Revision Notes

CHAPTER 1
Nature and Significance of Management

NATURE AND SIGNIFICANCE OF MANAGEMENT

Management is an art of getting things done with and through others. Management can
be defined as, the process of getting things done with the aim of achieving
organizational goals effectively and efficiently.

Efficiency and Effectiveness

Efficiency (completing the work at low cost) means doing the task correctly at
minimum cost through optimum utilization of resources while effectiveness
(Completing the work on time) is concerned with end result means completing the task
correctly within stipulated time. Although efficiency and effectiveness are different yet
they are inter related. It is important for management to maintain a balance between
the two.

1. Rohini prepared a well-documented and factual report on Co’s performance but she
could not present it in Board meeting as she could not complete it on time.

[Hint: Efficient but not effective]

2. Best roadways promised to deliver goods in time and charged extra money from
Mr. Singh. But the goods were not delivered on time.

[Hint: Efficient but not effective]

Characteristics of Management

1. Goal oriented Process It is a goal oriented process, which is to achieve already

specified and desired objectives by proper utilization of available resources.

2. Pervasive: Management is universal in nature. It is used in all types of organizations

whether economic, social or political irrespective of its size, nature and location and at
each and every level.

3. Multidimensional: It is multidimensional as it involves management of work, people

and operations.

4. Continuous: It consists of a series of function and its functions are being performed
by all managers simultaneously. The process of management continues till an
organization exists for attaining its objectives.
5. Group Activity: It is a group activity since it involves managing and coordinating
activities of different people as a team to attain the desired objectives of the
organization.

6. Dynamic function : It is a dynamic function since it has to adapt according to need,

time and situation of the changing business environment. For example, McDonalds
made major changes in its ‘Menu’ to survive in the Indian market.

7. Intangible Force: It is intangible force as it can’t be seen but its effects can be felt in
the form of results like whether the objectives are met and whether people are
motivated or not and there is orderliness and coordination in the work environment.

Objectives of Management

(1) Organizational objectives:

Organizational Objectives can be divided into Survival (Earning enough revenues to

cover cost); Profit (To cover cost and risk); and Growth (To improve its future
prospects).

(A) Survival - Management by taking positive decisions with regard to different

business activities ensures survival of business for long term.

(B) Profit - It plays an important role in facing business risks and successful running of
business activities.

(C) Growth - Management must ensure growth which can be measured by increase in
sales, number of employees, number of products, additional investment, etc.

(2) Social Objectives:

Social objectives is to provide some benefits to society like applying environmental

friendly practices in the production process and giving employment to disadvantaged
sections of society, etc. Example: TISCO, ITC, and Asian Paints.

(3) Personal Objectives:

Personal Objectives is to focus on diverse personal objectives of people working in the

organization which need to be reconciled with organizational objectives.

Importance of Management
(1) Achieving Group Goals: Management creates team work and coordination in the
group. Managers give common direction to individual efforts in achieving the overall
goals of the organization.

(2) Increases Efficiency: Management increases efficiency by using resources in the

best possible manner to reduce cost and increase productivity.

(3) Creates Dynamic organization: Management helps the employees overcome their
resistance to change and adapt as per changing situation to ensure its survival and
growth.

(4) Achieving personal objectives: Management helps the individuals achieve their
personal goals while working towards organizational objectives.

(5) Development of Society: Management helps in the development of society by

producing good quality products, creating employment opportunities and adopting new
technologies.

Management as an Art

Art refers to skillful and personal application of existing knowledge to achieve desired
results. It can be acquired through study, observation and experience. The features of
art as follows:

(1) Existence of theoretical knowledge: In every art, Systematic and organized study
material should be available compulsorily to acquire theoretical knowledge.

(2) Personalized application: The use of basic knowledge differs from person to
person and thus, art is a very personalized concept.

(3) Based on practice and creativity: Art involves in consistent and creative practice of
existing theoretical knowledge.

In management also a huge volume of literature and books are available on different
aspects of management. Every manager has his own unique style of managing things
and people. He uses his creativity in applying management techniques and his skills
improve with regular application. Since all the features of art are present in
management. so it can called an art.

Management as a Science

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

(1) Systematized body of knowledge: Science has a systematized body of knowledge

based on principles and experiments.

(2) Principles based on experiments and observation: Scientific principles are

developed through experiments and observation.
(3) Universal validity: Scientific principles have universal validity and application.

Management has systematic body of knowledge and its principles are developed over
a period of time based on repeated experiments & observations which are universally
applicable but they have to be modified according to given situation.

As the principles of management are not as exact as the principles of pure science, so
it may be called-an inexact science. The prominence of human factor in the
management makes it a Social Science.

Management as Profession

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

(1) Well-defined body of Knowledge: All the professions are based on well defined
body of knowledge.

(2) Restricted Entry: The entry in every profession is restricted through examination or
through some minimum educational qualification.

(3) Professional Associations: All professions are affiliated to a professional

association which regulates entry and frames code of conduct relating to the
profession.

(4) Ethical Code of Conduct: All professions are bound by a code of conduct which
guides the behavior of its members.

(5) Service Motive: The main aim of a profession is to serve its clients.

Management does not fulfill all the features of a profession and thus it is not a full-
fledged profession like doctor, lawyer, etc., but very soon it will be recognized as full-
fledged profession.

Levels of Management: Top, Middle and Operational Levels

“Levels of management” means different categories of managers, the lowest to the

highest on the basis of their relative responsibilities, authority and status.

Top Level
Consists of Chairperson, Chief Executive Officer, Chief Operating Officer or equivalent
and their team.

Chief task is to integrate and to coordinate the various activities of the business,
framing policies, formulating organizational goals & strategies.

Middle Level

Consists of Divisional or Departmental heads, Plant Superintendents and Operation

Managers etc.

Main tasks are to interpret the policies of the top management to ensure the availability
of resources to implement policies, to coordinate all activities, ensure availability of
necessary personnel & assign duties and responsibilities to them.

Lower Level/Supervisory Level

Consists of Foremen and supervisor etc. Main task is to ensure actual implementation
of the policies as per directions, bring workers’ grievances before the management &
maintain discipline among the workers.

Functions of Management

1.Planning: Thinking in advance what to do, when to do, and who is going to do it. It
bridges the gap between where we are and where we want to reach.

2.Organising: organization means deciding the framework of working how many units and sub-
units are needed,how many posts are needed, how to distribute the authority and responsibilities.

3. Staffing: It refers to recruitment, selection, training, development and appointment of the

employees. 4.Directing: It refers to guiding, instructing, inspiring and motivating the employees.

5.Controlling are the main functions of management.Controlling is monitoring the organizational

performance towards the attainment of the organizational goals.

Coordination (The Essence of Management):

Coordination is the force which synchronizes all the functions of management and
activities of different departments. Lack of coordination results in overlapping,
duplication, delays and chaos. It is concerned with all the three levels of management
as if all the levels of management are looked at together, they become a group and as
in the case of every group, they also require coordination among themselves. So, it is
not a separate function of management, rather it is the essence of management.
l. Coordination integrates group efforts: It integrates diverse business activities into
purposeful group activity ensuring that all people work in one direction to achieve
organizational goals.

2. Coordination ensures unity of action: It directs the activities of different

departments and employees towards achievement of common goals and brings unity
in individual efforts.

3. Coordination is a continuous process: It is not a specific activity matter it is required

at all levels, in all departments till the organization continues its operations.

4. Coordination is all pervasive function: It is universal in nature. It synchronizes the

activities of all levels and departments as they are interdependent to maintain
organizational balance.

5. Coordination is the responsibility of all managers: It is equally important at all the

three-top, middle and lower levels of management. Thus it is the responsibility of all
managers that they make efforts to establish coordination.

6. Coordination is a deliberate function: Coordination is never established by itself

rather it is a conscious effort on the part of every manager. Cooperation is voluntary
effort of employees to help one another. Effective coordination cannot be achieved
without cooperation of group members.
 CHAPTER – 2
PRINCIPLES OF MANAGEMENT

Principle

A principle is a fundamental statement of truth that provides guidance to thought and

action.

Principles of Management

Principles of management are broad and general guidelines for managerial decision
making and behavior (i.e. they guide the practice of management).

Nature of Principles of Management

The nature of principles of management can be described in the following points:

1. Universal applicability i.e. they can be applied in all types of organizations, business
as well as non-business, small as well as large enterprises.

2. General Guidelines: They are general guidelines to action and decision making
however they do not provide readymade solutions as the business environment is ever
changing or dynamic.

3. Formed by practice and experimentation: They are developed after thorough

research work on the basis of experiences of managers.

4. Flexible: Which can be adapted and modified by the practicing managers as per the
demands of the situations as they are man-made principles.

5. Mainly Behavioural: Since the principles aim at influencing complex human

behaviour they are behavioural in nature.

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

7. Contingent: Their applicability depends upon the prevailing situation at a particular

point of time. According to Terry, “Management principles are ‘capsules’ of selected
management wisdom to be used carefully and discretely”.

Significance of the Principles of Management

The significance of principles of management can be derived from their utility which
can be understood from the following points:
1. Providing managers with useful insights into reality: Management principles guide
managers to take right decision at right time by improving their knowledge, ability and
understanding of various managerial situations and circumstances.

2. Optimum utilization of resources and effective administration: Management

principles facilitate optimum use of resources by coordinating

the physical, financial and human resources. They also help in better administration by
discouraging personal prejudices and adopting an objective approach.

3. Scientific decisions: Decisions based on management principles tend to be more

realistic, balanced and free from personal bias.

4. Meeting the changing environmental requirements: Management principles provide

an effective and dynamic leadership and help the organization to implement the
changes.

5. Fulfilling social responsibility: Principles of management not only help in achieving

organizational goals but also guide managers in performing social responsibilities.
Example : “Equity” and “Fair” remuneration.

6. Management training, education and research: Management principles are helpful in

identifying the areas in which existing and future managers should be trained. They
also provide the basis for future research.

Fayol’s Principles of Management

About Henry Fayol: Henry Fayol (1841-1925) got degree in Mining Engineering and
joined French Mining Company in 1860 as an Engineer. He rose to the position of
Managing Director in 1988. When the company was on the verge of bankruptcy. He
accepted the challenge and by using rich and broad administrative experience, he
turned the fortune of the company. For his contributions, he is well known as the
“Father of General Management”.

Principles of Management developed by Fayol

1. Division of work: Work is divided in small tasks/job and each work is done by a
trained specialist which leads to greater efficiency, specialization, increased
productivity and reduction of unnecessary wastage and movements.

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

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

3. Discipline: t is the obedience to organizational rules by the subordinates. Discipline

requires good supervisors at all levels, clear and fair agreements and judicious
application of penalties.
4. Unity of Command: t implies that every worker should receive orders and
instructions from one superior only, otherwise it will create confusion, conflict,
disturbance and overlapping of activities.

5. Unity of Direction: Each group of activities having the same objective must have one
head and one plan. This ensures unity of action and coordination.

Difference between Unity of Command and Unity of Direction

Basis Unity of Command Unity of Direction

It advocates ‘one head, and one plan‘ for a
It means that a subordinate
group of activities having the same
1.Meaning should receive orders and
objectives. The activities should be
instructions from one boss only.
directed towards the common goals.
This principle is related to the functioning
This principle is related to the
2.Scope of a department or the organization as a
functioning of personnel
whole
The main purpose of unity of The purpose of unity of direction is to
command is to avoid confusion direct the efforts of employees of one
3.Purpose
and fix up the responsibility of department in achieving the main
the employee. objective of that department.
Systematic working and Co-ordination within a particular
4.Results
improved efficiency by removing department and overall; by preventing
in
confusion and chaotic conditions overlapping of various activities.

7. Remuneration of Employees: The overall pay and compensation should be, fair to
both employees and the organization. The wages should encourage the workers to
work more and better.6. Subordination of Individual Interest to General Interest: The
interest of an organization should take priority over the interest of any one individual
employee.

8. Centralization and Decentralization: Centralization means concentration of

decisions making authority in few hands at top level. Decentralization means evenly
distribution of power at every level of management. Both should be balanced as no
organization can be completely centralized or completely decentralized.

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

10. Order: A place for everything and everyone and everything and everyone should be
in its designated place. People & material must be in suitable places at appropriate
time for maximum efficiency.

11. Equity: The working environment of any organization should be free from all forms
of discrimination (religion, language, caste, sex, belief or Basis Unity of Command Unity
of Direction nationality) and principles of justice and fair play should be followed. No
worker should be unduly favoured or punished.

12. Stability of Personnel: After being selected and appointed by rigorous procedure,
the selected person should be kept at the post for a minimum period decided to show
results.

13. Initiative: Workers should be encouraged to develop and carry out their plan for
improvements. Initiative means taking the first step with self-motivation. It is thinking
out and executing the plan.

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

Taylor’s Scientific Management

Fredrick Winslow Taylor (1856-1915) was a person who within a very short duration
(1878-1884) rose from ranks of an ordinary apprentice to chief engineer in Midvale
Steel Company, U.S.A. Taylor conducted a number of experiments and came to
conclusion that workers were producing much less than the targeted standard task.
Also, both the parties - Management and workers are hostile towards each other. He
gave a number of suggestions to solve this problem and correctly propounded the
theory of scientific management to emphasize the use of scientific approach in
managing an enterprise instead of hit and trial method. For his contributions, he is well
known as the “Father of the Scientific Management”. Scientific Management attempts
to eliminate wastes to ensure maximum production at minimum cost.

Principles of Scientific Management

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

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

(3) Cooperation not individualism: It is an extension of the Principle of Harmony not

discord whereby constructive suggestions of workers should be adopted and they
should not go on strike as both management and workers share responsibility and
perform together.

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

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

and execution are separated. There are eight types of specialized, professionals, four
each under planning and execution who keep a watch on all workers to extract
optimum performance.

Planning Incharges:

1. Route Clerk to specify the exact sequence and route of production.

2. Instruction card clerk is responsible for drafting instructions for the workers.

3. Time and cost clerk to prepare time and cost sheet for the job.

4. Shop Disciplinarian to ensure discipline and enforcement of rules and regulations

among the workers.

Production Incharges:
1. Gang boss is responsible for keeping tools and machines ready for operation.

2. Speed boss is responsible for timely and accurate completion of job.

3. Repair boss to ensure proper working conditions of tools and machines.

4. Inspector to check quality of work.

2. Standardization and Simplification of work: Standardization refers to developing

standards for every business activity whereas Simplification refers to eliminating
superfluous varieties of product or service. It results in savings of cost of labour,
machines and tools. It leads to fuller utilization of equipment and increase in turnover.

3. Method Study: The objective of method study is to find out one best way of doing
the job to maximize efficiency in the use of materials, machinery, manpower and
capital.
(1) Which technique of scientific management is being violated here?
(Hint: Functional Foreman ship.)
(2) Write one consequence of this violation.

4. Motion Study: It is the science of eliminating wastefulness resulting from using

unnecessary, ill-directed and inefficient motions by workers and machines to identify
best method of work.

5 Time study: It determines the standard time taken to perform a well-defined job. The
objective of time study is to determine the number of workers to be employed, frame
suitable incentive schemes & determine labour costs.

6. Fatigue study: Fatigue study seeks to determine time and frequency of rest intervals
in completing a task. The rest interval will enable workers to regain their lost stamina
thereby avoiding accidents, rejections and industrial sickness.

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

For example: Standard task is 10 units. Rates are: Rs 50 per unit for producing 10 units
or more and Rs 40 per unit for producing less than 10 units
Worker A produces 11 Units; he gets Rs 550 (11 units x 50 per unit)
Worker B produces 09 units; he gets Rs 360 (9 units x 40 per unit)
This difference of Rs 190 will motivate B to perform better.

