CL 1.

3
BUSINESS
FUNDAMENTALS
PART 1
CMA Professional Program
2023-2027
CMA SRI LANKA OFFICIAL STUDY TEXT
 CMA Professional Programme 2023 – 2027
Certificate Level

CL 1.3: Business Fundamentals

Part I

Institute of Certified Management Accountants of Sri Lanka (CMA)

ISBN 978-955-0926-46-6

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the Institute of Certified Management Accountants of Sri Lanka.

1st edition – August 2023

Published by:
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29/24, Visakha Private Road,
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1.3 Business Fundamentals (BF) – Part 1 examination paper. It is carefully prepared
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CMA Sri Lanka

Fundamentals of Management

60%
 Table of Contents

CHAPTER 1: OVERVIEW OF MANAGEMENT 6

CHAPTER 2: THE EVOLUTION OF MANAGEMENT THOUGHTS 29

CHAPTER 3: THE PROCESS OF PLANNING 56

CHAPTER 4: ORGANISING 73

CHAPTER 5: LEADING TOWARDS ORGANISATIONAL OBJECTIVES 107

CHAPTER 6: EMPLOYEE MOTIVATION 123

CHAPTER 7: COMMUNICATION: THE ACT OF TRANSFERRING INFORMATION 141

CHAPTER 8: ORGANISATIONAL CONTROL AS MANAGEMENT PROCESS 156

CHAPTER 9: CORPORATE GOVERNANCE 172

CHAPTER 1 Page 6

Overview of Management

Learning Outcomes

After successful completion of this chapter, you should be able to:

● Describe an organisation; identify its characteristics and classifications

/ types of organisations
● Define the term Management
● Discuss the organisational environment, its complexity and dynamicity
● Understand SWOT analysis and practical application
● Describe the management functions and managerial decisions
● Discuss managerial skills and how they contribute to performance
● Discuss managerial roles and how they influence managerial performance
● Understand the challenges faced by the managers in contemporary business
environment

1.1 Organising

Organisation is defined by scholars such as Allen, Koontz, O'Donnell, Oliver Sheldon and
others as a process of welding together a framework of positions which can be used by the
management for the purpose of accomplishing the enterprise goals, involving the co-
ordination of employees' activities in an efficient manner to achieve the objectives of the
enterprise. Some of the definitions are:

DEFINITIONS OF ORGANISATION

● Organisation is a deliberate arrangement of people to accomplish some specific purpose.

(Robbin, Bergman, Stagg, and Coulter, 2008)
CHAPTER 1 Page 7

● Organisation is two or more people who work together in a structured way to achieve a
specific goal or set of goals. (Stoner and Freeman, 2009)

● Organisation is the process of identifying and grouping the work to be performed,

defining and delegating responsibility and authority, and establishing relationships for
the purpose of enabling people to work most effectively together in accomplishing
objectives (Mary Parker Follett, 1949)

● Organisation is a system of consciously coordinated activities or forces of two or more

persons (Chester Barnard)

● Organisation is an arrangement of interdependent elements in a system that functions as

a whole to achieve certain goals (Henry Mintzberg, 1978)

● Organisation is an arrangement of people, tasks, resources, and procedures that are

designed to accomplish a specific goal or set of goals (Stephen P. Robbins)

A group An Interaction among A Common

of People Members Objective/
Objective/Target Target

Figure 1.1: Elements of an Organisation

However, most of these definitions identify people, goals and structures as common
characteristics of an organisation.

CLASSIFICATION OF ORGANISATIONS/TYPES OF ORGANISATIONS

Organisation is designed on the basics of principles of labour and span of management. The
success of the organisation depends upon the experience and competence of the officers of
the organisation.

(a) The factors which determine the forms / type of organisations are:

● Size of the business:

The size of an organisation is a major factor in determining its form. Smaller
organisations tend to be simpler and less formal, while larger organisations are more
complex and structured.
CHAPTER 1 Page 8

● Nature of the Business:

The type of business an organisation is engaged in will determine the form it takes. For
example, a manufacturing company will have different organisational structures than a
service-based company.
● Technology:
The technology used by an organisation will also influence its form. Organisations that
have advanced technology may require more complex structures to manage the
technology effectively.

● Culture:
The culture of an organisation can also affect its form. Organisations with strong cultures
may have more informal structures, while those with weaker cultures may be more
structured and hierarchical.

(b) The following common types of organisations can be identified:

● Line, Military or Scalar organisation / Linear, Armed Forces or Vector organisation
● Functional Organisation
● Line and Staff organisation
● Committee organisation
● Matrix organisation
● Free Form organisation/ Flexible Form organisation
● Line (Military or Scalar) Organisation/ Linear, Armed Forces or Vector organisation

Line organisation is the simple and oldest type of organisation followed in an organisation.
Under line organisation, each division is generally a distinct self-contained unit. A distinct
individual will supervise the operations of the division and he/she has absolute authority
over the division.

● Functional Organisation

It has been structured to place the experts in the highest position across the organisation.
This is an arrangement in which we can characterise as a framework wherein practical
divisions are made to manage the issues of business at different levels. Practical power stays
limited to useful directions to various divisions. This assists with keeping up quality and
consistency of execution of various capacities over the whole venture.

● Line and Staff Organisation

This is an organisation which we can define as a structure in which functional Operational

divisions are established to address the issues of business at various levels. Functional
authority remains confined to operational guidance to different departments. This assists in
maintaining quality and sustaining excellence and consistency of performance of different
functions throughout the enterprise.
CHAPTER 1 Page 9

Under this kind of organisation, the line officers have authority to make decisions and
execute them to attain the goal of the organisation.

The line officers may be aided by the staff officers while framing the policies and plans and
taking decisions organisationally.

● Committee Organisation

A committee as a group of persons either appointed or elected who are to meet the purpose
of considering matters assigned to it.
Types of committees:
▪ Advisory committee
▪ Fact - Finding Committee
▪ Action Committee

● Matrix Organisation

Any organisation that employs a multiple command structure but also related support
mechanisms and an associated organisational culture and behaviour pattern. The matrix
organisation may be followed where a large number of minor projects have to be managed.
A matrix organisation is defined as one in which there is dual or multiple managerial
accountability and responsibility. However, the term matrix implies quite different meanings
to different people and in various industries. In a matrix there are usually two lines of
authority, one along functional line and the other along project, product, or customer lines.
Other chains of command such as geographic area are also possible.
Stuckenbruck, L. C., 1979).

● Free Form organisation/ Flexible Form organisation

This type of organisation is formed whenever a requirement arises to form an organisation,

for achieving a particular object. It will be disbanded after achieving the objective of the
organisation. The free form organisation resembles the project and matrix structure.

EXHIBIT 1.1: CLASSIFICATION OF ORGANISATIONS

Bases Classification
● Profit oriented organisation
Objective
● Non- profit-oriented organisation
● Manufacturing Organisation
Product
● Service Organisation
CHAPTER 1 Page 10

● Tall Organisation
Scale
● Flat Organisation
● Private organisation
⎯ Sole Proprietorship
⎯ Partnership
Ownership ⎯ Limited Liability Company

● Public Organisation
● Government Organisation
● Domestics Organisation
Markets/ Geographical
● Multinational Organisation

• Small Batch Technology Organisation

Technology • Mass Production Technology Organisation
• Continuous Process Technology Organisation
● Formal Organisation
Relationship
● Informal Organisation

● Marketing
● Financial
Function ● Operations
● Human Resources
● Administrative

1.2 Management

DEFINITIONS
We cannot find a precise definition for management since the different scholars from
different disciplines view and interpret management from their own angles. The economists
regard management as a resource akin to land, labour, capital, and organisation. The
bureaucrats view it as a system of authority to accomplish business objectives. Sociologists
perceive managers as a component of the upper class in society. Hence, we should examine
some such definitions available to comprehend what is meant by management.

Management term is perceived to be derived from a Latin term ‘Manage’. It is believed to be

the direction to which the horseman led.

● Management is a distinct process consisting of planning, organising, actuating and

controlling; utilising in each both science and art, and followed in order to accomplish
predetermined objectives. - George R Terry (1877 - 1955)

● Management is the art of getting things done through people. He believes that managers
CHAPTER 1 Page 11

must be able to motivate, lead, and direct their employees in order to achieve success.
- Henry Mintzberg
● Management is the art of knowing what you want to do and then seeing that they do it in
the best and the cheapest way possible. - Frederick Winslow Taylor (1856 – 1915)

● Management is the "art of getting things done through people. - Mary Parker Follett
(1868 –1933)

● Management is the art of getting things done through others and with formally organised
groups. - Harold Koontz (1909-1984)

● Management is the process of planning, organising, commanding, coordinating and

controlling. - Fayol, 1930

● Management is a multipurpose organ that manages a business and manages Managers

and manages Workers and work. -Peter Drucker, (1909 –2005)

● Management is the attainment of organisational goals in an effective and efficient

manner. It’s achieved through planning, organising, leading, and controlling
organisational resources. - Richard L. Daft, 2017

Hence, Management can be broadly characterised as a process of planning, organising,

leading, and controlling the limited assets efficiently and effectively to achieve
predetermined goals and objectives in an ever-changing business condition. Management is
also accepted to be the basic transformation process, which converts basic and scarce
resources.

The men–money – machinery – methods to goods and services. Arising from above, the
transformation process has several sub processes.

They are,
1. Planning
2. Organising
3. Leading
4. Controlling
CHAPTER 1 Page 12

INPUT PRODUCTIVITY OUTPUT

ENIRONMENT

INPUTS FROM
THE
ENVIRONMENT

Human
resources GOALS
Financial ATTAINED
resources
Physical
resources
Information
resources

EFFICIENCY TRANSFORMAT EFFECTIVENESS

ION PROCESS

Figure 1.2: Management as a Transformation Process

EFFECTIVENESS VS. EFFICIENCY:

Efficiency is doing the thing right. Effectiveness is doing the right thing.” - Peter F. Drucker

1.3 Organisational
Environment
Organisational environment is defined as a set of characteristics that describe the
organisation and distinguish it from other organisations. It is the focal element of
multifaceted managerial decisions. The elements and forces within and outer to the
organisation that affect the achievement of objectives. There are two major categories of the
business environment: Internal Environment and External Environment. These
environmental factors both Internal and External served as an alarm for a company that had
grown complacent. Hence, it is important to explore in detail the components of the internal
environment and external environment; also, how they affect the performance of the
environment.
CHAPTER 1 Page 13

Classifications of Environment

a) Internal environment refers to the conditions, entities, events, and factors within an
organisation that influence its activities and choices. It includes the culture, values,
attitudes, and beliefs of the organisation's employees as well as the organisation's
physical environment. Internal environment also includes the organisation's
management structure, policies, procedures, and practices.

The internal environment comprises the followings elements:

▪ Owners / Shareholders
▪ Employees
▪ Resources of the business
▪ Organisational structure
▪ Organisational culture
▪ Organisation structure is the way that the work, resources, authority and responsibility
have been divided among its members so that the objectives can easily be achieved.
▪ Organisational culture is the set of beliefs, attitudes, values, customs & behavioural
patterns shared by organisational members.

b) External environment refers to the external factors that can affect an organisation's
performance and decision-making. These external factors include economic conditions,
technological changes, legal and political developments, social and cultural influences,
and international forces. Organisations must be aware of these external forces in order
to remain competitive in their industry.

(i) Micro/Task Environment - This consists of all the outside individuals, groups &
organisations that affect the achievement of organisational objectives directly (all
external stakeholders).
E.g.: Government, Suppliers & Creditors, Customers & Debtors, Banks & Other
Financial institutions, competitors, Potential Investors, Media & Community

(ii) Macro/General Environment - This consists of all the broad forces in the economy
which affects the achievement of organisational objectives. The Macro Environment
consists of Six Major Forces that are known as the PESTEL factors. This classification
distinguishes between:

• Political factors - These refer to government policy such as the level of intervention in the
economy. What products and services does a government want to provide? To what
extent does it believe in subsidising companies? What are its priorities in terms when it
comes to business support? Political decisions can affect many vital/essential areas for
business such as the education of the workforce, the health of the nation and the quality
of the infrastructure of the economy such as the road and rail system.
CHAPTER 1 Page 14

• Economic factors - These include interest rates, taxation changes, economic growth,
inflation, and exchange rates.
For example:
o Higher interest rates may determine investment because it costs more to borrow,
while a strong currency may make exporting more difficult because it may raise the
price in terms of foreign currency.

o Inflation may provoke higher wage demands from employees and raise costs while
higher national income growth may boost demand for a firm's products.

• Social and Cultural factors – Change in social trends can influence the demand for a
company’s products and the accessibility and willingness of individuals to work. For
example, Manufacturers of baby products would be drawn to societies with favourable
attitudes towards the formation of families, high birth rates, and disposable cash. The
growth of premium cupcake shops is a reflection of a contemporary eating-out trend in
North America: some customers are quite fond of expensive speciality shops.

• Technological factors: new technologies generate new products and new processes. For
example, Amazon’s technological factors can be expansion of robotic automation for
product picking, packing, and delivery and artificial intelligence is being expanded to
service Amazon Web Services.

Online shopping, bar coding and computer aided design are all enhancements to the way
we do business as a result of improved technology. Technology can decrease costs,
improve quality and lead to innovation. These developments can benefit consumers as
well as the organisations providing the products.

• Environmental factors: Environmental factors include the weather and climate change.
variations in temperature can affect numerous industries including farming, tourism and
insurance. With major climate changes occurring due to global warming and with greater
environmental consciousness this external factor is becoming a significant issue for firms
to consider.
The increasing desire to protect the environment is having an impact on many industries
such as retail industries for example, Wal Mart’s call for a reduction in waste and the use
of non-renewable energy, weather and climate concerns in various regions and the
general move towards more environmentally friendly products and processes is affecting
demand patterns and creating business opportunities.

• Legal factors: These are related to the legal environment in which firms operate. For
example, to protect customers and assist them in making educated decisions, Health
Canada requires nutrition labelling on all pre-packaged foods, Laws requiring electronic
recycling are creating chances for "green collar jobs." Environmental fees are levied in all
CHAPTER 1 Page 15

Canadian provinces for the collection and recycling of specific electronic items, as well as
energy-intensive vehicular accessories such as air conditioning.

Exhibit 1.2: External Environments (PESTEL)

FACTOR ELEMENTS

POLITICAL e.g., Political Stability, Terrorism, taxation policy

e.g., interest rates, exchange rates, national income, inflation,

ECONOMIC
unemployment, Stock Market
e.g., ageing population, attitudes to work, cultural customs and
SOCIAL
norms, income distribution
e.g., innovation potentials, new product development, rate of
TECHNOLOGICAL
technological obsolescence, intellectual property

ENVIRONMENTAL e.g., global warming, environmental issues, climate change

LEGAL e.g., competition law, health and safety, employment law

Global (International) Environment: In addition to the PESTEL factors it is important to

view global markets / rapid global changes. Modern organisations have a couple of ways to
become involved globally such as offshoring or global outsourcing, developing markets for
finished products or services outside their home countries (exporting, licensing, and direct
investing).

Exporting: The term export refers to the movement of commodities or services produced in
one country to another. The seller of such goods and services is known as an exporter, while
the overseas buyer is known as an importer.

Licensing: Licensing is a business arrangement in which one company gives another

company permission to manufacture its product for a specified payment. It is a process of
creating and managing contracts between the owner of a brand and a company or individual
who wants to use the brand in association with a product, for an agreed period of time, within
an agreed territory.

Direct investing: It means that the company is involved in managing the productive assets,
which distinguishes it from other entry strategies that permit less managerial control (R.L
Daft, 2017).
CHAPTER 1 Page 16

Figure 1.3 - Organization and It’s Environment

EXTERNAL ENVIRONMENT

GENERAL
ENVIRONMENT
Political
TASK ENVIROMET
Economical
Customers
INTERNAL Socio-Cultural
Competitors
ENVIRONMENT Technological
Suppliers
Environmental
Labour Markets
Legal

GLOBAL /
INTERNATIONAL

Figure 1.4 - Dimension of the Organisation’s General, Task

and Internal Environment
CHAPTER 1 Page 17

1.4 Swot Analysis

The external and internal environmental factors have a direct and indirect impact on an
organisation. When the two environmental analyses are carried out, any organisation can
identify its Strengths and Weaknesses which are internal, as well as Opportunities and
Threats from the external environment. SWOT analysis is a process that identifies an
organisation's strengths, weaknesses, opportunities, and threats. Specifically, SWOT is a
basic, analytical framework that assesses what an entity (usually a business, though it can be
used for a place, industry, or product) can do and cannot do, for both internal (the strengths
and weaknesses) as well as external (the potential opportunities and threats) factors. Using
environmental data to evaluate the position of a company, a SWOT analysis determines what
helps the firm in achieving its objectives, and what obstacles must be overcome or minimised
to achieve desired results: where the organisation is currently located and where it may be
positioned in the future.
Threats
(External,
Weaknesses Negative
(Internal, factors)
Negative
Strengths factors) Threats include
(Internal, external factors
Weaknesses Opportunities
Positive beyond your
are aspects of (External,
factors) control that
your business Positive
could place
that detract factors)
Strengths your strategy,
describe the from the or the business
value you Opportunities
positive itself, at risk.
offer or place are external
attributes, You have no
you at a attractive
tangible and control over
competitive factors that
intangible, these, but you
disadvantage. represent
internal to may benefit by
You need to reasons your
your having
enhance business is
organization. contingency
these areas in likely to
They are plans to
order to prosper.
within your address them if
control. compete with they should
your best occur.
competitor.

Exhibit 1.3: SWOT Analysis

CHAPTER 1 Page 18

Practical Application of SWOT Analysis

Unilever is a global leader in the consumer goods industry. Unilever's SWOT analysis reflects
the company's internal situations as well as its external environment. Long-term success can
be improved through strategies based on corporate strengths and market opportunities.

Unilever’s Strengths (Internal Strategic Unilever’s Weaknesses (Internal Strategic

Factors) Factors)
1. Strong brands 1. Imitable products
2. Broad product mix 2. Limited business diversification
3. Economies of scale 3. Dependence on retailers
4. Strong global market presence

Opportunities for Unilever (External Threats Facing Unilever (External

Strategic Factors) Strategic Factors)
1. Business diversification 1. Tough competitive rivalry
2. Product innovation for health 2. Product imitation
3. Business enhancement for 3. Increasing popularity of retailers’
environmental conservation house brands
4. Market development

Figure 1.5.: SWOT Analysis of Unilever

Source: https://panmore.com/unilever-swot-analysis-recommendations

1.5 Types of Managers

There are different types of managers in an organisation. Managers are characterised based
on different bases as such:

a) Organisational Hierarchy
b) Managerial Level
c) Scope of the activities
d) Responsibility of the Activities

a) ORGANISATIONAL HIERARCHY

All managers, whichever level or responsibility one shoulder, will implement the process of
management. They, due to the level of manager they occupy, will be responsible for different
roles.
CHAPTER 1 Page 19

They show the following roles:

DECISION LEVEL
TOP/ STRATEGIC
LEVEL
Chairman, Managing
Director, General
Manager, Managers

MIDDLE LEVEL FUNCTIONAL LEVEL

Human Resource, Finance,
Production Manager, Managers

LOWER/BOTTOM LEVEL
Supervisor, Managers ACTION LEVEL

Figure 1.6: Managerial Levels

b) MANAGERIAL LEVEL

i) Top Level/Strategic Level Managers: They are the managers responsible for the
overall management of the organisation and placed at the top of the hierarchy. This level
of managers represented with different titles such as Chairman, Board of Directors,
Managing Director, General Manager, President, Vice President, Chief Executive Officer
(CEO.), Chief Financial Officer (CFO) and Chief Operating Officer who are the persons
essential for leading and directing the efforts of other people.

Their main duties are:

• Prepare corporate plans (including goals & objectives, policies & Strategies)
• Represent the organisation to the external environment.
• Guide the organisations interactions with its environment.
• Recruit, train & supervise middle level Managers.

ii)Middle Level Managers: They are the managers responsible for major divisions or
sections of the organisation and placed at the mid-range of the organisational hierarchy.
This level of management consists of departmental heads such as purchase department
head, sales department head, finance manager, marketing manager, executive officer,
plant superintendent, who are responsible for executing the plans and policies made by
the top level.
CHAPTER 1 Page 20

They link between top and lower-level management while exercising the functions of top
level for their department as they make plans and policies for their department, organise,
and gather the resources etc.

iii) Lower/Bottom Level Managers: They are the managers who work collaboratively
with operating employees & placed at lower of the organisational hierarchy. This level
consists of supervisors, superintendent, foreman, sub-department executives, clerk, etc.
Managers of this category carry on the work or execute the activities according to the
plans of top and middle level management. Their authority is restricted. However, the
quality and the quantity of output depend upon the efficiency of this level of managers.
They transmit instructions to workers and report to the middle level management. They
are also responsible for maintaining discipline among the workers.

c) SCOPE OF THE ACTIVITIES (FUNCTIONAL MANAGERS)

The field of management is very wide. Regardless of their level, managers may be classified
based on the areas of working within the organisation. The operational areas of business
management may be classified into the following categories:

• Marketing Managers
• Financial Managers
• Operations Managers
• Human Resources Managers
• Administrative Managers

d) RESPONSIBILITY OF THE ACTIVITIES

Many organisations have specialised management positions in addition to those already

described. General Managers are responsible for several departments that perform different
functions as well as different geographical areas. Project Managers also have general
management responsibility because they coordinate employees across several departments
to accomplish a specific project.

1.6 Management Process

Management is considered as a process consisting of planning – organising – leading and

controlling (Figure 1.2). Each such constituent shows life – the living situation. All such
functions contribute to the management process to operate in a cyclic manner. Thus, with
inputs in the form of raw materials and auxiliary materials, financial resources, and human
resources, as inputs, will bring products and services.

There are two classifications about management functions:

a) Traditional classification
b) Modern classification/Henry Mint burg’s managerial Roles
CHAPTER 1 Page 21

a) TRADITIONAL CLASSIFICATION

There are four managerial functions under this:

1) Planning - Process of establishing goals/objectives & suitable course of actions

(Strategies) for achieving those goals/objectives.

2) Organising - The process of dividing work, resources, and authority among

organisational members in order to achieve organisational objectives effectively &
efficiently.

3) Leading - Leading and motivating communicating to employees to perform the tasks of

the organisation.

4) Controlling - The process of monitoring activities to ensure they are being accomplished
as planned and of correcting significant deviations.

b) Modern Classification/Henry Mintzberg’s Managerial Roles

According to Henry Mintzberg, a manager has to perform three basic activities

(Interpersonal/Informational/Decisional) that can be subdivided into ten. Since these
activities are the kinds of behaviour patterns expected from any manager, they are termed
as 'Managerial Roles' by Mintzberg.
MANAGERIAL ROLES

INTERPERSONAL

INFORMATIONAL

DECISIONAL

Figure 1.7: Managerial Roles by Mintzberg

CHAPTER 1 Page 22

1) Interpersonal Roles- Role’s managers assume to coordinate and interact with

employees and provide direction to the organisation.

i) Figure head - Symbolic head, performing ceremonial duties

E.g.: Greeting visitors, attending a subordinate's wedding

ii) Leader - Getting things done from subordinates

E.g.: giving commands & advice, motivating subordinates'

iii) Liaison officer- Coordinating between activities, people, groups, and organisations
E.g.: Acknowledging mail, performing activities that involve outsiders.

2) Informational roles - Collecting information from various sources & transmitting

information for parties who require information for usage.

i) Monitor -Gathering information from internal and external sources

E.g.:
● Collecting information on inflation & GDP growth rate from Annual report of Central
Bank (External Source).
● Collecting information on sales from marketing managers by Finance Manager
(Internal source).

ii) Disseminator - Distributing information to the members of the work unit.

E.g.:
● Holding a meeting to inform information on profitability by finance manager.

iii) Spokesperson- Transmitting information to the people outside their own work units
(within or outside the organisation).
E.g.:
● speaking to the media, holding a company meeting to inform about profitability to
organisational members (People in other departments like Production, HR, and
Marketing)

3) Decisional Roles - Related to decisions made.

i) Entrepreneur - Searching business environment for opportunities & initiating

changes.
E.g.: Invest money in a new business.

ii) Disturbance Handler - Giving solutions to difficult problems business encounters.

E.g.: Resolving employees’ strike, solving a conflict among two employees, finding a
solution to low productivity problem

iii) Resource Allocator- Allocating limited resources among different objectives.

E.g.: Setting priorities, preparing budgets.
CHAPTER 1 Page 23

iv) Negotiator - Negotiating with internal & external parties to gain advantage to the
business
E.g.: Negotiating with a supplier, a labour union, another manager

1.7 Managerial Skills

A managerial skill is usually required for success in management. Certo & Certo (2009) Managerial
skills refer to what managers must be able to perform in order for organisational goals to be met
successfully and efficiently. Robert L Katz recognized three types of managerial skills.
They are:

a) CONCEPTUAL SKILL
b) HUMAN SKILL
c) TECHNICAL SKILL

a) Conceptual Skill:
This consists of the manager's ability to coordinate all organisational activities and varied
interests involved in it. It involves viewing the organisation in its whole and
comprehending the inter-dependence of its individual components. Thus, Analytical skill
& Creativity are also part of Conceptual Skill. Of all the skills, this conceptual skill is the
most difficult skill to acquire.
Conceptual skill is very essential for top management in formulating long-range plans,
broad policies and relating the business enterprise to the industry and economy.

b) Human Skill:
The ability of a manager to work with, understand and inspire people in the organisation
is known as human skill. It also involves the capacity to build effective work and
successful work groups. The human parts of management require individual as well as
group relations to be maintained and developed for achieving maximum efficiency.
Human skills are important at all levels of management to an equal degree. Relative
degree of skills Needed for Effective performance at different levels of management.

c) Technical Skill:
It is the ability of a manager to use the equipment, methods and techniques involved in
performing specific tasks. Technical skill is required more at the lower level of
management i.e., at the supervisory level. At higher levels, technical skill is less important
as managers can rely upon others for technical information.
CHAPTER 1 Page 24

Figure 1.8: Managerial Skills

The entity's future - its vision, goals, and similar decisions - is ultimately responsible for the
top management. They will be required to have a modest level of interpersonal relationships
and lower technical ability. Middle-level managers would need to demonstrate excellent
interpersonal skills as well as conceptual and technical ability.

The line managers and such other categories such as supervisors would need to exhibit more
interpersonal and technical skills, as compared to lesser conceptual skills. They are the
operative grades in an entity.

1.8 Challenges faced by the managers.

With the changing environment and difficulties in managing people, managers are facing
new challenges. The following would be the challenges for the managers in the present
scenario:

• Achieving stretch goals

• Bringing out the best in your employees
• Dealing with underperforming Employees
• Continuous improvement
• Managing workforce diversity
• Responding to globalisation
• Hiring the right people
• Difficult to understand the workers’ behaviours.
• Improving quality and productivity.
• Improving customer service.
• Responding to a crisis
• Pursue business ethics and perform corporate social responsibility activities.
• Uncertainty of the future of the business organisation.
CHAPTER 1 Page 25

Exhibit 1.4: Challenges faced by Managers.

Source: Effective Management Styles For Leaders Challenges Faced By Manager Elements PDF
- PowerPoint Templates (slidegeeks.com)

KEY TERMS

Controlling Organisation
Communication Organizing
Effectiveness Planning
Efficiency Process
Environment Productivity
Goal Resources
Leading Supervisor
Management SWOT
Manager Tactical
Managerial Roles Transformation
Managerial Skills
Matrix
CHAPTER 1 Page 26

Chapter Round-Up

The term management is studied in the context of organisation and different types of
organisations. This chapter states the organisational environment to cover the internal
environment and that to cover the external environment of organisations and SWOT
analysis as well as the practical example of SWOT analysis of Unilever company.

There are some different types of managers in an organisation, and they are
characterised by different bases namely, organisational hierarchy, managerial level
scope of the activities and responsibility of the activities. Management functions are
classified as traditional classification and modern classification/Henry Mint burg’s
managerial roles. The three types of managerial skills which are conceptual skill, human
skill and technical skill. Finally, this chapter includes the challenges faced by the
managers in the contemporary business environment.

EXPERIENTIAL EXERCISES

Multiple Choice Questions (MCQs)

1. What does management involve?

a. both internal and external environment
b. external environment
c. internal environment
d. none of the above

2. According to Mary Parker, ________ is an art of achieving objectives through others.

a. job
b. behaviour
c. management
d. both A & B

3. What are the components of management?

a. planning & organising
b. directing
c. controlling
d. all of the above

4. What is the primary purpose of management?

a. to maximise profits
b. to achieve organisational goals
c. to increase efficiency
d. to motivate employees
CHAPTER 1 Page 27

5. ……………. is about deciding in advance what should be done.

a. planning
b. organising
c. directing
d. controlling

6. _________ is called as father of scientific management.

a. Elton Mayo
b. Henry Fayol
c. F.W.Taylor
d. Robert Owen

7. "In all formal affairs, the manager speaks for the organisation. While speaking with people
outside the organisation, the senior manager represents the business legally and socially.
Which of the following best describes the managerial position he holds?
a. figurehead role
b. spokesperson role
c. leader role
d. monitor.

8. The most significant management skills are ________

a. technical, human, and conceptual
b. technical, behavioural, and conceptual
c. systematic, human, and conceptual
d. technical, human, and cognitive

9. …………………….. represents the top-level management pertaining to thinking and

planning functions.
a. operative management
b. administrative Management
c. floor level management
d. both A & B

10. Which is NOT an informational role of manager?

a. monitor’s role
b. disseminator’s role
c. spokesman’s role
d. disturbance’s handler role
CHAPTER 1 Page 28

Answers

1 a
2 c
3 d
4 b
5 a
6 c
7 b
8 a
9 b
10 d
CHAPTER 2 Page 29

The Evolution of Management

Thoughts

Learning Outcomes

After successful completion of this chapter, you should be able to:

• Explain the evolution of management thoughts.

• Demonstrate the different emphasis of management theories.
• Discuss the diverse management approaches.
• Evaluate and discuss the relevance of different perspectives of management
theories.
• Identify and describe contemporary management practices.

2.1 Management Theory

Business Dictionary defines that management theory as a collection of ideas which set forth
general rules on how to manage a business or organisation. Management theory addresses
how managers and supervisors relate to their organisations in the knowledge of its goals,
the implementation of effective means to get the goals accomplished and how to motivate
employees to perform to the highest standard.

Management theory is a compilation of concepts that provide general guidelines on how to

manage a business or organisation. Management theory examines how managers and
supervisors interact with their organisations in order to understand its objectives,
implement effective strategies to achieve those objectives, and motivate employees to reach
their highest potential.

2.2 Early Origins of Management Thoughts

Prior to Industrial Revolution there has been an ad-hoc process of management which was
successful throughout history when we study ancient engineering wonders such as Pyramid
in Egypt. However, the Industrial Revolution threw the toughest and an absolute new set of
challenges to owners and managers.
CHAPTER 2 Page 30

Entry to the paradigm shift from small craft to large-scale mechanized manufacturing at the
end of the 18th century raised the necessity for managers to search for new techniques to
manage their organisations’ resources, productivity increase and workers skill
improvement.

The classical theory of management emerged while finding an approach of predicting

workers behaviour and controlling their behaviour from the manager’s perspective to
achieve organisational goals. Under classical approach workers were strictly controlled to
perform as the manager’s accordance following a specific set of rules were given to them.
This model treated human power as a mechanical resource based on a systematic method
by contributing their maximum capacity in order to gain the optimal financial gain.

Until the early 18th Century, most people survived off the land like they had been lived off
for many age/Years. The era was based on undeveloped subsistence that is agriculture
defined by the harvests and the seasons. People in the early 18th century were
ruled/governed by political and social leaders. According to historians, the transition
towards the industries, new manufacturing processes was termed as “Industrial Revolution”
(Lucas, 2002).

Even though most of the discussions on evolution of management thought start with the
classical approach, we should acknowledge the contributions of some of the contributors of
the pre-classical period who were able to contribute to the process of development of
management thoughts. An assessment of the pre-classical contributors indicates that their
efforts were fragmentary/piecemeal and also, they applied their effort towards developing
specific/particular technique or solutions.

Hence, pre-classical scholars laid the foundation/groundwork for the management theories
which came later. We should learn some of the main pre-classical management thoughts
which contributed for the evolution of management thoughts.

The practice of management is as old as human civilization. The ancient civilizations of Egypt
(the great pyramids), Greece (leadership and war tactics of Alexander the great) and Rome
displayed the marvellous results/outcomes of good/sound management practices. The
Chinese Civil Service, the Roman Catholic Church also offer good example of early
application/implementation of management. The real development of management thought
began with the scientific management approach stated/proposed by Taylor.

Early management thoughts have come from the Roman Catholic Church, military
organisations, the Camerolaite, a group of German and Austrian public administrators and
intellectuals from the sixteenth centuries.

Their concepts of management were mostly related to the principles of specialisation,

selection of subordinates and their training/instruction and simplification/streamlining of
administrative procedures.
CHAPTER 2 Page 31

In the later period, contributions were made by Charles Babbage, James Watt and Robinson
Boulton, Robert Owen, Towne, and Simon. Charles Babbage was professor of Mathematics at
the Cambridge University, and he suggested the use of accurate data obtained through rigid
investigation in the management of an undertaking.

