Business Org

BCOC-132
Indira Gandhi National Open University

Business Organisation and
School of Management Studies
Management
Foundation of Indian Business 1

BCOC-132
Management
Block
1
FOUNDATION OF INDIAN BUSINESS
UNIT 1
Introduction to Business 5
UNIT 2
Technological Innovation and Skill Development 29
UNIT 3
Social Responsibility and Ethics 45
UNIT 4
Emerging Opportunities in Business 61
PROGRAMME DESIGN COMMITTEE B.COM (CBCS)
Prof. Madhu Tyagi Prof. D.P.S. Verma (Retd.) Prof. R. K. Grover (Retd.)
Director, SOMS, IGNOU Department of Commerce School of Management
University of Delhi, Delhi Studies IGNOU
Prof. R.P. Hooda
Former Vice-Chancellor Prof. K.V. Bhanumurthy (Retd.) Faculty Members
MD University, Rohtak Department of Commerce SOMS, IGNOU
University of Delhi, Delhi
Prof. B. R. Ananthan Prof. N V Narasimham
Former Vice-Chancellor Prof. Kavita Sharma
Prof. Nawal Kishor
Rani Chennamma University Department of Commerce
Belgaon, Karnataka University of Delhi, Delhi Prof. M.S.S. Raju
Prof. I. V. Trivedi Prof. Khurshid Ahmad Batt Dr. Sunil Kumar
Former Vice-Chancellor Dean, Faculty of Commerce &
Dr. Subodh Kesharwani
M. L. Sukhadia University, Management
Udaipur University of Kashmir, Srinagar Dr. Rashmi Bansal
Prof. Purushotham Rao (Retd.) Prof. Debabrata Mitra Dr. Madhulika P Sarkar
Department of Commerce Department of Commerce
Osmania University, Hyderabad University of North Bengal, Dr. Anupriya Pandey
Darjeeling
COURSE DESIGN COMMITTEE

Prof. Madhu Tyagi Prof. A.K. Singh Faculty Members
Director Department of Commerce SOMS, IGNOU
SOMS, IGNOU University of Delhi, Delhi Prof. N V Narasimham
Prof. D.K. Vaid (Retd.) Prof. Vijay Kumar Shrotriya Prof. Nawal Kishor
NCERT Delhi Department of Commerce Prof. M.S.S. Raju
University of Delhi, Delhi Dr. Sunil Kumar
Prof. Bhanu Murthy (Retd.)
Dr. Rajendra Maheshwari (Retd.) Dr. Subodh Kesharwani
Department of Commerce
University of Delhi, Delhi Ramanujan College Dr. Rashmi Bansal
University of Delhi, Delhi Dr. Madhulika P Sarkar
Dr. Anupriya Pandey
COURSE PREPARATION TEAM

Prof. Madhu Tyagi (Unit-2) Prof. Nawal Kishor
Prof. Bhanu Murthy (Unit-3) (Editor & Course Coordinator)
Dr. Subodh Kesharwani (Unit-2 and 4)
Business Organisation: ECO-01 (Editor & Course Coordinator)
(Unit-1 Revised by Dr. Subodh Kesharwani)
Prof. P. K Ghosh (Retd.), University of Delhi, Delhi
Dr. Nafis Baig (Retd.), AMU, Aligarh, UP
Dr. R.N Goyal (Retd.), Deshbandhu College
MATERIAL PRODUCTION
Mr. Y.N. Sharma Mr. Sudhir Kumar
Assistant Registrar (Publication) Section Officer (Pub.)
MPDD, IGNOU, New Delhi MPDD, IGNOU, New Delhi
May, 2019
© Indira Gandhi National Open University, 2019
ISBN:
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other
means, without permission in writing from the Indira Gandhi National Open University.
Further information on the Indira Gandhi National Open University courses may be obtained from the
University’s office at Maidan Garhi, New Delhi-110 068.
Printed and published on behalf of the Indira Gandhi National Open University, New Delhi, by the
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Laser typeset by Tessa Media & Computers, C-206, A.F.E-II, Jamia Nagar, New Delhi-110025
Printed at:
BLOCK 1 FOUNDATION OF INDIAN
BUSINESS
This is the first block on the course “Business Organisation and Management”.
This block will familiarise you to various dimensions of business including
technology, ethical dimension and emerging service on business opportunities.
This block will also expose you to the introductory aspect of business,
technological innovation, skill development, social responsibility, ethics, and
emerging opportunities in business. The block on the theme “Foundation of Indian
business” comprises of four units.
Unit 1: The very first unit of this particular block emphasizes on how does
business facilitate in generating revenue by producing or buying and selling
products (such as goods and services). This unit also focuses on the basic aspects
of business including its fundamental, features and rationale. It also explains
how is the business different from profession.
Unit 2: This unit explains the concept of innovation, its model and different
types. It deliberates on the significance of skill development and the initiatives
taken by government of India towards skill development including its different
strategies and approaches.
Unit 3: Every business has the responsibility to act ethically, alongwith obligations
to its different stake holders. This particular unit focuses on the ethics and
responsibilities which are required to comply with while performing business
activities.
Unit 4: There are a number of emerging trends that will influence future directions
in a current state of affairs in business. This unit deals with emerging trends in
business.
4
Introduction to
UNIT 1 INTRODUCTION TO BUSINESS Business
Structure
1.0 Objectives
1.1 Introduction
1.2 Human Activities
1.2.1 Non-economic Activities
1.2.2 Economic Activities
1.2.3 Sector of Economic Activities
1.3 Business, Profession and Employment
1.3.1 Business
1.3.2 Profession
1.3.3 Employment
1.3.4 Comparison among Business, Profession and Employment
1.4 Business
1.4.1 Essential Features of Business
1.4.2 Objectives of Business
1.5 Industry
15.1 Classification of Industry
1.6 Commerce
1.6.1 Trade
1.6.2 Aids to Trade
1.7 Micro, Small and Medium Size Enterprises
1.8 Let Us Sum Up
1.9 Key Words
1.10 Answers to Check Your Progress
1.11 Terminal Questions
1.0 OBJECTIVES
After going through the unit, you will be able to:
• identify broad categories of human activities
• describe what is business
• list the features and objectives of business
• classify business activities and their inter-relationship
• explain the nature of business organisation
• discuss the meaning and benefits of MSME
5
Foundation of
Indian Business
1.1 INTRODUCTION
In our day-to-day life, we use words like business, commerce, trade, industry,
etc. quite often. These words have a definite meaning in ‘Business
Organisation’. In this introductory unit, you will learn the exact connotation
of such terms. You will also learn the distinction between economic and non-
economic activities, objectives of business, the classification of business
activities, importance of organisation and the role of entrepreneur in business.
1.2 HUMAN ACTIVITIES

All of us participate in various kinds of works from the time we get up from
bed in the morning till the time we go to sleep at night. We get up from bed
in the morning, brush our teeth, take bath and get breakfast. Then children go
to school or college to study, elders go to office or factory or shop or field to
work, and housewives work at home. In the evening all of us come back
home, take food and sleep. All the activities in which we, thus, participate
from morning till night are called ‘human activities’.
If you closely examine the human activities, you will find that some of these
produce economic benefits e.g., working in a factory or in an office or at the
farm. Some other activities like brushing teeth, taking breakfast, going to
school, playing, cooking food for the family, etc., do not produce any direct
economic benefits. Thus, we can classify the human activities into two
groups: (1) non-economic activities, and (2) economic activities.
Human Activities
Economic Activities Non-Economic Activities
Business Profession Employment
Fig. 1.1: Classification of Human Activities
1.2.1 Non-economic Activities

These are the activities which are conducted by the human beings due to
love and affection, social obligation, religious obligation, physical
requirement, patriotism, etc., but not for earning money. The housewife
cooking for the family, children going to school and playing games, people
going to a temple or a mosque for prayer, a social worker working for the
uplift of the poor, etc., are some such examples. Persons who participate in
such activities do not get any direct economic benefit. Non-economic
activities are carried out with the motive of providing services to others with
a non-monetary objective. An example is the working of Non-Government
Organisations (NGOs). These activities are first and foremost undertaken for
satisfaction of personal, social, religious, cultural and sentimental
6
requirements of human beings. Non-Economic activities are described by Introduction to
Business
the nonappearance of a financial partner or where the cost paid by the
consumer is not corresponded to the expense of the product or service. A
few models are:
• Charitable activities: Labour searching for a social benefit purely based
on solidarity and without monetary advantages. For instance government
funded education institutes, community work or social assistance.
• Household activity: like tidying, washing dishes, child care, sewing

garments or home economics.
• Independency: Navigating under privileged and under marginalised

sectors of society in their upliftment and independence in order to meet
their livelihood.
• Voluntarily skilling: People who facilitate marginalised individuals in

achieving employment by training in skills.
1.2.2 Economic Activities

These are activities which are undertaken by human beings for earning
money or livelihood. These economic activities are concerned with
production, exchange and distribution of goods and services. For example, a
doctor works in the hospital, a teacher working in a school, an employee going
to his office, a farmer working in the field etc. They are all doing this to earn
his or her livelihood or to acquire wealth.
Table 1.1: Differences between Economic and Non-Economic Activities
Bases of Economic Activities Non-economic Activities
Difference
Meaning These are the activities which These are the activities which are
are performed for financial gain. performed to fulfill social,
These activities generate psychological and mental
revenue which may provide necessities. For example
financial stability to the functioning of NGO, like help
organisation for example age, save the children, CRY, etc.
working in the factory, office
etc.
Propose These activities are undertaken These activities are undertaken
with a financial motive. with social and mental needs.
Outcomes These activities result in the These activities result in personal
generation and dissemination of contentment.
goods and services.
Measurement These can be measured in These are measured in personal
financial terms. fulfillment terms.
Value These actions add value to the These activities do not add value
national income. to the national income.
Example An academician, a skilled A teacher teaching her own son, a
person, a doctor, lawyer, doctor treating poor patients
Chartered accountants, etc. without charging any fees, a boy
developing a software (website or
an App) which helps his father in
facilitating his business etc.
7
Foundation of 1.2.3 Sector of Economic Activities
Indian Business
The economic activities generate economic or financial achievement by
producing goods or services. The economic activity of any country can be
arranged into following division; primary sector, secondary sector and
tertiary sector. Economic activities are commenced with a cost-effective
intention. Non-economic activities, alternatively, do not have fiscal cause.
These activities are carried out on account of love, warmth, societal enriching
or spiritual reasons.
Fig. 1.2: Sector of Economic Activities
It is well understood from the Fig 1.2 that all the sectors work together to
create an economic chain of production. The primary sector gathers the raw
material, the secondary sector pulls the raw materials to use, tertiary sector
sells and supports the activities of the other two sectors.
– Primary economic sector: Primary sector is a sector which is related to

withdrawing materials required for production of goods. These are the
activities which are dependent upon nature. The examples of this sector
are: agriculture, breeding, forestry, fishery, hunting, and mining.
– Secondary economic sector: Secondary sector relates with the goods

produced by the raw materials of primary sector. Its example includes:
clothes made by the raw material of cotton, jute etc, the Indian Khadi
Industry, the construction of houses etc.
– Tertiary economic sector: Tertiary sector refers to the service

providing activities which can be seen in distinguish domains. Its
examples are: transportation work, disseminating education, medical
services etc. Other examples include: retail trade, real estate,
governmental and judicial activities, Insurance and financial services,
health services, media, transportation and storage, educational services,
hotels and restaurants, telecommunications, etc.
1.3 BUSINESS, PROFESSION AND EMPLOYMENT

We can further classify these economic activities into three groups:
8 (a) Business, (b) Profession, and (c) Employment.
Introduction to
1.3.1 Business Business
Any activity carried primarily with the object of earning profit can be called a
business activity. This objective of earning profit is achieved by production
and/or exchange of want satisfying goods and services. Therefore, we can
define business as “any activity concerned with the production and/or
exchange of want satisfying goods and services carried with a view of earning
profit”. Production of soaps, sale of eggs, production of TV sets, transport, etc.,
are some examples of business. A person who is engaged in business is called
a businessman or entrepreneur. Similarly, a firm formed for the purpose of
carrying a business activity is called a business enterprise or a business firm. You
will learn in detail about business later in this unit.
1.3.2 Profession
An activity which involves the rendering of personalised services of a
specialised nature, based on professional knowledge, education and training is
called a profession. Services rendered by doctors, lawyers, chartered
accountants, etc., come under this category. Generally, for each category of
profession, there would be a professional body. For example, Bar Council of
India is the professional body of lawyers which guides and regulates the law
profession in India. The professional body prescribes the nature and type of
educational qualifications and training required to practice the concerned
profession. A professional should become the member of concerned
professional body and follow the code of conduct prescribed by such body.
Professionals charge some fee for the professional service they render.
1.3.3 Employment
Any activity assigned to a person by the employer under an agreement or rules
of service comes under the category of employment. A person who
undertakes such activity is called employee. For performing such activity,
the employee receives remuneration from the employer in the form of wage
or salary, allowance, bonus, etc. The employment is also called ‘service’.
Working in a factory, office, hotel, college, etc., are a few examples of
employment. Even professionally qualified persons also work as employees in
various organisations. For example, doctors employed in government/ private
hospitals, engineers employed in a factory, etc.
Employment is an alliance between two parties, often dependent on an
agreement where work is compensated for. One party, which might be a
company, for profit, non-profit, association of persons, co-operative or any
other entity, is the employer and the other is the employee. Employment
refers to the contractual association between two parties i.e. employer and
employee. Employees work in return for payment, which may be in the form
of an hourly wage, by piecework or an annual salary as lump sum payment or
a contractual basis. This depends upon the work of an employee does or the
sector she or he works in. Under certain kinds of employment, employees
may receive perquisites beyond their regular payments. These include
gratuities, bonus payment or employee stock option plan (ESOP), health
insurance, housing, disability insurance or access to recreational service
during office hours. Employment is typically governed by employment laws
or regulations or legal contracts.
9
Foundation of Types of Employment
Indian Business
Employees can be recruited under several types of employments. The type of
employment under which an individual is employed is mentioned in the
employment contract. The employed person is bound by instructions,
directions regarding working hours, place of work, etc, mentioned in the
contract. The types of employment are as under:
• Full-time employment: Employment in which an individual works a
base number of hours put forth by the employer is known as full-time
employment. It is usually accompanied by benefits that are not ordinarily
offered to part time employees.
• Part-time employment: It is a form of employment where employees
work fewer hours per week than full-time employees. Such employees
are not entitled to all the benefits that full-time employees are given.
• Casual employment: Casual employees are recruited on an irregular
basis. Their engagement depends on the need and requirement of the
business.
• Contract employment: Employment done for a fixed term or for the
duration of a specific task is called contract employment. Employment is
over as soon as the contract finishes.
• Apprenticeship: Apprenticeship is a practice of training for individuals
in a particular trade or profession. A person undergoing apprenticeship is
called an apprentice. Apprentices have the benefit of full insurance
protection (sickness, accident, unemployment and pension insurance)
and have special shield against removal from office.
• Seasonal employment: Seasonal workers provide their services on
seasonal basis. For example, in the hotel and catering trade, seasonal
workers are subject to special cooperative settlement provisions
regarding their working time as well as full social insurance protection.
1.3.4 Comparison among Business, Profession and

Employment
Look at Table 1.2 which shows the comparison among Business, Profession
and Employment.
Although business, profession and employment are distinguished from each

other, they are also inter-dependent. Business enterprises provide
employment to a large number of people in the country. Similarly,
professionals like engineers, chartered accountants, cost accountants,
management consultants, legal experts, doctors, etc., work with the business
firms for tackling complicated technical problems. Thus, business enterprises
provide employment opportunities to professionals and general public. At the
same time the success of the business is dependent on its employees and
professionals working with it.
These three form a part of economic activities which have been bifurcated in
Table 1.2. The purpose behind this section is to distinguish among the
business, profession and employment and provide a bird’s eye view of the
10 same.
Introduction to
Table 1.2: Comparison among Business, Profession and Employment
Business
Basic Business Profession Employment
Mode of Entrepreneur’s Membership of a Appointment letter
establishment decision and other professional body and service
legal formalities, if and certificate of agreement
necessary practice
Nature of work Provision of goods Rendering of Performing work
and services to the personalised, as per service
public expert services contract or rules of
service
Qualification No minimum Expertise and Qualification and
qualification is training in a training as
necessary specific field is a prescribed by the
must employer
Reward or return Profit earned Professional fee Salary or wages
Capital investment Capital investment Limited capital No capital
required as per size needed for required
and nature of establishment
business
Risk Profits are Fee is generally Fixed and regular
uncertain and regular and pay; no risk
irregular, risk is certain; some risk
present
Transfer of interest Transfer possible Not possible Not possible
with some
formalities
Code of conduct No code of conduct Professional code Norms of behavior
is prescribed of conduct is to be laid down by the
followed employer are to be
followed.
1.4 BUSINESS
You have learnt that the entire range of economic activities of the human beings
may be classified into business, profession and employment. Among these three
categories, profession and employment, though important, are outside the scope
of this course. We are primarily concerned with business. So, let us discuss
about business in more detail.
1.4.1 Essential Features of Business
You have learnt that business refers to the human activities engaged in production
and/or exchange of want satisfying goods and services carried with the intention
of earning profits. Now let us study the important characteristics of business.
We can list the following five broad features of business.
1) Dealings in goods and services: Business deals with goods and
services. The goods may be consumer goods such as sweets, breads,
clothes, shoes, etc. They may be producer’s goods such as machinery,
equipment, etc., which are used to produce further goods for
consumption. Business also deals with services such as transport, 11
Foundation of warehousing, banking, insurance, etc., which are intangible and
Indian Business invisible.
2) Production and/or exchange: You can call an economic activity a
‘business’ only when there is production or transfer or exchange or
sale of goods or services for value. If goods are produced for
self-consumption or presentation as gift, such activities shall not be
treated as business. In a business activity, there must be two parties
i.e., a buyer and a seller. Such activity should concern with the
transfer of goods or exchange of goods between a buyer and a seller.
The goods may be bartered or exchanged for money.
3) Continuity and regularity in dealings: A single transaction shall not
be treated as business. An activity is treated as business only
when it is undertaken continually or at least recurrently. For example,
if a person sells his residential house, it is not considered as business. If
he repeatedly buys houses and sells to others, such activity comes
under business. But how frequently the transaction should occur
depends on the nature of the activity. For example, a ship building
company takes a long time to manufacture and sell a ship. At the same
time, a vegetable vendor purchases vegetables from the market in the
morning and sells out to his customers by evening. But both these
activities are treated as business.
4) Profit motive: Earning profit is the primary motive of business. This is
not to undermine the importance of the element of service in business
activity. In fact, a business will flourish only when it is able to serve its
customers to their satisfaction. Profits are essential to enable the
business to survive, to grow, expand, and to get recognition.
5) Element of risk: In every business, there is a possibility of incurring
loss. This possibility of incurring loss is termed as risk. The element
of risk exists due to a variety of factors which are outside the control of
the business enterprise. There are two kinds of risks. (1) Risks whose
probability can be calculated and can be insured. Losses due to fire,
floods, theft, etc., are some examples. (2) Risks whose probability
cannot be calculated and which cannot be insured against, e.g.,
changing technology, fall in demand, changing fashions, short
supply of raw materials, etc. These risks are to be completely borne by
the enterprise.
1.4.2 Objectives of Business

You have learnt that the primary objective of business is to earn profit.
Although profit plays an important role as a criterion of success, business
may not exist for long with the sole objective of earning profit. As stated
by Henry Ford, “business is not mere money chasing but it also should
aim at serving the community”. According to Urwick, “profit can no more
be the objective of a business than eating is the objective of living”. Thus,
serving the community is regarded as another important objective of business.
In fact, some authors regard ‘service to community’ as the major objective
of business and state that this provides the main justification for the
existence of business as an important human activity. Therefore, while
profit is necessary for the businessman to stay in business, he ought to aim at
12 something more for its survival and growth.
The objectives of business could be listed under three broad Introduction to
Business
headings: Let us learn them.
1. Economic Objectives: The primary objective of business are economic.
Some of the main economic objectives are:
• Earning of satisfactory profits.
• Exploring new markets and creation of more customers.
• Growth and expansion of business operations of the firm
• Making innovations and improvements in goods and services so that
customers get improved and more economic goods and services.
2. Social Objectives: Business, being a part of the society, has obligations

towards the society also. Some major social objectives are:
• Providing more and more employment opportunities to the people in
the country
• Supply of quality goods to the community
• Providing goods at reasonable price
• Ensure fair returns to investors
• Avoidance of profiteering and unfair practices
• Production of goods in accordance with national interests and
priorities.
3. Human Objectives: Business activity is, generally, carried out through
the human objectives of business and may thus take account of economic
well-being and the employees, social and psychological satisfaction of
employees as well as development of human resources.
You just recollect what we have stated about business. We stated that
business is concerned with production and/or exchange of goods and
services with the intention of earning profit. It states that business is
concerned with two aspects i.e. production and exchange. Based on this, we
may classify business activities into two categories. In the first category we
can group all the business activities relating to production. Similarly, all the
activities relating to exchange may be grouped under the second category.
The first category is known as industry’, while the second category is

called ‘commerce’ which will be discussed more elaborately under
separate head.
Thus, business organisation means bringing together various components of
business such as workforce, raw materials, machines, capital, energy etc. putting
them on work systematically, and coordinating and controlling their activities
effectively to achieve the objective of earning profit. Business may be owned
and managed by a single man, or a group of persons forming a partnership
firm or as a joint stock company or even as a cooperative society. Thus, on
the basis of ownership and management, we can classify business
organisation into two categories (sole proprietorship and partnership form) may
be called non-corporate forms of organisations. The remaining two categories
(company form and cooperative society) may be called as corporate forms of 13
Foundation of organisation. About these forms of organisation, you will study in details in
Indian Business Unit 5.
If you are planning to start a business, you should evaluate the merits and
demerits of each different business structure and work out which structure
suits the requirement. A business structure is a group of organisation that is
lawfully recognised in a given jurisdiction and characterised by the legal
definition of that particular type. On the basis of ownership and management
business may be classified into following category.
1. Sole Proprietorship
2. Partnership
3. Company
4. Co-operatives
You will learn in details in Unit 5.
Check Your Progress A

1) What is the main distinction between the economic activity and
non- economic activity?
………………………………………………………………………….
………………………………………………………………………….
………………………………………………………………………….
………………………………………………………………………….
………………………………………………………………………….
2) What is business?
………………………………………………………………………….
………………………………………………………………………….
………………………………………………………………………….
………………………………………………………………………….
………………………………………………………………………….
3) What is profession?
………………………………………………………………………….
………………………………………………………………………….
………………………………………………………………………….
………………………………………………………………………….
………………………………………………………………………….
4) What is employment?
………………………………………………………………………….
………………………………………………………………………….
………………………………………………………………………….
………………………………………………………………………….
14
5) Classify the following activities into business, profession and Introduction to
Business
employment.
Activity Classification
1 Selling vegetables. ……………………….
2 A person working in a medical shop as ……………………….
salesman.
3 A doctor working in a government hospital. ……………………….
4 A Chartered accountant started private practice. ……………………….
5 Manufacture of biscuits. ……………………….
6 Lawyer started private practice ……………………….
7 Transporting of goods. ……………………….
6) State whether the following statements are True or False
1 The sole objective of business is earning ……………………….
profit.
2 Profession is a non-economic activity. ……………………….
3 Employment is an economic activity. ……………………….
4 There is no element of risk in business ……………………….
5 Business is concerned only with the ……………………….
exchange of goods and services.
6 Industry is a part of business activity. ……………………….
7 Industry and commerce together constitute ……………………….
business activity.
8 An activity is treated as business when it is ……………………….
undertaken continuously or recurrently.
9 In case of profession, ownership interest ……………………….
can be transferred to others.
10 Activities taken up for earning money or ……………………….
livelihood are called economic activities.
11 Father teaching his daughter is an economic ……………………….
activity.
1.5 INDUSTRY
As you have learnt, industry refers to that part of business activities which is
concerned with the production of want satisfying goods/services through
utilisation of available material resources. Industry utilises the natural resources
and transfer them for final consumption or further use. It means that the
industrial activity aims at ensuring the supply of goods in that form which
suits the objects, needs and convenience of the persons expected to use them.
Thus, industry creates form utility to goods. For example, farms, factories,
mines, etc., make available a wide range of goods. These goods cater to the
needs and convenience of the people. In a nut shell, the activities of human
beings engaged in extraction, production, processing, construction and fabrication
of products come under industry.
15
Foundation of There is another explanation for industry. Under this second explanation, industry
Indian Business means a group of factories usually specialising in a particular product line. For
example, all the factories which produce fertiliser are collectively called fertiliser
industry. Similarly, all automobile factories together constitute automobile
industry. But, in the present context, this approach is not relevant. We adopt the
first approach.
1.5.1 Classification of Industry

There are various approaches of classifying industries. All these approaches
are listed below:
1) On the basis of the nature of activity
a) Extractive industries
b) Genetic industries
c) Manufacturing industries
d) Construction industries
2) On the basis of the nature of goods produced
a) Consumer goods industries
b) Producer goods industries
3) On the basis of the level of investment
a) Heavy industries
b) Light industries
4) On the basis of size of the activity
a) Small scale industries
b) Large scale industries
5) On the basis of area of operations
a) Regional industries
b) National industries
c) Multinational industries
Since the theme of the discussion in this Unit is centred around human
activity, the classification based on the nature of activity is more appropriate
for us. So, let us discuss about the first classification in detail.
a) Extractive Industries: Activities engaged in the discovery and

extraction of natural resources like minerals, animals, plants, trees, etc.,
from the surface or beneath the surface of the earth or air or water come
under this category. Extractive industries are also called exhaustive
industries because with every attempt there is a depletion of resources
and this wealth exhausts. Mining, farming, quarrying, hunting, fishing,
etc., come under this category.
b) Genetic Industries: Activities which are concerned with reproducing

and multiplying plants and animals with the objective of earning profit
from their sale come under this category. Examples are nurseries which
multiply and sell plants, poultry farms, cattle breeding farms, fish
culture, etc.
16
There is one important difference between an extractive industry and a Introduction to
Business
genetic industry. In the case of extractive industry, man cannot add to
the wealth which he withdraws from the earth, sea, and air. However, in
the case of genetic industry, man not only adds to the growth but also
reproduces the nature made goods.
c) Manufacturing Industries: These types of industries are engaged in the
conversion or transformation of raw-materials and semi-finished
materials into finished products. Generally, the products of extractive
industries become raw-materials for manufacturing industries.’ In other
words, manufacturing industries create ‘form utility’ to the products of
extractive industries. Cement industry, sugar industry, cotton textile
industry, iron and steel industry, fertiliser industry, etc., are some
examples for manufacturing industries.
d) Construction Industries: These industries are engaged in the
construction activities like the construction of buildings, bridges, dams,
roads, canals, railway lines, etc. These industries consume the products
of manufacturing industries (e.g., bricks, cement, iron and steel) and
extractive industries (e.g., quarries, wood). The products of construction
industries are immovable. They are erected, built or fabricated at a fixed
site.
Look at Fig 1.3 for classification of industries with some examples.
Extractive Genetic Industries Manufacturing Construction

Industries Industries Industries
e.g. Nurseries
e.g. Mining e.g. Iron & Steel e.g. Building
Fish culture
Farming Fertilizer Roads
Cattle breeding
Fishing Vanaspati Canals
Poultry farms
Quarrying Electronics Dams
Fig. 1.3: Classification of Industries Based on the Nature of the Activity.
When we talk of the nature of activity, we can also include the Service
Industry. These are the industries which do not produce any tangible products
but provides a service like tourism industry, entertainment industry etc.
Check Your Progress B
1) Distinguish between business and industry.
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
………………………………………………………………………… 17
Foundation of 2) Fill the missing texts inside the box numbered?
Indian Business
Human
Non- Economic Activities 1
2 Profession 3
4 Commerce
Extraction 5 6 7
3) To which category of industry the following activities belong:

Activities Category of Industry
i) Fishing in the sea ……………………………………….
ii) Raising coal from a mine ……………………………………….
iii) Weaving of cloth ……………………………………….
iv) Construction of a dam ……………………………………….
v) Preparing of wooden furniture ……………………………………….
vi) Cattle breeding ……………………………………….
vii) Development of railway track ……………………………………….
viii) Producing rail engine ……………………………………….
1.6 COMMERCE
You have learnt that the business activities are classified into: 1) industry,
and 2) commerce. You also learnt that the industrial activities are concerned
with the production of want satisfying goods and services. Unless these
goods and services are made available to those who need them, they may not
fulfill their objectives i.e., satisfying human wants. Therefore, the goods
produced by the industries should be made available to the consumers at right
place right time, right quantity, right price and in right manner. Here comes
the activity of commerce to fulfill all these requirements. All the activities
which establish link between the producers of goods and consumers of
these goods, and maintain a smooth and uninterrupted flow of goods
between them come under commerce.
A smooth and uninterrupted flow of goods and services from producer to
consumer is beset with many barriers and hindrances. For instance, goods
18
produced by one may be consumed by another. In such a case, unless the Introduction to
Business
producer and consumer identify each other, there is no scope for exchange of
goods between them. This is the hindrance of person. Similarly, for buying
a product, consumers should have the knowledge about the existence of that
product, its features, etc. Therefore, there is a need to provide such
information to the consumers. This is the hindrance of knowledge. The
hindrance of time arises out of the time gap between the time of production
and the time of consumption. In many cases goods are produced at one place
while they are consumed at another place. So, the goods should be carried
from the place of production to the place of consumption. This gives rise for
the hindrance of place. Commerce eliminates all these hindrances and
facilitates the exchange of goods between producers and consumers. Later, in
this section, you will learn in detail how these hindrances are eliminated
through various business activities which form part of commerce.
In a nutshell, commerce is mainly concerned with the purchase and sale of
goods, and also embraces all those functions which are essential for
maintaining smooth and uninterrupted flow of goods and services between
the buyers and sellers. Thus, there are two main aspects in commerce: i)
purchase and sale of goods, and ii) activities essential for the smooth and
uninterrupted flow of goods. Therefore, we can classify the whole range of
commerce activities into two categories:
1) Trade – activities of purchase and sale.
2) Aids to Trade – activities which facilitate the smooth and uninterrupted
flow of goods.
Let us learn them in detail.
1.6.1 Trade
You have already learnt that the human activities engaged in buying and
selling of goods and services come under trade. Therefore, trade includes
sale, transfer or exchange of goods and services with the intention of earning
profit. The objective of trade is to make goods available to those persons
who need them and are willing to pay for them. Thus, trade plays a major
role in establishing contact between the producers and the consumers and
eliminates the hindrance of person.
A person who is engaged in trade is called ‘trader’ or ‘middleman’. Various

traders operate in between producers and consumers and remove the
hindrance of person. We can classify trade into two broad categories; 1)
internal trade, and 2) external trade.
1) Internal Trade: When the trade takes place within the boundaries of
the country, you can call it ‘internal trade’. It means that both buying
and selling should take place within the country. Payment for the same is
generally made in national currency. This internal trade is also termed as
inland trade or national trade or home trade or domestic trade.
On the basis of the scale of operations, we can classify internal trade

into: a) wholesale trade, and b) retail trade.
19
Foundation of a) Wholesale Trade: Buying and selling in relatively larger quantities
Indian Business is called wholesale trade. A person who is involved in wholesale
trade is called wholesaler.
b) Retail Trade: This refers to buying and selling in relatively smaller

quantities. A person engaged in retail trade is called a retailer.
Let us now discuss in some detail how these wholesalers and retailers
operate and eliminate the hindrance of person. A wholesale trader buys
goods in large quantities from the manufacturers and sells in relatively
smaller quantities to the retailers. Thus, the wholesale traders constitute
a link between the producers on the one hand and the retailers on the
other hand. Retailers, who buy goods from the wholesalers, sell them in
smaller quantities to the consumers. Thus, retail traders establish link
between wholesale traders on the one hand and consumers on the other.
Thus, the wholesalers and retailers establish a link between the
producers and consumers and eliminate the hindrance of person.
However, sometimes producers may take the services of only either
wholesalers or retailers, or may establish a direct link with the
consumers. The whole chain of traders/middlemen operating in between
producer and consumer is referred to as ‘channel of distribution’.
2) External trade: This is also called ‘foreign trade’ or ‘international

trade’. When the trade takes place across the boundaries of a country,
you can call such trade as external trade. In other words, external trade
refers to the trade between nations. This trade could be in the form of
exchange of one commodity for another or for money.
We can classify foreign trade into three categories: a) import trade, b)

export trade, and c) re-export trade.
a) Import Trade: when a country buys goods from another country,

it is called ‘import trade’. For example, India bought machinery
from the USA. This is an import trade for India.
b) Export Trade: when a country sells goods to another country, it is

called ‘Export Trade’. For example, India sells leather goods to
Russia, and tea to USA. For India such selling of goods shall be
termed as ‘Export trade’.
c) Re-export Trade: This is also called ‘entrepot trade’. When the

goods are imported from one country and the same are exported to
another country, such trade is called ‘re-export trade’. Re-export is
done by those countries which have ports that are conveniently
situated to serve as distributing points for neighbouring countries.
Such countries import large quantities of goods and re-export the
same to the neighbouring countries.
1.6.2 Aids to Trade

Activities which facilitate the trade are called ‘aids to trade’. Thus, all human
activities which eliminate the hindrances and facilitate the flow of goods
from producers to consumers come under aids to trade. They are also called
20 ‘auxiliaries to trade’. The whole range of activities coming under aids to trade
may be classified into five categories: 1) transportation, 2) warehousing, Introduction to
Business
3) insurance, 4) advertising, and 5) banking. Let us learn them.
1) Transportation: Generally, all the goods are not consumed at the same
place where they are produced. Therefore, goods are to be moved from
the place of production to the place where they are demanded. The
activity which is concerned with such movement of goods is called
‘transportation’. Thus, transportation eliminates the hindrance of place
and creates place utility to goods.
Transportation can be of three types:

a) Land transportation — road, rail
b) Air transportation — aeroplane
c) Water transportation — boat, ship
2) Warehousing: Goods may not be consumed immediately after

production. Normally there will be time gap between production and
consumption. This is the hindrance of time. Therefore, goods once
produced should be preserved properly till they are consumed.
Particularly, perishable goods like milk, meat, vegetables, flowers, etc.,
should be preserved very carefully. Otherwise, they get spoiled and
become useless. For this reason warehousing is recognised as yet
another aid to trade. Warehousing refers to preservation of goods to
make them available as and when needed by consumers. Thus,
warehousing eliminates the hindrance of time and provides time utility
to goods.
3) Insurance: The goods may be destroyed while in production process, or

in transit due to accidents, or in storage due to fire or theft, etc. The
businessmen would like to cover these risks. Insurance companies come
to their rescue in this regard. They undertake to compensate the loss
suffered due to such risks. For this purpose, the business has to take an
‘insurance policy’ and pay a certain amount regularly, called ‘premium’.
Thus, insurance eliminates the hindrance of risk.
4) Advertising: Exchange of goods is possible only when the consumers

have the knowledge about the existence of a product. This is the
hindrance of knowledge. This hindrance is eliminated through
advertising. Through advertisement, producers communicate all
information “about their goods to the prospective consumers’ and create
in them a strong desire to buy the product. Thus, advertising facilitates
the flow of goods between producers and consumers by bringing the
knowledge about the products to the consumers. Advertising is done
through TV, radio, newspapers, magazines, hoardings, wall posters, etc.
5) Banking: Banking facilitates the flow of goods by removing the

hindrance of finance and credit. Now-a-days we cannot think of business
without banks. To start the business or to run it smoothly we require
money. Banks supply money. A bank is an organisation which accepts
deposits of money from the public, withdrawal on demand or otherwise,
and lends the same to those who need it. Banks also provide many
services required for the business activity.
21
Foundation of Look at Fig. 1.4 for classification and sub-classification of commerce.
Indian Business
Commerce
Trade Aids to Trade
Internal Trade External Trade
Wholesale Retail Import Export Re-export

Trade Trade Trade Trade Traders
Transportation Warehousing Banking Insurance Banner
Fig. 1.4: Classification of Commerce
Check Your Progress C

1) What is the difference between commerce and industry?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) What is the difference between internal trade and external trade?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) How is trade different from commerce?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
22
4) A list of hindrances are given below. State the names of the business Introduction to
Business
activities which eliminate them
Hindrance Name of the Business Activity
i) Hindrance of distance ......................................................
ii) Hindrance of time ......................................................
iii) Hindrance of risk ......................................................
iv) Hindrance of finance ......................................................
v) Hindrance of knowledge ......................................................
vi) Hindrance of person ......................................................
5) State whether the following statements are True or False.

i) Trade is concerned with buying and selling of
goods. True  False 
ii) A person who buys and sells in smaller quantities is called
wholesaler. True  False 
iii) When goods are sold in another country, it is called export trade.
True  False 
iv) Activities which facilitate buying and selling come under aids to
trade. True  False 
v) Import trade refers to buying goods in one country and selling the
same in another country. True  False 
vi) Internal trade refers to buying and selling within the national
boundaries. True  False 
vii) Retailer establishes link between wholesaler and consumer.
True  False 
viii) External trade is also called home trade. True  False 
1.7 MICRO, SMALL AND MEDIUM SIZE

ENTERPRISES
The Ministry of Micro, Small and Medium Enterprise (MSME) is the apex
body for the formulation and administration of rules, regulations and laws
relating to micro, small and medium enterprises in India. The sector provides
a wide range of services and is engaged in the manufacturing of over 6,000
products – ranging from traditional to hi-tech items.
MSME sized enterprises in both the manufacturing and service sector can obtain
MSME registration or SSI registration under the MSMED Act. MSME registration
provides a variety of benefits such as rate of interest charged would be very less, tax
subsidies, capital investment subsidies and other support from the government
sector. Micro, Small and Medium Enterprises Development (MSMED) Act,
2006. , defines Micro, small and medium enterprises based on the investment.
1) The investment in plant and machinery for those engaged in
manufacturing or production, processing or preservation of goods, and
23
Foundation of 2) The investment in equipment for enterprises engaged in providing or
Indian Business
rendering of services.
The guidelines with regard to investment in plant and machinery or

equipment as defined in the MSMED Act, 2006 are:
Table.1.3: Micro, Small and Medium Enterprises

Nature of Investment in plant and Investment in equipment
activity of the machinery excluding land and excluding land and building
Enterprise building for enterprises engaged for enterprises engaged in
in manufacturing or production, providing or rendering of
processing or preservation of services (loans up to Rs 1
goods crore)
Micro Not exceeding Rs.25.00 lakhs Not exceeding Rs.10.00
lakhs
Small More than Rs.25.00 lakhs but More than Rs.10.00 lakhs
does not exceed Rs.5. crore but does not exceed Rs.2
crores
Medium More than Rs. 5 crore but does More than Rs. 2 crores but
not exceed Rs. 10 crore does not exceed Rs.5 crores
Given the government of India’s latest ‘Make in India’ push, along with a
significant jump in the FDI flows, the Indian MSMEs sector is poised for
rapid growth and integration with major global value chains.
Benefits of Registration as MSME or Udyog Aadhar
To promote the growth of Micro Small & Medium Enterprises, the

government of India gives various concessions and extends financial
assistance exclusively to the units or enterprises which qualify to be a micro,
small or medium enterprises. Under MSME all kinds of enterprises can
obtain registration, like manufacturers, the service providers are also eligible
for MSME benefits. Hence, they are also required to get Udyog Aadhar
Registration.
The MSME registration is not statutory. However, the MSME registration

process in India has been conceptualised to provide maximum benefits to all
types of enterprises. After registration, any enterprise becomes qualified to
reap the benefits offered under the MSMED Act.
• Easy availability of loan

• Government procurement priority
• Low-interest overdraft
• Concessional electricity
• Rebate in taxes (under the MSMED Act, 2006)
• 50% discount on IP Protection
• MSME Conciliation Centre.
24
Banking Laws, Excise Law and the Direct Taxes Law have incorporated the Introduction to
Business
word MSME in their exemption notifications. Therefore, the registration
certificate issued by the registering authority is seen as proof of being MSME
and is required to avail the benefits sanctioned for MSMEs.
1.8 LET US SUM UP

The whole range of human activities can be classified into: 1) economic
activities, and 2) non-economic activities. Economic activities are further
divided into: 1) business, 2) profession, and 3) employment. Business is
concerned with production and/or exchange of goods and services carried
with the primary objective of earning profits. Activities concerned with the
rendering of personalised services of a specialised nature come under
profession. Employment refers to the activity assigned to a person by the
employer under an agreement or rules of service.
The main features of business activity are: 1) dealings in goods and services,
2) production and/or exchange, 3) regularity in dealings, 4) profit motive,
5) element of risk, and 6) enterprise. Besides earning profit, business also
serves certain economic, social, and human objectives.
Business activities are classified into: 1) industry, and 2) commerce.

Industrial activities are classified into four categories: 1) extractive industries,
2) genetic industries, 3) manufacturing industries, and 4) construction
industries.
Commerce is classified into: 1) trade, and 2) aids to trade. Activities

concerned with buying and selling come under trade. Activities which
facilitate buying and selling, and maintain smooth flow of goods and services
come under aids to trade. These are: 1) transportation, 2) warehousing,
3) banking, 4) insurance, and 5) advertising.
Organisation makes the business proposition into a reality. It brings together

required components, puts them on work systematically, and coordinates and
controls their activities effectively to achieve the objective of earning profit.
There are four basic forms of business organisation: 1) sole proprietorship, 2)
partnership, 3) company, and 4) cooperative society. All business starts with
an idea. A person who conceives the idea of doing a particular type of
business, mobilise the resources and bring the organisation into existence is
called an entrepreneur. Certain common elements in the character of
entrepreneurs include independence, hard work, desire to achieve goals,
open-mindedness, optimistic outlook etc.
Micro, Small and Medium Enterprises (MSME) are classified in two Classes:
Manufacturing Enterprises i.e. the enterprises engaged in the manufacture or

production of goods pertaining to any industry or employing plant and
machinery in the process of value addition to the final product having a
distinct name or character or use. Service Enterprises refer to the enterprises
engaged in providing or rendering of services and are defined in terms of
investment in equipment.
25
Foundation of
Indian Business
1.9 KEY WORDS
Advertising: An activity by which the product and its qualities are made
known to the public for stimulating demand.
Aids to Trade: Activities which facilitate the smooth and uninterrupted flow
of goods and services from producers to consumers.
Banking: An activity of mobilising money deposits from public and giving
loans to the needy.
Business Organisation: Bringing together various components of business
such as workforce, raw-materials, machines, capital, energy, etc., putting
them on work systematically, and coordinating and controlling their activities
to achieve the objectives of business.
Business: An activity of production and/or exchange of want satisfying
goods and services carried with the primary intention of earning profits.
Commerce: Activities related to purchases and sales of goods, and those
concerned with maintaining a smooth and uninterrupted flow of goods and
services between buyers and sellers.
Construction Industry: Industry engaged in the construction of buildings,
bridges, roads, dams, canals, railway lines, etc.
Economic Activities: Activities which are undertaken by human beings for
earning money or livelihood.
Economic activities: Economic activity can be defined as any activity that
involves money or the exchange of products or services.
Employment: Activity of working with an employer under agreement or
rules of service.
Entrepreneur: A person who conceives the business idea, brings the
organisation into existence, carries on the business activity, and is prepared to
bear the risk of loss.
Export Trade: Selling goods in another country.
External Trade: Purchase and sale of goods and services across the
boundaries of a country.
Extractive Industry: Industry engaged in the discovery and extraction of
natural resources like minerals, animals, plants, trees, etc. from the surface or
beneath the surface of earth or air or water.
Genetic Industry: Industry engaged in reproduction and multiplication of
plants and animals with the objective of earning profit from their sale.
Human activity: Those works which are performed by human beings in
order to satisfy their needs are acknowledged as human activities.
Import Trade: Buying goods from another country.
26
Introduction to
Industry: Activities engaged in the production of goods and services by
Business
utilising available material resources.
Insurance: Covering risk of loss arising from events like fire, accident, etc.,
by paying certain premium to insurance company.
Internal Trade: Purchase and sale of goods and services within the
boundaries of a country.
Manufacturing Industry: Industry concerned with the conversion or
transformation of raw-materials and semi-finished goods into finished
products.
Non-Economic Activities: Activities which are undertaken by human beings
due to love and affection, social obligation, religious obligation, patriotism,
physical requirement, etc., but not for earning money.
Profession: Activity which involves the rendering of personalised services of
a specialised nature based on professional knowledge, education, and
training.
Re-export Trade: Importing goods from one country and exporting the same
to another country. It is also called Entreport trade.
Retail Trade: Buying goods from wholesalers in large quantities and selling
these in small quantities to consumers.
Secondary economic sector: Secondary sector is a segment related with the
goods produced by the raw materials of primary sector such as construction,
generation and distribution of clean water, electricity, and gas.
Tertiary economic sector: Tertiary sector refers to the service providing
activities, like teaching work, Doctor etc, for the reason that they are
providing us only service.
Trade: Activities concerned with the buying and selling of goods and
services.
Transportation: Activities engaged in the moving of goods from one place
to another.
Warehousing: Activities engaged in the preservation of goods to make them
available as and when needed by consumers.
Wholesale Trade: Buying goods from producers in large quantities and
selling them to retailers in smaller quantities.
1.10 ANSWERS TO CHECK YOUR PROGRESS

A) 5 (1) Business (2) Employment (3) Employment (4) Profession
(5) Business (6) Profession (7) Business
6 (1) False (2) False (3) True (4) False (5) False (6) True (7) True
(8) True (9) False (10) True (11) False
B) 2 (1) Economic Activities (2) Employment (3) Business (4) Industry
(5) Genetic (6) Manufacturing (7) Construction
27
Foundation of 3 (i) Extractive (ii) Extractive (iii) Manufacture (iv) Construction
Indian Business (v) Manufacture (vi) Genetic (vii) Construction (viii) Manufacture
C) 4 (i) Transportation (ii) Storage (iii) Insurance (iv) Banking
(v) Advertising (vi) Trade
5 (i)True (ii) False (iii) True, (iv) True (v) False (vi) True (vii) True
(viii) False
1.11 TERMINAL QUESTIONS

1) What are human activities? What are its two types?
2) What are differences between economic and non-economic activities?
3) What is business? Explain its features and objectives.
4) Explain the different types of employment?
5) State the differences among business, profession and employment.
6) What are the different types of industries on various basis.
7) What is Trade? Explain various types of Trade?
8) What are different aids to Trade?
9) What are Micro small and medium size enterprises (MSME)? State the
benefits of registration as MSME or Udyog Aadhar.
Note: These questions will help you to understand the unit better. Try to
write answers for them. But do not send your answers to the
university. These are for your practice.
28
Technological
UNIT 2 TECHNOLOGICAL INNOVATION Innovation and
AND SKILL DEVELOPMENT

Skill Development
Structure
2.0 Objectives
2.1 Introduction
2.2 Innovation
2.2.1 Meaning of Innovation
2.2.2 Meaning of Invention
2.2.3 Meaning of Creativity
2.2.4 Difference among Creativity, Invention and Innovation
2.2.5 Importance of Innovation
2.3 Technological Innovation
2.3.1 Process of Innovation
2.3.2 Types of Innovation
2.4 Make in India v/s Made in India
2.5 Digital India
2.6 Skill Development: Approaches and Strategies
2.6.1 Skill Development Initiatives
2.6.2 National Skill Development Corporation
2.7 Start-up India and Incubator
2.8 Let Us Sum Up
2.9 Key Words
2.0 OBJECTIVES
After studying this unit, you will be able to:
• discuss the concept of innovation and explain different types of
innovation
• describe the meaning of technological Innovation
• examine the issues and challenges of innovative activities
• describe the concept of technological innovation
• explain the various government initiatives for skill development; and
• identify government skill development approaches in India.
2.1 INTRODUCTION
Technology is the most widely used word globally and has taken different
forms. Technology includes invention, innovation, R&D, technology
development, technology strategies etc. With new technological development
coming up everyday, ‘Innovation’ too has gained importance. It is being 29
Foundation of discussed in every walk of life. The concept of innovation in unorganised
Indian Business form has existed for ages but has developed in organised form only in the 20th
century. This unit focuses on different aspects of innovation and
technological innovation and how does it help in facilitating various activities
in different sections of society. In this unit you will learn how has technology
evolved and how has the concept of innovation taken its present form. In
subsequent sections you will learn various aspects of innovation and different
types of innovation. You will also learn concept of technological innovation
and various government initiatives for skill development. This unit will also
help you to identify such challenges. The process of innovation will help you
in understanding the role of innovation in the present context and how it can
help the business in developing competitive advantage. You will also learn
various government initiatives for skill development which has facilitated the
innovative activities.
2.2 INNOVATION
Innovation in its current connotation is a "new idea, creative thoughts, and
new imaginations in the form of mechanism or technique". Innovation refers
to the application of better solutions that meet new necessities, tacit needs, or
existing market needs. Thus Innovation involves purposeful application of
information, thoughts and scheme in deriving better or dissimilar values from
resources, and includes all procedure by which new ideas are created and
transformed into constructive products.
2.2.1 Meaning of Innovation

The word innovation comes form the latin word innovationem, noun of action
from innovare, is to make something new. Now an important question arises:
Can a bright idea be used only once? The answer to this question is ‘No’.
there are many ideas which have been used for centuries and can be revised
with a new thought process and more flexibility. Take the example of a tooth
brush. We all have been using it since our childhood. If we go back a little
and try to think, we will see that our ancestors used neem sticks (datoon) for
cleaning their teeth. The ‘idea’ was to clean teeth and over the period the
neem stick has evolved into a tooth brush. The same idea is now used in the
form of battery operated tooth brushes where you do not have to manually
clean the teeth. If we see the whole process, we find that at different ages and
at different stages the same idea was used in different innovative ways.
Another example can be of mobile/ cell phones. This is an example where an
idea has taken different forms and evolved in the present form. A decade
back no body would have thought of receiving mails on a mobile phone. But
now it is an integral part. Now, the question arises ‘what is an innovation?’ If
we go by the business dictionary ‘Innovation is the process of translating an
idea or invention into a good or service that creates value for which
customers will pay’ (business dictionary.com). At this point another question
arises ‘How can an idea be called as an innovation?’. An idea can only be
called an innovation when it is replicable, economical and satisfies a specific
need e.g. nasofilters. Nasofilters is a respiratory nasal filter that sticks to your
nose and prevents entry of harmful air/pollutants (PM 2.5) and they are
economical than the traditional anti pollution masks. There are number of
such innovations.
30
Technological
2.2.2 Meaning of Invention Innovation and
Skill Development
The words innovation and invention partly cover semantically but are
actually quite different. Invention can refer to a type of musical masterpiece,
a false hood, a discovery, or any product of the imagination. The sense of
invention most probable to be confused with innovation is “a device,
contrivance, or process originated after study and experiment,” frequently
amazing which has not beforehand been in existence.
2.2.3 Meaning of Creativity

Creativity is the act of turning new and creative ideas into reality. It is
featured by the ability to recognise the world in new ways, to find unknown
patterns, to make connections between apparently unrelated phenomena, and
to gather solutions. Basic elements of the concept of creativity include:
intelligence, intensive interest, knowledge, originality (ideas), creative
instinct, non-conformity, courage, and persistence.
2.2.4 Difference among Creativity, Invention and Innovation

Invention is an idea for a novel product or process. Innovation is the
introduction of new products, processes or services into the market place.
Technological innovation is a sub-set of innovation i.e. the introduction of
new products, processes or services based on new technologies. The
technological innovation begins with invention. We will discuss
technological innovation in the subsequent section. The first step is the idea
of the invention and the research to reduce the idea to practice. This often
results in a functional proto-types, which can be used for filing a patent. The
next step is the research and development of the proto-type into a
commercially designed product. Finally, the product is produced and sold.
The distinction between invention and innovation is an important one, for the
transformation from ideas into a successful product is actually difficult. This
transformation is the heart of the complex process of innovation. The hard
fact is that only a few inventions are successfully innovated, with fewer
inventions developed into new products, and still fewer new products succeed
commercially.
Table 2.1: Difference among Creativity, Invention and Innovation

S. No Creativity Invention Innovation
1. Creativity is novel ideas that Creating something Making the invention
are communicated, useful, and new into a product form
appealing.
2. Creativity is a fuzzy idea and A new to the world Innovation is about
can not be clarified until it is discovered or changing a pattern for
made into a prototype created doing something
3. Based on thinking up new Based on primary Based on broad set of

thing scientific skills strategic marketing and
technical skills.
The above discussion clearly shows that innovation refers to the introduction
of a new product. It basically improves an existing concept or idea using a 31
Foundation of step-wise process to create a product which is commercially viable.
Indian Business Innovation helps an idea to develop into a successful concept. This requires a
specific process. For an innovation to be successful one must understand the
process of innovation thoroughly and have a strong support system. Before
we discuss the process of innovation, let us see the importance of innovation.
2.2.5 Importance of Innovation

Innovation helps in solving problems e.g. providing customer services
virtually (using online complaints, suggestions etc). It also in new ways , for
example helps in adapting to change to the situations where rapid changes are
happening like in technological arena. This also helps the business to remain
relevant. The opportunities available to businesses worldwide due to
globalisation can be tapped using innovation. It is important for the
businesses to innovate so as to enter the foreign markets with new products.
Innovation helps organisations to face the competition. We all know that the
world is becoming more and more competitive. To sustain in the global
market one must make strategic and innovative moves. Innovation is
important and critical to ensure smooth running of organisations due to
evolving work place dynamics. As you are aware that the tastes and
preferences of customers keep on changing, therefore, innovation facilitates
in satisfying the consumers in new ways.
It is true that innovation is important but it also has certain challenges and
risks associated with it. Technological failure is one of the major challenges
of innovation. To overcome this challenge, it is important for the
organisations to carry out number of trials for the new product before it is
implemented. The other risk is the financial burden on the organisation.
Innovation comes with a cost. Usually an innovative product gives the returns
in the long run, therefore the organisation face a major challenge of finance.
The organisations, therefore, are required to assess their financial position
before taking up any innovative procedure. The other challenge is the market
failure. It is very much possible that an innovative product despite many trials
does not give the returns as expected. Redundancy is another challenge for an
innovative product. The market changes constantly with new technology
coming up every now and then. By the time the innovative product is
launched in the market, it becomes redundant due to technological up-
gradation. Therefore , it is imperative for the organisations to keep abreast
with the technology to avoid such risks. Lack of structural and financial
capacity of implementation is another challenge for organisations. This
challenge is usually for the start-ups as they do not have a sound base. In this
case they can look for the partners who are sound. Organisational risks are
associated with innovation. Usually an organisation tend to focus all its
attention on the innovation. This hinders day to day activities of the
organisation. Therefore, it is important for organisations to have separate
innovation centres so that the daily activities of the organisation are not
hindered. There are unforeseen risks associated which are unprecedented like
political events etc. The organisations need to have a contingency plan for the
same rather than being over ambitious. The challenges are definitely a part
and parcel of an organisation but when overcome, these turn into
opportunities. Innovation does help the organisations in many ways. It
provides experience to the organisation. It, therefore, becomes more creative
and the innovative organisations. Innovation does provide name and
32 recognition to the innovating organisation.
Technological
2.3 TECHNOLOGICAL INNOVATION Innovation and
Skill Development
Let us start with the definition of technology. Though there are many
definitions of technology and it is difficult to find one unique definition for
technology. Technology can be defined as an application of knowledge that
leads to production and marketing of goods and services. According to Betz
Technology develops business by providing technical knowledge for the
goods and services that firm produces. Technological Innovation implies new
technology, creating new products and services—hence new business
opportunities. In this lies the basic importance of innovation which is
fundamental to economic development i.e. the creation of business
opportunities. Managing technology means using new technology to create
competitive advantages. Technology is often thought to be a sole domain of
the scientific and engineering section of an organisation. Yet successful use
of technology requires strategic decisions about technology in other
functional areas, such as production, marketing sales, finance, HR etc.
Therefore, it is important to bridge technological and functional areas.
Technology and innovation when combined together lead to technological
innovation. The basic aim of technology management is to implement the
technology and float it in the market, e.g. agricultural produce like harvesting
use technology. The myth that IT is related only to computers and electronics
is not true.It is far more than that. Introduction of life saving drugs using
technology is another example of technological innovation. Technological
innovation is a part of the total innovation discipline. Technological
innovation therefore, has the following features:
• Generate or create a new idea which is based on technology, capability

or knowledge (invention);
• Develop the idea into a reality leading to building of a product
(realisation);
• Implement the new idea (implementation)
To summarise, the working definition of technological innovation is to create
or produce a new solution for a real or perceived need (invention) which is
viable and can be produced (realisation and then successfully introduce the
product in the market i.e. implementation).
2.3.1 Process of Innovation

After discussing different aspects of innovation, let us now have a brief
discussion related to the process of innovation. The process of innovation has
five basic steps. These steps are follows:
1) Idea Generation and Mobilisation

2) Advocacy and Screening
3) Experimentation
4) Commercialisation
5) Diffusion and Implementation
33
Foundation of 1) Idea Generation and Mobilisation : The very first step of the process
Indian Business of innovation stresses on generating an idea and then floating it. A new
idea can be new or can be created to improve an existing idea. A very
popular example is that of Apple. Apple inc. waited for three years to
introduce iPod after MP3 players were introduced. The idea was
generated when MP3 players came into existence but the organisation
waited before launching the product. During this step the customers,
employees, public at large and partner/supplier innovation should be
considered.
2) Advocacy and Screening: The second step involves screening of

ideas. The idea with maximum opportunity and having a futuristic
outlook is chosen. The screening is preceded by advocacy. The idea
generators do not have skills to advocate their ideas so it is important
for the managers working in the field to facilitate the idea which can
then be considered for screening.
3) Experimentation: This is the testing stage where the selected ideas are
tested in the targeted market. The testing can be continuous or in phases
wherein the advocates and screeners can reevaluate the idea. Time is
the most important factor in this case. A very good example is Amazon.
Amazon in 2007 came up with the idea of launching grocery delivery
service and it tested the experiment in the suburbs of Seattle. Once it
was ensured that the experiment is successful then it launched it in
other parts of the country.
4) Commercialisation: The main aim of this step is to create a market

value for the idea and focus on its potential impact. The innovated
product can be launched in the target market only when it meets the
demands of the customers.
5) Diffuison and implementation: This step involves two stages i.e.

diffusion and implementation. Diffusion is the stage where an
organisation accepts the innovation and implementation is the stage
when the idea is developed or produced.
If the above steps are applied along with proper resources, the innovation
may be successful.
2.3.2 Types of Innovation

Innovation can be broken down into two dimensions: Technology and Market
and based on these dimensions there are following four types of innovation
(Lopez, 2015):
1) Incremental Innovation
2) Disruptive innovation
3) Architectural Innovation
4) Radical Innovation
34
1) Incremental Innovation: This is the most popular type of innovation Technological
Innovation and
which utilises the existing technology thereby increasing the value to Skill Development
the customer. Usually all types of organisations at one point of time
engage in incremental innovation. For example Facebook. This social
network company since its inception in 2004 has used incremental
innovation in different forms.
2) Disruptive Innovation: This type of innovation is also known as

stealth(secret) innovation. This uses new technology processes to the
organisations current market. It is secretive in nature as this technology
tend to be inferior than the existing technology in the market and is
more expensive. The new technology initially is quite hard to use till it
surpasses the old technology and disrupts all existing organisations. In
this case the organisation going in for new technology gains a
competitive advantage. Apple’s iPhone is an example of disruptive
innovation wherein it disrupted the mobile phone market.
3) Architectural Innovation: This type of innovation takes the lessons,

skills and overall technology and applying the same in the different
market. Organisations in computer business like IBM, Dell etc. have
been using sustaining technologies with little modification to suit the
design. This type of innovation is less risky.
4) Radical Innovation: This kind of innovation usually gives birth to new

ideas consuming the old ones thereby creating a revolutionary
technology. A good example of the same is crowd funding as a mode of
financing being used by entrepreneurs.
The organisations use various types of innovation which best suits their
needs.

1) What is Innovation?
…………………………………………………………………………..
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2) What are the features of Technological Innovation?
…………………………………………………………………………..
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3) Name the different types of Innovation?
…………………………………………………………………………..
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…………………………………………………………………………..
35
Foundation of
Indian Business
2.4 MAKE IN INDIA V/S MADE IN INDIA
Make in India
‘Make in India’ is the initiative of Government of India and was launched in
2014. The concept of this initiative dates back to 1901 in the pre-independent
India. Dadabhai Nauroji is considered to be the brain behind this concept
when he disagreed with the export of raw materials as part of British
Economic Policy. The basic concept of ‘Make in India’ encourages the
industrialists to setup their manufacturing units in India through Foreign
Direct Investment (FDI) so as to put India on the global map with respect to
manufacturing. The objective of this programme are as follows:
• To solve the problem of employment;
• To improve the GDP growth rate.
These objectives tend to be highly ambitious but if implemented well will
give a boost to Indian economy and help build a solid infrastructure of the
nation. This policy has some drawbacks also. The plan to invite FDIs for
utilising India’s potential places India in a vulnerable position. The risk is
high as the expenditures in terms of licensing costs etc. are high. This may
also result in the capital outflow. This will lead to unemployment and thereby
adversely affecting the GDP which is against the objectives of ‘Make in
India’ programme. The highlights of ‘ Make in India’ programme are:
• FDI to invest in the manufacturing sector;
• FDI to invest in the defense sector;
• Licensed manufacturing of foreign defense equipment under defense
procurement (DPP).
• Despite drawbacks this scheme can be advantageous. To overcome the
drawbacks of this scheme ‘Made in India’ can be an alternative.
Made in India
It is a tag line given to the products manufacturing in India. You must have
often witnessed that the products like apparels and accessories, consumer
durables etc. having a caption mentioned in the specifications of the products
like Made in India, Made in USA, Made in China etc. How, is it that a
product gets the tag of Made in India? The product can only be tagged as
made in India when the product has been manufacture with Indigenous
factors of productions which are land, labour, capital, entrepreneurship and
technology. ‘Made in India’ can overcome the challenges posed by ‘Make in
India’. How can it be done? It can be done by promoting the products made
in India. This will help in utilising national talent and resources thereby
generating opportunities for employment. This can also be used as a platform
for promoting start-up. The main advantage of promoting Made in India
would be to promote the brand image of the country and place the country on
the global pedestal. Indigenously made products like jute products promote
the economy of the nation. ‘Made in India’ can averse the risks posed by
‘Make in India’. Table 2.2 gives basic differences between ‘Made in India’
and ‘Make in India’.
36
Technological
Table 2.2: Differences between ‘Make in India’ and ‘Made in India’
Innovation and
Skill Development
Sl. No. Particulars Make in India Made in India
1. Factors of Foreign Domestic
production
2. Brand image Does not create a Is a brand e.g.
brand instead it is an Amul.
instrument
2.5 DIGITAL INDIA

As per www.digitalindia.gov.in digital India is a government initiative which
was launched in 2015. The aim of this initiative is to transform India into a
digital nation. The objective of this is to reduce the paperwork involved in
getting many of the formalities completed for example passport services,
voters ID, driving license etc. The aim is to increase the speed of getting the
work completed and also to connect the rural sector to the urban sector.
Digitising various services will help the masses. Digital India programme has
some features and they are as follows:
• Robust digital infrastructure throughout the country resulting in

authentic digitised identity to the citizens of the nations.
• Good governance for online services in form of electronic and cashless
transactions.
• Digital empowerment through digital literacy.
Based on these features, the objectives of digital India are as follows:
• To provide fast speed internet services.
• To provide e-governance by reforming and digitising government

services.
• To bring e-revolution in terms of electronic delivery of goods and

services.
• To provide basic information through online platform.
• To provide more opportunities of employment in the IT sector.

As per UNINDIA February, 2019 programme which is an extension of
‘Digital India’ development agenda, the Government of India is planning to
invest in modernising classrooms across India. The initiative is to include
digital boards as part of broader digital initiative in all the state run schools
and colleges across India. This is the recent development and addition to
‘Digital India’ concept. Likewise many such programmes have been
launched which work for the benefit of the masses. Some of the programmes
are as follows:
• Internet Saathi: Improving digital literacy among women.

• Government services on your fingertip.
37
Foundation of • DIGIDHA – Go cashless to digital Gem-government e market place
Indian Business
• Online Market – for smart government buyers
• Rapid Assessment System (RAS)
• Dig cocker
There are many more such programmes which have been launched and are in
pipeline to make India digitally empowered and a knowledge economy.
2.6 SKILL DEVELOPMENT : APPROACHES

AND STRATEGIES
Ministry of Skill Development and Entrepreneurship (MSDE), Government
of India looks after the skill India Kaushal Bharat programme. Skill India is
an initiative which has been launched with the aims of empowering the youth
of the country (www.msde.gov.in) so as to increase their employability and
create a more productive work environment. The aim of such initiative is to
cater to the needs of 65% young population of the country. Skill India is a
programme which offers around 40 courses in various sectors across the
country.
2.6.1 Skill Development Initiatives

New age skills in the area of big analytics, Artificial intelligence, Internet of
things, 3D printing etc. are being harnessed amongst the youth through
various courses offered by different ITIs across the nation. A national policy
on Skill Development and Entrepreneurship 2015 and National Skill
Development Policy 2009 has charted out the do’s and don’ts of the skill
India mission. The National Skill Development Mission’s emphasis is on
developing the skills of the 500 million youth of the country by 2020.
Though this is an ambitious programme, still it holds prospects for the youth
of the country. The main initiatives of the MSDE are as follows:
- Setting up of first –ever Indian Institute of Skills in 2016 at Kanpur.

The proposal for setting up 6 such institutes across the country has been
planned.
- Pradhan Manri Kaushal Vikas Yojna (PMKVY): This is the
flagship scheme of skill training of MSDE and is the largest skill
certification scheme in India.
- MSDE also recognizes and certifies the skills acquired through informal
training centres through its Recognition of Prior Learning (RPL)
programmes under PMKVY.
- National Apprenticeship Promotion Scheme (NAPS): This scheme
was launched in 2016 with the aim to promote apprenticeship training.
- Dual System of Training: This scheme provides an opportunity for
training in dual mode i.e. through face-to-face teaching (ITI) and in
industries. This will increase the employability of the trainees.
- Space –based Distance Learning Programme (SDLP) for MSDE:
This programme aims at providing the vocational training facilities to the
masses.
38
There are many more informal skill based training programmes running to Technological
Innovation and
provide a knowledge base to the people and equip them for skill – based jobs. Skill Development
We have seen that Government of India is offering many schemes for skill
development. It is important to note here that MSDE is also collaborating
with various countries in the areas of skill development and entrepreneurship.
Some of the collaborations are as follows:
• MOUs with UAE and Qatar on mutual qualifications.

• MOU with France for skill training in the power sector
• MOU with Switzerland on sharing best practices
• MOU with Singapore and NSDC as the partner for setting up centres of
excellence.
• All these initiatives have taken the country a step forward in granting the
skills of the youth of the country.
2.6.2 National Skill Development Corporation (NSDC)

The National Skill Development Corporation (NSDC) was set up as a part of
National Skill Development Mission of MSDE as a public private partnership
company. The aim of NSDC is to facilitate the skills landscape in India. The
concept of NSDC is based on three pillars. These are:
1) Create: To facilitate in establishing quality vocational training

institutions.
2) Fund: To provide funds in form of grants and equality.
3) Enable: To ensure the sustainability of support systems required for
skill development which includes industry operated sector skill councils
(SSCS).
The vision and mission of NSDC is as follows:
Vision of NSDC: To fulfill the growing need in India for skilled manpower
across the existing gap between the demand and supply of skills.
Mission: The mission of NSDC is as follows (https://nsdcindia.org/vision-

mission):
• Upgrade skills to international standards through significant industry

involvement and develop necessary frameworks for standards, curricular
and quality assurance.
• Enhance, support and coordinate private sector initiatives for skill
development through appropriate Public-Private Partnership (PPP)
models; strive for significant operational and financial involvement from
the private sector.
• Play the role of a “Market-maker” by bringing financing particularly in
sectors where market mechanism are ineffective or missing.
• Prioritise initiative that can have a multiplier or catalytic effect as
opposed to one-off impact.
39
Foundation of Keeping in view the vision and mission of its main objective is NSDC
Indian Business
• To contribute significantly to the overall target of skilling up of people in
India, mainly by fostering private sector initiatives in programmes and to
provide funding.
The objective of NSDC includes all three pillars on the basis of which it was
formed.
MSDE through NSDC has taken up number of initiatives to collaborate with

industry under the larger mandate of Skill Indian Mission. NSDC has a
simple –window facilitation system which offers a platform for industries to
partner on different initiatives like Corporate Social Responsibility (CSR). It
works in partnership with varied set of stakeholders like corporates, NGOs,
government organisations etc. to structure skill development projects which
have high impact. NSDC since its inception has collaborated with NALCO,
SBI card, GE Power, NTPC etc. to fulfill CSR commitments under the
companies (CSR) Rules, 2013. NSDC is also providing certification through
National Skills Qualification Framework (NSQF) for skill development
programmes. All this is done to align all the skill development programmes
across the nation. After going through the vision, mission and objective of
NSDC, it can be said that NSDC has been facilitating the mandate of skill
development mission under PPP model.
2.7 START-UP INDIA AND INCUBATOR

Start-up India
Start up India is a flagship programme of the government of India with a
major aim of building a strong ecosystem which is favorable for the growth
of startup businesses. Which in turn will give a sustainable economic growth
leading to large scale opportunities for employment. The start-up India
programme has 19 – point action plan which will have many incubation
centres, easy talent, tax benefits and ease of setting up of business and faster
exit mechanism. This was launched in 2016. The main aim of this initiative is
to nauture innovation and design.
Action plan of start-up India

The action plan has three pillars which are as follow:
• Simplification and Land holding
• Funding support and incentives
• Industry – academia partnership and incubation.
Simplification and Landholding: This pillar focuses on issues related to
regulation, single point contacts, illegal support system, relaxed norms and
faster exit mechanism for start-up. The basic aim is to ease the formalities for
setting up of start-ups.
Funding Support and Incentives: focuses on providing funds, credit

guarantee, tax benefits on capital gains, investments etc., for start-ups. This
aims at providing funds and tax exemptions at various stages.
40
Industry-academia partnership and incubations: focuses on collaboration Technological
Innovation and
of educational institutions with industry for showcasing innovation, harassing Skill Development
sector expertise for incubators, building innovation centres, promoting start-
up in different sectors like biotechnology, launching of innovation focused
programmes for students etc. One more important feature of this pillar is the
launch of Atal Innovation Mission (AIM) with Self-Employment and Talent
Utilisation (SETU) programme.
The detailed Action Plan 2016 report is available on

www.startupindia.gov.in. We can say that start-up India programme caters to
the need of the young minds in contemporary times.
Incubator
Incubator basically is an organisation which shows the part to the start-up
companies to speed up their growth and success (http://thetechpanda.com).
The start-up India programme gives incubation support to set up incubation
centres across the states. Atal Innovation Mission aims at setting up Atal
Incubation Centres (AICS) in public and private sector. It also aims at
facilitating the established Incubation Centres (EICS). April, 2019. 13 AICS
have been approved with a flaunt of rupees 10 crore is also being given to
EICS. The state governments are also promoting this concept for e.g.
Government of UP has supported for setting up 8 incubators which includes
IIT BHU, IIM- Lucknow (Noida Campus IIT – Kanpur, KNIIT Sultanpur and
I Bhubs- UPDESCO, Lucknow government of Himachal has approved 7
academic institutes to set up incubators across various sectors which includes
engineering, food, processing, biotechnology, agriculture etc. every state
government provides different flaunt. Various other incubators under PPP
Model have also been set-up. Some examples are Indian Angel Network
(IAN) incubator in collaboration of National Science and Technology
entrepreneurship Development Board, Department of Science and
Technology Government of Science And Technology, Government of India.
There are many such examples. Incubators therefore, are organisation which
promote start-ups.

1) State objectives of make in India?
…………………………………………………………………………..
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2) Which are the programs the covered under Digital India initiative?
…………………………………………………………………………..
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41
Foundation of 3) Name three pillars of National Skill Development Corporation?
Indian Business
…………………………………………………………………………..
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4) What are Incubators?
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2.8 LET US SUM UP

Innovation is the process of translating an idea or invention into a good or
service that creates value for which customers will pay. It refers to the
introduction of a new product. It basically improves an existing concept or
idea using a stepwise process to create a product which is commercially
viable.
Creativity is novel ideas which are appealing and useful whereas invention is
an idea for novel product or a process and invention is making the invention
into a product from that is based n a broad set of strategic, marketing and
technical skills.
Innovation helps in solving and adapting the rapid changes of the

technological area. Innovations are different types such as Incremental
innovation, Disruptive innovation, Architectural innovation and Radical
innovation.
Make in India is the initiative of Government of India that encourage the

industries to setup their manufacturing units in India through FDI with the
objective to solve the problem of employment and improve the GDP growth
rate.
Made in India is a tag line given to the products manufactured in India. The
products can only be tagged as made in India when the product has been
manufactured in indigenous having India’s factors of productions which are
land, labor, capital, entrepreneurship and technology.
Digital India is a government initiative launched in 2015 with the aim to

transform India into a digital nation, to increase the speed of work getting
completed and also to connect rural sectors to urban sectors.
42
Ministry of Skill development and Entrepreneurship (MSDE) Government of Technological
Innovation and
India looks after the various skill development programmes for the country. Skill Development
The main initiatives of MSDE are: 1) Setting up of first ever Indian institute
of skills 2) Pradhan Mantri Kaushal Vikas Yojna 3) National Apprenticeship
Promotion Scheme 4) Dual system of training 5) Space based distance
learning programme etc.
Startup India is a flagship programme launched in 2016, with the aim of

building a strong ecosystem that is favorable for the growth of startup
business. The action plan of startup India has three pillars those are: 1)
Simplification and land holdings 2) Funding support and incentives. 3)
Industry academic partnership and incubations.
Incubators are the organisation which shows the part to the startup strategy
companies to speed theory growth and success.
2.9 KEY WORDS

Creativity: Creativity is a phenomenon whereby something new and
somehow valuable is formed. The created item may be intangible such as an
idea, a scientific theory, a musical composition, or a joke or a physical object
such as an invention, a literary work, or a painting.
Invention: An invention is a unique or novel device, method, composition or

process.
Innovation: Innovation is the process of translating an idea or invention into

a good or service that creates value for which customers will pay.
Technological Innovation: Technological innovation is an extended concept

of innovation. It is the process where an organisation (or a group of people
working outside a structured organisation) embarks in a journey where the
importance of technology as a source of innovation has been identified as a
critical success factor for increased market competitiveness.
Make in India: Make in India, a type of Swadeshi movement covering 25

sectors of the economy, was launched by the Government of India on 25th
September 2014 to encourage companies to manufacture their products in
India and enthuse with dedicated investments into manufacturing
Made in India: Made in India is a tag line given to the products

manufactured in India. The products can only be tagged as made in India
when the product has been manufactured in India.
Digital India: Digital India is a government initiative launched in 2015 with

the aim to transform India into a digital nation, to increase the speed of work
getting completed and also to connect rural sectors to urban sectors.
Start-up India: Start-up India is a flagship programme launched in 2016,

with the aim of building a strong ecosystem that is favorable for the growth
of startup business.
Incubator: Incubators are the organisation which shows the part to the
startup strategy companies to speed theory growth and success.
43
Foundation of
Indian Business
1) Explain the process of innovation.
2) State the differences among Creativity, Invention and Innovation.
3) What is Technological Innovation?
4) How ‘Make in India’ differs from ‘Made in India’?
5) What is digital India Programme? What are its features and objectives?
6) Explain the various approaches and strategies of skill development.
7) Discuss the action plan of start up India.
44
Social
UNIT 3 SOCIAL RESPONSIBILITY AND Responsibility
and Ethics
ETHICS
Structure
3.0 Objectives
3.1 Introduction
3.2 Social Responsibility of Business
3.3 Approaches to Social Responsibility
3.3.1 CSR Theories
3.3.2 CSR Agenda
3.3.3 Distinctive Profiles of CSR Practices
3.4 Ethics
3.5 Business Ethics
3.6 Corporate Responsibility
3.7 Paradigm Shift of Corporate Responsibility
3.8 CSR in India
3.9 Let Us Sum Up
3.10 Key Words
3.0 OBJECTIVES
• describe the notion of social responsibility of business
• explain the approaches to Social Responsibility (SR)
• discuss the concept of ethics
• apply the concept of ethics to Business Ethics (BE)
• evaluate the framework of Corporate Responsibility (CR) and
• examine the Corporate Social Responsibility (CSR) in India.
3.1 INTRODUCTION
Corporate Social Responsibility, popularly known as CSR is closely related
to Business Ethics. Often scholars tend to believe that these two concepts are
distinct from each other. In this unit, you will study these two related
concepts.
You will learn about the social responsibility of business and various
approaches further social responsibility. You will further learn the business
ethics, corporate responsibility and paradigm shift of corporate responsibility.
You will be also exposed to CSR in India in context.
45
Foundation of
Indian Business 3.2 SOCIAL RESPONSIBILITY OF BUSINESS
CSR is a self-regulating business replica that assists a corporation to be
collectively responsible to itself, its partners, and the community. By
rehearsing corporate social duty, additionally called corporate citizenship,
organisations can be perceptive of the sort of effect they are having on all
parts of society including fiscally practical, social, and biological. To fit into
place in CSR implies that, in the typical course of managing, an organisation
is working in manners that improve society and the environment, rather than
contributing indifferently to it. Once we understand this perception we can
apply it to Business Ethics. Corporate Responsibility has evolved in recent
years and links up ethics and CSR. CSR as a practice has evolved in India. It
is, therefore, important to study about CSR in India.
The ISO Strategic Advisory Group (SAG) on Social Responsibility perceives
that there is no single legitimate meaning of the expression
"corporate/authoritative social responsibility". It nonetheless, noticed that
most definitions accentuate the interrelationship among financial, natural and
social angles and effects of an association's exercises. You will be exposed to
the different concepts and definitions of corporate social responsibility and
the factors that have been driving the business organisations to pursue social
responsibility in different countries. According to the concept of social
responsibility, the objective of managers for taking business decisions is not
merely to maximize profits or shareholders' value but also to serve and
protect the interests of other members of a society such as workers,
consumers and the community as a whole.
In today’s world the interest of other stakeholders, community and
environment must be protected and supported. Social accountability of
business enterprises to the variety of stakeholders and society in all-purpose
is considered to be the result of social responsibility of business enterprises
towards stakeholders and society in general contract.
The social contract is a set of rules that define the agreed interrelationship
between various elements of society. The social contract often involves a
quid pro quo (i.e. something given in exchange for another). In the social
contract, one party to the contract gives something and expects a certain thing
or behavior pattern from the other.
Definitions of CSR
A widely quoted definition by the World Business Council for sustainable
development states that “Corporate social responsibility is the continuing
commitment by business to behave ethically and contribute to economic
development while improving the quality of life of the workforce and their
families as well as of the local community and society at large”. (‘Making
Good Business Sense’ by Lord Holmes and Richard Watts).
CSR is viewed in different ways in different societies across the world.
Following are some examples of different definitions in different countries:
“CSR is about capacity building for sustainable livelihoods. It respects
cultural differences and finds the business opportunities in building the skills
of the employees, the community and the government”…… Ghana
“CSR is about business giving back to society.” …..Phillippines
46
Social
A broad definition of CSR, which encompasses different viewpoints, is that
Responsibility
CSR is about how companies manage the business processes to produce an and Ethics
overall positive impact on society. This definition is given by Mallenbaker.
Organisations need to be answerable to two parts of their tasks:
1) The nature of their administration – both as far as individuals and
procedures (the internal circle) and
2) The nature and amount of their effect on society in the different zones.
We shall now consider the different approaches to the social responsibility of

business. These approaches are understood in different ways. Let us discuss
them in detail.
3.3 APPROACHES TO SOCIAL RESPONSIBILITY

Social responsibility is a decent structure and suggests that an entity, be it an
organisation or individual, has an obligation to act for the advantage of
society at large. Social responsibility is a duty every individual has to carry
out so as to uphold a balance between the financial system and the
ecosystems. According to the traditional view, an enterprise exists basically
to make benefits. From this cash focused point of view, seeing that business
morals are vital, they apply to moral difficulties emerging as the revenue
driven battle continues. These quandaries incorporate the accompanying:
“What obligations do organisations have to ensure that individuals seeking
employment or promotion are treated fairly?” “How should conflicts of
interest be handled?” and “What kind of advertising strategy should be
pursued?” These issues are critical all through the monetary world. When
organisations consider wide scope of financial and civic duties as a feature of
their everyday task, the field of business morals grows correspondingly.
3.3.1 CSR Theories

Presently there are substantial issues that should be understood and managed
beyond the financial supremacy. Comprehensively, there are three theoretical
ways to deal with these issues:
1) Corporate social responsibility (CSR) Theory;
2) Stakeholder theory; and
3) The triple bottom line
Let us learn them
1) Corporate Social Responsibility Theory: Corporate social
responsibility is a decision to improve the welfare of the community
through discretional business practices and contributions to the
corporation recourses. Discretional activities include: Voluntary
decisions to choose the activities and contributions on its own way.
These activities are performed in a way to maximize the positive
influence and to minimize the negative influence of their business on
society.
2) Stakeholder Theory: This theory states that the stake holders of the
business partners in the organisation and their voices must add to
corporate choices. It states that the interest of the stake holders should
47
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be protected by the organisation. As an example, at the point when a
manufacturing plant produces modern waste, a CSR viewpoint appends
a duty to production line proprietors to discard the waste securely. This
theory starts with those living in the encompassing area whose
condition may be harmed and starts to discuss business morals by
demanding that they have a right to clean air and water.
3) The triple bottom line: The concept of triple bottom line adds two
more bottom lines, social and environmental concern to the economic
concerns. These three together are known as “Profit, People, Planet”, or
referred to as the three pillars. This theory is intended to advance the
goal of sustainability in business practices.
3.3.2 CSR Agenda

To an expansive degree, national social responsibility plans are the after
effect of recorded and social variables, and they keep on developing as per
current monetary and political needs. For instance, the social responsibility
motivation in India has its underlying foundations in altruism and
philanthropy. Yet is presently progressively affected by market advancement
and expanded introduction to the global challenge. Similarly, in South Africa,
it was normal for organisations to make altruistic gifts and to look for support
from the chief amid the apartheid (politically-sanctioned racial segregation)
time. Be that as it may, in the run-up to and following the 1994 elections, the
business network began to build up an increasingly comprehensive SR
methodology, and this was fortified by an administrative drive. The plan in
South Africa is currently firmly moulded by the need to react to the heritage
of politically-sanctioned racial segregation, which implies that specific issues
are given priority. Not only is there little agreement on the social
responsibility agenda between nations but even within each nation.
But there is no “one size fits all”. In various nations, there will be distinctive
needs and qualities that will shape the CSR motivation. For instance there is
an important sense that social responsibility should thought to focus on the
help for the state to empower it to satisfy its advancement in arranging job.
By and large, expansive organisations working in remote parts of the world
or where nation government limit is missing, frequently find that they are
relied upon to give open products, for example, medicinal services, training
or infrastructure.
Indeed, even inside a solitary national setting, there are frequently altogether
different and in some cases clashing originations of social responsibility.
Unavoidably, there are distinctive originations of social responsibility inside
the business network, as indicated by the organisation's size, location, sector,
brand visibility, legal constitution and corporate culture, and its distance from
and contact with the contemporary social responsibility banter.
Beyond the private segment, view of social responsibility contrasts much
further. There is a developing evaluation of social responsibility practice
from common society associations in numerous nations. For instance, in
Chile and South Africa, there is an across the board view that there is an
expansive hole between the talk and routine with regards to social
responsibility, because of a reaction from ventures that is regularly shallow
and reactionary as opposed to vital. In like manner, studies in India show that
senior supervisors normally lead social responsibility activities, without
fundamentally deciphering and disguising them over their associations. In the
48
Social
U.K., a few NGOs and reporters give off an impression of being very nearly
Responsibility
pulling back from the social responsibility banter, contending that it is being and Ethics
utilised as a fig leaf while organisations proceed “business as usual.”
3.3.3 Distinctive Profiles of CSR Practices

Mohr et al (2010) divided the distinctive profiles of CSR practices into three
categories. These Categories are: Business case, social values and syncretism
stewardship. Let us learn them.
The business case model of CSR “is driven primarily by the ability of CSR
initiatives to create positive business results. Because serving shareholders is
paramount, a strong tie to the economic outcomes drives CSR initiatives"
(Mohr et al, 2010, p.440). Companies operating under business case model
usually adopt a reactive approach towards CSR issues and may engage in
such activities due to the pressure from various groups, or in the search of a
competitive edge.
Social values model of CSR, on the other hand, involves companies
associating with a specific social cause and "it is integrated into the
organisational fibre in every way: visible symbols of the cause can be found
everywhere in the company" (Mohr et al, 2010, p.441).
Businesses operating under syncretism stewardship CSR model aim to
harmonise and balance the demands of various stakeholders of the business.
In other words, these companies focus on profit maximisation objective of
the business as the business case model. At the same time, they also
comprehend the importance of CSR and aim to address it in an effective
manner.
Four approaches to CSR have been specified by Tudler and Zwart (2006) as
inactive, reactive, active and proactive (interactive). It is important to note
that “these approaches emerged at different stages of societal development
and they are neither mutually exclusive nor do they represent ‘best’ practice
models” (Tulder and Zwart, 2006, p.143).
3.4 ETHICS
Ethics or moral philosophy is a division of philosophy that includes
systematizing, protecting, and prescribing ideas of good and bad conduct.
Morals seek to decide inquiries of human ethical quality by characterizing
ideas, For example, great and abhorrent, good and bad, prudence and bad
habit, justice and wrongdoing. As a field of the scholarly request, moral logic
likewise is identified with the fields of ethical psychology, expressive morals,
and value theory. Thus Ethics is/are a regulation which teaches us what is
right and what is wrong.
Metaethics talks about the nature of ethics and moral reasoning. It is

concerned with what we mean when we use words like, “good”, “bad”,
“right”, “wrong”. It is not a normative system of ethics. It does not tell us
what we can, what can not do. Exchanges about whether morals are relative
and whether we generally act from personal circumstance are instances of
meta-moral talks. Indeed, drawing the theoretical refinement between
Metaethics, Normative Ethics, and Applied Ethics is itself a “metaethical
analysis.”
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Foundation of
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Moral Philosophy of Ethics
The study of human actions that effect beings capable of being in some way
(definitely humans, as well as many animal species) and the principles that
people appeal to when they act.
Meta Ethics Normative Ethics Applied Ethics

• Nature of moral • What constitutes the • Realm if professions,
knowledge “good life?” institutions and public
• Proper grounds for • What should I do, policy
justifying moral and who should I • Generates practical
claims be? moral answers
• Metaphysical • Development, • Applies moral/ethical
/ontological status of analysis and critique theories to practice
moral norms and of various
entities moral/ethical
theories
Fig. 3.1: Moral Philosophy of Ethics
Normative Ethics is interested in determining the content of our moral

behaviour. Normative ethical theories seek to provide action-guides;
procedures for answering the Practical Question (“What ought I to do?”).
Applied Ethics endeavours to manage explicit domains of human activity

and to make criteria for talking about issues that may emerge inside those
domains. The contemporary field of Applied Ethics rouse in the late 1960s
and mid-1970s. Today, it is a flourishing piece of the field of morals. Various
books and sites are committed to themes, for example, Business Ethics,
Computer Ethics, and Engineering Ethics etc.

