and - airwalkbooks.comairwalkbooks.com/images/pdf/pdf_41_1.pdfManagement and Administration 1.2 ......

and

PRINCIPLES OF MANAGEMENT MG6851 – R2013

UNIT I INTRODUCTION TO MANAGEMENT AND ORGANIZATIONS 9

Definition of Management – Science or Art – Manager VsEntrepreneur - types of managers - managerial roles and skills – Evolutionof Management – Scientific, human relations , system and contingencyapproaches – Types of Business organization - Sole proprietorship,partnership, company-public and private sector enterprises - Organizationculture and Environment – Current trends and issues in Management.

UNIT II PLANNING 9Nature and purpose of planning – planning process – types of

planning – objectives – setting objectives – policies – Planning premises –Strategic Management – Planning Tools and Techniques – Decision makingsteps and process.

UNIT III ORGANISING 9Nature and purpose – Formal and informal organization – organization

chart – organization structure – types – Line and staff authority –departmentalization – delegation of authority – centralization anddecentralization – Job Design - Human Resource Management – HRPlanning, Recruitment, selection, Training and Development, PerformanceManagement , Career planning and management.

UNIT IV DIRECTING 9Foundations of individual and group behaviour – motivation –

motivation theories – motivational techniques – job satisfaction – jobenrichment – leadership – types and theories of leadership – communication– process of communication – barrier in communication – effectivecommunication – communication and IT.

UNIT V CONTROLLING 9System and process of controlling – budgetary and non-budgetary

control techniques – use of computers and IT in Management control –Productivity problems and management – control and performance – directand preventive control – reporting.

TOTAL: 45 PERIODS

PRINCIPLES OF MANAGEMENT

CONTENTS

Chapter 1: Historical DevelopmentDefinition of Management 1.1Management–Science (or) Art 1.2Management and Administration 1.2Development of Management Thought 1.3Contribution of Taylor 1.5Henri Fayol’s Contribution to the Management 1.8Fourteen Principles of Management 1.9Functions of Management 1.13Steps Involved in Planning 1.14Organising 1.16Staffing 1.19Co-ordination 1.19Directing 1.20Controlling 1.21Organisation–Introduction 1.22Functions of an Organisation 1.23Types of Business Organisation 1.26Line Organisation 1.27Functional Organisation 1.32Line and Staff Organisation 1.38Committee Organisation 1.42Project Organisation 1.47Matrix Organisation 1.49Free form Organisation 1.52Forms of Organisation 1.53Sole Proprietorship Concern 1.54Partnership firm 1.57Joint Hindu Family Firm 1.64Joint Stock Companies 1.67Co-operative Institutions 1.73Public Enterprises 1.79Comparison of different forms of IndustrialOwnership

1.93 - 1.94

Role of a Manager 1.95

CONTENTS

v

Chapter 2: PlanningNature and Purpose 2.1Types of Plans 2.2Steps Involved in Planning 2.10Objectives 2.14Setting Objectives 2.17Management By Objective 2.18Process of MBO 2.19Effective MBO System 2.21Strategies and Policies 2.26The Strategic Planning Process 2.28Time Dimension and the TOW Matrix 2.34Portfolio Matrix 2.35Forecasting 2.40Forecasting Process 2.41Forecasting Techniques 2.46Decision Making 2.54Selecting an Alternative 2.57Programmed and Non-programmed Dicisions 2.60Decision–making Under Certainty,Uncertainty and Risk

2.62

Creativity and Innovation 2.63Brainstorming 2.64Creative Manager 2.65 - 2.66

Chapter 3: OrganisingNature and Purpose of Organising 3.1Formal and Informal Organisation 3.3Hawthorne Studies 3.5The Department 3.15Organisation Levels 3.15Span of Management 3.18Organisation Charts and Manuals 3.19The Organising Process 3.23Types of Departmentation 3.25Departmentation by Enterprise function 3.25Departmentation by Territory 3.28Customer Departmentation 3.30Departmentation by Product 3.32Departmentation by Process 3.35

vi

Matrix Organisation 3.36Strategic Business Units 3.37Authority and Power 3.39Empowerment 3.40Line and Staff Concepts 3.40Functional Authority 3.42Benefits of Staff 3.43Limitation of Staff 3.44Decentralisation of Authority 3.45Delegation of Authority 3.48Staffing 3.59Process of Staffing 3.62Recruitment 3.63Selection Process 3.70Kinds of Test 3.72Kinds of Interview 3.75Group Discussion 3.76Promotion 3.79Human Resource Development (HRD) 3.80Job Analysis 3.81Training and Development 3.85Performance Appraisal 3.86Compensation and Benefits 3.88 - 3.89Orientation: Career Development 3.90

Chapter 4: DirectingScope - Human Factors 4.1Individual Behaviour 4.2Group Behaviour 4.5Group attitudes and values 4.8Creativity and Innovation 4.9Leadership 4.14Types of Leadership 4.18Motivation 4.22Types of Motivation 4.24Motivation Theories 4.26Motivational Techniques 4.32Job Enrichment 4.33Communication 4.34Types of Communication 4.38

vii

Grapevine 4.38Methods of Communication 4.40Barriers and Break – down in Communication 4.43Methods of overcoming the barriers 4.46Characteristics of Effective Communication 4.47Electronic Media in Communication 4.52Teleconferencing 4.53The use of Computers for Informationhandling and Networking

4.54

Organisation Culture 4.55Managing Cultural Diversity 4.64

Chapter 5: ControllingSystem and Process of Controlling 5.1Steps to Establish Control 5.2Critical Control Points 5.5Standards 5.5Benchmarking 5.7Requirements of Effective Control 5.8Organisational Control 5.13The Budget as Control Technique 5.15Marketing Control 5.18Human Resource Control 5.19Operation Control 5.20Allocation of Resources 5.22Allocation Problem 5.23Scheduling Resources 5.25Material Requirement Planning 5.25Manufacturing Resource Planning MRP II 5.26PERT / CPM 5.27Inventory Management 5.35Economic Ordering Quantity (EOQ) 5.36Reorder point 5.38Quality Management 5.39Total Quality Control 5.40Just-In-Time 5.41The Principles of JIT 5.42JIT Techniques 5.44Kanban 5.45

viii

Techniques of Control 5.48Information Technology in Controlling 5.53The use of Computers in handling Information 5.55Challenges created by Information Technology 5.57Internet 5.58M-Commerce and Wireless Communication 5.59Productivity 5.59Productivity Techniques 5.62Factors affecting Productivity 5.64Human Factors in low Productivity 5.66Economic Growth and Standard of Living 5.67Total Quality Management (TQM) 5.74Control of Overall Performance 5.76Direct Control and Preventive Control 5.78Principle of Preventive Control 5.79The Globalization of Management 5.81International Management 5.83The Global Environment 5.85Multinational Strategies 5.91Economic Cycles and Direct Investment 5.93 - 5.96Purchase Control 5.97Maintenance Control 5.100Planning Operation 5.102

ix

Unit I

ROLE OF A MANAGER

Henry Mintzberg studied the activities of top executivesof a major corporation and determined that when businessorganisations confer authority on its executives, they alsoconvey a certain measures of status.

The executives may then use this status to facilitateinterpersonal relationships with seniors, subordinates peersand individual outside the organisation.

He concluded that these relationships donot adequatelycapture the reality of what managers do. He developed amodel of ten related roles that he called as “Managerial Roles”.

The ten roles are discussed below:

Interpersonal Roles: The first three managerial roles areclassified as interpersonal roles, as they deal withinterpersonal relationships both inside and outside theorganisation.