James Watt Junior (1796-1848) and Robinson Boulton (1770-1842) used the management
techniques such as market research and forecasting, production planning, planned machine
layout, standardization of components and parts, elaborate statistical records, maintenance
of control report, cost accounting data, provision of welfare of personnel etc.

The contributions of management thinkers stated above were limited mostly to the field of
developing the concept to make resources more effective at the shop floor levels. However,
the various ideas started by them have created awareness about managerial problems.

A stage was set by the end of the nineteenth century for making a systematic study of
management and a beginning was made by Fredrick Taylor at the beginning of the
20thcentury whose thoughts came to be known as Scientific Management.

Management practices and theories evolved in response to the changes which have been
taken place in social, political, and economic forces in the large society. Figure 2.1 illustrates
the evolution of significant management theories over time. The timeline reflects the
dominant time period for each approach, but elements of each are still used in today’s
organisation. Figure 2.1 illustrates the progression of significant management theories over
time. The timeline reflects the predominant era for each approach, yet components of each
are still employed in today's organisations.

Management Theories over

Time

Classical Management Behavioural

Modern Management Era
Approach Approach

Human Human Behaviour

Relation Resource al Science
Approach Approach Approach

Scientifi Admini Bureaucr

c strative
Manage atic
Manage Managem System manage
ment Approach “z” Japanese
ment ent continge ment Theory Managem
Theory Theory Theory ncy science ent
approach approach

Figure 2.1 The Evolution of Management Thoughts

CHAPTER 2 Page 32

2.3 Classical Approach to Management

The classical school of management thought is the oldest school of management thought
which was developed/formulated during the industrial revolution in 19th century. It
concerns ways to manage work and organisations more efficiently based on management
practices practiced/advocated by individual writers/authors who contributed to developing
their theories/ ideas of management.

During the Industrial Revolution (1760-1840), outburst of novel ideas and new technological
innovation came up which shaped a progressively more industrial and urbanized society.
The shift of economy from the agrarian period towards the rapid technology and innovations
was the Industrial Revolution. These events comprise of not only set of economic and social
changes but also the technological.

The industrial revolution resulted in a transition of hand work/from manual labour to

machines which led to increase in efficiency. This revolution spread across the eastern parts
of society/world and the economic adoptions accelerated (Alford, 1951). The rapid increase
in the industrialization and technological advancements transformed society from an
agrarian one to a more industrialized and urbanized one.

The modernist view collectively provoked the need to improving the economic proficiency,
focusing especially on labour productivity (Alford, 1951). On the basis of the classical
theories of management, the foundation of scientific management was laid by Frederick W.
Taylor (Louçã, 2002).

There are three areas of studies done by three different scholars.

(a) Scientific Management Theory - (F.W.Taylor, 1856-1915)

(b) Administrative Theory - (Henry Fayol, 1841-1925)
(c) Bureaucratic Theory - (Max Weber, 1864-1920)

The Classical approach mainly looks for the universal principles of operation in the striving
for economic efficiency. These would form the cognitive basis for a set of relevant skills to be
acquired, by all would-be managers through formal education.

The essence of the classical school of management thought was the belief that employees
have only economical and physical needs and the classical school believed that social needs
and job-satisfaction of employees are unimportant, or they do not exit universally. They
strongly advocate high specialisation of labour, centralisation, and profit maximisation.
CHAPTER 2 Page 33

2.4 Scientific Management Theory

Taylor published “The Principles of Scientific Management” in the year 1909. In this, he
suggested that by Standardize and streamlining jobs, productivity would increase. He also
advocated the notion that workers and managers needed to collaborate with one another.
This was very different from the way work was usually done in businesses beforehand.

A factory manager at that time had very little contact with the workers, and he left them on
their own to produce the necessary product. There was no Standardization, and a worker’s
main motivation was often continued employment, so there was no impetus to work as
quickly or as efficiently as possible. Taylor believed that all workers were motivated by
money, so he proposed the idea of “a fair day’s pay for a fair day’s work.” In other words, if a
worker didn’t accomplish enough in a day, he didn’t deserve to be paid as much as another
worker who was highly productive.

Although scientific management as a school of thought was outdated by the 1930s, with the
complexity of the external and internal environment, however the most of its themes are still
important parts of industrial engineering and management today (its themes remain
relevant to modern industrial engineering and management). These include analysis;
synthesis; logic; rationality; empiricism; work ethic; efficiency and elimination/reduction of
waste; Standardization of optimal practices; the transformation of craft production into
mass production; and knowledge transfer between workers and from workers into tools,
processes, and documentation.

Scientific management is a theory of management that analyses and synthesizes workflows.

Its main objective is to improve economic efficiency, especially labour productivity. It was
one of the earliest attempts to apply science to the engineering of processes and to
management. Scientific management is sometimes known as Taylorism after its founder,
Frederick Winslow Taylor.
Assumptions

The following assumptions were made by F. W. Taylor when he described scientific

management theory:

• Workers doing jobs should be paid more for increased efficiency and outputs.
• Money would motivate people.
• Efficiency is proportional to the working conditions.
• Offering more money for being efficient, benefits both the employer and employee.
• His main purpose was to maximize the efficiency.

Four principles of scientific management

1. Develop a science for each element of an individual’s work: Scientific management

involves the development of a scientific approach to each element of an individual’s
work, which includes the development of standard operating procedures and the use of
tools and techniques to measure performance.
CHAPTER 2 Page 34
2. Replace rule-of-thumb work methods with methods based on a scientific study of the
tasks: Scientific management involves replacing rule-of-thumb work methods with
methods based on a scientific study of the tasks, which includes analysing and studying
each task in order to determine the most efficient way to perform it.

3. Scientifically select, train, and develop each employee rather than passively leaving
them to train themselves: Scientific management involves selecting, training, and
developing employees based on their abilities and potential rather than leaving them to
train themselves.

4. Provide incentives for employees to work at their highest level of efficiency: Scientific
management involves providing incentives for employees to work at their highest level
of efficiency by offering rewards for meeting or exceeding performance goals.

Significance of scientific management

The significance of scientific management lies in its ability to increase efficiency and
productivity in the workplace. By breaking down tasks into smaller, more manageable parts,
it allows workers to focus on specific tasks and become more efficient at them. This leads to
increased output and improved quality of work. Additionally, scientific management can
help reduce costs by eliminating unnecessary steps in the production process and
streamlining operations.

Finally, it can help create a better working environment by providing clear expectations for
employees and encouraging collaboration between departments.

• Productivity increased; maximum utility of efforts and reduction of waste

• Incentives to employees
• Physical conditions for workers improved.
• Planning made easy.
• Fit workers to particular task and train them. Therefore, best utilisation of abilities
• Establishment of standard performance as average output

Limitations

• Having adhere to fixed methods / procedures.

• Pay is proportional to the output. Sickly and weak people cannot earn enough.
• Boring and repetitive jobs
• Planned by top people. No contribution by employees on designing of their own work.
• Promote individualism than team spirit.
• Specialisation and therefore, workers become unsuitable for doing other work. Threat to
employment in other types of jobs

Taylor stated that the principal objective of management should be to secure the maximum
prosperity for the employer coupled with the maximum prosperity for each employee.
CHAPTER 2 Page 35
Criticisms of Scientific Management

Although, the scientific management enables the management to put resources to its best
possible use and manner, it was found that there are criticisms marked by both workers as
well as employers.

Common Criticisms of Scientific Management.

1. Ignores Human Element: Scientific management ignores the human element in the
workplace, which can lead to a lack of motivation and job satisfaction among employees.

2. Inflexible: Scientific management is based on a rigid set of rules and procedures that may
not be suitable for all types of work environments or tasks.

3. Overly Simplistic: The principles of scientific management are based on a simplistic view
of how work should be done, which may not take into account the complexities of modern
workplaces.

4. Costly: Implementing scientific management can be costly, as it requires specialized

training and equipment to ensure that processes are followed correctly.

Workers’ Viewpoint

• Unemployment - Workers feel that management reduces employment opportunities

from them through replacement of men by machines and by increasing human
productivity less workers are needed to do work leading to chucking out from their jobs.
• Exploitation - Workers feel they are exploited as they are not given due share in
increasing profits which is due to their increased productivity. Wages do not rise in
proportion as rise in production.
• Monotony - Due to excessive specialisation the workers are not able to take initiative on
their own.
• Weakening of Trade Union - To everything is fixed & predetermined by management. So,
it leaves no room for trade unions to bargain as everything is standardised, standard
output, standard working conditions, standard time etc.
• Over speeding - the scientific management lays standard output, time so they have to
rush up and finish the work in time. These have adverse effect on health of workers. The
workers speed up to that standard output.

Employer’s Viewpoint
• Expensive - Scientific management is a costly system and a huge investment is required
in establishment of planning dept., standardisation, work study, training of workers.
• Time Consuming - Scientific management requires mental revision and complete
reorganising of organisation. A lot of time is required for work, study, standardisation &
specialisation.
CHAPTER 2 Page 36

2.5 Administrative Management Theory

Administrative management theory is a theory of management that focuses on the

administrative functions of an organization. It was developed by Henri Fayol, a French
industrialist, in the early 1900s.

The theory is based on five principles: division of work, authority and responsibility,
discipline, unity of command, and unity of direction. These principles are used to create an
efficient and effective organizational structure. The theory also emphasizes the importance
of communication and coordination between different departments in order to achieve
organizational goals. Administrative management theory has been widely adopted by
organizations around the world and is still used today.

Henri Fayol (1841-1925): Fayol was born in France, where he worked for a coal- mining
business. 14 administrative principles were developed for organisational structure and
management.

Under administrative model, three aspects of management will be looked at:

• The activities of the Enterprise (what the enterprise does)

• The elements of Management (what the Management does)
• The principles of Management (Series of practical suggestion to management problems)

Activities of the enterprise

All activities to which industrial undertakings give rise can be divided into 6 groups, namely,

1. Technical activities - production, manufacturing, adaptation

2. Commercial - buy, sell, exchange
3. Financial - search and optimum use of resources
4. Security - protect property and persons
5. Accounting - stock taking, balance sheets, costs, and statistics
6. Managerial - planning, commanding, organising, controlling, coordinating

Managerial activities

• Forecasting and planning: examine the future and draw up a plan of action organising
build up a structure both materials and human in an organisation Commanding: maintain
the activity among employees.

• Coordinating: bind together, unify, and harmonize all activity and effort Controlling: see
that everything occurs in conformity with established rules
CHAPTER 2 Page 37
Fourteen (14) principles of management

1) Division of Work – work should be specialised so that individuals build up expertise,

thereby become productive.

2) Authority and Responsibility – instructions issued with responsibility to carry out the
instructions. Those who have responsibility to give orders must be held responsible for
consequences.

3) Discipline – necessary in the smooth running of the organisation, management / Staff

must have self-discipline.

4) Unity of Command – employees must receive orders from one supervisor only; each has
only one boss.

5) Unity of Direction - having common purpose, employees engaged in same kind of

activities must have same objectives and one plan.

6) Organisational interest to override individual’s interest.

7) Remuneration – must be fair, but not lead to overpayment; there is no perfect system.

8) Centralisation or decentralisation – depending on current circumstances of business and

quality of staff; Decentralisation may be needed in large organisations.

9) Scalar chain – hierarchy is necessary for unity of direction and action, but also lateral
(same level) communication should also be promoted.

10)Order – There should be order and balance in the organisation. Place for everything and
everything in its place

11)Equity – Justice with fairness. All employees to be treated with justice.

12)Stability of tenure – Stability / learning takes time. Allow time to learn / get adjusted.

13)Initiative – managers must encourage initiative in subordinates, allow staff to

demonstrate initiative.

14)Esprit de corps – There is a need for social / interpersonal relationships and team work,
sense of shared purpose and fellowship.

Significance of administrative management theory

• Administrative Theory provides a structured and appropriate set of guidelines that
managers can employ to create a work setting that makes efficient and effective use of
organisational resources:
CHAPTER 2 Page 38
• These fundamentals remain the foundation of modern management theory; recent
scholars have refined or developed them to suit modern conditions. For example, Weber’s
and Fayol’s concerns for equity and for establishing appropriate links between
performance and remuneration are essential topics in contemporary theories of
motivation and leadership:

Criticisms of administrative management theory

Henri Fayol's Administrative Management Theory is criticised on the following grounds:

• Management Oriented Theory: The administrative management theory is management

oriented/focused. It does not give much attention to the problems of the
workers/employees.

• Lack of Importance to Informal Organisation: The administrative management theory

does not give any importance to informal organisation or groups. It gives importance only
to the formal organisation structure.

• Concepts Borrowed from Military Science: Some of the concepts of administrative

management theory were borrowed from military science. They tried to apply these
concepts to the social and business organisations. For e.g., Henri Fayol gave importance
to "commanding" and not " directing/guiding" the workers.

• Mechanical Approach: The administrative management theory has a mechanical

approach. It does not deal with some of the important/essential aspects of management
such as motivation, communication and leading.

2.6 Bureaucratic Theory of Management

The Max Weber’s theory of management, sometimes called bureaucratic management

theory, is built on principles outlined by Frederick Taylor in his scientific management
theory. Like Taylor, Weber advocated a system based on standardised procedures and a clear
chain of command. Weber stressed efficiency, as did Taylor, but also warned of the danger of
emphasising technology at the expense of emotion. The term bureaucracy means the rules
and regulations, processes, procedures, patterns, etc. that are formulated to reduce the
complexity of organisation’s functioning.

The bureaucratic theory of management is a theory of organizational management that was

developed by German sociologist Max Weber in the early 20th century. It is based on the idea
that an organization should be structured and managed in a hierarchical manner, with each
level of authority having clearly defined roles and responsibilities. The theory emphasizes
the importance of rules, regulations, and procedures in order to ensure efficiency and
effectiveness. It also stresses the need for clear lines of communication between different
levels of authority within an organization. The bureaucratic theory has been widely adopted
by many organizations, particularly those with large numbers of employees or complex
operations.
CHAPTER 2 Page 39
Characteristics of bureaucracy

• Clear chain of command; hierarchy and authority – each lower officer is under control
and supervision of a higher officer.

• Rules and regulations – equally applicable under similar circumstances of work,

accountability of every member is distinctly defined and assigned and strictly adhered to.

• Specialisation and competence/proficiency determine the structure – maximum possible

division of labour makes it possible to utilise all links of the organisation experts who are
fully responsible for the effective fulfilment of their duties.

• Selection and training based on merit – protected/safeguarded against arbitrary

dismissal, promotions correspond to seniority, merit or both; produce loyalty to the
organization.

• Relationships are impersonal – Impersonal/unemotional relationships between people,

rewards based on efficiency rather than nepotism (Favouriting for relations) or family
concentration, exclude personal considerations, emotions and prejudices.

Significance of bureaucratic theory

• Impartial application of rules

• Clearly defined authority
• Systematic procedures for work
• Specialisation and division of labour
• Leads to consistent employee behaviour.
• No overlapping / conflicting jobs
• Rightfully match people with work
• Organisations continue even if individuals leave as position is emphasised than person.

Limitations of bureaucratic theory

• Inflexible
• Slow communication
• Slow response to change
• Offer limited scope for creativity / freedom.
• Red tape / paper work
• As impersonal in nature, employees do not care about the organisation.
• No sense of belonging / devotion
• Treated like machines, not individuals.
• Routine work, therefore, resist changes
CHAPTER 2 Page 40
Key concepts / Assumptions in classical school

In brief, followings key assumptions/concepts have been made on classical school of

management thoughts.

• There is one best way for all organisations to be structured and operated.
• This structure should be based on the rules of law and legitimate managerial authority.
• Organisations are rational bodies.
• People are motivated to work by financial incentives / rewards.
• Human fallibility (being or likely to be wrong) at all levels of the organisation must be
removed.
• The most appropriate form of organisation design is that based on hierarchy and
horizontal division of labour.

The key features of the classical management theories

• Based upon economic rationality of all employees.

• Revolved around classical assumption of Adam Smith – ‘people are motivated by
economic incentives, and they go for the greater economic gain’.
• Concerned with structure of the organisations and working methods within
organisations.
• Advocated planning and principles of management
• Emphasized on purpose and structure.
• Job satisfactions and motivations were considered unimportant Concerned with
structure to increase efficiency.

2.7 Behavioural Approach to Management

The behavioural approach to management is a management style that focuses on the

behaviour of individuals in the workplace. It is based on the idea that understanding and
managing employee behaviour can improve productivity and efficiency.

This approach focuses on how people interact with each other, how they respond to different
situations, and how they can be motivated to work together effectively.

It also looks at how different personalities and attitudes can affect the overall performance
of a team or organization. The behavioural approach to management emphasizes
communication, collaboration, problem-solving, and decision-making skills. It also
encourages managers to be flexible in their approach to managing employees and to take into
account individual differences when making decisions.

Since the classical approach did not achieve sufficient production efficiency and workplace
harmony, the behavioural school emerged. Neo-classical/ behavioural theory deals with the
human factor. Elton Mayo pioneered the human relations to improve levels of productivity
and satisfaction.
CHAPTER 2 Page 41
This approach was first highlighted by the improvements known as ‘Hawthorne
Experiments’ conducted at Illinois plant of Western Electric Company between 1927 and
1932. Elton Mayo and Mary Parker Follett are the main contributors of human relations
approach. Neo-classical approach also causes ‘Behavioural Science Management’ which is a
further refinement of human relations approach.

(a) Human Relations Movement

(b) Human Resource Approach
(c) Behavioural Science Approach

a) Human relations movement

Professor Elton Mayo was associated with the famous Hawthorne studies; he had conducted
at the Hawthorne plant of the Western Electric Company in Chicago, U.S.A. During the period
1927 to 1932 this study was very important and very significant. He made great emphasis on
the worker, and not the human beings.

These studies were focused on people, their social relationships at work. The findings
revealed that man is a social being.
On invitation by the Western Electric Company, he had conducted several productivity tests
with varying lighting on a group of workers. The outcome of these studies was that individual
worker cannot be treated in isolation but must be seen as members of a group.

As a result of the said experiments, Hawthorne effect was identified, and it marked the
beginning of Behavioural management science.

Hawthorne effect recognised that the workers need to belong to a group and have status
within it is more important than monetary rewards or good physical working conditions. In
formal (or unofficial) groups at work exercise a strong influence over the behaviour of
workers. Supervisors and managers need to be aware of these social needs and to
accommodate for them, if workers are to cooperate with the official organisation, rather than
work against it.

b) Human resource approach

The human resource approach to organizational development focuses on the development

of people within an organization. This approach emphasizes the importance of developing
and maintaining a positive work environment, providing employees with opportunities for
growth and development, and creating a culture of trust and respect. It also involves creating
systems that support employee engagement, such as performance management systems,
training and development programs, and rewards and recognition programs. This approach
is based on the belief that people are the most important asset in any organization and that
their development is essential for organizational success.
CHAPTER 2 Page 42
The human resources approach, not to be confused with the human relations department
essentially combines both the classical and human relations approach in the fact that it
recognises that although individuals have needs and feelings that must be considered,
individual labour must not be forgotten when it comes to accomplishing organisational goals.

The human resources approach places an emphasis on the benefits that individual thoughts,
ideas, and discussions can bring to an organisation.
This approach essentially offers the best of both worlds by maximizing organisational
productivity and individual need satisfaction while emphasising the cognitive contributions
that employees can make to the organisation as a whole.

The human resources approach to communication can be a bit confusing to understand, but
with the help of Blake and Mouton’s managerial grid, it becomes a little less confusing.
The managerial grid is based on two behavioural dimensions:

• People Oriented (Concern for People): Essentially this is the degree that a leader
considers the needs of team members, their interests, and areas of personal development
when deciding the most effective way to accomplish a task.

• Task Oriented (Concern for Results): This is the degree to which a leader emphasises
concrete objectives, organisational efficiency, and high productivity when deciding how
to best accomplish a task.

c) Behavioural science approach

The behavioural scientists identified two new dimensions to the study of management and
organisations.

1. Self –actualising people: Abraham Maslow (Hierarchy of needs, 1908-1970) and Douglas
McGregor (Theory X & Theory Y, 1906-1964), wrote about ‘Self – actualising People”.
This thinking enlightens that how relationships can be beneficially arranged in
organizations. They pointed out that people wanted more than “instantaneous “pleasure
or rewards.

2. Behavioural scientists applied the methods of scientific investigation to the study of how
people behaved in organisations as whole entities.

2.8 Modern Management Theories

a) Management Science/Quantitative Management Approach

Management Science approach emphasises the use of mathematical models in making

managerial decisions and solving problems. Operational Research (OR) is an example for
this. The development of information and computer technology has vastly facilitated this.
Operation Research is a mathematical technique for the modelling, analysis, and solution of
management problems, also called management science.
CHAPTER 2 Page 43
During World War II, mathematicians, physicists, and other scientists joined together to
solve military problems. The quantitative school of management is a result of the

Research conducted during World War II. The quantitative approach to management
involves the use of quantitative techniques, such as statistics, information models, and
computer simulations, to improve decision making.

This school consists of several branches, described in the following sections. The
management science school emerged to treat the problems associated with global warfare.

Today, this view encourages managers to use mathematics, statistics, and other quantitative
techniques to make management decisions.

• Managers can use computer models to figure out the best way to do something - saving
both money and time. Managers use several science applications.

• Managers uses mathematical forecasting to make projections that are useful in the
planning process.

▪ Inventory modelling (EOQ: Economic Order Quantity) is used by the managers to

control inventories by mathematically establishing how and when to order a product.

▪ Queuing theory is another quantitative technique which is used by managers to

allocate service personnel or workstations to minimize customer waiting and service
cost.

▪ Linear Programming: Linear programming (LP) is one of the simplest ways to

perform optimisation. It helps you solve some very complex optimisation problems
by making a few simplifying assumptions. As an analyst you are bound to come across
applications and problems to be solved by Linear Programming.

Operations management is a branch of the quantitative approach to management. It

focuses on managing the process of transforming materials, labour, and capital into
useful goods and services. The resource inputs, or factors of production, include the
wide variety of raw materials, technologies, capital information, and people needed
to create finished products. The transformation process, in turn, is the actual set of
operations or activities through which various resources are utilised to produce
finished goods or services of value to customers or clients.

Operations management pays close attention to the demands of quality, customer

service, and competition giving close attention to the needs of customers: refereeing
to the economic fundamentals such as what do they want? Where do they want it?
When do they want it? Based on the answers to these questions, managers prioritise
resources and take any action necessary to meet customer expectations
CHAPTER 2 Page 44
b) Systems Approach

Contemporary system theorists find it helpful to analyse the effectiveness of organisations

according to the degree that they are open or closed. An organisation that interacts little with
its external environment (outside environment) and therefore receives little feedback from
it is called a closed system.

Systems theory has had a significant effect on management science and understanding
organisations. First, let’s look at “what is a system "A System is a set of elements in
interaction." (Bertalanffy1968). If one part of the system is removed, the nature of the system
is changed as well.

Hence, rather than dealing separately with the various segments of an organisation, the
system approach to Management views the organisation as a unified, purposeful system
composed of interrelated parts. This approach gives managers a way of looking at the
organisation as a whole and as a part of the larger, external environment.

Some key concepts of system approach: As exhibit in the figure 2.2 there are key concepts
which are important integral part of a system.

• System: is a set of elements in interaction.

• System Boundary: Each system has a boundary that separates it from its environment.
In a close system boundary is rigid and in an open system its environment is more flexible.

• Open system: a system that interacts with the environment to survive.

• Closed system: a system that does not interact with the environment to survive.
NB: in practice we do not come across closed systems. The classical school considered
organisations to be closed systems. It simplified problems for quantitative analysis. In
reality, all organisations are open systems.

• Entropy: a universal property of systems. This refers to the tendency to run down and die
if a system does not receive fresh inputs and energy from the environment. If inputs are
not received, eventually the system would cease to exist. This implies that the
organisations must monitor the environment and adjust to the changes and bring new
inputs continuously.

• Synergy: refers to the whole is greater than the sum of its parts. In organisational terms,
synergy means that as separate departments within an organisation cooperate and
interact, they become more productive than if each act in isolation.

• Feedback: It is the key to system controls. As operations of the system proceed,

information is fed back to the appropriate people, and work can be assessed and if
necessary corrected.
CHAPTER 2 Page 45

EXTERNAL
ENVIRONMENT

INPUT

(Resources) OUTPUT
Human Capital CONVERSION
Land and PROCESS Good &
Building Services
Equipment
Technology
Information

FEEDBACK

Figure 2.2: An open System

2.9 Contingency Approach (Situational Approach)

Classical perspective assumed a universalistic outlook, where management concepts were

thought to be universal. That is, whatever succeeded in one organisation would succeed in
another. But in business, each situation is considered to be distinct. This is called the case
view. There are no universal rules to be found.

Under this theory, the manager’s response depends on recognizing key contingencies in an
organisational situation. What succeeded in one situation may not succeed in another.
Managers must learn to identify important features, relate it to experience and knowledge
and fit most suitable solutions to each situation.

As Weber's bureaucracy and Taylor's scientific management had failed because they
neglected that management style and organisational structure were influenced by various
aspects of the environment: the contingency factors. There could not be "one best way" for
leadership or organisation.

Historically, contingency theory has sought to formulate broad generalisations about the
formal structures that are typically associated with or best fit the use of different
technologies. The perspective originated with the work of Joan Woodward (1958), who
argued that technologies directly determine differences in such organisational attributes as
span of control, centralisation of authority, and the formalisation of rules and procedures.
Some important contingencies for companies are as follows.

• Technology
• Suppliers and distributors
• Consumer interest groups
CHAPTER 2 Page 46
• Customers and competitors
• Government
• Unions
• Environment

Burns and Stalker identified the suitability of two types of organisations and under two (2)
types of environments,

Exhibit 2.1: Forms of Organisations under Contingency Approach

Environment Characteristics Type of Organization

Stable Static, little changes taking place Mechanistic/ Bureaucratic

Unstable /Volatile Rapidly changing environments Organic

2.10 Japanese Management Style

Japanese management culture is a management style based on and derived from Japanese
living and working philosophies or methods in Japan. It included concepts and philosophies
such as Just in Time, Kaizen and Total Quality Management Japanese Management style is
different from American/Western Management styles. It has following features.

• Life –Time employment

• Collective decision making
• Collective responsibility
• Slow evaluation and Promotion
• Non specialised career path
• High self-discipline
• Seniority based wages.
• Holistic concern for employee as a person
• Centralized management control
• Multiple location

2.11 Theory Z

Theory Z was developed by William Ouchi after making a comparative study of Japanese and
American management practices. This is a “Japanese Management" style popularised during
the Asian economic boom of the 1980s. Theory Z is an

Integrated model of motivation. Theory “Z” was developed by considering the strong features
of both Japanese management and American management theories which have been shown
in exhibit 2.2. Theory Z suggests that large complex organisations are human systems, and
their effectiveness depends on the quality of humanism used.
CHAPTER 2 Page 47
A type Z organisation has three (3) major features as follows.

1. Trust,
2. Subtlety
3. Intimacy

Mutual trust between members of an organisation reduces conflict and leads to team work.
Subtlety requires sensitivity towards others and yields higher productivity.
Intimacy implies concern, support and disciplined unselfishness.

The key features of Theory Z

• Mutual Trust:
According of Ouchi, trust, integrity and openness are essential ingredients of an effective
organisation. When trust and openness exist between employees, work groups, union and
management, conflict is reduced to the minimum and employees cooperate fully to achieve
the organisation’s objectives.

• Strong Bond between Organisation and Employees:

Several methods can be used to establish a strong bond between the enterprise and its
employees. Employees may be granted lifetime employment which leads to loyalty towards
the enterprise.
During adverse business conditions shareholders may forgo dividends to avoid
retrenchment of workers. Promotions may be slowed down.

• Employee Involvement:
Theory Z suggests that involvement of employees in related matters improves their
commitment and performance. Involvement implies meaningful participation of employees
in the decision-making process, particularly in matters directly affecting them. Such
participation generates a sense of responsibility and increases enthusiasm in the
implementation of decisions, Top manager’s serve as facilitators rather than decision-
makers.

• Integrated Organisation:
Under Theory Z, focus is on sharing of information and ‘resources rather than on chart,
divisions or any formal structure. An integrated organisation puts emphasis on job rotation
which improves understanding about interdependence of tasks. Such understanding leads to
group spirit.

• Coordination:
The leader’s role should be to coordinate the efforts of human beings. In order to develop
common culture and class feeling in the organisation, the leader must use the processes of
communication, debate and analysis.
CHAPTER 2 Page 48
• Informal Control System:
Organisational control system should be made informal. For this purpose, emphasis should
be on mutual trust and cooperation rather than on superior- subordinate relationships.

• Human Resource Development:

Managers should develop new skills among employees. Under Theory’ Z, potential of every
person is recognised, and attempts are made to develop and utilise it through job
enlargement, career planning, training, etc.

Limitations of Theory Z

The following limitations have been observed about the Theory Z:

• Provision of lifetime employment to employees to develop a strong bond between

organisation and employees may fail to motivate employees with higher level needs. It
merely provides job security and may fail to develop loyalty among employees.

• Participation of employees in the decision-making process is very difficult. Managers may

dislike participation as it may hurt their ego and freedom.

• Theory Z suggests organisation without any structure. But without structure there may
be chaos in the organisation as nobody will know who is responsible to whom.

• It may not be possible to develop a common culture in the organisation because people
differ in their attitudes, habits, languages, religions, customs, etc.

• Japan’s unique culture. Therefore, the theory may not be applicable in different cultures.

The following Exhibit 2.2 gives a comparative analysis between Japanese and American
/Western Management features.

c) Japanese Management

Japanese management features are often characterized by a hierarchical structure, with a

strong emphasis on loyalty and respect for authority. This is reflected in the way decisions
are made, with senior managers making most of the decisions and employees expected to
follow orders without question. Japanese managers also tend to be more focused on long-
term goals and strategies, rather than short-term objectives. They also place a strong
emphasis on team work and collaboration, with employees expected to work together to
achieve common goals.

British management features are typically more individualistic in nature, with less emphasis
placed on loyalty and respect for authority. Decisions are often made through consensus or
by majority vote, rather than by senior managers alone. British managers tend to be more
focused on short-term objectives and results, rather than long-term strategies.
CHAPTER 2 Page 49
They also place less emphasis on team work and collaboration, instead encouraging
employees to take initiative and make their own decisions.

Exhibit 2.2: Comparison of Japanese vs. American Management Features

Policy or Attitude Japanese Management American/WesternManagement

1. Workers Way to achieve Threat to management.
Suggestions continuous Collaborative.
improvement(Kaizen).
Hierarchical
2. Employment. Lifetime. Paternalistic. Revolving door. Workers laid offduring
No layoffs. Promote economic decline. Flexible Working
from within. Arrangements, Performance
Management
3. Training. Use cross training and Little commitment to training. De-skill
job rotation to develop so all are expendable. Use other firms
human resources as a training programs as leverage by
competitive weapon scavenging workers.
Understanding of the UK business
environment, Cultural awareness,
Communication skills, Leadership skills
4. Wages. Seniority based wages Performance based wages based on a
combination of factors, including the
employee's experience, qualifications,
and performance.
Individual decision-making
Worker participation
Participation in collaborative approach to decision-
5. expected to reach
decisions. making, involving multiple people in the
consensus decisions
process.
6. Managers Accessible to workers. Inaccessible. Aloof.
accessibility Wear same uniform. Offices separate from plant.
Open office policy in
plant
7. Control Implicit control Implicit control mechanisms
Mechanisms
8. Responsibility Collective Responsibility Individual Responsibility

9. Incentive Mostly monetary. Individual ego

10. Management Holistic concern for Segmented concern for employeeas an

Attitude employee as a person employee
CHAPTER 2 Page 50

2. 15 Excellence in Business Approach

Excellence in Business approach was born in 1978. It went on to appear in “In Search of
Excellence” by Peters and Waterman and was taken up as a basic tool by the global
management consultancy McKinsey &Company. Peters and Waterman identified the
following eight attributes which characterised the excellent, innovative companies in their
study.

A bias for action: meaning that although companies’ approach to decision making may be
analytical, they emphasise the importance of experiments. It is believed that too many
detailed analyses may be barriers against problem solving. Thus, their approaches to solve
problems and challenges are often experimental and dealt with immediately or in a relatively
short time through establishment of cross functional teams were also external partners like
customers or suppliers may participate.

Close to the customer: meaning that the successful companies really listen to the voice of
the customer and also use the voices as input for continuous improvements and new product
and service development.

Autonomy and entrepreneurship: meaning that all employees - not only people in R & D –
are expected to be creative and innovative in their daily jobs.

Productivity through people: meaning that people are expected to come up with ideas for
waste reductions and productivity growth by providing the proper framework i.e., respect,
involvement, and empowerment.

Hands-on, value driven: meaning that the company’s philosophy, vision and values are seen
as the main guideline and to be far more important than technological or economic resources
for the daily activities and challenges.

