UNIT - I: INTRODUCTION AND FORMS OF BUSINESS

ORGANISATION

CHAPTER - I

NATURE AND SCOPE OF BUSINESS

Essay Answer type Questions:

1Q. Define business? Explain the various functions undertaken by business?

Ans: Definition: Business may be defined as human activities directed towards

providing or acquiring wealth through buying and selling goods.

Functions of business:

1) Production Function: If involves transformation of raw material into

finished goods. A number of inputs such as labour, capital machinery,
energy etc., also essential to carry out this function. if follow activities
like designings the products and packages, procurement of materials and
stores, production planning and control, inventory control, repair &
maintenance of plant and machinery, operating quality control standards.
2) Marketing Function: It is primarily concerned with the movement of
goods and services from the producer to the ultimate consumer. It creates
place, time and possession utilities. It follow activities like undertaking
marketings research, selecting channels of distribution, deciding product
design, package, pricing, brand name and promotion method.
3) Finance Function: A business needs finance for establishing
developing and expanding an enterprise. It follows aspects like; Estimating
financial requirements, deciding capital structure, selecting the sources
of finance, proper management of cash, implementing financial
controls, proper use of surplus funds.
4) Personal Function: It is concerned with people at work and with their
relationship with in an organisation. It aims to bring together

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 and develop into an organisation of men & women who make up the
enterprise. If cover aspects like; Human resource planning, recruitment
and selection, organising training and development plans, induction and
placement of employees, Framing policies for promotion, transfer and
appraising, Determination of employee remuneration.
5) Accounting Function: Accounts are prepared to keep records of various
expenses and incomes. if follow activities like; Recording & classification
of financial information, preparing of profit and loss account and balance
sheet, preparing of various financial statements, submitting of various
returns to different authorities, Assess the performance of management
providing data for preparation of future plans.
6) Research and Development (R and D) Function: It is essential in the
present competitive market. Business has to keep pace with the products
offered by competitors. A business needs to improve its production process &
Marketing techniques. If follow activities like; collecting data about the
current business processes, Finding out the weaknesses and strengths of
production processes, conducting market surveys to get proper feedback,
suggesting better ways of doing things implementing improved plans.
7) Public Relations Functions: It has assumed an important role in the
current business environment. If efforts to establish & maintain proper
understanding between an organisation and the Public. If follow aspects
like; use public relations as a medium of communication with outside
world, providing information about the policies and progrmmes to the
public, Receiving feedback about organisation from outside sources,
clarifying understanding about the organisation to the public,
maintaining contacts with various stakeholders, keeping management
informal about public perspective of organisation.

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2Q. Define Business and explain the various objectives of business?

Ans: Definition: Business may be defined as human activities directed towards

providing or acquiring wealth through buying and selling goods.

Objectives of Business:

There are 3 types of objectives in business. They are:

a) Economic objectives
b) Social objectives
c) Human objectives

a) Economic objectives:

1) Profit Earning: Profit is the basic incentive to business pursuits. a

business needs profits not only for its existence but also for expansion and
diversification, profits are needed to face various uncertainties like
trade cycle, change in demand pattern and fluctuations in money markets.
2) Survival: If will possible only when the economic position of the business
is sound and it is able to face adverse situations successfully.
3) Growth: A business will stay in market if it is able to grow with the
passage of time. It will be possible only if the business is earning proper
profits and is able to finance its growth and expansion.
4) Production of Quality Goods: The profit can be earned only when some
exchange of goods and services takes place. The tastes, preferences and
paying capacity of consumers must be taken into account a businessman
creates from, place and time utilities and meets the requirement of the
society.
5) Creating Markets: Marketing consists of those efforts which effect
transfers in ownership of goods and care for their physical
distribution. The new markets are also exploited to keep a steady

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 demand for goods. An enterprise cannot exist without finding out new
markets for its product.
6) Technological Improvement: A businessman should always strive to
use latest method of production. There should always be an endeavour to
increase production and reduce cost. The businessman should try new
methods so that he may keep pace with the changing business world.
7) Innovation: It refers to new methods of production and adoption of latest
technologies. The companies wing innovations first will benefit the most.
In a competitive business environment innovation helps in taking
advantage of latest development and improve the profitability of the
business.
8) Optimum utilisation of Resources: If refers to the best use of men,
money, material, machinery etc. The resources are scarce and their proper
utilisation will help to improve economic position of the business wastage
of materials should curtailed and find out ways to use waste products, the
spending of money should be consonance with the benefits, proper trained
employees so that machines and equipment used in best possible way.

B. Social Objectives:

1) Production of Goods: The business should ensure the production of goods to

meet requirements of the society. The business should estimate the total
demand for various commodities and adjust the production accordingly.
2) Supply of Quality Goods and Services: A business cannot flourish in
the long run if it ignores consumers. So it is the duty of the business to
study wants and needs of consumers and provide them with quality goods
at reasonable prices.
3) Co-operation with the Government: The businessmen also try to evade
various taxes, which lead to a situation of suspicious and
misunderstanding between businessmen and the government the business
community should adopt a positive approach towards

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 policies of the government and should help it in solving national problems
and achieve the objective of socialistic pattern of society.
4) Generation of More Employment: The business community should plough
back its profit for further expansion of business activities which will
ultimately create new job opportunities for more persons in the factory but it
has a multiple effect.
5) Social Service or Community Service: Some business houses are
undertaking charitable activities by opening charitable dispensaries,
hospitals, Schools etc., for the benefit of needy people, participating in
social service programmes adds to the reputation of the company and helps
in establishing better image.
6) Avoiding Environment Pollution: Businessmen should try to and
disposing off their wastes, gases released through chimneys such types of
pollutions by installing mechanical devices to control it. It is the moral
duty of businessmen to use environment friendly technology and control
all types of pollutions.

C. Human Objectives:

1) Welfare of Employees: The businessman should look after the welfare of

his workers. The workers should be rewarded for their hard work. The
workers should be provided with physical comforts, material incentives,
appreciation, dignity of labour which will motivate the worker's to give their
best.
2) Satisfaction of Consumers: The business is meant for consumers and
their satisfaction should be the main objective of the business. So
responsibility to consumers means setting up and maintaining standards of
quality and service in addition to reasonable price.
3) Satisfaction of Shareholders: The shareholders should feel that their
money is not misused by the management taking these considerations
into account, company law has provided many restraints an
management so that the company resources are employed for welfare
of all. These things are important to encourage more investments into the
business.

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 4) Helpful to Government: Industrialisation has created a number of
problems which a government is expected to solve an unplanned industrial
growth has created a problem of pollution on. This problem is so gigantic
that government cannot do much without the help of business community.
Every industrial house have this problem. Business should also pay
various taxes to the government honestly and promptly. Business makes
main contribution to the government funds.

3Q. Distinguish between Trade, Commerce and Industry

Basis of
Difference Trade Commerce Industry
1 Meaning It is related to the If deals with all All those activities
purchase and sale those activities which which deal with the
of goods deal with taking of conversion of raw
goods from materials into finished
producers to goods are
consumers. covered in Industry.
2 Capital The requirements Commerce requires Capital needs are high
of capital are more less capital for industry because it
in trade as requires purchase of
compared to huge raw materials
commerce. and investments of
good in
process.
3 Scope Trade deals only Commerce Industry deals with
with purchase and includes trading those goods which
sale of goods and other servicing relate to primary
activities. manufacturing
processing.
4 Risk It involves a greater The risk involved Industry involves
Elemen amount of risk for in commerce is greater amount of
t fall in prices or comparatively less. risk
changes in as compared to
demand. any other activity.
5 Creatio of Trade creates It creates time and Industry creates from
n utility possession utility place utility by utility by converting
through exchange creating storing raw materials into
of goods and facilities and moving finished goods.
services. goods from one
place
to the other.
6 Nature of Trade deals with Commerce is Industry is
activit demand and related to demand concerned with
y supply of goods side of goods and supply side of goods
and services. and services.
services.
7 Place of Trading takes Commerce activities Industrial activities
operation place at market happen at production happen at production
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places and consumption centres (factories
centres. workshops)

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Short Answer type Questions:

1Q. What is Commerce? State various functions of commerce?

Ans: "Commerce is concerned with a group of activities, which directly and

indirectly are involved in the distribution of goods between the place where
they come into existence and the persons who finally use them".

Functions of Commerce:

1) Removing the Hindrance of Persons: Commerce helps in removing the

hindrance of persons by bringing them closer though the chain of traders.
There is a chain of middlemen between producers and consumers and
hindrances of persons are removed.
2) Removing the Hindrance of Place: Transport segment of commerce helps is
remaining the hindrance of place. The goods are taken to places, where
these are needed with the help of transport.
3) Removing the Hindrance of Exchange: The goods and services are
exchanged with the help of money. Banks helps the buyer and sellers in
exchange of money, increasing the volume of trade, both internal as well
as external, involved in various transactions like cheque and drafts. The
producers and traders are also helped by providing them loans and credit
facility.
4) Removing the Hindrance of time: The goods are stored properly when
not required and supplied, when needed. The hindrance of time is removed
with the help of warehousing function of commerce.
5) Removing the Hindrance of Risk: Insurance branch of commerce covers
the hindrance of risk and helps in the growth of trade. If need to ensure
risks of goods during transit, damage, storage, fire etc. The volume of
trade increases only when owners are compensation in case of loss.
6) Removing the Hindrance of Knowledge: The advertising brands of
commerce helps in removing the hindrance of knowledge by spreading
awareness about the new products and their utility.

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2Q. Describe the relationship between Industry, trade and commerce?

Ans: There is a close relationship between Industry, trade and commerce. They
are required for the growth of others, inter-related and are dependent on each
other. They provide base for each other and support the activities of each
other.

This relationship can be explained as follows:

1) Industry Products Goods and Services and these are distributed by

commerce. There will be no distribution unless there is production of
goods and services. So, industry provides the base for commercial
activities.
2) Commerce helps industry in taking goods and services from producer to
consumers. Industry cannot function without the help of commerce
and trade, commerce is called the lifeline of industry.
3) Trade means buying and selling of goods and services industry and
commerce provide base for trade or exchange of goods and services
among buyers and sellers. Trade become a link between industry and
consumers. The aids to trade such as transport, insurance,
warehousing, banking, communication etc., help in the smooth flow of
trade.

3Q. What is Industry? Explain various types of Industries?

Ans: Industry refers to an activity which coverts raw materials into useful products.
It involves changing of form from raw material into finished goods industry
imparts from utility to goods.

Types of Industries:

Industries are divided in three types such as Primary, Secondary and Tertiary.

a) Primary Industries: It relates to all those activities which are connected

with the extraction, production, processing of natural resources and
reproduction of living species.
Primary industry classified into two types: Genetic & Extractive

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 i. Genetic Industry: It is related to the re-producing and multiplying
of certain species of animals and plants with the object of earning
profits from their sale, Nurseries, cattle breeding, fish hatcheries, Poultry
forms etc. No doubt nature, Climate, environment play an important
part but human skill is also important.
ii. Extractive Industry: The extractive industry is engaged in raising
some form of wealth from the soil, climate, air, water or form beneath
the surface of the earth. these industries are classified into two
categories.
In first category, workers merely collect goods already existing. Ex:
Mining, Fishing and hunting.
In Second category the goods are to be produced by the application of
human skill Ex: agriculture and forestry.
b) Secondary Industries: It is related to the processing of materials which
have already been produced by primary industries. Ex: The mining of iron
are is a primary industry but manufacturing of steel is a secondary
industry.

Secondary industries divided into Manufacturing and Construction:

1) Manufacturing Industries: It is engaged in the conversation of raw materials

into semi finished goods. It creates from utility of goods by making them
suitable for human use. The products of extractive industry are generally
used as raw materials by manufacturing industry. It produce two types of
goods. Consumer goods are directly consumed by the consumers for meeting
day to day needs. Ex: Toothpaste, Soap, Oil, Clothes etc. Industrial goods
produced for manufacturing consumer goods. Ex: Machinery, equipment,
tools.

Manufacturing industries may further be sub-divided as follows:

i. Analytical Industry: A product is analysed and many products are

received as final product in the processing of crude oil we will get
kerosene, petrol gas and diesel etc.

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 ii. Processing Industry: A product passes through various processes to
become a final product. Ex: Cotton textiles, Cotton passes through
ginning, weaving and dyeing processes to become cloth.
iii. Synthetic Industry: Many raw materials are brought together in
manufacturing process to make a final product. Ex: In manufacturing
cement, rocks, gypsum, coal etc.
iv. Assembly Industry: Assembles different components to make a new
product, as Ex: in case of television (or) cycle, computer etc.

2) Construction Industry: It is engaged in the creation of infrastructure for

smooth development of economy. It is concerned with construction,
erection or fabrication of products. Ex: buildings, roads, dams, bridges and
canals.

c) Tertiary or Service Industry: It deals with all those activities which

smoothen the flow of goods and services from the manufacturers/
producers to those who use them. Service industry supplements the
activities of primary & secondary industries. It is the backbone of all
business activities. The contribution of this sector is as follows:

i. Transport, movement of goods from the places of production to the

places of their requirement.
ii. Banking, extending of all types of financial services required for
production as well as commercial activities.
iii. Insurance: Covers all types of risks related to business.
iv. Warehousing: Storing of raw materials as well as finished goods.
v. Advertising: It provides information to consumers about various goods
and services produced.

4Q. What is Human Activities? Explain types of human activities?

Ans: Human life is built around work. In order to satisfy needs human beings
are required to perform some activities. They undertake different
occupations in order to earn a living while some activities may be pursued
to derive personal satisfaction.

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Types of Human Activities:

Human Activities

Economic activities Non-Economic activities (Taken

(Taken upto Earn money) upto get satisfaction)

1. Economic Activities: All activities, undertaken with the object of earning

money are called economic activities. Economic activities are concerned with the
production and distribution of goods and services for sale at as profit, aim at
proper allocation, optimum use of resources and aim to maximise the satisfaction
or profit r welfare of the individuals. For example: Specialised personal service
rendered by professional like doctors; chartered accounts, personal service rendered
by employees and so on.

Economic activities are classified into three types:

a) Business: If refers to activities concerned with the production and exchange

of goods and services with the aim of earning profits. Ex: Manufacturing,
wholesale retail trade, transportation etc.
b) Profession: It is an occupation which involves the rendering of personal
services of a specialised nature. The services are based on professional
education, knowledge, teaching etc., It is professionally fee charged from
clients Ex: doctor, advocate etc.
c) Employment: The person who employs others is called employer & the
persons getting employment are called employees. The service is rendered
for a salary or wage and other benefits attached to that job. The service
may be in a government or a private organisation. Ex: Working in
factories, offices, banks, shops etc.