Basis Fayol Taylor

He developed the theory of
1. Nature of He developed the concept of
Functional management or
Research Scientific management.
Management process.
 His principles are concerned with His principle and techniques are
2. Concern
management efficiency. concerned with workers efficiency.
He designed principles for top level He designed principles for lower
3. Level
of management. level of management.
Improving overall administration by For him increasing productivity
4. Focus observing certain principles was his through work simplification was
main focus. main focus.
He developed the personality of a
He developed the personality of
researcher and practioner and was
5. Personality scientist and was called as ‘father
called as ‘father of general
of scientific management
management.
Hid main contribution was to
He provided a basis on
produce a systematic theory of
6. Major accomplishment on production
management with the help of
contribution line with the help of scientific
fourteen principles of general
techniques and management.
management.
He gave due emphasis to human
He ignored the human element and
7. Human elements by suggesting principles
emphasized more on increasing
element like equality, initiative, fair
productivity.
renumeration etc.
He was rigid in his approach and
8. Rigidity and
His principles were flexible. he felt that there should be no
flexibility
deviation from fixed standards.
His principles are applicable to His principles are applicable to
9. business as well as non-business production and manufacturing i.e.
Applicability organizations i.e. are applicable are applicable to specific
universally. situations.
He did not follow this principle
10. Unity of He strictly follow this principles i.e.
instead he insisted on minimum
command one boss for one employee.
eight bosses.

8. Mental Revolution: It involves a complete change in mental outlook and attitude of

workers and management towards one another from competition to cooperation. The
management should create pleasant working conditions & workers should work with
devotion and loyalty. Instead of fighting over distribution of profits, they must focus
attention on increasing it
 CHAPTER – 3
BUSINESS ENVIRONMENT

Meaning of Business Environment:

Business environment refers to forces and institutions outside the firm with which its
members must deal to achieve the organisational purposes. Here

• Forces = economical, social, political, technological etc

• Institutions = suppliers, customers, competitors etc

It includes all those constraints and forces external to a business within which it
operates. therefore,

• The firm must be aware of these external forces and institutions and

• The firm must be nagged keeping in mind these forces and institutions so that the
organisational objectives are achieved. .

Features of Business Environment

1. Totality of external forces: Business environment is the sum total of all the
forces/factors external to a business firm.

2. Specific and general forces: Business environment includes both specific and
general forces. Specific forces include investors, competitors, customers etc. who
influence business firm directly while general forces include social, political, economic,
legal and technological conditions which affect a business firm indirectly.

3. Inter-relatedness: All the forces/factors of a business environment are closely

interrelated. For example, increased awareness of health care has raised the demand
for organic food and roasted snacks.

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

the change in technology, consumer’s fashion and tastes etc.

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

environmental changes and their impact with full accuracy.

6. Complexity: Business environment is complex which is easy to understand in parts

separately but it is difficult to understand in totality.

7. Relativity: Business environment is a relative concept whose impact differs from

country to country, region to region and firm to firm. For example, a shift of preference
from soft drinks to juices will be welcomed as an opportunity by juice making
companies while a threat to soft drink manufacturers.
IMPORTANCE OF BUSINESS ENVIRONMENT

1. Identification of opportunities to get first mover advantage: Understanding of

business environment helps an organization in identifying advantageous opportunities
and getting their benefits prior to competitors, thus reaping the benefits of being a
pioneer.

2. Identification of threats: Correct knowledge of business environment helps an

organization to identify those threats which may adversely affect its operations. For
example, Bajaj Auto made considerable improvements in its two wheelers when Honda
& other companies entered the auto industry.

3. Tapping useful resources: Business environment makes available various resources

such as capital, labour, machines, raw material etc. toa business firm. In order to know
the availability of resources and making them available on time at economical price,
knowledge of business environment is necessary.

4. Coping with Rapid changes: Continuous study/scanning of business environment

helps in knowing the changes which are taking place and thus they can be faced
effectively.

5. Assistance in planning and policy formulation: Understanding and analysis of

business environment helps an organization in planning &policy formulation. For
example, ITC Hotels planned new hotels in India after observing boom in tourism
sector.

Helps in Improving performance: Correct analysis and continuous monitoring of

business environment helps an organization in improving its performance.

Economic Environment in India

As a part of economic reforms, the Government of India announced New Economic

Policy in July 1991 for taking out the country out of economic difficulty and speeding
up the development of the country.

Main features of NEP, 1991 are as follows:

1. Only six industries were kept under licensing scheme.

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

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

4. Foreign capital/investment policy was liberalized and in many sectors100% direct

foreign investment was allowed.

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

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

7. Various benefits were offered to small scale industries.

The three main strategies adopted for the above may be defined as follows:
1. Globalisation:
• Integrating the economy of a country with the economies of other countries to
facilitate freer flow of trade, capital, persons and technology across borders. It leads to
the emergence of a cohesive global economy.
• Till 1991, the Government of India had followed a policy of strictly regulating imports
in value and volume terms. These regulations were with respect to (a) licensing of
imports, (b) tariff restrictions and (c) quantitative restrictions.
• NEP ‘91 advocated rapid advancement in technology and directed trade liberalization
towards:

a. Import Liberalisation

b. Export promotion towards rationalization of the tariff structure and

c. Reforms w.r.t foreign exchange

2. Liberalisation:
= Liberalising the Indian business and industry from all unnecessary controls and
restrictions. That is relaxing rules and regulations which restrict the growth of the
private sector and allowing the private sector to take part in economic activities that
were earlier reserved for the government sector. The steps taken for this were:
a. Abolishing licensing b. Freedom in deciding the scale of operations c. Removal of
restrictions on movement of goods and services. d. Freedom in fixing prices.
e. Reduction in tax rates and unnecessary controls f. Simplifying procedures for import
and exports g. Making it easy to attract foreign capital.

3. Privatization:

• Refers to the reduction of the role of the public sector in the economy of a country.

• Transfer of ownership and control from the private to the public sector
(disinvestment) can be done by : a. Sale of all/some asses of the public sector
enterprises. b. Leasing of public enterprises to the private sector. c. Transfer of
management of the public enterprise to the private sector.
• To achieve privatization in India, the government redefined the role of the public
sector and -
a. Adopted a policy of planned disinvestment of the public sector

b. Refer the loss making and sick units to the Board of Industrial and Financial
Reconstruction (BIFR)

DIMENSIONS/COMPONENTS OF BUSINESS ENVIRONMENT

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

Rate of interest, inflation rate, change in the income of people, monetary policy, price
level etc. are some economic factors which could affect business firms. Economic
environment may offer opportunities to a firm or it may put constraints.

2. Social Environment: It includes various social forces such as customs, beliefs,

literacy rate, educational levels, lifestyle, values etc. Changes in social environment
affect an organization in the long run. Example: Now a days people are paying more
attention towards their health, as a result of which demand for mineral water, diet coke
etc. has increased while demand of tobacco, fatty food products has decreased.

3. Technological Environment: It provides new and advance ways/techniques of

production. A businessman must closely monitor the technological changes taking
place in the industry as it helps in facing competition and improving quality of the
product. For Example, Digital watches in place of traditional watches, artificial fabrics in
place of traditional cotton and silk fabrics, booking of railway tickets on internet etc.

4. Political Environment: Changes in political situation also affect business

organizations. Political stability builds confidence among business community while
political instability and bad law & order situation may bring uncertainty in business
activities. Ideology of the political party, attitude of government towards business, type
of government-single party or coalition government affects the business Example:
Bangalore and Hyderabad have become the most popular locations for IT due to
supportive political climate.

5. Legal Environment: It constitutes the laws and legislations passed by the

Government, administrative orders, court judgements, decisions of various
commissions and agencies. Businessmen have to act according to various legislations
and their knowledge is very necessary. Example: Advertisement of Alcoholic products
is prohibited and it is compulsory to give statutory warning on advertisement of
cigarettes.

MAJOR STEPS IN ECONOMIC FORMS

1. New Industrial Policy - Under this the industries have been freed to a large extend
from licences and other controls. Efforts have been made to encourage foreign
investment.

2. New Trade Policy - The Foreign trade has been freed from the unnecessary control.
The age old restrictions have been eliminated.
3. Fiscal Reforms. The greatest problem confronting the Indian Govt. is excessive
fiscal deficit.

(a) Fiscal Deficit - It means country is spending more than its income

(b) Gross Domestic Product (GDP) - It is the sum total of the financial value of all
goods & services produced in a year in a country.

4. Monetary Reform - It is a sort of control policy through which the central bank
controls the supply of money with a view to achieving objectives of general economic
policy.

5. Capital Market Reforms- The Govt. has taken the following steps for the
development of this market:

(1) SEBI has been established.

(2) The restriction in respect of interest on debentures has been lifted.

(3) Private Sector has been permitted to establish Mutual Fund.

6. Dismantling Price control - The govt. has taken steps to remove price control in
many products especially in fertilizers, iron and steel, petro products. Restrictions on
the import of these things have also been removed.

IMPACT OF GOVERNMENT POLICY CHANGESON BUSINESS AND INDUSTRY

1. Increasing Competition: De-licencing and entry of foreign firms Indian market is

increased the level of competition for Indian firms.

2. More Demanding Customers: Now customers are more aware and they keep
maximum information of the market as the result of which now market is
customer/buyer oriented, Now, products are produced keeping in mind the demands of
the customers.

3. Rapid Changing Technological Environment: Rapid Technological advancement has

changed/improved the production process as a result of which maximum production is
possible at minimum cost but it leads to tough challenges in front of small firms.

4. Necessity for Change- After New Industrial. Policy the market forces (demand &
supply) are changing at a very fast rate. Change in the various components of business
environment has made it necessary for the business firms to modify their policies &
operations from time to time.

5. Need for Developing Human Resources: The changing market conditions of today
requires people with higher competence and greater commitment, hence there is a
need for developing human resources which could increase their effectiveness and
efficiency.
6. Market Orientation: Earlier selling concept was famous in the market now its place
is taken by the marketing concept. Today firms produce those goods & services which
are required by the customers. Marketing research, educational advertising, after sales
services have become more significant.

7. Reduction in budgetary Support to Public Sector: The budgetary support given by

the government to the public sector is reducing thus the public sector has to survive
and grow by utilising their own resources efficiently.
 CHAPTER – 4
PLANNING

Meaning:

• Deciding in advance what to do& how to do it. It is one of the basic managerial
functions.

• It involves 2 aspects:
Setting of aims and objectives of the organization + Selecting and developing an
appropriate course of action to achieve these objectives.

• Koontz and O‘Donnell - ―Planning is deciding in advance what to do, how to do, when
to do, and who to do it. Planning bridges the gap from where we are to where we want
to go. It makes it possible for things to occur which would not otherwise happen.

• Involves setting of objectives & developing an appropriate course of action to achieve

these objectives

Importance of Planning

1. Planning provides directions: By stating in advance how the work is to be done

planning provides direction for action. If there was no planning, employees would be
working in different directions and the organization would not be able to achieve its
goals efficiently.

2. Planning reduces the risk of uncertainity: Planning is an activity which enables a

manager to look ahead, anticipate change, consider the impact of change and develop
appropriate responses.

3. Planning reduces wasteful activities: Planning serves as the basis of coordinating

the activities and efforts of different departments and individuals whereby useless and
redundant activities are mentioned.

4. Planning promotes innovative ideas: Planning is the first function of management.

Managers get the opportunity to develop new ideas and new ideas can take the shape
of concrete plans.

5. Planning facilities decision making: Under planning targets are laid down. The
manager has to evaluate each alternative and select the most viable option.

6. Planning establishes standards for controlling: Planning provides the standards

against which the actual performance can be measured and evaluated. Control is blind
without planning. Thus planning provides the basis for control.

Limitations of Planning
(A) Internal Limitations

1. Planning leads to rigidity: Planning discourages individual’s initiative &creativity. The

managers do not make changes according to changing business environment. They
stop taking or giving suggestions and new ideas. Thus detailed planning may create a
rigid framework in the organization.

2. Planning may not work in dynamic environment: Planning is based on anticipation

of future happenings and since future is uncertain and dynamic therefore, the future
anticipations are not always true.

3. Planning involves huge costs: When plans are drawn up, huge cost is involved in
their formulation.

4. Planning is time consuming: Sometimes plans to be drawn up take so much of time

that there is not much time left for their implementation.

5. Planning does not guarantee success: The success of an enterprise is possible only
when plans are properly drawn and implement. Sometimes managers depend on
previously tried successful plans, but it is not always true that a plan which has worked
before will work effectively again.

6. Planning reduces creativity: In planning, work is to be done as per pre-determined

plans. It is decided in advance what is to be done, how it is to be done and who is going
to do it. Moreover, planning is done by top management which leads to reduction of
creativity of other levels of management.

(B) External Limitations

They are those limitations of planning which arises due to external factors over which
an organization has no control.

1. Changes in Government policies way leads to failure of planning.

2. Natural calamities such as flood, earthquake etc. also adversely affect the success
of planning.

3. Changes in the strategies of competitors also leads to failure of planning many

times.

4. Regular technological changes may affect planning.

5. Changes in the Economic and Social Conditions also reduces the effectiveness of
planning.

Planning Process

1. Setting Objectives:
- Objectives specify what the organization wants to achieve.
- Objectives can be set for the entire org. & stated to each dept. within the org. very
clearly, to determine how all depts. would contribute towards overall objectives.
-Then these have to percolate down to all employees at all levels so that they
understand how their actions contribute to achieving objectives.
- E.g. Objective could be to achieve sales, expansion of business etc.

2. Developing Premises:
- Plans are made on the basis of some assumptions.
- These assumptions, which provide the basis for planning, are called premises.
- All managers involved in planning should be familiar w/ them, cuz plans are expected
to operate & reach their destination subject to these. They can be:
• Internal premises: Cost of products, capital, machinery, profitability etc.
• External premises: Changes in technology, population growth, competition, govt.
policies etc

3. Identifying Alternative Courses Of Action:

- After setting the objectives, managers make a list of alternatives through which the
org. can achieve its objectives as there can be many ways to achieve the objectives &
managers must know all of them.
- E.g. Sales could be increased through any of the following ways:
• By enhancing advertising expenditure
• Appointing salesmen for door-to-door sales
• By offering discounts
• By adding more product lines.

4. Evaluating Alternative Courses Of Action

- Positive & negative aspects of each &every proposal need to be evaluated to
determine their feasibility and consequences in the light of each objective to be
achieved.
- E.g. In financial plans, risk-return trade-off are imp. Riskier the investment, higher the
returns it is likely to give. To evaluate such proposals, detailed calc. of earnings, taxes,
earnings per share etc. should be done.

5. Selecting The Best Alternative

- Real point of decision-making→ Best plan has to be adopted and implemented.
- The ideal plan = most feasible, profitable and with least negative consequences.
- Most plans may not be subjected to mathematical analysis. In such cases, subjectivity
& manager‘s experience, judgment and intuition are important to select the most viable
alternative.
- Sometimes a combination of plans may be selected instead of one best course.

6. Implementing The Plan

- Concerned with putting the plan into action.
- For implementing the plans, managers start organizing & assembling resources for it.
- E.g. If there is a plan to ↑ production, then more labour, more machinery will be reqd.
This step would also involve organizing for more labour and purchase of machinery.
7. Follow Up Action
- This involves monitoring the plans and ensuring that activities are performed
according to the schedule.
- Whenever there are deviations from plans, immediate action has to be taken to bring
implementation according to the plan or make changes in the plan.

TYPES OF PLAN

Plan

A Plan is a specific action proposed to help the organization achieve its objectives. It is
a document that outlines how goals are going to be met. The importance of developing
plans is evident from the fact that there may be more than one means of reaching a
particular goal. So with the help of logical plans, objectives of an organization could be
achieved easily.

SINGLE USE PLAN

A Single use plan in a business refers to plan developed for a one-time project or event
that has one specific objective. It applies to activities that do not reoccur or repeat. It is
specifically designed to achieve a particular goal. Such plan is developed to meet the
needs of a unique situation. The length of a single use plan differs greatly depending on
the project in question, as a single event plan may only last one day while a single
project may last one week or months. For example, an outline for an advertising
campaign. After the campaign runs its course, the short term plan will lose its
relevance except as a guide for creating future plans.

Types of Single Use Plan

1. Programme: A programme is a single use plan containing detailed statements about

project outlining the objectives, policies, procedures, rules, tasks, physical and human
resources required to implement any course of action.

2. Budget: A budget is a statement of expected result expressed in numerical terms for

a definite period of time in the future.

STANDING PLANS

Standing plans are used over and over again because they focus on organizational
situations that occur repeatedly. They are usually made once and retain their value over
a period of years while undergoing revisions and updates. That is why they are also
called repeated use plans. For example, Businessman plans to establish a new
business Entrepreneur drafts business plan before opening the doors to their business,
and they can use their plan to guide their efforts for years into the future.