Stick to the knitting: meaning that the excellent companies stay close to the business they
know.

Simple form, lean staff: meaning that the underlying structural forms and systems in the
excellent companies are elegantly simple and top-level staffs are lean.

Simultaneous loose-tight properties: meaning that the excellent companies are both
centralized and decentralised. On the one hand for example they have pushed autonomy
down to the shop floor or product development teams, and on the other hand, they are fanatic
centralists around the few core values they hold dear.
CHAPTER 2 Page 51
Seven- S model
The Seven-S Model is a framework developed by McKinsey & Company to help organizations
analyse and understand their overall effectiveness. The model is based on seven
interdependent elements: strategy, structure, systems, shared values, style, staff, and skills.
The model suggests that these elements must be aligned for an organization to be successful.
The model can be used to assess an organization’s current state and identify areas for
improvement. It can also be used to evaluate the effectiveness of changes made within an
organization.

Seven – S model is an extension of excellence in business approach. While some models of

organisational effectiveness go in and out of fashion, one that has persisted is the McKinsey
7-S framework: The Seven S framework has been identified as a guide to become excellent in
business.

Figure 2.3: The Seven –S Model

Source: Stoner, Freeman, Gilbert “Management”, 6th Edition

As Figure 2.3 Illustrates, each of these factors is equally important and interacts with all the
other factors. Any number of circumstances may dictate which of the factors will be the
driving force in the execution of any particular strategy.

1. The Hard S’s

• Strategy: Actions a company plans in response to or anticipation of changes in its external

environment. Seven S model emphasises that, in practice, the development of strategies
poses less of a problem than their execution.

• Structure: Basis for specialisation and co-ordination influenced primarily by strategy and
by organisation size and diversity. The McKinsey consultants point out that in today’s
complex and ever-changing environment, a successful organisation may make temporary
structural change to cope with the changing environment.
CHAPTER 2 Page 52
• Systems: Formal and informal procedures that support the strategy and structure that
allow the organisation to function. System can overpower expressed strategies.

2. The Soft S’s

• Style / Culture: The culture of the organisation, consisting of two components:

Organisational Culture: the dominant values and beliefs, and norms, which develop over
time and become relatively enduring features of organisational life.

• Management Style: more a matter of what managers do than what they say, how do
company’s managers spend their time? What are they focusing attention on? Symbolism
– the creation and maintenance (or sometimes deconstruction) of meaning is a
fundamental responsibility of managers.

• Staff: The people/human resource management – processes used to develop managers,

socialisation processes, ways of shaping basic values of management cadre, ways of
introducing young recruits to the company, ways of helping to manage the careers of
employees.

• Skills: The distinctive competences – what the company does best, ways of expanding or
shifting competences.

• Shared Values / Superordinate Goals: Guiding concepts, fundamental ideas around which
a business is built – must be simple, usually stated at abstract level, have great meaning
inside the organisation even though outsiders may not see or understand them.

• The 7 S Models is a valuable tool to initiate change processes and to give them direction.
A helpful application is to determine the current state of each element and to compare
this with the ideal state. Based in this it is possible to develop action plans to achieve the
intended state.

2. 16 Contemporary Management Approach

• Change and Develop Management

• Creative and Innovative Management
• Supply Chain Management
• Total Quality Management
• Global Business Management
• Business Process Reengineering
• Knowledge Management
• Core Competencies
• Balanced Scorecard
CHAPTER 2 Page 53

KEY TERMS

Administrative Classical Approach

Management Linear Programming
Behavioural School Subtlety
Bureaucratic Approach Contingency Approach
Hawthorne Effect Organic
Industrial Revolution Super ordinate Goals
Inventory Control Charismatic Authority
Intimacy Productivity
Situational Approach Synergy
Strategy Feedback
Structure Subsystems Queuing theory
System Theory

Chapter Round-Up

The principles and concepts developed under, pre-scientific ear, classical era, Neo-
classical /Behavioural era, and Modern theories of management, have improved the
earlier thinking on management. Henry Fayol, Fredrick Winslow Taylor, Max Webber
propounded various theories of management.

Fredrick Winslow Taylor was known as the father of scientific management while Henry
Fayol was referred to as the father of modern scientific management, in recognition of
their immense contributions. With swift changes taking place in the business world,
employees at all levels are demanding more participation in decision making and more
joint control of working conditions.

Most of the theorists referred in this study have been practicing managers of consultants.
However Max Weber was a sociologist.

System approach, Contingency approach, Management Science and some of the famous
Japanese management theories such as Theory Z and Excellence approach have been
discussed under the modern management theories. Few contemporary management
practices have been listed in this text for the reference of students.
CHAPTER 2 Page 54

EXPERIENTIAL EXERCISES

True/False & Multiple-Choice Questions (MCQs)

1. Scientific management theory holds that the most efficient division of labour can best be
determined by intuitive knowledge.
True False

2. The system of task and authority relationships that control how employees use the
organization's resources to achieve the organization's goals is known as the
organizational structure.
True False

3. Max Weber described a system of administration designed to insure both efficiency and
effectiveness that is called "bureaucracy".
True False

4. According to Fayol's principles, workers should be given fewer job duties to perform and
should be encouraged to assume less responsibility for their work outcomes.
True False

5. The Human Relations movement arose prior to the development of Scientific

Management.
True False

6. When the tasks and authority associated with various positions in the organization are
clearly specified, it creates a scenario where:

a) employees are not sure of what is expected either of them or of each other.
b) employees are held strictly accountable for their actions.
c) managers face difficulty in tracking the assigned tasks.
d) confused employees create havoc within the formal hierarchy of authority.
e) order and discipline are undermined.

7. Henry Fayol believed that in order to increase the efficiency of the management process,
it is essential that:

a) authority should be concentrated at the top of the chain of command.

b) managers should discourage creativity in employees so that they stay focused on their
jobs.
c) there should be a greater number of levels in a managerial hierarchy.
d) managers should not have the right to give orders to employees; they should only give
polite instructions.
e) all organizational members are entitled to be treated with justice and respect.
CHAPTER 2 Page 55
8. In the context of management, rules refer to:

a) a reporting relationship in which an employee receives orders from only one superior.
b) the ability of an individual to act on his own accord without direction from a superior.
c) formal written instructions that specify actions to be taken under different
circumstances.
d) the performance gains that result when individuals and departments coordinate their
actions.
e) the methodical arrangement of positions to provide the organization with the greatest
benefit.

9. The degree of concentration of authority or its dispersal depends upon the situation and
circumstances of each enterprise. Principles give enough discretion to managers to adjust
according to the situation. Which Quality of Principles of management is highlighted
above?
a) General Guidelines
b) Universal applicability
c) Flexible
d) Contingent
e) Coordination

10. The idea that employees who stay with the organization for many years develop skills on
the job which can help the organization to become more efficient is consistent with
Fayol's principle of:
a) Equity
b) Order
c) Initiative
d) Discipline
e) Stability of tenure

Answers
1 False
2 True
3 True
4 False
5 False
6 b
7 e
8 c
9 c
10 e
CHAPTER 3 Page 56

The Process of Planning

Learning Outcomes

After successful completion of this chapter, you should be able to:

● Define the term ‘Planning’ and explain the relationship with other functions of
management.
● Understand its importance in managing organisations.
● Explain vision and mission, goals, objectives, and strategies.
● Explain the basic sequential steps involved in the planning process.
● Distinguish among different types of Planning hierarchy in organisations.
● Describe benefits and barriers of planning.
● Describe the planning models in the Dynamic Business Environment

3.1 Planning Process

Planning is the beginning of the process of management as described in previous chapters.

Before a manager organises, leads, and controls, he must have a plan in advance. Because
planning sets all other functions into action. It can be seen as the most important function of
management. Without planning, the other functions become mere activity, producing
nothing but chaos. It is by planning that managers of an organisation decide what to do?
When is it to be done? How is it to be done? Who is to do it? Therefore, decision making is an
integral part of planning.

Planning involves an imagined journey into the future, where all outcomes are uncertain and
where opportunity and problems co-exist. Master plans are like road maps. The most
important aspect of master planning is to provide a road map for future growth of the
organisation. Planning documents are not as specific as blueprints.

Rather they are flexible, living guidelines and policies, self – correcting and adaptable to
change. Planning is an inescapable part of all human activity. Because of its importance to
organisations, planning processors have become structural, in order to improve the
efficiency and effectiveness.
CHAPTER 3 Page 57
Different authors have given different definitions from time to time. Few main definitions of
planning are as follows:

Definitions of Planning

• Planning is the process of deciding the objectives or goal of the organisation and
preparing how to meet them (Cole, 1993)

• Planning is the process of establishing goals and a suitable course of action for achieving
those goals. (Stoner, Freeman, and Gilbert, 2013)

• Planning is the process of determining how the organisation can get where it wants to go
and what it will do to accomplish its objectives. (Samuel and Trevis, 2015)

• Business Dictionary defines planning process as the development of goals, strategies,

task lists and schedules required to achieve the objectives of a business. The planning
process is a fundamental function of management and should result in the best possible
degree of need satisfaction given the resources available.

• According to KOONTZ, “Planning is deciding in advance - what to do, when to do & how
to do. It bridges the gap from where we are & where we want to be”.

3.2 Effective Planning Process

Effective planning is important for any organisation to identify the organisation’s goals
clearly. The entire process of planning should be carried out in a systematic manner.
Planning is an intellectual process which an executive carries out before he/she does any job
with the help of the other people. The steps in the planning process are given below.

STEPS IN PLANNING PROCESS

1. Setting the future direction in terms of vision and mission

An organisation’s vision describes what the organisation hopes to become in the future.
Well-constructed visions clearly articulate an organisation’s aspirations. It ultimately
provides strategic direction alongside a company's mission statement.

2. Developing goals and objectives

Goals are a specific target, an end result or something to be desired. Objectives are a
measure of change in order to bring about the achievement of the goal.
Whereas a goal is a description of a destination, an objective is a measure of the progress
that is needed to get to the destination.

3. Environment Analysis and formulate SWOT (Strength, Weakness, Opportunities &

Threats)
SWOT Analysis is to help to assess both current as well as future potential for the
business.
CHAPTER 3 Page 58
4. Formulate strategies.
Strategy formulation is the process of using available knowledge to document the
intended direction of a business and the actionable steps to reach its goals. This process
is used for resource allocation, prioritisation, organisation-wide alignment, and
validation of business goals.

5. Select the best strategies.

A good strategy pays attention to current changes in the internal and external of your
organisation, and how all of this affects the future of the organisation. It does so that it
can make the best choices possible to allow the organisation to win. As such, skills in
strategy development are critical to the long-term success of your organisation.

6. Implementation
Strategy implementation is the process utilized to ensure that a strategic plan is executed.

3.3 Hierarchy of Plans

Those who would be assigned this work would also fit positions in the planning hierarchy,
which is something that needs to be taken into consideration.

Even the employee placed at the lowest level in the organisational hierarchy has to plan at
his level before embarking himself on the job. In the same way we have, a non- executive
clerical officer performing some clerical work will also have to plan his work. The next level
would be supervisors both Technical and Non-Technical, the Executive, the Assistant
Managers also similar to Executives, will have their plans, then next the supervisors and the
next level of managers, and so forth.

Thus, the organisational hierarchy will match with the planning hierarchy one has to
appreciate this aspect in relation to managerial skills, namely – the Conceptual Skills with
top managers would exhibit such managerial skills at the highest level.
CHAPTER 3 Page 59

Figure 3.1: Managerial Level of Planning

TYPES OF PLANS

On this foundation, modern corporate organisations should develop long-term objectives

that address a wide range of topics. They include market share, sales growth, skill
development, and corporate social responsibility. This ensures that the diverse interest
groups' needs are met satisfactorily. Another significant reason for this need is that, for most
organisations the owners are not the same people who happen to control the businesses in
practice. Even these diverse objectives need to be compatible so that it would successfully
operate in one specific direction. Hence, the organisational plans can be classified into the
following two main categories: Based on Level of Management and Based on Time or
Duration.

• Level of Management
a) Strategic Plan
b) Tactical Plan
c) Operational Plan

• Time or Duration
a) Long Term Plan
b) Medium Term Plan
c) Short Term Plan
CHAPTER 3 Page 60
LEVEL OF MANAGEMENT

A) STRATEGIC PLAN

Strategic plan defines the framework of the organisation’s vision and how the organisation
intends to make its vision a reality. Strategic Planning is an intellectual process characterised
by thinking before doing. It is an attempt on the part of the manager to anticipate the future
in order to achieve better performance. (Haimann, 1978).

• It is the determination of the long-term objectives of an enterprise, the action plan to be

adopted and the resources to be mobilised to achieve these goals.

• Since it is planning the direction of the company’s progress, it is done by the top
management of an organisation.

• It essentially focuses on planning for the coming years to take the organisation from
where it stands today to where it intends to be.

• The strategic plan must be forward looking, effective and flexible, with a focus on
accommodating future growth.

• These plans provide the framework and direction for lower-level planning.

b) TACTICAL PLANS

Tactical plans describe the tactics that the managers plan to adopt to achieve the objectives
set in the strategic plan.

• Tactical plans span a short time frame (usually less than 3 years) and are usually
developed by middle level managers.

• It details specific means or action plans to implement the strategic plan by units within
each division.

• Tactical plans entail detailing resource and work allocation among the subunits within
each division.

c) OPERATIONAL PLANS

Operational plans are short-term (less than a year) plans developed to create specific action
steps that support the strategic and tactical plans.

• They are usually developed by the manager to fulfil his or her job responsibilities.

• They are developed by supervisors, team leaders, and facilitators to support tactical
plans.
CHAPTER 3 Page 61
• They govern the day-to-day operations of an organization.

Operational plans can be –

• Standing plans − Drawn to cover issues that managers face repeatedly, e.g., policies,
procedures, rules.

• Single user plans − Prepared for single or exceptional situations or problems and are
normally discarded or replaced after one use, e.g., programs, projects, and budgets.

The Operational Plan provides what, who, when and how much:

What - the strategies and tasks that must be undertaken

Who - the persons who have responsibility of each of the strategies/tasks.

When - the timelines in which strategies/tasks must be completed

How much - the number of financial resources provided to complete each strategy.

ELEMENTS OF A CORPORATE PLAN

A corporate plan, like any strategic plan, usually contains the following elements:

a) Vision
• Definition of Vision
1. The desired or intended future state of an organisation.
2. A vision describes aspirations for the future – a destination for the organisation.
3. Vision serves the purpose of stating what an organisation wishes to achieve in the
long run.
4. Ultimate goal of an organisation can be defined as vision.

• Features of Vision
- Foresight or “power of seeing”.
- Focus on future (see the future & prepare for it)
- Serve as a concrete foundation for the organisation.
- Never change but it can be improved.

E.g., HP's vision is to create technology that makes life better for everyone, everywhere -
every person, every organisation, and every community around the globe. This motivates
us - inspires us - to do what we do. To make what we make. To invent, and to reinvent.
To engineer experiences that amaze. We won’t stop pushing ahead because you won’t
stop pushing ahead. You’re reinventing how you work. How you play. How you live. With
our technology, you’ll reinvent your world. This is our calling. This is a new HP.”
CHAPTER 3 Page 62
• A Vision Statement
This is where you define the objectives that will guide your internal decision making. A
strong vision statement can help you maintain your business focus and give a sense of
purpose to your business. A vision statement is sometimes called a picture of your
company in the future but it’s so much more than that. Your vision statement is your
inspiration, the framework for all your strategic planning. A vision statement may apply
to an entire company or to a single division of that company. Whether for all or part of an
organisation, the vision statement answers the question, “Where do we want to go?”

What you are doing when creating a vision statement is articulating your dreams and
hopes for your business. It reminds you of what you are trying to build. While a vision
statement doesn’t tell you how you’re going to get there, it does set the direction for your
business planning.

That’s why it’s important when crafting a vision statement to let go your imagination and
dare to dream – and why it’s important that a vision statement captures your passion.
Unlike the mission statement, a vision statement is for you and the other members of
your company, not for your customers or clients.

b) Mission

• Definitions of Mission

• Reason for existence

• Describes the organisations.

basic function in society, in terms of the products & services it produces for its clients”.

A company’s mission statement is typically focused on its present business scope- “who
we are, what we do & where we are now”. Mission statements broadly describe an
organisation’s present capabilities, customer focus, activities, and business makeup.

• A Mission Statement
While a vision is often inspirational, a mission statement should outline how you will
achieve your business plan. It should be short—one or two sentences—and Clearly state
what market(s) you intend to serve, the products or services you want to provide and
what makes you unique.

• Characteristics of a Mission Statement

- Defines current business activities.
- Highlights boundaries of current business
- Conveys
• Who we are,
• What we do
CHAPTER 3 Page 63
• Where we are now
• Company specific, not genetic
• So as to give a company its own identity
• Values & culture

Boundaries may be set in terms of geography, market, business method, product or any
other parameter that defines the nature of the organisation. Values are the basic, perhaps
unstated; beliefs of the people who work in the organisation. The values of the business
as a collective entity are in tune with the personal values of the individuals working for
it.

In conflicts of ethics, clashes between organisational & personal values are hard to
resolve if someone’s principles disagree with what the organisation wants.

c) Organisational Goals
A goal is a desired future circumstance or conditions that the organisation attempts to
realise (Etzioni, 1984). Goals are important because organisations exist for a purpose,
and goals define and state that purpose. Goals and objectives provide organisations with
a blueprint that determines a course of action and aids them in preparing for future
changes. A goal can be defined as a future state that an organisation or individual strives
to achieve. For each goal that an organisation sets, it also sets objectives. An objective is
a short-term target with measurable results. Without clearly defined goals and
objectives, organisations will have trouble coordinating activities and forecasting future
events. According to Barney and Griffin, organisational goals serve four basic functions:

• They provide guidance and direction,

• Facilitate planning.
• Motivate and inspire employees.
• Help organisations evaluate and control performance.

Organisational goals inform employees where the organisation is going and how it
plans to get there. When employees need to make difficult decisions, they can refer to
the organisation's goals for guidance. Goals promote planning to determine how goals
will be achieved.

d) Corporate Objectives
State your corporate objectives along with how these objectives will be measured. In this
way, your corporate plan will let employees and other stakeholders know where your
company is heading and what needs to be done.

OVERALL OBJECTIVES / PURPOSE OF THE ORGANISATION

Are stated in general terms and shall continue uninterrupted for a considerable period of
time. Such objectives are supplemented with statements, the conduct of the organisation to
achieve the purpose for which it was set-up.
CHAPTER 3 Page 64

The traditional approach in managing organisations had failed, and there was a need to
deviate from this situation. Hence the strategic approach was considered.

STRATEGIC OBJECTIVES

Such objectives are concerned with specific sections of the organisation, E g : Marketing,
Finance etc. They cover a minimum period of five years. An important feature of strategic
objectives is to have such objectives written in general terms. In the event they are written
specifically and quantifying, then they fall into operational or tactical objectives.

They are set for all major functions of an organisation and when considered together they
sum up for what the organisation would be doing in the future, for example the strategic
objective for the personnel function in an organisation could be indicated “as to ensure that
the needs of the organisation for adequate and suitable manpower are met for the next 5
years”.
In the same way the strategic objective for marketing function may be stated as to meet the
organisation’s needs for providing information and advice regarding,

• The markets, both the prevalent markets and the potential markets
• Its competitors, and
• Its economic environment

Therefore, it satisfies the need, why should the human resource department exist and also a
marketing department need to exist. Such strategic objectives would be formulated using the
SMART model.

It would be that to formulate strategic objectives, they should be

Specific (S): Is it can be well understood by those who are involved in?

Measurable (M): Is it quantified or at least suggests an indicator of progress?

Attainable (A): Is the goal attainable or feasible given the resources

available
Does the goal align with, support, or advance the
Relevant (R): organisation's vision, mission, values, principles, and
strategies?

Time-based (T): Does the goal have a target date for completion?
CHAPTER 3 Page 65

Peter Drucker believed that the survival of the company was at risk when managers
emphasised only the profit objective. He developed eight key areas in which managers
should set organisation objectives which are mentioned as follows:

• Market Standing: Management should set objectives indicating where it would like to be
in relation to its competitors.

• Innovation: Management should set objectives outlining its commitment to the

development of new methods of operation.

• Productivity: Management should set objectives outlining the target levels of production.

• Physical and Financial Resources: Management should set objectives regarding the use,
acquisition, and maintenance of capital and monetary resources.

• Profitability: Management should set objectives that specify the profit the company
would like to generate.

• Managerial Performance and Development: Management should set objectives that

specify rates of worker productivity as well as desirable attitudes for workers to possess.

• Worker Performance and Attitude: Management should set objectives that specify rates
of worker productivity as well as desirable attitudes for workers to possess.

• Public Responsibility: Management should set objectives that indicate the company’s
responsibilities to its customers and society and the extent to which the company intends
to live up to those responsibilities.

e) Strategy

Strategy can be seen as a means of mobilising an organisation to get to its future.

DEFINITION OF STRATEGY
According to the business Dictionary, the following definitions can be given for a Strategy.
• A strategy is a method or plan chosen to bring about a desired future, such as
achievement of a goal or solution to a problem.

• A strategy is an art and science of planning and marshalling resources for their most
efficient and effective use. The term is derived from the Greek word for general ship or
leading an army.

A strategy is a comprehensive plan for accomplishing an organisation’s goals. (Griffin, 1998)

CHAPTER 3 Page 66

It is important to know the distinction between the terms, strategy, and tactics. When
probing at online definitions and dictionaries, they often share many of the same
Characteristics, making them difficult to differentiate. Rather than debate Greek military
etymology, Sun Tzu philosophy, or latest publications from the Harvard Business Press,
here’s a simple way to look at strategy and tactics by their associated.

Exhibit 3.1: The Difference between Strategy and Tactic

Strategy
Purpose To identify clear broader goals
that advances the overall
organisation and organises
resources.
Roles Individuals who influence
resources in the organisation.
They understand how a set of
tactics work together to achieve
goals.
Tactics
To utilise specific resources to
achieve sub-goals that support
the defined mission.
Specific domain experts that
manoeuvre limited resources
into actions to achieve a set of
goals.

Held accountable for Held accountable resources

Accountability organisation. To overall health
All the resources within the
Scope
organisations, as well as broader
market conditions including
competitors, customers, and
economy. Yet don’t overthink it,
to paraphrase my business
partner Charlene Li, “Strategy is
often what you don’t do”.
Duration Long Term, changes infrequently.
Methods Uses experience, research,
analysis, thinking, then
communication.
Outputs Produces clear organisational
goals, plans, maps, guideposts,
and key performance
measurements.
assigned to specific
A subset of resources used in a
plan or process. Tactics are
often specific tactics with
limited resources to achieve
broader goals.
Shorter Term, flexible to
specific market conditions.
Uses experiences, best
practices, plans, processes, and
teams.
Produces clear deliverables and
outputs using people, tools,
time.

(http://www.web-strategist.com/blog/2013/01/14)
CHAPTER 3 Page 67

Time or Duration

• Short-term plans usually involve processes that show results within a year.

• Medium-term plans take several years to achieve.

• Long-term plans include the overall goals of the company set four or five years in the
future and usually are based on reaching the medium-term targets.

3.4 Contingency Plans

Planning is an activity which involves decisions about ends, that is organisational objectives,
means (plans), the conduct (the policies) and results (the outcome).
It also an activity which takes place against the background of:

• The organisation’s external environment and

• The organisation’s internal strengths and weaknesses

Planning we know can be short term, long term and strategic. There can also be plans to
cover the immediate future to arrest a crisis situation. The contingency plans are those that
would apply almost immediately. Such plans would help us to predict the future from a given
situation arising from the present operations. Contingency Plans define company responses
to be taken in the case of emergencies, setbacks, or unexpected conditions. In order to
develop a contingency plan, managers must identify important factors in the environment,
such as political, social, unstable economy, new technological development, increase in cost
of supply, declining markets etc.

3.5 Benefit of Planning

Planning is one of the crucial functions of management. It is basic to all other functions of
management. Planning is important for the following reasons:

• Attention on Objectives: Planning helps in clearly laying down objectives of the

organisation.

• Minimising Uncertainties: Planning is always done for the future. Planning is an effort
to foresee the future and plan things in the best possible way. Planning certainly
minimises future uncertainties.

• Better Utilisation of Resources: there will be better utilisation of resources of the

business. All the resources are first identified and then operations are planned. All
resources are put to best possible uses.

• Economy in Operations: The method of trial and error is avoided, and resources are not
wasted in making choices. The economy is possible in all departments whether
CHAPTER 3 Page 68
production, sales, purchases, finances, etc.
• Better Coordination: The objectives of the organisation being common, all efforts are
made to achieve these objectives by a concerted effort of all. The duplication in efforts is
avoided.

• Encourages Innovations and Creativity: A better planning system should encourage

managers to devise new ways of doing things. It helps innovative and creative thinking
among managers because they will think of many new things while planning.

• Management by Exception Possible: Management by exception means that

management should not be involved in each and every activity. If the things are going
well then there should be nothing to worry, and management should intervene only
when things are not going as per planning.

• Facilitates Control: Planning and control are inseparable. Planning helps in setting
objectives and laying down performance standards. This will enable the management to
check the performance of subordinates. The deviations in performance can be rectified
at the earliest by taking remedial measures.

• Facilitates Delegation: Under the planning process, delegation of powers is facilitated.

The goals of different persons are fixed. They will be requiring requisite authority for
getting the things done.

3.6 Barriers of Planning

Many barriers can inhibit effective planning. In order for plans to work and to achieve the
required results, managers must identify any potential barriers and also work to overcome
these. Some common barriers that inhibit successful planning are as follows:

• Lack of Leadership
• Negative attitude and culture towards planning
• Uncertainties in the environment
• Lack of environmental sensitivity
• Lack of knowledge and skills in planning.
• Lack of experienced personnel.
• Lack of creativity and imagination
• Lack of corporation
• Lack of top management commitment
• Lack of facilities and resources.
• Lack of reliable data
• Lack of time
• Expensive process
• External factors may reduce utility.

Source: University of J’apura, 2015/16

CHAPTER 3 Page 69

3.7 Planning Models in Dynamic Business Environment

• Dynamic environments are agent systems which allow agents to enter, leave and change
at runtime. How can managers plan effectively: -

• (Managers) should develop plans (specific but flexible).

• (Managers) need to recognize that planning is an ongoing process.

• Need to stay alert to environmental changes (that may impact implementation and
respond as needed).

• Making the organisational hierarchy flatter to effectively plan in dynamic environments.

• Teaching their employees how to set goals and to plan and then trust them to do it.

• Looking no further than Bangalore, India, to find a company that effectively understands
this.

KEY TERMS

Action Plan Mission Statement

Accountability Measurable
Attainable Productivity
Contingency plane Relevant
Corporate Scope
Creative Specific
Inescapable Strategic plan
Innovative Strategies
Strategies Tactical plan
Technical Time Based
Vision
CHAPTER 3 Page 70

Chapter Round-Up

This chapter includes the process of planning, various definitions of planning, the effective
planning process as well as the steps in the planning process, hierarchy of plans.

And subsequently, organisational plans can be classified into the two main categories
which are namely Based on Level of Management and Based on Time or Duration. Vision,
mission, organisational goals, are considered as the elements of a corporate plan. Strategic
objectives would be formulated using the SMART model.

Finally, this chapter includes the meaning of strategy, and what the differences between
the strategy and a tactic and also benefits and barriers of planning and planning models
in dynamic business environment.

EXPERIENTIAL EXERCISES

Multiple Choice Questions (MCQs)

1) _______ describes one of the concepts that is crucial for the smooth running of an
organisation. Name that concepts.

a) Planning
b) Management
c) None of the options are correct
d) Coordination

2) What is the term for the action in which managers at an organisation analyse the current
situation of their organisation and then develop plans to accomplish its mission and
achieve its goals?

a) Synergy planning
b) Strategy formulation
c) Functional planning
d) SWOT analysis

3) What does the acronym SMART stand for?

a) Suitable, measurable, actionable, rewarded, and timely

b) Specific, measurable, actionable, resourced, and timely
c) Standardised, measurable, achievable, rewarded, and timely
d) Specific, measurable, achievable, rewarded, and timely
CHAPTER 3 Page 71
4) What one of the following is not a key management skill in planning?

a) Conceptual skills
b) Analytical skills
c) IT and computing skills
d) Communication skills

5) Based on importance, planning can be ______.

a) Formal and Informal

b) Proactive and Reactive
c) Long-term and Short-term
d) Strategic and Operational

6) What are the three interpersonal roles of managers?

a) Figurehead, leader, and liaison

b) Spokesperson, leader, coordinator
c) Director, coordinator, disseminator
d) Communicator, organiser, spokesperson

7) Which one of the following is the limitation of planning?

a) Resistance to Change
b) Slower changes
c) Flexibility
d) Cost effective.

8) At what level of an organisation does a corporate manager operate?

a) Functional
b) Operational
c) Middle level
d) Top level

9) An organisation's general expression of its overall purpose is known as its:

a) objective
b) vision
c) goal
d) mission
CHAPTER 3 Page 72
10)Which of the following provides an answer to these questions: What is our business? Who
are our customers? What do our customers value? What should our business be?

a) objectives and goals

b) a mission statements.
c) a business portfolio
d) marketing and functional strategies
e) operational strategies

Answers

1 a
2 b
3 d
4 c
5 d
6 a
7 a
8 d
9 d
10 b
CHAPTER 4 Page 73

Organising

Learning Outcomes

After successful completion of this chapter, you should be able to:

• Describe the nature of organising as a function of management.

• Discuss the organisational design, structure, organisational chart, purposes and
the implications of organisational structure and the types of structures.
• Discuss elements of Organising.
• Illustrate different designs of organisations.
• Describe the development, implementation, and evaluation of employee
recruitment, selection, and retention plans and processes.

4.1 Organising

Organising is an important function of management which follows planning. Several

definitions which have been defined by scholars have been considered to understand (the
conceptual framework of) Organising.

Organising is a crucial managerial role. Scholarly definitions of a number of terms have been
taken into consideration when attempting to comprehend organising. Several definitions
have been identified by researchers that have been reviewed to understand “what is
Organisation?”

• Organising is the process of arranging and allocating work, authority, and resources
among an organisation’s members so they can achieve the organisation’s goal. (Stoner,
Freeman & Gilbert, 2013)

• Organising is the process of establishing orderly uses for resources within the
management system. (Samuel and Trevis, 2015)

• Organising is the deployment of organisational resources to achieve strategic goals. (Daft,

2017)
CHAPTER 4 Page 74
• Organising is the process of identifying and grouping the work to be performed, defining
and delegating responsibility and authority, and establishing relationships for the
purpose of enabling people to work most effectively together in accomplishing
objectives”. – Louis Allen.

Hence, organising can be viewed as the activities to collect and configure resources in order
to implement plans in a highly effective and efficient way in order to achieve the
organisational goals and objectives.

a) The Organising Process

The organising process comprises five main steps which should be continually repeated in
order to help the managers to reform the existing organisation.

• Reflect of plans and objectives

• Establish major task.
• Divide major task into subtask.
• Allocate resources and directive for subtask.
• Evaluate results of implemented organising strategy.

Organising is significant since it incorporates the method that was discussed in the previous
chapter. The effectiveness of a strategy is determined by organisational structure, which is
an impotent tool for achieving strategic goals.

b) Organisation Structure

An organisational hierarchy is defined by its organisational structure. Each job is identified,

along with its purpose and organisational reporting structure. This structure is developed to
establish how an organisation operates and assists an organisation in obtaining its goals to
allow for future growth.
Organisational Structure is defined as (Daft, 2017):

• The set of formal tasks assigned to individuals and departments.

• Formal reporting relationships, including line of authority, decision responsibility,

number of hierarchical levels, and span of control.

• The design of systems to ensure effective coordination of employees across departments.

When an Organisation develops in a simple path for some time, it increases beyond a certain
point and at a time, when the owners cannot exercise direct control, some degree of
differentiation and specialisation is inevitable.
Therefore, it becomes necessary to take steps to ensure sufficient co-ordination of the newly
arranged structures. Organisations are faced with the issues to identify the appropriate
structure that will best ensure the success of the enterprise.
CHAPTER 4 Page 75
A certain amount of diversification and specialisation is unavoidable when an organisation
develops in a straightforward manner for a while, extends past a certain point, and at a time
when the owners cannot exert direct supervision. As a result, action must be taken to
guarantee that the newly ordered structures are sufficiently coordinated. The challenge for
organisations is to decide which structure is optimal for ensuring the enterprise's success.
It becomes necessary for us to address the following questions, in this regard.

• To what extent specialisation is possible.

• What degree of standardisation should be imposed on behaviour and methods and what
degree of empowerment should be allowed to individual job holders?
• How much formality should be encouraged?
• To what extent decision making should be arranged? Centralised or decentralised?

There is no perfect answer to all these questions. However, there can be viable options, when
combined, will provide an optimum design.

Factors Influencing Organisational Structures

Organisations are living organisms that react to stimuli in response to environmental
changes. The political, economic, social, and technical variables all play a role in how the
environment changes.