1. Figurehead Role:

Every manager has to perform some duties of aceremonial nature, such as greeting the touring dignitaries,attending wedding of an employee, taking an importantcustomer to lunch and so on.

2. Leader Role:

Every manager must motivate and encourage hisemployees. He must also try to reconcile their individual needswith the goals of the organisation.

3. Liaison Role:

Every manager must cultivate contacts outside hisvertical chain of command to collect information useful for hisorganisation.

Supplementary 1.95

Informational Roles: These roles mainly involve themanagement of information. As a figure head, a leader and aliaison, the manager is placed in a strategic position to obtainand disseminate critical information.

4. Monitor Role:

The manager has to perpetually scan his environmentfor information, interrogate his liaison contacts and hissubordinates and retrieve unsolicited information much of itas a result of the network of personal contacts he hasdeveloped.

5. Disseminator Role:

The manager passes some of his privileged informationdirectly to his subordinates who would otherwise have noaccess to it.

6. Spokesman Role:

The manager informs and satisfies various group andpeople who influence his organisation. Thus he advisesshareholders about financial performance, assures consumergroups that the organisation is fulfilling its socialresponsibilities and satisfies government that the organisationis abiding by the law.

Decisional Roles: As the manager performs theinterpersonal and informational roles, certain decisional rolesemerge as a part of the manager’s day to day activities.

7. Entrepreneur Role:

The manager constantly looks out for new ideas andseeks to improve his unit by adapting it to changing conditionin the environment.

8. Disturbance Handler Role:

The manager has to work like a fire fighter. He mustseek solution of various unanticipated problems - a strike mayloom large, a major customer may go bankrupt, a suppliermay renege on his contract and so on.

1.96 Principles of Management

9. Resource Allocator Role:

The manager must divide work and delegate authorityamong his subordinates. He must decide who will get what.

10. Negotiator Role:

The manager has to spend considerable time innegotiations. For eg: The president of a company maynegotiate with the union leaders on a new strike issue, theforeman may negotiate with the worker on a grievanceproblem and so on.

It is important to recognise that these ten roles arehighly interrelated, as suggested in the fig. At any given pointof time, the manager is apt to be engaged in several activitiessimultaneously.

MANAGING DIRECTOR

The managing director is the most senior executive ofan organisation (except when there is an executive chairman).

Supplementary 1.97

The role of managing director and chief executive are virtuallythe same.

The managing director is responsible for theperformance of the organisation. He manages the overallpolicies and direction of organisations under guidingstipulations from the board of directors, chief executive officersand other stakeholders. He should have excellentmanagement, analytical and leadership abilities and ensurethat organisations operate at optimal levels. The duties ofmanaging directors vary depending on the needs of theircompanies, but personnel organization is usually high on thelist. Nearly all are responsible for heading up teams ofemployees and organizing efforts to meet certain internal andexternal goals. The Managing Director often also has reportingobligations to corporate directors, shareholders and the generalpublic and he may be called upon to discuss the progress ofcertain projects or the corporation’s stance on specific issues.The job typically involves a lot of paperwork, too. ManagingDirector is usually in charge of authoring final reports andmaking presentations about the topics within his control. Inmost cases, this person takes the fall for projects that fail,but will also receive the majority of the credit for majorsuccesses. As such, he must strive to motivate employees oflower level to do good work – to achieve goal.

Though the day-to-day jobs of managing director can besomewhat wide-ranging, there are some responsibilities thatinclude:

Formulating and successfully implementingcompany policy;

Directing strategy towards the profitable growth andoperation of the company;

Developing strategic operating plans that reflect thelonger-term objectives and priorities established bythe board;

Maintaining an ongoing dialogue with the chairmanof the board;


Putting a place adequate operational planning andfinancial control systems;

Ensuring that the operating objectives andstandards of performance are not only understoodbut owned by the management and other employees;

Closely monitoring the operating and financialresults against plans and budgets;

Taking remedial action where necessary andinforming the board of significant changes;

Maintaining the operational performance of thecompany;

Monitoring the actions of the functional boarddirectors;

Assuming full accountability to the board for allcompany operations;

Representing the company to major customers andprofessional associations;

Building and maintaining an effective executiveteam.

Duties and tasks

Allocate financial resources and authorise humanresource requirements to effectively implementpolicies and programs.

Compile and present reports, budgets and projectionplans to organisations governing boards andstakeholders.

Determine senior staff and review programs, reportsand recommendations made by management team.

Officially represent the organisation in negotiations,public hearings, conferences, etc.

Oversee monitoring and evaluation of organisationenactment with objectives.

Supplementary 1.99

Research relevant legislation and regulationspertaining to organisations activities and ensurepractices are within legal limits.

Set forth objectives, policies and strategies anddirect overall operations of organisations.

Skills required

Analytical Skills

Critical Thinking

Leadership Abilities

Organisational and Coordination Skills

Strong Communication Skills


1. HISTORICAL DEVELOPMENT

Definition of Management – Science (or) art – Managementand Administration – Development of Management thought –Contribution of Taylor and Fayol – Functions of Management –Types of Business Organisation

Definition of Management:

“Management is the process of designing andmaintaining an environment in which individuals workingtogether in groups, efficiently accomplish selected aims” - byHarold Koontz and Heinz Weihrich.

The Meaning of the above definition is as follows.

1. Managers carry out the managerial functions ofplanning, organising, staffing, leading and controlling.

2. Management applies to any kind of organisation.

3. It applies to managers at all organisational levels.

4. The aim of all managers is to create Surplus Surplusmeans profit in business organisation. In charitableorganisations, surplus means the satisfaction of needs.In universities, surplus means generation anddissemination of knowledge as well as providingservice to the community or society.

5. Managing is concerned with productivity; this implieseffectiveness and efficiency.

Different Definition of Management:

Management is a process undertaken by one (or) morepersons to co-ordinate the activities of other persons toachieve results not attainable by any one person acting alone.

Management is the art of knowing what you want todo and then seeing that it is done in the best and cheapestway. - F.W. Taylor

Management is a task of planning, organising,co-ordinating, motivating and controlling the efforts of otherstowards a specific objective.

Management is the effective utilization of human andmaterial resources to achieve the enterprise.

In general, management is a process of effectiveaccomplishment of tasks through others.

Managing : Science (or) Art:

Managing – like all other field ie., medicine,engineering, accountancy - is an art. It is know how. It isdoing things in light of realities of a situation.

However, managers can work better by using theorganised knowledge about management. This organisedknowledge constitutes a science.

Thus, managing by practice is an art. The organisedknowledge underlying the practice may be referred to as ascience.

Physicians without practice will kill so many people.Also, physicians without the advantage of science will be awitch doctors.

Similarly, managers who try to manage withoutmanagement science must trust luck and intution. Also,managers without having past experience, may fumblethings.

Management knowledge will improve managerialpractice and vice-versa. So managing is “Science and Art”.

Management and Administration:

Eventhough management and administration are usedinterchangeably in practice, there are some differencebetween these two items.

Administration is the overall determination of policiesand major objectives. It aims for framing major policies,

Historical Development 1.1 Principles of Management1.2

formulation of general procedure, listing out of the boardprogramme and approval of major projects etc.

Management is the function of executing the policieswithin the limits setup by the administration. It has thefunction of planning, organising, co-ordinating, directing,motivating and controlling. Administration is determinativeand management is executive.

The above figure shows that there will be moreadministrative function in the top level management. Andthere will be less administrative function and moremanagement function in the bottom level management.

Development of Management Thought:

Name and year ofmajor work

Major contribution tomanagement

Frederick W. TaylorSbop Management(1903). Principles ofScientific Management(1911). Testimony beforethe special Housecommittee (1912),

Acknowledged as “the father ofscientific management”. His primaryconcern was to increase productivitythrough greater efficiency inproduction and increased pay forworkers through the application ofthe scientific method. His principlesemphasized using science, creatinggroup harmony and cooperation,achieving maximum output, anddeveloping workers.