Types of Standing Plans

1. Objectives: Objectives are defined as ends for the achievement of which an

organization goes on working. They may be designed as the desired future position
that the management would like to reach. The first and foremost step of the planning
process is setting organizational objectives. Examples increasing sales by 10%, Getting
20% return on Investment etc. Objectives should be clear and achievable.

2. Strategy: Strategies refer to those plans which an organization prepares to face

various situations, threats and opportunities. When the managers of an organization
prepare a new strategy for the business it is called internal strategy and when some
strategies are prepared to respond to the strategies of the competitors, then such
strategies are called external strategies. Examples, selection of the medium of
advertisement, selection of the channel of distribution etc.

3. Policy: Policies refers to the general guidelines which brings uniformity in decision-
making for achievement of organizational objectives. They provide directions to the
managers of an organization. They are flexible as they may be changed as per
requirement. Example, selling goods on cash basis only, reserving some post for
women in the organization.

4. Procedure: Procedures are those plans which determine the sequential steps to
carry out some work/activity. They indicate which work is to be done in which
sequence/way. They help in the performance of work. Procedures are guides to action.
Example: Process adopted in the Selection of Employees.

5. Rule: Rules are specific statement that tell what is to be done and whatnot to be
done in a specified situation. They help in indicating which points are to be kept in mind
while performing task/work. Rules are rigid which ensure discipline in the organization.
Example : ‘No smoking in the office premises’. Violation of rules may invite penalty.

6. Method: Methods are standardized ways or manners in which a particular task has
to be performed. There may be many ways/method of completing a task but that
method/way must be selected by which work can be done early at the minimum
possible cost. Methods are flexible. Example, various methods of training are adopted
by an organization to train its employees like apprenticeship training, vestibule training
etc.

Basis of
Single use plans Standing Plans
Difference
A standing plans in a business refers to
A single use plans in a business
plans developed for using over and over
refers to plans developed for a
1. Meaning again because they focus on
one time project or event that
organizational situations that occur
has same objective.
repeatedly.
Single use plans is developed to
Standing plans however is developed for
carry out a course of action that
2. Objective activities that occur regularly over a
is not likely to be repeated in
period of time.
future time.
Standing plans generally encompass a
Single use plans generally
3. Scope wider scope involving more than one
encompass a narrow scope
department or business function.
 targeting a specific project or
event.
Single use plans are discarded Standing plans are relatively stable and
4. Stability when the situation, project or used over and over again with necessary
event is occur. modifications or updations.
Budget for Annual General Recruitment and selection procedure for
5. Example
Meeting of Shareholders. a particular post in a company.
 CHAPTER – 5
ORGANISING

Meaning of Organizing

•nce the objectives and plans are laid down, management has to identify and establish
productive relationships between various activities and resources for implementing
plans. In general words organising refers to arranging everything in orderly form and
making the most efficient use of resources. The aim of organizing is to enable people
to work together for a common purpose.

‘Organizing is the process of identifying and grouping the work to be performed,

defining and delegating responsibility and authority and establishing relationships for
the purpose of enabling people to work most effectively together in accomplishing
objectives.’

Steps Involved in the Process of Organizing

1. Identification & Division Of Work: -

The total work to be done should be divided into specific jobs as according to
predetermined plans. -
Job = a set of related tasks that can be performed by an individual. It should have
specific and definite tasks to be performed. As far as possible, it should define
expected results along with the job.
- Division of work → specialization of efforts and skills + avoids duplication of work.
- Management must ensure that all the activities required to achieve organizational
objectives are identified.

2. Departmentalization:
- Grouping similar and related jobs into larger units called departments, divisions or
sections and placing them under a department head. It facilitates specialization.
- The departments are linked together and are interdependent.
- Aims at achieving co-ordination and facilitate unity of action. Departmentation can be
done on the basis of:
•Functions: marketing, personnel, finance etc.
•Products: Textiles, chemical, power division etc.
•Territories: Western, northern, central, eastern etc.

3. Assignment Of Duties:
- Define the work of different job positions and allocate work accordingly.
- Once departments are formed, the dept is placed under the charge of an individual.
- Jobs are assigned to an individual best suited to perform it.
- Qualifications, experience, ability and aptitudes of people should be matched with
duties.
- E.g. activities of finance should be assigned to persons having qualifications and
experience in finance e.g. C.A‘s.
4. Establishing Reporting Relationships:
- Granting requisite authority to enable employees to perform the job satisfactorily.
- Superior subordinate relations between different people and job positions created, so
that everybody knows from whom he is to take orders and to whom he can issue
orders.
- Creates management hierarchy = a chain of command from the top manager to the
individual at the lowest level.
- This helps in coordination.

Importance of Organizing

1. Benefits of specialization: In organizing every individual is assigned apart of total

work and not the whole task. This division of work into smaller units and repetitive
performance leads to specialization. Thus organizing promotes specialization which in
turn leads to efficient & speedy performance of tasks.

2. Clarity in working relationship: It helps in creating well defined jobs and also
clarifying the limits of authority and responsibility of each job. The superior-subordinate
relationship is clearly defined in organizing.

3. Effective Administration: It provides a clear description of jobs and related duties

which helps to avoid confusion and duplication. Clarity in working relationships enables
proper execution of work which results ineffective administration.

4. Optimum utilization of resources: The proper assignment of jobs avoids

overlapping/duplication of work. This helps in preventing confusion and minimizing the
wastage of resources and efforts.

5. Adoption to Change: A properly designed organizational structure is flexible which

facilitates adjustment to changes in workload caused by change in external
environment related to technology, products, resources and markets.

6. Development of Personnel: Sound organization encourages initiative and relative

thinking on part of the employees. When managers delegate their authority, it reduces
their workload so they can focus on more important issues related to growth &
innovation. This also develops the subordinates’ ability and helps him to realize his full
potential.

7. Expansion and growth: It helps in growth & diversification of an enterprise by adding

more job positions, departments, products lines, new geographical territories etc.

Meaning of Organizational Structure

It seeks to establish relations among all the persons working in the organization. Under
the organizational structure, various posts are created to perform different activities for
the attainment of the objectives of the enterprise. Relations among persons working on
different posts are determined. The structure provides a basis or framework for
managers and other employers for performing their functions. The organization
structure can be defined as the frame work within which managerial and operating
tasks are performed.

Relation between Span of Management and Organization structure:

Span of management refers to the number of subordinates that can be effectively

managed by a superior. The Span of management to a large extent gives shape to the
organization structure. This determines the levels of management in the structure.
Arrow span of management results in tall structure whereas wider span of
management results in flat structure.

(A) Functional Structure: In functional structure activities are grouped and departments
are created on the basis of specific functions to be performed. For example, all the jobs
related to production are grouped under production department, sales departments etc.

Suitability

(1) Large organizations producing one line of product.

(2) Organizations which require high degree of functional specialization with diversified
activities.

Advantage

1. Specialization: Better decision of labour takes place which results in specialization

of functions and its consequent benefits.

2. Coordination is established: All the persons working within a departmental are

specialists of their respective jobs. It makes the co-ordination easier at departmental
level.

3. Helps in increasing managerial efficiency: Managers of one department are

performing same type of function again and again which makes them specialized and
improves their efficiency.

4. Minimizes cost: It leads to minimum duplication of effort which results in economies

of scale and thus lowers cost.

Disadvantages
1. Ignorance of organizational objectives: Each departmental head works according to
his own wishes. They always give more weight to their departmental objectives. Hence
overall organizational objectives suffer.

2. Difficulty in Inter-departmental Coordination: All departmental heads work as per

their own wishes which leads to coordination within the department easier but it makes
inter-departmental coordination difficult.

3. Hurdle in complete development – because each employee specializes only in a

small part of the whole job.

(B) DIVISIONAL ORGANIZATION STRUCTURE

Dividing the whole enterprise according to the major products to be manufactured (like
metal, plastic, cosmetics etc.) is known as divisional organization structure.

Suitability: This structure is suitable in organizations producing multi product or

different lines of products requiring product specialization. Also growing companies
which intend to add more lines of products in future adopt this structure.

Advantages

1. Quick decision-making: Divisional manager can take any decision regarding his
division independently which makes decisions quick and effective.

2. Divisional results can be assessed: Division results (profit/loss) can be assessed

easily. On this basis any unprofitable division can be closed.

3. Growth and Expansion: It facilitates growth and expansion as new divisions can be
added without disturbing existing departments.

Disadvantages

1. Conflicts among different divisions on allocation of resources.

2. Duplicity of Functions: Entire set of functions is required for all divisions. It gives rise
to duplicity of efforts among divisions & increases cost.

3. Selfish Attitude: Every division tries to display better performance and sometimes
even at the cost of other divisions. This shows their selfish attitude.

FORMAL ORGANISATION
- Refers to the org. structure that is designed by the management to accomplish
organizational objectives..

- It specifies clearly the boundaries of authority & responsibility and there is a

systematic coordination among the various activities to achieve organizational goals.

- Louis Allen – System of well defined jobs, each bearing a definite measure of
authority, responsibility & accountability. .

Features

1. It is deliberately created by the top management.

2. It is based on rules and procedures which are in written form.

3. It is impersonal i.e. does not takes into consideration emotional aspect.

4. It clearly defines the authority and responsibility of every individual.

5. It is created to achieve organizational objectives.

Advantages

1. Easier to fix responsibility since mutual relationships are clearly defined.

2. No overlapping of work – because things move according to a definite plan.

3. Unity of command through an established chain of command.

4. Easy to achieve objectives - because coordination and optimum use of human and
material resources.

5. Stability in the organization – because behavior of employees can be fairly predicted

since there are specific rules to guide them.

Disadvantages

1. The Work is based on rules which causes unnecessary delays.

2. Lack of initiative: The employees have to do what they are told to do and they have
no opportunity of thinking.

3. Limited in scope: It is difficult to understand all human relationships in an enterprise

as it places more emphasis on structure and work.

INFORMAL ORGANISATION

An informal organization is that organization which is not established deliberately but

comes into existence because of common interests, tastes and religious and
communal relations. The main purpose of this organization, structure is getting
psychological satisfaction. For example, employees with similar interest in sports,
films, religion etc. may form their own informal groups.

Features

1. It originates from within the formal organization as a result of personal interaction

among employees.

2. It has no written rules and procedures.

3. It does not have fixed lines of communication.

4. It is not deliberately created by the management.

5. It is personal means the feelings of individuals are kept in mind.

Advantages

1. Speed: Prescribed lines of communication are not followed which leads to faster
spread of information.

2. Fulfillment of social needs – enhances job satisfaction which gives them a sense of
belongingness in the organization.

3. Quick solution of the problems – because the subordinates can speak without
hesitation before the officers, it helps the officers to understand the problems of their
subordinates.

Disadvantages

1. It creates rumours: All the persons in an informal organization talk careless and
sometimes a wrong thing is conveyed to the other persons.

2. It resists change and lays stress on adopting the old techniques.

3. Priority to group interests: Pressurizes members to conform to group expectations.

Difference between Formal Informal Organisation

Basis Formal Organisation Informal Organisation

It refers to the structure of well It refers to the network of social
1. Meaning defined authority and relationships which develops
responsibility. automatically.
2. Nature Rigid and stable Flexible and unstable
Arises by virtues of positions in
3. Authority Arises out of personal qualities.
management.
4. Adherence to Violations of rules may lead to No such penalities and
rules penalities and punishments. punishments.
 Takes place through the scalar
5. Flow to Not through a planned route, it can
Communication take plane in any direction.
Chain.
To satisfy social and cultural
To achieve planned
6. Purpose needs and fulfill common
organizational objectives.
interests.
Emerges spontaneously as a result
Deliberately planned and
7. Formation/ origin of social interaction among
created by management.
employees.
Well defined structure of tasks No clear cut structure because of
8. Structure
and relationships. complex network of relationships.
Authority flows from top to Authority flows vertically as well as
9. Flow of Authority
bottom i.e. downwards. horizontally.
10.
Independent. Depends on formal structure.
Interdependence

Delegation of Authority

Meaning: It means the granting of authority to subordinates to operate within the

prescribed limits. The manager who delegates authority holds his subordinates
responsible for proper performance of the assigned tasks. To make sure that his
subordinates perform all the works effectively and efficiently in expected manner the
manager creates accountability.

Process/Elements of Delegation

1. Authority: The power of taking decisions in order to guide the activities of others.
Authority is that power which influences the conduct of others.

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

duty. When a superior issues orders, it becomes the responsibility of the subordinate to
carry it out.

3. Accountability: When a superior assigns some work to a subordinate, he is

answerable to his superior for its success or failure.

Principle of Absoluteness of Accountability: Authority can be delegated but

responsibility/accountability cannot be delegated by a manager. The authority granted
to a subordinate can be taken back and re-delegated to another person. The manager
cannot escape from the responsibility for any default or mistake on the part of his
subordinates. For example, If the chief executive asks marketing manager to achieve a
sales target of sale of 100 units/day. The marketing manager delegates this task to
deputy sales manager, who fails to achieve the target. Then marketing manager will be
answerable for the work performance of his subordinates. Thus, accountability is
always of the person who delegates authority.
Process of Delegation of Authority

Difference between Authority, Responsibility and Accountability

Basis Authority Responsibility Accountability

Accountability for the
1. •bligation to perform
Right to command outcome of the assigned
Meaning an assigned task.
task.
Arises from formal Arises from delegated
2. Origin Arises from responsibility.
position. authority.
Upward- from
Downward- from Upward- from subordinate
3. Flow subordinate to
superior to subordinate. to superior.
superior.
Can be withdrawn
4. Cannot be withdrawn Cannot be withdrawn once
anytime by giving
Withdrawl once created. created.
notice.

Importance of the Delegation of Authority

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

2. Employee development: Employees get more opportunities to utilize their talent

which allows them to develop those skills which will enable them to perform complex
tasks.

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

4. High Morale of subordinates: Because of delegation of authority to the subordinates

they get an opportunity to display their efficiency and capacity.

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

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

Decentralization

• Decentralisation of authority means dispersal of authority to take decisions

throughout the organization, upto the lower levels.

• It implies reservation of some authority with the top level management and
transferring rest of the authority to the lower levels of the organization. This empowers
lower levels to take decisions regarding problems faced by them without having to go
to the upper levels.

According to Allen,‘ Decentralisation refers to systematic efforts to delegate to the

lowest level, all authority except the one which can be exercised at central points.‟

Centralization = authority retained at top level and Decentralization = Systematic

delegation of authority at all levels and in all departments of a firm. Firm needs to
balance the two.

• In case of a decentralized firm, Top level retains authority for:

o Policies and decisions w.r.t the whole firm

o Overall control and coordination

• Middle and lower levels have authority to take decisions w.r.t tasks allocated to them

Centralization and Decentralization: represents the pattern of authority among

managers at different levels. Centralization of authority means concentration of power
of decision making in a few hands. In such an organization very little authority is
delegated to managers at middle and lower levels. No organization can be completely
centralized or decentralized. They exist together and there is a need for a balance
between the two. As the organization grows in size, there is tendency to move towards
decentralization. Thus, every organization is characterized by both.

Importance of Decentralization

1. Develops initiative amongst subordinates: It helps to promote confidence because

the subordinates are given freedom to take their own decisions.

2. Quick and better decisions: The burden of managerial decisions does not lie in the
hands of few individuals but gets divided among various persons which helps them to
take better and quick decisions.

3. Relieves the top executives from excess workload: The daily managerial works are
assigned to the subordinates which leaves enough time with the superiors which they
can utilize in developing new strategies.

4. Managerial Development: It means giving authority to the subordinates up to the

lower level to take decisions regarding their work. In this way the opportunity to take
decisions helps in the development of the organization.

5. Better Control: It makes it possible to evaluate performance at each level which

results in complete control over all the activities.

Difference between – Delegation and Decentralization

Basis Delegation Decentralization

1. Nature It is a compulsory act. It is an optional policy.
2. Freedom Less freedom to take decisions due More freedom of action due to less
of action to more control by the superiors. control by the top management.
It is a process of sharing tasks and It is the result of policy decisions
3. Status
authority. taken by top management.
Narrow- as it is confined to a Wide- It includes extension of
4. Scope superior and his immediate and delegation to all the levels of
subordinate. management.
To increase the role and the
5. Purpose To reduce the burden of manager. autonomy of lower level of
management.
 CHAPTER – 6
STAFFING

Meaning

Staffing means putting people to jobs. It begins with human resource planning and
includes different other functions like recruitment, selection, training, development,
promotion and performance appraisal of work force.

