses.
these organisations become
powerful enough to protect
That is why we as an informed consumer and promote the interests of
have to wake up and save our self consumers.
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Compensation for impurities in cold drinks
(iii) Widespread Exploitation of important because of the following

Consumers: Consumers might reasons:
be exploited by unscrupulous, (i) L o n g - t e r m I n t e r e s t o f
exploitative and unfair trade Business: Enlightened
practices like defective and businesses realise that it is
unsafe products, adulteration, in their long-term interest to
false and misleading advertising, satisfy their customers. Satisfied
hoarding, black- marketing, customers not only lead to
etc. Consumers need protection repeat sales but also provide
against such malpractices of the good feedback to prospective
sellers. customers and thus, help in
increasing the customer-base of
From the point of view of Business business. Thus, business firms
A business must also lay emphasis should aim at long-term profit
on protecting the consumers and maximisation through customer
adequately satisfying them. This is satisfaction.
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(ii) B u s i n e s s u s e s S o c i e t y ’ s it is advisable that business

Resources: Business organisations voluntarily resort
organisations use resources to such practices where the
which belong to the society. customers’ needs and interests
They, thus, have a responsibility will well be taken care of.
to supply such products and
render such services which are The Consumer Protection Act, 2019
in public interest and would
The Consumer protection Act 2019
not impair public confidence in
seeks to protect and promote the
them.
consumers’ interest through speedy
(iii) Social Responsibility: A and inexpensive redressal of their
business has social grievances. It extends to the whole of
responsibilities towards various India. It is applicable to all types of
interest groups. Business businesses whether a manufacturer
organisations make money by or a trader and whether supplying
selling goods and providing goods or providing servicesincluding
services to consumers. Thus, e-commerce firms. The Act confers
consumers form an important certain rights to consumers with a view
group among the many stake- to empowering them and to protect
holders of business and like their interests.
other stakeholders, their interest
has to be well taken care of. Who is A Consumer?
(iv) Moral Justification: It is the A ‘consumer’ is generally understood
moral duty of any business to as a person who uses or consumes
take care of consumer’s interest goods or avails of any service. Under
and avoid any form of their the Consumer Protection Act 2019,
exploitation. Thus, a business a consumer is a person who buys
must avoid unscrupulous, any goods or avails services for a
exploitative and unfair trade consideration, which has been paid
practices like defective and or promised, or partly paid and partly
unsafe products, adulteration, promised, or under any scheme of
false and misleading advertising, deferred payment. It includes any
hoarding, black marketing, etc. user of such goods or beneficiary of
(v) Government Intervention: A services if such use is made with the
business engaging in any form approval of the buyer. It applies to
of exploitative trade practices both offline and online transactions
would invite government through electronic means or by
intervention or action. This teleshopping or direct selling or
can impair and tarnish the multilevel marketing. However, any
image of the company. Thus, person who obtains goods or avails
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Protection against malpractices and exploitation
services for resale or commercial Consumer Rights

purpose is nottreated as a consumer
and is outside the scope of Consumer The Consumer Protection Act 2019
Protection Act 2019. provides for six rights of consumers.
Terms & Definitions

1. Complaint: Any allegation in writing made by the complainant for obtaining relief
w.r.t restrictive trade practice, defect in goods or deficiency in services provided,
overcharging of price or offer of goods or service injurious to life and safety.
2. Complainant: means one or more consumers, or any voluntary consumer
association, central or state government or the central authority or a legal heir
or legal representative or a parent or legal representative in case of a minor.
3. Spurious goods: Goods that are falsely claimed to be genuine.
4. Unfair trade practice: A trade practice for the purpose of promoting sale, use or
supply of any goods or service falsely represents its quality, standard, quantity,
composition, style or model.
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5. Restrictive trade practice: A trade practice which manipulates price or affect the
flow of supplies in the market relating to goods and services in such a manner
that an unjustified cost is imposed on the consumer.
6. Defect: Any fault, imperfection, shortcoming or inadequacy in quality, nature
and manner of performance in relation to goods or a product.
7. Deficiency: Any fault, imperfection, shortcoming or inadequacy in quality,
nature and manner of performance in relation to in relation to any service and
includes act of negligence or omission or commission or withholding relevant
information which causes loss or injury to the consumer.
8. Injury: Any harm illegally caused to any person in body, mind or property.
9. Product: Any article or goods or substance or raw material or any extended cycle
of such product either in gaseous , liquid or solid state possessing intrinsic
value capable of delivery either as assembled or a component produced or
manufactured to trade. It does not include human tissues, blood, blood products
and organs.
10. Product Seller: Any person in the course of business imports, sells, distributes,
leases, installs, prepares, labels, markets, repairs, maintains or otherwise
involved in placing the product for commercial use or a service provider.
11. Product Liability: Responsibility of a product manufacturer or seller of any
product or service to compensate for any harm caused to a consumer by defective
product manufactured or sold or by deficiency in services.
These rights include the following: complete information about