1) What is corporate social responsibility?
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
2) Distinguish between stakeholder theory and triple bottom line theory
of CSR.
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
50
Social
3) Distinguish between normatic ethics and applied ethics.
Responsibility
…………………………………………………………………………… and Ethics
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
3.5 BUSINESS ETHICS

Business ethics is a type of connected morals that analy
analyses moral standards
within a business setting;
ing; the different moral issues that can emerge in a
business setting; and any exceptional obligations or commitments that apply
to people who are occupied with a trade. As a rule, business ethics are a
regulating discipline,
iscipline, whereby specific moral measures are pushed and after
that connected. It makes explicit decisions about what is correct or wrong, or,
in other words, it makes guarantees about what should be done oor what
should not be done. Look at Fig. 3.3.2 which shows the major components of
business ethics.
Morality
Reliability Trust
Business
Choice Ethics Behaviour
Relationship Principle
Fig 3.2: Major components of b

business ethics
While there are a few exemptions, business ethicists are normally less
worried about the establishments of morals (metaethics), or with defending
the most fundamental moral standards, and are increasingly worried about
handy issues and applications, and pa
particular obligations that may apply to
business connections.
Logicians and others differ about the motivation behind a business in the
public eye. For instance, some propose that the important reason for a
business is to expand returns to its owners
owners, or on account of a publicly-traded
concern,, its investors. Consequently, under this view, jus
just those exercises that
expand profit and investor esteem ought to be supported. Some trust that the
main organisationss that are probably going to get in a focused comm commercial
centre are those that put benefit expansion above everything else. In any case,
some bring up that personal responsibility would even now require a business 51
Foundation of
Indian Business
to comply with the law and stick to fundamental moral guidelines, the
business should realise that the outcomes of neglecting to do as such could be
exorbitant in fines, loss of licensure, or organisation notoriety. The business
analyst Milton Friedman is the main advocate of this view.
Different scholars suggest that business has moral obligations that expand
well past serving the interests of its proprietors or investors and that these
obligations comprise of more than just complying with the law. They trust
business has moral duties to purported partners, individuals who have an
interest for the conduct of the business, the moral duties may be towards
workers, clients, merchants, the nearby network, or even society in general.
They would state that partners have certain rights as to how the business
works, and some would even recommend this even incorporates privileges of
administration.
The Relationship between Business Ethics and Social Responsibility

It is often felt that these two things are separate notions. Business ethics is
supposed to be an attribute associated with the individual businessman- the
owner or the manager. Corporate Social Responsibility are often treated
differently, as a responsibility of the business, not necessarily to be business
ethics. Thus, the ordinary understanding of business ethics is confused with
general ethics and morality. This has paved the way to great management
thinkers like Peter Drucker to pronounce that to state "There is neither a
separate ethics of business nor is one needed". Peter Drucker along with
some management thinkers is of the view that no Business Ethics are needed
since ethics are of personal nature and the individuals who are involved in the
business are required to follow ethical dimension and not the business. They
are of the view that organisations could be shaped and worked effectively
without satisfying their social duty. Their only duty is the creation and
delivery of value to the consumer in an efficient and effective way. Their
moral obligation is discharged through effective price mechanism in the
market. Factors of production such as raw materials, capital, labour and other
resources that are used by businesses from society are adequately
compensated by the payments established by the price mechanism in the
market. This means that business ethics only relate to the personal moral
behaviour of the businessman or manager.
The new thinking in this regard lays down the modern basis of a new concept
called "Corporate Responsibility". This new approach relates business ethics
to the social responsibility of business. In fact, it shows how these two
concepts are two sides of the same coin.
3.6 CORPORATE RESPONSIBILITY

Now before continuing any discussion, it is vital to make a distinction
between business philosophy and philosophy of business. Business
philosophy is related to the vision and mission of the business. It explains the
‘why’ of the particular business. It is the main driving force behind any
particular business. Business philosophy determines the objectives and
functional objectives of the particular business. But the philosophy of
business has a larger context. It explains the ‘why’ of all businesses and not a
particular business. For every discipline to exist, it must have some ethical
framework. If it does not have any ethical framework then such discipline
52
Social
ceases to exist and become like witchcraft. Now, this ethical framework is
Responsibility
provided through the philosophy underlying such discipline. When and Ethics
philosophy is applied to any discipline it becomes applied philosophy. So
philosophy of business is applied philosophy. It means an understanding of
the moral and ethical guidelines of business as a subject of knowledge. “Just
as medicine is an area of knowledge business is an area of knowledge.
Philosophy deals with knowledge. It answers the question of what the role
of a business is and as to what is the ethical basis of the judgment of whether
it is fulfilling its role or not.” Klempner (2006) also stated “Understanding
the rules and conventions of business is one of the main tasks for the
philosophy of business. In one of its forms, this is known as ‘business ethics’.
The other main task understands how business is possible…”
Benefits of Corporate Social Responsibility

The benefits of CSR are as follows:
• Better brand recognition
• Positive business reputation
• Increased sales and customer loyalty
• Operational costs savings
• Better financial performance
• Greater ability to attract talent and retain staff
• Organisational growth
• Easier access to capital
The philosophy of business considers the fundamental principles that underlie
the formation and operation of a business enterprise; the nature and purpose
of a business, for example, is it primarily property or a social institution; its
role in society; and the moral obligations that pertain to it. This definition
identifies 3 interrelated aspects of the philosophy of business. These are:
i) Nature of business,
ii) Role of business in society, and
iii) Moral obligation towards society.
Traditionally these aspects had different interpretations. Their traditional
interpretations were as follows:
i) Nature of business: It was treated as ‘property institution’ which only
exists to earn profits at any cost and its entity is entirely different and
independent from rest of the society.
ii) Role of business in society: Its only purpose is to create value for
members of the society by producing goods and services and through
that earn profits. It is not expected to take care of other social and
environmental concern.
iii) Moral obligation towards society: It has no extra moral obligation
since it discharges its entire obligation by compensating the factors of
production through price mechanism in accordance with their
contribution to production.
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As per the traditional interpretations, there is no business ethics at all. If there
is any moral obligation of business then it had discharged it by compensating
the factors of production. So no separate set of ethics or code of ethics is
applicable to business. Therefore the question of business ethics is just
limited to how individual entrepreneurs behave and this is dependent on
general or individual ethics. Any social programme or activities that were
carried out by business were only voluntary. So there were not any separate
business ethics, which were applicable only to business. Hence, business
ethics as an extant notation is disparate from social responsibility of business.
In this form, therefore, social responsibility of business naturally boils down
to philanthropy.
3.7 PARADIGM SHIFT OF CORPORATE

RESPONSIBILITY
However, over the time there are major changes in paradigm. These changes
have taken place due to many factors. These factors influence the
entrepreneurs to address business ethics. Some of these factors are as follows:
increasing influence of non–governmental organisations (NGOs), very
effective and heightened reach of media assisted by advancement in
information technology, knock–on effect of corporate scandals such as Enron
and Satyam, growth of socially responsible investment, changing employees'
expectation, more aware and demanding consumer, never-ending social
campaign and issues etc. Besides these factors, this is also an era of
globalisation where the role of the government has declined substantially so
there are changing social expectation from the business. There is a need for
countries to agree on common standards of labour, environment, quality etc.
and adhere to globally evolving standards.
Nowadays consumers have become vocally strong not only in exercising
their rights but also in demanding that business must explicitly state their
policies, business processes and practices. Therefore, entrepreneurs must be
proactive towards society’s expectation. Today businesses could not get the
label of good and ethical businesses by engaging in philanthropy. Something
more is required and that too at core level. Social responsibility stated that
these major changes have resulted in two types of shifts. These shifts are
Philosophy of business and towards society. Let us learn them.
1. First Shift: Philosophy of Business
First shift is related to the philosophy of business. The new perspective has
broken down this classification of business and society and by now it has
been realised that social and environmental issues can no longer be addressed
entirely through a unilateral imposition by the State through a legal
framework. The roles, relationships and realms of the three entities – the
government, the business and the society have changed. Hence, business is a
social institution rather than property institution. If it is a social institution
then it has to perform the duties assigned to it by society. If it is not fulfilling
the duties assigned to it by society then society is empowered to close the
business. Therefore, society lays down the criteria for the termination of
business. Hence, as per the first shift, philosophy of business not merely lays
down the framework for the operation of the business but it also lays down
the premises for termination of business as its obverse. Laying down the
premise for termination of business, philosophy of business empowers the
54
Social
society since it is eventually the society who should decide whether a
Responsibility
business should continue or not and not the entrepreneur. and Ethics
Besides this, business is also responsible to the natural environment. The
emergence of the term ‘Environmental Accountability' in the recent scenario
shows the importance of concern for the environment that has gained
momentum today. Till early 90's entrepreneurs had shown less interest in
environmental issues. Environmental degradation was considered as
necessary costs for growing economies. At that time almost all economies
prefer economic growth to the ecosystem. But due to many natural disorders
that have been occurred during last few years like global warming, depletion
of ozone layer, greenhouse gas effect, Asian brown cloud and many
unexpected natural calamities have turned the focus on environmental
concerns. Now the world is recognizing the fact that preserving fresh water,
pure air and fertile land is more important than producing low–cost goods for
consumers or profits to business. Nowadays many more issues like
environmental accounting, environmental degradation and environmental
management have been emerging. Even otherwise it has to be understood that
our natural environment or ecosystem is very important to us. If the eco-
system is destroyed then how can our future generations sustain? Hence, the
natural environment is of considerable importance. But on the other hand, it
has no voice of its own. As a result, anybody may cause unfettered damage to
natural environment without incurring any liability or punishment. So
somebody has to become the representative for the natural environment and
raise the voice on its behalf. Nowadays the public at large has recognized the
importance of natural environment and has started to raise the voice for it.
The government has been putting various restrictions on the use of natural
resources and that too at international level like setting norms for emission of
greenhouse gases (Kyoto Protocol). Now if the government and public at
large are feeling its responsibility towards the natural environment then how
businesses can be spared. Therefore, businesses should also consider their
responsibility towards the natural environment. In fact, it is primarily
responsible for the natural environment since it is operating in the natural
environment and also withdrawing resources from it.
2. Second Shift: Towards Society and Natural Environment
Natural
Environment
Society in general
Other Stakeholders:
Vendors, banks, etc.
Shareholders
Fig. 3.3: Corporate Responsibility of Business towards Society
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Foundation of
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Now the first shift resulted in an entirely new dimension of Business Ethics.
The second shift leads to one of the basic pillars of the philosophical
framework in ethics. So Business Ethics itself emerges out from the
philosophy of business with very broad dimension and it should be applied in
every facet of the business.
So as Business Ethics is applicable from ab–initio and at every level, hence it
must be known well in advance that who are the various participants in the
businesses and how do they interact with each other. Participants may be
internal and external. The internal participants are: shareholders, employees,
managers, board members etc. The external participants are customers,
suppliers, government, union, local community, society at large etc.
However, the most important participant is the natural environment.
Thus as per Business Ethics, businesses have a moral and ethical

responsibility towards all the participants. If the business does not behave
ethically to these participants then these unethical behaviour create grounds
for cessation of business. Fig. 3.3, shows the responsibility of business
towards different participants. The responsibility of Business towards
participants in order of priority is shown below:
i) Natural Environment
ii) Society in General
iii) Other stakeholders, Vendors, banks, etc. and
iv) Shareholders.
Therefore, the first and the primary responsibility of the business should be to
respond to the natural environment, then to Society in general after that to
other stakeholders like vendors or bankers and at last to the shareholders. But
what happens is just opposite to it. Business works primarily for shareholders
since shareholders have an immediate impact on it. Then it works for other
stakeholders like banker or vendor since they have also impact on it.
However, business considers its responsibility towards society in general and
natural environment at last since they do not have any say. If the natural
environment had its own voice then the business must have primarily listened
to it and worked in accordance with nature's discretion. In practice, this is not
happening, so businesses have made an easy escape route by not caring for
nature.
We must differentiate between Business Philosophy and Philosophy of

business. This forms the basis of Corporate Responsibility. There are two
Paradigm Shifts which have led Corporate Responsibility of Business
towards Society.
Corporate Responsibility consists of :

1) Corporate Social Responsibility
2) Corporate Governance
3) Environmental Accountability
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Social
3.8 CSR IN INDIA Responsibility
and Ethics
According to the Company Act, 2013. Organisations can put some portion of
profits in the activities of education, marginalised sections of society, gender
equality, and poverty and hunger.
National Voluntary Guidelines
The Ministry of Corporate Affairs, Government of India has provided

Corporate Social Responsibility Voluntary Guidelines (2009). The CSR
Policy prescribes six components of corporate social responsibility. These
are: Care for all Stakeholders, Ethical working, Respect for Workers' Rights
and Welfare, Respect for Human Rights, Respect for Environment and
Activities for Social and Inclusive Development.
The Guidelines provide opportunities for the organisations to work for the
benefits of workers, clients and financial specialists etc. The Securities and
Exchange Board of India (SEBI) has also suggested that the 100 best-
companies must submit Business Responsibility Reports, as a part of their
yearly reports. India's National Voluntary Guidelines on Social,
Environmental and Economic Responsibilities of Business (NVGs), for
mindful business envisages following:
As per these rules “Responsible Business” conduct refers to the commitment

of businesses to operating in an economically, socially and environmentally
sustainable manner while balancing the demands of shareholders and other
interest groups. It is about managing risks and impacts, which affect
business’ ability to meet its objectives.
According to Ministry of Corporate Affairs, 2011 The NVGs are formulated

with the objective of creating positive framework conditions to advance the
role of business in economic growth which is socially and environmentally
sustainable, while also ensuring enhanced competitiveness and integration
into the global markets.
The NVGs had served as a predecessor to the mandatory CSR provision in

the subsequent Company Bill 2012. NVG was a guide for businesses of all
size, ownership-type, sector and location to enable them to strive towards the
triple bottom line (i.e. envisages People, Planet and Profit), The NVGs “an
India specific comprehensive understanding of business responsibility”.
Mandatory Rules: Company Act 2013 and CSR

The Ministry of Corporate Affairs has notified Section 135 and Schedule VII
of the Companies Act 2013 as well as the provisions of the Companies
(Corporate Social Responsibility Policy) Rules, 2014 to come into effect
from April 1, 2014.
According to this rule, every company, private limited or public limited,

which either has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore
or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit
for the immediately preceding three financial years on corporate social
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Foundation of
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responsibility activities. The CSR activities should not be undertaken in the
normal course of business and must be with respect to any of the activities
mentioned in Schedule VII of the 2013 Act. Contribution to any political
party is not considered to be a CSR activity and only activities in India would
be considered for computing CSR expenditure.

1) What do you mean by business ethics?
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
2) Identify three benefits of corporate social responsibility.
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
3) List the components of CSR prescribed by National Voluntary
Guidelines.
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...................................................................................................................
...................................................................................................................
...................................................................................................................
3.9 LET US SUM UP

The job of business in the public eye has experienced an awesome change in
India. The organisations have begun to attempt CSR exercises willfully.
Social Responsibility of Business is a recent area of study in management
concepts. It is usually referred to as Corporate Social Responsibility or CSR.
There are several definitions of CSR. Mallenbaker has defined it as the role
of business in society. There are several approaches to Social Responsibility
of Business or CSR. Firstly, there are three CSR Theories. Different countries
have different CSR Agendas. Also, there are many distinctive profiles of
CSR practices.
Business Ethics is a branch of applied ethics. The relationship between

Business Ethics and Social Responsibility lies in the roots of moral
philosophy. Often people mistake these two concepts to be separate. Business
ethics is often treated as an individual trait of the businessman and CSR as
philanthropy. We must distinguish between Business Philosophy and
Philosophy of business. This forms the basis of Corporate Responsibility.
There are two Paradigm Shifts which have led to Corporate Responsibility of
Business towards Society. Corporate Responsibility consists of Corporate
Social Responsibility, Corporate Governance and Environmental
Accountability. The policy framework of CSR in India is shaped by National
58
Social
Voluntary Guidelines and Mandatory Rules under Company Act 2013 in
Responsibility
respect of CSR. and Ethics
Thus, to be ethical is to be moral in one's activities. We as a whole

comprehend the requirement to be morally thoughtful. Obviously we may
contrast what precisely we mean by being moral, however, we as a whole
concede to the need to attempt to satisfy our own moral measures and
convictions.
3.10 KEY WORDS

Social : Social responsibility means that individuals and
Responsibility companies have a responsibility to take steps in the
best interests of their environments and civilization
as a whole.
Corporate : Corporate social responsibility (CSR) is how
Social companies conduct their business activities to have
responsibility an overall positive impact on society. It covers
sustainability, social impact and ethics.
Corporate : It is a form of applied ethics or professional ethics,
Ethics that examines ethical principles and moral or ethical
problems that can arise in a business environment.
Business Plan : A business plan is a road map that gives headings for
designing future course of action.
Paradigm Shift : A fundamental change in the basic concepts and
experimental practices of a discipline.
Corporate : Corporations have accountability to those groups and
Responsibility individuals that they can influence, i.e., its
stakeholders, and to society at large.
Stakeholder : The stakeholder theory is a theory of organizational
theory administration and business morals that bargain with
ethics and qualities in dealing with everyday
operations.
Triple bottom : It is a notion which makes wider a business’
line emphasis on the budgetary concern to involve social
and natural contemplations. A triple primary concern
estimates an organisation’s level of social obligation,
its monetary worth and its natural effect.
Business Ethics : Business ethics is a type of connected morals that
analyses moral standards within a business settings.
Company : An organisation’s stakeholders are each one of the
Stakeholder individuals who are affected by, or can impact, an
organisation’s choices and activities.
Professional : Covers the numberless of pragmatic moral issues and
ethics phenomenon which occur out of express utilitarian
regions of organisations or in connection to reported
business professions.
59
Foundation of
Indian Business 3.11 TERMINAL QUESTIONS
1) Explain the different theories of Corporate social responsibility?
2) What do you mean by ethics? What are the different types of ethics?
3) What do you mean by Business ethics? State the major components of
business ethics?
4) Explain the term corporate responsibility? What are its different
components?
5) What is the role of Company Act 2013 in implementing Corporate
Social Responsibility in India?
6) Explain the relationship between Business ethics and Social
Responsibility?
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Emerging
UNIT 4 EMERGING OPPORTUNITIES IN Opportunities in
BUSINESS Business
Structure
4.0 Objectives
4.1 Introduction
4.2 Internet Applications in Business
4.2.1 Internet of Things
4.2.2 Technological Explosion
4.3 Emerging Trends in Business
4.3.1 Automation
4.3.2 Blockchain
4.3.3 Artificial Intelligence
4.3.4 Machine Learning
4.3.5 Social Shopping
4.3.6 Robotics
4.3.7 E-Tailing
4.3.8 Retail Entrepreneurship
4.4 Impact of Technology on Business
4.5 E-Commerce
4.5.1 Meaning of E-Commerce
4.5.2 Traditional Commerce v/s E-Commerce
4.5.3 Features of E-Commerce
4.5.4 Benefits of E-Commerce
4.5.5 Disadvantages of E-Commerce
4.6 M-Commerce
4.6.1 App Based Business Using Smartphone
4.6.2 Wallets and Plastic Money in Business
4.7 Franchising
4.7.1 Benefits of Franchising
4.8 Logistics and Supply Chain Business
4.8.1 Significance of Logistics
4.9 Outsourcing and Offshoring
4.9.1 Outsourcing
4.9.2 Offshoring
4.9.3 Difference between Outsourcing and Offshoring
4.10 Let Us Sum Up
4.11 Key Words
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Foundation of
Indian Business 4.0 OBJECTIVES
• assess how do opportunities play an important role in enhancing business
• discuss the trends which are bringing change in business
• explain the paradigm shift from website to application based business
• evaluate the impact of the use of plastic money and e-wallets
• examine the digital business collision with market place trends
4.1 INTRODUCTION
This unit aims to make the students aware of the various changes in the
business environment which has led to increased business opportunities. In
the second unit of this block, you have learnt how is digitisation finding a
way to every field of life. In this unit, you will learn how does digitisation
paves the way to a drastic shift in the business activities. In the present day,
entrepreneurs like Bill Gates, Mark Zuckerberg, Elon Musk, Jack Ma, Jeff
Bezos are the pioneers of success but all of them started from marginal
investment. Facebook was created in a Harvard dorm room at negligible cost
and Microsoft was formed two years after Gates decided to drop out of
school.
Tracing the business history of the world, it has been seen that the
marketplace is ripe for the determined entrepreneur to take it over. Some
individuals may have the business insight to sway the market but have not yet
managed to confine on a single thought to start with. But as Walt Disney
said, “If you can dream it, you can do it.”
The internet has touched our lives in more ways than we care to
acknowledge. We often do not realize how we would have reacted in a
different way less than a decade ago when the internet was not such a boom
and it is ever increasing. In this unit, you will learn the internet applications
in business, emerging trends in business and impact of technology on
business you will further learn the features, advantages and disadvantages of
e-commerce. You will also be exposed to franchising, logistics and supply
chain business, outsourcing and off-shoring.
4.2 INTERNET APPLICATIONS IN BUSINESS

It is very hard to visualize how any business could function during this time
without the use of the internet. The development of the internet has
considerably changed the day to day operations of a business; including how
they correspond with each other and their audience. Information can be
effortlessly transmitted to any destination in few seconds. The internet has
become a necessary tool for marketing and advertising. A business can
interact with the customers with the use of a website or online
advertisements. Many businesses now use the internet as a means of making
customers attentive of their current promotions. This can be very beneficial to
businesses that are targeting younger spectators.
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Emerging
4.2.1 Internet of Things Opportunities in
Business
The Internet of things (IoT) is the network of devices, vehicles, and home
appliances that contain electronics, software, actuators, and connectivity
which allows these things to connect, interact and exchange data. The
Internet of Things (IoT) has the supremacy to change our world. While we
are beginning to see its incredible boom, we are at a halt especially toward
the start of the transformational venture. As you can conceive, life in ten
years will appear to be physically unique from what it looks like in 2019. The
pace of innovation change is quickening, thanks to the coming wave of the
Internet of Things. Here and there, Internet of things still feels like void tech
language. It is difficult to piece all these different, divergent things together
and talk about them significantly. Along these lines, with an end goal to
comprehend this up and coming innovation, let us see what designs are
occurring to construct of Internet of things potential.
Sustained growth in the financial system comes with augmentation from all
sectors, among which development in the infrastructure sector is a key
requirement for intensification in sectors within manufacturing and services.
Within infrastructure, enlargement in different upcoming business in the
various sector is one of the most important requirements for the sustained
growth of a developing economy like India. The propagation of new
technologies such as mobile, cloud computing, and artificial intelligence (AI)
have changed customer behaviour and disrupted marketplaces. As a
consequence, our marketing practices must also step forward. Due to the
Information and Communication Technology revolution, there has been a
swift and outstanding boost in the interface between communities and
societies in today's human race. Our Indian social system is also going all the
way through enormous alteration to meet the needs of the modern world.
Information has by no means been so free and readily available as nowadays.
While the price of data has plunged, the supply of information has evolved
creating a data expansion. This is over and over again referred to as “Big
Data.” Companies are progressively emphasizing on their core competencies
(‘to do what you are preeminent at and leave all other non-value-added
activities to more suited players’) and working on to build strong
relationships with their supply chain partners who possess indispensable
harmonizing capability. Success will depend on how well companies act as a
team to deal with significant processes and activities across business
boundaries to meet customer requirements.
4.2.2 Technological Explosion

Technological explosion refers to the frequent increase in the use of
technology in everyday life. Innovation counselling firm Gartner, Inc.
predicts that 6.4 billion associated things will be used the world over this
year, which is 30% more than the last year. Furthermore, this number is
relied upon to develop by multiple occasions to about 21 billion by 2020.
It is a name given to the present pattern of computerization and information
trade in assembling innovations. It incorporates digital physical frameworks,
the Internet of things, cloud computing and cognitive computing. Industry 4.0
is generally alluded to as the fourth industrial revolution. The manufacturing
industry established long ago is experiencing a principal change, denoting the
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Foundation of beginning of savvy manufacturing or Industry 4.0. Consistently,
Indian Business
advancements dependent on IoT to make plants more brilliant, more secure
and all the more naturally reasonable. IoT associates the modern unit to an
entirely different scope of keen assembling arrangements, which go around
the manufacturing process.
4.3 EMERGING TRENDS IN BUSINESS

Today’s world is more about the practice economy. Customers are ready to
squander money on concerts, dinner dates, and trips. That is the new kind of
strategy with the know-how economy. Organisations in the present scenario
are trying to build, synchronise with the old business in a new way.
It is sky-scraping tea break entrepreneurs comprehend the importance of

being fastidious in project identification. Till in recent times, we in India kept
on exploring the possibilities of manufacturing almost the whole lot, right
from pins to planes and screws to submarines. Just as companies and
individuals carry out SWOT (Strength, Weakness, Opportunity and Threat)
analysis for identifying business opportunities for our entrepreneurs. Peter
Dawson in his book has mentioned that perpetual state of commercialization
which will change the manner in which organizations work. The Great
Recession has modified the very establishments of life and business and set-
off changes that are changing enterprises and organisations. The meaningful
brands research, led by the Havas Group, met 300,000 individuals around the
world. They broke down 1,500 brands in 15 ventures, all over 33 nations they
found that.
A standout amongst the most immediate influencers of business achievement

is the economy. For universal associations, this implies watching out for both
local and worldwide patterns. Money related changes can display a wide
scope of issues for organisations with workers spread all over the world. As
per Reuters, the up and coming scene in developing markets is relied upon to
get rough on occasion. Be that as it may, this has been an unavoidable truth
for organisations with areas in a wide range of nations.
Business patterns are quickly developing. It appears innovation is progressing

at a consistent quicker rate. We are feeling the impact of these progressions.
Business intelligence and analytics are in high demand as organisations seek
to use information assets to improve business outcomes, customer
relationships, and operational efficiency. Some of the emerging business
trends are explained below:
4.3.1 Automation
Automation driven by AI and advanced equipment is set to upset work as we
know it. We are robotizing customary occupations out of existence regularly.
Examples of these disruptions are given as under:
• Pizza Hut replaced waiters with robots to take orders and process
payments.
• Walmart used automation to replace 7,000 accounting and invoicing
employees.
• iPhone maker Foxconn replaced 60,000 employees with robots.
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• Wendy’s replaced their lowest paid employees with robots. Emerging
Opportunities in
As automation matures work will shift from Augmented Intelligence to true Business
Artificial Intelligence. No one knows for sure when AI will reach that tipping
point but every industry will be impacted.
4.3.2 Blockchain
Blockchain was designed by Stuart Haber and Scott Stornetta in 1991 as a
method to promise the trustworthiness of digital records. Haber and Stornetta
propelled the world’s first business blockchain. A Blockchain is a practice for
making an index of entries, which cannot be changed after they are
completed. This equally applies to the index. Blocks on the blockchain are
comprised of virtual snippets of data. In particular, they have three sections:
• Blocks store data about exchanges, for example date, time, and amount of
your latest buy from online business.
• Blocks store data about who is taking an interest in exchanges. Rather
than utilizing your real name, your buying is recorded with no identifying
data utilizing an unique “digital signature,” similar to a username.
• Blocks store data that contrasts them from different blocks. Much like
you and I have names to differentiate us from each other, each block
stores a special code called a “hash” that enables us to separate it from
other blocks.
4.3.3 Artificial Intelligence

The recent boom in technology has led to demands for our applications that
include artificial intelligence (AI) and machine learning. This has led the
industry to develop the expertise in AI and ML tools so that the skills can be
implemented in the products. Artificial intelligence has been democratized.
Microsoft reported that AI is now present in a large portion of a billion
gadgets running Windows 10. Google has released TensorFlow. Berkeley AI
research released Caffe and Apache released Apache MXNEt. Amazon made
an AI stage for designers to work with an assortment of AI explicit systems
and services. The rise of automation to unmistakable quality is powered by
enormous spending and fast development in specific regions.
4.3.4 Machine Learning
Machine Learning (ML) is the field of learning that gives computers the
potential to gain knowledge of without being unambiguously programmed.
ML is one of the most exciting technologies that one would have ever come
across. Machine learning is the scientific study of algorithms and statistical
models that computer systems use to in actual fact perform a specific task
without using explicit instructions, relying on patterns and inference
instead Machine learning is an application of AI that provides systems the
capability to mechanically learn and progress from knowledge without being
overtly programmed. Machine learning focuses on the development of
computer programs that can right to use data and utilize it learn for
themselves.
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Foundation of • Early adopters of machine learning are findings ways to mechanize
Indian Business
machine learning by embedding processes into operational business
environments to drive business value. This is enabling more effective and
precise learning and decision-making in real-time.
• For businesses today, growth in data volumes and sources sensor, speech,
images, audio, video will keep on to gather speed as data proliferates.
• Today, organizations can inculcate machine learning into core business
processes that are connected with the firm’s data streams with the
objective of improving their decision-making processes throughout real-
time learning.
4.3.5 Social Shopping

As e-commerce has grown over the last decade or so, it has also evolved,
changed shape, and spawned numerous offshoots. One of those offshoots of
the big e-commerce insurgency is social commerce and it is making a big
plaster. Social shopping is a new term that illustrates a progression where
social network users can procure products that come into sight in their feeds
and channels without interrupting their browsing occurrence. Before social
shopping, a corporation could set an advertisement on a social network, and
anyone who wanted to purchase their product would necessitate clicking the
ad, visiting a landing page on the company website, and ensuring through a
purchasing funnel. Once their purchase was inclusive, they could
recommence browsing their social network. The key divergence with social
shopping is that the user can currently make a procure without ever leaving
their social network feed.
According to Adweek, the top 500 retailers brought in nearly $6.5 billion
from social shopping in 2017. Social shopping is by all accounts on the
ascent. It will change how we consider moving items and administrations
since it is a moderately new channel that requires an alternate methodology.
Social shopping is a method of e-commerce where shoppers’ friends become
involved in the shopping experience.
4.3.6 Robotics
Robotics deals with the design, construction, operation, and use of robots, as
well as computer systems for their control, sensory response, and information
processing. These technologies are used to develop machines that can
substitute for humans and replicate human actions. Robots can be used in
numerous states of affairs and for lots of purposes including business. One of
the most common tasks robots perform for businesses is product assembly in
an industrial space. Manufacturing robots handle tasks such as welding,
sorting, assembly and pick-and-place operations with greater speed and
efficiency than human workers could ever hope to achieve. Most robots today
are used to do repetitive actions or jobs considered too dangerous for humans.
A robot is perfect for going into a building that has a possible
bomb. Robots are also used in factories to fabricate things like cars, candy
bars, and electronics.
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Emerging
4.3.7 E-Tailing Opportunities in
Electronic retailing (e-tailing) is a buzzword for any business-to-consumer Business
(B2C) transactions that take place over the Internet. Simply put, e-tailing is
the sale of goods online. The key difference between e-tailing and
e-commerce is that e-tailing is the action of selling of retail goods on the
Internet whereas e-commerce is the commercial transactions conducted by
electronic means on the Internet. We will discuss more in detail about
E-Commerce in forthcoming heads. With the continuation of shopping online
and other accessory applications, e-tailers can in reality have diverse forms of
transactions to choose from, either for business to business, consumer to
business, or consumer to consumer transactions. There are various impacts
of E-tailing in business. Some of them are mentioned below:
• E-tailing as a platform will also eliminate the barriers between businesses

and consumers, because the information about the product and the
business is made easily accessible, making the information readily
available.
• E-tailers can personally connect with their consumers and consumers can
give their appropriate feedbacks accordingly, making it an excellent
customer service tool.
• It also provides customers and businesses an extensive display of options
to choose from for the reason that they offer more elastic paying and
pricing systems and they equally grant more opportunities for businesses
to check contest.
4.3.8 Retail Entrepreneurship

The retail industry is observing a big boom in this decade. The experts are
expecting a bigger growth in the future. The expansion rate is 15% and
currently, it comprises 10% of India's GDP. The figures are enough to
explain the colossal growth of the industry. It also depicts the right time to
invest in a prospective retail business and become a part of the boon of
consumerism. The attractive economy is literally becoming a global
destination for many marvellous retail brands. They want to invest and
operate in the Indian market and uplift the life and stature of the Indian
population. The factors such as the rise in the working population, increased
disposable income household income, affluence, enhanced lifestyle, demand,
and government aids for businesses are contributing largely to the boom of
this industry. If you are thinking of launching your own business, this is the
right time to invest and enter the promising platform to create a remarkable
future.
1) What has been the impact of E-Commerce boom in India?
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Foundation of 2) What do you mean by robotics?
Indian Business
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3) What has made India one of the world’s fastest growing emerging
market economies?
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4) Give some examples of automation in business.
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4.4 IMPACT OF TECHNOLOGY ON BUSINESS

Businesses are affected by changes in the technological atmosphere.
Technology revolutionises and offers risks, opportunities and threats to
businesses. Some businesses can exercise changing technology to step
forward products and processes or even engender new products and processes
that will expand markets and profits. We have been witnessing how has
know-how transformed business.
Stone Age, Iron Age, Bronze Age, Steel Age, described in our history have
been defined on the basis of technology. It is the innovation and
transformation of activities which had brought transformation in business.
The transformation has been facilitating the progression in technology. The
progression which has changed the world around us. Look at Fig 4.1 which
shows effects of technology on business.
Benefits of Technology in the Business

Technology has both tangible and intangible benefits. It helps a business to
formulate ideas and fabricate the results that the customers demand.
Technological infrastructure affects the culture, effectiveness and
relationships of business. Depicts effects of technology on business
operations. Look at the Fig. 4.1 which shows the effects of technology on
business.
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Emerging
SECURITY EFFICIENCY EXPOSURE
Opportunities in
Business
• Technology • Work faster • These days it's
protects your and make easy to gain
business from fewer mistakes brand exposure
cyber attacks when you use by shopping
and viruses. technology to online and
complete your communicating
work. with your
target
audience.
Fig. 4.1: Effects of technology on business
While the benefits of technological advancement in business are too many,

let us learn a few key advantages:
• Reducing Business Costs: Small business owners can bring into play
innovation to reduce business costs. Business innovation mechanizes
back office operations, for example, record keeping, account
accounting, payroll
and finance. Entrepreneurs
ntrepreneurs can likewise utilis
utilise know-how to assemble
secure conditions for keeping up important business or customer data.
• Harmonising Communication: Technology facilitates in harmonisation

of the communication process. For example, emails, texting, websites
and personal digital products applications, known as “apps,” may
facilitate the communication with consumers. Companies can further
take customer criticism through these electronic communic
communication
methods. These methods also allocate companies to reach customers via
mobile devices in a real-time
time arrangement.
• Potential enlargement in Business: Technology permits small

businesses to accomplish the operations in the new markets. Rather than
just selling consumer goods or services in the restricted market, small
businesses can accomplish regional, national and international markets.
Retail websites are the most widespread technique for small businesses
to sell products in quite a few dissimilar ecoeconomic markets. Websites
provide a minimal effort choice that shoppers can get to all day, every
day when expecting to buy merchandise or services. E Entrepreneurs can
likewise utilisee Internet publici
publicising to achieve new markets and clients
through mindfully placed web promotions.
• Considerations: Business technology enables organi organisations to

subcontract business operations to different organisations in the
worldwide and local business surroundings. Outsourcing can encourage
organisations
ations to lower expenses and focus on finishing the business work
they do. Technical help and customer care are two important operations
that organisations
ations subcontract. Entrepreneurs may consider outsourcing
of the operations for which they do not have the fitting offices or
reachable labour.
bour. Innovation enables organis
organisations to contract out
capacity to the least expensive territories conceivable, including foreign
nations. The world is experiencing a profound situated adjustment, on
account of constant connectivity universally. This is making a
requirement for a computerized change of the entire thing – from retail to
our postal framework. It is changing our foundation needs and it is
additionally expanding the velocity of business. To remain on the ball
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Foundation of entrepreneurs should likewise change the traditionally settled methods
Indian Business
for working their ongoing business.
Changes in Business are Fast-Paced
When the business environment is altering and they take action accordingly
to provide accommodation with these changes. This adjustment may facilitate
businesses manage change. Companies have an improvement when they have
managers and leaders in place that are predominantly skilled sensing when
change needs to happen. With the rise of new tools such as artificial
intelligence, robotics, and automation, may bring new changes in the
organisations. Managerial comprehension and acquaintance of the long-
established leadership models are no longer adequate to be successful and
excel in today’s speedily changing business environment. These fast-paced
changes also need to be reproduced in business.
4.5 E-COMMERCE
The term “E-Business” was coined by IBM’s marketing and Internet teams in
1996. In 1997, IBM marketing, with its agency Ogilvy & Mather began to
use its foundation in IT solutions and expertise to market itself as a leader of
conducting business on the Internet through the term “e-business.”
E-Business is the conduct of business on the Internet, not only buying and
selling, but also servicing the customers and collaborating with the business
partners. E-Business includes customer service (e-service) and intra-business
tasks. Example of E-Business: An online system that tracks the inventory and
triggers alerts at specific levels is E-Business. Inventory Management is a
business process. When it is facilitated electronically, it becomes part of E-
Business. An online induction programme for new employees automates part
or whole of its offline counterpart.
4.5.1 Meaning of E-Commerce

E-Commerce is defined as those commercial transactions carried out using
the electronic means, in which goods or services are delivered either
electronically or in their tangible or intangible form. E-commerce is the
activity of buying or selling of products on online services or over the
Internet. Electronic commerce draws on technologies such as mobile
commerce, electronic funds transfer, supply chain management, Internet
marketing, online transaction processing, electronic data interchange (EDI),
inventory management systems, and automated data collection systems.
Examples of E-Commerce:
a) Online shopping: Buying and selling goods on the internet is one of the
most popular examples of E-Commerce.
b) Electronic payments: When we are buying goods online, there needs to
be a mechanism to pay online too.
With the e-commerce boom, the number of people using credit/debit cards
and mobile wallets has increased exponentially. Innovative finance services
are the need of the hour. India has the world’s fast-growing internet
population, and that is an indicator of the huge potential of e-commerce. The
e-commerce segment was pegged at around $30 billion in 2019.
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Emerging
4.5.2 Traditional Commerce v/s E-Commerce Opportunities in
Traditionally the trading of merchandise and services used to happen in Business
conventional mode. For example, the client needed to go to the market, take a
mixture of items and then acquire them by paying the predefined amount. Be
that as it may, with the coming of web-based business individuals can
purchase merchandise, pay bills, or move cash in only a single click.
Both the mode have their own pros and cons. The differences between
traditional commerce and e-commerce are discussed below:
Table: 4.1: Traditional Commerce v/s E-Commerce
Basis for comparison Traditional commerce e-commerce
Meaning Traditional commerce is E-commerce means

a branch of business carrying out
which focuses on the commercial transactions
exchange of products or exchange of
and services and information
includes all those electronically on the
activities which internet.
encourage exchange in
some way or other.
Processing of Manual Automatic

transaction
Accessibility Limited time 24 × 7 – time
Physical Inspection Goods can be inspected Goods cannot be

physically before inspected physically
purchase before purchase
Customer interaction Face-to-face Screen-to-face
Scope of business Limited to a particular Worldwide Reach

area
Information exchange No uniform platform Provides an uniform

for the exchange of platform for
information information exchange
Marketing One way marketing One-to-one marketing
Payment Cash, cheque, credit Credit card, fund

card etc. transfer, e-wallets etc.
Delivery of goods Instantly Takes time
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Foundation of
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4.5.3 Features of E-Commerce
E-Commerce sites have given access to the large markets. Let us learn the
salient features of e-commerce.
1) Real-time Shopping Experience at Online Shopping: E-commerce

sites provide you interactive platform to expectance real time for
shopping experience. Most online retailers have offices to talk on the
web, find proposals and solution every one of your inquiries. Online
membership even enables you to hold the item and contact it (for
example Style mint, Birch box), and some even give you a chance to
talk from the beginning while you are shopping with Catalog.
2) Using Mobiles and Android Apps for Transaction: With the cell
phones dwarfing the work areas, the utilisation of these gadgets for
purchasing will increase further. Moreover, the sites must act as an
application and must be exceptionally responsive. We have numerous
sorts of applications now that help shoppers check out on their own, use
instalment wallet, store coupon codes like India square coupons
loyalties, card numbers and have GPS for the appropriate promotion of
organisations. There are additional applications that will give you a
chance to look at the costs of a similar item at various outlets.
3) Multi-channel: Purchasers nowadays anticipate an exceptionally easy

exchange. They expect that a product added to the cart will be
accessible to them. To fulfill the expectations of the customers IT
executives may put resources into business bundles, E-Commerce POS
frameworks and CRM frameworks, which will facilitate the business
operations.
4) Big Data: Also called Hadoop strategy is taking care of a great deal of
information. This has been an idea that has been capturing the interest
of the E-Commerce site proprietors, and it is set down deep roots. It is
syncing disconnected information and online information together. It
enables retailers to comprehend the concealed purchaser designs the
retailers may upgrade the IT platform to meet the growing business
requirements.
5) Customisation and Personalisation: In an unstable market, one must

be prepared for change all the time, not generally but rather for
personalisation. Customised proposals will discover more prominence
in the market.
6) Valuing Customer Engagements than Conversion Ratio: Till date

the conversion rates were given the most priority. However, with the
ascent in E-Commerce destinations, assembling new clients will be
intense. So normally retailers will rely upon clutching the current
clients. Client commitment will guarantee individuals build up for your
site.
7) Push Notifications: Pull browsing is the most recent pattern now, yet it
is not far when push perusing will surpass it. Message notices, basket
notices for specific things on your homepages are for the most part
going to make up for lost time force.
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8) Social Networking Sites: As the long range interpersonal Emerging
Opportunities in
communication locales are expanding retailers must utilise this stage Business
for advertising and moving their items. Facebook, Twitter, LinkedIn
have been emerging good platforms for accruing information about the
most recent discounts and offers.
9) Mobile POS and Accessing Via Mobile: The idea of Mobile POS is
to make every single representative work and permit the client to
execute without being to the charging counter. On account of the
Android 4.2 Jellybean and iOS 6 that permit applications that let the
client do unlimited tasks with such applications.
10) Retailers Support to Omni-Channel Consumers: The mobile

applications facilitates you to analyse costs, check the surveys on the
web and offer the item with friends. The retailers will also incorporate
their different channels into one for offering support to the purchasers.
4.5.4 Benefits of E-Commerce

E-Commerce has reformed the idea of directing business by giving an
equivalent opportunity to all the business to mark their worldwide presence.
It has facilitated the clients with internet shopping and simple exchanges.
With the presentation of E-Commerce business, correspondence has turned
out to be easy and has additionally changed a great deal lately to improve
things.
It helps to reach Global: E-Commerce enabled business now have access to

people all around the world. In effect, all E-Commerce businesses have
become virtual multinational corporations. E-Commerce expands the market
place to national and international markets. Internal and web-based E-
Commerce helps to reach a more geographically dispersed customer base and
more business partners as compared to the traditional business methods.
Cost Effective: E-Commerce has ended up being exceptionally practical for

business worries as it chops down the expense of showcasing, producing,
marketing, stock administration, client care and so on. It additionally
diminishes the weight of foundation required for leading business. It can
likewise gather and deal with the data identified with the clients productively
which will help the buyer in creating an effective promotional technique.
4.5.5 Disadvantages of E-Commerce

The following are the important disadvantages of electronic commerce:
E-commerce Lacks the Personal Touch: Not all physical retailers have an
individual methodology, however, retailers do value human relationship.
Subsequently, shopping at those retail outlets is consoling and invigorating.
Tapping on "Purchase Now", and heaping up items in virtual shopping
baskets may provide glimpse of the product. The interactivity aspect may
provide feeling of personal touch to the customers.
System and data integrity: A computer virus is a program that clones itself
when an injected piece of program code is executed. It is a malicious
program. Data protection from the viruses that cause unnecessary delays and
can clean up all stored information is a must. The technical and human 73
Foundation of threats to web site security requires effective response for smooth operations
Indian Business
of the business.
E-Commerce Delays Goods: E-commerce sites take much longer time to get
the products into the customer's hands. Indeed, with express dispatching the
buyer gets the merchandise quickly. A special case to this standard is on
account of advanced merchandise like a digital book or a music record. For
this situation, an online business may really be quicker than acquiring
products from a physical store. Moreover, the delay in delivery of goods is a
matter of concern for the customers.
4.6 M-COMMERCE
M-commerce (mobile commerce) is the buying and selling of goods and
services through smart mobile devices. As a form of e-commerce, m-
commerce enables users to access online shopping platforms without needing
to use a desktop computer and take into consideration application based
phenomenon which in the current trend known as app. M-commerce plays a
very important function in business. It does this through many significant
applications like location-based services which allowed customers to glance
through their mobile devices in order to find services that are in close
proximity to their current location. They can also gain access to important
purchase data, reach new markets, and scale and time their messages
perfectly.
4.6.1 App Based Business Using Smartphone

Business software or a business application is any software or set of
computer programs used by business users to perform various business
functions. These business applications are used to increase productivity, to
measure productivity and to perform other business functions accurately.
This section will throw light on identifying the key players in the mobile
application value chain.
• Benefit from extensive forecasts and statistical material.

• Recognize the business opportunities in the mobile application market.
• Predict tomorrow’s most profitable monetisation strategies.
• Learn about the market opportunity for mobile network operators.
• Evaluate the existing mobile app platforms.
Software particularly created for cell phones has been around for well over
10 years and before the term (application) store was promoted. The
conveyance of mobile content and applications was regularly acknowledged
via portals which were overseen by system administrators. Administrator
entryways had some achievement in moving mobile substances.
4.6.2 Wallets and Plastic Money in Business

The plastic money has emerged as an important way of performing business
transactions. A recent American Express ‘share of wallet' study among
cardholders across the six cities of Delhi, Mumbai, Kolkata, Chennai,
Bangalore and Hyderabad reveals that card usage is highest for dining and
74
shopping, while it is also popular for travel-related expenses such as air Emerging
Opportunities in
tickets, hotels and car rentals. With GoI announcing on November 8, 2016, Business
India's first major ‘demonetization’, and amid the resultant cash squeeze
coming as a disruptive step to fast-forward the country into a breakaway
economy. As many as 23.3 crore unbanked people, out of 38 crore
smartphone users, are skipping the plastic money stage altogether and
embarking directly into digital transactional stage. No wonder, Nandan
Nilekani, one of India’s most famous IT czars and creator of Aaadhar Cards,
said digital transactions will escalate in the next three to six months to a rate
that would otherwise have taken three to six years.
An eWallet or a Digital Wallet like Paytm is a virtual wallet in which you can
deposit your money, and these wallets can be used to avail digital payment
services. Digital payment services refer to things like being able to pay at a
business without the need of physical currency and vice versa. These wallets
can be used to make payments and to receive payments as well. In these
wallets are regulated by RBI i.e. Reserve Bank of India and they can allow
users to keep a balance of up to Rs. 20,000 in a wallet for non - K Y C
accounts and KYC accounts the limit is higher and up to Rs. 100,000.
Examples of popular E-Wallets are Free charge, Mobikwik, Paytm etc.
An Electronic Money Processing platform gives you the opportunity to build

your own payment business without starting from scratch. A full-fledged
payment system has been made available for all kinds of payments and
transfers. Whether you operate financial services company, a retail network
or a telecom operator – E-Wallets allow businesses to harness up-to-date tech
trends.

1) How do technology help in reducing business costs?
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2) What is E-Commerce? Give a few examples of E-Commerce.
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3) What are the disadvantages of E-Commerce?
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75
Foundation of 4) Which is the regulatory body of E-Wallets and Digital Wallets in India?
Indian Business
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4.7 FRANCHISING
In a franchise operation, the owner of the original business, known as the
franchisor, essentially sells the rights to use his brand to an entrepreneur
called a franchisee. In return, the franchisee agrees to follow the franchisor’s
business model and to pay the franchisor royalties.
Franchising has been emerging as in important way for business

development. A franchiser licenses its know-how, methodology, protected
innovation, utilisation of its plan of action, brand; and rights to pitch its
marked items and administrations to a franchisee. Consequently, the
franchisee pays certain charges and consents to conform to specific
commitments, regularly set out in a Franchise Agreement. For the franchiser,
utilisation of an established framework is an elective business development
technique, contrasted with extension through corporate claimed outlets or
"chain stores".
4.7.1 Benefits of Franchising

The most significant cause to think about a franchise when buying a business
is that you are buying a system. Since there is a previously recognized system
in place, there is a higher probability of accomplishment if you follow it.
These systems are designed to get better the overall efficiency and augment
sales of each franchise.
Capital: The franchisor’s capital requirements will be lesser because the
franchisees provide the capital to open each franchised channel.
Better Management: The local management of each franchised unit will be
highly motivated and very helpful. They care for the franchise units as their
own and that will frequently lead to higher sales and profit levels.
Less Employees: The number of employees which a franchisor needs to
operate a franchise network is much smaller than they would need to run a
network of company owned units.
Speed of Expansion: The franchise network can grow as fast as the
franchisor can develop its infrastructure to recruit, train and support its
franchisees.
Reduced Attachment in Day-To-Day Operations: The franchisor will not
be drawn in the day-to-day operations of each franchised outlet.
Risks and Accountability: The franchisor will not risk its capital and will
not have to sign lease agreements, employment agreements, etc.
76
Increasing Brand Fairness: Levereging off the assets of franchisees helps Emerging
Opportunities in
franchisors grow their market share and brand equity more quickly and Business
effectively.
Publicity and Support: Franchisor will reach the target customer more
effectively through co-operative advertising and promotion initiatives.
Consumer Faithfulness: Franchisors use the power of franchising as a
system to build customer loyalty to catch the attention of more customers and
to keep them.
Worldwide Growth: International expansion is easier and quicker, since the
franchisee posesses the local market knowledge.
4.8 LOGISTICS AND SUPPLY CHAIN BUSINESS

As far back as history records, the merchandise that individuals needed were
not generally delivered where they needed to consume them, or these
products were not available when individuals needed to buy them.
Nourishment and different items were generally scattered and were just
accessible in bounty at specific occasions of the year. Earlier people had the
decision of delivering merchandise at their prompt area or moving the
products to a favoured site and putting away them for later use.
As logistics frameworks enhanced, utilisation and generation started to

isolate geologically. Districts would have some expertise in those items that
could be delivered generally effectively. Abundance generation could be
dispatched monetarily to other delivering regions, and required merchandise
could be either produced or bought. This trade procedure pursues the
standard of similarly preferred standpoint. This equivalent standard, when
connected to world markets, clarifies the abnormal state of global exchange
that happens today. Proficient logistics frameworks enable organisations to
exploit the fact that land, and the general population living there, are not
similarly profitable. Logistics is the very substance of exchange. It adds to a
higher financial way of life for all of us.
4.8.1 Significance of Logistics

Logistics is tied in with making value for clients and providers of the firm,
and incentive for the association's partners. The value in logistics is
essentially communicated particularly in terms of time and place. Items and
services have no value except if they are in the ownership of the clients when
(time) and where (place) they wish to expend them. For instance, concessions
at a games event have no value to buyers on the off chance that they are not
accessible at the time and place that the event is happening. Great logistics
management sees every action in the store network as adding to the way
toward including value. Value is added when clients are eager to pay more
for an item or service than the expense to put it in their grasp. To numerous
organisations all through the world, logistics has turned into an inexorably
essential value including the process for various reasons.
The term “procurement” is defined as “all those activities necessary to

acquire goods and services consistent with user requirements” The
procurement process is renamed as “supplier relationship management”. 77
Foundation of Practical storehouses incorporate Marketing, Research and Development,
Indian Business
Finance, Production, Purchasing and Logistics. Exercises in these procedures
live inside a utilitarian storehouse, yet a whole procedure won't be contained
inside one capacity. Each procedure is depicted at key and operational
dimensions. The vital part comprises of the foundation and key
administration of each procedure and gives an outline to usage. This is a vital
initial phase in incorporating the firm with different individuals from the
Supply chain. The operational segment is the realization of the procedure
once it has been set up.
4.9 OUTSOURCING AND OFFSHORING

Outsourcing and offshoring are two terms that every businessman is aware of
whether you outsource any function of your business or not. Most of the
time, these two terms are interchanged in conversation or even confused by
some to think they are one and the same. However, there are some
fundamental differences between the two. Outsourcing alludes to an
association contracting work out to an outsider, while offshoring alludes to
completing work in an alternate nation, more often than not to use cost points
of interest. The greatest contrast is that while outsourcing can be (and
regularly is) offshored, offshoring may not constantly include outsourcing.
4.9.1 Outsourcing
In simple terms, outsourcing refers to the act of contracting a third party
company to carry out certain functions of your business. Outsourcing can be
done for the sake of reducing operating costs as outsourcing is more cost
effective than hiring an in-house team.
Outsourcing turned into a well-known business technique back in the late 80s
and mid-90s to battle rising work costs and an inexorably worldwide
commercial centre. Basically, outsourcing is the way toward utilising outsider
specialist co-ops to deal with certain business capacities. At one time,
outsourcing was constrained to huge, global enterprises. Be that as it may,
today organisations of all sizes can take the advantages of outsourcing. Much
of the time, the advantages of outsourcing are not an enhancement procedure
they are a need. Frequently the main plausible approach to develop your
business, launch an item, or oversee activities is to appoint certain errands to
an outside merchant.
4.9.2 Offshoring
Off-shoring is the relocation of a business process from one country to
another typically an operational process, such as manufacturing, or
supporting processes, such as accounting. Typically this refers to company
business, although state governments may also employ off-shoring. Off-
shoring refers to a company getting their various services handled in a
different country to make the most of the cost advantage. Off-shoring is
usually done by finding a country where the exchange rate gives your
business a distinct monetary benefit. Companies based in western countries
like the U.S or U.K offshore their business to countries like India,
Philippines, and China etc.
78
Emerging
4.9.3 Difference between Outsourcing and Offshoring Opportunities in
As discussed above, outsourcing alludes to an association contracting work Business
out to an outsider, while off-shoring alludes to completing work in an
alternate nation, for the most part, to use cost focal points. The greatest
contrast is that while outsourcing can be (and regularly is) off-shored, off-
shoring may not constantly include re-appropriating.
Table 4.2: Comparison between outsourcing and offshoring

Basis for Outsourcing Offshoring
comparison
Meaning Outsourcing is the Offshoring refers to the
assignment of business relocation of business
peripheral operations to an processes in a different
external organisation. country.
Implications Shifting operations to the Shifting activities or
third party. offices.
Objective Focus on core business Lower labour cost
activities
Function Non-employees Employees of the
performed by organisation
Location Within or outside the Outside the country.
country.

1) What are the modern classifications of markets?
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2) Name few largest franchises of the World?
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3) What are the objectives of supply chain management?
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4) What are the advantages of off-shoring?
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79
Foundation of
Indian Business 4.10 LET US SUM UP
The internet has touched our lives in more ways than we care to
acknowledge. The development of internet has considerably changed the day
to day operations of a business including how they corresponded with each
other and their audience.
Internet of things is a network of devices which allows these things to

connect, interact and exchange data. It has the potential to change our world.
Technological innovation is a name given to a present pattern of

computerisation and information trade in assembling innovations. It
incorporates digital physical frameworks, the internet of things, cloud
computing and cognitive computing. Some emerging trends of business are:
1) Automation 2) Blockchain 3) Artificial Intelligence 4) Machine Learning
5) Social Shopping 6) Robotics 7) E-Tailing 8) Retail Entrepreneurship.
Businesses are affected by changes in the technological atmosphere.

Technology revolutionises and offers, risks, opportunities and threats to
businesses. Technology offers many benefits to the business by 1) Reducing
business course 2) Harmonising communication 3) Potential enlargement in
business etc.
E-Commerce refers to the conduct of business on the internet that includes

customers service and other business tasks. E-Commerce sites have given
access to the large markets. Various features or e-commerce sites are:
1) Real-time Shopping Experience at Online Shopping 2) Using Mobiles and
Android Apps for Transaction 3) Multi-channel 4) Big Data 5) Customisation
and Personalization 6) Valuing Customer Engagements than Conversion
Ratio 7) Push Notifications 8) Social Networking Sites 9) Mobile POS and
Accessing Via Mobile 10) Retailers Support to Omni-Channel Consumers.
E-wallet is the virtual wallet in which you can deposit your money and these
wallets can be used to avail digital payment services.
Franchising is an agreement between a franchisor and franchisee in which a

franchisor is the owner of the original business and he sales the right to use
the brand to an entrepreure called franchisee
Outsourcing refers to the act of contracting a third party company to carry out
certain functions for the sake of reducing operating cost where as off-shoring
is the reallocation of a business process from one country to another.
4.11 KEY WORDS

Internet of Things : The Internet of things (IoT) is the network of devices,
vehicles, and home appliances that contain electronics, software, actuators,
and connectivity which allows these things to connect, interact and exchange
data.
Industry 4.0 : It is a name given to the current trend of automation and data
exchange in manufacturing technologies.
80
Blockchain: Blockchain is defined as a digitized, decentralized ledger that Emerging
Opportunities in
logs all business transactions. Business
E-Commerce: E-commerce means carrying out commercial transactions or

exchange of information electronically on the internet.
E-wallets: E-wallets is a virtual wallet in which you can deposit your money,
and these wallets can be used to avail digital payment services.
Franchising: Franchising is a form of business by which the owner

(franchisor) of a product, service or method obtains distribution through
affiliated dealers (franchisees).
Outsourcing: Outsourcing refers to the act of contracting a third party

company to carry out certain functions of your business.

1) What is Internet of Things (IoT)?
2) What are the emerging trends in business?
3) How technology has impacted the business in today's time, and what
are its benefits?
4) What are the differences between E-Commerce and traditional
Commerce?
5) What are the features of E-Commerce?
6) What are Digital Wallets?
7) What are logistics? State the significance of logistics?
8) What is outsourcing? How is it distinguished from off-shoring?
81
Foundation of
Indian Business SOME USEFUL BOOKS
Basu C. R. (2017), Business Organisation and Management, Mc Graw Hill
India.
Tulsian. P.C. (Recent Edition), Business Organisation and Management,

Pearson.
Gupta C.B. (2018), Business Organisation and Management, Sultan Chand

and Sons.
Singh B. P. and T. N. Chhabra, Business Organisation and Management,

Dhanpat Rai and Co.
82
BCOC-132
Management
Business Enterprises 2
BCOC-132
Management
Block
2
BUSINESS ENTERPRISES
UNIT 5
Forms of Business Organisation-I 5
UNIT 6
Forms of Business Organisation-II 35
UNIT 7
Public Enterprises 46
UNIT 8
International Business: Multinational Corporation 72
Prof. R.P. Hooda
Prof. Nawal Kishor
Darjeeling

Dr. Anupriya Pandey

Prof. Nawal Kishor (Unit 8) Prof. Nawal Kishor
Business Organisation: ECO-01 (Editor & Course Coordinator)
(Unit-2, 3 and 17 Revised by Prof. Nawal Kishor)
(Editor & Course Coordinator)
Dr. Nafis Baig (Retd.), AMU, Aligarh, UP
Dr. R.N Goyal (Retd.), Deshbandhu College
MATERIAL PRODUCTION
May, 2019
ISBN:
Printed at:
BLOCK 2 BUSINESS ENTERPRISES
You have learnt foundation of Indian business covering introduction to business,

technological innovation, social responsibility and emerging opportunities in
business in Block 1. This Block 2 entitled Business Enterprises deal with the
various forms of business organisation, Public enterprises and the importance
of international business and recent trends, features and challenges of
multinational corporation.
Unit 5 explains various forms of business organisation and discusses the

features, merits and limitations of each form.
Unit 6 compares all forms of business organisation and analyses the factors
affecting the choice of form of business organisation.
Unit 7 explains the features, merits and limitations of various forms of

organisation of public enterprises and analyses their suitability in given situations.
Unit 8 discusses the importance of international business and features, trends

and challenges of multinational corporation.
Business Enterprises
4
Nature and Scope of Business
UNIT 5 FORMS OF BUSINESS
ORGANISATION-I
Structure
5.0 Objectives
5.1 Introduction
5.2 Sole Trader Organisation
5.2.1 Main Features
5.2.2 Merits and Limitations
5.3 Partnership Form of Organisation
5.3.1 Main Features
5.3.2 Classification of Partners
5.3.3 Partnership Deed
5.3.5 Joint Hindu Family Firm
5.3.6 Limited Liability Partnership
5.4 Company Form of Organisation
5.4.1 Main Features
5.4.2 Classification of Companies
5.4.4 One Person Company
5.4.5 Small Company
5.5 Cooperative Form of Organisation
5.5.1 Main Features
5.5.2 Classification of Cooperatives
5.6 Let Us Sum Up
5.7 Key Words
5.0 OBJECTIVES
After studying this unit, you should be able to:
describe the various forms of business organisations
discuss the features of each form of business organisation
explain the merits and limitations of each form of business organisation
5.1 INTRODUCTION
You must be knowing that any activity carried with profit motive is called
business. Such activity may be an industrial activity, a trading activity or a service
activity like banking, insurance, transportation, etc. Bringing various resources
together to set up a business and putting them to work systematically is termed 5
Business Enterprises as business organisation. The person who takes initiative to set up a business,
provides the necessary funds and bears the risk involved is called the owner of
the business. When the business is organised on small scale, it may be possible
for one person to provide the funds and bear the risk. But when it is large, he
may need others to join hands. Thus, business may be owned by an individual or
a group of persons. When a business is owned and carried on by one person it is
called ‘Sole Trader Organisation’. But when it is owned by a group of persons it
may take the form of partnership firm, a company or a cooperative society. In
this Unit, you will study in detail the features, classification, merits and limitations
of these different forms of business organisations.
Look at Figure 5.1. It shows various forms of business organisation.
Forms of Business
Organisation
Non-cooperative Forms of Cooperative Forms of

Organisations Organisations
Sole Trader Partnership Joint Stock Cooperative

Organisation Organisation Company Organisation
Fig. 5.1: Various Forms of Business Organisations
5.2 SOLE TRADER ORGANISATION

The sole trader organisation (also called proprietorship) is the oldest form of
organisation and the most common form of organisation for small business even
today. It is the simplest and easiest to form. What is required is that an individual
decides about the type of business to be started and arranges the necessary capital.
Required capital may be mobilised from his own savings, or may be borrowed
from friends and relatives. The business may be carried either in a portion of his
own residence or in a rented building. The person generally manages the business
on his own. He may also take the help of his family members or employ some
persons, if necessary. He can take the advice from others in running the business,
but his own decision will be the final decision. Thus, the sole trader enjoys full
control over the affairs of the firm. He enjoys all the profits earned by the business.
So in case of loss, naturally, he has to bear the full brunt of it.
Thus, we can now define sole trader organisation as “one man’s business in
which an individual produces independently with his own capital, skill and
intelligence and is entitled to receive all the profits and assumes all the risks of
ownership”. J.L. Hanson defines it as “a type of business unit where one person
is solely responsible for providing the capital for bearing the risk of the enterprise
and for the management of the business”. Under this form of business
organisation, no distinction is made between the business concern and the
6 proprietor. Likewise, the management rests with the same person.
5.2.1 Main Features Forms of Business
Organisation-I
Based on the above discussion, we can list the main features of sole trader
organisation as follows.
1) One man ownership: The ownership lies with one person only. There are
no associates or partners. He invests his own money or borrows from the
friends and relatives.
2) No separation of ownership and management: The owner himself

manages the business. Therefore, the separation of ownership and
management which is quite common in big business is not present in this
form of organisation. Since the proprietor himself manages the business,
he exercises a high degree of supervision and control in the working of his
business.
3) No separate entity: The business does not have an entity separate from the
owner. The proprietor and the business enterprise are one and the same.
4) All profits to proprietor: Since there are no partners, all the profits are
enjoyed by the sole proprietor.
5) Individual risk: All losses in the business are borne by the proprietor
himself.
6) Unlimited liability: The proprietor has an unlimited liability. This means

that in case of loss even the personal property of the owner can be utilised
for clearing the business obligations and debts.
7) Less legal formalities: To set up sole proprietorship, no legal formalities

are required. Of course, there are some legal restrictions for the setting up
of a particular type of business. For example, an individual cannot start a
bank or an insurance company. But one can start a fruit stall or a cycle shop
without much legal formalities. However, in some cases a licence may be
required. For example, to start a restaurant, you need licence from municipal
corporation

You have learnt about the main features of the sole-trade business. In view of
these features, this form of organisation has the following merits and limitations.
Merits
1) Easy formation: There are no legal formalities to be observed while starting

this form of organisation. Therefore, its formation is very easy and simple.
The expenditure involved in the process of formation is also negligible.
2) Direct motivation: As you know, all the profits and gains of the business
are solely and exclusively pocketed by the sole proprietor. This motivates
the proprietor to work hard and develop the business to get more and more
profits. His involvement in the business is, therefore, complete and free.
3) Full control: The proprietor is the monarch of the business he owns. He

manages the whole business and takes all decisions himself. In other words,
7
Business Enterprises proprietor exercises full control over the functioning and working of the
business.
4) Quick decision: The proprietor does not depend on others for decision
making. Since there are no partners, he is not required to consult others.
This enables the proprietor to take quick decisions on numerous matters
concerning his business.
5) Flexibility in operations: Being a small organisation, it is easy to bring

changes if situation so demands. In a large sized organisation to bring
changes is difficult.
6) Secrecy: Since the whole business is handled by the proprietor, his business
secrets are known to him only. He is not bound to publish his accounts.
Therefore, the degree of secrecy is the highest in this form of organisation.
7) Personal touch: When the proprietor handles everything relating to the

business himself, it is easy to maintain a personal rapport with the customers.
He can easily know their tastes, likes and dislikes and adjust his operations
accordingly. Similarly, in this form of organisation, employees, if any, work
directly under the proprietor. So, it gives scope for the proprietor to maintain
harmonious relations with the employees.
8) Dissolution easy: Since there are no co-owners or partners, there is no

scope for the difference of opinion in the case of dissolution of business.
The proprietor is free to withdraw from the business or to sell it at any time
he wants. Because of ease in formation and withdrawal, proprietorship form
is often used to test business ideas.
Limitations
1) Limited resources: The capital and other resources of an individual are

always limited. The sole trader has to mainly rely on his own money and
earnings, or he can borrow, if necessary, from relatives and friends. Thus,
the proprietor has a limited capacity to raise funds. This makes it difficult
to plan any large scale expansion.
2) Limited managerial capability: In the modern business, knowledge and

skills in various fields like production, finance, marketing, etc., are required.
It is not possible for a single individual to possess expertise in all these
areas. So, his decisions may not be balanced.
3) Not suitable for large scale operation: Since the resources of the sole
trader are limited, it is suitable only for small business and not for large
scale operations.
4) Unlimited liability: You know that the proprietor has an unlimited liability.
In case of a loss, even his personal property and belongings can be utilised
for clearing business obligations Therefore, he cannot take much risk and
is discouraged from expansion of his business.
5) Less stability: The continuity and stability of the business depends solely
on one person. When the man dies, there is a likelihood of closure of the
8 business.
6) No check and control: As the sole trader is the monarch of the business, Forms of Business
Organisation-I
no outsider can question him on his acts and deals. There are no checks
and controls on the sole trader.
7) Less scope for economies of scale: Sole trader usually operates on small
scale only. So, he can not enjoy the benefits of large scale production or
buying or selling. This may raise the cost of business operations.
1) Fill in the blanks.
i) The liability of the sole trader is ...........................................
ii) The whole profit of a sole trader organisation is pocketed by the
...........................................
iii) Sole trade business organisation is suitable when the size of business
is ...........................................
iv) Number of owners in sole trader organisation is ...................................
v) In sole trader business, decision making is solely in the hands of
...........................................
i) Sole proprietorship is most suitable for large scale business.
ii) In sole trader organisation, the proprietor is not distinct from the
business concern.
iii) Capital raising capacity of a sole proprietorship is unlimited.
iv) In case of loss, the sole trader has to clear business obligations from
his personal property.
v) A sole proprietorship is owned by many persons but is managed by
only one person.
5.3 PARTNERSHIP FORM OF ORGANISATION

You have learnt that the sole trader organisations have limited financial resources,
limited managerial ability and skills, and unlimited liability. In case of expansion
more capital and more managerial skills are required. At the same time, the risk
will also increase. A sole proprietor may not be able to fulfill all these
requirements. A person who lacks managerial skills may be having capital.
Another person who is a good manager may not be having sufficient capital.
This calls for a situation where two or more persons come together, pool their
capital and skills, and organise the business. This type of business organisation
is called partnership organisation. It grew essentially because of the limitations
and failure of the sole proprietorships.
As defined by J.L. Hanson, “a partnership is a form of business organisation in

which two or more persons upto a maximum of twenty join together to undertake
some form of business activity”. According to companies Act, 2013, the
maximum persons have been increased to 50.
9
Business Enterprises The Indian Partnership Act, 1932 defined partnership as “the relation between
persons who have agreed to share the profits of business carried on by all or any
of them acting for all”.
The Uniform Partnership Act of the USA defines a partnership “as an association
of two or more persons to carry on as co-owners in a business for profit”.
Based on the above definitions, we can state that partnership is an association

of two or more persons who have joined together to share the profits of
business carried on by all or any of them acting for all.
The persons who own the partnership business are individually called ‘partners’
and collectively known as the ‘firm’ or ‘partnership firm’. On an agreed basis,
partners contribute to capital and share the responsibility of running the business.
However, in some cases one partner may provide the whole or major portion of
the capital and others contribute technical and managerial skills with or without
some capital. All such terms and conditions of partnership are usually mentioned
in the partnership agreement.
5.3.1 Main Features

From the above discussion, we can list the main features of partnership form of
organisation as follows :
1) Plurality of persons; To form a partnership firm, there should be at least

two persons. The maximum limit has been 50 partners as per companies
Act, 2013.
2) Contractual relationship: Partnership is created by an agreement between

persons called ‘partners’. In other words, a person can become a partner
only on the basis of a contract. This contract could be oral, written or implied.
3) Profit sharing: There must be an agreement among the partners to share

the profits and losses of the business of the partnership firm. This is one of
the basic elements of partnership. If two or more persons jointly own some
property and share its income, it is not regarded as partnership.
4) Existence of business: The purpose of the agreement among the partners

is to do some lawful business and share profits. If the purpose is something
other than business, it should not be treated as partnership. For example, if
the purpose is to carry some charitable work, it will not be treated as
partnership.
5) Principal-agent relationship: The business of the firm may be carried on

by all or one or more partners acting for all the partners. Every partner is
entitled to take part in the operations of the firm. In dealing with other
parties, each partner is entitled to represent the firm and other partners in
respect of the business of the firm. All partners are bound by his acts done
in the ordinary course of business and in firm’s name. In this sense, a partner
is agent of the firm and the other partners.
6) Unlimited liability: In respect of business debts, each partner has unlimited

liability. This means that if the assets of the firms are not sufficient to meet
the obligations of the firm, the partners have to pay from their private assets.
10
The creditors can even realise the whole of their dues from one of the Forms of Business
Organisation-I
partners. Thus, all the partners are liable for all business debts and
obligations.
7) Good faith and honesty: A partnership agreement rests on good faith among
the partners. The partners must be honest to each other and trust each other.
They must disclose every information about the business and present true
accounts to one another.
8) Restriction on transfer of share: A partner cannot transfer his share to an

outsider without the consent of all the other partners.
5.3.2 Classification of Partners

You have learnt that different partners play different roles in the operations of
the firm. One partner may contribute more capital while another partner may
spend more time in managing it. Depending on the role played, we can classify
the partners into various categories. Look at Figure 5.2 for the classification of
partners.
Partners
Based on extent Based on sharing Based on Based on nature

of participation of profit liability of behaviour
Active Sleeping Nominal Partner in Limited General Partner by Partner by

Partner Partner Partner Profits Partner Partner Estoppel Holding out
Fig. 5.2: Classification of Partners
Based on the extent of participation in the functioning of the business, we can

classify partners into: (a) active partners, and (b) sleeping partners.
a) Active partner: If a partner takes an active part in the management of the

business, we call him as active partner. He is also known as a ‘working
partner’.
b) Sleeping partner: If the partner is not actively associated with the working
of the partnership firm, we call him a sleeping partner. A sleeping business
partner simply invests his capital. He does not participate in the functioning
of the firm. Such a partner is also known as a ‘dormant partner’.
Based on the sharing of profits, partners may be classified into: (a) nominal
partners, and (b) partner in profits.
a) Nominal partner: A partner who just lends his name to the partnership is
known as a nominal partner. He neither invests his capital nor participates
in the day-to-day working and management of the firm. Such partners are
not entitled to a share of profits, but they are liable to other parties for all
the acts of the firm.
11
Business Enterprises b) Partner in profits: A partner who shares the profits of the business without
being liable for losses is called a partner in profits. As a rule, he will not
take any part in the management of the business. This is applicable to a
minor who is admitted to the benefits of the firm.
Based on the behaviour and conduct exhibited, the partners may be divided
into: (a) partner by estoppel, and (b) partner by holding out.
a) Partner by estoppel: A person who behaves in the public in such a fashion

as to give an impression that he is one of the partners in a partnership firm
is called a partner by estoppel. Such partners are not entitled to profits but
are fully liable as regards the firm’s obligations.
b) Partners by holding out: If a particular partner of a firm represents that

another person is also a partner of the firm, and if such a person does not
disclaim the partnership relationship even after coming to know about it,
such person is called a ‘partner by holding out’. Such partners are not entitled
to profits but are liable as regards the obligations of the firm.
You should note the difference between these two types clearly. In the case
of a partner by estoppel, the person’s own behaviour and conduct have
created a mistaken impression in the third parties mind that he is a partner
of the firm. Whereas in the case of a partner by holding out, the other partners
have represented the person as a partner, though he is not one, and he does
not contradict it. You will learn more about such partners in a separate
course.
Based on liabilities also, partners may be classified into two categories: (a)
limited partners, and (b) general partners.
a) Limited partner: The liability of such a partner is limited to the extent of

the capital contributed by him. He is not entitled to take part in the
management of the business, but he can advise the other general members.
His acts do not bind the firm. He has right to inspect the books of the firm
for his information. Such partners’ are also called ‘special partners’.
b) General partner: He is also called ‘unlimited partner’. His liability is

unlimited and he is entitled to participate in the management of the business.
Every partner who is not a limited partner is treated as a general partner.
5.3.3 Partnership Deed

You know that a partnership is formed by an agreement. Such agreement may
be either written or oral. To avoid misunderstanding and unnecessary litigations,
it is always desirable to have a written agreement. When the written agreement
is duly stamped and registered, it is known as ‘Partnership Deed’. After
registration, each partner is given a copy of the partnership deed. A partnership
deed, generally contains the following particulars.
1) Name of the firm.
2) Nature of the business to be carried out.
3) Names of the partners.
12 4) The town and the place where business will be carried on.
5) The amount of capital to be contributed by each partner. Forms of Business
Organisation-I
6) The profit and loss sharing ratio of each partner.
7) Loans and advances by partners and the interest payable on them.
8) The amount of drawings by each partner and the rate of interest allowed
thereon.
9) The rate of interest on capital.
10) Duties, powers, and obligations of partners.
11) Remuneration, if any, payable to the active partner.
12) Maintenance of accounts and arrangements for audit.
13) Settlement in the case of dissolution of partnership.
14) The methods of evaluation of goodwill on admission or death or retirement
of a partner.
15) The method of revaluation of assets and liabilities on admission or death or
retirement of a partner.
16) The method of retirement of a partner and the arrangement for the payment
of the dues of a retired or deceased partner.
17) Arbitration in case of disputes among partners.
18) Arrangements in case of partner becomes insolvent.
This is not an exhaustive list. Any other clauses, as desired by the partners,
could be included in the partnership deed. In fact, the Partnership Act defines
certain rights and duties of a partner. But the provisions of the Act come into
operation only when there is no agreement amongst the partners.
Registration of the firm: Under the Indian Partnership Act, it is not compulsory
to register the firm. But there are certain limitations for an unregistered firm.
So it is better to register it. Registration can be done at any time. To register the
firm, an application with all particulars about the firm and registration fee has to
be sent to the Registrar of Firms.

You have learnt about the main features of partnership. This would help you to
identify the merits and limitations of this form of organisation which are as
follows:
Merits
1) Easy formation: Although the formation of a partnership firm is not as
easy as the sole proprietorship, but it is much less difficult as compared to
a company. The partners agree to do business together and draw up and
sign the partnership agreement. After that there are no complex government
laws regulating the establishment of the partnership.
2) More capital available: Unlike sole proprietorship, there are two or more
partners in partnership firms. So a partnership firm does not have to rely
on a single individual as the source of its funds. The added financial strength
of the partners increases the borrowing capacity of the firm.
13
Business Enterprises 3) More diverse skills and expertise: The partnership involves more people
in decision making because there are more owners. An ideal partnership
brings together partners who complement each other, not partners who have
the same background and experience. One partner might be a specialist in
manufacturing, another in marketing, and the third partner might be an
accountant. Combined judgement of all these partners often leads to better
decisions than otherwise.
4) Flexibility: Like sole proprietorship, the partnership business is also owned

and run by the partners themselves. They can easily appreciate and quickly
respond to the changing conditions.
5) Secrecy: In partnership firms, some secrecy can be maintained because

there is no obligation to publish accounts of the firm.
6) Keen interest: Since partners are liable to losses and risks of a business
they take keen interest in the affairs of the business.
7) Protection: Due to the rule of unanimity in fundamental matters, the rights
of all partners are fully protected. If a partner is dissatisfied with the working
of firm, he can ask for dissolution of the firm and withdraw from the business.
8) Checks and controls over careless decisions: Since the partnership is run
on collective basis and all partners participate in major decisions, there is
lesser scope for reckless and hasty decisions.
9) Diffusion of risk: The losses of the firm will be shard by all the partners.
Hence, the share of loss in the case of each partner will be less than that
sustained in sole proprietorship.
Limitations
1) Limited capital: Since there is a limit of maximum partners (50), the capital
raising capacity of the partnership firms is limited as compared to a joint
stock company.
2) Unlimited liability: The most important drawback of a partnership firm is

that the liability of the partners is unlimited.
3) No public confidence: Since the accounts are not published and publicised,
the firm may not be able to command confidence of the public.
4) Non-transferability of interest: No partner can transfer his interest in a

firm without the consent of other partners.
5) Uncertainty: The sudden death, lunacy or insolvency of a partner leads to

the dissolution of partnership. This breeds uncertainty in the continuity of a
partnership firm. However, this could be partly avoided if such matters are
specified in the partnership agreement.
6) Conflicts among partners: There is scope for misunderstanding and

conflicts among the partners. This may cause delays in decision making
and may lead even to dissolution of the firm. To some extent, this problem
could be avoided if the partnership agreement is clear and detailed.
14
7) Risk of implied authority: Since each partner acts as an agent of the firm, Forms of Business
Organisation-I
acts of one partner would bind the firm and all the remaining partners. A
dishonest or incompetent partner may lend the firm into difficulties and the
other partners may have to pay for it.
5.3.5 Joint Hindu Family Firm

Joint Hindu Family firm is a unique form of business organisation prevailing
only in India. This is the firm belonging to joint Hindu family and governed by
the provisions of the Hindu Law.
In Hindu Law there are two schools:
a) Mitakshara: It is applicable to the whole of India except Bengal and Assam.

According to this school, a Hindu inherits property from his father, grand
father, and great grand father. Thus, three successive generations in the
male line (son, grandson, and great grandson) inherit the ancestral property.
They are called coparceners and the senior most member of the family is
called ‘Karta’. The Hindu Succession Act, 1956 has extended the line of
coparcenary interest to female relatives of the deceased coparcener or male
relatives claiming through such female relatives.
b) Dayabhaga: It is applicable in Bengal and Assam. According to this, the

male heirs become members only on the death of the father.
According to Hindu Law, a business is an inheritable asset. After the death of

Hindu, the business will be jointly owned by all the coparceners. The elder
person among the coparceners becomes the new Karta and manages the business.
If any property is inherited from any other relative, or acquired from personal
resources, such property is regarded as personal property and treated as distinct
from ancestral property.
Important features of the Joint Hindu Family Firm are:
1) Business is managed by the senior member of the family called Karta. Other
members do not have the right to participate in the management of the firm.
2) Other members cannot question the authority of the Karta. Their only remedy
is to get the family dissolved by mutual agreement.
3) Karta has the power to borrow funds for the business. The liability of the
Karta is unlimited whereas the other coparceners are liable only to the extent
of their share in the business.
4) If the Karta has misappropriated the funds of the business, he has to
compensate the other coparceners to the extent of their shares in the joint
property.
5) The death of any member of the family does not dissolve the business or
the family.
6) Through mutual agreement the joint Hindu family firm can be dissolved.
You should note the difference between the joint Hindu family firm and the
partnership firm. A joint Hindu family firm is the result of the operation of the
Hindu Law. No formal agreement is required to convert a business into a joint
Hindu family business. The members of the family automatically become 15
Business Enterprises coparceners. Only the Karta can participate in the management. The liability of
the Karta is unlimited but the liability of the other coparceners is limited to their
shares in the business. The rights, duties and liabilities of coparceners are
governed by the provisions of the Hindu Law. Partnership is the result of an
agreement between the persons who need not be blood relatives. Each partner
has the right to participate in the management of the business. The liability of
each partner is unlimited. The duties, rights and liabilities of the partners are
governed by the Indian Partnership Act, 1932.
5.3.6 Limited Liability Partnership

Limited Liability Partnership (LLP) Act, 2008, is a new piece of legislation.
This Act enables formation of partnerships with liability of partners being kept
limited like that of share holders as in case of companies. Thus, the public has
been given a choice to form a partnership either under the partnership law, i.e.,
Partnership Act, 1932 or under LLP Act, 2008. The features of this limited liability
partnership are as follows:
1) Regulating Act: A LLP is regulated by the Limited Liability Partnership
Act, 2008.
2) Minimum and Maximum Number of Members: In case of LLP, minimum
numbers of partners required are 2. There is no limit to maximum number
of partners.
3) Governance Structure: The governance structure would be by contractual
agreement between partners.
4) Management: The management rests with those partners (including
designated partners) who are authorised by LLP agreement.
5) Transfer of Interest: In the case of a limited liability partnership, a partner’s
economic rights (i.e. right to a share of the profits and losses and to receive
contribution at the time of winding up) shall be transferable (Section 42).
However, such transfer shall not by itself cause the disassociation of the
partner and a dissolution and winding-up of the LLP. Further, such transfer
would not make the transferee a ‘partner’ of the LLP entitled to participate
in its management (Section 42). For becoming a partner of LLP, unless
otherwise provided in the LLP agreement, consent of all the existing partners
is required (Schedule I appended to LLP Act).
6) Audit: If the capital contribution does not exceed Rs. 25 lakhs or if the
annual turnover does not exceed Rs. 40 lakhs [Rule 24(8) of the LLP Rules,
2009] audit is not compulsory.
7) Meeting: In LLP, the annual meeting of partners is not mandatory.
i) The maximum number of partners in a partnership firm is .....................
ii) Liability of partners in a partnership firm is ................................. .....
iii) A partner who is not participating in the management of the firm is

16 called ....................................... partner.
iv) The minimum number of members in a partnership firm is................... Forms of Business
Organisation-I
v) A registered partnership agreement is called ................................
vi) A person’s own behaviour has created the impression that he is one of
the partners of a partnership firm. Such partner is called
.................................
vii) If the liability of the partner is limited to the capital contributed by

him, such a partner is called .......................................
i) Partnership agreement must be in writing.
ii) There is no maximum limit for membership in a partnership

organisation.
iii) Members of a partnership firm are called partners.
iv) A partner can transfer his share to some other person without the
consent of the other partners.
v) Every partner is a proprietor of the firm and also an agent of the firm.
vi) A sleeping partner actively participates in the working of the firm.
vii) A person who is a partner by holding out is entitled to share the profits.
viii) The acts of one partner would bind the firm and the remaining partners.
5.4 COMPANY FORM OF ORGANISATION

You have learnt that sole proprietorships and partnerships have the disadvantages
of limited resources, unlimited liability, limited managerial skills, etc. The life
and stability of these organisations also depend on the life and stability of the
proprietors/partners. Hence, they are not considered suitable for large scale
business.
For large scale business, you require large investment and specialised managerial
skills. The element of risk is also very high. This situation led to the emergence
of company form of business organisation. In case of joint stock company, capital
is contributed by not one or two persons but by a number of persons called
shareholders. Thus, it is possible to raise large amount of capital. A joint stock
company is an association of persons registered under Companies Act for carrying
on some business. It is called an artificial person as it is created by law, with a
distinctive name, a common seal and perpetual succession of members. It can
sue and be sued in its own name. The most widely quoted definition of a company
(called Corporation in USA) is the one given by Chief Justice Marshal. According
to him “a corporation is an artificial being, invisible, intangible and existing
only in contemplation of law. Being the mere creature of law, it possesses only
those properties which the charter of its creation confers upon it, either expressly
or an incidental to its very existence”. Lord Justice Lindley has defined it as “an
association of many persons, who contribute money or money’s worth to a
17
Business Enterprises common stock and employ it for a common purpose. The common stock so
contributed is denoted in money and is the capital of the company. The persons
who contribute it or to whom it belongs are members. The proportion of capital
to which each member is entitled is his share”.
The Indian Companies Act (1956) defines joint stock company as “a company
limited by shares having a permanent paid up or nominal share capital of fixed
amount divided into shares, also of fixed amount, held and transferable as stock
and formed on the principles of having in its members only the holders of those
shares or stocks and no other persons”.
5.4.1 Main Featurs

Based on the above definitions, we can list out the features of the company form
of organisation as follows:
1) Incorporation: A company is an incorporated association. It comes into
existence only after registration under the Companies Act.
2) Artificial Person: A company is regarded as an artificial person as it is

created by law and can be effaced only by law. It has no body, no soul, no
conscience, still it is in a position to exist. Like any other person it can own
property, conduct a lawful business, enter into contracts with others, buy,
sell and hold property, all under its own name and its own seal.
3) Separate legal entity: A company has a distinct entity separate from its
members. A shareholder of a company can enter into contract with the
company and can sue the company and be sued by it. You know that in the
case of partnership, every partner is an agent of the firm and also that of the
other partners. But the shareholder is not the agent of the company or its
shareholders. He can not bind them with his acts.
4) Common seal: As the company is not a natural person, it can not sign the
documents. It has a device in the form of common seal on which its name is
engraved. This common seal is a substitute of its signatures. It is affixed on
all important legal documents and contracts. It is used at the direction of
the board of directors and two directors have to sign as witnesses wherever
it is affixed on any document.
5) Perpetual succession: A joint stock company has a continuous existence.

Its life is not affected by the death, lunacy, insolvency or retirement of its
shareholders or directors. Members may come and go, but the company
continues its operations until it is legally dissolved. Thus, a company has
perpetual succession irrespective of its membership. This feature provides
stability to this form of organisation.
6) Separation of ownership and management: The shareholders of a

company are widely scattered throughout the country. For the conduct of
the business and its management, shareholders elect another set of persons
known as directors. The right to manage the company affairs is vested in
the directors who are elected representatives of the shareholders. Thus,
ownership is separated from management.
18
7) Number of members: In the case of a public limited company, the minimum Forms of Business
Organisation-I
number is seven and there is no maximum limit. In the case of a private
limited company, minimum number is two and the maximum is two hundred.
8) Limited liability: The liability of the members of a company is normally

limited by guarantee or by the shares. Members liability is limited to the
amount of shares held. Members are not personally liable for the debts of
the company. So personal properties of the members are not liable to be
attached for the payment of the company’s debts.
For example, the face value of the share of a company is Rs. 10 which the
member has already paid. At the time of winding up of the company, the
member cannot be asked to pay any money. But if the member had paid
only Rs. 7, he can at the most be asked to pay the balance of Rs. 3 (face
value Rs.10 minus money paid Rs. 7), and no more.
9) Transferability of shares: The member of a public limited company enjoys

a statutory right to sell his shares to others without the consent of other
shareholders. But for transferring the shares he has to follow the procedure
laid down in the Companies Act. However, there are restrictions for
transferring shares in case of a private limited company.
10) Rigidity of objects: The scope of the business of a company is limited.