Need and Importance of Staffing

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

competent personnel for various jobs.

2. High Performance: Proper staffing ensures higher performance by putting right

person on the right job.

3. Continuous growth: Proper staffing ensures continuous survival and growth of the
enterprise.

4. Optimum utilization of human resources: It prevents under-utilization of personnel

and high labour cost.

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

Staffing As a Part ofHuman Resource Management (HRM)

• Staffing
• Function which all managers have to perform as all managers directly deal with
people
• Staffing refers to this kind of role played by all managers in small organizations.
• As organizations grow and number of people employed increases, a separate
department called the human resource department is formed which consists of
specialists who are experts in dealing with people.
• In fact early definitions of staffing focused narrowly on only hiring people for vacant
positions. But today staffing is a part of HRM which encompasses not only staffing but
also a number of other specialized services such as job evaluation, management of
labour relations.

• Human Resource Management

• Involves procuring, developing, maintaining and appraising a competent and satisfied
workforce to achieve the goals of the organization efficiently and effectively.
• Its purpose is to enable every human being working in the organization to make his
best possiblecontribution..
PROCESS OF STAFFING

1. Estimating Manpower Requirement: It involves the following:

(a) Making inventory of current human resources in terms of qualification, training &
skills.
(b) Assessing future human resource needs of all departments.
(c) Developing a programme to provide the human resources. Job Analysis is an
intensive way of finding details related to all jobs.

2.Recruitment: It refers to identification of the sources of manpower availability and

making efforts to secure applicants for the various job positions in an organization.

3. Selection: It is the process of choosing and appointing the right candidates for
various jobs in an organization through various exams, tests &interviews.

4. Placement and Orientation: When a new employee reports for duty, he is to be

placed on the job for which he is best suited. Placement is very important process as it
can ensure “Right person for right job”. Orientation/Induction is concerned with the
process of introducing a new employee to the organization. The new employees are
familiarized with their units, supervisors and fellow employees. They are also to be
informed about working hours, procedure for availing leave, medical facilities, history
and geography of organization and rules/regulations relating to their wages etc.

5. Training and Development: Systematic training helps in increasing the skills and
knowledge of employees in doing their jobs through various methods.
Development involves growth of an employee in all respects. It is the process by which
the employees acquire skills and competence to do their present jobs and increase
their capabilities for higher jobs in future.

6. Performance Appraisal: It is concerned with rating or evaluating the performance of

employees. Transfers and promotions of the staff are based on performance appraisal.

RECRUITMENT

(A) Recruitment: Recruitment may be defined as the process of searching for

prospective employees and stimulating them to apply for jobs in the organization.

Sources of Recruitment
(A) Internal Sources
(B) External Sources
(A) Internal Sources of Recruitment
Internal sources refer to inviting candidates from within the organization. Following are
important sources of internal recruitment:

1. Transfers: It involves the shifting of an employee from one job to another, from one
department to another or from one shift to another shift.

2. Promotions: It refers to shifting an employee to a higher position carrying higher

responsibilities, prestige, facilities and pay.

3. Lay-Off: To recall the temporary worker for work is called Lay-Off, who were
temporarily separated from organization due to lack of work.

Advantages of Internal Sources Recruitment:

(1) Employees are motivated to improve their performance.
(2) Internal recruitment also simplifies the process of selection & placement.
(3) No wastage of time on the employee training and development.
(4) Filling of jobs internally is cheaper.

Limitation of Internal Sources

(1) The scope for induction of fresh talent is reduced.
(2) The employee may become lethargic.
(3) The spirit of competition among the employees may be hampered.
(4) Frequent transfers of employees may often reduce the productivity of the
organization.

External Sources of Recruitment

When the candidates from outside the organization are invited to fill the vacant job
position then it is known as external recruitment. The common methods of external
sources of recruitments are:

1. Direct Recruitment: Under the direct recruitment, a notice is placed on the notice
board of the enterprise specifying the details of the jobs available.

2. Casual callers: Many reputed business organizations keep a data base of unsolicited
applicants in their office. This list can be used for Recruitment.

3. Advertisement: Advertisement in media is generally used when a wider choice is

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

4. Employment Exchange: Employment exchange is regarded as a good source of

recruitment for unskilled and skilled operative jobs.

5. Campus recruitment and labour contractors can be used for the purpose.

Merits of External Sources

1. Qualified Personnel: By using external source of recruitment the management can
attract qualified and trained people to apply for the vacant jobs in the organization.

2. Wider Choice: The management has a wider choice in selecting the people for
employment.

3. Fresh Talent: It provides wider choice and brings new blood in the organization.

4. Competitive Spirit: If a company taps external sources, the staff will have to
compete with the outsiders.

Limitations of External Sources of Recruitment

1. Dissatisfaction among existing employees: Recruitment from outside may cause

dissatisfaction among the employees. They may feel that their chances of promotion
are reduced.

2. Costly process: A lot of money has to be spent on advertisement therefore this is

costly process.

3. Lengthy Process: It takes more time than internal sources of recruitment.

Selection
Selection is the process of choosing from among the candidates from within the
organization or from outside, the most suitable person for the current position or for
the future position.

PROCESS OF SELECTION

The successive stages in selection process are:

1. Preliminary Screening: After applications have been received, they are properly
checked as regarding qualification etc. by screening committee. A list of candidates to
be called for employment tests made and unsuitable candidates are rejected
altogether.

2. Selection Tests: These tests include:

(a) Psychological tests which are based on assumption that human behaviour at work
can be predicted by giving various tests like aptitude, personality test etc.

(b) Employment test for judging the applicant’s suitability for the job.

3. Employment Interviews: The main purpose of interview is:

(a) to find out suitability of the candidates.

(b) to seek more information about the candidate.

(c) to give the candidate an accurate picture of job with details of terms and conditions.

4. Reference Checks: Prior to final selection, the prospective employer makes an

investigation of the references supplied by the applicant. He undertakes a thorough
search into candidates family background, past employment, education, police records
etc.

5. Selection Decisions: A list of candidate who clear the employment tests, interviews
and reference checks is prepared and then the selected candidates are listed in order
of merit.

6. Medical/Physical Examination: A qualified medical expert appointed by organization

should certify whether the candidate is physically fit to the requirements of a specific
job. A proper physical exam will ensure higher standard of health & physical fitness of
employees thereby reducing absenteeism.

7. Job Offer: After a candidate has cleared all hurdles in the selection procedure, he is
formally appointed by issuing him an Appointment Letter. The broad terms and
conditions, pay scale are integral part of Appointment Letter.

8. Contract of Employment: After getting the job offer, the candidate has to give his
acceptance. After acceptance, both employer and employee will sign a contract of
employment which contains terms & conditions, pay scale, leave rules, hours of work,
mode of termination of employment etc.
Nishant wants to set a unit in rural area where people have very few job opportunities
and labour is available at a low cost.

For this he wants four different heads for Sales, Accounts, Purchase and Production.
He gives an advertisement and shortlists some candidates after conducting selection
tests.

1. Identify and state the next three steps for choosing best candidates.

2. Also identify two values which Nishant wants to communicate.

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

Benefits to the firm:

1. Avoids wastage of time, effort and money Benefits to the employee:
involved in the hit and trial method.
1. Improved skills an knowledge so
2. ↑ productivity(quality + quantity)thereby
better career opportunities
leading to ↑ profits
3. Equips future managers(to take over in
emergencies) 2. Better performance→ higher
4. ↑ employee morale,↓ absenteeism and earnings
turnover
5. response to fast changing environment 3. Less accidents
6. ↓ supervision, standardization of procedure
and safety of operations 4. ↑ satisfaction and morale of
employees

Training Methods

(A) On the Job Method: It refers to the methods that are applied at the work place,
where the employee is actually working. It means learning while doing.
The following are the methods of On-the job training:

1. Apprenticeship Training: Under this, the trainee is placed under supervision of an

experienced person (master worker) who imparts him necessary skills and regulates
his performance. The trainee is given stipend while learning so that he/she can enjoy
“earn while you learn” scheme.

2. Internship Training: Under this method an educational institute enters into

agreement with industrial enterprises for providing practical knowledge to its students
by sending them to business organizations for gaining practical experience.

3. Induction training is a type of training given to help a new employee in settling down
quickly into the job by becoming familiar with the people, the surroundings, the job and
the business. The duration of such type of training may be from a few hours to a few
days. The induction provides a good opportunity to socialize and brief the newcomer
with the company’s overall strategy, performance standards etc. If carefully done, it
saves time and cost (in terms of effectiveness or efficiency etc.)

Training and Development

Training is concerned with imparting technical knowledge in doing a particular job. But
development is a wider process concerned with growth of an individual in all respects.
However, both are related processes; training helps the employees in learning job skills
whereas development shapes attitude of the employees.

Comparison of Training and Development

Basis Training Development

1. It means imparting skills and It means growth of an employee in
Definition knowledge doing a particular job all respects.
2. It is concerned with maintaining and It seeks to develop competence and
Purpose improving current job performance. skills for future performance.
3. It is imparted through on the job It is imparted through off the job
Methods method. method.
4. The boss takes the initiative for The individual takes the initiative for
Initiative imparting training to his subordinates. self growth and development.
5. Training programmes are organized for Development takes place over a
Duration short terms. large period of time.
 CHAPTER – 7
DIRECTING

Meaning:
Directing means giving instructions, guiding, counseling, motivating and leading the
staff in an organization in doing work to achieve Organizational goals. Directing is a key
managerial function to be performed by the manager along with planning, organizing,
staffing and controlling. From top executive to supervisor performs the function of
directing and it takes place accordingly wherever superior – subordinate relations
exist.Directing is a continuous process initiated at top level and flows to the bottom
through organizational hierarchy.

Direction has got following characteristics:

1. Pervasive Function- Directing is required at all levels of organization. Every manager

provides guidance and inspiration to his subordinates.
2. Continuous Activity- Direction is a continuous activity as it continuous throughout the
life of organization.
3. Human Factor- Directing function is related to subordinates and therefore it is related
to human factor. Since human factor is complex and behaviour is unpredictable,
direction function becomes important.
4. Creative Activity- Direction function helps in converting plans into performance.
Without this function, people become inactive and physical resources are meaningless.
5. Executive Function- Direction function is carried out by all managers and executives
at all levels throughout the working of an enterprise, a subordinate receives instructions
from his superior only.
6. Delegate Function- Direction is supposed to be a function dealing with human
beings. Human behaviour is unpredictable by nature and conditioning the people’s
behaviour towards the goals of the enterprise is what the executive does in this
function. Therefore, it is termed as having delicacy in it to tackle human behaviour.

Importance

1. Initiates Action: It helps to initiate action by the people in the organization towards
attainment of desired objectives. The employees start working only when they get
instructions and directions from their superiors. It is the directing function which starts
actual work to convert plans into results.
2. Integrates Employee’s Efforts: All the activities of the organization are interrelated so
it is necessary to coordinate all the activities. It integrates the activities of subordinates
by supervision, guidance and counselling.
3. Means of motivation: It motivates the subordinates to work efficiently and to
contribute their maximum efforts towards the achievement of organizational goals.
4. Facilitates change: Employees often resist changes due to fear of adverse effects on
their employment and promotion. Directing facilitates adjustment in the organization to
cope with changes in the environment.
5. Stability and balance in the organization: Managers while performing directing
function instruct, guide, supervise and inspire their subordinates in a manner that they
are able to strike a balance between individual and organizational interests.

Principles of Effective Direction:

Effective direction leads to greater contribution of subordinates to organization goals.

The directing function of management can be effective only when certain well accepted
principles are followed.

The following are the basic principles of effective direction:

1. Harmony of Objectives:

It is an essential function of management to make the people realize the objectives of

the group and direct their efforts towards the achievement of their objectives. The
interest of the group must always prevail over individual interest. The principle implies
harmony of personal interest and common interest..

2. Unity of Command:

This principle states that one person should receive orders from only one superior, in
other words, one person should be accountable to only one boss. If one person is under
more than one boss then there can be contradictory orders and the subordinate fails to
understand whose order to be followed. In the absence of unity of command, the
authority is undermined, discipline weakened, loyalty divided and confusion and delays
are caused.

3. Unity of Direction:

To have effective direction, there should be one head and one plan for a group of
activities having the same objectives. In other words, each group of activities having
the same objectives must have one plan of action and must be under the control of one
supervisor.

4. Direct Supervision:

The directing function of management becomes more effective if the superior

maintains direct personal contact with his subordinates. Direct supervision infuses a
sense of participation among subordinates that encourages them to put in their best to
achieve the organizational goals and develop an effective system of feed-back of
information.

5. Participative or Democratic Management:

The function of directing becomes more effective if participative or democratic style of

management is followed. According to this principle, the superior must act according
to the mutual consent and the decisions reached after consulting the subordinates. It
provides necessary motivation to the workers by ensuring their participation and
acceptance of work methods.
6. Effective Communication:

To have effective direction, it is very essential to have an effective communication

system which provides for free flow of ideas, information, suggestions, complaints and
grievances.

7. Follow-up:

In order to make direction effective, a manager has to continuously direct, guide,

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

(i) Supervision- implies overseeing the work of subordinates by their superiors. It is the
act of watching & directing work & workers.

(ii) Motivation- means inspiring, stimulating or encouraging the sub-ordinates with zeal
to work. Positive, negative, monetary, non-monetary incentives may be used for this
purpose.

(iii) Leadership- may be defined as a process by which manager guides and influences
the work of subordinates in desired direction.

(iv) Communications- is the process of passing information, experience, opinion etc

from one person to another. It is a bridge of understanding.

1. Supervision, as an element of directing:

 process of guiding the efforts of employees and other resources to accomplish

desired objectives.

 Overseeing people at work

 Involves instructing, observing, monitoring and guiding employees.

Carried out at all levels but more important at the lower levels therefore the term
'Supervisor'is used at the operativeslevel of management

I. Importance of Supervision/Role of a Supervisor/Functions

1. Link between workers and management because the supervisor explains
management policies to workers and brings workers problems to the notice of the
management.

2. Ensures issuing Instructions: To make sure that the instructions are communicated
to each and every employee.

3. Facilities Control: Control means match between actual and planned output. It
ensures checking on the methods in use and progress of work according to planned
schedule.

4. Maintenance of discipline: The strict supervision and guidance of supervisor

encourages the employees and workers to be more disciplined in the activities.

Under the guidance of superior the workers follow a fixed or strict timetable and
execute the plans in right directions.

5. Feedback: The supervisors are directly dealing with the subordinates. As a result,
feedback in the form of suggestions, grievances keep coming to the management. It
improves quality management decisions and revision of plans & policies.

6. Improved Motivation: A supervisor with good leadership qualities can build up high
morale among workers. The relationship with the supervisor is a very good incentive to
improve the motivation level of the employees while guiding the employees, the
supervisors encourage the subordinates to perform to their best capacities.

7. Optimum utilization of resources: All the activities are under the observation of
supervisor so less wastage and optimum utilization of resources is possible.

II. Motivation

Meaning:

i. Incitement or inducement to act/move.

ii. Process of stimulating people to action to accomplish desired goals.

• Three key terms = motive, motivation, motivators

 Motive :inner state that energizes, activates and directs behaviour towards goals.

Arises out of unsatisfied needs = causes restlessness.

 Motivation : Process of stimulating people to action + Depend on satisfying needs of

people.

 Motivators: Technique used to motivate people.Egs. = pay, bonus, promotion,

recognition etc.
Features

1. Psychological Phenomenon: Motivation is an internal feeling which means it cannot

be forced on employees. The internal feeling such as need, desire, aspiration etc.
influence human behaviour to behave in a particular manner.

2. Goal Directed Behaviour: It induces people to behave in such a manner so that they
can achieve their goals. A motivated person works towards the achievement of desired
goals.

3. Motivation can be either positive or Negative: Positive motivation means inspiring

people to work better and appreciating a work that is well done e.g., pay increase
promotion recognition. Negative motivation means forcing people to work by
threatening or punishing them. e.g., issue of memo, demotion, stopping increments etc.