2. Non-Economic Activities: The activities which are pursued because of

social, religious, cultural, psychological or sentimental reasons. These activities
are voluntary in nature and are undertaken at the leisure or pleasure of the
persons pursuing them. for examples: A housewife working at home, a person
engaged in social work, attending a religious activity etc., these activities are
done for one's own satisfaction.

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 CHAPTER - II

SOCIAL RESPONSIBILITY OF BUSINESS

Essays Answer type questions:

1Q: What is Social Responsibility? Explain the type of Responsibilities

business owes towards different interest groups?

Ans: Social responsibility is the obligation of a business to act in a manner which

will serve the best interests of the society Business is an integral part of
society, so it must fulfill social responsibility.

Responsibility of business towards different interest groups:

1. Responsibility towards shareholders or owners: A business owes special

responsibility to the shareholders or owners who have invested their money in it and
are responsible to bring it into existence.

It must ensure that the shareholders get adequate return on their investments,
information which is of their interest, correct information from accounts, proper
representation in management, kept informed about the working.

2. Responsibility towards Employees: Managements should

understand the role of employee in proper prospective. It is only with the whole
hearted co-operation of employees that a business can achieve success.

It must; pay a fair wage which take into account the increasing cost of
living, motivate them by giving financial and non-financial incentives for
increasing efficiency, proper education to children, retirement benefit etc.

3. Responsibility towards Consumers: A business unit exists for the

consumers. If it neglects the consumers, it will neglect itself if must avoid
malpractices such as adulteration, profiteering, black-marketing, abide by laws
aimed of protection of consumer poor quality late supply of goods,

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goods not conforming to guarantee, machinery to handle grievances on account
of defective products.

4. Responsibility towards Community: The development of business

brings a number of problems. If these problems are not taken care of them these
are bound to adversely affect the society. it must aid and assist organisation
engaged in promoting sports and games, promote cultural activities which are
essential for healthy development of society, should not indulge false advertising
in order to promotes its products by conceal real picture, adequate safety
measures of hazardous or unsafe products.

5. Responsibility towards Government: Government is required to ensure the

best f available natural resources for the welfare of the society. Every govt. set
priorities for the development of the country.

It must pay various taxes in time and help govt. in collecting funds
constructive suggestions while some legislation are being framed or
business, at time of natural calamities (flood, draught etc.)

6. Responsibility toward Suppliers: A business is expected to take into account

the needs of the suppliers.

It should ensure that payments are made to suppliers on proper time, adopt
fair dealing with suppliers, encourage small suppliers by placing orders with
them.

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 CHAPTER - III

FORMS OF BUSINESS ORGANISATION

Long Answer type Questions:

1Q: Define and explain the different forms of organisation from ownership
point of view?

Ans: A business undertaking is a concern, company or enterprise which buys

and sells, is owned by one person or a group of persons and is managed
under a specific set of operating polices.

Form of Business Enterprises:

A number of form of organisation exist to suit requirements of different

business undertakings.

a) Private Enterprises: These enterprises have the following types of

organisations.

i. Sole proprietorship: In this form of organisation a single individual

promotes and controls the business undertakings and bears the whole risk
himself.
ii. Partnership: A partnership is an association of two or more persons to
carry on as co-owners, a business and to share its profits and losses.
This form of organsation grew essentially out of the failures and
limitations of sole proprietorship.
iii. Joint Hindu Family Firm: This prevalent only in India and that too
among. Hindus as the name is indicative. The business of JHF is
controlled under the Hindu law instead of partnership Act. The
membership in this form can be acquired only be birth or by marriage
to male person who is already a member of JHF. All the offices of the
undertaking are controlled by a person known as Karta.
iv. Joint Stock Company: It was first started in Italy in 13th century. a
company is an association of many person who

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 contribute money or money's worth to a common stock and employ it in
some trade or business, who share the profit and loss arising there form. It
is an artificial person created by law with corporate personality, limited
liability, perpetual succession & transferable shares.
v. Co-operative Societies: It is voluntary associations stated with aim of
service to members. The aim of societies is not to increase profits as in
other undertakings but service to members is their important goal. It is a
joint enterprise of those who are not financially strong & can't stand on
their legs and therefore, come together not with a view to get profits but to
overcome disability arising out of the want of adequate financial
resources. The societies are registered under the co-operative societies
Act, 1912.

b) Public Enterprises: Business enterprises owned or operated by public

authorities are known as Public or State undertaken.

i. Departmental Organisation: In this form, the enterprises works as a

part of government and management is in the hands of civil servants. The
secretary of Dept acts as Chief Executive under the control of direction of
minister. The Minister is accountable to parliament for the working of the
dept. It is suitable for public utility services and strategic industries. In
India, railways, radio & television, post & telegraph are working as govt.
dept.
ii. Public Corporation: It is created by special statute of a State or central
govt. A legislative act is passed by defining the sphere of work and
mode of mgt. or the undertakings in India, the Reserve Bank of India,
Bank of India, Industrial Finance Corporation are some of corporations
created by special act of parliament.
iii. Government Companies: The company owned by central/state Govt. is
called Govt. company. These are registered both as public limited and
private limited companies but the mgt remains with the government in
both the cases. it enjoys some privileges which are not available to non-
government companies.

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c) Joint Sector Enterprises: It is a partnership between the private sector
and the Government where mgt will generally be in the hands of private sector
and overall supervision will be with the Board of Directors giving adequate
representation to Government representatives. According to guidelines of central
government, the capital is to be shared as to state government 26%, private
enterprises 25% and investing public 49%. No single private party shall allowed to
hold more than 25% of the paid up capital without permission of central
government. Joint sector undertaking ensures the use of development technology
and resources of government and Private sector.

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 CHAPTER - IV

SOLE -

PROPRIETORSHIP

Long Answer type questions:

1Q: What is sole-proprietorship? Describe the characteristics of a sole

proprietorship form of organisation? Discuss the Advantages and
Disadvantages of sole-proprietorship?

Ans: Definition: A sole-proprietor is a person who sets up the business with

his own resources, manages the business himself by employing persons for
his help and alone bears all the gains and risks of the business.

Characteristics of Sole-proprietorship:

1. Individual Initiative: The business is started by the initiative of a single

person. He may employ other persons for assistance but ultimate authority
and responsibility lies with him. All the profits and losses are taken by the
single individual.
2. Unlimited Liability: The proprietor is responsible for all losses arising
from the business. The liability is not limited only to his investments but
his private property is also liable for business obligations.
3. Management and Control: The proprietor manages the whole business
himself. He prepares various plans and executes them under his own
supervision.
4. Motivation: There is a relationship between efforts and reward. If he
works more, he will earn more. He is motivated to expand his business
activities.
5. Secrecy: Proprietor keeps all the business secrets only to himself Business
secrets are very important for small business. By retaining business secrets
had avoids competitors entering the same business.
6. Owners and Business exist together: The business is dissolved if the
owner dies becomes insolvent or is removed from the scene.

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 7. Limited Area of Operations: Owner can arrange limited funds only and
will be able to supervise a small business. Since all decisions are to be
taken by the proprietors, so the area of business will be limited with his
management abilities.

Advantages of Sole-proprietorship:

1. Easy information: Sole-proprietorship is the only form of organisation

where no legal formalities are required. If anybody wishing to start a sole-
trade concern can do so without loss of time.
2. Better Control: The owner is all in all (functions, authority,
responsibility taking decisions) and he cannot escape his works. The
business is controlled in an effective way.
3. Flexibility in Operations: If the operations are on a large Scale, then it
becomes difficult to change the method of production. Whereas, in small
scale concern can adjust its productions, by changing demand pattern,
increase and decrease its production by requirements, no legal formalities
for making changes in operations. Because of being flexible operations a
sole trade concern is most suitable for industries dealing in fashionable
seasonable goods.
4. Retention of business secrets: Being the sole proprietor, he is not
expected to share his trade secret with anybody else. He don't publish his
accounts and maintain secrecy from his competitors.
5. Easy to Raise Finance: An individual entrepreneur is able to create good
will for his business. this helps him to establish his credit worthiness in the
market once a sole trader lose his credit worthiness, he will not be able to
get much help from the market.
6. Direct Motivation: The proprietor takes keen interest in work of
business. He tries to put his heart and soul in business. So to earn as
much profits as he can. There is direct relationship in efforts and reward.
7. Promptness in Decision Making: All important decisions are taken by
one person. He can take prompt decision & not let an opportunity slip
away.

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 8. Direct Accessibility to Consumers: The owner can have direct contact
with customers and employees. He can know the relations & preferences
of consumers & enables to make necessary changes in quality & design of
his products. It will help him to boost his sales.
9. Inexpensive Management: The sole trader is the owner, manager and
controller of the business. He doesn't appoint specialists for various
functions. He personally supervises various activities and avoid wastages
of the business.
10. No legal Restrictions: There are no illegal requirements for starting a
business. There is no special act governing, not submitting the results, no
restriction in changing the nature and even dissolution is easily
undertaken. The tax liability is also low.
11. Socially Desirable: One man business is generally on a small scale basis.
The consumers will not be dependent upon big business houses. So, sole-
trade business is socially desirable.
12. Self-Employment: The means of self employment to those who do not
want to serve others. As everyone cannot get a suitable job to earn his
livelihood in a developing country, the individuals can easily start a small
sized business unit as a sole-trader.
13. Healthy Relations with Employees: A Sole trader can quickly solve the
grievances of his employees. This results into healthy relations between
employer and employees which is of vital importance for the success of the
business.
14. Benefits of inherited Goodwill: A sole-trader passes on the business
goodwill to his successor. Technically a sole trade business is dissolved
on the death of the owner but in reality the same busines is continued by a
heir.

Disadvantages of sole proprietorship:

1. Limited Resources: The resources of a sole proprietor are limited there is

a limit to which a single person can invest. The capacity for expanding
business operations is limited for want of resources, even when there is a
scope for expansion.

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2. Limited Managerial Ability: One person may not be expert in each and
every function of the business. The managing capacity of the proprietor is
limited. In the present competitive world, complexities of managerial jobs are
increasing everyday limited managerial capacity will hinder the growth of
concern.
3. Unlimited Liability: The liability of a sole proprietor is unlimited a loss in
business may deprive him of his private assets also unlimited liability also
restricts his working.
4. Uncertain Continuity: The business continues as for as sole
proprietor is there. In case of his mobility or death the business is
discontinued. The closure of business will cause inconvenience to the
consumers. It will also result in social loss.
5. Limited Scope for Employees: A sole trader can't attract trained and
qualified persons for reasons of limited career opportunities. It is being
uncertain the employees also remain under psychological pressure. Sole
proprietor can't offer financial incentive to employees because his
activities on small scale. The employees try to join good concerns
whenever an opportunity arises.
6. No Large Scale Economics: A small scale concern can't economise in
purchases, production and marketing a large scale enterprise will have
favourable terms of purchasing and selling of goods. So this type of
concern cannot enjoy the benefits of large scale economics.
7. More Risk Involved: A sole proprietor is to take all decisions by himself
so there is a possibility of taking wrong decisions lack of counselling may
create difficult situations.
8. Possibility of Wrong Decisions: Sole proprietor can't consult experts to
have proper perspective of various aspects related to the decisions because he
can't effort to pay consultation fee. There is a possibility that some
decision may be wrong.
9. Limited Span of Supervision: A sole-proprietor has to supervise various
activities of the business himself. If becomes difficult for one person to
supervise the work of employee. In large scale business the limited span of
supervision is possible.

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10. Weak Bargaining Position: A sole-proprietor has a weak bargaining
position, both as a buyer & also a seller. Since his purchasing power is
limited he has to buy whatever available in market because larger buyers can
get better discounts and lower price.
11. Higher Employee Turnover: The turnover in small scale concerns is
generally higher because the employees are paid lower remuneration and
have limited chances for growth. The owner take all decisions and
conducts all activities himself. So employees don't find better future to
such organisations and will prefer to leave the job at earliest opportunity.

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 CHAPTER – V

PARTNERSHIP (INCLUDED LIMITED LIABILITY

PARTNERSHIP)

I. Long Answer Type Questions :

1Q. Define partnership, Discuss various types of partners?

Ans: Definition: The relationship between persons who agree to carry on a

business in common with a view to private gain.

Types of partners:

1. Active Partner: An active partner is one who takes active part in the day to
day working of business. He may act as manager, organiser, adviser and
controller of all the affairs of firm. He is also known as working partner.
2. Sleeping or Dormant Partner: A sleeping partner is one who
contributes capital, shares profit and contributes to the losses of the business
doesn’t take part in working of the concern.
3. Nominal Partner: He is the one who lends his name of the firm. He doesn’t
contribute any capital nor does he shares profit of the business. He is known

as a partner to 3rd party.

4. Partner is profits: A person may become a partner for sharing the profits
only. He is not allowed to take part in the managent of the business.
5. Partner by Estopped or Holding out: When a person is not a partner but
poses himself as a partner, either by words or in writing or by his acts, he is
called partner by estopped or by holding out.
6. Secret Partner: The position of secret partner lies between active and
sleeping partner. His membership of the firm is kept secret from outsiders.
His liability is unlimited& he is liable for the losses of the business.
7. Sub-Partner: A partner may associate anybody else in his share in the firm.
He gives a part of his share to stranger. The relationship is not between sub-
partner & firm but between his and partner. The sub-

23
 partner is a non – entity for partnership. He is not liable for debts of firm.
8. Minor a partner: A minor is a person who has not yet attained the age of
majority. A minor can’t enter into a contract accordingly to the Indian Contract
Act because a contract by minor is vold ab intio. However, the minor is not
presently liable for liabilities of firm, but his share in partnership property and
profits of the firm will be liable for debts of firm.

2Q. What is Partnership, Discuss various advantages and

disadvantages of partnership form of Organisation?

Ans: The relationship between persons who agree to carry on a business in

common with a view to private gain.

1) Easy to form: This is a suitable type of organisation requiring no legal

formalities. No formal documents are required in case of Joint Stock
Company. Even the registration of firm is optional.
2) Large Resources: The resources of more than one person area available for
the business. The partners can contribute to start a moderately large
– scale concern.
3) Grater Managerial Talent: The partners may be assigned dubits according to
their talent. The talent, expertise and knowledge of patterns in different fields
can be used for the welfare of the business. It will help to increase the
efficiency of the business resulting in more profits.
4) More Credit – Standing: The partners may have sufficient contacts in the
market. As compared to a sole – trade business, partnership concern has more
credit – worthiness.
5) Promptness in Decision – Making: The partners meet frequently and they
can take prompt decisions. The firm will not lose any business opportunities
because of delay in taking a decision.
6) Sharing of Risk: The risk of business is shared by more persons the burden of
every partner will be much less as compared to the burden of sole trade.
Where, the business expansion will not hampered for fear of risk.