Henry L. Gantt (1901) Called for scientific selection ofworkers and “harmonious cooperation”between labor and management.Developed the Gant chart. Stressedthe need for training.

Frank and LillianGilbreth (1900)

Frank is known primarily for his timeand motion studies. Lillian, anindustrial psychologist, focused on thehuman aspects of work and theunder-standing of workers’personalities and needs.

Modern operational-management theory

Henri FayolAdministrationIndustrielle et Generate(1916)

Referred to as “the father of modernmanagement theory”. Dividedindustrial activities into six groups:technical, commercial, financial,security, accounting, and managerial.Recognized the need for teachingmanagement. Formulated fourteenprinciples of management, such asauthority and responsibility, unity ofcommand, scalar chain, and espiritdecorps.

Behavioral sciences

Hugo Munsterberg (1912) Application of psychology to industryand management.

Walter Dill Scott (1901,1911)

Application of psychology toadvertising, marketing, andpersonnel.

Max Weber (translations1946, 1947)

Theory of bureaucracy

Vilfredo Pareto (books1896-1917)

Referred to as “the father of the socialsystems approach” to organisationand management.


Elton Mayo and F.J.Roethilsberger (1933)

Famous studies at the Hawthorneplant of the Western ElectricCompany. Influence of socialattitudes and relationships of workgroups on performance.

Systems theory

Chester Bernard *TheFunctions of theExecutive (1938)

The task of managers is tomaintain a system of cooperativeeffort in a formal organisation. Hesuggested a comprehensive socialsystems appoach to managing.

Emergence of Modern Management thought

Peter F. Drucker (1974) Very prolific writer on manygeneral management topics.

W. dwards Deming(after World War II)

Introduced quality control in Japan.

Laurence Peter (1969) Observed that eventually people getpromoted to a level where they areincompetent.

William Ouchi (1981) Discussed selected Japanesemanagerial practices adapted in theU.S. environment.

Thomas Peters andRobert Waterman (1982)

Identified characteristics ofcompanies they considered excellent.

Contribution of Taylor and FayolContribution of F.W.Taylor:

F.W.Taylor started out as an apprentice patternmaker and machinist in 1875. Then he joined the midvalesteel company in philadelphia as a machinist in 1878 androse to the position of chief engineer in the same companyafter earning a degree in engineering through evening study.

Taylor is generally acknowledged as “The Father ofScientific Management”. He devoted all his time and effortto the cause of scientific management.

Taylor’s experiences as an apprentice, a commonlaborer, a foreman, a master mechanic and then the chiefengineer of the same company gave Taylor ampleopportunity to know the problems and attitude of workersand to see the great possibilities for improving the qualityof management.

He published papers on“piece rate system”, “the art ofcutting metal” and “shop management”. He published a bookon “The principles of scientific management” in 1911.

Taylor faced many problems when he was working asa foreman in the factory. He found that management wantedmore output, but was not ready to pay more salary to theworkers. On the other hand, workers wanted more pay butdidn’t want to work more to increase the productivity. As aforeman, he wanted to solve these problems and he acted asa link between the management and the workers. To overcome these problems, he believed that the managementshould accept some special responsibilities for planning,directing and organising the work. He found that it wasessential to separate the planning of work from its executionso that each individual would be able to work at his highestlevel of performance with maximum benefits.

Taylor developed scientific management concept whichwas the application of method of science for solvingindustrial problems. He applied the scientific approach totechnical and behavioural human problems. The followingare the Taylor’s principles of scientific management.

1. Science, not rule of thumb

2. Harmony, not discord

3. Co-operation, not individualism

4. Maximum output, not restricted output.

5. Specialisation, not generalisation.


6. Scientific selection, training and development ofpersons, not on personal judgement.

1. Science, not rule of thumb:

Taylor said that rule of thumb would not help to solveproblems in industries. He believed in scientific methods toimprove industrial efficiency through higher productivity.Taylor identified the following conditions and methods forthis purpose.

(a) Standardisation of working conditions:

Industrial efficiency can be improved by providinggood working conditions. The good working conditions are(1) Adequate lighting (2) Best temperature and humidity (3)Provision for seating (4) Cleanliness, (5) Ventilation (6) Noisecontrol etc.

(b) Standardisation of working methods:

For analysing the work on scientific basis anddetermining the best possible method for doing a job, Taylorinvented motion study techniques. This study of scientifictechniques eliminated the human wasted efforts.

(c) Establishing the standard of performance:

Taylor found out the production time of each job bybreaking a job into elements. Time study techniques wereused for this purpose and standard time for a job was fixed.This was used to plan the daily work of each worker.

2. Harmony, not discord:

Taylor said that the employer and employee shouldhave “friendly relations” (harmony) among themselves. Thereshould be no difference of opinion and dispute (discord). Theinterest of employer and employees should be same.

3. Co-operation, not individualism:

Taylor suggested that hearty co-operation between themanagement and the worker should be essential. Thepersonnel should not always think of their own interests andshould not be selfish. General interest was more importantthan self interest.

4. Maximum output, not restricted output:

Taylor said that workers must be encouraged forhigher production by giving incentive or higher wages. Forthis he introduced “Differential piece rate system.” Theworkers produced above the standard level were paid highpiece rate and those produced below standard level were paida lower piece rate.

5. Specialisation, not generalisation:

Taylor said that the workers must be relieved frommental activities. He separated mental activity from physicalactivity. Mental activities were carried out by the office peoplewhere as physical activities were carried out by the peopleinside the factory. Taylor evolved functional organisationstructure. He identified the activities involved in an industryinto eight functions. These functions are explained later inthis book.

6. Scientific selection, training and development ofpersons, not on personal judgement:

Taylor said that the selection of workers should bedone scientifically. Right person should be selected for theright job. Taylor suggested that the workers should be givenproper training before doing a job in order to increase theproductivity. Promotions should be given for productivelabours.

HENRI FAYOL’S CONTRIBUTION TO THE MANAGEMENT:

Henri Fayol, graduated as a mining engineer in 1860.He joined as an engineer in a famous mining company inFrance. In 1888, he was appointed as a General Manager ofthat company. At that time, the company’s financial positionwas critical and the loss was more. Before his retirement(1918) he developed the company into an extremelyprosperous and one of the most famous coal mines in France.He published a book on “General and industrialAdministration” of a large scale organisation.


Principles of Management:

Fayol devoted his concentrations mostly on themanagerial activities. Fayol evolved the following fourteenprinciples of management.

1. Division of work

2. Authority and Responsibility

3. Discipline

4. Unity of Command

5. Unity of Direction

6. Subordination of individual interest to general interest

7. Remuneration of personnel

8. Centralisation

9. Scalar chain

10. Order

11. Equity

12. Stability of tenure of personnel

13. Initiative

14. Espirit de corps

1. Division of work:

This principle leads to specialisation in any field ofactivity. If a worker concentrates his efforts on a particulartask, he will become more skilled in that activity. It increasesproductivity, quantity and quality of output. This leads tobetter work with the same effort.

It has got some disadvantages.

1. Worker suffers boredom because of repetition of thesame type of work.

2. Difficult to reschedule if any worker is absent.

2. Authority and Responsibility:

Authority is the power given to a person to extract workfrom his subordinates. Responsibility is the obligation of aperson to perform his duties towards a job. Authority may bedelegated whereas responsibility cannot be delegated. Forexample, the production manager is answerable to the GeneralManager if the production is very less. He cannot say that hehas delegated the responsibility to the production engineer.