4.Complex Process: It is a complex and difficult process. Individuals differ in their

needs and wants and moreover human needs change from time to time.

5. Continuous Process: Human needs are unlimited and so they keep on changing
continuously, satisfaction of one need gives rise to another. As soon as one need is
satisfied another need arises. So managers have to continuously perform the function
of motivation.

Maslow‟s Hierarchy Of Needs:

Maslow‘s need hierarchy is considered to be fundamental to the understanding of
motivation and plays an important role in motivation.

• People have a wide range of needs like physiological needs, social needs, safety
needs, esteem needs and self actualisation needs which motivate them to work.

• The manager must understand the needs and wants of people in order to motivate
them and improve their performance levels.

• For the satisfaction of these needs, managers must offer different incentives
(monetary and non-monetary).

Management Can Satisfy This

Examples Of Need
NEED Need By (Organizational
(Individual Example)
Example)
Most basic in the hierarchy Offer monetary incentives e.g.
1. Basic Physiological and corresponds to Good salary/wages and
Needs primary needs. Hunger, comfortable working
thirst, shelter, sleep. conditions
Security and protection
from physical and Offer job security, pension,
2. Safety/Security Needs
emotional harm, stability insurance etc
of Income etc.
 The firm can encourage team
building and permit the
Refer to affection, sense of
3. Affiliation/Belonging workers to opportunity to
belongingness,
Needs interact socially and so
acceptance and friendship
develop cordial relations with
colleagues
Recognize good performance,
Include factors such as
provide opportunity for
self-respect, autonomy
4. Esteem Needs employees to feel a sense of
status, recognition and
accomplishment, provide
attention
important job titles etc
The drive to become what
Offer the freedom to take
one is capable of
decisions, providing them with
becoming. These needs
5. Self Actualisation Needs opportunity to learn things,
include growth, self-
encouraging creativity, leading
fulfillment and
to achievement of goals etc.
achievement of goals.

Financial and Non-Financial Incentives: Incentive means all measures which are used
to motivate people to improve performance.

Financial incentives = directly in Non-financial incentives= main

money form or measurable in emphasis is to provide psychological
monetary terms. and emotional satisfaction. Not
measurable in monetary terms. 1.
1. Pay and allowance Status

2. Productivity linked incentive 2. Organizational climate

schemes
3. Career advancement opportunities
3. Bonus
4. Job enrichment
4. Profit sharing
5. Employee recognition programmes
5. Co-partnership/Stock options
6. Job security
6. Retirement benefits
7. Employee participation 8.
7. Perquisites Employee empowerment

III. Leadership

Leadership is the activity of influencing people to strive willingly for mutual objectives.
Managers at all levels are expected to be the leaders of their subordinates. Leadership
indicates the ability of an individual to maintain good interpersonal relations with
followers and motivate them to contribute for achieving organizational objectives. It is
a process of interaction between the leader and his followers. It helps in persuading
employees to work cooperatively and enthusiastically towards common goals.
Importance of Leadership:

1. Makes people contribute positively:

• Influences behaviour and makes people contribute positively and produce good
results.

2. Creates congenial work environment:

• Maintains personal relations, helps followers fulfil their needs+ provides confidence,
support and encouragement.

3. Introduces change:

• Persuades, clarifies and inspires people to accept changes.

• So overcomes resistance to change with minimum discontent..

4. Handles conflict

• Does not allow adverse effects .

• Allows followers to express their feelings and disagreements and gives suitable
clarifications.

5. Trains subordinates:

• Builds up successors and helps in smooth succession process.

Qualities Of A Good Leader:

1. Physical features – appearance, personality, heath and endurance inspires followers

to work with the same tempo.
2. Knowledge – knowledge and competence to instruct and influence subordinates.
3. Integrity – the leader should be a role model regarding ethics, values, integrity and
honesty.
4. Initiative – grab opportunities instead of waiting for them.
5. Communication – capacity to explain his ideas and also be a good listener, teacher,
counselor and persuader.
6. Motivation skills – understand followers needs and devise suitable means to satisfy
them. 7. Self-confidence – so that he can provide confidence to followers
8. Decisiveness – should be firm and not change opinions frequently
9. Social skills – sociable, friendly and maintain good relations with followers.

Styles of Leadership

Leadership styles refer to a leader’s behaviour. Behavioural pattern which the leader
reflects in his role as a leader is often described as the style of leadership.
A Leadership style is the result of the leader’s philosophy, personality, experience and
value system. It also depends upon the type of followers and the atmosphere revealing
in the organization.

Different types of leadership style are:

1. Autocratic leadership
2. Participative leadership/Democratic
3. Free rein leadership/Laissez Faire

A leader may use all styles over a period of time but one style tends to predominate as
his normal way of using power.

l. Autocratic or Authoritarian Leader

An autocratic leader gives orders and insists that they are obeyed. He determines the
policies for the group without consulting them. He does not give information about
future plans but simply tells the group what immediate steps they must take. Under this
style, all decision making power is centralized in the leader. He does not give the
subordinates any freedom to influence his decisions.

It is like “bossing people around.” This style should normally be used on rare occasion.

It is best applied to situations where there is little time for group decision making or
where the leader is the most knowledgeable member of the group.

2. Democratic or Participative Leader

A democratic leader gives order only after consulting the group and works out the
policies with the acceptance of the group.

He never asks people to do things without working out the long term plans on which
they are working. He favours decision making by the group as shown in the diagram.

This improves the attitude of the employees towards their jobs and the organization
thereby increasing their morale. Using this style is of mutual benefit - it allows them
(subordinates) to become part of the team and helps leaders (seniors) to make better
decisions.
When should Participative/democratic leadership be applied?

It works best in situations where group members are skilled and eager to share their
knowledge.

It is also important to have plenty of time to allow people to contribute, develop a plan
and then vote on the best course of action.

This style should NOT he used when:

In situations where roles are unclear or time is of the essence, democratic leadership
can lead to communication failures and incomplete projects.

3. Laissez Faire or Free Rein Leader

A free rein leader gives complete freedom to the subordinates. Such a leader avoids
use of power. He depends largely upon the group to establish its own goals and work
out its own problems. Group members work themselves as per their own choice and
competence. The leader exists as a contact man with the outsiders to bring
information and the resources which the group requires for accomplishing the job.
Note: This is also known as laissez faire which means no interference in the affairs of
others. [French laissez means to let/allow fair means to do].

Communication

It is transfer of information from the sender to the receiver with the information being
understood by the receiver. Communication plays key role in the success of a manager.
Directing abilities of manager mainly depend upon his communication skills. That is
why organization always emphasizes on improving communication skills of managers
as well as employees. Communication is important for the directing function because
all other elements of directing become possible only when there is adequate
communication.

Elements of Communication Process

1. Sender: Who conveys his thoughts or ideas.

2. Message: Ideas, feelings, suggestions, order etc.

3. Encoding: Converting the message into communication symbols such as

words/pictures etc.

4. Media: Path/Channel through which encoded message is transmitted to receiver e.g.,

face to face, phone call, internet etc.

5. Decoding: Converting encoded symbols of the sender.

6. Receiver: Who receives communication of the sender.

7. Feedback: All those actions of receiver indicating that he has received and
understood the message of the sender.

8. Noise: Some obstruction or hindrance to communication like poor telephone

connection, inattentive receiver.

Importance of Communication

1. Facilitates Coordination: between interrelated departments and sections thus

creating a unity of purpose and action.

2. Provides data necessary for decision makings: When information is effectively and
efficiently communicated to management.

3. Increases managerial efficiency: Every individual in the organization is assigned a job

or task. The employee must know clearly who has to report to whom, what part of total
job they are expected to perform and what are their decisions. The clarity comes only
with smooth flow of communication which keeps the organization at work with
efficiency.

4. Promotes cooperation and Industrial Peace: The two-way communication promotes

cooperation and mutual understanding between the management and workers and
brings peace in the organization.

5. Establishes effective leadership: Effective communication helps to influence

subordinates. while influencing, a leader should possess good communication skills.

If there is two-way information flow between the superior and subordinates then there
will be positive reaction of employees.

Communication taking place within an organization may be broadly classified into two
categories.

Formal communication Informal Communication:

1.Official communication following the chain of 1.Takes place outside the official
command channels –

2.Is concerned with official matters 2. May be work related or other

matters –
3. May be written/oral but generally recorded and
filed. 3.Arises out of social interactions –

4.Directions = 4.Grapevine:

• Vertical: • Origin and direction of flow is

not easily located
1. Downward-superior to subordinates – • Cuts across scalar chain
sending notices, passing guidelines, asking • Spread of rumors is possible
them to complete assigned work. as it is not easy to fix
2. upward- subordinates to superior – responsibilities -
application for leave, submission of reports.
5.Types =
• Horizontal- between departments – about
schedule of product delivery, product • single strand,
design etc. • gossip,
• probability network,
5.Popular communication networks are: • clusters

• Single chain, Wheel, Circular, Free flow and

Inverted V

Difference between Formal and Informal Communication

Basis Formal Communication Informal communication

Between individuals and groups
1. Meaning Follows the official chain of command.
are not officially recognized.
2. Channel Through a definite path. No definite path.
Slow: because all information has to
Very fast-Cuts across all the
3. Speed pass through an established scalar
official channels.
chain.
Flexible and varies from
4. Nature More rigid and cannot be modified.
individual to individual.
5. It is mostly expressed in the written
It mostly tends to be oral.
Expression form.

Barriers to Effective Communication

Semantic Barriers: Concerned with problems and obstructions in the process of

encoding or decoding of message into words or impressions. Semantic barriers are as
follows:
1. Badly expressed message: Sometimes intended meaning may not be conveyed.
2. Words with different meanings confuses the receiver.
3. Faulty translations may transfer wrong messages.
4. Unclarified assumption: Different interpretations may result in confusion.
5. Technical Jargon: Technical words may not be understood by the workers.

Psychological/Emotional barriers

1. Premature evaluation- judgement before listening leads to misunderstanding.

2. Lack of attention/poor listening may disappoint the employees.
3. Loss by transmission and poor retention: When oral communication passes through
various levels it destroys the structure of the message or leads to transmission of
inaccurate message.
4. Distrust: If the parties do not believe each other. They cannot understand each
other’s message in its original sense.

Organizational Barriers

Factors related to organization structure:

1. If organizational policy does not support free flow of information it creates problem.
2. Rules and regulations: Rigid rules and regulations may lead to red tapism and delay
of action.
3. Status conscious managers may not allow subordinates to express their feelings
freely.
4. Complexity in organization structure results in delay and distortion.

Personal Barriers: of superiors and subordinates.

1. Fear of challenge to authority may withhold or suppress a particular communication.

2. Lack of confidence of superior in his subordinates.
3. Unwillingness to communicate. e.g., fear of punishment/demotion.
4. Lack of proper incentives stops the subordinates to offer useful suggestions.

Improving Communication Effectiveness

1. Clarify the ideas before communication.

2. Communicate according to the needs of receiver.
3. Consult others before communicating.
4. Be aware of language, tone and content of message.
5. Ensure proper feedback. Feedback provides opportunity for suggestions and
criticism.
6. Follow up communication helps to remove hurdles, misunderstanding of information
given by managers to subordination.
7. Be a good listener.
 CHAPTER – 8
CONTROLLING

Meaning & Definition: Controlling involves comparison of actual performance with the
planned performance. If there is any difference or deviation, then finding the reasons
for such difference and taking corrective measures or action to stop those reasons so
that they don‘t re-occur in future and that organizational objectives are fulfilled
efficiently.

Importance of Controlling

1. Controlling helps in achieving organizational goals: The controlling function

measures progress towards the organizational goals and brings to light/indicates
corrective action.

2. For Evaluating/Judging accuracy of standards: A good control system enables

management to verify whether the standards set are accurate or not by careful check
on the changes taking place in the organizational environment.

3. Making efficient use of resources: By the process of control, a manager seeks to

reduce wastage of resources.

4. Improves employees motivation: A good control system ensures that employees

know well in advance what they are expected to do & also the standard of performance.
It thus motivates & helps them to give better performance.

5. Facilitating Coordination in action: In controlling each department and employee is

governed by predetermined standards which are well coordinated with one another.
Control provides unity of direction.

6. Ensuring order and discipline: Controlling creates an atmosphere of order and

discipline in the organization by keeping a close check on the activities of its
employees.

Nature of Controlling/Features of Controlling

1. Goal oriented: Controlling is directed towards accomplishment of organizational

goals in the best possible manner.

2. Pervasive: Controlling is an essential function of every manager and exercised at all

levels of management.

3. Continuous: It is not an activity to be pursued in the end only; it has to be done on a

continous basis.
4. Controlling is looking back: Controlling involves measurement of actual performance
and its comparison with the desired performance. It is the process of checking and
verification.

5. Controlling is forward looking: It is related to future because it seeks to improve

future results on the basis of experience gained in the past.

6. Depends on planning: It pre supposes existence of planning because without

planning no control is possible.

7. Action oriented*: Control has no meaning if no corrective action is taken; So timely

action should be taken to prevent deviations.

8. Primary Function of Management* – controlling is performed at all levels and in all

types of organizations.

9. Brings back management cycle back to planning:* Control should not be viewed as
the last function. In fact it links back to planning. Controlling involves

• Comparing actual performance with standards • Finding out deviations • Taking

corrective action so that they don‘t repeat in future These are the guidelines when
future planning is done. Thus controlling not only completes one cycle of management
process and also helps to improve planning in the next cycle.

Relationship between Planning and Controlling

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

1. Planning is pre-requisite for controlling. Plans provide the standard for controlling.
Thus, without planning, controlling is blind. If the standards are not set in advance
managers have nothing to control.

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

discovers deviations and initiates corrective measures.

3. Effectiveness of planning can be measured with the help of controlling.

4. Planning is looking ahead and controlling is looking back: Planning is a future
oriented function as it involves looking in advance and making policies for the
maximum utilization of resources in future that is why it is considered as forward
looking function. In controlling we look back to the performance which is already
achieved by the employees and compare it with plans. If there are deviations in actual
and standard performance or output then controlling functions makes sure that in
future actual performance matches with the planned performances. Therefore,
controlling is also a forward looking function. Thus, planning & controlling cannot be
separated. The two are supplementary function which support each other for
successful execution of both the function. Planning makes controlling effective
whereas controlling improves future planning.

Controlling Process

1. Setting Performance Standards: Standards are the criteria against which actual
performance would be measured. Thus standards become basis for comparison and
the manager insists on following of standards.

2. Measurement of Actual Performance: Performance should be measured in an

objective and reliable manner which includes personal observation, sample checking.
Performance should be measured in same terms in which standards have been
established, this will facilitate comparison.

3. Comparing Actual Performance with Standard: This step involves comparison of

actual performance with the standard. Such comparison will reveal the deviation
between actual and desired performance. If the performance matches the standards it
may be assumed that everything is under control.

4. Analysing Deviations: The deviations from the standards are assessed and analysed
to identify the causes of deviations.

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

Limitations of Controlling

1. Difficulty in setting quantitative standards:

Control system loses its effectiveness when standards of performance cannot be

defined in quantitative terms. This makes comparison with standards a difficult task.

e.g areas like human behaviour, employee morale, job satisfaction cannot be
measured quantitatively.

2. Little control on external factors:

An enterprise cannot control external factors like government policies, technological

changes, competition. etc.
3. Resistance from employees:

Control is resisted by the employees as they feel that their freedom is restricted. E.g
employees may resist and go against the use of cameras to observe them minutely.

4. Costly:

Control involves a lot of expenditure, time and effort. A small enterprise cannot afford
to install an expensive control system.

Managers must ensure that the cost of installing and operating a control system
should not exceed the benefits derived from it.
 CHAPTER – 9
FINANCIAL MANAGEMENT

Introduction

• Business Finance = Money or funds available for a business for its operations (that is,
for some specific purpose) is called finance. It is indispensable for survival and growth
of business, for production and distribution of goods and meeting day to day expenses
etc.

• It involves acquiring funds to buy Fixed assets (tangible and intangible) and Raw
materials and maintain working capital.

Financial Management includes those business activities that are concerned with
acquisition and conservation of capital funds in meeting the financial needs and overall
objectives of a business enterprise.

