CHAPTER I

Nature and Significance of Management

Synopsis (Marks 7)

- Introduction

- Meaning

- Objectives & Importance

- Management as a process; as an activity as a group; as a discipline; and as a

profession

- Management as a Science and an art.

- Levels of Management

- Differences between Administration and Management

- Functions of Management

- Coordination – Elements, Nature and Significance

- Practice questions

- CBSE questions of last 03 years.

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 NATURE AND SIGNIFICANCE OF MANAGEMENT

Introduction

Every individual has his own objectives in life. In the same way, every organization
will have certain objectives. Organization achieves its objectives through
management. Management is the mobilization of an organisation’s resources to meet
a particular goal. It is applicable to all type of organizations.

Definition

“Management is an art of getting things done through and with people in a formally
organized groups” – Koontz.

“Management is the process by which a cooperative group directs actions of other

towards common goals.” – Massie and Douglas.

Concept

Management is a set of functions which are performed efficiently and effectively by

utilizing the resources of the organizations for achieving the organizational goals.
Hence, management is concerned, not only with getting activities completed but also
to achieve it efficiently.

Characteristics

The characteristics of management are as follows:

1) Achieving Organisational Objectives:

Management deals with achieving certain specific goals, expressed as an

objective. The manager will plan a course of action and organizes the required
activities to achieve the target.

2) Distinct Activity:

Management is an activity which consists of planning, organizing,

communicating decision making, staffing, leading and controlling.
Management is a distinct activity. It can be studied, experimented and
practiced.

3) Group Efforts:

Management is a group activity. All organizations consist of people with

formally assigned roles, who must work together to achieve the stated goals.

4) Intangible:

Management is intangible. It means that management cannot be seen but its

presence can be felt through orderliness, enthusiastic employees, adequate

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 work output etc. The management can be identified as more or less efficient
through the efforts of its employees.

5) Influences behaviour:

Management influences the behaviour of employees. It means that the way

people view their work and how they actually perform the work.

6) Composite Process:

The management process is a composite process consisting a series of inter-

related functions namely planning, organizing, staffing directing and
controlling.

Objectives

Objectives are the goals or standards against which the performance is

assessed. Objectives can be classified into three major categories

i) Organisational Objectives:

Managers should try to develop and attain variety of objectives.

Management should be concerned with utilizing material and human
resources available in the organization for deriving best results. This
results in reduction in costs and maximum prosperity for the
organization. Organizational objectives must take care of the interests
of all the stakeholders.

ii) Social Objectives:

Social objectives may be pertaining to health, safety, labour practices

and price regulations. They include activities intended to further social
and physical improvement of the community. Some companies
undertake social welfare activities.

iii) Individual Objectives:

Individual objectives are pertinent to the employees of the

organization.

These objectives include competitive salary, personal growth and

development, peer and social recognition.

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Importance:

Management is important for the following reasons:

i) Provides effectiveness to human efforts:

Management gives stress on better equipment plants, offices, products,

services and human relations. This helps management in achieving
effectiveness and efficiency in its efforts.

ii) Brings order to endeavours:

In an organization people come from different background and educational

qualifications. Because of diversity among the employees their style of
functioning may also vary. Due to this, there are possibilities of chaos. To
overcome such situation, management is required to put the energy of all the
workers in one direction for common objectives.

iii) Critical ingredient in nations growth:

Efficient management of resources is the critical factor in the economic

development of the country. Management know-how uses the available
resources to achieve the basic needs. Business organizations are the key
contributors to the economic growth of the nation.

iv) Provides judgement and vision:

Management has to think before doing anything. Management has to take

decisions that involve judgement. Sound management will enable an
enterprise to adjust to the complex and dynamic environment.

v) Helps in achieving group goals:

It is the role of the management to satisfy all the employees of the enterprise
to the maximum extent possible.

Dimensions:

The term management can be understood in different ways.

i) Activity

Management is the human activity. It refers to those activities which are

performed by the managers to achieve the desired objectives of the
organization.

ii) Process

The functions of management-planning, organizing, staffing, directing and

controlling are performed in a circular process.

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 Management process is social, integrated and continuous in nature.

Discipline

Management is regarded as a discipline because it has a systematized body of

knowledge and a separate field of study. There are scholars and exports in
management who teach management skills in recognized institutions.

Group

It refers to all those persons who are engaged in managing the affairs of the
organization. It consists of all the people who perform managerial activities.

NATURE OF MANAGEMENT

Management as a Science:

Science is a systematized body of knowledge. It is based on logically observed

findings, facts and events. Management is a science as it follows certain universally
accepted principles and techniques for solving management problems. But
management is an inexact science. The reasons are given as below.

1. The rational approach and the application of the method of science are now in
business.

2. Only a few managers are trained in using the various methods of scientific
techniques.

3. In science, precision measuring instruments and tools are available. But a

manager is forced to use relative measurement where absolute measurement is
not possible.

4. In physical sciences, the researcher works with a single variable, keeping all
other factors constant. Managers cannot do so, because the human element
cannot be treated as a constant.

5. Managerial decision making stresses result oriented action rather than truth.

Management as an Art

Art refers to the practical application of the theorist knowledge. Management as an

art has the following features:

1) Situational

Management deals with human beings. They behave differently in different

situations. Hence, no prescribed pattern can be developed for the given
situation.

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2) Personal Skill

There are certain factors in the organization which vary in their effect and role.
Managers should have personal skills to deal with them.

3) Personal Judgement

Individual judgement is required to apply the principles of management

properly.

4) Continuous Practice

An artist has to practice continuously to become an expert in his career, in the

same way a manager also has to practice continuously to become an efficient
manager.

5) Practical Knowledge

Business enterprises involve risks. If the manager is experienced then he can

deal with the risks effectively.

Management : Both Science and Art

Management contains all characteristics of both Science and art. As science, it is a

systematized body of knowledge based on observation, experimentation and universal
applicability of its principles. But it is only a social science as it deals with human
factor. Hence it is an inexact science.

Management has the features of art. Art implies how to do a job in most efficient
manner. In business organizations both skills and its applications are needed. So
management combines the features of both science and art.

Management, as an art

1) Situational
2) Personal Skill
3) Personal Judgement
4) Continuous Practice
5) Practical knowledge

Management as a Profession

Profession is a well defined boy of knowledge, which is learnt intellectually and

organizationally. The basic requirements of a profession are as follows.

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1) Existence of techniques, skills and specialized body of knowledge.

2) Availability of formal methods of training and experience.

3) Existence of a representative organization.

4) The formal ethical code of conduct

5) The charging of fees.

The points in favour of management as a profession are given below.

i) Body of Knowledge:

Management has a systematized body of knowledge. There are a large number

of books on management.

ii) Formal method of training:

Professional schools / colleges of management have been established to impart

the knowledge of management. For example: In India the IIM at Ahmedabad,
Calcutta and Bangalore.

iii) Fee as remuneration:

Large number of reputed firms are establishing their consultancy agencies.

They charge fee as remuneration.

iv) Existence of ethical code:

Ethical basis of management behaviour is emphasized these days. All India

Management Association (AIMA) has devised a code of conduct for Indian
managers.

v) Establishment of representative organization:

Both at the national and international levels, Management Associations have

been formed with their membership rules, code of conduct etc. AIMA – New
Delhi.

Management as Profession – A Trend

Many Indian companies have taken initiatives to replace family members by

professional managers. This trend is picking up due to increasing market competition.

In case of Public undertakings, it is run by Professional managers. These days,

proprietary managers are becoming more interested in acquiring the latest knowledge
and techniques of management.

In conclusion, management do not satisfy all the requirements of profession. But

management is, by and large, becoming a profession.

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Management and Administration

Administration

Management

A) Administration is part of Management

According to this opinion management involves the (i) responsibility for policy
formation (ii) responsibility for planning, organizing, directing and controlling
and (iii) responsibility for supervision. Thus it is found that management
begins with the administrative function at the top.

B) Management and Administration – both are the same.

According to this, administration is a purposeful action and to an increasing

degree. The three main elements of administration are the formulation of goals,
the choice of ways and means and the direction of the people in some group
purpose. So administration perform all the functions that a manager is expected
to perform.

ADMINISTRATION COMES FIRST, MANAGEMENT FOLLOWS IT

According to this administration is the determination of policy and coordination

whereas management is the execution of policy.

Administration lays down objectives of the organisation where as management leads

to accomplishment of the objectives.

Levels Administration vs Management

The whole relationship between managers

and subordinates working in a company
form of organisation are arranged in a
series of levels are called as level of
management. It is classified into three
levels namely top level, middle level and
lower level.

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Top Management

It consists of Chairman, Directors, Managing Director, General Manager etc.

Functions

1) Determining the objectives

2) Framing of policies
3) Organizing activities to be performed.
4) Assembling the resources
5) Controlling and monitoring the planned performance.

Middle Management

It comprises departmental heads and other executive officer.

Functions

1) Interpretation of policies.
2) Preparing the organizational setup
3) Finding out suitable personnel
4) Compiling detailed instructions.
5) Motivating the personnel.
6) Cooperating with other departments.
7) Collecting reports, statistical information and other records.

Supervisory or Operational Management

It consists of foremen, supervisors, clerks etc.

Functions

i) Representing the workers’ grievances before the management.

ii) Ensuring adequate lighting ventilation and providing other amenities to

workers.

iii) Looking after safety of workers.

iv) Helping the management in selection, training, placement and promotion of

workers.

v) Welcoming suggestions from workers for better working practices and

production techniques.

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 Administration Management

1. It is concerned with the formulation of 1. It is the art of getting the work done
broad objectives plans and policies through others.

2. It is a decision making function 2. It is an execution function.

3. It decides what is to be done and when 3. It decides who should do it and how
is to be done he should do it.

4. It is a thinking function 4. It is a doing function.

5. It is important at higher level of 5. It is more important at supervisory

management level of management.

6. Decision making is influenced by the 6. Decisions are influenced by the

force of Public opinion, Government values, opinions and beliefs of
policies, Social customs etc. managers.

MEANING OF ADMINISTRATION

Administration is concerned with laying down objectives of the enterprise, defining

its policies, determining the broad organisation structure and overall control operation
of the undertaking.

FUNCTIONS OF MANAGEMENT

1) Planning

It is the process of deciding in advance, what is to be done, how it is to be

done, where, when and by whom it is to be done. The process of Planning
consists of formulation of policies, drawing programmes, schedules etc.
Planning increases economy and efficiency by proper utilization of resources.

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2) Organising

It refers to identification of activities, grouping of similar activities and

assigning them to different departments. It makes each job holders to be clear
about his duties, responsibilities and accountability.

3) Staffing

It deals with finding manpower requirements of the enterprise and taking steps
to employ the right person for the right job. It includes recruitment, selection,
placement, training, remuneration, appraisal etc.

4) Directing

It is a process of guiding the subordinates towards achieving the

organizational goals. Advising, coaching and counseling are the functions of
directing. Supervision, motivation, leadership and communication are the
elements of directing.

05) Controlling

It is the process of measuring and comparing the operating results with the plans and
taking corrective actions, if there are deviations.

Coordination

Coordination means synchronization of group efforts. It refers to integrating the

activities of different units or departments of the organization to achieve the desired
objectives.

Elements

The key elements of coordination are explained below:

i) Integration

It refers to the unification of all the unrelated and diverse interests, to

accomplish the work effectively.

ii) Balancing

It means supplementing the activities, efforts and job of one department with
that of another.

iii) Timing

It involves scheduling of operations in suitable order.

Nature

The nature of management is discussed as below:

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i) Essence of Management

Coordination is an activity that is required at every level and every time in the
organisation. Since organisation is performing a variety of activities,
combining of efforts at all level is essential.

ii) Continuous Process

Coordination is needed for all activities and at all levels. So it is a continuous

process.

iii) Group effort

Coordination is applicable to group, not individual efforts. Many people will

be working in the organisation. Coordination is a must to achieve the goals.

iv) Unity of Effort

Coordination ensures unity of action by seeking cooperation among the

employees.

Importance

i) Size of the Organisation

In large organizations, the organizational efficiency is achieved by integrating

the individual and group goals through coordination.

ii) Functional differentiation

Function of an organisation is divided into departments, divisions, sections

etc. Sometimes the function ais grouped illogically, in such cases,
coordination is essential to work effectively in the organisation.

iii) Specialisation

Many specialists are working in the organisation. The efforts of the specialist
are brought together to achieve the goals through the process of coordination.

Exercises

1) Define the term ‘management’

2) Explain the concept of management

3) Discuss the characteristics of management

4) Explain management as a composite process

5) Explain the objectives of management

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6) Describe the importance of management

7) Explain management as an activity

8) How is management regarded as a process

9) Management is regarded as a learned discipline – comment

10) Explain management as a group

11) ‘Management is a trinity of art, science and profession’. – Explain the nature
of management in the light of this statement

12) Is management becoming a profession? Discuss in the light of the emerging

trend

13) What is administration

14) Management is a part of administration – Explain

15) ‘Management and Administration are the same’ – Do you agree. Give reason
in support of your answer.

16) Give any five differences between Administration and Management

17) What do you understand by the ‘levels of management’

18) What are the functions performed by the top level management

19) Briefly explain the middle and lower level management

20) Explain the functions of management

21) What do you mean by coordination

22) Briefly explain the elements of coordination

23) Discuss the nature of coordination

24) Elucidate the significance of management

25) Why management is not regarded as a fulfledged profession? Explain.

26) Name the levels of management engaged in

a) Over-seeing the activities of the workers.

b) Taking key decisions

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CBSE QUESTION

1. Explain in brief ‘Management’ as a group of people having managerial

responsibility for the enterprises 2

2. ‘Management and Administration mean the same thing’ – Explain the view 5

3. State any two functions of middle-level management 2

4. ‘Management is regarded as a perfect science’ – Do you agree? Explain in

brief any five reasons 5

5. Explain in brief ‘management as a process’ 2

6. Explain any five features of management 5

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 CHAPTER II
Principles Of Management

Marks 7

SYNOPSIS

 Introduction

 Meaning

 Definition

 Nature

 Significance

 Fayol’s Principles of Management

 Scientific Management – Meaning, Principles and Techniques.

 Taylor Vs Fayol

 Practice questions

 Last 3 years CBSE Questions.

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Introduction

Management principles are the statements of fundamental truth. They provide

guidelines for performing managerial functions and decision making. Management
Principles are formulated on the basis of managers personal experiences and
experiments.

Meaning of principle:

A Principle refers to a statement which reflects the fundamental truth about some
phenomenon. Thus, management truth, which provide guidelines for managerial
decision making and action.

Nature

Nature of management principles are explained below.

1) Evolutionary

Management principles are derived on the basis of facts, experiences and

analysis. They have not been tested in any laboratory, so they are evolutionary.

2) Limited application

Management principles are used for guiding human behaviour. Since human
behaviour is highly complex, management principles are of limited use.

3) Relativity

Management principles are not static. They are absolute in nature. They must
be applied carefully depending on organizational requirements and situational
demands.

4) Flexibility

Management Principles are flexible in nature. Refinements in principles take

place continuously. They change with changes in the environment.

5) Universality

Management principles are universally applicable to all types of organisation.

For eg. Government Enterprises, Business Organisation, Educational Institutions
etc.

Significance of Management Principles

Proper is necessary for managers due to the following reasons:

1) To Achieve results economically:

Management principles help in setting realistic objectives. Hence efforts could
be made to achieve the results economically.

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2) Optimum utilization of resources:

Managers are capable of making proper use of the available resources of the
enterprise with the help of management principles.

3) Scientific decision:

Managers have to make decisions to meet changing condition of the business.

Most appropriate decisions can be made by the managers with the help of
management principles.

4) Effective administration:

The principles of management help the managers in managing their organisation

effectively. Eg. unity of command, unity of direction etc.

5) Social Responsibility:

Business has its own responsibility to Shareholders, workers, customers, society

etc. The management principles, ‘fair to all’ suggests that organisation must
take care of the interests of all stake holders.

6) Research and Development

Principles of management stress that all practices should be based on sound

judgements. These judgements must be based on proper research. Management
principles provide the new spheres of knowledge and a basis for further
research.

Fayol’s Principles of Management

Fayol’s fourteen principles are explained below.

1) Division of Work

Work should be divided into small tasks. Each employee should be trained in
the job that he has to do. This process is called “division of labour”. This is
based on the principle of specialization.

2) Authority and Responsibility

Authority means the right to take decision and responsibility means the
obligation to perform a job. Purity should be maintained between authority and
responsibility.

3) Discipline

According to Fayol, discipline is obedience, application, energy and outward

mark of respect. He insists that discipline requires good superiors at all levels,
clear and fair agreements and judicious application of penalties.

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4) Unity of Command

According to this principles, an employee should receive orders from one

superior only. It avoids confusion and contradictory information.

5) Unity of Direction

According to Fayol, unity of direction is the principle that each group of

activities having the same objective must have one head and one plan, otherwise
it may lead to duplication of efforts and wastage of resources.

6) Subordination of individual interest to general interest

The business enterprise is superior to individuals. The interest of the

organisation must prevail upon the personal interests of the individuals. The
subordinates should not fulfill their own personnel interest at the firm’s cost.

7) Remuneration of Personnel

Remuneration payable to workers must be fair, reasonable and satisfactory both

to the employers and employees.

8) Centralisation and decentralisation

This principle refers to the extent to which authority is concentrated or

dispersed. Centralization means concentration of authority at one place, while
decentralisation means dispersal of authority.

9) Scalar Chain

It is the chain of superiors ranging from the ultimate authority of the lowest
level in the organisation. This principle suggests that there should be a clear
line of authority from top to bottom linking managers at all levels. It serves as a
chain of command as well as chain of communication.

Fayols gives an example to prove Scalar chain.

B I
C J
D K
E L
F M
G

H N

In the above figure, Scalar chain is represented by the double ladder HAN.
Suppose ‘F’ has to put on line with ‘M’, F will have to communicate through
EDCB and to A and then down from A to L. To avoid delay Fayol suggested
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 the concept of ‘Gang Plank’ – It allows two employees at the same level
communicate directly with each other. But each must inform his superior.

10) Order

There must be material order and social order in an enterprise. Material order
implies (proper place) for everything and everything in its right place.” Social
order means, a place for everyone in his appointed place.”

11) Equity

Equal treatment should be given to people in similar position. Employees must

be treated with kind and equity.

The superiors should be good natured and impartial.

12) Stability of tenure

Employees should not be moved from their positions frequently. It often takes
time to get used to work. Management should remove the feeling of insecurity
at work from the minds of employees.

13) Initiative

Subordinates should be given an opportunity and encouragement in making and

executing plans. Employees get satisfaction when they are allowed to
participate in taking decisions.

14) Esprit de corps

There must be team spirit and coordination among the members of an

organisation. Unity among the personnel can be accomplished through proper
communication and coordination. Unity lies its strength.

Unity of Command Vs Unity of Direction

Unity of Command Unity of Direction

1. It is related to the functioning of 1. It is related to the functioning of

personnel business enterprise as a whole.

2. Employee should receive orders 2. Unity of direction means one unit

from one superior. one plan

3. It is necessary to fix 3. It is necessary for sound

responsibility of subordinates organisation.

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SCIENTIFIC MANAGEMENT

Meaning:

It is the application of scientific methods of study and analysis to the problem of

management. It aims at replacement of traditional techniques by scientific
techniques. It is a thoughtful, organized human approach to the job of management as
contrasted with hit or miss method.

Taylor defined scientific management as follows:-

“Scientific management means knowing exactly what you want men to do and seeing
that they do it in the best and the cheapest way”.

Principles of Scientific Management:

Taylor formulated the following principles.

i) Science, not rule of thumb:

According to this principle, each job performed in the organisation should be

based on scientific enquiry and not hit or miss methods. Scientific
investigation should be used for taking managerial decisions.

ii) Harmony, not discord:

According to Taylor, workers who are working together should carry out their
tasks in harmony i.e. with mutual give and take and proper understanding.

iii) Cooperation, not individualism

Scientific management requires that work should be carried out by individuals

in cooperation with each other based on mutual confidence. Hence, managers
and workers can develop understand each other.

iv) Maximum not restricted output

According to this principle, there should be continuous increase in production

and productivity. Both management and labour should have a common
interest.

v) Separation of planning and operational work

Planning function should be separated from execution function. To achieve

this objective Taylor suggested to have 4 foremen in the planning department
and 4 foremen in the execution department.

TECHNIQUES OF SCIENTIFIC MANAGEMENT

The following are the techniques of Scientific Management

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Functional Foremanship

The workers and factory executives should be free from the burden of planning and
designing. The basic aim of functional foremanship is to separated planning functions
from doing functions.

Planning Department:

A worker is supervised by several specialist foreman. He suggested 4 foreman in the

planning department, namely.

a) Route Clerk

To determine the sequence of mechanical and manual operation of the work to

be performed.

b) Instruction Card Clerk

To lay down instructions, how to follow the process of work.

c) Time and Cost Clerk

It sets the time to be taken to complete the job and maximum time that can be
incurred.

d) Disciplinarian

To maintain discipline among the workers.