Enviroment

Stratgy Organizational Human

Structure Resources

Technology

Figure 4.1: Factors Influencing the Organisational Structure

• Environment:
If the environment changes quickly, managers will have to face more challenges and more
issues. So as to have the structure more adaptable, the design has to be more compatible, to
adjust to fast changes in the environment. Generally, there is a need to decentralise authority.
In general, authority should be decentralised.
CHAPTER 4 Page 76
• Strategy:
To meet different strategies, the structures differ to suit the situation. A differentiation
approach needs an adaptable structure low-cost strategy will promote more formal
structures. E.g. A low-cost strategy will favour more formal structures. Increased vertical
integration and diversification also will necessitate an adaptable structure.

• Technology:
This generally refers to a combination of skills, knowledge, tools, equipment, computers and
machines used in the organisation. More complex technology makes it difficult for managers
to regulate the organisation. Technology can be assessed by,

a) Task variety includes fresh problems and challenges a manager may have to face.

b) Task analysability processed or programmed solutions, available to a manager to solve

problems.

Technology and People: It is observed when technology in connection to people is

taken into account while designing organisational structures.

• Small Batch Technology – is to produce a small quantity of one kind of product.

• Mass Production Technology – automation makes provision of high volume of standard
products.
• Continuous Process Technology – is a situation where the process is mechanised and/or
automatic machines.

Workers are expected to be prepared to react to unexpected problems quickly. It is

desired to have a flexible structure.

• Human Resource Aspect:

Is also an essential aspect which will determine the types of the organisational structure. The
structure should be flexible to make effective teams. However, it is necessary for us to
provide highly skilled workers to be in working teams, such a structure is adaptable.

The process of developing organisation structure is organisation design. The organisation

chart is an aid to visualise structure. This chart must be described before analysing the main
organisation structure elements.

c) The Organisational Chart

An organisational chart is a diagram that shows how the entity is structured inside. The most
typical visual representation of an organisation's structure is an organisational chart. It
describes the connections among people within a company. An organisational chart can be
used to show an organisation's structure overall or broken down by department, unit, and
official channels of communication.
CHAPTER 4 Page 77
The main characteristics of an organisation chart are as follows:

• It is a graphic presentation.
• It shows at a glance the lines of authority and responsibility.
• It serves as a blueprint of the structure of the organisation and helps to clarify the
allocation of duties.
• It represents the formal organisation structure.
• It shows clearly the various positions in the organisation and how they relate to one
another.
• It indicates the channels of communication.

There are different types of Organisation Charts those can be classified in the
following types:

• Vertical Charts
It displays the vertical lines of command running from top to bottom. The highest position is
displayed at the top, followed by the next highest position. The lowest position is placed at
the bottom and the procedure moves up to it. This graph is also referred to as a "Top-to-
Down Chart." This is the most common chart used in the organisations. This is directly
related to the concept of the scalar relationship that is the chain of command.

Chain of Command: Unbroken line of authority ultimately linking each individual with
the top.

• Horizontal Chart
In this type of organisation chart the highest position is placed horizontally at the extreme
left and the lowest position is shown at the extreme right. In between the two, each
successive subordinate position goes on from left to right. It is also known as the ‘Left-to-
Right Chart’.

• Circular
In such types of organisation charts, the highest position is placed at the middle in the
innermost circle and the lowest position at the outermost circle. In between these two
positions, each successive subordinate position extends in all directions outward from the
centre. The minimum distance of a position from the centre indicates the degree of closeness
to the top position. Such a chart can exhibit the personal relation-ships of the executives in a
better way.

Advantages of Organisation Chart

• Clarifies the position and relationship.
• Shows the line of authority and responsibility.
• Avoids misunderstanding.
CHAPTER 4 Page 78
Disadvantages of Organisation Chart

• The organisation is dynamic in its nature, whereas its charts are static.
• Ignores the informal relationship.
• Organisation chart is, virtually, rigid and inflexibility in its nature.

d) Organisational Design

Organisational design is a step-by-step methodology which identifies dysfunctional aspects

of work flow, procedures, structures, and systems, realigns them to fit current business
realities/goals and then develops plans to implement the new changes. The process focuses
on improving both the technical and people side of the business. It creates a way to
implement strategies and plans to achieve organisational objectives. The foundation of
organisational designing goes back to the bureaucratic model and the behavioural model
which has identified two organisational design alternatives such as Mechanistic
Organisational Design and Organic Organisational Design.

4.2 Factors in Designing an Organisation and Its Implications on Organisational Behaviour

The PESTEL Model's environmental elements have an impact on organisations.

Organisational behaviour is influenced by Political, Economic, Social, Technological,
Environmental and Legal factors.

The organisation needs to adapt to changes in the environment. The influences of Political,
Economic, Social, Environmental and Technological aspects will effect changes. The effects
of these changes may influence how an organisation behaves. With the right and required
alterations, the organismic feature displayed by the organisation can be beneficial. The other
aspects, including technology, strategy, and human resources, will also have an impact on
organisational behaviour.

A greater and planned effect is possible with the human resource component influencing the
behaviour of our organisations. Such behaviours will influence organisations. The factor,
strategy, will have its effect on organisational behaviour deviating from the traditional or
conventional style. The organisation will be influenced with the changes desired and
productively.

The component, technology, also has tremendous influence on organisations with different
forms of technology contributing to such changes. The impact of information communication
technology has made organisations receptive to new trends. Thus, complex technology will
make it hard for managers to regulate the organisation. Thus, it is evident that the
implications can be analysed in terms of such changes.
CHAPTER 4 Page 79

4.3 Behavioural Aspects in Relation to Organisational Design – Division of Labour

Since Organisations have different characters and needs, it would not be possible to identify
an ideal structure that would fulfil their identity and diversified needs. Accordingly, on, each
and every organisational structure must suit the situation and be optimally needful in
meeting the organisational goals. Good organisational design is a function of a number of
components including the environmental technology, size of the company, and the
philosophy of the central management.

The classical Design - is lightly structured in a hierarchical process of superior and

subordinates in the form of a pyramid. It is a system of complex mechanisms, rules,
regulations and procedures that are highly disciplinary, in nature, and the individual
responsibilities are explained by their positions in the hierarchy.

The behavioural scientists have critically attacked this set-up, suggesting that there should
be less emphasis on hierarchy, and more participation of lower ranks in the decision-making
process.

Behaviourists have criticised this arrangement, suggesting that there should be less
emphasis on hierarchy and more involvement of the lower levels in decision-making. The
structure they say should be less formal and more democratic. The most recently developed
organic structure (T.Burns & G.Stalker, 1961) emphasises much more informal situations
with a minimum of formal division of duties, while the classical bureaucratic structure may
be suitable, the organic structure seems to be more suitable during the times of dynamic and
rapid technological changes. The characteristics of the organic structure are as follows:

Exhibit 4.1: Mechanistic Structure vs. Organic Structure

Characteristics Mechanistic Organic
Specialisation Individual Joint Specialisation:
specialisation:
Employees work together and
Employees work
coordinate tasks
separately and specialise
in one task
Simple integrating Complex integrating
Hierarchy mechanisms: mechanisms:
Hierarchy of authority task forces and teams are
well- defined primary integrating mechanisms

Decision Centralisation: Decentralisation:

Making/Authority Decision-making is kept Authority to control tasks is
as high as possible. delegated.
Communication flow: Communication Flow:
vertical. lateral.
CHAPTER 4 Page 80
Operating Procedure Standardisation: Mutual Adjustment:
Extensive use made of Face-to-face contact for
rules & Standard. coordination.

Operating Procedures Work process tends to be

unpredictable
Informal Status Informal status in Informal status based on
organisation based on perceived brilliance
size of empire
Communication Much written Much verbal communication
communication

Network Organisation is a Organisation is a network of

network of positions, persons or teams. People work
Corresponding to tasks. in different capacities
Typically, each person simultaneously and over time
corresponds to one task

a) Types of Organisation Designs

Organisation designs fall into two categories:

• Traditional designs: These designs include:

i) Simple structure,
ii) Functional structure
iii) Geographical Structure

• Contemporary Designs: These designs include:

i) Team structure,
ii) Matrix structure,
iii)Hybrid structure,
iv) Boundary less Organisation,
v) Emerging organisations

• Traditional Designs
i) Simple Structure:
A simple design is explained as a design with low departmentalisation, wide spans of
control, centralised authority, and little formalisation. This type of design is very
common in small startup businesses. For example, when there are few employees, the
owner often manages the entire operation and has complete authority. Employees
frequently work across the entire company and don't just concentrate on one task,
therefore departmentalization is rarely, if ever, achieved. This kind of design typically
lacks standardised policies and procedures. The structure typically emerges out of the
simple structure as the organisation starts to expand and becomes more sophisticated.
CHAPTER 4 Page 81
ii) Functional Structure:
A functional structure is defined as a design that groups similar or related occupational
specialties together. It is the functional approach to departmentalisation applied to the
entire organisation.

E.g.: Marketing, Sales, Production, Finance, Human Resource in organisations. It

becomes necessary for each such function to embody all employees performing similar
work, under their specialised area.

E.g.: In organisations, for instance, marketing, production, finance, and human

resources. Every person who performs a similar task falls under the purview of that
role, so it becomes essential.

President

R&D Finance Markting Division

Manager Manager Manager Product Z

Line
Design Accounting Sales
Supervisors

Customer Production
Development Purchasing
Service Teams

Testing Finance Distribution

Figure 4.2: Functional Structure

Sequence is:

• Tasks are grouped together into specific jobs.

• Jobs are grouped into functions.
• A Collection of functions working together - makes a division.

In designing jobs, the tasks are grouped into specific jobs. The purpose of job designing
results in a division of labour, between workers who are effective and efficient. Once the
tasks are grouped into jobs, the managers must decide how to group jobs together.

iii) Geographical Structure:

Structure based primarily on territory departmentalises according to the place where
the work is being done or the geographic markets on which the management is
focusing.
CHAPTER 4 Page 82
Businesses that have locations in several regions or geographic areas benefit from
having a geographical organisational structure. This form of structure enables
businesses to have a reporting and functional system across multiple locations.

Geography-based organisational Design

Figure 4.3: Geographical Structure

Sequence is:

• Tasks are grouped together into specific jobs.

• Jobs are grouped into Geographical area.
• Contemporary Designs

i) Team Structure:

A team structure is a design in which an organisation is made up of teams, and each team
works towards a common goal. Team structure refers to the extent to which the division of
labour (specialisation), leadership roles within the team (hierarchy), work routines,
priorities and procedures (formalisation) are clearly defined and understood by the team
members (Bunderson and Boumgarden, 2010).

Since the organisation is made up of groups to perform the functions of the company, teams
must perform well because they are held accountable for their performance. In a team
structured organisation there is no hierarchy or chain of command. Therefore, teams can
work the way they want to, and figure out the most effective and efficient way to perform
their tasks. Teams are given the power to be as innovative as they want. Some teams may
have a group leader who is in charge of the group.

ii) Matrix Structure:

A matrix structure is one in which experts from several functional departments are given
responsibility for one or more projects. In a company, several projects could be active at
once.
CHAPTER 4 Page 83
A project manager is designated for any particular project, and it is his responsibility to
allocate all the resources required to complete the project. In a matrix structure those
resources include the different functions of the organisation such as operations, accounting,
sales, marketing, engineering, and human resources.

Basically, the project manager has to gather specialists from each function in order to work
on a project and complete it successfully. In this structure there are two managers, the
project manager and the department or functional manager.

Matrix & Product Teams

Matrix Structures
Managers group people function and product teams simultaneously.
• Result in a complex network of reporting relationships.
• Very flexible and can respond rapidly to change.
• Each employee has two bosses, which can cause problems.
• Denotes two bosses for the employees of the team.

Product Team Structure

No Two - way reporting and the members are permanently assigned to the team and
empowered to bring products to market.

Figure 4.4 Matrix and Product Teams

iii) Hybrid Structure:

A structure adopting both functional and divisional structures at the same management
levels. A hybrid organisation is a body that operates in both the public sector and the private
sector, simultaneously fulfilling public duties and developing commercial market activities.
As a result, the hybrid organisation becomes a mixture of both a part of government and a
private corporation.
CHAPTER 4 Page 84
This especially leads to value pluralism: managers and workers in hybrid settings, as well as
the politicians steering and controlling them, have to combine public and private interests,
values, cultural orientations and syndromes.

The hybrid organisation is not only a mix of public and private organisation, it is a wider
organisational concept based on the postmodern perspective of organisation theory.

Examples include universities that provide consultancy services on a commercial basis,

social housing providers that compete with commercial property developers, public schools
that offer training for companies and hospitals that provide private medical check-ups.

A hybrid organisation combines components, value systems, and action logics (such as
generating profit and having a positive social impact) from several societal sectors, including
the public, private, and non-profit sectors. Hybrid institutions and governance provide a
broader definition of hybridity.

Previous studies stated that organisations that operate in both the public and private
domains have the following characteristics:

1. Shared ownership
2. Goal incongruence and different institutional logics in the same organisation
3. Variety in the sources of financing
4. Differentiated forms of economic and social control

Hybrid organisations have strong as well as weak points. The combination of public duties
and commercial activities can have significant synergy effects. But there is also the risk of
unfair competition and that market activities could oust public activities.

CEO

Vice President Vice Vice President

Desktop President Paim-Size
Computer Printer Computer

Marketing Human
Operations
and Sales Resources

Training and
International Domestic Manufacturing Logistics Compenention
Development

Figure 4.5: Hybrid Structure

CHAPTER 4 Page 85
iv) Boundaryless Organisation:

A boundary less organisation is one in which its design is not defined by, or limited to, the
horizontal, vertical, or external boundaries imposed by a predefined structure. In other
words, it is an unstructured design. A boundaryless organisation is an organisation that
actively removes boundaries to innovation, meaning it has less hierarchy and functional
separation and is more integrated.
This structure is much more flexible because there are no boundaries to deal with such as
chain of command, departmentalization, and organisational hierarchy.

Instead of having departments, companies have used the team approach. In order to
eliminate boundaries managers may use virtual, modular, or network organisational
structures. In a virtual organisation work is outsourced when necessary. There are a small
number of permanent employees; however, specialists are hired when a situation arises.
Examples of this would be subcontractors or freelancers. A modular organisation is one in
which manufacturing is the business.

This type of organisation has work done outside of the organisation from different suppliers.
Each supplier produces a specific piece of the final product. When all the pieces are done, the
organisation then assembles the final product. A network organisation is one in which
organisations outsource their major business functions in order to focus more on what they
are in business to do.

v) Emerging Organisational Structures

The new trend would be to have:

• Virtual Organisations
Where there is no physical arrangement to have a traditional office arrangement and
associated infrastructure facilities. A person who has communication facilities and computer
facilities will operate a virtual organisation.

• Flex-time Arrangement
A facility for workers to perform their responsibility by being available, not
necessarily/automatically during the usual hours, it generally includes the core time. With
more liberalisation and less formalisation, strong relationships will replace formal
structures; delegation of power and trust and with empowerment fruitful performance is
guaranteed.

The new trend is that the organisation and organisational structures of the sort are being
replaced by more workable situations, and with less rules and less regulations.

However, a new type of organisation is taking place, it is less formal with a minimum of
formal division of duties. Such a situation is referred to as ‘organic structure’ as described.
CHAPTER 4 Page 86

4.4 Elements of Organising

The organising comprises the following six key elements:

a) Designing jobs:

Identifying different approaches to job design encourages efficiency, productivity and caters
to individual needs. There are several different options such as Job Rotation, Job
Enlargement, and Job Enrichment.

• Job Rotation is a management approach where employees are shifted between two or
more assignments or jobs at regular intervals of time in order to expose them to all
verticals of an organisation.

• Job Enlargement means increasing the scope of employees’ duties and responsibilities.

• Job Enrichment means giving an employee additional responsibility previously reserved

for his manager or other higher-ranking positions. In essence, an enriched job gives the
employee more self-management in his duties.

b) Departmentalisation

As more jobs become specialised, one manager cannot manage them effectively. Then jobs
should be combined into groups called departments. Departmentalisation is grouping
individuals into units and units into departments to achieve organisational goals. Different
patterns of departmentalisation are called organisation designs (4.6). Four common
departmentalisation patterns are Functional, Divisional (Geographically, Customer,
process), Hybrid and Matrix.

The managers must focus on vertical and horizontal coordination to make the structure
effective.

c) Reporting relationships

An organisational chart usually illustrates the organisation’s structure by using boxes and
vertical and horizontal lines to connect the boxes. The vertical lines demonstrate the
reporting relationships of supervisors and their reporting staff. The lateral or horizontal
lines indicate a working relationship. When establishing the relationship among the
positions, the concept of span of control plays an important role.

d) Span of Control

The concept, span of control, is one principle amongst the 14 Management Principles put
forward by Henry Fayol and L.F. Urwick in 1952. They believed that the span of control
should not exceed 5 or 6 subordinates, Urwick was of the view that it is the complexity of
work that determines the span, when the work undertaken by the subordinates is relatively
self-contained, and then larger spans are possible.
CHAPTER 4 Page 87
It is the number of employees reporting directly to one person. In practice spans can vary
between one individual to forty persons, who are directly supervised. However, it has been
practically experienced, that the most likely range is between 3 persons to an optimum of 20
persons. However, smaller spans are possible with managerial, professional and technical
groups. Those occupying the bottom of the organisational hierarchy where routine tasks are
being carried out by employees, who have no subordinates themselves, it is possible to have
larger spans.

e) Span of Control - Levels of Staff in the Organisational Hierarchy

For an organisation which is considered as a Flat organisation, and then larger spans (Wider
span of control) are inevitable. This situation prevails for middle management. In tall
organisations then spans can be smaller (Narrow span of control).

Other important influence on the size of the span in an organisation will include:
• The level of ability of the management.
• The level of knowledge and experience of the subordinates concerned. Well trained and
knowledgeable staff need less supervision than those without training and experience.
• The degree of complexity and the degree of change to which it is subject.
• The costliness of possible mistakes by individuals in the unit.
• The degree of hazards and/or danger associated with work.

Thereby the studies on span of control and span of evaluation had helped organisations in
clarifying matters of importance for managing people in organisation. They have also been
very useful to establish levels of delegation in a given situation. The organisational structure
can be categorised in to main two broad categories as tall and flat depending on the size and
the complexity of the organisation.

f) Tall and Flat Organisations

An organisation when described as a tall organisation will have many levels of authority
relative to the organisation’s size. Generally, every organisation should show at the apex, the
level which represents the top management. Their responsibility is to decide the policies and
the objectives that are the purpose of the organisation, the objectives, and the means to
achieve them. Another level lower down the hierarchy, should have a group of persons who
would develop the plans and implement then to achieve the objectives. Plans are developed
by managers and implemented by the workers.

Thus, the simplest hierarchy will show a minimum of 3 layers. The top most is the top
management; next occupying a central position is the management, which develops plans
based on policies and at the last level, employees who implement such plans.

If we depict it by a diagram, it shows a pyramid with 3 layers. It is the basic organisation

structure. With this structure as the basis, we may have some organisations having more
than 3 layers in its hierarchy; such organisations may be referred to as tall organisations.
CHAPTER 4 Page 88
The top most is the policy making the last level will occupy policy implementers the workers.
In tall organisations in addition to the intermediate level for middle management, there will
be several other layers, providing room for senior level, middle level, junior level managers,
and front managerial level the supervisors and the last level to show the staff.

Top
Managers

Senior Managers

Managers

Frontline Supervisors

Employees

Figure 4.6: Tall Organisation Structure

Such tall, structured organisations experience difficulties in communication due to several

levels of staff function, when messages are transmitted from top to bottom, breakdown in
communication possible and hence communication is ineffective.

As the number of levels increase, decision making and decision implementing also becomes
difficult and delayed. Confusion may also occur in communication. In contrast flat structured
firms have basically a minimum of two layers, as compared to 3-layer organisation structure.
The top most is the top management with policy making responsibility. The next level is at
the bottom and makes way for policy implementers covering workers.

Project
Manager

Project
Project
Coordinator
Coordinator A
B

Team Team Team Team Team Team Team Team

Member Member Member Member Member Member Member Member

Figure 4.7: Flat Organisation Structure

CHAPTER 4 Page 89
A flat organisational structure means that an organisation has few (if any) levels of
management between the workforce and the highest-level managers. The absence of middle
managers places more authority, such as decision-making functions, at the worker level.

The advantage is that communication is clear, simple, and quick.

Disadvantage is that the managers will be overworked.

Authority distributed in organisations.

When organisations grow there becomes a need for validating authority. Assigning work
duties to subordinates allows mangers to get more work done. There are three steps in the
delegation process. Assigning responsibility means the manger will give a subordinate a job
to do. Then subordinate is given the authority to do the job. Lastly, accountability is
established by the subordinate accepting responsibility to complete the task. The authority
is power that has been legitimised by the organisation.

There are three types of authorities:

• Line Authority
Lion authority is that which is an excellent exercise over his subordinates to fulfil primary
goals of the organisation. The superior issues orders and instructions to his subordinates to
accomplish the tasks. This authority is delegated to those positions or elements of the
organisation which have direct responsibility for fulfilling the primary organisational
objective.

• Staff Authority
Literally, workers authority implies a stick carried in the hand for support giving guidance
and service to the line managers. In the context of management, it implies those elements
that help the line authorities to function effectively in accomplishing the primary objectives
of the organisation.

• Functional Authority
Functional Authority is given to a line or staff manager to do a specific job. When the job is
completed, the authority is taken back.
Two specific issues that managers must address when distributing authority are delegation
and decentralisation.

The Delegation Process

Delegation is the process of assigning duties to subordinates to enable them to act within the
authority granted to them. Delegation does not take away the ultimate accountability of the
senior person.
On the other hand, the term empowerment explained by Ga Cole (2001) in his management
theory and practice says granting employees more discretion over how their jobs are done,
or their responsibilities fulfilled. It is observed that the empowerment concept is viewed in
the same or almost identical situation as delegation.
CHAPTER 4 Page 90
Delegation is considered as a management issue rather than an organisational issue, both
delegation and empowerment can be pursued under different issues, as follows.

• Authority referred to as the legitimate power, is explained as the right conferred on some
members of an organisation, to act in some specific way over others. The selected or
specific members would include Directors, managers, Specialists, Supervisors.

• Responsibility or accountability explains that one person is accountable to another

person for a given task to fulfil these responsibilities, a person may delegate some of his
authority to act, but he is prevented from passing down the responsibility.

• This seems to be the reason why delegation becomes a problem; if something goes wrong
in such situations the delegator is answerable.

• Power is the ability to influence others to do what you want.

• Empowerment in this context is used to signify an approach to manage people which

permits team members to exercise greater powers for decision making, on day-to-day
matters in their work.

Different types of power exercised in organisations are discussed below.

• Positional Power
It is the power one devotes to his/her position. For example – a manager may exercise.

• Legitimate Power
It is the power – the power that comes from the formal management position and the
authority granted. Ex: Instructions; advice given by the manager to the supervisor. For
example, a boss can assign projects, a policeman can arrest a citizen, and a teacher assigns
grades.

• Reward Power
That is the authority to reward others. Ex: salary increase; Granting increments; Recognition,
Formal appraisal etc.

• Coercive Power
Authority to punish or recommend punishment. Ex: Dismiss an employee, demote, etc.
Parents may also use coercion such as grounding their child as punishment for
noncompliance.

• Expert Power
Power that stems from special knowledge, skills etc. Technology companies are often
characterised by experts, rather than legitimate power.
CHAPTER 4 Page 91
• Referent Power
Power that results from characteristics that commands subordinate’s respect and
admiration. Referent power stems from the personal characteristics of the person such as
the degree to which we like, respect, and want to be like them. This arises from the
personality of the superior. Ex: Mahatma Gandhi ji; late Peter Drucker. examples include the
boss who everyone wants to impress and the go-getter who always puts others first.

In addition to these, there is another view, in that access to information and ability to develop
good contacts are significant powers a manager shows in an organisation, there arise 2
different sets of power. They include Linear Power and Staff Power.

• Linear Power
It is the linear type of relationship one establishes, basically from a higher position to a lower
position, in the form of a straight line.
Eg: MD will communicate some formal instructions to an Accountant through General
Manager and next through Finance Manager. This is a vertical pattern of giving instructions
and directives.

• Staff Powers
The principle of unity of command specifies that there can be only one superior officer to
whom one should report. But there can be practical situations, deviating from this standard.
For example, the Production Executive who is responsible to the Production Manager may
have to seek specific instructions and or advice from the Human Resource Manager. Because
of this need, this form of power is referred to as staff power.

This form of power should be given to the HR Manager legitimately.

He could exercise this power in the form of advice only.

The Principles Followed in Delegating to Subordinates

• Ensure that the objective to be achieved is made clear.

• Indicate the standard of performance.
• Decide what level of authority is permitted.
• Allocation of adequate resources.
• Reporting to be clear.
• Requests for further help when needed.
• To ensure that the task is completed to agreed standard.
• In the event of more resources needed
• Thank the individual for their efforts.
CHAPTER 4 Page 92
Practical Reasons – For the Need to Delegate

• To provide sufficient time for senior managers to focus on more important work.
• To provide training opportunities for juniors to perform routing jobs.
• Provides opportunities in decision making to the point of impact.
• Saves considerable time – cost etc. when decisions are taken by juniors.

Decentralisation and Centralisation

Just as authority can be delegated from one individual to another, organisations also develop
patterns of authority across a wide variety of positions and departments.

Decentralisation is the process of systematically delegating power and authority through the
organisation to middle and lower managers.

Centralization is the process of systematically retaining power and authority in the hands of
higher-level managers.

Advantages in Decentralisation

• As the decisions are made at a point near the operations, they are fast, practicable, and
flexible to accommodate any changes.
• It releases top management for more important central decisions.
• Increases the quality of decisions.
• Encourages the initiatives of subordinates.
• Motivates Subordinates
• Trains lower-level managers for higher-level responsibilities
• Satisfaction of Human needs.

Disadvantages of Decentralisation
• It may result in duplication of work since each division will have its own staff as
specialists.
• As each division is responsible for profit and loss, sometimes divisional, interests may
take priority over organisational goals.
• Difficulty in maintaining uniformity and consistency of organisational policies &
Procedures.
• Difficulty in Communication.
• Coordination problems.

These are observed to be conflicts in both corporate objectives and organisational goals,
which have to be resolved by the General Manager or a top manager, amicably.
CHAPTER 4 Page 93

4.5 Coordinating activities

This is the process of linking the activities of the various departments of the organisations
due to the interdependence between departments. They depend on each other for
information and resources to perform their respective activities. The greater the
interdependence between departments, the more coordination the organisation requires if
departments are to be able to perform effectively.

Present days, there are multiple ways to utilise electronic coordination such as email,
calendar, and SharePoint sites.
All of these coordination sources assist with an individual's organisation and prioritisation
skills.

Some of the most useful devices for maintaining coordination among interdependent units
are:

• Managerial Hierarchy
• Rules and Procedures
• Liaison Role of Manager
• Task Forces
• Integrating Departments

Differentiating between positions

The last element of organising is differentiating between line and staff positions. A line
position is a position in the direct chain of command that is responsible for the achievement
of an organisation’s goals. In contrast, a staff position provides expertise, advice, and support
for line positions. Administrative intensity is the degree to which managerial positions are
concentrated in staff.

4.6 Staffing the Organisation

After designing an organisation’s structural, it needs people with the right skills, knowledge,
and abilities to fil in that structure. People are most important resource, because people
either create or undermine an organisation's reputation for quality in both products and
service. In addition, an organisation must respond to change effectively in order to remain
competitive.
The right staff can carry an organisation through a period of change and ensure its future
success. Because of the importance of hiring and maintaining a committed and competent
staff, effective human resource management is crucial to the success of all organisations.

Human resource management (HRM), or staffing, is the management function devoted to

acquiring, training, appraising, and compensating employees. In effect, all managers are
human resource managers, although human resource specialists may perform some of these
activities in large organisations.
CHAPTER 4 Page 94
Solid HRM practices can mold a company's workforce into a motivated and committed team
capable of managing change effectively and achieving the organisational objectives.

Understanding the fundamentals of HRM can help any manager lead more effectively. Every
manager should understand the following three principles:

• All managers are human resource managers.

• Employees are much more important assets than buildings or equipment; good
employees give a company the competitive edge.
• Human resource management is a matching process; it must match the needs of the
organisation with the needs of the employee.

4.7 Human Resources Management (HRM)

Employees are the assets to the organisations. Therefore, they are called human capital. As
with other assets in the organisations it is vital to manage employees. HRM focuses on hiring,
managing and firing the employees. Nowadays it is viewed as more than managing the
human resources but investing in human capital development.

Definitions of Human Resources Management

• The field of HRM involves planning, organizing, directing, and controlling function of
procuring, developing, maintaining, and utilizing a lobar force.
- M.J.Jucious

• HRM is a provision of leadership and direction of people in their working or employment

relationship.
- Dale Voder

• Human Resource management is a series of decision that affect the relationship between
employee and employer: it effects many constituencies and is intended to influence the
effectiveness of employees and employers.
- Milkovich &Boudreau

• The policies and practices the organisation needs to carry out the people or human
resource aspects of the management position including recurring screening training
rewarding appraising.
- Gray Dessler

• HRM is a set of organisational activities directed at attracting developing and maintaining

an effective workforce.
- Ricky W. Griffen
CHAPTER 4 Page 95

a) The Generic Purpose of HRM

The major purpose of HRM is to generate and retain an appropriate and contented workforce
who gives the maximum individual contribution to organisational effectiveness. The goal of
HRM is to increase an organisation's productivity through enhancing each employee's
effectiveness.

b) Strategic goals of HRM

• To improve employee productivity
• Employee development
• To increase quality of work life
• To ensure legal compliance

c) Short term objectives of HRM

• To procure the right people at the right time for the right job
• To retain the most desirable employees within the organisation
• To obtain employee commitment and improve it.
• To motivate employees
• To control employment cost

d) Significance of the HRM

• Human Resource is the most important resource of an organisation.
• Human Resource Management is a responsibility of every manager.
• HRM is one of the business functions as well as one of the managements functions.
• Success of other functions depends on the success of HRM functions.
• HRM has a big impact on the well-being of the society.

e) HRM functions
• Job Design
• Job Analysis
• Manpower Planning
• Employee procurement
- Recruitment - Selection
- hiring - Induction/Orientation
• Training and Development
• Performance Evaluations
• Reward Management/Compensation Management
• Employee Movement (promotions, Transfers)
• Discipline Management
• Grievance Administration
• Employee Health and Safety Management
• Employee Welfare Administration
• Labour relations
• Employee Motivation
CHAPTER 4 Page 96

f) Job Design
Job design refers to the way that a set of tasks, or an entire job, is organised. Job analysis
investigates and identifies the duties, tasks, responsibilities, skills and knowledge, essential
qualifications for a certain job profile.
Job design helps to determine:
• what tasks are done.
• how the tasks are done
• how many tasks are done, and
• in what order the tasks are done

g) Job Analysis
Job Analysis is the process of describing and recording aspects of jobs and specifying the
skills and other requirements necessary to perform the job. A job analysis made up two parts.
The Job Description lists the duties of a job. The job’s working conditions, and the tools,
materials, and equipment used to perform it. The Job specification lists the abilities, and
other credentials needed to do the job.

h) Job description
Job description is the document that describes the “job”. A job description is a written
statement of the obligations, obligations, and functions of a particular job within an
organisation. Include followings:
• The title of the job
• The job grades.
• The location of the job (department, section)
• The Job title of individual responsible to the jobholder
• The main tasks and duties to be performed.
• Salary scale

i) Job Specification
Job specification is the document that describes the “person”. A job specification is a list of
the talents, abilities, personality traits, and other characteristics that a candidate must
possess in order to execute the job. Include followings:
• Educational qualifications
• Professional qualifications
• Experience
• Special skills required.
• Interests
• Physical requirements

4.8 Human Resources planning

Human Resource planning is the process of estimating or projecting the number of personnel
required for a project (with different skill sets) over a predefined period of time. Manpower
CHAPTER 4 Page 97
planning also includes the details like how and when new employees will be acquired.
This whole process is done keeping in view the goals of the organisation, the future
predictions for business and changing technology trends.

This helps the organisation be prepared for the future with the correct manpower at their
disposal for business prosperity. An organisation's present and long-term needs for human
resources are determined through the process of human resource planning. Human resource
management and an organisation's overarching strategy should be connected by human
resource planning.

The process of determining future employee needs and deciding steps or strategies to
achieve those needs for the purpose of accomplishing organisational goals and objectives.

Forecasting Estimating Comparing Developing

Measuring
the Demand the HR the Forecast Strategic
Performance
for HR Supply & Supply Plans

Figure 4.8: Human Resource Management process

a) Factors considered when forecasting future HR requirements.

• Demand for the organisation’s good/services
• Plans goals and objectives
• Method of productions
• Retirement, transfers, resignations
• Death
• Retrenchments

b) Employee Recruitment
Employee recruitment is the process of obtaining a new employee for the purpose of filling
a vacancy. This involves four steps as given below:

• Attracting
Attracting is the process of attracting applicants with required qualification to be
considered for filling a vacancy.