Aims of Financial Management:

1. Reduce cost of funds procured

2. Keep risks under control
3. Achieve effective employment of fund
4. Ensure availability of sufficient funds while avoiding idle funds

•bjectives of Financial Management

• Primary objective: To maximize wealth of owners in the long run – Wealth

Maximization concept.

• ‘Owners’ of a company are the shareholders.

• The term wealth refers to wealth of owners as reflected by the market price of their
shares.

• The market price of shares is linked to three basic financial decisions:

• Investment decision • Financing decision and • Dividend decision

• Market price of a share will increase if benefits from a decision are greater than the
cost involved in it.

• The goal of a firm should be to maximize the wealth of owners in the long run.

• Increase in the market price of shares is an indicator of the financial health of a firm.

• Other objectives that help a firm achieve the primary objective are:
Ensure availability of funds at reasonable costs:

Ensure effective utilization of funds:

Ensure safety of funds thro creation of reserves:

Maintain liquidity and solvency:

Financial Decisions

Every company is required to take three main financial decisions which are as follows:

1. Investment Decision

Resources are scarce and can be put to alternate use. A firm must choose where to
invest so as to earn the highest possible profits.

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

Has two components:

• Working Capital Decisions - Short Term investment decisions.

• Capital Budgeting decisions – Long Term investment decisions

Factors affecting Investment Decisions/Capital Budgeting decisions

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

2. Rate of Return: The expected returns from each proposal and risk involved in them
should be taken into account to select the best proposal.

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

2. Financing Decision
• These are decisions w.r.t quantum of finance or composition of funds from various
longterm sources.(short term = working capital management)

• Financing decisions involve: a) Decision whether or not to use a combination of

ownership and borrowed funds. b) Determining their precise ratio.

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

• Debt involves ‘Financial Risk‘ = risk of default on payment of interest on borrowed

funds and the repayment of the principle amount whereas

• Shareholders‘ funds involve no fixed commitment w.r.t payment of returns or

repayment of capital.

• Ownership fund vs. Debt fund: They can be compared on the basis of factors such as
examples, interest/dividend payout and repayment of principle, tax deductibility, and
risk and floatation costs.

Factors Affecting Financing Decision

1. Cost: The cost of raising funds from different sources are different. The cheapest
source should be selected.

2. Risk: The risk associated with different sources is different. More risk is associated
with borrowed funds as compared to owner’s fund as interest is paid on it and it is
repaid also, after a fixed period of time or on expiry of its; tenure.

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

4. Cash flow position of the business: In case the cash flow position of a company is
good enough then it can easily use borrowed funds and pay interest on time.

5. Control Considerations: In case the existing shareholders want to retain the

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

6. State of Capital Markets: During boom, finance can easily be raised by issuing shares
but during depression period, raising finance by means of debt is easy.

7. Period of Finance: For permanent capital requirement, Equity shares must be issued
as they are not to be paid back and for long and medium term requirement, preference
shares or debentures can be issued.

3. Dividend Decision
• Dividend is that portion of divisible profits that is distributed to the owners i.e. the
shareholders. It results in current income for the shareholders.

• Retained earnings= proportion of profits kept in, that is, reinvested in the business for
the business.

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

retain earnings to finance long-term profits of the firm. Must be done keeping in mind
the firms overall objective of maximizing the shareholders wealth.

Factors affecting Dividend Decision

1. Earnings: Companies having high and stable earning could declare high rate of
dividends as dividends are paid out of current and paste earnings.

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

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

4. Cash Flow Positions: Dividends involve an outflow of cash and thus, availability of
adequate cash is for most requirement for declaration of dividends.

5. Preference of Shareholders: While deciding about dividend the preference of

shareholders is also taken into account. In case shareholders desire for dividend then
company may go for declaring the same.

6. Taxation Policy: A company is required to pay tax on dividend declared by it. If tax on
dividend is higher, company will prefer to pay less by way of dividends whereas if tax
rates are lower then more dividends can be declared by the company.

7. Issue of bonus shares: Companies with large reserves may also distribute bonus
shares to increase their capital base as it signifies growth of the company and
enhances its reputation also.

8. Legal constraints: Under provisions of Companies Act, all earnings can’t be

distributed and the company has to provide for various reserves. This limits the
capacity of company to declare dividend.

Financial Planning

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

estimating the fund requirement of a business and determining the possible sources
from which it can be raised.

• Objectives of Financial Planning:

• To ensure availability of funds whenever they are required o Includes estimation of the
funds required for different purposes (long term assets/working cap requirement)

• Estimate the time at which these funds need to be made available.

• Specify sources of these funds.

• To see that the firm does not raise resources unnecessarily:

• Shortage of funds => firm cannot meet its payment obligations.

• Surplus funds => do not earn returns but adds to costs.

Importance of Financial Planning

1. To ensure availability of adequate funds at right time.

2. To see that the firm does not raise funds unnecessarily.

3. It provides policies and procedures for the sound administration of finance function.

4. It results in preparation of plans for future. Thus new projects can he under taken
smoothly.

5. It attempts to achieve a balance between inflow and outflow of funds. Adequate

liquidity is ensured throughout the year.

6. It serves as the basis of financial control. The management attempts to ensure

utilization of funds in tune with the financial plans.

Capital Structure

• On the basis of ownership, funds => owners funds + borrowed funds.

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

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

• Capital Structure = The mix of long-term sources of funds

• Refers to the proportion of debt and equity used for financing the operations of a
business.

• Cost and risk- Debt Vs Equity:

• Cost of Debt is lower than cost of equity but Debt is more risky than equity.

• Cost of debt < cost of equity as lenders risk < owners risk.

• Lender earns an assured interest and repayment of capital..

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

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

• Any default w.r.t payment of interest or repayment of principle amt may lead to
liquidation.

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

• Optimal Capital Structure is that combination of debt and equity that maximizes the
market value of shares of that company

Factors Affecting Capital Structure

i. Cash flow position:

a. The size of the projected cash flows must be considered before deciding the capital
structure of the firm. If there is sufficient cash flow, debt cab be used.
b. It must cover fixed payment obligations w r t:
i. Normal business operations ii. Investment in fixed assets iii. Meeting debt service
commitments as well as provide a sufficient buffer.

ii. Interest coverage ratio :

a. Higher the Interest coverage ratio which is calculated as follows: EBIT/ Interest,
lower shall be the risk of the company failing to meet its interest payment obligations.
b. Low Interest coverage ratio => debt ≠ used.

iii. Debt Service Coverage Ratio:

a. Debt service coverage ratio = Profit after tax + Depreciation + Interest + Non Cash
exp. Pref. Div + Interest + Repayment obligation
b. A higher Debt service coverage ratio, in which the cash profits generated by the
operations are compared with the total cash required for the service of debt and the
preference share capital, the better will the ability of the firm to increase debt
component in the capital structure.
c. Low Debt service coverage ratio => debt ≠ used.

iv. Return On Investment

a. If return on investment of the company is higher, the company can choose to use
trading on equity to increase its EPS, i.e., its ability to use debt is greater.

v. Cost Of Debt
a. More debt can be used if cost of Debt is low.

vi. Tax Rate

a. A higher tax rate makes debt relatively cheaper and increases its attraction as
compared to equity.
vii. Cost Of Equity
a. when the company uses more debt, the financial risk faced by equity holders
increase so their desired rate of return increases.
b. If debt is used beyond a point, cost of equity may go up sharply and share price may
decrease in spite of increased EPS.

viii. Floatation Cost

a. Cost of Public issue is more than the floatation cost of taking a loan.
b. The floatation cost may affect the choice between debt and equity and hence the
capital structure

ix. Risk Consideration:

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

x. Flexibility:
a. If the firm uses its debt potential, it loses the flexibility to use more debt.
b. To maintain flexibility the company must maintain some borrowing power to take
care of unforeseen circumstances.

xi. Control:
a. Debt normally does not cause dilution of control whereas a public issue makes the
firm vulnerable to takeovers.
b. To retain control, firm should issue debt.

Fixed Capital

Fixed capital refers to investment in long-term assets. Investment in fixed assets is for
longer duration and they must be financed through long-term sources of capital.
Decisions relating to fixed capital involve huge capital funds and are not reversible
without incurring heavy losses.

Factors Affecting Requirement of Fixed Capital

1. Nature of Business: Manufacturing concerns require huge investment in fixed assets

& thus huge fixed capital is required for them but trading concerns need less fixed
capital as they are not required to purchase plant and machinery etc.

2. Scale of Operations: An organization operating on large scale requires more fixed

capital as compared to an organization operating on small scale.

For Example - A large scale steel enterprise like TISCO requires large investment as
compared to a mini steel plant.

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

more investment in plant & machinery as compared to an organization using labour
intensive techniques.
4. Technology upgradation: Organizations using assets which become obsolete faster
require more fixed capital as compared to other organizations.

5. Growth Prospects: Companies having more growth plans require more fixed capital.
In order to expand production capacity more plant & machinery are required.

6. Diversification: In case a company goes for diversification then it will require more
fixed capital to invest in fixed assets like plant and machinery.

7. Distribution Channels: The firm which sells its product through wholesalers and
retailers requires less fixed capital.

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

Working Capital

Working Capital refers to the capital required for day to day working of an organization.
Apart from the investment in fixed assets every business organization needs to invest
in current assets, which can be converted into cash or cash equivalents within a period
of one year. They provide liquidity to the business. Working capital is of two types -
Gross working capital and Net working capital. Investment in all the current assets is
called Gross Working Capital whereas the excess of current assets over current
liabilities is called Net Working Capital. Following are the factors which affect working
capital requirements of an organization:

l. Nature of Business: A trading organization needs a lower amount of working capital

as compared to a manufacturing organization, as trading organization undertakes no
processing work.

2. Scale of Operations: An organization operating on large scale will require more

inventory and thus, its working capital requirement will be more as compared to small
organization.

3. Business Cycle: In the time of boom more production will be undertaken and so more
working capital will be required during that time as compared to depression.

4. Seasonal Factors: During peak season demand of a product will be high and thus
high working capital will be required as compared to lean season.

5. Credit Allowed: If credit is allowed by a concern to its customers than it will require
more working capital but if goods are sold on cash basis than less working capital is
required.

6. Credit Availed: If a firm is able to purchase raw materials on credit from its suppliers
than less working capital will be required.
7. Inflation: Working capital requirement is also determined by price level changes. For
example, during inflation prices of raw material, wages also rise resulting in increase in
working capital requirements.

8. Operating Cycle/Turnover of Working Capital: Turnover means speed with which the
working capital is converted into cash by sale of goods. If it is speedier, the amount of
working capital required will be less.
 CHAPTER – 10
FINANCIAL MARKETS

Introduction

Financial Intermediation = process of allocating funds from saving surplus units (E.g.
households) to saving deficit units (e.g. industries, government etc).

• Alternatives = Banks or Financial markets

Financial Markets are the institutional arrangements by which savings generated in the
economy are channelised into avenues of investment by industry, business and the
government. It is a market for the creation and exchange of financial assets.

Functions of Financial Market

1.Mobilization of savings and channelising them into the most productive uses:

• Facilitates transfer of savings from the savers to the investors.

• Financial markets help people to invest their savings in various financial instruments
and earn income and capital appreciation.

• Facilitate mobilization of savings of people and their channelisation into the most
productive uses.
2. Facilitate Price Discovery:

• Price of anything depends upon the demand and supply factors.

• Demand and supply of financial assets and securities in financial markets help in
deciding the prices of various financial securities; where business firms represent the
demand and the households represent the supply.
3. Provide liquidity to financial assets:

• Financial markets provide liquidity to financial instruments by providing a ready

market for the sale and purchase of financial assets.

• Whenever the investors want, they can invest their savings into long term investments
and whenever they want, they can sell the investments/ instruments and convert them
into cash.
4. Reduce the cost of transactions:

• By providing valuable information to buyers and sellers of financial assets, it helps to

saves time, effort and money that would have been spent by them to find each other.
• Also investors can buy/sell securities through brokers who charge a nominal
commission for their services. This way financial markets facilitate transactions at a
very low cost.

Types of Financial Markets

Money Market

Market for financial securities with maturity period of less than one year.

• Mkt for low risk, unsecured and short term debt instruments that are highly liquid are
traded everyday.
• No plysical location bye conducted over the telephone and the internet.
• Helps to:

o raise short term funds

o Temporary deployment of funds .

The main instruments of money market are as follows:

l. Treasure Bills: They are issued by the RBI on behalf of the Central Government to
meet its short-term requirement of funds. They are issued at a price which is lower than
their face value and arc repaid at par. They are available for a minimum amount of
Rs.25000 and in multiples thereof. They are also known as Zero Coupon Bonds. They
are negotiable instruments i.e. they are freely transferable.

2. Commercial Paper: It is a short term unsecured promissory note issued by large

credit worthy companies to raise short term funds at lower rates of interest than
market rates. They are negotiable instruments transferable by endorsement and
delivery with a fixed maturity period of 15 days to one year.

3. Call Money: It is short term finance repayable on demand, with a maturity period of
one day to 15 days, used for interbank transactions. Call Money is a method by which
banks borrow from each other to be able to maintain the cash reserve ratio as per RBI.
The interest rate paid on call money loans is known as the call rate.
4. Certificate of Deposit: It is an unsecured instrument issued in bearer form by
Commercial Banks & Financial Institutions. They can be issued to individuals.
Corporations and companies for raising money for a short period ranging from 91 days
to one year.

5. Commercial Bill: It is a bill of exchange used to finance the working capital

requirements of business firms. A seller of the goods draws the bill on the buyer when
goods are sold on credit. When the bill is accepted by the buyer it becomes marketable
instrument and is called a trade bill. These bills can be discounted with a bank if the
seller needs funds before the bill maturity.

Capital Market

Facilities and institutional arrangements through which long term securities are raised
and invested- both debt and equity.
• Nature of Capital Markets:
a. Important component of Financial markets b. Two segments(primary and
secondary) c. 2 forms(organized and unorganized) d. long term securities e. Satisfies
long term requirements of funds f. Performs trade-off functions g. Creates dispersion
in business ownership h. Helps in capital formation i. Creates liquidity
• Features Of Capital Market Instruments:
a. Provide long term funds
b. Lesser outlay required as unit value of instruments is low
c. Duration more than 1 year
d. Liquidity
e. Lower safety
f. Higher expected returns as compared to short term securities

The capital market can be divided into two parts:

1. Primary Market

2. Secondary Market

Primary Market
• New issues markets
• Transfers investible funds from savers to entrepreneurs.
• Funds used for setting up new projects, expansion, diversification, modernization of
existing projects, mergers and take overs etc.

Methods of Floatation of New Issues in Primary Market

1. Offer through Prospectus: It involves inviting subscription from the public through
issue of prospectus. A prospectus makes a direct appeal to investors to raise capital
through an advertisement in newspapers and magazines.

2. Offer for Sale: Under this method, securities are offered for sale through
intermediaries like issuing houses or stock brokers. The company sells securities to
intermediary/broker at an agreed price and the broker resells them to investors at a
higher price.

3. Private Placements: It refers to the process in which securities are allotted to

institutional investor and some selected individuals.

4. Rights Issue: It refers to the issue in which new shares are offered to the existing
shareholders in proportion to the number of shares they already possess.

5. e-IPOs: It is a method of issuing securities through an on-line system of stock

exchange. A company proposing to issue capital to the public through the on-line
system of the stock exchange has to enter into an agreement with the stock exchange.
This is called an e-initial public offer. SEBI’s registered brokers have to be appointed for
the purpose of accepting applications and placing orders with the company.

Secondary Market

1.Refers to a market where existing securities are bought and sold.

2.The company is not involved in the transaction at all. It is between two

investors. Features of Secondary market are: 1) Creates liquidity 2) Fixed location 3)
Comes after primary market 4) Encourages new investment

Difference between Primary Market and Secondary Market

Basis Primary Market Secondary Market

Securities Only new securities are traded Existing securities are traded
Price of Prices of securities are determined by the Prices are determined by the forces by the
Securities management of the company. demand and supply of the securities.
Purchase and Securities are sold to investors directly by the
Investors exchange ownership of securities.
Sale company or through intermediary.
Place of
There is no fixed geographical location. Located at specified places.
Market
Both buying and selling of securities can take
Medium Only buying of securities takes place.
place.