The Production department has consists of :

a) Gang Boss

To perform all preliminary work i.e. arranging machines, materials, tools etc. for
the workers.

b) Speed Boss

To ensure that each job is done well on time and maintain the speed in doing the
job.

c) Inspector
To see whether the work conforms to the standards and quality already set.
d) Repair Boss

To see that all machines and tools are in perfect working condition.

2) Standardisation of Work

It means maximization of output through the use of standard equipment,

methods and processes. The objectives of standardization are

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 i) To reduce a given line of product to fixed types sizes and features.
ii) To establish the interchangeability of manufactured parts and products.

iii) To establish standards of excellence and quality in materials and

iv) To establish standards of performance of men and machines.

3) Simplification of Work:

Simplification refers to the elimination of superfluous varieties, sizes and

dimensions. Simplification leads to economy in the use of machines and tools
needed; it reduces labour costs. It helps in improving the quality.

4) Fatigue Study :

It refers to “tiresomeness”. By doing the same job the employee feels boredom
and tired. Taylor suggested that there must be a change in the work of the
employees and places of work.

5) Method Study

Method Study is concerned with the methods of performing a job. There can be
a number of methods to perform the same job. Taylor suggested that
management should find out ‘one best way’ to perform the task.

6) Time Study

It is a technique of determination of standard time to be taken to perform a well

defined job by an average worker in the organisation.

The objective of the time study is to determine the number of workers to be

employed, frame suitable incentive schemes and determine labour costs.

7) Motion Study

It explains the movements of operators and machines to perform a job. It helps

identify and eliminate their unnecessary movements. It helps to find out which
motions are productive and unproductive.

8) Differential Wage System

Differential Wage System is to award wages to employees on the basis of their

performance. Taylor suggested two types of wages for similar work. Higher
wages for efficient workers and lower wages for those who are performing
below standards.

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9) Mental Revolution

Taylor insisted on the change in the mental attitudes of the workers and the
management towards each other. Workers feel that the managers exploit them,
the management feels that workers always grumble about the load of the work.
So the workers and the management suspect each other. Such change in their
attitude can be brought about through training and development programmes.

MOTION STUDY Vs TIME STUDY

Motion Study Time Study

1. It relates to watching and 1. It involves careful measurement of the

recording the movements of time required to do the job.
operators.

2. It is conducted to minimize the 2. It is concerned with increasing the

movements of the operators productivity of labour.

3. The purpose of motion study is 3. The aim of time study is to determine

to determine the best way of a fair day’s work.
doing a job.

A comparative statement of Fayol and Taylor’s work is given below.

Points of difference Taylor Fayol

1. Perspective Operative and shop floor level Top Management

2. Personality Scientist Practitioner

3. Results Scientific observation and Personal experiences translated

measurement into universal truths.

4. Focus Increasing productivity Improving over all

through work simplification administration
time and motion studies.

5. Major Contribution Provided a basis for Produced a systematic theory of

accomplishments on the management.
production line

Practice Questions

1. What do you mean by principles of Management?

2. Explain the nature of Management principles
3. Bring out the need of Management principles
4. Explain any six principles of Management given by Henry Fayol.
5. Explain the concept ‘Gang Plank’
6. How is the principle of ‘Unity of Command’ useful to the management?
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7. Distinguish between Unity of Command and Unity of direction
8. Explain the principle ‘Equity’
9. What do you mean by ‘Scalar Chain’?
10. Briefly explain the principle authority and responsibility
11. Write short notes on the following Fayols principles of Management
a) Order
b) Initiative
c) Espirit de corps
d) Subordination of individual interest to general interest.
12. What do you mean by ‘Scientific Management’?
13. Discuss the principles of Scientific Management
14. Explain any six techniques of Scientific Management
15. Write short notes on
a) Functional foremanship
b) Standardisation of work
c) Simplification of work
16. Distinguish between Time study and Motion study
17. What is the aim of Fatigue Study
18. What do you mean by ‘Mental Revolution’?
19. ‘One Head One Plan’ which principle is based on this idea? What is meant by
this principle?
20. Which principle of management is violated if an employee receives order from
two supervisors. Explain the principle with example
21. Give any five differences between Taylor’s and Fayors principles of
Management

CBSE QUESTIONS

1. An organisation follows the principles of management. What are the adverse

effects of each of the following principles of management on the organisation
i) Unity of command
ii) Order
iii) Stability of tenure of personnel
2. Describe, in brief, Taylor’s principles of
i) Cooperation, not individualism and
ii) Maximum, not restricted output
3. The Production Manager of Bharat Ltd. instructs a Salesman to go slow in
selling the product, whereas the marketing manager is insisting on fast selling to
achieve the target.

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 Which principle of management is being violated in this case? State any one of
the consequences of violation of this principle
4. State any five techniques of scientific management. Also give a brief
explanation of each technique.
5. An organisation follows the principles of management. What are the positive
effects of each of the following principles of management on the organisation:
a) Unity of direction
b) Esprit de corps
c) Subordination of individual interests to general interests.
6. Explain the meaning of management principles and state how they are derived
7. Which principle of management envisages that each group of activities having
the same objectives must have one head and one plan? Explain the principle
with a suitable example?
8. Explain any three points which highlight the nature of principles of management

25
 CHAPTER – 3

BUSINESS ENVIRONMENT

Meaning :

Environment of business means forces (economic, social, political,

technological etc.) and institutions (suppliers, customers, competitions etc.) outside
the firm with which its members must deal to achieve the organisation’s purpose.

Categories of Business Environment

I. Economic Environment : It consists of factors like the fiscal policy, the

monetary policy, the industrial policy, pace of
economic development etc.

II. Non-economic Environment : It refers to social, cultural, political, legal,

technological factors etc.

Importance of Business Environment

1. First Mover advantage:

Environmental awareness can help the firm to capitalize an early opportunities

rather than lose these to competitors.

2. Source of Intellectual Stimulation:

Environmental Scanning provides intellectual stimulation to planners in their

decision making. The top level should also lead by empowering people. They
have to come forward to make every possible change and transformation in their
corporations.

3. Warning Signal:

Environmental awareness provides a base of objective qualitative information,

which can be used and recognized well in advance.

4. Image building:

Environmental understanding helps in improving the image of the firm with its
public by showing that it is sensitive to its environment and responsive to it.

5. Basis of Strategy:

Environmental Understanding provides a base of objective qualitative

information about the business environment that strategists can utilize.

26
DIMENSIONS / COMPONENTS OF BUSINESS ENVIRONMENT

Business Environment is classified into three major categories

i) Internal Environment
ii) Operational Environment
iii) General Environment

GENERAL ENVIRONMENT
E A Economic
Technological Component Component

OPERATIONAL ENVIRONMENT
International Customer
Component Component
INTERNAL ENVIRONMENT

1. Organisational aspect
2. Production aspect
3. Personal aspect
4. Financial aspect
5. Marketing aspect

Competition Labour
Component Component
Supplier
Component
D B
Legal Component Social Component
C. Political Component

General Environment and its components :

a) Economic Environment

It consists of corporate profits, inflation rate, productivity, balance of payments,

interest rates, gross national product, etc.

b) Social Environment

It describes characteristics of the society in which the organisation exists.

Literacy rates, educational levels, values, beliefs, age etc.

c) Political Environment

It includes those elements that are related to governmental affairs, e.g. Type of
government in existence, governmental attitude towards various industries,
platform of political parties, etc.

27
d) Legal Environment

It consists of Legislation that has been passed by the parliament and State
Legislatures. This component prescribes rules or laws that all members of
business community must follow.

e) Technological Environment

It includes new approaches to producing goods and services, procedures and

equipment.

Changes profile of Indian Economic Environment

Since 1991, India has been going through a process of economic reforms and
liberalization. These economic reforms aim at modernizing the country’s industrial
system, removing unproductive controls, encouraging private investment including
foreign investment and integrating India’s economy with the global economy.

Major Economic changes

i) New Industrial Policy

a) A number of industries have been liberalized from the clutches of licensing

and control.

b) The role of public sector has been curtasted.

c) Monopolies and Restrictive Trade Practices Act (MRTP) and Foreign

Exchange Regulation Act (F.E.R.A) have been diluted significantly.

d) Substantative changes have been introduced in matters like Foreign

Investment and technology import.

ii) New Trade Policy

Export-Import trade has been realized from the shackles of controls. Almost all
imports have been liberalized except for a small non-permitted list of items.
Imports have been completely remained from licensing field and decentralized
for the most part. Export duties have been abolished. Procedures related to
promoting exports have been simplified.

iii) Fiscal Reforms

The Fiscal reforms centered on reduction of fiscal deficits and reforms of the
taxation system. Corporate tax as well as personal income tax were seated
down. Removal of some of the existing concessions and exemptions.
Strengthening of tax compliance and modification in the treatment of capital
gains. Tax and Wealth Tax were the other features of divert tax reforms. As
regards indirect taxes, substantial reductions were made in excise as well as
import duties.

28
iv) Monetary Reforms

a) The Government carried out a phased reduction of statutory liquidity ration (

SLR)

b) The Government permitted a degree of flexibility to the banks in the matter

of airport interest rates.

c) The Government also allowed nationalized banks to go to the capital market

raising their capital base.

d) Disinvestment upto 49% of the total equity has been permitted.

v) Capital Market Reforms

a) SEBI has been made a statutory body.

b) Bonus issues have been made more liberal.

c) Private sectors have been allowed to setup mutuals.

d) Office of the Controller of Capital Issue (CCI) has been also abolished and
free pricing of shares has been allowed.

e) A scheme of the registration of sub-workers has been introduced to ensure

invests protection.

vi) Phasing out subsidies and Dismantling price controls

a) Abdishing cash compensatory scheme as export subsidy.

b) Reducing subsides on fertilizers and petro-products.

c) Removed price and distribution controls on iron steel.

d) In fertilizers, the government decontrolled the price of phosphatic

potassium and complex fertilizers.

e) In respect of kerosene and LPG, it allowed dual pricing and parallel

marketing by the private sector.

Impact of changes in Government Policy on Business and Industry

a) Threat from MNC (Multi National Companies)

The massive entry and consolidation of multinations in the Indian markets

constitutes another new challenge. With majority stake for the parent
multinationals, their Indian subsidiaries gain a new strategic advantage. For

29
 example, Indian Sewing Machine company became Singer India and started
producing the latest series with 900 range of sewing machines, employing the
new technology of singer corporation, USA.

b) All round competition:

Companies now face staff competition from Indian players Competition from
multinationals and firm imports is the another facet of this new competitive
environment. The easier access to better technology is an additional dimension.
Finally, competition will now be global in character, not confined to the
country’s boundaries. For example – Weston , a major player in the early days
with over 18% market share lost out heavily to competition from imported
products.

c) Buyers Market:

There were shortages practically in every sector-consumer goods, industrial

goods and services. As a result the buyers suffered. A shift from shortage to
surplus has been a major development of the liberalized regime. Government
removed controls on capacity creation and capacity utilization. Industry has
been given total freedom to expand and diversify. Decisions on investments
have been left on the entrepreneurs. Control on prices has been removed.
Investment now taken place in areas of demand.

d) Export – a matter of survival:

The New trade policy has been helped the Indian business firms to earn the
foreign exchange required for importing whatever raw materials, spares and
components they needed for keeping their production lines going. Linking of
imports to exports and market driven exchange rate was the first compulsion.
For example, DMC Data Products, MRF and WS Industries turned to exports
due to domestic competition.

e) World Class technology:

Competitive advantage and core competency rests largely on technology

strengths, Investment in R&D and innovation becomes inescapable for
companies which enjoyed protection under the regulated regime. For example,
pharmaceutical industries made 2% investment in R&D in India.

f) Corporate Vulerability:

With increased MNC presence, Indian firms financial weakness comes to the
fore. The Indian companies are facing.

i) takeover treat
ii) subordinate position in joint ventures
iii) unequal battle in general.

All of these are real facts of vulnerability with their roots in capital/financial
inadequacy.

30
Managerial Responses to changes the Business Environment

a) Acquisitions and Mergers:

Entrepreneurial freedom became all the more prominent through the spate of
mergers, acquisitions, takeovers and amalgamations. They were with a view to
achieve differing objectives. Some of these objectives were to achieve market
dominance (Rassi-India cement, Narmada L&T. ACC – Gujarat Ambiya),
dominant market position (Lafarge – TISCO and Raymond, Himdalco India)
market entry (coke buy parle, lever by kission and kwality).

b) Diversification

There was a spate of diversification. For example, Reliance has resorted to

vertically integrated diversification in a big way in the synthetic fibre
intermediates-petro-chemical business. Similarly Eureka Forbes – a vacuum
cleaner company entered into water purifier. Electric-iron food processor etc.

c) Consolidation of Multinationals:

Many multinationals enter India afresh through new joint ventures, General
Motors enters through a joint venture with Hindustan Motors, Hondo enters with
SIEL and GE enters with Godrej (Appliances).

d) Brand Building

Expenditures were enhanced by companies in building brands. The

expenditures on the launch of the Korean brands, LG, Samsung and Hyundai or
by new dot.com companies are good illustrations.

e) Distribution and Selling:

Distribution has been initiative like the ‘Bharat’ programme of level and
successful direct marketing operations of Amway Tupperware. Selling
expenditures to sales have risen in the last decade and more for Indian than for
Foreign companies.

f) Production Capacity:

Manufacturing capacity becoming world class especially in new plants, the best
example being that of Reliance petroleum, with the largest refinery capacity in
the world.

IMPORTANT QUESTIONS:

1. What is business environment?

2. What are the major components of economic environment?
3. What is economic and non-economic environment?

31
4. Environment provides with constraints and opportunities. Discuss with help of
an examples
5. Define Environment Scanning
6. ‘Understanding of business environment gets a first mover advantage, acts as a
warning signal adverse conditions and sensitive the management’. Discuss.
7. “Image building, basis of strategy and continuous learning are the outcomes of
understanding Business Environment Explain.
8. Enumerate the importance/benefits of understanding Business Environment
9. What is the significance of understanding environment in shaping the future of
business?
10. What constitutes the general environment of business?
11. Enumerate the component of General Environment of business
12. Explain the key component of General Environment
13. How is economic environment different from social environment
14. Explain legal environment and technological environment
15. Enumerate the various charges initiated by the Government of India since 1991
16. Fiscal reforms, monetary reforms and capital market reforms are some of the
changes initiated by the Government of India since 1999. Discuss.
17. Destabilisation of protected environment, threat from MNC, all round
competition and buyers market are the main impacts of changes in government
policy on business and industry. Explain.
18. Do changes in environment influence the business decisions? If so, explain.
In what ways Indian managers responds to these changes

HINTS:

Q.No. 1 to 3 - Meaning and its components

Q.No. 4 - The environment provides both constrains and opportunities
constraints such as economic conditions customs, government
regulations, availability of natural regulation, availability of
natural resources, labour supply and so forth are obvious.
Q.No. 5 - It means a process by which oganisations monitor their relevant
environment to identify opportunities and threats affecting their
business. By monitoring the environment through environmental
scanning, an organisation can consider the impact of the different
events, trends, issues and expectations on its strategic
management process.
Q.No. 7, 8 & 9 - Importance / Benefits
Q.No.10,11,12, - Components of general
13 & 14 i) Economic environment
ii) Social Environment
iii) Political Environment

32
 iv) Legal Government
v) Technological Environment

Q.No. 15, 16 - i) New Industrial Policy

ii) New Trade Policy
iii) Fiscal Reforms
iv) Monetary Reforms
v) Capital Market Reforms
vi) Phasing out subsidies and dismantling price controls.
Q.No. 17 - Impact of changes in government policy on business and
industry.
i) Threat from MNC
ii) All round competition
iii) Buyers market
iv) World class technology
v) Export – a matter of survivals
vi) Corporate vulnerability

Q.No.18, 19 - i) Acquisition and mergers

ii) Consolidation of multinationals
iii) Brand Building
iv) Distribution and selling
v) Customer focus
vi) Production capacity

CBSE QUESTIONS

1. Give two examples of the impact on business organizations of changes in social

environment
2. Explain, in brief, any five economic changes that have been initiated by the
Government of India since 1991
3. What is meant by ‘Political Environment’ of business?
4. Explain briefly any five positive impacts of globalization and liberalization on
business and industry in India
5. Banking sector reforms have led to easier credit terms and better services. This
is one example of a key component of the ‘Business Environment’. Name this
component and explain it’s brief
6. Explain ‘Customer-Focus’ and ‘Technology as managerial responses’ to
changes in Business Environment

33
 CHAPTER - IV

PLANNING

A. Introduction

B. Meaning : Definition

C. Features

D. Importance

E. Process

F. Limitations

G. Types of Plans

H. Distinction

I. Practice Questions

J. CBSE Questions

34
 Unit IV : Planning
Weightage : 6

A. Introduction:

To achieve desire objectives, it is better to decide what is to be done in future. It

is required for every individual, organizations for removing the uncertainities in
future and reduce the wastages in time, money, machines, materials and
manpower.

B. Meaning & Definition:

Deciding future course of action before hand is planning– Theo Highmann

. “Planning is deciding in advance what is to be done in the future”

“Planning is an intellectual process, the conscious determination of course of

action, the basing of decisions on purpose, facts and considered estimates” –
Koontz & O’Donnell

C. Features/Characteristics:

a) Contributes to Objectives :

After determining the objectives, planning decides the steps to achieve

these objectives. Ex : If a firm decides a sell 1200 washing machines in an
year, it finds different ways to achieve this objectives like giving
advertising, appointing salesmen or giving discounts etc.

b) Primacy of Planning:

Planning is the first function which is the basis for all other functions of
management. Based on the plans other functions work accordingly. It
becomes easier to implement other functions.

c) Forward Looking:

Planning is looking forward of the future course of action. It is thinking

before doing. Therefore it is an intellectual process which requires skills
to find the trends of the social, economic, technological and regulatory
environment that influences business.

d) Pervasiveness:

Planning is essential at all levels within the organisation. Strategic

planning at the top level tactical and operational planning at middle and
lower levels respectively are required for the efficient running of the
business.

35
 e) Involves choice:

Planning is based as chosing the best among various alternatives available

with the management. While selecting the best, the cost and time involved
must be considered.

f) Continuous Process:

Planning is ongoing process. Every business man has to plan according to

the changing environment and continue to make changes as and when it is
required.

Importance of Planning:

a) Removes Uncertainities:

Planning facilitate smooth running of business, quick decisions, proper guidance

and easy control for the future. Therefore planning removes all the
uncertainities about the future. Ex. Forecast of future growth of population
facilitates the business to estimate the demand for the products in future.

b) Economical Operations:

As the planning paves the way for the future course of action, business can
achieve economy in all operations. It helps in avoiding wastages, disorder,
confusion and facilitate good decisions. It reduces overlapping and duplication
in all the activities.

c) Encourages innovation and creativity:

Planning gives scope for finding better and shortcut methods for achieving the
goals. This helps the manager to innovate and adopt better plans for the future.
It encourages every employee towards the achievement of the objectives.

36
d) Facilitates coordination:

It becomes easier for the manager to unify the actions as the objectives are clear
for the employees. Therefore they cooperate among themselves to achieve the
goals.

e) Facilitates control:

Controlling is based on planning. When objectives are clear achievement

becomes easier. The manger can measure the performance based on the
objectives and give proper guidance wherever necessary.

f) Results in economy and efficiency:

Planning helps management to use the limited resources efficiently to achieve

the goals. People achieve the efficiency in implementation and achieving the
objectives as it is clear as to how to do, what to do, when to do and when is to
do.

E. Process of Planning

The following are the steps followed for the formulation of plans.

a) Define Organisational objectives:

Specific objectives for different aspects must be clear. For Eg : Objectives

for men, materials, money, machines etc. shall be clear and specific is the
beginning.

b) List alternative courses of action:

Different alternative plans shall be framed for different aspects. Ex.

Planning different methods for solving a problem like for selling goods

i) direct
ii) intermediaries
iii) salesmen etc.

37
c) Develop planning promises:

Planning premises are the factors which influence the plans in future. The
manager shall be aware and forecast those factors that will effect the
different plans in future. Ex. Demand, markets, unions of labour,
government etc.

d) Choose the best alternative plan:

After formulating the planning premises the next step is to chose a best
plan from among the alternatives that is best suitable for achieving the
organizational goals.

e) Formulation of derivative plans:

Based on the basic plans, other plans supporting the main plans shall be
made by the middle and lower level managers. Ex. Plans for production,
finance, marketing, staffing etc.

f) Putting the plans into action:

Once the plan is decided, it is to be put into action. Implementation

becomes easier for the employees. Manager can guide the people on the
basis of planning.

F. Limitations of Planning

No doubt planning is an important function. However the manager shall take

care of the following limitations while formulating the plans.

a) Lack of accuracy:

Planning depends on collection of information and facts. But correct facts

and information may not be available at all times. In such a situation
planning results cannot be realiable and perfect. Futures is also uncertain.