24
7) Relationship between Reward and work: The partners try to put more labour to
earn more and more profits. It is direct relation between reward and work. The
more they work, the more they are benefited.
8) More possibility of growth and expansion: Partnership concern more
possibilities for growth and expansion of business, activities the partner can
contribute more and manage the activities more systematically.
9) Close – Supervision: The partners themselves look after the business: so they
can avoid wastages they have direct access to the employee & can encourage
them for more production.
10)Flexibility in operations: There can be any change in managerial setup,
capital and scale of operations. These changes can be made easily depending
upon the business opportunities.
11)Secrecy: A partnership concern is not expected to publish its profit and loss
account and balance sheet as is necessary for a joint stock company. The
partners can keep the business secrets to themselves.
12)Protection of Minority Interests: Every partner has a right to participate in
the Management of the business. If a majority decision is enforced on
minority then effected partners can get the business dissolved.
13)Easy Dissolution: The partnership can be dissolved on insolvency, lunacy or
death of a partner. If the partnership is at will, then any partner can get the
firm dissolved by giving notice to other partners. No legal formalities are
required at the time of dissolution. So it’s easy to start a well as dissolve a
partnership concern.
14)Democratic Administration: All partners may take active interest in the
working of the firm. All the partners are consulted on important decisions.
Generally, strategic decisions are taken by consensus only.
15)Saving in Managerial Expenses: There are savings in expenses of a
Partnership firm. The partners divide all important functions amount
themselves and look after them.

25
Disadvantages of Partnership:

1) Unlimited Liability: The liability of partners is unlimited pertaining to avoid

risks and it restrict s the expansion and growth of the business.
2) Limited Resources: There is a limitation in raising additional resources for
expansion purposes. The business resources are limited to the personal funds
of the partners. Borrowing capacity of partners is also limited. The number of
partner to be added to a business is also limited.
3) Instability: The partnership concern suffers from the uncertain of duration
because is can be dissolved at the time of death, lunacy or insolvency of a
partner. The lack of trust among partners can also lead to dissolution. The
discontinuity of the business is a social loss & it causes inconvenience to
consumer and workers.
4) Mutual Distrust: Amount partners is the main cause for the dissolution of
partnership concerns. Lack of confidence is each other can be cause for
quarrels and it may lead the dissolution of firm.
5) Limitations of Transfer of share: No partner can transfer his share to a third
part without the consent of the other partners. If a partner wants his share
back it will not be possible without the approval of other partners or without
dissolution of the firm.
6) Burden of Implied Authority: A partner can bind the business by him acts.
He can act as an agent of the business. A dishonest partner may lead the
business in difficulties the provision of implied authority may create problems
for the business.
7) Lack of Public faith: There is a suspicion in public mind that these concerns
earn huge profits at the cost of consumers. There is no legal binding of the
publication of accounts. So partnership concerns lack public confidence.
8) Lack of prompt decisions: There may be a possibility of losing business
opportunities because of slow decision making the decisions are generally taken
by consensus, it may be difficult to convince all partners for agreeing to
particular decision.

26
9) Cautions Approach: Unlimited liability of partners leads to cautions approach
on the part of partners. They try to avoid decisions where some sort of risk is
involved.

II Short Answer type Questions:

1Q. What is a Partnership deed? Why is it necessary? Give the main

contents of an ideal deed?

Ans : “Partnership deed is a document containing all the matters according to

which mutual rights, duties and liabilities of the partners in the conduct and
management of the affairs of the firm are determined”.

It is necessary because, in a partnership firm, there is a collective and separate

responsibility of partners. If the partners work with understand and co-operation,
then the partners will work smoothly. If the areas of dispute, conflict or
suspicion are spotted earlier and a clear understanding is reached, then the
business can run smoothly. Even if there is a dispute later on, then partnership
deed helps in its easier settlement.

Contents:

1. The name of the firm;

2. Names & addresses of Partners
3. Nature of business proposed to be carried on by the firm.
4. The total amount of capital & contributions by each partners.
5. The extent to which partners are to take part in the mgf of the firm.
6. Amount of withdrawals to be allowed to each partner.
7. The profit sharing ration:
8. The amount of salary or commission payable to any partners for the services
rendered to the business.
9. Rate of interest to be allowed on capital as well as rate of interest to be
charged on drawings.
10. Division of power and duties among partners ;
11. The method of evaluating goodwill at the time of admitting a new partner
or at the time of retirement/death of partner.

27
12. Procedure for dissolution of firm, maintenance of books, settlement and
audit of accounts and;
13. Arbitration clause for settlement of disputes amount the partners.

28
 CHAPTER – VI

HINDU UNDIVIDED

FAMILY

I. Long Answer Type Questions :

1Q. What is Hindu undivided Family. Explain the characteristics of joint

Hindu family firm? Give various advantages and disadvantages of
this form of organisation.

Ans: Hindu undivided family firm is a unique form of business organisation

which is found only in India. Hindu undivided family refers to a form of
organisation where in the business is owned and carried on by the
members of the family.

Characteristics /features of joint Hindu Family:

1) Governed by Hindu Law: The control & Management of JHF firm is

done according to the un codified or codified Hindu la. The un codified
Hindu law consists of 2 schools Mitakshara and Dayabhaga. In the same
way rights & duties of its members are governed by Hindu law.
2) Membership by birth: The membership of the family can be acquired
only by birth. Whosoever is born in the family becomes a member. By
adoption, an outsider, can be admitted to its membership, because adoption
is considered to the replantation in the family by which a person is being
adopted. Marriage with the male members also confers membership. These
are the only two exceptions by which membership is acquired other
then birth.
3) Management: The family affairs are managed by the senior most
member of the family known as “Karta” or Manager. The powers of
management are unlimited. The members also have full faith and
confidence in ‘Karta’. Only ‘Karta’ is entitled to deal with third parties.
Other can transact with outsiders only with the permission of ‘Karta’.

29
 4) Limited liabilities of others: All the members in a JHF has limited liability
to the extend of property which is jointly help by the family. It is only the
joint family property which liable for satisfying debts.
5) Continuity: The death in the family doesn’t bring the JHF for an end. It
continues forever. There is no limit to its membership number also.
6) Minor also a member: This is an important feature of this business
organisation that a person from its very birth becomes the member.
7) Accounts: The accounts are maintained by Karta but this is not obligatory
on his part. He is not accountable to any member & on member can ask
what are the profits & losses of a transitions.
8) Implied Authority of Karta: There is implied authority in favour of Karta to
contract debts and pledge the property of the family for purpose of family
business. Their decisions are binding on the entire family.

Advantages of Hindu undivided Family:

1) Centralised Management: The management of JHF firms is

centralised in the hands of one person known as ‘Karta’. He may be
managing rightly or wrongly, no other member interferes in his
management.
2) Utmost Secrecy: Karta can do it with utmost secrecy which no other
business can maintain, he can keep a thing secret even from the members
of the firm.
3) Quick Decisioning: In JHF firm, as Karta is the only decision maker, he
can take a very quick decision. It is further advantages that the decision is
final & unchallengeable.
4) Credit Facilities: In JHF firm the more credit facilitates are
available. One reason for this is that the liability of the Kata is unlimited.
Karta is to satisfy even the unsatisfied debts raised by him during his lift
time. Moreover, Karta is having personal relations with others, which are
also helpful in raising credits.

30
 5) Work according to capacity: A person who is more strong than others
may be assigned work of physical nature. Inform are not required to do
any work at all. This is a great advantage of JHF firm.
6) Natural love among Members: In JHF firm, it is the natural love and
affection which the members are having for each other. Due to this, there
ignoring the shortcomings of each other and help to run the business more
smoothly and efficiently.
7) Economy in Operations: It is well balanced and maintained in JHF firm.
The family is concerned with profits as they are to form the part of joint
family property. Karta spends money with great caution and economy. This
is also due to the constantly having sword of partition of family on the
neck of Karta.
8) Limited liability: The liability of all the members of the family firm is
limited to their undivided shares in the property of the family. However,
Karta’s liabilities are unlimited.

Disadvantages of Hindu undivided family:

1) No reward for efficiency: All the members of the family are provided with
basic needs and other facilities. The persons who work more efficiently and
dedicatedly are not rewarded for there work so efficient workers are also
tempted to work less.
2) Limited control: The investments are limited only upto the resources of
one family. They may not be sufficient to meet business requirements for
expansion. This is great disadvantage these days, when big industries are
being encouraged.
3) Limited Managerial Skill: Only the eldest members of the family is to
manage the family business. He may not be conversant with
knowledge of business skill and other problems of business
management. He performs all functions of might. Inspite he also manage
and continues the business of JHF.
4) Suspicion among members: The Karta is empowered with vast power of
secrecy & keep secret even from its members. But there is no restriction
that he can't disclose anything to any person with whom

31
 he love, which gives birth to suspicion among members themselves which
can be disastrous for the JHF.

II Short Answer type Questions:

1Q. Explain about the two school of joint Hindu family (i.e.)
(i) Dayabhaga (ii) Mitakshara.

Ans: (i) Dayabhaga: Dayabhaga system of community is prevalent in West

Bengal, Assam and part of Odisha, This system allows both male and
female members as co-parceners.
(ii) Mitakshara: This system is prevalent in whole India except West
Bengal, Assam & Parts of Odisha. In this system only male members are
allowed to be co-parceners. However, an amendment in Hindu Succession
Act. In 2005, the daughter is allowed as a co-parceners. This amendment
gave equal rights to male and female members.

32
 CHAPTER – VII

CO-OPERATIVE ORGANISATION

I. Long Answer Type Questions :

1Q. What is co-operative society? Give the characteristics of a co-

operative society?

Ans: Co-operator is a form of organisation wherein persons voluntarily associate

together as human beings on the basis of equality for the promotion of the
economic interests of themselves.

Characteristics of co-operative organisation:

1) Voluntary Membership: Voluntary membership is the main ingredient of

co-operation. Everybody willing to join a society is allowed to do so. It has
also been responsible for the success of co- operative movement.
2) Political and Religious Neutrality: The membership of a co- operative
society is open to all irrespective of religion, caste, creed, colour or
political affiliation. Co-operative represents universal brotherhood and it
should not lose its path in political contradictions. So, co-operative
societies are neutral as for as political & religious affiliations are
concerned.
3) Democratic Management: The management of co-operative societies is
always on democratic lines. The management is elected through ‘one-man,
one-vote system. In a co-operative, democracy is more than a system, it is
a condition of its business success co-operative business stands or falls
with democracy.
4) One Man, One Vote: In co-operative societies every member is given one
vote irrespective of his contribution towards the capital. In a co- operative
nobody can control the society on the strength of his wealth. All members
have equal choice in the management of the society.

33
5) Service motive: The service of members is the fundamental objective of
co-operative societies. The societies earn a small amount of profit to
cover up administrative expenses.
6) Distribution of Surplus: The Indian co-operative societies Act has given
guidelines for the distribution of the surplus. A certain percentage is
paid in the form of dividend on capital contributions. At present this rate
should not exceed 9%. One fourth of surplus should be kept as reserve in
society upto 10% of surplus should be spent for the general welfare of the
members.
7) Cash Trading: Co-operatives flourish only when cash trading
principle is strictly followed. Cash trading ensures economy for the co-
operatives. It eliminates load debts and collection expenses.
8) Limited Interest on investments: The pioneers of co-operative
movement wasted to give certain percentage on capital contribution in the
form of dividend. In India, a maximum of 9% p.a can be paid as interest

on contributions to society. This is 1st charge on surpluses of the society.

9) State Control: The co-operative societies are to follow certain rules and
regulations framed by Government. In India, all co-operative societies are
registered under Indian co-operative societies Act or respective state co-
operative laws.
10) Co-operative education and training: The members should be property
educated about the aims & objectives of the societies and they should be
trained to perform various activities of the society. So proper education and
training of members will add to the success of co-operative movement.

34
2Q. Discuss the advantages and disadvantages of co-operative
societies?

Ans: Advantages of Co-operatives:

1) Open Membership: The membership of co-operative societies is open to

each and every person. Nobody is barred from joining societies on the
basis of economic position, caste, colour or creed.
2) Service Motto: The co-operative societies are started not for profits but for
service. The societies try to promote the interest of the members.
3) Supply of Goods at Cheaper Rates: The societies purchase goods directly
from producers and sell them to the members at cheap rates. Even capital
good (Ex: machinery etc.) are procured directly from producers and are
supplied to the members. So co-operative societies ensure regular supply of
goods at cheaper rates.
4) Democratic Management: The management of a co-operative is elected
by the members from among themselves. Every members has equal say in
formulating policies of the society. So these associations are run on
democratic principles.
5) Low management costs: Members take active interest in the working of the
society. So the societies need not spend large amount on management
personnel.
6) Surpluses Shared by Members: These societies sell goods to the members
on a nominal profit to cover up administrative costs. Non- members are
charged at market rates so all profits of the society are either distributed
among members or are spend on their welfare.
7) Check on Other Business: The Co-operatives are a check on other forms
of organisation. Other enterprises will have to lower their prices when co-
operatives are providing these good at lower prices.
8) Limited liability: The liability of members of co-operative societies is limited
only to the extent of capital contributed by them. The private assets of
members cannot be used to pay off the losses of the co- operative societies.

35
 9) State Patronage: The effort is to help economically weaker sections of
society to get goods and services of reasonable prices. The State Government
provides incentives and concessions to co-operative societies and encourages
the opening of such organisations.
10) Social Desirability: Co-operative societies work for the social upliftment of
economically weaker section of society. The surplus profits of these
societies are distributed among members of the society. Such
organisations are socially desirable for saving weaker sections from the
exploitation of those who aim only to increase their profits.
11) Employment opportunities: The societies create jobs for carrying out
its activities. The co-operative established for sugar, spinning mills and in
other areas create employment opportunities for large number of persons.

Disadvantages of co-operative:

1) Lack of capital: The resources of members are not enough to start large -
scale enterprises. They cannot undertake production of goods for want of
funds. So, co-operative societies suffer from lack of capital.
2) Lack of Unity among Members: The members do not take much interest in
the affairs of the society and leave everything to the paid officials.
3) Cash Trading: The cash trading business has both advantages and
disadvantages. The societies sell goods at lower prices but absence of
credit facilities compel them to go to trader for meeting their requirements.
4) Political Interference: The societies are generally under the regulations of
the government. The societies are governed on political consideration rather
than on business lines. Political interference has adversely affected co-
operative movement in India.
5) Unprofessional Management: These societies cannot employ professional
experts to run these organisations because of limited

36
 resources. So the societies are generally run by unprofessional persons.
6) Lack of Secrecy: The members of the society elect persons to manage
their societies. There persons remain changing from time to time. It is very
difficult to maintain secrecy of business policies when many persons are
involved in management.
7) Lack of Motivation: The societies are generally run on no profit no loss'
basis or charge small profits on sales the members do not feel motivated and
do not get incentives for their work.
8) Delay in Decision Making: All decisions are taken during meetings of
members and after proper discussions. The discussions take long time and
sometimes may not arrive at some census. There is delay in taking decisions
and it may adversely affect the working of co- operatives.