Stock Exchange/Share Market

A Stock Exchange is an institution which provides a platform for buying and selling of
existing securities. It facilitates the exchange of a security i.e. share, debenture etc. into
money and vice versa. Following are some of the important functions of a Stock
Exchange:

a. Gives liquidity and marketability to existing securities

b. Pricing of securities(dd and ss)
c. Safety of transactions(membership = regulated + dealings well defined)
d. Contributes to economic growth (ensures that savings are channelized to most
productive investment avenues)
e. Spreading of equity cult(ensures wider share ownership)
f. Provides scope for speculation (in a restricted and controlled environment)
Trading Procedure on a Stock Exchange

1. Selection of Broker: in order to trade on a Stock Exchange first a broker is selected

who should be a member of stock exchange as they can only trade on the stock
exchange.

2. Placing the order: After selecting a broker, the investors specify the type and number
of securities they want to buy or sell.

3. Executing the order: The broker will buy or sell the securities as per the instructions
of the investor.

4. Settlement: Transactions on a stock exchange may be carried out on either cash

basis or carry over basis (i.e. badla). The time period for which the transactions are
carried forward is referred to as accounts which vary from a fortnight to a month. All
transactions made during one account are to be settled by payment for purchases and
by delivery of share certificates, which is a proof of ownership of securities by an
individual. Earlier trading on a stock exchange took place through a public outcry or
auction system which is now replaced by an online screen based electronic trading
system. Moreover, to eliminate, the problems of theft, forgery, transfer, delays etc. an
electronic book entry from a holding and transferring securities has been introduced,
which is called process of de materialisation of securities.

Difference between Capital and Money Market

Basis Capital Market Money Market

Financial Institutions, Banks, Corporate RBI, Banks Institutions and finance
Participants
Entities, foreign investors and individuals. companies.
Instruments Equity shares, bonds preferences and
Treasury Bills, Trade Bills commercial paper
traded debentures, call money etc.
Investment Does not necessarily require a huge financial Entails huge sum of money as the instruments
Outlay outlay. are quite expensive.
Deals in medium and long term securities Deals in short term funds having a maturity
Duration
having a maturity period of one year. period upto one year.
Securities are less liquid as money market
Liquidity Money markets instruments are highly liquid
securities.
Expected High return Low return
Capital Market Instruments are riskier both Money market instruments are generally much
Safety
with respect to return and repayment. safer with a minimum risk of default.

Depository Services and DEMAT Accounts: Keeping in the mind the difficulties to
transfer of shares in physical form, SEBI has developed a new system in which trading
in shares is made compulsory in electronic form Depository services system and D-Mat
Account are very basis of this system.

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

Services provided by Depository

Dematerialisation (usually known as demat) is converting physical certificates to

electronic form. Rematerialisation, known as remat, is reverse of demat, i.e getting
physical certificates from the electronic securities.

Transfer of securities, change of beneficial ownership.

_ Settlement of trades done on exchange connected to the Depository. Now a days on-
line paper-less trading in shares of the company is compulsory in India. Depository
services is the name of that mechanism. In this system transfer of ownership in shares
take place by means of book entry without the physical delivery of shares. When an
investor wants to deal in shares of any company he has to open a Demat account.
There

are four players who participate in this system.

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

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

2. The Depository Participant: He opens the account of Investor and maintains

securities records.

3. The Investor: He is a person who wants to deal in shares whose name is recorded

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

Benefits of Depository Services

• Sale and Purchase of shares and stocks of any company on any stock Exchange.
• Saves time.
• Lower transaction costs
• Ease in trading.
• Transparency in transactions.
• No counterfeiting of security certificate
• Physical presence of investor is not required in stock exchange.
• Risk of mutilation and loss of security certificate is eliminated.

Demat Account

Demat (Dematerialized) account refers to an account which an Indian citizen must

open with the depository participant (banks, stockbrokers) to trade in listed securities
in electronic form. The securities are held in the electronic form by a depository.
Benefits of Demat Account

1. Reduces paper work.

2. Elimination of problems on transfer of shares such as loss, theft and delay.
3. Exemption of stamp duty when transfer of shares.
4. The concept of odd lot stand abolished.
5. Increase liquidity through speedy settlement.
6. Attract foreign investors and promoting foreign investment.
7. A single demat account can hold investments in both equity and debt instruments.
8. Traders can work from anywhere.
9. Automatic credit into demat account for shares arising out of
bonus/split/consolidation % merger.
10. Immediate transfers of securities.
11. Change in address recorded with a DP gets registered with all companies in which
investor holds securities eliminating the need to correspond with each of them.

Opening of Demat Account

A Demat account is opened on the same lines as that of a bank account. Prescribed
account opening forms available with the DP, need to be filled in. Standard agreement
is to be signed by the client and the DP, which details the rights and obligation of both
parties. Along with the form, the client is required to attach photograph, attested copies
of residence proof and proof of identity need to be submitted.

Securities and Exchange Board of India (SEBI)

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

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

Objectives of SEBI

1. To regulate stock exchange and the securities market to promote their orderly
functioning.

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

3. To prevent trade mal practices such as internal trading.

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

Functions of SEBI

1. Protective Functions :a) Prohibit fraudulent & unfair trade practices in secondary
market (e.g. Price rigging & misleading statement) .b) Prohibit insider
trading. c) Educate investors Promote fair practice & code of conduct in securities
market

2.Development Functions : a) Promotes training of intermediaries of the securities

market . b) Investor education c) Promotion of fair practices code of conduct of all
SRO‘s. d) Conducting research & publish information useful to all market participants

3. Regulation Functions : a) Registration of brokers and sub brokers & other players in
the mkt. b)) Registration of collective investment schemes & mutual funds. c)
Regulation of stock bankers & portfolio exchanges & merchant bankers.
 CHAPTER – 11
MARKETING MANAGEMENT

MEANING OF SOME IMPORTANT TERMS:

• Needs = basic human requirements. Essential items necessary or fundamental to

human existence.

• Wants= desire for a particular product. Tend to be "satisfier specific".

• Demand- willingness to buy is backed by purchasing power

• Utility – want satisfying power of a product.

• What can be marketed:

• A product =
• bundle of utility not confined to physical products but can refer to other things of
value such as services, ideas, place. It refers to anything that satisfies a need or want.

• may be tangible or intangible(i.e. goods and services)

• even people can be marketed

• Customers= people or organizations that seek satisfaction of their wants.
• "Marketers‟ =
• Anyone taking a more active role in the process of exchange is called a marketer.
Normally it is the seller. But in certain situations, it may also be the buyer. This may be
in the situation of rare supply.

• Sellers as marketer are the deliverers or providers of satisfaction. They makes

available products or services and offers them to customers with an intention of
satisfying customer needs and wants. They can be divided into:

• Goods marketers (such as Hindustan Lever)

• Services marketers (such as Indian Airlines)

• Others marketing experiences (such as Walt Disney) or places (like tourist

destinations).
• Marketing activities =activities carried on by the marketers to facilitate exchange of
goods and services between the producers and the users of such products.
• Market is:

• Place where buyers and sellers meet and conduct buying and selling activities. It does
not necessarily mean a geographical place(e.g. conduct of business thro telephone,
mail or internet)
• 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).

• In the modern marketing sense, it refers to a set of actual or potential buyers of a

product or service i.e. all customers who share a particular need or want and are able
to buy the product (also referred to as target markets)

Important Features of Marketing

1. Needs and wants: Satisfaction of the needs and wants of individuals and
organizations.

2. Creating a market offering: Complete offer for a product of service.

3. Customer value: greatest benefit or value for the money.

4. Exchange mechanism: Exchange of products/services for money/for something of

value to them.

Meaning and concept of Marketing Management

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

process of organizing, directing and controlling the activities related to marketing of
goods and services to satisfy customers’ needs & achieve organizational goals.

The process of Marketing involves:

i. Choosing a target market

ii. Getting, keeping as well as growing the customer

• that is, ensure that the target customers purchase the firm‘s product, ensure that they
keep their customers satisfied with the products and attract new customers so that the
firm can grow.

iii. Create, develop and communicate superior values to the customers.

Functions of Marketing/Marketing activities

Gathering And Analyzing Market Information:

• systematic investigation of facts

• SWOT analysis

• Necessary to identify needs

• Decisions can be wrt. Identifying customer needs and wants, identifying buying
motives, choice of a brand name, packaging and media used for promotion.

• Data is available both from primary as well as secondary sources.

Marketing planning :
• Aim = to develop a complete marketing plan so that the marketing objectives can be
achieved.
• It also must specify the action programs .
• E.g if a marketer aims at enhancing his market share in the country in the next three
years, then his marketing plan should include various important aspects like plan for
increasing level of production, promotion of products etc.

Product designing and development:

• Involves decisions regarding the product to be manufactured and it‘s attributes such
as its quality considerations, packaging, models and variations to be introduced etc..
• Done by anticipating customer needs and developing new products or improving
existing products to satisfy these needs.

Standardization and grading:

• Standardization = Process of setting certain standards for a product on the basis of
its desired qualities. E.g. ISI mark for electrical goods.
• Grading = Division of products into classes made up of units possessing similar
features such as for agricultural products

Packaging and labeling:

• Packaging‘ refers to designing a package (that is a wrapper or a container) for a
product.
• Packaging protects the products from damage , risks of spoilage, breakage and
leakage. It also makes buying convenient for customers and serves as a promotional
tool.
• Labeling = designing a label to be put on the package. It may vary from a simple tag to
complex graphics.

Branding
• Whether to sell the product in its generic name or in a Brand name.
• Helps in differentiation, builds customer loyalty and promote its sale.
• Decision = whether each product will have a separate brand name or the same brand
name to be used for all products.

Concepts & Philosophies of Marketing

1. PRODUCTION CONCEPT = In the earlier days of the industrial revolution, the number
of producers were limited, → limited supply of industrial products → not able to match
demand . So, anyone who was able to produce goods could easily find buyers for the
same.
2. PRODUCT CONCEPT= With passage of time, the supply improved→ customers
started looking for products that were superior in performance, quality and features.

3. SELLING CONCEPT= increase in scale of production→ competition among the

sellers → Product quality and availability alone did not ensure survival as a large
number of firms were now selling products of similar quality.

4. MARKETING CONCEPT : Implies that a firm can achieve its goals by identifying
needs of the customer and satisfying them better than the competitors. Customer
satisfaction is the precondition for realizing the firm’s goal and objectives,

5. SOCIAL MARKETING CONCEPT : Under this concept customer satisfaction is

supplemented by social welfare. Some products bring harmful effect on environment
so these should not be supplied. It pays attention to the social, ethical and ecological
aspects of marketing. Raman, Joginder, John, Iqbal and Shreya are friends. They are
operating different business. Each one has his/her own concept regarding operating
their business. Raman believes in producing products at a large scale. Thereby
decreasing the average cost of the products and selling it’s at a reasonable price.

Meaning and Concept of Marketing and Selling

Marketing is a wide term. It refers to a large set of activities of which selling is just one
part. A marketer before making the sale does a lot of other activities such as planning
the type, design of the product, the price and selecting the distribution outlets at which
the same would be available.

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

Difference between Selling & Marketing

Basis Selling Marketing

It is a wide term consisting of a
It is only a part of process of
Scope number of activities such aside
marketing.
notification, customers needs etc.
Transfer of the title from seller to Achieving maximum satisfaction
Focus
consumer. of customers needs and wants.
Pre-dominance Product is given quantity. Customer is treated as the king.
Profits through customer
Aim Profits through sales volume.
satisfaction.
Bending the customer according to To develop the products as per the
Emphasis
the product. customer needs.

Marketing Mix

There are a large number of factors that affect marketing decisions. They can be
classified as:
• Non-controllable factors and Controllable factors:
To be successful, a firm needs to take sound decisions wrt controllable factors while
keeping the environmental factors in mind.

To develop marketing tools, marketing managers use the above mentioned controllable
factors and the set of marketing tools that a firm uses to pursue its marketing
objectives in the target market is described as Marketing Mix. Success of a market
offer will depend upon how well these ingredients are mixed to create superior value for
customers and simultaneously achieve their sales and profit objective. Thus, an ideal
marketing mix would need:
• Producing satisfying products • Offered to buyers at a reasonable price
• Conveniently available • About which communication is offered

Marketing mix refers to ingredients or the tools or the variables which the marketeer
mixes in order to interact with a particular market.

11.8.1 Elements of Marketing Mix

The four main elements of marketing mix as classified by MCcarthy are:

A. Product
B. Price
C. Place/Physical Distribution
D. Promotion

These elements are more popularly known 4 P’s of the marketing.

Elements/4 Ps of Marketing Mix

1. Product Mix: All the features of the product or service to be offered for sale.

2. Price Mix: Value (Money) in lieu of product/service received by seller from a buyer.

3. Promotion Mix: Informing the customers about the products and persuading them to
buy the same.

4. Place Mix: Physical distribution: Various decisions regarding distribution of

products.

• Channels of distribution: Whether wholesalers, retailers are to be used or not.

• Physical movement of the products from producer to consumers.

• Storage, transportation, managing inventory (stock) etc.

i) Branding:

The process used to create a distinct identity of a product. It is the process of using a
name, term, symbol or design individually or in some combination to identify a product.

Brand : Name, term, sign, design or some combination of the above used to identify the
products of the seller and to differentiate them from those of competitors.

Qualities of a Good Brand Name

1. Short, easy to pronounce, spell and remember(Rin, Vim, Ponds)

2. Suggest product benefits and quality (Genteel, Boost)

3. Distinctive (Zodiac, Safari)

4. adaptable to packing or labeling requirements, to different advertising media and to

different languages.
5. Versatile to accommodate new products(Maggi)

6. Capable of being registered and protected legally

7. Have staying power(should not get outdated easily.

Advantages of Branding-

Advantages to the marketers:

1. Enables product differentiation:.

• Distinguishes the firms products from that of its competitors, thus secures and
controls its markets.

2. Helps in advertising and display programmes:

• Without a brand, the advertiser can only create an awareness about the generic
product and not be sure of the sale of his brand.

3. Differential pricing:

• As when customers like and become used to a brand, they would agree to pay a little
more for it than the competing product

4. Ease in introduction of a new product

minimizes selling costs – enjoys the reflected glory of the brand.

Advantages to Customers:

1. Helps in product identification:

• If customer is satisfied with a brand, he will not make a close inspection every time.

2. Ensures quality:

• deviation in quality, customers can have a recourse to the manufacturer/marketer. ↑

confidence and level of satisfaction of customers

3. Status symbol:

• Because of their quality, customers feel proud of suing them and so ↑ level of
satisfaction of customers

2. (ii) Packaging: Act of designing and producing the container or wrapper of a product.
Good packaging often helps in selling the product so it is called a silent salesman.

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

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

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

storage, identification and transportation e.g. package of toffees are put into
corrugated boxes for storing at a manufacturer’s warehouse and for transportation.

Functions of Packaging

1. Product Identification: Packaging helps in identification of the product.

2. Product Protection: The main function of the packing is to provide protection to the
product from dirt, insects and breakage.

3. Convenience: It provides convenience in carriage, stocking and in consumption.

4. Product Promotion: Packaging simplifies the work of sales promotion.

Advantages of Packaging

• Rising Standards Of Health And Sanitation - As chances of adulteration in such goods

are minimized

• Self-Service Outlets – so some of the traditional role assigned to personal selling w.r.t
promotion has gone to packaging.

• Innovational Opportunities – innovation on packaging used to market products e.g.

tetra packs for milk.

• Product differentiation – colour, size, material etc of packaging makes a difference in

perception of customers about the quality of the product.

3. Labelling:

Labelling means putting identification marks on the package. Label is a carrier of

information & provides information like - name of the product, name of the
manufacturer, contents of the product, expiry and manufacturing date, general
information for use, weight etc. Labels perform following functions:

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

2. Describe the product and specify its contents:

The manufacturer prints all the information related to the product.

3. Grading of products: With the help of label, products can be graded indifferent
categories for example: Brook Bond Red Label, Brook Bond Yellow Label, Green Label
etc.

4. Helps in promotion of products: Attractive and colourful labels excite the customers
and induce them to buy the products. For example: 40%extra free mentioned on
detergent etc.