1. Right to Safety: The consumer the product he intends to buy
has a right to be protected including its ingredients, date
against goods and services which of manufacture, price, quantity,
are hazardous to life, health directions for use, etc. It is
and property. For example, because of this reason that the
legal framework in India requires
electrical appliances which are
the manufactures to provide such
manufactured with substandard
information on the package and
products or do not conform to
label of the product.
the safety norms might cause
serious injury. Thus, consumers 3. R i g h t t o b e a s s u r e d : T h e
are educated that they should consumer has the freedom to
use electrical appliances which access variety of products at
are ISI marked as this would be competitive prices. This implies
an assurance of such products that the marketers should offer a
meeting quality specifications. wide variety of products in terms
of quality, brand, prices, size, etc.
2. Right to be informed: The and allow the consumer to make
consumer has a right to have a choice from amongst these.
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BUSINESS STUDIES
296
4. Right to be heard: The consumer Consumer Responsibilities

has a right to file a complaint
and to be heard in case of The Consumer Protection Act
dissatisfaction with a good or empowers the consumer to fight
a service. It is because of this against any unscrupulous, exploitative
reason that many enlightened and unfair, restrictive trade practices
business firms have set up adopted by sellers. Consumer rights,
their own consumer service and by themselves, cannot be effective in
grievance cells. Many consumer achieving the objective of consumer
protection. Consumer protection can,
organisations are also working
in effect, be achieved only when the
towards this direction and helping
consumers also understand their
consumers in redressal of their
responsibilities.
grievances.
A consumer should keep in mind
5. Right to seek redressal: The
the following responsibilities while
consumer has a right to get relief
purchasing, using and consuming
against unfair trade practice
goods and services —
of restrictive trade practices or
unscrupulous exploitation in (i) Be aware about various goods
case the product or a service and services available in the
market so that an intelligent and
falls short of his expectations.
wise choice can be made.
The Consumer Protection Act
2019 provides for redressal to the (ii) Buy only standardised goods as
consumers including replacement they provide quality assurance.
of the product, removal of defect Thus, look for ISI mark on
in the product, compensation paid electrical goods, FPO mark on
for any loss or injury suffered by food products, Hallmark on
the consumer, etc. jewelry, etc.
6. Right to Consumer Education: (iii) Learn about the risks associated
The consumer has a right to with products and services, follow
acquire knowledge and to be manufacturer’s instructions and
use the products safely.
a well informed consumer
throughout life. He should be (iv) Read labels carefully so as to
aware about his rights and the have information about prices,
reliefs available to him in case net weight, manufacturing and
of a product or service falling expiry dates, etc.
short of his expectations. Many (v) Assert yourself to ensure that
consumer organisations and you get a fair deal.
some enlightened businesses are (vi) Be honest in your dealings.
taking an active part in educating Choose only from legal goods
consumers in this respect. and services and discourage
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consumer protection
297
unscrupulous practices like Ways and Means of Consumer

black-marketing, hoarding, etc. Protection
(vii) Ask for a cash memo on purchase
of goods or services. This would A consumers’ awareness about their
serve as a proof of the purchase rights and responsibilities is just one
made. of the ways in which the objective of
consumer protection can be achieved.
(viii) File a complaint in an appropriate There are other ways in which this
consumer forum in case of a objective may be achieved.
shortcoming in the quality of
1. Self-regulation by Business:
goods purchased or services
Socially responsible firms follow
availed. Do not fail to take an
ethical standards and practices in
action even when the amount
dealing with their customers Good
involved is small.
and ethical practices encourage
(ix) Form consumer societies which firms to realise that it is in their
would play an active part in long-term interest to serve the
educating consumers and customers in a rightful manner.
safeguarding their interests. Many firms have set up their
(x) Respect the environment. Avoid customer service and grievance
waste, littering and contributing cells to redress the problems and
to pollution. grievances of their consumers.
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BUSINESS STUDIES
298
2. Business Associations: The of his responsibilities would also