The type of business in which the company would participate is mentioned
in the ‘object clause’ of its Memorandum of Association. The company
cannot take up any new business without changing the object clause. To
change the object clause, the company has to comply with the provisions
of the Companies Act.
11) Statutory regulations: A company is governed by the Companies Act and

it has to follow various provisions of the Act. It has to submit a number of
returns to the Government. Accounts of a company must be audited by a
Chartered Accountant. Thus, the company form of organisation has to
comply with numerous and varied statutory requirements.
Having studied the features of a joint stock company, you can easily make out
that the shareholders are the real owners of the company. Their liability is limited.
They can also transfer their shares to others. Since the shareholders are very
large in number, the company cannot be managed by all. They elect a board of
directors to manage the company. The destiny of the company is guided and
directed by the directors. These directors employ some people to carry on the
day-to-day business of the company. The company can raise additional funds by
issuing debentures (also called bonds).
5.4.2 Classification of Companies

We can classify companies on the basis of 1) Mode of incorporation, 2) Extent
of liability, 3) Category of shareholders, and 4) Jurisdiction of functioning. Look
at Figure 5.3 for the classification of companies.
1) On the basis of the mode of incorporation, we can classify companies into

three categories:
a) Statutory Company: A company established by a special Act of the
Parliament or State Legislature is called ‘Statutory Company’. Such 19
Business Enterprises companies are established in special cases when it is necessary to
regulate the working of the company for some specific purposes.
Examples of such corporations are Reserve bank of India, Life Insurance
Corporation of India, Air India Corporation, Food Corporation of India,
etc. These are mostly public sector enterprises.
Companies
Based on mode Based on the Based on Based on the

of type of category of jurisdiction of
incorporation liability shareholders functioning
Statutory Unlimited Private Ltd. National

Company Company Company Company
Registered Company Ltd. Public Ltd. Multinational

Company by Guarantee Company Company
Chartered Company Ltd. Government

Company by Shares Company
Fig. 5.3: Classification of Companies
b) Registered Company: A company which is incorporated through

registration with the Registrar of Companies under the Companies Act,
1956, is called a ‘Registered Company’. This is also called ‘Incorporated
Company’. All companies established under the private sector belong
to this category.
c) Chartered Company: A company which is incorporated under a special
Royal Charter granted by the Monarch is called a ‘Chartered Company’.
It is regulated by the provisions of that charter. Examples are: British
East India Company, Bank of England, Hudson’s Bay Company, etc.
In India this type of companies does not exist now because there is no
monarchy.
2) Based on the type of liability, companies may be classified into three
categories:
a) Unlimited Companies: A company in which the liability of the
members is unlimited, is called ‘Unlimited Company’. At the time of
winding up of the company shareholders have to pay, if necessary,
from their personal assets to clear the company’s debts. From this point
of view, it is very much like sole proprietorship and partnership.
However, such companies are very rare.
b) Companies Limited by Guarantee: In the case of some companies,
20 members give guarantee for the debts of the company up to a certain
limit in addition to the amount of shares held by them. The additional Forms of Business
Organisation-I
amount guaranteed by the members is generally, laid down in the
Memorandum of Association. Such companies are not formed for the
purpose of profit. They are formed to promote art, culture, religion,
trade, sports, etc. Clubs, Charitable organisations, trade association,
etc.
c) Companies Limited by Shares: In this case, the liability of the
members is limited to the amount of the shares held by them. A
shareholder can be called upon to pay only the unpaid amount of shares
held by him and nothing more. Most of the companies come under this
category.
3) On the basis of the ownership, companies may be classified into three
categories:
a) Private Limited Company: A private limited company means a
company which by its article.
i) Restricts the right to transfer its shares;
ii) Limits the number of its members to minimum 2 and maximum
200; and
iii) Prohibits any invitation to the public to subscribe for any shares
or debentures of the company.
b) Public Limited Company: A public limited company is one which is
not a private limited company. A company having the following
characteristics should be called a public limited company.
i) The right of the shareholder to transfer his shares is not restricted.
ii) The minimum number of shareholders is 7 but there is not limit
to the maximum number of members.
iii) It can invite public to subscribe for its shares and debentures.
The minimum number of members in the case of a private limited company
is two and can be formed more easily as compared to a public company. It
is exempted from various regulatons of the Companies Act and thus
combines the advantages of limited liability and the facilities of a partnership
organisation. It is considered suitable for a medium sized business.
d) Government Company: A company in which not less than 51 per
cent of the paid up share capital is held by the Central Government, or
by any State Government or jointly by Central and/or State
Governments.
4) On the basis of the jurisdiction of the functioning, we can classify companies
into two categories.
a) National Company: When the operations of a company are confined
within the boundaries of the country in which it is registered, such a
company is called a national company.
b) Multinational Company: When the operations of a company are
extended beyond the boundaries of the country in which it is registered,
such a company is called a multinational company. It is also called
‘transnational company’. 21
Business Enterprises 5.4.3 Merits and Limitations
The company form of organisation has been popular and successful in almost
all the countries. This form is suitable where large resources are required and
the production has to be carried out on a large scale. The number of joint stock
companies has shown a phenomenal increase in the twentieth century. Let us
now discuss the merits and limitations of the company form of organisation.
Merits
1) Large capital: Since company forms of organisation are allowed to have a
large number of shareholders, it is possible to raise capital in large amounts.
Whenever new capital is required, it can issue shares and debentures. For
this reason, only the company form of organisation is best suited.
2) Limited liability: The liability of shareholders, unless and otherwise stated,

is limited to the face value of the shares held by them or guarantee given by
them. Their private property is not attachable to recover the dues of the
company. Thus, this form of organisation is a great attraction to persons
who are not willing to take risk as is inherent in sole proprietorship and
partnership.
3) Stability of existence: A company has a separate legal entity with perpetual

succession The Corporation is not affected by lunacy or insolvency of a
shareholder, director or officer. The continuity of the company is desirable
in the interest of not only its members but also the society.
4) Economies of scale: As companies operate on a large scale, they can take

advantage of large scale buying, selling, production, etc. As a result of
these economies of large scale operations, companies can provide goods to
consumers at a cheaper price.
5) Scope for expansion: As there is no limit to the maximum number of

shareholders in a public limited company, expansion of business is easy by
issuing new shares and debentures. Companies normally keep part of their
profits as reserve and use them for expansion.
6) Public confidence: Companies are subject to Government controls and

regulations. Their accounts are audited by a chartered accountant and are
to be published. This creates confidence in the public about the functioning
of the company.
7) Transferability of shares: The shares of the public limited company can

be sold at any time in the stock exchange. Shareholders can sell their shares
whenever they want. There is no need to take the consent of other
shareholders. Thus, shareholders can convert their shares into cash at any
time without much difficulty.
8) Professional management: You know that the management of a company

is in the hands of the directors who are elected by shareholders. Normally,
experienced persons are elected as directors. You also know that day-to-
day activities are managed by salaried managers. These managers are the
experts in their respective fields. As companies have large scale operations
and profits, attracting good professional managers are easy by paying
22
attractive salaries. Thus, company form of organisation gets the services of Forms of Business
Organisation-I
professionals on the Board of Directors and in various management
positions.
9) Tax benefits: Companies pay income tax at flat rates. There is no provision
for slab system in the taxation of companies. As a result, companies pay
lower taxes on higher incomes compared to other forms of organisations.
Companies also get some tax concessions if they are established in backward
areas.
10) Risk diffused: As the membership is very large, the business risk is divided
among the several members of the company. This is an advantage for small
investors.
Limitations
1) Difficulty in formation: Promotion of a company is not as simple as
proprietorships and partnerships. A number of persons known as promoters
should be ready to associate themselves with it for getting a company
incorporated. A lot of legal formalities are to be performed at the time of
registration. Promotion of a company is expensive as well as complicated.
2) Lack of secrecy: The management of companies is usually in the hands of

many persons. Everything is discussed in the meetings of Board of Directors.
Therefore, compared to sole trader and partnership concerns, maintaining
business secrets is relatively difficult in a company form of organisation.
3) Delay in decision making: In company form of organisation all important

decisions are taken by either the Board of Directors or shareholders in their
meetings. Hence, decision making process is time consuming. If a quick
decision is needed it will be difficult to arrange meetings all of a sudden.
So, some business opportunities may be lost because of delay in decision
making.
4) Neglect of minority interest: The representatives of the majority group of

shareholders become the members in the Board of Directors. The
shareholders who are in minority never get representation on the Board of
Directors. As a consequence, the interests of the minority members may be
neglected and oppressed at the hands of the majority group.
5) Concentration of economic power: The company form of organisation

gives scope for concentration of economic power in a few hands. Some
persons become directors in a number of companies and formulate policies
to promote their personal interests. The shares of a number of other
companies are purchased to create subsidiary companies. Establishment of
subsidiary companies and interlocking of directorships have facilitated
concentration of economic power in the hands of a few business houses.
6) Lack of personal interest: In sole proprietorship and partnership firms

business is managed by owners themselves. In company form of
organisation, day-to day management is vested with the salaried executives
who do not have any personal interest in the company. This may lead to
reduced employee motivation and result in inefficiency.
23
Business Enterprises 7) More government restrictions: A company is subject to many restrictions
from which the proprietorships and partnerships are exempted. So, it has to
spend considerable time and effort in complying with the various legal
requirements.
8) Fradulent management: There is a possibility that some unscrupulous

promoters may float a bogus company, issue shares and collect money.
Later on, they can get away with the money by putting the company in
liquidation. It is also possible that the directors and professional managers
may misuse the company resources for their personal benefit and bring
losses to the company.
5.4.4 One Person Company (OPC)

Section 2(62) of the Companies Act, 2013 defines ‘One Person Company’ to
mean a company with only one person as its member. Section 3(1) (c) provides
that a company may be formed for any lawful purpose by one person, where the
company to be formed is to be One Person Company, that is to say, a private
company by subscribing his name to a memorandum and complying with the
requirements of the Act in respect of registration.
An OPC may be registered as ‘limited by shares’ or ‘limited by guarantee’

However, the memorandum of One person Company shall indicate the name of
the other person, with his prior written consent in the prescribed form (Form
No. INC.3), who shall, in the event of the subscriber’s death or his incapacity to
contract become the member of the company and the written consent of such
person shall also be filed with the Registrar at the time of incorporation of the
One Person Company along with its memorandum and articles.
Such other person may withdraw his consent in such manner as may be
prescribed.
On the death of the promoter member of an OPC, the person nominated by such
promoter member shall be the person recognised by the company as having title
to all the shares of the member and shall be entitled to the same dividends and
other rights and liabilities to which such sole promoter member of the company
was entiled or liable.
The member of One Person Company may at any time change the name of such
other person by giving notice and shall intimate the Registrar any such change
within such time and in such manner as may be prescribed.
The words “One Person Company” shall be mentioned in brackets below the
name of such company, wherever its name is printed, affixed or engraved.
Relaxations available to OPCs
Relaxations given to an OPC include:
1) There is no need to prepare a cash-flow statement [Section 2(40)].
2) The annual return can be signed by the Director and not necessarily a
Company Secreatey (Section 92).
3) There is no necessity for an Annual General Meeting (AGM) to be held
24 (Section 96).
4) Specific provisions related to general meetings and extraordinary general Forms of Business
Organisation-I
meetings would not apply (Sections 100 to 111).
5) Compliance can be said to have been done if the resolutions are entered in
the minutes’ book of the company (Section 122).
6) It would suffice if one director signs the audited financial statements (Section
134).
7) Financial statements can be filed within six months from the close of the
financial year as against 30 days (Section 137).
8) An OPC needs to hold only one meeting of the Board of Directors in each
half of a calendar year and the gap between the two meetings should not be
less than ninety days (Section 173).
Special Provisions Applicable to OPCs

Where the OPC limited by shares or by guarantee enters into a contract with the
sole member of the company who is also the director of the company, the company
shall, unless the contact is in writing, ensure that the terms of the contract or
offer are contained in a memorandum or are recorded in the minutes of the first
meeting of the Board of Directors of the company held next after entering into
contract (Section 193). This will not apply to contracts entered into by Company
in the ordinary course of its business.
As per the Rules Framed by the Central Government:

1) Only a natural person who is an Indian citizen and resident in India shall be
eligible to incorporate a One Person Company or be appointed as a nominee
for the sole member of a One person Company. The term “resident in India”
means a person who has stayed in India for a period of not less than 182
days during the immediately preceding 1 financial year (Rule No. 3.1).
2) No person shall be eligible to incorporate more than a One Person Company
or become nominee in more than one such company (Rule No. 3.2.).
3) No minor shall become member or nominee of the One Person Company
or can hold share with beneficial interest (Rule no. 3.4).
4) Such Company cannot be incorporated or converted into a company under
section 8 of the Act (Rule No 3.5) or carry out Non-Banking Financial
Investment activities including investment in securities of any body
corporate (Rule No. 3.6).
5) Where the paid up share capital of a One Person Company exceeds 50 lakh
rupees and its average annual turnover during the relevant period exceeds
2 crore rupees, it shall cease to be entitled to continue as a One Person
Company. (Rule No. 3.7). It may convert itself into a private or public
company within a period of 6 months from the date its paid up capital
exceeds Rs. 50 lakh and turnover exceeds Rs. 2 crore (Rule No. 6).
6) Conversion of One Person Company into a private company or a public
company: One Person company can get itself converted into a Private or
Public company after increasing the minimum number of members and
directors to 2 or minimum of 7 members and 3 directors as the case may be,
and by maintaining the minimum paid-up capital as per requirements of the 25
Business Enterprises Act for such class of company and by making due compliance of section 18
of the Act for conversion i.e. Conversion of companies already registered
(Rule No. 6). However, such a company cannot convert voluntarily into
any kind of company unless two years is expired from the date of its
incorporation (Rule No. 3, 7).
5.4.5 Small Company

The concept of Small Company has also been introduced for the first time in the
Companies Act, 2013. According to Section 2(85) of the Companies Act, 2013,
“small company” means a company, other than a public company.
i) Paid-up share capital of which does not exceed fifty lakh rupees or such
higher amount as may be prescribed which shall not be more than five
crore rupees; and
ii) Turnover of which as per its last profit and loss account does not exceed
two crore rupees or such higher amount as may be prescribed which shall
not be more than twenty crore rupees;
However, the expression ‘small company’ small not include:
a) a holding company or a subsidiary company;
b) non-profit association (i.e, companies registered under Section 8 of
the Companies Act, 2013);
c) a company or body corporate governed by any special Act.
In such company there is no need to prepare cash flow statement, annual
return can be signed by the Director or Secretary and to hold only one
meeting in one half of calendar year and gap between two meeting should
not be more than 90 days.
i) In the case of companies, shareholders cannot transfer their shares to
others.
ii) A company is a legal person created by law.
iii) A company form of organisation is not suitable for large scale business.
iv) Compared to sole proprietorship and partnership, companies can avail
the benefits of economies of large scale.
v) Company can not buy property on its own name.
vi) There are less legal formalities to start a company.
vii) Company is separate from its owners and it has an entity of its own.
viii) A company has to be closed if the majority of the shareholders are
dead.
5.5 COOPERATIVE FORM OF ORGANISATION

Cooperative organisations are generally started by the poor and the economically
weak sections to promote their common economic interests through business
26 propositions. The basic philosophy of cooperative organisation is self-help and
mutual help. The primary objective of any cooperative organisation is to render Forms of Business
Organisation-I
service to its members. In this respect, it is different from the other three forms
of organisations which are primarily meant for making profits. The important
features of the cooperative organisation are service in place of profit, mutual
help in place of competition, self-help in place of dependence, and moral
solidarity in place of unethical business practices.
As defined by International Labour Office “Cooperative organisation is an
association of persons, usually of limited means, who have voluntarily joined
together to achieve a common economic end through the formation of a
democratically controlled business organisation, making equitable contributions
to capital required and accepting a fair share of risks and benefits of the
undertaking.”
Calvert has defined cooperation as “a form of organisation wherein persons
voluntarily associate together as human beings on the basis of equality for the
promotion of the economic interests of themselves.”
The Indian Cooperation Societies Act, 1912, Section 4, defined it as “a society
which has as its objectives the promotion of economic interests of its members
in accordance with cooperative principles.”
Based on these definitions, we can state that the cooperative organisation is a
‘voluntary’ association of persons who are not financially strong and cannot
stand on their own legs. They come together not with a view to get profits but to
overcome destability arising out of the want of adequate financial resources.
The basic objective of such an organisation is self-help and mutual help.
Cooperative organisations are to be registered with the Registrar of Cooperative
Societies of the concerned state in which the society’s registered office is situated.
There should be minimum of 10 members to form a cooperative. But there is no
maximum limit for membership.
Like the company form of organisation, the members of the society are the
owners. They contribute the required capital and get a share in the profit, which
is known as dividend. The liability of the members is limited.
Management is vested in the hands of the managing committee which is elected
by the members in the annual general meeting.
5.5.1 Main Features

Based on the above discussion, we can identify the following distinctive features
of cooperative organisations.
1) Voluntary association: As stated above, persons desirous of pursuing a
common objective can form themselves into an association and leave the
same as and when one likes. This has two important connotations:
a) Any person can become a member irrespective of his caste, creed,
religion, colour, sex, etc.
b) The members come together to form themselves into an association
without any coercion or intimidation.
2) Autonomy and stability: Within the limits set by the constitution, the
general law and its charter, a cooperative society is a self governing
27
Business Enterprises organisation. It is self-sufficient, self-renewing, and self-controlling within
its jurisdiction. Like a company, a cooperative organisation also enjoys a
separate and independent entity distinct from that of its members. As such,
it has a perpetual life and is not affected by the entry and exit of members.
3) Democratic management: The management of cooperative organisation
vests in a managing committee elected by members on the basis of ‘one
member-one vote’ irrespective of the number of shares held by any member.
It is the general body of the members which lays down the broad framework
of policy within which the managing committee has to function. Democracy
is, thus, the keynote of the management of a cooperative society.
4) Capital: The capital is procured from its members in the form of share
capital. However, the share capital constitutes only a limited source of
business finance. The major part is raised either by way of loan from the
government and the apex cooperative institutions, or by way of grants and
assistance from the central or state governments.
5) Government control: In India, all cooperative societies are registered under
Cooperative Societies Act, 1919 or other State Cooperative Societies Act.
Cooperative societies are subjected to detailed regulation under these Acts.
6) Service motive: The primary objective of any cooperative society is to
provide service to its members. As you know, in the case of the other three
forms of organisations the primary objective is to earn profits.
7) Limited return on capital: In cooperative system, profits are distributed
among the shareholders for the capital they have contributed. But the rate
of dividend paid to the shareholders is limited to 9% as per the Cooperative
Societies Act.
8) Distribution of surplus: In case of a partnership firm and a company, profits
are distributed among the members in the ratio of the capital contributed by
each of them. In case of cooperative societies, after giving a limited dividend
to shareholders, the surplus profits are distributed in the form of bonus.
This bonus is not in the proportion of the share capital, but in the proportion
of the business they have done with the society. For example, in case of a
consumer cooperative society, bonus is paid in the proportion of the
purchases made by the members from the society. Similarly, in case of a
producer’ society, bonus is paid in the proportion of the goods delivered for
sale to the society.
5.5.2 Classification of Cooperatives

Cooperatives were started in different fields to promote the well being of different
section of the society. Therefore, there are different types of cooperative societies.
The important types are given below.
1) Consumer Cooperatives: People who want to obtain their day-to-day

household good at reasonable prices form consumer cooperative societies.
The main objective of these societies is to protect the members from the
evils of unfair trade and the steep rise in prices. These societies purchase
goods in bulk from wholesalers or producers and sell them to its members,
sometimes also to non-members.
28
2) Producer’s Cooperatives: These are the societies formed by the small Forms of Business
Organisation-I
industrial producers and artisans. They are also called industrial
cooperatives. The main objective is to protect the small producers and
workers from exploitation. They provide credit facility, supply raw-
materials, market the products produced by members, and help the members
to buy machinery on hire purchase.
3) Marketing Cooperatives: When the producers form into a cooperative

society for the purpose of arranging the sale of their output, it is called
marketing cooperative. These societies are started in order to protect
producers from exploitation by the middlemen when they market their
products.
4) Housing Cooperatives: These societies mainly operate in urban areas. They

are mainly formed to provide housing facility to its members. The housing
societies acquire land, plan the lay out and construct houses, and later allot
them to the members. Some of them simply develop the land and allot plots
to its members who then construct houses on their own. The society helps
in arranging loans for them.
5) Credit Cooperatives: Credit societies are started by persons who are in

need of credit. Such societies provide credit to their members at a reasonable
rate of interest. These credit societies may be classified into agricultural
credit societies and non-agricultural credit societies. Agricultural credit
societies are started to provide loans to farmers to meet the expenses in
cultivation. These societies may be further classified into two groups: i)
societies which provide short term and medium term credit, and ii) societies
which are concerned with long term credit.
Non-agricultural credit societies are formed by the employees of industrial

units and various institutions. They can also be organised by small traders,
artisans and people of low income groups in towns and cities to meet their
credit requirements. Under this category, there are cooperative urban banks,
thrift societies, employees credit society, industrial cooperative banks, house
mortgage banks, etc.
6) Farming Cooperatives: Economies of large scale operations cannot be

derived by small farmers. Therefore, small farmers form into a cooperative
society, carry on the work jointly and share the returns. These societies are
most helpful to small and marginal farmers and enable them to get the
advantages of large scale operations. They may form a cooperative better
farming society, a cooperative tenant farming society, a cooperative joint
farming society, a cooperative collective farming society, etc.
In addition to the cooperatives described above, there are many other types
of cooperative because the principle of cooperation is extended to a large
number of activities and operations. There are cooperatives such as
processing cooperatives, construction cooperatives, transport cooperatives,
auto rickshaw cooperatives, washer men cooperatives, fishery cooperatives,
dairy cooperatives, sugarcane growers cooperatives, oilseeds growers
cooperatives, etc. The aim of all these societies is to promote the welfare of
their members.
29
Business Enterprises 5.5.3 Merits and Limitations
Different types of cooperatives have distinct merits and limitations. But there
are some common merits and limitations which can be traced to all types of
cooperative societies.
Merits
1) Easy formation: Formation of a cooperative society is easy as compared
to the formation of a company. Cooperative society is a voluntary association
and so it does not require long and complicated legal formalities at the time
of formation. Any 10 adult persons can voluntarily form themselves into an
association and get it registered with the Registrar of Cooperatives.
2) Limited liability: Like company form of organisation, liability of members
is limited in cooperative societies also.
3) Social services: Cooperatives foster fellow feeling among members and
impart moral and educative values in their everyday life which are essential
for better living.
4) State assistance: Cooperatives have been adopted by the government as
an instrument of economic policy. So, a number of grants, loans and financial
assistance are offered by the government to these societies to make them
function effectively.
5) Open membership: The membership of cooperative societies is open to
everybody. Nobody is debarred from joining on the basis of economic
position, caste, colour or creed. There is no limit on the maximum number.
6) Supply of goods at cheaper rates: The societies purchase goods directly
from producers and sell them to the members at cheap rates. The middlemen
are eliminated from the channel of distribution. The consumer cooperatives
supply essential goods to the members at a time when there is scarcity of
goods in the market. Even capital goods (like machinery, etc.) are procured
directly from producers and are supplied to the members. So cooperative
societies ensure regular supply of goods at cheaper rates.
Limitations
1) Lack of business acumen: Members normally do not have business
experience. As a consequence, when they become the members of the Board
of Directors, the society is not conducted efficiently. Unlike companies,
cooperatives cannot employ outside talents and trained personnel for
improving the management competency. This is because such steps are
incompatible with their avowed ends and limited means.
2) Absence of mutual interest: A cooperative can only succeed when the
members are imbued with a spirit of cooperation. Unfortunately, some
influential members use the cooperative society as a source of their personal
gains.
3) Lack of interest: Sustained efforts over a period are the prerequisites for
success in any business. But such a state of affairs does not exist in many
cooperatives. Within a short period of its dramatic start, the cooperative
becomes lifeless and inactive in its operation.
30
4) Lack of coordination: It cannot be denied that internal dissensions and Forms of Business
Organisation-I
rivalries among the members sap much of its strength and vigour. The
absence of coordinated and joint action is responsible for the collapse of
many cooperative associations.
5) Corruption: One of the most important drawbacks of a cooperative form
of organisation is the prevalence of corrupt practices in the management
and functioning of the cooperative societies.
6) Lack of secrecy: The affairs of cooperatives are generally exposed to the
members and it becomes quite difficult for them to maintain secrecy in
business affairs.
7) Insufficient motivation: Since the rate of return on capital is low, the
members do not feel involved in the affairs of the society.
Check Your Progress D
i) Earning profit is the primary objective of cooperative organisation.
ii) Management of cooperatives is completely in the hands of the
government.
iii) Cooperative society is incorporated under the Indian Companies Act.
1956.
iv) In cooperatives each member is entitled to receive the bonus in the
proportion of the business he has done with the society.
v) Women cannot become members of a cooperative society.
i) In cooperative societies, liability of the members is ..........................
ii) To form a cooperative, there should be at least members..................
iii) The maximum number in a cooperative society is ..........................
iv) Primary motive of cooperative is ..........................
v) Maximum rate of dividend that can be paid to the members on share
capital in a cooperative society is ..........................
5.6 LET US SUM UP

Based on ownership there are four basic forms of business organisation: 1) sole
trader organisation, 2) partnership organisation, 3) company organisation, and
4) cooperative organisation.
A business which is owned, financed and controlled by a single person is called
sole trader organisation. This is most suitable for small business. There is no
distinction between the business concern and the proprietor. This form of
organisation has advantages from the point of view of control, secrecy, ease and
low cost of formation, ease of dissolution and less government regulations.
Disadvantages include: the owner’s unlimited liability, difficulty in raising capital,
limited management expertise, unstable business life and difficulty in attracting
qualified employees.
31
Business Enterprises A partnership is an association of two or more persons to carry on as co-owners
of a business for profit. Usually there would be a written or oral agreement
between partners which specifies the contribution of each partner to the business,
the partner’s roles, and other major points of agreement. There are various types
of partners based on: (a) extent of participation, (b) profit sharing, (c) behavior
and conduct exhibited, and (d) liability shared. Partnership organisation can
overcome some of the disadvantages of sole proprietorship organisations.
Advantages of partnership include: capital, more specialised management, more
certainty, greater incentives to key employees, etc. Partnerships suffer from
unlimited liability, difficulty in transferring the shares, potential owner conflicts,
short length of life, etc. Comapnies Act 2013, has provided the provision for
One Person Company and Small Company.
Limitations of sole proprietorships and partnerships gave rise to company form
of organisation. A company is an artificial person created by law, with a
distinctive name, a common seal and perpetual succession. Major advantages of
company form of organisation include: shareholders’ limited liability,
transferability of shares, stability of existence, ease of obtaining additional capital,
more managerial expertise, etc. Major limitations are cost and difficulty of
formation, more government regulations, lack of secrecy, less scope of prompt
decision making, etc.
Cooperative form of organisation is a voluntary association of persons who are
not financially strong and cannot stand on their own legs. They come together
not with a view to get profits, but to overcome the instability arising out of want
of adequate financial resources. The underlying objective is self-help and mutual
help. Advantages of cooperative form of organisation include: easy formation,
limited liabllity, government assistance, open membership, etc. Disadvantages
include: lack of business acumen, absence of mutual interest, lack of secrecy,
rivalry among members, etc.
5.7 KEY WORDS

Active Partner : A partner who takes an active part in the operations
of the partnership business.
Chartered Company : A company which is incorporated under a special
Royal Charter granted by the Monarch.
Company : An association of persons registered under the
Companies Act. It is an artificial person created
by law, with a distinctive name, a common seal
and perpetual succession of its members.
Comapny Limited by : A company having the liability of its members
Guarantee limited by it, memoradum to such amount as the
members may respectively undertake to
contribute to the assets of the company in the
event of its being wound up.
Company Limited by : A company having the libility of its members
Shares limited by the memorandum to the value of shares
held by them.
Cooperative Organisation : A voluntary association of persons established
32 under the Cooperative Societies Act.
General Partner : A partner of a partnership organisation whose Forms of Business
Organisation-I
liability is unlimited and also entitled to
participate in the management of the business.
Government Company : A company in which not less than 51% of the
paid-up capital is held by the Government.
Limited Partner : A partner whose liability is limited to the extent
of the capital contributed by him.
Joint Hindu Family Firm : A business firm owned by a joint Hindu family.
Nominal Partner : A partner who just lends his name to the
partnership firm. He neither invests his capital
nor participates in the management.
Partner : A person who is the member in a partnership firm.
Partner by Estoppel : A person whose conduct and behaviour creates
an impression that he is a partner in the
partnership firm.
Partner by Holding Out : If a member of a partnership firm represents that
another person is also a member of the firm, and
if such a person does not disclaim the partnership
relationship even after coming to know about it,
such person is called partner by holding out.
Partner in Profits : A partner who shares the profits of the business
without being liable for losses.
Partnership Agreement : A written or oral agreement entered into by
partners specifying the constitutions rules and
regulations of the partnership.
Partnership Deed : A written partnership agreement which is duly
stamped and registered.
Partnership Organisation : An association of two or more person, who join
together to share the profits of business carried
on by all or any of them acting for all.
Private Limited Company : A company which by its articles (a) limits the
maximum number of its members to 50 excluding
its employees, (b) restricts the right to transfer
its shares, and (c) prohibits the invitation to the
public to subscribe to its shares and debentures.
Public Limited Company : A company which is not a private limited
company.
Registered Company : A company which is incorportated under the
Companies Act.
Sleeping Partner : A partner in a partnership firm who is not actively
associated with the working of the firm.
Sole Trader Organisation : One man business in which an individual
produces independently with his own capital,
skill and intelligence and is entitled to receive
all the profits and assume all risks of ownership.
33
Business Enterprises Statutory Company : A company established by a special Act of the
Parliament or State Legislature.
Unlimited Company : A company in which the liability of the members
is unlimited.

A) 1. (i) unlimited (ii) proprietor/owner (iii) small (iv) one (v) proprietor/
owner
2. (i) False (ii) True (iii) False (iv) True (v) False
B) 1. (i) 50 (ii) unlimited (iii) sleeping (iv) two (v) partnership deed
(vi) partner by estoppel (vii) limited partner
2. (i) False (ii) False (iii) True (iv) False (v) True (vi) False (vii) False
(viii) True
C) 1. (i) False (ii) True (iii) False (iv) True (v) False (vi) False (vii) True
(viii) False
D) 1. (i) False (ii) False (iii) False (iv) True (v) False
2. (i) limited (ii) ten (iii) unlimited (iv) self-help and mutual help
(v) 9%

1) What do you understand by sole trader organisation? State merits and
limitations of the sole trader organisation?
2) Partnership organisations emerged essentially because of the limitations
and failures of the sole proprietorships. Discuss.
3) What is partnership? How does it differ from a joint stock company?
4) What is a joint stock company? Explain how it overcomes the limitations
of non-corporate form of organisation.
5) Discuss the special features of a cooperative form of organisation. How is
it different from a company?
6) What are the objectives of a cooperative form of organisation? Explain its
merits and limitations.
University. These are for your practice only.
34
Forms of Business
UNIT 6 FORMS OF BUSINESS Organisation-I
ORGANISATION-II
Structure
6.0 Objectives
6.1 Introduction
6.2 Requisites of an Ideal Form of Business Organisation
6.3 Comparison of Various Forms of Organisation
6.4 Criteria for the Choice of Organisation
6.4.1 Criteria at the time of Starting a Business
6.4.2 Criteria at the time of Expansion
6.5 Choice of Form of Organisation
6.6 Social Enterprises
6.7 Let Us Sum Up
6.0 OBJECTIVES
After studying this Unit, you should be able to:
discuss the features of an ideal form of business organisation
compare the forms of business organisation
outline the criteria for the choice of form of business organisation.
6.1 INTRODUCTION
You have learnt in Unit 5 that there are four forms of business organisation, viz
(i) sole proprietorship, (ii) partnership, (iii) joint stock company, and (iv)
cooperative society. You have also learnt about the merits and limitations of
each of these four forms.
Sole proprietorship and partnership have the advantages from the point of view
of control, secrecy, motivation, ease of formation, and low cost of organisation.
But they suffer from the drawbacks of limited resources, limited managerial
abilities with unlimited liability. The company form of organisation, on the other
hand, has the advantages of more resources, limited liability and diverse
managerial abilities.
When you plan to set up a new business, you have to decide which form of
organisation is more suitable for the proposed business. For this, you have to
critically analyse the suitability of each forms of organisation in the light of the
nature of the proposed business. This is a very crucial decision because it
determines the power and responsibility of the entrepreneur and the division of
profits and losses. Once it is chosen, it is very difficult and expensive to change
it. In this Unit, you will learn about the requisites of a good form of organisation,
compare the four forms of organisations, analyse the factors influencing the
35
Business Enterprises choice of organisation form, and decide which form is the most suitable in a
given situation.
6.2 REQUISITES OF AN IDEAL FORM OF

BUSINESS ORGANISATION
Before we discuss how to select a particular form of business organisation in a
given situation, we should know the essentials of an ideal form of organisation.
This may help you in the evaluation of each form of organisation in the right
perspective and take the final decision about the choice of a particular form
more judiciously. The requisites of an ideal form of organisation are as follows:
1) Ease of Formation: An important factor for preferring a particular form of

organisation to another is the ease with which a business can be brought
into existence. The comparative ease of difficulty in forming a particular
form of organisation mainly depends on three factors: (i) formation expenses
by way of registration fee, stamp duty, fees of legal experts, charges involved
in the drafting of documents, obtaining licences, etc., (ii) legal formalities,
and (iii) procedural delays, etc. Unless it is very essential, it is better to go
for an organisation which is easy to form.
2) Scope of raising capital: The choice of organisation mainly depends on

the amount of capital required which is determined by the nature of business
and the scale of operations. For example, if you want to open a retail shop
in groceries, the amount of capital needed will not be much. But if you
want to set up a sugar factory, you may require a large amount of capital.
Ideal form of organisation is one which provides scope for raising the amount
of capital as and when required.
3) Extent of liability: You know that the element of risk and uncertainty is
prevalent in each business. In view of this, normally, the businessmen prefer
limited liability. Obviously, limited liability is considered as an important
feature of a good form of organisation. However, a certain amount of risk is
also found to be important to provide the needed spur for initiative, drive,
and involvement in business. Many times, the absence of such spur leads to
weakness, inefficiency and even dishonesty on the part of management
personnel.
4) Flexibility of operations: The form of organisation should be very flexible

and adaptable to changing business conditions without much difficulty or
complication. For example, if you want to expand your business, diversify
or modernise the plant and equipment, the organisation should be able to
meet all requirements.
5) Stability and continuity: Stability and long life of business is desirable

from the point of view of owners, employees, and customers. Employees
always prefer a stable and continuous employment. If the business is stable,
the owner should be able to formulate plans for the future and to make
investments paying for a considerable length of time. From the customers’
point of view also, regular supply of goods and services is expected to meet
their needs. An ideal form of organisation is one which provides reasonable
amount of stability to the business.
36
6) Effectiveness of management: As you know that the success of any business Forms of Business
Organisation-II
enterprise depends on the efficiency of management. Managerial efficiency
depends on skills, motivation, flexibility, adaptability, etc. It is difficult for
an individual to possess all these qualities.
7) Extent of government control and regulations: If the governmental control

and regulations are too many, the enterprise may have to divert a lot of
time, money and energy for complying with legal formalities and
instructions. In some cases there may be too much interference by the
government officials in the day-to-day business of the firm. No doubt, the
investors, creditors, and customers trust the business enterprises whose
activities are properly regulated by the government. But too much
government interference is not favoured by the entrepreneurs because it
mars their initiative and disrupts the working of their business.
8) Business secrecy: In business, it is important to maintain business secrets

without leaking them out to competitors. Therefore, a form of organisation
which enables retention of business secrets is preferred to the one wherein
business secrets are difficult to preserve.
9) Tax burden: Business taxes GST, excise duty, and customs duty are charged
on certain products and services. Hence, such taxes affect all forms alike
and they will not affect the choice. But the income tax liability is different
from one form of organisation to the other. Naturally, the form of organisation
which attracts the minimum amount of this tax liability is considered as an
ideal form. From this point of view, company form of organisation is
considered to be best because it enjoys a number of tax reliefs which are
not available in case of other forms of organisation.
10) Ownership prerogatives: Some persons have a very strong desire to control
the entire business activities themselves and place a great value upon their
right of personal leadership. Some persons are desirous of sharing the
responsibilities and risks of a business. Some people may want to own a
part of the capital without a strong desire to control the affairs of the business.
You can also find some persons who are not ready to bear the business risk.
An ideal form of organisation takes care of such prerogatives of the owners.
6.3 COMPARISON OF VARIOUS FORMS OF

ORGANISATION
You have learnt that an ideal form of organisation should have the features of
easy formation, limited liability, scope to raise enough capital, business secrecy,
flexibility, stability in operations, less governmental controls, less tax burden,
etc. You know that there are four basic forms of organisations viz., (1) Sole
proprietorship, (2) Partnership, (3) Company, and (4) Cooperative society. In
the light of the above features identified for an ideal form of organisation, let us
now compare the features of these four forms of organisations. With such
comparison, probably, we can identify that form of organisation which fulfils
all the ideal features. Look at the Table 6.1 and compare the features of the four
forms of business organisations.
37
Business Enterprises Table 6.1: Comparative Study of Different Forms of Organisation
S. Basis of Sole Partnership Private Limited Public Limited Cooperative
Comparison Proprietorship Company Company Organisation
1 Formation Easiest. No legal Quite easy. No rigid Difficult due to Quite difficult due Few legal formalities
formalities legal formalities legal formalities to many legal are involved
required formalities
2 Specific None Indian Partnership Companies Act, Companies Act, Cooperative
regulation Act, 1932 1956 1956 Societies Act, 1912
3 Legal status No separate No separate legal Separate legal Separate legal Separate legal
legal status status status status status
4 Membership Single owner Minimum is 2 Minimum 2 and Minimum 7 and no Minimum 10 and no
Maximum is 50 maximum 200 maximum limit maximum limit
5 Capital Very limited Limited capital Larger capital Any amount of No substantial
capital resources capital can be resources
raised
6 Management Owner Owner management Control, risk and Complete Not managed by all
and management ownership separation of members
ownership generally go management from
together ownership
7 Managerial Very limited Limited expertise Scope for expertise Very wide scope Scope for expertise
expertise expertise for expertise
8 Owner’s Unlimited Unlimited Limited Limited Limited subject to
liability By-laws
9 Basis of Fully enjoyed Shared by partners Shared by owners Shared by owners Volume of business
profit by owner as per agreement in the proportion in the proportion of by each member
sharing of shares held shares held
10 Ownership At will and Restricted and Restricted and At will and very
transfer Restricted
relatively easy relatively difficult relatively difficult easy
11 Business Depends upon Depends upon the Perpetual existence. Perpetual existence Death, insolvency of
stability the life of owner life, insolvency, death, insolvency death, insolvency its members does not
retirement of of the members of the members effect the life
partners does not effect the does not effect the
life life
12 Business Full secrecy Secret shared by the Secrets shared by Exposed to public Exposed to members
secrets partners the members
13 State Almost nil Very little Considerable Excessive Considerable
regulations regulations regulations regulations
14 Tax liability No special No special income Heavily taxed and Heavily taxed and Exemption from
income tax tax income is double income is double income tax
taxed taxed
15 Flexibility It is an elastic It can be changed It is an elastic It is an inelastic It is an inelastic
organisation. only by the consent organisation organisation. Its organisation. Its
There is no need of all partners. It Memorandum of Memorandum of
of written requires partnership Association is Association is
documents deed which can be difficult to change. difficult to change,
changed by the It can be changed It can be changed
consent of all the through the through the
partners permission of the permission of Govt.
Govt.
16 Auditing of Not required Compulsory Compulsory Compulsory
accounts Not required
17 Winding up At will At will Under the Act Under the Act Under the Act
38
If you carefully analyse Table 6.1, you will realise that no single form of Forms of Business
Organisation-II
organisation is having all the ideal features. You can find each form of
organisation having some of these features. Each form is good in some aspects
and not good in other respects. For instance, sole proprietorship and partnership
forms of organisations are considered good from the point of view of ease of
formation, freedom from government regulations, ownership interest, retention
of business secrets, etc. But the same features are not prevalent much in company
form and cooperative form of organisations. Company form and cooperative
forms are ideal from the point of view of limited liability, scope of raising capital,
professionalised management, continuity of life, etc. So, it is difficult to treat
any one form as ideal in all respects and suitable in all situations.
1) List the features of an ideal form of business organisation.
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
i) An ideal form of organisation is one which has complicated legal
formalities at the time of formation. ………..
ii) Unlimited liability is an important feature of an ideal form of
organisation. ……………….
iii) Organisation should be flexible and adaptable to changing businesses
……………….conditions.
iv) Too much governmental control is not ideal. ………………..
v) An ideal form of organisation should ensures table and continuous
life to the business. ……………….
vi) Retention of business secrets is one of the essential features of a good
form of organisation. ………………..
vii) The form of organisation which attracts more tax burden is desirable.
…………………
i) ....................... form is the easiest and ................... form is the most
difficult in formation.
ii) Membership of owners is the highest in ............. form and the lowest
in .................... form.
iii) Scope to raise capital is very limited in .................... form.
iv) Income is exempted from tax for .............. form of organisation.
v) Owners liability is unlimited in ...................... forms.
vi) Business secrets are maintained in ...................... forms.
vii) State regulations are the maximum in ..................... form
viii) Business secrets are mostly exposed in ............ form 39
6.4 CRITERIA FOR THE CHOICE OF
ORGANISATION
By comparing the four forms, we realised that none of them is ideal in all respects.
Each form of organisation is good in some respects and not good in other respects.
It means that looking for one best form of organisation will be like looking for a
shirt that fits everybody in the family. Thus, a particular form of organisation
which is suitable in one situation may not be suitable in other situations. So, the
best form of organisation is one which fulfils the requirements of a particular
business in a satisfactory manner. The basic consideration governing the selection
is the attainment of the objectives decided upon by the entrepreneur. Since these
objectives also vary from one business to the other, no single form of organisation
can be considered as the best suited for all kinds of business.
Now let us analyse what considerations help us in making our choice of the
form of business organisation. The decision regarding the choice of organisation
assumes importance at two stages of business.
a) At the time of starting a business
b) At the time of expansion.
6.4.1 Criteria at the time of Starting a Business

Choice of a suitable form of business organisation assumes great importance at
the time of initiating or launching a new business enterprise because it is the
form of organisation which ultimately determines the power and responsibility
of the entrepreneur. The choice is dependent on the following factors.
1) Nature of business: Choice of a suitable form of organisation is dependent
on the nature of the proposed business. The organisational requirements
are different for different types of business. For example, a big cement
manufacturing activity and a retail cement shop cannot have the same form
of organisation. Similarly, the form of organisation suitable for a textile
mill is not suitable for a tailoring shop.
2) Volume of business: The expected volume of business also influences the
decision about the suitable form of organisation. If the volume of business
is small, you need small amount of capital and run less risk. In that case,
sole proprietorship may be quite suitable. But if the volume is large, you
need more capital and run more risk which a single owner may find it difficult
to cope with. So, partnership form or a company form would be considered
more suitable.
3) Area of operation: The area of operation of the business also influences
the choice of form of organisation. If the area is limited and confined to a
particular locality, the suitable form of organisation may be sole
proprietorship. In case the area is widespread, the suitable form may be a
joint stock company.
4) Desire for control: The extent of control and supervision will also determine
the choice of organisation. If it is desired to have a direct control over the
business operations, a sole proprietorship or a partnership form of business
should be adopted. In case if you feel that there is no need for direct control,
40 the company form of organisation is the best.
5) Capital requirements: The form of organisation will also depend on the Forms of Business
Organisation-II
extent of financial requirements of the business. A business which requires
a small amount of capital can be organised on sole proprietorship or
partnership basis. But if the financial requirements are huge, then the joint
stock company form of organisation may be preferred.
6) Extent of risk and liability: You know business operations involve risk. If
the promoters of a business enterprise are deterred by the risk involved,
they will start the business on the basis of a limited liability. That means
they can go for a company. In case they have capacity to bear the risk
involved, it can be organised on sole proprietorship or partnership basis.
7) Government regulations: As you know the governmental controls and

regulations are more in company form and cooperative form of organisations
compared to the remaining two forms. If you do not want too much
government control and regulation, you should choose either sole
proprietorship form or partnership form.
6.4.2 Criteria at the time of Expansion

Growth is a normal phenomenon in business. When your business is successful,
naturally, you may plan to expand it. The expansion programmes may have the
following implications.
i) Need for larger financial resources.
ii) Need for internal reorganisation and control.
iii) Need for specialised services like communication, accounting, marketing,
etc.
iv) Increase in governmental controls and regulations.
v) Increase in tax liability.
vi) Increase in the problem of control and coordination
In fact, the nature of these problems will depend upon the nature of the existing
business and type of expansion programme undertaken. To implement your
expansion programme, you can either continue with the existing form of
organisation or adopt a new form of organisation. Whatever alternative you
choose, it must be able to meet all requirements of expansion. If your existing
business is organised as a sole proprietor concern, you can think about employing
a manager or taking a partner. In case, it is a partnership firm, you may have to
choose between increasing the number of partners or converting it into a private
limited company. Similarly, if your existing business is in the form of private
company, you have the choice of converting it into a public limited company or
not.
6.5 CHOICE OF FORM OF ORGANISATION

On the basis of the above discussion, we can conclude that the small business
like grocery stores, hair dressers, small restaurants and hotels, small auto
workshops, stationery shops, confectionaries, bakeries, dry cleaners, shoe
manufacture and suppliers, small electric and electronics repair shoes, barbers,
tailors, etc., are predominantly sole trade organisations. The reasons for preferring
41
Business Enterprises sole proprietorship form of organisation for these types of businesses are
abundantly clear. They function on small scale, cater to the needs of a limited
market or deal with a restricted number of customers or dealers, and require a
very limited capital. Moreover, they require the personalised attention of the
owners to deal with a face-to-face situation. The managerial supervision can be
tackled easily by the owner himself and the owner generally likes to be his own
boss and active manager.
Business on a relatively larger scale is generally organised as partnership firm.

Service enterprises like auto workshops, larger restaurants and hotels, large scale
retail houses and medium scale industrial organisations are generally organised
under partnership form. In these cases, the entrepreneurs would like to pool
their capital, skills, experience, etc. as partners of a firm. The internal organisation
of such undertakings is looked after by the partners who specialise in a particular
activity in the enterprise.
In those enterprises where the risk involved is quite significant and scale of
operation is medium, the likely choice will be the private company. Transport
undertakings, hire purchase units, finance and leasing companies, medium scale
manufacturing companies are generally organised as private limited companies.
In these undertakings the requirements of capital are larger as compared to those
of a partnership firm.
For large scale business operations, the most suitable form of business
organisation is the public limited company. The large scale manufacturing plants,
large transport undertakings, engineering and electronic companies, departmental
stores, multiple shops, etc., are usually organised on the basis of public limited
company. The principal reasons are the necessity of larger capital and the large
amount of risk involved.
On the other hand, the cooperative form of organisation is suitable when the
interest of a particular segment of society is to be promoted. Thus, the cooperative
form of organisation is used largely for consumers, producers, farmers, etc.
6.6 SOCIAL ENTERPRISES

The social enterprises have been established for the development of the society.
These enterprises have been involved in dealing with the issues of education,
training, unemployment, women empowerment, poverty, inequity etc.
According to National Entrepreneurship Policy 2015, The Ministry of Skills

and Entrepreneurship, Government of India “Social Enterprises have emerged
as important business instruments to address the issues of poverty, unemployment
and inequity in Society, through socially oriented business innovations. Social
innovation seeks to answer these social problems by offering new products and
services which allow the poor to interact with markets as active participants
rather than passive recipients”.
It is clear from the policy that :
i) Social Enterprises have emerged as important business instruments;
ii) These enterprises have been involved in addressing the issues related to
poverty, unemployment and inequity;
42
iii) They are committed to the socially oriented business innovations; Forms of Business
Organisation-II
iv) The social innovations may be used to explore answers to the social
problems;
v) They provide new products and services which help in dealing with the
problems of the society; and
vi) The social enterprises primarily perform the social activities, therefore, the
society may get an opportunity to interact with the social enterprises. Thus,
they may become active participants.
The U.K. Government has defined social enterprise as “Business with primarily
social objectives whose surpluses are principally reinvested for that purpose in
the business or in the community, rather than being driven by the need to
maximize profit for shareholders and owners”.
It is clear from this definition that :
1) Social objective is the primary aim of the social enterprise;
2) The profit of these enterprises are reinvested for the benefit of the society
or the business; and
3) The social enterprises are not guided by the maximization of profits for
shareholders and owners.
According to British Council Survey, 2016, the state of Social Enterprise in
India, the most commonly stated objectives of social enterprises in India are :
“creating employment (62%) followed by improving health (41%), protecting
the environment (40%), addressing social exclusion (40%), supporting agriculture
and allied activities (36%), empowering woman (33%), promoting education
(32%), addressing financial inclusion (31%) and supporting other organisations
(20%)”.
The above activities show that the social enterprises have been contributing for
the social development of India. Moreover, the philosophy of social objectives,
social commitment, social upliftment as well as reinvestment for the society
required to be spread in all parts of the country.
1) List the factors influencing the choice of organisation at the time of starting
a business unit.
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
i) Higher the business volume, the lower is the capital requirement

..................................
ii) Sole trader or partnership forms are desirable when direct control of
business is preferred .................................. 43
Business Enterprises iii) Nature of the business does not have any influence on the choice of
organisation form ..................................
iv) If the area of operation is very wide, partnership form is ideal

...................................
v) Company form is suitable in case of limited liability is desired

...................................
vi) Raising of capital to an unlimited extent is possible through public

limited company ..................................
vii) Government regulations are more in the case of company form of

organisation ..................................
3) Put a ( ) mark against correct answer.
i) Suitable form of business organisation for a very small business is

sole proprietorship/ company form.
ii) For large scale manufacturing business, suitable form of organisation
is partnership/company form.
iii) Suitable form of organisation for medium size retail cloth business is
partnership/company form.
iv) To raise small amount of capital, suitable form is sole trade form/
cooperative form.
v) If the risk element is very high, suitable form of organisation is
partnership/private limited company.
6.7 LET US SUM UP

The features of an ideal form of business organisation are: ease of formation,
limited liability, scope to raise enough capital, maintenance of business secrecy,
flexibility, stability in operations, less governmental controls, less tax burden,
higher managerial efficiency, and more ownership interest.
Comparison of the four forms of organisations shows that none of these forms
have all the ideal features. Each form of organisation is good in some respects
and not good in other respects. Sole proprietorship and partnership forms are
ideal from the point of view of ease of formation, governmental controls,
ownership interest, business secrecy, and flexibility. Company and Cooperative
forms are ideal from the point of view of limited liability, scope of raising capital,
managerial efficiency, stability, and continuity of operations.
As none of the four forms is ideal in all respects, the entrepreneur has to choose
the suitable form of organisation in the light of the objectives of his business.
For choosing a suitable form of organisation at the time of launching the new
business, the entrepreneur has to consider the nature of business, volume of
business, area of operation, capital requirements, degree of control desired,
expected life of business and desired level of governmental regulations. At the
time of the expansion, depending on the situation, the entrepreneur can either
44 continue the existing form or adopt a new form of organisation.
Based on the analysis, it is concluded that the sole proprietorship is the suitable Forms of Business
Organisation-II
form for small business. If business is relatively larger, partnership is the proper
form of organisation. Private limited company is ideal for medium sized business
and public company is suitable for large scale business. The cooperative form
of organisation is suitable when the interest of a particular segment of the society
is to be looked after

A) 2. i) False (ii) False iii) True iv) True v) True vi) True
vii) False
3. i) Sole trader, public limited company
ii) public limited company cooperative, sole trader
iii) sole trader
iv) cooperative
v) sole trade and partnership
vi) sole trade and partnership
vii) public limited company
viii) public limited company.
B) 2. (i) False (ii) True (iii) False (iv) False (v) True vi) True
(vii) True
3. (i) sole proprietorship (ii) company form (iii) partnership
(iv) sole trader form (v) private limited company

1) Explain the features of an ideal form of business organisation. Which form
can be considered to be an ideal in all respects?
2) None of the four forms of business organisations has all the features of an
ideal form of organisation. Discuss.
3) Explain the factors determining the choice of the form of business
organisation.
4) You plan to start a business. How would you choose the suitable form of
organisation for your business?
5) Company form of organisation is the most ideal form for all types of
businesses. Discuss.
6) A partnership firm has decided to expand its business which requires more
capital and expertise. Should it take more partners or convert it into a private
limited company. Give your advice with suitable arguments.
Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not send your answers to the
45
UNIT 7 PUBLIC ENERPRISES
Structure
7.0 Objectives
7.1 Introduction
7.2 What is a Public Enterprise?
7.3 Features and Objectives of Public Enterprises
7.4 Contribution of Public Enterprises
7.5 Problems of Public Enterprises
7.6 Departmental Organisation
7.6.1 Features
7.6.2 Merits
7.6.3 Limitations
7.7 Public Corporation
7.7.1 Features
7.7.2 Merits
7.7.3 Limitations
7.8 Government Company
7.8.1 Features
7.8.2 Distinction between Government and Non-government Companies
7.8.3 Merits
7.8.4 Limitations
7.9 Comparison of the Forms of Organisation
7.10 Let Us Sum Up
7.11 Key Words
7.0 OBJECTIVES
describe the meaning, features and objectives of public enterprises
state the contribution of public enterprises
identify the problems of public enterprises
describe various forms of organisation in public enterprises
describe the features of each form of organisation
explain the merits of each form of organisation
evaluate the suitability of each form of organisation.
7.1 INTRODUCTION
As you know that the business enterprises promoted by private entrepreneur are
46 organised in any of the following three forms: 1) sole proprietorship, 2)
partnership, and 3) joint stock company. But, the forms of organisation in public Public Enterprises
enterprises are different. In the case of public enterprises there are three forms
of organisation: 1) departmental organisation, 2) public corporation, and 3)
government company. Look at Figure 7.1 for the forms of organisation in public
enterprises. In this Unit, we shall discuss about the features, objectives,
contribution and problems of public enterprises. You will further learn the
features, merits and limitations of each of these three forms of organisations and
evaluate which form is suitable under a given situation.
Public Enterprises
Departmental Statutory/Public Government

Organisation Corporation Company
Fig. 7.1: Forms of Organisation in Public Enterprises
7.2 WHAT IS A PUBLIC ENTERPRISE?

Strictly speaking the term public enterprise, as a business entity, refers to any
industrial or commercial undertaking which is owned and managed by the
Central, State or Local government and of which the output is marketed i.e. not
supplied free. Thus public enterprises include manufacturing, trading as well as
service organisation which are essentially business undertakings.
Public enterprises consist of nationalised private organisations as well as new

enterprises promoted under government ownership and control. Life Insurance
Corporation, Indian Airlines Corporation, Coal India Ltd., etc. are examples of
public enterprises established by nationalising private organisations. Hindustan
Machine Tools, Hindustan Antibiotics Ltd., Chittaranjan Locomotive Works,
etc., are examples of public enterprises promoted by government.
Schemes of Public Sector Enterprises

The Government of India has provided more powers to the Boards of the Profit
making public enterprises. For this purpose, Maharatna, Navratna and Miniratna
schemes have been operationalised. Let us learn them.
Maharatna Scheme: The maharatna scheme was initiated in the year 2010.
The main objective of this scheme was to empower mega central public sector
enterprises to expand their operations and emerge as global giants. There are
eight Maharatna central public sector enterprises. These are: i) Coal India Limited
ii) Bharat Heavy Electrical Limited, iii) GAIL India Limited, iv) Indian Oil
Corporation Limited, v) NTPC Limited vi) Oil and Natural Gas Corporation
Limited, vii) Steel Authority of India Limited, and viii) Bharat Petroleum
Corporation Limited.
Navratna Scheme: The navratna scheme was initiated in the year 1997. The
main objective of this scheme was to identify central public sector enterprises
that had comparative advantages and to support them in their drive to become 47
Business Enterprises global giants. In this scheme, the Boards have been provided more powers in
the areas of i) capital expenditure, ii) investment in Joint Ventures/Subsidiaries,
iii) mergers and acquisitions, iv) human resources management, etc. There are
sixteen Navratna Central Public Sector Enterprises. These Navratna enterprises
are:
i) Bharat Electronics Limited, ii) Container Corporation of India Limited, iii)

Engineers India Limited, iv) Hindustan Aeronautics Limited, v) Hindustan
Petroleum Corporation Limited, vi) Mahanagar Telephone Nigam Limited and
10 others.
Miniratna Scheme: The miniratna scheme was initiated in the year 1997. The
Government of India has provided more autonomy and delegation of financial
powers to the miniratna enterprises to make them efficient and competitive.
There are 74 miniratna central public sector enterprises. The miniratna enterprises
have been placed in two categories i.e. category-I and category-II. The miniratna
enterprises in category-I are: i) Airports Authority of India, ii) Antrix Corporation
Limited, iii) Balmer Lawrie & Co Limited, iv) Bharat Cooking Coal Limited, v)
Bharat Dynamics Limited and 54 others. The miniratna enterprises in category-
II are: i) Artificial Limbs Manufacturing Corporation of India, ii) Bharat Pumps
& Compressors Limited, iii) Broadcast Engineering Consultants (I) Limited,
iv) Central Mine Planning & Design Institute Limited, v) Central Railside
Warehouse Company Limited and 10 others.
Performance of Public Sector Enterprises

According to the Annual Report (2017-18), Department of Public Enterprises,
Government of India, there were 320 central public sector enterprises in India.
There were 244 operating enterprises. Remaining 76 enterprises were yet to
start operations. Out of 244 operating enterprises, 165 enterprises were running
in profits for the year 2015-16. The remaining 78 enterprises were running in
losses for the year 2015-16.
Disinvestment of Public Sector Enterprises

According to investopedia.com “Disinvestment is the action of an organisation
or government selling or liquidating an asset or subsidiary”. According to
Department of Investment and Public Asset Management, Ministry of Finance,
Governament of India, the salient features of the disinvestment policy are as
follows:
i) Public Sector Undertakings are the wealth of the nation and to ensure this
wealth rests in the hands of the people, promote public ownership of Central
Public Sector Enterprises CPSEs;
ii) While pursuing disinvestment through minority stake sale in listed CPSEs,
the Government will retain majority shareholding, i.e. at least 51 per cent
of the shareholding and management control of the Public Sector
Undertakings;
iii) Strategic disinvestment by way of sale of substantial portion of Government
shareholding in identified CPSEs upto 50 per cent or more, alongwith transfer
of management control.
48
Difference Between Public Enterprise and Private Enterprise Public Enterprises
Private enterprises, on the other hand, refer to industrial and commercial

organisations which are set up under individual or group ownership within the
general framework of regulatory laws and rules of the government. These include:
manufacturing and commercial companies, medium and small firms organised
as proprietary and partnership concerns.
Private enterprises are primarily motivated by private profit. Public enterprises

are governed by public policies framed by government and aimed at maximizing
social welfare and upholding public interest. The objectives of public enterprises
in India are laid down in conformity with the objectives of the development
plans. They are accountable to the government and the parliament or state
legislatures regarding the fulfillment of their objectives. Private enterprises are
free to set their objectives and to undertake any business activity except those
which are illegal. However, private enterprises are also regulated by government
controls of different kinds.
7.3 FEATURES AND OBJECTIVES OF PUBLIC

ENTERPRISES
Features
The main features of public enterprises as distinguished from private enterprises

are as follows:
1) Public enterprises are owned and managed by the government or agencies
set up by the government.
2) The whole or major part of the capital required for the public enterprises is
provided by government.
3) A public enterprise can be organised as a departmental undertaking or as a
statutory corporation or as a government company.
4) These are governed by public policies laid down by the government in the
public interest and are not entirely guided by profit motive.
5) Their objectives are laid down in conformity with the development plans.
They are accountable to the Parliament or state legislature for their
performance and fulfilment of objectives.
Objectives
It should be clear from the reasons which prompted the growth of public
enterprises, that the principal objectives of these undertakings are many. The
objectives are outlined below:
1) To achieve rapid economic development through industrial growth in
accordance with the development plans.
2) To chanelise resources in the best possible manner for economic growth.
3) To secure public welfare and to reduce inequalities in the distribution of
income and wealth.
4) To ensure balanced regional development of industry and trade.
49
Business Enterprises 5) To prevent the growth of monopoly and concentration of economic power
in a few private hands.
6) To control the prices of essential consumer goods in the market to prevent
public hardship.
7) To mobilise public savings through financial institutions to meet the demands
of public and private enterprises in accordance with planned priorities.
8) To provide satisfactory employment conditions to the personnel as model
employers.
7.4 CONTRIBUTION OF PUBLIC ENTERPRISES

Many people argue that if we judge the contribution of public enterprises only
in financial terms, we are less than fair to them. There are many other important
aspects of their contribution which cannot be ignored. Non-financial gains of
public enterprises are diverse and substantial. Some of these gains are as follows:
1) Public enterprises have a great deal for the country to emerge as an industrial
nation. Today, India is considered to be among the industrialised nations of
the world. We are also self-reliant in many major areas of industrial
production and most items of consumer goods and services.
2) They have helped the industrialisation and development of backward areas.
3) They have also assisted the development of backward communities,
particularly scheduled castes and scheduled tribes, by providing employment
opportunities.
4) Expansion of public enterprises have led to the reduction of income
disparities. As compared to private enterprises, the salary differential
between the lowest and the highest paid employees is much less in public
enterprises.
5) The constitutional objective of avoidance of concentration of economic
power in few hands, has been greatly achieved by the public enterprises. In
the absence of these enterprises, economic power would have gone into the
hands of a few large and established business houses.
6) The dealings of public enterprises with their suppliers, dealers, customers,
employees and public at large have a higher level of morality than in the
counter part private enterprises.
Thus, we find that public enterprises are an important instrument in implementing
the nation’s social and economic policies, and their success cannot and should
not be measured only in terms of profit.
7.5 PROBLEMS OF PUBLIC ENTERPRISES

We have learnt that the government in India is in business in a big way covering
varied fields of activity. We also studied about the performance and contributions
of public enterprises. Now let us study the limitations of these enterprises.
1) Even though public enterprises are often registered as joint stock companies
50 like any other private sector companies, their way of working is not fully
commercial. It is so because these enterprises being close to the government Public Enterprises
system, often adopt the procedures, practices and attitudes prevalent in
government departments.
2) The Board of Directors of public enterprises are not fully professional.

Often there is no continuity in the job of the top men.
3) There is too much job security at all managerial levels below the board and
this affects the level of performance in public enterprises.
4) The system of reward and punishment in public enterprises more often

resembles that in the government than in similar private enterprises.
5) Many important and large public enterprises are in areas where technology
is difficult and new. And also the location is not always decided from the
economic point of view.
6) The workers unions are strong and well-organised. So, they are able to
extract from these enterprises more than their rightful share.
7) Most public enterprises show poor performance due to surplus manpower

and low productivity of the personnel, almost at all levels, particularly so at
lower levels.
8) Public enterprises are very large in size as compared to private enterprises.

The complexity of managerial problems increase in geometric progression
with increase in size. The public enterprises, by and large, have not been
able to adequately cope with their complex managerial and administrative
problems.
9) Many constraints are also caused due to the public enterprises being subject
to the government type audit by the Comptroller and Auditor General of
India, and Parliament’s scrutiny of their affairs.
So far right answers to many of these problems have not been found. Many
expedients and remedies have been tried from time to time, but without much
success.
In public enterprises, there are three forms of organisation: i) Departmental

organisation, ii) Public Corporation, and iii) Government Company. Let us learn
them in detail.
7.6 DEPARTMENTAL ORGANISATION

Departmental form of organisation is the oldest form of organising public
enterprises. Under this form of organisation, business activities of the
undertakings are conducted under the overall control of one of the departments
of the government. In other words, when a public enterprise is organised, financed
and controlled in much the same way as any other government department, it is
known as ‘departmental form of organisation’. This form of organisation is
generally, chosen for such undertakings which are important from the view point
of public interest and national interest. This form is suitable for most of the
undertakings which are not run on pure commercial principles. Departmental
form of organisation, generally, is suitable under the following situations. 51
Business Enterprises i) Where the basic purpose of an enterprise is to procure revenue for the
government.
ii) Where the government desires to have firm control over service sectors
keeping in view public interest (e.g. posts and telegraph, broadcasting, etc.)
iii) Where maintenance of secrecy is regarded as a matter of strategic importance

(e.g. atomic energy, defence industries, etc.).
iv) Where projects are in earlier stage of initial planning and require constant
efforts and continuous funds that can be provided only by the government.
However, the latest trend seems to favour the participation of private enterprises
even in defence industries. For instance, the Bharat Electronic Ltd., which is a
state owned undertaking, is given a company form of management. A part of the
telecommunication services was converted into two joint stock companies in
1981. One of them is called the Videsh Sanchar Nigam Ltd., which is responsible
for the overseas telecommunication service; the other is the Mahanagar Telephone
Nigam Ltd., which is responsible for telephone systems in Mumbai and Delhi.
7.6.1 Features
The main features of departmental form of organisation are as follows:
1) Overall control rests with the minister: Under this form of organisation,
overall responsibility of management rests with the minister under whose
ministry the undertaking functions. The minister, in turn, delegates authority
downwards to the various levels of the organisation. Thus, the line type of
authority relationship is represented between executives at different levels.
In some cases, to manage the day-to-day operations, the government may
appoint a Board. The examples of such Boards are the Railway Board, the
Postal Services Board, the Telecommunications Board, etc. However, in
this form of organisation, the overall responsibility rests with the minister
and the minister is answerable to the legislature for the efficient operation
of the undertaking.
2) Employees are the civil servants: The employees in the case of
departmental organisation are civil servants. For example, Union Public
Service Commission (UPSC) is responsible for the recruitment of gazetted
personnel in railways and postal services (which are departmental
organisations) as it is for administrative and police service. The terms and
conditions of service of the employees are also the same as for the other
government employees.
3) Financed through budget appropriations: The finances of a departmental
form of organisation are not independent of the government. They are
financed out of the government treasury through the annual budget
appropriations and its revenues are paid into the treasury. For example,
railways and postal (they are departmental organisations) budgets form part
of the government budget.
4) Accounting and auditing systems: This form of organisation is subject to
budget, accounting and audit controls. For this purpose, the undertaking is
treated on par with other government organisations.
52
5) Sovereign immunity: Being an integral part of the government, it enjoys Public Enterprises
the sovereign immunity of the state. Therefore, it cannot be sued without
the consent of the government.
7.6.2 Merits
You have learnt about the meaning and features of departmental form of
organisation. Now let us discuss about the merits of this form of organisation.
1) Maximum degree of government control: This form of organisation lends

itself to the maximum degree of government control. Therefore, government
can meet its social obligations very effectively.
2) Limited scope to misuse public funds: As you know, departmental

undertakings are managed by the concerned ministry. Hence, the
accountability of the enterprise to Parliament is complete. You have also
learnt that these undertakings are treated on par with other government
departments for purposes of budgeting, accounting and auditing. Therefore,
the danger of misuse of the public funds is reduced. In the words of Krishna
Menon’s Committee ‘the accountability of departmental undertakings to
Parliament is complete, their management being under the ministry
concerned’.
3) Governmental control over economic activities: It provides an opportunity

for the government to secure absolute control of economic activities. The
government can freely use departmental undertakings as instruments of its
social and economic policy.
4) Multiplies economic progress: The surplus coming from departmental

undertakings increases the revenue of the government. Thus, this surplus
can be utilised for the economic progress of the nation and the welfare of
the masses.
5) Responsible to Parliament: A departmental enterprise is responsible to

Parliament even for its day-to-day operations. It is not possible for a
departmental enterprise to claim certain privileges from Parliamentary
scrutiny. For example, if members of Parliament ask questions regarding
the appointment or dismissal or promotion of a particular employee, or
regarding a particular sale or purchase transaction, it is a matter of day-to-
day operations. Such a question can be allowed to be asked of a departmental
enterprise but not of a statutory corporation or a government company.
7.6.3 Limitations
Departmental form of organisation suffer from the following limitations:
1) Bureaucracy and red-tapism: You know that the staff of these departmental
undertakings are the civil servants. So it is too close to the bureaucratic
system of the government where much importance is attached to rules,
regulations and precedents for every decision. Therefore, scope for initiative
is limited. Normally a business enterprise needs much flexibility and
quickness in decision making which you do not find in the departmental
form.
53
Business Enterprises 2) Suffers from political instability: These undertakings are generally at the
mercy of the political party which is in power. The fate of departmental
undertakings also depends on the balance of power between the ruling party
and the opposition. Hence there is even a possibility of victimising such
undertakings because of political changes and political instability. Thus,
these undertakings are subject to political changes and attacks motivated
by political considerations.
3) Excessive parliamentary control: You have learnt that the departmental

undertakings are completely answerable to Parliament even for their day-
to-day operations. As a result, there is less scope for any initiative and skill
in the departmental organisation. Every detail relating to their working are
scrutinised and questioned in Parliament and outside. This causes-delay in
making vital decisions relating to the organisation.
4) Lack of professional expertise: These undertakings, as you know, are

managed by civil servants who often lack business acumen. They are selected
and trained altogether for a different purpose. Rigid adherence to formalities
and procedures causes delays in decision making which is quite opposed to
business principles. Besides, there is no bar on transfers of these officers.
This hampers their understanding commitment and responsibility.
5) Absence of competition and profit motive: Departmental undertakings

are run with the objective of service motive. So, the commercial principles
which are necessary for their very success are neglected. Further, due to
lack of competition there is little incentive to improve their operational
efficiency.
6) Financial constraints: You know that these undertakings are financed

through annual budget appropriations made by the legislature and its
revenues are paid into the treasury. They are not allowed to raise finances
on their own and depend completely on the government. As a result,
sometimes, these undertakings suffer due to shortage of funds. Further,
these enterprises do not have much flexibility in financial matters, as they
are subject to budget, accounting and audit controls.
1) What are the forms of organisation in public enterprises?

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2) What is a departmental form of organisation in public enterprises?

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54
3) State whether each of the following statements are True or False. Public Enterprises
i) Under departmental form of organisation overall control rests with

the managing director.
ii) A public enterprise organised under departmental form can raise the
capital by public issue of shares.
iii) The staff working under departmental form of organisation are the
civil servants.
iv) In departmental form of organisation, individuals are not allowed to
subscribe to the capital.
v) Departmental form is suitable when the enterprise is working with
profit motive.
vi) Departmental form of organisation is not suitable where maintenance
of secrecy is regarded as a matter of strategic importance.
vii) Departmental form of organisation suffers from red-tapism and
bureaucracy.
viii) Personnel working in departmental undertakings are not subject to
transfer.
7.7 PUBLIC CORPORATION

Public Corporation is a corporate body created by the Parliament or State
Legislature as the case may be, by a special Act which defines its powers, duties,
functions, immunities and the pattern of management. Public Corporation is
also known as statutory corporation. The capital is wholly subscribed by the
government. It is managed by the management committee constituted according
to the provisions of the Act. It is answerable to the Parliament or State Legislature
as the case may be.
As stated by Roosevelt, public corporation is an organisation which is clothed

with the power of the government but is possessed of the flexibility of private
enterprise. Herbet Morrison views a public corporation as a combination of
public ownership, public accountability and business management for public
ends. Thus the public corporation device is an attempt to combine public interest
with the flexibility of operation most prominently found in a company form of
organisation working in the private sector. Normally, the public corporations
are constituted for any of the following purposes:
i) To transfer the business of a nationalised undertaking to the corporation.
ii) To facilitate the acquisition of undertakings belonging to an existing
company.
iii) To promote, develop and operate certain schemes.
iv) To extend certain social services and utility-services.
v) To provide for regulation and control of the working and operations of an
institution or for other matters connected therewith or incidental thereto.
55
Business Enterprises The development of the public corporation is largely a post-independence
phenomenon. The first public corporation was the Damodar Valley Corporation
which was established under a Parliament Act in 1948. It is a multi-purpose
river project. In the same year, the government set up the Industrial Finance
Corporation of India to provide finance for industries in the private sector. In
1953 when the Indian Airlines and Air India were set up, the Air Corporations
Act was passed. In 1955 the State Bank of India was established through the
State Bank of India Act and the Life Insurance Corporation of India was set up
through the Life Insurance Corporation Act of 1956. Thus, we find that whenever
the government wants to undertake a commercial activity, it goes to Parliament
and gets approval to set up a distinct entity.
It may be noted that it is not necessary that each corporation will have an Act of
its own. More than one statutory corporation can also be established under the
same act of the legislature. For example, the State Electricity Boards have been
established in most of the states under the Electricity (Supply) Act of 1948.
Similarly, most of the States have State Financial Corporations set up under the
State Financial Corporations Act of 1951.
7.7.1 Features
You have studied what a public corporation is? Now let us discuss about the
main features of the public corporations.
1) Created by a special Act of legislature: Public corporation is an

autonomous corporate body created by a special Act of a legislature as the
case may be. The Act defines the powers, duties, privileges, immunities,
relationship to the government department, etc.
2) It is a corporate body: A corporation, like a joint stock company is a legal

entity. It means that a corporation is an ‘artificial person’ which exists in
the eyes of law. Like a living being, it can enter into contracts and can
transact any business under its own name. Since it does not have physical
existence, it operates through its agents, which is its Board of Directors.
3) Owned by the State: It is fully owned by the state and the capital is wholly
subscribed by the state.
4) Managed by a Board of Directors: It is managed by a Board of Directors

constituted according to the provisions of the Act. The members of the
Board represent various interests and are appointed by the concerned public
authority.
5) Answerable to legislature: Public corporation is answerable to legislature

(Parliament/ State Assembly) which creates it. The way the corporation
would be held accountable is mentioned in the Act. Parliament is not
expected to interfere in its day-to-day working. But it can discuss matters
of policy and the overall performance of the corporation. Sometimes,
however, questions are asked and answered on the floor of the house even
though they relate to the day-to-day functioning of a corporation. You may
ask why doe this happen? Parliament in a democracy is supreme and it is
not possible to curtail its freedom. Further, when public enterprises are
mismanaged, Parliament cannot be stopped from enquiring into their
56
performance even though it may involve infringement of a principle agreed Public Enterprises
to by Parliament itself.
6) Relation with the government: Even though a statutory corporation is

owned by the government, it does not operate as a wing or part of the
government. The legal relationship and channels of communication between
the government and the corporation are laid down in the Act of its
incorporation. For example, the Life Insurance Corporation which is a
statutory corporation, would be guided on matters of policy involving public
interest as per the directions issued in writing by the Central Government.
Thus, the relationship with the government is formal and clear.
In practice, however, there is a lot of informal dealing with the statutory
corporations. An example would clarify as to how this happens. Suppose
the government wants the Indian Airlines to operate a service between Delhi
and Imphal which is not being run by the Indian Airlines because it is
uneconomical. Now, under the Air Corporation Act, the government can
ask the Indian Airlines to run a service by issuing a written directive. But
the government will only suggest the Airlines to undertake such service. If
there is a formal order by the government, it may have to meet the loss, if
any, suffered by the Indian Airlines in carrying out its orders. In many
matters, therefore, the government prefers to remain informal and get things
done without owning the responsibility for its actions.
7) Own staffing system: Although a corporation is owned and managed by
the government, its employees are not government servants. The employees
are recruited, remunerated and governed by the rules and regulations laid
down by the corporation. Their pay and benefits are also different from
those of the government servants. Thus, the corporation can have the
necessary freedom in regard to its employees in running its business.
However, the government closely regulates the terms and conditions of
employment of corporations, but that is mainly to maintain uniformity in
the pay and benefits received by the employees of the various corporations.
8) Financial independence: A major source of autonomy of a statutory
corporation is its independence in respect of its finances. Unlike
departmental form of organisation, a public corporation is not subject to
the budget, accounting and audit controls. The corporation shall have its
own funds and all receipts of the corporation shall be credited thereto and
payments shall be made therefrom. Once the funds are given to a corporation,
it manages them on its own. It does not have to go to the Parliament to get
its budget approved. A corporation can also borrow money within and outside
the country after getting approval from the government.
7.7.2 Merits
Public corporation strikes a mid-way between departmentally run public
undertakings and the privately owned and managed corporate bodies. It absorbs
some of the salient desirable features of both of them to fetch the best of both
forms. At the same time, it eliminates some of their major weaknesses also. Let
us discuss about the merits of a public corporation form of organisation.
1) Initiative and flexibility: As it is an autonomous corporate body set up

under an Act of legislature, it manages its affairs independently with its 57
Business Enterprises own initiative and flexibility. It experiments in new lines, exercises initiative
in business affairs and enjoys the operational flexibility as in private
enterprises.
2 Avoids red-tapism: The evils of red-tapism and bureaucracy associated

with departmental form of organisation are avoided. Business functions
cannot be carried out efficiently in a government set-up, which is marked
by rules, regulations and procedures. Compared with a departmental
organisation a public corporation can take quick decisions and prompt
actions on any matter affecting its business.
3) Easy to raise capital: Public corporations are government owned statutory

bodies. They can easily raise required capital on their own whenever needed
by floating bonds at relatively lower rates of interest. Public also comes
forward to subscribe to such bonds since they are safe.
4) Protects public interest: As you know, compared to a departmental

organisation, a public corporation is relatively free from political
interference, parliamentary enquiry and departmental checks and controls.
Although it has a considerable degree of administrative autonomy, its
policies are subject to Parliamentary control. Thus, it ensures protection of
public interests. Further, the Board of Directors of the public corporations
consists of persons from various fields such as business experts and the
representatives of special interests like labour, consumers, etc., who are
nominated by the government. Thus, exploitation of any class at the cost of
another is ruled out.
5) Works with service motive: Public corporation avoids the defects of

profiteering, exploitation, illegitimate speculation, etc., which are often
associated with private enterprises. A public corporation works primarily
with service motive and profit earning is only a secondary consideration.
Though it works efficiently to show good results in the form of ‘surplus,’
such surplus must not be the result of exploitation. The surpluses generated
by the public corporations are used for the good of the consumers and the
community.
6) Secures working efficiency: It secures greater working efficiency by

providing better amenities and more attractive terms of service to its
employees which in turn, reduces the labour problems.
7) Secures benefits of large scale economies: Economies of large scale

operations are realised by the virtue of increased size and scale of the
business. Further, it is easy to reap considerable economies in management
by affecting the integration of several companies under this form. For
example, giant government undertakings organised as autonomous units
such as, banking, insurance, transport, etc., can secure better management
and staff with comparatively lesser costs.
7.7.3 Limitations
You have learnt about the merits of public corporation form of organisation.
This form of organisation also suffers from certain limitations.
58
1) Less autonomy: Compared to departmental form, public corporations enjoy Public Enterprises
more autonomy. But, in practice, the autonomy of public corporation is
closely and systematically controlled by the government even in matters
where they are supposed to have freedom. For example, the Food
Corporation of India and the Electricity Boards in various States (these are
statutory corporations) are of important to the government and to the public
at large. But, the Central and State Governments often find it difficult to
allow them the freedom which they are entitled to as per their Acts.
2) Inflexibility: A public corporation is set up by a special Act of legislature.

Any change in the objects and powers of the corporation requires an
amendment in the Act by the legislator. This tends to make a corporation
inflexible and insensitive to changing situations.
3) Clash amongst divergent interests: As you know, the corporations are

owned by the government and are managed by a Board of Directors
appointed by the government. When the Board of Directors represent
different interests there may be clash of interests. This in turn, may hamper
the smooth functioning of the corporation. Sometimes, the directors may
abuse their autonomy and authority by indulging in undesirable practices.
This would defeat the social objectives of public corporation.
4) Ignores commercial principles: Public corporations do not have to face

any competition. They are neither guided by profit motive nor haunted by
the fear of loss. Therefore, there is a possibility of ignoring commercial
principles in their working. This may ultimately lead to inefficiency and
losses to the corporation. The losses, thus arising are met by the government
through subsidies.
5) Excessive public accountability: You know that the public corporations

work with the service motive rather than profit motive. This public
accountability of the corporation, sometimes acts as a stumbling block in
the operational efficiency of the enterprise.
1) What is a public corporation?

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2) List three features of a public corporation.

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59
Business Enterprises 3) Fill in the blanks.
i) For public corporation capital is fully subscribed by ..............
ii) Public corporation is created by a .............
iii) Public corporation is managed by ...............
4) State whether each of the following statements are True or False.
i) Members of the Board of Directors of a public corporation are elected
by the public.
ii) Capital of public corporation is partly subscribed by the private
entrepreneurs.
iii) Public corporations can raise required capital on their own.
iv) The employees of a public corporation are government servants.
v) The budget of the public corporation is to be approved by Parliament
every year.
vi) Members of the Board of Directors of a public corporation are
nominated by the concerned public authority.
7.8 GOVERNMENT COMPANY

According to the Indian Companies Act, a government company is a company
in which 51 per cent or more of the total paid-up capital is held by the central
government or any state government or by many state governments or partly
central government and partly by one or more state governments. Any company
which is subsidiary of such a company is also considered a government company.
Thus a government company is an enterprise wherein government is a
predominant shareholder having the bulk of controlling interests. Government
company is registered under Indian Companies Act. When the government
applied to the Registrar of Joint Stock Companies for setting up a new company,
it has to follow all the rules and procedures as are applicable to private persons.
Just because the government is getting a company registered it does not get any
concession in regard to the formal requirements.
Of late, we come across mixed-ownership companies wherein capital is jointly

held by the state and private (Indian or foreign) interests. A government company
in which both the government and private (enterprises/individuals) are
shareholders, is known as a mixed-ownership company. The Government of
India has registered and organised a large number of its commercial and industrial
undertakings mostly as private limited companies even though their control and
regulation actually rests with the government by virtue of its owning majority
of shares. But why does the government do like that? Government normally
establishes the company form of organisation for the following reasons.
1) Public interest: Government sometimes acquires shares of the existing

private enterprises when they are unprofitable or have become insolvent or
are in financial crisis. Government acquires such companies in the interests
of the country. Eastern Shipping Corporation and Hindustan Shipyard Ltd.,
are examples of the companies taken over by the Government of India.
60
2) Mixed-ownership: Sometimes, in order to secure capital, technical Public Enterprises
knowhow, expert guidance, etc., the government may be desirous of starting
an enterprise in association with private entrepreneurs. In such situations,
the government may set up mixed ownership companies. The examples of
mixed-ownership companies are Hindustan Machine Tools, Hindustan
Shipyard Ltd., Heavy Engineering Corporation, Hindustan Cables, etc.
3) Industrial promotion: In order to encourage industrial promotion,

sometimes, government may establish some companies. Such companies
are not directly connected with any manufacturing activity, but they are
expected to bring out commercially feasible projects to be eventually
established in private or public sectors. National Industrial Development
Corporation, and National Small Industries Corporation are some examples
in this category.
4) Promotion of trade or commerce: Government may also establish some

companies to promote trade or commerce. State Trading Corporation, Export
Credit & Guarantee Corporation (ECGC), etc., are some examples.
5) Lack of incentives: The private entrepreneur does not come forward to

establish enterprises because of certain risks such as longer gestation period,
heavy investment outlay, lack of profit in the initial years of its formation,
etc. In such cases the government may establish government companies.
7.8.1 Features
The basic features of a government company are the same as those of a statutory
corporation. However, there is one major difference i.e., an act of legislature
(central/state) is necessary for establishing a statutory corporation while a
government company does not require it. This difference has some constitutional
implications. You would learn about the distinction between public corporation
and government company in this unit later. The other features of the government
company are about the same as those of the statutory corporation. Now we shall
discuss the features of government company in detail.
1) Created under Indian Companies Act: Government company is a

corporate body, created under the Indian Companies Act, 1956, like any
other joint stock company in the private sector. With regard to registration,
memorandum, articles, meetings, capital structure, accounts, audit, etc., it
is governed by the provisions of the Companies Act. But the government
has the authority to exclude or modify certain provisions of the Companies
Act by special notifications duly approved by the legislature.
2) It is a corporate body: A government company is a legal entity. It is an

‘artificial person’, which exists in the eyes of law. Like a living being, it
can file a suit in a court of law or be sued, can enter into contract and
acquire property in its own name.
3) Scope for private participation in the capital: A government company

may be wholly or partly owned by the government. In any case, the share
of the government is not less than 51%. In case it is partly owned by the
government, the private persons (individuals as well as corporate bodies)
can also participate in the capital. Thus, there is scope for the private sector
to participate in the capital. 61
Business Enterprises 4) Managed by a Board of Directors: It is managed by the Board of Directors.
All the directors or the majority of them, depending on the extent of private
participation, are appointed by the government. While constituting the
Board, the government may give representation to various interests like
technocrats, labour, consumers, foreign collaborators, etc.
5) Enjoys financial independence: Government company can use and reuse

the revenue derived from the sale of its goods and services. If necessary, it
can borrow money from the financial institutions and the general public.
6) Independent staffing: Its employees are not civil servants. They are
appointed by the company on its own terms and conditions. It regulates its
personnel policies according to its Articles of Association.
7 Independent accounting and auditing system: It is exempted from the

accounting and audit laws and procedures applicable to government
departments. Its accounting practices are more akin to those of commercial
enterprises and its auditors are chartered accountants appointed by the
government on the advice of the CAG.
8) Annual reports: Its annual reports and accounts alongwith the audit reports
are to be presented to the legislature, as per the Companies Act.
7.8.2 Distinction between Government and Non-government

Companies
There are certain differences between a government companies and other joint
stock companies called ‘non-government companies’. They are as follows:
1) Paid-up capital: In the case of a government company not less than 51%
of the paid up share capital is held by the central government or by the state
government or jointly by the central or one or more state governments.
There can be any combination of the shares owned by the central and state
governments. But the total paid-up capital owned by one or more
governments should be 51% or more, to make it a government company. It
may be noted that there are a few government companies which have private
participation in the equity. In the case of non-government companies, major
share of the paid-up capital is held by the private individual.
2) Auditor appointment: The auditor of a government company is appointed

by the government on the advice of the Comptroller and Auditor General
of India (CAG). He is also empowered to direct the auditor about the manner
and method of auditing. Sometimes, the CAG himself carries out the audit
of government companies under the Companies Act. The Auditor of a non-
government company is appointed by the General Body of the company.
3) Annual reports: The annual reports alongwith audit reports of government

companies are laid before Parliament if it is a central government company,
and before the state legislature in case of a state government company. In
case of a non-government company, the audit reports are laid before its
General Body.
4) Provisions of the Companies Act: Central government has the power to

62 exempt any provision of the Companies Act from applying to a government
company except the provisions regarding audit. But, central government Public Enterprises
has nothing to do with regard to the provisions of the Companies Act relating
to a non-government company.
7.8.3 Merits
You have learnt about the meaning and features of government company form
of organisation in public enterprises. Now let us discuss about the merits of this
form of organisation.
1) Easy to form: Most of the public enterprises in India are in the form of
joint stock companies. The main reason for this is the ease with which the
government can form a company. Whenever the need arises to take up a
new activity, the government can float a new company. It can avoid all the
problems of getting a bill passed by the legislature, as is required when a
statutory corporation is to be set up.
2) Easy to bring changes in the constitution: Government favours this form

because it is easy to bring changes in the constitution through amendments
to Articles, Most of the government companies are fully-owned by the
government. As the sole shareholder, the government has all the right to
amend the Articles of Association of the company and pass resolution in
the meeting, when the need arises.
3) Facilitates taking over a running enterprise: This form facilitates taking

over a running enterprise by the government after securing a majority interest
in the equity of the company. For example, after acquiring the equity of the
Burmah-shell group of companies, the government changed their name to
Bharat Petroleum Corporation Ltd., which now operates as a government
company. In the same way, dozens of private sector companies which were
taken over by the government are running as government companies, with
or without a change in name.
4) Facilitates private participation: This form of organisation facilitates

private participation in the equity of public enterprises. If the government
wants, it can easily do so by selling a part of the equity of a government
company to the public at large.
5) Easy to transfer ownership: This form is also helpful in disposing of a
public enterprise easily. Once the price at which the shares are to be
transferred is decided, the transfer of ownership becomes easy by selling
the shares to the private party.
6) More autonomy: It has almost all the advantages available in the public
corporation form of organisation. It has its own charter, autonomy of
operations, self-sufficiency in finance, freedom in personnel matters, etc.
7) Flexibility in operations: As you know, the employees of the government
company are not the civil servants. So, the evils of red-tapism and
bureaucracy associated with departmental form of organisation are avoided.
This enables a government company to take decisions and prompt actions
on any matter affecting its business.
63
7.8.4 Limitations
The government company form of organisation suffers from the following
limitations:
1) Evades constitutional responsibility: The government company can be

created without specific approval of Parliament. Parliament does not discuss
the reasons for setting up a government company or its constitution. Thus it
evades constitutional responsibility.
2) Government interference: Being the sole shareholder in most cases, the

government can revise the Memorandum and Articles of Association of a
government company, whenever necessary. Thus, the constitution of a
government company can be altered without any public discussion but public
scrutiny is necessary in the case of a statutory corporation. This may affect
the autonomy of the company.
3) Fear of públic accountability: The directors and chief executives of a

government company always have the fear of public accountability. As a
result, they may not take the initiative in breaking new ground and in entering
into new areas of activities.
4) Public criticism: The performance of a government company is shown in

the annual reports of the ministry concerned. These annual reports are placed
before the parliament or State Legislature as the case may be. As such, they
become public documents exposing the enterprise to the glare of public
criticism.
5) Lack of professional management: As you know, the directors of a

government company are mostly appointed by the government. So, these
enterprises fail to achieve business efficiency found in similar enterprises
in the private sector.
1) What is a government company?