People often seek of authority but not responsibility.The fear of responsibility spoils initiative and destroys othergood qualities. Authority without responsibility andresponsibility without authority are the major defects of anyorganisation. Therefore, management should clearly arrangeand distribute the Authority and Responsibility.

3. Discipline:

Discipline is very much essential for the smoothrunning of any organisation. Discipline is “respect foragreements, sincere effort for completing a given task andoutward marks of respect.” Maintenance of discipline requires

(i) Good supervisors at all levels

(ii) Clear and fair agreements

(iii) Judicial application of penalty and

(iv) Effective communication

4. Unity of Command:

For any action, an employee must receive orders andinstructions from the supervisor only. If it is not followed,then there will not be any discipline. Multiple commandswill cause confusions and conflicts. Therefore a soundmanagement should avoid dual commands.

5. Unity of direction:

This means that there should be one head and oneplan for each group of activities having the same objectives.All the groups work together to achieve the common goal.Unity of command cannot function without unity of direction.


6. Subordination of individual interest to generalinterest:

In any industry, an employee’s interest is to earnmoney to meet his personal needs where as the organisationinterest is to maximize the production and develop thefactory. The interest of an organisation is more importantthan the interest of an employee. It is necessary to maintainunity and to avoid friction among the employees. Therefore,supervisors should set the following to others to maintaingeneral interest.

Fair agreements

Effective supervision

Good example

7. Remuneration of personnel:

Remuneration is the money paid to the employees fortheir physical and mental efforts in carrying out a work. Itshould be fair and satisfy both the employees and employers.

8. Centralisation:

If most of the power and responsibilities are retainedat top level management, the organisation is centralised. Allthe decisions are taken only by the top executive at the centre.It has more span of control. If the power is delegated to thesubordinates, the organisation is decentralised. For effectivemanagement, decentralisation is necessary. It means that thedelegation of authority to subordinates helps to take a quickdecision on all important problems. Decentralisation willhave shorter span of control.

9. Scalar Chain:

Scalar chain means “line of authority.” This principlestates that any instructions and orders should be sent fromtop level to the bottom level only through the line ofauthority. There should be an unbroken line of power andcommand from top level to bottom level. Over lapping anyone in the organisation structure will spoil the performanceof the management system.

10. Order:

This principle deals with the arrangement of thingsand persons. This is of two types “Material order” and“Social order”. A place for everything and everything in itsplace is “Material order” and a place for every one andeveryone in his place is “Social order”. Scientific selection,training and placement are necessary so that materials canbe easily taken out and men can be easily located.

11. Equity:

The manager should treat the employees equally andkindly. When this principle is followed, the employee’smorale, sincearity and loyalty will be improved. There willnot be any friction among the employees.

12. Stability of tenure of personnel:

Stable and secure work force is an asset to anyorganisation. It will take some time for an employee to workefficiently in his job even if he has the required skill andknowledge. Therefore the management should createfavourable working conditions by providing good salary,promotion opportunities, welfare facilities etc. It is better tokeep a stable manager of average ability than a very efficientmanager who merely comes and goes.

13. Initiative:

Initiative is the power of thinking and executing anytask with enthusiasm voluntarily. When employees comeforward with new ideas, new methods etc., they must beencouraged. It improves good morale among the employees.

14. Espirit de corps:

It is a French word which means “feeling of harmonyand union among personnel” of an organisation. Union isstrength. Management should treat the employees kindly andequally to develop co-operation among them. Managementshould avoid the policy of “divide and rule.”


Functions of Management:

The functions of managers (management) provide auseful structure for organising management knowledge.

The various functions of a manager (management) aregiven below.

1. PLANNING:

Planning is the process of thinking and deciding inadvance for the future course of action. Without proper planning,the activities of an organisation may become ineffective.

Planning is a decision making process to decide inadvance what is to be done, when it is to be done, where it isto be done, how it is to be done and by whom it is to be done.

Objectives of Planning:

1. To forecast the future course of action

2. To adjust the changes and uncertainties in the system

3. To utilise the available resources effectively

4. To determine the quality of products

5. To take correct decision making

6. To facilitate effective control in the management

7. To avoid bottlenecks in the production

8. To help the firm to remain more competitive andsecure good name

Steps Involved in Planning / Hierarchy of plans:

The various steps in planning function (Purpose ormissions, objective, strategies etc.) are shown in fig.

Purpose or missions:

Generally the purpose of any industry is to produceand distribute more number of goods. Like that, eachbusiness will have their own purpose. Therefore a cleardefinition of purpose is necessary in order to formulate theobjectives

Objectives:


Objectives or goals are the end results to be achieved.Managers at the top level formulate the objectives for theorganisation as a whole. These over-all goals are brokendown into number of specific targets and each target isassigned for each department. For example, the goals ofproduction department is to produce more number of unitswith lowest costs at the right time. In any organisationmanagement objectives and each departments objectivesshould be same.

Strategies:

Strategies are defined as a course of action in orderto attain the objectives. The general plans of action orprogrammes of action are called strategies.

Policies:

Policies are general guide lines in the decision makingprocess. Policies are the rules for action and it should notbe confused with objectives. For example, decision aboutrunning one shift or two shifts, giving over time to theworkers, wage incentives etc. are policies.

Procedures:

Procedure is the sequence of steps involved forcompleting any task. This gives guide lines for action.Procedure tells how and in what order, the job is to be done.eg. Procedure for placing a purchase order.

Rules:

It is a simple type of plan. A rule clearly tells whataction one should do and what action one should not.

Programmes:

A programme is a sum total of goals, policies,procedures, rules etc. which is designed to carryout a courseof action. It may be a major programme or a supportingprogramme. Good programming leads to better co-ordinationamong the different departments.

Budgets:

A budget is a numerical programme and it is referredin “financial terms.” A budget is defined as a statement ofanticipated results. A plan always has a budget which isessentially a control device. To achieve the objectives of thecompany, the following resources are used. They are men,machines, materials, etc. The financial statement which isto be used for the utilisation of the above resources is calledbudget.

The Planning function in explainted clearly in chapter 2.

2. ORGANISING:

Organising is defined as the process of “identifyingand grouping of activities required to attain the objectives,defining and delegating authority, creating responsibility andestablishing relationship for the people to work effectively.”

STEPS INVOLVED IN ORGANISING:

The process of organising involves the following steps

1. Establishment of objectives

2. Departmentation

3. Defining authority and responsibility

4. Delegation of authority

5. Establishment of structural relationship

Establishment of objectives:

The nature of any organisation mainly depends uponthe objectives. Hence it should be very clear. Therefore, itis very essential for a manager to be familiar with theobjectives and plans of the organisation.

Departmentation:

Grouping of activities is called as departmentation.Grouping is done on the basis of (1) functions (2) processes(3) location (4) products (5) customers etc., Most generally,grouping is done on the basis of functions. This consists of


grouping of all similar activities into major department ina manufacturing industry. Production, sales, marketing,purchase, accounting, finance, inspection etc., are theexamples of departmentation by function.

Defining Authority and responsibility:

Authority and responsibility of any person should beclearly described in writing so that he can do his workefficiently. If a manager has to work efficiently, he mustknow what type of job he has and how much authority hehas.

Delegation of authority:

Delegation is the distribution of work to anotherperson with necessary rights and responsibility. A managercannot do all the work by himself. He needs help fromothers. So he should delegate sufficient authority to thesubordinates in order to carryout work.

Establishing Structural relationship:

The relationship between different departments anddifferent individuals must be clearly established. Thestructual relationship in the organisation must be clearlyshown with the help of organisation charts and manuals.An organisation structure will clarify the position, role andrelationship of all personnels.