37
 UNIT-II : JOINT STOCK COMPANY

Chapter-9 Joint Stock Company

1Q. Define Joint Stock Company & Explain Its Salient Features or characteristics?
Definition: A Joint stock company is a voluntary association of individuals
for profit, having a capital divided into transferable shares, the ownership of which is
the condition of membership .

OR
Section 2(20) of the companies Act, 2013 Provided that “ Company
means A company incorporated under this Act or under any previous
company law”.
Features:
1. Artificial Person:- A Company is created under law and exists independent of its
members. Like a person a company can own property, own bank accounts, under take
agreements with outsiders, raise capital, borrow money, sue others. Therefore, A company
is called a Artificial Person.
2. Formation: A company is formed under companies Act. There are a number of
formalities, which need to be completed before a company is formed. A number of
documents are prepared which are submitted at the time of registration. The formation of a
company is complicated and time-consuming process.
3. Separate Legal Entity: The company is created under law. It has a separate legal entity
apart from its members. A company Acts independently of its members. The company is not
bound by the act of its members, an members do not act as a agents of the company. A
person can own its shares and can be its creditor too. The life of the company is independent
of the lives of its members. The company can sue and be sued in its own name.
4. Liability: The liability of its share holders is limited to the value of shares they have
purchased. In case the Company incurs huge liability, the shareholders can only be called
upon to pay the unpaid balance of their shares. The Company being a separate legal entity
can incur debts in its own name and the shareholders will not be personally liable for that.
However, shareholders of an unlimited company have unlimited liability. The liability of
the members of a company limited by guarantee is limited to the guaranteed amount.

5. Control: There is a separation between management and control. The owners of the
company are shareholders but these are wildly spread in the country. The shareholders elect
board of directors to manage and control the company. The shareholders do not interfere in
the day-to-day working of the company. The board of directors appoint top officials for
running the business.
6. Risk Bearing: In a company form of organisation the risk is borne by all the
shareholders. In the event of financial crisis all the shareholders can be required to contribute
to the extent of their capital contribution. Hence the risk of loss gets spread among all the
shareholders.

38
 7. Common Seal: A company being an artificial person cannot put its signatures. The
law requires every company to have a seal and get its name engraved on it. The seal of
the company is affixed on all important documents and contracts as a token of signature.
The directors must witness the affixation of the seal.
8. Transferability of shares: The shares of a company can be transferred by its members.
Whenever the members want to dispose off the shares. Under Article of Association, the
company can be put certain restrictions on the transfer of shares, but it cannot altogether stop
it.
9. Perpetual Succession: The company has a permanent existence. The shareholders may
come or may go but the company will go on forever. The continuity of the company is not
affected by death, lunacy or insolvency of its shareholders. The company can be wound
up only by the operation of law. The shares of the company may change hands a number
of times but the continuity of the company is not affected at all.

2Q. Define Joint Stock Company. Explain its Advantages and Disadvantages?
Definition: A Joint stock company is a voluntary association of individuals for
profit, having a capital divided into transferable shares, the ownership of which is the
condition of membership .
Advantages:-
1. Limited Liability: The liability of members in a company is limited to the nominal
value of the shares they have acquired. If a person has purchased a share of ₹100, his
liability is
limited to ₹100 only. If the share is partly paid, then he can be required to pay only
the unpaid value of the share.
2. Transfer of Interest: The shares of a public company are freely transferable. A share
holder can dispose-off his shares at any time when the market conditions are favourable or
he is in need of money. Stock exchange provides a ready market for the purchase and sale of
shares. This provides liquidity to the investor and stability of the company.
3. Perpetual Existence: When a company is incorporated, it becomes a separate legal entity.
It is an entity with perpetual succession. The members of a company may go on changing
from time to time but that does not affect the continuity of a company. The continuity of a
company is not only in the interests of the members, but is also beneficial for the society.
The discontinuation of a company may cause wastage of resources, and inconvenience to the
consumers.
4. Scope of Expansion: A company can arrange large financial resources as compared to
sole-proprietorship and partnership forms of organisation. In case more funds are needed,
additional funds can be raised from issue of shares and debentures from the public. A
company is also in a better position to raise loans from banks and other financial
institutions.
5. Professional Management: In company form of organisation, ownership is separate
from management. It enables the company to appoint expert and qualified persons for
managing various business functions. The availability of large-scale resources enables the
company to attract talented persons by offering them higher salaries and better career
opportunities.
39
 6. Economies of Large Scale Production: With the availability of large resources, the
company can organise production on a big scale. The increase in scale and size of the
business will result in economies in production, purchase, marketing and management,
etc. These economies will enable the company to produce goods at a lower cost, thus
result in more profits.
7. Ability to Cope with Changing Business Environment: Technological changes or
taking place every day. The needs of consumers or varied and changing, to cope with the
changing economic environment every business is required to invest money on research and
development programmes. Joint stock company is can afford to invest money on research
projects.
8. Diffused Risk: In sole trade and partnership business, the risk is shared by small number
of persons. Further uncertainties discourage them to from taking up new ventures for fear of
risk. In company form of organisation, the number of contributories, is large; so risk is
shared by a large number of persons.
9. Democratic Set-up: The values of shares is generally small. It enables persons with
low incomes to purchase the shares of companies. Shareholders come from all walks of
life. Every individual has an opportunity to become a shareholder. Secondly, the board of
directors is elected by the members. So members have a say in deciding the policies of the
company.
10. Social Benefits: The company form of organisation mobilises scattered savings of
community. These savings can be better used for productive purposes. The companies also
enables the utilisation of natural resources for better productive uses. Large scale
production enjoys a number of economies enabling low cost of production. The society is
supplied with enough quantity of goods.

Disadvantages:-
1. Dificulty in Formation: Promotion of a company is not an easy task. A number of
stages are involved in company promotion. The suitability of a particular type of business
is to be decided first. A lot of legal formalities are required to be performed at the time of
registration. The shares will have to be sold during the particular time. Promotion of a
company is both expensive and risky.
2. Lack of Secrecy: The management of companies remains in the hands of many persons.
Everything is discussed in the meeting of board of directors. The trade secrets cannot
maintained. In case of sole trade and partnership concerns such secrecy is possible because
a few persons are involved in management.
3. Impersonal Work Environment: There is a separation of ownership and management. It
leads to a situation where there is lack of personal involvement on the part of company
officers. The size of the company is large, it makes it difficult per top management to keep
personal contact with customers, suppliers, employees and creditors.
4. Numerous Regulation: A large number of rules and regulation are framed for the
working of the companies. The companies will have to follow rules even for their internal
working.

40
 The government tries to regulate the working of the companies because large public money is
involved. The formalities are many and the penalties for there non-compliance are heavy.
5. Delay in Decision-Making: In company form of organisation no single individual can
make a policy decision. All important decisions are taken either by the board of directors or
are referred general house. Decision-taking process is time consuming. If some business
opportunity arises and a quick decision is needed, it will not be possible to arrange
meetings all of a sudden. So many opportunities may be lost because of delay in decision-
making.
6. Oligarchic Management: In theory, the management of a company is elected by
shareholders and board of directors exercise managerial control. In practice the number of
shareholders is large and they have no role in running the company. The management is
in the hands of few persons and they perpetuate their control.
7. Conflict on Interest: There may be conflicting interests of different stakeholders. The
shareholders may be interested in getting higher dividend and raising the intrinsic value
of their shares, the employees, on the other hand, are interested in getting higher wages
and salaries. It becomes difficult for the company to reconcile the interests of various
stakeholders.
8. No direct relation between efforts and rewards: The ownership and management of a
public company is in different hands. The owners i.e., shareholders play an insignificant role
in the working of the company. On the other hand, control is in the hands of those who have
no stakes in the company. The management may indulge in speculative business activities.
There is no direct relationship between efforts and rewards.
9. Evils of Factory System: The company from of organisation leads to large-scale
production. The evils of factory like insanitation, air pollution, congestion of cities are
attributed to joint stock companies. Joint stock companies facilitate formulation of business
combinations which ultimately lead to the monopolistic control and exploitation of
consumers.
10. Speculation in shares: The joint stock companies facilitate speculation in the shares at
stock exchanges. The prices of shares depend upon both economic and non-economic factors.
The speculators try to fluctuate the prices of shares according to their stability. The
management of joint stock companies also sometimes encourage speculation in shares for
their personal gains.
11. Fraudulent Management: The promoters and directors may indulge in fraudulent
practices. The management is in the hands of those persons who have not invested much in
the company. The company law has devised methods to check fraudulent practices but they
have not proved enough to check them completely.
12. Concentration of Economic power: The company from of organisation has helped
concentration of economic power in a few hands. Some persons become directors in a
number of companies and try to formulate policies which promote their own interests. It
facilitated concentration of economic power in the hands of a few business houses.

3Q. Describe the kinds of a Company?

41
 Kinds of Companies may be classified into five types. They are:

1. According to Incorporation
2. According to Liability.
3. According to Nationality.
4. On the Basis of Ownership.
5. According to Transferability of Shares.
6. Companies According to Public Interest.
1. Companies According to Incorporation:
1. Characted Companies. This type of companies are incorporated under Royal
Charter issued by the King or Head of the State. Under the charter, certain exclusive
rights and privileges are granted to the company for undertaking certain commercial
activities. If company violates the rules, the Head of the State can close such
companies. Chartered Companies were popular in England in the nineteenth
century.
2. Statutory Companies: These companies are formed under a Special act of
parliament or of a State Legislature. The objects, powers, rights and responsibilities
of these companies are clearly defined in Act. Generally, companies for public utility
services are found under special statutes. These companies may or may not use the
word ‘Limited’. These companies are given wide powers under the Acts.
3. Registered Companies: These are the companies formed and registered under the
provisions of the Companies Act. Most of the companies in India are registered
under the Indian Companies Act, 2013. The method of formation, management and
liquidation are given under various clauses of this Act. Registered companies may be
limited by shares, limited by guarantee or unlimited companies.
2. According To Liability:
1. Companies Limited by Shares: The companies limited by shares have a capital.
The capital is divided into shares. The shareholders pay share money at one time or by
instalments. The shareholders are not liable to pay anything more than the value of the
shares held by them, whatever be the liabilities of the company.
2. Companies Limited by Guarantee: These companies are also formed under
the Companies Act with a stipulation in the memorandum clause that members are
guaranteed to pay a certain amount of money in case of its winding up.The amount
which members undertake to pay is called the guarantee money.
3. Unlimited Companies: The companies registered without limiting the liability of
members to the value of shares are called unlimited. All the members will be liable to
meet the liabilities of the company to an unlimited extent. These companies are
rarely formed.
3. Companies According To Ownership:
1. Government Companies: A company owned by central and/or state government
is called a government company. Either whole of the capital or majority of the shares
are owned by the government. In some cases, private investments is also encouraged
but at least 51% shares are held by the government.
2. Holding Companies: If a company can control the policies of the another
company through the ownership of its share or through control over the composition
of its Board of Directors, the company is called a Holding Company. A company, the

42
policies of which are controlled, is called a subsidiary company. The holding
company has a say in the formulation of policies of the other company.
3. Subsidiary Companies: A company is called a subsidiary company when one of
another the following conditions is fulfilled:
(a) If the formation of Board of Directors is controlled by another company.
(b) The other company controls more then half of the voting rights of this
company i.e., company in question.
(c) If it is subsidiary of a company which itself is the subsidiary of another company.
(d) The other company owns more than half of the maximum value of the shares
in the company.
4. Companies According To Nationality:
1. Indian Companies: A company incorporated in India under the Companies Act,
2013 whether operating in India or outside, is called an Indian Company. There may
be companies incorporated under Indian Companies Act but separate rules are
farmed for their regulations. These companies may be manufacturing companies,
insurance companies, banking companies, etc.

2. Foreign Companies: A foreign company means company incorporated

outside India but has a place of business in India through its branches or agencies.
Such companies have to furnish some information as required by the Registrar of
Companies in India.
5. Companies According to Public Interest:
1. Small Company:- The concept of small company has been introduced for the
first time in the Companies Act, 2013. According to section 2(85) of the Act, small
company means a company other than a public company.
i. Paid up capital of which does not exceed fifty lakh rupees or such high amount
as may be prescribed which shall not be more than five crore.
2. One person Company:- One Person Company (OPC) has been allowed, for the
first time in Companies Act, 2013. A one person company is a one shareholder
corporate entity, where legal and financial liability is limited to the company only.
One person subscribes his name to a memorandum and comply with the
requirements of the Act in respect of registration.
6. Companies According to Transferability of Shares:
1. Public Companies:- Section 2(7) of the Companies Act, 2013 defines a
public company to mean a company which.
a) Is not a private company.
b) Has a minimum paid up capital of Rs.5 lakhs or such higher capital, as may
be prescribed.
c) Is a private company which is a subsidiary of a public company.

2.Private Company:- As per section 2 (68), a private company means a

company which has a minimum paid up capital of one lakh rupees or such higher
paid up capital as may be prescribed, and by its articles:
a) Restricts the right to transfer its shares
b) Limits the number of its member to two hundred.

43
 c) Prohibits any invitation to the public to subscribe for any shares
and debentures of the company.

4Q. Difference between Private Company and Public Company.

S.No. Basis Private Company Public Company

1. Minimum number of Minimum two persons can Seven persons are required to
members form a company form public company
2. Maximum number It cannot be more than 200 No restriction on maximum
of members number of members
3. Transferability of Restriction on transfer of There is no restriction on
Shares shares transfer of shares
4. Prospectus Private company cannot issue a Public company may invite
Prospectus subscription through issue of
Prospectus
5. Minimum directors Must have at least two Must have at least three
directors directors
6. Retirement of Directors are not required rd
At least 2/3 of directors must
directors to retire by rotation be such who will retire in
rotation
7. Quorum for Two members is the quorum The quorum is five members
meetings for meetings
8. Managerial There is no restriction on Total managerial remuneration
Remuneration managerial remuneration cannot exceed 11 per cent of
the net profits
9. Public Deposits A Private Company cannot It is free to accept public
accept deposits from public deposits
10. Paid-up capital Registered with a minimum Registered with a minimum
paid up capital of ₹ 1 lakh paid up capital of ₹ 5 lakhs

CHAPTER:10. PROMOTION OF A COMPANY

1Q-. Define memorandum of association and Describe various clauses of memorandum of

association.
Meaning: The memorandum of association is the constitution of the company and
provides the foundation on which its structure is built. It is the principle document of
the company and no company can be registered without the memorandum of
association.
Definition: “ The memorandum of association of a company as originally framed or
as altered from time to time in pursuance of any previous company loss or of this
act.”