.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
i) The auditors of a government company are appointed by the ........ on

the advice of the .............
64
ii) To become a government company, the minimum percentage of the Public Enterprises
paid-up capital to be held by the government is ......
iii) Most of the public enterprises in India are organised in the form of
................
iv Government company is created under the ................. Act.
v) Government company is managed by a ....
i) The General Insurance Corporation of India is a government company.
ii The government company is a corporate body.
iii) The government has the right to run a government company as it likes.
iv) All the funds of government companies are always provided by the
government.
v) A government company is free to employ persons according to its

requirements without any reference to government.
vi) A company with 51% or more shares owned by the government is a

government company.
vii) The government can exempt government companies from the

application of some of the provisions of the Companies Act.
7.9 COMPARISON OF THE FORMS OF

ORGANISATION
We have already discussed the features and limitations of each of the three forms
of organisations i.e.. departmental organisation, statutory corporation, and
government company. Now let us compare the features of these three forms and
evaluate which form is suitable in a given situation. Look at Table 7.1 which
summarises the features of all the three forms.
The comparison of the features of the three forms of organisation clearly shows
that the accountability to legislature and the government control are maximum
in departmental organisation and minimum in government company. In the
matters of staffing, financing and day-to-day operations, the departmental
organisation has the least autonomy while the company form enjoys the maximum
autonomy. Similarly, departmental form of organisation is the least flexibie while
company form enjoys the maximum flexibility. The main features of the public
corporation and government company are about the same. There is hardly any
difference in the working of these two forms of organisation. For example, the
Life Insurance Corporation of India is a statutory corporation, but the General
Insurance Corporation of India is a government company. But both of them
function alike in respect of their working and management.
65
Business Enterprises Table 7.1: Comparative Study of the three Forms of Organisation in Public Enterprises
S.No. Basis Departmental Organisation Public Corporation Government Company

1. Formation Created by the government and Comes into existence by Formed by ministry under the
attached to a particular ministry. a special Act of Companies Act.
legislature.
2. Legal Status No separate legal status. It is a separate legal entity. It is a separate legal entity.
3. Management Managed by the concerned Managed by the Board of Managed by the Board of
ministry of the government. Directors nominated by Directors consisting of
the government. members nominated by the
government plus the elected
shareholders.
4. Capital Provided wholly by the Fully subscribed by the Minimum of 51% by the
government out of budgetary government. government.
appropriation.
5. Scope for Private No scope for private No scope for private Scope for private (national/
Participation participation. participation. international) participation in
its share capital and hence in
its affairs too.
6. Operational Least or no autonomy. Works Works as an autonomous Runs on commercial

Autonomy as a part and parcel of the body within the principles like a private
government. provisions of the Act. enterprise and enjoys higher
Enjoys considerable degree of freedom from
degree of autonomy as government interference.
there is no government
interference in day-to-day
affairs.
7. Flexibility Subject to government control Subject to some More freedom from
completely. Subject to budget, restrictions by the government control. Not
accounting and audit procedures government. Not subject subject to audit budget and
of the government. to budget, audit and accounting procedures of
accounting procedures the government.
of the govt.
8. Public Concerned Minister is Accountable to the public Government and the

Accountability accountable to the legislature. through legislature. concerned ministry is
accountable to the public.
9. Operating Finance Budgetary allocation only. No. Makes own arrangements Makes own arrangements
and Borrowing powers to borrow. Its revenues and enjoys borrowing and enjoys borrowing
Powers are paid into the treasury. powers. It has authority to powers. It has the authority to
use its revenues. use the revenue.
10. Staffing and Terms Employees are the civil servants Employees are not civil Employees are not civil
of Service and governed by civil service servants. Employees servants. Employees
code. governed by its own governed by its own contract
contract of service. of service.
The main difference, however, is that the public corporation is established by a

special Act of legislature while the government company is incorporated under
the Companies Act without referring to legislature. There is scope for private
participation in capital and management in the case of government company
whereas there is no such scope in a public corporation. Then the company form
of organisation is able to evade parliamentary control.
66
From this relative assessment of the features of these three forms of organisation, Public Enterprises
it should be obvious that company form of organisation is best suited to industrial
and commercial undertakings, while statutory corporations should be preferred
in the case of public utility undertakings. To run efficiently the industrial and
commercial enterprises must have maximum autonomy of management and
manned by professional managers so as to ensure their functioning on business
lines. For such enterprises, it is essential that there is least interference from the
Ministry or Parliament in their day-to-day affairs. Besides, there should be
adequate flexibility with regard to formulation of policy and strategy. With the
company form of organisation, these requirements are substantially fulfilled
because of the juristic entity of companies and there being no need for getting
parliamentary approval for changes in strategy or policies. On the other hand,
public utilities are best organised as statutory corporation in view of their
monopoly character and the necessity of strict regulation by government.
You will observe that various government organisations often include in their
names the words like corporation (State Trading Corporation of India Ltd.),
‘company’ (Hindustan Photofilms Manufacturing Company Ltd.), ‘authority’
(Steel Authority of India Ltd.), and Commission (Oil and Natural Gas
Commission). But, there are no legal implications of this. They do not necessarily
indicate the form in which they are organised. For example, the word ‘corporation’
is used as part of the names of both the statutory corporations and the government
companies. The Life Insurance Corporation of India is a statutory corporation
but the General Insurance Corporation of India is a government company. It is,
therefore, not possible to distinguish between a statutory corporation and a
government company on the basis of the words used in their names.
To some extent, we can distinguish between a statutory corporation and a
government company with the word ‘limited’. Normally, the government
company carries the word limited as a part of its name. But there are some
exceptions even in this case. If a government company is registered under Section
25 of the Companies Act it need not use the word ‘limited’ as part of its name
because such companies are established for cultural social or non-commercial
purposes only. They do not pay dividends to its members and should apply their
income mainly to promote specific objectives. The central government companies
in this category are: i) National Research Development Corporation, ii) Indian
Dairy Corporation. iii) Trade Fair Authority of India, and iv) Artificial Limb
Manufacturing Corporation of India. These companies do not use the word limited
in their names. even though they have been incorporated under the Companies
Act.
Check Your Progress D

i) ............... is created by a special Act of legislature and ...............
incorporated under Companies Act.
ii) ............... form is closer to bureaucratic system compared to the other
forms.
iii) The scope for private participation in the capital is there in ...............
form.
67
Business Enterprises iv) ............... form of organisation is subject to budget, accounting and
audit procedures of the government.
i) For all practical purposes there is no difference between a statutory
corporation and a government company.
ii) Both the statutory corporations and the government companies are
corporate bodies.
iii) Compared to other forms of organisation, departmental organisation
has more financial autonomy.
iv) The words ‘corporation and company’ in the name of a public enterprise
can indicate different forms of organisation.
v) Operational autonomy is more in the case of statutory corporation
compared to departmental organisation.
7.10 LET US SUM UP

The term ‘public enterprise, as a business entity refers to any business undertaking
which is owned and managed by the central or state or local government, and of
which the output is marketed i.e., not supplied free of charge. These enterprises
are governed by public policies framed by government and aimed at maximising
social welfare and upholding public interest. They are accountable to the
government and the Parliament or state legislatures regarding the fulfilment of
their objectives.
The main features of public enterprises are : government ownership and control,
contribution of capital by the government, governance by public policies,
objectives in conformity with development plans, accountability to legislature,
etc. The objective of public enterprises are: rapid industrialisation, channelising
resources for development, reduction of inequalities in the distribution of income
and wealth, balanced regional development, control of monopoly power and
concentration of wealth, check of rise in prices, mobilisation of public savings,
provision of satisfactory employment conditions, etc.
There are three forms of organisations in public enterprises: 1) departmental

organisation. 2) statutory corporation, and 3) government company.
Under the departmental form of organisation, the enterprise is organised, financed

and controlled in the same way as any other government department. The overall
control rests with the concerned minister and the minister is answerable to the
legislature for its efficient operations. It is financed through annual budget
appropriations made by the legislature and its revenues are paid into the treasury.
It is subject to budget accounting and audit controls as applicable to other
government departments. Employees of this organisation are civil servants.
Departmental organisation has certain advantages. Since its accountability to

legislature is complete, government gets maximum degree of control over the
operations of these enterprises. Therefore, there is limited scope to misuse public
funds. The government can use departmental undertakings as instruments of its
social and economic policy. The surpluses coming from these undertakings can
be utilised by the government for the economic progress of the nation. These
68
undertakings suffer from bureaucracy and red tapism, extensive legislative Public Enterprises
control, political instabilities, lack of professional expertise, lack of flexibility
and autonomy in financial matters, and absence of competition and profit motive.
Public corporation is a corporate body created by the Parliament or a State
Legislature by a special Act which defines its powers, duties, functions,
immunities, and the pattern of management. It is also called ‘statutory
corporation’. Public corporation is fully owned by the state and the capital is
wholly subscribed by the state. It enjoys financial autonomy. It is managed by a
Board of Directors nominated by the government. Its employees are not the
civil servants. Public corporation is answerable to the legislature which creates
it. But the legislature is not expected to interfere in its day-to-day operations.
Public corporation form of organisation has certain merits. Being an autonomous
corporate body, it can manage its affairs independently with initiative and
flexibility, and can also avoid red-tapism. Since it has financial independence, it
can easily raise capital whenever needed. As it works with service motive and
answerable to legislature, it protects the public interest and avoids the defects of
profiteering, exploitation, illegitimate. speculation, etc. It can secure working
efficiency and economies of scale. Public corporations suffer from excessive
government interference, inflexibility in policy matters, clash of interest among
Board members, excessive public accountability and lack of commercialism.
Government company is a corporate body registered under Indian Companies
Act in which not less than 51% of the paid-up share capital is held by the central
government or any state government or by several state governments or partly
by the central government and partly by one or more state governments. Any
company which is a subsidiary of such a company is also considered a
government company. For establishing a government company, the government
need not go to the legislature. In this form of organisation, there is scope for
private participation in the capital as well as management. It is managed by the
Board of Directors consisting of members nominated by the government and
the elected members of the private shareholders, if any. It has financial autonomy
and independent staffing system. It is free from auditing, accounting and
budgetary controls applicable to departmental organisations.
The major advantage of the government company is that while taking care of all
the disadvantages of the departmental form, it provides all the benefits of the
public corporation. It is easy to form and also easy to bring changes in its
constitution whenever needed. There is scope for private participation in capital
and management. It facilitates taking over a running enterprise by the government
or transferring the ownership to private entrepreneurs. Being autonomous in
financial, staffing and accounting aspects, government company has more
operational flexibility. The major limitation of this form of organisation is that it
evades parliamentary probe. It also suffers from lack of professional management,
government interference, fear of public accountability among top executives,
and so on.
The relative assessment of the features of all the three forms indicates that the
departmental form of organisation is suitable for such undertakings which are
very important from the view point of public interest and national interest. The
company form of organisation is best suited for commercial and industrial
undertakings, while public corporations should be preferred for public utility
undertakings. 69
7.11 KEY WORDS
Autonomy : In the context of public enterprise, autonomy
refers to the management’s independence in
policy-making and execution of policies without
political interference.
Capital Employed : Total fixed assets less accumulated depreciation
plus working capital. The working capital means
all current assets less current liabilities and
provision.
Corporate Body : An organisation having a legal entity created
by an Act of the legislature, or by registration
under the Companies Act.
Departmental Organisation: A form of organisation where a public enterprise
is organised, financed and controlled in the same
way as the government department.
Government Company : A company registered under the Indian
Companies Act in which not less than 51% of
the paid-up share capital is held by the central
government or any state government or partly
by the central government and partly by the one
or more state governments.
Industrial Policy Resolution: It is a formal decision of the government in the
form of a resolution regarding its industrial
policy, including the place which the public and
private enterprises would have in the economy.
Mixed-Ownership Company: An enterprise where capital is jointly held by
the government and private interests (Indian or
foreign).
Public Accountability : Answerability of public enterprises to the public
through Parliament or state legislature as the
case may be.
Public Corporation : An autonomous corporate body created by a
special Act of Parliament or state legislature with
defined functions and powers.
Public Enterprise : Is an industrial, commercial or business activity
of the government, where a return on investment
is expected.
Socialist Pattern of Society: Broadly it means a system in which the benefits
of economic development accrue more and more
to the relatively less privileged classes of the
society and there is an effort to avoid concentration
of wealth and to reduce disparities of income.
The Comptroller and : An authority under the Constitution of India to
Auditor-general of India ensure thorough audit of accounts of
government organisations.
70
Public Enterprises
A) 3. i) False ii) False iii) True iv) True v) True vi). False vii) True
viii) False
B) 3. i) Government ii) Special Act of legislature iii) Board of Directors
4. i) False ii) False ui) True iv) False v) False vi) True
C) 2. i) Government, the Comptroller and Auditor-General of India
ii) 51%
iii) Joint stock companies
iv) Indian companies
v) Board of Directors
3. i) True ii) True iii) False iv) False v) True vi) True vii) True
D) 1. i) Statutory corporation, government company
ii) Departmental organisation
iii) Government company
iv) Departmental
2. i) True ii) True iii) False iv) False v) True

1) What is public enterprise? What are its characteristics? How is it different
from a private enterprise?
2) What are the forms of organisation in public enterprises? Explain the features
of each form.
3) What is a statutory corporation? Explain its features, merits and limitations.
4) What is a government company? List the differences between a government
company and a non-government company.
5) What are the main features of the government company? How are they
different from those of the statutory corporation?
6) What is a government company? Explain its features, merits and limitations.
7) What is a departmental form of organisation? Give the main features of this
form of organisation and comment on the lack of its popularity.
8) Compare the company form of organisation with the statutory corporation.
Which of the two would you recommend for managing public enterprises
and why?
write answers for them. But do not submit your answers to the
71
UNIT 8 INTERNATIONAL BUSINESS:
MULTINATIONAL CORPORATION
Structure
8.0 Objectives
8.1 Introduction
8.2 Definition of International Business
8.3 Importance of International Business
8.4 Definition of Multinational Corporation
8.5 Why do Firms Become Multinational ?
8.6 Features of Multinational Corporations
8.7 Recent Trends in Multinational Corporations
8.8 Issues and Controversies of MNCs
8.9 Indian Perspectives of MNCs
8.10 Let Us Sum Up
8.11 Key Words
8.0 OBJECTIVES
explain the importance of international business
discuss why do firms become multinational
describe the features of multinational corporation
explain the recent trends in multinational corporation
describe the issues and controversies regarding multinational corporations
discuss the Indian Perspectives of multinational corporation
8.1 INTRODUCTION
In simple term, business as well as related activities carried out beyond the
boundary of the country is referred to international business. Multinational
Corporations accelerate the process of international business. International
operation is an important part of globalisation. The operations of firm in different
countries have given birth to the multinational corporations. Multinational
corporations are engaged in the international operations of both the goods and
services sectors. In this Unit, you will learn the importance of international
business, why do firms become multinational? features and recent trends in
multinational corporations. You will further learn the issues and controversies
as well as Indian perspectives of multinational corporations.
72
International Business:
8.2 DEFINITION OF INTERNATIONAL Multinational Corporation
BUSINESS
You must be knowing that the knowledge is considered as significant economic
power of the business enterprise. Most of the business enterprises have been
striving for the attainment of the knowledge. How to produce the best product
or service suitable to the customer has been the major challenge for the business
enterprises. The business enterprises invest significant amount on the research
and development activities to find out or discover the new process, product or
service. The discovery of the new process may facilitate the business enterprise
to operate beyond the boundary of the country. Thus, the research and
development, technology, management, investment, production and trade play
very significant role in the smooth conduct of international business. In fact,
they are the important drivers of international business.
What is international business? In simple term, business as well as related
activities carried out between two or more countries is referred to international
business. There may be different physical, social, economic, political, legal,
ecological environmental and other factors influencing the international business.
The detailed understanding of these factors may facilitate smooth conduct of
international business.
According to Daniels, Radenbough and Sullivan (2008), “International business
is all commercial transactions. private and governmental; sales, investments,
and transportation that take place between two or more countries’’.
According to Ball Mc Culloch Jr, Geringer, Minor and McNett (2009),
“International business is business whose activities are carried out across national
borders.” This definition includes not only international trade and foreign
manufacturing but also the growing service industry in areas such as
transportation, tourism, advertising, construction, retailing, wholesaling, and
mass communication.
The above definitions show that international business involves:
i) All commercial transactions carried out beyond the boundary of the country.
ii) The transactions may be in terms of investments, production, trade,
management, etc. between two or more countries.
iii) The transactions related to services and other aids to trade between two or
more countries.
Thus, international business involves transactions of goods, services, aids to

trade and other business activities between two or more countries.
8.3 IMPORTANCE OF INTERNATIONAL

BUSINESS
International business may involve foreign trade, trade of services, aids to trade
like transportation, banking, insurance, etc. and other activities involved in
carrying out business between two or more countries.
73
Business Enterprises The basis of international business is to be found in the diversity of economic
resources in different countries. All countries have not been endowed by nature
with the same production facilities. There are differences in climatic conditions
and geological deposits as also in the supply of labour and capital. Due to these
differences, each country finds it advantageous to specialise in the production
of some specific commodities. Such specialisation is facilitated by the exchange
of surplus production through international trade. International trade takes place
when buyers find foreign market cheaper to buy in and sellers find them more
profitable to dispose of their products than the domestic market. Thus, a more
effective use of world’s resources is made possible through international trade.
The importance of international business has been discussed as below:
i) Awareness about different countries of the world: The international

business involves business between two or more countries. The business
enterprise makes effort to understand all spheres of business operations of
the other countries. The firms try to analyse the physical, social, cultural,
political, legal, ecological environment, etc. of the foreign country. The
firms also evaluates the demand, supply and consumption pattern of other
countries. As a result, the firms become aware about various dimensions
of the business operations of foreign countries.
ii) Facilitates the process of globalisation: Globalisation involves integration

of the world economy. International business and related activities, like
technology, management, investment, production, trade, aids to trade, etc.
facilitate the international operations of the business. The development of
transportation and communication mechanism has been further accelerating
the growth of international business. The process of globalisation has been
instrumental in bringing the country closer to other country. As a result,
the world has been emerging as a global village.
iii) Diffusion of technology: Technology has been revolutionising all areas of

business activities. The development of new technology involves huge
amount of investment. The large business enterprises may be in a position
to invest such a huge amount on the development of new technology. Such
enterprises would like to sell the technology to the different parts of the
world to earn profit. The international business may facilitate diffusion of
technology into different parts of the world.
iv) Competitive environment: International business may facilitate

development of competitive environment. When the international firm
introduces product in the new market, it may also bring new operations,
management, technology, etc. along with the product or service. Considering
the business practices of these firms, the local firms of host countries may
also like to improve their product, services as well as operations. Thus, the
competitive environment may be generated among the firms. As a result of
the competition, the customers may get better product or service.
v) Harmonious relationship: International business may be a major force in

linking various countries to each other. It promotes harmonious and cordial
relationships among all of them. It can lead to world economic integration.
This in turn leads to political peace and greater cooperation in countries
regarding socio-culture developments.
74
vi) Better use of country’s resources: International business helps in the International Business:
Multinational Corporation
utilisation of country’s resources in the best possible manner. In many cases,
domestic industries depend upon foreign markets for the disposal of their
production. For example, the jute and tea industries of India are mainly
dependent upon export market. Japanese industry depends upon exports
for its prosperity. Though the US dependence on foreign trade is not so
great. Yet more than 25% of US production of a number of agricultural and
industrial production is exported. In many cases the existence of an export
market enables the producers to increase their production and thus avail
themselves of the economies of large-scale production. Some domestic
industries depend upon foreign countries for the supply of capital goods
and equipment as also for their supply of raw materials and components.
vii) High rate of economic development: International business leads to rapid

economic development and higher rate of growth in national income. In
fact, foreign trade was considered as an engine of growth. Many developed
countries like the UK, the USA and Japan owe their prosperity to their
export of manufactured products. In recent years, many developing
countries like Korea, Taiwan, Thailand, Singapore and Hongkong have
benefitted a lot by active participation in international business.
Viii) Stability of prices: Whenever the price of some commodity tends to

increase in a country, it can increase the level of its imports of that
commodity to check the rise in prices. Similarly, whenever the price of
commodity falls due to a glut in its supply, the trend may be checked by
exporting the same. This in turn leads to more or less uniform price
throughout the world. Foreign trade could also be utilised to control the
nefarious activities of monopolists.
ix) Greater availability of goods: The international business provides

opportunity to obtain those goods which it cannot produce or cannot produce
as cheaply as other countries. Thus a country’s well being is determined to
a great extent by the extent to which it participates in international business.
Consumers benefit from international business as much as they can purchase
from the cheapest source. Indian depends upon foreign countries for a
substantial portion of her supplies of edible oils. US consumers depend
upon imports for the supply of coffee and sugar while the UK consumers
obtain the major portion of their foodstuffs and the entire supply of tea
from foreign countries. Foreign trade can also help countries to overcome
the adverse effects of famines and crop failure.
x) Greater employment opportunities: Foreign trade leads to an increase in

domestic agricultural and industrial production which in turn generates
more employment in the country.
xi) Reduction in cost of production: As capital goods and raw materials are
purchased from the cheapest sources, the overall cost of production goes
down leading to lower prices.
xii) Contribution to government revenue: Most government impose duties

on imports and sometimes on exports too. These duties generate substantial
revenue for the government.
75
8.4 DEFINITION OF MULTINATIONAL
CORPORATION
At the outset it must be made clear that very often the term ‘Multinational
Corporation’ is used synonymous with the term Transnational Corporations
TNCs. There is, however, according to some, a difference between MNCs and
TNCs. According to them, MNCs produce commodities/products for domestic
consumption of the countries in which they operate. TNCs, on the other hand,
produce products/commodities to meet the markets of third countries. This fine
distinction is generally not made while referring to either MNCs or TNCs. Thus,
in our context, MNC can also be referred to as TNC.
A Multinational Coorporation or Transnational corporation is defined as an
organisation that owns productive assets in different countries, and has common
strategy formulation and implementation across border. It is engaged in
international production under the common governance of its headquarters.
Factors of production move among units located in different countries. These
systems increasingly cover a variety of activities ranging from research and
development to manufacturing to service functions. MNCs/TNCs are also
increasingly established through mergers between existence firms from different
countries or the acquisition of existing firms in the countries by firms from
other countries.
Dictionary of International Trade (globalnegotiator.com) defined multinational
corporation as “A large commercial organisation with affiliates operating
companies in a number of different countries. A typically one normally functions
with a headquarter that is based in one country, while other facilities are based
in locations in other countries’’. The analysis of the above definitions show that:
i) Multinational corporation are primarily large enterprises.
ii) They operate in many countries.
iii) They are primarily managed by their headquarter.
iv) The headquarter is based in one country.
v) Other operating facilities are based in other countries.
United Nations Conference on Trade and Development (unctad.org) defined
Transnational corporation as “ An enterprise, which is irrespective of its country
of origin and its ownership, including private, public or mixed, which comprises
entities located in two or more countries which are linked, by ownership or
otherwise, such that one or more of them may be able to exercise significant
influence over the activities of others, in particular, to share knowledge, resources
and responsibilities with the others.
The analysis of the above definition shows that:
i) Transnational or Multinational Corporations operate in more than one
country.
ii) Multinational Corporations are linked by the ownership.
iii) One entity of Multinational Corporation influence it’s other entity
significantly.
76 iv) They share knowledge, resources and responsibility with their other entities.
International Business:
8.5 WHY DO FIRMS BECOME MULTINATIONAL? Multinational Corporation
The firms become multinational or transnational due to a number of reasons.

The major reasons are:
i) To take the benefits of economies of scale: Once the operations of the

enterprise grows and stabilise, the enterprise may be tempted to explore
the new markets. The enterprise may realise that there may be more demand
of the products or services in the foreign market. In order to meet the
requirement of the foreign countries, the enterprise may produce the goods
in large quantities. This may facilitate attainment of economies of scale to
the Multinational Corporation.
ii) To protect themselves: The firms are exposed to the risks and uncertainties
of the domestic business cycle. If they set up operation in another country,
they hope to diminish the negative effects of economic swings in the home
country.
iv) To tap the growing world market: As a result of globalisation, similar

goods and services are produced and distributed by multinational
corporation in different parts of the world. Firms want to tap such a growing
world market for goods and services.
v) Response to increased foreign competition: Firms become multinational

in response to increased foreign competition and to protect world market
shares. In order to beat the competitor’s strategy, a firm sets up operations
in the home countries of competitors.
vi) To reduce costs: Multinational Corporations set up operations close to

the foreign customers to reduce costs. By doing so, they can eliminate
transportation costs , avoid the expenses associated with having middlemen
to handle the product, respond more accurately and rapidly to customer
needs and take advantage of local resources. These activities help in
reducing the cost of the MNCs.
vii) To reduce impact of tariff: The firms may overcome tariff by serving a
foreign market from within. For example, firms producing the goods within
the European Union can transport them to any other country in the Union
without paying tariffs.
viii) To take advantages of technological expertise: In order to take advantage

of technological expertise, firms may manufacture goods in the foreign
market. Direct involvement in foreign market brings the company closer
to increasing technological developments. They are prepared to respond
by acquiring new technology. Thus, they are able to protect their
international competitiveness.
8.6 FEATURES OF MULTINATIONAL

CORPORATIONS
The main features of multinational corporation are as follows:
77
Business Enterprises i) MNCs are normally very large in size as measured by the value of their
total sales. The average MNC has billions of US dollars at its total sales
value which is often equivalent to more than the national incomes of one,
two or three large developing countries. In the eighties, and nineties,
however there has been a growth of smaller MNCs from Canada, Japan
and the UK. Even the USA has now some small MNCs.
ii) Many MNCs depend to a large extent on their foreign sales. There has
been a steady growth of the share of foreign sales to total sales.
iii) MNCs are multi-product enterprises that provide them tremendous market
power.
iv) The main strength of MNCs is their command over technology and
innovation. They spend sizable amount on research and development (R &
D). Most MNCs spend 5-6 percent of their sales value on R & D which
amount to billions of dollars. This is the reason for their tremendous market
power.
v) Affiliates of the MNCs are responsive to a number of important
environmental forces, including competitors, customers, suppliers, financial
institutions and government.
vi) MNCs draw on a common pool of resources including assets, patents
trademarks, information and human resources.
vii) The affiliates of the MNCs are linked by a common strategic vision. Each
MNC formulates its strategic plan so as to bring the affiliates together in a
harmonious way.
Multinational Corporations from Developing Countries

The growth of MNCs from developing countries is a relatively new phenomenon.
The majority of them are from South Asia, South East Asia and Latin America.
There are certain factors which differentiate them from the TNCs of developed
countries.
The MNCs from developing countries are generally more interested in
developing countries although developing countries occasionally establish
subsidiaries and joint ventures in developed countries. Most of them,
however, are established in export supporting activities.
In some cases, they have management approaches and technologies better
suited to the developing countries context because of their own basic back
ground and orientation to developing countries.
It is also believed that sometimes, the MNCs of developing countries provide
competition to MNCs of developed countries.
The MNCs of developing countries are less able to internalise their parent/
subsidiary transactions.
8.7 RECENT TRENDS IN MULTINATIONAL

CORPORATIONS
The operations of multinational corporations have been growing. The process
78 of globalisation has further accelerated the growth of multinational corporations.
If you analyse the foreign assets, foreign sales or foreign employment of 100 International Business:
largest multinational enterprises of the world, you will be able to comprehend
the vast magnitude of operations of multinational enterprises across the world.
Table 8.1: 100 largest MNEs of the World

Billion of dollars,
Assets, Sales and Employment for the year 2016
thousand of
employees
Assets
Foreign 8268
Domestic 4985
Total 13,252
Foreign assets as percentage to total assets 62
Sales
Foreign 4764
Domestic 2700
Total 7464
Foreign sales as percentage to total sales 64
Employment
Foreign 9330
Domestic 6993
Total 16,323
Foreign employment as percentage to total 57
employment
Source: World Investment Report 2017.
Look at the Table 8.1 which shows 100 largest non-financial Multinational
Enterprises across the world. As you are aware that the Multinational Corporation
operate in two or more countries. They generate assets, sales and employment
in many countries. Table 8.1 shows that the foreign assets as a percentage to
total assets of 100 largest MNEs of world has been 62 percentage for the year
2016. You may also witness in the table that the foreign sales as a percentage to
total sales of 100 largest MNEs of the world has been 64 percentage for the year
2016. Similarly, the foreign employment as a percentage to total employment of
100 largest MNEs of the world has been 57 percentage for the year 2016.
Look at the Table 8.2 which shows 100 largest MNEs from developing and
transition economies. The MNEs from developing and transition economies have
been also growing. These MNEs have been expanding their operations across
the world. The Table 8.2 clearly shows that the foreign assets as a percentage to
total assets of 100 largest MNEs from developing and transition economies has
been 29 percentage for the year 2015. You may also witness in the table that the
foreign sales as a percentage to total sales of 100 largest MNEs from developing
and transition economies has been 47 percentage for the year 2015. Similarly,the
foreign employment as a percentage to total employment of 100 largest MNEs
79
Business Enterprises from developing and transition economies has been 33 percentage for the year
2015.
Table 8.2: 100 largest MNEs from developing and transition economies
Assets, Sales and Employment for the year 2015 Billion of
dollars, thousand
of employees
Asset
Foreign 1717
Domestic 4249
Total 5966
Foreign assets as percentage to total assets 29
Sales
Foreign 1769
Domestic 2011
Total 3780
Foreign sales as percentage to total sales 47
Employment
Foreign 3954
Domestic 8090
Total 12044
Foreign employment as percentage
to total employment 33
Source: World Investment Report 2017.

1) What do you mean by international business?
......................................................................................................................
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......................................................................................................................
2) Identify three importance of international business.
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80
3) Write three features of multinational corporations. International Business:
......................................................................................................................
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......................................................................................................................
......................................................................................................................
......................................................................................................................
4) State whether following statements are True or False.
i) Firms become multinational in response to increased foreign
competition.
ii) Firms may not overcome tariff walls by serving a foreign market from
within.
iii) The main strength of multinational corporation is their command of
technology and innovation.
iv) MNCs of developing countries do not provide competition to MNCs
from developing countries.
v) Companies move their production centres across the border to derive
advantages arising from cheap labour.
8.8 ISSUES AND CONTROVERSIES OF MNCs

There is broad consensus that MNCs, besides being technological giants and
innovation, are efficient allocators of resources in the world economy. Yet there
are a large number of issues on which controversies exist. They are:
i) MNCs interest and the interest of host countries specially developing ones,
in many areas, conflict with each other. MNCs produce products which
may not be very essential for host developing countries and thus they divert
scarce resources away from production of necessary items.
ii) MNCs generally dominate high profit oriented consumer sectors

monopolising profit in these sectors. This is gained through their market
power, promotion, brand name, packages etc.
iii) MNCs are extremely reluctant to transfer latest technology to the host
country, thus making the developing countries depend on them for
technology. They also preserve all their important R & D in home countries.
iv) In order to protect market share, MNCs take recourse to restrictive business
practices. These include: tying imports to specific sources of interests to
them, conditions imposed on technology transfer, price fixation, restrictions
and restrictive use of brands names and trade marks.
v) Through transfer pricings, MNCs avoid paying taxes to government of host

countries and thus transfer resources away from them. MNCs also deprive
the partners from host countries of their legitimate profits.
vi) MNCs do not appoint host countries personnel at higher positions.

81
Business Enterprises vii) MNCs may create balance of payments problems for the host developing
countries through imports and repatriation of huge dividends, royalty,
technical and management fees.
viii) MNCs do not create necessary backward and forward linkages. This failure
very often leads to non-industrialisation of host countries.
ix) MNCs are not necessarily very efficient in their operations. There are cases
of MNCs incurring huge losses.
x) MNCs increase their dominant power through mergers and acquisitions

thus preventing competition.
xi) MNCs have a tremendous capacity to influence the policies of home

governments and international organisations. This capacity enables them
to promote national and international policies to their advantage at the cost
of interest of many countries, specially the developing ones.
The Home Country Perspectives

While home countries generally promote their MNCs, there are certain aspects
of their operations, which attract adverse comments even from home countries.
I) MNCs divert resources away from their home countries.
II) MNCs establish production centres in those countries where cheap labour
is available thus creating unemployment in the home countries.
III) MNCs also often violate environmental conditions by establishing industries

in many countries where environment regulations are lax. This leads to (a)
global environment problems and (b) import of environmentally hazardous
goods.
The supporters of MNCs argue that the above criticisms are exaggerated and
not based on adequate evidence. Very often they refer to the economic
development of countries such as Malaysia, Thailand and some Latin American
countries as proof of the beneficial effect of MNCs. In any case, the eighties and
nineties are considered to be a period of cooperation between governments and
MNCs.
8.9 INDIAN PERSPECTIVES OF MNCs

India followed a restrictive foreign direct investment policy till 1990. Even then
a number of MNCs operated in India either through collaboration with Indian
enterprises taking minority shares holdings or through their own subsidiaries.
Many of them had even dominated some consumer industries with nearly 60-70
per cent of market share. Since many MNCs found that India’s domestic market
was large, they persisted to operate within the framework of the Indian policies,
though the policies were considered very restrictive.
Since 1991, after the government of India liberalised the Foreign Direct
Investment (FDI) policy, the country has emerged as an important market for
serious considerations of MNCs. Large MNCs like Philips, Union Carbide,
82
Unilever, Glaxo, Boots, Welcome, Coca Cola, pepsi, IBM, Brooke Bond, ITC International Business:
are operating in India and many of them are diversifying into a large number of
consumer industries. International Banks are also showing interest in the Indian
economy. The free entry of MNC is, however, still subject to some concern in
Indian industry and political circles. Indian industry fears that too much of
liberalisation of FDI policy will adversely affect the operations of the domestic
enterprises. Therefore, many of them are seeking level playing fields for them.
Some political parties are wary about the domination of MNCs on Indian
economy. While this debate is never-ending, it can be concluded that MNCs
will increasingly come to India. But their primary pre-occupation, one can
envisage, would be to exploit the growing domestic market. Indian enterprises
should learn the technology and management skills of MNCs and compete with
them.
Indian Companies Operating Overseas

During the last more than one and a half decades since liberalisation, many
Indian companies are moving into multinational operations. ONGC Videsh,
Reliance, WIPRO, Tatas, Ranbaxy, Dr. Reddy’s Laboratories, Infosys, Wipro,
Aditya Birla, Mahindra & Mahindra, Bharat Forge, Amtek auto, Asian paints,
Essel propack, Sundram Fasteners, and BPL, etc. are some of the better known
Indian MNCs.
1) Distinguish between MNEs of world and MNEs of developing and emerging

economies.
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
2) State whether following statements are True or False.
i) The percentage of foreign assets as percentage to total assets of 100
largest MNEs of the world has been 62 percent for the year 2016.
ii) The percentage of foreign sales as percentages to total sales of 100
largest MNEs from developing and transition economies has been 47
percent for the year 2015.
iii) MNCs are not reluctant to transfer of technology to host country.
iv) MNCs create necessary backward and forwards linkages.
v) MNCs violate environmental conditions by establishing industries in
many countries where environmental regulations are lax.
83
8.10 LET US SUM UP
International business involves transactions of goods, services, aids to trade
and other business activities between two or more countries. The importance of
international business includes: awareness about different countries of the world,
facilitates the process of globalisation, diffusion of technology, competitive
environment, harmonious relationship, better use of country’s resources, high
rate of economic growth, stability of prices, greater availability of goods, greater
employment opportunity, reduction in costs of production, contribution to
government revenues. etc.
Multinational corporations are defined as the companies which have subsidiaries
and affiliates in a large number of countries, with central control and with an
objective of global profits maximisation. The Multinational Corporations are
huge companies measured in terms of their sales turnover, assets and employment.
They are multi-product technology intensive companies and technology
ownership is their core strength. However, lately, medium sized MNCs are also
gaining importance. MNCs normally dominate the markets of products which
they are producing.
The major reasons for firms to become international are: to take the benefits of
economies of scale, to protect themselves, to tap the growing world market,
response to increased foreign competition, to reduce costs, to reduce impact of
tariff and to take advantages of technological expertise.
The features of multinational corporations include: large size, large foreign sales,
multi-product enterprises, command over technology and innovation, responsive
to environmental forces, common pool of resources, and common strategic vision
for affiliates.
The analysis of 100 largest MNEs of the world shows that the foreign assets as
percentage to total assets has been 62 percent for the year 2016. Similarly, the
foreign sales as percentage to total sales has been 64 percent for the year 2016.
As far as employment is concerned, the foreign employment as percentage to
total employment has been 57 percent of the total employment for the year 2016.
The MNCs from developing & transition economies also have significant foreign
assets, sales and employment.
The issues and controversies of MNCs invove : conflict of interest , high profit
orientation, reluctant to transfer of technology, recourse to restrictive business
practices, resort to transfer pricing, do not appoint host countries personnel at
higher position, may create balance of payments problem for host country, do
not create necessary backward and forward linkages, may incur losses, mergers
and acquisition strategy, may influence host country’s government, etc.
8.11 KEY WORDS

Home Country : Country of origin of the parent company.
Host Country : An independent nation state where MNC establishes
its subsidiary or affiliate.
Intra-Firm Trade : Trade between subsidiaries, branches and affiliates
84 of the same TNC.
Market Failure : When the response of the market does not satisfy the International Business:
expectations of a corporation.
Market Power : Strength or capacity of a MNC to dominate a market.

A 4. i) True ii) False iii) True iv) False v) True
B 2. i) True ii) True iii) False iv) False v) True

1) What is international business? Discuss the importance of international
business.
2) What is MNC? Why do firms become multinational?
3) Describe main feature of MNCs.
4) Describe the recent trends in the world as well as in developing and transition
economies in various developments pertaining to MNCs.
5) Discuss the issues and controversies related to multinational corporations.
6) Discuss the main advantages and disadvantages of MNCs operations for

the host country and the home country.
85
SOME USEFUL BOOKS
India.
Tulsian. P.C. (Recent Edition), Business Organisation and Management, Pearson.
Gupta C.B. (2018), Business Organisation and Management, Sultan Chand and
Sons.
Singh B. P. and T. N. Chhabra, Business Organisation and Management, Dhanpat

Rai and Co.
86
BCOC-132
Management
Management, Organisation and Control 3

BCOC-132
Management
Block
3
MANAGEMENT, ORGANISATION AND CONTROL
UNIT 9
Planning and Decision Making 5
UNIT 10
Organising 26
UNIT 11
Departmentation and Forms of Authority Relationships 51
UNIT 12
Delegation of Authority and Decentralisation 67
UNIT 13
Control 81
Prof. R.P. Hooda
Prof. Nawal Kishor
Darjeeling

Dr. Anupriya Pandey

Management Theory: ECO-03
(Unit-4, 6, 7, 8, 15 and 16 Revised by Prof. Nawal Kishor) Prof. Nawal Kishor
Prof. P. K Ghosh (Retd.) University of Delhi, Delhi (Editor & Course Coordinator)
Prof. B.P. Singh (Retd.), Department of Commerce
University of Delhi, Delhi Dr. Subodh Kesharwani
Mr. P. S. Prasad, Institute of Chartered Accountants (Editor & Course Coordinator)
of India, New Delhi
Prof. D.P Sharma (Retd.), S.K. University, Anantpur (A.P.)
Dr. B. B. Kansal, M M College, Modi Nagar
Dr. G. S. Sundresh, Moti Lal Nehru College, Delhi
MATERIAL PRODUCTION
May, 2019
ISBN:
Printed at:
BLOCK 3 MANAGEMENT, ORGANISATION
AND CONTROL
You have learnt about foundation of Indian business in Block 1 and Business
enterprises in Block 2. This block discusses in detail about the importance,
process and principle of planning, the process of decision making, process and
structure of organisation, bases of departmentation, delegation and decentralisation
of authority and techniques of control.
Unit 9 deals with the nature and importance of planning, the process of planning,
types of planning, essential principles of planning, and decision making.
Unit 10 describes the importance and structure of organisation, the concept of

formal and informal organisation, the span of supervision, organisational charts
and manuals.
Unit 11 deals with the concept of departmentation, bases of departmentation

and the forms of authority relationships.
Unit 12 explains the process and principles of delegation of authority and the
concept of centralisation and decentralisation.
Unit 13 discusses the characteristics and importance of control, stages in the

control, effective control and techniques of control.
Management, Organisation
and Control
4
Planning and Decision
UNIT 9 PLANNING AND DECISION Making
MAKING
Structure
9.0 Objectives
9.1 Introduction
9.2 What is Planning?
9.3 Nature and Characteristics of Planning
9.4 Importance of Planning
9.5 Limitations of Planning
9.6 The Process of Planning
9.7 Forecasting as an Element of Planning
9.8 Types of Planning
9.9 Principles of Planning
9.10 Decision Making
9.11 Let Us Sum Up
9.12 Key Words
9.0 OBJECTIVES
explain the meaning, nature and importance of the managerial function of
Planning
discuss various steps of the planning process
describe the major types of planning-such as strategic planning, tactical
planning, long-range planning and short-range planning
enumerate and explain the principles on which planning is based; and
discuss the process of decision making.
9.1 INTRODUCTION
Planning is recognised as a key function of managers at all levels in the
organisation. Of late, there has been a vigorous surge of interest in planning all
over the world-especially corporate, long-range and strategic planning. In this
Unit, you will learn the fundamentals of planning i.e. its meaning, nature,
characteristics, importance and limitations. You will also learn the elements and
steps in the planning process, and the role of forecasting in planning. You will
further learn the concepts of strategic planning, tactical planning, long-range
planning, short-range planning and the essential principles of planning as well
as the process of decision making. 5
and Control 9.2 WHAT IS PLANNING?
Most of us are fairly familiar with the meaning of planning in our everyday life.
We do often decide in advance about the things to be done on a busy working
day. Parents make advance decisions on the education of their children. As
students, you may think in advance how to go ahead with the preparation for
your examination? How to make use of your time in the best possible manner
and so on? Laymen understand planning as some systematic way of deciding
about and doing things in a purposeful manner.
However, in the context of formal organisations and their management, the

concept of planning has a specific connotation. It means deciding in advance
what is to be done in the future for a specific period and then taking the necessary
steps to do the things decided upon. It means looking ahead into the future and
trying to anticipate what is it likely to be, how will it affect the organisation,
what direction the organisation should take, and how to cope with the future
events? Planning also implies determination of courses of action from among
alternatives to achieve the goals of the organisation, both in the immediate future
and in the long run. The very notion of planning brings to mind such images as
neat, orderly and disciplined approach to work, goal-oriented behaviour, thinking
about and arranging things in advance, careful allocation of scarce resources,
and so on. In short, planning may be defined as the process of setting future
objectives and deciding on the ways and means of achieving them.
9.3 NATURE AND CHARACTERISTICS OF

PLANNING
The managerial function of planning has certain unique characteristics of its
own, which distinguish it from the other managerial functions. It also shares a
few characteristics with other managerial functions. All the characteristics
together reflect the nature of the planning function. They are discussed as below:
i) Primacy of planning : Planning precedes all other managerial functions.

The process of management begins with planning. Planning provides the
basis for the subsequent functions of organising, staffing, directing and
controlling, though all the functions are highly interrelated and are equally
important. Planning is the prime function from which the other functions
get the necessary base.
ii) Planning as a process : Planning is a process involving a few stages or

steps. It is a sub-process of the process of management. The planning
process begins with identification of mission and goals of the organisation
and ends with making arrangements for implementation of plans.
iii) Pervasiveness of planning : Planning is a pervasive function of managers

at all levels of the managerial hierarchy, right from the chief executive
down to the first line supervisor. However, the content and quality of the
function differ from level to level. The time devoted to planning also differs.
Typically, the chief executive and other top level managers concentrate on
corporate-wide planning function. Their decisions on planning have far-
reaching effects on the organisation. Managers at middle and lower levels
6 have more limited planning functions.
Planning is also pervasive across the various organisational functional areas. Planning and Decision
Making
In a manufacturing enterprise, for example, we come across such planning
activities as production planning, materials requirements planning,
manpower planning, financial planning, and so on.
iv) Future orientation : Planning is invariably future-oriented. Henri Fayol
defined planning as the process of looking ahead (thinking ahead) and
making provision to tackle future events and situations. The concern for
future makes sense to the extent that planning is intended to cope with
uncertainties and unknowns which unfold themselves as one marches into
the future.
It is needless to state that planning cannot be anything other than future-
oriented; one does not plan for the past and the present. Of course, while
planning for the future, managers consider the relevant events and situations
of the past and the present within and outside the organisation.
v) Information base : Planning is backed by information. Without
information, planning exists in a vacuum. Information on the past trends,
current conditions and future possibilities are essential for planning.
Information is needed to diagnose planning issues and problems, to develop
alternative courses of action, to evaluate them and to make final choice of
plans.
vi) Rationality : Planning is a rational managerial activity. It implies that
planning is a purposeful and conscious managerial function. It is backed
by adequate information, knowledge and understanding. Managers who
are planners are somewhat objective and fair in their approach to planning.
They have a reasonably clear idea of the planning issues and know how to
tackle them. They make planning decisions with some awareness of their
consequences.
vii) Formal and informal nature : Planning has both formal and informal
elements. Formal planning refers to a systematic and rigorous process of
arriving at planning decisions through investigation and analysis of the
various factors. Formal planning is more explicit, and open; responsibility
for various aspects of planning is pinpointed among managers. Plans are
put into writing and are communicated through the organisational channels
of communication to the various managerial levels.
Informal planning is done by managers through an intuitive process.
Managers carry plans in their heads in the form of specific but flexible
intentions and communicate them to others through word of mouth. Informal
planning may also be viewed as a trial and error, fragmented, intermittent
process as against a systematic step-by-step and logical process of formal
planning.
viii) Intellectual process : Planning is an intellectual process and requires certain
conceptual skills. It requires abilities to think both in abstract and concrete
terms, to visualise and look ahead into the future and to form ideas and
images of future expectations and desires. Planning also calls for intellectual
abilities to anticipate opportunities and threats in the environment, to
diagnose problems, develop alternative courses of action, and analyse them
for choosing the right course.
7
Management, Organisation ix) Pragmatic, action-orientation : Although planning is an intellectual
and Control
thinking activity, it is primarily pragmatic and action-oriented. Planning
precedes action and is often described as action laid out in advance. To
think before acting and to decide before doing are part of the discipline
and culture of planning. The focus is on action ability of plans, i.e., their
quality of being implementable. Planning is also reality-oriented.
x) Planning as a form of decision making : Planning involves problem

solving and decision making. It is a process of identification of issues and
problems needing decisions, collection of relevant information, evaluation
of alternative courses and choices of the most appropriate alternative.
Decisions are made on organisational objectives, strategies, policies,
programmes, procedures and other plans. They are all choices from
alternatives. They also involve mobilisation, allocation and commitment
of resources and efforts in specific ways.
xi) Planning premises : Planning is based on certain assumption and estimates

about the future behaviours of events and situations in the environment.
These are formally known as planning premises which are derived through
the process of forecasting. Without such assumptions planning becomes
an empty speculative exercise. Managers make promises or assumptions
about the future events for purposes of planning, in order to have a sense
of security and certainty in the midst of grave uncertainties and complexities
of the environment.
xii) Dynamism : Planning is a dynamic process. It is a process of making the

organisation selectively move and change in tune with relevant changes in
the external environment. It is a process of building flexibility and
adaptability into the functioning of the organisation. It is a process of making
continuous assessment and reassessment of the goals, resources, directions,
opportunities and problems of the organisation and converting them to
serve its needs.
xiii) Levels of planning : Planning is often divided into a few levels on the
basis of their scope, significance and time span. On the basis of scope,
there are two levels: (1) corporate planning covering the entire organisation,
and (2) sub-corporate or functional planning carried on within the various
functional units or divisions. On the basis of significance, we may divide
planning into strategic planning and tactical or operational planning. On
the basis of time span, there are two levels: (1) long-range planning covering
periods of more than one year in general, and (2) short-range planning
covering a period of one year or less.
The division of planning into various levels facilitates analysis of the

dimensions and critical elements of planning. Even so, planning is an
integrated function. Thus, different levels of planning should be balanced
and coordinated so that they support one another.
xiv) Types of plans : The process of planning produces several types of plans
which may be viewed as a series or hierarchy of decisions and ‘action
packages’. They include: objectives or goals, strategies, policies,
programmes, budgets, schedules, procedures, methods, rules and so on.
8 Some of the plans such as objectives and budgets serve as integral elements
of the planning process while others such as policies, procedures, rules Planning and Decision
Making
and methods serve as facilitating tools for smooth planning. All the plans
are categorised into two broad groups: (i) single use plans, and (ii) standing
plans. Single use plans are those which are designed to meet specific, non-
repetitive and unique situations, while standing plans are those which are
fairly stable and are meant to handle a wide range of repetitive situations
over a period of time.
9.4 IMPORTANCE OF PLANNING

The importance of the planning function should have been clear after all that
you have read about it till now. We may outline the importance of planning
function as follows:
i) Provides direction : Planning provides a clear sense of direction to the

activities of the organisation and to the job behaviour of managers and
others. It strengthens their confidence in understanding where the
organisation is heading and what for, how best to make the organisation
move along the chosen path, and when should they take what measures to
achieve the goals of the organisation.
ii) Provides opportunity to analyse alternative courses of action : Another

source of importance of planning is that it permits managers to examine
and analyse alternative courses of action with a better understanding of
their likely consequences. If managers have an enhanced awareness of the
possible future effects of alternative courses of action, for making a decision
or for taking any action, they will be able to exercise judgement and proceed
cautiously to choose the most feasible and favourable course of action.
iii) Reduces uncertainties : Planning forces managers to shake off their inertia
and insular outlook. It induces them to look beyond those noses, beyond
today and tomorrow, and beyond immediate concerns. It encourages them
to probe and cut through complexities and uncertainties of the environment
and to gain control over the elements of change.
iv) Minimises impulsive and arbitrary decisions : Planning tends to minimise

the incidence of impulsive and arbitrary decisions and adhoc actions. It
obviates exclusive dependence on the mercies of luck and chance elements.
It reduces the probability of major errors and failures in managerial actions.
It injects a measure of discipline in managerial thinking and organisational
action. It improves the capability of the organisation to assume calculated
risks. It increases the freedom and flexibility of managers within well-
defined limits.
v) King-pin function : As stated earlier, planning is a prime managerial

function which provides the basis for the other managerial functions. The
organisational structure of task and authority roles is built around
organisational plans. The functions of motivation, supervision, leadership
and communication are addressed to implementation of plans and
achievement of organisational objectives. Managerial control is meaningless
without managerial planning. Thus, planning is the king-pin function around
which other functions are designed.
9
Management, Organisation vi) Resource allocation : Planning is a means of judicious allocation of
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strategic and scarce resources of the organisation in the best possible manner
for achieving strategic goals of the organisation. The strategic resources
include: funds, highly competent executives, technological talent, good
contacts with government, exclusive dealer network, and so on. If the
organisation enjoys a distinct advantage in possession of such resources, a
careful planning is essential to allocate them into those lines which would
strengthen the overall competitive position of the organisation.
vii) Resource use efficiency : For an ongoing organisation, planning contributes

towards a more efficient functioning of the various work units. There is
better utilisation of the organisation’s existing assets, resources and
capabilities. It prompts managers to close gaps, to plug loopholes, to rectify
deficiencies, to reduce wastage and leakages of funds, materials, human
efforts and skills so as to bring about an overall improvement in resource
use efficiency.
viii) Adaptive responses : Planning tends to improve the ability of the

organisation to effectively adapt and adjust its activities and directions in
response to the changes taking place in the external environment. An
adaptive behaviour on the part of the organisation is essential for its survival
as an independent entity. For a business organisation, for example, adaptive
behaviour is critical in technology, markets, products and so on.
ix) Anticipative action : While adaptation is a behaviour in reaction and

response to some changes in the outside world, it is not enough in some
situations. In recognition of this fact, planning stimulates management to
act, to take bold initiatives, to anticipate crises and threats and to ward
them off, to perceive and seize opportunities ahead of other competitors,
and to gain a competitive lead over others. For the purpose, some enterprises
establish environmental scanning mechanism as part of their planning
systems. Thereby such enterprises are able to direct and control change,
instead of being directed and controlled by the pervasive external forces of
change.
x) Integration : Planning is an important process to bring about effective

integration of the diverse decisions and activities of the managers not only
at a point of time but also over a period of time. It is by reference to the
framework provided by planning that managers make major decisions on
organisational activities, in an internally consistent manner.
1) Which of the following statements are True and which are False?
i) Among other things, planning implies determination of concern of
action from among alternatives?
ii) Planning follows all other managerial functions.
iii) Planning cannot be future-oriented as the future is always uncertain.
iv) Planning has both formal and informal elements.
v) Planning reduces the probability of major errors in management.
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2) Fill in the blanks: Planning and Decision
Making
i) Planning is the process of setting ...................................... objectives.
ii) .......................... and ..................... of planning functions differ from
level to level of management hierarchy.
iii) Informal planning is done through the ................... ... process.
iv) As planning requires certain conceptual analytical skills, it is regarded
as all . . . . . . . . . . . . . . . . . . . . . . . . . . process.
v) Assumptions and estimates about the future events are known as
planning................................
vi) Plans which are drawn to meet specific, unique situations are known
as.....................................
vii) Planning is a means of judicious .................................. of resources.
viii) Planning stimulates management to take ..........................................
9.5 LIMITATIONS OF PLANNING

You have learnt the nature and importance of planning. Let us now discuss its
limitations.
i) Based on certain assumptions : Planning is based on certain assumptions

or premises derived from forecasts about the likely behaviour or relevant
future events and variables. If such assumptions or premises turn out to be
wide off the mark, the very basis of plans get affected. Afterall, forecasting
is not an exact science.
ii) Incomplete information : The information needed for planning is often
incomplete. It may not be available in time and its reliability tends to be
doubtful. In several situations, managers are forced to make planning
decisions on the basis of partial knowledge because of time lags and
credibility gaps in information.
iii) Lack of control : Managers have little knowledge and less control over
several elements of external environment. There is often go way to bring
external situations under the discipline of planning. Several external events
tend to influence organisational activities and plans in random and perverse
ways, as for example, natural calamities, sudden strikes, government policy
changes, and so on.
iv) Difficult to change with the changing environment : Planning, under
conditions of rapid changes in the external environment tends to be a tough
job. Plans would become quickly outdated and irrelevant even before they
are implemented. Though flexible plans would be of some help under such
conditions, there are also limits on injecting flexibility into organisational
plans.
v) Fluid process : Planning is essentially a fluid process in the sense that it is
always in a state of flux. This is because of the march of the times and the
subtle changes which characterise the future as it unfolds. Future is always
a moving target. It is not easy to visualise an integrated and composite
view of the past, present and future for planning purposes.
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Management, Organisation vi) Delay in action : Since planning means thinking and deciding before doing
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things, it is likely to delay action. For one thing, thinking and deciding are
somewhat slow intellectual exercises. Many managers may not have the
time or taste for such exercises. For another, managers attach more
importance to action and that too timely action wherein lies much activism
and dynamism.
vii) Rigidity : The plans produced through the planning process tend to introduce
rigidity into the functioning of the organisation. Managers are likely to
insist on strict compliance with pre-determined plans. This may sometimes
mean foregoing new opportunities and better options. A faithful conformity
with plans would stifle initiatives beyond the established ways and routines.
viii) Plans might remain on paper : At the other extreme, it is also likely that
plans remain on paper as some sacred documents worthy to be respected
and preserved are not followed or implemented. They may be far removed
from realities such that managers regard them as “untouchables’.
Alternatively, managers may be too busy in struggling with crises to find
time for going along planned courses.
ix) Difficult to implement at unit level : It may be easy to formulate broad

plans at the corporate level. Problems are likely to arise when managers
try to prepare more detailed plans in physical and financial terms at
functional and unit levels for purposes of implementations. The detailed
plans, if and when prepared, may not reflect the intents of the broad plans
in a consistent manner.
9.6 THE PROCESS OF PLANNING

We have stated earlier that planning is a process consisting of certain steps or
series of sequential activities. There is no generally accepted or standard format
of the planning process. Different authors have their own ways of conceptualising
the planning process. Let us discuss one of the conceptual schemes of the process
of planning.
i) Planning to plan : Planning does not just occur on its own or with the
issue of an order from the chief executive. It has to be properly and carefully
decided upon and planned. The management of the organisation has to
inject a culture of planning at all the levels of management by highlighting
the imperatives and virtues of planning as also the philosophies and
techniques embedded in it. It has to educate the managers in various
departments by arranging training programmes and conferences on the
methodology of planning so as to improve their competence to plan. The
required planning system has to be designed and activated. This is especially
so with regard to a new organisation.
ii) Appraisal of internal situation : In this step, top management in

collaboration with other managers, have to make an analysis of the current
state of affairs with the organisation; its existing plans, processes, activities,
performance levels, achievements and problems. It is essential to review
in detail the specific strengths and weaknesses of the organisation in its
sphere of operations. For example, products and services it supplies,
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financial position, manpower and managerial resources, competitive Planning and Decision
Making
position, profitability levels, market image, manufacturing and other
facilities, R&D advantages, capital structure, and so on. Management has
also to make forecasts and projections of the likely future position and
trends of the organisation’s activities in all the above areas.
iii) Appraisal of the external environment : Top management of the
organisation is vitally concerned with the analysis of external environmental
conditions for planning purposes. This facilitates them in understanding
the elements and events in the world outside the organisation which affect
its present and future functioning. Appraisal of environmental trends in
economic, social, technological and other means of relevance for the
organisation is to be continuous process. Not only the present but also the
likely future trends have to be appraised through systematic scanning and
forecasting mechanisms. This will enable the organisation to identify the
present and future opportunities and threats in the various external elements
with which the organisation is directly concerned.
iv) Definition of key areas and issues for planning : The appraisal of internal
and external environmental conditions gives to the management an idea
about what tentative planning the organisation needs. Managers have to
ask themselves whether, in the light of external appraisal, the existing
businesses, products, markets, processes and practices are relevant, and
which aspects of them have to be retained, strengthened, refined and
modified. The analysis also may reveal the need for new directions to
strengthen the competitive position of the organisation, and to bring about
a better alignment between the organisation and the external environment.
It may also unearth the possibilities of going into new businesses, new
technologies, new products and new markets. An important outcome of
the above appraisal is identification of possible measures necessary to cope
with environmental opportunities and threats, which are likely to help or
hinder, as the case may be, the performance and progress of the organisation.
v) Development of alternative plans for evaluation and choice : In this
stage, managers have to apply their creative and innovative skills to generate
alternative plans, missions, objectives, strategies, policies and programmes,
etc., on the basis of assessment of planning needs. They are generally of
corporate-wide and long-range in character, ranging from 5 to 10 years
ahead, depending on circumstances. Development of alternative plans calls
for an intensive thinking and search on the part of managers. For example,
a business enterprise has several options to increase its economic power
and profitability by increasing the sales of its existing products in the
existing markets, by exploring new markets, by going in for new products,
by acquiring outside enterprises and so on. The objective of improving its
economic power could be achieved by one or a combination of some of the
above alternative strategies.
An important part of this stage is the evaluation of alternative plans by
reference to their comparative merits and demerits whereupon choices have
to be made from among the alternatives on the basis of certain predetermined
selection criteria. The choices are the decisions of managers which will
chart the long-range directions of the organisation for a specified period of
time.
13
Management, Organisation vi) Formulation of medium range and short-range plans : The long-range
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set of organisational plans provide the basis for formulation of more specific
medium range and short-range plans. Medium-range plans have a time
span of more than one year but upto three years in general. Short-range
plans have a duration of one year or less. Medium-range plans and short-
range plans are progressively more specific than long-range plans. Short-
range plans are also called operational plans and the process of formulating
them is called ‘Operational Planning. Medium range plans and short-range
plans are generally formulated in such functional management areas like
manufacturing, marketing, purchase, personnel, finance, R&D and so on.
They are further de-composed into more detailed sectional and unit plans
valid for basic units of operations in the organisation.
vii) Arrangements for implementation of plans : Effective implementation

of plans and decisions is the crux of the planning process. Since plans are
implemented by managers and others at various levels of the organisation,
it is essential for top management to enlist their co-operation, participation
and commitment for the purpose. Authority and accountability have to be
pinpointed specifically among the various managers for implementation
of plans, for acquiring and allocation of resources and tasks, for making
day-to-day decisions and taking initiatives and for activating the
communication system in the organisation.
9.7 FORECASTING AS AN ELEMENT OF

PLANNING
We have stated earlier that forecasting is an essential element of the planning
process. The term forecasting refers to the process of making systematic but
tentative appraisal of future conditions and events for a specified period of time
- whether for a few months or, a few years ahead. It is a process of predicting
relevant future situations which are likely to affect the activities of the
organisation. It is an attempt to look ahead and make tentative estimates and
projections of the behaviour of relevant variables in the environment.
Since planning is future-oriented, forecasting is a basic ingredient of the planning

process. Forecasting provides vital clues to managers on what the future problems
and prospects are likely to be for the organisation. By means of forecasting,
managers generate information on several dimensions and aspects of the
environment, i.e. economic, social, technological, and political. These are directly
relevant to the functioning and fortunes of the organisation and which directly
influence the planning and other decisions, initiatives and responses of managers.
Forecasting is necessary to enable managers to get important inputs for planning
and to make informed judgement about the likely impact of the external forces
on the organisation’s present and future courses of action. Organisational plans
are based on proper and reliable information generated by managers through
forecasting and other means.
For a business enterprise, for example, several aspects of future trends should
be understood through forecasting. They include: future sales trends of the
products and serivices of the enterprise based on an assessment of future demand,
supply, cost and competitive conditions, likely levels and trends of profitability,
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future technological changes, general economic and industry trends, likely Planning and Decision
Making
emergence of new products, new processes and new markets, probable changes
in population characteristics, their levels of income, life styles and buying patterns
and so on.
The individual enterprises may be able to get part of the above information on
the basis of forecasts made by other agencies like government, trade associations,
academic and research organisations, consultancy firms and so on. But forecasts
on internal variables like sales, profits, market share, cost trends etc. have to be
made by the enterprise itself.
Forecasting and Premising : For purposes of formulating plans, managers have

to convert the appraisals, estimates and projections about the future events into
certain meaningful assumptions, which are known as planning Premises. This
conversion process is called Premising, which is an essential follow-up action
after forecasting. Planning premises form the foundation of organisational plans.
They are in the nature of informed guesses of managers with respect to specific
future trends. A few examples of planning premises are given below :
a) The enterprise will maintain its competitive strength over the next four
years.
b) There will be revolutionary developments in TV technology during the
next five years.
c) There will be future liberalisation in the economic and industrial policies
of government with respect to big business enterprises.
Planning premises are categorised in various ways. External Premises relate to
general economic and business conditions, social, political, technological and
other trends. Internal Premises are confined to the activities of the enterprise;
for example, cash flow, cost of products and services, profitability and so on.
Tangible Premises are quantitative in nature, as sales volume of Rs. 50 crores.
Intangible Premises are qualitative, as for instance the competence and character
of managerial personnel in the organisation. Controllable Premises are those
which are manageable by the enterprises (example: advertising expenditure).
Uncontrollable Premises relate to acts of god or man about which little can be
done by the industrial enterprise (example: A big fire in the plant, government
policies etc.)
Forecasts and planning premises are different from plans. The former outline
what the future is likely to be. The latter underline what the enterprise should do
in future. Further forecasts and planning premises do not reduce the complexity
and uncertainty of the future. They only aid managers in understanding the state
of complexity and uncertainty of the behaviour of future events and in going
ahead with confidence to cope with them.
It is true that forecasting is most unlikely to be perfect and that it is in fact a

hazardous exercise especially in a situation of rapidly changing external
conditions. Forecasts are only approximations and estimates. Future events may
not behave exactly according to forecasts and premises made by managers. But
still forecasting before formulating plans is an inescapable exercise. Without
intelligent and systematic forecasting, organisational plans would be mere
expectations and pious wishes.
15
Management, Organisation Check Your Progress B
and Control
1) Fill in the blanks :
i) The information needed for planning is often and may not be
...........................
ii) One of the limitations of planning is that it is essentially a .......... process.
iii) Appraisal of the external ........................ ... is an essential requirement
in the planning process.
iv) Forecasting provides vital ....................................... to manager about
the future problems and prospects.
v) The estimated sales for the future is an example of ...............................
premises for the managers of a company.
i) Planning leads to delayed action as it involves prior thinking.
ii) Development of alternative plans is most essential for planning at the
functional level.
iii) Forecasting and premising for planning are one and the same thing.
iv) Planning premises and forecasting reduce the uncertainties and
complexities of the future.
v) Medium-range plans have a duration of more than one year.
9.8 TYPES OF PLANNING

Planning may be categorised into several types on the basis of certain variables.
Here we will divide the function of planning into four categories on the basis of
two variables i.e. degree of comprehensiveness and time span. On the basis of
degree of comprehensiveness, planning is divided into strategic planning and
tactical planning. On the basis of time span, we may divide planning into long-
range planning and short-range planning. Let us have a brief idea of the four
types of planning.
Strategic Planning : The term strategic planning refers to the process of

determining the integrated organisation-wide courses of action to achieve the
major objective of the organisation. The term has a military origin where it is
used to describe the process of formulation of military campaigns to achieve
military goals of defending the home territory and defeating the enemy forces.
In military parlance, strategic planning covers such aspects as how to attack the
enemy and from how many fronts, the size and combination of ground forces,
air forces and naval forces, the amount of resources to be deployed, the timing
of the various moves, the areas to be fortified and defended and so on. The term
acquired great significance in non-military situations also. We often hear of
strategies to achieve the goals of Five Year Plans at the national and regional
levels, strategies for solving rural drinking water problems, strategies to reduce
the growth rate of population and so on. In the context of business enterprises,
strategic planning consists of formulation of strategies which are in the
16 nature of critical and intelligent courses of action to gain upper hand over
competitive and other complex external forces in the environment. It involves Planning and Decision
Making
tentative chalking out of the major measures and moves necessary to perceive
and exploit opportunities and to tackle threats and constraints, in the light of
distinctive strengths and inevitable weaknesses of the enterprises.
The kinds of questions that top management of the enterprise asks itself and
finds answers in strategic planning include: What are the most significant market
and other opportunities and in what way they are relevant to the enterprise?
What are the kinds and complexities of external problems, threats and constraints
forced by the enterprise? How shared the enterprise take advantage of relevant
opportunities and to tackle the threats and constraints (as for example: price
cuts, aggressive advertising campaigns, introduction of new or improved
products, and so on initiated by rival enterprises) in order to achieve the
objectives. In what specific areas and businesses did the enterprise concentrate
its efforts to gain or retain its competitive dominance? Into what new businesses
should enterprise extend its activities?
Strategic planning is a means of improving the competitive position of the
enterprises in relation to other existing and potential rivals in the industry. It is
an attempt to design an action plan on how, where and when the strategic
resources of the enterprise (investment funds, customer goodwill, and loyalty,
distribution network, R & D facilities and so on) have to be deployed, and the
combination, sequence and timing of various major decisions and initiatives
necessary to achieve the enterprises goals of growth, diversification, high
profitability, competitive power, good market share and so on.
Tactical Planning : Tactical Planning refers to the process of formulating more
specific, functional, sub-plans to implement the strategies of the enterprise.
Tactical Planning is more limited in its scope and consists of detailed decisions
and actions initiated at lower managerial levels to exploit situations as and when
they arise and to cope with local, operational problems. It is sub-corporate wide
in nature. Tactical plans take the form of small, successive steps or moves taken
in a concerted manner. Tactical decisions are concerned with what and how
activities are to be carried out, what performance criteria are to be established,
how scarce resources are to be utilised efficiently and so on.
Tactical Planning is carried out on the basis of more information under less
risky conditions and in a more structured manner than strategic planning. Tactical
Planning provides the basis for detailed specification of various activities to be
carried out by the enterprise in a coordinated and time-bound basis.
To take an example, a major objective set by the top management of an enterprise
manufacturing industrial goods is rapid growth by doubling the sales volume
within a period of next four years. To achieve this objective, one of the strategies
formulated by the enterprise is diversification into manufacture of consumer
goods. To implement this strategy the enterprise formulated specific policies on
make or buy, internal growth vs acquisitions or mergers, foreign collaboration
and so on. Within the framework of the above strategy and policies, tactical
plans and decisions on such aspects as size of operations, product types, sizes,
quality ranges, customer services, distribution channels and so on are designed.
The distinction between strategic planning and tactical planning is one of scope
and impact. In many cases, the two types of planning become indistinguishable.
They are, however, inter-dependent. 17
Management, Organisation Long-range Planning : The term long-range planning refers to the process of
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formulating the long-range objectives of an organisation and of determining the
ways and means of achieving such objectives. The term long-range indicates
the extent of future time horizon, the fairly long period of time which can be
visualised and verbalised into tentative objectives by the organisation. The
duration and limit of long-range differs from enterprise to enterprise and from
situation to situation. For some enterprises, 3 to 5 years is a fairly longtime
horizon, while for others, 25 to 30 years and even beyond is the relevant planning
time frame. The long-range planning period is determined keeping in view the
nature of the enterprise’s business, its size and growth rate, the extent of variability
of the environment, the time required for converting major decisions into tangible
results and so on.
Long-range planning provides a framework for determination of such critical
goals as the desired growth rate of the enterprise’s assets or sales and profitability,
new activities in the future, major new investments, areas of development, and
disinvestment, and so on. As Peter Drucker stated, every enterprise should ask
itself these and similar questions in the context of complex and dynamic nature
of external environment. Business and other organisations cannot expect that
their present businesses, product lines and activities, technology, profit levels
and markets will continue to remain relevant in the future. Long-range planning
is intended to induce such awareness and to enable managers to make current
major decisions with a fairly good sense of future Outlook.
Short-range Planning : The term short-range planning refers to the process of
formulating short-range objectives and of deciding on the courses of action or
plans, to achieve them. Short-range planning is done for a time span of one year
or less. In general, it is carried out within the framework of long-range planning,
and for achieving long-range objectives, in a step-by-step manner. A short-range
plan is an attempt to breakdown a long-range plan into compact and actionable
programmes. Short-range planning is more action-oriented, more detailed,
specific and quantitative. For example, if the long-range goal of an enterprise is
to increase its sales volume by 50% during the course of next five years, it has to
formulate its short range plan for the next one year to bring about an increase of
say 20% in its sales turnover. It has to formulate a detailed budget of short-range
goals, targets of performance, activities, and resource requirements in a time-
bound manner. Short-range planning provides the basis for a coordinated
performance of activities, allocation of resources, assignment of tasks and design
of appropriate plan, implementation and programme evaluation system. Long-
range plans are implemented by programming, budgeting and scheduling efforts
and activities needed to achieve organisations goals.
It may be noted that tactical planning and short-range planning are also referred
to as Operational Planning because they represent planning of detailed
operations at the lower levels of management at middle and supervisory levels.
9.9 PRINCIPLES OF PLANNING

Since planning is a function of management, it must be based on certain principles
to serve as guidelines for undertaking the function in right earnest. We may
outline the principles of planning as below.
18
1) Principle of top management interest : The chief executive of the Planning and Decision
Making
organisation must show genuine interest in planning, submit himself to the
discipline of planning and must inspire his team to do the same.
2) Principle of long-range view : Every manager must plan decisions after

a full analysis and understanding of their long-term future effects, and after
considering all the available facts objectively.
3) Principle of contribution to objectives : Planning should be purposeful.

It should directly contribute to the achievement of organisational objectives
or desired ends.
4) Principle of primacy of planning : As stated earlier, planning holds the

prime position in the process of management. It is logically regarded as
the first function of managers from which all other functions flow.
5) Principle of flexibility : The principle suggests that flexibility in planning

helps the organisation to cope with rapid and unforeseen changes in the
external events. This can be achieved without abandoning the pre-
determined plans or without inviting adverse consequences even if drastic.
6) Principle of navigational change : This principle is related to the principle

of flexibility. It indicates that a regular process of monitoring the course of
external events is to be combined with a review and revision of plans. This
should be done in order to achieve desired goals just as a navigator
negotiates his ship’s way by making changes in his route in response to
behaviour of the water mass.
7) Principle of commitment : This principle helps in the determination of

the planning period. Planning should cover a period of time necessary to
fulfil the commitments involved in a decision. For example, if a student
makes a decision to join a three years B.Com. Course, his planning period
is three years.
8) Principle of the limiting factor : A limiting factor is one which stands in

the way of achieving the desired objective. Managers should pay due
attention to tackle those limiting factors which hinder the smooth progress
in achievement of objectives.
i) Strategic planning consists of formulation of strategies for the
organisation as a whole.
ii) Tactical planning is carried out under more risky conditions than
strategic planning.
iii) Operational planning includes both long-range and short-range
planning.
iv) The principle of flexibility of planning suggests that plans should be
changed as frequently as possible.
v) The principle of commitment helps in the determination of the planning
period.
19
Management, Organisation 2) Fill in the blanks :
and Control
i) Strategic and tactical planning are defined on the basis of .......................
ii) Courses of action planned to gain upper hand over competitive and
other external forces are known as .........................................
iii) Tactical planning involves a more .....................................................
approach than strategic planning.
iv) Long-range planning provides a ....................................................... for
determining critical goals.
v) Any factor which stands in the way of achieving desired goals may be
called a ............................ factor.
9.10 DECISION MAKING

Every body takes decision in life. You have to take admission in B.Com
programme. For this purpose. You have to decide that which courses are to be
taken, in which University/College to be admitted, what profession do you
want to pursue, etc. Smilarly a manager has to take decision in all functional
areas of management like planning, organising, directing, coordinating,
controlling, etc. The success of business depends on the quality of right decision
taken by the manager.
The leading management expert Peter Drucker has defined decision as “A

decision is a choice whereby a person performs a conclusion about a situation.
This represents a course of behaviour about what must or what must not be
done”. Mc Farland has defined decision as “A decision is an act of choice where
in an executive forms a conclusion about what must be done in a given situation,
A decision represents behaviour chosen from a number of possible alternatives”.
The above definitions show that:
i) Decision making is an act/choice: This means that there may be an issue

or problem to be resolved. As a manager, you are supposed to take an action
considering various activities related to the decision.
ii) Possible alternatives: There may be various ways of finding a solution to

the problem. You have to explore and examine the possible ways to take a
decision.
iii) Conclusion: You have to select the best possible alternative. Thus, you
conclude the decision by selecting the best alternative.
Therefore, the central theme in decision making is to select among the possible
alternatives.
Decision Making Process
The steps involved in the process of decision making are discussed below:
1) Identification of problem or opportunity: As you set up the goal for your

career and strive for the achievement of the goal. Similarly, the manager
establishes the goal for the organisation. S/he makes the effort to realise the
20
goal. There may be number of internal and external factors influencing the Planning and Decision
Making
achievement of the goal. The manager has to identify the exact problem or
opportunity related to the organisation.
David B. Gleicher, a management consultant in Stoner, Freeman and Gilbert,

(2000), stated that “problem as something that endangers the organisations,
ability to reach its objectives, and an opportunity as something that offers
the chance to exceed objectives”. It is clear from this definition that the
problem creates obstacle whereas the opportunity provides scope for the
progress of the organisation. For example ‘how to produce environmental
friendly product’ may be a problem for a manager. The redesigning of
manufacturing unit for the production of environmental friendly products
may provide opportunity to capture growing market of environmental
friendly products. Therefore, the problem and opportunity have to be defined
clearly.
2) Exploration of possible alternatives: In this stage, the manager explores

various available possible alternatives for the solution of the problem. For
example, if the sale of a company has been decreasing, S/he has to diagnose
the causes of decreasing sale. Is it due to internal factors of the organisation
or the external factors? Similarly, if the manager want to capture the new
market, how will he manage the factors of production to enter into the new
market. He has to explore all the internal and external factors for this purpose.
3) Evaluation of alternatives: In this stage, the manager has to evaluate all

the alternatives. S/he examines the positive and negative aspects of each
alternatives. If he finds more positive points in a particular alternative, he
may think that this alternative may be suitable for his organisation. Based
on the available resources, he examines how best the scarce resources may
be used for the achievement of the objective of the firm.
4) Selection of the best alternative: After evaluating the positive and negative
aspects of all the alternatives, S/he tries to select the best possible alternative
for her/his organisation. Peter Drucker has suggested following four criteria
for selection of the best way of performing the task.
i) Risk: The meaning of risk has been danger, threat, harm, etc. The
manager has to assess the situation considering the risk involved in
the activity. He has to think about the minimisation of the risk. This
may facilitate the probability of success.
ii) Economy of effort: As you must be aware that the recourses are
limited. Therefore, the factors of production should be used in such a
manner that they provide the best result. All activities should be
managed in such a way that with the application of less effort, you
should get better result. There should be economy in terms of utilisation
of resources, processing, timing, etc. The management of economy
may lead to success to the ventures.
iii) Situation or Timing: You must have heard that the right decision
should be taken at the right time. For example, woollen clothes are
demanded during the winter. Therefore, the decision related to
manufacture and distribution of woollen clothes has to be taken in
21
Management, Organisation such a way that these clothes are made available in the market during
and Control
the winter.
iv) Limitation of resources: As you know that the resources are limited.
Therefore, you have to use these resources in such a manner that you
get the best result. The manager should reduce the wastages and enhance
the productivity at each level to achieve the better result.
If the manager examines the above criteria minutely, he may be able

to select the best possible alternative action for his organisation.
5) Implementation of decision: After selecting the best course of action, the

manager has to implement the decision in his organisation. Sometimes, there
may be resistance during the implementation of the decision. In order to
facilitate implementation and minimise resistance, the manager may be
required to convince the concerned stake holders about the positive
consequences of the decision. If all parties related to the decision are
convinced, the implementation of the decision may be facilitated. The
manager has to put his best effort for the smooth implementation of the
selected decision.
6) Follow up: The consequences of the implementation of the decision are

examined and analysed frequently. The good result may be considered as
an example for solving other related problems. The negative result may be
considered for corrective action. Thus, the manager has to take feed back
regularly for further improvement as well as correction.
9.11 LET US SUM UP

Planning is the process of setting future objectives and deciding on the ways
and means of achieving them. It means deciding in advance what is to be done
in the future for a specific period and then taking the necessary steps to do the
things decided upon.
Planning precedes all other managerial functions. It is a sub-process of the process

of management. It pervades all levels and all branches of management. Planning
is invariably future-oriented but is backed by information relating to the past
trends, current conditions and future possibilities. It is a purposeful conscious
managerial function. It has both formal and informal elements. At the same
time, planning is an intellectual process and requires certain analytical and
conceptual skills. Even then, it is primarily a pragmatic and action-oriented
function. Planning involves problem solving and decision-making. It is based
on certain assumptions and is a dynamic process.
Planning may be divided into certain levels on the basis of scope, significance,
and time span, e.g. corporate planning and functional planning, strategic planning
and tactical planning; long-range planning and short-range planning. All types
of plans may be broadly categorised into two groups. Single use plans and
standing plans.
The importance of planning function stems from the following benefits of

planning. Planning provides a clear sense of direction to the activities of the
22 organisation and the job behaviour of managers and others. It permits managers
to examine alternative courses of action with a better understanding of their Planning and Decision
Making
likely consequences. Planning forces managers to shake off their inertia and
induces them to look beyond the immediate concerns. It minimises the incidence
of impulsive and arbitrary decisions and adhoc actions. Planning provides the
basis for all other managerial functions. It is a means of judicious allocation of
strategic and scarce resources of the organisation, and also brings about an over
all improvement in the efficiency of resource use. Further, planning improves
the ability of the organisation to adapt effectively and adjust its activities in
response to changes in the external environment. It stimulates management to
take bold initiatives to anticipate crises or threats and to prevent them and to
perceive and seize opportunities ahead of competitors. It is also an integrative
process at a point of time as well as over a period of time.
The limitations of planning arise out of the following elements. The assumptions
and forecasts which form the basis of planning may be wide off the mark.
Information required may not be reliable or may not be available in time. Changes
in external environment are often beyond the knowledge and control of
management, particularly in the case of rapid changes. Further, planning is always
in a state of flux, due to the continuous and subtle changes taking place in the
environment. Besides, planning may delay action as it involves prior thinking
and deciding. Often the plans formulated introduces rigidity in the functions of
managers. On the other hand, plans may be far removed from reality and thus
become difficult to implement, particularly with respect to detailed plans.
The process of planning involves: Planning to plan, appraisal of internal

conditions and external environment, defining key areas and issues for planning,
development of alternative plans for evaluation and choice, formulation of
medium-range and short-range plans and implementation of plans.
Forecasting is an essential element of the planning process. It provides vital

clues to managers through the generation of information on several dimensions
of economic, social and technological environment. It also provides estimates
and projections about the future events.
The appraisals, estimates and projections provided by forecasting are converted

into meaningful assumptions known as planning premises. The premises may
be of different categories: external, internal, tangible, intangible, controllable
and uncontrollable.
Planning may be divided into four categories on the basis of degree of

comprehensiveness and time span. These are : Strategic Planning, Tactical
Planning, Long-range Planning and Short-range Planning. Tactical and Short-
range Planning are also referred to as “Operational Planning”.
As a function of management, planning is best carried out on the basis of certain

principles viz., principles of top management interest, long-range view,
contribution to objectives, primacy of planning, flexibility, navigational change,
commitment, and limiting factor.
The process of decision making involves : identification of problem of

opportunity, exploration of possible alternatives, evaluation of alternatives,
selection of the best alternative and fellow up.
23
Management, Organisation Check Your Progress D
and Control
1) What is decision making?
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
2) List the process of decision making.

......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
9.12 KEY WORDS

Forecasting : Estimating the future behaviour of variables
affecting the business unit.
Long-range Planning : Formulating the long-run objectives and
determining the ways and means of achieving those
objectives.
Objectives : Goals or purposes towards which business
activities and operations are directed.
Operational Planning : Planning of detailed operations at the middle and
supervisory levels of management.
Planning : The process of setting future objectives and
deciding on the ways and means of achieving them.
Policies : Guidelines for decision-making and action.
Strategic Planning : The process of planning which involves product,
market decisions in the light of environmental
changes and internal resources.
Strategy : Courses of action to gain upperhand over
competitive and other environmental forces.
Tactical Planning : The process of formulating specific, functional sub-
plans to implement the strategic plan.
24
Organising
A) 1) i) True ii) False iii) False iv) True V) True
2) i) future ii) content, quality iii) intuitive iv) intellectual v) premises
vi) single use plans vii) allocation viii) bold initiative
B) 1) i) incomplete, reliable ii) fluid iii) environment iv) clues v) tangible
2) i) True ii) False iii) False iv) False v) True
C) 1) i) True ii) False iii) False iv) False V) True -
2) i) comprehensiveness ii) strategies iii) structured iv) framework v)
limiting

1) Define the concept of planning and explain its salient characteristics.
2) Comment on the following statements:
a) Planning is a pervasive process.
b) Planning is a useless exercise in a situation of rapidly changing
environment.
c) Planning and decision making are two sides of the same coin.
3) Do you think that planning is a guarantee for organisational success? Give
reasons.
4) Is there any need for planning a plan? Explain.
5) The limitations of planning are too serious to make planning a credible
function. Do you agree? Why?
6) What is the difference between strategic and long-range planning?
7) Discuss the process of planning.
8) What are planning premises? How are they relevant to planning?
9) Why is forecasting so important for planning?
10) Explain the principles of planning.
11) “Long-range planning is concerned with making today’s decisions with a
better sense of futurity”. Comment.
12) What is the role of top management in the planning process?
13) Describe the process of decision making.
write answers for them. But, do not send your answers to the university.
These are for your practice only.
References
Stoner, Freeman and Gilbert (2000). Management, Prentice Hall of India Pvt
Ltd, New Dehli.
25
and Control UNIT 10 ORGANISING
Structure
10.0 Objectives
10.1 Introduction
10.2. Nature of Organising Function
10.2.1 Characteristics of Organisation
10.2.2 Importance of Organisation
10.3 Organisation as a System
10.4 Steps in the Organisation Process
10.5 Organisation Structure
10.5.1 Significance of Organisation Structure
10.5.2 Types of Organisation Structure
10.6 Principles of Organisation
10.7 Span of Control
10.8 Organisation Chart
10.9 Organisational Manual
10.9.1 Importance of Manual
10.9.2 Types of Manual
10.9.3 Advantages of Manual
10.9.4 Drawbacks of Manual
10.10 Formal and Informal Organisations
10.10.1 Difference between Formal and Informal Organisations
10.10.2 Characteristics of Informal Organisation
10.10.3 Functions of Informal Organisation
10.10.4 Problems of Informal Organisation
10.11 Let Us Sum Up
10.12 Key Words
10.0 OBJECTIVES
state the importance of organising
describe the different interpretations of the word organising
distinguish between the different types of organisation structure viz.
functional, divisional, and adaptive
analyse the formal and informal dimensions of any organisation; and
explain the significance of span of supervision, organisational charts and
manuals.
26
Organising
10.1 INTRODUCTION
InUnit 9, You have learnt about various dimensions of planning. Organisation is
another important function of managment. In this unit, you will learn the
organising function of management and its integral aspects such as organisation
structure, charts, manuals, formal and informal organisations forms of
organisation and span of control.
10.2 NATURE OF ORGANISING FUNCTION

As a function of management, organising refers to the process involving the
identification and grouping of activities to be performed, defining, and
establishing the authority responsibility relationships. This enables people to
work most effectively together in achieving the objectives of the enterprise. In a
general sense, organising consists of determining and arranging for men,
materials, machines and money required by an enterprise for the attainment of
its goals. In a restricted and operational sense, the term organising means defining
the duties and responsibilities of the people employed, and determining the
manner in which their activities are to be interrelated. The end result of organising
is the creation of a structure of duties and responsibilities of people in different
positions, grouped according to the similarity and interrelated nature of activities.
In other words, the outcome of the organising process is an “Organisation’
consisting of a group of people working together for the achievement of one or
more common objectives.
10.2.1 Characteristics of Organisation

The characteristics of an organisation are:
a) Group of people: An Organisation comes into existence when a group of

people combine their efforts for some common purpose and willingly
contribute towards their common endeavour.
b) Division of work: Setting of an organisation involves division of the total

work into various activities and functions, and assigning the tasks to different
persons according to their skill, ability and experience.
c) Common purpose: Every organisation comes into existence on the basis

of goals of the enterprise which are separate from the personal goals of the
people employed. It is the common purpose of the organisation which
provides the basis of cooperation among the members of the organisation.
d) Vertical and horizontal relationships: An organisation creates cooperative

relationships between different departments and divisions as well as between
superiors and subordinates. Different functions and activities like production,
marketing, financing etc. are integrated for the achievement of proper
coordination. The duties and responsibilities of superiors and subordinates
in each department or division are also unified so as to serve the purpose of
their joint efforts.
e) Chain of command: The superior-subordinate relationships established

in an organisation are based on the authority which flows from the higher
27
Management, Organisation levels of management to the next lower levels, thereby forming a hierarchical
and Control
chain. This is known as the chain of command, which also determines the
line of communication.
f) Dynamics of organisation: Besides the structural relationships among

people which are based on their activities and functions, there exists an
organising interactions based on sentiments, attitudes and behaviour of
individuals and groups. These aspects of relationship provide a dynamic
element to the organisational functioning. They are subject to change from
time to time.
10.2.2 Importance of Organisation

Sound organisation contributes greatly to the continuity and success of the
enterprise. Its importance can be discussed below :
i) Facilitates administration : Sound organisation facilitates management

to relate resource flows continually to overall objectives. It provides an
appropriate platform from where management can perform the functions
of planning, direction, coordination, motivation and control.
ii) Facilitates growth and diversification : It helps in organisational

elaboration. Growth and diversification of activities is facilitated by clear
division of work, proper delegation of authority etc. As the organisation
expands to a reasonable proportion, the functional type can be replaced by
a more flexible decentralised organisation.
iii) Permits optimum use of resources : Sound organisation permits optimum

use of technical and human resources. The organisation can incorporate
the latest technological improvements like computers, electronic data
processing machines etc. It permits optimum use of human efforts through
specialisation. It also develops people by creating appropriate training and
promotion opportunities. Thus, organisation gives a company the greatest
possible strength for meeting predicted needs-changing conditions.
iv) Stimulated creativity : Specialisation provides individuals with well-

defined duties, clear lines of authority and responsibility. Sound organisation
structure enables managers to turn over routine and repetitive jobs to
supporting positions and concentrate on important issues where they can
exploit their potential better. Thus, it encourages the creativity of the people.
v) Encourages humanistic approach : People can work in team and not like
robots or machines. Organisation provides job rotation, job enlargement
and enrichment. Jobs are designed to suit human needs and are made
meaningful and interesting. Organisation adopts efficient methods of
selection, training, remuneration and promotion of employees. Proper
delegation and decentralisation, conducive working environment and
democratic and participative leadership provide higher job satisfaction to
the employees. It enhances the interaction among different levels of the
management.
Although we have discussed the importance of the organisation, a sound

organisation structure by itself does not guarantee success. According to
28 Prof. Drucker good organisation structure does not by itself produce
good performance-just as a good constitution does not guarantee great Organising
presidents, or good laws or a moral society. But a poor organisation
structure makes good performance impossible no matter how good
the individuals may be.
10.3 ORGANISATION AS A SYSTEM

Systems concept recognises that organisations are made up of components, each
of which has unique properties, capabilities and mutual relationships. It further
recognises the significance of system and emphasises that a whole composed of
various parts may be quite different from the simple sum of its parts. There are
many and varied definitions of the term 'system’. Most definitions involve such
phrases as ‘complex whole’, ‘set of entities’, ‘set of relationships’, ‘resources
network’, and ‘conglomeration of interrelated parts’. For the purpose of our
analysis, we may define system as an arrangement and set of relationships among
multiple parts operating as a whole. An organisation viewed as a system is
composed of many interdependent and interrelated parts known as sub-system.
Every sub-system is itself a system composed of smaller interrelated parts of
sub-systems.
Components of an Organisation System

An organisation as a social system consists of the following components :
Throughput
Inputs Outputs
Transformation
Fig. 10.1: Organisation as a System
a) Inputs : As depicted in Fig. 10.1, the system takes certain inputs from its
environment. These inputs are human resources, material resources, energy
and information.
b) Processor : The processor or throughput involves the utilisation of inputs

within the organisation to produce the desired outputs. A number of sub-
systems such as production, marketing, finance, personnel and research
and development must be created for processing or transformation. There
are further sub-systems within each sub-system. The individual employee
is also a sub-system and he or she is composed of multiple physical and
psychological sub-systems. Interrelatedness among all the sub-systems must
be kept in mind all the time.
c) Output : The output of an organisation may be both intended and

unintended. Intended outputs are usually labelled objectives. For instance,
high productivity is an intended objective. The output may consist of goods
and services. An unintended output may be informal relation among the
group members.
d) Management : The management component of the system is concerned

with the determination and implementation of processor activities in order
to achieve intended outputs. Managing involves planning, organising,
29
Management, Organisation staffing, directing and controlling. For managing, feedback of information
and Control
concerning the quality, quantity, cost and time of system outputs is
necessary. Standards concerning desired results must be established and
enforced by management through the feedback initiation activity. If outputs
are named improper or inadequate according to the predetermined standards,
corrective measures such as guidance and warning of workers, improvement
of planning and organising, revision of standards, etc. are initiated.
10.4 STEPS IN THE ORGANISATION PROCESS

Organising involves the following interrelated steps :
1) Determination of objectives : Organisation is always related to certain
objectives. Therefore, it is essential for the management to identify the
objectives before starting any activity. It will help the management in the
choice of men and materials with the help of which it can achieve its
objectives. Objectives also serve as the guidelines for the management
and the workers. They will bring unity of direction in the organisation.
2) Identification and grouping of activities : If the members of the groups
are to pool their efforts effectively there must be proper division of the
major activities. Each job should be properly classified and grouped. This
will enable the people to know what is expected from them as members of
the group and will help in avoiding duplication of efforts. For instance, the
total activities of an individual industrial organisation may be divided into
major functions like production, purchasing, marketing, and financing, and
each such function is further subdivided into various jobs. The Jobs then
may be classified and grouped to ensure the effective implementation of
the other steps.
3) Allotment of duties : After classifying and grouping the activities into
various jobs, they should be allotted to the individuals so that they could
perform them effectively. Each individual should be given a specific job to
do according to his ability and made responsible for that. He should also
be given the adequate authority to do the job assigned to him.
4) Developing relationships : Since so many individuals work in the same
organisation, it is the responsibility of management to lay down structure
of relationships in the organisation. Everybody should clearly know to
whom he is accountable. This will help in the smooth working of the
enterprise by facilitating delegation of responsibility and authority.
5) Integration of these groups of activities : Integration can be achieved in
all activities in following ways-(a) through authority relationships -
horizontally, vertically, and laterally and (b) through organised information
or communication systems, i.e., with the help of effective coordination
and communication. We can achieve unity of objectives, team work and
team spirit by the integration of different activities.
10.5 ORGANISATION STRUCTURE

Organisation structure may be defined as the established pattern of relationships
among the component parts of the organisation. Organisation structure in this
30
sense refers to the network of relationships among individuals and positions in Organising
an organisation. It describes the organisation framework. Just as human beings
have skeletons that define their parameters, organisations have structures that
define their parameters. It is like the architectural plan of a building. Just as the
architect considers various factors like cost, space, special features needed etc.
While designing a good structure, the managers too must look into factors like
benefits of specialisation, communication problems, problems in creating
authority levels etc., before designing the organisation structure.
The manager determines the work activities to get the job done, writes job
descriptions, and organises people into groups and assigns them to superiors.
He then fixes goals and deadlines and establishes standards of performance.
Operations are controlled through a reporting system. The whole structure takes
the shape of a pyramid. The structural organisation implies the following
activities;
i) The formal relationships with well-defined duties and responsibilities;
ii) The hierarchical relationships between superior and subordinates within
the organisation;
iii) The tasks or activities assigned to different persons and the departments;
iv) Coordination of the various tasks and activities;
v) A set of policies, procedures, standards and methods of evaluation of
performance which are formulated to guide the people and their activities.
The arrangement which is deliberately planned is the formal structure of
organisation. But the actual operations and behaviour of people are not always
governed by the formal structure of relations. Thus the formal arrangement is
often modified by social and psychological forces and the operating structure
provides the basis of the organisation.
10.5.1 Significance of Organisation Structure

The organisation structure contributes to the efficient functioning of organisations
in the following ways.
a) Clear-cut authority relationships: Organisation structure allocates

authority and responsibility. It specifies who is to direct whom and who is
accountable for what results. The structure helps an organisation member
to know what is his role and how does it relate to other roles.
b) Pattern of communication: Organisation structure provides the patterns

of communication and coordination. By grouping activities and people,
structure facilitates communication between people centred on their job
activities. People who have joint problems to solve often need to share
information.
c) Location of decision centres: Organisation structure determines the

location of centres of decision making in the organisation. A departmental
store, for instance may follow a structure that leaves pricing, sales promotion
and other matters largely up to individual departments to ensure that various
departmental conditions are considered.
31
Management, Organisation d) Proper balancing: Organisation structure creates the proper balance and
and Control
emphasises on coordination of group activities. Those more critical aspect
for the success of the enterprise may be given higher priority in the
organisation. Research in a pharmaceutical company, for instance, might
be singled out for reporting to the general manager or the managing director
of the company. Activities of comparable importance might be given,
roughly equal levels in the structure to give them equal emphasis.
e) Stimulating creativity: Sound organisation structure stimulates creative

thinking and initiative among organisational members by providing well
defined patterns of authority. Everybody knows the area where he
specialises and where his efforts will be appreciated.
f) Encouraging growth: An organisation structure provides the framework

within which an enterprise functions. If it is flexible, it will help in meeting
challenges and creating opportunities for growth. A sound organisation
structure facilitates growth of the enterprise by increasing its capacity to
handle increased level of activity.
g) Making use of technological improvements: A sound organisation

structure which is adaptable to change can make the best possible use of
latest technology. It will modify the existing pattern of authority-
responsibility relationships in the wake of technological improvements.
In short, existence of good organisation structure is essential for better

management. Properly designed organisation can help in improving team
work and productivity by providing a framework within which the people
can work together most effectively. Therefore, an organisation structure
should be developed according to the needs of the people in the organisation.
10.5.2 Types of Organisation Structure

Different types of Organisation structure can be distinguished on the basis of
arrangement of activities. Accordingly, three broad types of structural forms
are:
1) Functional,
2) Divisional, and
3) Adaptive
Functional structure: When units and sub-units of activities are created in an
organisation on the basis of functions, it is known as functional structure. Thus,
in any industrial organisation, specialised functions like manufacturing,
marketing, finance and personnel are constituted as separate units of the
organisation. All activities connected with each such function are placed in the
same unit. As the volume of activity increases, sub-units are created at lower
levels in each unit and the number of persons under each manager at various
levels get added. This results in the interrelated positions taking the shape of a
pyramid. The figure 10.2 shows the functional structure of a medium-size
organisation.
The main advantage of the functional structure of organisation is that there is

functional specialisation in each unit, which leads to operational efficiency of
32
Chief Executive Organising
Manufacturing Marketing Finance
Mechanical Electrical Advertis- Sales Accounts Audit

works works ing
Sub-units Sub-units Sub-units Sub-units Sub-units
Fig. 10.2: Functional Structure
people engaged, and the organisation as a whole derives the benefit of specialised
operations. The heads of the functional units are in direct touch with the chief
executive who can sort out inter-functional problems, if any, and also coordinate
the interrelated functions. The chief executive is also able to be in direct touch
with lower level subordinates and thereby have full knowledge of the state of
affairs in the organisation.
However, while the functional arrangement may be well suited to small and
medium size organisations, it is incapable of handling the problems of an
organisation as it grows in size and complexity. Problems of sub-units at lower
levels do not receive adequate attention of higher level managers while some of
the activities tend to be over-emphasised.
Functional units become unwieldy and difficult to manage when there are diverse
kinds of activities performed in large number of sub-units. Personal contact
between superiors and subordinates becomes rare, and flow of communication
is slow leading to problems of coordination and control.
Chief Executive
Corporate Planning Manufacturing Finance Marketing Personnel

and Control
Eastern Division Wastern Dvision Northern Division Southern Division
Accounting Personnel Accounting Personnel Accounting Personnel Accounting Personnel
Manufacturing Marketing Manufacturing Marketing Manufacturing Marketing Manufacturing Marketing
Fig. 10.3: Product Divisionalisation
Divisional structure : The divisional organisation structure is more suited to

very large enterprise particularly those which deal in multiple products to serve
more than one distinctive markets. The organisation is then divided into smaller
business units which are entrusted with the business related to different products
or different market territories. In other words, independent divisions (product
divisions or market division) are created under the overall control of the head
33
Management, Organisation office. Each divisional manager is given autonomy to run all functions relating
and Control
to the product or market segment or regional market. Thus, each division may
have a number of supporting functions to undertake.
Chief Executive
Corporate Planning Finance Personnel

and Control
Chemicals Products Division Textiles Division
Manufacturing Marketing Accounting Personnel
Manufacturing Marketing Accounting Personnel
Fig. 10.4: Territorial Divisionalisation
A divisional structure may consist of two or more product divisions or market or

territorial divisions as depicted in the Figure 10.3 and 10.4.
In a divisional structure, each division contributes planned profits to the

organisation, but otherwise operates as an independent business. The functional
units are headed by managers while the final authority vests in the divisional
manager, who coordinates and controls the activities of the various functional
units in the division. The top management of the organisation, besides providing
funds, determines the organisational goals and formulates policies.
The divisional structure is characterised by decentralisation of authority. Thus it

enables managers to take decisions promptly and resolve problems appropriate
to the initiative in matters within their jurisdiction. But such a structure involves
heavy financial costs due to the duplication of supporting functional units for
the divisions. Moreover, it requires adequate number of capable managers to
take charge of the respective divisions and their functional units.
Adaptive structure : Organisation structures are often designed to cope with

the unique nature of the undertaking and the situation. This type of structure is
known as adaptive structure. There are two types in structures.
i) Project Organisation, and
ii) Matrix Organisation.
i) Project organisation : When an enterprise undertakes any specialised,
time-bound work involving one-time operations for a fairly long period,
the project organisation is found most suitable. In this situation, the existing
organisation creates a special unit so as to engage in a project work without
disturbing its regular business. This becomes necessary where it is not
possible to cope the special task or project. Within the existing system, the
project may consist of developing a new project, installing plant, building
an office complex, etc. A project organisation is headed by a project manager
34
in charge, who holds a middle management rank and reports directly to the Organising
chief executive. Other managers and personnel in the project organisation
are drawn from the functional departments of the parent organisation. On
completion of the project they return to their parent departments.
The main advantage of such a structural arrangement is that it leaves regular

business undisturbed. It is exclusively concerned with the task of completing
the project work on time and in conformity with the standards of
performance relevant to its goal. There is better management and control
over the project activities as the project manager enjoys necessary authority
and is alone responsible for the results. But project organisations may create
problems as well. Functional managers often resent the exercise of authority
by the project manager in the functional areas and hence conflict arises.
The stability of the functional departments is disturbed by transfer of
personnel to project work from time to time. Shifting of personnel from
project to project disrupts their development in the specialised fields.
ii) Matrix organisation : This is another type of adaptive structure which

aims at combining the advantages of autonomous project organisation and
functional specialisation. In the matrix organisation structure, there are
functional departments with specialised personnel who are deputed to work
full time in different projects. Sometimes in more than one project under
the overall guidance and direction of project managers. When a project
work is completed, the individuals attached to it go back to their respective
functional department to be assigned again to some other project. This
arrangement is found suitable where the organisation is engaged in
contractual project activities and there are many projects to manager, as in
a large construction company or engineering firm.
Matrix organisation provides a flexible structure ideally suited to the

requirements of changing conditions. It facilitates pooling of specialised
and technical personnel from different functional departments, who can be
deputed to a number of projects. They acquire valuable experience of
handling varied and complex problems in project work. There is speedy
exchange of information and decision-making as they work under the
coordinating authority of project managers.
The major drawback of matrix organisation is that the personnel drawn

from specialised functional departments are subjected to dual authority,
that of the functional heads and the project managers. The principles of
unity of command is thereby sacrificed. This generates stresses and strains
in project management, because there is simultaneous engagement of the
same individual in a number of projects.
1) Which of the following statements are True and which are False.
i) The outcome of the process of organising is an ‘organisation’ consisting
of a group of people working together for the achievement of common
goals.
ii) The chain of command does not indicate the time of communication.
35
Management, Organisation iii) The formal structure of an organisation is not affected by social or
and Control
psychological forces.
iv) The divisional structure of organisation is characterised by
decentralisation of authority.
v) Project organisation is concerned with time bound one-time operations.
i) Viewed as a system, an organisation consists of ........................... parts
known as sub-systems.
ii) It is through the process of organising that the ............................... and
................. of people are determined.
iii) The structure of organisation established hierarchical relations between
........... and .....................
iv) As the volume of activity increases, a functional organisation requires
addition of sub-units at ................... units.
v) The divisional structure of organisation is more suited to .......................
enterprises.
10.6 PRINCIPLES OF ORGANISATION

The principles of organisation are guidelines for planning an efficient organisation
structure. Let us discuss the important principles of organisation:
1) Unity of objectives : An enterprise strives to accomplish certain objectives.