This is the initial attraction and screening of the supply of prospective Human Resources
available to fill a given positions. In other words, it is the process of involving the
attraction of suitable candidates to vacant positions from both internal and external
CHAPTER 4 Page 98
sources of the organisation.
Exhibit 4.2: Attracting internal and external recruitments.

Internal External

Job posting Advertising Job placement Agencies

Intranet Internet

Succession plans Placement through Colleges and Universities

Referrals

• Selection
This is a systematic process of selecting the most appropriate and suitable person to a
particular job. In other words, Selection is choosing an individual to hire from all those
who have been recruited/ attracted.

i. Methods of Selection
Application Evaluation: This involves choosing the most appropriate person through
evaluating the applications sent by the candidates.

- Interviews: this is to face a meeting with a member/s of the management. One of the most
commonly used methods of selection but it requires careful planning. E.g.: One on one
interviews, Panel interviews, Sequence interviews.

- Tests: this is meaning the candidates for qualities relevant to performing available jobs.
E.g.: Knowledge Tests, Aptitude Tests, Practical Tests, and IQ Tests, Personality test, Job
knowledge test, Integrity test, Cognitive ability test, Emotional intelligence test, Skills test

- Background Investigations: this is assessing the appropriateness of an applicant by

investigating into his/her family, financial positions, Residential Background, criminal
background etc.

- Medical Tests: this involves assessing the applicant’s physical fitness for particular jobs.

ii. Hiring/appointment
This is the process of legally appointing the person selected for a particular job. In this
process, letters of appointments will be prepared, employment contracts will be signed, and
the new employee will be sent in for a probationary period.
(Probationary period: the time period where the newly appointed employee will have to
work till, he/she is made permanent)

iii. Induction and Orientation

Induction and orientation are the process of providing a basic understanding and skills for
the newly selected employee in relation to the organisation, its members and the job, for the
CHAPTER 4 Page 99
purpose of facilitating him/her to easily settle the job.

iv. Training and Development

Training involves teaching operational or technical employees how to do the job for which
they were hired. Development is teaching managers and professionals the skills needed for
both present and future jobs:

- Training is the process by which the employees are taught skills and given the necessary
knowledge to carry out their responsibilities to the required standard. In other words, it
is the improvement of the performance to carry out the current job.

- Development is concerned with giving the individual necessary knowledge, skills,

attitude, and experience to enable an employee to undertake greater and more
demanding roles and responsibilities in the future. Development is concerned with the
long-term prospects of a career succession plan.

- Methods of Training and Development

On the job training- The training is received while the real job is performed Off the job
training- The training is given outside from the real job.

Simulations - Employees can practise tasks that closely resemble the actual work associated
with their particular job description through simulation training, which sets up several
scenarios.

Role playing - This method involves the learner and the instructor playing out hypothetical
workplace events. As it gives them practise dealing with challenging situations with
consumers, this technique works best for staff members whose jobs include direct client or
customer connection. (E.g.: call centre training.)

Case Studies - Employees are given a complex problem to assess and utilise as a model for
their answers when using the case study method. Although the intricacy and level of detail
in each instance varies, students should be provided enough knowledge to examine the
problem and come up with solutions.

v. Performance Appraisals
This is a regular systematic assessment of an employee’s performance in order to review
whether his/her performance matches the expected performance levels.

Performance evaluations are an analysis of an employee’s recent successes and failures,

personal strengths and weaknesses, and suitability for promotion or further training. It is
also the judgement of an employee’s performance in a job based on considerations other
than productivity alone.
CHAPTER 4 Page 100

The reasons why organisations should perform formal performance appraisals of

employees:

- To know the strengths and weaknesses of employees.

- To give opportunity for employees to improve their performance.
- To reward on basis of performance
- To motivate each and every individual employee
- To identify training and development needs of employees
- To collect and disseminate information for succession planning.
- To identify employees who potentiality for new and challenging jobs
- To know an individual employee’s present level of job performance

vi.Compensation Management
Compensation refers to the financial remuneration given by the organisation to its
employees in exchange for their work.

The main objective of the function is to develop and maintain a good salaried and wages
system which is reasonable both internally and externally.

vii. Factors affecting Salaries and Wages

a) Cost of living
b) Supply and demand of labour
c) Government requirements (minimum wage rates)
d) Competitor wage scales
e) Trade Union influences
f) Labour productivity

c. Employee Movement
The movements of employees take place in three methods,

• Promotions: this is the re-assignment of an employee to a higher ranked job in terms of

responsibility, respect, and salaries. Promotions are usually based on seniority,
competency, and merit.

• Transfers: this is the movement of an employee from one job to another on the same
occupational level and at the same level of wage or salary.

• Lay off: This is the temporary stoppage or suspension of the service of the employee for
various reasons.
CHAPTER 4 Page 101

4.9 Discipline Administration

It is important to control the performance and behaviour of the employees according to the
rules and regulations of the organisation. For this very reason it is important to develop,
implement and maintain an appropriate disciplinary system.

Importance of a Discipline Administration

• To reduce conflicts and confusions

• To control the employees in an orderly manner
• To ensure employees behaviour in accordance with performance standards, rules, and
regulations of the organisation.

i. Grievance Handling
A grievance can be identified as a situation where the employee is in metal distress,
dissatisfies or has a bad attitude, due to a work related unreasonable or unjust situation. A
grievance could take place for various reasons.

• Job related reasons

• Work services related reasons.
• Employee management related reasons
• Service conditions related reasons
• Employee behaviour related reasons

ii. Health and safety Administration

This is concerned with maintaining required and reasonable levels of professional Health
and safety in the job and its environment. The organisation should ensure the employees
physical and mental health. The work place should be free of hazards.

iii. Welfare Administration

This refers to all the facilities and comforts given to the employee by the employer apart from
wages, salaries, and incentives.

• Medical facilities
• Canteen facilities
• Housing facilities
• Transport facilities
• Loan facilities
• Educational facilities
CHAPTER 4 Page 102
iv. Labour Relations
Labour relationship means that relationship between the labour force and the management.
Since labour forces are organised as Trade Unions, it is actually a relationship between Trade
union representatives and the management.
However, the Government is also involved as a third party in order to regulate this
relationship by ways of laws.

This relationship is also more commonly known as a tripartite relationship.

If in case there is a dispute between the employees and the management, the most common
way of dispute resolution is through negotiations or Collective Bargaining and when the two
parties reach an agreement it’s known as Collective Agreement.

• Collective Bargaining: this can be identified as the negotiation that takes place between
the management and the Trade unions during a particular time period regarding
labour/Industrial issues.

• Collective Agreement: The agreements which the management and the Trade unions get
into after a collective Bargain.

KEY TERMS

Accountability Hybrid
Appraisal Human
Collective Resource
agreement Job Analysis
Collective Job Description
bargaining Job Specification
Design Organizing Matrix
Expert Performance
Grapevine Power
Grievances Relation
Health Selection
Structure Training and
Trade Union Development
Welfare Wages
CHAPTER 4 Page 103

Chapter Round-Up

This chapter gives us an awareness of what we mean by the term,

organising. It also describes what we mean by an organisational structure,

its importance and what it contributes to an organisation as management

always applies in the context of the organisation, it is relevant that

different types of organisational structures are possible. The brief

explanation of the terms associated with people in organisations is

informative and comes across more often.

Also, this chapter covers key concepts and key functions of Human

Resource Management, which will help the reader to appreciate how

important are such concepts developed by various eminent persons.

Importance of Human Resource Plans to align with organisational business

plans would bring immense benefits and enormous results. The studies on

recruitment
EXPERIENTIAL and selection are important activities to ensure the best-fit
EXERCISES
personnel in organisations. Placement of such new recruits in vacant
Multiple Choice Questions (MCQs)
positions, and providing them in puts in the induction process, and ways
1. When decision-making authority is retained, an organisation is said to be by higher
to appraise their performance – and new ways to motivate them give us
management levels, ______.
new knowledge, which will supplement our earlier studies.
(a) Decentralised
(b) Centralised
(c) Fragmented
(d) None of the above

2. Accountability is derived from _______.

(a) Authority
(b) Formal position
(c) Responsibility
(d) All of the above
CHAPTER 4 Page 104

3. Which of the following cannot be delegated?

(a) Responsibility and accountability

(b) Authority and responsibility
(c) Accountability and responsibility
(d) All of the above

4. Name the process which coordinates human efforts, assembles resources, and integrates
both into a unified whole to be utilised for achieving specified objectives.

(a) Management
(b) Planning
(c) Organising
(d) Directing

5. Which of the following activities is better decentralised in the typical organisation?

(a) Operations management

(b) Information systems design
(c) Purchasing capital equipment
(d) Controlling international cash flows

6. Which of the following is not a demerit of the informal organisation?

(a) It leads to the spreading of rumours.

(b) It gives more importance to the structure and work.
(c) It may restrict the implementation of changes within the organisation.
(d) It puts psychological pressure on members to conform to group expectations, even if
they are against the interest of the organisation.

7. Framework metal products PVT LTD is a company dealing in metal products. The work
is mainly divided into functions including production, purchase, marketing, accounts, and
personnel. Identify the type of organisational structure followed by the organisation.

(a) Functional structure

(b) Relational structure
(c) Divisional structure
(d) None of the above

8. Identify the correct sequence of steps to be followed in an organising process.

CHAPTER 4 Page 105
(a) Departmentalisation, Establishing reporting relationships, Assignment of duties,
Identification, and division of work.
(b) Identification and division of work, Departmentalisation, Assignment of duties,
Establishing reporting relationships.
(c) Identification and division of work, Assignment of duties, Departmentalisation,
Establishing reporting relationships.
(d) Identification and division of work, Establishing reporting relationships,
Departmentalisation, Assignment of duties.

9. Sanjeev has been given the task of arranging a five-day conference for foreign delegates.
In order to ensure smooth functioning of the event, he has appointed two people as co-
ordinators to take care of activities related to registration and refreshment. Identify the
function of management being carried out by Sanjeev.

(a) Planning
(b) Staffing
(c) Organising
(d) Directing

10. ……………….. type of organisation chart, the highest position is placed at the centre in the
innermost circle and the lowest position at the outermost circle.

(a) Vertical chart

(b) Horizontal chart
(c) Circular
(d) Chain of command

11. An organisational chart describes.

(a) The relationship between the different department and their personnel
(b) The company goals.
(c) The function each person performance
(d) Both B&C

12. Employee relationships are major element of occupation of

(a) Marketing manager

(b) Account manager
(c) Finance manager
(d) Human resource manager

13. For an employee to be granted authority?

(a) Equal to the responsibility entrusted to him.

(b) Less than the responsibility entrusted to him.
CHAPTER 4 Page 106
(c) More than the responsibility entrusted to him.
(d) All of the above

14. Who gave the definition that “Organising is the process of identifying and grouping the
work to be performed, defining and delegating responsibility and authority, and
establishing relationships for the purpose of enabling people to work most effectively
together in accomplishing objectives”.

(a) Louis Allen

(b) Theo Haimman
(c) Chester Barnard
(d) Keith Davis

15. What is the point of distinction between formal and informal organisation?

(a) the managers are the leaders in case of formal organisation while in case of informal
organisation the managers may or may not be the leaders and the leaders are chosen
by the group.
(b) formal organisation is flexible in nature while informal is rigid in nature.
(c) Both 1&2
(d) non above.

Answers

1 B
2 C
3 A
4 C
5 A
6 B
7 A
8 B
9 C
10 C
11 A
12 D
13 A
14 A
15 A
CHAPTER 5 Page 107

Leading Towards
Organisational Objectives

Learning Outcomes

After successful completion of this chapter, you should be able to:

• Explain Leading as a function of Management.

• Define the terms ‘Power’ and the sources of Power.
• Distinguish between the Leader and Manager.
• Describe the approaches to Leadership.
• Compare and contrast between different Leadership Styles
• Explain contemporary leaderships theories.

5.1 Leading as a Managerial Function

The third basic managerial function is leading. The skill of influencing people for a particular
purpose or reason is called leading. Leading is considered to be the most important and
challenging of all managerial activities. Leading is influencing or prompting the member of
the organization to work together with the interest of the organization. Leading involves a
number of deferment processes and activities. The functions of direction, motivation,
communication, and coordination are considered a part of leading process.

Motivating is the function of management process of influencing people’s behaviour based

on the knowledge of what cause and channel sustain human behaviour in a particularly
committed direction. Efficient managers need to be effective leaders. Since leadership
implies fellowship and people tend to follow those who offer a means of satisfying their own
needs, hopes and aspirations, it is understandable that leading involves motivation,
leadership styles / approaches and communication.
CHAPTER 5 Page 108

Hence, leading is a management process comprising the following three components which
lead an organisation to achieve its goals.

1. Leadership
2. Motivation
3. Communication

Leadership Definitions

• Leadership is the process of directing the behaviour of others toward the

accomplishment of an objective. (Samuel and Trevis, 2015)
• Leadership is the process of directing and influencing the task- related activities of group
members. (Stoner, Freeman, and Gilbert, 2013)
• The concept of leadership evolves as the needs of organisations change. That is, the
environmental context in which leadership is practiced influences which approach might
be most effective, as well as what kinds of leaders are most admired by the society. (Daft,
2017)

5.2 Influencing others.

Power is the capacity to affect others’ behaviour or to influence people. Power comes from
the organisational position and that they know and can do (personal skill).

The Power

As per the business dictionary, the power is the ability to influence others. One of the most
influential theories of power comes from the work of French and Raven, who classified power
in to five sources of power leaders use to influence others. According to French and Raven,
identified five sources of power that can be grouped into two categories.

a) Position Power
• Legitimate
• Reward
• Coercive

b) Personal Power
• Expert
• Referent

c) Legitimate Power
It is due to the position in the managerial hierarchy and the authority used in that
position.
CHAPTER 5 Page 109

E.g., Directions / instructions received from superior officers. Legitimate power relates
to the position one occupies in the organization and not to the person.

d) Reward Power
Is the ability to control and provide rewards to others.

E.g., pay rise, bonuses, more than one annual increment; Once and for all cash payment;
promotions, recognition.
The greater the extent to which the manager has control over rewards, the intensity of
reward power, will be high.

e) Coercive Power
With the undesirable behaviour of subordinates, the manager has capacity to punish
them.
Warn; reprimand; suspend terminate pay cut; fine.
The extent to which there is freedom to punish others, it is to that extent the leader has
coercive power.

f) Expert Power
Utilizing the expert knowledge and skills others would value contributions. Managers
show considerable knowledge and vast experience that may be critical to subordinates’
success. To the extent the leader possesses knowledge and experience, to that extent he
exerts expert power.

g) Referent Power (Charismatic)

This form of power is the result of being admitted by others or liked by others. When
Leader admires some people, we have a tendency to be one of them, or develop friendship
towards them, and more willingly follow them, and guided by their directions as a result
we have some loyalty to them. The extent to which a leader can cultivate the likings, the
association, admiration, and then the stronger is the referent power.

In addition to the above five sources of power, there is another important source of power
which was discussed by the scholars with the rapid changes in the technological
environment during last two decade.

h) Information Power
Power generated due to the access of information and or its control over the distribution
is referred to as information power. As managers we tend to have better access to
information than subordinates and can use our discretion in disseminating them. The
greater the control the leader has for such information will be a measure of his power.

5.3 Role of the Leader

A leader has to play the following roles in an organization.

CHAPTER 5 Page 110
i. Directing and Guiding:
Leadership is an essential requirement of all levels in an organization. In the top level, it is
important for getting co-operation in formulation of plans and policies.
In the middle and lower level, it is required for interpretation and execution of plans and
programmes framed by the top management. Leadership can be exercised through
guidance and counselling of the subordinates at the time of execution of plans.

ii. Communicating (Networking):

A leader is said to be the representative of the enterprise. He has to represent the concern
at seminars, conferences, general meetings, etc. His role is to communicate the rationale of
the enterprise to outside public. He is also representative of the own department which he
leads.

iii. Motivating People:

A leader through leadership traits helps in reconciling/ integrating the personal goals of the
employees with the organization’s goals. He is trying to co-ordinate the efforts of people
towards a common purpose and thereby achieves objectives. This can be done only if they
can motivate people to achieve the organization’s goal.

iv. Act as a Change agent:

Every leader deal with change, however some leaders handle it better than others. There
are change agent leaders who seem to have an innate gifting at leading through change. Most
of the change agent leaders have the following common characteristics.
• Flexible,
• Courageous,
• Networking,
• Strategic,
• Creative,
• Change for a specific purpose, &
• Thorough on commitments

5.4 Leader versus Managers

The terms Leaders and Managers are used interchangeably, but these are not. There are
various ideas on what a leader is, in contrast to a manager, such as intelligent, inspiring, and
intuitive as opposed to directing, controlling, and commanding. However, it can be
challenging to tell a leader from a manager in real life.

However, numerous industry experts have worked tirelessly over the years to distinguish
between the duties and responsibilities of managers and leaders, and many have been
successful in doing so. In order to make it simple to comprehend the differences between
managers and leaders, we have highlighted the main ones here.

Although managers and leaders have many things in common, there are also many things
that set them apart. While management is responsible for the day-to-day operations of an
organization, leadership focuses on creating a vision for others to follow.
CHAPTER 5 Page 111

Exhibit 5.1: Characteristics of Mangers and Leaders

Subject Manager Leader

Role Stability Change

Decision Making Makes Facilitate

Approach Plan detailsaround constraints Sets and Leads directions

Vision Short term Long Term

Control Formal influence Personal Charm

Action Reactive Proactive

Rules Make Brake

Direction Existing Direction/ Keep the New Direction

status quo.

Focus Managing the work Leading People

Human Resource Subordinates Followers

Value Result Achievements

Concern Doing Thing Right Doing the Right Thing

5.5 Leadership Theories

Leadership Theories can be categorized in to two groups.

A) Traditional Theories

i.Traits Theories
ii.Behavioural Theories
iii.Contingency Theories

B) Contemporary Theories

i.Charismatic
ii.Transformational
iii.Transactional
CHAPTER 5 Page 112

A) Traditional Theories

i) The Trait Theory

The trait theory assumes that people inherit certain qualities or traits make them better
suited to leadership. The Trait theory emphasizes that leadership is in born and comprises
of inborn traits. These traits are not acquired but are inherent and are personal qualities.

This has a view that leaders are born and cannot be made. Traits of the type: intelligence,
understanding, perception, high motivation, socio – economic status initiative, maturity, self-
assurance, self-actualization are said to be traits inherited. Studies conducted on leadership
styles and the personal traits that present in such a leader, was by Stogodill, indicated that a
person who becomes a leader under one given situation, may not be a leader in another given
situation, he also observed that a leader has some specific traits, may still be a leader in
another given situation.

It’s important to note that the two sets of traits would be different in the two-given situation.
It was also observed that there was no specific trait that would typify a leader and could be
applied in all situations.

Leadership is one that implies activity, movement, and results in doing work. The essence of
leadership is that in terms of interactions – for one to lead and others to follow the leader.
Most of the critics of the Trait theory focus attention only on leader, and not on the leadership
process.

Traits of Leadership
A leader is supposed to depict some inherit qualities and traits, which tend to assist him in
playing a directing role, and to would commanding influence. In simple terms a leader is said
to be a person who is supposed to perform non-ordinary things.

Researcher Jago had listed the following traits, they include:

• Energy and drive
• Appearance and presentation
• A sense of co-cooperativeness
• Enthusiasm
• Personality – height and weight
• Initiatives
• Intelligence
• Judgments
• Self-confidence
• Sociability
• Tact and diplomacy
• Moral courage and integrity
CHAPTER 5 Page 113
• Will power and flexibility.
• Emotional stability
• Knowledge of human relations

Significance of the Trait Theory

These traits are not universally present in all leaders. It’s also important to note that all such
15 traits do not function at the same time. Some of these traits differentiate some leaders
from unsuccessful ones; and some specific traits make some leaders to be unique than their
contemporaries. The leadership behaviours make it possible for some individual and group
activity to be directly involved. It has influence on factors such as regular attendance, less
staff turnover and high employee morale.

The main deficiencies of the Trait theory

• The traits listed are not identical in the same way as needed by the leader.
• Some traits are not inherited; they have to be acquired by training.
• Does not identify what traits are more important as a leadership.
• The traits needed to qualify for leadership are not the same the sustain leadership.
• It fails to explain why a leader with specific traits had failed in their task.
• In a given situation both the leader and the followers exhibit the same or identical traits,
but follower cannot be leader, which situation is inexplicable.
• Traits do not consider the different environmental factors.

ii) Behavioural Theories of Leadership

Behavioural theories emerged as a response to the deficiencies of the trait theories. The
behavioural theory provides an opportunity for others to look at leaders, and then to emulate
them.
The leader effectiveness is best assessed by the terms, individual subordinate outcome.

This holds the view that leaders are not born and can be made through education &training.
As theorists shifted their focus from traits to behaviours, they also moved from notions of
“leaders” to “leadership”, which became the dominant style of approaching organizational
leadership in the 1950s and early 1960s.

Different patterns of behaviour were grouped together and labelled as styles. The theory
assumes that certain leadership styles will be effective while others will not.

Determining goals, motivating employees for achieving the goals, effective communication,
ability to interact effectively, building team spirit, etc. are the functional behaviours of a
successful leader.

Behavioural Theory
Important early research programs on leadership were conducted at the Ohio State
University and the University of Michigan. University of Michigan, suggests that leader’s style
has very important implications for the emotional atmosphere of the work environment and,
therefore, for the followers who work under that leader.
CHAPTER 5 Page 114

Effective leadership is determined by the way a leader behaves towards subordinates. Two
main leadership styles are introduced, Task Oriented and People Oriented Leaderships.
People Oriented (Employee-centred)
supervisors spent more time in actual, supervisory activities; less time performing tasks
similar to those performed by subordinates, used general rather than close supervision, took
a personal interest in employees and their gods, and were less punishing when mistakes
were made.
Employees of employee-centred supervisors felt that their supervisor took a personal
interest in them, let them know how they were doing on the job, and would support them.
This leadership style can be recognized as Democratic style of leadership.

Task Oriented (Production-centred)

supervisors spent less time in actual supervisory practices such as planning; more time
performing tasks similar to those subordinates performed, used close supervision, and
punished mistakes.

Employees of production-centred supervisors tended to feel as if they were treated only as

instruments of production and responded with poor performance. This type of leadership
style can be recognized as Autocratic style of leadership.
Another approach to the study of leadership, developed at the Ohio State University. The
researchers identified two major behaviours called considerations and initiating structure.

The Managerial Grid

Robert Blake and Jane Mouton were instrumental in introducing the managerial grid to study
managerial behaviour in organization development. It is built on 2 Axis – the people and the
CHAPTER 5 Page 115
'Task'.
Figure 5.1: Managerial Grid
Source: Management Theory Practice Work Design
The two underlying dimensions of the grid are labelled Concern for task and Concern for
people. These two attitudinal dimensions are independent of each other and in different
combinations form various leadership styles. Blake and Mouton originally identified five
distinct leadership styles.

• Impoverished style (1,1):

Manager makes a minimum effort to get work done. Involve minimum standard of
performance and minimum workers commitment.

• Produced or Perish style (9,1):

Excellent work design well established procedures, minimum worker interference,
performs orderly and efficient operation.

• Country club Style (1,9):

Personal and meaningful relationships with people. There is friendly atmosphere, with
high morale. Work design is loosely – structured.

• Middle-of- the Road style (5,5):

Satisfactory performance achieved by equating the need to perform, reasonable morale.

• Team Style (9,9):

Ultimate situation in managerial efficiency. There is a strongly dedicated staff. There is
trustworthy and homely atmosphere – highly organised task performance.

On this basis managers are carefully selected on the basis of their ability to co- ordinate
people and tasks for optimum benefits.

iii) Contingency /Situational Theories of Leadership

Researchers using the trait and behavioural approaches showed that effective leadership
depended on many variables, such as organizational culture and the nature of tasks. No one
trait was common to all effective leaders. No one style was effective in all situations. Whilst
behavioural theories may help managers develop particular leadership behaviours, they give
little guidance as to what constitutes effective leadership in different situations.

Contingency theories of leadership focus on particular variables related to the environment

that might determine which style of leadership is best suited for a particular work situation.
According to this theory, no single leadership style is appropriate in all situations. Success
depends upon a number of variables, including leadership style, qualities of followers and
situational features.

Researchers, therefore, began trying to identify those factors in each situation that influenced
CHAPTER 5 Page 116
the effectiveness of a particular leadership style. Taken together, the theories resulting from
this research constitute the contingency approach to leadership.

These theories focus on the following factors:

• Task requirements
• Peers’ expectations and behaviour
• Employees’ characteristics expectations and behaviour
• Organizational culture and policies

Hersey and Blanchard’s situational leadership Model: (1970-1980)

The Hersey-Blanchard leadership model suggests that successful leaders adjust their styles.
For Hersey and Blanchard, the key issue in making these adjustments is follower maturity,
as indicated by their readiness to perform in a given situation. Hersey and Blanchard define
readiness as desire for achievement, willingness to accept responsibility and task related
ability skill and experience. The goals and knowledge of followers are important variables in
determining effective leadership style.

The theory is based on the amount of direction (task behaviour) and socio-emotional support
(relationship behaviour) a leader must provide given the situation and the “level of maturity”
of the followers.

• Task Behaviour: is the extent to which the leader engages in spelling out the duties and
responsibilities to an individual or group. This includes telling people what to do, how to
do, when to do it, where to do it, and who’s to do it. It is one way communication from top
to bottom.

• Relationship Behaviour: is the extent to which the leader engages in two – way or multi-
way communications. This includes listening, facilitating, and supportive behaviours. The
leader involves in two-way communication by providing socio- emotional support.

• Maturity: is the willingness and ability of a person to take responsibility for directing his
or her own behaviour. People tend to have varying degrees of maturity, depending on the
specific task, function or objective that a leader is attempting to accomplish their efforts.

Hersey-Blanchard leadership model recognise four leadership styles:

• Directing: The leader provides clear instructions and specific directions. This style is best
matched with a low follower readiness level.

• Coaching: the leader encourages two-way communication and helps build confidence and
motivation on the part of the employee, although the leader still has responsibility and
controls on decision making. Selling style is best matched with a moderate follower
readiness level.
CHAPTER 5 Page 117
• Supporting: In this style, leader and followers share decision making and no longer need
or expect the relationship to be directive. Participating style is the best matched with a
moderate follower readiness level.
• Delegating: This style is appropriate for leaders whose followers are ready to accomplish
a particular task and are both competent and motivated to take full responsibility.
Delegating style is best matched with a high follower readiness level.

The Path Goal Theory

This theory has been propounded by behaviourists Robert J. House (1971). It emphasizes
that the leader’s behaviour be such that as to complement the group work and aspirations.
This approach is based on the principle that efforts would lead to successful results. The
theory was developed by Robert House and has its roots in the expectancy theory of
motivation. The theory is based on the premise that an employee’s perception of
expectancies between his effort and performance is greatly affected by a leader’s behaviour.

The leaders help group members in attaining rewards by clarifying the paths to goals and
removing obstacles to performance. They do so by providing the information, support, and
other resources which are required by employees to complete the task. According to House’s
path-goal theory, a leader’s effectiveness depends on several employee and environmental
contingent factors and certain leadership styles. All these are explained in the figure below:

What steps should leader take to motivate employees?

• Firstly, to identify and recognize the needs of the subordinates.

• Once goals are achieved reward the followers appropriately.
• Assist and guide subordinates to establish their desires.
• Remove all the barriers and clear the path to achieve goals.
• Enhance opportunities for achieving personal satisfaction so as to exhibit performance.

The path goal model takes into consideration of the four types of behaviour that would
achieve this approach. The situation decides what is appropriate.

The 4 styles are:

• Directive: In a situation there is no clear-thinking process as for the task to be achieved,
leadership is needed, but when the task is clear, or a possibility is there to provide a clear
explanation then the style of leadership desired is ordinary, simple type.

• Supportive: Leadership is always friendly and is easily accessible. It will also have a
positive effect on employee – satisfaction. They include fellow employees working on –
unpleasant stressful and for frustrating tasks which again are repetitive.

• Achievement Oriented: This approach is to increase performance standards and bring

confidence in the subordinates that they are able to meet challenging goals.

• Participative: This has provision for the leader to encourage subordinates to participate
CHAPTER 5 Page 118
in decision making. The leader consults subordinates, and such views are closely
examined by the leader for decision making.

Vroom – Yetton Model

It was originally developed by Victor Vroom and Philip Yetton (1973) in their book,

"Leadership and Decision Making" They proposed a model of leadership which focuses on
the social processes utilise in decision-making. Specially, their model focuses on the leaders’
decision about the amount and manner in which subordinates should be involved in the
decision-making process. Every manager needs to be able to make good decisions.

This modal adopts a contingency approach to decision- making as it is based on the idea that
the consequences of participation in decision making vary with the situation. It can also help
leader to determine the most effective means of reaching a decision. The Vroom-Yetton
model is designed to help leader to identify the best decision- making approach and
leadership style to take, based on current situation. These modals distinguished three classes
of outcomes which follow from Maier’s work (1963) in problem solving. The effectiveness of
a decision is a function of these three classes of outcomes.

The three classes of outcomes are:

• The quality of rationality of the decision.
• The acceptance or commitment on the part of subordinates to execute the decision
effectively.
• The amount of time required to make the decision.

B) Contemporary Theories

Research on leadership behaviour is moving in many directions. This section covers

charismatic leadership, Transactional leadership, and Transformational leadership theories.

i. Charismatic Leadership
Charismatic leadership is rooted in the personal and behavioural characteristics of the
leader. Such leaders are able to inspire and enthuse their subordinates through their
articulation of an organizational vision (House, 1977).

Leaders who, through their personal vision and energy, inspire followers and have a major
impact on their organizations. (Stoner, Freeman, & Gilbert, 2013)

Some of examples of charismatic leaders are Ronald Reagan, Martin Luther King, Jr, and
Mother Teresa.

ii. Transactional Leadership (Burns, 1978)

The transactional leaders with a view to lead the followers and also to motivate them will
initially decide the role and the needs of the followers.
The transactional leaders will provide benefits or some form of remuneration for the
CHAPTER 5 Page 119
followers and will create motivation in them.
Such leaders will compare the performance standards specified against the actual achieved,
and in the process will assign them with duties and responsibilities.

iii. Transformational Leadership

In this process, transactional leaders will closely follow the subordinates and effectively
provide them opportunities to contribute their share such leaders focus on the people or
employees and encourage them to realize their potential.
In the process they provide on alternative way to solve their earlier problems. Through
inspiration team efforts are achieved.

• Ethical leadership
Ethical leadership is a form of leadership in which individuals demonstrate conduct for the
common good that is acceptable and appropriate in every area of their life. It is composed
of the following three major elements:

1. Be the Example: A noble quality of a leader is leading by example.

2. Champion the Importance of Ethics: One role of an ethical leader is focusing on the
overall importance of ethics, including ethical standards and other ethical issues, and
how these factors can influence society.
3. Communicate: Successful ethical leaders tend to be good communicators.

• Servant leadership
Servant leadership is a very social leadership style. Servant leaders are focused on service to
others. It places the needs of others in high regard. Servant leaders address the
responsibilities and relationships in society, organizations, and companies. Servant leaders
are constructive, persistent, and motivating. They are also the leaders who see complex, big
pictures. They permeate all areas of our culture.

• Level- 5 leadership
Level- 5 leadership is modest, shy and fearless and possesses the capability to transform an
organization from good to great without portraying themselves as wizards with magic
wands. They prefer talking about the company and the contribution of other people but
rarely about their role or achievements.

• Interactive Leadership
Interactive Leadership is when a leader takes it upon them to include others as much as
possible, by delegating tasks and not doing all of the ‘leader’ jobs by themselves.

This means that groups are made, collaborations are built, and relationships extended so that
everyone feels part of the way they organization is run. Letting people know they are part of
the company is a very important aspect for many leaders as not only does it make motivation
higher for the staff, it increases motivation for the leader.
CHAPTER 5 Page 120

KEY TERMS

Autocratic Position Power

Charismatic Situational
Coaching Supportive
Contingency Task Oriented
Co-ordinates Transactional
Delegating Transformational
Democratic Leadership
Goals congruence Participative
Laissez-faire People Oriented

Chapter Round-Up

This chapter helps us understand what we mean when we use the word

"Leadership." How leadership is absorbed into the management function. It

also explains how leading is used in organisations managerial activities. As

management is always applied in the context of the organization, it is

relevant that may vary by organisation.

It also defines what we mean by a ‘Power’ and the sources of Power, its

importance, and what it contributes to an organisation. Chapter provides

explanations about the tasks performed by a leader in an organisation and

the succinct explanation of the Distinguish between the Leader and

Manager.

The reader will be able to understand the significance approaches and main

theories of Leadership practices. The leadership theories are broadly

indicated under three broad headings, trait theories, Behavioural, Modern

theories and contemporary theories of leadership. After reading this

CHAPTER 5 Page 121

EXPERIENTIAL EXERCISES

Multiple Choice Questions (MCQs)

1. Leadership today is increasingly associated with the concept of ______________?

a) Strategy
b) Control
c) Getting others to follow
d) Command

2. What is the most common element in definitions of leadership?

a) Leadership is an influence process.
b) Leadership is an attribution made by followers.
c) Leadership is the ability to make good decisions.
d) Leadership is an authority relationship.