44
 Clauses of Memorandum:-
1. The Name Clause : A company being a separate legal entity must have a name. A
company may select any name which does not resemble the name of any other
company which should not contain a words like king, queen, emperor, government
bodies and the names of world bodies like U.N.O.,W.H.O. World bank, etc. The name
should not be

45
 objectionable in the opinion of the government. The word ‘limited’ must be used at
the end of the name of a public and ‘private limited’ is used by a private company. If
the company has a name which is undesirable or resembles the name of any other
existing company, this name can be changed by passing an ordinary resolution.
2. Registered Office Clause: Every company should have a registered office, the address of
which should be communicated to the registrar of companies. This helps the registrar to
have correspondence with the company. The place of register office has to be intimated
before getting the certificate of commencement.
A company can shift registered office from one place to another in the same town
with an intimation to the registrar. But if the company wants to shift its registered
office from one town to another town in the same state, a special resolution is require
to be passed. If the office is to be shifted from one place to another state it involves
alteration in the memorandum.
3. Object Clause: This is the one of the important clauses of the memorandum of
association. It determines the rights and powers of the company and also defines its sphere of
activities. The object clause gives protection to the subscribers who learn from it the purpose
to which their money can be applied. The object clause should be decided carefully because
it is difficult to alter this clause later on. No activity can be taken up by the company which is
not mentioned in the object clause.
The object clause can be changed to enable a company to carry on its activities more
economically.
4. Liability Clause: This clause states that the liability of the members is limited to the
value of shares held by them. It means that the members will be liable to pay only the unpaid
balance of their shares. The liability of the members may be limited by guarantee. It also
states the amount which every member will undertake to contribute to the assets of the
company in the event of its winding up.
5. Capital Clause: The clause states the total capital of the proposed company. The division
of capital into equity share capital and preference share capital should also be mentioned.
The number of shares in each category and their value should be given. The capital clause
can be altered by passing a special resolution and by obtaining the approval of company law
board.
6. Name of Nominee in case of One Person Company: In case of one person company,
memorandum must sate the name of the person who, in the event of death of the
subscriber, shall become the member of the company. The written consent of the nominee
should be obtained and filed with the registrar of companies.
7. Associate Clause: This clause provides that those who have agreed to subscribe to the
memorandum must signify their willingness to associate and form a company. This clause
contains the names of signatories to the memorandum of association. The memorandum
must be signed by at least seven persons in the case of a public limited company, by at least
two persons in case of private limited company. Each subscriber must take at least one share
in the company and by one person in case of one person company.

46
 2Q. Define articles of association. Discuss various contents of this document.
Meaning : The rules and regulations which are framed for the internal management
of the company are set out in a document named articles of association. The articles
are framed to help the company in achieving its objectives set out in memorandum of
association. It is a supplementary document to the memorandum.
Definition: “Articles of association of the company as originally framed are as
altered from time to time in pursuance of any previous companies law or of this act.”

Contents of Articles of Association:

I. The exclusion, wholly or in part, of the model articles as contained in
respective tables,
II. Share capital – shares and their value and their division into equity and
performance shares, if any.
III. Rights of each class of shareholders and procedure for variation of their rights.
IV. Procedure relating to the allotment of shares, making of calls and forfeiture of shares.
V. Increase, alteration and reduction of share capital.
VI. Rules relating to transfer or transmission of shares and the procedure to be
followed for the same
VII. Lien of the company on shares allotted to the members for the among unpaid
in respect of such shares and the procedure in respect thereof
VIII. Appointment, remuneration, powers, duties etc. of the directors and officers of
the company,
IX. Constitution and composition of audit committee, remuneration committee,
CSR committee
X. Procedure for conversion of shares into stock and vice versa.
XI. Notice of the meetings, voting rights of members, proxy, quorum, poll, etc...
XII. Audit of accounts, transfer of amount to reserves, declaration of dividend, etc..
XIII. Borrowing powers of the company and the mode or exercise of those powers.
XIV. Issue of share certificates including procedure for issue of duplicate shares.
XV. Winding up of the company.

3Q. Define Prospectus. State various contents which are part of prospectus.
Meaning: After getting the company incorporated, promoters will raise finances.
The public is invited to purchase shares and debentures of the company through an
advertisement. A document containing detailed information about the company and
an invitation to the public subscribing to the share capital and the debentures is
issued. This document is called “Prospectus”. Private companies cannot issue a
prospectus because they are strictly prohibited from inviting the public to subscribe
to their shares. Only public companies can issue a prospectus.

Contents:

The following matters are to be disclosed in a prospectus:

1. Name and full address of the company.

47
 2. Full particulars about the signatories to the memorandum of association and
the number of shares taken up by them.
3. The number and classes of shares. The interest of shareholder in the property
and profits of the company.
4. Name, addresses and occupations of members of the board of directors or
proposed directors.
5. The minimum subscription fixed by promoters after taking into account all
financial requirements at the beginning.
6. If the company acquires any property from vendors, there full particulars are to
be taken.
7. The full address of underwriters, if any, and the opinion of directors that
the underwriters have sufficient resources to meet their obligations.
8. The time of opening of the subscription list
9. The nature and extent of interest of every promoter in the promotion of the company
10. The amount payable on application, allotment and calls
11. The particulars of preferential treatment given to any person for subscribing shares
or debentures
12. Particulars about reserves and surpluses
13. The amount of preliminary expenses
14. The name and address of the auditor
15. Particulars regarding voting rights at the meeting of the company.

Short Answers
1Q. One person company ?
A new concept of ‘one person company’ has been incorporated in the
companies act 2013. This concept is widely accepted in developed countries like
U.K., china but has been introduced in India for the first time. J.J. Irani committee
was setup to suggest changes in companies act 1956 and it was the recommendation
of this committee that one person company was incorporated in companies act 2013.
It is a company with only one person as its member.
One person company provides the benefits of sole-proprietorship and
company. OPC is run in the same way as sole-proprietorship and limiting the liability
of the owner to the shares subscribed by him [limited liability]. All the provisions of
the act applicable to a private company shall also be applicable to one person
company. One person company shall be treated as a private company for all legal
purposes with only one member.

Formation of one person company:

An Indian citizen and resident in India can form one person company.
One person cannot from more than one OPC or become nominee in more than
one OPC. It must have only one member at any point of time and may have only
one director.
2Q. What is meant by Statement in Lieu of Prospectors?

STATEMNET IN LIEU OF PROSPECTUS

A Public company raises funds from the public and it issues prospectus for this purpose.
The promoters may also decide to approach public for raising necessary capital. The
48
 directors of the company may be hopeful of raising required funds from friends
and relatives or through underwriters. In such a situation, a prospectus need not
be issued but a statement in lieu of prospectus must be filed with the Registrar
at least three days before the first allotment of shares. This statement will be
prepared strictly in accordance with the particulars set out in part I of schedule III
of the Act.

49
 UNIT-3
Introduction to functions of Management

1Q:Whatisthescientificmanagement?

Inspiteofso manybenefits,scientific
managementhasevokedcertaincriticismfromvarious quarters. It has been severely
criticized by the workers, the employers and the industrial psychologists.

(A) Workerscriticism

1. Speedingupofworkers:Workersfeelthatscientificmanagementenvisagesreasonable
working hours with adequate rest pauses, proper working conditions and others safety
measures for the well being of workers.

2. Loss of workers skill and initiative: Workers allege that under scientific management
they are reduced to the position of machines as the work methods and operations are
standardized.Thisleadtolossofinitiative fromtheworkersandtheycannotsuggest better
methods of work.

3. Monotony:Underscientific management thefunctionsofplanning isseparated-fromthat of

doing. Everyworker is expected to perform his small part of a job due to specilasations.

4. Une3mployment:Scientificmanagement reducesthenumberofprocessesandmotionsof
workers, increase the hourly or daily output per worker, increases their efficiency by
standardizationand divisionoflabour,thereby, it createsunemployment byrequiring lesser
number of workers.

5. Exploitation of workers : The workers allege that, under a scheme of scientific

management,there isanexploitationofworkers.Thegainsofincreasedproductivityarenot shared
appropriately with the workers.

6. Discriminationamongworkers:Undertheschemeofscientificmanagement,efficient
workers get more wages as compared to the inefficient ones due to the differential wage
incentive scheme as suggested by Taylor.

7. Undemocratic in nature: Workers object that scientific management is undemocratic in

natureasit givesabsolutecontroloverworkerstothe functionalbosses. Theworkershaveto follow
the instructions of the bosses without thinking on the part of the workers.

8. WeakeningofTradeUnions: Workersallegethattheschemeofscientific management

killsthevery basisoftradeunionmovement. Importantmatterslike fixationofwage, work
methods, working conditions, hours of work, etc are all decided by the management. This
weakens the process of collective bargaining and the information of trade unions.

(B) Employerscriticisms

1. Expensive:Theintroductionofscientificmanagement involvestopheavyexpenditureon
account of standardization of materials, equipment, tools and working conditions. Further,
expenses are incurred on conducting time, motion and fatigue studies.

2. Re-organisation: The introduction of scientific management calls for a complete

50
reorganisationofthewhole set upofindustrialunit. Amajorityoforganizers, topexecutives, line
managers and others are so, attached with the old routine that theyare not mentally prepared
for any major change.

51
3. Unsuitable for small-scale Units: Some employers are of the opinion that scientific
management issuitable foronlylarge-scaleunitscannot affordstointroducetheschemeof
scientific management.

4. Over-production: Employers allege that if scientific management is introduced byall

unitsinone industry, it mayleadtoover-productionorglut inthe market,whichinturn,is bound
to cause recession in the market.

(C) Psychologistscriticisms

1. Mechanical in Nature: The most important criticisms advanced against scientific

management bythe industrialpsychologistsisthatit ismechanicalinapproach.Theworkers have
to work strictly in accordance with the instructions given them.

2. Speeding up of workers: Scientific management forces workers to work to a greater

speed, withoutmuchregardfortheir healthandsafety. Itcreatesalotofphysicaland mental strain
upon them.

3. Monotony:Specialisationasenvisagedunderscientificmanagementresultsinmonotony. It
reduces efficiency as the worker tends to lose interest in his job. The industrial
psychologists suggest job enlargement as a possible solution to reduce the monotony of
continuous work.

4. AbsenceofNon-WagesIncentives: Scientific management providestheuseofonly

monetary financial incentives by way of differential wage plan. But the industrial
psychologistsareoftheviewthattherearevariousnon-monetaryincentivessuchas job
security, independence recognition urge for self expression status promotions etc.

5. OnebestwayofDoingwork: Scientificmanagement isprimarilyconcernedwithfinding one

best wayofdoing work. Allthe workers are expected to do the work inaccordance with the
‘one best’ way.

(D) TheoreticalObjections

1. Separationofplanningfrom‘Doing’:Scientificmanagementregardsplanninganddoing as
two separate jobs. Peter Drucker points out that separation of planning fromdoing is a major
blind spot of this doctrine.

2. One-sideApproach: Scientific management lays more emphasis on the engineering side

ofthework,itsminutedivisionintoparts,workstudy,taskplanning,routineandscheduling, and so
on.

3. Too Much of Specialisation: Under scientific management there is a complete

specialization.Workersareexpectedtoworkunderthestrict instructionsoffunctional
bosses.

4. Pessimistic Assumptions: The scientific management there is a based too much on

pessimisticassumptionsabout humannature.DougalsMcGregorisoftheopinionthat active and
responsible role should be assigned to workers and there should be management by
Objectives and ‘self-control’

52
2Q)Explain theneedsofimportant ofManagement?

Management istheartofsecuring maximumprosperitywitha

minimumofeffort.Wherever there is an organized group of people working towards
common goals, some type of management becomes essential. It has been rightly said
that anything minus management amounts to nothing.

1. Achievementofgroupobjectives:Itisthemanagementwhichmakesthepeoplerealize the
objectives of the group and directs their efforts towards the achievement of these
objectives.

2. Optimum utilisation of resources: No business activity can be undertaken without the

five factorsofproductionviz.,theland, labour,capital,enterpriseandthemanagement.The four
factors may prove ineffective in the absence of the fifth-the management. It is the
management which makes optimum utilization of resources possible.

3. Minimisationsofcost(tocombatrisingcompetition): Inthepresent daysofincreasing

competition, only those businessenterprise can survive which can produce quality goods at
the lowest of costs.

4. Increased Profits: Profits can be increased in any organisation either by increasing the
sales revenue or reducing cost. To increase the sales revenue is beyond the control of an
organization.Management byreducingcostsincreasesitsprofitsandprovidesopportunities for
future growth and development.

5. Smooth running of business: Management ensures efficient and smooth running of

businessthroughbetterplanning,soundsorganisation,effectivecontrolandthe varioustools of
management.

6. ProvideInnovation:Managementprovidesnewideas, imaginationandvisionstothe
organisation.

7. Change of Growth: An enterprise operates in an changing environment. Management

moulds the enterprise in such a changing environment. It moulds not only the enterprise but
also alters the environment itself to ensure the success of the business. In order to meet the
challengeofautomationandthecomplexitiesofadvancedtechnologyalso thereisa need for the
development of management.

8. Meeting Social Obligations: Management is beneficial not only to the business

enterprises but to the societyas a whole. It raises the standard of living of the people by
providinggoodqualityproductsandservicesatthelowest possiblecost.Italso makesthe
optimum use of scarce resources and promotes peace and prosperity in the society.

9. Special Important of Management in India’s Developing Economy: Management has

toplaya morevitalrole inthedevelopingcountries likeIndia, whereproductivityis lowand
theresourceslimited.Ithasbeenrightlysaid,‘Therearenounderdevelopedcountries.There are
only under-managed ones.”

53
 3Q) HenryFayal14principlesofmanagement

HenriFayol, a French industrialist, isnow recognized asthe Father ofModernManagement.

Inthe year 1916Fayolwroteabookentitled“IndustrialandGeneralAdministration”. Inthis book,
he gave the 14 Principles of Management.

1. DivisionofWork

Dividingthefullworkoftheorganizationamongindividualsandcreatingdepartmentsis
called the division of work.
Divisionofworkleadsto
specialization,andspecializationhelpstoincreasesefficiencyand efficiency which
results in improvements in the productivity and profitability of the organization.

2. Authorityand Responsibility
Authoritymustbe equaltoResponsibility.
According to Henri Fayol, there should be a balance between Authority (Power)
andResponsibility(Duties).Theright togiveordersshouldnot beconsideredwithoutreference to
responsibility.
Iftheauthorityis morethanresponsibilitythenchancesarethat amanager maymisuse it. If
responsibility is more than authority then he may feel frustrated.

3. Discipline
Outwardmarkofrespect inaccordance withformalorinformalagreementsbetweena
firm and its employees.
Discipline meansrespect fortherulesandregulationsoftheorganization.Discipline
maybe Self-discipline, or it may be Enforced discipline.
No slackingorbendingofrules,notallowed inanyorganization.Theworksmust
respectthe rules that runthe organization. To establish discipline, good supervision
and impartial judgment are needed.