The organisation and every part of it should be directed towards the
attainment of objectives. Every member of the organisation should be
familiar with its goals and objectives. There must be unity of objective so
that all efforts can be concentrated on the set goals. The principle requires
objectives to be clearly formulated and well-understood.
2) Division of work and specialisation : The entire work in the organisation

should be divided into various parts so that every individual is confined to
the performance of a single job. This facilitates specialisation which in
turn leads to efficiency and quality. However, each area of specialisation
must be interrelated to the total integrated system by means of coordination
of all activities of all departments.
3) Definition of jobs : Every position in the organisation should be clearly

defined in relation to other positions in the organisation. The duties and
responsibilities assigned to every position and its relationship with other
positions should be so defined that there is no overlapping of functions.
4) Separation of line and staff functions : Whenever possible, line functions

should be separated from staff activities. Line functions are those which
accomplish the main objectives of the company. In many manufacturing
companies, the manufacturing and sales departments are considered to be
accomplishing the main objectives of the business and so are called the
line functions. Other functions like personnel, plant maintenance, financing
and legal are considered as staff functions.
36
5) Chain of command or scalar principle : There must be clear lines of Organising
authority running from the top to the bottom of the organisation. Authority
is the right to decide, direct and coordinate. The organisation structure
should facilitate delegation of authority. Clarity is achieved through
delegation by steps or levels from the top position to the operating level.
From the chief executive, a line of authority may proceed to departmental
managers, to supervisors or foremen and finally to workers. This chain of
command is also known as scalar principle of organisation.
6) Parity of authority and responsibility or principle of correspondence :

Responsibility should always be coupled with corresponding authority.
Each subordinate must have sufficient authority to discharge the
responsibility entrusted to him. This principle suggests that if a plant
manager in a multiplant organisation is held accountable for all activities
in his plant, he should not be subject to seek orders from company
headquarters for his day to day activities.
7) Unity of command : No one in the organisation should report to more

than one line supervisor. Everyone in the organisation should know to whom
he reports and who reports to him. Stated simply, everyone should have
only one boss. Receiving directions from several supervisors may result in
confusion, chaos, conflicts and lack of action.
8) Unity of direction : According to this principle, a group of activities that

have a common goal should be managed by one person. There should be
one head and one plan for a common objective of different activities. This
facilitates smooth progression towards the achievements of overall
organisational goals.
9) Exception principle : This principle suggests that higher level managers

should attend to exceptional matters only. All routine decisions should be
taken at lower level, whereas problems involving unusual matters and policy
decisions should be referred to higher levels.
10) Span of supervision : The term ‘span of supervision’ means the number of
persons a manager or a supervisor can direct. No manager should be required
to supervise more subordinates than he can effectively manage within the
limits of available time and ability. The exact number may vary according
to the nature of the job and the frequency or intensity of supervision needed.
11) Principle of balance : There should be proper balance between various

parts of the organisation and no function should be given undue importance
at the cost of others. Balance should be maintained also between
centralisation and decentralisation, span of supervision and lines of
communication, and authority allocated to department and personnel at
various levels.
12) Communication : A good communication network is essential to achieve

the objectives of an organisation. No doubt the line of authority provides
channels of communication downward and upward, still some blocks in
communication occur in many organisation. The confidence of superior in
his subordinates and two-way communication are the factors that unite an
organisation into an effectively operating system.
37
Management, Organisation 13) Flexibility : The organisation structure should be flexible so that it can be
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easily and economically adapted to the changes in the nature of business
as well as technological innovations. Flexibility of organisation structure
ensures the ability to change with the environment without disrupting the
basic design.
14) Continuity : Change is the law of nature. Many changes take place outside
the organisation. These changes must be reflected in the organisation. For
this purpose the form of organisation structure must be able to serve the
enterprise to attain its objectives for a long period of time.
10.7 SPAN OF CONTROL

The term ‘span of control’ is also known as ‘span of supervision’ or ‘span of
authority’. Simply stated it refers to the number of individuals a manager can
effectively supervise. Thus, it is expected that the span of control, that is, the
number of subordinates directly reporting to a superior should be limited so as
to make supervision and control effective. This is because executives have limited
time and ability.
It is sometimes suggested that the span of control should neither be too wide nor
too narrow. In other words, the number of subordinates should not be too large
or too small. According to some experts, the ideal span is four at higher levels
and eight to twelve at lower levels. But the number of subordinates cannot be
easily determined because the nature of jobs and capacity of individuals vary
from one organisation to another. Moreover, the actual span of supervision affects
the organisation in different ways. A wide span results in fewer levels of
supervision and facilitates communication. But it permits only general
supervision due to the limited availability of time. Narrow span, on the other
hand, requires multiple levels of supervision and hence longer time for
communication. It is more expensive and complicates the process of
communication. A narrow span, however enables managers to exercise close
supervision and control.
Factors affecting Span of Control

Although there are certain limits to the span of control, the tendency in recent
years has been to avoid specifying absolute numbers because it has been
recognised that the ideal span depends on a number of factors. Some of the
more important of these factors are discussed below :
i) Nature of the work : If the work is simple and repetitive, the span of
control can be wider. However, if the work requires close supervision the
span of control must be narrow.
ii) Ability of the manager : Some managers are more capable of supervising
large numbers of people than others. Thus for a manager who possesses
qualities of leadership, decision-making ability, and communication skill
in greater degree the span of control may be wider.
iii) Efficiency of the organisation : Organisations with efficient working

systems and competent personnel can have larger span of control.
38
iv) Staff assistants : When staff assistants are employed, contact between Organising
supervisors and subordinates can be reduced and the span broadened.
v) Time available for supervision : The span of control should be narrowed

at the higher levels because top managers have less time available for
supervision. They have to devote the major part of their work time in
planning, organising, directing and controlling.
vi) Ability of the subordinates : Fresh entrants to jobs take more of a

supervisor’s time than trained persons who have acquired experience in
the job. Subordinates who have good judgement, initiative, and a sense of
obligation seek less guidance from the supervisor.
vii) Degree of decentralisation : An executive who personally takes many

decisions is able to supervise fewer people than an executive who merely
provides encouragement and occasional direction.
It should be clear that the size of the span of control is related to numerous
variables, and no single limit is likely to apply in all cases. A variety of
factors can influence the resulting number of employees comprising the
optimum span of control in any particular organisation.
i) The chain of command is based on the .......................... principle of
organisation.
ii) Principle of correspondence suggests ................................ of authority
and responsibility.
iii) Higher level managers should be required to attend to ..........................
matters only.
iv) The organisation structure should be ................................ so that it can
be adapted to change.
v) A wide span of control results in ........................... levels of supervision.
i) A narrow span is less expensive than a wide span.
ii) Unity of command means that a manager must issue the same
instructions to all his subordinates.
iii) Personnel functions are not line, but staff functions.
iv) The size of the span of control can be broadened if there are more staff
assistants.
v) A department with all freshly recruited personnel must have a wide
span.
10.8 ORGANISATION CHART

An organisation chart shows a diagrammatic representation of important aspects
of an organisation including the major functions and their relationships. It is a
39
Management, Organisation blue print of company organisation, its functions lines of authority and way
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positions. In other words, it is a graphic portrayal of positions in the enterprise
and of the formal lines of accountability among them. It provides a bird’s eye-
view of the relationships between different departments of divisions of an
enterprise as well as the relationships between the executives and subordinates
at various levels. It enables each executive and employee to understand his
position in the organisation and to know to whom he is accountable. Thus, it is
obvious that an organisation chart has the following characteristics :
1) It is a diagrammatic presentation.
2) It shows principal lines of authority in the organisation.
3) It shows the interplay of various functions and relationships
4) It indicates the channels of communications.
The organisation chart should not be confused with the organisation structure.
An organisation chart is merely a type of record showing the formal organisational
relationships which management intends to prevail. It is, therefore, primarily a
technique of presentation. It presents diagrammatically the lines of authority
and responsibility among different individuals and positions. It may be either a
personnel chart or functional chart. Personnel organisation chart depicts the
relationship between positions held by different persons. Functional organisation
chart depicts the functions or activities of each unit and sub-unit in the
organisation.
Advantages of Organisation Chart
Following are the advantages of an organisation chart :

i) It is a tool of administration which indicates graphically to the employees
how their positions fit into the total organisation and how they relate to
each other.
ii) It shows at a glance the lines of authority and responsibility. It is a reliable,
blue print of how the positions are arranged. From it, the individuals can
have a sense of the limit of their authority, and can see who their associates
are, to whom they have to report, and from whom they are to receive
instructions.
iii) It serves as a valuable guide to the new personnel in understanding the
organisation structure and the inter relationship between its units and sub-
units.
iv) It provides a framework of personnel classification and evaluation systems.
v) It plays a significant part in organisational improvement by reflecting
inconsistencies and deficiencies.
With an overview of the total organisation depicted in the chart management
may discover unintended gaps, overlaps, etc., in the distribution of tasks and
functions.
Limitations of Organisation Chart
While the organisation chart is an important tool of management, its existence
alone does not ensure effectiveness of organisation because of the following
40 limitations :
i) Organisation chart shows only the formal relationships and fails to show Organising
the informal relations within the organisations. In modern enterprises,
informal relationships significantly effect the functioning of organisations.
ii) It shows the lines of authority, but it is notable to answer questions like the
degree of authority that can be exercised by a particular executive, how far
he is responsible for his functions, and to what extent he is accountable.
iii) It introduces rigidity in the relationships. Updating is not possible without

disturbing the entire set up.
iv) Faulty organisation chart may cause confusion and misunderstanding among
the organisational members. Moreover, it gives rise to a feeling of
superiority and inferiority which causes conflicts in the organisation.
v) It does not show the relationships which actually exist in the organisation,
but shows only the ‘supposed relationships’.
10.9 ORGANISATIONAL MANUAL

An organisation chart shows who has authority over whom, but it does not show
the extent of authority of the duties each person in the organisation is expected
to perform, except in so far as duties are implied by job titles. For this reason,
big undertakings prepare organisation manuals that include job descriptions and
other information in addition to the charts. A job description includes factual
statements of job contents in terms of its duties and responsibilities. An
organisation manual is an authoritative guide to the organisational members. It
consists of records of top management decisions, standard practices and
procedures and the description of various jobs. With such information available
in the manual, employees are not required to approach their superiors for
instruction and guidance, causing interruption of work and resulting in wastage
of time and energy of the superior and the subordinates.
10.9.1 Importance of Manual

A manual can be a valuable aid to management which more than justifies the
amount of work and money involved in its compilation. The availability of a
good manual helps individuals to determine the responsibilities of their jobs
and their relationship with other jobs in the organisation. Jurisdictional conflicts
and overlapping can be avoided. The sources and degree of authority are also
made clear. Thus, it can help to make instructions definite and shows how each
employee and his job fits into the total organisation and how he can contribute
to the achievement of organisational objectives as well as maintain good relations
with other employees. A reference to the manual can quickly remove
misunderstandings. It relieves managers the necessity of repeating the same
information time and again. It provides uniformity and consistency of procedures
and practices. It facilitates training of new employees as it contains in writing
the established routines and practices with respect to the jobs. Since manuals
are revised periodically or after every major changes, they serve as effective
refreshers for employees who have been on the payroll for some time. Both
delegation of authority and management by exception are promoted by the use
of manuals.
41
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10.9.2 Types of Manual
Manuals may be prepared by an organisation with different contents and purposes
in view, such as, (1) Policy manual, (2) Operations manual, (3) Organisation
manual, (4) Rules and Regulations manual, and (5) Departmental manual. These
are discussed below :
1) Policy manual : It is prepared to state the policies of the enterprise. It is a

basic guide to action. Policy manual describes the overall framework within
which activities are to take place and thus reveals the broad courses of
managerial action likely to take place under certain conditions. It contains
decisions, resolutions and pronouncements of the management of the
enterprise.
2) Operations manual : The purpose of manual is to inform the employees

of established methods, procedures and the desired standards of
performance of work. It lists the authorised steps and supplements them
by the use of diagrames sketches, charts, etc. of each department and
division.
3) Organisation manual : It describes the organisational setup indicating

the duties and responsibilities of various departments and their respective
sub-divisions. It is a portrayal of the formal chain of responsibilities and
authorities among different persons working in the enterprise. The levels
of authority and responsibility of each executive is indicated in the manual
so as to avoid conflicts in the organisation. Promotional charts may be
included in the organisation manual showing the possible promotional
avenues throughout the entire organisation.
4) Rules and regulations manual : This manual provides information relating
to the operating rules and employment regulations. It contains regulations
governing hours of work, timings, procedure for taking leave, etc. It is
actually a handbook of employment rules. It may also indicate the various
benefit plans for employees including rules regarding the use of library,
cafeteria, recreation club, etc.
5) Departmental manual : This manual includes procedures to be adopted
with regard to departmental work. It gives in detail the internal policies
and operating rules of the department. It shows with the help of charts and
diagrames the inter-departmental relationships. For instance, the filing
manual contains the organisation of filing department responsibilities of
various jobs, relationships between the employees, and the standard
procedures for different operations. Similarly, other departments may also
have such manuals.
10.9.3 Advantages of Manual

1) It contains procedural rules and regulations and various other information
in a written form. These need not be explained to the employees time and
again.
2) It provides a ready reference with regard to all important decisions relating
to the internal organisation of the enterprise.
42
3) It presents jurisdictional conflicts by clear indication of the sources of Organising
authority.
4) It enables new employees to learn the standard procedures and practices in
the shortest possible time. They have a clear understanding of the
responsibilities of their jobs and their relationship with other jobs.
5) It enables quick decisions as instructions and policies are stated in definite

terms.
10.9.4 Drawbacks of Manual

1) Small enterprises cannot afford to have a manual because its preparation is
costly and a time-consuming process.
2) Manuals may cause rigidity of operations in the organisation by putting

the standard procedures and practices in writing. It leaves little scope for
individual initiative and discretion.
3) Manuals may put on record those relationships which no one would like to
see exposed.
10.10 FORMAL AND INFORMAL ORGANISATIONS

Formal organisation is a planned structure which represents the officially
established pattern of relationships among individuals, groups, sections, units,
departments and divisions so as to accomplish the goals of the enterprise.
Typically, it is represented by a chart and set forth in organisation manuals,
position descriptions, and other formalised documents. The formal organisation
provides a broad framework and delineates certain prescribed functions and the
relationships between them. Formal organisation may be defined as a system of
consciously coordinated activities of two or more persons towards a given
objective. It is a group working together cooperatively under authority toward
goals that mutually benefit the participants and the organisation. Moreover, stable
and consistent relationships promote order and facilitate planning and controlling
functions. Formal organisation may also be defined as (i) the pattern of formal
relationships and duties, the organisation charts, job descriptions and positions
guides; and (ii) formal rules, policies, work procedures and similar devices
adopted by management to guide employee behaviour in certain ways within
the structure of formal relationships.
The formal organisation facilitates the determination of objectives and policies.

Communication, delegation of authority, and coordination take place according
to a prescribed pattern. In fact, formal structure restricts and circumscribes the
area of operations of individuals working within an organisation. Informal
organisation refers to relationships between individuals in the organisation based
on interest, personal attitudes, emotions, prejudices, likes, dislikes, physical
location, similarity of work, etc. The informal organisation comes into existence
because of the limitations of the formal structure. It represents natural grouping
of people in working situation. The birth of small groups in an organisation is a
natural phenomenon. The informal groups may also overlap because an individual
may be a member of more than one informal group in many cases. Informal
groups came into being to support and supplement the formal organisation indeed,
43
Management, Organisation the formal and informal organisations are inextricably interlinked. The difference
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between the two aspects of organisational life is only analytical and it should
not be given undue emphasis.
10.10.1 Difference between Formal and Informal

Organisations
The formal and informal organisations differ from each other in the following
respects :
1) Origin: Formal organisations are created by conscious managerial

decisions. But informal organisations arise spontaneously within the formal
organisation because of the natural tendency of the individuals to associate
and interact. Management has no hand either in the emergence or abolition
of informal groups.
2) Purpose: Formal organisations are created for realising certain well-defined

objectives. But informal organisations are created by organisational
members for their social and psychological satisfaction.
3) Activities: Activities in case of formal organisation are differentiated and

integrated around the objectives of the enterprise and are formalised into
work-units or departments on a horizontal basis. In case of informal
organisation, there are no specific activities. They arise from time to time
as a result of interactions and sentiments of the individuals. Informal groups
may be based on common values, language, culture or any other factor.
4) Structure: Formal organisation is hierarchical, pyramid shaped in structure

with well defined positions, roles and superior-subordinate relationships.
It involves enforcement of organisational order through a set of policies,
procedures and rules, emphasises on status differentiation based on
authority, upward and downward oriented communication system, etc. On
the other hand, informal organisation is non-hierarchical; it looks like a
complicated social network of interpersonal relationships. Informal
organisation is loosely structured, with only unwritten norms of behaviour
enforced by consent. Communication is informal and multidimensional.
There are no rigid status differentials.
5) Membership: In a formal organisation every individual belongs to one

work group only and works under one superior. But in case of an informal
organisation, a person can be a member of more than one group, according
to his choice. He may be a leader in one group and a follower in another.
There is no rigidity about group membership.
6) Orientation: In case of formal organisation, values, goals and tasks are

dominantly economic and technical, and they concern productivity,
profitability, efficiency, survival and growth. But in case of informal
organisation values, goals, and tasks are predominantly psycho-social,
centred around individual and group satisfaction, affiliation cohesiveness
and friendship.
7) Norms of behaviour: In a formal organisation individuals are required to

behave in the prescribed manner in their work situation. They are expected
44
to behave in a rational manner. Deviations from the standard are dealt with Organising
according to the organisational rules and regulations. There is also a system
of rewards and punishments. But in case of informal organisation, individual
behaviour and group behaviour influence each other. Moreover, behaviour
is more natural and socialised. Informal groups develop their own norms
of behaviour and system of rewards and punishments. Rewards take the
form of a continuous membership of the group, social status, recognition
etc. While punishments include censure by the groups, isolation from the
group, etc.
10.10.2 Characteristics of Informal Organisation

In the informal organisation, authority-responsibility relationship, channels of
communication, pattern of coordination, etc. are not predetermined. Such as,
organisation operates without any structured set up. The informal organisation
interacts with formal organisation quite frequently. It affects and is affected by
the formal organisation. Following are the characteristics of the informal
organisation :
1) Authority: There is a network of relationships in an informal organisation
which may cut across the formally prescribed pattern of relationships. An
informal organisation has its own code of conduct, system of
communication, and system of reward and punishment. The authority in
an informal organisation is personal rather than positional as in case of
formal organisation. Power in informal organisation is earned or given by
group members, rather than delegated; therefore, it does not follow the
official chain of command. It is more likely to come from peers (equals)
than from superiors in the formal hierarchy; and it may act across
organisational lines into other departments. It is usually more unstable than
formal authority, since it is subject to the sentiments of people. Because of
its subjective nature, informal organisation cannot be controlled by
management, in the way as formal organisation.
2) Objectives: Groups evolve their own goals reflecting their own special
interests. Group members are dedicated to group goals. Group cohesiveness
results in the group acting in a unified manner. This cohesiveness is the
result of the degree to which the group goals help the satisfaction of
individual needs. Therefore, the group objectives should be related to the
individual needs of the members of the group.
3) Communication: Informal organisation comes into existence because of
the deficiencies of the formal channels of communication. The formal
channels of communication may be inadequate and they may be slow. The
need for speedier communication may give birth to informal channels of
communication. Informal communication is very fast but the greatest danger
is that it may give rise to rumours. Rumours may prove to be detrimental
to the interests of the organisation.
4) Leadership: The informal group has its own leader. An informal leader
may not be the superior under whom the group members are working. An
informal group leader performs the following functions: (i) he facilitates
consensus among the group members, (ii) he initiates action, and (iii)
provides a link with the outside world. If the formal leader is able to perform
these functions, he may be accepted as an informal leader also. Workers 45
Management, Organisation will go to him for their personal problems, counselling, etc. The important
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factors which determine informal leadership are age, seniority, work
location, technical competence, etc. It may be noted that persons who
emerge as informal leaders are perceived by other group members as being
the best people who can satisfy the goals of the group. The group may
have a number of leaders for different purposes. For instance, the group
may have a task leader whose function is to drive the group towards its
goals and a human relations leader who helps in promoting co-operation
among the members.
10.10.3 Functions of Informal Organisation

Informal organisation is a psycho-social system and helps the organisation in
the following ways.
1) Filling in gaps in managerial abilities : Informal organisation may fill in
gaps if any in the abilities of managers. For example, if a manager is weak
in planning his subordinates may help him informally in such a situation.
2) Solving work problems : Informal organisations help in solving work
problems of members. It allows sharing knowledge and taking decisions
which may affect a number of jobs.
3) Better coordination : Informal groups evolve short cuts and eliminate
red-tapism. They facilitate smooth flow of information and quick decision
making. All these ensure better coordination among various individuals
and departments.
4) Channel of communication : Informal groups often fill up communication
gaps which might arise in the organisation. Informal communication cuts
across the hierarchical and departmental boundaries and transmits
information with greater speed. Management can use informal channels,
to share information with the workers and get their reaction to management
proposal.
5) Restraint on managers : Informal groups do not allow managers to cross
the limits of authority. They resist them from exercising unlimited power
and correct using their power unjudiciously.
6) Better relations : A manager can build better relations with his subordinates
through informal contacts. He can consult the informal leaders and seek
their cooperation in getting the things done from the workers.
7) Norms of behaviour : Informal groups develop certain norms of behaviour
which differentiate between good and bad conduct and between legitimate
and illegitimate activities. These bring discipline and order among the
employees of the organisation.
8) Developing future executives : Informal groups recognise talented workers
as their leaders. Such leaders can be picked up by the management to fill
vacancies at the junior executive level in future.
10.10.4 Problems of Informal Organisation

Informal groups have negative aspects too. They may create problems for the
organisation as outlined below :
46
1) Negative attitude of informal leaders : The informal leader may turn out Organising
to be a trouble shooter for the organisation. In order to increase his influence,
he may work against the policies of management, and manipulate the
behaviour of his followers. Thus, he can be a source of conflict between
the management and workers. He may induce the followers to work against
the interests of the organisation. If such a leader is promoted to the rank of
an executive, he may prove to be work shirker and an arrogant and autocratic
boss.
2) Conformity: The informal group exerts strong pressure on its members

for conformity. The members may become so loyal to their group that
following the group norms become a part of their life. This implies that
members become subject to wilful control of the group leader who may
lead the group toward selfish ends. This may lead to dilution of the effect
of organisational policies and practices on the group members.
3) Resistance to change : Informal groups generally have a tendency to resist

change. Change requires new skills but groups want to maintain status
quo. Sometimes, groups react violently to the changes proposed by
management. This creates obstructions in implementing new ideas and
thus organisation’s growth.
4) Rumour: Informal communication may give rise to rumours which may

create conflict and misunderstanding among the people. Rumour tends to
change as it passes from person to person. Its general theme may be
maintained, but not its details. The rumour gets twisted and distorted always
when it passes from one mouth to another. It may originate due to
employee’s anxiety, insecurity and poor communication of the organisation.
Rumours may prove very dangerous for the organisation.
5) Role conflict : Every member of the informal group is also a member of

the formal organisation. Sometimes role conflict may arise because the
ideas, expectation and requirement of both the organisation may be opposite
to each other. For example an individual wants to follow the formal
instructions of his boss, he may be compelled by the informal leader to
follow informal norms. Thus organisational interests are likely to suffer in
case of conflicts between formal and informal roles.
i) An organisation chart indicates the lines of communication as well as
lines of authority.
ii) Both formal and informal relationships are depicted in the organisation
chart.
iii) The existence of organisation manual totally relieves managers of their
responsibility of issuing instructions to subordinates.
iv) The formal organisation is created by conscious managerial decision.
v) Informal groups in an organisation consist of members drawn from
the same department.
47
Management, Organisation 2) Fill in the blanks :
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i) Organisation manuals enable employees to quickly learn the standard
.................. and .......................
ii) An organisational chart shows the ............. . . . . . . . . . . . . . of authority
but not the ...................... of authority with respect of the various
managerial positions.
iii) Formal organisation is typically reflected in the organisational
................
iv) Informal organisation cuts across ................................................ and
...................boundaries.
v) In a formal organisation every individual belongs to only one
..................
10.11 LET US SUM UP

As a function of management organising refers to the process involving the
identification and grouping of activities to be performed and defining and
establishing the authority responsibility relationships. This enables people to
work most effectively together in achieving the enterprise objectives. The
outcome of the organising process is the ‘organisation’ consisting of a group of
people working together for the achievement of one or more common goals.
The characteristics of an organisation thus are: Willingness of a group of people
to willingly contribute their efforts towards a common endeavour, division of
work, common purpose, vertical and horizontal relationships, chain of command
and dynamic functioning.
An organisation provides the framework within which co-operative work can
be carried out without friction, and people can perform their tasks more
effectively. Organising is the process by which managers bring order out of
chaos and create proper conditions for effective team-work. An organisation
viewed as a system is composed of many interdependent and interrelated parts
known as sub-systems. As a social system, components of an organisation consist
of: inputs of human and material resources along with information, the processor
(also known as throughput); and output consisting of goods and services.
Organising involves: (i) determination of objectives, (2) identification and
grouping of activities; (3) allotment of duties; (4) developing relationships. The
structure of organisation refers to the pattern of relationships formally established
by top-management among various parts or components of the organisation.
Three different types of organisation structure can be distinguished on the basis
of arrangement of activities as 1) Functional, 2) Divisional, 3) Adaptive.
Principles of organisation which have been enunciated by management experts,
are guidelines for planning an efficient organisation structure. These include:
(a) unity of objectives; (b) division of work and specialisation, (c) definition of
jobs; (d) separation of line and staff functions; (e) chain of command; (f) principle
of correspondence; (g) unity of command; (h) exception principle: (i) span of
supervision; (ii) principle of balance; (k) communication; (1) flexibility; and
(m) continuity.
48
Span of control refers to the number of individuals a manager can effectively Organising
supervise. The ideal span depends on a number of factors like nature of work,
ability of the manager, staff assistance, ability of subordinates, etc.
An organisation chart gives a diagrammatic view of the major functions, their

relationships, as well as the positions and formal lines of accountability among
them. It serves as a valuable aid to management and personnel. An organisation
manual consists of records of top management decisions, standard practices and
procedures, and job descriptions in terms of duties and responsibilities.
Formal organisation is a planned structure which represents the officially

established pattern of relationships among individual groups, sections, units,
departments and divisions. Informal organisation refers to relationship between
individuals based on their social and psychological needs.
10.12 KEY WORDS

Chain of Command : The line of authority running from the top to the
bottom of the organisation.
Departmentation : Grouping of various activities on some well
defined basis.
Formal Organisation : A planned structure which represents the
officially established pattern of relationship
among individuals, groups, sections, units,
departments and divisions.
Informal Organisations : A network of relationship among the participants
of an organisation which arises spontaneously
on the basis of social and psychological needs.
Organisation Chart : A graphical portrayal of positions in the
enterprise and of the formal lines of
accountability among them.
Organisational Manual : A recorded document containing job
descriptions and other information in addition
to the organisation chart.
Organisation Structure : The authority and responsibility relationships
between various positions in the organisation
showing who reports to whom.
Span of Control : The number of subordinates a manager can
effectively supervise.
Structure : A framework of relationship among parts.
Systems : An arrangement and set of relationship among
multiple parts operating as whole.
Unity of Command : The principle of every subordinate being under
one supervisor.
49
and Control 10.13 ANSWERS TO CHECK YOUR PROGRESS
A) 1. i) True, ii) False, iii) False, iv) True, v) True
2. i) Interrelated, ii) tasks, responsibilities iii) superior, subordinates,
iv) lower, v) large.
B) 1. i) Scalar, ii) parity, iii) exceptional, iv) flexible, v) fewer.
2. i) False, ii) False, iii) True, iv) True v) False.
C) 1. i) True, ii) False, iii) False, iv) True, v) False
2. i) Procedures, practices, ii) line, extent, iii) chart, iv) hierarchical,
departmental v) workgroup.

1) What do you understand by organising? What are the important principles
of sound organisation?
2) Explain the components of organisational system.
3) Discuss the important steps involved in organisation process.
4) Under what circumstances is a divisional structure of organisation superior

to the functional structure? Compare their relative merits.
5) What do you mean by span of control? Discuss factors affecting span of

control.
6) “Organisation chart provides a broad picture of positions of authority and

their relationships in the organisation structure”, Explain this statement
and point out limitations of organisation chart.
7) What is meant by organisational manual? What are its uses? What

information should it contain?
8) Beneath the cloak of formal relationship in every institution there exists a

more complex system of social relationships, called the ‘informal
organisation’. Elucidate this statement and explain the nature of informal
organisation.
9) Distinguish between formal and informal organisation. What should be the

attitude of management towards informal organisation?
10) Write notes on: a) Organisation structure b) Project organisation.
university. These are for your practice only.
50
Departmentation and Forms
UNIT 11 DEPARTMENTATION AND FORMS of Authority Relationships
OF AUTHORITY RELATIONSHIPS
Structure
11.0 Objectives
11.1 Introduction
11.2 Definition of Departmentation
11.3 Need for Departmentation
11.4 Bases of Departmentation
11.4.1 Function
11.4.2 Product
11.4.3 Territory
11.4.4 Customers
11.4.5 Process or Equipment
11.5 Choosing a Basis of Departmentation
11.6 Benefits of Departmentation
11.7 Authority Relationships
11.7.1 Line Organisation
11.7.2 Line and Staff Organisation
11.7.3 Line Organisation vs. Line and Staff Organisation
11.7.4 Functional Organisation
11.7.5 Line Organisation vs. Functional Organisation
11.8 Let Us Sum Up
11.9 Key Words
11.0 OBJECTIVES
explain the concept and nature of departmentation
describe and evaluate different bases of departmentation
make an assessment of the significance and limitations of departmentation
enumerate and outline the important forms of authority relationships in an
organisation
suggest measures for harmonising relationships among different line and
staff position in any organisation.
11.1 INTRODUCTION
Grouping homogeneous activities into one organisational unit on the basis of
special and continuous nature of activities is called departmentation. The
51
Management, Organisation appropriate division of organisational activities into departments for the purposes
and Control
of administration has been one of the fundamental concerns of management. In
the previous unit, you have learnt about the nature of organisation, its elements,
structural forms, the usefulness of organisation chart and manuals, span of control,
and about informal and formal aspects of organisational relations. In the present
unit, you will learn the bases of departmentation and selecting a suitable basis
of departmentation. You will further learn the forms of authority relationship
and their merits and demerits.
11.2 DEFINITION OF DEPARTMENTATION

Departmentation may be defined as the process of forming departments or
grouping activities of an organisation into a number of separate units for the
purpose of efficient functioning. This term vary a great deal between different
organisations. For example, in business undertakings, terms are division,
department and section; in Government, these are called branch, department
and section; in military, regiment, battallion, groups and company.
The impact of departmentation is a delineation of executive responsibilities and

a grouping of operating activities. Every level in the hierarchy below the apex is
departmentalised and each succeeding lower level involves further departmental
differentiation.
11.3 NEED FOR DEPARTMENTATION

The necessity of departmentation arises because of the anxiety on the part of
management to achieve the organisational goals through coordinated efforts of
the individuals working in the organisation. More specifically it is necessitated
by the following considerations.
i) Departmentation permits an organisation to take advantage of specialisation.
ii) Departmentation enables each person to know the role he is expected to
play in the total activities of the company.
iii) Departmentation facilitates communication, coordination and control and
contributes to the organisational success.
iv) Departmentation provides a platform around which the loyalties of
organisational members may be built.
v) It enables a manager to locate the sources of information, skills and
competence to take certain vital managerial decisions.
11.4 BASES OF DEPARTMENTATION

Followings are the bases used for the departmentation of the business enterprises.
11.4.1 Function
The most common form of grouping activities prevalent almost in every enterprise
is the functional departmentation. The word function refers to the principal
52
activities of an enterprise. It may be defined as any task involved in the Departmentation and Forms
of Authority Relationships
performance of activities of an enterprise that can be clearly distinguished from
any other task. In a manufacturing organisation, the important functions are
production, sales, finance, and personnel.
Functional departmentation may also be carried out at the lower levels of the
organisation. For example, activities in the marketing department may be
classified and grouped into marketing research, sales and advertising. In other
words, the process of functional differentiation may take place through successive
levels in the hierarchy. The process can continue as long as there exists a sound
base for further differentiation.
In the following figure this has been divided in to Production, Marketing and
Finance, function
President
Marketing
Production Manager Finance
Manager Manager
Advantages of functional departmentation: The advantages of functional

departmentation are as follows:
i) It is the most logical and natural form of departmentation.
ii) It brings about specialisation which ensures optimum utilisation of
manpower and other resources.
iii) It lays emphasis on each and every activity. Every department makes its
contribution to the organisation’s objectives.
iv) It facilitates delegation of authority and thus reduces the burden of the
chief executive.
v) Specialists can be employed to perform various activities requiring
specialised knowledge.
Disadvantages of functional departmentation: The disadvantages of functional

departmentation are as follow:
i) There is too much emphasis on specialisation which hampers the broadening
of outlook of various people. This might also discourage the organisation.
They may think that they are insignificant parts of the total organisation.
ii) There may be conflicts between different departments. For instance, delivery
dates promised by the sales department may not be honoured by the
production department.
iii) There may be difficulties in coordination and control of the activities of
different departments.
iv) Functional specialisation may reduce costs through higher efficiency but
such saving may not be sufficient to compensate for increased expenses
resulting through departmentation. Managers may try to build their
functional empires. 53
and Control
11.4.2 Product
In the case of product departmentation, departments are created on the basis of
products. Each department is known as a Division. Product departmentation is
useful when product expansion and diversification, and the engineering,
manufacturing and marketing characteristics of the product are of primary
concern. Under the product diversification, all activities related to a product
line are grouped together under the direction of semi-autonomous divisional
manager. The divisional manager has the authority to develop the product
according to the nature of demand in the market. It is used when the product is
relatively complex and a great deal of capital is required for plant and equipment
such as in automobile and electronic industries. For instance, a big company
may have metal division, chemical division and plastic division, as shown in the
following figure.
Board of Director
Managing Director
Finance Operations Marketing Personnel
Plastic Metals Chemicals

Division Division Division
Production Marketing Research Accounting Personnel
Advantages of product departmentation : Following are the advantages of

product departmentation:
i) Product departmentation reduces the coordination problems which are
created under functional departmentation. There is integration of activities
relating to a particular line of product. It facilitates product expansion and
diversification.
ii) It focuses attention on each product line.
iii) It leads to specialisation of physical facilities on the basis of products which
results in economy.
iv) It is easier to evaluate and compare the performance of various product
divisions.
v) It keeps problems of production isolated from those of others.
Disadvantages of product departmentation : The disadvantages of product

departmentation are given below :
i) There is duplication of physical facilities and many functions. Each products
division maintains its separate facilities and functional personnel.
ii) Advantages of centralisation of certain activities like accounting, financing,
marketing, etc., cannot be achieved.
54
iii) There may be under-utilisation of plant capacity if the demand of product Departmentation and Forms
is not sufficient.
iv) It may be difficult for a company to adapt itself to certain changes in demand
technology, etc.
11.4.3 Territory
Departmentation by territory takes place when a company is organised into a
number of divisions located in different areas. It is also known as geographical
departmentation. Territorial departmentation is specially useful for banks,
insurance companies, transport companies, etc. They can divide their activities
into zones, divisions and branches. For instance, Life Insurance Corporation of
India has followed territorial departmentation in the organisation of its activities.
The organisation chart of Life Insurance Corporation is given below :
LIC
Head Office
(Bombay)
Eastern Central Northern Southern Western

(Calcutta) (Kanpur) (Delhi) (Madras) (Bombay)
New Delhi Jalandher Chandigarh Ajmer
Branch Branch Branch Branch

1 2 3 4
Advantages of territorial departmentation: The adventages of territorial
departmentation are as follow:
i) It helps in achieving the benefits of local operations. The local managers
are most conversant with their needs and those of their customers. They
can adapt to the local situation with speed and accuracy.
ii) A marketing division can meet local demands more effectively.
iii) There is better coordination of activities in a locality through the setting of
a regional division.
iv) It facilitates the expansion of business in various regions.
v) It is beneficial from the point of view of country’s economic development.
Disadvantages of territorial departmentation: The disadvantages of territorial
departmentation are as follows :
i) There is duplication of physical facilities. It leads to uneconomical
operations.
ii) There may be problem of integration between various regional offices.
iii) There may be lack of talented personnel to take charge of regional
departments.
iv) There will also be problems in providing centralised services to various
departments which are located in different regions.
11.4.4 Customers
Under this basis of departmentation, separate departments are created to serve
the needs of particular customers. Such an organisation helps managers to satisfy
the customer’s requirement more conveniently and successfully. A marketing 55
Management, Organisation organisation may group its activities according to the classes of customers served
and Control
by it, depending on their volume of demand, languages and liking. For example,
a departmental store may have childrens department, ladies department, gents
department, each catering to the various requirements of different classes of
customers. Another organisation may organise its marketing activities into
wholesale, retail and export as shown below.
General Manager
Finance Purchase Marketing Production Personnel
Wholesale Retail Export
Advantages of customer departmentation: The adventages are as follow:

i) An organisation can consider the needs of baffling variety of customers.
ii) Such organisation can concentrate on clearly identified and potential
customers.
iii) It is easier to develop rapport with attractive and resourceful customers.
iv) It is highly useful in customer-oriented organisation.
Disadvantages of customer departmentation: The disadvantages are as follow:
i) It is almost impossible to consider all the customers, their interests, habits
and customs.
ii) Departmentation by customer leaves coordination problems between sales
personnel and production people.
iii) Organisation may discriminate between rich and poor customers.
11.4.5 Process or Equipment

Under this departmentation, activities are grouped on the basis of various
manufacturing processes. In this process, similar types of labour and equipment
are brought together. A manufacturing enterprise may departmentalise its
activities on the basis of production process of equipment involved. For example,
a textile organisation may organise its departments into spinning, weaving,
calendering and dyeing as shown below. Similarly, a printing press may consist
of composing, proof-reading, printing and binding departments. This type of
departmentation may also be followed in engineering and oil industries. The
justification of a separate department around equipment is that it is not always
possible to install a costly equipment in every department which needs its use.
Moreover, skilled personnel are required to operate the equipment.
General Manager
(Textiles)
Spinning Weaving Calendering Dyeing
Advantages of process departmentation: The adventages are as follow:

i) This departmentation is very helpful when machines or equipment used
56 require special operating skills.
ii) It enables the organisation to gain the advantages of specialisation, optimum Departmentation and Forms
maintenance of equipment and resources.
iii) It is better suited to manufacturing companies.
Disadvantages of process departmentation: The disadventages are as follow:
i) Departmentation by process makes coordination of various functions and
products difficult.
ii) It results in conflicts between different managers at different levels.

i) Departmentation does not take place at all levels of the hierarchy in an
organisation.
ii) The process of departmentation on functional basis is restricted to the
top and middle levels of organisational hierarchy.
iii) There is duplication of facilities and functions in the case of both
product and geographical departmentation.
iv) Customers cannot be the basis of departmentation if a firm deals in
only a single product.
v) Process departmentation is neither beneficial nor possible in all types
of enterprises.
2) Fill in the blanks selecting the most appropriate words from those given
within brackets.
i) Departmentation enables the chief executive to locate the source of
.............. for decision making. (raw materials/information/finished
products)
ii) Functional departmentation may reduce ....................... ..........
(efficiency/costs/authority of managers)
iii) Expansion of business in various regions is facilitated by . . . . . . . . . .
. . . . . . . . . . . . . departmentation. (product/process/territorial)
iv) Textile mills generally organise departments on the basis of ....................
(customers/territories/process)
v) Product departmentation reduces ........................... problems which are
created under functional departmentation. (decision-making/control/
coordination)
11.5 CHOOSING A BASIS OF DEPARTMENTATION

The following factors should be kept in mind while selecting a suitable basis of
departmentation.
1) Specialisation: Specialisation brings about internal economies in the
business. Therefore, it is an important consideration while choosing a
particular basis of departmentation. The management should group various
activities into units in such a way which leads to specialisation of work.
Overspecialisation should be avoided because it may result in loss of
motivation among the personnel. 57
Management, Organisation 2) Economy: This factor is of great relevance to the number of departments
and Control
to be created. Creation of a new department increases various costs. This is
because the new department requires additional personnel, space and
equipment. Therefore, management should see that the departments created
make the best possible use of these factors and maximum economy is
achieved by creating the departments.
3) Appreciation of key areas: All the important areas of the business on
which the success of the business depends must be given proper weightage.
That is why, in practice, function is taken at the top of the organisation
structure. Separate departments are created for important functions like
production, financing, marketing etc. Sometimes, local conditions are very
important. Therefore, the management should give necessary attention to
the local conditions at the time of determining the basis of departmentation.
4) Minimum conflicts: The jurisdiction of the departments should be clearly
laid down in order to avoid conflict among them. The authority of the
managers of different departments should be clearly specified.
5) Coordination: The basic purpose of departmentation is the achievement
of organisational goals. Coordination in the operations of different
departments is essential to achieve the organisational goals. Therefore,
departmentation should always facilitate coordination in the organisation.
6) Control: Control is an important function of management by which it guides

and checks the activities of different departments and personnel. The selected
basis of departmentation should ensure effective control to achieve the
organisational goals more economically and efficiently. Departmentation
should make easier for top management to ensure performance and to hold
people accountable for results.
7) Human consideration: Departmentation should not only consider the

technical aspects of the organisation but it should also give due attention to
the human factor. The existence of informal groups, cultural pattern, value
system, etc., should be given due weightage at the time of grouping the
personnel.
In short, whatever may be the basis, the departmentation should be directed

to promote the attainment of organisational objective economically and
efficiently. Naturally, managers concerned with taking such a decision will
consider the relative advantages and disadvantages of various types of
departmentation. In practice, in many cases, it is not possible to follow a
single basis in grouping the activities throughout the organisation. Most of
the big organisations follow schemes of departmentation that are a composite
of several basis. Thus, there is no ideal pattern to suit all occasions and
situations. Therefore, the management has to be very careful and use high
degree of imagination at the time of choosing a pattern of departmentation.
Once the pattern is chosen, it is very difficult and costly to switch over to
another pattern.
In India, the most commonly followed basis of departmentation at the top

level of the organisation is functional departmentation. At the intermediate
and lower levels, other bases are used wherever further functionalisation is
not feasible.
58
11.6 BENEFITS OF DEPARTMENTATION of Authority Relationships
Departmentation helps in achieving the following benefits :

1) Specialisation: Departmentation leads to the benefits of specialisation as
various organisational activities are grouped according to their relation
with the specific functions or objectives. Every departmental manager
specialises in the tasks assigned to him.
2) Administrative control: Departmentation helps in effective managerial
control because the standards of performance for each and every department
can be laid down precisely. Every department has a specific objective.
This also facilitates keeping expenditure within limits.
3) Fixation of responsibility: Since organisation work is divided into
manageable units and authority and responsibility are precisely defined, it
is easier to fix the accountability of different managers for the performance
of various tasks.
4) Freedom or autonomy: The departments created through departmentation
are semi-autonomous units. Their heads are given a sufficient degree of
authority to run their departments. This increases the efficiency of the
departments.
5) Development of managers: Departmentation helps in the development of
managerial personnel by providing them opportunities to take independent
decisions and initiative. The executives can develop themselves for
promotion to higher jobs.
11.7 AUTHORITY RELATIONSHIPS

Creation of an appropriate structure is indispensable for any organisation.
Organisation structure represents the hierarchical arrangement of various
positions in the enterprise. It helps in allocating authority and responsibility
formally. It also lays down the pattern of communication and coordination in
the enterprise. Thus, the need for clear-cut authority/responsibility relationships
has led to three different forms of administrative organisation as follows :
1) Line organisation/authority
2) Line and staff organisation/authority, and
3) Functional organisation/authority.
11.7.1 Line Organisation

It represents a direct vertical relationship through which activity flows. It is also
known as scalar or military organisation. The line of authority flows from top to
bottom throughout the organisation. The quantum of authority is highest at the
top and reduces at each successive level down the hierarchy. Every person in
the organisation is in the direct chain of command as shown below. The line of
authority consists of an uninterrupted series of authority steps and forms a
hierarchical arrangement. The line of authority not only becomes the avenue of
command to operating personnel, but also provides the channel of
communication, coordination and accountability in the enterprise.
59
and Control Board of Directors
Managing Director
Divisional Manager (Textiles) Divisional Manager (Chemicals)
Assistant Assistant
Divisional Divisional
Manager Manager
(marketing) (production)
Foreman Foreman Foreman
(Workers)
Merits of line organisation: Following are the merits of line organisation:

i) It is very simple to establish and can be easily understood by the employees.
ii) There is a clear-cut identification of authority and responsibility relationship.
iii) It ensures better discipline in the enterprise because every individual knows
to whom he is responsible.
iv) It facilitates prompt decision making because there is definite authority at
every level. An executive cannot shift his decision-making to others nor
can the blame be shifted.
v) It facilitates unity of command and thus conforms to the scalar principle of
organisation.
Demerits of line organisation : Following are the demerits of line organisation:
i) There is concentration of authority at the top. If the top level executives are
not capable persons, the enterprise will not be successful.
ii) With growth, the line organisation makes the top executive overloaded
with work.
iii) There is practically no communication from bottom upward because of

concentration of authority at the higher levels. If superiors take wrong
decision, it would be carried out without anybody having the courage to
point out its deficiencies.
iv) Line organisation is not suitable in a big organisation because there is lack
of specialisation. Many jobs create problems of their own which may not
be within the competence of the superior and require handling by specialists.
Despite these drawbacks, the line organisation is very popular. Particularly

in small organisations where there are fewer levels of authority and a small
number of people. A modification of this structure is line and staff
organisation under which specialists are attached to line executives to
provide them specialised assistance on matters of great importance to the
organisation.
60
11.7.2 Line and Staff Organisation Departmentation and Forms
In line and staff organisation, line authority moves down in the same manner as
in the line organisation, but in addition, specialists (known as ‘staff’) are attached
to line managers to advise them on important matters. Those specialists stand
ready to advise and assist line men as and when required, which enable the line
officials to carry out their activities better. The staff officers do not have any
power of command in the organisation as they are employed only to provide
advice to the line officers. Staff means a supporting function intended to help
the line managers. In most organisations, the use of staff can be traced to the
need for helping handling details, gathering data for decisions and offering advice
on specific managerial problems. Staff investigates, supplies information and
makes recommendations to managers who take decisions. Line and staff structure
is shown below.
Managing Director
Public Relation Secretary

Officer
Production Marketing Finance

Manager Manager Manager
Chief Production Chief
Quality Marketing Chief Budget
Engineer
Control Research Control
Assistant Assistant
Production Production
Manager Manager Sale Advertising Chief Cost
Manager Manager Accountant Accountant
Merits of line and staff organisation: The line and staff organisation has all
the benefits of line organisations. In addition, it has the following advantages.
i) Line managers get the benefit of specialised knowledge of staff specialists.
ii) Many problems that are ignored or poorly handled in line organisation can
be properly resolved in the line and staff organisation with the help of staff
specialists.
iii) Staff specialists relieve the line managers from the botheration of
concentrating on the specialised functions like budgeting selection and
training, public relations, etc.
iv) Staff specialists help the line executives in taking better decisions by
providing them with adequate information of the right type at the right
moment and render expert advice.
v) Line and staff organisation is more flexible as compared to the line
organisation. General staff can be employed to help line managers at the
various levels.
Demerits of line and staff organisation: The biggest drawback from which
this form of organisation suffers is the conflict between line and staff. The major
source of line owned staff conflict is the difference in their viewpoints and
perception. Conflict arises when any of them fails to appreciate the viewpoint of
the other. When a conflict between line and staff arises both the parties try to
explain the causes of conflict in terms of behaviour of the others. The important
causes of line and staff conflict as reported by line men are as follows: 61
Management, Organisation i) Staff officers encroach upon the line authority. They interfere in the work
and Control
of line managers and try to tell them how to do their work.
ii) Staff specialists may be profesionals and may not be well acquainted with
the practical problems of the enterprise.
iii) Since staff men are not directly accountable for any result, they are generally
overzealous and recommend a course of action which is not practical.
iv) Staff men generally fail to view the whole organisation objectively as they
are specialists in particular areas.
v) Staff men have the tendency to take credit for the decisions which prove
successful and lay the blame on line men in case the decisions do not
prove successful.
The important causes of line and staff conflict as reported by staff men are
discussed below:
i) Line managers generally do not make a proper use of the services of the
specialists.
ii) Sometimes, staff advice is sought only as a last resort as line executives
feel that asking for the advice is admitting defeat.
iii) The staff specialists should try to appreciate the difficulties in implementing
new ideas. They should not consider it as a prestige issue if sometimes
their advice is not followed.
iv) Line and staff people should try to understand the orientation of each other.
They should try to achieve cooperation for the achievement of enterprise
objectives.
Some people argue that the distinction between line and staff is an obsolete
concept and should be done away with. They argue that it is meaningless
to segregate organisation activities on the basis of their contribution to the
achievement of goals. Moreover in recent years, the horizontal and diagonal
relationships and work flows are gaining greater importance than the vertical
relationships represented by the line authority.
Superiority of line and staff organisation over line organisation : Line and
staff organisation structure has gained popularity because certain problems of
management have become so complex that in order to deal with them expert
knowledge is necessary which can be provided by the staff officers. For instance,
personnel department is established as a staff department to advise the top
executives and other line executives on personnel matters. Similarly, accounts,
law and public relations departments may be set up to advise on problems relating
to accounting legal issues and public relations.
11.7.3 Line Organisation vs. Line and Staff Organisation

Line Organisation Line and Staff Organisation
Line refers to those positions which Staff refers to those positions which
have the responsibility of achieving the have the responsibility of providing
primary objectives of the organisation. advise and service to the line in
attainment of organisational
objectives.
62
There are no experts to assist and advise There are experts known as staff to of Authority Relationships
the line officials. assist and advise the line officials.
There is no scope of friction between There is always a risk of friction
line and staff. between line and staff people over
their respective roles.
It is not based upon planned It is based upon planned
specialisation. specialisation.
Certain line men become key men as This is not possible in case of line
they occupy those positions on which and staff organisation as staff
the survival of the organisation depends. officials share credit with line
officials.
11.7.4 Functional Organisation

Functional authority occupies a mid-way position between line and staff authority.
It is a means of putting the specialists in top positions throughout the enterprise.
It confers upon the holder a limited power of command over the people of other
departments concerning their function. Functional authority remains confined
to functional guidance of different departments. It helps in maintaining ability
and uniformity of the performance of functional areas throughout the
organisation.
Under functional organisations various activities of the enterprise are classified

according to certain functions like production, marketing, finance, personnel,
etc. and are put under the charge of functional specialists. A functional head
directs the subordinates in his particular areas. That means the subordinates
receive instructions not from one superior but from several functional specialists.
In other words, the subordinates are accountable to different functional specialists
for the performance of different functions.
General Manager
Production Marketing Finance Personnel

Director Director Director Director
Manager Manager Manager

Plant I Plant II Plant III
It was F.W. Taylor who evolved functional organisation for planning and
controlling manufacturing operations on the basis of specialisation. But, in
practice, functionalisation is restricted to the top levels of the organisation
structure and is not carried down to the lowest level in the organisation as
recommended by Taylor.
Merits of functional organisation: The merits of functional organisation have
been discussed below :
i) Specialisation: Functional organisation helps in achieving the benefits of
specialisation of work. Every functional incharge is an expert in his area
and can help the subordinate to perform better in his area.
63
Management, Organisation ii) Executive development: A functional manager is required to have expertise
and Control
in one function only. This makes it easy to develop executive.
iii) Reduction of work-load: Functional organisation reduces the burden on
the top executives. There is point supervision in the organisation. Every
functional incharge looks after his functional area only.
iv) Scope for expansion: Functional organisation offers a greater scope for
expansion as compared to line organisation. It does not face the problem
of limited capabilities of a few line managers.
v) Better control: The expert knowledge of the functional manager also
facilitates better control and supervision in the organisation.
Demerits of functional organisation : Functional organisation suffers from
the following drawbacks:
i) Double command: Functional organisation violates the principles of unity
of command since a person is accountable to a number of bosses.
ii) Complexity: The operation of functional organisation is too complicated
to be easily understood by the workers. Workers are supervised by a number
of bosses. This creates confusion in the organisation.
iii) Problems of succession: Functional organisation develops specialists rather
than generalists. This may create problem in succession of top executive
positions.
iv) Limited perspective: A functional manager tends to create boundaries
around himself and thinks only in terms of his own departments rather than
the whole enterprise. This results in loss of overall perspective in dealing
with business problems.
v) Delay in decision making: There is generally lack of coordination among
the functional executives and delay in decision making when a decision
problem requires the involvement of more than one specialist.
11.7.5 Line Organisation vs. Functional Organisation

Line Organisation Functional Organisation
The line of authority is vertical as The line of authority is functional or
it follows the principle of scalar diagonal. The functional manager has
chain. authority over his function wherever
it is performed.
Line managers are generalists. Functional managers are specialists in
their respective areas.
There is unity of command. Unity of command is not followed as
each subordinate gets instructions
from his line boss and the functional
bosses.
There is strict discipline. There is loose discipline.
It is suitable for small scale It is suitable for large scale operations

operations. where experts knowledge in certain
fields is a must.
64
Check Your Progress B Departmentation and Forms
i) Specialisation should be kept in view but ................... should be avoided
while choosing the basis of departmentation.
ii) The ............... of departments to be created must be clearly laid down
to minimise inter-departmental conflicts.
iii) Not only technical aspects of the organisation but also ...........................
factors should be given due attention in departmentation.
iv) In the line organisation .................... flow from top to bottom and forms
a chain of command.
v) Line and staff conflict is mainly due to difference in their .......................
i) Functionalisation is restricted to the top levels of the organisation
structure.
ii) Departmental heads are given full autonomy to run their departments
as they like.
iii) Different basis may be adopted for departmentation in the same
organisation.
iv) Functional organisation increases the workload of top executives.
v) Staff specialists do not have authority to implement their ideas.
11.8 LET US SUM UP

Departmentation, the process of grouping activities on certain basis, is an
important element of organisation. It can be done on the basis of function, product,
territory, customers, process, or project. But, whatever may be the basis, the
departmentation should be directed to promote the attainment of organisational
objectives economically and efficiently.
In choosing the basis of departmentation several factors like specialisation,
economy, appreciation of key areas, minimum conflicts, coordination, control
and human consideration should be kept in mind.
Departmentation is a means of dividing the large and complex organisation into
smaller, flexible, administrative units. By doing so, the organisation achieves
the benefit of specialisation, administrative control, fixation of responsibility,
freedom or autonomy and development of managers.
Another concept related to organisation is that of the form of authority
relationships which lays down the pattern of communication and coordination
in the enterprise. There are three basic types of forms, viz., line organisation,
line and staff organisation and functional organisation. Though line and staff
are sometimes argued to be obsolete concepts, they are still used.
There are occasions when the line and staff are in conflict because of the
differences in viewpoints and perceptions of the two. Efforts should be made to
minimise the conflict in the interest of the organisation. Functional organisation
should be restricted to the top levels of the organisation.
65
and Control 11.9 KEY WORDS
Authority : It denotes certain rights granted to a position holder
in an institution. It includes rights to take decisions
and get them executed.
Departmentation : It is the process of grouping activities on certain
well defined basis.
Functional authority : It confers upon the holders a limited power to
command over the people of other departments
concerning their function.
Line authority : It refers to those positions and elements of the
organisation, which have responsibility and
authority and are accountable for the
accomplishment of primary objectives.
Staff authority : Staff refers to those elements which have
responsibility and authority for providing advise and
service to line - in attainment of objectives.

A) 1. i) False ii) False iii) True iv) False, v) True
2. i) information, ii) costs, iii) territorial, iv) processes, v) coordination.
B) 1. i) over-specialisation, ii) jurisdiction, iii) human, iv) authority, v)
perception/ points of view.
2. i) False, ii) False, iii) True, iv) False, v) True.

1) Discuss the meaning and importance of departmentation.
2) Suggest a scheme of departmentation for a large business enterprise with a
field network of sales all over the country. Discuss its merits and demerits.
3) Distinguish between product departmentation and process departmentation.
Outline the respective advantages of the two.
4) What are the benefits derived from departmentation of activities? Discuss.
5) What are the factors which have to be considered while selecting a suitable
bases of departmentation?
6) The chief executive of a large manufacturing enterprise is upset over
frequent conflicts between the production department and the personnel
department. The enterprise is organised on line and staff pattern. What can
be the possible causes of this conflict and what steps can be taken to reduce
and overcome it?
7) Compare line, functional and line and staff organisation. Which of these
will be appropriate for a large manufacturing enterprise?
write answers for them. But, do not submit your answers to the
66
UNIT 12 DELEGATION OF AUTHORITY of Authority Relationships
AND DECENTRALISATION
Structure
12.0 Objectives
12.1 Introduction
12.2 Delegation
12.2.1 Delegation of Authority
12.2.2 Elements of Delegation
12.2.3 Principles of Delegation
12.2.4 Importance of Delegation
12.2.5 Barriers to Effective Delegation
12.2.6 Means of Effective Delegation
12.3 Decentralisation
12.3.1 Distinction between Delegation of Authority and Decentralisation
12.3.2 Merits and Limitations of Decentralisation
12.3.3 Factors Determining the Degree of Decentralisation
12.4 Let Us Sum Up
12.5 Key Words
12.0 OBJECTIVES
explain the concept and process of delegation of authority and importance
of delegation
describe the principles of delegation
identify the barriers to delegation and suggest how to make delegation
effective
analyse the implications of centralisation and decentralisation and
differentiate between delegation and decentralisation
identify the merits and demerits of decentralisation
describe the factors determining the extent of decentralisation of authority
in an organisation.
12.1 INTRODUCTION
Delegation is one of the important requirements of successful management.
Delegation is a concept as well as a process. As a concept, it refers to manager’s
sharing of work with his subordinates. However, the manager’s sharing of the
burden of his work with subordinates is different from division of labour. It is
also different from the routine of giving order. The special kind of work sharing
67
Management, Organisation in delegation involves planning, assessment of subordinates, interpersonal
and Control
communication and relationship of trust between the manager and his
subordinates. In this unit, we shall discuss the meaning and process of delegation,
its importance, the principles of delegation, and how delegation can be made
effective. You will also learn the concepts of centralisation and decentralisation
of authority, the difference between delegation and decentralisation, and the
merits and limitations of decentralisation.
12.2 DELEGATION
In any organisation no individual can perform all duties and accomplish all
tasks by himself. It is physically impossible for a single individual to look after
the affairs of a large business. His skill lies in his ability to get things done
through others. As an organisation grows in size and the manager’s job increases
beyond his personal capacity, his success lies in his ability to multiply himself
by training his subordinates and sharing his authority and responsibility with
them. The only way he can achieve more is through delegation, through dividing
his work load and sharing responsibilities with others. Thus, the sharing of power
or authority with another for the performance of certain tasks and duties is known
as delegation.
To delegate means to grant or confer, hence the manager who delegates grants
or confers (authority) on others (subordinates) to accomplish certain duties in
the form of work.
According to O. Jeff. Harris it is an authorisation to a subordinate manager to
act in a certain manner independently. The delegation of authority is the delivery
by one individual to another of the right to act, to make decisions, to acquire
resources and to perform other tasks in order to fulfil job responsibilities.
L.A. Allen has defined delegation as ''the entrustment of a part of the work, or
responsibility and authority to another, and the creation of accountability for
performance''. Responsibility is the work assigned to a position. Authority is the
sum of powers and rights entrusted to make possible the performance of the
work delegated. Accountability is the obligation to carry out responsibility and
exercise authority in terms of performance standards established. It is the
obligation of an individual to render an account of the fulfilment of his
responsibilities to the boss to whom he reports.
12.2.1 Delegation of Authority

Just as no one person in an enterprise can do all the tasks necessary for
accomplishment of goals so it is impossible, as an enterprise grows, for one
person to exercise all the authority for making decisions. As you know that,
there is a limit to the number of persons, managers can effectively supervise and
for whom they can make decisions. Once this limit is passed, authority must be
delegated to subordinates, who will make decisions within the area of their
assigned duties.
Then the question is how is authority delegated when decision-making power is
vested in a subordinate by his superior. Clearly, superiors cannot delegate
authority they do not have. It is equally clear that superiors cannot delegate all
their authority without, in effect, transferring their position to their subordinates.
68 The entire process of delegation involves four steps. They are:
1) The determination of results expected from persons in a position ; Delegation of Authority and
Decentralisation
2) The assignment of tasks to persons;
3) The delegation of authority for accomplishing these tasks;
4) The holding of people responsible for the accomplishment of these tasks.
Thus, delegation is the process that a manager follows in dividing the work
assigned to him so that he performs that part, which because of his position he
can perform effectively.
But there is a difference between delegation and work assignment. Delegation

constitutes a master agent relationship while work assignment constitutes master
servant relationship. An employee’s work assignment may be reflected in his
job description while delegated duties may not form the part of the employee’s
normal duties.
Delegation is legitimate authorisation to a manager or employee to act in specified

ways. It enables him to function independently without reference to the supervisor
but within the limits set by the supervisor and the normal framework of
organisational objectives, policies, rules and procedures.
From the above discussion, it is clear that delegation involves; a) entrustment of

work to another for performance b) grant of power, right or authority to be
exercised to perform the work, c) creation of an obligation on the part of the
person accepting delegation.
12.2.2 Elements of Delegation

There are three distinct elements of delegation : a) assignment of task or duties,
b) conferment of powers or authority, and c) creation of obligation, responsibility
or accountability. These are discussed below.
a) Assignment of task or duties: In the first step, the delegator (superior)

assigns duties to delegate (subordinate). While assigning the duties, the
delegator must be clear in his mind as to what tasks should he assign to
subordinates. Thus, the work or task to be assigned is identified and clearly
defined before it is assigned. For example, when a sales manager asks his
subordinate to set up a divisional sales office, he must explain clearly the
objectives, the sales territory, etc.
b) Conferment of power of authority: Granting of authority is the second

step in delegation. Authority may be defined as the powers and rights
granted to another to perform the delegated work. These powers may include
the authority to acquire necessary resources for the performance of the
assigned work. Without adequate authority, the subordinate (delegate)
cannot be expected to perform his task or duties. For example, in the above
case when the sales manager asks his subordinate to set up a divisional
office he has to give him the right to procure and use necessary resources.
c) Accountability: Once the duties are assigned and authority is given to a

subordinate, the delegator creates an obligation/accountability to perform
the tasks. The obligation to carry out the task and bear responsibility in
terms of the standards established and specified is known as accountability.
Thus, accountability is the obligation of an individual to render an account 69
Management, Organisation of the fulfilment of his responsibilities to the principal to whom he reports.
and Control
The subordinate is always answerable to the superior for the task assigned
to him. He cannot shift his responsibility to anyone else, that is
accountability is fixed to the position. Thus, the superior can control the
performance of his subordinate through accountability. The delegatee is
accountable to his delegator through reports, meetings and evaluation.
1) Which of the following statements are True or False?
i) Delegation takes place when one person gives another a free hand to
perform all types of work on his behalf with no responsibility.
ii) The purpose of delegation is to share work with another, which means
division of work.
iii) Delegation involves entrustment of work, grant of authority and creation
of obligation.
iv) A manager can control the performance of his subordinate through his
accountability.
v) Delegated duties are always a part of the subordinate’s normal duties.
2) Fill in the blanks choosing the appropriate word from those given within
brackets.
i) Delegation constitutes a .......................... relationship (master-servant/
master-agent/master-worker).
ii) As a process, delegation implies the transfer of a portion of superior’s
...................... to his subordinate (activities/authority/obligation)
iii) The obligation to carryout the delegated task in terms of specified
standards in known as ......................................... (responsibility/
accountability)
iv) Accountability is fixed to the .......................... (person/position/
superior)
v) The delegatee must function within the limits set by the .........................
(job description/superior/subordinate)
12.2.3 Principles of Delegation

Delegation is one of the most important elements in the organising process. It is
through delegation that interrelationships are created in any organisation. There
are certain principles which may be followed as guidelines for effective
delegation. These principles are:
Principle of delegation by results: The purpose of delegation is to get work
done through another more effectively and efficiently than it may be accomplished
by the delegator himself in a given situation. It is, therefore, essential that the
assignment of task or duty and the entrustment of authority should be done
keeping in view the results expected.
Delegation by result implies that goals have already been set and properly
communicated to the delegatee and understood by him and that the job assigned
fits the objectives.
70
Principles of competence: The person selected as a delegatee should be Delegation of Authority and
Decentralisation
competent for the task assigned to him.
Principle of trust and confidence: It is necessary that there is an atmosphere of

trust and confidence in the organisation as a whole and that there is a feeling of
trust between the delegator and the delegatee. The delegatee should enjoy mental
freedom in his work. He would be able to use his initiative and drive in work if
he is mentally free.
Principle of parity between authority and responsibility: Authority delegated

should be adequate in relation to the responsibility. It is logical that the
responsibility for actions cannot be greater than the authority delegated, nor
should it be less.
Principle of unity of command: The principle of unity of command describes

the authority-responsibility relationships. The principle stresses that each
subordinate should have only one boss to whom he should be accountable to
avoid confusion and conflict. In delegation, it is assumed that the right of
discretion over a particular activity will flow from a single superior to a
subordinate.
Principle of absolute responsibility: Responsibility is an obligation which can

neither be delegated nor be temporarily shifted. No superior can escape the
responsibility for the activities of his subordinates through delegation, because
it is the superior who has delegated the authority and has assigned duties.
Similarly, the responsibility of the subordinate to his superior for performance
of the delegated duties is absolute and cannot be shifted.
Principle of adequate communication: There should be free flow of information

between superior and subordinate.This enables the subordinate to take decisions
and interpret correctly the nature of the task to be completed with the nature and
degree of authority vested in him.
Principle of effective control: As the delegator delegates his authority but not
the responsibility, he should ensure that the authority delegated is properly used.
Principle of reward: Effective delegation and proper exercise of authority should

be rewarded. A rational rewarded system of reward would act as an incentive to
subordinates to willingly take the responsibility and assume authority and also
create a healthy environment within the organisation.
Principle of receptiveness: Delegation needs and it also creates an understanding

between the superior and subordinate. Decision-making involves some discretion.
This means that no two decisions or two persons can exactly be the same. It is
therefore, necessary that the superior who delegates authority accommodates
the ideas of his subordinates.
12.2.4 Importance of Delegation

Delegation of authority is one of the most important element in the process of
organisation. Organisations are characterised by a network of activities and roles.
Delegation is the process through which the interrelationships are created among
individuals in their different roles in the organisation.
71
Management, Organisation Delegation is necessary because it is physically impossible for a single man to
and Control
look after the affairs of a large organisation. The success of a manager lies in his
ability to multiply himself through other people. The organisations of today are
not only large but also complex in character. No manager can claim to have all
the skills and expertise to perform all the diverse kinds of jobs. Again, large
scale business activities are not confined to one place. It may have several
branches and units at several places. Delegation becomes a necessity for running
these branches.
An organisation is a continuity. Managers may go and come but the organisation

continues. Delegation provides continuity of operations in the organisation. The
process of delegation helps managerial development in an organisation.
Thus, delegation is important for any organisation because it reduces the burden
of the manager and leaves him free to look after important matters of the
organisation. It is a method by which subordinates can be developed and trained
to take up higher responsibilities. It provides continuity to the organisation and
creates a healthy organisational climate by creating better understanding among
the employees.
1) Fill in the blanks with appropriate words from those given within brackets:
i) Delegation by result implies that goals have been properly .....................
(assigned/communicated/discussed).
ii) Responsibility can be neither delegated nor shifted. It is ........................
(fixed/absolute/rigid).
iii) Subordinates often avoid responsibility due to fear of ............................
(penalty/criticism for mistakes/discharge)
iv) Subordinates should be ............................. to accept delegation (forced/
ordered/trained).
v) Managers are reluctant to delegate when they have no confidence in
the ................... of subordinates (morality/sense of responsibility/
integrity).
i) The responsibility of the delegatee cannot be greater than the authority
delegated to him.
ii) Delegation is not possible if the managers are younger than the
subordinates.
iii) Delegation provides continuity of operations in the organisation.
iv) Objectives have nothing to do with the effectiveness of delegation.
v) For effective delegation managers must have trust in their subordinates.
12.2.5 Barriers to Effective Delegation

The problem of delegation is essentially one of human leadership. Delegation is
not only a technique of management; it is a part of the attitude of business itself.
As such what is necessary is the atmosphere of giving and taking responsibility
in the organisation. This is possible by creating an atmosphere of mutual trust
72
and confidence. The reluctance of the superior to delegate and the reluctance or Delegation of Authority and
Decentralisation
avoidance of the subordinates to accept delegation are the major barriers to
delegation which are discussed below.
Why are managers reluctant to delegate?
Managers are sometimes reluctant to delegate authority due to the following
reasons :
1) Lack of confidence in the capability of subordinates: A manager may
not have confidence in the capability and competence of subordinates. He
may consider that he can do the job better than his subordinates.
2) Lack of confidence in the subordinate’s sense of responsibility: The

manager’s lack of confidence in the sense of responsibility of subordinates
may also stand in the way of delegation of authority to others.
3) Fear of loss of power: Managers who feel insecure and fear that if the
subordinates perform well they may lose their power, are usually reluctant
to delegate.
4) Lack of self confidence: Some managers may lack self-confidence or may

be too conscious of their own incompetence, and therefore, reluctant to
delegate authority. This is true in organisations where professional
management is lacking.
Why subordinates avoid delegation?

Subordinates are also found to avoid delegation under certain circumstances
discussed as below:
1) Reluctance to bear responsibility: Researches have shown that many

subordinates prefer controlled existence with minimum responsibility. Such
employees are unwilling to accept responsibility which goes with delegation
of authority.
2) Fear of criticism: Another factor which prompts subordinates to avoid

responsibility is the fear of criticism for inefficiency or mistakes.
3) Fear of inadequacy of resources: Many subordinates hesitate to accept

responsibility for fear of inadequacy of necessary resources for completion
of the task and uncooperative attitude of the delegator.
4) Lack of motivation: In many cases, the organisational climate is not

motivating enough. It prevents subordinates in accepting responsibility.
Some studies undertaken in India show that delegator’s love for authority,
the tendency on the part of the superiors to hold back information needed
by subordinates and delegators’ lack of confidence in the subordinate are
important reasons for the reluctance of the subordinate in taking up
delegated tasks.
12.2.6 Means of Effective Delegation

Effectiveness of delegation is governed largely by the general attitude of business
which depends on various factors, like management policies, organisational
culture, professional outlook and willingness on the part of key managers to 73
Management, Organisation delegate authority and the willingness as well as competence of the subordinates
and Control
to accept delegation. The studies undertaken have shown that poor or inept
delegation is one of the most prominent causes for the lack of delegation or
failure of delegation. For effective delegation, the following measures may be
taken.
1) Improvement in the organisational climate and general management

policies: The organisational climate depends on several factors, the most
important of which is the general attitude of the key managers and the
overall personnel policy of the organisation. A forward looking, progressive
organisation believes in the development of its people and as such throws
open more and more opportunities for the younger managers to develop.
2) Trust in subordinates: If the key managers create an atmosphere of trust

and repose their confidence in the subordinates, the subordinates will be
motivated to take responsibilities. Once trust prevails, the feeling of fear
disappears.
3) Establish clear objectives: Effective delegation depends on clarity of

objectives. The delegatee should clearly know what has he to achieve.
4) Define responsibility and authority: The delegatee should know the degree
of authority he enjoys to perform the job, and its adequacy in relation to
his responsibilities.
5) Motivate subordinates: Motivation is the moving force in delegation.

About the best leader, the Chinese philosopher Lao-tzu said when their
task is accomplished, their work done, the people feel “we have done this
ourselves’.” It is difficult to say what would motivate people. The true
motivation is internal. What clicks in motivating an individual is not easy
to know. Yet it is for the superior to know as to what the urgent needs of
their subordinates are. Research studies have shown that group recognition
and group cohesiveness encourage participative management. The
introduction of participative management in the organisation must be
encouraged at all levels i.e. lower, middle and top levels.
6) Improve communication: Communication is an effective tool for

promoting better understanding and improving the organisational climate.
There should be a free flow of information about the policies and
programmes of the organisation.
7) Provide necessary training: Subordinates should be trained to accept

delegation and the manager should master the skill of delegation.
8) Establish adequate controls: Effective delegation requires a system of

controls to free the manager from routine inspections and yet enable him
to maintain accountability.
12.3 DECENTRALISATION
Delegation of authority is closely related to the concepts of centralisation and
decentralisation of authority. Let us learn them in detail.
74
Centralisation: Centralisation is the reservation or withholding of authority by Delegation of Authority and
Decentralisation
individual managers within the organisation. According to Henry Fayol,
‘everything that goes to increase the importance of the subordinates role is
decentralisation, everything which goes to reduce it is centralisation'' In
centralisation little delegation of authority is the rule; power and discretion are
concentrated in a few executives. Control and decision making reside at the top
levels of management. However, absolute centralisation is untenable because it
would mean that subordinates have no duties, power or authority.
Centralisation may be essential in small organisations to survive in a highly

competitive world. But as the organisation becomes more complex in terms of
increasing size, interdependence of work-flow, complexity of tasks and spatial
physical barriers within and among groups, a function requisite for efficiency is
to move decision-making centres to the operating level. Thus, the larger the size
of an organisation, the more urgent is the need for decentralisation. This does
not mean that decentralisation is good and centralisation is bad.
Decentralisation: Decentralisation is the systematic effort to delegate to the

lowest levels, all authority - except that which can be exercised at central points.
It is the pushing down of authority and power of decision-making to the lower
levels of organisation. The centres of decision-making are dispersed throughout
the organisation. The essence of decentralisation is the transference of authority
from a higher level to a lower level. It is a fundamental principle of democratic
management where each individual is respected for his inherent worth, and
constitution.
As you know, decentralisation is a correlate of delegation; to the extent that

authority is not delegated, it is centralised. Absolute centralisation decreases the
role of subordinate managers which in turn encourages decentralisation. Absolute
decentralisation is also not possible because managers cannot delegate all their
authority. If he does so, his status as manager would cease and his position
would be eliminated. The degree of centralisation and decentralisation is shown
in Figure 12.1
Complete Complete
Centralisation Decentralisation
Fig. 12.1: Degree of Centralisation and Decentralisation
12.3.1 Distinction between Delegation of Authority and

Decentralisation
Although decentralisation is closely related to delegation, there are some
differences between decentralisation and delegation which are discussed below.
1) Delegation is a process of systematic transfer of authority while
decentralisation is the end result of planned delegation.
75
Management, Organisation 2) Delegation refers to the transfer of authority from one individual to another.
and Control
Decentralisation refers to the systematic delegation of authority to all units
in an organisation-wide context.
3) Delegation can take place from one person to another and be a complete
process. But decentralisation is complete only when the fullest possible
delegation is made to all or to most of the people.
4) Delegation is between a superior and a subordinate while decentralisation
is company-wide delegation as between top management and divisions or
departments.
5) Delegation is necessary for effective management because no individual
manager can afford to look after everything. But decentralisation is optional,
necessitated by the growth of the organisation.
6) In delegation, operational control is exercised by the delegatee but in,
decentralisation, the overall control is by the top management.
12.3.2 Merits and Limitations of Decentralisation

Centralisation and decentralisation are extensions of delegation. The belief that
complete decentralisation is always desirable is fallacious. Equally fallacious is
the belief that complete centralisation is good. The merits and limitations of
decentralisation are discussed below.
Merits
1) Facilitates growing and complex organisation : Centralisation of authority
may be desirable under certain special circumstances to accomplish specific
results or when the company is small. But when organisation grows in size
and becomes complex, even a hardcore autocratic manager is forced to
delegate some authority and bring about decentralisation.
2) Reduces the burden of executives: Decentralisation is always preferable
when an organisation has grown in size and complexity, and there is a
need to reduce the burden of the top executives.
3) Facilitates diversification: Decentralisation is required when business
needs to be expanded by diversifying its activities or product lines.
4) Quick decision making: Decentralisation facilitates consultative as well
as quick decision-making at the action point. This promotes interaction
among the different functionaries giving them an opportunity for self
development and training and stimulating them to put in their best effort in
the growth and development of the organisation as whole.
Limitations
1) Leads to disintegration: Extreme decentralisation, however, may not be a
cure. It may lead to looseness and also ultimately to the disintegration of
the organisation. It may bring about the diseconomy of scale with the
increase in the overhead expenses of each decentralised unit. The duplication
in functions may further add to the total cost.
2) Does not suit specialised services: For specialised services like accounting
personnel, research and development etc., decentralisation is unwarranted.
76
Moreover, there are certain areas of control and responsibility like setting Delegation of Authority and
Decentralisation
up overall organisational objectives, long-term planning, formulation of
policy, capital investment etc. which need to be under central control only.
3) Conflict: Decentralisation puts increased pressure on divisional heads to

realise profits at any cost. This encourages the managers to become
department conscious. Sometimes the top management deliberately
encourages competition between different departments to increase the
profitability. This competition results in bitter inter-divisional rivalries and
conflict.
Thus neither extreme centralisation nor decentralisation is desirable. What is

required is a golden means i.e. a balance between centralisation and
decentralisation. The question before managers, therefore is, not whether an
organisation should be decentralised but to what extent it should remain
centralised.
12.3.3 Factors Determining the Degree of Decentralisation

Decentralisation helps in achieving the organisational objectives more efficiently.
Following factors are usually considered in determining the degree of
decentralisation.
1) Size of operations: As an organisation grows in size and complexity, need

for decentralisation tends to increase. More decisions are taken at different
places and coordination of a large number of departments becomes difficult.
Thus as the size increases, decentralisation becomes inevitable.
2) Cost and risks of decision-making: As the organisation grows in size the

decisions involving heavy costs also multiply. With decentralisation of
authority, the high cost and high-risk decisions may be taken at the top
level but routine decisions can be taken at lower levels. Thus
decentralisation helps and quickens decision-making process.
3) Top management philosophy: The attitude of top executives and their

philosophy have an important influence on the extent to which authority is
decentralised.
4) Availability of managerial resources: The extent of decentralisation is

limited to the extent of availability of trained and competent managerial
personnel.
5) Environmental influence: The most important environmental forces

affecting the degree of decentralisation are: Government controls, tax
policies, and unionism.
For example, where prices of a product are controlled, the sales manager’s
freedom is curtailed. Similarly, labour legislations and the decisions of worker’s
unions may limit the authority of managers.
i) Decentralisation of authority and delegation of authority are closely
interrelated. 77
Management, Organisation ii) Delegation is essential for management but decentralisation is optional.
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iii) Decentralisation of authority is not good for large organisations.
iv) Centralisation of authority is bad under all circumstances.
v) Delegation is not possible in all units of an organisation.
i) Decentralisation is the ............................. or planned delegation in the
organisation-wide context.
ii) Centralisation may be desirable when the organisation is
.............................
iii) When business needs expansion by diversifying the product line, the
organisation should be ...........................
iv) As ...................... of a business increases centralisation is not preferable.
v) For specialised services like accounting ......................... is unwarranted.
12.4 LET US SUM UP

Delegation may be defined as assigning formal authority and responsibility to
another person for the performance of certain activities. As a process, it is
followed by managers in dividing up work with subordinates by entrusting a
part of their duty and assigning them the necessary authority to accomplish it.
Delegation involves entrustment of duties and responsibilities, assignment of
authority and creation of accountability.
Delegation facilitates effective utilisation of resources, relieves top executives

of their extra work-load, improves decision-making and encourages initiative
and self-development.
The superior executives are often reluctant to delegate and the subordinates
hesitate to take responsibility. These constitute barriers to effective delegation.
Managers may be reluctant to delegate authority due to lack of confidence in

the capability of subordinate’s or in the subordinate’s sense of responsibility,
fear of loss of power, or lack of self-confidence. Subordinates are often reluctant
to accept delegation on account of their preference to avoid responsibility, fear
of criticism for mistakes or inefficiency, inadequacy of resources, and lack of
motivation.
Effective delegation can be possible by improving the organisational climate,

creating an atmosphere of trust in the subordinates, establishing clear objectives,
precisely defining authority and responsibility, motivating the subordinates to
accept delegation, improving communication, providing necessary training, and
establishing adequate a golden mean i.e. a balance between the two.
Centralisation is the withholding or reservation of authority by individual

managers within an organisation. Decentralisation refers to the systematic
delegation of authority to all units in an organisation-wide context. It is complete
only when the fullest possible delegation is made to all or most of the people
lower down the level in an organisation.
78
Centralisation of authority may be desirable under special circumstances to Delegation of Authority and
Decentralisation
accomplish specific results or when the company is small in size. Decentralisation
is always preferable when an organisation has grown in size and complexity
and there is a need to reduce the burden of the top executives.
Delegation is closely related to decentralisation. Delegation leads to

decentralisation. The degree of decentralisation in any organisation is determined
by several factors like the size of organisation, the rate of growth and the nature
of organisation. It is influenced by the management philosophy and the
environment in which an organisation operates. Whatever may be the size of the
organisation there is nothing like a complete centralisation or complete
decentralisation in an organisation. Neither complete centralisation nor complete
decentralisation is desirable. What is required is a golden mean-a balance between
the two.
12.5 KEY WORDS

Absoluteness of : The principle that responsibility can neither be
responsibility delegated nor shifted to another person.
Accountability : Subordinate’s responsibility to account for the
performance of the task delegated to him.
Chain of command : Superior-subordinate relationship in an
organisation which follows a hierarchical order
of ranks from top to bottom.
Centralisation : The systematic and consistent reservation of
authority to make major policy decisions at one
or a very few central points within the
organisation.
Decentralisation : Systematic delegation of authority pushing down
the decision-making process to lower levels in
the organisation.
Delegation : The act of assigning formal authority and
responsibility to a subordinate for the
achievement of specific objectives.
Parity of authority : The principle that grant of authority should be at
and responsibility par with the responsibility of the delegatee.
Responsibility : The obligation owed by subordinates to their
superiors for exercising authority delegated to
them to accomplish a given task.
Unity of command : The principle of each subordinate being
responsible to only one superior.