associations of trade, commerce enable a consumer to safeguard
and business like Federation of his interests. In this regard, the
Indian Chambers of Commerce of Department of Consumer Affairs,
India (FICCI) and Confederation of GOI, has been undertaking
Indian Industries (CII) have laid JagoGrahakJagocampaign, for
down their code of conduct which generating awareness among
lay down for their members the consumers.
guidelines in their dealings with 4. C o n s u m e r O r g a n i s a t i o n s :
the customers. Consumer organisations play
3. C o n s u m e r A w a r e n e s s : A an important role in educating
consumer, who is well-informed consumers about their rights and
about his rights and the reliefs providing protection to them. These
available to him, would be in a organisations can force business
position to raise his voice against firms to avoid malpractices and
any unfair trade practices or exploitation of consumers.
unscrupulous exploitation. In 5. Government: The government
addition to this, an understanding can protect the interests of the
Mark of Bureau of Indian

Standards
Food Process Order Agmark
BIS Hallmark Eco-mark
Marks indicating quality in different products
Ch_11.indd 298 10-08-2022 10:03:35

consumer protection
299
consumers by enacting various machinery at the district, state

measures. For example, the GOI and national levels for redressal
has set up a toll-free national of consumer grievances.
consumer Helpline Number
1800114000 for this purpose. R edressal A gencies U nder T he
The legal framework in India Consumer Protection Act
encompasses various legislations
which provide protection to For the redressal of consumer
consumers. The most important of grievances, the Consumer Protection
these regulations is the Consumer Act 2019 provides for setting up of a
Protection Act, 2019. The Act three-tier enforcement machinery at
provides for a central authority the District, State, and the National
to regulate matters relating to levels, known as the District Consumer
violation of rights of consumers, Disputes Redressal Commission,
unfair trade practices and false or State Consumer Disputes Redressal
misleading advertisements which Commission, and the National
are prejudicial to the interests Consumer Disputes Redressal
of consumers. This is known Commission. They are briefly referred
as Central Consumer Protection to as the ‘District Commission’, ‘State
Authority (CCPA). A three-tier Commission’, and the ‘National
Consumer Awareness
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BUSINESS STUDIES
300
Commission’, respectively. While the evidence brought to its notice

National Commission is set up by by the complainant and can ask
the Central Government, the State for any required information
Commissions and the District Forums document or records from the
are set up, by the State Government. service provider for settlement.
The Figure on redressal agencies If any of the parties are
shows the hierarchical structure of not satisfied by the order of
this three-tire machinery. District Commission can appeal
Let us now see how the consumer against such order to the State
grievances are redressed by the three- Commission on the grounds of
tire machinery: facts or law within a period of forty
1. District Commission:District five days from the date of order.
commission has a jurisdiction 2. S t a t e C o m m i s s i o n : I t i s
to entertain complaints where established by the respective
value of goods or services paid state government and ordinarily
as consideration does not exceed function at the state capital. State
one crore rupees. Either on the Commission has a jurisdiction
first hearing or at any later stage, to entertain complaints where
it appears to district commission value of goods and services paid
that there exists elements of as consideration exceeds one
settlement which may be crore but does not exceed ten
acceptable to the parties, it may
crore rupees. If any of the parties
direct them to give their consent
are not satisfied by the order of
for settlement of dispute through
State Commission can appeal
mediation within five days. In case
against such order to the National
the parties agree for settlement
Commission within a period of
by mediation and give written
thirty days of such order.
consent, the district commission
refers the matter for mediation 3. National Commission: The
and the provisions relating to National Commission has
mediation shall apply. However, in territorial jurisdiction over
the event of failure of settlement the whole country. National
by mediation proceeds with the Commission has a jurisdiction
complaint. If the complaint alleges to entertain complaints where
defect in goods which cannot value of goods or services paid as
be determined without proper consideration exceeds ten crores
analysis or test of goods, the of rupees. If any of the parties
commission obtains the sample are not satisfied by the order of
of goods, seal it and refer to the National Commission can appeal
appropriate authority for analysis. against such order to the Supreme
In case of services, the dispute Court of India within a period of
is settled based on the basis of thirty days of such order.
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consumer protection
301
Relief Available (x) Compensate for any loss or injury