PRINCIPLES OF ORGANISING:

The principles of organising are

1. Principle of objective2. Principle of efficiency3. Principle of span of control4. Principle of unity of command5. Principle of unity of direction6. Principle of scalar chain7. Principle of division of work8. Principle of authority and responsibility9. Principle of flexibility and continuity

10. Principle of stability

1. Principle of objective:

In any organisation, the action and aim of everyindividual in the department and the aim of managementboth must be same to attain the final objective. Theorganisation structure should help better co-operation amongthe employees.

2. Principle of efficiency:

The organisation structure will be efficient when itachieves its final objective with minimum cost. It shouldprovide job satisfaction and work facilities for the individuals.

3. Principle of span of control:

Span of control means the number of subordinates canbe controlled by a superior. At top level management, thespan will be narrow where as the lower level management,the span can be broad. The span depends upon (1) thenature of work (2) level of management (3) type oforganisation and (4) type of subordinates.

4. Principle of unity of command

5. Principle of unity of direction

6. Principle of Scalar chain

7. Principle of division of work

8. Principle of authority and responsibility

(For all the above, Refer Henri Fayol’s principles ofmanagement.)

9. Principle of flexibility and continuity

An organisation structure should be made flexible insuch a way that it can be changed easily. After changes,the organisation can be able to work efficiently.

10. Principle of stability:

Management should not depend only on a fewindividuals. If it is so, if any one leaves from the factorywill lead to instability. Therefore management should trainthe subordinates in order to take over the superior’s workat short notice. This will lead to stable management.


3. STAFFING:

In organising function, all the activities aredetermined and assigned to different personnel. For this, theman power is required at various levels of the organisation.The main motto of staffing is to recruit “Right man forthe right job”. Staffing includes recruitment, selection,placement, training, promotion, demotion, transfer andtermination etc., During expansion and growth, additionalmanpower is required. For this, employees can be recruitedand also the subordinates can be trained. To achieve theorganisational goals, every manager should ensure that highquality personnels are available in an organisation at alllevels.

The organising and staffing function are clearlyexplained in chapter 3.

4. CO-ORDINATION:

Co-ordination may be defined as “the process ofuniting and synchronizing all activities of an organisationto achieve harmony of individual efforts towards theachievements of objectives.”

Co-ordination is not co-operation as often confused.Co-operation means employees should work together in orderto achieve the common objective. Co-ordination meansputting things and actions in proper order (ie) deciding whohas to do, what and when. It is the duty of a manager tosee that the individuals in the organisation should work asteam. The process of co-ordination can be explained by thefollowing example.

Take the case of cricket team. Players are placed indifferent positions when they are fielding. Depending uponthe opponent team, batsman’s style of batting, the playersmust move to the correct position. There is a captain toco-ordinate the fielders’ activities with good understandingin order to win the match.

In an industry, there are many activities likeproduction, purchase, sales, finance etc., All these activitiesshould take place at right sequence and at right place forachievement of objectives. Therefore, the manager has toco-ordinate the above activities of individuals in order toachieve the required results.

The following factors must be considered for achievingbetter co-ordination.

1. Unity of direction.

2. Effective co-ordination among the employees and alsobetween the manager and his subordinates.

3. Good industrial relationship.

4. Harmonising employees goals with organisation goals.

Co-ordination may be external co-ordination orinternal co-ordination in an organisation.

External Co-ordination:

The management has to co-ordinate the activities tobe carried out by the various persons outside the factorysuch as suppliers, customers, government, community andother related agencies.

Internal Co-ordination:

Co-ordination existing between the group of employeesof the same department, managers level and the personnelsfrom various departments inside the factory is calledinternal co-ordination.

5. DIRECTING:

Directing is another function of management. It isdefined as the process of guiding and supervising thesubordinates towards the achievement of organisationalgoals. Directing is the inter-personnel aspect of managing.By directing, the manager makes the subordinates toperform clearly with their work as per the plan. Thedirecting function can be successfully carried out throughthe following.


1. Effective communication

2. Proper motivation

3. Good leadership

The above three are explained in Chapter 3.

CONTROLLING:

The function ‘controlling’ is explained in detail inChapter 5.

Controlling means to check whether the things aredone as per the plan or not. Planning and controlling shouldgo together. It is a performance and correction of activitiesin order to achieve the desired plans. Controlling functionconsists of the following steps.

1. Establishing standards

2. Measuring the actual

3. Comparing the actual with the standard

4. Analysing the deviation

5. Taking corrective action

1. Establishing standards:

To measure the actual performance, it is necessary toestablish the standards. The types of standard are.

Quantity standard:

Defining the volume of production, sales volume arethe examples of quantity standards.

Quality standards:

Defining the surface finish, tolerances of a product,dimension and life of the product etc.,

Cost standard:

This is a monetary based standard. It defines theamount of money to be spent for raw material,advertisement, labour and other expenses.

Time standard:

Setting up a schedule to be followed in order tocomplete the work is time standard.

2. Measuring the actual performance:

After establishing the standards, the performance mustbe measured actually. Measurement can be done by personalobservation at regular intervals or at random intervals.

3. Comparing the actuals with the standards:

The actual performance measurement should be comparedwith the established standards to improve the performance.

4. Analysing the deviation:

The difference of actual performance with theestablished standard is called deviation. The reason for thisshould be analysed for further development.

5. Taking Corrective action:

Once the reason is found out, then corrective actionshould be taken immediately to avoid losses. Action shouldbe taken in such a way that the same should not come infuture. Corrective action may be rescheduling the plan,change the standards etc.,

Types of controls:

The various types of controls are

1. Production control 2. Budgetory control3. Inventory control 4. Cost control 5. Labour control6. Quality control 7. Material control.

TYPES OF BUSINESS ORGANISATION:

ORGANISATION - INTRODUCTION:

Organisation is a mechanism or structure which helpsthe activities to be performed effectively. The organisation isestablished for the purpose of achieving the businessobjectives. The business objectives may differ from onebusiness to another. Whatever may be the business objectives,there is a need of an organisation.


The word ‘Organisation’ is derived from the word‘Organism’ which means an organised body with connectedinterdependent parts sharing common life.

MEANING:

Organisation is the detailed arrangement of work andworking conditions in order to perform the assigned activitiesin an effective manner.

FUNCTIONS OF AN ORGANISATION:

The functions of an organisation includesdetermination of activities, grouping of activities, allotmentof duties to specified persons, delegation of authority,defining relationships and the co-ordination of variousactivities.

1. Determination of activities:

It includes the deciding and division of variousactivities required to achieve the objectives of theorganisation. The entire work is divided into various partsand again each part is sub-divided into various sub-parts.For example, the purchase work may be divided intorequisition of items, placing of an order, storage and so on.

2. Grouping of activities:

The next function of organisation is that the identicalactivities are grouped under one individual or a department.The activities of sales such as canvassing, advertisementsand debt collection activities are grouped under onedepartment i.e., sales department.

3. Allotment of duties to specified persons:

In order to ensure effective performance, the groupedactivities are allotted to specified persons. In other words,the purchasing activities are assigned to the PurchaseManager; the production activities are assigned to ProductionManager; the sales activities are assigned to Sales Managerand the like. Besides, adequate staff members are appointed

under the specified persons. The specified persons arespecialised in their respective fields. If there is any need,appropriate training would be provided to such persons.

4. Delegation of authority:

Assignment of duties or allotment of duties to specifiedpersons is followed by delegation of authority. It will be verydifficult for a person to perform the duties effectively, if thereis no authority to do it. While delegating an authority,responsibilities are also fixed. Thus, the Production Managermay be delegated with the authority to produce the goodsand fixed with the responsibility of producing quality goods.