38
 b) Rigidity:

Predetermined procedures, policies and rules tend to be rigid. They cannot

be applicable to its changing situations. The managers have to follow the
rigid plans but can not follow the changing situations.

c) Costs:

If the costs of planning is more than its benefits then it is financial burden
to the organisation. So the management shall be aware of the costs
incurred for planning the future course of action.

d) Personal Factors:

Planning is effected by personal bias and prejudices. Personal likes,

attitudes, interests and preferences will effect the planning. Incompetency
of persons will prove the plans ineffective.

e) Psychological bauriers:

People have the preference for the present against future. Planning
involves changes. People do not tend to adjust with changes.

f) Delay in action:

Planning requires time for thinking, analyzing the situations for finalizing
a choice plan. In case of emergencies and unusual situations it tends to be
difficult to finalise the plans.

Costs Rigidity Delay Personal Lack of Psychological

in action Factors Accurancy

Limitations of Planning

G. Types of Plans

a) Goals:

A goal is a desired state of affairs. Goals are collective ends towards

which organizations direct their energies and activities. Goals may be
short term or long term in nature. They guide the activities to keep them
on right track.

39
 b) Objectives:

Objectives are the end points towards which activities are aimed. They are
expressed in quantitative terms. Objectives may be economic and social.
They are measurable and challenging.

` c) Policies:

Policy is a standing direction to management for taking decisions within

the prescribed limits. Policies are of many types. Ex : Purchase policy,
transfer policy, promotion policy, recruitment policy etc. They exist at all
levels of management.

d) Procedures:

Procedures are guide to action. They establish required steps for future
course of action. They are chronological sequences of required actions.
Ex : Procedure for selection of workers, procedure for sales, procedure for
maintenance of stocks, procedure for accounting records etc.

e) Rules:

Rules spell out specific required actions or non-action. They allow no

discretion. They are rigid. Rules do not allow any deviation from a stated
course of action. Ex : Workers have to come at 9 am. They can not
change the time as they like.

f) Methods:

Methods are formalized and standardized ways of accomplishing repetitive

and routine jobs.
Ex : Methods of calculation of depreciation, Methods valuation of
goodwill etc.
It facilitates efficiency. They provide specific and detailed guidance for
solving a particular action. They help in simplification of work. They
serve as uniform norms to guide and control actions. They are limited in
scope than a procedure.

g) Programmes:

Programmes are combination of goals, policies, procedures, rules and

other elements to carry out a given course of action. A primary
programme may call for many supporting programmes. Ex :Programme
for training and seminars.

L. Budgets

Budget is a statement of expected results expressed in numerical terms. It may

be referred to as a numbered programme. A financial budget is an estimate of

40
 income and expenditure for a particular period. Ex : Financial budget, Capital
budget, Cash budget etc. Budget is a necessary for control.

Goals
Objectives
Policies
Procedures
Rules
Methods
Programmes
Budgets

Types of Plans

H. Distinctions

Policies Objectives

1. Guides for taking decisions 1. End points toward which

activities are directed.

2. Determine how the work is to 2. Determine what is to be done

be done

3. Policies help the manner in 3. Objectives are end points in

which objectives are achieved. planning.

4. Policies well framed at all 4. At the top level only

levels

Policies Procedures

1. Guides to decision making 1. Guides to actions

2. They facilitate achieving 2. They facilitate formulation and

objectives implementation of policies.

3. They are flexible 3. They are rigid

4. They leave discretion 4. They leave no discretion

5. They are in the form of 5. They are in the form of specific

general statement terms.

41
 Policies Rules

1. General statements 1. Specific statements

2. Guide to decision 2. Guide to behaviour

3. Flexible 3. Rigid and expect no deviations

4. Provide discretion to 4. Provide no scope for discretion.

implement

Rules Methods

1. Taboos and norms 1. Standard way of doing things

2. Seek to ensure discipline 2. Seek to ensure efficiency

3. No standardization required 3. Standardization is essential

4. Penalty is attached if violated 4. No penalty for violation.

5. Relate to individual behaviour 5. Relates to physical and mental

tasks.

I. PRACTICE QUESTIONS:

1. Define Planning. Explain the features of planning

2. Explain the importance of planning
3. Explain the limitations of planning
4. Explain the process of planning
5. Explain the following terms:
a) Pervasiveness of planning
b) Planning premises
6. Explain different types of plans
7. Distinguish between
a) Policies and procedures
b) Policies and objectives
c) Rules and policies
d) Procedure and methods.

42
J. CBSE QUESTIONS:

I. 2006 March

1. Explain the process of planning

Or
‘Planning is an important function of management. Explain any six
points. 6

II. 2004 March

1. Explain briefly any six points which highlight the importance of

planning.
6
Or
Explain in brief the meaning of policy and rule as types of Mans and
give any four points of distinction between them.

III 1. Explain in brief any six limitation of planning 6

Or
“Planning is of vital importance in the managerial process”. Do you
agree? Explain any five reasons in support of your answer.

43
 CHAPTER – 5

ORGANISING
Synopsis

This chapter deals with the following

Meaning and Definition of Organising, its importance, steps in the process of

organizing, functional and divisional structures of organisation, formal and
informal organisation, delegation and decentralization, its importance,
difference between delegation and decentralization.

Introduction

Once the plans and objectives have been laid down, management has to identify and
establish productive relationships among various activities and resources. Organizing
is required for implementing plans.

Meaning

The process of identifying and grouping various activities and bringing together
physical, financial and human resources and establishing productive relations among
them for the achievements of specific goals.

Definition of Organisational Structure

Organizational structure is defined as a system of job position. The roles assigned to

them and the authority relationships among the various positions.

Authority

It is the powers and rights to use financial material, human resources as well as the
right to decide, act or not to act.

Delegation

According to Louis Allen, the concept of delegation can be described as the

entrustment of work or responsibility to another for performance; the entrustment of
powers and rights or authority to be exercised and the creation of an obligation or
accountability of the person accepting the delegate of work.

Responsibility

It refers to the work assigned by a person position or job.

Accountability

It is the obligation to carry out the assigned tasks, duties or responsibilities.

44
Decentralization

It refers to systematic delegation of authority at all levels of management and in all

departments of the organisation for taking decision and actions at appropriate or the
respective levels.

Organisation

The organized group of people with collective sense is known as organisation.

Hierarchy

It refers to ranking of managerial positions and it is done by giving different degrees

of authority to different positions.

Steps in organizing process

a) Division of work
b) Grouping of jobs and departmentation
c) Establishing authority relationship

Importance of organizing. Explain?

1. Specialisation:

The activities are grouped on the basis of similarity, so it leads to

specialization, speeding performance of tasks and efficiency.

2. Role clarity:

The jobs of managers and non manager are clearly defined, so it helps to
remove duplication of work.

3. Clarifies authority and responsibility:

organizing process defines the authority enjoyed by each managers and his
jurisdiction of activity. So it minimized conflict and confusion about the
respective powers and priviledges of managers.

4. Avoiding duplication of work:

Organisation process assigns specific jobs to individuals and work groups.

So it avoids duplication of work.

5. Co-ordination

Harmony of work is ensured by high level manager because they have

authority over interconnected activities of lower level subordinates.

45
Advantages of Functional structure of organization:

1. An expert can manage each department and there is efficiency in

operations.
2. Supervison is facilitates
3. Corodination within the department is easier.

Disadvantages :

1. Specialists may not be able to see the perspective of the organisation as a

whole.
2. When departments become too large it is difficult to coordinate and there
will be delay in decision making.
3. Manager may try to build their own functional empires leading to
conflicts.
4. In case of any problem, it becomes difficult to hold a particular
department.

Advantages and disadvantages of Divisional structure of organization:

a) Advantages :

1. All activities associated with one product or product group can be

easily integrated.
2. Decision making is faster and effective.
3. Performance of individual products or groups can be assessed easily
and objectively.

b) Disadvantages

1. Duplication of effort among divisions

2. Managers in each department don’t think about the rest of the
organisation.

Distinguish between Formal and Informal organisation.

Basis Formal Organ Informal Organ

1. Formation Formed by management Formed as a result of social

internationally interaction among people

2. Purpose To achieve planned goals To satisfy social needs

3. Standard of behaviour Prescribed by management Evolved by mutual consent

among members

4. Structure Well defined structure Does not have clear cut

structure.

5. Interdependence Independent of informal It exists within formal organ.

6. Communication Official line of communication Informal communication based

on convenience.

46
7. Stability and durability It is stable and predictable Neither stable nor predictable.

8. Leadership Managers are leaders Leaders are chosen.

9. Flow of authority Top to bottom Not fixed.

G) Distinguish between responsibility and accountability.

Responsibility Accountability

1. It refer to task or work to be performed It refers to answerability or obligation to

perform the work.

2. It can be delegated or entrusted to another It can’t be delegated.

person

H) Distinguish between Delegation and Decentralisation.

Delegation Decentralization

1. It is compulsory It is optional

2. It is a process It is done regularly

3. Scope of delegation in narrow Scope of decentralization is wide

4. It involves two parties Entire organisation is involved.

5. Delegation can be withdrawn It can’t be withdrawn.

6. Purpose of delegation is to do more work Subordinates role is increased.

The importance of delegation of authority is as follows.

a) Reduces workload of managers:

Managers shares work load with his subordinates as a result of delegation

of authority.

b) Basis of Superior subordinate relations:

Delegation directs the flow of authority from top level to lower level and it
establishes superior sub-ordinate relations.

c) Improves Managerial effectiveness

The manager can get some work done by his subordinates and is able to
concentrate on important maters, take appropriate decisions and act
accordingly.

47
 d) Motivates subordinates

Subordinates are given authority along with responsibility or work. So

subordinates have a sense of recognition.

e) Facilitate, development of managers

Delegation provides opportunities for managers to acquire leadership and

other skills and competency.

f) Facilitates organizational growth:

Delegation leads to better utilization of human and material resources.

Organisation is able to generate more sales and profit. It results in
organizational growth.

Decentralisation :

Decentralisation is considered almost essential in large organisation because of

the following reasons :

1. Reduction in workload of top executives:

Top executives can concentrate on coordination and control because day to

day problems are solved by middle and lower level executives.
2. Improving motivation

Decentralisation encourages lower levels to take decisions on their own. It

gives employees a sense of importance, recognition and responsibility.

3. Improved team work :

Superiors consult subordinates in decision making, communicate with

them freely and frankly and take personal interest in their welfare. This
leads to superior team work.

4. Execution development:

Lower level managers are trained to take decisions on their own, They feel
independent, have challenge and vision to meet goals and it leads to
development of future executives.

5. Quick decision making:

There won’t be any delay in taking certain decisions.

6. Promotes initiative and creativity:

Since managers enjoy freedom of action, they develop better way of doing
work. Thereby creativity is encouraged.

48
Organising and its process:

According to Henry Fayol, organizing is defined as “To organize and business is

to provide it with everything useful to its functioning: raw materials, machines
and tools, capital and personnel’.

Process of organizing

Division of Grouping the Jobs Establishing

Work and Authority/Responsibility
Departmentation Relationship

Authority can be delegated but not accountability

Yes. It is based on the principle of absolute responsibility or principle of

abdication.
For eg. The directors of a computer manufacturing company have asked their
production manager to achieve a target production of 150 computers per day.
The production manager has asked his five foremen to achieve this target. Two
of them couldnot achieve the target.

In this case production manager is responsible and accountable for non

completion of target because by passing authority and work to foreman manager
can’t get rid of his responsibilities and accountability.

Some Examples:

a) “A manager is of the view that he is not responsible for the quality of work that
he has delegated to his subordinate”. Do you agree with this viewpoint?
Justify your answer.
I do not agree.
Give same explanation as given in (2) above.

b) Can an overburdened manager take help from his subordinates? How? Explain
the three important things which he should keep in mind while taking such help?

Yes. By delegating authority to his subordinates.

Three things to kept in mind while taking such help.

1. Manager must internationally assign his job to the other person.

2. He must give them sufficient powers to mobilize and command resources.
3. Standard performance must be fixed for the subordinates. 3x1=3

Functional Structure :
Functional structure is formed by grouping similar work to be done into major
functional departments. In a manufacturing enterprise production, marketing,

49
 finance and personnel are regarded as essential functions. In case of retail store,
purchases, sales and warehousing are the major functions.

Divisional Structure :

Divisional structure is formed by grouping activities and personnel on the basis

of different products manufactured.

The factors that are to be kept in mind while building an organization structure are as
follows:
a) Job design – all activities and related tasks contained in each job.
b) Departmentation – grouping of similar jobs to form a department.
c) Spam of control – how many people and jobs one manager can
supervise/control.
d) Delegation of authority – Sharing of power with subordinates.

Practical Questions :
1) Distinguish between formal and informal organizations on the basis of

i) Communication
ii) Flow of authority
iii) Tenure
iv) Leadership
v) Durability and
vi) Independence

Refer – Answer to Q.No. ………..?

2) “Delegation of authority is based on the elementary principle of division of

labour”. Explain this statement (6)

3) What is an informal organisation? Distinguish between formal organisation and

informal organisation on the basis of
i) purpose
ii) behaviour of members
iii) adherence to rules and
iv) stability AISSESS 2004 (6)

4) Explain in brief any size points which highlight the importance of

decentralisation in an organ. (6)
AISSCE 2004
W) “Delegation of authority is a process involving authority, responsibility and
accountability”. Explain this statement in brief. (4)
AISSCE 2004
Elements of delegation:
Authority
Responsibility
Accountability

50
 CHAPTER 6

STAFFING

10 Marks
 Introduction

 Meaning and the need

 Importance

 Steps involved

 Recruitment and its sources

 Meaning of solution and its process

 Training and Development

 Compensation and Incentives.

 Practice Questions

 CBSE questions and last 03 years.

Introduction

Managing, human element and its relationship between different individuals in

the most challenging assignment for the management. It lays stress that the
management should make solution of employees strictly in accordance with job
requirement of the enterprises.

In other words, “the policy of selecting right man for the right job should be
adopted”.

51
 STAFFING

Meaning

Staffing is the process of determining the manpower requirements that could

meet the company’s objectives. This includes appraising and selecting candidates to
fill these requirements and orientation, training and development programmes for new
and existing staff.

Staffing as a function of Management

It is concerned with providing people needed to carry out the tasks and
responsibilities designated for each organizational position in a business enterprise.

Need for Staffing

i) Filling the roles:

The staffing of organizational roles includes knowledge and approaches which

is not generally recognized by managers who think of organizing as setting up a
structure of position.

ii) Human Emphasis:

It gives greater emphasis on the human element in selection, appraisal and

manager development.

iii) Availability of Knowledge:

An important body of knowledge and experience in the area of staffing is now

available. Such knowledge can be used in empowering human resource of the
organisation to get better results.

Importance

i) Investment Costs:

Procurement of human resources involves investment in terms of selection,

training and development costs.

ii) Holistic approach:

The usefulness of the persons in an enterprise depends on the manger under

whom they work and the facilities made available as well as other person who
assist them.

iii) Long term effect:

The investment in human resources is of long term effect. This makes the
decision to employ and remove a person from employment the most important
consideration. It is more so in case of managerial personnel.

52
iv) Potential Contribution

While selecting a person, especially for middle and top level executive, the
enterprise has to think potential capabilities which will serve the future
requirements.

v) Costs may surpass investments

Costs of material resources used in any business enterprise cannot be negative.

The return on the investment of personnel with special reference to managerial
personnel, may be positive or negative.

vi) Multiplier effect

The total effect of the functioning of the individual members of a team of

managers may not be equal to the effect of the team as a whole. It may be less
or more, as a matter of fact, the sum total of the effect of the team should be
much more than the arithmetical calculations of the effect of the work of the
individual members of the team.

Staffing as a part of Human Resource Management

Human resource management involves the planning, acquisition and

development of human resource necessary for organizational success. This definition
underscores the point that people are valuable resource requiring careful nurturing.

In fact most personnel departments are now called human resource departments.
This approach also emphasizes the serious moral and legal issues involved in viewing
labour simply as a commodity to be brought, exploited to exhaustion and discarded
when convenient.

Moreover, global competitive pressures have made the skillful management of

human resources more important than ever. Particularly promising development in
the staffing area is the linkage of the human resource with strategic management
where physical resources are same in two competitive organizations, but people who
are managing one different and the results of these firms may be different.

It is evident that man can’t be replaced by machine. As such, Human Resource

Management is very important in all types of organisation.

Process (or) Steps in Staffing Function

Staffing is concerned with ensuring a business enterprises that it has the right
number of people and right kind of people at the right places, at the right time. This
will need the following measures.

i) Manpower Planning:

It is a process of determining the size and composition of employees needed by

the organisation. Both present and future requirements of manpower should be

53
 estimated. It is done by keeping in mind the production schedule, market
fluctuations, demand forecast etc.

ii) Job analysis:

It refers to the careful study of each job to determine

i) Te responsibilities involved in a job.

ii) Relations of one job to other job.
iii) Conditions which are required to perform the job and
iv) The personal capabilities of a job holder.

iii) Recruitment

It is a process of searching for prospective candidates and stimulating them to

apply for jobs in the organisation.

Thus it is the activity of publishing information about vacancies/jobs in the

organisation and inducing suitable candidates to apply for the job.

iv) Selection

Selecting an employee is choosing from among the candidates the one that best
meets the position requirement. In the selection, applicants sought to fill a
position with rather specific requirements in the placement approach, the
strength and weaknesses of the individual. Once evaluated and suitable positions
are found or even discarded.

v) Placement and Orientation

Placement means asking the selected candidates to occupy the position in the
organisation for which they have been considered.

Orientation means introducing every selected employee to his follow

employees, supervisor and rules & policies of the organisation. This involves
becoming acquainted with associates and the duties of the job.

vi) Training

Training means equipping with required knowledge and skills with reference to
his jobs. Every candidates has to go through a period of training for further
enrichment of knowledge.

vii) Performance appraisal

Performance appraisals are conducted to determine how successfully employees

are meeting the demands of their positions feedback is essential to improvement.
Appraisals are used for a variety of purposes relating to training, promotion and
compensation.

54
viii) Promotion and Career Planning

Organisations are dynamic resulting in a continual need to advance people to

higher positions. Also, many workers may not fit into their correct jobs. So
transfers into positions more consistent with their skills and interests are
appropriate.

ix) Compensation

A major problem for an organizations is to match a person’s salary with the

contribution made. The wage and salary structure needs to be fair and provide
incentives to employees.

x) Separation

Since, an organisation is dynamic, it will lose employees by termination,

satirement, resignation and death. Higher turnover represents a potential
problem that commands managerial attention.

Recruitment

Meaning :

It is the process of attracting qualified persons to apply for the jobs that are
called for simple. In words, recruitment is understood as the process of searching for
and obtaining applicants for jobs, from among whom the right people will be selected.

Sources of Recruitment

Sources of Recruitment

Internal External

Transfer Advertisement
Promotion Personnel Consultant
Lay-off Jobbers (or) Contractors
Factory gate
University (or) Colleges
(Campus selection)
Existing Employees
Waiting List
Employment Exchanges

Internal Sources :

Recruitment from within the organisation is made through promotion and transfer.

55
i) Transfer

It involves the shifting of an employee from one job to another. By and large
transfer does not involve any change in the responsibilities, ranks, rate of
compensation or prestige of the employees.

ii) Promotion

It refers to shifting an employee to a position carrying higher responsibilities

and therefore, enjoying increased prestige. Thus promoting suitable employees
may fill up vacant positions at higher ranks.

iii) Lay-Off

It refers to the temporary separation of the employee from the employer on the
initiative of the employer. In most of the cases reasons for lay-off are due to
lack of work.

External sources of recruitment

Employees may resign, vacancies thus created must be filled up. Expansion
programme may create new jobs with specifications which cannot be met from the list
of existing employees. Therefore recruitment from outside sources is necessary.
They are.

i) Waiting List

Many firms maintain their application files in which applications received from
casual applicants are kept pending. Similarly individuals might have visited
personally or enquired about the availability of job through mail or on phone.

ii) Recommendation of the present employees

Many firms encourage their employees to recommend the names of their

relatives, friends and acquaintances for employment. Some firms believes this
policy to be valuable asset both for maintaining goodwill of the present
employees and finding valuable candidates.

iii) Notices exhibited in the workshop or office

Notices showing what vacancies exist may put on notice boards placed at a
central location in the workshop and office.

iv) Factory Gate

A large number of job seekers assemble everyday at the gate of the factory. It is
useful when unskill workers are required to fill up casual vacancy. Such
practices are common at the time of construction of plants, ports and docks.

56
v) Employment exchanges

Public employment exchanges are an important source of recruitment from

outside. Job seekers get their names registered in these exchanges. At the
request of the employers names of persons from the list of those registered
having requisite qualifications are sent for consideration.

vi) Media Advertising

Advertising is an extremely popular method of recruiting staff. One significant

benefit is that the advertisers can choose the most appropriate newspapers or
Journal for the post being advertised.

