UNIT – 5

Rationalization
• Rationalization is the reorganization of a
company in order to increase its
operating efficiency.
• This sort of reorganization may lead to an
expansion or reduction in company size, a
change of policy, or alteration of strategy
pertaining to particular products offered. 
• Rationalization is more widespread,
encompassing strategy as well as
structural changes. 
The rationalization is a concept of systematic
reasoning that is designed to reduce waste in
terms of effort, time and resources and
simplify processes for the betterment of a
company

Advantages
 1. Rationalization helps in the standardization of processes
that simplify the manufacturing method and eliminates
waste
2. It helps in introducing new techniques as well as the latest
equipment and machinery that boosts productivity
3. Rationalization aids in avoiding unhealthy competition
4. Unsold stock is a massive problem for every sector and
rationalization aids in mitigating this problem by removing
unhealthy competition
5. Enhances the creditworthiness of weaker and inefficient
units by integrating them with strong ones
6. Improves market stability
7. The process of rationalization offers higher remuneration
and good security to the workforce
8. One of the advantages of rationalization is that it provides
the workforce with a chance to develop their efficiency
levels

Disadvantages
1. The process of rationalization involves a large number of
capital expenses and that too without the guarantee of
adequate returns
2. It is sometimes unable to check trade cycles
3. Raising funds for the process of rationalization from
external sources is difficult
4. Rationalization needs further research
and development to continue with the process of
improvements, and it is not possible to keep with it every
time
5. The rationalization is about being fair and equitable, but it
is unable to determine the sharing ratio between
employers and employees
6. Rationalization promotes mechanization and
modernization, and that leads to unemployment of
workers because of automated processes
7. It is a common belief that the human resources that are
deployed after the process of rationalization will have to
work doubly hard to compete with each other as well as
automated processes

Principles of Rationalisation
o Technological – standardisation, mechanisation,
specialisation, simplification
o Organisational – Industrial combination, machinery
and supply with demand, nationalisation
o Financial – capital structure, financial control,
financial planning
o Social – Industrial relation, social welfare, national
interest

Nationalization
Nationalization is the process by which
private companies become owned and
controlled by the government.
It often happens in developing countries
when governments wish to seize control of
a profitable industry in order to create a
sizable income stream for those in power.
Nationalization happens in developed
countries as well in the form of private-
public partnerships.
It allows for a larger cut of the profits than
simple taxation does in an industry that
 may be central to the economy, such as the
energy sector
Advantages of nationalisation
1. It helps to check exploitation: Just like I have discussed
before, Nationalisation of helps to stop exploitation by foreign
and private businesses in the nation. When the government
take control of the business, citizens will enjoy because the
government might provide that same service for free or fore a
lesser amount.

2. It ensures steady supply of essential services: When

essential services like water supply is owned by private
individuals in a country, it won’t be as efficient as when it is
owned by the government. Thus, nationalization is a way of
through which can ensure efficiency in the supply of some
goods or services

3. Encourages efficient use of resources: It encourages

more efficient use of economic resources.

4. Protection of strategic industries: The government can

also nationalize a business due to the fact they the business is
so important that it should not be allowed to be in the hands of
a private individual or foreign investor.

5. Ensures equitable distribution of resources: Since the

sole aim of the government is to provide for the needs of the
whole nation, nationalization of businesses tends to benefit
every part of the country more than when those businesses
were owned by private individuals. It ensures equitable
distribution of resources as well as correct any imbalance in the
means of production.

6. Elimination of Monopoly: This is also one of the major

advantages of nationalization. By taking over privately owned
and foreign companies, there is a large decrease in private
monopoly.

7. Mobilisation of capital: When a business is nationalized,

large capital can be mobilised to ensure large scale investment.

Disadvantages of nationalisation
1. Low productivity and inefficiency: Due to the fact that
government businesses are usually poorly managed, most
nationalized businesses by the government end up being
mismanagement and that reduces efficiency of the business.

2. Prevention of private initiatives: When government takes

over private business, there is every likelihood that private
initiatives will also decrease. This can also be due to lack of
competition.

3. Consumers can be exploited: Even though nationalization

is supposed to be with the aim of not making profit, that does
not mean that the government cannot exploit the citizens. In
many cases, even after nationalization, citizens are still
exploited by the government.

4. Corruption and mismanagement: As usual, there is always

a high rate of corruption in businesses owned and managed by
the government. Thus, nationalization may not be a good idea
for a nation where majority of politicians are corrupt by nature.