A) 1. i) False ii) False iii) True iv) True v) False
2. i) master-agent ii) authority iii) accountability, iv) position v) superior.
79
Management, Organisation B) 1. i) Communicated ii) absolute iii) criticism for mistakes iv) trained
and Control
v) sense of responsibility.
2. i) True ii) False iii) True iv) False v) True
C) 1. i) True ii) True iii) False iv) False v) False
2. i) end result ii) small iii) decentralised
iv) size v) decentralisation.

1) Define delegation. What are the elements of delegation?
2) Discuss the principles of delegation of authority.
3) What are the barriers to effective delegation? How can they be overcome?
4) Distinguish between delegation and decentralisation.
5) What do you understand by centralisation and decentralisation? What are
the advantages of decentralisation?
6) Extreme decentralisation is as bad as extreme centralisation. Discuss.
7) What are the factors that determine the degree of decentralisation of
authority in an organisation?
8) What is the importance of delegation of authority? How is it related to
decentralisation of authority?
80
Delegation of Authority and
UNIT 13 CONTROL Decentralisation
Structure
13.0 Objectives
13.1 Introduction
13.2 Definition of Control
13.3 Characteristics of Control
13.4 Importance of Control
13.5 Stages in the Control Process
13.6 Requisites of Effective Control
13.7 Limitations of Control
13.8 Areas of Control
13.9 Traditional Control Techniques
13.9.1 Budgetary Control
13.9.2 Standard Costing
13.10 Modern Techniques
13.10.1 Break-Even Analysis
13.10.2 PERT (Programme Evaluation and Review Technique)
13.10.3 CPM (Critical Path Method)
13.10.4 Statistical Quality Control
13.10.5 Management Audit
13.11 Let Us Sum Up
13.12 Key Words
13.13 Answers To Check Your Progress
13.0 OBJECTIVES
explain the nature and characteristics of control function
describe the importance of control in management
enumerate and analyse the stages in the control process
explain the requisites of effective control, and
outline the various types of control.
13.1 INTRODUCTION
In the preceding units you have learnt in detail, the planning of management.
Controlling is another very important function of management. The study of
management practices cannot be complete unless this function is also examined
in detail. In this unit, we shall discuss the nature and importance of the control
function of management, analyse the stages in control process, outline the types
of control, and explain the requisites of an effective control system.
81
and Control 13.2 DEFINITION OF CONTROL
Control may be defined as the process of analysing whether actions are being
taken as planned and taking corrective measures to make them conform to the
plan of action. Control is the essence of good management. It is concerned with
ascertaining that planning, organising and directing functions result in attainment
of organisational objectives. In fact, control precipitates bad decisions and their
consequences and restores effectiveness and efficiency. It is a continuous process
which helps a manager to get the performance of his subordinates correspond to
the standard fixed. It also defects the variations as soon as they occur and takes
corrective steps to prevent them in future.
According to Henri Fayol: “Control consists in verifying whether everything

occurs in conformity with the plan adopted, instructions issued and principles
established.”
The control function of management involves determining what is to be

accomplished (the standard); what is being accomplished (the performance),
and, if necessary, applying corrective measures so that performance takes place
according to plans i.e. in conformity with the standard.
In other words controlling involves:
a) Knowing exactly what work is to be done as to quantity, quality and time
available
b) Checking whether work has been or is being carried out with the resources
available, within the time available, at a reasonable cost and in accordance
with the required standard of quality
c) Analysing deviations, if any, from the planned targets and standards to
ascertain the causes thereof
d) Adopting remedial measures to correct the deviations, and
e) Suggesting revision of plans and targets, if necessary.
13.3 CHARACTERISTICS OF CONTROL

Control is a device or a procedure which keeps the manager informed as the
activities for which he is responsible and which assures him that his plans and
policies are being carried out according to schedule. The nature of control function
will be clearly understood from the following characteristics of control:
1) Control is all pervasive function: Control is essential at all levels of

organisation. It is a follow-up action to the other management functions.
Every manager performs the control function irrespective of his rank and
nature of job. Control is the essential counterpart of planning. It is the
control function which completes the management process.
2) Control is a continuous process: Control is an ongoing and dynamic

function of management. It involves continuous review of performance
and revision of standards of operations. As long as an organisation exists,
control continues to exist. It is amenable to change with the external
environment. Therefore, it is a highly flexible process.
82
3) Planning is the basis of control: Control can be exercised only with Control
reference to and on the basis of plans. Effective control is not possible
unless the management spells out clear objectives of the organisation. In
fact, measurement of performance requires certain standards which are
laid down under planning. Planning sets the course and, control ensures
that actual action conforms to the planned action.
4) Action is the essence of control: Control is an action-oriented process. A

manager initiates action which guides the operation within the sphere of
plans. In order to prevent a recurrence of deviations, a manager modifies
or improves the existing plans.
5) Control is a forward looking process: Control aims at future. Although

past experience is the criteria for future standards, control is concerned
with checking the current performance and providing guidelines for the
future. Therefore, control is both backward-looking and forward-looking.
It looks at future through the eyes of past.
6) Delegation is the key to control: Effective control requires adequate

delegation of authority. An executive can perform the control function
properly if he enjoys the authority to take remedial action and is to be held
accountable for results.
7) Control allows the organisation to cope with uncertainty: Control helps

in regulating the uncertain events of the organisation. It anticipates any
shift in task and preferences of consumers and directs the organisation to
modify its process in order to meet the contingencies of the future.
13.4 IMPORTANCE OF CONTROL

The necessity of control in business organisation cannot be over-emphasised.
Proper control smoothens the working of an organisation. Absence of control
leads to lowering of efficiency of the employees, since there is no check on their
performance. Existence of an efficient system of control creates an atmosphere
of order and discipline and helps greatly in minimising the chances of work
being defective or being delayed. The importance of control function also arises
from the following benefits derived from it.
1) Adjustment in operations: A control system acts as a device for adjustment

of organisational operations. There are various objectives which serve as
the basis of control. It is through the control function that these objectives
are achieved. Control provides the means of determining whether plans
are being implemented and there is progress towards the achievement of
objectives. It facilitates measures to be taken, if necessary, to correct any
deviations.
2) Managerial responsibility: In every organisation, managerial responsibility

is created through assignment of activities to various individuals. This
process starts at the top level and then goes to the lower level. While
manager assigns work to be carried out by his subordinates, he remains
responsible for the performance of their activities. It is quite natural that
when a person is responsible for the performance of his subordinates, he
83
Management, Organisation must exercise some control over them. Thus, controlling enables managers
and Control
to discharge their responsibilities.
3) Psychological effect: The process of control induces individuals towards
better performance. The performance of individuals is evaluated in the
light of targets set for them. A person is likely to act according to the plan,
if he is aware that his performance will be evaluated against the planned
targets. Thus, he is more inclined to achieve the results according to the
standards fixed for him, particularly when there is provision of reward or
punishment on the basis of the performance. Since performance
measurement is one of the basic elements of the process, it ensures that
every person in the organisation contributes to his maximum ability.
4) Coordination in action: Though coordination is the essence of management
and is achieved through the proper performance of all managerial functions,
control affects this aspect significantly. Controls are designed in such a
way that they focus not only on the operating responsibility of a manager,
but also on his ultimate responsibility. So this forces a manager to coordinate
the activities of his subordinate in such a way that each of them contributes
positively towards the objectives. Since this follows throughout the
organisation, coordination is achieved in the organisation as a whole.
5) Organisational efficiency and effectiveness: If the control function is
carried out properly, it results in organisational efficiency and effectiveness.
By making manager responsible, motivating them for higher performance,
and achieving coordination in their performance, control ensures that the
organisation works efficiently. As regards effectiveness, the organisation
is effective if it is able to achieve its objectives. Since control focuses on
the achievement of organisational objectives, it necessarily leads to
organisational effectiveness.
13.5 STAGES IN THE CONTROL PROCESS

Controlling is the final step in the process of comparing actual performance
with the plans and taking steps to initiate corrective action. The basic control
process, wherever it is found and whatever it controls, involves the following
steps:
1) Setting standards: The total workload of the business is broken down into
departments, sections and individuals. Each of them has specific objectives
for detailed operation. These objectives are set in physical terms, such as
quantities of products, units of service, labour-hours, speed or volume of
rejections.They may be expressed in monetary terms, such as volume of
sales, costs, capital expenditures or profits or it may be expressed in any
other verifiable qualitative terms. These standards must be clear so that the
checking of performance becomes possible. At the same time, it is essential
that the responsibility should be identified with definite individuals in the
organisation and he is accountable for the lapse, if the performance varies
from the standard laid down.
Establishment of standard may be discussed with S-O-G-P chain. Standard
is a measuring rod for the attainment of organisational objectives. These
objectives aim at accomplishing the organisational goals, which is the
ultimate purpose of every organisation.
84
Standards - Objectives - Goals - Purpose Control
As shown above, standards are used to control objectives, objectives are

used to control goals, and goals are used to control purpose.
2) Measurement of performance : The second step is to measure actual
performance of various individuals, groups or units in the light of standards.
Management should not depend upon the guess that standards are being
met. It should measure the performance and compare it with the standards.
Quantitative measurement is done in those cases where standards have
been set in numerical terms. This makes evaluation easy and simple. In all
other cases, the performance is measured in terms of qualitative factors.
For instance, performance of Industrial Relations Manager may be measured
in terms of attitudes of workers, frequency of strikes, and morale of workers.
Attitude and morale of workers are not capable of being measured
quantitatively. They have to be measured qualitatively. If standards are
appropriately drawn and if means are available for determining exactly
what subordinates are doing, appraisal of actual or expected performance
is fairly easy.
3) Comparing performance with standards and ascertaining the causes
of difference, if any: The responsibility of a manager does not end with
measuring the performance. Deviations from the standard, if any, must be
noted and the causes of deviation ascertained. Comparing performance
with the standard and ascertaining the causes of deviation involve the third
stage of control. The causes of factors responsible for deviations may be
defective material, machinery, process, slackening of efforts, etc. The
comparative analysis should be done as close to the point of performance
as possible. It assists in quick location of defects and results in correction
with minimum losses.
4) Adopting corrective measures: The final step in the control process
consists of remedial actions so that deviations may not occur again and the
objectives of organisation are achieved. Towards that end, managers must
take appropriate decisions so as to meet immediate needs, or revising the
existing targets and standards, or changing the methods of selection and
training of workmen, or even drawing up revised plans.
The above stages in the control process are shown in the Figs. 13.1 and 13.2.
(1) Establishing standards
(4) Taking corrective action (2) Measuring performance
(3) Comparing actual performance with expected performance
(1)
Objectives
(2)
Standards
(6) (3)
No abnormal
Corrected Performance Performance

Common
Deviation
(5)
Corrective (4)
action (if Measurement
necessary)
85
Fig.13.1: Control process
Management, Organisation Check Your Progress A
and Control
1) Define ‘Control’ as a function of management.
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
i) Control relieves managers of their responsibilities.
ii) Control is necessary only when there is deviation of performance from
standards.
iii) Organisational efficiency is ensured with the help of controls.
iv) Controlling mainly involves punishing people and putting pressure
on employees for efficient performance.
v) The process of control is relevant at all levels of management.
3) Enumerate the stages in control process.
i) ..............................................................................................................
ii) ..............................................................................................................
iii) ..............................................................................................................
iv) ..............................................................................................................
13.6 REQUISITES OF EFFECTIVE CONTROL

To be effective and to serve its purpose, the system of control must satisfy certain
requirements. These may be regarded as the prerequisites of effective control.
The requirements of an effective control system may be enumerated in brief as
under:
1) Definition of objectives: Before planning a control system, it is essential

to clearly define the objectives of the organisation. The control system
must be directed towards the potential or actual deviations from plans early
enough to permit corrective action.
2) Efficiency of control techniques: Control techniques are said to be efficient

when they detect deviations from plans and make possible corrective action
at an early stage with the minimum of unsought consequences.
3) Responsibility of control: The primary responsibility for the exercise of

control should rest with the manager charged with the implementation of
plans.
4) Direct control: Any control system should be designed to maintain direct

86 contact between the controller and the controlled.
5) Organisation suitability: Controls should be tailored to fit the organisation. Control
The flow of information concerning current performance should correspond
with the organisational structure. If superior is to control overall operations,
he must find a pattern that will provide control for individual parts.
6) Flexibility: A good control system must keep-pace with the continuously

changing pattern of a dynamic business world. It-must be responsive to
changing conditions. It should be adaptable to new developments including
the failure of the control system itself. Plans may call for an automatic
system to be backed up by a human system that would operate in an
emergency; likewise, an automatic system may back up a human system.
7) Self-control: Units may be planned to control themselves. If a department

can have its own goals and control system, much of the detailed controls
can be handled within the department. These sub-systems of self-control
can then be tied together by the overall control system.
8) Strategic point control: Effective and efficient control can be achieved if

critical key or limiting points can be identified and close attention can be
directed to adjustment at those point. This is known as ‘Control by
exception’. It is called control by exception because according to this
principle only significant deviations from standard, whether positive or
negative, require management’s attention as they constitute exceptions.
An attempt to go through all deviations tends to increase unnecessary efforts
and to decrease attention on important problems.
9) Corrective action: Merely pointing out deviations is not sufficient in a

control system. It must lead to timely corrective action to be taken to check
deviations from standards through appropriate planning, organising and
directing.
10) Forward-looking control: The control system should be directed towards

future. It should report the deviations from the plans quickly in order to
safeguard the future. If the control reports do not relate to the future, then
the reports are of no use as they will not be able to suggest the type of
measure to be taken to rectify the past deviations.
11) Human factor: A good system of control should be worker centred rather
than work centred as the control is exercised on the workers who do the
work. It must find the persons accountable for results whenever large
deviations take place and they must be directed accordingly. So the human
factor must be given proper attention while controlling. A ‘technically fit’
well-designed control system may fail because the human beings may react
unfavourably to the system.
12) Economical: The system of control must be worth its cost. The controls
must justify the expenses involved. A control system is justifiable if the
savings anticipated from it exceed the expected costs in its working. Small-
scale production units cannot afford elaborate and expensive control system.
13) Objective standards: As far as possible, standards should be objective,

that is based on factual information. If they are subjective, a manager’s or
subordinate’s personality may influence judgement of performance
87
Management, Organisation inaccurately. Effective control requires objective, accurate and suitable
and Control
standards. Objective standards may be quantitative or qualitative. However,
in either case, the standard should be factually determinable and verifiable.
Although we have explained how the ‘Control Function’ can be effective
with various requirements as mentioned above, even then there are some
limitations of control. Let us now examine the limiting factors.
13.7 LIMITATIONS OF CONTROL

The limitations of control are discussed below.
1) No control over external factors: Control is intended to be exercised on

factors which are internal to an enterprise. But there are external factors
like government action, change of market conditions, discovery and
invention of new techniques and material of production, innovation and so
on, which are often beyond the control of management. So, controls may
be ineffective in the face of changing external factors.
2) Want of satisfactory standards: Satisfactory standards help control

operations. But there are many areas and activities with intangible nature
of performance which do not permit accurate measurement. No satisfactory
standards can be established for them, e.g. results of management
development, public relations, human relations, advice of staff service,
loyalty of workmen, and such other human behaviour.
3) Measurement of imperfections: Intangible performance presents

difficulties in setting up standards. It is also a complicated matter to measure
its results in quantitative or qualitative terms. It is then left to managerial
judgement and interpretation which cannot be taken as perfect measurement.
Moreover, results of day-to-day activities involving uneconomic
expenditure cannot be evaluated or measured properly on grounds of
economy.
4) Limitations of corrective actions: Business can be run on an even keel if

all deviations and mistakes can be corrected properly in time. This will
guard against losses. Control operations are carried out in assumption of
fixed personal responsibility and the person concerned is expected to adopt
necessary corrective and remedial actions. It is not uncommon that many
deviations occur, but nobody in particular can be held responsible for them.
Control becomes ineffective in such cases.
5) Adverse reaction against control: Control operations as a rule are not

liked by the subordinates over whom they are exercised. Such operations
curtail their freedom of action and interfere with their individual thinking
and initiative. Control thus invites opposition and adverse reaction of the
subordinates.
6) Practical impediments to application: Control involves analysis of

deviations to find out their causes. But it faces great obstacles in such
analytical work. First of all, it involves considerable expenditure. Secondly,
it requires skilled and experienced staff to cope with the situation. Thirdly,
corrections and deviations may require some time and even stoppage of
88 work which may result in loss to the concern.
Control
13.8 AREAS OF CONTROL
For effectiveness, it is important to decide on the critical areas where control
should be exercised. There are many advantages of identifying these areas of
control (also known as types of control) so as to enable management to:
i) Delegate authority and fixing responsibility;
ii) Reduce the burden of supervising each activity in detail; and
iii) Secure means of achieving satisfactory results.
Controls are actually needed in every area where performance and results directly
and vitally affect the survival and prosperity of the organisation. These areas
need to be specially mentioned. In this connection, Peter Drucker has identified
eight key result areas where objective should be set and controls should be
exercised. These are:
1) Market standing
2) Innovation
3) Productivity
4) Physical resources
5) Financial resources
6) Profitability
7) Manager’s performance and attitude
8) Public responsibility
Apart from the identification of key areas, control may be distinguished on the
basis of their nature and purpose. Let us discuss them one by one.
1) Physical and Financial Control: Physical controls refer to controls over
the safety and maintenance of properties and assets, stocks of materials,
stores, spare parts, and other articles on the task of quantitative and
numerical measures. Financial controls include control over cash receipts
and payments, fixed and working capital, income and expenditure as well
as profits and the value of assets and liabilities.
2) Control Over Actual and Anticipated Performance: Day-to-day
operations need to be controlled to achieve the short-run objectives, targets
and standards as well as continuing goals. This is another category of
controls.
3) Control Over Activities or Areas of Operations
i) Control over policies and procedures: Policies are formulated,
procedures laid down to govern the behaviour and action of personnel
in the organisation. These are generally controlled through manuals
which are prepared by top management. Each individual in the
organisation is expected to function according to manuals.
ii) Control over organisation: Organisation Charts and Manuals are used
to keep control over organisation structure. Organisation manuals
attempt at solving organisational problems and conflicts, making long-
range organisational planning possible, enabling rationalisation of the 89
Management, Organisation organisation structure, helping in proper designing and clarification
and Control
of each part of the organisation, and conducting periodic check on
facts about organisation practice.
iii) Control over personnel: Generally the Personnel Manager or Head
of the Personnel Department, whatever his designation may be, keeps
control over personnel in the organisation. Sometimes, a personnel
committee is constituted to act as an instrument of control over key
personnel.
iv) Control on wages and salaries: Control over wages and salaries is
exercised through job analysis and job evaluation. The functions are
carried out by personnel and industrial engineering departments. Often,
a wage and salary committee is constituted to provide help to these
departments.
v) Control over costs: Control over costs is exercised through making
comparison between standard costs and actual costs. Standard costs
are set in respect of different elements of costs. Cost control is also
supplemented by budgetary control system which includes different
types of budgets. The Controller’s department provides information
for setting standard costs, calculating actual costs, and pointing out
differences between these two.
vi) Control over methods and manpower: Control over methods and
manpower is required to ensure that each individual is working
according to schedule. For this purpose, periodic analysis of activities
of each department is conducted. The functions performed, methods
adopted, and time consumed by every individual are studied to
eliminate non-essential functions, methods and time. Many
organisations create a separate department or section known as
‘Organisation and Methods’ to keep control over methods and
manpower.
vii) Control over capital expenditure: Control over capital expenditure
or acquisition of fixed assets exercised through the system of evaluation
of projects and ranking of projects on the basis of their importance,
generally on the basis of their earning capacity. A capital budget is
prepared for the business as a whole. The budget is reviewed by the
budget committee or appropriation committee. For effective control
over capital expenditure, there should be a plan to identify the
realisation of benefits from capital expenditure and to make comparison
with anticipated results. Such comparison is important in the sense
that it serves as an important guide for future capital budgeting
activities.
viii) Control over service departments: It is effected:
a) through budgetary control within operating departments,
b) through putting limits upon the amount of service an individual
department can ask for, and
c) through authorising the heads of service departments to evaluate
the request for service made by other departments and to use
90 discretion about the quantum of service to be rendered to a
particular department. Sometimes, a combination of the methods Control
may be used.
ix) Control over line of products: Control over line of products is
exercised by a committee whose members are drawn from production,
sales and research departments. The committee controls the product-
mix on the basis of studies about market needs. Efforts are made to
simplify and rationalise the line of products.
x) Control over research and development: Control over research and
development is exercised in two ways:
1) by providing a budget for research and development, and
2) by evaluating each project keeping in view savings, sales or profit
potentialities.
Research and development being a highly technical activity is also
controlled indirectly. This is done by improving the ability and
judgement of the research staff through training programmes and other
devices.
xi) Control over foreign operations: Foreign operations are controlled
in the same way as domestic operations. The tools and techniques
applied are the same. The only difference is that the chief executive of
foreign operations has relatively greater amount of authority.
xii) Control over external relations: External relations are regulated by
the public relations department. This department may prescribe certain
measures to be followed by other departments while dealing with
external parties.
xiii) Overall control: Control over each segment of the organisation
contributes to overall organisational control. However, some special
measures are devised to exercise overall control. This is done through
budgetary control, project profit and loss account and balance sheet.
A master budget is prepared by integrating and coordinating budgets
prepared by each segment. The budget committee reviews such budget.
This budget acts as an instrument for overall control. Profit and loss
account and balance sheet are also used to measure the overall results.

i) Control techniques may be said to be efficient if subordinates like
them.
ii) Past deviations can be corrected only if controls are forward looking.
iii) Expenses on control should not matter because control relieves the
manager of their worries.
iv) Manager having no control over external factors should not try to
control internal disturbances.
v) Identifying critical areas of control enables manager to delegate
authority.
91
Management, Organisation 2) Enumerate the critical or key result areas where control should be exercised
and Control
by managers.
i) ……………………………….. v) ………………………….......
ii) ……………………………….. vi) ……………………………
iii) ……………………………….. vii) ………………………........
iv) ……………………………….. viii) …………………………..
13.9 TRADITIONAL CONTROL TECHNIQUES

The control function of management is a systematic effort to set performance
standards with planned objectives, to compare actual performance with the
predetermined standards, to determine whether there are any deviations and to
adopt suitable measures to ensure that performance is in conformity with the
plans.
A variety of tools and techniques have been developed and used over the years
for purposes of managerial control. Some of these techniques are termed as
traditional and others as modem. The traditional techniques of control have been
found useful for a long period of time in the past and some of these are still used
by organisations. Two such techniques commonly used are: Budgetary Control
and Standard Costing. Let us discuss about them in detail.
13.9.1 Budgetary Control

Simply stated, a budget refers to the plan of an enterprise expressed in financial
or physical terms. It lays down financial estimates relating to various programmes
or activities for a defined period on the basis of given objectives. These estimates
are intended to serve as targets or standards for the purpose of controlling actual
performance. For a business firm, budgets generally include plans to produce
and sell goods at costs and prices which will bring the desired profit. Thus,
budgeting consists of formulation of plans for future activity. It lays down
objectives and programmes of action. It also provides yardsticks by which
deviations from planned achievements can be measured.
Budgetary Control, as a technique of managerial control, refers to the

principles, procedures and practices of achieving given objectives through
budgets. Thus, budgetary control involves preparation of budgets, relating the
responsibilities of managers to budgeted activities, and the continuous
comparison of actual with budgeted results. It aims at securing the objectives as
per the budget and providing a basis for its revision, if necessary.
The commonly used budgets are: Expense budget, Revenue budget, Cash budget,
Capital budget, Sales budget, Production budget, Purchase budget, Labour
budget, Master budget, etc.
13.9.2 Standard Costing

Standard costing as a technique of control may be defined as a system which
involves the use of predetermined ‘standard costs’ relating to each item of cost
and for each line of product, manufactured or service rendered.
92
Standard cost refers to a predetermined estimate of cost which can be used as a Control
standard or yardstick. It suggests what the cost should be under given conditions.
Standard costs form the basis of control under standard costing. Actual costs are
compared with the standards, variations, if any, are analysed, and suitable action
is taken to correct adverse tendencies. Thus, standard costing may be regarded
essentially as a tool of cost control.
Standard costing is an essential part of budgeting and budgetary control. It may

be noted that budgetary control is a broader function. It consists of setting
objective and planning business activities for all departments; it lays down
standards of cost and expenses as well as targets of sales income. Standard costing
provides the basis of framing the expense budgets particularly in respect of
direct material and labour costs.
13.10 MODERN TECHNIQUES

Besides the traditional techniques of budgetary control and standard costing,
there are several other techniques of control which have been developed in
modern times. These techniques may also be called non-budgetary techniques.
One or more of these techniques may be adopted alongwith budgetary control
and srandard costing. Let us discuss the more important techniques in detail.
13.10.1 Break-Even Analysis

Break-even analysis as a technique of control consists of the analysis of costs in
relation to changes in the volume of sales and its impact on profit. It is basically
concerned with determining the relationship between cost, volume of sales and
profit. One of the major concerns of the management of an enterprise relates to
the impact of changes in the volume of sales on profits. It is of interest to them
to know the volume of sales at which costs will be fully covered and beyond
which profits will be earned. For this purpose, two types of costs are distinguished.
Variable costs (like direct material cost, direct wages, etc.) and Fixed costs (like
factory and office rent, managers’ salary, etc.). If production and sales increase,
variable cost per unit remains constant but fixed cost per unit decline. Suppose,
the direct materials cost of a product is Rs. 10 per unit and direct wages per unit
comes to be Rs. 5, whereas fixed cost upto the total production capacity is Rs.
400. Then, for 100 units produced and sold, the variable cost will amount to Rs.
(10 + 5) × 100 i.e., Rs. 1500. For 200 units, the variable cost will be double the
amount i.e., Rs. 3000 Fixed cost remains the same. Total cost for 100 units will
thus be Rs. 1900, and for 200 units it would be Rs. 3400, not Rs. 3800. Hence,
the total cost is found to rise less than proportionately to the increase in sales
revenue. If the volume of production and sales decrease, there is a reverse effect.
Thus, for 50 units the total cost will be Rs. (15 × 50) + 400 i.e. Rs. 1150. It will
not be half of Rs. 1900 (total cost of 100 units). In other words, the total cost
decreases less than proportionately to the decrease in sales revenue.
Further, suppose the selling price of the product per unit is fixed at Rs. 17. In
that case, for each unit sold there will be a margin of Rs.2 after meeting the
variable cost of Rs. 15. To recover the fixed cost of Rs. 400, the firm must sell at
least 200 unit. The total sale price (200 × Rs. 17) will then be equal to the total
cost i.e. Rs. 3400.
93
Management, Organisation Thus, sale of 200 units (or Rs. 3400 sales revenue) may be regarded as the
and Control
volume at which there is neither any profit nor any loss. This is known as the
break-even volume. It indicates the-number of units that must be sold if the
business is to be run without loss. Each unit of product sold above the break-
even volume is expected to yield profit. If 250 units are sold, the profit earned
will be Rs. 100 (50 x Rs. 2). This is because, the variable cost will increase by
Rs. 15 per unit while sales revenue will rise by Rs. 17 per unit and there being
no increase in fixed costs, there will be a margin of Rs. 2 per unit on 50 units as
the profit.
The difference between the selling price and variable cost per-unit is known as
the contribution margin. The amount of this difference contributes towards the
recovery of fixed costs. Hence, the break-even volume of sales in units can be
calculated by dividing the total fixed cost by the contribution margin. In the
above example, the contribution margin is Rs. 2 (Rs.17 - Rs. 15), and the fixed
costs are Rs. 400. So, the break-even volume is Rs. 400 ÷ 2 i.e. 200 units.
13.10.2 PERT (Programme Evaluation and Review Technique)

The key to success of most organisations is to clearly examine the projects or
activities for the achievement of an objective within stipulated time and cost.
Management is then required to determine detailed activities and their
interrelationships, to estimate resources required and the time needed to complete
these activities as per schedule, and to monitor and control the time and cost of
the project.
Network analysis is a technique which is concerned with minimising the total
completion time of the project, as well as minimising the over-all project costs.
The network analysis is eminently suitable to projects which are not routine or
repetitive and which may be conducted only once or a few times, such as
construction of buildings, dams, research and development, marketing of new
products, building a ship, construction of factories, missile production, etc. PERT
and CPM are the two very popular types of network analysis used in modem
management.
PERT is basically a technique of project which is useful in the following
managerial functions related to planning, scheduling, controlling, etc.
The first and most important condition for using PERT is the breaking up of the
project into jobs or activities and determining the order of precedence for these
jobs, that is, deciding which jobs are to be completed before another can be
started.
13.10.3 CPM (Critical Path Method)

CPM was developed by the engineers of the Du Pont Company in the 1950s for
its application in all scheduling work, construction projects, research and
development programmes and in many other situations that require estimates of
time and performance. It calls for dividing a programme or project into its
elementary parts in their chronological order of sequence. By breaking a project
into interconnecting parts, the CPM technique is helpful in finding out the more
strategic elements of a plan for the purpose of better designing, planning,
coordinating and controlling the entire project.
94
Let us examine the concept of critical path to appreciate the significance of the Control
critical path method as a technique of control.
In a network of activities one can enumerate a number of sequences of operations

(paths) from starting event to end event of the project. Each sequence contains
different combinations of activities with different durations. The study of the
duration of various paths in a project can tell us the minimum time in which a
particular project can be completed. The sequence of activities (path) for which
the duration is the maximum indicates the minimum duration for the completion
of the project.
This path is known as the ‘Critical Path’ being the path of maximum duration
and reflects the minimum time necessary for the completion of the project. The
critical path is so called because any delay in the completion of the activities
lying on this path would cause a delay in the whole project. To finish the
project in time, the activities lying on the critical path should be given top priority.
13.10.4 Statistical Quality Control

The purpose of quality control is to ascertain whether the quality of a product or
service is being maintained or if there is any variation in size, weight, finish etc.
In every production process there are always some standard specifications laid
down either by the producer or the consumer. A good quality item is one which
conforms to these specifications. However, variation in the quality of a product
is inherent in every production process due to a number of factors. So, it is
necessary to ascertain the variation which may be quantitative and qualitative.
Quantitative characteristics are those which can be directly measured, e.g. weight,
height, diameter etc. and such variations can be noted with the help of specific
instruments. On the other hand in qualitative characteristics, direct quantitative
measurement is not possible, e.g. cracks, breakage, colour etc. These can be
determined by inspection only or by distinguishing between defective and non-
defective items. But variation in the quality of products being an inherent
characteristic of manufacturing process, irrespective of all possible precautions
and measures, there are possibilities of random disturbances responsible for
deviations in the quality of the product from the set standards.The sources of
these disturbances are known as chance causes, e.g. changes in machine speed
due to sudden changes in temperature or voltage of power supply etc. The
presence of these causes in the system is due to multitude of reasons which are
difficult to identify and uneconomic to eliminate. There may be other sources of
variations which further cause the product to deviate from set standards. These
causes are individual and can be identified and eliminated economically. The
magnitude of variability due to these causes varies with the conditions of the
production process, nature of raw material, behaviour of operation etc. These
causes are known as assignable causes.
Statistical quality control refers to the technique of ascertaining whether the

variation in the quality of the product is due to chance causes or due to assignable
causes. If the variation is due to assignable causes, it is detected and some
corrective action is planned to improve the quality of the product. Statistical
quality control is carried out with the help of control charts. To prepare a control
chart the whole production line is divided into a number of subgroups. The
basis of selecting these sub-groups is such that variation in the quality of items
within each sub-group is attributed due to chance causes, whereas the 95
Management, Organisation corresponding variation between various sub-groups can be due to assignable
and Control
causes. The variation of quality characteristic within and between the sub-groups
is analysed by some method to identify whether the process is in control or not.
Briefly speaking, statistical quality control is based on statistical estimation of

errors or possible variation from the average (normal) proportion of errors. In
its simple operation it involves specifying the quality levels and limits on control,
and then plotting the variations.
13.10.5 Management Audit

Management audit is a systematic and impartial examination, analysis and
appraisal of management’s overall performance. It is basically a procedure of
appraisal of management’s total performance by means of an objective and
comprehensive examination of the organisation structure, its objectives, plans
and policies, its operation and its use of physical and human resources, and
methods of operation. Thus ‘management audit’ signifies a critical assessment
of management of the enterprise from the broadest point of view. It may be
undertaken by the management itself or it may be carried on with the help of
management consultants.
One very important feature of management audit it that instead of comprehensive

audit, company may even apply it to a specific section of the organisation. As
regards its scope, ‘production efficiency’ or ‘investment appraisal’ may be the
subject matter of ‘management audit’. It may even be used to provide guidance
on critical assessment of capital budgeting or profit performance.

1) What do you mean by standerd costing?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) What is break-even analysis?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) Distinguish between PERT and CPM
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
96
Control
13.11 LET US SUM UP
The study of management practices cannot be complete unless the controlling
function is clearly understood. Control may be defined as the process of analysing
whether actions are being taken as planned and taking corrective measures to
make these conform to the plan of action. It is a continuous process which helps
a manager to get the performance of his subordinates correspond to the standards
fixed, to detect the variations as soon as they occur, and to take corrective steps
to prevent them in future.
The characteristic features of control include: Control is all pervasive function,

control is a continuous process, planning is the basis of control, action is the
essence of control, control is a forward-looking process, delegation is the key to
control and control allows the organisation to cope with uncertainty.
Proper control smoothens the working of an organisation. Existence of an efficient

system of control creates an atmosphere of order and discipline and helps greatly
in minimising the chances of work being defective or being delayed. The
importance of control function also arises from the various benefits derived
from it. Like adjustment in operations, managerial responsibility, psychological
effect, coordination in action and organisational efficiency and effectiveness.
The process of control involves (l) establishing standards (2) measurement of

performance (3) comparing performance with the standards and ascertaining
the causes of differences, if any, and (4) correcting deviations by remedial action.
To be effective and to serve its purpose, the system of control must satisfy certain
requirements, which includes: (1) Definition of objectives in clear terms: (2)
Efficiency of control techniques; (3) Assigning responsibility for control; (4)
Direct contact; (5) Suitability of the system to the organisation; (6) Flexibility;
(7) Encouragement of self-control; (8) Strategic point control; (9) Timely
corrective action; (10) Forward-looking control; (11) Attention to human factor;
(12) Economical; and (13) Specifying objective standards .
Despite all precautions, controls are not always perfect since there are several
limiting factors which restrict the effectiveness of controls.
Controls may be distinguished on the basis of the key result areas where controls
should be exercised. Controls may also be distinguished on the basis of their
nature and purpose. Thus, controls may be divided into several categories, such
as: (1) Physical and financial controls (2) Control over actual and anticipated
performance, and (3) Control over activity or areas of operation.
The traditional control techniques are: Budgetary control and standard costing.
The modern control techniques are: Break-even analysis, PERT, CPM, statistical
quality control and management audit.
13.12 KEY WORDS

Control : Process of verifying whether performance of work is
in conformity with plan and correcting it where
necessary.
97
Management, Organisation Control by Exception: Attending only to significant or exceptional deviations
and Control
in the process of control.
Financial Control : Control over cash flows, capital, income, expenditure
and profits.
Forward-looking : Correcting deviations to safeguard the future
Control operations in the concern.
Physical Control : Control over the safety and maintenance of properties,
assets and physical quantifiable objects.
Standards : Norms of work performance.
Strategic Point : Identifying and directing closer attention to key or
Control limiting factors and points in the process of control.

A) 2. i) False ii) False iii) True iv) False v) True
3. i) Establishing standards of performance.
ii) Measuring performance.
iii) Comparing performance with standards and ascertaining the
causes of differences, if any.
iv) Adopting corrective measures.
B) 1. i) False ii) True iii) False iv) False v) True
2. i) Market standing ii) Innovation iii) Productivity
iv) Physical resources v) Financial resources
vi) Profitability vii) Manager’s performance and attitudes
viii) Public responsibility.

1) What do you mean by controlling function of management? Describe salient
characteristic features of control.
2) “Control is a fundamental management function that ensures worth
accomplishment according to plans.” Discuss.
3) Explain the importance of control in a business enterprise. What are the
requirements of an effective control system?
4) Explain in detail various stages in the control process.
5) Enumerate the various requisites of an effective control system and outline
the limitations of control.
6) Discuss various types of control or control areas.
university. They are for your practice only.
98
Control
SOME USEFUL BOOKS
India.
Sons.

Rai and Co.
99
BCOC-132
Management
Communication, Motivation and Leadership 4

BCOC-132
Management
Block
4
COMMUNICATION, MOTIVATION AND LEADERSHIP
UNIT 14
Communication and Coordination 5
UNIT 15
Motivation 24
UNIT 16
Leadership 43
UNIT 17
Team Building 59
Prof. R.P. Hooda
Prof. Nawal Kishor
Darjeeling

Dr. Anupriya Pandey

Management Theory: ECO-03
(Unit-11, 12, 13, and 14 of ECO-03 and Unit-15 of MCO-01 Prof. Nawal Kishor
Revised by Prof. Nawal Kishor) (Editor & Course Coordinator)
Prof. B.P. Singh (Retd.) Department of Commerce, DU Dr. Subodh Kesharwani
Mr. P. S. Prasad, Institute of Chartered Accountants of India (Editor & Course Coordinator)
New Delhi
Dr. B. B. Kansal, M M College, Modi Nagar
Dr. G. S. Sundresh, Moti Lal Nehru College, Delhi
Prof. Kulwant Singh Pathania, HP University, Himachal Pradesh
MATERIAL PRODUCTION
May, 2019
ISBN:
Printed at:
BLOCK 4 COMMUNICATION, MOTIVATION
AND LEADERSHIP
You have learnt about foundation of Indian business in Block 1, Business

Enterprises in block 2 and Management, Organisation and Control in Block 3.
This fourth block covers the process and theories of motivation, the theories,
styles and functions of leadership, the concept of team and team development,
team building and team effectiveness.
Unit 14 discusses the nature and characteristics of communication, the process

of communication, the different types of channels of communication, the barriers
of effective communication and the principles of communication.
Unit 15 explains the concept and process of motivation, the different theories
of motivation, the importance of job enrichment, and the various types of
motivation.
Unit 16 deals with nature and importance of leadership, the various theories
and styles of leadership, the functions of leadership and the qualities of an
effective leader. It also discusses the significance of morale and the factors
determining morale.
Unit 17 describes the concept and types of team, the team development, team
building and team effectiveness.
Communication, Motivation
and Leadership
4
Communication and
UNIT 14 COMMUNICATION AND Coordination
COORDINATION
Structure
14.0 Objectives
14.1 Introduction
14.2 Nature and Characteristics of Communication
14.3 Process of Communication
14.4 Channels of Communication
14.4.1 Based on Relationships
14.4.2 Based on Direction of Flow
14.4.3 Based on Method Used
14.5 Importance of Communication
14.6 Barriers to Effective Communication
14.7 Principles of Communication
14.8 How to Make Communication Effective?
14.9 Definition of Coordination
14.10 Objectives of Coordination
14.11 Let Us Sum Up
14.12 Key Words
14.0 OBJECTIVES
After studying this unit, you should be able to :
explain the meaning of communication
describe the nature and characteristics of communication
outline the process of communication
enumerate and distinguish between different types of channels of
communication
State the importance of communication in management
describe the barriers to effective communication
state the principles of communication
suggest how can communication be made effective.
14.1 INTRODUCTION
Communication is as important aspect of the directing function of management
as supervision, motivation and leadership. The success of management depends
on a great deal on effective communication. Since the purpose of directing is to
activate subordinates to work towards the realisation of organisation goals, 5
Communication, Motivation therefore, the orders, instructions, plans, policies, rules, procedure and methods
and Leadership
of operation must be communicated by managers to their subordinates. Similarly,
the problems arising in the work process, actual performance of employees etc.
must be known to the superiors for proper guidance to be given to them in the
day-to-day activities. In this Unit, we will discuss the meaning of communication
in a business organisation, its nature, characteristics and importance. We shall
also distinguish between the various channels of communication which may be
used in an organisation, analyse the barriers to effective communication and
discuss how communication can be made effective on the basis of the principles
of communication.
14.2 NATURE AND CHARACTERISTICS OF

COMMUNICATION
Simply stated, communication means transmission of messages or exchange of
ideas, facts, opinion or feelings between two or more persons. It is the act of
making one’s ideas and opinions known to others. It may also be regarded as the
process of meaningfully transferring information from one person to another. In
an organisational set up, communication is the means by which people are linked
together for a common purpose, to establish a common interest or mutual
understanding. Thus, communication does not simply involve sending of a
message by one person. It also involves the receiver listening to it, interpreting
it, and responding to it or acting according to it.
Communication is essentially a two-way process. It is not complete unless the

receiver of the message has understood the message and his reaction or response
is known to the sender of the message. The basic purpose of communication is
to create mutual understanding and unity of commonness of purpose. It may
involve exchange of facts by way of information, thought, or ideas, opinion or
points of view, feelings or emotions. Communication is a continuous process in
management. No manager can avoid communicating with his superior and
subordinates in the course of his activities. Inadequate or ineffective
communication is often responsible for making managerial performance
unsatisfactory. Managers at all levels and in all departments must communicate
to keep the wheels of operations running smoothly. Thus communication pervades
the entire organisation.
The characteristics of communication in a business enterprise may be outlined

as follows:
1) It is a cooperative process involving two parties, one who transmits and

one who receives the message.
2) The respective parties to a communication must have the ability to convey

and listen to what his counterpart has to communicate.
3) Communication includes sending the message as well as receiving the

reaction or response to the message and therefore is a two-way traffic.
4) The response to a communication is as essential as the initial communication

because the response indicates the impact of the communication.
6
5) The message to be communicated may be conveyed verbally, in writing, by Communication and
Coordination
means of signs, gestures or symbols. More than one means may be adopted
to make the communication effective.
6) The purpose of communication is that of passing information and

understanding, to bring about commonness of purpose, interest and efforts.
7) Communication is a continuous process for effectiveness and efficiency of

on going operations, planning and policy making.
8) Communication may flow vertically upward or downward between superiors

and subordinates, horizontally between persons occupying similar ranks in
different departments, as well as diagonally between persons at different
levels in different parts of the organisation. Hence, communication flows
pervade the entire organisation.
14.3 PROCESS OF COMMUNICATION

The process of communication implies the existence of a sender, a receiver, a
message and a motivating climate for it. The process includes the following
steps :
1) Clear perception of the idea or problem : No message can be transmitted

properly unless the idea or problem is formulated with clarity of thought
and perception on the part of the communicator. It is only on the basis of
clear thinking that the communicator can decide on the means to be adopted
to convey the message.
2) Participation of others involved : The next step is to secure the participation

of other persons in the decision to communicate a message. This may be
helpful in clarifying the ideas through interaction with others, gathering
new ideas and suggestions, and in creating a motivating climate for securing
positive response to the message.
3) Transmission of the message : What to communicate, to whom, when and

how are expected to be decided before actual transmission of the message.
Actual transmission involves preparing the matter and the form of
communication (known as ‘encoding’ the message) and selecting the
medium or means of communication (oral or written) keeping in view the
nature of person or group to be addressed.
4) Motivating the receiver of the message : The communicator cannot depend

on the message alone to get an appropriate response from the receiver. He
must ensure that the receiver of the message is not only able to interpret the
message correctly but is also prepared to act according to it. Thus, apart
from the clarity of the message, it must inspire the receiver to do or behave
as desired by the sender of the message.
5) Evaluation of the effectiveness of communication : After the message

has been transmitted and accepted by the receiver, it remains for the
communicator to ascertain and evaluate the nature of impact of the
communication. This determines whether and to what extent the receiver
has positively responded to the message.
7
Communication, Motivation Elements in the Communication Process
and Leadership
The process of communication may be better understood if we take into account
the basic elements in the communication process. The elements are shown in
Figure 13.1
Communicator Encoding Message Medium
Feedback Receiver Decoding
Fig. 14.1: Elements of Communication Process
Let us now discuss them one by one.
1) Communicator : The communicator plays an important role in the process

of communication as the message originates from him. Communicators
may include: managers, subordinates, clients, customers, as well as outside
parties.
2) Encoding : Encoding the matter to be communicated is the second element.

It refers to preparing the subject of communication (idea, fact, information,
etc.) in a suitable language.
3) Message : The encoded message needs to be transmitted by appropriate

means. It may be in verbal or written form depending on the purpose in
view.
4) Medium : The medium of communication carries the message from the

communicator to the receiver. Face-to-face verbal communication, use of
telephone, intercom facilities, issue of memorandum, notice, circulars,
statements, telegraph, telex, etc. are the various means available as media
of communication. Besides, non-verbal media like signals, gestures, etc.
may also be used. The choice of medium is an important aspect of
communication, since proper medium also determines its effectiveness.
5) Decoding : Decoding refers to the conversion of the message by the receiver

into meaningful terms so as to make it understandable. This is another
important element of communication for the receiver’s response and depends
upon his understanding of the content and purpose of the message.
6) Receiver : The receiver of the message has an equally vital role to play as
the communicator. Indeed, communication to be effective must be receiver-
oriented. The ability of the receiver for decoding and understanding the
message contribute to a positive response from the receiver.
7) Feedback: The actual response of the receiver to the message communicated

to him is known as ‘feedback’. This is an important element of the
communication process. It reduces the possibility of a difference between
the intention of the communicator and the interpretation of the message by
the receiver. Two-way communication requires feedback to the initial
message sent and enables the sender to check whether the message received
has been properly understood by the receiver.
8
Check Your Progress A Communication and
Coordination
i) Communication involves something more than sending a message.
ii) The basic purpose of communication is to issue orders and instructions
to subordinates.
iii) Encoding means writing a message in code language.
iv) Communication is always made either verbally or in writing.
v) Two-way communication ensures feedback to the initial message sent.
vi) What to communicate must be decided first, and when to communicate
decided later.

i) Communication is a ................................... process in management.
ii) The receiver has to ................................... the message to understand
its content and purpose.
iii) The response of the party to whom a message has been sent is known
as ..............................................
iv) The respective parties to a communication must have the ability to
........................................... and .............................. what his counterpart
communicates.
v) The encoded message may be transmitted through one or more
...............................................................
14.4 CHANNELS OF COMMUNICATION

The direction or path through which the flow of communication takes place is
known as the channel of communication. The channels of communication can
be divided on the basis of (1) the relationships (2) the direction of the flow and
(3) the method used.
14.4.1 Based on Relationships

The direction of the flow is basically governed by the relationships between the
parties involved. Thus, communication may be of two broad types: (1) formal
(2) informal
1) Formal communication : The formal channels of communication are based

on organisational relationships established formally by the management of
the organisation. Orders, instructions and information which flow through
these channels are official communication. In other words, the formal
channels of communication are used for the transmission of official messages
within or outside the organisation. In every organisation, the lines of
communication correspond to the chain of command, that is the superior-
subordinate relations in the hierarchy. A superior gives orders to the
subordinates directly under his authority but cannot do so to anyone who is
9
Communication, Motivation more than one level below him in the hierarchy. Similarly, a subordinate
and Leadership
cannot report on his performance or seek information from anyone except
his immediate superior. He cannot directly communicate with any one who
is more than one level higher in the hierarchy. He can do so only through
his immediate superior. Formal channels of communications help
management in maintaining order and add to the seriousness of purpose of
the message transmitted. But, formal communication which is intended to
flow through more than one level suffers from delay and chances of
distortion.
2) Informal communication : Communication which takes place on the basis

of informal or social relations among people in an organisation is known as
informal communication. Such communication does not generally follow
the official, formal channels. This type of communication occurs due to the
natural desire of human beings to communicate with each other and is the
result of social interaction among people. It may take place between persons
cutting across the organisational positions occupied by them and among
people working in different work units. The origin and flow of informal
communication are difficult to trace. Hence, it is also known as ‘grapevine’.
The messages which flow through informal channels are of varied nature.
It may be purely personal or related with organisational matters.
The characteristic feature of informal communication is that it spreads very

rapidly among people. But at the same time, it may consist of half-truths
and rumours passing between members of the organisation. No one can be
made responsible for it, nor is it taken seriously. Moreover, it may lead to
leakage of confidential information. Sometimes it causes tension. It is also
liable to a great deal of distortion as it passes from one person to another.
However, management can take advantage of it by maintaining friendly
and cooperative relations with others.
14.4.2 Based on Direction of Flow

Whether the communication is formal or informal in nature, channels of
communication may be divided according to the direction of the flow. These
are: (1) vertical (2) horizontal (or lateral) and (3) diagonal communication. Let
us examine the implication of these types.
1) Vertical Communication : This type refers to communication that takes

place between persons occupying superior and subordinates positions in
the organisational hierarchy. Orders and instructions issued by managers to
subordinates, and performance reports sent by subordinates to the managers
are typical examples of vertical communication. It may be sub-divided into
: (a) downward communication and (b) upward communication.
a) Downward Communication : Communication which flows from

higher-level managers to others in lower-level positions is generally
known as downward communication. Thus, messages transmitted from
the superior to his subordinates, or from a manager to the assistant
manager are downward communication. It also includes directives and
messages which are issued by top management and are transmitted
down the hierarchy through intermediate levels of management to
employees at the lower levels. Such communications may consist of
10
verbal messages conveying orders, policies, procedures, or written Communication and
Coordination
matter conveyed through notices, circulars, memorandum, bulletins,
handbooks etc.
b) Upward Communication : This type of communication flows from

lower level managers and employees to those in higher level positions.
Information and reports communicated by subordinate workers to the
foreman, by the manager to the general manager, or by the chief
executive to the Board of Directors, are examples of upward
communication. The upward channels of communication not only
enable higher level managers to get valuable information but also
opinions and suggestions from lower levels at the time of making
decisions on plans and policies. The opportunity of upward
communication encourages people to transmit their complaints and
grievances to superiors, draw the attention of managers to problems
and make proposals for improving the efficiency of work performance
in the organisation.
2) Horizontal Communication : Communication that takes place directly

between two persons having equal ranks in the managerial hierarchy or
between two subordinates under the same manager is called horizontal
communication or lateral communication. Thus, horizontal communication
consists of interaction between people in the same or different departments.
This facilitates coordination of activities which are interdependent. For
example, coordination of production and sales activities requires continuous
exchange of information between the respective managers of the two
departments. The same is true of factory manager and repairs and
maintenance manager.
3) Diagonal Communication : This type of communication implies exchange

of information between persons who are in positions at different levels of
the hierarchy and also in different departments. This type of communication
does not take place except under special circumstances. For example, the
Cost Accountant placed in the Accounts Department may want reports from
the sales representatives for the purpose of distribution cost analysis. These
reports may be sent directly to the Cost Accountant instead of being sent to
the sales manager. This is an example. However, formal communications
are normally expected to be routed through the manager who is in charge
of the department from which the communication is made.
14.4.3 Based on Method Used

On the basis of the methods used for the purpose, communication may be : (i)
verbal (ii) written (iii) gesture.
1) Verbal Communication : When the messages are transmitted orally it is

called verbal communication. It is more effective method of conveying
ideas, feelings, suggestions, information etc. It gives communication a
personal touch. It is especially useful when the manager wants to know the
reaction of the other person quickly. It is economical both in terms of time
and money. There can be nothing better and more economical than passing
a verbal order. Verbal communication includes: face-to-face contact,
interviews, joint consultation. However, verbal communication has its
11
Communication, Motivation drawbacks. It is not useful when the number of persons to be communicated
and Leadership
is more and if the communicator and receiver are at places far away from
one another. Moreover, when the subject matter of communication has to
be kept as a record, verbal communication will not serve the purpose.
2) Written Communication : In a formal organisation, written communication

is the most important media for conveying ideas, information etc. In every
such organisation one comes across a variety of orders, instructions, reports
and bulletins, serving as the basis of communication. Written communication
is permanent, tangible and verifiable. The record is maintained and both
the sender and the receiver have access to the records for further clarification.
Written communication is advantageous where the subject matter to be
conveyed is lengthy or where it is intended to be conveyed to a large number
of persons. One fundamental limitation of written communication is that it
is usually time- consuming. Written communications tend to be very formal
and lack personal touch. It is difficult to maintain complete secrecy about a
written communication. Some day or other it is bound to reach those whom
it was intended to be kept as a secret.
3) Gestural Communication : Communication through gestures is often used

as a means to make verbal or written communication more effective. One
has only to attend meeting addressed by a trade union leader to see how he
uses different gestures by hands, movement of eyes to make his point. If
sometimes the superior pats his subordinate on his back, it will be considered
as appreciation for his work. This will in turn increase the efficiency of the
subordinate.
All types of channels of communication described above have been summarised

in Figure 14.2
Based on Based on Based on

Relationships Direction of the Method Used
Flow
Formal Informal Verbal Written Gestural
Horizontal Upward Downward Diagonal
Fig. 14.2: Types of Channels of Communication
14.5 IMPORTANCE OF COMMUNICATION

The significance of effective communication in a modern organisation is
recognised all over the world. It is of vital importance for efficient and smooth
functioning of an enterprise. The importance is evidenced by the fact that every
12
manager on an average spends 80-90 percent of his time in the communication Communication and
Coordination
process.
Let us analyse the basis of its importance.
1) Adequate and timely communication is necessary for the managerial
functions of planning, organising, directing and controlling to be carried
out successfully.
It is on the basis of information communicated to them that plans can be
developed by top management. On the other hand, plans, policies and
procedures must be communicated to operating managers and employees
without which implementation of plans can hardly be possible. Similarly
to establish organisational relations, people must be informed about their
position, tasks, and authority in the organisation. The directing function
also requires proper communication between managers and their
subordinates and between members of work-groups. Only then it is possible
to achieve group goals as well as organisation goals. Again, timely feedback
of actual performance against planned targets forms the basis of the control
function of management.
2) Effective communication contributes a great deal to higher efficiency in
job performance. It ensures willing cooperation of others due to the close
understanding of ideas and instructions established through communication.
Indeed a direct relationship exists between the effectiveness of
communication and efficiency in an organisation.
3) The quality of decisions made in an organisation depends largely on the
amount and quality of information available to the decision maker. However,
the quality of information depends on the effectiveness of the communication
system. Thus, a good communication system contributes positively to the
quality of decisions.
4) Communication is the means by which delegation and decentralisation of
authority is accomplished in an organisation. Operating managers must have
a clear understanding of their respective limits of authority and
accountability and the jobs assigned to them. This is possible only through
the existence and use of communication channels.
5) Coordination of interdependent activities requires communication to flow
horizontally as well as through all levels of authority.
6) The effectiveness of communication also helps in moulding attitudes and
building up employee morale. It plays an important role in removing
misunderstanding and developing harmonious labour-management relations.

i) Formal channels of communication are based on ......................
relationships established by management.
ii) Downward communication flows from ............managers to others
occupying .................positions.
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Communication, Motivation iii) ......................... and ................. communication is essential for
and Leadership
managerial functions to be carried out successfully.
iv) Effective communication leads to .................... in job performance.
v) Horizontal communication facilitates .................... of interdependent
activities.
i) Diagonal communication involves exchange of information between
people of different ranks and working in different departments.
ii) Upward communication should be allowed only when there is a crisis
or emergency.
iii) Downward communication takes place only at the lowest level of the
hierarchy of management.
iv) The channels of formal communication correspond to the chain of
command in the organisation.
v) No one can be held responsible for informal communication.
14.6 BARRIERS TO EFFECTIVE

COMMUNICATION
Effective communication implies that the message transmitted by the sender is
understood, accepted and acted upon by the receiver for the intended purpose.
In actual practice, one or more factors often stand in the way of effective
communication. These are obstacles or barriers, which create confusion,
misunderstanding and may even lead to breakdown of the communication
process. The following types of barriers are commonly found to create problems
in organisations.
1) Multiplicity of Organisational Layers : The structure of organisation often
causes messages to be distorted, stopped or absorbed particularly when
there are many layers or levels in the hierarchy. In upward communication,
the message tends to be distorted as it passes through intermediate levels.
Information may be withheld at a particular level or passed on with changes.
This is done if it is likely to have the effect of carrying an unfavourable
impression to higher levels about the performance of the manager at that
level. Downward flow of communication may also be distorted at
intermediate levels to suit the convenience or serve the interest of managers
concerned. This is known as ‘filtering’ of the message.
2) Language Barrier : The language used for communicating a message may
create problems due to the difficulty of interpreting words or due to lack of
clarity of expression. People with different educational and cultural
background and intellectual ability may find it hard to understand the
message due to jargon used by the sender. In such cases, the same word
may be attributed different meanings by the sender and receiver of the
message. This is known as the problem of semantics.
3) Status Barrier : Status relationships in an organisation may also be a serious
14 obstacle to effective communication. People placed in superior and
subordinate positions have difference in status on account of their respective Communication and
Coordination
ranks in the hierarchy. It is due to the status difference that subordinates
often suppress or withhold information which may not be liked by their
superiors, or pass on distorted information to please their superiors. No
subordinate likes to reveal his mistakes to his superior. Similarly, the status
consciousness of the Superior prevents him from fully communicating
information which may adversely reflect of his ability or judgement.
4) Physical Distance as a Barrier : In large organisations, the physical distance
between the sender and the receiver of any message may become an obstacle
to effective communication. This is because it is difficult to evaluate whether
the receiver has understood, accepted and acted on the message sent to him
if his workplace is far away from that of the sender.
5) Emotional and Psychological Barriers : When people have strong attitudes
and feelings, they are emotionally affected by messages received which do
not conform to their attitudes. Hence, they tend to either reject or refuse to
accept such messages. The sender may also distort a message if he feels
strongly about it or is under emotional stress at the time. Psychological
barriers often arise due to lack of mutual trust and confidence. Similarly
when subordinates have a favourable image of the superior they are
psychologically more inclined to accept and respond positively to his
messages. It does not happen if they have an unfavourable image. The image
is built on the basis of experience and interaction between the superior and
the subordinate. Any communication which purports to bring about a change
in the existing state of affairs also creates psychological barriers since people
generally do not like a change particularly when its effects are uncertain.
14.7 PRINCIPLES OF COMMUNICATION

There are no fixed principles for the guidance of communication by the managers
of an organisation. The guidelines which are useful for making communications
effective may be regarded as principles of communication. These are listed below:
1) The problem or idea to be communicated needs to be analysed systematically
so as to be clear about it.
2) The purpose of each communication, that is, what is really to be
accomplished through the communication should determine the language,
means and media of communication.
3) The meaning and intention of communication is conveyed not by words
alone. The timing, physical setting, and the organisational climate are
important determinants of the success of communication.
4) Consultation with others may be appropriately made in planning
communication so as to gain additional insight and objectivity to the
message.
5) The basic content and overtones of the message as well as receptiveness to
the viewpoint of the receiver have considerable impact on the effectiveness
of communication.
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Communication, Motivation 6) Whenever possible, messages should convey something of value to the
and Leadership
receiver in the light of his interest and needs.
7) Communications have greater chances of being effective when followed
up by encouraging the receiver to express his reactions, or by review of
performance and ensuring a feedback.
8) Although communications are primarily necessary to meet immediate
situations, they must also be consistent with long-term interest and goals.
9) The most persuasive communication is not what is conveyed through words
but the action of the communicator following the communication.
10) The sender of a message should ensure that the message is understood. But
he must try to understand the reaction and attitude of the receiver by listening
to his viewpoint.
14.8 HOW TO MAKE COMMUNICATION

EFFECTIVE?
The principles or guidelines to making communications effective are of a general
nature, operationally speaking, a number of more specific suggestions can be
made to ensure the effectiveness of communications.
1) Regulating the flow of communications : Planning communication should

involve determining the priority of messages to be communicated so that
managers may concentrate on more important messages of high priority.
Otherwise, there is a possibility of managers being overloaded with the
task of communication. Similarly, incoming communication should be edited
and condensed, if possible, to reduce the chances of overlooking or ignoring
important messages received.
2) Feedback : Along with each communication there is need for feedback,
that is, communication of the response or reaction to the initial message.
Feedback may include the receiver’s acceptance and understanding of the
message, his action or behavioural response, and the result achieved. Two-
way communication is thus considered to be more helpful in establishing
mutual understanding than one-way communication.
3) Language of the message : Use of appropriate language is essential for
effective communication. While preparing the message, its sender must
keep in view the climate, as well as the ability of receiver to interpret the
message accurately. Abstract ideas should be explained and vague
expressions avoided. He must keep in view tire semantic problem, that is,
the possibility of particular words having more than one meanings.
Experimental studies have shown that oral communication accompanied
by its written version is more effective in bringing about the desired response.
4) Importance of listening carefully : Listening to verbal messages carefully
implies an active process. Half-hearted attention to the communication is
often the cause of misunderstanding and confusion. A listener has to be
patient, mentally composed, and avoid distractions while receiving the
message. He should be in a position to concentrate on the message and
seek clarification, if necessary. On the other hand, the sender of the message
16
must also be prepared to listen to what the receiver has to say, and respond Communication and
Coordination
to his questions, if any.
5) Restraint over emotion : Strong feelings and emotional stress on the part
of either the sender or receiver of messages are serious handicaps in the
communication process. To avoid any negative impact of emotion on the
content of the message, the sender may defer the communication for
sometime or consult to exercise restraint over his psychological feelings to
avoid misinterpreting the message and to be able to respond to it with a
composed mind.
6) Non-verbal signals of compliance : Verbal messages are generally accepted
orally by the receiver. But whether action will follow the acceptance of the
message is not certain. It is, therefore, suggested that in the case of verbal
communication the sender should observe the action of the receiver to
ascertain whether the actions are in conformity with the intent and
understanding of the message.
7) Mutual trust and faith : No amount of seriousness of the parties involved
can make the process of communication effective unless there is mutual
trust and faith between them. The best means of developing these among
people in an organisation are honesty of purpose and openness of the
managers. However, it takes time to build such a climate. Both managers
and subordinates have to cooperate for the purpose so that individuals feel
free to make suggestions and correct each other’s views without
misunderstanding.
14.9 DEFINITION OF COORDINATION

You must have seen that in an orchestra, its conductor directs activities of the
group in such a manner that it produces harmony and melody in music. Similarly,
in an enterprise a manager (conductor) must also direct the activities of the
group in such a manner that it brings harmonious and united action to achieve
the common goal.
In every organisation, division and sub-division of activities become necessary

to derive the benefits of specialisation and smooth operation. Individuals and
members of groups are expected to contribute maximum efforts in the
performance of their tasks. But, to ensure that their efforts are non conflict with
each other, individual and group activities are to be harmonised so that there is
unity of action. The process by which a manager brings unity of action in an
organisation is coordination. Thus, managers at all levels are required to
coordinate the efforts of their subordinates.
Coordination refers to the orderly arrangement of individual and group

efforts to ensure unity of action in the realisation of common objectives. It
involves synchronisation of different actions or efforts of the various units of an
organisation to provide the requisite amount, quality, timing and sequence of
efforts so that the planned objectives may be achieved with minimum of conflict.
According to Brech, “Coordination is balancing and keeping together the team

by ensuring suitable allocation of tasks to the various members and seeing that
the tasks are performed with the harmony among the members themselves.”
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Communication, Motivation According to McFarland, “Coordination is the process whereby an executive
and Leadership
develops an orderly pattern of group efforts among his subordinates and secures
unity of action in the pursuit of common purpose.”
The Haimann defines Coordination as “the orderly synchronising of efforts of

the subordinates to provide the proper amount, timing and quality of execution
so that their united efforts lead to the stated objectives, namely the common
purpose of the enterprise.” From the above definitions we can infer that
coordination is a conscious process of assembling and synchronising various
kinds of activities with a view to achieve specific objectives.
The following five points emerge from the above discussion :
1) Harmonisation of group efforts : Most of the management thinkers have

emphasised on harmonisation of group efforts to point out that organisation
is not merely a collection of men, money, material, machines, methods, but
these resources need to be properly organised. Besides, subordinates efforts
must also be synchronised to ensure proper timing and quality of execution
so that the organisational objectives are realised.
2) Unity of action : Each individual in the organisation performs certain unique

and different types of tasks. He is not only related with others in the
organisation (through structure) but his function also affects other’s
functions. A manager tries to synchronise individual efforts to attain unity
of efforts in the pursuit of common objectives. Coordination, therefore,
applies to group efforts.
3) Pursuit of common purpose : Each employee has goals, perceptions,

values, beliefs, attitudes etc, and makes every effort to achieve his own
goals. When individuals and groups work for achieving their objectives,
they also contribute something for the achievement of organisational goals.
The conflict, if any, between personal and organisational goals gets resolved
through coordination. Managers have to persuade individuals and groups
to work for a common purpose while achieving their own objectives as
well.
4) Continuous process : Coordination is not a one-shot deal but a continuous

process. It starts with the very first action in the process of establishment of
business and runs through until its closure. It is a continuous process for
achieving unity of purpose in the organisation.
5) Responsibility : It should be noted here that coordination is the most

important responsibility of every manager in the organisation as he tries to
synchronise the efforts of his subordinates with others. When this is not felt
or realised by managers, there is a need to appoint special coordinators.
14.10 OBJECTIVES OF COORDINATION

You have learnt the meaning and need for coordination. Let us now discuss the
objectives of coordination which have been listed as below:
1) Reconciliation of goals : Conflicts in organisation arise because of
differences between organisational goals and individual goals and the
18
individualistic perception of goals and its realisation. Coordination is the Communication and
Coordination
only means by which such conflicts can be avoided.
2) Total accomplishment of goals : Although individuals are firmly committed
for the achievement of organisation goals. Individual contribution to work
bring about total accomplishment which is in excess of the aggregate of the
individual contribution. This is realised through the establishment of a
reporting system and clear cut spelling out of business objectives.
3) Harmonious relationships : Another objective of coordination is to
maintain harmonious relationship between individual and the organisation.
Individuals derive satisfaction when their work performance brings about
realisation of the desired goal. This keeps their morale high.
As the organisation is structured with clear lines of authority and
responsibility, conflict between line and staff personnel is minimised and
better relationship is established.
4) Economy and efficiency: Coordination aims at bring about economy and
efficiency of operations through synchronisation of activities and individual
efforts whereby wastage of resources is minimised. There is saving of time
and expense. Reduced rejection and minimum delays in execution lead to
efficiency in the operations of the organisation.

i) Communication suffers from semantic barrier when the message is
conveyed in vague words.
ii) As a principle, communication must be consistent with long-term
interests and goals while meeting short-term needs.
iii) Action should be taken on messages on a ‘first come first serve’ basis.
iv) A subordinate should not be permitted to ask questions on the
communication received from his superior.
v) Verbal acceptance of a communication is not enough, it must be acted
upon.
i) Mutual faith and trust can be developed if there is ................... and
................... to ............... the viewpoints of each other.
ii) Messages should convey something of value to the receiver in the light
of his ............. and ...................
iii) Subordinates do not feel free to express their views on policy matters
to their superiors due to difference in ..............................
iv) The most persuasive communication is that which is conveyed through
.......................... of the communicator following the communication.
v) ........................ is as important in communication as speaking.
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and Leadership 14.11 LET US SUM UP
Communication means transmission of messages or exchange of ideas, facts,
opinion or feelings by two or more persons. Communication does not only involve
sending a message but also its acceptance by the receiver. It is essentially a two-
way process. It is not complete unless the receiver has understood the message
and his reaction is known to the self of the message.
Communication is a cooperative process involving two parties, each having the

ability to convey and listen to what his counterpart communicates. The response
to a communication is as essential as the initial communication. The message
may be communicated verbally, in writing, through gestures, signs or symbols.
The purpose of communication is to pass information and understanding to bring
about commonness of purpose, interest and efforts. It is a continuous process in
management. The process of communication includes the following steps; (1)
clear perception of the idea or problem by the sender, (2) participation of others
involved, (3) transmission of the message, (4) motivation of the receiver, and
(5) evaluation of the effectiveness of communication.
The basic elements of the communication process are: (a) The communicator,
(b) Encoding, (c) Message, (d) Medium, (e) Decoding, (f) Receiver, and (g)
Feedback.
Communication channels may be of two broad types: Formal and Informal.

Formal channels of communication are based on organisational relationships
formally established by the management. These are used for the transmission of
official messages within and outside the organisation. Formal communication
corresponds to the chain of command.
Communication which takes place on the basis of informal or social relations

among people in an organisation is known as informal communication. Generally,
such communications do not follow the formal channels. It is also known as
grapevine. Channels of communication may be divided into three categories
according to the direction of the flow viz., vertical, horizontal or lateral, and
diagonal communication.
Communication that takes place between persons occupying superior and

subordinate positions in the organisational hierarchy is known as vertical
communication. The direction of flow of vertical communication may be
downward or upward. Downward communication flows from higher level
managers to others in lower level positions. Upward communication flows from
subordinates to superiors in the hierarchy of management. Horizontal or lateral
communication refers to communications that take place directly between persons
having equal ranks, or between subordinates under the same manager. Diagonal
communication implies exchange of information between persons who are placed
at different levels and in different departments.
Adequate and timely communication is necessary for managers to be able to

carry out their functions successfully. Effective communication contributes to
higher efficiency in job performance and ensures willing cooperation of others.
The quality of decisions made by managers depends largely on the amount and
quality of information available to them. Further, communication provides the
20
means by which delegation and decentralisation is accomplished. Coordination Communication and
Coordination
of interdependent activities requires continuous flow of information and exchange
of views among managers. The effectiveness of communication also helps in
moulding the attitudes and building up employee morale. Barriers which stand
in the way of effective communication are: (1) multiplicity of organisational
layers; (2) language and semantic problems; (3) status difference; (4) physical
distance; (5) emotional and psychological factors.
The guidelines or principles which may be followed for effective communication

include: (1) systematic analysis of the idea or problem; (2) the purpose
determining language, means and media of communication; (3) the importance
of timing, physical setting, and the organisational climate as determinants of the
success in communication; (4) planning communication in consultation with
others; (5) consideration of the impact of the basic content and overtones of the
message and receptiveness to the receiver’s viewpoints; (6) necessity of
conveying something of value to the receiver; (7) need for follow-up by
encouraging the receiver to give his reaction, or by review of performance and
ensuring feedback; (8) consistency of communication with the long-term interest
and goals; (9) importance of action following the initial communication; (10)
understanding the reaction and attitude of the receiver.
To make communication effective, the following factors should be given due

attention; (1) regulating the flow of communication; (2) feedback; (3) use of
appropriate language; (4) listening carefully; (5) restraint over emotion; (6)
looking for non-verbal cues of compliance; and (7) mutual trust and faith.
Coordination refers to the orderly arrangement of individual and group efforts

to ensure unity of action in the realisation of common objectives. The objectives
of coordination are: reconciliation of goals, total accomplishment of goals,
harmonious relationships and economy and efficiency.
14.12 KEY WORDS

Communication Barriers : The problems which create confusion,
misunderstanding and lead to breakdown of
communication process.
Communication Channel : The direction or path through which the flow
of communication takes place.
Coordination : It refers to orderly arrangement of individual
and group efforts to ensure unity of action in
the realisation of common objectives.
Decoding : Conversion of a message by the receiver into
meaningful term.
Diagonal Communication : Exchange of information between persons
holding different ranks and places in different
departments.
Downward Communication : The flow of communication is from the higher
to the lower levels of management.
21
Communication, Motivation Encoding : Expressing the message to be communicated
and Leadership
in a suitable language.
Feedback : The reaction or response of the receiver to the
message.
Formal Communication : It refers to communication among people
strictly as per the channels laid down in the
organisation structure.
Grapevine : Channels or flow of informal communication.
Horizontal or Lateral : Communication between persons holding
Communication similar ranks in the same or different
departments.
Informal Communication : It flows through unofficial channels not
specified in the organisation structure.
Transmission : The act of saying, sending or issuing the
message.
Upward Communication : This type of communication flows from lower
level positions to higher level positions.
Vertical Communication : Flow of communication between persons
having superior- subordinate relations.

A) 1. (i) Right, (ii) Wrong, (iii) Wrong,
(iv) Wrong, (v) Right, (vi) Wrong.
2. (i) Continuous, (ii) decode, (iii) Feedback,
(iv) Convey, listen to, (v) media
B) 1. (i) Organisational, (ii) Higher-level, lower-level,
(iii) Adequate, timely (iv) Efficiency, (v) Coordination
2. (i) Right, (ii) Wrong, (iii) Wrong, (iv) Right, (v) Right.
C) 1. (i) Wrong, (ii) Right, (iii) Wrong, (iv) Wrong, (v) Right.
2. (i) Honesty of purpose, openness, (ii) Interest, need,
(iii) Status, (iv) Action, (v) Listening.

1) Define ‘Communication’. Why is communication of vital importance to
management?
2) State and explain the basic elements of the communication process.
3) What are the steps involved in the process of communication? Discuss.
4) Distinguish between formal and informal communication. Why is informal
communication called ‘grapevine’?
22
5) Explain the nature and significance of vertical, horizontal and diagonal Communication and
Coordination
communication channels.
6) What are the most common barriers to effective communication? How can
they be overcome?
7) Discuss the major principles of communication. How can communication
be made effective?
8) Write Notes on
a) Status barrier to communication
b) Communication channels
c) Emotional and psychological barriers to communication
d) Informal communication
9) What do you mean by coordination? Describe the objectives of coordination.
write answers for them. But, do not submit your answers to
23
and Leadership UNIT 15 MOTIVATION
Structure
15.0 Objectives
15.1 Introduction
15.2 Concept of Motivation
15.3 Nature of Motivation
15.4 Process of Motivation
15.5 Role of Motivation
15.6 Theories of Motivation
15.6.1 McGregor’s Participation Theory
15.6.2 Maslow’s Need Priority Theory
15.6.3 Herzberg’s Motivation Hygiene Theory
15.6.4 Distinction between Herzberg’s and Maslow’s Theories
15.6.5 Relationship between Maslow’s and Herzberg’s Theories
15.6.6 Job Enrichment
15.7 Types of Motivation
15.7.1 Financial Motivation/Incentives
15.7.2 Non-Financial Motivation/Incentives
15.8 Let Us Sum Up
15.9 Key Words
15.0 OBJECTIVES
explain the concept of motivation and the process of motivation
describe the significance of motivation in present day organisations
analyse some of the theories of motivation
compare Maslow’s Need Hierarchy Theory with Herzberg’s Motivation
Hygiene Theory
explain the importance of job enrichment and its limitations in work
motivation
classify different types of motivations — positive and negative, extrinsic
and intrinsic and financial and non-financial
explain the relative importance of financial and non-financial incentives.
15.1 INTRODUCTION
In any organisation, all employees do not perform their work with equal
efficiency. Some are found to be more efficient than others. The difference in
24 their performance can be attributed either to differences in their abilities or in
their urge or willingness to perform as best as possible. Given the ability and Motivation
skill, it is the motive of employees which determines whether they will be more
or less efficient. Employee motivation i.e. bringing about an inner urge or desire
in employees to work to the best of their ability is an important function of
management. In this Unit, we shall deal with the concept and process of
motivation, its importance, theories of motivation and the types of incentives
which may be provided to motivate people.
15.2 CONCEPT OF MOTIVATION

Motivation may be defined as the complex of forces inspiring a person at work
to intensify his willingness to use his maximum capabilities for the achievement
of certain objectives. Motivation is something that motivates a person into action
and induces him to continue in the course of action enthusiastically. It determines
the behaviour of a person at work. According to Dalton E. McFarland
“Motivation refers to the way in which urges, drives, desires, aspirations,
striving, or needs, direct control or explain the behaviour of human being.”
The term ‘motivation’ is derived from the word ‘motive’. Motive may be defined
as needs, wants, drives or impulses within the individual. Motives are expressions
of a person’s needs and hence they are personal and internal. In this context, the
term ‘need’ should not be associated with urgency or any pressing desire for
something. It simply means something within an individual that prompts him to
action. Motives or needs are ‘why aspects’ of behaviour. They start and maintain
activity and determine the general direction of the person. Motives give direction
to human behaviour because they are directed towards certain ‘goals’ which
may be conscious or sub-conscious.
Motives or needs of a person are the starting point in the motivation process.
Motives are directed towards the achievement of certain goals which in turn
determine the behaviour of individuals. This behaviour ultimately leads to goal
directed activities such as preparing food and a goal activity such as eating
food. In other words, unsatisfied needs result in tension within an individual
and engage him in search for the way to relieve this tension. He will develop
certain goals for himself and try to achieve them. If he is successful in his attempt,
certain other needs will emerge which will lead to setting a new goal. But if he
is unsuccessful he will engage himself in either constructive or defensive
behaviour. This process keeps on working within an individual.
15.3 NATURE OF MOTIVATION

Motivation helps in inspiring and encouraging the people to work willingly.
1) Motives are the energising forces within us : These forces are invisible
and it is very difficult to measure them, because all of us are different and
the motives energising us at a point differ from time to time. All that is
possible is to observe and measure the behaviour we choose and from this
behaviour make a kind of backward causation statement to the possible
motive. Observing someone’s behaviour may indicate that a certain need is
present in this person, motivating him onward.
25
Communication, Motivation 2) One motive may result in many different behaviours : The desire for
and Leadership
prestige may lead a person to run for political office, give money away, get
additional educational training, steal, join, groups or may change his outward
appearance. A person wanting acceptance will behave differently in a car
pool, office secretarial pool, or swimming pool.
3) The same behaviour may result from many different motives : Behaviour
may be caused by a number of different motives. For instance the motives
underlying purchase of a car may be: to appear younger and attractive; to
appear respectable; to gain acceptance from others; to maintain the
acceptance already gained through a similar income level; to satisfy
economic values and to reinforce company created status differentials. Thus
it would be wrong for the manager of an organisation to lump all behaviour
as coming from the same motive people join unions, get married, attend
class, laugh at professor’s jokes for many different reasons (motives). Thus
a motive cannot be identified from any specific behaviour.
4) Behaviour can be used as an estimate of an individual’s motives : It is

possible to get repeated observations of one individual’s behaviour and
then make an estimate of the cause of that behaviour. For example, there is
truth in the statement that some people always seem to feel insecure and
thus behave continuously in a manner reflecting the insecurity of feeling.
There are also people who behave in away that radiates confidence. They
are confident in many different social settings so that one finds a constant
and repeated behaviour from which people probably estimate the motive of
the person. Obviously, if a person is at a state of near starvation, most of his
behaviour will be related to the need for food. Although it is dangerous to
categorise people, it is also wrong to believe that individual behaviour,
when looked at in a time perspective, cannot be used as an estimate for
motivation.
5) Motives may operate in harmony or in conflict : Behaviour is frequently

the result of the interplay of several motives. These motives may push a
person in one direction or in a number of directions. For example, a girl
may want to get high grades in school while also wanting to help her mother
in the kitchen. An athlete may desire an outstanding performance and may
also be sensitive to being shunned by his fellow team-mates if he performs
too well and receives too much of credit. Behaviour, therefore, is the result
of many forces differing in direction and intent.
6) Motives come and go : It is very rare that a motive has the same energy
potential over a long period of time. A young man who prefers to travel
during vacation may give up the idea during the football season because
the joy of travelling takes second place to the need to play football. The girl
who is overly concerned about her hair and clothes during adolescence
may turn her attention to other things once she grows up. Because humans
are constantly growing, the motive at one point in time will not be as intense
as the motive at another point in time.
7) Motives interact with the environment : The situation at a particular point

in time may trigger or suppress the action of a motive. You probably have
experienced situations where you did not realize the intensity of your hunger
26
needs until your smelling senses picked up the odour of palatable food. Motivation
Similarly, many of these sociological needs become stimulated when you
are in a situation filled with the sociological factors. Thus needs that may
be latent can be quickly stimulated by the environmental situation. We have
now identified a number of generalisations that could be useful in
understanding the concept of motivation. The topic of human motivation is
very complex and is related to other fundamental ideas such as drives and
needs so that it is difficult to put our thinking into a clear system of
relationships.
15.4 PROCESS OF MOTIVATION

The basic elements of the process of motivation are (i) behaviour (ii) motives
(iii) goals and (iv) some form of feedback as shown in figure 15.1
Motive ——— Behaviour ——— Goal
Tension reduction
Fig. 15.1: Process of Motivation
Behaviour : All behaviour is a series of activities. Behaviour is generally

motivated by a desire to achieve a goal. At any moment individuals may indulge
in multifarious activities like walking, talking, eating, and so on. They switch
over from one activity to another activity swiftly. In order to predict and control
behaviour, managers must understand the motives of people.
Motives (Needs/drives/wants) : Motives prompt people to action. They are the

primary energisers of behaviour. They are the ‘ways’ of behaviour and
mainsprings of action. They are largely subjective and represent the mental
feelings of human beings. They are cognitive variables. They cause behaviour
in many ways. They arise continuously and determine the general direction of
an individual’s behaviour.
Goals : Motives are directed toward goals. Motives generally create a state of
disequilibrium, physiological or psychological imbalance, within the individuals.
Attaining a goal will tend to restore physiological or psychological balance.
Goals are the ends which provide satisfaction of human wants. They are outside
an individual; they are hoped for incentives toward which needs are directed.
One person may satisfy his need for power by kicking subordinates and another
by becoming the president of a company. Thus, a need can be satisfied by several
alternate goals. The particular goals chosen by an individual depends on four
factors; (i) the cultural norms and values that are instilled as one matures, (ii)
one’s inherited and biological capabilities, (iii) personal experience and learning
influences and (iv) mobility in the physical and social environment.
The dilemma posed by a large number of needs can often be resolved by

integrating wants where one activity may satisfy several needs. Researchers
27
Communication, Motivation have found that many overweight people continue to eat excessively because
and Leadership
they have fused the satisfaction of a number wants (Love, Security, Comfort)
into the act of eating. Eating, in a way, releases the tension built by the numerous
unsatisfied needs.
The process of motivation discussed above implies that individuals possess a

host of needs, desires and expectations. All of these needs compete for their
behaviour and ultimately the need with the maximum strength at a particular
moment leads to activity. When a need is satisfied, it is no longer a motivator of
behaviour.
15.5 ROLE OF MOTIVATION

The following factors contribute to the significance of the role of motivation :
1) Managers and organisational researchers cannot avoid a concern with the
behaviour requirements of an organisation. Every organisation needs people
(in addition to physical and financial resources) in order to function.
2) Motivation as a concept is pervasive and a highly complex activity that
affects and is affected by a host of factors in the organisational milieu.
3) Organisational effectiveness becomes to some degree a question of
management’s ability to motivate its employees, to direct at least a
reasonable effort toward the goals of the organisation.
4) As technology increases in complexity, machines tend to become necessary,
but insufficient vehicles of effective and efficient operations. In other words,
it becomes necessary for an organisation to ensure that it has employees
who are both capable of using and willing to use the advanced technology
to achieve organisational goals.
5) Many organisations are now beginning to pay increasing attention to develop
their employees as future resources (for talent bank) upon which they can
draw as they grow and develop.

i) Motives and needs are the ‘whys aspects’ of behaviour.
ii) Motives always operate in harmony and drive individuals in a single
direction.
iii) To control the behaviour of subordinates, managers must understand
their motives.
iv) Environment has nothing to do with human motive.
v) Motives do not change in intensity over time.
i) Motives are expressions of a person’s and hence they are personal and
..........................
ii) ........................ can be used as an estimate of an individual’s motives.
28
iii) .................................... needs may be quickly stimulated by the Motivation
environment.
iv) Motives are directed towards ..............................
v) Organisational effectiveness is to some degree a question of the
management’s ability to .............................. the employees.
15.6 THEORIES OF MOTIVATION

Theories of motivation generally aim at analysing the process of motivation and
indicating how to motivate people. We shall discuss here three well known
theories of motivation. These are McGregor's participation theory; Mashlow's
need priority theory and Herzberg’s two factors theory.
15.6.1 McGregor’s Participation Theory

Douglas McGregor formulated two sets of assumptions about human beings
based on the participation of workers. The first set of assumptions are contained
in Theory X and the second set of assumptions are contained in Theory Y’. In
the Theory X, McGregor proceeds with the assumption that the average human
being has inherent dislike for work and will avoid it if he can. The managers of
such employees think that “most people must be coerced, contributed, directed,
threatened with punishment to get them put forth adequate efforts towards the
achievement of organisational objectives.” Theory X presumes that people by
nature :
1) Lack integrity.
2) Are fundamentally lazy and desire to work as little as possible.
3) Avoid responsibility.
4) Are not interested in achievement.
5) Are incapable of directing their own behaviour.
6) Are indifferent to organisational needs.
7) Prefer to be directed by others.
8) Avoid making decision whenever possible.
9) Are not very bright.
McGregor described Theory X as the traditional theory of how are the workers
and what management must do to manage them. Workers have to be persuaded
and pushed into performance. Workers may be made to work only through
autocratic leadership. After describing Theory X, McGregor questioned if this
view of human behaviour is correct. He propounded theory Y which, he felt
better represents the human behaviour. Under theory Y, it is assumed that people
by nature:
1) Have integrity.
2) Work hard towards objectives to which they are committed.
3) Assume responsibility within their commitments.
4) Desire to achieve.
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Communication, Motivation 5) Are capable of directing their own behaviour.
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6) Want their organisation to succeed.
7) Are not passive and submissive.
8) Will make decisions within their commitments.
In developing theory Y, McGregor made the following assumptions:
1) Engaging in physical and mental efforts — as natural as play or rest. The
average human being does not inherently dislike work.
2) External control and the threat of punishment are not the only mean of
directing efforts towards organisational objectives. Man will exercise self-
direction and self-control in the service of objectives to which he is
committed.
3) Commitment to objectives follows the rewards associated with their
achievement. The most significant of such rewards namely satisfaction of
ego and self-actualisation needs, can be the direct result of efforts toward
organisational objectives.
4) The average human being learns, under proper conditions, not only to accept
but to seek responsibility. Avoidance of responsibility, lack of ambition
and emphasis on security are generally consequences of experience and
not inherent human characteristics.
5) The capacity to exercise a relatively high degree of imagination, ingenuity,
and creativity in the solution of organisational problems is widely, not
narrowly, distributed in the population.
6) Under the conditions of modem industrial like the intellectual potentialities
of the average human being are only partially utilised.
The assumptions of McGregor’s theory Y suggest a new approach to
management. It lays greater emphasis on cooperation between management and
workers. The managers following this theory aim at getting maximum output
with minimum degree of control. Generally, no conflict is visible between the
organisational goals and individual goals. Thus, the efforts of employees which
are in their best interest are also in the interest of the organisation. Theory Y has
proved to be useful in such management practices as job enrichment,
decentralisation and participative management. However these techniques are
applicable in organisations where self-motivated, self-controlled mature and
responsible people work. According to McGregor, researches in the behavioural
sciences have shown that the assumptions of theory Y are more valid than the
practices of theory X.
Appraisal
McGregor’s contribution should be analysed in the proper perspective. All that
he postulated and sought to dramatise through his theory X and theory Y is to
outline the extremes to draw the fencing within which the organisational or
enterprise man is seen to behave. No enterprise man would belong either to
theory X or theory Y. He shares the traits of both, with emphasis shifting from
one set of properties to the other with changing moods and impulses (needs and
motives) and with the varying environment.
30
The chief merit of McGregor’s formulation is that it helped to crystallise and set Motivation
the right perspective to the findings of Elton Mayo, which had then puzzled
management and productivity experts and set in motion a wave of research into
the behaviour of the enterprise man. It (alongwith Hawthorne Studies) can be
said to have been the starting point and mainspring that evoked wide and lasting
interest in the area of motivation, leadership and techniques of manipulating
behaviour of the human element of the enterprise.
One might get the impression that theory X is bad and theory Y is good. This is
not true because the assumptions under these theories are attitudes or
predispositions of managers towards people. They are not behaviour patterns.
Thus, although the ‘best’ assumptions for a manager to have may be theory Y, it
may not be advisable to behave consistently with these assumptions about human
nature. He may find it necessary to behave in a very directive manner (as if he
had theory X assumptions) with some people in the short-run to help to be matured
and self-motivated as per Y theory.
15.6.2 Maslow’s Need Priority Theory

Maslow’s theory is based on the needs of people. Maslow was of the view that
the process of motivation begins with behaviour which at least in part, is directed
towards the satisfaction of needs. He proposed that human needs can be arranged
in a particular order from the lower to the higher as shown in figure 14.2.
Self-actualisation
needs
Esteem and staus
Self fulfilment
needs
Growth
Social needs Recognition Advancement
Status Development
Safety and
Affection Self respect Desire to take on
Security needs
Love Competence increased
Personal security Affiliation Achievement responsibilities
Physiological
Security of the Acceptance Prestige Liberation of
needs
source of income Belongingness Independence creative talents
Provision for old Communication
Food
Air age
Water Insurance
Shelter against risk
———Primary Needs——— ——————Secondary Needs————————