4. Unity of Command
Accordingtothisprinciple,asubordinate(employee)must
haveandreceiveordersfromonly one superior (boss or manager).
Toputit anotherway,asubordinate must
reporttoonlyonesuperior.Ithelpsinpreventing dualsubordination.
Thisdecreasesthepossibilitiesof“Dualsubordination”whichcreatesa problem is a
function of managers.

5. Unity of Direction
One headandoneplanforagroupofactivitieswiththesameobjective.
Allactivitieswhich have the same objective must be directed byone manager, and
he must use one plan.
Thisiscalledthe UnityofDirection.
Forexample,allmarketingactivitiessuchasadvertising,salespromotion,pricingpoli
cy, etc., must be directed by only one manager.
He must use onlyone plan for all the marketing activities. Unity of direction
meansactivitiesaimedatthesameobjectiveshouldbeorganizedsothatthereareoneplanand
one person in charge.

6. SubordinationofIndividualIntereststothe GeneralInterest
The interest of one individual or one group should not prevail over the general
good. The individualinterest shouldbegivenlessimportance,whilethegeneralinterest
shouldbegiven the most importance.
Ifnot,theorganizationwillcollapse. The interestoftheorganizationalgoalshould not be
sabotaged by the interest of an individual
54 or on the group.
7. Remuneration

55
 Remunerationistheprice forservicesreceived.Payshouldbe
fairtoboththeemployeeand the firm.
Ifanorganizationwantsefficient employeesand best performance,thenit
shouldhavea good remuneration policy.
Thispolicyshouldgive maximumsatisfactiontobothemployersandemployees.It should
include both financial and non-financial incentives.
Compensationshouldbebasedonasystematicattempttorewardgoodperformance.

8. Centralization
Itisalwayspresenttoagreaterorlesserextent, dependingonthesizeofthecompanyandthe qualityof
its managers. In centralization, the authority is concentrated only in a fewhands.
However,indecentralization,theauthorityisdistributedto allthe
levelsofmanagement.No organization can be completely centralized or decentralized.
If there is complete centralization, then the subordinates will have no authority
(power) to carryouttheirresponsibility(duties).Similarly,
ifthereiscompletedecentralization,thenthe superior will have no authority to
control the organization.
Therefore, there should be a balance between centralization and
decentralization.Thedegreetowhichcentralizationordecentralizationshouldbeadopted
dependsonthespecificorganization, but managersshould retain finalresponsibilitybut
should give subordinates enough authority to do the tasks successfully.

9. ScalarChain
Thechainofcommand,sometimescalledthescalarchain, istheformallineofauthority,
communication, and responsibility within an organization.
Thechainofcommandisusuallydepictedonanorganizationalchart,whichidentifies the
superior and subordinate relationships in the organizational structure.
Or it isthe lineofauthorityfromtoptobottomoftheorganization. Thischain
implements the unity-of-command principle and allows the orderly flow of
information.
Undertheunityofcommandprinciple, theinstructions flowdownwardalongthechainof
command and accountability flows upward.
Moreclear-cutthechainofcommand,the moreeffectivethedecision-makingprocessandthe
greater the efficiency.

10. Order
Aplace foreverythingandeverything initsplace’theright manintheright
place.There should be an Order for material/things and people in the
organization.
OrderforthingsiscalledMaterialOrderandorderforpeople iscalled‘SocialOrder’.
Material Order refers to “a place for everything and everything in its place.”
SocialOrderreferstotheselectionofthe“rightmanintherightplace”.
There must be an orderlyplacement ofthe resources such as Men and Women,
Money, Materials,etc.Humanandmaterialresourcesmust beintheright
placeattherighttime. Misplacement will lead to misuse and disorder.

11. Equity
Whiledealingwiththeemployeesa managershouldusekindlinessand justicetowards
employees equally. Equity is a combination of kindness and justice.
Itcreatesloyaltyanddevotionintheemployeestowardtheorganization.
Theequityprinciple suggests that the managers must be kind as well as equally fair to
the subordinates.

12. StabilityofTenureofPersonnel
Althoughit couldtakealotoftime,Employeesneedtobegivenfairenoughtimeto
56
settle into their jobs. An employee needs time to learn his job and to become
efficient.
Theemployeesshouldhavejobsecuritybecauseinstabilityleadstoinefficiency.Successfu
l firms usually had a stable group of employees.

57
13. Initiative

Withoutlimitsofauthorityand discipline,
alllevelsofstaffshouldbeencouragedtoshow initiative. Management should
encourage initiative.
That is, theyshould encourage the employeesto make their ownplansand to
executethese
plans.Thisisbecauseaninitiativegivessatisfactiontotheemployeesandbringssucces
sto the organization.
Itallowsthesubordinatestothinkoutaplananddowhatittakestomakeithappen.

14. EspritDeCorps
Esprit deCorpsmeans“TeamSpirit”.Therefore,the management shouldcreateunity,co-
operation, and team-spirit among the employees.
Theyshouldavoiddividingandrulepolicy.Harmony,cohesionamongpersonnel.It’sagrea
t source of strength in the organization. It is a quality in every successful business.
These principles are guidelines for every management function. The manager
must act
accordingtothe14principlesofmanagement;inordertoreachthegoalandcreateasurplus
. These 14 management principles of Henri Fayol are universally accepted. they
work as a guideline for managers to do their job according to their responsibility.
Code:urcsdid u seegoa

1 U=Unityofcommand
2 R=Remuneration
3 C=CentralisationandDecentralisation
4 S=Stabiltyoftenureofpersonnel
5 D=Divisionoflabour
6 I=Initiative
7 D=Discipline
8 U=Unityofdirection
9 S=Scalarchain
10 E=Equity
11 E=EspritDecorps
12 G=SubordinatonofindividualinteresttoGeneralinterest
13 O=Order
14 A=AthorityandResponcibility

4Q) Functions/process/stepsofmanagement

Management has been described as a socialprocess involving responsibility for

economical and effective planning & regulation of operation of an enterprise in
the fulfillment of given purposes. It is a dynamic process consisting of various
elements and activities. These
activitiesaredifferentfromoperativefunctionslikemarketing,
finance,purchaseetc.Rather these activities are common to each and every manger
irrespective of his level or status.

Differentexpertshaveclassifiedfunctionsofmanagement.Accordingto
George&Jerry, “Therearefourfundamentalfunctionsofmanagement
i.e.planning,organizing,actuating and controlling”.

According to HenryFayol, “To manage isto forecast and plan, toorganize, to

command, & tocontrol”.WhereasLutherGullick hasgivena
keyword’POSDCORB’wherePstandsfor Planning, O for Organizing, S for
58
 Staffing, D for Directing, Co for Co-ordination, R for reporting & B for
Budgeting. But the most widely accepted are functions of management given by
KOONTZ and O’DONNEL
i.e.Planning,Organizing,Staffing,DirectingandControlling.

59
 Fortheoreticalpurposes, it maybeconvenientto separatethefunctionofmanagement but
practicallythese functions are overlapping innature i.e. theyare highly inseparable.
Each function blends into the other & each affects the performance of others.

1. Planning

It is the basic function of management. It deals with chalking out a future course of
action&deciding inadvancethe most appropriatecourseofactionsforachievement ofpre-
determinedgoals.AccordingtoKOONTZ,“Planning isdeciding inadvance - what to do,
when to do & how to do. It bridges the gap fromwhere we are & where we want to
be”. A plan is a future course of actions. It is an exercise in problem solving
&decisionmaking.Planning isdeterminationofcoursesofactiontoachieve desired goals.
Thus, planning is a systematic thinking about ways & means for accomplishment of
pre-determined goals. Planning is necessary to ensure proper utilization of human &
non-human resources. It is all pervasive, it is an intellectual activity and it also helps
in avoiding confusion, uncertainties, risks, wastages etc.

2. Organizing

It is the process of bringing together physical, financial and human resources and
developingproductiverelationshipamongstthemforachievementoforganizational goals.
According to Henry Fayol, “To organize a business is to provide it with
everythingusefuloritsfunctioningi.e.rawmaterial,tools,capitalandpersonnel’s”. To
organize a business involves determining & providing human and non-human
resources to the organizational structure. Organizing as a process involves:

 Identificationofactivities.
 Classificationofgrouping ofactivities.
 Assignmentofduties.
 Delegationofauthorityandcreationofresponsibility.
 Coordinatingauthorityandresponsibilityrelationships.
3. Staffing

It is the function of manning the organization structure and keeping it manned.

Staffing has assumed greater importance in the recent years due to advancement of
technology, increase insizeofbusiness,complexityofhumanbehavioretc.The main
purposeo staffing isto put right manonright job i.e. squarepegsinsquareholesand round
pegsinround holes. According to Kootz &O’Donell, “Managerialfunctionof staffing
60
involves manning the organization structure through proper and effective

61
 selection, appraisal&development ofpersonneltofilltherolesdesignedunthe structure”.
Staffing involves:

 ManpowerPlanning(estimating manpowerintermsofsearching,choosethe
person and giving the right place).
 Recruitment,Selection&Placement.
 Training&Development.
 Remuneration.
 PerformanceAppraisal.
 Promotions&Transfer.
4. Directing

It is that part of managerial function which actuates the organizational methods to

work efficiently for achievement of organizational purposes. It is considered life-
spark ofthe enterprise which sets it in motion the action ofpeople because planning,
organizingandstaffingarethemerepreparationsfordoingthework.Directionisthat inert-
personnelaspect ofmanagement whichdeals directlywithinfluencing, guiding,
supervising, motivating sub-ordinate for the achievement of organizational goals.
Directionhasfollowingelements:

 Supervision
 Motivation
 Leadership
 Communication

Supervision- impliesoverseeingtheworkofsubordinatesbytheirsuperiors.It isthe act of

watching & directing work & workers.

Motivation-meansinspiring,stimulatingorencouragingthesub-ordinateswithzeal to
work.Positive, negative, monetary, non-monetaryincentives may beused forthis
purpose.

Leadership- maybedefinedasaprocessbywhichmanagerguidesand influences the

work of subordinates in desired direction.

Communications- istheprocessofpassing information,experience,opinionetcfrom one

person to another. It is a bridge of understanding.

5. Controlling

It implies measurement of accomplishment against the standards and correction of

deviation if any to ensure achievement of organizational goals. The purpose of
controlling istoensurethat everythingoccursinconformitieswiththestandards.An efficient
system of control helps to predict deviations before they actually occur.
According to Theo Haimann, “Controlling is the process of checking whether or not
proper progress is being made towards the objectives and goals and acting if
necessary,to correct anydeviation”.AccordingtoKoontz&O’Donell“Controllingis the
measurement & correction of performance activities of subordinates in order to make
sure that the enterprise objectives and plans desired to obtain them as being
accomplished”. Therefore controlling has following steps:

a. Establishmentofstandard performance.
b. Measurementofactualperformance.
c. Comparisonofactualperformancewiththestandardsand finding out
deviation if any.
d. Correctiveaction.
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 SHORT QUESTIONS:

1Q)SKILLSOFMANAGEMENT

A manager has to performa number of jobs. It necessitates that a manager

should have properskillstoperformdifferent jobs.HenryFayolput
thequalitiesrequiredbymanagers.

Robert L.Katzconductedresearchduringearly1970’sand foundthat

mangersneedthree essential skills or competencies: technical, human &
conceptual.

 TECHNICAL SKILLS: A manager have the necessary technical skills or the

abilityto workwiththeresources,tools,technical,proceduresetc.First lineaswell as
many middle managers have involved in technical aspects of the organisation’s
operations.
 HUMANSKILLS:Itistheabilityto workwellwithotherpeoplebothindividually and in
a group. Managers with human skills can get best out of the people working with
them. They know how to communicate, motivate, lead and inspire enthusiasm and
trust.
 CONCEPTUAL SKILLS: Conceptual skills is the ability to integrate and co-
ordinate various activities. Managers must have the ability to think and to
conceptualiseaboutabstractsolutions.Theymust beableto seethe organisationas
awhole and the relationship among its various subunits and to visualize how the
organisation fits into its broader environment.

2Q)VARIOUS LEVELOF MANAGEMENT

An organisations may have various levels of management. The term level

involves persons arrangedinaseries.Thuslevelsofmanagement
suggestthearrangedmanagerialpositionsin an organisation. This chain is divided
into three levels of management.

1. Toplevel management

2. Middlelevelmanagement

3. Lowerlevel/Operatinglevelmanagement

63
64
1. Toplevel:Toplevelmanagement consistofsenior most executivesoftheorganization and
their teams.

 Board ofDirectors
 ManagingDirector
 President
 Vice-President
 ChiefExecutiveofficer(CEO)
 ChiefFinancialController (CFO)

2. Middlelevel: Middle levelmanagement actsasa link betweentopmanagement andthe

supervisory level. These are departmental head and responsible for implementing and
controlling polices and plans decided at the top level.

 ProductionManager
 MarketingManager
 FinanceManager
 OperationsManager
 RegionalManager
 DivisionalManager
 HumanResourceManager
3. Low level :This is the lowest level in the hierarchyof management and actualoperations
aretheresponsibilityofthis level. Thequantityofoutputdependsupontheefficiencyofthis level of
managers.
 Supervisors
 Superintendents
 Inspectors
 Foremen
 SectionOfficers

65
 UNIT-IV-PLANNING & ORGANISING

Chapter-14-Planning
1Q. Define planning. Explain in detail various advantages and disadvantages of
planning.
Definition: planning is a function that determines in advance what should be done. It
consists of selecting the enterprise objectives, policies, programmes, procedures and other
means of achieving these objectives.
Advantages:
1. Facing Complexities Of Modern Business: The business is becoming more and
more complex. There is a globalisation of business, competition is increasing, and
constant need for creativity and many more issues crop up in day to day working.
There is a constant need to plan the things to face complex situation. Planning helps a
businessman to face emerging situations in a systematic way.
2. Forewarn Against Business Failures: business failures may due to wrong and
unscientific planning. A bad planning may cause wastage of resources and loss of
opportunities. The business may fail to face competition from efficiently run units.
Better planning and proper implementation will be able to save the business from
failures.
3. Attention on Objectives: Planning helps in clearly laying down objectives of the
organisation. The whole attention of management is given towards the achievement of
those objectives. There can be priorities in objectives, important objectives to be take
an up first and others to be followed after them.
4. Minimizing Uncertainties: Planning is always done for the future. Nobody can
predict accurately what is going to happen. Business environments are always
changing. Planning is an effort to foresee the future and plan the things in a best
possible way.
5. Better Utilisation of Resources: another advantage of planning is better utilisation of
resources of the business. All the resources are first identified and then operations are
planned. All resources are put to be possible uses.
6. Economy in Operations: The objectives are determined first and then best possible
course of action is selected for achieving these objectives. The operations selected
being better among possible alternatives, there is an economy in operations.
7. Better Co – Ordination: The objectives of the organisation being common, all
efforts are made to achieve these objectives by a concerted effort of all. The
duplication in efforts is avoided. Planning will lead to better co-ordination in the
organisation which will ultimately lead to better results.
8. Encourages Innovations and Creativity: A better planning system should
encourage managers to devise new ways of doing the things. It helps innovative and
creative thinking among managers because they will think of many new things while
planning.
9. Management by Exception Possible: Management by exception means that
management should not be involved in each and every activity. If the things are going
well then there should be nothing to worry and management should intervene only
well things are not going as per planning.
66
10. Facilitates control: planning and controls are inseparable. Planning helps in setting
objectives and laying down performance standards. This will enable the management

67
to check performance of subordinates. The deviations in performance can be rectified at the earliest
by taking remedial measures.