5. Political interference: When a business becomes owned

and managed by the government, there is usually political
interference and that may lead to misallocation of resources.
Operating principles
Operating Principles, or as they are often referred to, a
company's operating system, are essentially the way that
organizations put their values into practice and get things
done. Many companies rely on operating principles to get
things done faster. They also influence culture and values

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.

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.

PROCESS OF VARIOUS BUSINESS

ORGANISATIONS
 Operational processes or core business processes are
the “key activities or cluster of activities which must
be performed in an exemplary manner to ensure a
firm’s continued competitiveness because it adds
primary value to an output.”
 Operational processes. Also called primary processes, these
processes deal with the core business and value chain and deliver
value to the customer by helping to produce a product or service.
Operational processes represent essential business activities that
accomplish business objectives such as generating revenue.
Examples of this include the following:

o taking customer orders

o processing product payments

o managing bank accounts

  Supporting processes. Also known as secondary processes,
these involve back-office processes within the business functions
that keep the organization running. One key difference between
operational and supporting processes is that supporting
processes do not directly provide value to customers. Examples of
supporting processes include the following:

o accounting

o HR management

o workplace safety

 Management processes. These processes measure, monitor

and control the activities related to business procedures and
systems. Like supporting processes, management processes do
not provide value directly to the customers. Some examples of
management processes include the following:

o internal communications

o governance

o strategic planning

o budgeting

o infrastructure or capacity management

Some organizations and executives prefer to classify business processes

by business function and group them under the following titles:

 accounting and finance business processes

 business development business processes

 HR management business processes

 marking and sales business processes

 product delivery business process

Stock and commodity
market
Stock Market

It refers to a collection of exchanges where stocks are sold, bought, and

traded. Stocks denote the ownership of a company. These can be best
understood as units of a company’s overall equity.

If a company’s equity is worth Rs.1000 crores and it has 1 crore stocks,

each stock represents only Rs.1000 of its entire equity. A person that holds
1 stock has a claim to only that portion of the company’s ownership.

The value of one’s holding continually changes with alterations in the

company’s equity, brought about by a myriad of factors, both external and
internal. A person can sell his/her stocks on the day they are bought, one
year from the day, or even ten years from that day, depending on his/her
investment objectives.

The market that facilitates this transaction – buying and selling – is the
stock market, and there are several exchanges within it. In the Indian stock
market, there are two primary stock exchanges –

 National Stock Exchange

 Bombay Stock Exchange

To invest in stocks listed in any of these exchanges or others, individuals

need to have a trading and DEMAT account.
Commodity Market

As the name suggests, it’s a marketplace for commodities. These

commodities are broadly defined under two categories –

 Hard commodities

 Soft commodities

The former refers to extracted and mined goods, like crude oil and gold.
These are two of the most precious and widely traded commodities
globally.

The latter category includes agricultural products and livestock, such as

rice, wheat, eggs, pork, cattle, etc. These usually have a much shorter shelf
life compared to hard commodities.

Commodity markets enable selling, buying, and trading of these products.

One of the points in commodity vs stock is the trading process. Most
traders enter into a futures contract to trade in commodities.

These contracts obligate two parties to execute a transaction at a

predetermined price on a prefixed date. Farmers and manufacturers often
leverage futures contracts to hedge against potential losses. However,
these also act as an exceptional instrument to realise a profit.

Individuals can also choose to invest directly in commodities. There are six
commodity exchanges in India to that end 
Difference
 Inflation 

Inflation refers to an upward trend in prices of virtually all goods in an

economy. Usually, inflation occurs in tandem with an increase in the
income of consumers. However, in some cases, the former outstrips the
other.

A commodity market thrives under such inflation because as prices of raw

materials increase, more and more investors flock towards those. This
leads to an increase in prices of manufactured goods, leading to lowered
consumption. It snowballs into poor performance across different
industries, resulting in a bearish trend in the stock market.

It’s one of the most significant points in the stock market vs commodity

market dichotomy.

 Value of the US Dollar

USD’s effect is particularly pronounced in the case of gold. The US dollar

shares an inverse relationship with gold’s value. Usually, gold is sought as
an investment haven when USD is underperforming. On the other hand, it’s
not so strongly preferred by investors when the US dollar is rallying.