SELECTION

Meaning

It is a process of choosing candidates possessing relevant qualification for a job.

It is an elimination process in which unsuitable candidates are dropped for further
stages of selection.

Steps in Selection Process

Following are the steps taken in the selection of personnel.

i) Preliminary Screening:

The preliminary interview is held to eliminate the unsuitable candidates.

Candidates having some chance of selection, are given a prescribed application
blank.

ii) Application blank:

Application blank is a personal history questionnaire i.e. age, marital status,

educational qualification, work experience, reference etc.

iii) Employment Test:

Employment test include general personality and psychological tests, aptitude

and proficiency test.

iv) Interview:

Selection interview consists of conversation between candidates and the

employer. Its aim is to have an overview of the candidates ability for the job.

v) Physical Examination:

Successful candidates are required to undergo physical examination by Medical

Practitioner. Its aim is to assess the health of candidates in accordance with the
requirement of the jobs.

57
vi) Reference checks:

References give detailed information about candidates capabilities. From

reference a lot information is received about a candidate.

TRAINING

Meaning

Training is a systematic programme to enrich the knowledge, skills, abilities and

aptitudes of workers to perform specific job. The purpose of training is to achieve a
change in the behaviour of those trained and to enable them to do their jobs in a better
way.

Training is the act of improving or updating the knowledge and skill of an

employee for performing a particular job.

Need

Training is a vital and necessary activity in all organisation. It plays a major

part in determining the effectiveness and efficiency of the establishment. Some of the
reasons any training is needed are outlined below.

i) Reduced Learning Time:

By having qualified instructions and carefully controlled learning situations,

management in numerous cases has been able to obtain efficiency. Shortened
learning periods enure higher productivity from new employees.

ii) Improval performance:

It helps employees increase their level of performance on their present job

assignment.

iii) Attitude formation:

The main aim of Training programme is to moulding the employee attitudes to

achieve goals of organisation and to obtain better co-operation and greater
loyalty.

iv) Aid in solving operational problems

Training of both supervisory and hourly aid employees can help reduce
turnover, absenterism, accidents and grievance rates. Other operational
problems that training can solve are low morale, poor customer services,
excessive waste etc.

v) Managing Manpower needs

The best way to solve the manpower problem in the long run was to establish its
own apprentice training programme.

58
 Distinction between Training and Development

Point of Training Development

Difference
1. Concerned with Training is concerned with Development is concerned with
teaching technical skill imparting technical, human and
conceptual skills.
2. Aims at Training aims at improving a Development aims at improving the
special skill relating to a job total personality of an individual.
3. Seeks to It seeks to make workers It seeks to prepare employees for
proficient in their existing handling over more responsible and
jobs challenging jobs.
4. Methods used “On the Job” training “Off the Job” training methods such as
methods such as job rotation lecture, brain storming
apprenticeship institute role playing methods are used in
training one use in training. development.

Training Methods

Training methods are classified into two groups

i) On the Job Training :

On the job training places the employees in actual work situations and makes
them appear to be immediately productive. It is learning by doing.

Methods

a) Apprenticeship Programme:

People who would like to skilled trades are required to undergo

apprenticeship programme. The trainee will be put under the guidance of
master worker. The trainee has to learn skill and knowledge of a particular
trade. The training period is varied between 2 to 5 years. During the
apprenticeship period, the trainee is paid stipend.

ii) Vestibule Training:

In vestibule training an attempt is made to duplicate as close as possible the

method, materials, equipment and condition as found in real work situation. It is
particularly suitable when a large number of employees are to be formed at the
sometime for the same kind of work.

iii) Job rotation:

Under this method an individual is transferred from one job to another or from
one department to another in the co-ordinated and planned manner with a view
to broader the general background of the trainee. By this, a new entrant gets a
specialized knowledge and skill of different types of situation.

59
iv) Internship:

This refers to a joint programme of training in which technical institutes and

business enterprises co-operate to enable the students to gain a good balance
between theory and practice. During this period stipend is given to the students.
Internship is ventrally a practical training of the theoretical knowledge.

COMPENSATION

Meaning :

It is aggregate of pay, incentives and benefits offered by employer for hiring the
service of employee. It is compensation received in exchange for their contribution to
the organisation.

Incentives

Incentive means an inducement which stimulates a person to act in a desired direction.

An incentive has motivational power because it helps to satisfy a need. Eg. Bonus,
premium etc.

Incentives are two types

i) Monetary
ii) Non-Monetary incentives.

Monetary Incentives :

It involves payments in cash or kind or both, the various monetary incentives are
given below.

i) Profit Sharing:

Under this scheme, employees are given a legitimate scheme in the surplus
earned by the firm. It is a scheme of providing a sort of group incentive to the
worker for higher productivity and general probability.

ii) Co-Partnership:

Under the scheme of co-partnership a worker gets his used wages, a share in the
profit of the company and a shame in the management of the company as well.

iii) Bonus:

Bonus is a reward that is offered on a one-time basis for higher performance. A

bonus may be in cash or in some other form like trips for top sales people.

60
iv) Suggestion system:

Suggestion plans offer incentives or rewards for employee suggestions that

result on either increased profits or reduced cost. This plan is helpful in saving
costs, improves employee commitment.

v) Commission:

A commission plan has the advantage of relating rewards directly to

performance. Many sales people work under some type of commission plan.
Commission is paid according to the sales volume. Some sale people work on a
straight commission basis, others works on a combination of salary plus
commission.

Non-Monetary Incentives:

It include all social and psychological attraction by which workers are incited to
accomplish the best and work more. Some of the Non-Monetary Incentives are

i) Supervisory relationship

Cordial relations with supervisor enhance commitment to work and motivate

employee to work effective and efficiently.

ii) Assignment of challenging jobs:

Assignment of challenging jobs leads to a sustained interest in the job and

motivate people to work efficiently.

iii) Recognition:

Praise has its greater impact when given and received as recognition. This helps
in improving attitudes of employees and motivates them to perform better.

iv) Experience of achievement

An experience of achievement through task completion provides job satisfaction

to the individual. The individual tends to consider the completion of the task as
a goal in itself.

Methods of Wage Payment

Workers are rewarded in the form of wages to compensate them for the skill,
energy, effort (i.e.) all their physical and mental qualities used to turn out the work
allotted to them. There are two major methods of rewarding labour.

i) Payment on time basis

ii) Payment on piece work basis

61
I. Time Rate Wage System:

Under the scheme, wages are determined according to the time, which the
workers spends on the job assigned to him. The unit of time may range from
one hour to one week. Time wages one generally taken to mean the sum total of
an hourly rate and the number of hours worked.

Advantages

i) It provides a guaranteed minimum wages to employees.

ii) Workers can pay more attention to the quality of work.

iii) Due to slow and steady pace of the workers, the damages and rough handling of
machines, tool and equipment are reduced.

iv) It requires less administration attention because the very basis of time wage
contract is good faith and mutual trust among the parties.

Disadvantages

i) There is a need for constant supervisor.

ii) This scheme lacks incentives to reach and sustain a reasonable level of work,

iii) Efficient and inefficient work cannot distinguished.

iv) There is a tendency for workers to go slow and production systems.

Piece rate wage system:

According to the piece rate system, a worker is paid for the amount of work
performed. A specified rate of wages may be fixed unit of output measured in terms
of unit of production. The formula for calculation of wages is as follows:

Wages = N x R N = Number of Unit product.

R = Wage rate per unit of product

Advantages

i) Efficiency - Piece rate method does not ignore efficiency of workers. The
efficient works gets more ways then inefficient worker.

ii) It reduces the cost of supervision.

iii) It motivates them towards higher productivity and leads to higher output.

62
Disadvantages

i) Too much emphasis on the quantity of production may lower the quality of
products.

ii) There is no guarantee of minimum wages.

iii) More repairs and maintenance due to rough healthy of machines and tools.

iv) It is detrimental to the long term health and working efficients by the workers.

TIME RATE V/s PIECE RATE WAGE SYSTEM

Point of Time rate Piece rule

Difference

i) Basis Wages are determined on the Wages are determined on the basis of
basis of time member of unit produced.

ii) Efficiency Wages are not linked with Wages are linked with efficiency of
the efficiency of the worker the workers.

iii) Supervisor Continuous supervision is Supervision is not at all required.

required

iv) Quality Quality of work is high Quality of work trend to low.

v) Maintenance Low maintenance of High maintenance is required.

machinery and tool and
equipment

Suitability : It is suitable in the following cases

i) Units of output can be measured.

ii) Work flow is regular, the job standardized and delays are few or consistent.

iii) Quality is less important than quantity.

iv) There should be clear relationship between effort and output.

63
PRACTICE QUESTIONS

1) What is meant by staffing as a function of management? (2)

2) Mention two reasons for the increase involvement of manager in staffing during
these days. (2)

3) Discuss briefly the process of staffing (6)

4) Briefly discuss the need for and importance of staffing function of management
(6)

5) Explain the importance of training (2)

6) Distinguish between training and development of employees (Any three) (3)

7) Explain the limitations of internal sources of recruitment (Any four) (4)

8) Explain briefly “Job rotation”, Vestibule training and apprenticeship programme

as methods of employees training (5)

9) Enumerate six essential elements of good wages system (6)

10) What is incentives? Discuss how incentives can help a manager towards better
relationship with labour and motivate them to increase their productivity (6)

64
CBSE QUESTIONS

1) Explain, in brief, any six external sources of Recruitment of employees.

a) Waiting list
b) Jobbers and contractors
c) Personnel consultants
d) Employment exchange
e) Media advertising
f)Factory gate
Each point to be explained

2) Why is Staffing an important function of Management in all organisation?

Explain in brief, any six reason.

- Staffing – Meaning
- Important

i) Investment cost
ii) Holistic approach
iii) Long term effect
iv) Potential contribution
v) Costs may surpass investments
vi) Multiplier effect

3) The workers of a factory are demanding the introduction of time – wage system
in place of the existing piece rule system of wage payment. The management is
not prepared to accept their demand of workers. Why, in your opinion, is the
management opposing this demand? Explain in brief any four reasons.

Ans The Management is opposing the time rate system because of following

i) Increase production
ii) Better employer – employee relationship
iii) Maximum utilization of tools and equipment
iv) Benefit of consumers
v) Difficult assessment of work
vi) Industrial dispute
vii) Managerial slacknes

4) Which method of wage payment – Time rate or piece rate – Would you adopt in
each of the following situations. Give reasons in support of your answer.

i) Where rate of output is determined solely by machine and not by operation

– Time rate.
ii) Where production process requires high degree of skills – Time rate
iii) Where work flow is regular – Piece rate
iv) Where quantity of output is more important than its quality – Piece rate

65
5) Explain, in brief any six steps involved in the process of selection of employees.
Ans. Steps.
i) Manpower planning
ii) Job analysis
iii) Recruitment
iv) Selection
v) Placement and orientation
vi) Training
vii) Performance appraisal
viii) Promotion and career planning
ix) Compensation
x) Separation

6) Explain personnel consultants, employment exchange and media advertising as

external sources of recruitment.

Personal Consultants :

There are firms of personnel or management consultants, which specialized on

the recruitment of managerial personnel.

Employment exchange:

Job seekers get their names registered in employment exchange, at the request of
the employers names and persons from the list of those registered having
requisite qualification are send for considerance.

Media Advertising:

Most of the company gives advertisement in leading newspaper for recruitment

of staff. One significant benefit in that the advertised can choose the most
appropriate newspapers or journal for the post being advertised.

7) Explain Vestibule Training, Job rotation and internship as methods of training.

Vestibule Training

Under this method classroom training is imported with the help of equipment,
machines and facilities identical to those in use of work.

Job rotation

Under this method an individual is transferred from one job to another or from
one department to another in the coordinated and planned manner with a view to
broaden the general background of the trainee.

Internship

This refers to a Joint programme of training in which technical institutes and

business enterprises co-operate to enable the students to gain a good balance
between theory and practicals.

66
8) Explain a brief any four advantages of Time rate system of wages payment.

i) It provides a guaranteed minimum wages to employees.

ii) Worker can pay more attention to the quality of work.

iii) Due to slow and steady pace of the workers, the damages and rough
handling of machines, tool and equipments.

iv) It is easy to calculate and easy to understood by workers.

67
 CHAPTER – 7

DIRECTING

Marks 8

SYNOPSIS

- Introduction

- Meaning

- Importance

- Elements

a) Supervision
b) Motivation
c) Leadership and
d) Communication

- Practice Questions

- Last 3 years CBSE Questions

68
Introduction

The execution of plans is accomplished by directing the people who has to do

and seeing that they do it to the best of their ability. It is through directing that
managers get the work done through people.

Meaning

Direction is that part of management process which helps the members of an

organisation to work efficiently for achieving the objectives. It is a function of all
managers of an organisation.

Definition

Direction is a complex function that includes all those activities, which are
designed to encourage a subordinate to work efficiently and effectively.” – Koontz
and O’ Donnel.

Importance

Importance of directing in the organisation can be presented as follows:

1) Initiates action

Planning, organizing and staffing are merely preparations for doing the work. It
is the direction function which starts actual work to convert plans into results.

2) Integrates employees efforts

The work performed by the employees are interrelated. The performance of

each individual affects the performance of others. Thus individual efforts are
integrated through directing.

3) Means of Motivation

Workers are motivated to work efficiently. It helps the workers to work

willingly. So the workers contribute their best to the organisation with the help
of directing.

4) Balances the conflicts

Sometimes conflicts may arise between individual and organizational goals.

Directing helps to reduce or avoid this conflicts and brings balance between
individual and organizational conflicts.

5) Facilitates change

All organisation are operating in a changing environment. Changes in the

environment requires changes in the organisation also. Directing helps the
organisation to cope up with the changing condition through communication and
leadership.

69
Elements

1. Supervision

Meaning – Supervision means overseeing from above. In management it

means, overseeing the employees at work. It involves directing, guiding
and controlling the subordinates in their work.

Importance

i) Ensures issuing instructions

Managers issue orders and instructions to carry out the job. These
orders and instructions are the primary tool through which various
activities are carried out thus supervision sets the work into action.

ii) Facilitates control

Supervision helps to monitor the work, measure the progress of the

work, evaluating the actual performance and taking corrective action.
Thus it ensures control of work.

iii) Optimal utilization of resources

In supervision, the work is observed and guided when it is

performed. It leads to minimum waste of time and resources. This
results in efficient utilization of resources.

iv) Maintenance of discipline

Supervision ensures that whether the plans and time schedules are
followed properly. If deviations are there, then corrective actions are
taken. Thus supervision helps to maintain discipline.

v) Feedback

Supervision helps to maintain contact with the employees. So the

management receives points, suggestions, grievances from the
workers. Hence feed back is possible with the help of supervision.

vi) Improves communication

While performing the function of supervision, the supervisor gives

orders and instructions to the subordinates during monitoring, the
managers receive feedback from the subordinates. Thus supervision
improves communication.

70
Motivation

Meaning

It is a process of stimulating people to action, to accomplish desired goals. It is

the set of forces that causes people to behave in certain ways.

Definition

“Motivation means a process of stimulating people to take action to accomplish

desired goals” – W.G. Scott

Process of motivation

Feet need or Search for Choice of

Deficiency alternatives to behaviour to
Satisfy need satisfy need

Determination Evaluation of Carrying out the

of future need need satisfaction chosen option

Importance

i) Motivation sets in motion the action of people

In every organisation there are physical, financial and human resources.

Motivation puts human resources into action. It also builds the will power of
workers to work. Thus it ensures best possible utilization of resources.

ii) Improves efficiency

Motivation helps the employees to perform the work according to their ability.
Thus it bridges the gap between the ability to work and willingness to work.
Thus by inducing people, motivation helps in improving efficiency.

iii) Ensures achievement of organizational goals

Management achieves goals effectively by motivating subordinates to

contribute their best efforts.

iv) Motivation creates supportive work environment

Organisations offer various rewards to their employees to satisfy their needs. It

brings about satisfaction among employees such satisfaction results in cordial
relationship and it also creates supportive work environment.

v) Reduction in resistance to change

71
 Motivated employees support all changes that are in the organizational interests.
They easily accommodate the changes which are taking place in the organisation
at every now and then.

vi) Reduction in employees turnover

Motivation creates confidence in the methods of the subordinates. They are

loyal to the organisation. This helps the organisation to maintain a stable work
force.

Need Hierarchy

Abraham H. Maslow developed the ‘Need Hierarchy Theory’. He divides human

needs into five categories as

i) Physiological
ii) Security
iii) Social
iv) Status
v) Self-actualisation

1) Physiological needs

They refer to physical or biological needs which are necessary for living
survival and maintenance of eye. They consist of food, clothing, housing, water
etc. They are also known as basic human needs.

2) Safety and security needs

The feeling of being safe and security of one’s life is also a necessary need.
People should be made sure that their security and safely needs will be satisfied
in future. Physical securely includes protection against the accidents, crime etc.

3) Social Needs

They include behaviour, love and affection, recognition in the society,

friendship etc. Organisation may satisfy these needs by encouraging team
building and permitting the workers the chance to interest socially on the job.

4) Esteem Needs

These needs consists of two set of needs

i) The need for a positive self-image and self respect.

ii) The need for recognition and respect from other.

Organisation can satisfy these needs by recognizing good performance,

providing challenging job, good job titles, nice offices etc.

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5) Self-actualization needs

Maslow defines these needs as the ‘desire to become everything are capable of
becoming’. The satisfaction of self-actualisation needs enables the individual to
realize fully his potentialities.

Leadership
Meaning

Leadership may be expressed as one’s ability to lead others. It is a process of

influencing group activities of a business enterprise to achieve certain goals.

Definition

“Leader is one who guides and directs other people and gives their efforts, direction
and purpose” – Louis Allen

Features

1. It is a process of influencing the behaviour :

2. It involves interaction between two or more persons.

3. It implies pursuit of common goals in the interest of individuals as well as the

group as a whole.

4. It is a process of securing willingness.

The following are the influence strategies adopted by managers for performing
leadership roles.

1. Reason - Using supportiveness, creation of a logical argument.

2. Friendliness - Using supportiveness, creation of goodwell and praise.

3. Coalition - Mobilising others in the organisation.

4. Bargaining - Negotiating on the basis of mutual give and take.

5. Assertiveness - Adopting a direct and forceful approach to address issues.

6. Higher authority - Gaining support of higher levels in the hierarchy.

7. Sanctions - Using rewards and punishments.

Importance

i) Helps in guiding and inspiring employees

A leader creates a wise in the employees for higher performance. Leadership

directs the potential abilities of employees towards the achievement of goals.

73
ii) Secures cooperation of members of organisation

Managers are successful only when they are able to secure the cooperation of
their subordinates. As leaders, managers persuade the employees to work
efficiently with confidence. He also convinces the subordinates to work
diligently and achieve goals.

iii) Creates confidence

Sometimes, individuals fail to recognize their qualities and capabilities. The

leader creates confidence among them. He provides psychological support and
infuses the spirit of enthusiasm.

iv) Improves productivity

Efficiency of performance depends on motivation, confidence and cooperation

of employees. Leadership secures these elements at work place. As a result of
this employees contribute their maximum effort towards achieving the goals.

v) Improves job satisfaction

Leadership ensures that managers adopt behaviour patterns which are acceptable
to subordinates. Leadership guides the employees while performing in uncertain
situation. It provides support during stress and encourage the subordinate to
take initiatives.

vi) Enhances group cohesion

Leadership aligns people at work place by creating team spirit. It encourages

subordinates to share the common vision and work collectively.

Qualities of a good leader

1. Intelligence and Scholarship

A leader should be able to examine problems in the right perspective. He should

possess sound judgement and decision making abilities. He should have a
logical bent of mind. He must be matured and free from bias.

2. Communication Skills

He must possess communication skills. He should be able to communicate

clearly, precisely and impressively by using effective words, methods and
proper channel of communication.

3. Listening Skills

Leader should create an image in the minds of the people that they can freely
share the information with them. So a leader should be a good listener.

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4. Ability to inspire people

A leader should be able to inspire people. He should set an example to his

subordinates.

5. Self confidence and sense of responsibility

A leader must have confidence in his own ability. He must have complete
knowledge of his work. He should be ready to assume the responsibility of his
job.

6. Empathy

The ability of a person to look at things from others point of view is known as
empathy. A leader should be able to see things from other peoples point of
view. If he has this quality then this able to get feedback about himself.

75
 COMMUNICATION

Meaning

Communication is the process of transmission of message, information and

creation of understanding between two parties. In involves sending a message, to
another, who receives the message and respond to it.

Definitions

According to Newman. “Communication is the exchange of facts, ideas,

opinions or emotions by two or more persons”

In the words of Louis A. Allen. “Communication is the sum of things that one
person does when he wants to create understanding in the mind of other. It involves a
systematic and continuous process of telling, listening and understanding.