Disadvantages of planning.
1. Lack of reliable data: Planning is based on various fax and figures supplied to the
planners. if the data on which decisions are based on are not reliable then decisions
based on such information will also be unreliable. Planning will lose its value is
reliable facts and figures are not reliable.
2. Difficulty in selecting best alternative: In planning a number of alternatives are
developed and one best one is selected. Finding out the best alternate is a difficult task
.there may be a difference among managers about the most suitable alternative.
Different managers may identify different alternatives as the most suitable but one is
to be accepted.
3. Difficulty in taking quick decisions: Sometimes quick decisions need to be taken for
benefiting from a particular situation. They may be sudden developments which were
not anticipated earlier and quick decision needs to be taken.
4. Time consuming process: Practical utility of planning is sometimes reduced by the
time factor. Planning is a time – consuming process and actions on various operations
may be delayed because proper planning as not yet been done. The delay may result
in loss of opportunities.
5. Expensive: The planning process is very expensive. The gathering of information and
testing of various courses of action involve greater amounts of money. Sometimes,
expenses are so prohibitive that small concerns cannot afford to use planning.
6. External factors may reduce utility: Besides internal factors there are external
factors too which adversely affect planning. These factors may be economic, social,
political, technological or legal. The general national and international climate also
acts as limitation on the planning process.
7. Sudden emergencies: In case certain emergencies arise then the need of the hour is
quick action and not advanced planning. This situation may not be anticipated. In case
emergencies are anticipated or there have regularity in occurrence then advance
planning should be under taken for emergencies too.
8. Resistance to change: Most of the persons, do not like any change. Their passive out
look to new ideas becomes a limitation to planning. McFarland writes, “The principal
psychological barrier is that executives, like most people have more record for the
present than for that future.

2Q.Define planning. Explain various types of planning.

Definition: planning is a function that determines in advance what should be done. It

consists of selecting the enterprise objectives, policies, programmes, procedures and other
means of achieving these objectives.
Plans may be classified on the basis of time, levels, broadness and use This classification
is given as follows:

I. On the Basis of Time

Plans on the basis of time may be described as follows:

68
 1. Long term plans: These are the plans for three and more years. These plans
are formulated to achieve long term objectives and are prepared at the top level
of the management.
2. Medium term plans: The period of medium term plans varies between one to
three years. The middle level managers prepare medium term plans.
3. Short term plans: These plans are generally for a year or less. These plans are
meant to meet current objectives and also to help in the achievement of middle
level and long term plans. These plans are prepared at lower level of the
management.
II. On the basis of the Managerial Levels
1. Top Level Plans: These plans are formulated at top level of the management.
The Directors, Managing Director or General Manager are associated with
planning for long term objectives, policies, programmes, budgets etc.
2. Middle level Plans: Middle level management consists of departmental
managers. They make plans for medium term periods and these plans are
prepared in the context of main or long term plans.
3. Lower Level Plans: these plans are prepared at the level of a supervisor or
foreman. These plans are generally for short period and are meant to achieve
current targets.
III. On the Basis of Broadness
1. Corporate Level Plans: These plans are prepared for the whole organisation
and are meant to achieve organisational objectives.
2. Departmental Level Plans: The plans prepared by departments for achieving
immediate and near future objectives are called department level plans.
IV. On the Basis of Use
Plans on the of Use

Multi-purpose use Plans Single use Plans

Objectives Programmes
Policies Schedule
Strategies Budgets
Producers
Rules
3Q.What is MBO. Explain its Features and Objectives of MBO?
MBO is a result-centered, non-specialist, operational managerial process for the
effective utilisation of material, physical, and human resources of the organisation by
integrating the individual with the organisation and organisation with the environment.
Features of MBO:
1. MBO is a Philosophy: MBO is not merely a technique but a philosophy to
management. A technique is applicable only in specified areas but a philosophy or
approach guides and influences every aspect of management. MBO is an approach
which includes various techniques of better management.
2. Objectives Decided Collectively: In this approach various objectives of the
organisation and of individuals are collectively decided by superiors and
69
 subordinates. These objectives become the targets which are to be achieved by
various persons in the organisation. The review of objectives is also done
collectively.
3. Basis for Measuring Performance. The corporate, departmental and individual
objectives are used as a yardstick to measure performance. A comparison of targets
and actual results will enable managers to judge the performance of subordinates
and top level management will similarly assess the performance of managers.
4. Regular Review of Performance: MBO provides for a regular review of
performance. This review is normally held once in a year It emphasises initiative
and active role by the manager who is responsible for achieving the objectives.
5. Guidelines for setting up System: The objectives in MBO provide guidelines for
appropriate system and procedures. The degree of delegation of authority, fixation
of responsibility, allocation of resources etc. can be decided on the basis of
objectives of various individuals.
6. Matching of Objectives and Resources: The objectives are set on the basis of
availability of resources. There will not be a problem of resources for achieving the
objectives since both are matched with the objectives.
7. More freedom to subordinates: MBO system not only decides objectives in
consultation with the subordinates, but it gives them freedom in implemention also.
The subordinates are free to decide their course for achieving the objectives set for
them.
8. Integration of Objectives: The objectives of the organisation, department and
individual are integrated. First the objectives of the organisation are decided, then
objectives of various departments are set in conformity with the organisational
objectives.
Objectives of MBO
1. Measuring Performance: The main objective of setting objectives is to measure
the performance of persons. Since the objectives are set with the participation of
persons for whom these are set, they know that their evaluation will be done on the
basis of their actual performance.
2. Increasing Growth of Subordinates: When goals are given to the employees then
they will try to achieve them by improving their performance When employees
achieve their goals then it will give them confidence and help in their growth.
3. Encouraging Efficiency: MBO process encourages efficient persons since their
performance comes to the notice of the management. When the output or
performance of individual persons is not separately counted or recorded then there
will be no record of performance of different persons.
4. Relating individual performance to Organisational Goals: The individual
performance of different persons will be related to organisational goals. The
organisational goals are set first and then the individual goals will be determined to
enable the achievement of organisational goals.
5. Basis for Deciding Salary and Promotion: The performance of individuals at
work will be the best criterion for deciding about salaries of individual employees.
The annual pay rises and incentives to be given to employees can be worked out on
the basis of their performance.
6. Improving communication among Superiors and Subordinates: Another
objective MBO is to improve communication among superior and subordinates.
70
 Firstly, when objectives are set, both superior and subordinate sit together and take
the decisions after proper discussions.
7. Device of Organisational Control: MBO helps in assessing the organisational
performance against the given objectives. Regular information about the
performance of employees will help the management in assessing the overall
results of the organisation, the management will be able to take quick actions.

4Q. What are the Process/Steps involved in Management By Objectives?

MBO is used to plan goals for the employed through their own participation. The
goals will act as motivational factor and help in increasing employee efficiency. The setting
of objectives requires following steps:
1. Setting Objectives at the Top: The first step in MBO process is to analyse the
purpose or mission of organisation. This exercise is undertaken at the top level. The
mission of the organisation will be converted into goals for a given period; it may be
for a quarter, half year, a year, 5 years or more. In many cases objectives are set to
coincide with the completion of a project or with an annual budget. This may not be
desirable.
2. Clarifying Organisational Roles: Sometimes organisational roles are not properly
clarified and specific responsibility for attaining the objectives is not fixed. There
should be a clear cut assignment of tasks and fixation responsibilities. In some cases
the responsibility of one person for a particular task may not fixed. For example, the
development of a new product may be the responsibility of research, production and
marketing managers. Such activities can be put under the overall command of a
particular person, say product manager.
3. Setting Subordinates Objectives: The subordinate managers should be informed of
general objectives, planning premises and strategies of the company. The Superior
should then discuss with the subordinate about the objectives which he can
accomplish, time frame for them and the resources required. The feasibility of such
goals for the company is also discussed. The superior has to play an important role
while interacting with the subordinate What are the hurdles he faces in reaching has
objectives? What changes he expects from superiors? How can the superior help him
in his task? The answers to such questions can help in deciding the specific objectives
of the subordinates. The goals should be such which are practicable, realistic or
achievable.
4. Periodic Reviews: The objectives should be periodically reviewed to assess the
Performance. The superiors and subordinates have regular meetings and review the
progress of objectives. In case the progress is not as per the plans then remedial
measures are taken immediately. The weaknesses are identified and steps are taken to
improve the working. The review meetings do not find faults for slow performance
but concentrate on improving the work so that stated organisational objectives are
achieved.
5. Assessing Final Performance: At the end specified period the performance of
individuals and departments is assessed. If the performance is as per plans then all
those involved are complemented. In the objectives are not reached then reasons for
low performance are identified. The performance of workers may not be up to the
mark due to their skills or training. Then they are given additional training and targets
along with the things they need to improve their performance. There may be problem

71
 of resources or lack of co-ordination between persons or departments, all these causes
are discussed and remedial measures are taken so that goals are reached in future.

5Q. What is Line and Staff Organisation. What are the Causes of Conflicts between
them?
Line and staff structure is based on the assumption that both will help and support each
other. But often there are conflicts between the two and both accuse each other. Some of the
reasons between the two are as follows:
1) Line managers have the following complaints against staff
(a)Staff officers claim credit for programmes which are successful but do not want to
share responsibility for their failure. The blame for unsuccessful tasks is thrust on line
managers even though they act on the advice of the staff.
(b)Staff officers are more theoretical than practical. They tend to give advice which has
not been tested earlier. They emphasise their field of specialisation without giving
much thought to the overall interest of the company.
(c)Staff officers do not remain contended by giving advice only. They try to persuade the
line for implementing whatever they have suggested. They trespass their field of
activity and enter the area meant for line people.
(d)Though staff officers are well qualified and have good knowledge of their field but try
to dominate line officers. They feel themselves superior to line officers. This type of
tendency creates conflict and friction between line and staff officials.
2) Staff personnel have the following complaints:
a) Line officers do not make proper use of expert knowledge of the staff. They do not
consult staff personnel at the planning level where they can make practical
suggestions. Staff people are consulted only as a last resort.
b) Staff people feel that their advice is not properly implemented by the line personnel.
Line officers do not consult staff while implementing the advice. When staff officers
try to guide line persons in implementing the programmes then they are accused of
interference.
c) Line officers are not generally enthusiastic about the new ideas suggested by the staff.
They resist new things and insist on following the traditions.
d) Staff officers do not have authority to implement their ideas. They should be
given Authority like line officers in supervising the implementation of their
suggestions.
All the complaints of both line and staff personnel are based on lack of understanding. These
conflicts are not based on ideologies.

6Q. What are the Principles of Organisation?

1. Principle of Objective. The enterprise should set up certain aims for the achievement
of which various departments should work. A common goal so devised for the
business as a whole and the organisation is set up to achieve that goal. In the absence
of a common aim, various departments will set up their own goals and there is a
possibility of conflicting objectives for different departments.
2. Principle of Specialisation. The organisation should be set up in such a way that
every individual should be assigned a duty according to his skill and qualification.
The person should continue the same work so that he specialises in his work. This
helps in increasing production in the concern.
72
3. Principles of Co-ordination. The co-ordination of different activities is an important
principle of the organisation. There should be some agency to co-ordinate the
activities of various departments. In the absence of co-ordination there is a possibility
of setting up different goals by different departments.
4. Principle of Authority and Responsibility: The authority flows downward in the
line. Every individual is given authority to get the work done. Though authority can
be delegated but responsibility lies with the man who has been given the work. The
responsibility cannot be delegated under any circumstances.
5. Principle of Definition. The scope of authority and responsibility should be clearly
defined. Every person should know his work with definiteness. If the duties are not
clearly assigned, then it will not be possible to fix responsibility also. Everybody's
responsibility will become nobody's responsibility.
6. Span of Control. Span of control means how many subordinates can be supervised
by a supervisor. The number of subordinates should be such that the supervisor
should be able to control their work effectively. Moreover, the work to be supervised
should be of the same nature.
7. Principle of Balance. The principle means that assignment of work should be such
that every person should be given only that much work which he can perform well. If
some person is over worked and the other is under-worked, then the work will suffer
in both the situations.
8. Principle of Continuity. The organisation should be amendable according to the
changing situations. Everyday there are changes in methods of production and
marketing systems. The organisation should be dynamic and not static. There should
always be a possibility of making necessary adjustments.
9. Principle of Uniformity. The organisation should provide for the distribution of work
in such a manner that the uniformity is maintained. Each officer should be incharge of
his respective area so as to avoid dual subordination and conflicts.
10. Principle of Unity of Command. There should be a unity of command in the
organisation. A person should be answerable to one boss only. If a person is under the
control of more than one person then there is a likehood of confusion and conflict. He
gets contradictory orders from different superiors. This principle creates a sense of
responsibility to one person.
11. Principle of Exception. This principle states that top management should interfere
only when something goes wrong. If the things are done as per plans then there is no
need for the interference of top management. The management should leave routine
things to be supervised by lower cadres. It is only the exeptional situations when
attention of top management is drawn.
12. Principle of Simplicity. The organisational structure should be simple so that it is
easily understood by each and every person. The authority, responsibility and position
of every person should be made clear so that there is no confusion about these things.
A complex organisational structure will create doubts and conflicts among persons.
13. . Principle of Efficiency. The organisation should be able to achieve enterprise
objectives at a minimum cost. The standards of costs and revenue are pre-determined
and performance should be according to these goals. The organisation should also
enable attainment of job satisfaction to various employees.
14. Scalar Principle. This principle refers to the vertical placement of supervisors
starting from top and going to the lower level. The scalar chain is a pre-requisite for
effective and efficient organisation.
73
 7Q. Difference between Formal and Informal Organisation?