Where District or State or National suffered by consumer under
Commission is satisfied about defect product liability action and
in goods, or deficiency in services on withdraw hazardous products
any unfair trade practice or claim for from being offered for sale etc.
compensation under product liability, However, every order of a district
issues an order: commission, the state commission or
(i) To remove the defect in goods or the national commission is deemed
deficiency in service. final if no appeal for such order is
made by any of the parties involved
(ii) To replace the defective product
in dispute.
with a new one, free from any
defect. Role of Consumer Organisations
(iii) To refund the price paid for the And Ngos
product, or the charges paid for In India, several consumer
the service. organisations and non-governmental
(iv) To pay a reasonable amount of organisations (NGOs) have been set
compensation for any loss or up for the protection and promotion
injury suffered by the consumer of consumers’ interests. Non-
due to the negligence of the governmental organisations are non-
opposite party. profit organisations which aim at
promoting the welfare of people. They
(v) To pay punitive damages in
have a constitution of their own and
appropriate circumstances.
are free from government interference.
(vi) To discontinue the unfair/ Consumer organisations and NGOs
restrictive trade practice and not perform several functions for the
to repeat it in the future. protection and promotion of interest
(vii) Not to offer hazardous goods for of consumers. These include:
sale. (i) Educating the general public
(viii) To withdraw the hazardous about consumer rights by
goods from sale. organising training programmes,
(ix) T o c e a s e m a n u f a c t u r e o f seminars and workshops.
hazardous goods and to desist (ii) Publishing periodicals and
from offering hazardous services. other publications to impart
Setting up of Consumer Mediation Cell

The Chapter V of the Consumer Protection Act of 2019 provides for a
mediation process for settlement of disputes at three levels - National, State
and District with all three being attached to the respective commissions.
It is a new provision in the Act 2019 as an alternate mechanism to ensure
faster aspeedydispute settlements by respective commissions.
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BUSINESS STUDIES
302
knowledge about consumer exploitative and unfair trade

problems, legal reporting, reliefs practices of sellers.
available and other matters of (v) Providing legal assistance to
interest. consumers by way of providing
aid, legal advice etc. in seeking
(iii) C a r r y i n g o u t c o m p a r a t i v e
legal remedy.
testing of consumer products
(vi) Filing complaints in appropriate
in accredited laboratories to test
consumer courts on behalf of the
relative qualities of competing consumers.
brands and publishing the (vii) Taking an initiative in filing
test results for the benefit of cases in consumer courts in the
consumers. interest of the general public,
(iv) Encouraging consumers to not for any individual.
strongly protest and take an (viii) Consumer unity and Trust
action against unscrupulous, Society (CuTS), Jaipur.
Key Terms
Consumer protection Consumer Rights Consumer Responsibilities

Redressal mechanism Mediation
SUMMARY
Importance of Consumer Protection: From the point of consumers, consumer

protection is important because consumers are ignorant, unorganised and
exploited by sellers. Consumer Protection is also important for a business
because (i) It is in the long-term interest of business, (ii) Business uses
society’s resources, (iii) It is a social responsibility of business, (iv)It has moral
justification, (v) It avoids government intervention in the functioning of business.
Legal Protection to Consumers: The Indian legal framework consists of a
number of legislations which provide protection to consumers. These include
(i) The Consumer protection Act, 1986, (ii) The Indian Contract Act, 1872, (iii)
The Sale of Goods Act, 1930, (iv) The essential Commodities Act,1955, (v) The
Agricultural produce (Grading and Marking) Act, 1937, (vi) The prevention of
Food Adulteration Act, 1954, (vii) The Standards of Weights and Measures Act,
1976, (viii) The Trade Marks Act, 1999, (ix) The Competition Act, 2002,(x) The
Bureau of Indian Standards Act, 1986.
Consumer Rights: The Consumer Protection Act, 1986, provides for six
consumer rights. These are: (i) Right to safety, (ii) Right to be informed, (iii)
Ch_11.indd 302 10-08-2022 10:03:35

consumer protection
303
Right to choose, (iv) Right to be heard, (v) Right to seek redressal,(vi) Right to
consumer education.
Consumer Responsibilities: In addition to exercising his rights, a consumer
should also keep in mind his responsibilities while purchasing, using and
consuming goods and services.
Ways and Means of Consumer Protection: There are various ways in which
the objective of consumer protection can be achieved. These Include (i) Self
regulation by business, (ii) Business associations, (iii) Consumer awareness,
(iv)Consumer organisations, (v) Government.
Redressal Agencies under the Consumer Protection Act: The Consumer
Protection Act provides for setting up of a three-tier enforcement machinery at
the District, State, and the National levels. They are referred to as the ‘District
Forum’, ‘State Commission’, and the ‘National Commission’. There are various
reliefs available to a consumer under the Act. The appropriate consumer court
may pass an order for removal of defect in goods, replace a defective product,
refund the price of the product, pay compensation for the loss suffered, etc.
Consumer Organisations and NGOs: In India, several consumer organisations
and non-governmental organisations (nGOs) are playing an active role in
protection and promotion of consumers’ interests.
EXERCISES