3. Leadership is best defined as ________.

a) the ability to merely project one's abilities in the lack of actual accomplishments.
b) the ability to induce the team members to focus on individual goals rather than
collective goals.
c) the ability to reduce the dependence of team members on each other.
d) the ability to influence a group toward the achievement of a vision or set of goals.

4. Which of the following statements about leaders versus managers is false?

a) Leadership is a value-laden, activity, management is not.
b) Leaders are thought to do things right, managers do the right things.
c) Leaders focus on risk taking, managers perform functions such as planning and
controlling.
d) Leaders develop, managers maintain.

5. Approaches to the study of leadership which emphasis the personality of the leader are
termed ______________.
a) Trait theories
b) Contingency theories
c) Group theories
d) Inspirational theories

6. Which of the following types of power can be categorized as personal power?

a) Coercive
b) Reward
c) Referent
d) Legitimate
CHAPTER 5 Page 122

7. Legitimate power is directly based on ________.

a) the charisma of the leader
b) structural position of the manager in the organization
c) interpersonal trust and commitment of the manager
d) personality traits of the manager

8. What do you call a style of leadership that takes account of others' views, opinions, and
ideas?
a) Democratic
b) Laissez-faire
c) People-oriented
d) Autocratic

9. How can you describe the thinking and outlook of transformational leaders?
a) Operational
b) Functional
c) Developmental
d) Strategic

10. What are the key characteristics of transactional leaders?

a) Guiding, commanding, and motivating
b) Guiding, demonstrating, and motivating
c) Guiding, mentoring, and motivating
d) Guiding, mentoring, and demonstrating

Answers

1 C
2 A
3 D
4 B
5 A
6 C
7 B
8 A
9 D
10 C
CHAPTER 6 Page 123

Employee Motivation

Learning Outcomes

After successful completion of this chapter, you should be able to:

• Define the motivation and role of motivation in determining employee

performance.
• Explain the motivation process.
• Classify the basic needs of employees.
• Elaborate the theories of motivation and their implications.
• Understand the importance of rewards and punishments.

6.1 Introduction to Motivation

With each passing year, the world becomes increasingly digital, thus today's workforce looks
significantly different than it did 25 years ago. This process, accelerated by the global
Covid19 pandemic, poses new obstacles for today's businesses to traverse in order to engage
their teams, reduce employee burnout, and minimise turnover.

To comprehend and overcome the obstacles of inspiring today's workforce, particularly in

firms with a large proportion of non-desk workers, we must first grasp the challenges and
motivators of new age, digital employees.

Motivation is one of the more complex topics in organisation management. Motivation comes
from the Latin root word ''movere” which means “to move' ' (Nelson & Quick, 2008).

There are several definitions for motivation and the few of them are listed below.

• Motivation may be defined as a planned managerial process, which stimulates people to

work to the best of their capabilities, by providing them with motives, which are based
on their unfulfilled needs.
CHAPTER 6 Page 124
• Motivation is the process by which a person’s efforts are energised, directed, and
sustained towards attaining a goal. (Robbins, Bergman, Stagg, and Coulter, 2008)
• Motivation is the inner state that causes an individual to behave in a way that ensure the
accomplishment of some goal (Samuel and Trevis, 2015)

• According to Joe Kelly, motivation is a process whereby needs instigate behaviour

directed towards the goals that can satisfy those needs.

• Glueck said motivation is the inner state that energises channels and sustains human
behaviour.

• Motivation is defined as the desire to achieve a goal or a certain performance level,

leading to goal-directed behaviour.

• In the encyclopaedia of management states motivation refers to the degree of readiness

of an organisation to pursue some designed goals and implies the determination of the
nature and locus of forces inducing the degree of readiness

Motives are forces which induce people to act in a way, so as to ensure the fulfilment of a
particular human need at a time. Behind every human action there is a motive. Hence,
management must provide motives to people to make them work for the organisation.
Motivation is no doubt an essential ingredient of any Organization. It is the psychological
process which really executes the plans and policies through the efforts of others. In simple
language, motivation is the desire to do some work or achieve the desired results; however,
motivation is different from job satisfaction.

Significance/Importance of Motivation
Motivation is an integral part of the process of leading (Jain, 2005). While leading his
subordinate, a manager must create and sustain in them the desire to work for the specified
objectives:
• High Efficiency: A good motivational system releases the immense untapped reservoirs
of physical and mental capabilities. By satisfying human needs motivation helps in
increasing productivity. Better utilisation of resources lowers cost of operations.
Motivation is always goal directed. Therefore, higher the level of motivation, greater is
the degree of goal accomplishment.

• Better Image: A firm that provides opportunities for financial and personal advancement
has a better image in the employment market. People prefer to work for an enterprise
because of opportunities for development, and a sympathetic outlook. This helps in
attracting qualified personnel and simplifies the staffing function.

• Facilitates Change: Effective motivation helps to overcome resistance to change and

negative attitude on the part of employees like restriction of output. Satisfied workers
take interest in new organisational goals and are more receptive to changes that
CHAPTER 6 Page 125
management wants to introduce in order to improve efficiency of operations.

• Human Relations: Effective motivation creates job satisfaction which results in cordial
relations between employer and employees. Industrial disputes, labour absenteeism and
turnover are reduced with consequent benefits. Motivation helps to solve the central
problem of management.

• Optimum utilisation of Resources: The success of any organisation depends upon the
optimum utilisation of resources. The utilisation of physical resources depends upon the
ability to work and the willingness to work of the employees. In practice, ability is not the
problem but necessary will to work is lacking. Motivation is the main tool for building
such a will.

Figure 6.1: Simple Model of Motivation Process

Source: New Era of Management. by R. L. Daft, 2017

Needs: Create desire to fulfil needed (money, recognition, friendship, achievements)

Behaviour: Result in action to fulfil needs
Rewards: Satisfy Needs; Intrinsic or Extrinsic rewards
Feedback: informs whether behaviour was appropriate or should be used again.

Characteristics of demotivated Employees

• High labour turnover

• High labour absenteeism
• Increase rate of labour grievances
• Sabotage to organisational assets
• Increased number of labour actions such as strikes.
• Employee conflicts
• Low productivity
• Bad labour relations between employees & employer
• Poor production or service quality
CHAPTER 6 Page 126

6.2 Theories of Motivation

All available motivation theories are classified into two types of motivation theories.
A) Content Theories (Need Theory)
B) Process Theories

A) Content Theories (Need Theory)

The content theory of motivation mainly focuses on the internal factors that energise and
direct human behaviour. At any point in time, people have a variety of needs which translate
into an internal drive that motivates specific behaviours in an attempt to fulfil the needs.
i. Maslow's hierarchy of needs,
ii. Frederick Herzberg’s motivator-hygiene theory (Herzberg’s Two factors theory)
iii. David McClelland's three-needs theory
iv. Clayton Alderfer’s ERG Theory
v. Douglas McGregor’s Theory X and Theory Y
vi. Mayo’s motivation theory

B) Process Theories
Whether their choices were Process theories of motivation provide an opportunity to
understand thought processes that influence behaviour which explains how people select
behaviour actions to meet their needs and determine success.
i. J. Stacy Adams's equity theory,
ii. Victor Vroom's expectancy theory,
iii. Edwin Locke & Gray Latham’ Goal-setting theory
iv. B.F. Skinner ‘s Reinforcement Theory
v. Taylor’s motivation theory
vi. Bandura’s self-efficacy theory
CHAPTER 6 Page 127

Figure 6.2 Brief overview of theories of Motivation

A) Content Theories

i. Abraham Maslow’s Hierarchy of Need Theory (1943, 1954)

This is the most famous content theory developed by Abraham Maslow which proposes that
people are motivated by multiple needs and that these needs exist in a hierarchical order as
exhibited in Figure 6.3: Maslow’s Hierarchy of Needs.

Figure: 6.3 Maslow’s Hierarchy of Needs

Source: New Era of Management (R. L. Daft, 2017)

- Physiological Needs
These are biological needs. They consist of needs for oxygen, food, water, and a relatively
constant body temperature, Oxygen. They are the strongest needs because if a person were
CHAPTER 6 Page 128
deprived of all needs, the physiological ones would come first in the person's search for
satisfaction.

- Safety Needs
When all physiological needs are satisfied and are no longer controlling thoughts and
behaviours, the needs for security can become active. Adults have little awareness of their
security needs except in times of emergency or periods of disorganisation in the social
structure (such as widespread rioting). Children often display the signs of insecurity and the
need to be safe.

- Needs of Love, Affection and Belongingness

When the needs for safety and physiological well-being are met, the need for love, affection,
and belongingness can emerge. According to Maslow, people attempt to overcome feelings of
loneliness and alienation. Giving and receiving love, affection, and a sense of belonging are
all part of this.

- Needs for Esteem

When the first three classes of needs are satisfied, the needs for esteem can become
dominant. These involve needs for both self-esteem and for the esteem a person gets from
others. Humans have a need for a stable, firmly based, high level of self-respect, and respect
from others. When these needs are satisfied, the person feels self- confident and valuable as
a person in the world. When these needs are frustrated, the person feels inferior, weak,
helpless and worthless.

- Needs for Self-Actualization

When all of the foregoing needs are satisfied, then and only then are the needs for self-
actualization activated. Maslow describes self-actualization as a person's need to be and do
that which the person was "born to do." "A musician must make music, an artist must paint,
and a poet must write." These needs make themselves felt in signs of restlessness. The person
feels on edge, tense, lacking something, in short, restless. If a person is hungry, unsafe, not
loved or accepted, or lacking self-esteem, it is very easy to know what the person is restless
about. It is not always clear what a person wants when there is a need for self-actualization.

Table 6.1 Hierarchy of Needs

Need Level Description Examples
Self-actualization Realise one's full potential Use abilities to the fullest
Esteem Feel good about one self Promotions and recognition
Belongingness Social interactions Interpersonal relationships
Safety Security, stability Job security, health insurance
Physiological Food clothing shelter Basic pay-level to buy items

According to this theory lower-level needs must be satisfied before higher needs are
CHAPTER 6 Page 129
addressed.

Criticism on Maslow’s Theory

• The Practical importance of needs can be changed. For example, First need of people in
Afghanistan is Safety need.
• People are not fulfilling their needs in a hierarchy. Simultaneously they may fulfil few
needs.

ii. Fredrick Hertzberg’s Two Factor Theory (1959)

Hertzberg’s Two Factor Theory is a "content theory" of motivation". Hertzberg analysed the
job attitudes of 200 accountants and engineers who were asked to recall when they had felt
positive or negative at work and the reasons why. From this research, Hertzberg found that
the factors causing job satisfaction (Motivation) were different from that causing job
dissatisfaction. He developed the motivation-hygiene factors theory to explain it.

Figure 6.4: Fredrick Hertzberg’s Two Factor Theory

Source: Foundation of management, Robbin, Bergman, Stagg, and Coulter, 2008)

- Hygiene Factors
Hygiene factors are based on the need for a business to avoid unpleasantness at work. If these
factors are considered inadequate by employees, then they can cause dissatisfaction with
work.

- Motivator Factors
CHAPTER 6 Page 130
Motivator factors are based on an individual's need for personal growth. When they exist,
motivator factors actively create job satisfaction. If they are effective, then they can motivate
an individual to achieve above-average performance and effort.

iii) McClelland’s Theory of Three Needs

David McClelland proposed a context for understanding needs in people, which holds
significance in understanding motivations and behaviours. It is subdivided into three
categories: the Need for Achievement, the Need for Affiliation, and the Need for Power.

(a) The need for achievement (n-Ach)

The n-ach person is 'achievement motivated' and therefore seeks achievement,
attainment of realistic but challenging goals, and advancement in the job. There is a
strong need for feedback as to achievement and progress, and a need for a sense of
accomplishment.

(b) The need for affiliation (n-Affil)

The n-affil person is 'affiliation motivated’ and has a need for friendly relationships and
is motivated towards interaction with other people.
The affiliation driver produces motivation and needs to be liked and held in popular
regard. These people are team players.

(c) The need for authority and power (N-power)

The n-pow person is 'authority motivated'. This driver produces a need to be influential,
effective and to make an impact. There is a strong need to lead and for their ideas to
prevail. There is also motivation and need towards increasing personal status and
prestige.

This is not to say that one person cannot have needs spanning all three categories. A person
may have the need for affiliation at the same time they have the need for power. While this
may initially seem contradictory, there are instances where both needs can be fulfilled. Also,
timing may connote different strengths of needs at different moments. So, while a person
may strongly feel the need to affiliate during times of loneliness, they may at another time
feel the strong need for power when instructed to organise an event. Needs may arise and be
changed out of a change of context.

iv) ERG Theory

Clayton Alderfer extended and simplified Maslow's Hierarchy into a shorter set of three
needs: Existence, Relatedness and Growth (hence 'ERG').

- Existence Need
At the lowest level is the need to stay alive and safe, now and in the foreseeable future. When
we have satisfied existence needs, we feel safe and physically comfortable. This includes
Maslow's Physiological and Safety needs.

- Relatedness Need
CHAPTER 6 Page 131
At the next level, once we are safe and secure, we consider our social needs. We are now
interested in relationships with other people and what they think of us. When we are related,
we feel a sense of identity and position within our immediate society. This encompasses
Maslow's Love/belonging and Esteem needs.

- Growth Need
At the highest level, we seek to grow, be creative for ourselves and for our environment.
When we are successfully growing, we feel a sense of wholeness, achievement, and fulfilment.
This covers Maslow's Self-actualization.

Table 6.2: Alderfer’s Existence (E) Relatedness (R) and Growth (G)
Need Level Description Examples
Self-development
Growth Worker continually improves skills
creative work
Relatedness Inter-per relationship Good relations, feed back

Existence Food clothing shelter Basic pay level to buy items

v) McGregor’s Theory X and Theory Y
One important organisational implication of the need hierarchy concerns how to manage
people at work. Douglas McGregor understood people’s motivation using Maslow’s need
theory. He grouped the physiological and safety needs as “lower order” needs and social,
esteem, and self-actualization needs as “upper order” needs. He set out in 1960 two sets of
contrasting views and assumptions on human behaviour; they are theory X and Y.

a) Theory X, (Lower Order)

• On average, the human being has an inherent dislike of work, and will tend to avoid work
if possible.
• Because of the lack of attitude to work, most people have to be forced, controlled,
directed or threatened with punishment, to get them to work.
• The average human being prefers to be directed, wishes to avoid responsibility, has
relatively little ambition, and wants security above all.
• Human beings are by nature resistant to change and very much set in their ways.
• He believed that Theory X assumptions are appropriate for employees motivated by
lower order needs.

b) Theory “Y” (Upper Order)

• The expenditure of physical and mental effort in work is as natural as play as rest. The
average human being does not inherently dislike work. Depending on the controllable
conditions, work may be a source of satisfaction or a source of punishment.
• External control and the threat of punishment are not the only means for bringing effort
towards organisational objectives. People will exercise self-direction and self-control in
the services of objectives to which they are committed.
• Commitment to objectives is a result of the rewards associated with their achievement.
CHAPTER 6 Page 132
• The average human being learns under proper conditions not only to accept but to seek
responsibility.
• The capacity to exercise a relatively high degree of imagination, ingenuity, and creativity
in the solution of organisational problems is widely distributed in the population.
• He believed that Theory Y assumptions, in contrast, are appropriate for employees
motivated by higher order needs.

vi) Mayo’s Theory

According to Mayo's theory, employee motivation is primarily driven by relational factors
such as recognition, social interaction, and camaraderie, rather than monetary rewards or
environmental conditions. Elton Mayo's theory, also known as the Hawthorne studies. Mayo
conducted a series of experiments at the Western Electric Hawthorne Works in Chicago
during the 1920s and 1930s. The purpose of these studies was to understand the relationship
between workplace conditions and employee productivity.

Mayo's theory challenged the prevailing belief that productivity was solely determined by
physical and technical factors. He found that social and psychological factors, such as
employee morale, communication, and group dynamics, played a significant role in
influencing productivity.
In sum, Elton Mayo's theory contributed to a shift in management thinking, highlighting the
importance of employee engagement, motivation, and interpersonal relationships in
achieving organisational success.

B) Process Theories

i. J. Stacy Adams's Equity Theory

Equity theory is based on the idea that individuals are motivated by fairness. John Stacey
Adams (1963) suggests that the higher an individual's perception of equity, the more
motivated they will be and vice versa: if someone perceives an unfair environment, they will
be demotivated.
• A brief survey would give us the following insights. it considers workers' perception of
the fairness of work outcomes in proportion to their inputs. Adams notes it is the relative
rather than the absolute level of outcomes a person receives. The outcome/input ratio is
compared by an employee with that of another employee, referred to as a referent. The
referent is perceived as similar to the worker.
• Equity exists when a person perceives their outcome/input ratio to be equal to their
referent's ratio. It infers that if the referent receives more outcomes, he should also give
more input to achieve equity.

Table 6.3: Equity theory inputs when tabulated give us

Condition Person Referent Example
Worker contributes more inputs
Outcome = Outcome
Equity but also gets more output than
Inputs Inputs referent.
CHAPTER 6 Page 133
Worker contributes more inputs
Outcome = Outcome
Underpayment Equity but also gets the same output as
Inputs Inputs
referent.
Worker contributes same inputs
Outcome = Outcome
Overpayment Equity but also gets more output than
Inputs Inputs
referent.

A. It is to be noted that the situation of the person may not actually be unfair, but it is
perceived to be unfair.

B. Secondly this uneasiness will be caused even if the inequality works in the individuals’
favour as well. They think they are getting a bad deal. Thus, the implication is that the
employees would think that they are not getting a fair pay for the work they do. As a
result, they will reduce this effort to a level which they think appropriate, to what they
are paid for.

ii. The Victor Vroom's Expectancy Theory

Propounded by an American V.H. Vroom during the 1960 decade, this theory says that an
individual’s behaviour is formed not on objective reality, but on her subjective perception of
that reality.
The core of the theory, as decided by the appended diagram, relates to how a person
perceives the relationship between three (3) things, namely – The Effort, Performance and
Rewards.

Vroom focused especially on the factors involved in stimulating an individual to put effort
into something, since this is the basis of motivation. He concluded that there were three such
factors, each based on the individual’s personal perception of the situation. Hence,
expectancy theory suggests that motivation depends on an individual's expectations about
their ability to perform tasks and receive desired rewards.

Vroom also believed that increased effort would lead to increased performance; given the
person has the right tools to get the job done. The expected outcome is dependent upon
whether or not the person has the right resources to get the job done, has the right skills to
do the task at hand, and they must have the support to get the job done.

That support may come from the boss or by just being given the right information or tools to
finish the job. Although many people correlate high performance with high rewards, many
times the theory is limited because rewards are not always directly correlated with
performance in many organisations.

It is also related to other parameters such as position, effort, responsibility, education, etc.
It is important to remember that there is a difference between incentives and motivators.
Incentives are non-material objects.

They are manipulated by managers and leaders in order to get employees to do desired tasks.
Incentives may work, if the incentive is something the employee desires, however if the
CHAPTER 6 Page 134
incentive is taken away, the behaviour may not sustain. Motivation theories need to
accentuate motivation and not incentives. For this reason, motivation implies that people
make decisions about their own behaviour and what motivates them.

Figure 6.5: Basic expectancy theory model

Source: New Era of Management, R.L. Daft, 2017

• Expectancy: That is – the extent of the individual’s perception or belief that a particular
act will produce a particular outcome.
• Instrumentality: That is the extent the individual perceives that effective performance
leads to desired rewards.
• Valence: That is the strength of the belief that attractive rewards are potentially available.
• E-P Expectancy: It involves determining whether putting effort into a task will lead to
higher performance.
• P-O Expectancy: It involves determining whether successful performance will lead to the
desired outcome or rewards.

Key Features of the Expectancy Theory

• It gives a comprehensive view of the motivational process.

• It indicates that individuals would act only when they perceive that their behaviour will
lead to desired outcome.
• It emphasises the importance of individual perceptions of reality in the motivational
process.
• It implies that job satisfaction will follow effective job performance.

iii. Edwin Locke & Gray Latham’ Goal – Setting Theory (1960)
Edwin Locke put forward the Goal-setting theory of motivation which states that goal setting
is essentially linked to task performance. It states that specific and challenging goals along
with appropriate feedback contribute to higher and better task performance. On the other
hand, goals indicate and give direction to an employee about what needs to be done and how
CHAPTER 6 Page 135
much effort is required to be put in.

The important features of goal-setting theory

• The willingness to work towards attainment of a goal is the main source of job motivation.
• Clear, particular, and difficult goals are greater motivating factors than easy, general and
vague goals.
• Specific and clear goals lead to greater output and better performance.
• Unambiguous, measurable, and clear goals accompanied by a deadline for completion
avoids misunderstanding.
• Goals should be realistic and challenging.
• The more challenging the goal, the greater is the reward generally and the more is the
passion for achieving it.
• Better and appropriate feedback of results directs the employee behaviour and
contributes to higher performance than absence of feedback.
• Feedback is a means of gaining reputation, making clarifications, and regulating goal
difficulties. It helps employees to work with more involvement and leads to greater job
satisfaction.

iv. B.F. Skinner ‘s Reinforcement Theory

This theory was proposed by BF Skinner and his associates. This theory suggests that a
given behaviour is said to be a function of the consequences of earlier behaviour.

It is based on “law of effect”, it is perceived that all behaviour is determined to some extent
by the rewards or punishments meted from previous behaviour which will have the effect of
reinforcing current actions. It is perceived that all behaviour is caused by external sources,
and that we have little control over the consequences of our actions.

In this sense, all types of behaviour are caused by external sources since we can have little
control over the consequences of our actions. Thus, an individual’s efforts to contribute the
ideas to a team are consistently met with no encouragement but indicated by the
management. Then such a situation is referred to as Negative Reinforcement. In such a
situation the individual employee is likely to be discouraged from making further
suggestions.

It may end up with such employees deciding to seek employment elsewhere.

In the event, the management decides to promote such suggestions, and reward him; he will
continue to generate even more ideas. It’s a glaring example for Positive (+) Reinforcement.
Reinforcement theory will offer some important guidelines to those intending to use it as a
motivating tool in the workplace. The managers use the following methods for controlling
the behaviour of the employees:

• Positively Reinforcement: Increases likelihood that behaviour will be repeated.

CHAPTER 6 Page 136
• Negative Reinforcement: Increases likelihood that behaviour will be repeated.
• Punishment: Reduces likelihood that behaviour will be repeated
• Extinction: Reduces likelihood that behaviour will be repeated

Figure 6.6: Changing Behaviour with Reinforcement

Source: New Era of Management, R.L Daft, 2017

Implications of Reinforcement Theory

Reinforcement theory explains in detail how an individual learns behaviour. Managers who
are making an attempt to motivate the employees must ensure that they do not reward all
employees simultaneously. They must tell the employees what they are not doing correctly.
They must tell the employees how they can achieve positive reinforcement.

v. Taylor’s motivation theory

• Frederick Taylor is the key theorist that developed Taylor’s scientific management theory
also known as Taylor's motivation theory. It concentrates on analysing workflows to find
the best way tasks can be performed to maximise efficiency. While Taylor's management
approach emphasises using scientific methods to increase productivity, it also points to
financial incentives as the main motivator for employees. Taylor’s motivation theory
argues that money is the main force that motivates employees to work at a company.

• Therefore, to motivate employees Taylor’s theory suggests that instead of paying

employees a fixed salary they should receive performance-based pay. He believed that it
would motivate workers to work harder without supervision.

• Taylor’s theory is summarised in four key principles that include:

a) Scientific methods are used to discover the most efficient way to perform a task.
b) Clear division of responsibilities
c) Performance-based pay
CHAPTER 6 Page 137

d) Rigid hierarchy and strict surveillance of employees.

Figure 6.7: Advantages and disadvantages of Taylor’s theory

• Taylor’s scientific management theory is still used today in manufacturing industries,

some hospitals, and fast-food chains. A real-life example of an organisation that continues
to implement this method is McDonald’s.

• The main difference between Taylor’s and Herzberg theories was that Herzberg’s
motivation-hygiene theory stated that employees are motivated by other things than
money and Taylor’s theory states that employees are motivated only by monetary gains.

vi. Bandura’s self-efficacy theory

The self-efficacy theory of motivation is a task-specific way of thinking about motivation. Self-
efficacy defines one's belief in themselves in being capable of accomplishing a particular task
or goal. In 1977, Albert Bandura, a Canadian - American psychologist, first introduced the
term 'self-efficacy'. Self-efficacy theory implies that individuals tend to engage in tasks or
activities to an extent to which they perceive themselves to be capable. The four components
of self-efficacy theory are mastery experiences, vicarious experiences, emotional and
psychological states, and verbal persuasion. The higher your self-efficacy, the greater your
belief that you can perform a specific task. This is important for motivation because people
with low self-efficacy are unlikely to give their full effort to a task.

Application of Self-Efficacy Theory

• Self-efficacy is interconnected with employees' satisfaction and performance at work. It

is important to encourage entrepreneurship spirit in business contexts.

• Businesses can create a healthy and encouraging environment to cultivate their

employees' self-efficacy. For instance, as compliments and recognition are central to the
development of self-efficacy, modern companies have adopted various recognition
CHAPTER 6 Page 138
rewards programs to drive their employees forward.

• Organisations simultaneously focus on offering various learning opportunities for their

employees. In modern workplaces, coaching and mentoring are common practices to
foster individuals' vicarious experiences. Employees can learn from watching how their
coaches or mentors handle specific tasks, thus repeating such behaviours and attitudes
in their own projects.

KEY TERMS

fortuity Performance
esteem Process
expectancy Reprimands
extinction Reinforcement
Goal Setting Rewards
Intrinsic Safety
Hierarchy Self-Actualization
Motivation Needs Valance

Chapter Round-Up

This chapter taught us how employees are self-inspired to do some work

effectively in an organisation. There are possibilities for people to be

motivated by providing various forms of good services – rewards and

recognition in return to their best performance. The theories of motivation

can be classified into two categories namely content theories and process
CHAPTER 6 Page 139

EXPERIENTIAL EXERCISES

Multiple Choice Questions (MCQs)

1. Which of the following is the correct definition of motivation?

a) Our ability to understand and perceive emotions.
b) An internal state that guides our behaviour to attain the goal.
c) Our ability to understand cultural norms and values.
d) Our ability to adapt to our environment.

2. Maslow and Herzberg are two examples of ___________ theories of motivation.

a) Content
b) Expectancy
c) Process
d) equity

3. The motivational process and not the motivators as such are associated with,
a) Two factor theory
b) Berg theory
c) Need hierarchy theory.
d) Expectancy theory

4. Equity theory of motivation focuses on:

a) people’s expectation of the different outcomes for a given action
CHAPTER 6 Page 140
b) the motivational force involved in a person’s actions at work.
c) people’s perception of how they should perform in a given situation at work.
d) people’s perception of how fairly they have been treated in comparison with others.

5. What theory is built around the principle that 'people make choices regarding how to
behave based on values and beliefs'?
a) Instrumental
b) Classical
c) Expectancy
d) Contingency

6. 6. Motivation to be in charge, have high status, and exert influence over others is
a) Achievement motivation
b) Power motivation
c) Intrinsic motivation
d) Aggressive motivation

7. According to Abraham Maslow’s Hierarchy of Needs, which need is on the bottom

among the following needs?
a) Physiological needs
b) Safety needs
c) Belongingness needs.
d) Esteem needs

8. Which one of the following is a feature of McGregor's Theory X?

a) Workers enjoy responsibility.
b) Workers view physical and mental effort as a natural part of work.
c) Workers like to show initiative.
d) Workers like to be directed.

9. Hygiene factors are associated with which writer?

a) D.C. McClelland
b) Frederick Hertzberg
c) Abraham Maslow
d) Douglas McGregor

10. An individual's belief that he or she is capable of performing a task is called:

a) Self-worth
b) Self-esteem
c) Self-efficacy
d) Self-actualization
CHAPTER 6 Page 141

Answers

1 B
2 A
3 C
4 D
5 C
6 B
7 A
8 D
9 B
10 C

The Act of Transferring

Information

Learning Outcomes

After successful completion of this chapter, you should be able to:

• Describe the communication process.

• Understand the types of communication techniques and its effectiveness.
• Illustrate the importance of communication to an organisation.
• Discuss Modern Technology in Communication
• Understand the types and forms of communication.
• Identify the barriers to effective communication and how to overcome them.
CHAPTER 7 Page 142

7.1 Introduction to Communication

Communication is a process of sending and receiving messages. It is also referred as

transmission of information. Effective communication is always vital to all major
management functions, and it is especially important to the leading function as it is the
channel for interaction with and impact on others. Communication is not just for exchanging
information, but also to persuade and influence people. Although communication skills have
been important to managers, the ability to persuade and influence is even more critical today.
Communication as a function of management plays an important role for three primary
reasons.

• Communication provides a common thread for the management process of planning,

organising, leading, and controlling.
• Effective communications skills can enable managers to draw on the vast array of talents
available in an organisation.
• Managers spend a great deal of time communicating.

Communication is critical to every manager’s job. It is especially not possible to have good
human relations without communication. Communication is the key management function
to keep an organisation existing.
Hence it is important to understand the few definitions of communication which will provide
the proper understanding about the communication as a process.

Definitions of Communication

Several definitions of communication are presented below.

• Communication is a tool for exchanging experience and values as well as transfer of

meanings and knowledge. (Miroslavljević, M., 2008)
• Communication is the process of sharing information with other individuals. (Samuel and
Trevis, 2015).
• Communication is the process by which information is exchanged and understood by two
or more people, usually with the intent to influence or motivate behaviour. (Daft R.L,
2017)

Communication is a linking process of management. Communication is the way managers

conduct the managerial functions of Planning, Organizing, Leading, and Controlling.

Communication is the heart of all organisations. Communication helps managers to perform

their jobs and responsibilities. Communication serves as a foundation for planning. All the
essential information must be communicated to the managers who in-turn must
communicate the plans so as to implement them.
CHAPTER 7 Page 143
Organising also requires effective communication with others about their job task. Similarly,
leaders as managers must communicate effectively with their subordinates so as to achieve
the team goals. Controlling is not possible without written and oral communication.

7.2 Process of Communication

The sender will initiate the communication process by developing an idea into a message.
This is also known as encoding. The sender will then transmit the message through a channel,
or a method of delivery; think of things like e-mail, phone conversations, instant messages,
face-to-face discussion, or even a text message.

The message then moves through the channel to the receiver, who completes the
communication process by interpreting and assigning meaning to the message, which is also
known as decoding.

Since most communication exchanges involve a continued dialogue between senders and
receivers, a feedback loop was added to the communication process.

The feedback loop is a critical component in the communication process because it ensures
a message was properly received and interpreted by the other party.

To spread knowledge over space, transmission models of communication concentrate on the

movement of message(s) from one communicator to another. While other models take into
account ongoing processes or feedback loops, transmission models emphasize
communication as a linear process in which the sender projects a message to the destination.

A fundamental transmission model of communication was created in 1949 by the

mathematician Claude Shannon and the engineer Warren Weaver. This model is a key
resource for comprehending how communication works.

Figure 7.1: A Model of the Communication Process

CHAPTER 7 Page 144
Elements of Communication Process

• Sender: The initiator of a communication

• Receiver: The individual whose senses perceive the sender’s message.
• Encoding: The translation of information into a series of symbols for communication
• Decoding: The interpretation and translation of a message into meaningful information
• Channel: The formal medium of communication between a sender and a receiver
• Noise: Anything the confuse, disturb, diminishes, or interferes with communication
• Feedback: The receiver's basic response to the interpreted message. (Bartol & Mating,

a) Importance of Communication

• To prepare plans (Establish objectives, design strategies & Policies) (planning)

• To organise human and other resources in the most effective & efficient way- organising
• To select, develop & appraise members of the organisation (Staffing)
• To lead & motivate people (Leading)
• To control organisation performance (Controlling)

b) Importance of Superior-Subordinate Communication

• To give specific job instructions and directions

• To give information about organisational procedures and practices
• To educate employees as to why their jobs are important.
• To give feedback to subordinates about their performance, as to how well they are doing
and how they can improve.
• To provide ideological type information to facilitate the indoctrination of goals.

7.3 Communication within an organisation

Communication is a process of exchanging information, ideas, thoughts, feelings and

emotions through speech, signals, writing, or behaviour. People communicate with each
other in a number of ways that depend upon the message and its context in which it is being
sent. Choice of communication channel and your style of communicating also affect
communication. Hence, another aspect of management communication concerns the
organisation as a whole.

Two basic types of organisational communication can be identified within an organisation

based on style and purpose.

i. Formal communication
CHAPTER 7 Page 145
ii. Informal communication

Organisational communication comprises formal and informal communication throughout

an organisation, including communication among employees and employee-manager
communication.

I. Formal Communication Channel

Formal communication is designed by the management. It is an official communication which
takes place through the line of authority or chain of command. The basic purpose of designing
such communication is to connect various sub-systems of organisation and coordinate their
functioning for achieving organisational goals.