5. Defining relationship:

When a group of persons is working together for acommon goal, it becomes necessary to define the relationshipamong them in clear terms. If it is done, each person willknow who is his boss, from whom he has to receive ordersand to whom he is answerable. In another sense, each bossshould know what authority he has and over which person.

6. Co-ordination of various activities:

The delegated authority and responsibility should becoordinated by the Chief Managerial Staff. The reason is thatthere must be a separate and responsible person to seewhether all the activities are going on to accomplish theobjectives of the organisation or not.

NATURE OR CHARACTERISTICS OF AN ORGANISATION:

Organisation is the pioneering step of the management.The functions of management are sitting over the strongorganisational set up. A palace may be constructed only whena very strong foundation is laid. The same principle isfollowed here. Organisation is the foundation of management.Without organisation, the functions of management such asplanning, organising, staffing, directing, co-ordinating andcontrolling cannot succeed.


Organisation supplies the human and material resourcesand helps to achieve the objectives of business. The organisationprovides the means or techniques with strong efforts for moreproduction and effective completion of the work. Organisationincreases the certainity and promptness in the completion ofwork by assigning fixed duties to every person. Whenever theduties are fixed, it automatically develops team spirit towardsthe realisation of common goals. Initially, the total work of theenterprise can be divided into various parts and then linkedwith all the parts as and when the need arises to achieve themain objectives. The connection of various parts of theorganisation is given by the authority relationship oforganisational structure. The relationship may operate upward,downward, and sidewise of the organisation.

1. Division of labour:

The total work can be divided into many parts foreffective performance of the work. Each part of work may becompleted by one person or a group of persons. But, all theparts of the work are done with the aim to achieve the mainobjective of the organisation. The work is assigned to aperson who is specialised in that particular work.

If there is a proper division of labour, no person will beallowed to do anything according to his own way unless andotherwise he is not well equipped. The division of labour results inthe creation of specialised persons because a person does the samework again and again. No waste of time, energy and resources aresome of the advantages of division of labour. In addition to this,the division of labour results in the increase of quality output andquantity of product without any additional capital.

2. Co-ordination:

Different persons are assigned different work in oneorganisation. But, all the work are performed to achieve theobjectives. It implies that there is a need for co-ordinationamong the workers in an organisation. Each and everydepartment or section of the organisation should haverelationship with each other, to get mutual co-operation.

3. Objectives:

The objectives of the organisation should be definedclearly. The objectives cannot be achieved without theexistence of a good organisational structure. In turn, theorganisation cannot exist without objectives for a long period.

4. Authority-responsibility structure:

An organisation means an arrangement of position ofexecutives by adopting a rank system. In other words, asubordinate has one boss and a superior has control overthe subordinate specifically. The position of each of theexecutives is defined with regard to the extent of authorityand responsibility vested in him to discharge the duties.

5. Communication:

Every organisation has its own communication system.The success of management depends upon the effective systemof communication. The reason is that each and every personworking in an organisation should know the techniques ofcommunication and the importance of communication. Thechannels of communication may be divided into formal,downward and upward or horizontal.

TYPES OF BUSINESS ORGANISATION:Organisation is designed on the basis of principles of

division of labour and span of management. The success ofthe organisation depends upon the experience andcompetence of the officers of the organisation. There is anecessity of chalking out the line of authority among thepeople who are working in an organisation to achieve thedesired results. Besides, it involves the determination ofduties among the officers and combining the activities of allofficers to get the desired results.

Nature, scale and size of the business are the normalfactors which determine forms of internal organisation. Thefollowing common types of organisations find a place inthe structure of internal organisation.


1. Line, Military or Scalar organisation2. Functional organisation3. Line and staff organisation4. Committee organisation5. Project organisation6. Matrix organisation7. Freeform organisation

A brief explanation of the above types of organisationsis given below.

I. LINE ORGANISATION:

Line organisation is the simple and oldest type oforganisation followed in an organisation. Under lineorganisation, each department is generally a completeself-contained unit. A separate person will look after theactivities of the department and he has full control over thedepartment.

There are certain powers which will be given to lineexecutives to take decisions whenever a need arises. Hecommunicates his decision and orders to his subordinates.The subordinates, in turn, can communicate them to thosewho are immediately under them.

Such decision making authority is to flow from thetop management level to the bottom. The top managementpeople have greater decision making authority than thebottom level executives. It should be noted that in this typeof organisation, an executive is independent of otherexecutives of the same level (say departmental heads). Inother words, the same level executives do not give or receiveany orders amongst themselves. But they receive ordersfrom their immediate boss (general manager) and giveorders to their subordinates. Hence, it is known that all thedepartmental heads are responsible to the general manager.The general manager, in turn, is responsible to the boardof directors. The board of directors is responsible to theshareholders who are the owners.

This type of organisation is followed in the army on thesame pattern. So, it is called military organisation. Under thistype of organisation, the line of authority flows from the topto bottom vertically. So, it is called line organisation.

CHARACTERISTICS OF LINE ORGANISATION:

1. It consists of direct vertical relationships.2. Authority flows from top level to bottom level.3. Departmental heads are given full freedom to control

their departments.4. Each member knows from whom he would get orders

and to whom he should give orders.5. Operation of this system is very easy.6. A senior member has direct command over his subordinates.7. Existence of direct relationship between superiors and

subordinates.8. Each member knows to whom he is responsible for

the accomplishment of objectives of the organisation.9. The superior takes decisions within the scope of his

authority.


ADVANTAGES OF LINE ORGANISATION

1. Simplicity:

The line organisation is very easy to establish. Itsworkers can understand the concept and relationship withothers without any difficulty. There is no complication in itsideals.

2. Division of authority and responsibility:

Each person has his area of authority which is clearlyexplained to him. So he knows to whom he is responsiblefor doing the job. No person could share off his ownresponsibility after it has been fixed.

3. Unity of control:

According to unity of control, an individual can receiveorders only from one superior. It means, that a subordinateis responsible only to one superior and he gets orders onlyfrom him.

4. Speedy action:

Under line organisation, there is a proper division ofauthority and responsibility and unity of command. Hence,an individual can take decisions and execute the planswithout any delay.

5. Discipline:

The authority flows from top to bottom. Loyalty anddiscipline can be maintained among the employees of theorganisation without much difficulty.

6. Economical:

Since line organisation is a single type of organisation,it is economical.

7. Co-ordination:

The business activities are grouped on functionalbasis. Each department is responsible for a function, so thedepartment heads can get co-ordination from the workerswho are working under them.

8. Direct communication:

There is a direct relationship between the superiorand the subordinate at all levels of organisation. This willhelp to know each other intimately. This ensures directcommunication between the staff members and increases theefficiency of the employees.

9. Flexibility:

Adjustments in the organisation can be easily madeto suit the changing conditions of the business.

DISADVANTAGES OF LINE ORGANISATION

1. Lack of specialisation:

Each person is responsible for the overall exhibitionof activities relating to his department alone. He is notexpected to be an expert in all aspects of managerial task.He simply gives instructions to his subordinates and doesnot specialize in certain phases of operation.

2. Over loading:

Whenever the scale of operations (or) size of thebusiness unit increases, this system gives over work to theexisting executives. So, they are not in a position to directand control the efforts of their subordinates properly.

3. Lack of initiative:

Since maximum authority is invested with the topmanagement, the departments will lose their initiative tomotivate the subordinates.

4. Scope for favouritism:

Only one person controls the activities of thedepartment when there is a scope for favouritism andnepotism.