This inclination towards gold also coincides with a waning interest in the
stock market in some cases, like in the recent economic crisis that hit the
markets in late February

Methods of Remunerating labour

Time based system

• Time-based wage is a remuneration system calculated based
on the time contributed by workers.

• It is usually calculated based on hours worked.

• Thus, the total wage paid to each individual is equal to the
total hours worked times the hourly rate.
• Thus, the higher the total hours worked, the greater the
compensation received by the employee, assuming a fixed
hourly rate.
• In another variation, rates may be based on daily rather than
hourly

Advantages

• Less harmful to quality. As mentioned above, this pay system

allows workers to focus on quality. They don’t rush into work and
chase quantity to get paid more.

• More applicable in many cases. Indeed, this compensation

system is suitable for jobs where output is difficult to measure. In
addition to the service sector, administrative work can also apply it.
In fact, when the product is standardized, and the output per
worker is measurable, it can also be applied.

• Easier cost budgeting. Companies can more easily plan

employee cost budgets because it only calculates the number of
employees with total working hours.

• Measurable income. For workers, they are more comfortable with

calculating their income. Whether they are passionate about work
or lazy, they get a normal paycheck as long as they spend the
same total working hours.
 Disadvantages

• Calculations are more complex. Unlike payroll, calculating

payments to individual employees can be more time-consuming

• Pay is not commensurate with productivity. Some employees

may work hard to produce more output.

• The company should pay supervisors more. Your company

needs supervisors to oversee workers prevent their lazy habits.

Performance-Based system
• Performance-based pay plans involve compensating
employees for a specific outcome or work that goes
above and beyond the typical call of duty

Advantages

• Identify Areas for Improvement: By implementing a

performance-based pay system, your company can quickly identify
top-performing employees.

• Increase Retention: Help employers differentiate between top

and low performing employees. top performers are paid a higher
compensation rate and recognized for their performance, they are
more inclined to remain with their organization.

• Better Recruiting: Instead of vetting and hiring employees who

might not contribute to the organization, they can use data on their
 top performers to hire candidates with similar attributes, goals, and
personalities.

Disadvantages

• If company do not outline compensation and performance metrics

precisely, there could be confusion and miscommunication about
company expectations to reach compensation goals.

• When employees are motivated solely by the incentive to receive

a higher wage, this could become their only focus - forgetting
about your organization’s goals.

• Companies may lack a plan for when the cost begins to outweigh
the benefits. If the promise of extra compensation causes your
employees more stress and impacts their productivity, you may
experience the law of diminishing returns.

• Employees can be demotivated if the goals are set too hard to

achieve.

• Team spirit and cooperation can be hindered.

• As reward is made for short term quantifiable goal, it can be

too narrowly focused.

Bonus Sharing
This system is used in continuous process and assembly lines
where efforts of a number of workers are required to complete
the job and, therefore, it is not practicable to assess the output of
individual worker, there it is necessary to pay a collective or
group bonus to retain the incentive payment idea.

Types

• Holiday Bonuses: These types of bonuses are awarded to

employees to signify gratitude and appreciation at the end of the
year. Typically, a holiday bonus is given equally to the entire staff.

• Project Bonuses: These types of bonuses are given to employees

for completing outstanding work on a special project.

• Spot Bonuses: These types of bonuses reward employees for “on

the spot” achievements that deserve recognition.

• Referral Bonus: This type of bonus is given to an employee who

refers a qualified candidate for a job position. If the candidate is
hired, the referring employee receives a bonus.

• Retention Bonus: This type of bonus is awarded to high-tenure

employees or workers in competitive job roles to decrease their
potential for leaving.

Profit sharing
This system has been introduced by the employers in order to
encourage their employees and by means of which the workers
 receive a share of the profit over and above their normal
wages.

Advantages
(i) Better co-operation may be easily expected.

(ii) There is reduction of supervision, which results in reduction of

supervision cost.

(iii) Non-productive labour cost will be reduced.

(iv) As there is a community of interest of all the workers, they all

work more harmoniously, honestly, resulting in better production.

Disadvantages
(i) It is difficult to ascertain the share of profit to be given to each
worker and unless the profits are large, the share of each worker
may appear to him very insignificant.

(ii) Since the efficiency of individual worker is of no concern to the

group, individual efficiency escapes from the notice of the
management.

(iii) As the distribution will normally take place only once a year,
worker may lose interest in it.

(iv) If the efficient workers are not selected as group leaders, the
efficiency of the whole group suffers.