Importance of the Communication process

i) Better coordination

Communication serves as tool for coordinating activity. Coordination without

communication is a remote possibility. Through communication employees
come to know what is going on in other department.

ii) Good industrial relations

Communication aims at good industrial relations. Communication gives

information from both sides and it pays more attention on understanding i.e.
employees and management understand each other’s view point.

iii) Development of managerial skills

Facts, ideas, information etc. enrich the knowledge of the executives. They try
to make use of the acquired knowledge which results into an increase in his
wisdom and skill. It ultimately benefits the organisation.

iv) Quick decision and its enforcement

Effective communication is needful for the quick decision. Effective

communication translates the policies into effective instrument of seeing
through the organisation on the veil of its progress.

v) High morale of the employee

The effective medium of the communication develops the feeling of mutual

trust. Hence, workers offer their proposals, suggestions and ideas.

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Elements of communication process

Communicator Encoding Transmission

(Sender)

Decoding Receiver

Noise

1. Sender : Sender is a person from whom the communication

process originates.

2. Encoding : Encoding is the process of translating ideas into language

or code. (Words, Symbols or gestures).

3. Transmission : It is a medium or route through which the message is

passed by the sender.

It links the sender with the receiver. A transmission could

take the form of face to face written, telephone, group
meetings, television etc.

4. Receiver : Receiver is the person who is supposed to receive the

message. He may be a listener, a reader.

5. Decoding : It means retranslating the message to words for the

purpose of understanding. Thus, it is the conversion of
received message into thought in order to derive its
meaning.

6. Noise : Noise means anything that hinders communication and

thereby reduces its accuracy. Such thing may be lying in
the sender, the encoding process, the channel, the receiver
and the decoding process.

7. Feedback : Feedback is the response by the receiver.

Network Communication

It refers to the pattern through which members of work groups communicate.

Due communication network among members of five person work groups may take
the form of wheel, chain Y, circle or all channel as shown in below.

77
1) Wheel
In the wheel pattern, all communication flows through one central person who is
generally the group leader. It is the most centralised network. In the sense one
person receives and disseminate all information.

2 3

4 5
2) ‘Y’

The ‘Y’ pattern is slightly less centralized. Two persons are closer to the centre
of the network.

4 5

3) In case of chain, the persons at the end of the chain interact with only one person
but other members communicate with two each. As such, chain offers more
even information flow compared with ‘Y’ and wheel.

1 2 3 4 5

4) The circle permits each person to communicate with two in the group.

1 3

5 4

5) All channel network permits all members to communicate with others. It is the
most decentralised network and allow free flow of information among members.
2

1 3

5 4
78
 Directing Vs Supervision

Basis Direction Supervision

1. Meaning & It is a wider term consisting of Only one element of direction
Scope motivation supervisor, communication
and leadership.
2. Level of It is at the top level of management It is limited to lower level of
management management
3. Communication Directing makes effective Communication is meant only
communication for particular department.
4. Leadership Provides leadership to middle and It provides leadership to
lower level of management operational workers.
5. Framing of In direction, formulation of policies Implementation of policies is
policies and decisions making are taking place taking place.

Forms of Organisational communication

i) Formal communication

Refers to official communication which take place following the chain of

command. It takes place in the scalar chain of authority. Eg.Notes, Momos,
Statements etc.

According to the direction of flow

Formal communication may be of four types.

i) Downward

It refers to the flow of communication from the higher to the lower level.
Communication from superiors to subordinates at different levels of
organisation is known as downward communication.

There are many ways in which the manager can communicate with subordinates.

a) Meetings

Group meetings play major role in communication. In this meetings

managements major plans and policies can be communicated.

b) Directives

These are generally issued to the middle and lower level by superiors.
They include orders and instruction.

ii) Upward Communication

It flows from a subordinate to his superior in the hierarchy. It may consist of

information relating to subordinates performance and opinion,
grievance/suggestions etc. It may also relate to instruction, procedures and
methods of work.
79
This can be accomplished in the following ways.

a) Suggestion system

Employees are encouraged to give suggestions to the company on any matter. It

leads to cut down of costs, increase in revenue etc.

b) Formal grievance procedures

These are setup for various reasons to discuss matters with the management.
Managerial actions against an employee can be represented to the union and
procedure to solve the dispute is specified.

c) Task forces

It is formed with management and non management members. Specific issues

and problems are entrusted to them. The force studies the problem and offers
solution.

d) Horizontal communication

Flow of communication between persons holding position at the same level of

the organisation is known as horizontal communication. Eg. Exchange of
information between two departmental heads

e) Diagonal communication

Flow of communication between the persons of two departments, one holding a

higher position than the other is known as diagonal communication. Eg. A sales
executive communicating the production manager.

Advantage of formal communication

1. It ensures orderly flow of information and ideas.

2. The source of information can be easily located.

3. It provides support to the authority of superiors over subordinates.

4. Responsibility can be easily fixed.

5. It facilitates control.

Disadvantages

1. It is a slow moving process.

2. It lacks personal touch.

3. Accurate information may not be communicated for tear of criticism.

80
Informal Communication

It refers to communication between individuals and groups which are not officially
recognized. The necessity of informal communication arises among people to satisfy
their social needs, which is not possible through formal communication.

Characteristics

i) It is verbal communication

ii) It is not authentic and authorized.

iii) It may create misunderstanding and spread rumours.

iv) It is spontaneous and flexible communication.

Types of grapevine system of communication

Grapevine refers to the network or pathway of informal communication. Messages

that were difficult to make out were said to have come through the grapevine.
Grapevine cut across formal channels of communication.

a) Gossip chain

4 2

5 1 9

6 8
7

In the gossip chain, one person tells many. It is also likely to carry personal
information.

b) Cluster

One person passes the information to a selected few. Some of the receivers pass
on the information to a few others while some keep it to themselves.

C E F K
B L

B
M
A D G
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 Grapevine often leads to rumours being spread through the organisation and it is
not positive to fix responsibilities for such communication. But manager also
get valuable information from the grapevine and use it to improve decision
making.

Advantages

i) High speed : It operates with much greater speed.

ii) Dynamic : It is dynamic and reacts quickly because informal

channels have their sanction in the social groups.

iii) Better relation : It provides emotional relied to the subordinates and

reduces tension in labour management relations.

Disadvantages

i) Unsystematic : It is unsystematic and cannot be taken as reliable and

timely.

ii) Distored facts : It is very often carries half, truth, remours and distored
facts which may misinform and mislead the numbers.

iii) Difficult in assigning responsibility

It is difficult to pinpoint the origin and directive of the flow of information.

Hence, it is difficult to assign responsibility for false information.

Differences between formal and informal communication

Basis Formal Informal

1. Form It is always in written form It is in verbal or oral form.

2. Speed It is slow, because it follows Fast, as it follows no particular path.

the prescribed path.

3. Meaning It is communication which It is communication which follows

follows established chain of official chain of command.
command

4. Responsibility Easy to fix responsibility Very difficult to fix responsibility

5. Authenticity It is authentic It is not authentic

6. Distortion No possibility of distortion Very high chances of distortion

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Barriers to effective communication

i) Selective reception

When people receive information they may sea or read only those informations
which are very much essential for them. They may not bother about the
information which they donot require at that point of time. People tend to hear
only what they want to hear, so communication gets distorted.

ii) Poor listening skills

Some people are poor listeners. When informations are given they may not take
it seriously.

iii) Creditability of source

It refers to the trust and confidence that the receiver has in the words and actions
of the communicator. The problem of creditability arises when people behave
inconsistently.

iv) Predisposition

Sometimes people develop a certain idea about a phenomenon. They bring such
predisposition to the communication process. Hence the receiver interprets the
information by biases and predisposition.

v) Status differences

Communication is adversely affected when status of communicators is not

equal.

vi) Screening or filtering

Sometimes managers donot receive accurate feedback from the subordinates,

because subordinates may filter the unfavourable information for them.

vii) Semantic problems

Messages conveyed to the people may not be correctly followed. They may be
misunderstood in different ways. Messages may be differently interpreted. So
communication become ineffective.

83
PRACTICE QUESTIONS

1. What do you mean by directing

2. Define Directing

3. Mention the elements of directing

4. Explain the significance of directing functions

5. What do you mean by supervision

6. Discuss the importance of supervision

7. Distinguish between directing and supervision

8. What do you mean by motivation

9. Explain the process of motivation

10. Discuss the importance of motivation

11. Explain briefly Maslows need hierarchy theory

12. Explain esteem needs of an employee

13. How does motivation lead to stability and efficiency

14. What do you mean by leadership

15. Explain the importance of leadership in the management of business

16. Briefly explain the qualities of a good leader

17. What do you mean by communication

18. Write short notes on ‘Communication network’?

19. Explain the importance of communication in the business?

20. What are the forms of organizational communication?

21. What do you mean by formal communication?

22. Explain the three different ways in which the manager can communicate with
his subordinate?

23. What do you mean by downward communication?

24. What are Task forces?

84
25. What are advantages of formal communication?

26. What are the limitation of formal communication?

27. What is meant by informal communication?

28. Explain the concept of ‘Noise’ in communication process?

29. Explain the network ‘Grapevine’?

30. Discuss the advantages of informal communication?

31. What are the limitations of informal communication?

32. Define any six differences between formal and informal communication?

33. Discuss the barriers to effective communication?

CBSE QUESTIONS

1. Explain in brief, the term ‘Supervision’ as an element of directing (2)

2. Enumerate any three advantages and disadvantages of ‘formal communication’?

(3)

3. ‘Leadership is required only for less efficient workers’. Do you agree? Give
any three reasons of your answer. (3)

No. Leadership is required for all types of workers.

The advantages of leadership has to be written.

4. Explain in brief, the term ‘motivation as an element of directing’. (2)

5. Enumerate any two functions of a Supervisor (2)

6. Why is leadership considered as the most important element of directing

function of management? Give any three reasons. (3)

Write the importance of leadership (Any three).

7. (Managerial functions cannot be carried out without an effective system of

‘communication’. Do you agree? Give any three reason in support of your
answer. (3)

Ans. Significance of Communication

8. Enumerate any two points of importance of directing as a function of

management (2)

85
9. Explain in brief directing as a function of management (2)

10. Name the type of formal communication in which two departmental Heads
communicate with each other. Give any two reasons why this type of
communication is requested?

Ans. Horizontal communication

Reason

1. It is necessary to coordinate different activities or to resolve interrelated

problems of two or more departments.

2. Such communication is requested because the work of both the departments

are interrelated and interdependent.

11. Explain in brief any three advantages of informal communication.

86
 CHAPTER – 8

CONTROLLING

- Introduction

- Meaning

- Importance and limitations

- Relationship between planning and controlling

- Process of control.

- Practice Questions

- CBSE Questions

INTRODUCTION

Business operations are ongoing process. Like planning, organizing, staffing

and directing, controlling is also one of the main functions of management. All these
functions are to be performed in chronological order.

Controlling is an activity to see whether work is carried out accordingly to

schedule or plans laid down and taking corrective action. If necessary, corrective
measures will be implemented. Immediate activities can be supervised on a
continuous basis. It is applicable to all types of organisation and management.

87
Meaning

It is a comparison and verification process of the actual performance with the

planned of the actual performance with the planned performance. It discovers
deviations between the results achieved and the results expected, detects reasons
responsible for the deviations and also employs corrective measures.

Definition

i) In the words of Philip Kotler, “Control is the process of taking steps to bring
actual results and desired results closed together.”

ii) According to Roberts Anthony, “Management Control is the process, by which

managers assure the resources are obtained and used effectively in
accomplishment of the organizations objective”

Importance of controlling

a) Controlling helps in achieving the objectives.

Controlling ensures that results of operations conform as closely as possible to

the predetermined objectives. It ensures the use of human and material
resources in the best possible manner. The objective may be in terms of a target
profit, sales and production.

b) Improves Employee’s morale:

Controlling creates an atmosphere of order and discipline in the organisation. It

improves employee’s morale. Evaluation of performance against predetermined
standards includes employees to do things in a proper manner.

c) Helps in better coordination:

Controlling facilitates the work of coordination. This is possible by keeping all

activities and efforts directed towards the achievement of goals in conformity
with plans and programmes. Overlapping and duplicating of work are avoided
and deviations, if any are promptly corrected.

d) Helps in better planning

Planning and controlling are important functions. The two are closely
interrelated. Planning provides purpose and direction to enterprise activities.
Controlling provides useful information which makes the plan more realistic
controlling is the process of checking the current performance against
predetermined standard certained in theplans, with a view to ensuring
satisfactory performance.

88
e) Controlling helps in improving employee’s performance.

In atmosphere of order and discipline employees are aware of the duties and the
standards against which their performance will be judged. Predetermined
standard enables an employee to work according to a proper schedule.

f) Controlling helps in minimizing errors

If errors are respected. It may be a serious matter and result in a disaster. An

effective control system helps in detecting these errors in time.

Limitations of controlling

1. External factors such as government policy, technological changes adversely

effects controlling.
2. Resistance by subordinates.
3. Expensive process.
4. Difficulty in determining quantitative standards.

Relationship between Planning and controlling

Planning and controlling are interdependent and inter-related activities without

planning, there is no basis for controlling activities and without effective control,
planned activities cannot be properly implemented.

Like planning and controlling is also forward looking as future cause of actions
are formulated based on controlling. The relationship between planning and
controlling has been shown with help of chart.

Planning Action Controlling

Hence, planning and controlling go together.

Steps in the controlling process

a) Establishment of Standards:

The first step in the control process is the setting of standards of performance.
Standards are the criteria for judging results. They are the yardsticks of
performance and specify what should be accomplished.

b) Measurement of Performance:

The second major step in the control process is the measurement of

performance. It means evaluation of the work actually done and result achieved.

89
 Measurement is more useful if actual performance is expressed in the same units
as the planned targets.

c) Comparison of actual performance with standards.

Comparison of actual performance with the planned target or standard involves

two steps.

i) Finding the extent of deviations

ii) Identifying the causes of such deviations.

d) Taking corrective action

The purpose of control is not only to detect variation performance of work but
also to adopt remedial measures. Corrective action are therefore initiated on the
basis of factors causing deviations between standards and actual results.

Above are the steps involved in process of control.

Management by Exception (MBE)

It is not true that an ideal control technique is the one that checks every bit of
performance. A good control system should concentrate on key performance
aspects. There are hundred and thousands of activities to be controlled. In real life it
is difficult to control each and every activity. This is the reason why attention should
be focused on key points only. Extending the control system beyond the key
variable may mean doing. What is not really essential controlling each and every
item results in delay, increased cost and neglect to key control points.

Hence, Top management should aim at strategic areas only

Essential features of good control system

1. Simplicity

A good control system must be easy to understand. It should be so simple that

every employee in the organisation should easily understand it.

2. Suitability

The control system should be appropriate to the needs of the organisation. It

should be fit the size, nature and objectives of the enterprise.

3. Objective and specific

Standards of performance as far as possible, should be objective and specific,

control system should not be influenced by the personality of the superior or
subordinate. It should be definite. It should be based on facts.

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4. Economical

The system of control must be worth its cost. It must justify the expenses
involved. It is justifiable only if the economic anticipated from it are more than
the expected costs in its working.

5. Flexibility

Control must be flexible that it can easily be adjustable in various changing

conditions. It should be adoptable to new development including the failure of
the control system itself.

6. Quick reporting

As effective control system must have the quality of reporting the deviation
quickly. It will help in taking quick action to check the deviation and set things
right.

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 TECHNIQUES OF MANAGERIAL CONTROL
Traditional techniques are those, which have been used by the companies for a
long time. These include:
1. Personal observation
2. Statistical reports
3. Breakeven analysis
4. Budgetary control

MODERN TECHNIQUES
Modern techniques of controlling are those, which are of recent origin and are
comparatively new in management literature.
a. Return on investment
b. Ratio analysis
c. Responsibility accounting
d. Management audit
e. PERT and CPM
f. Management information system

TRADITIONAL TECHNIQUES

1.PERSONAL OBSERVATION
Personal observation enables the manager to collect first hand information. It also
creates a psychological pressure on the employees. It is a very time consuming exercise.

2.STATISTICAL REPORTS
Statistical analysis in the form of averages, percentages, ratios, correlation, etc.,
present useful information to the organization in various areas. It allows a comparison to
be made with performance in previous periods.

3.BREAKEVEN ANALYSIS
Breakeven analysis is a technique used by managers to study the relationship
between costs, volume and profits. It determines the probable profit and losses at
different levels of activity. The sales volume at which there is no profit, no loss is known
as breakeven point.
Breakeven point is determined by the intersection of Total Revenue and Total
Cost curves.
Breakeven point = fixed costs
Selling price per unit – variable cost per unit
4.BUDGETARY CONTROL
Budgetary control is a technique of managerial control in which all operations are
planned in advance in the form of budgets and actual results are compared with budgetary
standards.
A budget is a quantitative statement for a definite future period time.
Budgeting offers the following advantages
1. Budgeting focuses on specific and time-bound targets.
2. Budgeting is a source of motivation to the employees.

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Important Questions

Q.1 What do you mean by controlling?

Q.2 “Controlling is continuous activity of an organisation”. Explain

Q.3 ‘Control is forward looking’. Explain

Q.4 ‘Controlling is looking back’. Explain

Q.5 “Control implies taking action’. Explain

Q.6 Explain the importance of controlling in the business

Q.7 What are the requisites of good control system

Q.8 How are planning and controlling functions of management inter-related?

Explain briefly

Q.9 Describe the steps involved in the process of controlling

A.1 Meaning

A.2 Like all functions of management, control is a continuous activity in an

organisation. As control means taking corrective action to improve
performance, it has to be continuous effort to be meaningful. Control cannot
be an ad hoc effort. Actual performance has to be compared with
predetermined performance on a continuous basis so that any short coming
can be overcome, the manager has not to wait for the year end results but has
to take action as and when any deviations arises from the target performance.

A.3 To be effective, the control should be forward looking. It must focus attention
on two things – checking current performance and providing early information
to achieve results in conformity with standards. Checking an operation should
enable prompt detection of faults and of the causes before it is too late for
remedy. Deviations, if any, should lead to investigation of the factors
responsible and noting the effect on future operations. Remedial action should
follow so as to prevent the occurrence of defects thereafter. In other words,
control must ensure timely detection of deviations and prevention of their
repetition in future.

A.4 The control process is made of three phases.

a) Determination of the planned performance.
b) Comparison of actual performance with planned performance.
c) Corrective action to be taken on the basis of analysis of the difference
between actual and planning performance.

93
 Thus, control is in fact looking back to planned performance. In control it is
seen that actual performance in conformity with plans. We have to look back
what was actually planned to be achieved and what is actually achieved.

A.5 Controlling does not imply simply measuring the performance. It involves
action to correct a situation which is different from the planned one. A
manager must initiate action to prevent failure in future.
A.6 i) Controlling helps in achieving the objectives.
ii) Facilitates decision – making.
iii) Improves employee’s morale.
iv) Helps in better co-ordination.
v) Helps in better planning.
vi) Controlling helps in maintaining and improving quality.
A.7 i) Simplicity
ii) Flexibility
iii) Suitability
iv) Economy
v) Objectivity
vi) Quick reporting

A.8 Relationship between planning and controlling.

A.9 i) Establishment of standards
ii) Measurement of performance.
iii) Comparison of actual performance with standards.
iv) Taking corrective action.

CBSE QUESTIONS

1. Explain, in brief, any six steps involved in the process of controlling.

2. ‘Control is considered important for many reasons’. Explain any five such
reasons.

3. ‘Controlling helps in financial matters and maintaining and improving quality.

Explain this statement, in brief.

94
 CHAPTER IX
FINANCIAL MANAGEMENT
10 Marks
A. Introduction & Meaning
B. Definitions
C. Objectives
D. Finance function
E. Financial Planning
F. Importance of Financial Planning
G. Objectives of Financial Planning
H. Capital structure
I. Factors effecting Capital structure
J. Capitalization
K. Over capitalization
L. Causes of over capitalization
M. Effects over capitalization
N. Under capitalization
O. Causes of under capitalization
P. Effects of under capitalization
Q. Distinctions between over capitalization and under capitalization
R. Management of fixed capital
S. Factors determining fixed capital
T. Factors effecting capital budgeting decisions
U. Working capital
V. Factors determining working capital requirements.
W. Determinants of dividend decision
X. Factors affecting dividend policy
Y. Exercise questions
Z. CBSE Questions.

95
A. Introduction

Finance is life blood of business. Finance is required for purchase of fixed assets
as well as for working capital requirements in business. Success of business
depends on how well the funds are deployed in fixed and working capital
requirements. Financial management is concerned with requirement of finance,
procuring finance and utilization of finance in a befitting manner.

Meaning:

Financial Management is concerned with efficient acquisition and allocation of

funds.”

B. Definitions:

a) “Financial management involves the application of general management

principles to a particular financial operation”. – Howard and Upton.

b) “Business Finance includes those business activities which are concerned

with the acquisition and conservation of capital funds in meeting the
financial needs and overall objectives of business enterprise” – B.O.
Wheeler

C. Objectives

a) Procurement of Funds:

The basic objective of financial management is to procure sufficient fund.