In formal communication, certain rules, conventions, and principles are followed while
communicating messages. Usually professional settings, corporate meetings, and
conferences undergo formal patterns.

There are four types of formal communication based on the direction of the flow:
a) Upward Communication
b) Downward Communication
c) Horizontal or Lateral communication
d) Diagonal or Crosswise

a) Upward Communication

The function of upward communication is to send information, suggestions, complaints and

grievances of the lower-level workers to the managers above. It is, therefore, more
participative in nature. E.g., Problems, Expectations, Suggestions, Performance reports,
disputes, Financial and Accounting information.

b) Downward Communication

Communication in the first place, flows downwards. It is based on the assumption that the
people working at higher levels have the authority to communicate to the people working at
lower levels. This direction of communication strengthens the authoritarian structure of the
organisation. This is also called Downstream Communication.

Example: Implementation of goals and strategies, Job instructions, Procedures, Practices,

Performance feedback, Indoctrination – Motivating employees

c) Horizontal or Lateral communication

This type of communication can be seen taking place between persons operating at the same
level or working under the same executive. The main use of this dimension of communication
is to maintain coordination and review activities assigned to various subordinates. Usually,
lateral communication arises during committee meetings or conferences in which all
CHAPTER 7 Page 146
members of the group, mostly peers or equals, interact.

Example: The horizontal exchange of messages from among peers / co-workers

• Intradepartmental problems solving within the same department helping each other.
• Intradepartmental coordination to accomplish joint tasks between two departments
(Meeting between marketing and production on a matter of mutual interest)
• Change initiatives and improvements-share information among teams, departments to
help organisations to change and grow, improve.

d) Diagonal or Crosswise

II. Informal Communication

Informal communication is done using channels that are in contrast with formal
communication channels. It’s just casual talk. It is established for societal affiliations of
members in an organisation and face-to-face discussions. It happens among friends and
family. In informal communication use of slang words, foul language is not restricted. Usually,
informal communication is done orally and using gestures.

Informal communication, unlike formal communication, doesn’t follow authority lines. In an

organisation, it helps in finding out staff grievances as people express more when talking
informally. Informal communication helps in building relationships.
Example: Grapevine: The usual implication is that the information was passed person to
person by word of mouth, perhaps in a confidential manner among friends or colleagues. It
can also imply an overheard conversation or anonymous sources of information. For
instance, "I heard through the grapevine that Brad was getting fired. (Wikipedia)

(a) Diagonal communication refers to the flow of information or messages between

individuals or departments that are not directly in a hierarchical or formal reporting
relationship.

Unlike vertical communication, which occurs between individuals at different levels of

authority (such as from a manager to a subordinate), and horizontal communication,
which takes place between individuals at the same level, diagonal communication cuts
across different levels and departments within an organisation.

Diagonal communication is characterized by its cross-functional nature, as it enables

individuals from different departments or teams to exchange information, collaborate,
and coordinate efforts to achieve common goals.

It promotes the sharing of knowledge, ideas, and perspectives across organizational

boundaries, leading to improved problem-solving, innovation, and overall organizational
effectiveness.

7.4 Communication Techniques

CHAPTER 7 Page 147

a) Verbal
i. Oral Communication
ii. Written Communication

b) Nonverbal Communication

a) Verbal Communication
Verbal communication is a form of oral communication in which the message is
communicated by speaking out the words loud. Here, the sender verbalises his emotions,
ideas, and viewpoints in the form of speeches, dialogues, presentations, and conversations.

The tone of the speaker, speech clarity, loudness, pace, body language, and the calibre of the
words used in the conversation all affect how well verbal communication is conveyed. Since
the message is simultaneously sent and received by the sender and recipient in the case of
vocal communication, the response is immediate.

The effectiveness of verbal communication depends on a person's listening abilities in

addition to their speaking abilities.

i. Oral Communication
In oral communication, spoken words are used. It includes face-to-face conversations,
speech, telephonic conversation, video, radio, television, voice over internet. In oral
communication, communication is influenced by pitch, volume, speed and clarity of speaking.

- Effectiveness of Oral Communication

It is possible to describe oral communication as the act of exchanging ideas and information
verbally. It is a crucial method of communication that is important in a variety of situations,
such as intimate partnerships, academic settings, and professional settings.

- Maintain Clarity in communication.

Maintaining clarity in communication is speaking succinctly and clearly so that your
audience can understand what you’re saying. Avoid using jargon, speak at a speed that is
appropriate for your audience, and use clear, plain English.

- Audience-cantered communication
Consider your audience’s requirements, interests, and degree of understanding when
communicating with them to make sure your message is pertinent and interesting. Adapt
your vocabulary and communication style to the group you are speaking to.

- Body Language
Non-verbal clues like posture, gestures, and facial expressions can either improve or
CHAPTER 7 Page 148
detract from your message. Effectively convey your message by using confident body
language.

- The tone of voice

The tone of your voice can transmit attitudes and emotions, which might affect how your
message is understood. Adapt your tone to the message you’re trying to convey.

- Listening
Effective oral communication involves active listening. Listen carefully to your audience,
respond to their questions and concerns, and be open to feedback.

ii. Written Communication

In written communication, written signs or symbols are used to communicate. A written
message may be printed or hand written. In written communication messages can be
transmitted via email, letter, report, memo etc.

Message, in written communication, is influenced by the vocabulary & grammar used, writing
style, precision and clarity of the language used. Written Communication is the most common
form of communication being used in business. So, it is considered core among business
skills. Memos, reports, bulletins, job descriptions, employee manuals, and electronic mail are
the types of written communication used for internal communication.

For communicating with external environments in writing, electronic mail, Internet Web
sites, letters, proposals, telegrams, faxes, postcards, contracts, advertisements, brochures,
and news releases are used.

Effectiveness of Written Communication

The audience, the subject, your intended audience, as well as other considerations, all play a
role in effective written communication. However, all successful written communication
shares the following traits:

• Connection – Effective writing creates a bond between the writer and the reader.
• Clarity – Clear and simple-to-understand written communication is essential.
• Cause – The purpose of writing must be obvious to both the author and the reader, as
well as any specific actions you are requesting of your audience.
• Conciseness – Effective written communication gets right to the point and doesn’t
digress or include a lot of unnecessary details.
• Correctness – For written communication to be effective, the tone, phrasing, and
grammar must be acceptable.

b) Non-verbal Communication
Non-verbal communication is the sending or receiving of wordless messages. We can say that
communication other than oral and written, such as gestures, body language, posture, tone
CHAPTER 7 Page 149
of voice or facial expressions, is called nonverbal communication. Non- verbal
communication is all about the body language of the speaker.

Nonverbal communication helps the receiver in interpreting the message received. Often,
nonverbal signals reflect the situation more accurately than verbal messages. Sometimes,
nonverbal response contradicts verbal communication and hence affects the effectiveness of
the message.

Nonverbal communication has the following three elements.

• Appearance: Speaker: clothing, hairstyle, neatness, use of Cosmetics, Surrounding: room
size, lighting, decorations, furnishings
• Body Language: facial expressions, gestures, postures
• Sounds: Voice Tone, Volume, and Speech rate

Effectiveness of Non-verbal Communication

Non-verbal communication can be very effective in conveying messages and expressing
emotions. In fact, research has shown that non-verbal communication can account for up to
93% of the meaning in face-to-face interactions.

Non-verbal cues such as facial expressions, gestures, posture, and eye contact can
communicate a wide range of emotions, including happiness, sadness, anger, fear, surprise,
and disgust. They can also convey information about a person's personality, confidence, and
credibility.

In addition, non-verbal communication can be used to reinforce or contradict verbal

messages. For example, a person may say that they are happy, but their facial expression may
indicate otherwise. In this way, non-verbal communication can provide important contextual
information that helps to clarify or interpret verbal messages.

Overall, non-verbal communication is an important aspect of human communication and

can be highly effective in conveying messages and building relationships.

7.5 Communication Networks

The pattern of contacts among the members of the organisation and flow of information
among them is a communication network. Network helps managers to establish contacts in
different patterns through communication flows. The network depends upon the magnitude
of the organisation, nature of communication channels in the organisation and the number
of persons involved in the process.

The Communication networks can be categorised basically into two according to the power
/authority position in an organisation.

• Centralised Network: Team members must communicate through one individual to

CHAPTER 7 Page 150
solve problems or make decisions.

• Decentralised Network: Individuals can communicate freely with other members.

Members can process information equally among themselves until they agree on a
decision.

Also, there can be many patterns of communication network. Normally there are five types
of networks such as,

• Vertical
• Wheel
• Y
• Circle
• All Channels

A A

D O B O
C B
C Figure 7.4: Y

Figure 7.3: Wheel

Wheel network is an
In the ‘Y’ network two
information flow to
subordinates report to
and from one central
the superior. It may be
member of the group.
regarded as a four-
This network of
level hierarchy.
communication is
CHAPTER 7 Page 151

A
A
E B E B

D C D C

Figure 7.5: Circle Figure 7.6: All Channel

The ‘circle’ network
represents a three-level
hierarchy in which
there is communication
between superiors and
Decentralised network,
superior in complex
tasks, more
democratic, but can be
very slow, everyone can

Figure 7.2: Different patterns of communication networks

Modern Technology in Communication
The world of technology is always evolving. The way individuals interact has been
permanently changed by recent advancements in applied science. The talk of the day seems
to be investigating how technology affects communication and discussing if people interact
with others differently.

No matter how far apart they are, people may stay in touch thanks to technology. On an
interpersonal level, communication is possible 365 days a year, seven days a week.
In order to reveal the importance of technology in communication, the essay tries to find
answers to these questions. It explores how everything changes over the years and discusses
the connection between technology and communication.

To begin this examination and find answers to these questions, we begin by defining media
and communication and outlining the stages of technological advancement from old age to
the present day in the field of communication. The paper will highlight the use of internet,
newspaper, radio and other media but it mostly dwells on the use of mobile telephony.
Modern technology has revolutionised the way of communication with each other. Some of
the most popular and widely used technologies in communication include:

1. Smartphones: Smartphones have become an essential part of daily life, allowing people
to stay connected through phone calls, messaging apps, and social media platforms.
CHAPTER 7 Page 152
2. Social Media: Social media platforms like Facebook, Twitter, Instagram, and LinkedIn
have transformed the way people interact with each other. These platforms allow people
to share updates, photos, and videos with their friends and followers in real-time.

3. Video Conferencing: Video conferencing tools like Zoom, Skype, and Google Meet have
become increasingly popular for business meetings, online classes, and virtual events.
They allow people to communicate and collaborate with others from anywhere in the
world.

4. Instant Messaging: Instant messaging apps like WhatsApp, iMessage, and Telegram have
made it easy for people to send text messages, voice messages, and share files with each
other instantly.

5. Email: Email is still a popular mode of communication, especially in the business world.
It allows people to send and receive messages, files, and documents quickly and easily.

6. Voice Assistants: Voice assistants like Siri, Alexa, and Google Assistant allow people to
control their devices, search the internet, and perform other tasks using voice
commands.

These technologies have made communication faster, more efficient, and more convenient
than ever before, allowing people to stay connected with each other no matter where they
are in the world.
Barriers to Effective Communication

• The use of jargon: Over-complicated, unfamiliar and/or technical terms

• Emotional barriers and taboos: Some people may find it difficult to express their
emotions and some topics may be completely 'off-limits' or taboo.
• Lack of attention, interest, distractions, or irrelevance to the receiver
• Differences in perception and viewpoint
• Physical disabilities: such as hearing problems or speech difficulties.
• Physical barriers to non-verbal communication: Not being able to see the non- verbal
cues, gestures, posture, and general body language can make communication less
effective. Phone calls, text messages and other communication methods that rely on
technology are often less effective than face-to-face communication.
• Language: differences and the difficulty in understanding unfamiliar accents.
• Cultural differences: The norms of social interaction vary greatly in different cultures, as
do the way in which emotions are expressed.

How to Overcome Barriers to Communication

• Have Clarity in Thoughts: Managers should be very clear about objectives and what they
want to convey.
• Understand the needs of the audience: Managers should be emotional and sensitive
towards the needs of the receiver.
CHAPTER 7 Page 153
• Seek the Advice of others before Communicating.
• Take adequate care of Language and way of speaking.
• Have Feedback from the receiver.
• Retain Consistency about the Message
• Keep a Routine check on the communication system.
• Make use of the body language
• Avoid overloading too much of information.
• Reduce the level of noise as far as possible.
• Communication chain should be short.

KEY TERMS

Body Language Network

Channel Noise
Communication Receiver
Decoding Sender
Downward Sound
Exchange Staffing
Encoding Two-Way
Feedback Written
Formal Verbal
Grapevine Vertical
Informal Wheel
Lateral

Chapter Round-Up
CHAPTER 7 Page 154

Communication as a means of information exchange. Communication is

crucial and pertinent in organisations. An organisation is viewed as a small

component of a larger civilisation. Utilising diverse network kinds, such as

centralised and decentralised networks, and vertical and lateral

communication strategies. It has been discovered that an organisation's

excellent communication is the key to its success.

No matter the direction of the communication-vertically upwards or

downwards, horizontally, laterally, or diagonally it always involves sending

messages and receiving responses. This guarantees the communication

process' efficacy. Modern technology in communication also supports the

organisation to communicate effectively.

EXPERIENTIAL EXERCISES
Multiple Choice Questions (MCQs)

1. ___________ aims at making people work together for the common good of the
organisation.
a) Conversation
b) Combination
c) Connection
d) Communication

2. Communication is the __________ or accidental transfer of meaning.

a) Unintentional
b) Deliberate
c) Strategic
d) Conscientious

3. In organisations, the flow of communication sometimes slows down because there are
too many:
a) managers
b) channels
c) hierarchical levels
d) departments
CHAPTER 7 Page 155
4. Appeals and representations are used in _______ communication.
a) upward
b) grapevine
c) horizontal
d) downward.

5. ___ communication may be defined as information that flows from subordinates to

superiors.
a) Downward communication
b) Horizontal communication
c) None of above
d) Upward communication

6. Which of the following is not a barrier to effective communication?

a) Filtering
b) Channel richness
c) Language
d) Defensiveness

7. A message can only be deemed effective when it is_________

a) Communicated face-to-face.
b) Repeated back as proof of understanding.
c) Understood by others and produces the intended results.
d) Delivered with confidence.

8. Horizontal communication takes place between_________

a) Subordinate to superior
b) Employees with same status
c) Superior to subordinate
d) None of these

9. Downward communication flows from ___________ to __________

a) Upper to lower
b) Lower to upper
c) Diagonal
d) Horizontal

10. As a process of sharing thoughts and ideas, communication suffers mainly

from__________________
a) Non-physical barriers
b) Gender differences
c) Both physical and non-physical barriers
d) Physical barriers
CHAPTER 7 Page 156

Answers

1 B
2 D
3 C
4 A
5 D
6 B
7 C
8 B
9 A
10 D

Organisational Control as
Management Process

Learning Outcomes

After successful completion of this chapter, you should be able to:

• Define control and the importance of control in an organisation.

• Explain the nature of Control functions and Levels.
• Identify the activities in the Process of Control
• Recognise different types of financial and non-financial controls together with the
control systems.
• Illustrate essentials of information as effective controlling strategies.
• Describe behavioural implications of control and modern controlling techniques.

8.1 Organisational Control as Management Process

CHAPTER 8 Page 157

Controlling is one of the managerial functions within the organisation which facilitate goal
attainment while interacting with all of the other management functions. A specific
relationship exists between the planning function and controlling function of management.
Some of the definitions of organisational control are given below.

Definitions of Organisational Control

Organisational control is a systematic effort by business management to compare

performance to predetermined standards, plans, or objectives to determine whether
performance is in line with these standards and presumably to take any remedial action
required to see that human and other corporate resources are being used in the most
effective and efficient way possible in achieving corporate objective. (Lahart, 2010).

Organisational control refers to the systematic process of regulating organisational activities

to make them consistent with the expectation established in plans, targets, and standards of
performance. (Daft, 2017)

Therefore, the control process is the system that allows setting, measuring, and matching and
tweaks any business activities such as production, packaging, delivery and more. Controlling
is an essential part of the management process. Controlling is a process of regulating
organisational activities so that actual performance conforms to expected organisational
goals and standards.

Importance of Control

Control is intended to regulate and check, i.e., to structure and condition the behaviour of
events and people, to place restraints and curbs on undesirable tendencies, to make people
conform to certain norms and standards, to measure progress to keep the system on track. It
is also to ensure that what is planned is translated into results, to keep a watch on proper use
of resources, and on safeguarding assets.

Control is required for achieving the goals in a predefined manner because it provides the
instruments which influence the performance and decision-making process of an
organisation. Control is in fact concerned with the regulations applied to the activities within
an organisation to attain expected results in establishing policies, plans, and practices.
Controlling is one of the important functions of management and is regarded as the core of
the management process.

It is a function intended to ensure and make possible the performance of planned activities
and to achieve the predetermined goals and results. The controlling function involves
monitoring the activity and measuring results against pre-established standards, analysing
CHAPTER 8 Page 158
and correcting deviations as necessary and maintaining/adapting the system. It is intended
to enable the organisation to continuously learn from its experience and to improve its
capability to cope with the demands of organisational growth and development.

Control mechanisms play an important role in any business organisation, without which the
roles of managers get constrained. Control mechanisms can be set according to functions,
product attributes, geographical attributes, and the overall strategic and financial objectives.
The process of control has the following elements:

a) Objectives of the business system which could be operationalized into measurable and
controllable standards.
b) A mechanism for monitoring and measuring the performance of the system.
c) A mechanism (i) for comparing the actual results with reference to the standards (ii) for
detecting deviations from standards and (iii) for learning new insights on standards
themselves.
d) A mechanism for feeding back corrective and adaptive information and instructions to
the system, for effecting the desired changes to set right the system to keep it on course.

Therefore, control is an essential managerial function at every level. The process of

management is incomplete without control.

• To ensure that activities are performed in accordance with the predetermined standard
that is to see that activity is achieving the desired result.
• To know what is happening or what has actually happened in the organisation.
• To determine the corrective action, if any, required for the achievement of goals with a
minimum of time, effort, and expense.
• To coordinate the diverse activities and efforts.
• To improve the efficiency of operations by minimising unnecessary and wasteful actions.
• To minimise the accumulation of errors.
• To adapt to the changes in the environment.

8.2 Nature of Control function

1. Control is a Function of Management

Control is a follow-up action to the other functions of management performed by
managers to control the activities assigned to them in the organisation.

2. Control is Based on Planning

Control implies the existence of plans or standards in the organisation.

3. Control is a Dynamic Process

It involves continuous review of standards of performance and results in corrective
action.
CHAPTER 8 Page 159
4. It is a Continuous Activity
It involves constant revision and analysis of standards resulting from the deviations
between actual and planned performance.

5. Control is a Universal Function of Management

Once a plan becomes operational, follow-up action is required to measure progress to
take corrective actions.

Levels of Control
There are three levels of control, which correspond to the three principal managerial levels:

i. strategic planning by top managers,

ii. tactical planning by middle managers,
iii. operational planning by first-line (supervisory) managers.

For these controls to be effective, managers at various levels in the organisation have the
primary responsibility for establishing and evaluating strategic, tactical and operational
controls.

(i) Strategic control

It involves monitoring critical environmental factors (political changes, volatility in customer
needs, economic shifts, and technological change) that affect strategic plans, assessing the
effects of organisational strategic actions, and ensuring that strategic plans are implemented
as intended.

It is mainly under the domain of the top management who generally take an organisation-
wide perspective with a long-term time frame.

(ii) Tactical Control

A regulatory process that focuses on assessing the implementation of tactical plans at
departmental levels, monitoring periodic results, monitoring specific internal and external
forces that affect such tactical plans and taking corrective action when necessary.

Involves middle managers who are concerned with departmental level objectives,
programmes and budgets at periodic or middle term time frames such as weekly and
monthly reporting cycles.

(iii) Operational Control

Involves overseeing the implementation of operating plans, monitoring day-to-day results,
and taking corrective action when required.
Short-term time frame. Usually done by first-line managers or supervisors which provides
short-term feedback usually daily, hourly, or weekly.
CHAPTER 8 Page 160

Figure 8.1: Three levels of control

8.3 Process of Control

The control process of management ensures that every activity of a business is furthering its
goals. This process basically helps managers in evaluating their organisation’s performance.
The steps in the basic control process can be followed for almost any application, such as
improving product quality, reducing waste, and increasing sales. Through the process of
controlling in management, a company can accurately tell if plans are moving in the right
direction and are fully implemented.

The control process is a four steps process as given below:

I. Establish standards and methods for measuring performance.

II. Measure actual performance.
III. Compare actual performance against the set standards or methods.
IV. Check whether performance matches with standards. (If yes, no action needed, if no,
take corrective action)

Compariso
Step Establish Step Measurement Step n of actual Step Correctiv
ment of of actual performanc e action if
I standards II performance III e with the IV necessary
standards

Feedback

Figure 8.2 Model of Control Process

CHAPTER 8 Page 161
There are five types of main controls in an organisation.

a) Operational
b) Financial
c) Structural
d) Strategic
e) Non-Financial Control

a) Operational Control
Operational control regulates the day-to-day output relative to schedules, specifications, and
costs. Whether product and service output are high-quality and delivered on time? Are
inventories of raw materials, goods-in-process, and finished products being purchased and
produced in the desired quantities? Are the costs associated with the transformation process
in line with cost estimates? Is the information needed in the transformation process available
in the right form and at the right time? Is the energy resource being used efficiently?

Operational control can be a very big job, requiring substantial overhead for management,
data collection, and operational improvement. The idea behind operational control is
streamlining the process to minimise costs and work as quickly and efficiently as possible.

There are three types of operational control.

The following three types of operational controls can be identified in an organisational
control process.

I. Feed forward controls, sometimes called preliminary or preventive controls, attempt to

identify and prevent deviations in the standards before they occur. Feed forward
controls focus on human, material, and financial resources within the organisation.
These controls are evident in the selection and hiring of new employees. For example,
organisations attempt to improve the likelihood that employees will perform up to
standards by identifying the necessary job skills and by using tests and other screening
devices to hire people with those skills.

II. Concurrent controls monitor ongoing employee activity to ensure consistency with
quality standards. These controls rely on performance standards, rules, and regulations
for guiding employee tasks and behaviours. Their purpose is to ensure that work
activities produce the desired results. As an example, many manufacturing operations
include devices that measure whether the items being produced meet quality standards.
Employees monitor the measurements; if they see that standards are not being met in
some area, they make a correction themselves or let a manager know that a problem is
occurring.

III. Feedback controls involve reviewing information to determine whether performance

meets established standards. For example, suppose that an organisation establishes a
CHAPTER 8 Page 162
goal of increasing its profit by 12 percent next year. To ensure that this goal is reached,
the organisation must monitor its profit on a monthly basis. After three months, if profit
has increased by 3 percent, management might assume that plans are going according
to schedule.

b) Financial Controls
After the organisation has strategies in place to reach its goals, funds are set aside for the
necessary resources and labour. As money is spent, statements are updated to reflect how
much was spent, how it was spent, and what it obtained. Managers use these financial
statements, such as an income statement or balance sheet, to monitor the progress of
programs and plans. Financial statements provide to the management with information to
monitor financial resources and activities. The income statement shows the results of the
organisation's operations over a period of time, such as revenues, expenses, and profit or
loss.
The balance sheet shows what the organisation is worth (assets) at a single point in time, and
the extent to which those assets were financed through debt (liabilities) or owner's
investment (equity).

1. Financial audits, or formal investigations, are regularly conducted to ensure that financial
management practices follow generally accepted procedures, policies, laws, and ethical
guidelines. Audits may be conducted internally or externally.
2. Financial ratio analysis examines the relationship between specific figures on the
financial statements and helps explain the significance of those figures:

3. Profitability ratios measure an organisation's ability to generate profits. Profit Margin

on Sales: Net Income / Sales
Gross Margin: Gross Income / sales
Return on Assets (ROA): Net Income/ Total Assets

4. Liquidity ratios measure an organisation's ability to generate cash. Current Ratio: Current
Assets / Current Liabilities
Quick Ratio :( Cash & Bank Deposits + Account Receivables)
Current Liabilities

5. Leverage Ratio refers to funding activities with borrowed money: Debt Ratio: Total Debt/
Total Assets

6. Activity ratio measures internal performance with respect to key activities defined by
management:
Inventory Turnover: Total Sales/ Average Inventory Conversion Ratio: Purchase
orders/Customer inquiries

7. Budgetary Controls:
A budget depicts how much an organisation expects to spend (expenses) and earn
CHAPTER 8 Page 163
(revenues) over a time period. Amounts are categorised according to the type of business
activity or account, such as telephone costs or sales of catalogues. Budgets not only help
managers plan their finances, but also help them keep track of their overall spending.

A budget in reality is both a planning tool and a control mechanism. Budget development
processes vary among organisations according to who does the budgeting and how the
financial resources are allocated. Some budget development methods are as follows:

a. Top-down budgeting. Managers prepare the budget and send it to subordinates.

b. Bottom-up budgeting. Figures come from the lower levels and are adjusted and
coordinated as they move up the hierarchy.

c. Zero-based budgeting. Managers develop each new budget by justifying the projected
allocation against its contribution to departmental or organisational goals.

d. Flexible budgeting. Any budget exercise can incorporate flexible budgets, which set
“meet or beat” standards that can be compared to expenditures.

c) Structural Control
Structural control monitors how the building blocks of the organisation’s structure are
holding up to their planned function. Two major types of control operate at opposite ends of
each other because they have different goals, degrees of formality, performance expectations,
organisation designs, reward systems, and levels of participation. There are two types of
controls:

• Hierarchical Controls
• Decentralised Controls

Table 8.1: Hierarchical Control and Decentralised Methods of Control

Hierarchical Control Decentralised Control
People are incapable of self-
discipline and cannot be
Basic People work best when they are
trusted. They need to be
Assumption fully committed to the organisation
monitored and controlled
closely.
Features limited use of rules:
Uses detail rules and
rules on values, group, and self –
Action procedures: Formal
control, selection and socialisation.
control systems
CHAPTER 8 Page 164

Authority: Use Top- Authority: Relies on flexible

Down authority authority. Flat structure, expert
power, everyone monitors quality.
Reward: Emphasise
extrinsic rewards (pay, Relies on result-based job
benefits status) description; emphasises goals on
result – based job descriptions
Features rigid organisational emphasise.
culture
Goals to be achieved.
Reward: Emphasises extrinsic and
intrinsic rewards
Features adaptive culture: culture
recognized as means for uniting
individual, team, and organisational
goals for overall control.

Consequences Employees follow instructions Employees take initiative and week

and do just what they are told. responsibility.

Employees feel a sense of Employees are actively engaged and

indifference toward work. committed to their work.

Employee absenteeism and Employee turnover is low.

turnover is high

Source: New Era of Management, Daft 2017

d) Strategic Control
Strategic control is an integral part of strategic management. It focuses on whether the
strategy is being implemented as planned and the results produced are those intended.
According to Schendel and Hofer “Strategic control focuses on the dual questions of whether:
(1) the strategy is being implemented as planned; and (2) the results produced by the
strategy are those intended.”

Strategic control is the process of evaluating strategy as it is formulated and implemented. It

is directed towards identifying problems and changes in premises and making necessary
adjustments.

Execution must be controlled and evaluated if the strategy is to be successfully implemented.

Strategic control focuses on two questions:
CHAPTER 8 Page 165
1. Is the strategy being implemented as planned?
2. Is it producing the intended results?

Hence, strategic control: monitoring strategic progress, evaluating deviations and taking
corrective action is also very important. These are the key tasks in strategy implementation.
The following strategy control methods are important to an organisation to implement the
strategy control process in an organisation.

i. Premise Control
Premise control is designed to check methodically and constantly whether the premises on
which a strategy is grounded on are still valid. If you discover that an important premise is
no longer valid, the strategy may have to be changed.

ii. Special Alert Control

A special alert control is the rigorous and rapid reassessment of an organisation's strategy
because of the occurrence of an immediate, unforeseen event. Such an event will trigger an
immediate and intense reassessment of the firm's strategy. Form crisis teams to handle your
company's initial response to the unforeseen events.
iii. Implementation Control
Implementing a strategy takes place as a series of steps, activities, investments, and acts that
occur over a lengthy period. There are two types of implementation controls:

a. Strategic Thrusts or projects: Strategic thrusts provide you with information that helps
you determine whether the overall strategy is shaping up as planned.

b. Milestone Reviews: Milestone Reviews review the progress of the strategy at various
intervals or milestones.

iv. Strategic Surveillance

Strategic surveillance is designed to observe a wide range of events within and outside your
organisation that are likely to affect the track of your organisation's strategy based on the
idea that the organisation can uncover important yet unanticipated information by
monitoring multiple information sources such sources include trade magazines, journals and
observations etc.

e) Non-Financial controls
i) Quality Control: Quality Control is a process employed to ensure a certain level of
quality in a product or service. It may include whatever actions a business deems
necessary to provide for the control and verification of certain characteristics of a
product or service. The basic goal of quality control is to ensure that the products,
services, or processes provided meet specific requirements and are dependable,
satisfactory, and fiscally sound. Essentially, quality control involves the examination of
a product, service, or process for certain minimum levels of quality.
The goal of a quality control team is to identify products or services that do not meet a
company’s specified standards of quality. If a problem is identified, the job of a quality
CHAPTER 8 Page 166
control team or professional may involve stopping production temporarily. Depending
on the particular service or product, as well as the type of problem identified,
production or implementation may not cease entirely.

ii) Total Quality Management (TQM) is one of the quality control mechanisms used in
practice. Total quality management or TQM is an integrative philosophy of management
for continuously improving the quality of products and processes. TQM functions on the
premise that the quality of products and processes is the responsibility of everyone who
is involved with the creation or consumption of the products or services offered by an
organisation.
In other words, TQM capitalises on the involvement of management, workforce,
suppliers, and even customers, in order to meet or exceed customer expectations.

iii) Quality Control Circle is another quality control mechanism used in practice. A small
group of employees who come together to discuss with the management issues related
to either quality control or improvement in production methods form a Quality Control
Circle (QCC). These employees usually work in the same areas, and voluntarily meet on
a regular basis to identify, analyse, and solve their problems.
8.4 Essentials of Information
As mentioned in the controlling process, controlling is the process of making things happen
as planned. In order to perform the control function, managers need information from
different sections of an organisation. If managers lack information on the manner in which
various events occurred in the organisation, they will not be able to ensure that things will
happen as planned. Therefore, timeliness and accuracy or appropriateness of providing
information is an integral part of any control system.

The process of developing information is an important part of an organisation to achieve its

goals / objectives as planned. In this regard, the Management Information System of an
organisation plays a vital role to provide accurate information on time to the relevant people
in the organisation.

Management Information Systems

Management Information System is a system consisting of people, machine, procedure,
databases, and data models, as its elements. The system gathers data from the internal and
external sources of an organisation; processes IT and supplies management information to
assist managers in the process of decision making.

Management Information system (MIS) basically provides information for effective decision-
making. Managers can retrieve any data as and when needed. It is one of the cost-effective
controlling techniques available for managers. Moreover, it provides information at the right
time and helps manage a huge bundle of data. The information obtained from MIS is accurate
and facilitates decision-making.
CHAPTER 8 Page 167

Figure 8.3: Management Information Systems

Management Information Systems and Application Controls at the Tactical Level

They are as follows,

• Control Systems: which monitors the activities of the organisation, reports on them E.g.,
production output, sales revenue. Organisational control systems are a vital aspect of
executing strategy because they track performance and identify adjustments that need to
be made.

• Database Systems: which process and store information, which can be drawn upon a kind
of organisational memory – bank. Database Management System (DBMS) is a commercial
software program used to control, manipulate, and maintain the Database by enabling
users to access, store, organise, modify, retrieve, secure and provide integrity of data in a
database.

• Enquiry Systems – based on either internal or external databases, for checking or

performance of departments – product lines, competitors. An enquiry management
system is an automated software that works on your front line so that every new enquiry
is handled with the care it deserves. Enquires are logged, tracked, and managed
systematically so that sales teams can take action. It also gives management a bird’s eye
view of how inquiries are handled so they can better predict sales performance.

• Decision Support Systems – It can be seen as a knowledge-based system, used by senior

managers, which facilitates the creation of knowledge and allows its integration into the
organisation. Decision support systems (DSS) are interactive software-based systems
CHAPTER 8 Page 168
intended to help managers in decision-making by accessing large volumes of information
generated from various related information systems involved in organisational business
processes, such as office automation systems, transaction processing systems.

8.5 Behavioural Implications of Organisational Control

The behavioural implications of control are as follows:

1. Control affects individual freedom. Hence, it is common for individuals to resist certain
controls if such controls put constraints on their freedom.
2. Control carries certain status and power implications.
3. When controls are based upon subjective and personal judgements as against quantified
performance, standards and appraisals, these may create interpersonal or intergroup
conflicts within the organisation.
4. Excessive number of controls may limit flexibility and creativity. This may lead to low
levels of employee satisfaction and personal development.

Research shows the following negative impacts of the organisational control mechanism.