1. Under which consumer right does a business firm set up consumer
grievance cell?
2. Which quality certification mark is used for agricultural products?
3. What is the jurisdiction of cases that can be filed in a State Commission?
4. State any two relief available to consumers under CPA.
5. Name the component of product mix that helps the consumer to exercise
the right to information.
Short Answer Type

1. Enumerate the various Acts passed by the Government of India which help
in protection of consumers’ interests.
2. What are the responsibilities of a consumer?
3. Who can file a complaint in a consumer court?
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BUSINESS STUDIES
304
4. FSSAI (Food Safety and Standards Authority of India) has made a proposal
for hotels and other food outlets to declare the kind of oil/fat used in cooking
each of the food items on their menus. Name and explain the Consumer
Right being reinforced by this proposal.
5. Who is a consumer as per CPA?
Long Answer Type

1. Explain the importance of consumer protection from the point of view of
a business.
2. Explain the rights and responsibilities of consumer?
3. What are various ways in which the objective of consumer protection can
be achieved?
4. Explain the redressal mechanism available to consumers under the
Consumer Protection Act, 2019
5. Explain the role of consumer organisations and NGOs in protecting and
promoting consumer’s interest.
6. Mrs. Mathur sent a jacket to a laundry shop in January 2018. The jacket
was purchased at a price of `4,500. She had previously sent the jacket
for dry cleaning with Shine Dry Cleaners and the jacket was cleaned well.
However, she noticed that her jacket had white discoloration marks when
she collected the jacket this time. On informing the dry cleaner, Mrs. Mathur
received a letter confirming that discolouration indeed appeared after the
jacket was dry cleaned. She contacted the dry cleaner multiple times and
requested for compensation for discoloured jacket but to no avail.
Upon Consumer court’s intervention, Shine Dry Cleaners agreed to
compensate Rs. 2,500 to Mrs. Mathur for the discoloured jacket.
(a) Which right was exercised by Mrs. Mathur at the first instance.
(b) Name and explain the right which helped Mrs. Mathur to avail the
compensation.
(c) State which consumer responsibility has been fulfilled by
Mrs. Mathur in the above case.
(d) State any other two responsibilities to be assumed by the consumers.
Project work
1. Visit a consumer organisation in your town. List down the various functions
performed by it.
2. Collect some newspaper cuttings of some consumer cases and the rulings
given therein.
Ch_11.indd 304 10-08-2022 10:03:35

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0__Prelims.indd 1 01-09-2022 12:28:31

ALL RIGHTS RESERVED

108, 100 Feet Road

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The National Council of Educational Research and Training (NCERT)

0__Prelims.indd 4 01-09-2022 12:28:31

In view of the COVID-19 pandemic, it is imperative to reduce content

0__Prelims.indd 5 01-09-2022 12:28:32

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Note to the Teacher

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Chapter 9 Financial Management 215

Chapter 10 Marketing 242

Chapter 11 Consumer Protection 289

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Chapter 2 Principles of Management 30

Chapter 3 Business Environment 69

Chapter 5 Organising 109

Chapter 6 Staffing 139

Chapter 7 Directing 169

Chapter 8 Controlling 201

0__Prelims.indd 10 01-09-2022 12:28:32

CLICK HERE TO JOIN

Ch_9.indd 215 10-08-2022 09:09:51

Introduction thus, very crucial for the survival and

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prominent examples of the aspects raised by way of debt and/or equity

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expected returns from each whether or not a firm has earned a

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Factors Affecting Financing different. A prudent financial

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India Inc. Issues Bonus Shares and Dividends

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increases the firm’s future earning the change in earnings is small or

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a dividend distribution tax is levied Financial Planning

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Thus, financial planning strives to programmes. Short-term planning

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respect of the availability and timing sales is predicted. However, it

Cutting Back on Debt

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immense help in running the public deposits etc. These may be

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in meeting these commitments may Capital structure of a company,

Situation I Situation II Situation III

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D that company is earning on funds

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structure are as follows: A higher DSCR indicates better

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