It has to see that a adequate funds are acquired at a reasonable cost.

b) Utilisation Funds:

The financial management has to ensure the effective utilization of funds

to achieve the objectives of the organization.

c) Fair return to Shareholders:

Maximization of wealth of shareholders is the important objective of

financial management. Fair return to shareholders and appreciation in the
market value of shared depicts the efficiency of financial management.

D. Finance Function

The finance manager has to take three major decisions of relating to finance are
as follows. All these decisions are interdependent.

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1. Investment Decision

This decision relates to the allocation of funds to different investment proposals

investment decision involves the investment of funds in fixed and current assets
on the basis of their return and risks involved.

2. Financing decision:

This decision relates to the raising of funds. There are different sources of funds
like shares, debentures and loans. A proper mixture of these sources (i.e) capital
structure is essential. A proper balance between equity and debt shall be
maintained.

3. Dividend decision:

This decision involves the disposal of projects. The net projects are allocates
into retained projects and dividends retained projects are used as reinvestment in
business.

E. Financial Planning

Financial Planning is the process of deciding in advance the objectives, policies,

procedures, programmes and budgets to deal with the financial activities. In
simple terms it is the process of estimating the fund requirements of a business
and determining the sources of funds is called Financial Planning.

F. Importance of Financial Planning

1. Helps management to avoid waste of funds resulting from complexity of

operations.

2. It helps the company to prepare the funds for the future

3. It avoids confusion and wastage of financial resources.

4. It helps in taking financial decisions

5. It provides detailed plan of action for reducing uncertainties regarding

finance in individual and group efforts.

6. It provides control to use the finances in the firm.

G. Objectives of Financial Planning

1. To determine the amount of capital requirements of business for short term

and long term.

2. To decide the form of securities to be issued and to decide the ratio

between them to minimize cost of capital.

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 3. To lay down policies for efficient administration of capital and ensure
profitability and liquidity of the firm.

H. Capital Structure

Capital Structure means the composition of long term sources of funds such as
equity shares, preference shares, debentures and long term loans. It reflects the
proportion of owners’ funds and long term loans.

I. Factors affecting Capital Structure

1. Trading on Equity:

It means the use of fixed cost sources of finance such as preference shares,
debentures and long term loans in the capital structure so as to increase the
return on equity on equity shares. This is also known as Financial
leverage. It is advisable to use trading on equity when the rate of return on
equity is more than the rate of interest payable on debt.

2. Stability of Sales:

When the business has high sales turnover it can easily pay the interest on
debentures and long term loans (i.e) the company can employ more debt in
its capital structure or vice versa.

3. Cost of Capital:

Cost of Capital refers to the payment mode by the company to obtain

capital. Dividend paid is the lost of equity and the interest is the cost of
debenture. In order to minimize cost of capital, a company may prefer
debt subject to its earning capacity.

4. Exercise of Control:

If the shareholders are board of directors want to retain the control over the
company in their hands they may not issue further equity rather they raise
funds from debt.

5. Capital Market Conditions:

The conditions prevail in capital market influence the investing decisions

of investors. Ex. In depression the investors do not want to take risk and
invest in Debt capital. In boom they want to invest in shares.

6. Statutory requirements:

The capital structure has to be determined keeping in view of the

requirements of laws applicable to the company. Ex : Banking Companies
Regulation Act prohibits any type of securities other than equity shares to
be issued by the banking companies.

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J. Capitalisation:

Capitalisation means the total of long term funds available to a company and the
surplus not meant for distribution.

Capitalisation = Owners equity + Debt

= Share capital + Surplus + Debentures + Long
term loans.
Share Capital = Equity share capital + Preference share capital
+ Surplus

i) Fair or normal capitalization means that the business employs correct

amount of capital.

ii) Over capitalization: Business employs more capital than required.

iii) Under capitalization: Business employs less capital than warranted.

K. Over Capitalisation:

A company is said to be over-capitalised when its evenings are not sufficient to

yield a fair return a when the securities outstanding exceeds the current value of
assets. (i.e)

i) When the company is unable to have a fair rate of return.

ii) When the amount of capital exceeds the seal value of assets.
iii) The company has more net assets than required.

L. Causes of Over Capitalisation

1. High Promotion Costs:

When a company incurs heavy preliminary expenses such as promoters,

brokerage and under writing commission etc. at the time of promotion, it
may be over capitalized. These expenses add to the amount of financing
without yielding any profit.

2. Unduly high prices paid for the assets:

When a new company informed by converting another firm, if the assets

are transferred at inflates prices the company is said to be over capitalized.
These assets do not contribute to the earning capacity of the company.

3. Inflationary conditions:

If a company is formed during a boom period it acquires assets at an

inflated price. The company is not able to increase it earnings accordingly
therefore over capitalized.

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 4. Inadequate provision for depreciation:

When insufficient provision is made for depreciation on assets, adequate

funds are not available for replacement of assets. Consequently the
earning capacity deceives and leads of over capitalization.

5. Liberal dividend policy:

In case a company distributes its all profits without retaining profits, when
required the company has to borrow from outside at high cost. This will
lead to over capitalization.

6. Shortage of Capital:

If the capital is insufficient and when required the company has to borrow
from outside funds with high interest. This leads to earnings not sufficient
to pay interest and thereby it becomes over capitalized.

M. Effects of Over Capitalisation

1. On the Company

a) The market value of the shares falls drastically.

b) The company cannot borrow loans from outside funds as its credit
standing is adversely affected.

c) Since earnings are low the company cannot meet its expenses of
maintenance, depreciation etc.

d) The company resorts to manipulation of accounts.

e) The reputation of the company is effected and goodwill is lost.

2. On the Shareholders:

a) The market value of shares falls and share value is depreciated and
they get less price for their shares.

b) They suffer from fall of dividends or irregular dividends.

c) Share of the company are not accepted as security.

d) Face value of the share goes down if the company resorts to

reorganization.

3. On the Society:

a) The company increases the prices and reduces the quality of the
products.

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 b) Expenditure on wages reduces and leads to labour unrest and strikes.

c) Creditors are dissatisfied by the irregular payments of interest.

d) As the companies becomes sick the become drain on the society.

N. Under Capitalisation:

A company is said to be under capitalized when

i) The future earnings are under estimated.

ii) Unforeseen increase in earnings.

iii) When the rate of earnings is exceptionally high in relation to the return
enjoyed by other similar companies.

O. Causes of Under Capitalisation

1. Under estimation of earnings:

Capitalization is based on estimation of future earnings. If the future

earning capacity of company is under estimated the amount of
capitalization will be lower than fair or normal capitalization.

2. Flotation of company during depression:

When a company is promoted during depression, at acquires assets at

lower prices, earning of the company during boom period may increase
disproportionately and under capitalization results.

3. Conservation dividend policy:

If the company retains large part of its profits and earnings increase
considerably the company then becomes under capitalized.

4. High Efficiency:

A very vigilant and efficient management utilize its assets effectively and
achieves high levels of productivity and profitability. As a result of it the
company becomes under capitalized.

P. Effects of Under Capitalisation

1. On the Company:

a) The market value of the shares goes up.

b) Secret reserves are built up.

c) Higher taxes will be levied by the government.

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 d) Outside competition to enter into the business becomes a threat to the
company.

2. On Society

a) Speculative business as shares of the company in stock exchanges

results in higher prices of shares.

b) Consumers feel exploited since the company’s projects are high.

Q. Distinctions between Over and Under Capitalization

Over Capitalization Under Capitalization

1. When the company’s earnings are low, When the earnings of the
current value of assets are less than company are high and the assets
capital it is the situation of over values are understated it is the
capitalization. situation of under capitalization.

2. High promotion costs and inadequate Under estimation of earnings and

provision for depreciation. conservative dividend policy.

3. Reputation of the company reduces Reputation of the company

increases.

4. Low earnings per share High earnings per share.

5. Uncertain and irregular dividends Certain and high dividends.

6. Reduction in the value of share Share prices go up.

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R. Management of Fixed Capital

Fixed Capital refers to investment in long term assets. Management of fixed

capital involves allocation of firm’s capital in different long term assets of the
business. These decisions are called investment decision or capital budgeting
decision. Fixed capital is also known as block capital. Fixed capital is raised
through long term sources like shares, debentures, long term loans and retained
earnings.

S. Factors determining Fixed Capital

1. Nature of business:

A manufacturing concern or a public utility concern requites large amount

of fixed capital as compared to trading or commercial firm.

2. Scale of operations:

A large scale firm requires more fixed capital than a small scale firm.

3. Type of manufacturing process:

Processing industries require more fixed capital than service Industries.

4. Degree of mechanization:

The technique of production effects fixed capital. If a firm uses

automation it requires fixed capital. If a firm uses handlooms requires less
fixed capital.

5. Mode of acquiring Fixed Assets:

If a firm acquires fixed assets on cash basis requires more fixed capita
where as if it purchases or hire purchase or installments require has fixed
capital.

6. Scope of business:

If a firm produces all parts and assembles itself requires more fixed capital
whereas a firm only assembles parts requires less fixed capital.

I. Factors effecting Capital Budgeting Decisions:

Following are the factors effecting capital budgeting decisions.

1. Cash flows of the project

When a company takes an investment decision involving huge amount is

expressed to generate some cash flows. These cash flows are too analyzed
before taking any capital budget decision.

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 2. The rate of return:

The rate of return expected from the project shall be assessed and the risk
involved shall be ascertained.

3. Investment criteria involved:

The decision to invest in a project involves a number of calculations.

There are known as Capital budgeting techniques. These Techniques are
applied to proposed projects and to select a project among them.

U. Working Capital

Working capital refers to the day to day requirements of business. Gross

working capital refers to the investment in current assets. Net working capital
refers to the excess of current assets over current liabilities.
V. Factors determining the Working Capital requirements.

1. Nature of business:

The business which do not keep huge stock of finished goods and which
sell goods on cash basis require less working capital. Those companies sell
the goods on credit require more working capital.

2. Size of business:

Big enterprises require more looking capital than small enterprises.

3. Length of manufacturing cycle:

Manufacturing cycle is the time gap between commencements of

production to the completion of production. The longer the period the
more working capital is required and vice versa.

4. Terms of buying and selling:

The firms which buy the goods on cash and sell the goods credit require
more working capital where as the firms purchase on credit and sell on
cash require less working capital.

5. Business cycles:

During inflation the working capital requirement is more and during

depression the requirement is less.

6. Seasonal nature:

Firms which manufacture the goods in a particular season require more

working capital than in the season in which it sells the finished goods.

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W. Determinants of dividend decision:

Any company has to decide how much of its profits are to be distributed and
how much are to be retained to reinvest in business. This is known as dividend
decision. The retained profits are used as long term source of finance. Retained
earnings are preferred as long term source of funds as they do not involve
flotation costs and legal formalities. The following are the factors effecting
dividend policy.

X. Factors Affecting Dividend Policy:

1. Financial requirements of the company:

A financial requirement of a company depends on its investment needs. If

a company requires more long term investment, it postpones dividend and
invest retained earnings as they have profitable investment opportunities.
The company which requires small investment distributes higher
dividends.

2. Stability of dividends:

Most of the companies follow stable dividend policy. This policy will
have impact on the market value of the shares. The share holder also
wants regular dividends. The company may follow fixed rate of dividend
every year and minimum dividend per share.

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3. Capital market considerations:

If the company has easy access to capital market for long term funds then
it can follow liberal dividend policy. If it has limited access to capital
market then it has to depend on retained earnings and postpone dividends.

4. Preferences of share holders:

The dividend decision depends on the preference of the share holders. If

the share holders are regular income group people or retired people. They
want dividends regularly. Wealthy investors like to reinvest their earnings
for future and to avoid taxes from time to time.

5. Legal Restrictions:

The dividend policy of a company depends on the legal restriction. Ex.

Dividend can be paid out of current profits or past profits after
depreciation, companies cannot pay dividend of all paid up capital etc.
Interest has to be paid before payment of dividends by the companies.

6. Inflation:

At times of inflation, because of the rising prices company need more

funds. In this case the company cannot declare high dividends.

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Functions of Financial Management

The following are the functions of Financial Management:

1) Estimating the Capital Requirements:

The first and basic function of financial manager is to forecast the financial
requirements of the business for short term and long term requirements.

2) Determining the composition of capital:

The financial manager has to decide the ratio and composition of owners equity
and outside funds. He has to maintain balance between these funds.

3) Determining the sources of funds:

The finance manager determines the various sources of funds like Shares,
debentures, deposits, retained earnings etc. He will compare their relative
merits and cost of financing them. He should see that the company gain
economy from the chosen sources of funds.

4) Utilization of Funds:

The funds obtained from various sources shall be utilized properly and
efficiently for achieving the objectives.

5) Disposal of Surplus:

The finance manager has to see that the surplus is distributed as dividends or
used for further expansion as retained profits basing on the needs of the
company.

6) Management of Cash:

The finance manager has to see that cash is available to pay the creditors on
suppliers so that the credit worthiness of the company is maintained. At the
same time he should see that cash is utilized property and avoid keeping excess
than required.

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PRACTICE QUESTIONS

1. Define Financial Management. Explain the objectives of Financial Management

2. Explain the Finance Function

3. What is Financial Planning? Explain its importance

4. Explain the objectives of Financial Planning

5. What is Capital Structure? What are the factors effecting it? Explain.

6. What is Capitalisation?

7. What is Over Capitalisation? What are the causes of it? Explain.

8. What are the effects of Over Capitalisation on the share holders, company and
society?

9. What is Under Capitalisation? What are the causes of Under Capitalisation?

Explain

10. What are the effects of Under Capitalisation on the company and society?

11. Distinguish between Over Capitalisation and Under Capitalisation

12. What is Management of Fixed Capital?

13. What are the factors determining Fixed capital. Explain?

14. What is Working capital? What are the factors effecting working capital
requirements of a business? Explain?

15. What are the determinants of dividend decision?

16. Explain the factors effecting dividend policy

CBSE QUESTIONS

1. What is Financial Planning? (2)

2. Explain the three major decision taken by the Finance Manager relating to the
Finance function (3)

3. Explain any five factors effecting dividend policy (5)

4. “Though one of the effects of Under Capitalisation is that the market value of
shares goes up, yet under capitalization is not considered good for the
company”. Do you agree with the statement? Give reasons. (5)

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5. Explain in brief, any five factors that should be taken into consideration while
determining the long term dividend policy? (5)

6. “You have joined as a finance advisor in a company and found that the company
was under capitalized the directors of the company do not agree with you as
they are ignorant about the meaning of Under Capitalisation. Explain them the
meaning of Under Capitlization and convince them by giving few reasons in
supporting your view point (5)

7. Explain briefly any five factors which affect the capital structure of a business
enterprise. (5)

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 CHAPTER – 10

CAPITAL MARKET

Marks 08

- Introduction

- Meaning of Capital Market

- Primary (or) New Issue Market

- Method of New Issue

- Meaning of Secondary Market

- Primary Market v/s Secondary Market

- Money Market and Instruments used in Money Market

- Capital Market V/s Money Market

- Definition of Stock Exchange

- Functions of Stock Exchange

- WSEI & OTCEI – Features of difference

- SEBI – Objective, Functions

- Practice Questions

- CBSE Questions

INTRODUCTION

In order to accelerate the pace of Industrial growth and build sound financial health of
the economy, organized Capital Market is indispensable. A sound stock market will
help in the procurement of long term funds for industrial enterprises and will also
generate liquidity. It will build genuine climate and atmosphere for the economic
growth of the country.

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 CAPITAL MARKET

Meaning of Capital Market

The Capital Market is the market for Medium and Long term funds. It refers to
all organizations, institutions and instruments that provide long term fund.

The organizations and institutions which constitute the Capital Market include
the new issue market and the stock exchange. The business enterprise utilizes this
market to procure finances for long term investment such as buying plant, machinery,
building etc.

Instrument used in Capital Market

The following instruments are used in Capital Market for raising capital.

i) Equity shares (or) Ownership securities

ii) Debentures (or) Creditorship securities
iii) Preferences Shares
iv) Other securities such as Zero Interest Bonds and Deep Discount Bond.

The major components of the Capital Market are

i) The Primary (or) New Issue Market

ii) The Secondary Market (or) The Stock Exchange

Primary Market (New Issue Market)

The Primary Market is the market in which a security is sold for the first time. It deal
with the issue of new or fresh capital and is therefore also referred to as the New Issue
Market.

In a Primary Issue, the securities are issued by the company directly to investors. The
company receives the money and issues new securities certificate to the investors.
Primary issues are used by companies for the purpose of setting up new business or
for expanding or modernizing the existing business.

The following methods are used in New Issue Market (Primary Market)

i) Initial Public Offer

ii) Right Issue
iii) Preferential Issue

I. Initial Public Offer (IPO)

The Initial Public Offer is the first time sale of securities by a company. The
IPO can be made through any of the following methods.

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 a) Public Issue through properties:

Under this method, the company wants to raise capital issues a prospectus
to inform and attract the investing public. It invites prospective investors
to apply for the securities.

The prospectus involves the details regarding the purpose for which funds
are being raised, past financial performance of the company and
background experience of promoters. Investor shall understand and
evaluate the earning potential and risk of the proposed investment.

b) Offer for Sale:

Under this method the new securities are offered to the investing public by
an intermediary who buys over the entire lot of securities of a fixed price
and results to the public at a higher price.

The advantage of this method is that the issuing company is saved the
tedious process involved in making a public issue.

c) Private Placement:

In Private placement the entire lot of new securities is purchased by an

intermediary at fixed price, and sold not to the public but to selected
clients at a higher price.

Under this method, there is no prospectus issued by companies as the issue

is sold mainly to sophisticated initial investor like UTI, EIC, GIC.

II. Rights Issue

This is the offer of new share by a company to the existing shareholders. Each
shareholders has the right to subscribe to the new shares in the proportion of
shares he already holds.

The rights issue is an inexpensive and convenient way of raising additional

capital, particularly if the amount required is moderate as compared to the
amount already issued.

III. Preferential Issue

This is the practice followed by a company to make preferential allotment of

securities to selected persons, who are normally the promoters at a price
unrelated to the prevailing market price.

Secondary Market (Stock Exchange)

The Stock Exchange represents the Secondary market for security. It is market for the
sale and purchase of previously issued securities. In this market, existing securities
are traded. Any investor holding a security may choose to sell it. Likewise any

112
intending investor may wish to buy securities which had previously been issued by
the company.

Primary V/s Secondary Market

Primary Market Secondary Market

1. New Issues of Securities are dealt in Dealings in the existing securities are
Market. made.

2. Securities are exchanged between Securities are exchanged between

company and investors. investors.

3. Promoters Capital formation directly Promoters capital formation

individually

4. Price of the securities are determined Prices are determined by the demand
by the Management of company and supply of securities.

5. There is no fixed geographical There is fixed specified places of the

location market.

MONEY MARKET

Money Market refers to transactions involving borrowing and lending of money for
short periods. Money market is the market for short term funds for a period of up to
one year. Money market constitutes a major source of working capital finance.

The important money market instruments or securities are

i) Call Money
ii) Treasury Bill (T. Bill)
iii) Trade Bill
iv) Commercial Paper (C.P)
v) Certificate of Deposit (C.D)

i) Call Money

The day to day surplus funds, mostly of banks, are traded as Call Money. The
borrowers are banks faced with a temporary shortage of cash. The Insurance
companies, Mutual funds and Financial companies are major suppliers of short
term funds. Maturity periods are extremely short and may sometimes be only a
single day.

ii) Treasury Bill (T. Bill)

Treasury Bills are issued by the Reserve Bank of India on behalf of Government
of India as a short term liability and sold to banks and to the public. The issue
period ranges from 14 to 364 days. Treasury bill are negotiable instrument i.e.
they are freely transferable.
iii) Trade bills
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 Trade bills and accommodation bills are bills drawn by one business firm on
another. They are short term instruments generally issued for a period of 90
days.

A trade bill is a written acknowledgement of debt by the maker directly to pay a

specified sum of money of a particular person.

iv) Commercial paper (C.P)

A Commercial paper is an unsecured promissory note, issued by a corporate

with a fixed maturity period which varies from 3-12 months. It is issued by
highly credit worthy reputed lending firms. Commercial banks and Mutual
funds are the main investors in this instrument.

v) Certificate of Deposit (CD)

It is a time deposit or fixed deposit which can be sold in the Secondary market.
Only a bank can issue a C.D. It is a bearer certificate and is negotiable in the
market. It is issued by banks against deposits kept by companies and
institutions. The tenure ranges from 91 days to one year.

Capital Market Vs Money Market

Basis of Capital Market Money Market

Distinction

1. Participants Its participants are Its participants are RBI, FI

financial institutions, and Financial.
banks, corporate entities,
foreign investors.