It is a form of externally devised influence on the work context and the work process of
employees and thus to be need for autonomy (Argyris,1957; Walton,1985)

i. Formal control is often portrayed to interrupt social relations. (Bijlsma-Frankema and

Costa,2005; Fox 1974)
ii. It potentially signals suspicion (Kramer ,1999; McGregor,1960; Sitkin and Stickel, 1996)
iii. Exacerbates the hierarchical distance between the controller and the controlee.

Characteristics of Effective Control Systems

A control system is effective when it is able to manage an organisation’s activities according

to planned ones. An effective control system ensures the achievement of companies’ goals as
outlined standards.

• Accuracy: Ability to generate accurate information

• Timely: Ability to provide timely information
• Economy: Cost effectiveness (should justify the benefits that it gives in relation to the cost
it incurs)
• Flexibility: must be flexible enough to adjust the environmental changes
• Understandability: should be understandable to employees
• Reasonable criteria: Control standards must be reasonable and attainable
• Objective and Comprehensible: The information in a control system should be
understandable and be seen as objective by the individuals who use it.
• Organisational Realistic: The control system has to be compatible with organisational
CHAPTER 8 Page 169
realities and all standards for performance must be realistic.

Modern Controlling Techniques

Techniques of controlling are the tools used for establishing control over business activities,
monitoring and taking necessary corrective measures. Modern techniques are more
scientific in nature. They are also more accurate and logical. There are some modern
controlling techniques.
They are as follows:

1. Digitalisation
Digitalisation refers to enabling or improving processes by leveraging digital
technologies and digitised data.
Digitalisation increases productivity and efficiency while reducing costs. It improves an
existing business process or processes but doesn’t change or transform them.
2. Automation
It is the technology by which a process or procedure is accomplished without human
assistance.
Basic elements of an automated system:
1) Power - to accomplish the process and operate the automated system
2) Program of instructions–to direct the process
3) Control system–to actuate the instructions
3. CCTV
Businesses can correctly monitor numerous commercial buildings and all of their
sensitive company data simultaneously, live, and round-the-clock by outsourcing CCTV
surveillance. Outsourcing video surveillance keeps companies combat-ready to handle
any unforeseen incidents.

KEY TERMS

Activity Ratio Feed forward

Control Flexible budgeting
Concurrent Flexibility
Current Ratio Liquidity
Database Leverage Ratio
Systems Portrayed
Disorganized Standard
Exacerbates Zero-based Budgeting

Chapter Round-Up

This chapter elaborates organisational control as a management process

and controlling is one of the important functions of management and is

CHAPTER 8 Page 170

EXPERIENTIAL EXERCISES
Multiple Choice Questions (MCQs)

1. The process by which managers monitor and regulate the efficiency and effectiveness of
the workers in an organisation is called:
a) Planning
b) Organising
c) Controlling
d) Leading

2. What is the first step in a control process?

a) Select a strategy
b) Set standards
c) Allocate resources
d) Choose key personnel for the task

3. Control is a general concept that can be applied to __________________?

a) Organisational performance only
b) Individual behaviour only
c) Individual performance only
d) Both individual behaviour and organisational performance

4. Which of the following is not the feature of Controlling?

a) A goal-oriented process
b) Not the last function of management
CHAPTER 8 Page 171
c) Improves employee motivation
d) A pervasive function

5. Controlling function finds out how far __________ deviates from standards.
a) Actual performance
b) Improvements
c) Corrective actions
d) Cost

6. Controlling in management is of ------------------------- type

a) Preventive
b) Corrective
c) Preventive and Corrective
d) All of the Above

7. Which of the following is not a limitation of controlling?

a) Little control on external factors
b) Ensuring order & discipline
c) Costly affair
d) Difficulty in setting quantitative standards
8. The formal monitoring, evaluation, and feedback systems that allow managers to
determine if the organisation’s strategy and structure are working according to plans are
known as:
a) Clan control
b) Concurrent system
c) Organisational socialisation
d) Control Systems

9. Which type of control do managers typically use in the input stage of the process of
transforming raw materials into finished goods?
a) Concurrent control
b) Feedback control
c) Feed forward control
d) Bureaucratic control

10. Which of the following are key components of a Total Quality Management system?
a) Involves everyone, continual improvement, use of data and knowledge
b) Individual responsibility, incremental improvement, use of raw data
c) Collective responsibility, continual improvement, use of raw data
d) Group responsibility, staged improvement, knowledge

Answers
CHAPTER 8 Page 172
1 C
2 B
3 D
4 C
5 A
6 C
7 B
8 D
9 C
10 A

Corporate Governance

Learning Outcomes

After successful completion of this chapter, you should be able to:

• Define the term corporate governance and explain its importance.

• Identify and explain global principles of corporate governance.
• Understand common corporate governance mechanisms.
• Describe and understand the framework of corporate governance in Sri Lanka
and
• Define and understand Corporate Social Responsibility.

9.1 Introduction
CHAPTER 9 Page 173

As a company is an artificial legal person and can only act through its human actors, issues
necessarily arose as to the governance of these corporate entities. The key issue in corporate
governance is how the management of a company can be held accountable for the exercise
of their powers since the management of the company is distinct and separate from the
shareholders of the company.

The 2008 global financial crisis is a prime example of how effective corporate governance is
necessary to ensure protection of not only the interests of shareholders but also the wider
stakeholders of the company. This chapter introduces the fundamentals of corporate
governance and the current framework in Sri Lanka.

9.2 The Origin of Corporate Governance

There are a multitude of theories relating to corporate governance, however, the key theory
in this area is agency theory.
Agency theory identifies the relationship between the owner of the company and its directors
as a principal-agent relationship wherein the directors are acting as agents of the
shareholders. This theory recognises a body of shareholders as a principal who expects the
directors, as its agents, to act and make decisions that are in the favour of the principal.
An enhancement of the agency theory also recognises the agency issues that arise between
majority shareholders and minority shareholders and this phenomenon is often referred to
as horizontal agency costs.

The concept of corporate governance rose to the fore in the United Kingdom in 1991 with the
appointment of the Cadbury Committee in England headed by Sir Adrian Cadbury by the
Financial Reporting Council, the London Stock Exchange and other accounting bodies. In
December 1992, the Cadbury Committee produced its report ‘The Financial Aspects of
Corporate Governance’ which specifically recommended that the boards of listed companies
should comply with a Code of Best Practice. Whereas the Cadbury Committee’s mandate was
to look at the financial aspects of corporate governance, it also considered how the behaviour
of boards of directors required correction to ensure the efficient functioning of companies
within the country’s economy. Subsequent reports in the UK, namely, the Greenbury Report
(1995), Hambel Report (1998), Smith Report (2003) and Higgs Report (2003) concentrated
on specific aspects of corporate governance such as non-executive directors, disclosure of
the remuneration of directors, audit committees etc. In current times, specific aspects of
governance and accountability are encapsulated in the UK Corporate Governance Code.

The said Code is applicable to companies with a premium listing on the London Stock
Exchange, regardless of where they are incorporated. Nevertheless, companies that are not
required to follow the said Code have voluntarily adopted the same. Further, in 2018, the UK
Government introduced new legislation to require the largest private companies to report
on their governance and this was supported by the Wates Corporate Governance Principles
for Large Private Companies.
CHAPTER 9 Page 174

The United States is another jurisdiction where the corporate governance debate has been
ongoing since the shift from entrepreneurial capitalism to managerial capitalism in the
1930s. The American Law Institute (ALI) formulated the ‘Principles of Corporate Governance
and Structure: Restatement and Recommendations’ in 1982. With its subsequent 1992
publication, the ALI was at the forefront of publishing on corporate governance. The spate of
corporate scandals in 2001, ranging from Enron, WorldCom, Typco and others resulted in
Congress passing the Sarbanes-Oxley Act of 2003 which imposes significant new disclosure
requirements, increased liability and added corporate governance requirements.

The next key development in the Unites States was when the Dodd-Frank Wall Street Reform
and Consumer Protection Act was signed into law in 2010 in response to corporate
governance practices that were seen to contribute to the 2008 economic crisis.
Sri Lanka followed the developments in the law of England and other nations and started to
develop its own approach to corporate governance.

The first Code of Best Practice on matters relating to Financial Aspects of Corporate
Governance was formulated by the Institute of Chartered Accountants in Sri Lanka in 1997.
The said Code was then reviewed and revised in 2003, 2008 and 2013 with the final update
to the Code was made in 2017. Overall, the Sri Lankan framework for corporate governance
to date consists of a mix of statute, regulations, rules, and codes.
9.3 OECD Principles of Corporate Governance

The Organisation for Economic Co-operation and Development (OECD) is an international

organisation that focuses on establishing international standards in a variety of areas,
including corporate governance. The first set of standards were issued in 1999 and was
endorsed by G20 leaders in 2015. These principles represent international standards
distilled from the experiences of several jurisdictions. At the time of writing this text, a
revision of the 2015 Principles is in progress. An overview of the 2015 principles is set out
below:

Ensuring the Basis for an Effective Corporate Governance Framework

The OECD recognises the following elements as ensuring the basis for an effective corporate
governance framework, namely:

• The promotion of transparent and efficient markets.

• Consistency with the rule of law. and
• Specification of the division of responsibilities between supervisory, regulatory and
enforcement authorities.

The Rights and Equitable Treatment of Shareholders and Key Ownership Functions

In terms of this OECD principle, the corporate governance framework should protect and
facilitate the exercise of shareholder rights. In doing so, it recognizes that shareholders have
CHAPTER 9 Page 175
a property right worthy of protection. Moreover, this principle recognizes that shareholders
and management should always be distinct and separate as shareholders cannot take over
the task of management. Furthermore, in terms of this principle, the corporate governance
framework should be structured in a manner to ensure the equitable treatment of all
shareholders of the same series of a class, regardless of the size of their shareholding.

Further, in the event of a violation of the rights of shareholders, an effective corporate

governance framework should provide opportunities for redress.

Institutional Investors, Stock Markets and Other Intermediaries

The OECD principle sets out that the corporate governance framework should provide viable
incentives in the investment chain and provide for stocks markets to function in a manner
that contributes to good corporate governance. This recognises that in practice, corporate
governance and ownership are no longer characterised by a direct investment chain and that
current investment chains can involve numerous intermediaries between the ultimate
beneficiary and the company. The presence of multiple intermediaries has been as affecting
the nature of the incentives available and a company’s ability to engage in corporate
governance.

The Role of Stakeholders in Corporate Governance

The corporate governance framework must recognise the legally established rights of
stakeholders. This principle specifically identifies stakeholder as resource providers,
including investors, employees, creditors, customers and suppliers. Further, the framework
should encourage the active cooperation between corporate entities and stakeholders in
creating wealth, employment and the sustainability of financially healthy enterprises.

Disclosure and Transparency

The corporate governance framework should be structured to ensure that timely and
accurate disclosure is made on material matters regarding the corporation. Such material
matters include the disclosure of the company’s financial situation, performance, ownership
and its governance. This principle recognises that a strong disclosure regime can help to
attract capital and maintain confidence in the capital markets.

The Responsibilities of the Board

In terms of Board responsibility, the corporate governance framework should ensure the
strategic guidance of the company, the monitoring of management by the Board and the
Board’s accountability to the company and its shareholders.

9.4 Common Internal Corporate Governance Mechanisms

CHAPTER 9 Page 176
There are a multitude of corporate governance structures that are used globally. This section
will introduce common mechanisms used in Sri Lanka.

The Audit Committee

The Audit Committee is a recommended structure to ensure the carrying out of the reviews
of the process and effectiveness of risk management and internal controls.

The Audit Committee must present their findings to the Board and the Board is responsible
for the disclosures on risk management and internal controls. One such example can be found
in the Voluntary Code of Best Practices which sets out the recommended structure and scope
of the remuneration committee (see D.3 of the Voluntary Code).

The Remuneration Committee

In order to avoid conflicts of interest regarding Directors deciding their own remuneration,
the Board of Directors is recommended to set up a Remuneration Committee to make
recommendations to the Board as to the suggested level of remuneration for Directors’
salaries. An example can be drawn from the Voluntary Code of Best Practices which sets out
the recommended structure and scope of the remuneration committee (see B.1 of the
Voluntary Code).
The Nomination Committee

The purpose of the nomination committee is to assess the Board composition and make
recommendations to the Board on all new Board appointments. Yet again, the Voluntary
Code of Best Practices sets out the recommended structure and scope of the nomination
committee (see A.7 of the Voluntary Code).

The Related Party Transactions Review Committee

A related party is a person or entity that has a relationship or close association with the party
the entity that is preparing its financial statements i.e., the reporting entity. A related party
transaction is when there is a transfer of resources, services or obligations between a
reporting entity and a related party. The definition of a related party disregards the
consideration exchanged in the transaction but focuses on the relationship. The purpose of
the related party transactions review committee to ensure that transactions between related
parties do not result in more favourable treatment than what is accorded to an unrelated
third party in the normal course of business. This is demonstrated in Voluntary Code of Best
Practices which sets out the recommended structure and scope of the nomination committee
(see D.4 of the Voluntary Code).

Non-Executive Directors and Independence

Whereas executive directors are contractually employed by the company, non-executive

directors do not carry out work at the company and serve only the Board. Non-executive
CHAPTER 9 Page 177
directors have a specific role on the board of exercising independent judgment in Board
decisions (for more, see the Cadbury Report in 1992).

In certain instances, good corporate governance practices further require the ‘independence’
of non-executive directors. Independent directors are directors who are independent of
management and free of business and other relationships that could interfere with the
possibility of unfettered and independent judgment.

The Voluntary Code of Best Practices sets out the requirement for board balance with
stipulations as to both non-executive directors and independent non-executive directors (see
A.5 of the Voluntary Code).

Risk Management and Internal Control

Risk management and internal control is a process that is designed to provide a reasonable
assurance to the shareholders that the Company will reach its objectives. A company’s
system of internal control should be designed to manage potential failures to achieve
business objectives and provide reasonable assurance against material misstatements of
loss. It is interesting to note that apart from setting out the principle in D.2, the Voluntary
Code of Best Practices expressly sets out the responsibilities of directors in maintaining a
sound system of internal control in Schedule L thereto.
Disclosure Requirements

Disclosures are an important mechanism is corporate governance to ensure that

shareholders and other stakeholders are privy to necessary information. Accordingly, most
corporate governance approaches require the provision of high-level information and should
prevent the provision of misleading information. The Voluntary Code of Best Practices
requires multiple disclosures, and a summary of the disclosures are set out in Schedule I
thereof.

9.5 Key Statutory Provisions Relating to Corporate Governance in Sri Lanka

The statutory framework supporting corporate governance in Sri Lanka is not encapsulated
in a single statute. The principles set out in the statutory provisions require mandatory
compliance. Accordingly, this section identifies key statutory provisions relating to corporate
governance.

Companies Act No. 07 of 2007

All companies carrying on business in Sri Lanka come under the purview of the Companies
Act No. 07 of 2007. Certain principles of corporate governance are encapsulated in the
Companies Act.

• Management of the Company

Management of 184. Subject to the provisions contained in the articles of a company -

Company
CHAPTER 9 Page 178
(a) the business and affairs of a company shall be managed by or
under the direction or supervision of the board of the company.

(b) the board of a company shall have all the powers necessary for
managing and for directing and supervising the management of the
business and affairs of the company.

The above provision sets out a fundamental principle of company law that the shareholders
are a distinct body from the management of the company. If a shareholder wishes to
participate in the management of the company, they would have to be duly appointed to the
board of directors in terms of the law.

Due to this principle, agency costs giving rise to the need for corporate governance.

Delegation of 186. (1) Subject to any restrictions contained in the provisions of the
Powers articles of the company, the board of a company may delegate to a
committee of directors, a director or employee of the company or any
other person, any one or more of its powers other than its powers under
any of the sections of this Act specified in the Sixth Schedule.

(2) A board that delegates a power under subsection (1) shall be

responsible for the exercise of the power by the delegate as if the power
had been exercised by the board, where –

(a) the board had reason to believe before the exercise of the power, that
the delegate would not exercise the power in conformity with the duties
imposed on directors of the company by this Act and the company’s
articles. or

(b) the board has failed to monitor by means of reasonable methods

properly used, the exercise of the power by the delegate.

The Companies Act allows for the delegation of powers of the Board, subject to any
restrictions in the Articles of Association in the company and the Sixth Schedule of the
Companies Act. This provision allows for greater flexibility in the management processes of
the company.

o Directors and their Duties

For the purposes of this chapter, several key duties of directors will be discussed to facilitate
a greater understanding of the statutory provisions that supplement key principles of
corporate governance. At this juncture, it is also worthy to note that the Companies Act sets
out a broad definition of the term ‘director’ in Section 529 of the said Act.

Duty of directors 187. (1) A person exercising powers or performing duties as a director
to act in good faith of a company shall act in good faith, and subject to subsection (2), in
and in the interests what that person believes to be in the interests of the company.
of the company
(2) A director of a company which is a wholly owned subsidiary of
another company may, if expressly permitted to do so by the company’s
articles, act in a manner which he believes is in the interest of that
CHAPTER 9 Page 179
other company even though it may not be in the interests of the
company of which he is a director.

The above provision specifically addresses the agency problem between the shareholders
and the management of the company by requiring directors to act in good faith and in the
interests of the company. Subsection (2) above extends this duty even to a nominee director
of a wholly owned subsidiary who is required to act in the best interests of the subsidiary.

Directors to comply 188. A director of a company shall not act or agree to the company
with Act and acting, in a manner that contravenes any provisions of this Act, or the
company’s articles. provisions contained in the articles of the company.

Section 188 further imposes a restriction on the freedom of Directors’ actions by compelling
them to act in accordance with the articles of association of the company.

Directors’ standard 189. A person exercising powers or performing duties as a director of

of care. a company-
(a) shall not act in a manner which is reckless or grossly negligent.
and
(b) shall exercise the degree of skill and care that may reasonably be
expected of a person of his knowledge and experience.

Directors are subject to a statutory standard of care to ensure that Directors exercise the due
level of care in executing their duties.

The Companies Act No. 06 of 2006 provides for many other instances that contribute to good
corporate governance practices, including inter alia, disclosure of directors’ interests in
shares and transactions (Sections 191 to 200), directors’ duties on insolvency (Section 219),
and the identification of specific instances when personal liability is imposed on directors
and/or officers of the Company etc.

Securities and Exchange Commission of Sri Lanka Act No. 19 of 2021

The Securities and Exchange Commission (SEC) is the primary regulatory body for listed
companies in Sri Lanka. The Securities and Exchange Commission of Sri Lanka Act No. 19 of
2021 (hereinafter the ‘SEC Act’) extends liability for compliance with the rules and
regulations promulgated by the SEC.

The SEC Act empowers the SEC to make rules on matters, including but not limited to,
disclosures, audits, business affairs and activities of a market institution and market
intermediaries etc.

The SEC together with the Institute of Chartered Accountants of Sri Lanka published the Code
of Best Practices on Corporate Governance in 2008 and 2013 in order to establish good
corporate governance practices in the Sri Lankan capital market. Accordingly, companies
falling within the purview of the SEC are to comply with the said Code of Best Practices. The
Code of Best Practices on Related Party Transactions (2013) issued by the SEC is a mandatory
requirement for compliance after 2016.
CHAPTER 9 Page 180

9.6 The Mandatory Code of Best Practice for Listed Companies

9.6 may
Public companies Corporate Social
seek to list Responsibility
on the Colombo Stock Exchange (CSE) to raise capital. The
Listing Rules of the CSE, inter alia, govern the admission of companies to the stock exchange,
listing of securities etc. Section 7.10 of the said Listing Rules set out the Rules on Corporate
Governance.
This is often referred to as the Mandatory Code of Best Practice for Listed Companies.

The said rules set out, inter alia:

• Requirements as to non-executive directors.

• Requirements as to independent non-executive directors.
• Disclosures relating to directors.
• The composition and function of a remuneration committee. and
• The composition and function of an audit committee.

It is also necessary to note that related party transactions and the relevant review committee
are required in terms of Section 9 of the Listing Rules and Section 8 sets out necessary
corporate disclosures.

9.7 The Voluntary Code of Best Practice on Corporate Governance

9.6Practice
The Code of Best Corporate Social Responsibility
on Corporate Governance 2017 (‘the Code’) was formulated by the
Institute of Chartered Accountants of Sri Lanka. This 105-page document covers the best
practices to be implemented in a variety of areas. The Code expressly states that it is to
address agency problems between majority shareholders and minority shareholders and
agency problems between shareholders and managers. Overall, the vertical agency issues are
addressed by specifications as to:

• Board composition.
• The nomination and election of independent directors.
• Determinants of independence.
• Related party committees.
• Approvals and disclosures of independent audits. and
• Regulations of minority protection.

Moreover, the horizontal agency issues have been addressed by specifications as to:

• The Board’s role.

• Devolutions of powers to execute strategy.
• Succession planning.
• Guidelines for performance-based pay.
• Remuneration committees.
• Disclosure and clawback provisions.
• Codes of ethics.
• Related party provisions. and
• Contracts of employment.

The key principles encapsulated in the Code have been reproduced below as it is necessary
CHAPTER 9 Page 181
to have a working knowledge of the current best practices in corporate governance in Sri
Lanka.

A - The Company

Every public company should be headed by an effective Board,

Principle A.1 which should direct, lead and control the Company.

There are two key tasks at the top of every public company –
conducting the business of the Board and facilitating executive
responsibility for management of the Company’s business. There
Principle A.2 should be a clear division of responsibilities at the head of the
Company, which will ensure a balance of power and authority, such
that no one individual has unfettered powers of decision.

The Chairman’s role in preserving good Corporate Governance is

crucial. As the person responsible for running the Board, the
Principle A.3 Chairman should preserve order and facilitate the effective
discharge of Board functions.

The Board should ensure the availability within it, of those with
sufficient financial acumen and knowledge to offer guidance on
Principle A.4
matters of finance.

It is preferable for the Board to have a balance of Executive and

Non-Executive Directors such that no individual or small groups of
Principle A.5
individuals can dominate the Board’s decision-taking.

The Board should be provided with timely information in a form

Principle A.6 and of a quality appropriate to enable it to discharge its duties.

There should be a formal and transparent procedure for the

Principle A.7 appointment of new Directors to the Board.

All Directors should be required to submit themselves for re-

Principle A.8 election at regular intervals and at least once in every three years.

Board should periodically appraise their own performance in order

Principle A.9 to ensure that Board responsibilities are satisfactorily discharged.

Shareholders should be kept advised of relevant details in respect

Principle A.10 of Directors.

The Board should be required, at least annually, to assess the

Principle A.11
performance of the CEO.
CHAPTER 9 Page 182

Director’s Remuneration

Companies should establish a formal and transparent procedure for

developing policy on executive remuneration and for fixing the
Principle B.1 remuneration packages of individual directors. No Director should
be involved in deciding his/her own remuneration.

Level of remuneration of both Executive and Non-Executive

Directors should be sufficient to attract and retain the Directors
needed to run the Company successfully. A proportion of Executive
Principle B.2
Directors’ remuneration should be structured to link rewards to
corporate and individual performance.

The Company’s Annual Report should contain a Statement of

Remuneration Policy and details of remuneration of the Board as a
Principle B.3 whole. (Specimen Remuneration Committee Report annexed as
Schedule D to the Code).

C - Relations to Shareholders

Boards should use the AGM to communicate with shareholders and

Principle C.1
should encourage their participation.
The Board should implement effective communication with
Principle C.2
shareholders.
Further to complying with the requirements under the Companies
Act, Securities and Exchange Commission law and Colombo Stock
Exchange regulations. as applicable, Directors should disclose to
Principle C.3 shareholders all proposed material transactions, which if entered
into, would materially alter/vary the Company’s net assets base or
in the case of a Company with subsidiaries, the consolidated group
net asset base.
D – Accountability and Audit

The Board should present a balanced and understandable

assessment of the Company’s financial position, performance,
Principle D.1
business model, governance structure, risk management, internal
controls and challenges, opportunities and prospects.
The Board is responsible for determining the nature and extent of
the principle risks it is willing to take in achieving its strategic
Principle D.2 objectives. The Board should have a process of risk management
and a sound system of internal control to safeguard shareholders’
investments and the Company’s assets. Broadly, risk management
CHAPTER 9 Page 183
and internal control is a process, effected by a Company’s Board of
Directors and management, designed to provide reasonable
assurance regarding the achievement of the Company’s objectives.

The Board should establish formal and transparent arrangements

for considering how they should. select and apply accounting
policies for financial reporting, determine the structure and content
Principle D.3
of corporate reporting, implement internal control and risk
management principles and for maintaining and appropriate
relationship with the Company’s Auditors.
The Board should establish a procedure to ensure that the Company
does not engage in transactions with “related parties” in a manner
Principle D.4 that would grant such parties “more favourable treatment” than that
accorded to third parties in the normal course of business.

Companies must adopt a Code of Business Conduct & Ethics for

Directors, Key Management Personnel and all other employees’
including but not limited to: dealing with shares in the company.
compliance with listing rules. bribery and corruption.
Principle D.5 confidentiality. encouraging that any illegal, fraudulent and
unethical behavior be promptly reported to those charged with
governance. The company must disclose waivers of the Code for
Directors, if any.

Directors should be required to disclose the extent to which the

Principle D.6 Company adheres to established principles and practices of good
Corporate Governance.

E – Institutional Investors

Institutional shareholders have a responsibility to make considered

use of their votes and should be encouraged to ensure their voting
Principle E.1
intentions are translated into practice.

When evaluating Companies’ governance arrangements,

particularly those relating to Board structure and composition,
Principle E.2 institutional investors should be encouraged to give due weight to
all relevant factors drawn to their attention.

F – Other Investors

Individual shareholders, investing directly in shares of companies

Principle F.1 should be encouraged to carry out adequate analysis or seek
independent advice in investing or divesting decisions.
CHAPTER 9 Page 184

Individual shareholders should be encouraged to participate in

Principle F.2 General Meetings of companies and exercise their voting rights.

G – Internet of Things and Cybersecurity

The Board should have a process to identify how in the

organization’s business model, IT devices within and outside the
organization can connect to the organization’s network to send and
receive information and the consequent cyber security risks that
Principle G.1 may affect the business.
Internal and external parties could have computing devices
embedded in everyday objects which may enable them to
interconnect with the company’s network to send receive data. Such
access could be authorized or unauthorized.
The Board should appoint a Chief Information Security Officer
(CISO) with sufficient expertise, authority, and budgetary allocation
to introduce and implement a cyber security risk management policy
which should be approved by the Board.

Principle G.2
The policy should include a robust cyber security risk management
process, incident response system, vendor management system,
disaster recovery plan and a governance structure to monitor
effective implementation, reporting and the need for cyber security
insurance.
The Board should allocate regular and adequate time on the board
meeting agenda for discussions about cyber-risk management.

The matters taken up for the discussion on the board meeting

agenda may include:
Principle G.3
• Potential cyber security risks in the company’s business model.
• CISO’s security strategy and status of the current projects.
• Compliance with the cyber security risk management process
and incident reports.
• Findings and recommendations from independent reviewers.

The Board should ensure the effectiveness of the cyber security risk
management through independent periodic review and assurance.

Principle G.4 The scope and the frequency of the independent periodic reviews
could be determined based on the industry vulnerability, company’s
business model and incident findings.
CHAPTER 9 Page 185
The Board should disclose in the annual report, the process to
Principle G.5 identify and manage cyber security risks.

H – Environment, Society and Governance (ESG)

The Company’s annual report should contain sufficient information

to enable investors and other stakeholders to assess how ESG risk
and opportunities are recognized, managed, measured, and
reported.

Environmental, social and governance considerations can affect a

company’s ability to execute its business strategy and create value.
While many ESG factors are ‘non-financial’, their management and
likely impact have financial consequences. Hence, they are
important factors to be built into a company’s business model,
strategy, governance, and risk management framework. ESG factors
relevant to the company could impact the following:

• Access to financial capital.

• Cost savings and productivity.
• Brand value and reputation.
Principle H.1 • Employee recruitment.
• Employee retention.
• Access to markets.
• License to operate.
• Market Capitalization.

Integrating ESG policies and practices into a company’s strategy,

business model, governance and risk management and reporting its
likely impact and implications are increasingly seen by investors as
material to their investment decisions. Further, investors want to
understand how well companies are managing the risks associated
with ESG issues, as this is seen as a key test of the long-term
sustainability of the company. They are also increasing interested in
the opportunities presented by the low carbon economy and are
allocating capital to companies that are well equipped to benefit
from this.

While this Code is voluntary, reputed companies in Sri Lanka have chosen to adopt the Code
as signal to shareholders of their commitment to best practices. In the event companies fail
to comply with the Code, a statement is included in their Annual Report as to why there has
not been compliance with the specific best practice.

9.8 Corporate Governance in Regulated Industries

9.6 Corporate Social Responsibility
CHAPTER 9 Page 186

Companies operating in regulated industries such as finance businesses are subject to

separate corporate governance requirements. For example, the Monetary Board of the
Central Bank of Sri Lanka issues directions on corporate governance. It is beyond the scope
of this text to set out all the relevant statutory provisions for compliance in regulated
industries. As such, it is necessary for companies and related parties operating in regulated
industries to remain up to date with industry specific requirements for corporate
governance.

9.9 Corporate Social Responsibility

9.6 Corporate Social Responsibility
At the other end of the spectrum of corporate governance is a duty to the public in general.
Corporate Social Responsibility, often shortened to CSR, is a form of social accountability for
corporations.
The practice of CSR makes companies aware of their impact on society and to take on roles
as stewards of society. CSR activities can range from economic, social to environmental
activities.

In order to emphasise the breadth of CSR activities, examples of CSR carried out by Sri Lankan
corporate entities are set out below.

Environmental CSR – Tokyo Cement Company (Lanka) PLC

Tokyo Cement with a consortium of partners deployed structures made from recycled
concrete waste from its ready-mix concrete plants to help with the rehabilitation of coral
reefs. Reef balls have now been deployed with the assistance of their project partners to coral
reefs in six locations in the seas surrounding Sri Lanka.

Economic CSR – CBL Group

The Munchee Tikiri Shishyadara scholarship programme was launched in 1997 to support
children of low-income families and to prevent children dropping out of school due to
financial difficulties.

Social CSR – John Keells Group

The John Keells Foundation, the CSR arm of the John Keells Group, among other activities
carries out CSR activities focused on gender empowerment. This includes Project Wave
(Working Against Violence through Education) which seeks to combat gender-based
violence and child abuse.

Chapter Round-Up

The concept of corporate governance seeks to address an age-old problem

that arises due to the nature of the corporate structure. A familiarity with

common corporate governance structures and their underlying reasoning

CHAPTER 9 Page 187

9.11 Further Reading

Cabral, H., ‘Duties of Company Directors and Corporate Governance in Sri Lanka’, Updated
Second Edition (2019)

Code of Best Practice on Corporate Governance 2017

Companies Act No. 07 of 2007

Listing Rules of the Colombo Stock Exchange

OECD Principles of Corporate Governance

Securities and Exchange Commission of Sri Lanka Act No. 19 of 2021

EXPERIENTIAL EXERCISES

Multiple Choice Questions (MCQs)

1. As a general principle of company law, who manages a company?

a) The shareholders.
b) The Board of the Company.

2. The OECD Principles of Corporate Governance are a set of:

a) binding domestic standards.
b) voluntary domestic standards.
c) voluntary international standards.
d) binding international standards.

3. An Audit Committee is a common internal corporate governance mechanism which

CHAPTER 9 Page 188
relates to:
a) the process and effectiveness of risk management.
b) the process and effectiveness of internal controls.
c) (a) and (b).
d) None of the above.

4. Which committee decides on Board composition?

a) The Audit Committee.
b) The Remuneration Committee.
c) The Nomination Committee.
d) The Related Party Transactions Review Committee.

5. Does the Companies Act No. 07 of 2007 allow Directors to delegate all their powers?
a) Yes.
b) No.

6. A director is appointed to the Board of a wholly owned subsidiary by the said subsidiary’s
parent company. The Articles of Association do not stipulate any provisions requiring the
director to act in the best interests of the parent company. Accordingly, under the law,
the director who is now on the Board of the wholly owned subsidiary must act:
a) In the best interests of the parent company.
b) In the best interests of the wholly owned subsidiary.
c) Balancing the best interests of both the parent company and the wholly owned
subsidiary.

7. The aim of corporate social responsibility is to provide:

a) a form of social accountability for corporations.
b) increased revenue for corporations.
c) increased employee satisfaction.
d) a better reputation or the company.

8. The Code of Best Practice on Corporate Governance 2017 states that it is best if a Board
has:
a) Only executive directors.
b) Only non-executive directors.
c) A balance of non-executive directors and executive directors.

9. In terms of corporate governance best practices, who is responsible for running the Board
and ensuring the effective discharge of Board functions?
a) The majority shareholders.
b) All Board members.
c) The Chairman of the Board.

10. In terms of corporate governance best practices, is there a responsibility on the Board to
look into cyber security risk and the management thereof by the Company?
CHAPTER 9 Page 189
a) Yes.
b) No.

Answers

1 B
2 C
3 C
4 C
5 B
6 B
7 A
8 C
9 C
10 A
Institute of Certified Management Accountants of Sri Lanka
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