5. Dictatorial:

Under line organisation, a subordinate should carryout the instructions and orders which are given by the


superior. If not, he will be penalised. This entails inautocratic and aristocratic approach in administration. So,managers will become dictators and not leaders.

6. Limited communication:

In normal time, the communication moves downwards butvery rarely it moves upwards. The downward communicationmay be orders, instructions etc. If upward communication isallowed, the management may know the grievances ofemployees. But upward communication is not preferred by thetop management. So it results in limited communication.

7. Unitary administration:

Each department’s activities are looked after by asingle executive who takes all the decisions relating to hisdepartment. Hence, the successful functioning of thatdepartment depends on his abilities.

8. Subjective approach:

The degree of availability of authority is more to thesuperior than to the subordinates. So the superior takesdecision without considering the opinions of thesubordinates. The subordinate should follow the decisionstaken by the superior.

9. Instability:

The success of this type of organisation dependsmostly on the ability of only few strong men and the failureof this organisation is likely due to the inability of the samepersons.

10. Lack of co-ordination:

The co-ordination among the departmental heads isnot easy to achieve. The reason is that the executive of adepartment does not consider other departments importance.This will result in the lack of co-operation and team spirit.

11. Unsuitability for large scale enterprise:

This type of line organisation is not suitable for alarge-scale enterprise which requires specialisation.

12. The business activities may be divided according to thewill of the manager rather than according to any scientificplan.

13. The system has no means of appreciating the efficientworker and punishing of the inefficient worker.

14. Under line organisation, efficient persons are essentialto the top management. Practically, it is very difficult tofind efficient persons for small organisations.

15. The required time and efforts are insufficient formanagerial planning, research and development andcontrolling activities of the organisation.

Suitability:

1. This type of organisation is suitable to small sizebusiness units.

2. Where the activities are of routine nature or machinebased.

3. If the business activities are service minded.

4. Where the number of persons working is small.

5. The business operation is simple in nature.

6. A business unit which has straight methods ofoperations.

II. FUNCTIONAL ORGANISATION

Under line organisation, a single person is inchargeof all the activities of the concerned department. Here, theperson incharge finds it difficult to supervise all theactivities efficiently. The reason is that the person does nothave enough capacity and required training. In order toovercome the limitations of line organisations, F.W. Taylorproposed a new type of organisation called functionalorganisation.


Under functional organisation, various specialists areselected for various functions performed in an organisation.These specialists will attend to the work which are commonto different functions of various departments. Workers,under functional organisation, receive instructions fromvarious specialists. The specialists are working at thesupervision level. thus, workers are accountable not only toone specialist but also to the specialist from whominstructions are received. Taylor advocated this organisationas a point of the scheme of scientific management.Directions of work should be decided by functions and notby mere authority.

The need for functional organisation arises out of;

(i) The complexity of modern and large-scale organisation;

(ii) A desire to use the specialisation in full and;

(iii)To avoid the work-lead of line managers withcomplex problems and decision-making.

CHARACTERISTICS OF FUNCTIONAL ORGANISATION

1. The work is divided according to specified functions.2. Authority is given to a specialist to give orders and

instructions in relation to specific function.3. Functional authority has right and power to give

command throughout the line with reference to hisspecified area.

4. The decision is taken only after making consultationswith the functional authority relating to hisspecialised area.

5. The executives and supervisors discharge theresponsibilities of functional authority.F.W. Taylor, the father of scientific management,

recommended a functional organisation of activities at thetop level. According to Taylor, a foreman should not beburdened with looking after all the activities of his work.Instead, he should be assisted by a number of specialists insolving the problems. The following chart will also help tounderstand the functional organisation.

1. Route clerk:

He is a technical expert. He fixes the route throughwhich each work should travel up to the stage of completion.

2. Instruction card clerk:

He is expected to draft instructions to workers on thebasis of the route fixed by the route clerk. These instructionsare written on a separate card.

3. Time and cost clerk:

This clerk fixes the standard time for each work andthe cost incurred for each work. He gives instructions to theworkers to record the time actually spent by the workersand actual cost incurred for completion with standard timeand cost.


4. Gang boss:

This worker is expected to see the various machinesand materials kept ready for workers to perform the work.

5. Speed Boss:

He advises the worker to complete the work withinthe standard time considering the speed of the machines.Besides, the speed boss sees whether each work is completedin time or not.

6. Inspector:

The Inspector checks up the quality of each work andcertifies it as standard. Actually, the accuracy of work ischecked with reference to the specification.

7. Repair boss:

His work starts only after the actual work isperformed by the workers. He is concerned with the up-keepof machines and other equipments. It means that theresponsibility of the repair boss is the maintenance ofmachines.

8. Disciplinarian:

He implements the rules and regulations of the entireorganisation. He is a peacemaker of the organisation. Healso checks whether each work is performed in a systematicand perfect manner.

The route clerk, the instructions clerk and time andcost clerk work in the planning department. The gang boss,speed boss, inspector, and repair boss belong in the factorysection of the organisation. The disciplinarian is not a staffof any section but he is responsible for the worker’s conduct.

ADVANTAGES OF FUNCTIONAL ORGANISATION

1. Benefit of specialisation:

Under the functional organisation, each work isperformed by a specialist. It helps to enhance the efficiencyof the organisation. Each work is divided among the workersscrupulously.

2. Application of expert knowledge:

Planning function and execution function are dividedseparately and each function is entrusted to a specialist inthe line organisation. So, the specialists can use their expertknowledge in the actual performance of work.

3. Reducing the work load:

Each person is expected to look after only one typeof work. It reduces the unnecessary work allotted to them.Hence, the quality of work and effective control over thework are achieved.

4. Efficiency:

Since each worker is responsible for each work, theworkers can concentrate on the work allotted to them. Theycould assure proficiency in the work.

5. Adequate supervision:

Each staff member is incharge of a work. So, he candevote enough time to supervise the workers.

6. Relief to line executives:

Under functional organisation, the instructions aregiven by the specialist directly to the actual workers. Hence,the line executive does not have any problems regarding theroutine work.

7. Co-operation:

A single person could not have full control over theworkers in the organisation, So, there is a possibility ofpromotion among the executives of the organisation.

8. Mass production:

Large-scale production can be achieved with the helpof specialisation and standardisation.


9. Economy:

Under functional organisation, each specialist isresponsible to the performance of a work. Wastage in theproduction can be avoided and the expenditure could beconsiderably reduced.

10. Flexibility:

Any change in the organisation can be introducedwithout any difficulty.

DISADVANTAGES OF FUNCTIONAL ORGANISATION

1. Complex relationship:

A single worker is working under eight specialistsunder functional organisation. It is very difficult for theworker to be responsible to all persons. This results inconflict between the workers and the specialist.

2. Discipline:

It is very difficult to maintain discipline among theworkers when a single worker has to serve many masters.

3. Over specialisation:

The organisation can reap the advantages ofspecialisation. But at the same time, there might beoverlapping of authority and divided responsibility.

4. Ineffective co-ordination:

The extent of authority of a specialist is not correctlydefined. It creates problems while getting the co-operationamong the specialists.

5. Speed of action:

When the control of a worker is divided among thespecialists, the speed of action of the workers may behampered.

6. Centralisation:

Eight specialists are guiding and directing theworkers to perform the work. So, the workers do not haveany scope for doing the job on their own. This leads to thecentralisation of authority.

7. Lack of responsibility:

If there is any defect in the performance of work, themanagement is not in a position to fix the responsibility forit. The reason is that none of the eight specialists is readyto own the responsibility. They may shift the responsibilityto any one among themselves for the poor performance ofthe work.

8. Increasing the overhead expenses:

The remuneration of the specialist may be higher thanthat of the foreman or supervisor.