2. Instruments Its main instruments are Its main instruments are

equity shares, debenture, T.Bill, Trade Bill,
bonds, preference shares Commercial paper and
etc. Certificate of Deposit.

3. Duration It deals in medium and It deals in short term

long term securities securities.

4. Liquidity Its securities are Its securities enjoy a higher

considered less liquid degree of liquidity.
investment

5. Return Its securities yield a high Its securities yield lesser

return for investors return in comparison to
Capital Market.

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Stock Exchange

Definition :

The Securities Contract (Regulation) Act 1956 defines a stock exchange as an

association, organization or body of individuals, whether incorporated or not
established for the purpose of assisting, regulating and controlling of business in
buying, selling and dealing in securities.

Every stock exchange has a specific location. The place where buying and
selling of securities takes place in referred to as the Trading floor (or) Trading ring.
Only members who have applied and obtained membership are authorized to trade in
Stock exchange.

Listing of Securities

Securities that one traded on the Stock exchange are known as listed securities.
A stock exchange permits only listed companies to trade their securities in the
exchange.

List of securities means the inclusion of securities permitted to be traded as per

the official list of the stock exchanges.

Functions of Stock Exchange

i) Liquidity:

The main function of stock markets is to provide a ready and continuous market
for the sale and purchase of securities. The presence of a continuous market is
an assurance to investors that their investment can be converted into cash as and
when required by them.

ii) Valuation of Securities:

The stock market helps to correctly value and price securities. Profitable and
growth oriented companies are valued higher by buyers and sellers as compared
to average performance companies.

iii) Better allocation of Capital:

The companies with better performance and growth have their shares quoted at a
higher price. When such company need funds and enter the capital market, their
previous stock market record helps in raising the additional capital. Thus stock
market quotation contribute to better allocation of capital.

iv) Promotes the habit of saving and investment:

Stock exchanges promotes the habit of saving and investment among the general
public. They provide an avenue for investment in industrial projects.

v) Safety in its dealing:

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 Stock exchanges are subject to severe rules and regulations. Companies who
securities to undergo strict scrutiny before they are permitted to transact
dealings. This ensure safety of dealings.

National Stock Exchange of India (NSEI)

NSEI is one of the All India Level Stock Exchange its salient features are:

i) Nationwide Coverage:

It has nationwide coverage, investors from all over the country may deal in
securities through their local NSE dealer.

ii) Ringless:

It has no trading floor. Dealings in securities are done through network of

computers. The network of computers is connected to the central computer of
NSEI through a satellite links like stock exchange it has got no ring or trading
floor.

iii) Screen based trading:

It is screen based automated stock exchange using satellite telecommunication

link. It is the computer screen, which makes information regarding securities
available and used as trading link.

iv) Transparency:

The use of computer screen for trading makes the dealing in securities
transparent. Investors can check and satisfy themselves with the price and
dealings of securities.

v) Professionalism in trading:

NSEI has been established as a company by the consortium of financial

institutions. Its corporate form is responsible in bring professionalism in its
formation.

Over the Counter Exchange of India (OTCEI)

OTCEI market is envisaged as floorless security trading system equipped with

electronics or computer network through which nationally and internationally
scattered buyers and sellers can conduct business more efficiently and economically.

Functions of OTCEI

i) Facilitating small companies to raise funds from the capital market in a cost
effective manner.

116
ii) Providing a convenient and efficient avenue of capital market investment for
small investors.

iii) Strengthening investors confidence in the market by providing best prices.

iv) Ensuring transparency, redress investor’s complaints.

v) Providing liquidity to both shares and debt securities.

Distinction between NSEI and OTCEI

Points of NSEI OTCEI

Difference

1. Establishment 1992 1990

2. Securities traded Equity, Debentures, T.bill, Equity, debenture etc.

PSU Boards etc.

3. Settlement Payment within 15 days of Payment within 7 days of

transaction transaction

4. Objective Nationwide ringless Serving as exchange for

transparent trading of capital the securities of small
and money market companies.
instruments

SECURITIES EXCHANGE BOARD OF INDIA (SEBI)

Securities and Exchange Board of India (SEBI) was set up in 1988 to regulate
the function of the securities markets with a view to promoting their orderly and
healthy development, to provide adequate protection to investors. In May 1992, SEBI
was granted legal status. It is a body corporate having a separate legal existence and
perpetual succession.

Objectives

i) Protect the interest of Investor in securities.

ii) Promote the development of the security market.
iii) Regulate the securities market.

Functions

There are three kinds of functions

i) Protective
ii) Developmental
iii) Regulatory

I Promoting Development of Security Market

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 SEBI is vested with process to take steps to promote development of capital
market for the ultimate goal of achieving national development.

Development functions

i) SEBI promotes training of intermediaries of the securities market.

ii) SEBI undertakes measures to develop the capital markets by adopting a flexible
and adoptable approach examples are
a) SEBI has permitted internet trading in a limited way through
registered stock brokers.

b) In order to reduce the cost of issue. SEBI has made underwriting

optional.

c) SEBI has accepted the system of using the stock exchanges for
market IPOS.

Regulatory Function:

With rapidly growing capital market, an efficient regulatory frame work is necessary
to sustain investor’s confidence.

Functions

i) Regulating business in stock exchange and securities market.

ii) Regulating intermediaries, such as brokers, merchant bankers, underwriters,

registrars etc.

Protective Functions

i) Prohibiting fraudulent and unfair trade practice such as

a) Price rigging – Manipulating the price of shares and cheating investors.

b) Prohibiting misleading statement, inducing purchases and sale of
securities,

ii) Prohibiting Insider Trading:

Transactions involving directors, promoters or persons having access to
privileged information regarding financial status of the company has been
prohibited because they may use the information in their favour.

iii) Educating investors

iv) Promoting fair practices and code of conduct.

a) The company cannot roll over debenture holders’ funds unilaterally.

b) The company cannot change terms of debentures midterm.
c) SEBI is empowered to investigate insiders trading.
d) Stopping preferential allotment of shares at lower price.
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v) Registering and regulating the working of stock brokers, sub-brokers, share
transfer agent, bankers and an issue, portfolio manager etc.

vi) Registering and regulating working of mutual fund.

vii) Regulating takeover of companies

viii) Conducting enquiries and audit of stock exchange.
PRACTICE QUESTIONS

1. Explain the meaning of Stock Exchange (2)

2. Explain the meaning of SEBI (2)

3. Briefly explain the objectives of NSEI (3)

4. Explain the functions of stock exchange (6)

5. What is Capital market? Enumerate its features (4)

6. Briefly explain the importance of Money market (4)

7. Enumerate the major borrowers in the capital market (4)

8. Differentiate between primary and secondary market (5)

9. Name the instrument used in the money market (any five) (3)

10. SEBI is the watchdog of the securities market – comment

11. Primary market contribute to capital formation directly, secondary markets do so

indirectly - comment

12. Write any five differences between NSEI and OTC.

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CBSE QUESTIONS

1. Distinguish between Capital market and Money market on the basis of

i) Safety
ii) Instruments
iii) Liquidity
Ans:
Basis Capital Market Money Market

1. Expected return It gives higher return for Rate of return is low as

investor them the money compared with Capital
market Market.

2. Safety Capital Market Money market is generally

instruments are riskier much safer with a minimum
both with respect to risk of default.
return and principal
repayment.

3. Instrument Equity and preference Instrument such as Call

shares, debentures, money, treasury bill, trade
bonds etc. bill, commercial papers and
certificate of deposit.

4. Liquidity Capital market securities Money market instruments

are considered liquid enjoy a higher degree of
investment because they liquidity.
are marketable on the
stock exchange

2) State and explain in brief any four features of NSEI

Ans:
i) Nationwide coverage
ii) Ringless
iii) Screen based trading
iv) Transperancy
v) Professionalism in trading

3) In today’s commercial work, the stock exchange performs many vital functions.
Do you agree?
Give any four reason in support of your answers. Yes,
Ans:
i) Industrial growth of the country
ii) Mobilization of saving
iii) Protection from false securities
iv) Protection of foreign investors.

4) State any four protective functions of the Securities and Exchange Board of
India (SEBI) (4)
Ans. Prohibiting fraudulent and unfair trade practice such as
a) Price rigging
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 b) Prohibiting Insiders Trading
c) Educating Investors
d) Promoting fair practice and code of conduct
5) The directors of a newly established company having paid up equity share
capital of Rs.2.5 crores desires to get its shares traded at an All India Level
Stock Exchange. As Finance Manager of an Company. Suggest the name of the
Stock Exchange for the purpose. Give any three reasons in support of your
answer.
Ans. Companies having paid up Capital less than 3 crores can list their share in
OTCEI. The reasons are
i) Providing a convenient and efficient avenue of Capital Market Investment
for small investors.
ii) Provide liquidity to share and debentures
iii) Strengthening investors confidence in the market by providing best prices.
iv) Ensuring transparency, redress investors complaints. Uniting country’s
security market to cover even those places which do not have stock
exchange.

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 CHAPTER 11
MARKETING MANAGEMENT
16 Marks

- Introduction

- Meaning

- Definition

- Business concepts

- Key missions of marketing management

- Objectives

- Distinction between marketing and selling

- Functions of marketing

- Element of marketing mix

- Three product levels

- Types of goods

- Branding strategies

- Qualities of a good brand name

- Important functions of Packaging

- Labeling and its functions

- Price mix and factors determining price

- Choice of channel of distribution

- Various media of advertising

- Objections to advertisement

- Personal selling – meaning, its characteristics

- Process of personal selling

- Public relations

- Practice Questions

- CBSE Questions

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Introduction

Manufacturing companies perform so many activities to satisfy the customers in a

market. They interact with the customers. They exchange their views, opinions,
suggestions, problems/grievances.

Meaning

Market :

It refers to a place where the buyers and sellers meet and conduct buying and selling
activities.

Customer :

It refers to the people or organizations that seek satisfaction of their needs and wants.

Marketeer/Seller :

It refers to a person or organisation who makes available products or services and

offers them to the customer with an intention of satisfying customer needs and wants.

DEFINITIONS

Marketing :

Philip Kotler defines marketing as a social process by which individuals and groups
obtain what they need and want through creating, offering and freely exchanging
product and services of value with others.

Managerial Marketing :

It is a process by which the marketer attempts to match products or services with

customer needs with the purpose of satisfying them at a profit.

Marketing Mix :

Kotler defines marketing mix as “set of marketing tools that the firm used to pursue
its marketing objectives in the target market”.

It refers to the ingredients or the tools or the variable which the marketer mixes in
order to interact with a particular market.

Product

“According to Philip Kotler”, a product is a bundle of physical service and symbolic

particulars expected to yield satisfaction of benefits to the burger”.

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Branding

It is defined as the process of using a name, term, symbol or design individually or in

some combination to identify a product.

Packaging

Packaging a set of tasks or activities which is concerned with the design and
production of an appropriate container for the product.

BUSINESS CONCEPTS

Marketing efforts are guided by the following factors:

a) Production Concept:

This concept proposes that products must be inexpensive and widely available.

b) Product Concept:

This concept proposes that the way of realizing business goals is to make high
quality products.

c) Selling Concept:

This concept proposes that the firm must undertake aggressive selling and
promotion efforts. Then only customer will buy the product. This means that
products should be pushed on to the customers by any means.

d) Marketing Concept:

It implies that the firm can achieve its goals by identifying the needs of
customers in a chosen market and satisfying them better than the competitors.

e) Societal Marketing Concept:

This concept says that social goals must be included in the need satisfaction
process.

Key missions of Marketing Management in business :

The critical missions of marketing management are

a) Collection of resources
b) Making use of marketing opportunities.
c) Customer satisfaction
d) Making company management and employees to think about customers.

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Marketing Management :

1. Creation of Element :

Producers first ascertain the needs and wants of customers and then produce
goods.

2. Market Share :

Aggressive selling efforts, promotional methods helps the company to capture a

reasonable share in the market.

3. Goodwill :

Company products are popularized through advertising, reasonable price, high

quality, convenient distribution channel. This helps the firm to build reputation.

4. Profitable sales volume through customer satisfaction :

Marketing satisfies customers wants at the same time it helps company to earn
profit, to have grown and stability.

Distinction between Marketing & Selling :

Points of Selling Marketing

difference

1. Focus It focuses on the need of It focuses on the need of

seller customer

2. Objective Profit maximization and Profit maximization with

sale customer satisfaction

3. Scope Limited Wide

4. Start and end Selling starts after Marketing starts much

production and ends with before production and
the sale of product. continues even after sale.

5. Tools Selling efforts like Integrated marketing efforts.

promotion and
persuasion

6. Internal / External Internal oriented External oriented

7. Supremacy Produce is considered Consumer is considered

supreme in the market. supreme in the market.

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Functions of Marketing :

Various functions to be performed in the process of marketing.

1. Marketing Research :

It means application of research process in solving marketing problem like

finding out customers need, these motivates time of purchase, quantity of their
labeling purchase, place of buying, selecting brand name, packaging etc.

2. Product Planning :

Marketeer has to plan what product or service has to be offered. He has to

decide the quality standards, shape or design of the product, type of packing,
Number of models and types, price, distribution and transportation etc.

3. Buying and assembling :

It means buying of raw material and other inputs from different sources and
assembling them under one roof.

4. Packaging :

It refers to designing of packets, wrappers, cartons etc. which are used to pack
the product. It is called silent salesman.

5. Strange and Warehousing :

The goods are not consumer immediately when they are produced. There is a
time gap between the production and consumption. So it is necessary to keep
the goods safe during the time gap as goods need to be protected from moisture,
insects etc.

6. Transportation :

The marketer compares various modes of transport on various criteria and

selects the best and most suitable to transport raw materials inputs and finished
goods.

7. Promotion and Selling :

Promotion includes all the activities which are undertaken to communicate with
the customers and increase the sale. For promotion marketer performs various
functions such as advertising, sales promotions, personal selling and publicity
etc.

Elements of marketing mix :

- Product
- Price
- Place
- Promotion
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1. Product :

It is a bundle of utilities. Anything that can be offered to a market to satisfy a

want or need. It is a carrier of functional and psychological and social
satisfaction. Product mix refers to important decisions related to the product
such as quality packing, designing.

2. Price :

It is the value which a buyer passes on to the seller in lieu of the product or
service provided. It must match the utility offered by the product or service. It
is expressed in monetary terms. Price mix refers to important decisions relating
to fixing of price of a commodity. Eg. Price of product/service, demand, cost of
product.

3. Place Mix :

It refers to important decisions related to physical distribution of goods and

services.

4. Promotion Mix :

It refers to all decision related to promotion of sales of products and services.

Eg. Selecting advertising media, promotional techniques, publicity measures,
public relations etc.

Three product levels which a marketer has to follow while developing an offer :

1. Core benefit level :

It is the basic benefit the customer seeks in a product or service car – benefit of
transportation.

2. Expected product level :

It refers to additional features that a marketer can add to the expected product in
order to exceed customer expectations. Eg. after sale service, warranties,
financing etc.

Types of goods

a) Convenience goods
b) Shopping goods
c) Speciality goods

Convenience goods :

They are the ones which are bought by the buyers with minimum shopping efforts.
Eg. Matchbox, salt, candles, toothpaste, cigarette, biscuits.

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Shopping goods :

These are bought after due shopping efforts i.e. search and comparison of goods on
the basis of price, quality, suitability etc. eg. TV, Furniture, shoes, shirts etc.

Speciality goods :

These are unique in nature and have special importance for the consumer. Eg.
Stamps, coins (how prices specialists goods) designer suits (Armani suits) pens (Mont
Blane or cartier) High price speciality goods)

Different branding strategies adopted by large scale companies.

1. Individual branding :

The firm uses a separate brand name for each product.

Eg. Robin for blues, Cherry blossom for shoe polishes.

2. Blanket family branding :

One brand name is used by the company for all its products.

Eg. Philips, Samsung, GE, LG.

3. Separate family brand names :

Products are classified in different family and brand names are given to each
family.

Eg. Reliance uses Vimal brand for sarees and suitings. Harmony for curtains.

4. Company’s name combined with individual name :

Company uses its own name with the brandname of its product.

Eg : Bajaj, Chetak, Bajaj Caliber, Bajaj Pulser etc. Britannia Marie, Britannia
Goodday, etc.

Qualities of a good brand name

1. Brand name should be short and simple of Lux, Dettol, Surf.

2. It should be easily pronounceable. Eg. Product names like Heinz etc. are
difficult to pronounce.

3. They can convey product attribute or benefits. Eg. Hajmola suggest digestive
properties, Ujjala suggests brightness.

4. It should be distinctive. Eg. Tide, shell, paste.

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5. It should be selected after considering its meaning in other languages and
cultures. Eg. Ambassador Nova Car. Nova in Spanish means ‘doesnot go”.

Important functions of packaging.

a) Protection :

It protects the product from damage. Appropriate packaging protects the product
from sun, rains, moisture, breakage, insects etc.

b) Identification ;

Packaging helps the customer to identify the product easily.

c) Convenience :

It makes product convenient to store and convenient to shift from one place to
other.

d) Promotion :

It promotes or enhances the sale of the product. Attractive packing induces the
customer to buy the product.

e) Innovation :

Marketeer can capture the market / new customer segment by developing

innovative packages.

Labelling

Labeling means putting identification marks on the package. Label provides

information like name of the product, name of manufactures, contents of products,
expiry and manufacturing date, general instructions for use, weight, price etc.

Functions :

1. It helps to identify the product.

2. It helps in grading
3. It is the carrier of information.
4. It fulfils the legal requirement.
5. It promotes sale.

Price Mix :

It refers to important decision related to fixing of price of a commodity i.e. price of

competitors, decisions related to demand, fixing cost.

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Factors to be kept in mind :

Objectives :

High price will be fixed if the objective is profit maximization / creating special
image with innovative technologies. Low price is fixed if the objective is sales
manimisation.

Cost :

Price of the product must be able to cover the total cost of the product. Total cost
means fixed cost and variable cost.

Competition :

When the firm does not face any competitions, it enjoys freedom in fixing price.

Customer demand :

High price is fixed when demand is in elastic and vice versa.

Factors determining the choice of channels of distribution

1. Market related factors :

a) Nature of market
b) Size of market
c) Geographical concentration
d) Quantity purchased

2. Product related factors :

a) Value of product line

b) Product complicity
c) Nature of product
d) Perishable or non perishable product

3. Company related factors

a) Finance
b) Degree of control

Various media of advertising :

1. Newspapers :

It offers mass coverage or reach cost per exposure is very low.

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2. Magazines :

It reaches a focused target group, lifetime is more, quality tends to be better.

3. Television :

It is audiovisual medium, dramatization is possible, high reach. It has high

attention catching power.

4. Radio :

It offers massive reach and lower cost. It can reach remote places.

5. Outdoor :

It is attractively designed with electronic and electric displays. It offers benefit

of repeated exposure, high attention catching power, message dramaisation, high
visibility and lower cost.

6. Internet :

It can reach highly selected audience. It permit the scope of narrow costing and
it is interactive.

The objectives to advertisement

1. Effect of advertising on values, materialism and life styles :

For : Advertising is a source of discontentment. It promotes materialism.

Some advertisement promote new lifestyle which do not find social
approval.

Against : If occasional discontent is not there, nothing exciting would happen.

New products have to be discovered and advertisement informs
consumers about them.

2. Advertisement encourages sale of inferior and dubious predicts.

For : Advertisement show all for types of products irrespective of their

quality. With the help of advertisement anything can be sold in the
market.

Against : Everyone can’t afford to buy superior quality expensive products but
it does not mean they should not use the product.

3. Advertisement confuses rather than helps :

For : The number of advertisement shown in TV and Radio are increasing

day by day and it confuses the customer and it becomes very
difficult for him to make choice.

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 Against : Advertisement give wide choice to customers and they can select the
most suitable brand for him.

4. Some advertisements are in bad taste :

For : Advertisement use bad language, some advertisement distort

relationship between employer and employer mother in law and
daughter in law etc.

Against : Good or bad taste differs from person to person and it is a matter of
personal opinion.

5. Advertisement costs are passed on to the customers in the form of higher

price.

For : Firm spend huge amount on advertisement and it is added to cost and
consumer has to pay a higher price for the produce and service.

Against : Advertisement increase demand for the product, thereby sales

increases. Company can increase production and cost of production
decreases.

Personal Selling

It means selling personally. It involves face to face interaction between seller and
buyer for the purpose of sale.

Characteristics :

1. Personal Interaction :

Buyers and sellers have face to face interaction.

2. Two way communication :

The seller give information about the product, at the same time the buyer get a
change to clarify his doubts.

3. Better response :

When seller is personally explaining the utilities of product to the customers,

they pay some attention and listen to the information.

4. Relationship :

Salespersons normally make friendly relations with the customers.

5. Better convincing :

Sales person can convince the buyer by demonstrating the use of product and
make changes in the product according to the need of customer.

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Process of Personal Selling :

1. Identification :

Potential customers are identified by referring to directories.