Fig. 14.2 : Maslow’s Need Hierarchy
1) Physiological needs : The needs that are taken as the starting point of
motivation theory are the physiological needs. These needs relate to the
survival and maintenance of human life. These needs include such things
as food, clothing, shelter, air, water and other necessities of life. These
needs must be met at least partly before higher level needs emerge. They
exert tremendous influence on behaviour. They are the most powerful of
motivating stimuli. Therefore, we must satisfy most of them for survival.
2) Safety and security needs : After satisfying the physiological needs, people
want the assurance of maintaining a given economic level. These needs
include: job security, personal security, security of the income, provision
for old age, insurance against risks, etc. 31
Communication, Motivation 3) Social needs : Man is a social being. He is, therefore, interested in
and Leadership
conversation, social interaction, exchange of feelings, companionship,
recognition, belongingness, etc. Socialising is one of those reasons why
many individuals (especially older people) go to work, and why people
generally work better in small groups where they can develop affiliations
that are important to them.
4) Esteem and status needs : These are concerned with awareness of self
importance and recognition from others. Most people feel this need to be
rated higher than other needs and seek recognition and respect on that
account. Satisfaction of esteem needs produces feelings of self-confidence,
prestige, power, and control. The fulfilment of esteem needs leads to self
confidence strength and capability of being useful in the organisation.
Whereas inability to fulfil these needs results in feelings of inferiority,
weakness and helplessness.
5) Self-actualisation needs : The final step under the need priority model is
the need for self-actualisation. This is also called self fulfilment or the need
to fulfil what one’s potentialities for continued self-development and for
being creative in the broadest sense of that term. After his other needs are
fulfilled, a man has the desire for personal achievement. He wants to do
something which is challenging and since this challenge gives him enough
dash and initiative to work, it is beneficial to him in particular and to the
society in general. The sense of achievement gives him satisfaction.
Maslow felt that the needs have a definite sequence of domination. The second
need does not dominate until the first is reasonably satisfied. The third need
does not dominate until the first two needs have been reasonably satisfied and
so on. The other side of the need hierarchy is that man is never satisfied. If one
need is satisfied another need arises. According to Maslow, if one’s lower order
needs (physiological and security needs) are not satisfied, he can be motivated
only by satisfying these needs first and not by satisfying the higher order needs.
Further, once a need or a certain order of needs is satisfied, it ceases to be a
motivating factor.
The physiological and security needs are finite, but the needs of higher order are
sufficiently infinite and are likely, to be dominant in persons at higher levels in
the organisation. Studies have also revealed that those needs which are thought
to be most important like social needs, ego needs and self-realisation needs are
also the best satisfiers.
Do needs follow a hierarchy
The need priority model may not apply at all times in all places. Surveys in
continental European countries and Japan have shown that the model does not
apply very well to their managers. The degree of satisfaction of needs does not
vary according to the need priority model. For example, workers in Spain and
Belgium felt that their esteem needs are better satisfied than their security and
social needs. Apparently, cultural differences are an important cause of these
differences. Thus, need hierarchy may not follow the sequence postulated by
Maslow. Even if safety need is not satisfied, the ego or social need may emerge.
The proposition that one need is satisfied at one time is also of doubtful validity.
The phenomenon of multiple motivation is of great practical importance in
understanding the behaviour of man. Man’s behaviour at any time is mostly
32 guided by multiplicity of motives. However, one or two motives in any situation
may bp predominant while others may be of secondary importance. Moreover, Motivation
at different levels of needs, the motivation will be different. Money can act as a
motivator only for physiological and social needs, not for satisfying higher order
needs. Employees are enthusiastically motivated by what they are seeking, more
than by what they already have. They may react protectively to try to keep what
they already have, but they move forward with enthusiasm only when they are
seeking something else. In other words, man works for bread alone as long as it
is not available.
There are always some people in whom, for instance, need for self-esteem seems
to be more prominent than that of love. There are also creative people in whom
the drive for creativeness seems to be more important. In certain people, the
level of motivation may be permanently lower. For instance, a person who has
experienced chronic unemployment may continue to be satisfied for the rest of
his life if only he can get enough food. Another cause of reversal of need hierarchy
is that when a need has been satisfied for a long time it may be under-evaluated.
15.6.3 Herzberg’s Motivation Hygiene Theory

A significant development in motivation theory is based on the distinction
between motivational and maintenance factors in job situation. On the basis of
his research findings Herzberg drew a distinction between what he called
‘motivators’ and ‘hygiene’ factors.
Some job conditions operate primarily to dissatisfy employees when the
conditions are absent, but their presence does not motivate employees in a strong
way. Many of these factors are traditionally perceived by management as
motivators, but these are really more potent as dissatisfiers. The potent
dissatisfiers are called maintenance factors in job because they are necessary to
maintain a reasonable level of satisfaction among the employees. They are also
known as dissatisfiers or ‘hygienic factors’ because they support employees’
mental health. Another set of job condition operates primarily to build strong
motivation and high job satisfaction but their absence rarely proves strong
dissatisfier. These conditions are ‘Motivational Factors’. Herzberge’s
maintenance and motivational factors have been shown in the table given below.
Table 15.1: Herzberg’s Maintenance and Motivational Factors
Physiological or Primary Needs
Need Structure
Social, Psychological, Ego, or Secondary Needs
Maintenance or Hygienic Factors Motivational Factors

1) Company Policy and Administration 1) Achievement
2) Technical Supervision 2) Recognition
3) Inter-personal relations with Supervisor 3) Advancement
4) Inter-personal relations with Peers
4) Work itself
5) Inter-personal relations with Subordinates
5) Possibilities of growth
6) Salary
6) Responsibility
7) Job Security
8) Personal life
9) Working Conditions
10) Status
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Communication, Motivation Hygienic factors include wages, fringe benefits, physical conditions and overall
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company policies and administration. The presence of these factors at a
satisfactory level prevents job dissatisfaction, but they do not provide motivation
to the employees. So they are not considered as motivational factors. Motivational
factors on the other hand are essential for increasing the productivity of the
employees. They are also known as satisfiers and include such factors as
recognition, feeling of accomplishment and achievement, opportunity of
advancement and potential for personal growth, responsibility and sense of job
and individual importance, new experience and challenging work etc.
Herzberg further stated that managers have hitherto been very much concerned
with hygienic factors. As a result, they have not been able to obtain the desired
behaviour from employees. In order to increase the motivation of employees, It
is necessary to pay attention to the satisfiers or motivational factors.
According to Herzberg today’s motivators are tomorrow’s hygiene because the

latter stop influencing the behaviour of persons when they get them. When a
person gets one thing, then something else will motivate him and the need which
has been fulfilled will have only negative significance in determining his
behaviour. It should also be noted that one’s hygiene may be the motivator of
another. For instance it is likely that workers in underdeveloped economies will
designate some of the maintenance factors as motivators because their primary
needs have not been fulfilled and they continue to be motivated by these factors.
15.6.4 Distinction between Herzberg’s and Maslow’s Theories

Both Herzberg and Maslow theories focus on motivational factors. Maslow’s
motivation theory is based on the hierarchy of needs. According to him an
unsatisfied need becomes a motivating factor for the individual and governs his
behaviour in that direction. But Herzberg has developed a theory of motivation
by differentiating between motivational and maintenance (or hygienic) factors.
Maintenance factors avoid job dissatisfaction but do not provide motivation to
workers. According to him lower order needs like physiological, safety and social
needs act as maintenance factors.
Herzberg’s theory has a limited applicability in the sense that it is more applicable
to professional personnel, Maslow’s theory on the other hand has universal
applicability, it is applicable to all kinds of workers.
— Motivation
Self-actualisation
Esteem
Social
Safety
Physiological
Maintenance
34 Fig. 14.2: Relationship between Maslow’s and Herzberg’s Theories

15.6.5 Relationship between Maslow’s and Herzberg’s Theories Motivation
Though there are differences between the theories of Herzberg and Maslow still
they are related to each other. Most of the maintenance factors of Herzberg
come under comparatively lower order needs. Most of these needs remain
satisfied and hence cease to be motivating. Maslow’s physiological, security
and social needs come under Herzberg’s maintenance factors while self-
actualisation comes under motivating factors. A portion of esteem needs like
status becomes part of the maintenance factors and the remaining portion
including advancement and recognition comes under motivational factors.
15.6.6 Job Enrichment

Herzberg attached greater importance to job enrichment in his two factor theory.
Job enrichment implies enriching the content of job or the deliberate upgrading
of responsibility, scope and challenge in work. Job enrichment is a motivational
technique which emphasises the need for challenging and interesting work. It
suggests that jobs be redesigned so that intrinsic satisfaction is derived from
doing the job. In its best application, it leads to a vertically enhanced job by
adding functions from other organisational levels so as to contain more variety,
and challenge and offering autonomy and pride to the employee.
The term job enrichment should be distinguished from the term ‘job enlargement’.
Job enlargement attempts to make a job more varied by removing the dullness
associated with performing repetitive operations. It involves a horizontal loading
or expansion i.e. the addition of more tasks of the same nature. But in jobs
enrichment, the attempt is to build into job a higher sense of challenge and
importance of achievement. Job enrichment involves vertical loading. Additions
in job enrichment require higher levels of skills and competence.
Some of the principles which make job enrichment effective are:
1) Give the workers the freedom of operation and responsibility.
2) Managers should have better understanding of what workers really want.
They wish that their managers feel concerned about the welfare.
3) Workers should be consulted and given the chance to offer their suggestions.
4) Introduce new and more difficult tasks at each step, giving workers an
opportunity to learn and specialise.
5) The workers should be given frequent feedback on their performance.
Recognition and appreciation of their work induce them to learn more. It
also eliminates possibilities of wide variations. This increases the efficiency
of workers.
Advantages of job Enrichment
Following are the advantages of job enrichment:
i) It makes the work interesting.
ii) It decreases the rates of absenteeism and labour turnover.
iii) It helps motivation through opportunities for growth and advancement.
iv) It makes for task reinforcement and increases the skill of workers.
35
Communication, Motivation v) Workers get higher job satisfaction.
and Leadership
vi) The enterprise gains through improvement of output both quantitatively
and qualitatively and higher satisfaction of the workers.
Limitations of job Enrichment
Following are the limitations of job enrichment:
i) Technology may not permit the enrichment of all jobs. With specialised
machinery, it may not be possible to make jobs very meaningful.
ii) Job enrichment has proved to be a costly process in certain cases as the
expenditure involved is bigger than the gains in productivity.
iii) Jobs of highly skilled professional employees contain many challenging
elements, but they are not necessarily that much efficient.
iv) It is difficult to say that all workers really want challenging jobs. Many of
them even like to avoid responsibility. They seem to like above all job
security and pay.
v) All those who prefer job enrichment may not have the requisite capability
to meet the new challenges.
i) According to Theory X, workers can be made to work only through

.................. leadership.
ii) Needs that are taken as the starting point of Maslow’s motivation theory
are the ..................... needs.
iii) Lower order needs are .......................... but the higher order needs are
.............................
iv) ............................ factors also known as dissatisfiers are of negative

importance in motivation.
v) Job enrichment is a .......................... technique.
2) Match the following words/phrases in columns I and II by pairing the

alphabets and number against each:
Column I Column II
i) Hygienic factor a) Increased responsibility
ii) Theory X b) Achievement
ii) Theory Y c) Addition of similar tasks
v) Job enrichment d) Salary
vi) Real motivators e) Work is as natural as play
vi) Job enlargement f) Dislike of work

36
Motivation
15.7 TYPES OF MOTIVATION
Motivation may be classified on various bases :
1) Positive or negative
2) Extrinsic and intrinsic
3) Financial or non-financial
Positive motivation is the process of attempting to influence the employees’
behaviour through recognition and appreciation of employees’ efforts and
contribution towards achievement of organisational goal. Examples of positive
motivators are : taking interest in subordinates benefits, appreciation and credit
for work done, delegating the authority and responsibility to subordinates etc.
Negative motivation is based upon fear i.e. demotion, lay off etc. The fear of
punishment affects the behaviour towards changes. Though punishment has
resulted in controlling the misbehaviour and contributed towards positive
performance but it may also lead to poor performance & lower productivity.
The second classification relates to extrinsic and intrinsic motivation. Extrinsic
motivators arise away from the job. They do not occur on the job. These factors
include: wages, fringe benefits, medical reimbursement, etc. Thus, they are
generally associated with financial incentives. But, intrinsic motivators occur
on the job and provide satisfaction during the performance of work itself. Intrinsic
or internal motivators include: recognition, status, authority, participation, etc.
Lastly motivators may be financial or non-financial. Financial motivators are

those which are associated with money. They include: wages and salaries, fringe
benefits, bonus, retirement benefits, etc. Non-financial motivators are those which
are not associated with monetary rewards. They include: intangible incentives
like ego satisfaction, self- actualisation and responsibility. Here we shall be
confining our discussion only to financial and non-financial motivation/
incentives.
15.7.1 Financial Motivation/Incentives

Money plays an important role in motivation. Management generally make use
of financial incentives like wages and salaries, bonus, retirement benefits,
insurance, medical reimbursement, etc. to motivate the workers. However, such
incentives may not always prove to be motivating. In many cases, management
may have to increase the financial incentives to keep the workers with the
organisation. This can be appreciated from the practice of making wages and
salaries competitive among various enterprises so as to attract and maintain
good work-force.
Money is a real motivating factor when the physiological and security needs of
the workers have not been fully satisfied. Money plays a significant role in
satisfying these needs. Therefore, management can use financial incentive for
motivation. Money also helps in satisfying the social needs of employees to
some extent because money is often recognised as a symbol of status, respect
and power. Besides money is an important means of achieving a ‘minimum
standard of living’ although this ‘minimum’ has the tendency to go up as people
become more affluent. But this should not lead one to conclude that money will
always be a motivating factor to all people. To some people, importance of
37
Communication, Motivation money may be reduced after a certain stage, and non-financial rewards may
and Leadership
become more important. They are motivated by money only up to the stage they
are struggling for satisfying their physiological and security needs.
Money provides for the satisfaction of physiological and safety needs only which
have been called hygienic factors by Herzberg. Hygienic factors include: wages
and salaries and other fringe benefits. The presence of these factors at a
satisfactory level prevents job dissatisfaction. They do not provide ‘on a job
satisfaction’ to the employees and, therefore, cannot be considered as motivational
factors. According to Herzberg, in order to motivate the employees, it is necessary
to provide for the satisfaction of ego, social and self-actualisation needs. But
these needs are present generally in case of employees in the higher positions,
who get higher monetary rewards and are not motivated by increased monetary
benefits. In case of employees at the operative levels, money certainly plays a
significant role in motivating them because their survival and safety depends on
it.
From the above discussion, it can be said that money is not the only motivator
and it is not always a motivator. Management should therefore, establish a
motivational system which is capable of satisfying different kinds of human
needs. On the job, satisfaction can be provided by helping the employees to
develop themselves. Job enlargement, participative management, recognition,
status symbols, and making the job challenging are some of the other non-
financial incentives which also motivate employees.
15.7.2 Non-Financial Motivation/Incentives

When the physiological and security needs are satisfied with the help of money,
it ceases to be a motivating force; that is why it is regarded as a maintenance
factor. Indeed employees have other needs also. They want status and recognition
in society; they want to satisfy their ego needs and they want to achieve something
in their lives. In order to motivate the employees having these needs, management
may use the following non-financial incentives:
1) Competition : If there is healthy competition among individual employees,

groups of employees, it leads them to achieve their personal or group goals.
Hence, competition acts as a non-financial incentive.
2) Praise or Appreciation of work done : Recognition of satisfactory

performance acts as a non-financial incentive since it satisfies one’s ego
needs. Sometimes appreciation of work done is more effective than any
other incentive. However, this incentive should be used with great care
because praising an incompetent employee creates resentment among
competent employees.
3) Knowledge of the results : Knowledge of the results of work accomplished

leads to employee satisfaction. A worker feels happy if he is informed about
performance. He derives satisfaction when his superior appreciates the work
he has done. In modern industry, the production workers have no contact
with the consumers and so they cannot get the reaction of the consumers.
However, they can be motivated to a greater extent if they are told the
rating of their performance.
38
4) Workers’ participation in management : Participation in management Motivation
provides strong motivation to the employees. It gives them psychological
satisfaction that their voice is heard. Participation in management provides
for two-way communication and so imbibes a sense of importance.
5) Suggestion system : Suggestion system is an incentive which satisfies many

needs of the employees. Many organisations which use the suggestion
system make use of cash awards for useful suggestions. They sometimes
publish the worker’s name with his photograph in the company’s magazine.
This motivates the employees to be in search for something which may be
of greater use to the organisation.
6) Opportunity for growth : Opportunity for growth is another kind of

incentive. If the employees are provided opportunities for their advancement
and growth and to develop their personality, they feel very much satisfied
and become more committed to organisation goals.

i) Negative motivation influences behaviour through the threat of penalty.
ii) Intrinsic motivation includes such factors as wages, fringe benefits,
etc.
iii) Employees participation in management acts as a non-financial
incentive.
iv) Opportunity for growth is a financial incentive.
v) Money can be a motivator to an unlimited extent.
i) Money is a real motivating factor so long as ..................... and
................... needs are not fully satisfied.
ii) Positive motivation is based on ................
iii) Hygienic factors satisfy the .................. needs.
iv) Competition among employees is a ..................... incentive.
v) Knowledge of the result of one’s performance leads to ................
15.8 LET US SUM UP

Motivation may be defined as the complex of forces inspiring a person at work
to intensify his willingness to use his maximum capabilities for the achievement
of certain objectives. Motives or needs of a person are the starting point of the
motivation process. Motives are energising, invisible forces. One motive may
result in many different behaviours. Also the same behaviour may result from
many different motives. Behaviour can be used as an estimate of an individual’s
motive. Motives can operate in harmony or in conflict. Motives change over
time. Motives can also interact with the environment.
The basic elements of the process of motivation are : (i) behaviour, (ii) motives,
(iii) goals, (iv) some form of feedback or reaction. Behaviour is generally 39
Communication, Motivation motivated by the desire to achieve a goal. Motives are directed towards goals
and Leadership
and prompt people to action.
McGregor formulated two sets of assumptions about human beings, which formed
the basis of Theory X and Theory Y of motivation. He described Theory X as
the traditional theory which required workers to be persuaded and pushed into
performance on the assumption that the average human being dislikes work and
would avoid it if he can. He propounded Theory Y based on the assumption that
people by nature love work and can exercise self- direction and self-control in
the service of objectives to which they are committed.
Maslow’s need priority theory is based on needs of people which arise in sequence
and hierarchical order from physiological needs through security needs, social
needs, esteem needs and self-fulfilment needs. Herzberg’s two-factor theory
distinguishes between maintenance or hygienic factors and motivational factors,
the former having only negative significance and the latter having positive effect
on motivation. The absence of maintenance factors like wages, job security,
physical conditions of work and such extrinsic elements cause dissatisfaction,
but their presence does not provide motivation. On the other hand, motivational
factors such as recognition, achievement, etc. are essential for motivating
employees and these factors provide positive incentives.
Herzberg emphasised the importance of job enrichment as one of the motivational
factors. It refers to enriching the job content or the deliberate upgrading of
responsibility, scope and challenge in work. Job enrichment differs from job
enlargement which involves horizontal loading, that is, addition of more tasks
of the same nature.
Motivation may be classified on different bases e.g. positive and negative,
extrinsic and intrinsic, financial and non-financial. Positive motivation is .the
process of attempting to influence the employees behaviour through the
possibility of reward. Negative motivation is based on fear and threats i.e.
demotion, lay off etc. Extrinsic motivators arise away from the job and are
financial in nature. Intrinsic motivators are concerned with the state of self-
actualisation and occur on the job.
Financial motivation refers to motivation induced by money or money’s worth,
like wages and salaries, bonus, medical benefits, etc. Non-financial motivation
includes: incentives like competition, praise, knowledge of results, participation
in management, opportunity for growth etc.
15.9 KEY WORDS

Behaviour : Behaviour refers to the series of activities
undertaken by an individual or a group with a view
to achieving stated goals.
Esteem and status needs : They relate to self-confidence independence,
achievement, competence, initiative, success, etc.
Extrinsic Motivation : Extrinsic motivation refers to the incentives which
are external to the job, such as, salary, fringe
benefits, etc.
40
Financial Incentives : Financial incentives are those which involve Motivation
money or benefits in kind like wage, salary,
retirement benefits, insurance, medical
reimbursement etc.
Goals : Goals are the ends which provide satisfaction of
human needs.
Intrinsic Motivation : It refers to incentives internal to the job and
provides satisfaction during the performance of
work itself.
Job Enrichment : It refers to the process whereby a job is enriched
in terms of its contents, responsibility, scope,
variety and challenge.
Motivation : Motivation refers to the process by which human
needs direct and control the behaviour of a human
being.
Motives : Motives are the primary energisers of behaviour
which prompt people to action.
Motivators : Motivators are associated with positive feelings
of employees about the job.
Negative Motivation : It refers to the process of influencing employees’
behaviour through fear of losing the job or losing
promotion.
Non-Financial Incentives: It includes incentives like status, recognition,
challenge in work etc.
Physiological Needs : These needs relate to survival and maintenance
of human life, such as, need for food, clothing,
shelter, water, rest, etc.
Positive Motivation : It refers to the process of influencing employees’
behaviour through the possibility of reward.
Safety and Security Needs : These needs relate to job security, physical
security, income security, provision for old age,
etc.
Self-Actualisation or : It refers to realising one’s potentiality for
Self-Fulfilment continued self-development and for being creative
in the broadest sense of the word.
Social Needs : These relate to need for social incentive,
relatedness, companionship, belongingness, etc.
15.10 ANSWER TO CHECK YOUR PROGRESS

A) 1. (i) True (ii) False (iii) True (iv) False (v) False
2. (i) needs internal (ii) behaviour (iii) latent (iv) goals (v) motivate
41
Communication, Motivation B) 1. (i) autocratic (ii) physiological (iii) finite, infinite (iv) hygienic/
and Leadership
maintenance (v) motivational
2. (i)-d) (ii)-f) (iii)-d) (iv) -e) (v)-b) (vi)-c)
C) 1. (i) True (ii) False (iii) True (iv) False (v) False
2. (i) physiological security (ii) rewards (iii) lower-order (iv) non-financial

(v) satisfaction.

1) Define motivation. Explain its importance to a modern enterprise.
2) What do you understand by the term ‘motivation’? Point out the difference
between positive and negative motivation.
3) Explain Herzberg’s two-factor theory and differentiate it from Maslow’s
theory of Need Hierarchy.
4) Enumerate the assumptions of McGregor’s Theory X and Theory Y. Which
one is applicable in India?
5) What is meant by hierarchical nature of needs? Is the hierarchy rigid?
Discuss with suitable examples.
6) “Money holds the key to work motivation in modern business organisations.”
Discuss.
7) “Non-financial incentives are as strong motivators as the financial ones”
Critically examine this statement in the light of need-priority model and
two-factor theory of motivation.
write answers for them. But, do not submit your answers to
42
Motivation
UNIT 16 LEADERSHIP
Structure
16.0 Objectives
16.1 Introduction
16.2 What is Leadership?
16.3 Importance of Managerial Leadership
16.4 Theories of Leadership
16.5 Leadership Styles
16.6 Functions of Leadership
16.7 Motivation and Leadership
16.8 Leadership Effectiveness
16.8.1 Factors Influencing Leadership Effectiveness
16.8.2 Qualities of an Effective Leader
16.9 Let Us Sum Up
16.10 Key Words
16.0 OBJECTIVES
explain the meaning of leadership
describe the importance of managerial leadership
state the theories and different styles of leadership
outline the functions of leadership
analyse the relation between motivation and leadership
explain the meaning of leadership effectiveness and enumerate the qualities
of an effective leader
describe the meaning and significance of morale.
16.1 INTRODUCTION
As you know that management involves getting work done through the people.
By virtue of their position, managers can issue orders and instructions to their
subordinates to get work done. But it is also necessary to ensure that subordinates
put in their maximum effort in performing their tasks. Hence, managers have to
regulate and influence the subordinates behaviour and conduct at work. It is
through the leadership role of managers that employees may be induced to
perform their duties properly and maintain harmony in group activities. A
manager having formal authority can direct and guide his subordinates and
command their obedience by virtue of his positional power. But as a leader, the
manager can influence work behaviour by means of his leadership ability to get
43
Communication, Motivation the cooperation of all members of the group. In this Unit, you will learn the
and Leadership
importance, theories, styles and functions of leadership. You will further learn
about the leadership effectiveness and morale.
16.2 WHAT IS LEADERSHIP?

Leadership may be defined as a process of influencing group activities towards
the achievement of certain goals. Thus, the leader is a person in a group who is
capable of influencing the group to work willingly. He guides and directs other
people and provides purpose and direction to their efforts. The leader is a part of
the group that he leads, but he is distinct from the rest of the group. As defined
by George R. Terry “Leadership is the activity of influencing people to strive
willingly for group objectives”.
Leadership naturally implies the existence of a leader and followers as well as

their mutual interaction. It involves inter-personal relation, which sustains the
followers accepting the leader’s guidance for accomplishment of specified goals.
Managers have to guide and lead their subordinates towards the achievement of
group goals. Therefore, a manager can be more effective if he is a good leader.
He does not depend only on his positional power or formal authority to secure
group performance but exercises leadership influence for the purpose. As a leader
he influences the conduct and behaviour of the members of the work team in the
interest of the organisation as well as the individual subordinates and the group
as a whole. But leadership and management are not the same thing. Management
involves planning, organising, coordinating and controlling operations in
achieving various organisational goals. Leadership is the process which
influences the people and inspires them to willingly accomplish the organisational
objectives. Thus, a manager is more than a leader. On the other hand, a leader
need not necessarily be a manager. For instance, in an informal group, the leader
may influence the conduct of his fellow members but he may not be a manager.
His leadership position is due to the acceptance of his role by his followers. But,
the manager, acting as a leader, has powers delegated to him by his superiors.
His leadership is an accompaniment of his position as a manager having an
organised group of subordinates under his authority. Thus, managerial leadership
has the following characteristics:
i) It is a continuous process whereby the manager influences, guides and directs
the behaviours of subordinates.
ii) The manager-leader is able to influence his subordinates behaviour at work
due to the quality of his own behaviour as leader.
iii) The purpose of managerial leadership is to get willing cooperation of the
work group in the achievement of specified goals.
iv) The success of a manager as leader depends on the acceptance of his
leadership by the subordinates.
v) Managerial leadership requires that while group goals are pursued,
individual goals are also achieved.
44
Leadership
16.3 IMPORTANCE OF MANAGERIAL
LEADERSHIP
The importance of managerial leadership in an organisation arises from the basic
nature of the managerial and leadership roles of managers. Combination of these
roles invariably leads to not only effective task performance and fuller
achievement of organisation goals but also human satisfaction alround. This is
because management is based on the formal authority of managers. Whereas,
being leaders of work groups enables managers to achieve results on the basis
of inter-personal relations. The leader manager identifies himself with the work
group. He acts as an intermediary between his subordinates and the top
management. He takes personal interest in the development of his subordinates,
helps them in overcoming individual problems through advice and counselling,
creates appropriate work environment and builds up team spirit. As a result the
leader manager is able to develop better team work. The subordinates willingly
accept his advice, guidance and direction and are inspired as a group to
accomplish the specific goals.
16.4 THEORIES OF LEADERSHIP

There are a number of theories which provide explanations regarding various
aspects of the leadership phenomenon. Let us examine some of the theories.
Trait Theory : This is the earliest theory based on a distinction between the
personal qualities or traits of successful leaders. The theory suggests a list of
personality traits or characteristics which must be present in a person for his
success as a leader. According to this theory, leaders must be physically strong
and well-built, intelligent, honest and mentally mature. He must have initiative,
self-confidence, ability to take decisions, and so on. Since all individuals did
not have these qualities, only those who had them would be considered potential
leaders. Following are the limitations of this theory:
i) The trait theory is not accepted as a valid theory.
ii) There is no universally agreed list of traits associated with successful leaders.
iii) It is difficult to measure the traits and, therefore it is not always possible to
distinguish between leaders and followers.
Behavioural Theories : The behavioural theories of leadership are based on

the belief that leaders can be identified by reference to their behaviour in relation
to the followers. In other words, it is suggested that leadership can be described
in terms of what leaders do rather than what they are. Behavioural theories have
been presented mostly on the basis of research studies. According to the studies
conducted in the States of Michigan, USA, leaders who treat their subordinates
as human beings, are concerned about their well-being, and encourage and
involve them in goal setting, are more effective. They are described as ‘employee-
centred’ leaders. On the other hand, leaders who are ‘production-centred’
emphasise job performance in conformity with prescribed standards. He exercises
close control over the employees as if they were tools of production. Such a
leadership is associated with unsatisfactory work performance due to the low
morale of employees.
45
Communication, Motivation Studies conducted in Ohio State University showed two dimensions of leader’s
and Leadership
behaviour viz., Initiating structure and Consideration. Initiating structure refers
to the leader’s behaviour in delineating the relationship between himself and
members of the work group and in endeavouring to establish well defined pattern
of organisation, channels of communication and methods of procedure. Whereas,
consideration refers to behaviour indicative of friendship, mutual trust, respect
and warmth in the relationship between leader and the members of his staff.
(High)
High High
Consideration Structure
and and
Low Structure
Consideration
High Consideration
Low Structure High Structure

and and
Low Consideration Low Consideration
(Low)
(Low) Initiating Structure (High)
Fig. 16.1: Combination of Initiating Structure and Consideration
Look at Figure 16.1 which shows that the behaviour of a leader may be described
as any mix of both dimensions.
Situational Theories : In the situational theories of leadership the success of

leadership depends upon the situation in which the leader operates.
According to leadership contingency model developed by Fred E. Fiedler, the

leader’s effectiveness depend upon three situational factors:
i) Leader-followers relations, that is the degree of follower’s trust, confidence

and respect for the leader.
ii) The extent to which the task performed by subordinates is routine or non-
routine (known as task structure).
iii) The position power of the leader, that is, the power associated with the
rank and position of the leader in the organisation. He defined favourableness
of a situation as the degree to which the situation enables the leader to exert
his influence over his group.
The most favourable situation for leaders to influence their group is one in which
they are well liked by the members, the task is highly structured (i.e., routinised
and predictable) and the leader has enormous power attached to his position. On
the other the most unfavourable situation for leaders is one in which they are
disliked, the task is highly unstructured and he will have little position power.
46
Leadership
Task Oriented Relationship Oriented Task Oriented
Very favourable Intermediate favourable Very unfavourable
leadership situation leadership situation leadership situation
Fig. 16.2: Appropriateness of leadership behaviour for various group situations
Look at Figure 16.2 which shows that task oriented leaders tend to perform best
in group situations that are either very favourable or very unfavourable to the
leader. On the other hand, relationship-oriented leaders tend to perform best in
situations that are intermediate (medium) in favourableness.
Another situational theory is the ‘Path-Goal Theory’. According to this theory,

leaders are effective due to their influence on followers’ motivation, ability to
perform, and their satisfaction. Subordinates are motivated by the leader to the
extent he is able to influence their expectancies relating to the performance and
attractiveness of the goal. Further, individuals are satisfied with their job if they
believe that (a) performance of the job will lead to desirable outcomes and (b)
with hard work they will be able to achieve the desirable outcomes.
16.5 LEADERSHIP STYLES

The dominant behaviour pattern of a leader-manager in relation to his
subordinates is known as leadership style. There are three basic styles of
leadership as follows:
1) Autocratic or Authoritative Style
2) Democratic or Participative Style and
3) Laissez-faire or Free-rein Style.
Autocratic or Authoritative Style
An autocratic leader centralises power and decision-making in himself and
exercises complete control over the subordinates. In this style, subordinates are
compelled to follow the orders of the leader under threat of penalties. They have
no opportunity to take part in goal-setting, or take initiative or make suggestions.
They are subject to close supervision and, thus have a tendency to avoid
responsibility. The autocratic manager has little concern for the well-being of
employees, who suffer from frustration and low morale. They do not have any
sense of belonging to the organisation and try to work as little as possible.
Limitations : It should be clear from the above that there are several limitations
of the autocratic style of leadership.
i) It results in low morale due to the inner dissatisfaction of employees.
ii) Efficiency of production goes down in the long run.
iii) It does not permit development of future managers from among capable
subordinates.
Despite the above limitations, autocratic leadership can be successfully applied
in the following situations:
i) When subordinates are incompetent and inexperienced.
47
Communication, Motivation ii) The leader prefers to be active and dominant in decision-making.
and Leadership
iii) The company endorses fear and punishment for disciplinary techniques.
iv) There is a little room for error in final accomplishment.
v) Under conditions of stress when great speed and efficiency are required.
Since the leader-manager takes all decisions in autocratic style, there is uniformity
and consistency in decision-making.
Democratic or Participative Style
The democratic style is also known as participative style. In this style, decisions
are taken by the leader in consultation with the subordinates and with their
participation in the decision making process. The participative leader encourages
subordinates to make suggestions and take initiative in setting goals and
implementing decisions. This enables subordinates to satisfy their social and
ego needs, which in turn, lead to their commitment to the organisation goals and
higher productivity. Frequent interaction between the manager and subordinates
helps to build up mutual faith and confidence.
Several benefits can be derived from the participative style of leadership as
listed below:
i) It helps subordinates to develop their potential abilities and assume greater
responsibilities.
ii) It provides job satisfaction and improves the morale of employees.
iii) The group performance can be sustained at a high level due to the satisfied
and cohesive nature of the group.
However, the democratic style cannot be regarded as the best style under all
circumstances. Its limitations are as follows:
i) Decisions taken through consultation may cause delay and require
compromises to meet different viewpoints.
ii) A few vocal individuals may dominate the decision-making process.
iii) No one individual may take the responsibility for implementing the decision
taken by the group as a whole.
Despite the above limitations, democratic style is suitable in the following
situations:
i) When subordinates are competent and experienced.
ii) The leader prefers participative decision-making process.
iii) Rewards and involvement are used as the primary means of motivation and
control.
iv) The leader wishes to develop analytical and self-control abilities in his
subordinates.
v) The organisation has clearly communicated its goals and the objectives to
the subordinates.
Laissez Faire Leadership Style
Laissez faire leadership style is just the opposite of autocratic style. A manager,
48 who adopts this style, completely gives up his leadership role. The subordinate
group is allowed to make decisions and it is left to the members of the group to Leadership
do as they like. The role of any leader is absent. The group members enjoy full
freedom as regards goal-setting and acting on it. Hence, there is chaos and
mismanagement of group goals. However, laissez faire leadership is found to be
quite suitable where the subordinates are well-trained, competent and the leader-
manager is able to fully delegate the powers of decision-making and action to
the subordinates.
Laissez faire style is suitable in the following situations:
i) When leader is interested in delegating decision-making fully.
ii) Subordinates are well trained and highly knowledgeable.
iii) Organisation goals have been communicated.
Despite a few suitability, this style should be adopted rarely because it may lead
to chaos and mismanagement.
Look at Figure 16.3 which shows diagrammatic representation of all these
leadership styles
L L L
Autocratic Style Laissez Faire Style Democratic Style
Fig. 16.3: Diagramatic Representation of Leadership Style
Robert Tannenbaum and Warren Schmidt depicted a broad range of leadership

styles on a continuum which moves from authoritarian or boss-centred leader
behaviour at one end to democratic or subordinate-centred behaviour at the other
end.
Look at Figure 16.4 which shows that leaders who are at the authoritarian end of
the continuum tend to be task-oriented and use their power to influence their
followers. He enjoys a high degree of control and delegate very little authority.
On the other hand, leaders who are at the democratic side tend to be group
oriented and provide their followers considerable freedom in their work.
Although the leader continuum approach provides a wide range of leader’s

behaviour. It identifies the number of behavioural alternatives available to a
manager. Moreover, the success of the leadership style depends on the
modification of the leader to the needs of the situation. Its major limitation is
that it supports unidimensional thinking. It has been found that employees
orientation and task-orientation are not opposite ends on a continuum.
49
Communication, Motivation (Democratic) ...................................................................................... (Authoritarian)
and Leadership
Relationship Oriented ....................................................................... Task Oriented
Source of Authority
Area of Freedom for
Subordinates
Use of Authority by the
Leader
Leader permits Leader presents Leader Leader Leader

subordinates to problem, gets presents sells makes
function within suggestions and ideas and decision decision
limits defined makes decision invites and
by superior questions announces
it
Leader defines Leader presents
limits; asks tentative decision
group to make subject to change
decision
Fig. 16.4: Continuum of Leader Behaviour

i) Leadership is not the same thing as managership.
ii) Leadership is a function of management.
iii) Managerial leadership involves pursuit of group goals, not individual
goals.
iv) Trait theory of leadership emphasises the behaviour of leaders.
v) An autocratic leader-manager can be effective in the short-run, but not
in the long- run.
2) Fill in the blanks selecting appropriate words from those given within
brackets.
i) A leader manager invariably .................. his subordinates (commands
/ directs and guides/rewards).
ii) Managerial leadership is a .................... process (regular/continuous /
convenient).
iii) A democratic leader takes decisions on the basis of ...................... (his
own judgement / group opinion / individual views).
iv) Employee-centred leaders have maximum concern for (work /
subordinates / organisational goals).
v) If the situation is highly favourable ...................... leadership is most
suitable (relations oriented / task oriented).
50
Leadership
16.6 FUNCTIONS OF LEADERSHIP
A leadership functions of a manager are closely related with his managerial
functions. But they are somewhat different as well as overlapping. Essentially,
the leader as a manager has to set the group goal, make plans, motivate and
inspire subordinates and supervise performance. But he has to perform several
other functions as leader. The more important of these functions are given below:
1) To develop team work : One of the primary functions of the leader is to
develop his work-group as a team. It is his responsibility to create a congenial
work-environment keeping in view the subordinates competence, needs
and potential abilities.
2) To act as a representative of the work-group : The leader of a work-
group is expected to act as a link between the group and top management.
When necessary, the leader has to communicate the problems and grievances
of his subordinates to the top management.
3) To act as a counsellor of the people at work : Where the subordinates
face problems in connection with their performance at work, the leader has
to guide and advise the subordinates concerned. The problems may be
technical or emotional in nature.
4) Time management : The leader’s functions include not only ensuring the
quality and efficiency of work performed by the group, but also checking
on the timeliness of completing different stages of work.
5) Proper use of power : While exercising power or authority in relation to
his subordinates, the leader must be careful about using his power in different
ways according to the situation. It may be necessary to use reward power,
coercive power, or expert power, formal or informal power, depending on
what will stimulate positive response from the subordinates.
6) Secure effectiveness of group-effort : To get the maximum contribution
towards the achievement of objectives, the leader must provide for a reward
system to improve the efficiency of capable workmen, delegate authority,
and invite participation of employees in decision-making, ensure the
availability of adequate resources, and communicate necessary information
to the employees.
16.7 MOTIVATION AND LEADERSHIP

Effective leadership makes a positive impact on the motivation of members of a
work group. This is due to the following reasons :
i) Leadership creates a congenial work environment and thus ensures job

satisfaction.
ii) It enables group members to achieve individual goals as well as

organisational goals.
iii) It provides for a proper system of rewards and incentives for capable
employees, which includes both financial and non-financial incentives.
51
Communication, Motivation iv) The leader’s concern for the well-being and development of subordinates
and Leadership
promises self- fulfilment to every group member.
An effective leader-manager helps and supports his subordinates in the light of

their individual values and expectations. This supportive relationship increases
their motivation as it builds and maintains a sense of personal worth and
importance of each individual.
16.8 LEADERSHIP EFFECTIVENESS

We have discussed above how different styles of leadership reflect the behaviour
pattern of the leaders. The manager leader may be effective or ineffective
depending upon the leadership style adopted by him. He may be employee-
centred (i.e., relations-oriented) or production centred (i.e., task oriented). In
other words, the style may reflect the leaders concern for people or concern
for production. But in reality, the manager-leader may combine his concern for
people and concern for production with different degrees of emphasis on each.
This idea was developed in the form of what is known as ‘Managerial Grid’,
which is briefly outlined below.
Managerial Grid : The managerial grid refers to a diagramatic representation

of the possible combinations of concern for people and concern for production
which may be reflected in the style of leadership. The concept of managerial
grid was developed by Blake and Mouton in 1964.
(High)
1.9 9.9
Concern for People
(Country Club) (Team)
1.1 9.1
(Impoverished) (Task)
(Low)
(Low) Concern for Production (High)
Fig. 16.5: Diagramatic Representation of Managerial Grid
As shown in the diagram, there are nine degrees of concern each for people and
production. Combining lower degrees and higher degrees of concern, five basic
styles of leadership are distinguished as follows (No. 1 representing minimum
concern, and No. 9 maximum concern):
1.1 style, where the manager has minimum concern for people as well as
production, is known as impoverished management. This represents a
casual attitude of the manager towards his job and the organisation cannot
be expected to survive.
9.1 style reflects the manager’s highest concern for production but least
concern for people. It is known as task management.
1.9 style in which the manager has the maximum concern for people and
52 minimum concern for production is described as country club management.
It implies that the manager is inclined to keep people happy expecting that Leadership
happiness will make them more efficient, which is not true for business
enterprises.
5.5 style represents moderate concern for both people and production and
therefore known as middle of road management. This style of leadership is
preferred by many managers whose approach to management is that of
“live and let live”.
9.9 style is the best combination of concerns for people and production
with maximum concern for both. In this case, the manager tries to integrate
the objectives of the organisation with the objectives of the people employed.
This style therefore represents team management. It may be suggested that
the 9,9 management style is likely to be most effective.
Effective and Ineffective Styles

Effectiveness depends on the situational demands of a specific environment.
When the style of a leader is appropriate to a given situation, it is termed effective.
On the other hand, when the style is inappropriate to a given situation it is termed
ineffective. Look at Figure 16.6 which shows the effective dimension of
leadership.
Relationship Behaviour
on
Dimension
n si
me
Di
ss
ene
t iv
fec
Ef
Task Behaviour Dimension

Fig. 16.6: Diagramatic Representation of Effectiveness Dimension
The basic styles of leadership are further divided into eight styles according to
their degrees of effectiveness i.e., as more effective and less effective styles.
The following are regarded as more effective styles.
Executive : Used by a manager, this style attaches maximum importance to
work as well as the people. Such a manager is able to motivate people and
utilise the team effectively. He sets high standards of performance and can
accomplish the goals successfully.
Developer : The manager adopting this style attaches greatest importance to the
people at work and has minimum concern for work. He devotes maximum
attention to the development of individual subordinates and believes in their
capability.
53
Communication, Motivation Benevolent autocrat : The manager whose attitude and style are those of a
and Leadership
benevolent autocrat has high concern for work and low concern for people. But
he is able to achieve the goals without causing any resentment among the
subordinates.
Bureaucrat : With a bureaucratic style the manager is able to control the work-
situation and achieve goals by means of rules and procedure. He has minimum
concern for people and work as such.
The less effective (or ineffective) styles are stated to be those which are not
appropriate to the situation. These are as follows:
Compromiser : A manager who is equally concerned with people and work in
a situation which requires emphasis on one of these, is a poor decision-maker
due to pressures on both counts. Thus he is ineffective manager leader.
Missionary : The missionary manager is one who aims at harmonious relations
among people as an ideal and is little concerned with work, although the situation
requires greater emphasis on work. He is unable to get results.
Autocrat : An autocratic manager is interested only in work and results thereof,
whereas the situation requires relation-orientation. Such a manager lacks
confidence in his subordinates and depends on high-handed management. So
his leadership fails in the long-run.
Deserter : The manager who is concerned with neither people nor work reflects
a passive attitude towards his job. He is an escapist.
16.8.1 Factors Influencing Leadership Effectiveness

Taking an overall view of the question of effectiveness of leaders, some writers
have identified a number of factors that influence the leader and his effectiveness.
These factors are:
1) The leader’s own personality, past experience and expectations.
2) The expectations and behaviour of his superiors.
3) The subordinates’ characteristics, expectations and behaviour.
4) The requirements of tasks to be performed by subordinates.
5) Expectations and behaviour of fellow managers (peers).
6) Organisational culture (climate) and policies.
16.8.2 Qualities of an Effective Leader

A leader cannot be effective unless he possesses certain qualities of head and
heart. Irrespective of the nature of the manager-leader’s own responsibilities of
the job and the style adopted by him, a number of qualities are generally found
to be possessed by the effective leader. The more important of these qualities
are listed below :
1) Mental and physical health : To be able to bear the pulls and pressures of
leadership, it is essential for the leader to have sound health both mental
and physical. Along with a balanced temperament and optimistic outlook,
he must possess stamina and sound health.
54
2) Empathy : A leader must have the capacity to appreciate others and look at Leadership
things from his subordinates’ angle. This attitude of the leader motivates
his subordinates.
3) Self-confidence : Confidence about one’s leadership ability makes it
possible for a leader to analyse and face different situations and adopt a
style. Lack of self- confidence often prevents managers to adopt participative
style and repose trust in his subordinates.
4) Awareness of others’ opinion about himself : A leader having self-
confidence should not ignore how others perceive him as a leader. He must
be aware of his strength and weakness in relation to his subordinates.
5) Objectivity : A leader who is effective does not get carried away by
emotions. He is fair and objective in his dealings with subordinates.
6) Knowledge and intelligence : A leader to be effective must have knowledge
of group behaviour, human nature, and activities involving technical and
professional competence. He must have intelligent perception of human
psychology and ability to think clearly and argue cogently on points of
dispute.
7) Decisiveness : Decision-making is a necessary but difficult task for every
leader. A leader often has to take initiative and exercise mature judgement
while taking decisions. Besides, he has to have foresight, imagination and
creative ideas for effective decision making. Open mindness is yet another
essential quality for that purpose.
8) Ability to communicate : The skill of effective communication of goals
and procedure of work is extremely important in leadership. To achieve
desired results and coordination of efforts in a group, oral communication
is of great significance.
9) Sense of purpose and responsibility : A leader must have clarity of purpose
and responsibility to be able to inspire his subordinates to achieve specific
goals.
10) Other qualities : Enthusiasm, courage, sense of direction, judgement, tact,
courtesy and integrity are also regarded as necessary qualities for a leader
to be effective.

i) The primary function of the leader is to develop the work group as a
.......................................................
ii) When subordinates at work face problems the leader must act as a
.................................................................
iii) Leadership enables group members to achieve .................. as well
as .......................... goals.
iv) The leader-manager’s effectiveness depends upon the .....................
adopted by him.
v) Maximum concern for people and minimum concern for work is known
as .................. management. 55
Communication, Motivation 2) Which of the following statements are True and which are False.
and Leadership
i) Team management refers to moderate concern of the manager for work
and people.
ii) A leader provides for a proper system of financial and non-financial
incentives for subordinates.
iii) The managerial grid represents combination of lower degrees of
concern for people and concern for work.
iv) Middle of the road management means a passive attitude on the part
of manager leader.
v) The bureaucratic manager attaches maximum importance to work as
well as to people.
3) Match the following expressions given in column (A) and (B) by reference
to the alphabets and numbers against each.
Column A Column B
i) Minimum Concern for people & work a) Executive
ii) No Concern for people & work b) Benevolent autocrat
iii) Maximum Concern for people & work c) Deserter
iv) Maximum Concern for work and d) Bureaucrat
Minimum Concern for people
16.9 LET US SUM UP

Leadership is a process of influencing group activities towards the achievement
of certain goals. It is a continuous process whereby the manager influences,
guides and directs the behaviour of subordinates to secure willing cooperation
of the group. Combination of the managerial and leadership roles in the manager
leads to not only effective task performance but also human satisfaction all round.
The trait theory of leadership suggests the success of a leader depends mainly
on his personality traits or characteristics. Whereas the behavioural theories of
leadership are based on the belief that leaders can be identified by reference to
their behaviour in relation to the followers.
In the situational theory of leadership the success of leadership is said to depend
upon the situation in which the leader operates. The situational factors which
influence leader’s effectiveness include leader-follower relations, the task
structure and the position power of the leader.
The dominant behaviour pattern of a leader-manager in relation to his
subordinates is known as leadership style. There are three basic styles of
leadership:
(1) Autocratic, (2) Laissez faire and (3) Democratic style.
An autocratic leader centralises power and decision-making in himself and
exercises complete control over the subordinates. Hence it results in low morale,
and decline of productivity in the long run.
In democratic style of leadership decisions are taken by the leader in consultation
with members of the group and with their participations in the decision-making
56
process. It helps subordinates to develop their potential abilities, provides job Leadership
satisfaction and improves morale. In laissez faire style, subordinates are left to
take the decisions and perform their work as they like. Hence there may be
chaos and mismanagement under this leadership style.
The functions of a leader manager include : developing teamwork, representing

the group and acting as a link with top management, advising and counselling
subordinates, managing the time schedule of work performance, using power
properly, and securing effectiveness of group effort.
Effective leadership makes a positive impact on the motivation of the members

of the work group. The manager-leader may be effective or ineffective depending
upon the leadership style adopted by him. The concept of managerial grid helps
managers to identify their own leadership style in terms of the degrees of concern
for people and concern for work combined in the style.
More effective styles are said to be the following which reflect the manager’s
orientation : Executive, developer, Benevolent autocrat, and Bureaucrat. Less
effective styles are those which are not appropriate to the situation e.g.,
Compromiser, Missionary, Autocrat, and Deserter.
An effective leader must possess certain qualities like physical and mental health
empathy, self-confidence, awareness of his strength and weaknesses, objectivity,
knowledge and intelligence, decisiveness, ability to communicate, etc.
16.10 KEY WORDS

Leader : A person who is capable of influencing the group
in its activities.
Leadership : The process of influencing group activities
towards the achievement of certain goals.
Leadership Style : The dominant behaviour pattern of a leader-
manager in relation to his subordinates.
Managerial Grid : Diagramatic representation of the possible
combination of concern for people and concern
for work which may be reflected in the style of
leadership.

A) 1. (i) True (ii) True (iii) False (iv) False (v) True
2. (i) directs and guides (ii) continuous, (iii) group opinion

(iv) subordinates (v) task oriented
B) 1. (i) team (ii) counsellor (iii) individual, organisational

(iv) leadership style (v) team
2. (i) False (ii) True (iii) False (iv) False (v) False
3. (i) and (d); (ii) and (c); (iii) and (a); (iv) and (b)
57
and Leadership 16.12 TERMINAL QUESTIONS
1) What do you understand by leadership? How does it differ from
managership?
2) Enumerate the principal characteristics of managerial leadership.
3) Define ‘leadership style’. What are the main differences between autocratic,
democratic and free rein leadership styles?
4) What are the two types of leader behaviour identified in research studies in
the State of Michigan and Ohio in U.S.A.? Explain briefly.
5) Explain in detail the concept of ‘managerial grid’ and its purpose.
6) Write explanatory notes on :
a) Effective and Ineffective styles of leadership
b) Functions of leadership
c) Qualities of an effective leader
d) Trait theory of leadership.
7) What is meant by morale? Outline the factors that influence the morale of
employees in an organisation. What is the significance of leadership vis a
vis morale?
58
Leadership
UNIT 17 TEAM BUILDING
Structure
17.0 Objectives
17.1 Introduction
17.2 Concept of Team
17.3 Types of Team
17.4 Team Development
17.5 Team Building
17.6 Team Effectiveness
17.7 Let Us Sum Up
17.8 Key Words
17.0 OBJECTIVES
discuss the concept of team
identify various types of team
describe the process of team development
explain the team building process
analyse the effectiveness of team
17.1 INTRODUCTION
In order to achieve the objectives of an organisation, the restoration of conducive
work culture is very important. Hence, there is a need to work in a team spirit.
Managers who act as a key person at different levels have to coordinate and
channelise the efforts of all subordinates and followers in a positive ways. Leaders
are responsible for not only to show the way to the subordinates to work as a
team/group towards the attainment of goals but they are supposed to lead the
group/team as well. P.F. Drucker considers leadership as a human characteristic,
which lifts a man’s vision to higher rights, raises man’s performance to higher
standards and builds a man’s personality beyond its normal limits. In this Unit,
you will learn the concept and types of team, team development, team building
and team effectiveness.
17.2 CONCEPT OF TEAM

If you visit an organisation, you will find that most of the activities of the
organisation are performed by a group of persons. In an organisation, activities
are arranged in such a way that require collective contribution. Every individual
contributes for the achievement of a common goal. The individuals interact,
collaborate, coordinate and influence among the members. Thus, most of the
time individuals work in a team. A team may be defined as group of two or
59
Communication, Motivation more people who interact and influence the members for the achievement
and Leadership
of common goal.
Steven and Mary Ann Von have defined team as “groups of two or more people
who interact and influence each other, are mutually accountable for achieving
common objectives, and perceive themselves as a social entity within an
organisation”. Based on this definition, the characteristics of the teams may be
elaborated as under:
a group of two or more persons
regular interactions among members
influence the behaviour of team members
mutually accountable
interdependent
social entity
achievement of common goal
The frequency of interactions, influence and the nature of task may determine
the formation of group, i.e., long-term, short-term, formal, informal, etc.
17.3 TYPES OF TEAM

Formal teams or groups are created deliberately by managers carrying out specific
tasks to help the organisation achieve its goals. The most prevalent type of formal
group is the command team, which includes a manager and all employees who
report to that manager. In some organisations that want to deemphasize hierarchy,
the titles may change.
Another type of formal team is the committee, which generally lasts a long time
and deals with recurrent problems and decisions. For instance, your university
or college probably has a committee for student affairs to deal with recurring
issues that involve students’ lives. While members of this committee may come
and go, the committee remains in place over time.
A quality circle is a kind of team. At Reynolds Metal Company’s McCook Sheet
& Plate Plant, based in McCook, IIIinois, quality circles have been a significant
component of a quality programme that has dramatically improved productivity
and quality since 1981. In a programme called Cooperative Hourly and
Management Problem Solving (CHAMPS), quality circle teams meet for an
hour weekly to discuss work related problems, investigate the causes,
recommend solutions, and take corrective action. When a team has completed
its investigation and identified a solution, it makes a formal presentation to the
plant management and staff. Of the almost 475 solutions offered in the first four
years of the programme, almost 400 were approved. The total savings from the
ideas has been eight times their cost, a significant amount in a major
manufacturing facility where cost control is very important. Over a three-year
period, McCook was able to double the pounds of aluminum per employee that
it shipped and deliver more than 2,000 items to a specific customer without a
single rejection.
60
Some formal teams are temporary. They may be called task forces or project Team Building
teams. These teams are created to deal with a specific problem and are usually
disbanded when the task is completed or the problem is solved.
Informal teams or groups emerge whenever people come together and interact
regularly. Such groups develop within the formal organisational structure.
Members of informal teams tend to subordinate some of their individual needs
to those of the team as a whole. In return, the team supports and protects them.
The activities of informal teams may further the interests of the organisation.
Saturday morning games, for example, may strengthen the players ties to each
other. A women’s group may meet to discuss various actions that can make the
organisation a better place for women to work.
For example in 1990, female employees at the telephone giant, NYNEX

Corporation, formed mentoring circles to assist women in moving up the
corporate advancement leader. NYNEX women created these informal groups
independently and outside management auspices. The groups encourage,
recognize, and strengthen the bonds of women at all levels of the company. The
NYNEX employees turned to the group format because there was a shortage of
female upper-level managers to serve as mentors. However, participants believe
the group process is actually better than individual mentoring. In the circles,
which have a minimum of eight participants and a maximum of twelve, the
mentored women have an increased exposure to different ideas and an increased
network.
17.4 TEAM DEVELOPMENT

As you have already learnt that the team is formed as a result of interactions and
influence of members who strive for the achievement of common goal. In this
process, the team members try to understand others behaviour, realise the
appropriateness of the behaviour and the roles of the team members. This is an
on going process because the composition of team may keep on changing. The
new members may join and the old members may leave the team. Thus, the
team members pass through several stages for the development of team. Bruce
Truckman has identified five stage model of team development. These are
discussed below:
Forming: This is the first stage of team development. In this stage, the members
try to explore and understand the behaviour of the team members. They make
their efforts in understanding the expectations of the team members. At this
stage, they are polite and try to find out how to fit into the team.
Storming: In the second stage, members start competing for status, leadership
and control in the group. Individuals understand others behaviour and assert
their role in the group. As a result, inter-personal conflict starts. Members try to
resolve the issues related to the task and working relations. They also resolve
the issues related to the role of the individual in the group.
Norming: The members start moving in a cohesive manner. They establish a

balance among various conflicting forces. They develop group norms and
consensus for the achievement of the group goal. At this stage, cooperative
feelings develop among the team members.
61
Communication, Motivation Performing: In this stage, the team makes effort for the performance of task
and Leadership
and accomplishment of objectives. The established pattern of relationships
improves coordination and helps in resolving conflicts. Members trust each other
and extend their full cooperation for the achievement of the group goal.
Adjourning: As you must be aware that the team is formed for some purpose.
When this purpose is fulfilled, the team may be adjourned. Thus, the breaking
up of the team is referred to adjournment.
Kormanski and Mozenter have identified following stages of team development:
Awareness
Conflict
Cooperation
Productivity, and
Separation
17.5 TEAM BUILDING

Team building refers to shaping of the team for smooth functioning. Steven and
Mary Ann Von have defined team building as any formal intervention directed
towards improving the development and functioning of a work team. Thus, the
process of team building aims at enhancing the effectiveness of a team. Pareek
Udai has suggested following approaches for team building.
The Johari Window Approach: This approach aims at helping members to

express their feelings, opinions, reactions and accept feedback from team
members. This enhances their sensitivity towards the team members.
The Role Negotiation Approach: This approach focuses on understanding the

expectations of the team members and accommodating their behaviour according
to the expectations. This enhances the collaborative effort of the team members.
The Team Roles Approach: This approach advocates that there are certain
roles which each team members are expected to perform. Belbin has identified
eight roles. They are: Chairman/coordinator, shaper, plant, monitor/evaluator,
company worker, resource investigator, team worker and completer/finisher.
Smooth performance of these roles brings harmony in the effort of the team
members.
The Behaviour Modification Approach: This approach focuses on examining
members behaviour towards the team. The individual member evaluates his/her
own behaviour and finds out the most suitable behaviour. Now he/she adopts
the most suitable behaviour for the performance of the team.
The Simulation Approach: In this approach an artificial team is formed where
members interact, discuss, deliberate and learn from other members behaviour.
In this situation, the team members learn the most effective way of dealing with
the challenges and meet the requirements and the expectations of the team
members.
The Action Research Approach: In this approach, the whole range of behaviour
is analysed and evaluated.
62
The researcher interacts with the team members and evaluates their behaviour. Leadership
The effort is made to find out most suitable behaviour of the team members.
The Appreciative Inquiry Approach: This approach focuses on the

identification of positive qualities in the team members. The effort is made to
channelise these positive qualities towards the achievements of the team goal.
Pareek Udai has integrated the above approaches and further suggested following
approaches for team building which are discussed below:
Projection into Future: In this approach, the team members prepare common
vision of the team. Several small teams may prepare their own vision which
may be further developed as a broader organisational vision. The team members
may be encouraged to make effort towards realising them.
Linkage with Individual Goals: As you must be aware that the building block
of the team is individual. Each person has his/her individual goal as well as
team goal. Therefore, the individual goal must be integrated with the team goal.
This brings harmony in the team effort and enhances the performance of the
team.
Force Field Analysis: Several forces influence the performance of the team.
Team members are required to analyse these forces and identify the positive
forces. These favourable forces are channelised for the achievement of the team
goal.
Strengthening Positive Forces: The positive forces are identified and further
reinforced. The reinforcement of behaviour motivates the members for making
efforts towards the realisation of team goal. This further strengthens the positive
behaviour of the team members.
Reducing Negative Forces: In this approach, the forces which inhibit the
performance of the team are identified. The efforts are made to remove these
negative forces.
Monitoring: The team members chalk out detailed plans and targets to be
achieved. The mechanisms for achieving these targets are spelt out. The steps
are devised to monitor them at each step. The proper monitoring mechanism
facilitates the process of accomplishment of team goal.
While building the team, the managers must take into account those factors
which contribute to effective accomplishment of the team goals. The integrated
view of the above approaches may provide better insights for enhancing the
effectiveness of the team.
1) Distinguish between formal team and informal team.
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
63
Communication, Motivation 2) Distinguish between storming and norming.
and Leadership
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
3) Enumerate five most suitable process of team building.
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
17.6 TEAM EFFECTIVENESS

In an organisation, you may find that some teams are very successful and work
effectively than others. The question arises what is team effectiveness? Steven
and Mary Ann Von have defined team effectiveness as the extent to which the
team achieves its objectives, achieves the needs and objectives of its members
and sustains itself over time. This means that the effective team has following
parameters:
The degree to which the objectives of the team are achieved;
The degree to which the team achieves the needs and well being of its
members; and
The ability of the team to survive.
Steven and Mary Ann Von have suggested following elements of team
effectiveness:
l) Organisational and Team Environment: Organisational and team

environment relates to the following elements:
Reward System
Communication
Systems
Physical Space
Organisational Environment
Organisational Structure, and
Organisational Leadership
64
2) Team Design: It involves following elements: Team Building
Task Characteristics
Team Size; and
Team Composition
3) Team Processes: It includes:
Team Development
Team Norms
Team Roles; and
Team Cohesiveness
Kormasnski and Mozenter have identified following elements which contribute
to team effectiveness:
Members understand and are committed to group goals;
They are friendly, concerned and interested in others;
They acknowledge and confront conflicts openly;
They listen to others and understand them;
They involve others in the process of decision making;
They recognize and respect individual differences;
They contribute ideas and solutions;
They value ideas and contributions of others;
They recognize and reward team efforts; and
They encourage and appreciate comments about team performance.
These are the major elements contributing to the team effectiveness. Moreover,
there may be several factors which influence the team effectiveness. Managers
are required to make detailed analysis of these factors and find out broader
perspectives of the team effectiveness. The proper management and
implementation of these elements may certainly improve the effectiveness of
the team.
1) What do you mean by team effectiveness?
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
2) What is team design?
......................................................................................................................
......................................................................................................................
...................................................................................................................... 65
Communication, Motivation ......................................................................................................................
and Leadership
......................................................................................................................
......................................................................................................................
......................................................................................................................
3) What do you mean by team prcesses?
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
17.7 LET US SUM UP

Most of the activities of the organisation are performed by a group of persons.
In an organisation, activities are arranged in such a way that require collective
contribution. Every individual contributes for the achievement of a common
goal. The individuals interact, collaborate, coordinate and influence among
members. Most of the time individual work in a team. A team refers to a group
of two or more persons who interact and influence the members for the
achievement of common goal. There may be formal team and informal team in
an organisation.
The team members pass through serveral stages for the development of the team.
The stages involved in the development of team are: Forming, Storming,
Norming, Performing and Adjouring.
The team building process involves shaping of the team for smooth functioning.
The approaches of team building are; The Johri Window, Role Negotiation, Team
Roles, Behaviour Modification, Simulation, Action Research, Appreciative
Enquiry, Future Projection, Linkage, Force Field Analysis, Strengthing, Positive
Forces, Reducing Negative Forces and Monitoring.
The team effectiveness refers to the extent of achivement of objectives of the
team as well as the ability of the team to survive. The team effectiveness may be
achieved through the creation of favourable organisational and team environment,
development of proper team design and team processes.
17.8 KEY WORDS

Team : Two or more people who interact with and
influence of each other towards common purpose.
Team building : Conscious effort to develop effective work groups
throughout an organisation.
Team development : Stages through which team memebrs pass for the
development of team.
Team effectiveness : Refers to the extent of achievement of objectives
of the team as well as the ability of the team to
66 surive.
Team Building
1) What you mean by team? Discuss the Process of development of team with
relevent examples.
2) Explain the approaches of team building in an organisation.
3) How can you develop effective team in the organisation? Discuss with
examples.
67
and Leadership SOME USEFUL BOOKS
India.
Sons.
Rai and Co.
68
BCOC-132
Management
Functional Areas of Management 5

BCOC-132
Management
Block
5
FUNCTIONAL AREAS OF MANAGEMENT
UNIT 18
Marketing Management 5
UNIT 19
Financial Management 27
UNIT 20
Human Resource Management 50
Prof. R.P. Hooda
Prof. Nawal Kishor
Darjeeling

Dr. Anupriya Pandey

Dr. Sunil Kumar, SOMS, IGNOU (Unit-19) Prof. Nawal Kishor
Prof. Ajay Kumar Singh (Editor & Course Coordinator)
Department of Commerce Dr. Subodh Kesharwani
University of Delhi, Delhi (Unit-20) (Editor & Course Coordinator)
&
Ms. Shilpy Sahi, Bharti College
Marketing: AMK-01
(Unit-1, 5 and 8 Revised by Prof. Nawal Kishor)
Prof. D. Amarchand, University of Madras, Madras
Prof. P .K Kapoor, Thapar Institute of Engineering & Technology, Patiala
Prof. D.P.S. Verma (Retd.), University of Delhi, Delhi
MATERIAL PRODUCTION
May, 2019
ISBN:
Printed at:
BLOCK 5 FUNCTIONAL AREAS OF
MANAGEMENT
You have learnt foundation of Indian business covering introductory aspects of

business, technological innovation, social responsibility and emerging
opportunities in business in Block-1.The Business Enterprises covering forms
of business organisations, public enterprises and international business including
Multi-national Corporation have been discussed in Block-2. You have been
exposed to various dimensions of managerial functions like planning and decision
making, organising, departmentation and forms of authority relationship,
delegation of authority and decentralisation as well as techniques of control in
Block-3. Communication and Coordination, motivation, leadership and team
building have been discussed in Block-4.
This last Block-5 entitled ‘Functional Areas of Management’ will expose you to
the important functional areas of management like marketing, finance and human
resource management. These are very significant areas of management.
Unit 17 entitled ‘Marketing Management’ discusses the concept and evolution

of marketing, the importance of marketing and marketing in a developing country.
The marketing mix, concept of product life cycle and basics of pricing have
been further discussed.
Unit 18 entitled ‘Financial Management’ describes the concept and objectives

of financial managment, the sources of fund covering equity shares, debentures
as well as venture capital and lease finance. The security market and role of
SEBI have been further elaborated.
Unit 19 entitled ‘Human Resource Management’ discusses the definition and

functions of HRM, the skills of HR professional, competitive challenges and
dynamics of employer-employee relations. The employee empowerment and
employee engagement have been further elaborated.
Functional Areas of
Management
4
Marketing Management
UNIT 18 MARKETING MANAGEMENT
Structure
18.0 Objectives
18.1 Introduction
18.2 Definition of Marketing
18.3 Marketing Concepts
18.3.1 Production Concept
18.3.2 Product Concept
18.3.3 Selling Concept
18.3.4 Marketing Concept
18.3.5 Societal Concept
18.4 Evolution of Marketing
18.5 Difference between Selling and Marketing
18.6 Importance of Marketing
18.7 Marketing in a Developing Economy
18.8 Concept of Marketing Mix
18.9 Concept of Product Life Cycle
18.10 Basics of Pricing
18.10.1 Cost-oriented Pricing
18.10.2 Demand-oriented Pricing
18.10.3 Competition-oriented Pricing
18.11 Let Us Sum Up
18.12 Key Words
18.0 OBJECTIVES
After studying this unit, you should able to:
explain the meaning of the term marketing and various marketing concepts
state the importance of marketing to the business, the consumer and the
society
describe the nature of marketing in a developing economy
discuss the concept of marketing mix
explain the concept of product life cycle; and
describe the basics of pricing.
17.1 INTRODUCTION
As you know that the manufacturer produce the products and sell those products.
This process facilitated the emergence of exchange system. Now question arises
5
Functional Areas of what is marketing? Is it selling the product? Is it advertising the product? Is it
Management
promoting the product? In fact, marketing is a wider concept. In simple terms,
marketing refers to identification and satisfaction of needs of the customers. It
involves creation of value as well as management of relationship. In this Unit,
you will study the meaning of marketing and various marketing concepts,
evolution of marketing, importance of marketing and the nature of marketing in
a developing economy like India. You will also learn the concept of marketing
mix and the components of marketing mix. You will be further acquainted with
the concept of product life cycle and the basics of pricing.
18.2 DEFINITION OF MARKETING

According to the American Marketing Association "marketing is the activity,
set of institution, and process for creating, communicating, delivering and
exchanging offerings that have value for customers, client, partners and society
at large''. This definition focuses on creation of communication, delivering and
exchange of offerings. The creation of value for the stakeholder has been the
significant aspect of marketing.
If you are an entrepreneur who wants to start a new business and you do not
have a product. In fact you will have to decide what product you should
manufacture and sell. How do you decide this? This you can do only when you
identify the need, which require satisfaction among human beings. Once you
identify the need of a group of human beings, you can determine the product
which can satisfy that need. This is a part of the modern philosophy of marketing
or the marketing concept.
Philip Kotler, a well known author in the area of marketing, defines marketing
as "a human activity directed at satisfying needs and want through exchange
processes." Thus, the most fundamental concept which must be realised as being
the basis of all marketing activities is the existence of human needs. A marketing
man may devise a product or service aimed at satisfying a certain need, and thus
provide satisfaction to the user. People may have unlimited wants but the ability
to buy may be restricted on account of their economic background. They will,
therefore, select from among those products which give more satisfaction or are
needed more. Thus, when they are backed by ability to buy, the wants are
converted into demand for your product. Therefore, when people decide to satisfy
their needs and wants, in terms of marketing activities, exchange takes place.
This explains in detail the definition given by Kotler.
Kotler, Armstrong and Agnihotri (2018) in their book Principles of Marketing

defined marketing as "the process by which companies engage customers, build
strong customer relationships, and create customer value in order to capture
value from customers in return."
The analysis of above definition reflects that:
Marketing is a wholistic process;
In this process, the organisation makes effort to engage customers;
The organisation makes effort to develop strong customer relationships;
The customer value is created;
6
The company takes back the value from the customers in terms of revenue Marketing Management
and profit.
Based on the above discussion we can develop a process-oriented definition of
marketing, as "the process of ascertaining consumer needs, converting them
into products or services, and moving the products or services to the final
consumer or user to satisfy certain needs and wants of specific consumer segment
or segments with emphasis on profitability, ensuring the optimum use of the
resources available to the organisation."
In practice, often, the business functions such as production, finance and
marketing are performed by separate departments with their own way of thinking.
Production was often considered the more important function as compared to
marketing. This practice is, gradually losing ground and it is being recognised
that unless you can sell a product, you should not manufacture it. Production-
orientation evolved because often products were designed and developed by
inventors who hoped that they would sell. However, if these products fail to
satisfy some needs, they would never sell in the market place. Therefore,
consumer oriented thinking becomes necessary for any business to survive and
grow.
18.3 MARKETING CONCEPTS

There are five different marketing concepts under which business enterprises
conduct their marketing activity. These concepts are;
1) Production concept
2) Product concept
3) Selling concept
4) Marketing concept
5) Societal concept
18.3.1 Production Concept

This is probably the oldest concept. Some businessmen believe that the consumers
are interested only in low priced, easily and extensively available goods. The
finer points of the product are not very important to them. So the producers
believe they must concentrate only in efficient (economical) and extensive (large
scale) production. A company which believes in this approach concentrates on
achieving high production efficiency and wide distribution coverage.
Organisations may adopt this concept in two types of situations:
i) When the demand for the product is higher than the supply, you can sell
more if you increase production. Here the main concern of the management
is to find ways to increase production to bridge the demand and supply gap.
ii) When the cost of the product is high and increase in production is going to
bring down the cost due to economies of scale.
7
Functional Areas of The organisations which adopt this concept are typically production oriented
Management
concerns. Production and engineering departments play an important role in
this situation. Such organisations have only sales departments to sell the product
at a price set by production and finance departments.
18.3.2 Product Concept

As against the production concept, some organisations believe in product concept.
The product concept implies that consumers favour those products that offer the
most quality, performance and features. They also believe that consumers
appreciate quality features and will be willing to pay 'higher' price for the 'extra'
quality in the product or service made available. Hence, those companies which
believe in this concept concentrate on product and its improvement. But, while
improving the product they rarely take into consideration the consumers'
satisfaction and his multifarious needs. Even when new products are planned,
the producer is concerned more with the product and less with its uses or the
consumer needs. For example, a biscuit manufacturer produced a new brand of
biscuits with good ingredients, colour, packaging, etc., without taking into account
consumer tastes and preferences. This may fail in the market if the buscuit does
not taste good to the ultimate consumer.
18.3.3 Selling Concept

Sometimes the main problem of the enterprise is not more production, but to
sell the output. Similarly, a better product may not assure success in the market.
Hence, selling assumes greater importance. So some producers believe that
aggressive persuasion and selling is the crux of their business success, and without
such aggressive methods they cannot sell and survive. Therefore, attention is
paid to find ways and means to sell. They also believe that customers left to
themselves will not buy enough of organisation's products and services, and
hence considerable promotional effort is justified. Thus, the selling concept
assumes that consumers on their own will not buy enough of organisation's
products, unless the organisation undertakes aggressive sales and promotional
efforts. Many insurance agents, sales persons of certain electrical gadgets, health
drinks, soft drinks, and fund raisers for social or religious causes come under
this category.
Sale is the index of success of marketing as well as production efforts. The

marketers who believe in sales concept often forget that the consumers buy
goods to fulfil certain needs. After the sale, what happens or how the consumer
feels is not their concern. They may not expect the customer to come again to
buy the product. They may go to new target consumers rather than building up
a network of satisfied customers. Some firms facing with excess production
also adopt selling concept. There are fair as well as unfair persuasive means
adopted in this process. But the purpose behind all such action is selling more.
Sales executives or sales department assumes greater importance in sales concept
compared with production concept and product concept.
18.3.4 Marketing Concept

In an evolutionary process, many organisations have come to change their focus
and to see their marketing tasks in a broader perspective. Marketing concept is
considered a business philosophy wider in its implications. Under the marketing
8
concept, the organisation considers the needs and wants of consumers as the Marketing Management
guiding spirit and the delivery of such goods and services which can satisfy the
consumer needs more efficiently and effectively than the competitors. It is also
said that the marketing concept is consumer orientation with the objective of
achieving long run profits. It is a modern marketing philosophy for dynamic
business growth. In other words, under this concept, the task of marketing begins
with finding what the consumer wants, and produce a product which will meet
that want and provide maximum satisfaction. Implicitly, the consumer is the
boss or king who dictates. The focus which moved from the product to selling,
now rests with the consumer.
When organisations practice the marketing concept, all their activities

(manufacturing, finance, research and development, quality control, distribution,
selling, etc.) are directed to satisfy the consumer. Consumer satisfaction becomes
a single value which becomes the core of corporate culture in such organisations.
Companies produce what consumers want and, thus, satisfy consumers and make
profits.
Those companies which have attained a certain maturity and which could see
far beyond the immediate future adopt this concept. Some companies may not
adopt this concept because they feel that this may result in the decline of sales or
profits in the short run and the long run profits in any case are unpredictable or
uncertain. The companies which want to make 'quick-bucks' also do not adopt
this concept. Even the departments within the organisation may not fully
cooperate since they may not be 'convinced' about the advantages of following
the marketing concept. In spite of these hurdles, it is now a world-wide
experience. Companies which are successful, enjoy goodwill and grow in the
long run are companies which have adopted the marketing concept as their
business philosophy. These companies realised that a satisfied customer is the
best advertiser for their product. Their profits are generated from the satisfaction
of the customer and not only from the product or their selling efforts. In an
economy like India with shortages in many goods as well as lack of resistance
from the consumers, the firms which practice the first three concepts also survive.
18.3.5 Societal Concept

With the growing awareness of the social relevance of business, there is an
attempt to make marketing also relevant to the society. In a sense, marketing is
not a business activity alone but must take into account the social needs. Excessive
exploitation of resources, environmental deterioration and the customer
movements in particular have necessitated the recognition of the relevance of
marketing to the society. Marketing then must be a socially responsible or
accountable activity. The societal concept holds that the business organisation
must take into account the needs and wants of the consumer's satisfaction as
well as the society's well being. The societal concept is an extension of the
marketing concept to cover the society in addition to the consumer.
In effect, a company which adopts the societal concept has to balance the company
profit, consumer satisfaction and interests of the soceity. The problem is almost
the same as that of social responsibility of business. What is good for the society
is a question to be decided. A voluntary acceptance of this concept is desirable
for the long run survival of private business. An effective implementation of the
9
Functional Areas of societal concept will certainly enhance the goodwill of the business house. The
Management
business enterprises which believe in this concept will produce and market those
goods and services which are beneficial to the society, those that do not pollute
the environment, and give full value for the money spent.
1) What do you mean by marketing?
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
2) Distinguish between selling concept and marketing concept.
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
3) Distinguish between marketing concept and societal concept.
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
4) Match the organisational objectives given in Column 1 with the marketing

concepts in Column 2.
Organisational Objectives Marketing Concept

i) Effective distribution a) Product concept
ii) Large scale selling and b) Societal concept
promotion effort
iii) Product what consumers need c) Selling concept
iv) Product improvement d) Production concept
v) Improve society's well being e) Marketing concept
i) In an organisation which adopts the production concept, marketing
10
department assumes greater importance.
ii) Producing a cheaper product is the focus of product concept of Marketing Management
marketing.
iii) Selling concept of marketing assumes that left to themselves consumers
will not buy enough of organisation's products.
iv) "Make what you can sell instead of trying to sell what you can make",
is the approach in marketing concept.
18.4 EVOLUTION OF MARKETING

Marketing has gradually evolved out of the barter system. The industrial
revolution, growing population, improvements in communications and transport
facilities have contributed to the growth of marketing as an important economic
activity. In the initial stages of development, a village artisans or craftsmen
made goods to order and tried to meet the neighbourhood demand. After the
industrial revolution, large scale production became possible and large scale
industries came into existence. In the initial stages of industrial revolution,
producers were able to sell whatever they have produced. So, they concentrated
on higher production. At that stage, most of the enterprises adopted the production
concept. Later when the competition started building-up, producers faced
difficulties to sell whatever they produced and the need to improve the product
arose. This led to the emergence of product concept and selling concept. With
the increase in competition, producers realised the advantage of producing what
consumers need instead of selling whatever is produced. This led to the consumer
orientation in marketing and the emergence of marketing concept and societal
concept.
Production Product Selling Marketing Societal

Concept Concept Concept Concept Concept
Late 1900 1920 1950 1970 Present

1880s
Fig. 18.1: Evolution of Marketing Concepts - Approximate Time Period
Figure 18.1 presents the approximate time spans covered by each of the five
concepts in the USA. Since changes occur gradually over a continuum, the periods
overlap one another. So, the figure indicates only the times during which a
particular concept has been prevalent. Other developed countries also have gone
throuugh the similar periods, as USA.
In the developed countries where the markets are developed, most of the producer
adopt the marketing concept. In the developing countries, markets are
heterogeneous and you can see the co-existence of all the five concepts. Thus,
the concept of marketing has grown along with the process of economic
development.
The growth of civilisation, the standard of living, the changing life styles and
technological growth have created new wants. These can be satisfied only with
a wide variety of new goods and services apart from changes and improvements
11
Functional Areas of in the existing goods and services. This is however the general trend, and there
Management
are several exceptions. Markets for all products and services have to reach a
certain maturity to experience this evolutionary trend. It may not be so in the
case of each and every product or market. The rural market in India, for example,
is fairly different from the urban market. Even among a set of consumer goods,
for example, cosmetics which serve the middle/upper income groups are much
more consumer oriented than the market for undergarments for men. Besides,
there is a seller's market in some goods and services and a buyer's market in
some others.
Another feature in the evolutionary process of marketing is the growing role of

service marketing. The demand for service contracts to maintain the gadgets in
use have become more easily marketable and a reliable service commands a
premium in the market. When one computer manufacturer enters the market,
may be another 20 to 30 service organisations come up to offer their services for
an uninterrupted performance of the computer or to train people in computer
software and operation.
Another feature in the growth of marketing is the globalisation of markets. Many

producers aim at selling in more than one country. The product and promotion
strategies are planned that way. It does not require a large scale business to enter
the export market, even the small scale businesses are entering the export market
quite significantly.
18.5 DIFFERENCE BETWEEN SELLING AND

MARKETING
Many people use the terms marketing and selling as synonyms. In fact, these
two terms have different meanings in marketing management. An understanding
of the differences between them is necessary for you to be a successful marketing
manager.
Selling is an action which converts the product into cash but marketing is the
whole process of meeting and satisfying the needs of the consumer. Marketing
consists of all those activities that are associated with product planning, pricing,
promoting and distributing the product or service. Selling focuses on the needs
of the seller whereas marketing concentrates on the needs of the buyer.
Selling is the modern version of the exchange under barter system. When the
focus is on selling, the business man thinks that after production has been
completed the task of the sales force starts. It is also the task of the sales
department to sell whatever the production department has manufactured.
Aggressive sales methods are justified to meet this goal and customer's actual
needs and satisfaction are taken for granted.
But marketing is a wider and all pervasive activity to a business firm. The task
commences with identifying consumer needs and does not end till feedback on
consumer satisfaction from the consumption of the product is received. It is a
long chain of activity which comprises production, packaging, promotion, pricing,
distribution and then the selling. Consumer needs become the guiding force
behind all these activities. Profits are not ignored but they are built up on a long
run basis. Distinction between selling and marketing are summarised in
12 Table 18.1.
Table 18.1: Difference between Selling and Marketing Marketing Management
Selling Marketing
1. Emphasis is on the product. Emphasis is on customers wants.
2. Company first makes the Company first determines customers
product and then figures out wants and then figures out how to make
how to sell it. and deliver a product to satisfy these wants.
3. Management is sales volume Management is profit oriented
oriented.
4. Planning is short-run-oriented Planning is long-run oriented, in terms of
in terms of today's products new products, tomorrow's markets and
and markets. future growth.
5. Stresses needs of seller. Stresses wants of buyers.
Source: Stant on W.J., and Charles Futrell, 1987. Fundamentals of Marketing, McGrawa Hills
P.11-12
18.6 IMPORTANCE OF MARKETING

Marketing is considered to be the most important activity of the present day
business. Without it, business will be meaningless. Quite often the success of a
business is considered synonymous with the success of its marketing. Apart
form becoming so crucial to a business, it is also helpful to the consumer and the
development of the economy as well as the society. Over a period of time, business
have realised various dimensions and significance of this function and a more
comprehensive view is being adopted. Specialised branches of marketing like
the marketing of consumer goods and services, industrial goods and services,
have developed with their own unique features.
Marketing is a concept applicable not only to goods but also to services such as
health service, investment counselling, bank deposits and loans, etc. Marketing
is important to the business, consumer and the society. For the business house
marketing brings in revenue, for the consumer it provides the goods and services
of utility, for the society it enables a redistribution of income and generation of
employment, and improving the standard of living of people. Major advantages
of marketing are briefly discussed below:
1) Marketing is important to the business organisation, since it is the activity
that sells the product and brings revenue to the company, and it is also the
key to its success. Research and development and production become
meaningless if the product is not marketed successfully. Scanning the
environment, finding marketing opportunities, formulating product policies,
evolving distribution and pricing strategies are some of the problem areas
which pose challenges to the success of a business. Marketing takes care of
all these challenges.
2) Marketing enables the consumers to exercise choice and to improve their
levels of consumption. In a sense, marketing is defined as the delivery of a
standard of living. The easy availability of goods and services of good quality
at competitive prices is made posssible only by an efficient marketing
13
Functional Areas of system. In such a system the consumer is the king.
Management
3) Marketing creates time, place and possession utilities to products and
services. Products are useful only when they are available at the required
time and place as well as to the person who needs them. Marketing creates
these utilities.
4) Marketing contributes to the economic development of the country. It
symbolises the economic development of a country. This is because on the
one hand marketing activities generate employment and income. On the
other hand the development of a country is reflected in the variety and
volume of goods available and consumed by the people of that country.
The per capita availability of essential consumer goods is an indicator of
the level of poverty or affluencce in a country.
5) Marketing offers career opportunities to a large number of people. Marketing
related occupations account for a significant portion of the employment
generated in a country.
18.7 MARKETING IN A DEVELOPING ECONOMY

Marketing in a developed economy is somewhat different from a developing
economy like India. All the advantages of a matured marketing system as found
in a developed economy, may not be realised in a developing economy. Some
characteristics of marketing in a developing economy are as follows:
1) Most of the markets remain seller’s markets. The seller is in a dominating
position and can influence the pattern of consumption, prices and quality
of goods and services to his advantage. Many of the manufacturers may
believe in the selling concept and bother less about consumer satisfaction.
2) The variety of goods and services available are limited and even their quality
may require improvement. Lack of effective competition may enable the
manufacturers to sell whatever they produce. The consumers may have to
accept and buy whatever is available in the market.
3) In a developing economy, due to lower per capita income, people spend
most of their income on necessities and little money is available for
discretionary spending. People may not be able to buy many goods and
services within the limited income. As income determines consumption
patterns, the scope for marketing is also determined by income.
4) The consumers knowledge and awareness about their rights is also limited
because they do not have more exposure to marketing activities. It is difficult
to know about higher quality, better service and wider choice unless one
has an exposure in these terms. The consumers of the developing economies,
therefore, appear to be content with whatever is available in their country.
5) The supporting services such as departmental stores, credit facilities, packing
and delivery systems, after sales services, product guarantee, money back
guarantee etc., may also be less in developing countries.
All the developing countries are in a process of gradual evolution and in the
normal course of events must grow into developed systems.
14
18.8 CONCEPT OF MARKETING MIX
Marketing requires several activities to be done. To begin with, a company may
choose to enter into one or more segments of a market, since it may not be
possible to cover the entire market. The manufacturer of a bathing soap, for
example, may aim at the working class in the middle or lower income groups as
his target consumers. Once the target market is decided, the product is positioned
in that market by providing the appropriate product qualities, price, distribution
and advertising efforts. These and other relevant marketing functions are to be
combined or mixed in an effective proportion so as to achieve the marketing
goal. In order to appreciate this process, it is easier to divide the marketing
activities into four basic elements which are together referred to as the marketing
mix. These four basic elements are : 1) product, 2) price, 3) promotion, and 4)
physical distribution. As all these four start with the letter 'P', they are referred
to as the four Ps of the marketing mix or the four Ps in marketing. Thus, marketing
mix may be defined as the set of controllable marketing variables/activities that
the firm blends to produce the response it wants in the target markets. Let us
study the four Ps in details.
The word product stands for the goods or services offered by the organisations.
Once the needs are identified, it is necessary to plan the product and after that
keep on analysing whether the product still satisfies the needs which were
originally planned for, and if not, to determine the necessary changes. In the
product, we study how are new products introduced? How have they to be
modified in due course to continue to be successful in sales? Why should marginal
or non-profitable products be removed, unless they are contributing in some
way to the overall benefit of the organisation.
Price is the money that the consumer has to pay. Price must be considered as
worth the value of the product to become an effective marketing tool. The product
has to be reasonably priced. The manufacturer has to take into account cost
factors, profit margin, the possibility of sales at different price levels and the
concept of the right price.
Promotion is the aspect of selling and advertising or communicating the benefits

of the product or service to the target customers or the market segment in order
to persuade them to purchase such products or services. It includes selling through
advertising as well as the sales force. Besides, a certain amount of promotion is
also done through special seasonal discounts, competitions, special price
reductions, etc.
Physical distribution refers to the aspect of the channels of distribution through

which the product has to move before it reaches the consumer. It also includes
the logistic aspects of distribution such as warehousing, transportation, etc.,
needed for geographical distribution of products. It is also concerned with the
selection of distribution channels. The organisation must decide whether it should
sell through wholesalers and then to retailers, or whether directly to the
consumers. There are many ways in wihch a product can be moved from the
producer to the consumer. The optimum method has to be determined in terms
of both consumer satisfaction and profitability to the organisation, or optimum
use of the organisation's resources.
15
Functional Areas of
Management
Product Planning
Introduction of New Product
Improvement of Existing
products
Elimination of Marginal or
non-profitable products
Packaging
Branding
Physical Distribution
Selection of Distribution Channels
Logistics of Distribution
(Warehousing, Insurance, Transportation)
Fig. 18.2: Marketing Mix
The manufacturer must design the most effective combination of these four basic
factors as well as the expenditure he would like to incur on them. The variables
that are relevant in the marketing mix vary from company to company. These
variables are not independent in their effect on the marketing effort. One variable
may influence the other. Apart from the expenditure involved, these decisions
are influenced by the company's market positioning decision. Look at Figure
18.2 carefully. It summarises all the components of marketing mix.
1) What are the four Ps of marketing?