5. Providing information required by law: There is legal compulsion to print batch no.,
contents, max retail price, weight/volume on all the products and statutory warning on
the packet of cigarettes, “Smoking is injuries of health”: In case of hazard on/poisonous
material appropriate safety warnings need to be put.

II P-PRICE MIX:

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

Normally expressed in monetary terms. Decisions include decisions wrt basic price,
discounts to be offered etc

Factors determining price determination:

1. Pricing Objectives

(a) to maximise profits in the short term-tend to charge maximum price.

(b) Obtain large share of the market i.e., by maximising sales it will charge lower price.

(c) Firm is operating in the competitive market it may charge low price for it.
2. Product cost:

• Price should include all costs and also include a fair return for undertaking the
marketing effort and risk.

• Includes costs of producing, distributing and selling the product.

• Costs sets the floor price – the minimum level / lower limit at which the product may
be sold. • Price should recover Total costs (Fixed costs/overheads + Variable costs+
Semi-variable costs) in the long run, but in certain circumstances(introduction of a new
product/entry into a new market) product price may not cover all the costs for a short
while.

3. Utility and demand:

• Utility provided by the product and the demand of a product set the upper limit of
price that a buyer would be willing to pay for a product.

• Buyers pay to the point where the utility of the demand is more than or eequal to the
utility derived from it.

• Law of demand = consumers purchase more at a lesser price.

• Elasticity of demand = responsiveness of demand to change in prices of a product.

Demand = elastic if a small change in price results in a large change in quantity
demanded.

• If demand is inelastic, firm can fix higher prices.

4. Competition in Market: Prices of competitors need to be considered before fixing

prices.

5. Government Policies: Products regulated by government pricing regulations need to

be priced as per government policies.

III. P-Place Mix/Physical Distribution Mix

A set of decisions needs to be taken to make the product available to customers for
purchase and consumption.

• The marketer needs to make sure that the product is available at the right quantity, at
the right time and at the right place.

• It requires development of:

• Channels of distribution

• Physical distribution of products.

Components of physical distribution-

1. Order Processing: Accurate & speedy order processing leads to profit & goodwill &
vice versa.

2. Transportation: Add value of the goods by moving them to the place where they are
required.

3. Inventory control: Additional demand can be met in less time, the need for inventory
will also be low.

4. Ware housing: Need arises to fill the gap between the time when the product is
produced & time when it is required for consumption.

Channels of Distribution

• Includes a series of firms/ individuals/ people/institutions/merchants and

functionaries who form a network which helps in the transfer of title to a product from
the producer to the end consumer.

• They help to overcome time, place and possession gaps that separate the goods and
services from those who need/want them from those who want them

Types of Channels:

Direct Channel — Manufacturer-Customer. Eg. mail order, internet, door to door selling.

Indirect Channel —

1. Manufacturer-Retailer-Customer.

Usually used for specialty goods like expensive watches, appliances, Cars( Maruti
Udyog) etc.

2. Manufacture-wholesaler-Retailer-customer.

Usually used for consumer goods like soaps , salt etc.

3. Manufacture → Agent → Wholesaler → Retailer → Customer

Done when manufacturers cannot approach wholesalers directly or when they carry a
limited product line and has to cover a wide market.

Factors Determining Choice of Channels of Distribution

Choice of appropriate channel of distribution is a very important marketing decision,
which affects the performance of an organisation. Whether the firm will adopt direct
marketing channels or long channels involving a no. of intermediaries is a strategic
decision.

IV. P-Promotion Mix

It refers to combination of promotional tools used by an organization to communicate

and persuade customers to buy its products.

Tools/Elements of Promotion Mix

1. Advertising: Most commonly used tool of promotion. It is an impersonal form to

communication, which is paid by the marketers (sponsors) to promote goods and
services. Common mediums are newspaper, magazine, television & radio.

Role or Importance of Advertising

1. Paid Form –sponsorer has to bear the costs of communicating with the prospective
buyer.

2. Impersonality – no direct face to face contact between prospects and advertisers.

Creates a monologue and not a dialogue.

3. Identified Sponsor –undertaken by an identified individual who makes the advertising

effort and bears the costs of it.

4. Mass Reach – large number of people over a large geographical area can be
reached.
5. Enhancing Customer Satisfaction And Confidence – creates confidence and
prospective buyers feel more comfortable and assured about the product quality

6. Expressiveness – due to development in art, computer designs and graphics, special

effect can be created that makes simple products and messages look attractive.

7. Economy- because of its wide reach, overall cost of advertising gets spread over a
wide audience and per unit cost of reach ↓.

Objections against Advertising: Though advertising is one of the most frequently used
medium of promotion of goods & services but it attracts a lot of criticism/objections
against it, which are as follows:
1. Increased Product Price: Which is ultimately added to product cost, manufacturers
pass this cost to ultimate customers.
2. Confusion to Customers: The number of advertisements shown for a single product
having different brands confuse the customers and it becomes very difficult for them
to make choice.
3. Encouraging sale of Inferior Products: In many cases some product features are
over emphasized.
4. Advertisement of Bad Tastes: Events, models degrade the human dignity.
5. Undermines Social Values and Promotes Materialism: It induces the customers to
buy more and more products. Because of emphasis on materialism, social
relationships are distorted which brings social disorder. In the changed economic
environment of globalisation, advertising is considered as an important tool of
marketing. It helps a firm in effectively communicating with its target market,
increasing the sale and thereby reducing the per unit cost of production. It is not a
social waste rather it adds value to the social cause by giving a boost to production and
generating employment.

2. Personal Selling
Personal selling consists of contacting prospective buyers of product personally i.e
face to face interaction between seller and buyer for the purpose of sale.

Features of the Personal Selling

1. Personal contact is established under personal selling.

2. Oral conversation.

3. Quick solution of queries.

4. Receipt of additional information.

5. Development of relationship with the prospective customers which may become

important in making sale.
Qualities of a Good Salesman

1. Physical qualities: Tidy appearance, good posture, cheerful smile etc

2. Psychological qualities: good nature with Empathy and ego drive,

3. Technical quality: Full technical knowledge about the product,

4. Good communication skills - Polite, tactful, having good manners etc

5. Honesty,

6. Courtesy,

7. Persistent- must not give up as one additional argument can close a sale.

8. Capacity to inspire trust

Sales Promotion refers to short term incentives/ other promotion activities that seek to
stimulate interest, trial or purchase.
Merits of Sales Promotion:

1. Attention Value: Attract attention of people through use of incentives.

2. Useful In New Product Launch: Sales promotion tools induce people to break away
from their regular buying behavior and try new products.
3. Synergy in Total Promotional Efforts: Sales promotion activities add to the overall
effectiveness of the promotional efforts (advertising and personal selling) of a firm.

• Limitations Of Sales Promotion – if used frequently:

a. Reflects Crisis: A firm that frequently relies on sales promotion activities may give
the impression that it is unable to manage its sales and there are no takers for its
products.
b. Spoils Product Image: Consumers may feel that the products are not of good quality
or are not appropriately priced.

TECHNIQUES

1. Product Combination: Offering another product as gift along with the purchase of a
product.

2. Istant draws and assigned gift: Scratch a card and instantly win a prize with the
purchase of a TV, T. Shirt, Refrigerator etc.

3. Quantity Gift: Offering extra quantity of the product e.g., Buy three LUX soaps and
get one free.

4. Refunds: Refunding a part of price paid by customer on production of some proof of

purchase. e.g Rs 2 off on presentation of empty pack of Ruffle lays

5. Sampling: Offer of free samples of the product to potential customers. Generally

used at the time of introduction of a product.

Public Relations

“The Chartered Institute of Public Relations” defines Public Relations as a strategic

management function that adds value to an organization by helping it to manage its
reputation Public relations covers a wide range of tactics, usually involve providing

information to independent media sources in the hope of gaining favorable coverage. It

also involves a mix of promoting specific products, services and events and promoting
the overall brand of an organization, which is an ongoing tact. Public Relation tools
include:

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

other newsworthy item that is issued to the press by a public relations professional of
an organization. It is written in the form of a story with an attractive heading so that the
media quickly grasp and circulates the message through
newspaper/radio/television/internet.
2. Press Kits: It is a comprehensive package of information outlining a company’s
products and services most frequently sent to members of the press. It includes

• A brief company biography.

• Information of senior management.

• Comments from customers.

• Reprints of newspaper and magazine articles.

• Photos of products.

3. Brochures: It is a booklet published by the organization which contains the

organization’s background, its ethics, vision, mission, its past, present and future
projects, its CISP, etc. E.g.: brochure given to new employees to give them a gist of the
organization.

4. Newsletter: It is a printed publication produced at regular intervals focusing on a

particular set of people. The content of a newsletter is presented in a writing style that
is less formal and letter-like. For example, a newsletter published by a college consists
of information about activities conducted during a particular period, special
achievements by students or teachers, etc.

5. Events and Press support: Special events are acts of news development. The
ingredients are time, place, people, activities, drama, showmanship; one special event
may have many subsidiary events, such as luncheons, banquets, contests, speeches,
and many others as part of the buildup.

6. Conferences and Seminars: Conferences and seminars are conducted for making
people aware about the organization. For example travel companies generally call
prospective clients and offer travel packages. The members are contacted through
telephones and asked to attend seminar.

7. Websites: A website acts as a window for the outside world to know an organization.
So it is designed not just to serve as a resource for members, but also to present a
positive message to non-members who are browsing through.

ROLE OF ‘PR’ IN AN ORIGINATION

(i) Smooth functioning of business and achievement of objectives.

(ii) Building corporate image that affects favorably on its products. Up keep of parks,
gardens, sponsoring sports activities etc.
 CHAPTER – 12
CONSUMER PROTECTION

• As a result of this, consumers may be exposed to risks due to unsafe products- that
is, he may be cheated, may have to pay a higher price etc.

• Thus; there is a need to provide adequate protection to consumers against such

practices

Importance of Consumer Protection

(from Consumer’s point of view)

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

2. Unorganized Consumers: In India consumers are still unorganized and there is lack
of consumer organizations also, thus consumer protection is required.

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

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

From the point of Business

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

2. Moral Justification: It is the moral duty of any business to take care of consumer
interest & avoid any form of their exploitation & unfair trade practices like defective &
unsafe products, adulteration, false and misleading advertising, hoardings, black
marketing etc.

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

4. Social Responsibility: A business has social responsibilities towards various groups

like owners, workers, government, customers etc. Thus, customers should be provided
qualitative goods at reasonable prices.

5. Government Intervention: If a business engages in any form of unfair trade practices

then government takes action against it, which adversely affects its goodwill.

CONSUMER PROTECTION ACT, 1986 (CPA, 1986)

1. Set up to protect and promote consumer interests thro a speedy and inexpensive
redressal of grievances.

2. Recognizes consumer rights

Redressal agencies- set up a three-tier agency to address consumer grievances.

Scope of the act-

It is applicable to all types of undertaking:

• Large and small scale

• Private, public and co-operative sector

• Manufacturer or trader
• Firms supplying goods as well as services

Meaning of Consumer

1. Any person who buys any goods for a consideration. It includes any user of such
goods with the approval of the buyer. But it does not include a person who obtains
goods for resale or any commercial purpose.

2. Any person who avails any services for a consideration. It includes any beneficiary of
such services but it does not include a person who avails such service for any
commercial purpose.

Rights of a Consumer

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

1. Right to Safety: Consumer has the right to be protected against products, & services
which are hazardous to health & life (should use ISI marked electronic device.

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

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

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

5. Right to Seek Redressal: Consumer has the right to get relief in case the product or
service falls short of his expectations or is dangerous. He may be provided with
replacement/removal of defect or compensation for any loss. Various redressal forums
are set up by the Govt. at National and State level.

6. Right to consumer education: Consumer has the right to acquire knowledge nd to be

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

Responsibilities/Duties of a Consumer

Consumer Responsibilities:

1. Ask for a cash memo

• On purchase of goods or services. This would serve as a proof of the purchase made.

2. Be aware
• About various goods and services available in the market so that an intelligent and
wise choice can be made.

3. Buy only standardized goods

• As they provide quality assurance. Thus, look for ISI mark on electrical goods, FPO
mark on food products, Hallmark on jewelry etc.

4. Follow manufacturer‘s instructions

• Learn about the risks associated with products and services, and use the products
safely.

5. Read labels carefully

• So as to have information about prices, net weight, manufacturing and expiry dates,
etc.

6. Assert yourself
• To ensure that you get a fair deal.

7. Be honest in your dealings.

• Choose only from legal goods and services and discourage unscrupulous practices
like blackmarketing, hoarding etc.

8. File a complaint in an appropriate consumer forum

• In case of a shortcoming in the quality of goods purchased or services availed. Do not
fail to take an action even when the amount involved is small.

9. Form consumer societies

• Which would play an active part in educating consumers and safeguarding their
interests.
10. Respect the environment.
• Avoid waste, littering and contributing to pollution.

THE SALIENT FEATURES AND PROVISIONS OF CONSUMER PROTECTION ACT,1986

Who Can File A Complaint Under CPA, 1986

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

1. Any consumer.

2. Any registered consumer association.

3. The central or state government.

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

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

Complaints can be filed and compensation claimed w.r.t:

• Fraudulent practices by traders and manufacturers

• Defective goods

• Deficiency in services in connection with 9 services such as banking, transportation,

insurance, supply of electricity and gas, house construction, medical service

REDRESSAL AGENCIES UNDER CONSUMER PROTECT ACT, 1986

For the redressal of consumer grievances the act provides a three–tier machinery as:
1. DISTRICT FORUM

District forum are set up in each district by the state concerned. The important features
are:

(a) It consists of a President and two members, one of whom should be a woman, duly
appointed by State Govt.

(b) It can receive consumer complaints of not more than Rs. 20 lakhs value.

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

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

2. STATE COMMISSION

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

(a) Each commission consists of a president and it least 2 members appointed by state
Govt.

(b) Complaints of at least Rs. 20 lakhs but not more than 1 crore can be filed with state
commission.

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

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

3. NATIONAL COMMISSION

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

(a) It consists of a President and at least 4 members appointed by Central Govt.

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

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

(d) The National Commission has the power to issue orders for replace mentor removal
and to pay the compensation for loss.

REMEDIES AVAILABLE TO CONSUMERS

• Remove defect in goods and deficiency in services.

• Replace defective goods with one with no defects

• Refund price paid

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

• Pay punitive damages in appropriate circumstances.

• Discontinue unfair/restrictive trade practice

• Not to offer hazardous goods and services for sale

• Withdraw hazardous goods from sale

• Cease manufacturing hazardous goods

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

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

• Pay adequate costs to parties.

CONSUMER AWARENESS

Some important consumer organization and NGO’s engaged in protecting consumer

interests are:

1. Consumer coordination council, Delhi.

2. Voluntary organization in Interest of Consumer Education, Delhi.

3. Mumbai Grahak Panchayat, Mumbai.

4. Consumer Association, Kolkata.

5. Consumer Unity and Trust Society Jaipur.

Role of Consumer organizations and NGO’s

1. Educating the general public about consumer rights by organizing training

programmes, seminars and workshops.

2. Publishing periodical & other publications to educate consumers.

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

4. Producing films or cassettes on food adulteration, misuse of drugs etc.

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

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

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

Ways and Means of Consumer Protection

1. Self Regulation by Business:

• It is in the long-term interest of businesses to serve the customers well.

• Socially responsible firms follow ethical standards and practices in dealing with their
customers.

• Many firms have set up their customer service and grievance cells to redress the
problems and grievances of their consumers.

2. Business Associations:

• Examples of associations of trade, commerce and business - Federation of Indian

Chambers of Commerce of India (FICCI) and Confederation of Indian Industries (CII)

• They have laid down their code of conduct which lay down for their members the
guidelines in their dealings with the customers.

3. Consumer Awareness:

• A consumer, who is well informed about his rights and the reliefs available to him,
would be in a position to raise his voice against any unfair trade practices or
unscrupulous exploitation. • This enables them to understand their responsibilities and
to safeguard their interests.

4. Consumer Organizations’:

• Force business firms to avoid malpractices and exploitation of consumers.

5. Government:

• The most important of these regulations is the Consumer Protection Act, 1986. The
Act provides for three-tier machinery at the district, state and national levels for
redressal of consumer grievances.