2. Qualifying :

On the basis of financial background, location, past record, identified customers

are short listed.

3. Pre-approach :

Before interacting with the customers, some basic knowledge about the
customers is gathered.

4. Approach :

At this stage sale person meets the buyer for the first time.

5. Presentation and Demonstration :

Presentation means telling the customer about the usefulness of product. It can
be done by using charts, slides, video, audio tips etc. Demonstration are given
to show the functioning of the product.

6. Handling objections :

It means answering to the doubts and objections of customers.

7. Closing :

This process gets closed on end when sales person asks for order.

8. Follow up :

Sales person must ensure customer satisfaction.

Public Relation Tools

1. News

It constitutes a credible source of information for the public.

2. Speeches :

Corporate leaders speeches can influence the company image in the minds of
shareholders, bankers, customers and employees.

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3. Events :

News conference, press tours, multimedia presentations etc. are conducted to

build image of the company.

4. Written Materials :

It includes annual report, special documents, brochures, articles and newsletters.

5. Public Service activities :

Welfare activities like upkeep of park and gardens are undertaken by companies
to create a favourable image.

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PRACTICAL QUESTIONS

1. Write short notes on - 3 marks

a) Marketer
b) Customer
c) Market

2. Define Marketing 2

3. What d you mean by marketing mix? Explain its components 6

4. Briefly explain business concepts 2

5. Mention any three key missions of marketing management in business. 3

6. Enumerate marketing management objectives of a firm 4

7. Distinguish between Marketing and Selling 5

8. Explain briefly any five functions of marketing 5

9. State the three products levels and marketer has to follow while developing an
offer 3

10. Describe briefly important functions of packaging 5

11. Critically examine the objections to advertising 6

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CBSE QUESTIONS

1. Explain ‘Marketing Research’, ‘Product Planning’ and ‘Buying and

Assembling’ as functions of ‘Marketing’. AISS 2006 (6)

2. Explain the factors determining choice of channels of distribution

AISS 2006 (6)

3. ‘Automobiles Ltd. Offered to sell their new bike at about Rs.4,000/- less than
the usual price ‘ is an example of one of the techniques of sales promotion and
name the technique and explain two other techniques with example. (5)

Ans. a) Discount offer 1 mark

b) Two other techniques

1) Rebate :

It refers to selling product at a special rate which is less than the original price
for a limited period of time. It is given to clear off the stock or excessive
inventory. For example, coke announced 2 little bottle at Rs.35 only.

2) Refund :

This refers to refund or part of price paid by customer on presenting the proof of
purchase. (2)

Rs.2 off on presentation of empty pack of ruffle lays.

4. Explain ‘product mix’ as an element ‘marketing mix’ AISS 2006 (2)

5. What is meant by ‘Marketing Management’? AISS 2005 (2)

It is done to help customers solve their diverse consumption problems according

to the objectives of the firm.

6. Differentiate between ‘marketing’ and ‘selling’ on the basis of

a) Meaning and
b) Emphasis AISS 2005 (2)

7. Explain any three sales promotion activities commonly used by marketing

AISS 2005 (3)
Advertising : It is non personal presentation and promotion of idea,
goods or services by an identified sponsor.

Sales promotion : It refers to short term use of incentives or other

promotional activities that stimulate the customer to buy
the product.

Publicity : It is non paid form of impersonal communication 3x1=3

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8. Explain briefly any three features of personal selling AISS 2005 (3)

9. “Advertising costs are passed on to the consumers in the form of high prices”
and “some advertisements are in bad taste”. Do you agree? Give reasons in
support of your answer. AISS 2005 (6)

10. Explain in brief, the factors that are taken into consideration while taking
decision on pricing the product. AISS 2005 (6)

11. What is the social concept of marketing? AISS 2005 (2)

12. What is meant by the ‘Production concept of marketing’? AISS 2004 (2)

13. How does marketing help an enterprise to establish a place in the market.
AISS 2004

14. State any three objectives of Sales promotion AISS 2004 (3)

a) To induce customers to try the product.

b) To make the customers keep on purchasing the product on a repeated
basis.
c) To gain the intermediary support 3x1=3

15. Enumerate any three product related factors that should be taken into
consideration while taking a decision AISS 2004 (3)

16. Explain the major activities involved in physical distribution of goods.

AISS 2004

1. Transportation : It is concerned with movement of goods. It adds

value to the goods by moving them to the place
where there are required.

2. Inventory : It is to be maintained because they ensure product

availability as an when customer demand arises. It
prevents out of stock situations.

3. Warehousing : Every company needs to store finished goods until

they are sold in the market place.

4. Order processing : The order cycle involves stages like order placement,
order transmission, order entry, inventory and
production scheduling order and invoice shipment
and receiving order shipment.

17. You are the advertising manager in a company manufacturing coloured

television sets. Which media would you choose for advertising your product?

Explain briefly any five reasons in support of your answer. AISS 2004 (6)

Television is preferred for advertising colour TV Sets (1)

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 Reasons : 1. Audio visual medium. It combines sight, sound and motion.
2. Great dramatization is possible.
3. It has high reach.
4. It has catching power.
5. It has better impact on customers.
Each point carries 1 mark

18. Explain the important features of advertising.

1. Reach : It can reach a large market.

2. Choice : There is wide variety of media available for

advertising for video, audio, visual audio, print media
etc. It helps the marketer to select the media keeping
in mind the target customer.

3. Legitimacy : Customers feel that publicity company will not give

false information of the product.

4. Expressiveness : It gives enough opportunities to dramatise the

message with the help of drawings, colours, pictures,
music, dance etc.

5. Economy : It is considered economical as compared to other

promotional techniques.

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 CHAPTER – 12

CONSUMER PROTECTION

 Introduction

 Meaning

 Importance

 Consumer Rights

 Consumer Responsibilities

 Ways and Means of Consumer protection

 Consumer grievances redressal

 Role of Consumer organization

 Question for Practice

 CBSE questions of last 3 years.

INTRODUCTION

In previous chapter, we have studied management functions and functional

organization of a production unit. The consumer exploitation in the context of goods
and services more in India. Should we allow these practices to continue? Is any body
to check such malpractices? Why do Indian consumers need protection?

For all these questions, the answers can be :

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 CHAPTER – 12

CONSUMER PROTECTION ACT – 1986

DEFINITION OF A CONSUMER

The term consumer is defined to:

a) One who buys goods or hires services for consideration.

b) Any user of such goods with the approval of the buyer and beneficiary of
services which is availed of with the approval of one who hires the services.

c) Any one who uses goods bought or services hired exclusively for earning
livelihood by self-employment.

CONSUMER PROTECTION

Concept : Consumer Protection refers to protecting the consumer against anti-

consumer trade practices by the producers or sellers. In other words,
consumer protection means that consumer’s rights as to information,
quality, quantity, product specification, guarantee, after sale service are
not violated. Therefore, rights of the consumers need to be
safeguarded and protected. The purpose at economic planning is to
allocate resources, as far as possible, for the maximum satisfaction of
consumer needs.

IMPORTANT ASPECTS OF CONSUMER PROTECTION

(i) Physical protection of the consumer:

It includes the measures to protect consumers against products that are unsafe
or injurious to health any hygiene.

(ii) Protection of economic interest of consumer:

It includes the measures to protect the consumer against deceptive and other
unfair trading practices and to provide him adequate means to get his
grievances redressed.

(iii) Protection of public interest:

It includes the measures to prevent abuse of monopoly position or restrictive

practice.

NEED FOR CONSUMER PROTECTION

Business practice which ignore consumer interest are basically linked with the
need for consumer protection. In order to achieve the goal of profit maximization and

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growth, a businessmen sometimes resorts to adulteration of goods, poor, quality
failure to give fair measure, lack of service and courtesy to the customer, misleading
or dishonest advertising etc., which necessitates consumer protection.

IMPORTANCE OF CONSUMER PROTECTION :

a) Business is a means of human welfare:

Business serves the customers and thus is a means not an end in itself. To save
well is in the interest of both the consumers as well as business person.
Ignoring the interests of consumers may be a sure depth of business.

b) Growth with Social Justice:

Growth with social justice is the cornerstone of our economic philosophy.

Exploitation of consumers is against the directive principles of state policy laid
down in the constitution.

c) Single vs Multiple objectives:

Business works for various stakeholders and thus to take care of the interesting
of all including customers. As a part of society, business cannot ignore the
interests of society including consumers.

d) Power Centre:

Business has considerable power and influence over society and government.
Therefore it is the responsibility of the business to set standards that may not
damage the cause of the society and serve the interests of only a few persons.

e) Self-Interest:

Unless companies become consumer oriented, they are likely to be beaten by

competition from multinationals. Moreover, government has enacted laws to
protect the interest of consumers. Business persons who violate the laws are
likely to lose their goodwill and clients for all times to come.

f) Consumer is the purpose of the business:

Without providing goods of the right quality, quantity and price, how can a
customer be satisfied; and without satisfied customers, no business can survive
for long. The customer is the foundation of business and keeps it in existence.

CONSUMER RIGHTS

i) The right to safety:

The right to safety is important for safe and secure living. Without any
effective regulatory mechanisms consumers suffer most in terms of safety.
The right to safety means the right to be protected against products, production,
processes and services which are hazardous to health or life.

141
ii) Right to be informed:

Consumers should have the right to be informed about the quality, quantity,
potency, purity, standard and price of goods or services, so as to make the right
decision and protect themselves against abusive practice.

iii) Right to choose:

The right to choice deals with the issue of choosing between different
alternative. The right to choice can be defined as an assurance, whenever
possible, of availability, ability and access to a variety of products and services
at competitive prices.

iv) Right to be heard / Representative

The right to presentation (to be heard) means the right to advocate. Consumers
interests with a view to receiving full and sympathetic consideration in the
formation and execution of economic and other policies, which affect
consumers. In other words the right to representation is a right as well as a
responsibility as a part of civil society to ensure that consumer interest prevails.

v) The right to seek redressal of a grievances

This right includes the right to receive compensation for supply of shoddy
goods or unsatisfactory services and availability of acceptable forms of legal
aid or redress for smell claims wherever necessary.

vi) Right to consumer education

The right to consumer education means the right to acquire the knowledge and
skills to be an informed consumer. It is easier for the literate to know their
rights and to take actions to influence factors which affect consumers
decisions.

RESPONSIBILITY OF A CONSUMER

i) Consumer must exercise his rights:

Consumers must be aware of their own rights with regard to the products or
services they buy from the markets.

ii) Cautions Consumer:

Before purchasing, consumer must insist on getting full information on the

quality, quantity, utility, price, etc., of the goods or services. This will ensure a
better purchase.

iii) Filing Complaint for the redressel of genuine grievances:

Sometimes, consumers ignore the deception of traders believing that the loss is
smell but this attitude encourages corrupt business practices to continue.

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iv) Consumer must be quality conscious:

While making purchases, consumers must look for quality certification marks
like ISI, Agmark, Woolmark etc.

v) Insist on cash memo:

If there is any defect in the goods purchased and consumer has to make a
complaint the cash memo must be there as proof of purchase. A seller is bound
to give a cash memo.

WAYS AND MEANS OF CONSUMER PROTECTION

a) Measures adopted by the consumers

i) Consumer individual measures

ii) Consumer collective measures.

b) Measures adopted by NGOs.

c) Measures adopted by the Business

d) Measures adopted by the Government.

i) The agricultural produce (Grading and Marketing) Act 1937.

ii) Essential commodities Act 1955.
iii) Prevention and Control of Pollution Act 1974.
iv) The Standards of Weights and measures Act 1976.
v) The prevention of goods adulteration Act 1976.
vi) The drugs and Cosmetics Act 1946.
vii) MRTP 1969.

REMEDIES AVAILABLE TO THE CONSUMER

i) To remove the defect panted out by the appropriate laboratory from the goods
supplied.

ii) To replace the defective goods with new goods of similar description which are
free from any defect.

iii) To return the complainant the price paid for the goods or the charges paid for
the services.

iv) To remove the defects and deficiencies in the services supplied.

v) To discontinue the unfair trade practice or the restrictive trade practice or not to
repeat them.

vi) To provide for adequate costs to parties.

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COMPLAINT

Under the Act, a Complaint means any allegation in writing made by a complainant in
regard to one or more of the following:-

a) That he has suffered loss or damage as a result of any unfair trade practice or a
restrictive trade practice adopted by any trades.

b) That the goods bought by him or agreed to be bought by him suffer from one
or more defects.

c) That the services hired or availed of or agreed to be hired or availed by him

suffer from deficiency in any respect.

d) That a trader has charged for the goods mentioned in the complaint, a price in
excess of the price.

e) Displayed on the goods: or

f) Displayed on any packet containing such goods.

WHO CAN FILE A COMPLAINT

a) A Consumer

b) Any Voluntary Consumer Association, Registered under the Consumer Act

1956.

c) Central Government

d) Any State Government

e) One or more consumers where there are numerous consumers having the same
interest.

PROCEDURE FOR FILING A COMPLAINT

a) The name, description and address of the complainant.

b) The name, description and address of the opposite party or parties as the case
may be, as far as they can be ascertained.

c) The facts relating to complaint and when and where it arose.

d) Documents, if any, in support of the allegations contained in the complaint.

e) The relief which the complainant is seeking.

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ROLE OF CONSUMER ORGANISATIONS

i) Bringing out brochures, journal, monographs.

ii) Collecting data on different products and testing them.

iii) Arranging talks, seminars, workshops and conferences for the purpose of
focusing on the problems of consumers and finding solutions thereof.

iv) Filing suits, complaints and write petitions on behalf of the consumer before
the courts.

v) Investing into problems of consumers.

vi) Educating women regarding consumerism.

CONSUMER GRIEVANCES REDRESSAL AGENCIES

a) District Forum

The State Governments are required to establish District Forum in each district.
Import features of

i) Each district forum consists of Chairman and 02 members appointed by

the State Government. It has the powers of Civil Court for enquiring into
any complaint.

ii) A District forum can receive consumer complaints where the value of
goods or service and the compensation claimed does not exceed Rs.20
lacs.

b) State Commission

It is setup by the State Government and its Jurisdiction is restricted to the

boundaries of the State concerned. It deals with the cases where the value or
claim for compensation exceeds Rs.20,00,000 but not exceeds Rs.1 crore. The
features of

i) The State Commission shall consists of a President who either is or has

been a judge of a High Court and two other members. All the three shall
be appointed by State Government.

ii) The State Commission is required to refer the complaint to the opposite
party concern and send the sample of goods for retesting in a laboratory.

c) National Commission:

The National Commission is set up by the Central Government. It takes all the
cases exceeding the value of Rs.1 Crore. An Appeal against the order of the
National Commission can be filed to the Supreme Court within 30 days.

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 i) It shall consist of a President who is or has been a Judge of the Supreme
Court and four other members appointed by the Central Government.

ii) All complaints pertaining to those goods or services and compensation

whose value is more than rupees twenty lakhs can be filed.

iii) The National Commission shall have the same power as that of a Civil
Court in dealing with case and follow the procedures prescribed by the
Central Government.

IMPORTANT QUESTIONS

1. Explain three aspect of Consumer Protection

2. Why is Consumer Protection required in India

3. What does ‘Consumer Protection’ refer to

4. Explain the importance of Consumer Protection

5. Explain, in brief, right of consumers as provided under the Consumer

Protection Act, 1986

6. Describe the responsibilities of a consumer

7. What type of judicial machinery is there to deal with consumer grievances and
disputes?

8. List the various reliefs available to consumers on his complaint

9. What are the salient features of Consumer Protection Act, 1986?

10. How do Lok Adalats and Publicity measures help in protecting the consumer?

11. What are the remedies available to consumers under the Consumer Protection
Act, 1986? Discuss.

12. Explain the role of Consumer Organisation / Non-government Organisations

Answers :
A.1 (a) Physical Protection of the consumer : It includes the measures to
protect consumers against products that are unsafe or injurious to health
and hygiene.

(b) Protection of economic interest of consumer : It includes the measures

to protect the consumer against deceptive and other unfair trading
practices and to provide him adequate means to get his grievances
redressed.

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 (c) Protection of Public Interest : It includes the measures to prevent abuse
of monopoly position or restrictive practices.

A.2 Business Practice which ignore consumer interests are basically linked with
the need for consumer protection. In order to achieve the goal of profit
maximization and growth, a businessman, sometimes resorts to adulteration of
goods, poor quality, failure to give fair measure, lack of service and courtesy
to the customer, misleading or dishonest advertising, which necessities
Consumer Protection.

A.3 Consumer protection refers to protecting the consumers against anti-consumer

trade practices by the producers or sellers. Therefore, rights of the consumers
need to be safeguarded and protected.

A.4 i) Business is a means of human welfare.

ii) Growth with social justice.
iii) Single Vs multiple objectives.
iv) Power Centre
v) Self Interest
vi) Customer is the purpose of the business.

A.5 i) The right to safety

ii) Right to be informed
iii) Right to choose.
iv) Right to be heard
v) The right to seek redressal of agrievances
vi) Right to consumer education
vii) Right to basic needs.

A.6 i) Customer must exercise his rights.

ii) Cautions consumer.
iii) Filing complaint for the redressal of genuine grievances.
iv) Consumer must be quality conscious.
v) Insist on cash memo
vi) Advertisement often exaggerate.

A.7 There is a three tier judicial machinery to deal with consumer grievances and
disputes.
a) District forums to deal with all complaints where the value of goods or
services and compensation claimed does not exceed Rs.20,00,000/-.
b) State commission to deal with cases where the value or claim for
compensation exceeds Rs.20,00,000/- but not exceed Rs.1 crore
c) National commission to take up all cases exceeding the value of Rs.1
crore.

A.8 i) Removal of defects from the goods.

ii) Replacement of the goods.
iii) Refund of the price paid.
iv) Award of compensation for loss or injury suffered
v) Removal of deficiency in services.
vi) To provide for adequate costs to parties.

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A.9 i) Applies to all goods and services unless specifically exempted by the
Union Government.
ii) Covers all the sectors whether private, public or cooperative.
iii) Provisions of the act are compensatory in nature.
iv) Enshrines the consumers’s rights related to safety, information choice,
representation, redressal and consumer education.
v) Empower consumers eeking discontinuance of certain unfair and
restrictive trade practices, defects or deficiencies in service, and stopping
in services or withdrawal of hazardous goods from the market.

A.10 Lok Adalats :

The concept of Lok Adalats in India is catching up fast. Here, aggrieved

parties are directly approaching these adalats with their grievance. Issues are
discussed on the sport and decisions are taken thereafter. The procedure
followed in these adalats saves time and money of the general public. It have
become part of a speedy, effective and economical redressal system.

15th March is celebrated as world consumer Right Day all over the world and
this day is observed in a befitting manner every year. In 1995, the main
function was organized at Vigyan Bhawan, New Delhi. In addition, the
ministry, with the help of DAVP undertook a massive outdoor publicity
programme such as display hoarding, banners, bus panels etc.

A.11 i) Lok Adalats : refers to Ans – 10.

ii) Environmentally friendly products :

The ministry of environment and forests has introduced the “Eco-Mark”

scheme. The scheme authorizes producers to use the eco-mark label
with the general of an earthen pitcher if the products to satisfy the
condition laid down regarding the production processes and use of
environmentally friendly materials.

iii) Redressal forums and consumer

Protection Concils :

Under the Consumer Protection Act 1986, a judicial machinery has been
set up to deal with consumer grievances and disputes. The Disrict
forums, State Commission and National Commission are constituted to
provide for a simple, speedy and inexpensive redressal of consumer
grievance.

iv) National Youth Award on Consumer Protection :

To encourage the participation of consumers and youths in the field of

consumer protection, the union ministry instituted two national awards,
namely National Award on Consumer Protection and National Youth
Award on Consumer Protection which are given every year.

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 v) Publicity Measures : Refer to Ans.10.

vi) Consumer Welfare Fund :

The Ministry of Finance, Department of Revenue has passed the Central

Excise and Customs Laws Act 1991, which provides for creation of
Consumer Welfare Fund (CWF) wherein the amount of excess
excise/custom duties which are not refundable to manufactures, shall be
created and the money from this fund will be used for promoting the
welfare of consumers.

A.12 i) Bringing out brochures, journals, monographs.

ii) Acceleration consumer awareness.
iii) Collecting data on different products and testing them.
iv) Arranging talks, seminars, workshops and conferences for the purpose of
focusing on the problems of consumers and finding solutions thereof.
v) Filing suits, complaints and write petitions on behalf of the consumers
before the courts.
vi) Investigating into problems of consumers.
vii) Educating a women regarding consumerism.
viii) Educating the consumers to help themselves.

CBSE QUESTIONS

1. Explain the following rights of consumers :

i) The right to safety

ii) The right to consumer education and
iii) The right to be heard.

2. Explain any four ways and means of consumer protection followed in India.

3. Explain, in brief any six reasons as to why consumer protection is needed in

India.

4. Explain, in brief, any six responsibilities of consumers to safeguard their

interests.

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