......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
2) Identify three distinction between selling and marketing.
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
......................................................................................................................
i) From the society's point of view marketing is a waste.
ii) An underdeveloped economy is primarily a buyer's market.
iii) Marketing creates time and place utilities to products and services.
16
iv) Selling primarily refers to exchange function. Marketing Management
v) Marketing starts with the product.

vi) Marketing in developing countries is different from the marketing in
developed countries.
vii) In developing countries markets are mostly sellers' markets.
18.9 CONCEPT OF PRODUCT LIFE CYCLE

Like human beings, products also have a distinct life cycle. A product generally
passes through four stages during its entire life from birth to death. These stages
are: 1) Introduction, 2) Growth, 3) Maturity, and 4) Decline or Obsolescence.
Thus, product life cycle refers to the stages a product goes through from its
introduction, through its growth and maturity, to its eventual decline and death
(withdrawal from the market).
A company which introduces a new product naturally hopes that the product
will contribute to the profits and provide consumer satisfaction for a long period
of time. This however, does not always happen in practice. So, business
organisations try to remain aware of what is happening throughout the life of
the product in terms of the sales and the resultant profits. The sales volume and
profit curves may be different with each product. However, basic shape and
relationship between the two factors usually remain identical. As stated earlier,
new products are essential for sustaining the organisations and for each new
products we have to take stock of the relation between sales volume and profit
margin. The relationship of the two curves (sales volume curve and profit margin
curve) must be clearly understood before formulating marketing policy. A
company must understand and manage the various stages of life cycle of a product
to ensure marketing success.
The total length of the life cycle varies from product to product. It ranges from
a few weeks (as in the case of a fashion or a fad) to several years (as in the case
of motor cycles or refrigerators).
You should note that among various products the duration of each stage is not
the same. As a matter of fact, it is different with each product. There are products
which remain in the introductory stage for a number of years, while some others
may find market acceptance in a few weeks and thus move on to the next stage
of the life cycle.
Similarly, all products may not pass throguh all stages of life cycle. A product
may fail right at the stage of introduction. There may be situations where a
company may not enter a market till the product of another company gains
acceptance and reaches the growth or maturity stage.
However, all products enter the decline and possible abandonment phase. This
could be because of any of the following three reasons. Firstly, the need for the
product is not there. Secondly, a better or less expensive product came into the
market. Thirdly, a competitor, with a better marketing effort, forces the company
product out of the market arena.
17
Functional Areas of Look at Figure 18.3 carefully. It presents the relationship between the sales
Management
volume and profit volume at different stages of the product life cycle.
Fig. 18.3: The Product Life Cycle
Introductory Stage
During this stage arrangements for full scale production are made, a marketing
programme is finalised, and the product is offered to the market. From Figure
18.3, you can assess that the sales volume shows an upward trend, but the rate
of growth is quite slow. At this stage, the product being new and has been first
made available for purchase in the market, it may not face competition in the
market.
The company has to communicate with target market and inform potential
customers of the new arrival in a big way, thus incurring high promotional
expenditure. The promotional effort is also aimed at inducing the potential buyers
to buy and test the product. It also aims at securing distribution at retail outlets
in the process. More money is spent in attracting distributors for the new product.
Because of this high promotional costs and low sales volume during this
introduction stage, the profits of the company are low and sometimes even
negative.
There are, if at all, only a few competitors and they all offer the basic version of
the new product without any refinements. Selling efforts at this stage is, therefore,
aimed at those prospective buyers who can be motivated to buy. Product at this
stage, is usually priced high because of low level of production and high cost of
promotion and distribution.
Growth Stage
After the product gains acceptance in the market i.e., accepted by the consumers
as well as trade, it enters into the growth stage. Now the demand of the product
grows rapidly, generally outpacing supply. In the light of increased sales volume,
18
the company profits also increase. Effective distribution and promotional efforts Marketing Management
are considered key factors during this stage, so as to cash on the rising trend of
demand. The company considers increased sales volume as a top priority.
In the wake of rising demand, a large number of competitors begin to enter the
market. The competitors start adding new features to the product. With the rise
in competition, distribution outlets also increase in number resulting in increased
demand to "fill the pipeline".
Prices normally remain at the same level or may fall marginally. Promotional
tempo is maintained or even raised to meet the challenge of competition.
Maturiity Stage
It is too optimistic to think that sales will keep on shooting up. At this stage, it is
more likely that the competitors become more active. In case your product is a
novel one, by now competition would have come out with a similar product in
the market to compete with yours. Therefore, the sales are likely to be pushed
downwards by the competitors while your promotional efforts would have to be
increased to try and sustain the sales. Thus, the sales reach a plateau. This is
called the 'maturity stage' or 'saturation'. At this point, it is difficult to push sales
up. With regard to the profit picture, the profits are likely to stabilise or start
declining as more promotional effort has to be made now in order to meet
competition. Unless of course, you have the larrgest market share with your
product and it needs no extra push in the market.
Decline or Obsolescence Stage
Thereafter the sales are likely to decline and the product could reach the
'obsolescence' stage. Steps should be taken to prevent this obsolescence and
avoid the decline. This decline that generally follows could be due to several
reasons such as changes in consumer tastes, improvement in technology and
introduction of better substitutes. This is the stage where the profits drop rapidly
and ultimately the last stage emerges. Retaining such a product after this stage
may be risky, and certainly not profitable to the organisation. Thus, a firm has to
finally choose between a total abandonment of the product or continue it in a
specialised limited market. The decision will be based on the level of remaining
opportunity and ability of the management.
18.10 BASICS OF PRICING

From the point of view of sound business principles, prices should be deter-
mined after taking into consideration the costs, demand, competition, elements
of marketing mix, and legal considerations. However, in practice, marketters
often rely on one of the three major determinants of prices i.e. costs, demand
and competition. Based on the relative emphasis given to these factors, there are
three practical approaches to the settting of the price of a product or service:
1) Cost-oriented pricing
2) Demand-oriented pricing
3) Competition-oriented pricing
19
Functional Areas of Look at Figure 18.4 carefully for the classification of various methods of pricing.
Management
Let us learn these methods in detail.
Fig. 18.4: Methods of Price Determination
18.10.1 Cost-oriented Pricing

When the selling price is determined based on the total product cost and a
specified margin of profit, the approach is known as the cost-oriented approach
to pricing or the cost-based pricing. There are two methods of price setting
which stem from the cost-oriented pricing: 1) Cost-plus pricing, and 2) Target-
profit pricing or break-even analysis. Let us learn these two methods in details.
1) Cost-plus Pricing
Some Firms set the selling price of their products by aggregating all the
costs of the product (including the manufacturing cost, distribution and
marketing costs) plus a predetermined margin of profit. The cost-plus pricing
method has been explained in the following illustration:
Rs. per Unit
Total manufacturing costs 30.00
Selling and promotional costs 4.00
Distribution and administration costs 6.00
Total costs 40.00
Margin of profit 10.00
Selling price 50.00
In this method, the product costs include both variable cost and fixed overhead
costs. This approach can be simply stated as:
Selling Price = Variable Costs + Overhead Costs (Fixed Cost) + Profit

Margin.
To make this method of cost-plus pricing more realistic, the company must
consider the changes that are expected to occur in these costs as a result of
change in the volume of production.
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The pricing method enables the firm in covering all the costs and, in addition, to Marketing Management
earn the desired margin of profit. Thus, the method is quite justifiable on grounds
of fairness to both the sellers and the buyers. The method is also easy to understand
and implement as there is generally less uncertainty about cost than the demand
for the product. The margin of profit to be added to the cost has to be determined
by the company. It can vary from industry to industry and from situation to
situation. Retailers using the cost-plus method of pricing do not necessarily
apply the same percentage of mark-up to every item.
This may also be a safe method in an uncertain market. It can safely be used for
pricing the jobs like government contracts that are difficult to estimate in advance.
For fixing prices for services, often cost-plus pricing method is adopted.
2) Break-even Analysis and Target-profit Pricing
This pricing method is slightly different from the cost-plus pricing method. Here,
the firm wants to determine a price that will enable it to earn the desired profit.
For this purpose, the break-even analysis is used by the firm and the break-even
point is determined.
A break-even analysis relates total cost to total revenue. A break-even point is

that level of production at which the total sales revenue (TR) equals the total
cost (TC). In other words, a break-even point is the level of production or supply
where the firms neither earns any profit nor suffers any loss.
For fixing of price through the break-even analysis, the company must consider
different prices, their impact on the sales volume required to pass the break-
even point and earn the desired profit. Possibility of achieving the break-even
sales level at different price levels also must be examined. The break-even
analysis is particularly useful for fixing the price of a new product.
18.10.2 Demand-oriented Pricing

Demand-oriented pricing is based on an estimate of how much sales volume
can be expected at various prices which can be paid by different types of buyers.
Instead of fixing the price on the basis of costs or competitors price, some firms
often fix the selling price of their products on the basis of the demand. In other
words, irrespective of the cost of the product or what the competitors are charging,
a higher price is charged for a product or service when its demand is more.
Similarty, lower price is charged when the demand is less, even though the costs
are the same in both cases.
The two methods of pricing under this approach are:

1) Differential pricing
2) Perceived-value pricing
1) Differential Pricing
Generally different groups of buyers have different wants and desires.
Consequently the intensity of their demand for the product would also be
different. In such situations, for the same product sellers would be tempted
to charge higher price for those having less elastic demand and lower price
for those having more elastic demand. Differential pricing is normally based
21
Functional Areas of on one of the four factors; the customer, place (location of the customer),
Management
time of purchase, and the product version.
Different prices may be fixed for different customers, persons or groups of

persons. This may be possible due to the difference in the capacity of
bargaining, ability to pay, level of knowledge about the product features or
the availability of the product. For example, in a cinema hall tickets for
different classes of seats are priced at different rates whereas there is no
significant difference in the cinema shown to these classes.
If the prices are different for the same or similar product sold at different
places, it is a case of location or place differential. In terms of time, the
demand for a product frequently varies by season, day, or even by the hour
of the day. The prices may be fixed to take advantage of the demand intensity
at a particular season or point of time.
Under product based differential pricing, the seller charges substantially

different prices from the buyers of slightly different versions of the same
products, so that the difference in prices is more than proportionate to the
cost of different product forms of versions.
Discriminatory prices are likely to generate customer ill-will and may also
attract legal action. Hence, the seller has to consider the consequences well
before deciding upon the discriminatory prices.
2) Perceived-value Pricing
Different buyers often have different perceptions of the same product on
the basis of its value to them. A cup of tea is priced differently by hotels
and restaurants of different categories, because buyers will assign different
value to the same item. When you follow this 'perceived-value' method of
pricing, you have to ascertain how different buyers perceive the product in
terms of its quality, features and attributes (like colour, size, durability,
softness etc.), and how they perceive the value of the product in terms of
such product differences.
18.10.3 Competition-oriented Pricing

When the price is determined with reference to the price of a similar product
charged by the competitor, and not on the basis of the costs of the product or the
different perceptions of the product by different buyers, the pricing approach is
referred to as competition-oriented pricing. The company firm may adopt going
rate pricing for competition oriented princing.
Going Rate Pricing
This is the important method under competition-oriented pricing approach. In

this case the firm does not maintain an elaborate record of various product costs.
The firm also does not try to ascertain the difference in the intensity of demand
or the perceptions of the value of the product in the minds of the buyers. The
firm decides the price of its products on the 'going-rate' prices in the market.
The price is not necessarily the same as that charged by the competitors or by
the industry leader, it can be lower or higher. Whenever the industry leader or
22
the trade association increases/decreases the price, the firm follows them. The Marketing Management
practice of fixing the going rate price is quite popular among traders, especially
among the retailers.
Those who adopt the going rate method of pricing argue that the prevailing rates
represent the collective wisdom of the industry. Furthermore, it is often difficult
to ascertain the customer's reaction to price differentials and their perception of
the different product features. Moreover, this method is easy to adopt as there is
no need to estimate the price elasticity of demand or various product costs. It is
also felt that the adoption of the going-rate pricing method prevents price wars
among competitors. This method is practiced mainly in the case of homogeneous
products, under conditions of pure competition and oligopoly. The firm selling
an undifferentiated product is under purely competitive market such firm has
very little choice in setting its prices.
1) What do you mean by product life cycle?

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2) Distinguish between cost-oriented pricing and demand-oriented pricing.

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3) What do you mean by competition-oriented pricing.

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18.11 LET US SUM UP

The term marketing has been defined in different ways. This is because each
author defines it with a particular approach or purpose. According to Philip
23
Functional Areas of Kotler, 'marketing is human activity directed at satisfying needs and wants
Management
through exchange process.' It is a process of ascertaining consumer needs,
converting them into product or services; and moving the product or service to
the final consumer or user to satisfy certain needs and wants with emphasis on
profitability and ensuring the optimum use of the resources available to the
organisation.
After the industrial revolution, marketing philosophy has undergone so many

changes. It has passed through four stages and a fifth stage is emerging. During
these five stages of development, five marketing concepts emerged. They are:
1) Production concept, 2) Product concept, 3) Selling concept, 4) Marketing
concept, and 5) Societal concept. However, even in the present day world many
companies are still in the earlier stages.
Many people think that the terms selling and marketing are synonymous. In
fact, selling is different from marketing. Selling is the action which converts
the product into cash whereas marketing is the whole process of identifying,
meeting and satisfying the needs of the consumers.
Marketing is the most important activity of any business. Quite often the success
of the business is considered synonymous with the success of its marketing
efforts. Apart from becoming crucial to the business, it is also helpful to the
consumer and the development of the economy as well as the society. Marketing
in a developing economy is somewhat different from developed economy. All
the advantages of a matured marketing system as found in a developed economy
may not be realised in a developing economy.
Marketing activities may be divided into four basic elements which are together
referred to as the marketing mix. These four basic elements are: 1) Product,
2) Price, 3) Promotion, and 4) Physical distribution. As all these elements start
with the letter P, they are referred to as the 'four Ps' of the marketing mix or the
'four Ps' in marketing.
The product life cycle refers to the stages a product goes through from its
introduction through its growth and maturity, to its eventual decline and death
i.e. withdrawal from the market. The understanding of these stages may be useful
in designing the marketing strategy.
The major determinants of prices are: Costs, demand and competition. Based on
these determinants, various methods of pricing include: Cost-oriented pricing,
demand oriented pricing and competition-oriented pricing.
18.12 KEY WORDS

Competition-oriented : In this method, the price is determined with
Pricing reference to the price of a similar product charged
by the competitor.
Cost-oriented Pricing : In this method, the price is determined based on

the total product cost and a specified margin of
profit.
24
Demand-oriented Pricing : In this method, the price is determined on an Marketing Management
estimate of how much sales volume can be
expected at various prices which can be paid by
different types of buyers.
Marketing : The process of ascertaining consumer needs,
converting them into products or services, and
moving the product or service to the final
consumer or user to satisfy certain needs and
wants with emphasis on profitability and
ensuring optimum use of the resources available
to the organisation.
Marketing Concept : A marketing philosophy which holds that
achieving organisational goals depends on
determining needs and wants of target markets
and delivering the desired satisfaction more
effectively and efficiently than competitors.
Marketing Mix : The set of four Ps-product, price, promotion and
physical distribution-that the firm blends to
produce the response it wants in the target group.
Product Concept : A marketing philosophy which holds that
consumers will favour the products that offer the
most quality, performance and features, and
therefore the organisation should devote its
energy to making continuous product
improvement.
Production Concept : A marketing philosophy which holds that

consumer will favour products that are available
and highly affordable, and therefore management
should focus on improving production and
distribution efficiency.
Product Life Cycle : Refers to the stages a product goes through from
its introduction, through its growth and maturity,
to its eventual decline and death.
Selling Concept : A marketing philosophy which holds that

consumer will not buy enough of the
organisation's products unless the organisation
undertakes a large selling and production effort.
Societal Concept : A marketing philosphy which holds that the

organisation must take into account the needs and
wants of the consumers and deliver the goods
and services efficiently so as to enhance
consumer's satisfaction as well as the societal
well being.
25
Functional Areas of
Management 18.13 ANSWERS TO CHECK YOUR PROGRESS
A) 4. i) d ii) c iii) e iv) a v) b
5. i) False ii) False iii) True iv) True
B) 3. i) False ii) False iii) True iv) True
v) False vi) True vii) True

1) Define marketing and explain its implications. Explain how is marketing
different from selling.
2) What are the marketing concepts? Explain the process of evolution of these
concepts.
3) Describe the profile of a company which has adopted the marketing concept.
4) What is the consumer's place in modern marketing?
5) Explain the importance and features of marketing in a developing economy.
6) What is marketing mix? Explain the components of marketing mix.
7) Describe the concept of product life cycle. Explain various stages of product
life cycle.
8) Discuss the methods of price determination of a product.
write answers for them. Do not submit your answers to the University
for assessment. These are for your practice only.
References
Kotler Philip, Armstrong Gary and Agnihotri Prafulla, (2018). Principles of
Marketing, Pearson, Noida, U.P.
26
UNIT 19 FINANCIAL MANAGEMENT
Structure
19.0 Objectives
19.1 Introduction
19.2 Definition and Functions of Financial Management
19.3 Objectives of Financial Management
19.3.1 Profit Maximisation Approach
19.3.2 Wealth Maximisation Approach
19.3.3 Profit Maximisation Vs. Wealth Maximisation
19.4 Sources of Finance
19.4.1 Shares
19.4.2 Debentures
19.4.3 Venture Capital
19.4.4 Lease Financing
19.5 Security Market
19.5.1 Primary Market
19.5.2 Secondary Market
19.6 Role of SEBI
19.7 Let Us Sum Up
19.8 Key Words
19.0 OBJECTIVES
describe the concept of financial management and its functions
discuss the objectives of financial management
explain various sources of finance
discuss the merits and demerits of equity shares and preference shares
explain the various types, merits and demerits of debentures
describe the features, advantages and disadvantages of venture capital
discuss the features, advantages and disadvantages of lease financing
describe about securities markets, i.e. primary and secondary market; and
state the role of SEBI
19.1 INTRODUCTION
You must be aware that the major activities involved in a manufacturing
organisation may be : purchasing of raw materials, processing them with the
association of labour, machinery etc., manufacturing the final product and
27
Functional Areas of marketing the finished product. Thus, the finance, production and marketing are
Management
important aspects of business. Finance plays very crucial role in the business.
The production and marketing activities are related to the finance. It is essential
to take the financial decisions at the right time and in the most rational way. The
success of the business may depend on taking right financial decision. Thus,
finance is considered as life-blood of business. In this unit, you will learn the
concept, functions and objectives of financial management. You will further
learn the sources of finance i.e. equity shares, debentures, venture capital and
lease financing. You will be also acquainted with the security market i.e. primary
and secondary market and the role of SEBI.
19.2 DEFINITION AND FUNCTIONS OF

FINANCIAL MANAGEMENT
Financial management is concerned with planning and controlling of resources
of Firms. According to Paul. G. Hasings, “Finance is the management of the
monetary affairs of a company. It includes determining what has to be paid for
raising the money on the best terms available and devoting the available resources
to best uses.”
Kenneth Midgley and Ronald Burns stated that “Financing is the process of
organising the flow of funds so that a business can carry out its objectives in the
most efficient manner and meet its obligations as they fall due.”
From the above definitions of finance, it can be concluded that the term business
finance mainly involves : raising of funds and their effective utilisation keeping
in view the overall objectives of the firm. The management makes use of the
various financial techniques and devices for the most effective and efficient
way of financing. Let us now discuss the various functions and objectives of
Financial Management.
Functions of Financial Management

The functions of financial management are as follows :
1) Estimation of capital requirements: An estimation regarding the capital
requirements of the company has to be made in the most appropriate way.
The estimation depends on costs and profits as well as future programmes
and policies of the organisation. Estimations have to be made in an adequate
manner to facilitate earning capacity of the organisation.
2) Determination of capital composition: The capital structure has to be
decided after making estimation of capital. Short- term and long- term debt
equity analysis may be done for this purpose. This depends on the proportion
of equity capital and the additional fund to be raised.
3) Choice of sources of funds: The company has many sources for raising
funds. These sources are :
a) Issue of shares and debentures
b) Loans to be taken from banks and financial institutions
c) Public deposits to be drawn in the form of bonds.
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4) Investment of funds: The finance manager has to decide to allocate funds Financial Management
into profitable ventures. This facilitates safety and regular returns on
investment.
5) Disposal of surplus: The finance manager has to decide about the disposal
of surplus. The disposal of surplus may be decided in the following ways :
a) Dividend declaration – The manager may decide about the rate of
dividends and other benefits like bonus.
b) Retained profits - The amount of retained profit may be decided by
the manager. The decision may depend on the expansional, innovational
diversification etc., as well as the plans of the company.
6) Management of Cash: The cash management may be decided by the
finance manager. Cash may be required for payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current
liabilities, maintenance of enough stock, purchase of raw materials, etc.
7) Financial controls: In addition to planning, procuring and utilisation of
funds, the finance manager has to exercise control over finances. The
financial control may be done through ratio analysis, financial forecasting,
cost and profit control, etc.
19.3 OBJECTIVES OF FINANCIAL

MANAGEMENT
As you have learnt that the Financial Management is concerned with the efficient
use of capital funds. It evaluates how are funds procured and used. Financial
Management includes taking decision in three inter related areas. These are :
investment, financing and dividend policy. The decisions are taken by the finance
manager considering the objectives of the firm. The objectives provide a
framework for optimal financial decision of the company. There are two
approaches for this purpose.
i) Profit Maximisation Approach
ii) Wealth Maximisation Approach
19.3.1 Profit Maximisation Approach

According to this approach, actions that increase profits should be undertaken
and that decrease profits should be avoided. This approach focuses on
maximisation of profits and income of the company. The company should decide
those projects which are profitable. The projects which are not profitable should
be rejected. The behavior of a Company is analysed in terms of profit
maximisation in economic theory. In the profit maximisation, a firm either
produces maximum output for a minimum input, or uses minimum input for a
given output. Therefore, the efficiency is the most significant aspect for the
company. Profit is a test of economic efficiency which provides a yardstick for
evaluating the economic performance.
29
Functional Areas of There are several criticisms of profit maximisation approach. The main technical
Management
flaws are ambiguity, timing of benefits and quality of benefits. These are discussed
as below:
a) Ambiguity : There is an ambiguity in the concept of profit. Different

scholars have interpreted this concept differently. The profit may be total
profit before tax or after tax or profitability rate. The rate of profitability
may be determined in relation to share capital; owner’s funds, total capital
employed or sales. The profit does not indicate about the short-term and
long-term profits. The short-term profit may not be the same as those in the
long term. For example, a firm may maximise its short-term profit by
avoiding current expenditures on maintenance of a machine. In lack of
maintenance, the machine may not be able to operate for manufacturing
the products. As a result, the firm will have to make huge investment to
replace the machine. In this way, the profit maximisation suffers in the long
run due to maximisation of short-term profit.
b) Timing of benefit : The profit maximisation approach ignores the

differences in the time pattern of the benefits received. It does not consider
the difference between returns received in different time periods. It treats
all benefits irrespective of the timings equally. This is not true in actual
practice. The benefits in early years should be valued more than benefits in
later years.
c) Quality of benefits : This approach ignores the quality aspect of benefits in

financial action of the company. The quality refers to the degree of certainty
with which benefits can be expected. The more certain the expected return,
the higher is the quality of the benefits. An uncertain and fluctuating return
may lead to high risk for stakeholders.
The above criticisms show that the profit maximisation approach may not be
only decider for financing, investing and dividend decision of the company. It
does not consider the risk and time value of money.
19.3.2 Wealth Maximisation Approach

This approach is also known as value maximisation or Net Present Worth
maximisation. It tries to remove the technical limitations of profit maximisation
approach.
Wealth maximisation means maximising the Net Present Value (or wealth) of a
course of action. The net present value of a course of action is the difference
between the present value of its benefits and the present value of its costs. A
financial action which leads to positive Net Present Value may create wealth,
this should be acceptable by the company. A financial action which leads to
negative NPV and does not create wealth should not be accepted. Thus, the
project which has the potential of highest NPV should be decided.
The objective of wealth maximisation takes into account the timing and risk of
expected benefits. These problems are taken care by selecting an appropriate
rate for discounting the expected flow of future benefits. You should understand
that the benefits are measured in terms of cash flows. The flow of cash is important
in investment and financial decisions, not the accounting profits. The wealth
30
created by a Company through its actions is reflected in the market value of
company’s shares. The value of the company’s share is represented by the market Financial Management
price. The market price of the company’s share reflects sound financial decision
of the company. It shows the performance indicator of the company.
There are three requirements of a suitable operational objective of financial

courses of action. These are : exactness, quality of benefits and the time value of
money. Let us learn them in detail.
1) Exactness : The value of an asset should be determined in terms of returns.

The worth of a course of action should be valued in terms of the returns
less the cost of undertaking the particular course of action. The important
factor in computing the value of a financial course of action is the exactness
in computing the benefits associated with the course of action. This approach
focuses on cash flows and not on accounting profit. The computation of
cash inflows and cash outflows should be precise.
2) Quality, benefit and time value of money : The wealth maximisation

considers both the quality and quantity dimensions of benefits. It also
considers the time value of money. You have understood from earlier
discussion that the quality of benefits refers to certainty with which benefits
are received in future.
The more certain the expected cash inflows, the better the quality of benefits
and higher the value. If the flows are less certain, the quality would be less and
the value of benefits would be less. You should also understand that money has
time value. Therefore, the benefits received in earlier years should be valued
higher than benefits received later.
In order to deal with the uncertainty and timing dimensions of the benefits of
financial decision, the adjustments need to be made in the cash flow pattern.
The cash flow pattern should incorporate risk and make an allowance for
differences in the timing of benefits. Thus, Net Present Value maximisation
appears to be superior to the profit maximisation approach.
It involves a comparison of value of cost. Let us consider an action that has a

discounted value which reflects both time and risk. If this action exceeds cost,
it is said to create value. Such actions should be selected. Contrary to this, actions
with less value than cost, reduce wealth, such actions should be rejected.
Therefore, the Net Present Value Maximisation appears to be superior to the
profit maximisation.
19.3.3 Profit Maximisation Vs. Wealth Maximisation

One of the main objective of financial management has been profit maximisation
and wealth maximisation. Profit maximisation focuses on improving profitability,
maintaining the stability and reducing losses and inefficiencies.
1) Profit may be considered in two senses :
1) Profit maximisation for the owner; and
2) Profit maximisation for others.
Normally profit is linked with efficiency, therefore, it is the test of efficiency.
The limitation of this concept may be ambiguity which reflects different
interpretation from different persons. 31
Functional Areas of 2) Quality of profit – Usually, profit is calculated in rupees. The amount
Management
earned is known as profit. It ignores wastage, efficiency, employee’s skill,
employee’s turnover, product mix, manufacturing process, administrative
set-up etc., which may influence profit.
3) Timing of benefit - In inflationary conditions, the value of profit may

decrease. Therefore, the profits may not be comparable over a longer period
span.
4) Some economists argue that profit maximisation may result into unhealthy
trends. The unhealthy trend may be harmful to the society. It may lead to
exploitation, unhealthy competition and taking undue advantage of the
position.

1) Define Financial management?
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2) What do you mean by Profit maximisation approach?

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3) What is Wealth Maximisation approach?

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19.4 SOURCES OF FINANCE

You have learnt the functions and objectives of financial management. The
finance is the backbone of the business. The finance is required for performing
the operations of the business. When the business is carried out in the company
form, there are different sources of finance for the company. The company has
to decide the sources of finance based on the financial requirement and the
position of the debt to the company.
32
The finance may be raised through equity shares, debentures, venture capital Financial Management
and lease financing. Let us learn them in detail.
19.4.1 Shares
According to Companies Act 2013, “Share means a share in the share capital of
a company including stocks shares are considered as a type of security”. There
are two types of shares i.e. equity shares and preference shares. Let us learn
about both the types of shares.
Equity Shares
Equity shares are the most important source of raising long term capital by a
company. These shares represent the ownership of a company. The capital raised
by issue of equity shares is known as ownership capital or owner’s funds. Equity
share capital is a prerequisite to the creation of a company. Equity shareholders
do not get a fixed dividend. They are paid on the basis of earnings by the company.
They are also referred to ‘residual owners’. They receive the claim after all
other claims on the company’s income and assets have been settled. They enjoy
the reward and also bear the risk of ownership. The liability of equity shareholder
is limited to the extent of capital contributed by them in the company. They have
a right to participate in the management of the company through their right to
vote.
Merits
The important merits of raising funds through issuing equity shares are as follows:
i) Equity shares are suitable for those investors who are ready to take risk for
higher returns.
ii) Payment of dividend is not compulsory for equity shareholders. Therefore,
there is no burden on the company for payment of dividend to them.
iii) Equity capital is a permanent capital. It is repaid only at the time of
liquidation of a company. The claims are paid after all settlement. Therefore,
it works as cushion for creditors in case of winding-up of company.
iv) It provides credit worthiness to the company. It also provides confidence
to prospective loan providers.
v) Funds may be raised through equity issue without creating any charge on
the assets of the company. The assets of a company may not be required to
be mortgaged for the purpose of borrowings.
vi) The voting rights of equity shareholders facilitates democratic control over
management of the company.
Demerits
The demerits of equity shares are as follows :
A) To the Shareholders
1) Uncertainty about payment of dividend: The equity share-holders
get dividend only when the company is earning sufficient profits and
the Board of Directors declare dividend. In case of preference
33
Functional Areas of shareholders, equity shareholders get dividend only after payment of
Management
dividend to the preference shareholders.
2) Speculative: There may be speculation on the prices of equity shares.

This may happen at the time of boom when company pays high
dividend.
3) Danger of over–capitalisation: If the management is not able to

predict long-term financial requirements, it may raise more funds than
required by issuing shares. This may lead to over-capitalisation. The
over-capitalisation results into low value of shares in the stock market.
4) Ownership in name only: The holder of equity shares becomes the

owner of the company. They have got voting rights. They manage
and control the company. This may be true theoretically. In fact, few
persons may control the voting rights and thus, they may manage the
company. Board of Directors take the decision to declare dividends.
5) Higher Risk: Equity shareholders take high degree of risk. In case of

losses, they do not get dividend. In case of winding-up of a company,
they are the last persons to get refund of the money which they have
invested. Equity shares actually swim and sink with the company.
B) To the Management
1) No trading on equity: It refers to the ability of a company to raise
funds through preference shares, debentures and bank loans, etc. The
company has to make payment at a fixed rate on the funds. When
profits are high, the equity shareholders get a higher rate of return.
The major part of the profit earned is paid to the equity shareholders.
This is done because borrowed funds carry only a fixed rate of interest.
The company may get advantage of trading on equity if a company
has only equity shares and does not have either preference shares,
debentures or loans.
2) Conflict of interests: You are aware that the equity shareholders carry
voting rights. Therefore, the groups are formed to corner the votes.
Such groups grab the control of the company. The conflict of interests
may develop which may be harmful for the smooth functioning of a
company.
7) Preference Shares
Preference shares refer to those shares which have certain special rights.
The dividend is payable on these shares before the equity shares. Capital
is repaid to preference shareholders before the return of equity capital in
case of winding-up of the company. Preference shareholders do not have
the voting rights. In case of non-payment of dividend, the preference
shareholders may claim the voting rights. The voting rights may be claimed
if dividends are not paid to cumulative preference shareholders for two
years or more and for non-cumulative preference shares for three years or
more.
34
Merits Financial Management
The merits of the preference shares are as follow:
1) Appeal to Cautious Investors: There are investors, who want safety of

their capital. They want fixed and regular return. The preference shares
may be sold to such investors.
2) No Obligation: When the profits of the company are not sufficient, the
company may not pay dividend on preference shares. In case of cumulative
preference shares, the dividend may be postponed.
3) No Intervention: Preference shares have no voting rights. Therefore, they

are not able to intervene in the management of the company.
4) Trading on Equity: As you know that rate of dividend on preference shares

has been fixed. The benefits of trading on equity may be provided to the
equity shareholders when the profits of the company are high.
5) No Charge on Assets: As you know that preference shares do not create

any mortgage or charge on the assets of the company. The fixed assets of
the company may be utilised for raising the funds in future.
6) Flexibility: The redeemable preference shares may be issued by the

company for a fixed period. When the capital is not required for the business,
it can be repaid. The capital structure becomes elastic. The company does
not face the problem of over-capitalisation.
Demerits
The demerits of the preference shares are as follow:
1) Fixed Obligation: The company is bound to pay the dividend on preference
shares at a fixed rate. This is paid before the payment of dividend on
equity shares.
2) Limited Appeal: The risk taker investors may not invest in preference
shares. The investors who do not want to take risk may like to invest in
debentures and government securities. The company may provide high
rate of dividend to attract the investors.
3) Low Return: The fixed rate of dividend on preference shares may not be
attractive, when the profits of the company are high.
4) No Voting Rights: There are no voting rights to the preference shareholders.

As a result, they can not intervene in the management of the company.
Difference between Equity Share and Preference Share

You have learnt merits and demerits of equity shares and preference shares. Let
us now learn the difference between equity shares and preference shares which
are discussed below :
35
Functional Areas of Difference between Equity Share and Preference Share
Management
Basics Equity share Preference share
Refund of Capital The payment to the equity The payment to the preference
share capital is made after the share capital is made before the
payment of preference share payment of the equity share
capital in case of winding-up capital in case of winding-up of
of the company. the company.
Right of Dividend Equity shares are paid The preference shares are paid
dividend after the payment of dividend before the payment of
dividend on preference dividend on Equity shares.
shares.
Rate of Dividend There is no fixed rate of There is a fixed rate of dividend.
dividend. The dividend is The dividend is prescribed on
decided by Board of the face of preference shares at
Directors every year and vary the fixed rate. For example, 9%
from time to time. preference share means rate of
dividend is 9%.
Right to Vote The right to vote has been The right to vote has not been
provided to equity provided to preference share-
shareholder. The equity holders in normal case. In
shareholders elect Director special case, they may be
for managing the company. provided right to vote.
Redemption Equity shares are not Preference shares are always
redeemable. According to redeemable. The company
Companies Act, 2013 cannot issue irredeemable
(Section 68), the company preference shares.
may buyback its equity
shares.
19.4.2 Debentures
The company issues debentures under its common seal. Debentures are the
debt for the company. The terms of payment as well as interest are mentioned
on the debentures. Section 2 (30) of Companies Act, 2013 defines debenture as
“Debenture includes debenture stock, bonds or any other instrument of a company
evidencing a debt, whether constituting a charge on the company’s assets or
not.”
36 Fig. 19.1 : Types of Debentures

Debentures are generally freely transferable. Debenture holders do not have Financial Management
rights to vote in the general meetings of the company. The interest paid to
debenture holder is charged against the profit of the company.
Types of Debentures
There are three types of debentures based on Convertibility, Security and
Redemption. Let us learn them in detail.
i) Convertibility : On the basis of convertibility, debentures are classified

into following types :
Convertible debentures : These debentures may be converted into equity
shares of the issuing company after a predetermined period of time. The
convertible debentures may be partly convertible debentures and fully
convertible debentures.
Partly Convertible Debentures (PCD): A part of these debentures may
be converted into equity shares in the future at the issuers notice. The issuer
company decides the ratio for conversion. It is generally decided at the
time of subscription.
Fully Convertible Debentures (FCD): These debentures are fully
convertible into Equity shares at the notice of the issuer company. The
issuer company decides the ratio of conversion. When these debentures are
converted into ordinary shares, investors get the status of ordinary
shareholders of the company.
Non-convertible Debentures: These are regular debentures which cannot
be converted into equity shares. Since these debentures do not have
convertibility features, their rates of interest are higher than convertible
debentures.
ii) Security : On the basis of security, debentures are classified into following
types:
Secured Debentures: These debentures are secured by a charge on the
fixed assets of the issuer company. In case the issuer company fails to make
payment of principal or interest, the assets of the issuer company may be
sold to make the payment of the secured debenture holders.
Unsecured Debentures: These debentures are unsecured. In case the issuer
company is not able to pay the principal or interest, the investors are
considered like unsecured creditors of the company.
iii) Redemption : On the basis of redemption, debentures are classified into
following types :
Redeemable Debentures: These are the debentures which are redeemed
or paid off after the termination of fixed term. The amount includes the
principal amount and the current year’s interest. The company may redeem
all the debentures at specified date. The company may also redeem a specific
number of debentures annually.
Irredeemable or Perpetual Debentures: These are the debentures which
do not have any fixed date of redemption. They are redeemed in case the
company is winding-up or they may be redeemed after a very long time.
37
Functional Areas of Bearer of such debentures can not force the company to redeem their
Management
debentures.
Merits
a) Raising funds without allowing control over the company: The debenture
holders do not have right to vote. Thus, they can not intervene in the
management of the company. The company can raise funds without the
control of debenture holders.
b) Reliable source of long term finance: Debentures are ordinarily issued

for a fixed time. The company may use the funds raised by issuing
debentures. It facilitates long-term planning of the company.
c) Tax Benefits: Interest paid on debentures is treated as an expense. The

interest is charged to the profits of the company. It results into reduction in
tax liability of the company.
d) Investors’ Safety: Generally debentures are secured. When the company

is winding-up, they are repayable before any payment is made to the
shareholders. Interest on debentures has to be paid whether the company is
earning profit or loss.
Demerits
1) As you have understood that the interest on debentures have to be paid
every year whether the company earns profits or incurs losses. In case of
losses, payment becomes a burden for the company.
2) Generally the debentures are secured. The company creates a charge on its
assets in favour of debenture holders. If company does not own sufficient
amount of assets, the company may not be in a position to issue debentures.
If the assets of the company are mortgaged, these assets can not be issued
for further borrowing.
3) Debenture-finance enables a company to trade on equity. If the company

issues very large number of debentures, it may have adverse impact on
shareholders. The shareholders may get frustrated. As a result, the value
of shares may fall.
4) It may be a burden on the company during recession. At the time of recession,

the profits of the company may decline. In such cases, it may be difficult to
pay interest on debentures. The interest may keep on accumulating. The
accumulation of very large amount of interest may lead to the closure of
the company.
19.4.3 Venture Capital

These days, the venture capital has emerged as an important source of finance.
The investors invest in start-up companies, micro, small and medium size
enterprises with long-term growth perspective. The investment is made
particularly for starting the business and expansion for the business considering
the long-term growth potential. The capital invested in such project is known as
venture capital. The person who contributes capital in such project is known as
venture capitalist. It is an important method of equity financing for the long-
38
term growth potential enterprises. The venture capitalists may be professionals Financial Management
in many fields. They provide funds for earning high returns. They take active
part in the management of the enterprises. They provide professional expertise
to the organisation.
Advantages of Venture Capital

Venture Capital provides fund as well as expertise to the company.
The enterprise may obtain large amount of equity finance.
The enterprise is not obligated to repay the fund.
The venture capital provides important information, resources, technical
assistance for the enterprises.
Disadvantages of Venture Capital

The founder may loose the control and autonomy because the investors
become part of the owners.
The finance through venture capital may be complex and lengthy.
This method of financing may be uncertain.
This method of financing may not be suitable for short-term.
19.4.4 Lease Financing

A lease is a contractual agreement whereby one party i.e., the owner of an asset
grants the other party the right to use the asset in return for a periodic payment.
In the lease financing the asset is given on rent for specified period. The owner
of the assets is known as the Lessor. The party whom the asset is given is called
the Lessee. The fixed amount is paid by Lessee to the Lessor for the use of the
asset which is known as lease rental. The lease contract is signed, which stipulates
the terms and conditions for regulation of the lease arrangements. The asset is
given back after the expiry of lease period. This finance may be used for
modernisation and diversification of the organisation. Lease financing may be
suitable for the business related to fast changing technological developments.
The Lessee shall compare the cost of buying the asset and the cost of leasing the
asset for entering to lease financing.
Types of Lease
There may be two types of lease financing. These may be finance lease and
operating lease. Let us learn them in detail.
a) Finance Lease: The Lessor transfers substantially all the risks and rewards
of ownership of assets to the Lessee for lease rentals. The Lessee is brought
in the same condition as he/she would have been if he/she had purchased
the asset. There are two phases of finance lease. The first phase is known
as primary phase. The primary phase is non-cancellable period. The Lessor
recovers his investment through the rent of the lease. The primary period
may last for indefinite period of time. The lease rental for the secondary
period is smaller than that of primary period.
Features of Finance Lease
1) In the lease financing, the Lessee gets a right to use an asset.
39
Functional Areas of 2) The Lessor charges lease rent during the primary period of lease. The
Management
amount of the lease rent may recover the investment.
3) The amount of lease rent for secondary period is less.
4) The maintenance of asset is done by the Lessee.
5) The Lessor do not take the risk and reward related to asset.
6) The investment of Lessor is ensured because the lease is non-
cancellable.
b) Operating Lease
Lease which is not finance lease is called operating lease. In case of operating
lease, the risks and rewards incidental to the ownership of asset are not
transferred by the Lessor to the Lessee. The term of such lease is much less
than the economic life of the asset. The Lessee may not recover the total
investment through lease rental during the primary period of lease. The
Lessor usually provides advice to the Lessee for repair, maintenance and
technical know how of the leased asset. Thus, the operating lease is also
referred as service lease.
Features of Operating Lease
1) The term of lease is less than the economic life of the asset.
2) The Lessee can terminate the lease at a short notice. The penalty is not
charged for termination.
3) The technical know how is provided by the Lessor.
4) The Lessor bears the risks and rewards.
5) Lessor gives leasing an asset to different Lessee. The leasing facilitates
recovery of investment.
Advantages and Disadvantages of Lease Financing

There are many advantages and disadvantages of lease financing. Let us learn
them in detail :
Advantages of Lease Financing

a) To Lessor
1) Regular Income: The lease rental income is received by the Lessor
for the lease period. Thus, the Lessor gets regular and assured income.
2) Ownership: The ownership of asset is not transferred to Lessee. Lessee
bears the risks and rewards related to the asset.
3) Tax Benefit : The Lessor gets tax benefit by charging the depreciation
of the leased asset.
4) Profitability: The rate of return on lease rent is higher than the interest
payable on financing the asset. Thus, the leasing of asset is highly
profitable.
5) Growth Potential : Being the cost efficient financing, the leasing
business has been growing. This may facilitate the business during
40
the depression period. Therefore, the growth potential of leasing may Financial Management
be higher than other financing business.
6) Investment Recovery : The Lessor may recover investment through
lease rentals.
b) To Lessee
1) Use of asset: The Lessee can use an asset by paying fixed rentals. He
need not spend large amount on the purchase of the asset.
2) Tax benefits: The lease expenses are chargeable to profits, hence, the
enterprise gets the tax benefits.
3) Cheaper: The lease financing is cheaper than other sources of finance.
4) Assistance: The technical support may be provided by the Lessor to

the Lessee for the leased asset.
5) Inflation friendly: The Lessee makes fixed payment in the form of

lease rent. The same fixed amount is paid when the cost of asset
increases. Thus, leasing is considered as inflation friendly.
6) Ownership: The Lessor offers the Lessee to purchase the asset by

paying less amount when the primary period expires.
Disadvantages
a) To Lessor
1) Unprofitable in case of inflation: The lease rent is fixed, therefore,

the Lessor gets the same amount even if the cost of asset increases.
2) Double taxation: The tax burden is doubled. At the time of buying

the asset as well as at the time of leasing the asset.
3) Greater chance of damage of asset: The asset may be used carelessly

by the Lessee because the ownership of asset is not transferred. Thus,
the asset may not be usable after the expiry of primary period.
b) To Lessee
1) Compulsion: The lease can not be cancelled. The Lessee is bound to

make the payment of lease rent when the asset is not used by him/her.
2) Ownership: The ownership is not transferred to Lessee. He/she can

not be the owner unless the asset is bought by him/her.
3) Costly: The Lessee pay the lease rental as well as the incidental
expenses related to the asset. Therefore, the lease financing may be
costlier than other financing.
4) Understatement of asset: The lease asset is not shown in the Balance

Sheet because Lessee is not the owner of asset. This leads to
understatement of the asset for the Lessee.
41
Functional Areas of Check Your Progress B
Management
1) What is the difference between equity shares and debentures?
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2) Write two merits and demerits of equity shares.
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3) Write two merits and demerits of debentures.
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4) What do you mean by venture capital?
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5) What is lease financing?
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42
Financial Management
19.5 SECURITY MARKET
You have learnt the sources of finance being raised through equity shares,
debentures, venture capital and lease financing. Security Market is another
important source of raising finance. The Securities Market consist of primary
market and secondary market. In security market, the securities are bought and
sold on the basis of demand and supply of securities. It consists of equity markets,
bond markets and derivative markets. It plays a crucial role in the economy.
The fund is channelised from savers to investors by the security market. The
security market facilitates in the allocation of funds by channelising the fund to
the users of the fund. Let us learn them in detail.
19.5.1 Primary Market

In the primary market new securities are issued. It is also known as New Issue
Market. Issuers, Government and Corporate issue security in primary market.
It helps in raising resources and fulfills the requirement of investment. The
securities may be issued at face value, or at a discount/premium value. The
securities may be in the form of equity, debt, etc. The market participants may
issue the securities in domestic market as well as the international market.
In primary market, the issue is carried out through public issues or private
placement. A public issue does not restrict in investing. In private placement,
the issue is provided to select people. In terms of the Companies Act, 1956, an
issue becomes public if it results in allotment to more than 50 persons. This
means an issue of less than 50 persons falls in private placement. There are two
types of security issuers. These are : (i) Corporate entities, who issue mainly
shares, debentures, etc. and (ii) the Government, who mainly issue debt securities
like dated securities, treasury bills and others.
The price may reflect information about the issuer and his business. The risk
involved in the secondary market may attract the investors in the primary market.
There are various ways to raise capital or equity in primary market. These are :
1) Public Issue : In this issue, the securities are sold through IPO.
2) Rights Issue : In this issue, Shares are offered to existing shareholders on
pro-rata basis. This facilitates raising of supplementary capital.
3) Private Placement : Securities are sold to high profile investors. These
may be Venture Capitalists, Mutual Funds and Banks.
4) Preferential Allotment : Equity shares are issued to selected investors. A
listed company issues equity shares which may or may not be in accordance
with the market price.
19.5.2 Secondary Market

A market where securities are traded which were initially offered to the public
in the primary market and/or listed on the Stock Exchange is known as secondary
market. Majority of the trading are preformed in the secondary market. Secondary
market consists of equity markets and the debt markets.
The investors or participants trade the already held securities. This is done
considering the risk and return. Secondary market has two components : (i) The
over-the-counter (OTC) market and (ii) exchange-traded market. The Over the
43
Functional Areas of Counter Exchange of India Limited has provided the OTC market. The OTC
Management
market are informal markets where trades are negotiated. Most of the trades in
Government securities are done in the OTC market. Spot trades are not provided.
Cash market is also somewhat like spot market. In cash market, settlement takes
place after sometime. Trades takes place over a trading cycle, i.e. a day under
rolling settlement. Trades are settled after a two working days. Clearing
corporation clears and settles the trades done on the National Stock Exchange
of India Limited (NSE). In this way, notation and settlement guarantee are
provided. Almost all the trades are settled in DEMAT (dematerialisation) form.
NSE also provides a platform for trading of a wide range of debt securities. The
Government securities are also traded.
In the Secondary market, the trade may also take place for future date, this is
known as forward market. In this market, securities are traded for future delivery
and payment. There are two types of forward market i.e. Futures and Options.
In future market, standardised securities are traded for future delivery and
settlement. These Futures are on an underlying asset i.e. an index or a security
or even a commodity. In Options, securities are traded for conditional future
delivery. There are two types of Options. These are put and call Options. A Call
Options allows the owner to buy a security from the writer of the Option at a
predetermined price. A Put Option allows the owner to sell a security to the
writer of Options at a predetermined price. These Options also derive their value
from underlying security. NSE and the Bombay Stock Exchange (BSE) provide
trading of derivatives of securities.
You have learnt about the primary and secondary market. Let us learn the
difference between primary market and secondary market.
Difference between Primary and Secondary Market
Basis Primary Market Secondary Market

Meaning It is a new issue of market. The securities which have been
In this market, first time already issued, are bought and
dealings take place. sold in secondary market.
Type of buying There is direct buying. There is an indirect buying.
Financing Finances are raised for The trading of prior-issued
expansion and shares take place. Finances are
diversification. not raised.
Selling of security The securities are sold only The securities which have been
once. already issued are traded
several times.
Buying and Buying and selling take Buying and selling take place
Selling place between company and among investors.
investors.
Gain Company Investors
Intermediary Underwriters Brokers
Price There is a fixed price There is a price fluctuation. It
provided at the time of IPO. depends on the demand and
supply in the market.
44
Financial Management
19.6 ROLE OF SEBI
The stock market has grown over the year. The malpractices such as price rigging,
new issue unofficial premium, delay in delivery of shares, stock exchange rules
and regulations violation and others have also been noticed. Therefore,
Government of India took decision to set-up a regulatory body SEBI (Securities
Exchange Board of India).
SEBI is the regulator for the securities market in India. It is known as Securities
Exchange Board of India. The regulation facilitates smooth functioning of
security market. The statutory powers of SEBI are as follows :
It protects interests of the investors in securities.
It promotes the development of the securities market.
It regulates the securities market.
SEBI may conduct enquiries, audits and inspection as well as adjudicate offences.
It may register and regulate the market Intermediaries. It may also penalise in
case of violation of the Act. SEBI aims at the development of orderly security
markets.
Purpose and Role of SEBI

SEBI was formed to keep check on the malpractices and protect the interest of
investors. It focused on protecting the interest of issuers, investors and
Intermediaries as discussed below :
1) Issuers: SEBI provides safe market place to Issuers for raising the finance
fairly and easily.
2) Investors: SEBI aimed at protecting the investors and supplying them
accurate information.
3) Intermediaries: Professionally competitive market is provided by SEBI
for the Intermediaries.
Objectives of SEBI
The objectives of the SEBI are :
1) The activities of stock exchange are regulated.
2) The rights of investors are protected. Safety is ensured for their investment.
3) Establishes the balance between self regulation and statutory regulations.
4) Development and regulation of Code of Conduct for brokers, underwriters
and others.
Functions of SEBI
The functions of SEBI are:
1) Protective functions : SEBI aims at protecting the interest of the investors.
It provides safety of investment. The malpractices, fraudulent activities
and unfair trade practices are curbed. It promotes fair practices and provides
code of conduct for fair operations.
45
Functional Areas of 2) Developmental functions : SEBI promotes training for securities market
Management
Intermediaries. Stock Exchanges are encouraged to adopt flexible and
adoptable approach.
3) Regulatory functions : SEBI regulates the business in Stock Exchange.

Regulations, Rules and Code of Conduct have been prepared to regulate
the operations of the Intermediaries. It regulates the working of stock
brokers, mutual funds, take-over of companies, etc. It also conducts audit
of Stock Exchange.
1) What is Primary market ?

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2) What do you mean by Secondary market ?

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3) What is SEBI?
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4) Write two functions of SEBI?

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46
5) State whether following statement are True or False. Financial Management
i) New shares are issued in Secondary market.

ii) Equity shares are paid dividend before the payment of dividend on
preference shares.
iii) The lease is not a contractual agreement
vi) Venture capital provides fund as well as expertise to the company
v) SEBI does not register and regulate the working of mutual funds.
19.7 LET US SUM UP

Financial Management means planning, organising, directing and controlling
the financial activities such as procurement and utilisation of funds of the
enterprise. It means applying general management principles to financial
resources of the enterprise. The objectives of the financial management are to
ensure the regular and adequate supply of funds, optimum utilisation of funds
and reasonable returns to the investment. The main objective of the financial
management is still a debatable issue that whether firm should focus on profit
maximisation or wealth maximisation. Every firm has a predefined goal or an
objective. Therefore, the most important goal of a financial manager is to increase
the owner’s economic welfare. Here economic welfare may refer to maximisation
of profit or maximisation of shareholders wealth. Therefore, Shareholders wealth
maximisation plays a very crucial role as far as financial goals of a firm are
concerned.
In order to earn the return, firm has to invest the money and in order to invest the
money firm has to look for suitable sources of funds. The sources of funds are :
Equity shares, Debentures, Venture Capital and Lease Financing. Equity shares
are the ownership of the company and help in raising the finance from the public.
It is considered as permanent source of capital although shareholder has the
share in the profit. Debentures are the kind of loan. In other words, any money
borrowed for a longer duration is known as debentures. They carry a fixed rate
of return.
Venture capital is financing that investors provide to start-up companies and

small businesses that are believed to have long-term growth potential. Leasing
provides the opportunity to secure the use of capital without ownership. It is
effectively a hire agreement. In security market, securities are bought and sold.
There are two types of securities market i.e. Primary market and Secondary
market. Primary market is the market where the first-time securities are traded.
It is done via an Initial Public offering. Secondary market is a place where further
buying and selling of securities/shares takes place. In other words, in secondary
market actually trading of shares take place. Primary market provides or generates
funding for the companies by letting them issue securities, while secondary
market provides them the platform to trade in those securities. SEBI i.e the
Securities Exchange Board of India which manages and monitor the securities
market. The purpose is to protect the interests of investors in securities, promote
the development of the securities market and regulate the securities market.
47
Functional Areas of
Management 19.8 KEY WORDS
Authorised Capital : Maximum amount of capital a company can issue.
Capital : The amount invested in the business for the
purpose of earning revenue.
Called-up Capital : The amount of nominal value of shares that has
been called up by the company for payment by
the subscriber.
Capital Reserve : Capital profit not available for distribution as
dividend. It is represented in Balance Sheet as
Reserves and Surplus under the heading
Shareholder’s Funds.
Debentures : A long-term security yielding a fixed rate of
interest, issued by a company and secured against
assets.
Equity Shares : Equity shares represent the ownership of a
company and thus, the capital raised by issue of
such shares is known as ownership capital or
owner’s funds.
Financial Management : Financial management is that managerial activity
which is concerned with planning and controlling
of firm’s financial resources.
Issued Capital : Part of authorized capital which is offered to
public for subscription. It cannot exceed
authorized capital.
Lease Financing : Where the owner of an asset gives another person,
the right to use that asset against periodical
payments. The owner of the asset is known as
Lessor and the user is called Lessee.
Paid-up Capital : Part of called up capital that the members of
company or shareholders have paid.
Profit Maximisation : Profits maximisation approach implies that the
functions of financial management/decisions
taken by financial managers should be oriented
towards maximisation of profits or income of the
firm.
Reserve Capital : It is part of increased capital and/or portion of
uncalled share capital of an unlimited company
which can be called only in case of winding- up
of the company.
Share Capital : Capital raised by issue of shares.
SEBI : Securities Exchange Board of India is the
regulator for the securities market in India.
48
Venture Capital : Financing that investors provide to start-up Financial Management
companies and small businesses that are believed
to have long-term growth potential
Wealth Maximisation : Wealth maximisation means maximising the Net
Present Value (or wealth) of a course of action.

Answers to check your Progress (C)
5) i) False, ii) False, iii) False, iv) True, v) False

1) What is meant by Financial Management? Describe the functions and
objectives of Financial Management.
2) “Wealth Maximisation is preferred over Profit Maximisation”. Critically

examine.
3) Discuss the sources of raising finance through the equity shares and
debentures ? Compare their relative merits and demerits.
4) Elucidate the difference between Primary Market and Secondary Market?
5) How do Equity Share differ from Preference shares and Debentures?
6) Describe the financing through Venture Capital, explaining its merits and
limitations.
7) What is the meaning of Lease Financing? Explain its advantages and

limitations.
8) Explain the Role and Functions of SEBI?
49
Functional Areas of
Management UNIT 20 HUMAN RESOURCE
MANAGEMENT
Structure
20.0 Objectives
20.1 Introduction
20.2 Definition of Human Resource Management
20.3 Functions of Human Resource Management
20.3.1 Managerial Functions
20.3.2 Operative Functions
20.3.3 Advisory Functions
20.4 Skills of HR Professionals
20.5 Competitive Challenges Influencing HRM
20.6 Dynamics of Employer-Employee Relations
20.7 Employee Empowerment
20.8 Employee Engagement
20.9 Let Us Sum Up
20.10 Key Words
20.0 OBJECTIVES
explain the meaning of Human Resource Management
discuss functions of Human Resource Management
describe the skills of HR professionals
explain the dynamics of employer-employee relations
discuss the concept of employee empowerment and employee engagement
20.1 INTRODUCTION
Human resource management is a function concentrated on recruiting, managing
and directing people who work in an organisation. It deals with issues related to
compensation, performance management, organisation development, safety,
wellness, benefits, employee motivation, training, etc. HRM plays a strategic
role in managing people and the workplace culture and environment. The
performance of effective HRM function may facilitate accomplishment of goals
and objectives of the Organisation.
HR function of an organisation has a very critical role to play in an organisation.

When the organisation realises the value of its people and their responsibilities,
it indicates that the HR department has emerged as a true support for all managers.
50
Over the time, it has expanded from traditional role of ensuring employment, Human Resource
Management
law compliance and maintaining staffing levels (named as personnel
management), to becoming an influential partner in the strategic development
and growth of an organisation.
In this Unit, on Human Resource Management, you will learn the concept of
HRM, various functions of HRM, skills required from HR professionals to
perform these functions and challenges of competitive environment. You will
also learn the concept of employer-employee relationship, employee
empowerment, and employee engagement.
20.2 DEFINITION OF HUMAN RESOURCE

MANAGEMENT
According to Flippo (1980), human resource management is “the planning,
organising, directing, and controlling of the procurement, development,
compensation, integration, maintenance, and reproduction of human resources
to end that individual, organisational, and societal goals are met”.
According to National Institute of Personnel Management of India (2014),

“human resource management is that part of management concerned with people
at work and with their relationship within the organisation. It seeks to bring
together men and women who make up an enterprise, enabling each to make his
own best contribution to its success both as an individual and as a member of
working group”.
Dessler (2005), defined HRM as “the process of acquiring, training, appraising,

and compensating employees, and of attending to their labour relations, health
and safety, and fairness concerns”.
Based on the analysis of above definitions, Human Resource Management is

the process of acquisition, utilisation and development, compensations and
reward, integration, maintenance, and separation of human resources of an
organisation. This definition gives us a base to understand various functions of
human resource management.
20.3 FUNCTIONS OF HUMAN RESOURCE

MANAGEMENT
The functions of HRM can be broadly classified into three broad categories.
1) Managerial Functions
2) Operative Functions
3) Advisory Functions
20.3.1 Managerial Functions

HR Managers perform the essential functions of managing the people. In line
with the other managers, a human resource manager performs the function of
planning, organising, directing and controlling. The primary functions of
51
Functional Areas of management are planning, organising, staffing, leading, and controlling. These
Management
functions are discussed below.
Planning: Planning involves deciding human resource goals, formulating human

resource policies and preparing the human resource budget.
Organising: It involves developing the organisation structure, establishing the

relationship among jobs and allocating resources to perform the organisation
objectives.
Directing: Directing helps in building sound individual and human relations in

the Organisation.
Controlling: Controlling the management of human resources involves: auditing,

training, analysing labour turnover records, directing surveys, conducting
separation interviews, and such other means.
These four areas and their related functions have the common objective. The
skills, abilities, knowledge, and experience are required for the achievement of
further organisational goals. Each managerial human resource function may be
assigned to one of the four areas of HR responsibility. There may be some
specialised or operative HR functions which may serve many purposes. For
example, performance appraisal measures serve to stimulate and guide employee
development as well as salary administration purposes. The compensation
function facilitates retention of existing talented employees and attraction of
potential employees to the organisation. A brief description of operative human
resource functions are given below:
20.3.2 Operative Functions

Operative functions of human resource management are concerned with specific
activities of procuring, developing, compensating, and maintaining an efficient
workforce. Let us learn them.
1) The Procurement Functions
It is concerned with the acquisition of a proper kind and number of personnel

necessary to accomplish organisational goals. It deals specifically with
following activities :
Human Resource Planning: Human resource planning refers to forecasting

human resource needs for the Organisation. It involves planning the required
mechanism to meet the objectives of the Organisation. Human resource
planning is essential to timely and properly manage the human resource.
Proper planning facilitates the managers in achieving the organisational
goal.
Job analysis: It is the process of determining the tasks that constitute a

job. It is related to identification of nature of the job and skills, abilities,
and responsibilities that an individual require to perform that job.
Job design: Job design is a written record of overall summary about the
kind of work to be done. How the job should be performed and where it
should be performed ? It describes the contents of the job and methods of
52
performing the job. It clearly defines the position of employee performing Human Resource
Management
the job.
Recruitment: It is the process of identifying the vacant posts and taking

steps to get candidates for such positions. It is a positive function of getting
sufficient number of candidates for the vacant or new positions. The process
of recruitment ends where selection process starts.
Interviewing: It is a formal interaction between the employers and the

candidates. It provides an opportunity to extract as much information as
possible from the candidates.
Selection: It is the process of picking up the best candidate from the pool
of applicants. It involves selecting the perfect match with adequate
qualification and skills for the respective post. It is a negative function for
rejecting or filtering the candidates.
Hiring and Socialising: Hiring is the act of finding the most suitable
candidate in the company and handing over the concerned duty to him /
her. The selected candidate is hired and made familiar with the environment
and people working in the Organisation. This process is commonly known
as socialisation. The socialisation is important to attain quality output from
the employees.
2) Development Functions
Another basic function of human resource management is development of
people working for the organisation for better performance. The
development function of HRM involves : training and development,
performance management, and career development functions.
Training and Development: Training is designed to help employees in

acquiring better skills for their current job. Development is designed to
help the organisation ensure that it has the necessary talent internally for
meeting future human resource needs. The employee training focuses on
skill development to cope with the changes.
Career Development: It is concerned with overall development of

individuals. It is the lifelong process of managing employee’s work
experience within or between organisations. It is also the responsibility of
the individual to develop his/her career. Career development Programmes
are designed to help employees in improving their work lives in an
Organisation. Career development involves understanding career path of
the employee to match long-term individual and organisational needs.
Management Development: It is a systematic process of training and

growth of the employees. This process facilitates individuals in gaining
and applying knowledge, skills, insights, and attitudes to manage work in
the Organisation. It involves developing in a systematic manner the
knowledge, skills, and attitudes of managers.
Performance Appraisal and Performance Management: HRM appraises

employees’ performance. It evaluates the individual with respect to
performance on the job and potential for further development. In
53
Functional Areas of performance management process, managers and employees work plan,
Management
monitor, and evaluate employee’s work objectives and overall contribution
to the Organisation.
3) Compensating Functions
It is the activity by which human resource management evaluates the
contribution of the employee in order to distribute direct and indirect
monetary and non-monetary reward within the organisational ability to pay.
It involves financial as well as non-financial reward to employees for
services rendered to the organisation. It consists of following activities:
Job Evaluation: It is the process of determining the relative worth of a

job.
Wage and Salary Administration: It implies developing and operating a

suitable wage and salary programme.
Bonus and Incentives: It involves payment of bonus as well as other

incentives to the employees.
4) Integration Functions
It is a process of reconciling the goals of the organisation with its members.
Integration function concerns with activities for managing human relations
in integrating employees in work environment. The integration motivates
them to work together productively, co-operatively and with economic,
psychological, and social satisfaction. This function involves:
i) Motivating the employees
ii) Boosting employee morale
iii) Collective bargaining
iv) Workers’ participation in management
v) Redressing employee grievances properly
vi) Developing well formulated grievance redressal procedures
vii) Handling disciplinary cases by means of an established disciplinary
procedure.
viii) Counselling the employees in solving their personal, family, and work
problems.
ix) Improving quality of work life of employees through participation
and other means.
5) Maintenance Functions
It is concerned with protecting and promoting the physical and mental health
of the employees. Competent and committed employees are invaluable
assets for any company. Under this function, HRM focuses on various
functions which are briefly described below.
Good Working Climate: It is essential for physical and mental well-being

of employees. It may be difficult to make good input in lack of healthy
work space.
54
Employee welfare activities: It involves facilitating employees with various Human Resource
Management
fringe benefits. These benefits may be conveyance, health insurance,
retirement benefits along with other incentives to retain employees.
6) Separation Functions
An employee may be separated from an organisation as a consequence of
resignation, retirement, retrenchment, downsizing, layoff, voluntary
retirement, death or any other cause. It involves great deal of empathy and
planning to deal with such separation. Organisations must have a
comprehensive separation policies and procedures to deal with the leaving
employee. They should be treated equitably for smooth transition for him/
her. Some of these are:
i) Out Processing: The separating employee must return organisation’s
property at the time of separation. It may include uniforms, phone,
keys, laptops, identification cards etc. If they fail to return some items
of the organisation, it may result in deductions from the employee’s
final payment.
ii) Exit Interviews: Such employees can provide significant information
at the time of separation. Exit interviews can be conducted by the HR
department to ascertain the views of the leaving employees about
different aspects of the organisation, including the efficacy of its HR
policies.
iii) Retirement Benefits: The HR manager has to ensure the release of
retirement benefits to the retiring personnel in time. In other cases of
separation, all other dues need to be cleared.
iv) Rehire: Employees who have left the company may be considered for
hiring in future by the organisation. This is done when the employee
has good performance record. In such cases, the former employee must
submit an application to the HR department. He must meet all minimum
qualifications and requirements of the position.
20.3.3 Advisory Functions

Human resource manager has specialised education and training in managing
human resources. He is an expert in his area. He/she advises on matters relating
to human resources of the organisation to :
Top Management: HR manager advises the top management in formulation
and evaluation of personnel policies, and procedures. He/she also advises on
issues related to human relations, employee motivation, and morale.
Departmental Heads: HR manager offers advice to the heads of various
departments. The advice may involve : manpower planning, job analysis, job
design, recruitment, selection, placement, training, performance appraisal, etc.
Look at Figure-1 which shows the functions of human resource management.
55
Functional Areas of
Management Human Resource Management
Functions
Managerial
Operative Functions Advisory Function:
Functions
Top Management
Department Heads
Planning Procurment Development Compensation Integration Maintenance
Organising
Directing
Controlling Human Career Job Evaluation Motivation
Climate
Resource Development and morale
Planning
Training & Wages & Collective Employee
Recruitment Development Salary Bargaining welfare
Management Bonus and

Incentives Workers Participation
Interview Development
in Management
Performance
Selection Management Grievance
handling
Discipline
Fig. 19.1: Functions of Human Resource Management
20.4 SKILLS OF HR PROFESSIONALS

You have learnt the managerial, operative and advisory functions of HRM. Let
us now learn the various skills required for HR Professionals.
Human Resource professionals serve an important role in the Organisation.

Hence, it is essential that they possess requisite skills to perform all the HR
functions well. Some of the important skills are discussed below:
Multi-tasking Skills: HR professionals have to deal with many aspects of

business. The business moves fast and priorities also change from time to time.
Hence, the main skill for human resource management is to acquire multitasking
capability of the professionals. For example, recruitment for key position involves
understanding of leadership requirement, organisation culture, finding suitable
candidates, matching suitable candidate with the position, etc.
Interpersonal Skills: In order to be an effective managers, they must possess

strong interpersonal skills as well as decision making skills. Since they have to
deal with the interview process, they should be able to communicate in an
effective manner. They should also present the company in an appropriate manner.
Communication Skills: The HR managers should be able to communicate in a

clear and effective manner. Good communication skills are required for posting
memos, policy handbooks, and related information. HR managers need to be
empathetic listener. The HR managers should possess the capability to clearly
understand the problems of the employees. For example, grievance handling of
employees. Further, HR professionals should be able to understand non-verbal
communication and voice inflections as well as verbal communication.
56
Negotiation Skills: HR professionals must possess the competence to negotiate. Human Resource
Management
For example, while making offer for employment to new employee, HR managers
often negotiate on salary and benefits. They should possess negotiation,
analytical, and problem solving skills in order to assess the overall package as
per the industry norms.
Problem-solving and Conflict Management: Problem-solving and conflict

management as a combination is necessary for HR managers. All employees in
an organisation may not be able to adjust with their co-workers. The managers
are required to manage conflicts and solve problems.
Assessment Skills: Assessment skills are required in performing many functions

of human resource management. For example, in the process of implementing
performance management, assessment skills is required for performance
evaluation of employees. These skills may be useful for performance assessment,
skills assessment of employees before designing relevant training programmes,
etc.
Instruction Design Skills: The HR managers should possess the competence

to develop training for the Organisation. They should possess presentation
abilities, instructional design skills to conduct best training programmes for the
benefit of the Organisations
Organisational Skills: The HR management requires suitable organisational

skills. These may include : time management skills, organisation of files, and
personal efficiency. HR professional deals with careers and lives of many people.
In case, a HR professional receives request for details regarding termination or
compensation, he should provide the desired information.
Ethical and Discretionary Skills: HR professionals are the keepers of

confidential information of the Organisation. The HR department deals with the
top level of management. The department should make sure that the regulations
and policies are followed in the right manner.
Strategic Skills: The human resource management has objectives, goals, budgets,
and people to manage. The functioning of the organisation along with its strategic
plans must be well understood by the HR professionals. They assist the
management in strategic way, e.g., bringing in new skill sets for business growth,
and revision of compensation in the light of business strategy etc.
Fairness: There should be fairness demonstrated from the HR professionals

towards all employees. There should be a clear communication. The voices of
people must be heard and all policies must be followed in fair manner. The HR
professionals must also make sure that respect and privacy are also maintained.
Development Skills: The HR professionals need to assist, coach, and develop

the employees. The main intention of the HR professionals should be continued
improvement and innovation in the organisation for the development of
employees.
Team Orientation: The organisations have hierarchies which are headed with
supervisors. The HR professionals should be able to understand the team
dynamics and work in order to bring in different individuals together and develop
team work. 57
Functional Areas of Technology Skills: There are number of software applications and tools that
Management
are used in the HR management. HR professionals should be proficient in the
applications of these tools. They should possess HR competencies such as
applicant tracking software, human resource information system, data analytics,
and many more innovative tools and techniques, etc.

1) Write three functions of HRM.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
2) Write three operative functions of HRM.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) Write three advisory functions of HRM.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
4) Match the following statements given in Column I with the appropriate
skills given in Column II
Statement Skills
i) Designing training and development a) Assessment Skills
of employees
ii) Performance appraisal b) Interpersonal Skills
iii) Managing human resource c) Instructional Design
information system Skills
iv) Keeping important information d) Technology skills
confidential and following rules
and regulations
v) Interviewing candidate for a new job e) Ethical and discretionary
skills
58
5) Fill in the blanks with appropriate word: Human Resource
Management
i) Organising activities such as developing structure of relationships
among jobs, personnel, and physical factors is ........................ function
of human resource management.
ii) ........................................ is the process of inviting applications to fill
vacant positions in an organisation.
iii) Developing and operating a suitable wage and salary programme is
concerned with ................................................. function of human
resource management.
iv) Helping top management in formulating and evaluating HR related
policies and is ............................................ function of HRM.
v) Collective bargaining and workers participation in management are
part of ............................................ function of management.
20.5 COMPETITIVE CHALLENGES

INFLUENCING HRM
Organisations have to keep pace with the ongoing challenges and trends
influencing human resource management. Some of these challenges are detailed
below:
Responding Strategically to Changes in the Marketplace : In today’s highly

competitive environments, the competition has been global and innovation has
emerged as a continuous process. As a result, innovation and adaptation have
become the key to capturing opportunities and overcome obstacles. Adaptation
of innovative practices facilitate the success of the organisation. For example.
When big auto manufacturing companies like General Motors, Chrysler, and
Ford were on the verge of bankruptcy, most of their part suppliers sold exclusively
to them. As a result, part suppliers of these auto manufacturing companies had
to rapidly find other markets which required significant human resource changes
and challenges.
Competing, Recruiting, and Staffing Globally : The integration of world

economies and markets has sent businesses abroad to look for opportunities as
well as deal with foreign competition domestically. Consumers around the world
want to be able to buy “anything, anytime, anywhere.” The companies are also
making it possible for them to do so. For example, BMW has traditionally been
a German brand, but now the automaker builds cars in the United States, China,
and elsewhere. In globalisation, managers have to balance a complicated set of
issues related to different geographies, including different cultures, employment
laws, business practices, and the safety of employees and facilities abroad.
Setting and Achieving Corporate Social Responsibility and Sustainability

Goals: Companies are realising that being socially responsible may not only
help them to avoid legal complications and also improve their earnings.
Sustainability is closely related to corporate social responsibility. Sustainability
refers to a company’s ability to produce without damaging the environment or
depleting resources. For instance, after the 2010 oil spill in the gulf of Mexico,
59
Functional Areas of one of the several accidents in BP Oil’s history that have harmed both the people
Management
and the environment. Many people demanded that BP should change its approach
to corporate social responsibility. Corporate social responsibility has now become
more important for prospective customers as well as employees.
Advancing HRM through Technology : Advanced technology tends to reduce

the number of jobs that require little skill and to increase the number of jobs that
require considerable skill. In general, this transformation has referred to as a
shift from “touch labour” to “knowledge workers.” In this process, responsibilities
of employee expand to include a richer array of activities such as planning,
decision making and problem solving.
The most central use of technology in HRM is an organisation’s Human Resource

Information System. It is a computerised system that provides recent and accurate
data for purposes of control and decision making. Information technology is
affecting human resource management in relational nature. It also connects people
with each other and with HR data. For example, companies are using software
to recruit, screen, and pre-test applications online before hiring them as well as
to train, track, and promote employees once they have been hired. The internet
and social media are also having an impact. Social media networking has become
the new way to find employees and find out the acceptable candidates.
Managing Costs While Retaining Top Talent and Maximising Productivity:

For years, most human resources managers have been under pressure to cut
labour costs. Organisations apply many approaches to lower labour-related costs,
including carefully managing employee benefits, downsizing, outsourcing, and
engaging in employee leasing in order to enhance productivity.
Few jobs come with lifetime guarantees and benefits that will never change.
Nonetheless, employees want to work for employers that can provide them with
a certain amount of economic security. Some companies, such as, Google, are
able to hire talented employees by offering them a great deal of job security and
great benefits. However, most companies, especially smaller ones, find it hard
to compete with bigger firms with deluxe benefit packages. HR managers have
to face this challenge of retaining the top talent at the same time managing the
labour cost of the company.
Responding to the Demographic and Workforce Diversity : Changes in the

demographic composition of employees, such as their age, education levels,
caste, creed, gender, and other ethnicities are the biggest challenge in managing
workforce diversity. In such scenario, it is absolutely vital to increase efforts to
recruit, train, and manage more diverse workforce. Workplace diversity impacts
the way human resource management functions are performed to cater to their
diverse needs. For example, Generation Y, also known as millennials, are
generally regarded as having good technical know-how and initiative, especially
when it comes to starting their own business (Facebook founder Mark Zuckerberg
is notable example). Moreover, employers wanting to attract talented women,
have to devise measures to ensure that they are treated equally in the workplace
in terms of advancement, opportunities and compensation.
60
Human Resource
20.6 DYNAMICS OF EMPLOYER-EMPLOYEE Management
RELATIONS
You have learnt the functions of HRM, skills required for HR Professionals and
competitive challenges influencing HRM. Let us now learn the dynamics of
employer-employee relations.
Employer-employee relations is one of the most delicate and complex problems

of industrial society today. When an employer hires a new employee, s/he should
not be considered as only new member of the Organisation. s/he should initiate
new relationship in the Organisation. Managing these relationships are most
important task for the success of the organisation. Industrial progress may hamper
without labour management cooperation and industrial harmony. Therefore,
creation of good relations between employers and employees becomes essential
for smooth functioning of the Organisation.
According to Dale Yoder, the term employer-employee relations refer to “the

whole field of relationship among people, human relationship that exist because
of the necessary collaboration of men and women in the employment process of
modern industry”. The clear spelt out roles and responsibilities of employer and
employee may lead to good relationship.
Employer-employee relationship exists from employment relationship.

Employment relationship exists when a person performs work or services under
certain conditions in return for remuneration. It is through the employment
relationship, the reciprocal rights and obligations are created between the
employee and the employer.
The existence of an employment relationship is the condition that determines

the application of the labour and social security law provisions addressed to
employees. It is the key point of reference for determining the nature and extent
of employers’ rights and obligations towards their workers. According to ILO,
the issue has become more important because of the increasingly widespread
phenomenon of dependent workers who lack protection because of one or a
combination of the following factors:
The scope of the labour law is too narrow or it is too narrowly interpreted.
The labour law is poorly or ambiguously formulated so that its scope is
unclear.
The employment relationship is disguised.
The relationship is objectively ambiguous, giving rise to doubt as to whether
or not an employment relationship really exists.
The employment relationship clearly exists but it is not clear who the
employer is, what rights the worker has and who is responsible for them;
and.
Lack of compliance and enforcement.
The employer-employee relations may involve : (i) the relations between the
various unions (ii) the relationship between the State and the unions and (iii) the
relationship between the employers and the Government.
61
Functional Areas of According to the International Labour Organisation, ''employer-employee
Management
relations comprise relationships between the State on the one hand and the
employers’ and employees’ of organisations on the other hand and the relationship
among the occupational organisations themselves. The ILO uses the term to
“denote such matters as freedom of association and the protection of the right to
organise, the right of collective bargaining, collective agreements, conciliation
and arbitration and the machinery for cooperation between the authorities and
the occupational organisations at various levels of economy”.
Major Features of Employer-Employee Relations

Based on the discussion above, major features of employer-employee relations
are summarised below:
1) Outcome of the Employment Relationship: Employer-employee relations

are the outcome of the employment relationship in industry. These relations
exist due to existence of two parties, employer and employees. It is the
industry which provides the setting for employer-employee relations.
2) Inclusive of Individual Relations as well as Collective Relations:

Employer-employee relations include both individual relations as well as
collective relations. Individual relations imply relations between employer
and employees. Collective relations refer to relations between employers’
associations and trade unions as well as the role of the State in regulating
these relations.
3) Complex and Multi-dimensional: The concept is not limited to relations

between trade unions and employer. It extends to the broad relationships
between employers, employees and the Government. It covers regulated as
well as unregulated, institutionalised as well as individual relations. It may
occur in organised as well as unorganised sector.
4) Dynamic and Developing: It may change with changing environment of

industry. It changes along with the economic and social institutions of the
society. Economic factors include : economic organisations (capitalist,
socialist, individual ownership, company ownership, and Government
ownership), capital structure and technology, nature and composition of
labour force, demand and supply of labour. Institutional factors refer to :
state policy, labour legislation, employers’ organisations, trade unions, social
institutions (community, caste, joint family, and religions), attitude to work,
power and status systems, motivation and influence, etc.
5) Involvement of Multiple Parties in the Employer-Employee Relations

System: As you must be aware that the main parties are employers and
their associations, employees and their unions, and the Government. These
three groups interact to shape the relationship.
Three main groups that are involved in shaping employer-employee relations

for the purpose of manufacturing or services. are :
a) Employers: Employers hire and fire workers. Management may relocate,

close or merge a factory and introduce technological changes which may
affect employees adversely. Many employers may use different tactics to
62
weaken unions. They may focus on commitment and efficiency of labour. Human Resource
Management
Employers may negotiate individually. They may also negotiate through
associations to settle terms and conditions of employment.
b) Employees: Workers are desirous to improve the terms and conditions of

their employment. They may focus and discuss their views with management
and put-up their grievances. Workers may get support from trade unions as
well as labour legislation. Trade unions may influence both at plant level
and industry level.
c) Government: Government has come to play an important role in employer-

employee relations to protect the interests of both employers and employees.
The Central and State Government evolve, influence and regulate employer-
employee relations through laws, rules, agreements, awards of courts as
well as executive and financial machinery.
20.7 EMPLOYEE EMPOWERMENT

Empowerment may be defined as providing employees at all levels the authority
and responsibility to take decisions on their own. It occurs when power goes to
employees who then experience a sense of ownership and control over their job.
According to, Newstrom and Davis (1986) “empowerment is any process that
provides greater authority through the sharing of relevant information and the
provision of control over factors affecting job performance.”
Empowerment has become necessary due to the following reasons:

1) The response time has been reduced drastically. For example, the complaints
of the customers are resolved within the stipulated time.
2) First-line employees are expected to take appropriate decisions.
3) Authority has been granted to employees, therefore, he may take quick
decision.
4) The empowerment may help in channelising the untapped potential of
employees.
Benefits of Employee Empowerment

1) Accountability Improves: The management develops trust by empowering
the employees. As a result, employees become more accountable. S/he feels
confident that the superior recognises her/his abilities.
2) Faster Problem Resolution: If a person is given the resources and authority
to get the job done, the job may be performed faster.
3) Higher Quality Customer Service: If the employees are empowered to
take decision, s/he may be motivated to provide better quality service to
the customers. He need not consult every time from his superiors. He
feels pride in serving better to the customer.
4) Job Satisfaction: Empowered employees feel valued and trusted. If he
solves the problem of the customer, he feels happy and satisfied. He gets
the feeling of accomplishment. Moreover, he becomes confident in resolving
the problems of the customers. 63
Functional Areas of 5) Improved Processes and Procedures: Empowered employees are involved
Management
in every aspect of the job from their perspective. An empowered employee
explores for better way of performing the job. Empowered employees
understand that managers respect new ideas which may facilitate better
performance.
Approaches to Empowerment
Following approaches can be used by the managers to empower its employees:
i) Developing employees through training, coaching, and guided experience.
ii) Providing discretion over job performance and making them accountable
for the performance outcomes.
iii) Providing successful role models.
iv) Reinforcing employees by giving promise, encouragement, and feedback.
v) Providing emotional support through role clarity, assistance, personal care
and continuous support.
20.8 EMPLOYEE ENGAGEMENT

Kahn (1990) described “employee engagement as the harnessing of people’s
selves to their work, such that they fully invest their physical, cognitive, and
emotional resources in their work roles. He suggested meaningfulness, safety,
and availability as essential conditions and important indicators of engagement”.
Employee Engagement refers to employee being psychologically involved in,

connected to, and committed to the job. Employee engagement is important
because many employee behaviours, including turnover, reflect the degree to
which employees are engaged. Based on surveys by the Gallup organisation,
business units with the highest levels of employee engagement have better
chances of higher productivity, sales, and profitability (Corbin, 2017). Similarly,
in a survey conducted by consultants Watson Wyatt Worldwide, it was found
that companies with highly engaged employees have higher revenue per
employee (Worldwide, 2008).
Seijts and Crim (2006) has provided ten Cs for employee engagement. These
are : “Connect, Career, Clarity, Convey, Congratulate, Contribute, Control,
Collaborate, Credibility, and Confidence”. Let us learn them.
1) Connect: Managers should develop connection with the employees by
showing value to them.
2) Career: Employees should be provided opportunities for the development
of their career.
3) Clarity: Employees should be provided clear vision to make them
understand the goals of the organisation. The contributions of employees
should be highlighted.
4) Convey: There should be clarity regarding the expectations of the
employees. The feedback of their performance should be provided.
5) Congratulate: The employees should be appreciated for their performance.
64
6) Contribute: When employees realise that their contribution leads to the Human Resource
Management
success of the organisation, they feel happy and confident.
7) Control: Employees should be encouraged to participate in the working of
the organisation. The deviations should be controlled for effective
performance.
8) Collaborate: Employees should work as teams. They should develop trust
and cooperation with their team members.
9) Credibility: Managers should make effort for enhancing reputation and
credibility of the organisation. Employees should be proud of their jobs,
performance and organisation.
10) Confidence: Managers should make effort for instilling confidence among
employees. The confident employees feel pride for being part of the
organisation.
Kumar and Singh (2013) analysed the drivers of employee engagement and
impact of employee engagement on certain organisational outcomes in Indian
context. They developed spiritually aligned employee engagement scale in which
spirituality, meaningfulness, and alignment are the profound dimensions. ‘Fit’
between an individual’s self-concept and role assigned to him/her leads to an
experienced sense of meaning, and thereby point towards spirituality as an
opportunity to grow, and to contribute to society. They have highlighted the
factors like “experienced meaningfulness of the job, work-role-fit, co-worker
relations, psychological safety, supportive supervisory relations, group norms,
self-assessment, and work-role security as the important drivers of employee
engagement”.
Fostering Employee Engagement: In addition to above factors, employee

engagement may be improved by :
1) Employees should realise about the contribution of their department for
the success of their organisation.
2) Employee’s efforts should be linked to the company’s goals, and
3) Achieve a sense of accomplishment as a part of working in the organisation.
1) Identify three major competitive challenges influencing HRM.

.....................................................................................................................
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65
Functional Areas of 2) What do you mean by dynamics of employer-employee relations ?
Management
.....................................................................................................................
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.....................................................................................................................
.....................................................................................................................
3) What is employee empowerment ?

.....................................................................................................................
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4) What is employee engagement ?

.....................................................................................................................
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.....................................................................................................................
5) State whether following statements are true or false:

i) State government has no role to play in managing employer and
employee relations.
ii) Employer and employee relationship emerges from employment
contract.
iii) Employee empowerment is simply delegation of authority to the
employee.
iv) Employee engagement can be improved by aligning individual’s goals
with the departmental goals and organisational goals.
v) Employee empowerment leads to more control on the behaviour and
actions of the employees.
20.9 LET US SUM UP

Most of the authors have defined human resource management in terms of various
functions to be performed by managers for managing human resources. Human
resource management involves all the activities performed by managers for
acquisition, utilisation, maintenance and development of human resource in an
organisation. It involves managerial operative and advisory functions. Planning,
organising, directing, and controlling are managerial functions. Operative
66
functions are specialised function of HR like procurement, development, Human Resource
Management
maintenance, integration, compensation and separation. It also involves advising
top management and departmental head related to strategic human resources.
HR professionals need to possess requisite skills to perform necessary HR

functions well. Some of the important skills are multi-tasking skills, interpersonal
skills, communication skills, negotiation skills, problem-solving, and conflict
management, assessment skills, instruction design skills, perfect organisation
skills, ethical and discretionary skills, strategic skills, fairness, development skills,
team orientation, and technology skills.
Organisations have to keep pace with the ongoing challenges and trends
influencing human resource management. Some of these challenges are :
responding strategically to changes in the marketplace, managing HR globally,
setting and achieving corporate social responsibility and sustainability goals,
advancing HRM through technology, managing costs while retaining top talent
and maximising productivity, responding to the demographic and diversity
challenges of the workforce.
Employer-employee relations have become one of the most delicate and complex
problems of modern industrial society. Industrial progress is impossible without
labour management cooperation and industrial harmony. Employer-employee
relations are complex set of relationships that exist between employers,
employees, unions, and government.
Employee empowerment may be defined as providing employees at all levels

the authority and responsibility to take decisions on their own. It provides greater
authority through the sharing of relevant information and the provision of control
over factors affecting job performance. Employee Engagement on the other hand,
refers to employee being psychologically involved in, connected to, and
committed to the job.
20.10 KEY WORDS

Human Resource : The planning, organising, directing, and
Management controlling of the procurement, development,
compensation, integration, maintenance and
reproduction of human resources to end that
individual, organisational, and societal goals are
met.
Human resource : Forecasting human resource needs for the
planning organisation and planning the steps necessary to
meet these needs.
Job analysis : The process of determining the tasks that
constitute a job.
Recruitment : The process of identifying the vacant posts and
taking steps to get candidates for such positions.
It is positive function of getting sufficient number
of candidates for the vacant or new positions.
67
Functional Areas of Selection : The process of picking up the best candidate from
Management
the pool of applicants.
Performance Appraisal : Periodic process of evaluating individual’s on the
job performance with the performance standards.
Exit Interviews : Interview conducted at the time of separation.
Instruction Design : The systematic process by which instructional
materials are designed, developed, and delivered.
This is used in the context of training and
development activities.
Employer-employee : Employer-employee relations are complex set of
Relations relationships that exist between employers,
employees, unions, and government.
Employee empowerment : Providing employees at all levels the authority
and responsibility to take decisions on their own,
through the sharing of relevant information and
the provision of control over factors affecting job
performance.
Employee Engagement : Refers to employee being psychologically
involved in, connected to, and committed to the
job.

A) 4. i) c ii) a iii) d iv) e v) b.
5. i) Managerial ii) Recruitment
iii) Compensating/operative
iv) Advisory v) Integration
B) 5. i) False ii) True iii) False iv) True v) False

1) Explain Human Resource Management.
2) Explain functions and sub-functions performed by managers involved in

managing human resources of an organisation?
3) Discuss the necessary skills required to be possessed by Human Resource

Professionals?
4) Briefly explain the dynamics of employer and employee relationship.
5) What is employee empowerment? What are different approaches to

empower employees in an organisation?
6) What is employee engagement? Discuss its relevance for today’s

organisations?
68
7) Assuming you are entrusted with the duty of determining personnel needs Human Resource
Management
of a sales department of manufacturing organisation. In which HR functions
will you be involved to perform this duty?
8) “A good human resource manager is no longer just a hirer and firer of

men.” Critically evaluate this statement. Also, explain the competencies of
HR manager.
9) “Of all the tasks of management, managing human components is the central
and most important task because all others depend on how well is it done”.
Discuss.
10) “Globalisation, technology, changes in demographics, nature of work and

demographic trends are significantly influencing the way HR managers do
their work today”. Discuss this statement giving adequate examples.
References
Corbin, J. (2017). The Gallup 2017 Employee Engagement Report is Out:
And the Results…Nothing has changed. Retrieved February 10, 2018, from
http://www.theemployeeapp. com/gallup-2017-employee-engagement-
report-results-nothing-changed/
Dessler, G. (2014). Fundamentals of human resource management. Pearson
Education Limited.
Flippo, E. B. (1980). Personnel management. McGraw-Hill Book Co.
Kahn, W. A. (1990). Psychological conditions of personal engagement and
disengagement at work. Academy of Management Journal, 33(4), 692-724.
Kumar, V., & Singh, A. K. (2013). Spiritually aligned employee engagement
scale and its impact applying structural equation modelling. DSM Business
Review, 5(1), 71-112.
National Institute of Personnel Management of India (2014), Retrieved
February 18, 2018, from https://www.nipm.in/
Newstrom, J. W., & Davis, K. (1986). Human behavior at work. New York,
NY.
Seijts, G. H., & Crim, D. (2006). What engages employees the most or, The
Ten C’s of employee engagement. Retrieved December 14, 2015, from http:/
/iveybusinessjournal.com/publication/what-engages-employees-the-most-
or-the-ten-cs-of-employee-engagement/.
Worldwide, W. W. (2008). Driving business results through continuous
engagement. Work USA survey report.
Note: These questions will help you to understand the unit better.
Try to write answers for them. But do not submit your answers
to the university for assessment. These are for your practice
only.
69
Functional Areas of
Management SOME USEFUL BOOKS
India.
Sons.
Rai and Co.
70

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BCOC-132

Indira Gandhi National Open University

Foundation of Indian Business 1

COURSE DESIGN COMMITTEE

COURSE PREPARATION TEAM

1.2 HUMAN ACTIVITIES

Economic Activities Non-Economic Activities

Business Profession Employment

Fig. 1.1: Classification of Human Activities

1.2.1 Non-economic Activities

• Household activity: like tidying, washing dishes, child care, sewing

• Independency: Navigating under privileged and under marginalised

• Voluntarily skilling: People who facilitate marginalised individuals in

1.2.2 Economic Activities

Fig. 1.2: Sector of Economic Activities

– Primary economic sector: Primary sector is a sector which is related to

– Secondary economic sector: Secondary sector relates with the goods

– Tertiary economic sector: Tertiary sector refers to the service

1.3 BUSINESS, PROFESSION AND EMPLOYMENT

1.3.4 Comparison among Business, Profession and

Although business, profession and employment are distinguished from each

1.4.2 Objectives of Business

2. Social Objectives: Business, being a part of the society, has obligations

The first category is known as industry’, while the second category is

Check Your Progress A

1.5.1 Classification of Industry

a) Extractive Industries: Activities engaged in the discovery and

b) Genetic Industries: Activities which are concerned with reproducing

Extractive Genetic Industries Manufacturing Construction

Fig. 1.3: Classification of Industries Based on the Nature of the Activity.

Non- Economic Activities 1

3) To which category of industry the following activities belong:

Let us learn them in detail.

A person who is engaged in trade is called ‘trader’ or ‘middleman’. Various

On the basis of the scale of operations, we can classify internal trade

b) Retail Trade: This refers to buying and selling in relatively smaller

2) External trade: This is also called ‘foreign trade’ or ‘international

We can classify foreign trade into three categories: a) import trade, b)

a) Import Trade: when a country buys goods from another country,

b) Export Trade: when a country sells goods to another country, it is

c) Re-export Trade: This is also called ‘entrepot trade’. When the

1.6.2 Aids to Trade

Transportation can be of three types:

2) Warehousing: Goods may not be consumed immediately after

3) Insurance: The goods may be destroyed while in production process, or

4) Advertising: Exchange of goods is possible only when the consumers

5) Banking: Banking facilitates the flow of goods by removing the

Trade Aids to Trade

Internal Trade External Trade

Wholesale Retail Import Export Re-export

Transportation Warehousing Banking Insurance Banner

Fig. 1.4: Classification of Commerce

Check Your Progress C

5) State whether the following statements are True or False.

1.7 MICRO, SMALL AND MEDIUM SIZE

The guidelines with regard to investment in plant and machinery or

Table.1.3: Micro, Small and Medium Enterprises

Benefits of Registration as MSME or Udyog Aadhar

To promote the growth of Micro Small & Medium Enterprises, the

The MSME registration is not statutory. However, the MSME registration

• Easy availability of loan

1.8 LET US SUM UP

Business activities are classified into: 1) industry, and 2) commerce.