Basis Formal Organisation Informal Organisation

1.Objective It is created to achieve predeter- It has no pre-determined
mined objectives. objective
2.Structure It refers to well defined authority It is based on human emotions
responsibility relationship. and sentiments
3.Formation Formal relations are well planned and Informal relations originate
created deliberately automatically
4.Stability Formal organisation is normally Informal organisation does not
stable. last long
5.Communication There is a prescribed chain of There is no specific chain of
communication communication.
6.Chain of There is a prescribed chain of The chain of command is based
command command which is follow for all acts. on the sentiments of members.
7.Flexibility A rigid structure is followed. It is loosely structured and highly
flexible.
8.Leadership Managers provide leadership to the The leader is elected amongst
workers. members.
9.Authority It gives formal authority to every It gives informal authority to the
person in position members.

SHORT ANSWERS

1Q. What is MBE?

Management by exception means that management should not concentrate on things of

minor nature rather it should involve when there are exceptions. If the things are happening
as per the decided standards, there is no need to inform the management, rather if there are
minor deviations even it should be adjusted at lower levels. The management must be
informed if there are significant deviations between the standards and actual performance.
The management by exception is an important principle of organisational control. If top
management is informed of small variations then it will distract its attention from important
issues. So top management should be involved only in exceptional cases and not in cases
involving insignificant changes. The information which is critical for management control
actions is sent to the manager. This helps in installing an effective control system.

2Q. Span of Supervision?

Broadly speaking, there are two types of span of supervision: (1) Wider span of
supervision, and (2) Narrow span of supervision.

1. Wider Span of Supervision. Wider span of supervision also known as flat

organisation implies few levels of supervision. In this type of span, the supervisor
controls and guides the activities of subordinates directly under his control. Wider
span of supervision is favoured where workers are competent and trained.
74
2. Narrow Span of Supervision. Narrow span of supervision implies tall or vertical
organisation. Under this type of supervision, there are many levels and more supervisors are
required to perform the job of guidance and control for different activities. It increases the
efficiency of supervision but the cost of supervision is very high as compared to wider span
of supervision. This type of supervision is favoured at higher levels of management where
all the other activities of planning, organising, directing and controlling are also to be
performed.

75
 ` UNIT-5
Authority,Co-Ordination and Control
ESSAY QUESTIONS
1.What is authority ? Describe various sources of authority?
A. Meaning: Management assigns tasks to different persons in the organisation. In order to complete the
tasks the persons need authority to direct their subordinates for undertaking the work.
In the authority there are some sources of authority some of them are given below:
1.legal:formal Authority: According to this theory authority is based upon the rank or position of the
person and this authority may be given by law or by social rules and regulations protected by law. A law
may grant authority to police man to arrest a person committing a crime. In a company for of business
organisation share holders appoint board of directors to exercise all authority.
2.Traditional Authority: Traditional authority has evolved from social order and communal relationship
in the form of ruling “lord” and obedient subjects .Generally, these decessions are based on consideration
like ethic and justice. The authority passes from the father to the son.
3. Acceptance Theory: The authority of the superior has no meaning unless it is accepected by the
subordinates.
(i) He understands it well.
(ii) He belives it to be consistent with the organisational goals.
(iii) He belives it to be compatible with his personal instrests as a whole.
(iv) He is able mentally and physically to compty with it.
The subordinates may accept on order if they gain out of its acceptance or may lose out of its non
acceptance. It can be said that acceptence of an order of an order is the function of advantages from it.
4.Competence Theory: Thereia also a feeling that authority is generated by personal competence of a
person. These qualities may be personal or technical ,The advice of some persons may be accepetedeven if
they do not have a formal authority. “(EX) : When a doctor advices rest to a paitent he accepts this advice
because of Doctor’s knowledge and not because of Him/His formal authority is accepected by others.
So the knowledge or competency of a person gives him a status where his authority is accepected by
others.
5.Charismatic Authority: The personal traits such as good looks ,intelligence , integrity influence others
and people follow the dicates of their leaders because of such traits . The charismatic leaders are generally
good orators and have hypontic effect on their followers. The religious and political leaders comes under
this category. The charismatic phenomena also extend to filimactors. Actresses and War Heroes e.t.c.,
2Q:What is meant by delegation of authority ? Discuss about the principles of delegation of
authority?
1. Principle of Functional Definition. The related or similar activities should be grouped togther
according to enterprise function. When the definition of a position is clear then delegation of authority
becomes simple. In the words of Koontz and O'Donnell "the more a position or a department has clear
definitions or results expected, activities to be undertaken, organisation authority delegated and authority
and informational relationships with other positions understood, the more adequately the individuals
responsible can contribute toward accomplishing enterprise objectives It is very difficult to define a job
and the authority required to accomplish it. If the superior is not clear about the results expected then it
becomes all the more difficult.
2. Principle of Unity of Command. The basic management principle is that of unity of command. This
principle states that a subordinate should report only to single superior) This will give a sense of personal
responsibility. Although it is possible for a subordinate to receive orders from more superiors and report to
them but it creates more problems and difficulties. An obligation is essentially personal and authority
delegation by more than one person to an individual is likely to result in conflicts in both authority and
responsibility. This principle is also useful in the classification of authority-responsibility relationships
3. Principle of Delegation by Results Expected. The delegation of authority should be based on the basis
of results expected.) The authority should be sufficient to achieve the desired results. If the authority is
insufficient then results will not be achieved. So there should be a balance between the results expected
and the authority required.
4. Principle of Absoluteness of Responsibility. The responsibility of a subordinate, once he has accepted
the work, is absolute to his superior The responsibility of the superior does not decrease once he has
delegated authority. A person can delegate authority and not responsibility. He will remain accountable for
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the work even if it is delegated to the subordinate. So the responsibility of superior and subordinate
remains absolute.
5. Principle of Parity of Authority and Responsibility. Since authority is the right to carry out
assignments and responsibility is the obligation to accomplish it, there should be a balance between the
both. The responsibility should bear logical relationship with authority delegated. The subordinate should
not be burdened with high performance responsibility with delegating enough authority, Sometimes the
authority is delegated but the concerned person is not made accountable for its proper use
.6. Authority Level Principle. The principle that decision-making should remain at the level at which
authority is delegated. The managers delegate authority to subordinates but have the temptation to make
decisions for them. They should allow the subordinates to take their own decisions as per the authority
delegated to them. The delegation of authority will be effective only when it is clear and understandable to
subordinates.
7. The Scalar Principle. The scalar principle refers to the chain of direct authority relationships from
superior to subordinates throughout the organisation. The ultimate authority must rest some where.
Subordinates must know to whom they should refer the matter if it is beyond their authority. The more
clear the line of authority from top manager to every subordinate the more effective will be responsible
decision- making."

Q3. What is Decentralization? Discuss the advantages and disadvantages of decentralization?

ANS: Meaning: When the power to take decisions and • formulate Policies does not lie with one person at
the top but it is passed on to different person at varia -us levels, it will be a case of decentralization.

Definitions:
"Decentralization refers to the systematic effort to delegate to the lowest levels all authority expect that
which can only be exercised at the central points??
-ALLEN-
 Advantages of decentralization:

1. Reduces Burden of Top Executives: In decentralization decision making Power is delegated to the
lower levels. revelieveing top excutives of some of their burden. Under this system top excutives will
retain only that work which requires their personal attention otherwise everything is assigned to persons of
approprite levels.
2. Quick Decesions : Whenever there is a need for taking a decision, the concerned executive will decide
the things Immediately. There is no need to make reference to the top level for most of the work. It
quickens the process of decession making.
3.Facilitates Diversification: Decentralization gives enough authority to person of Various levels for
Carring out the required task. The organisation will become more and more complex with the addition of
new products and setting up of more units.
4.Motivation of subordinates: Under decentralization Subordinates get opportunity for taking decissions
independently. They will try to put their maximum efforts so that their performance improves. The
subordinates fellmotivated Under decentralization set-up.
5. Sense of competition: Under decentralization System different or units are made separate profit centres.
The Employees of different departments will compete with each other to show better results.
6.Division of Risk: The enterprise is divided into number of departments under decentralization.
Management can experiment new ideas at one department without disturbing others. So risk elements can
be limited under decentralisation System.

 Disadvantage of Decentralisation:

1. Lack of co-ordination: Under decentralisation each department, They have the powers to formulate
their own policies → and programmes. Moreover, every segment emphasis its own work only without
bothering about others.
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2. Difficulty in control: since different units of Work Independently it becomes difficult to control their
activites. Top management will not be able to exercise control because it does not remain in touch with
day to- day activites of various segments.
3.costly: Dentralisation system involves heavy over head expenses has to be self sufficient for its activities
like Production, Marketing, accounting, Personnel, etc.. These persons are paid higher salaries involving
huge cast. Decentralisation system is suitable for large scale enterprises only.
4. Lack of Able Managers: Dentralisation system will succeed only if competent persons are employed to
manager. - Various jobs in different segments. Competent person are not some times available as per the
requirements. The system will tail it competent personnel are not avilable.
4Q). Explain the Various techniques of effective Co-ordination?
ANS: Meaning: co-ordination is the Process of synchronising activities of Various Persons in the
organisation in order to achieve goals.
Definition:
"To co-ordinate is to harmonise all the activites of a Person in order to facilitatic its Working and its
success's Given by C-Henry Fayol
1. Well-defined, Goals: The goals of the organisation should be clear and Well- defined. Every body
should know the objectives and his contribution towards its achievement. Unity of purpose will be
achieved through proper Co-ordination.

2. Simplified Organisations: The organisational structure should be clear and Well-defined aurthority and
responsibility of each and every person. There should be Well- -defined organisational charts, job
descriptions, Work manuals, etc. for avoiding any type of misunderstanding. Co-ordination will be
achieved when there are clear lines of authority and responsibility.
3. Proper communication: Effective communication helps in creating Proper Understanding among
Persons whose Work needs to be co-ordinated. Through communication Every individual understands his
scopes limitations, his posit -on. Regular communication among Various Persons helps in resolving
conflicts and differences.
4. Effective Leadership: Effective leadership is essential for better Co-ordination. As a good leader is
able to achieve Co-ordination both of planning and Execution Stages. If a leader is undecided about his
tasks. Then will not be able to either guide or co-ordination their activities.
5. Proper supervision: A Person / A Supervisor is the Person Who Constantly Watches the work of his
subordinates. He can adjust the Work load. Provide guidance to his Subordinates if the situation demands;
supervisor is an important Person in co-ordinating the work at excution level.
6. Co-operation: There should be a feeling of mutual help for each other. Co-operation can be brought by
keeping mutual Help for each other. Management ment should encourage formal and informal
communication among employers. The decissions of committees will be group decisions and every body
will co-operate in implementing them.
Q5: Define controll and discuss about the require- -ments good controll system?
Ans: Meaning: Controll is the Process of checking Weather the plans are being adhered to or not, keeping
a record of progress and then taking corrective measures if there is any deviation.
Definition:
"Controlling is determing what is being accomplished that is evaluating the performance, and if necessary,
applying correct measures so that Performance takes place according to Plans." EGeorge R.Terr.

1. Should be easily Understandable: The Controll Should be such that it is a easily understood
by the managers and as well as by the subordinates. If the managers age not clear about the controls then
they will not be effectively exercised. Generally, the first line manages are expected to exercise controls
because they directly come in contact with Workers. The managers may devise certain mathematical
formulas or statistical charts for finding In Performance. Out deviations
2.Reflect organisation Needs: There are a number of control techniques like Budgets, statistical charts,
PERT, CPM. etc. but these may not be used in every type of enterprise. The best control is that which is
properly used in an organisation and is able to give results, so that controls should reflect organisations
seeds.
3. Report Deviations, quickly: A manager cannot control Past but deviations are determined only when
actual figures are reported to him. This can be possible only When manager does not wait for the reporting
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of actual results by accounts department and collect some approximate figures for finding out the level of
performance.
4. Must be Appropriate and Adequate: The control must be such which should help the enterprise to
achieve its objectives. The controls will different for various departments and sections. There are many
control techniques like standard hours, standard costs, budgets, financial ratios.
5. Forward Looking: This concept is such that results precede the exercise of control. The manager
should try to make corrective action at the earliest.The control system should help in Planning process.
6. Must be Flexible: A good control system should be able to change with the needs of the future. The
future is always un certain and nothing Can be said with certainty. The rigidity in contras will have to play
with the system. If the expenditure of sales department is not increased under the garb of rigidity then its
working will be adversely affected. The flexibility in controls will help in making amends whenever a
Situation demands it. There should be an inbuilt flexibility in controls.

7. Economical: The controls are essential for every type of enterprise irrespective of its size. In spite of the
need for controls, the cost factor cannot be overlooked. The economical nature of a control system will be
judged from its relative contribution to the enterprise.
8. Motivating: The controls should be motivate both the controller and the controlled. The control should
be used in a positive sense. They should not be taken as a device to give punishment to employees. Science
the performance is regularly monitored, the employees will feel motivated to increase their performance.
6. Q) what is a delegation of authority. What are the barriers of delegation of authority?
Definitions:- Delegation takes place when one person gives another the right to perform work on his
behalf and in his name and the second person accepts a corresponding duty or obligation to do what is
required of him
Difficulties involved in delegation of authority are given:
1. Over confidence of superior: The feeling in a superior that only he can do certain work effectively
than others is the main difficulty in delegation. When a managers is of the opinion that his subordinates
will not be able to make proper decision then he will concentrate all powers with him and will not like to
delegate his authority.
2. Lack of confidence in subordinates:- The Superior may be of the view that Subordinates are not
competent to carry out certain things of their own. He may lack Confidence in his subordinates. Under this
circumstance Superior will hesitate to delegate authority.
3. Lack of Ability in Superior: A Superior may lack the ability to delegate authority to subordinates. The
manager may not be able to identify the areas where delegation is required. The lack of competence of the
part of superior restricts the delegation of authority.
4. Lack of proper controls: There may not be proper which help controls in the organisation the manager
to keep in touch with performance of Subordinates. When the certain controls like budgets Standard costs
etc.,In the absence of such techniques he will not be able to judge the performance of his subordinates.
Since he will not be able to exercise control he will not like to delegate the authority.

5. Lack of proper Temperament of Superior: The chief execrative may be over-cautions or

Conservative by nature. He will not like to take the risk of delegation authority. His fear will always be
that Something may not go wrong. The executives with this type of temperament will hesitate to delegacy
authority. A lack of5 proper temperament of superior may also act as a barrier in delegation, Subordinates:
There

6. Inability of subordinates: These may also be shyness on the part of Subordinate in assuming additional
responsibility. They may avoid delegation botheration accuring from of authority. The fear Committing
mistakes mistake or lack of Confidence on the part of subordinates may also act as a barrier in delegation
of authority.
SHORT QUESTION
1. Define authority and responsibility.
Authority and responsibility should match each other. There should be appropriate authority for getting the
things done. For example, when a Forman is assigned the responsibility of producing a particular quantity,
he should have the authority to hire required personnel and take disciplinary actions if they do not perform
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as required. However, any imbalance between authority and responsibility will be dangerous. More
authority than the responsibility may be misused and inadequate authority will not help in getting the
assigned task performed.

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