9. Poor administration:

Since many specialists control the same group ofworkers, no effective administration of workers could beensured.

Suitability of functional organisation

It is very suitable to a business unit which is engagedin manufacturing activities.

III. LINE AND STAFF ORGANISATION

There are some advantages and disadvantages bothin the line organisation and functional organisation. In orderto reap the advantages of both line organisation andfunctional organisation, a new type of organisation isdeveloped, i.e., line and staff organisation. Under line andstaff organisation, the disadvantages of line organisation andfunctional organisation may be avoided to some extent.


This type of organisation is best suited for mediumand large size industries. When an organisation size isincreased, it is necessary to go for staff organisation. Stafforganisation consists of special executives from differentfields eg. Planning, design, sales, quality control, personneletc. These executives are arranged along with the lineexecutives (works manager, superintendent, foremen etc.) inorder to carryout the work.

The line executives have authority and therefore theycan maintain discipline and stability where as the staff donot have any authority to direct the workers and have onlyadvisory work. In the following fig the line executives areshown in a vertical line and staff in a horizontal line.

The line officers have authority to take decisions andimplement them to achieve the objectives of the organisation.The line officers may be assisted by the staff officers whileframing the policies and plans and taking decisions.

In the fast developing industrial world, the lineofficers are not in a position to acquire the technicalknowledge. For example, while taking decisions regardingthe production, technical knowledge is needed to take correctdecisions.

This type of gap may be bridged with the help of staffofficers. The staff officers may be experts in a particularfield. Then, the line officers can get expert advice from thestaff officers before taking the final decisions. Staff refers tothose elements of the organisation which provide advice andservice to the line.

The authority flows from top level to the lower levelof the organisation through the line officers while the staffofficers attached to the various departments advise thedepartments. The staff officers do not have any authority tocontrol anybody in the organisation. Besides, the staffofficers are not in a position to compel the line officers tofollow the advice given by them. Each department is headedby a line officer who exercises full authority regarding theplanning, implementation and control of workers under himwith the help of staff officers. There is no connectionbetween workers and the staff officers of any department.The workers get the instructions only from the line officers.Hence, the unity of command and specialisation are followedin this organisation.

In many organisations, the line officers extend theirfull co-operation to staff officers and vice-versa. This ensuressmooth functioning of the organisation. In certaincircumstances, conflicts may arise between the staff officersand line officers. When an officer blames the other officersfor some lapse, it affects the smooth functioning of thebusiness.


ADVANTAGES OF LINE AND STAFF ORGANISATION

1. It facilitates the workers to work faster and better.

2. Specialisation is attained when the staff officersconcentrate on planning function and the line officersconcentrate on execution function.

3. It enables the organisation effectively utilise the staffofficers’s experience and advice.

4. The line officers can take sound decisions with thehelp of proper advice from the staff officers.

5. A new technology or a new procedure may beintroduced in the organisation without any dislocation.

6. A new variety of responsible jobs can be given toskilled workers.

7. The work of line officers would be reduced to someextent if they are relieved of the work of takingdecisions.

8. It promotes the efficient functioning of the lineofficers.

9. The principle of unity of command is followed in theline and staff organisation. Hence, the line officers canmaintain discipline among the workers and exercisecontrol over the workers.

10. A very good opportunity is made available to theyoung persons to get training.

DISADVANTAGES OF LINE AND STAFF ORGANISATION

1. If the powers of authority pertaining to the lineofficers and staff officers are not clearly defined, thereis a possibility of confusion throughout theorganisation.

2. The line officers may reject the advice withoutassigning any reasons for their action.

3. The staff officers may underestimate the authority ofline officers. The reason is that they are superior tothe line officers.

4. The staff officers are not involved in the actualimplementation of the programme. So, it is notobligatory on their part to give advice with care andcaution.

5. The staff officers are not responsible if favourableresults are not obtained.

6. It requires the appointment of staff officers who arespecialised in various areas. It increases theadministrative expenses of the organisation.

7. There is no authority to the staff officers to compelthe line officers to accept and implement the advicegiven by them.

8. There is a communication gap between line officersand staff officers. It reduces the degree of co-operationbetween them.

9. The difference of opinion between line officers andstaff officers will defeat the very purpose ofspecialisation.

11. The line officers may mis-understand the advice givenby the staff officers and proper results cannot beobtained. Sometimes, the staff-officers cannot giveunambiguous advice to the line officers.

12. Line officers blame the staff officers for unfavourableresults and want to get rewards for favourable results.

13. Frequently, the line officers want to get advice fromthe staff officers not only on important matters, butalso on ordinary matters. It reduces the effectivenessof control of line officers.

IV. COMMITTEE ORGANISATION

A committee is a group of competent and interestedpersons who work collectively, discuss and recommendsolution to the problems which arise from time to time andcannot be solved by an individual. A committee is purely anadvisory group and gives better solutions.


In industries, committees are formed in the top level.Such committees are executive committee, financecommittee, advisory committee, manufacturing committee,bonus committee and safety committee etc. Committees maybe permanent or temporary.

A committee is a group of persons to whom certainmanagerial functions are assigned and from whom someadvice or recommendations are expected. A committee is agroup of people who meet by plan to discuss or make adecision for a particular subject. The duties, responsibilitiesand authority are fixed by the top management and thecommittee is accountable to the management.

TYPES OF COMMITTEE

1. Advisory committee (or) problem solving committee:

This committee examines the problems which arereferred to it.

If a committee is requested to solve a given problem, itshould give the best solution. The reason is that the committeemembers have wide knowledge, offer different opinions andsuggest approaches to solve a problem. Before solving aproblem, it is analysed by the committee members fromdifferent angles. A solution is found out by the committee afterconsidering the pros and cons of the proposed solutions.

2. Fact-finding committee:

This type of committee is formed only for the purposeof collecting information on a particular subject. A detailedreport is submitted with recommendations to themanagement. This is the most common committee formedin any organisation.

3. Action committee (or) executive committee:

This committee consists of line officers. Thiscommittee can take the decisions and it has power toimplement the decisions. The committee is permanent innature. Board of Directors of a company is the best examplefor the Action committee.

FUNCTIONS OF A COMMITTEE

1. Collect the necessary information from differentsources and arrange the information in order.

2. The collected information is critically analysed.

3. Draft a detailed report containing the recommondationsfor the purpose of implementation.

4. Formulate the standard of performance for thepurpose of evaluation of actual performance in future.

5. Take a decision if the committee is requested to doso.

6. Framing the policies of the organisation.

7. The committee can select personnel to carryout thebusiness operations.

8. Directing and controlling the officers at regularintervals to achieve the goals.

ADVANTAGES OF COMMITTEE ORGANISATION

1. The committee can take valuable decisions. Thecommittee members can make use of their experienceand knowledge while taking decisions.

2. Hasty decisions are avoided by the committee.Normally, the hasty decisions do not give maximumbenefit to the organisation. Hasty decisions are notworthy from a long term point of view.

3. The committee members are encouraged to participatein the decision making process. Each committeemember can acquire a knowledge and understand thefeelings of the people in other parts of the company.Keeping these in view, the decision is taken by thecommittee.

4. The committee decisions will certainly be the best one.There is a proverb, “Two heads are better than one.”

5. By participating in the decision making process, anofficer is persuaded to accept the decision andimplement it without any delay.


6. Co-ordination between the various departmentsbecomes very easy, because, the committee consists ofmembers from various departments. Committee is auseful device for co-ordinating business planning andthe execution of the business policies.

7. The committee members have authority to implementthe decisions. If any individual takes a decision, thedecision may not be implemented by the committee. Thereason is that there is no authority for the committeeto implement the decision taken by an individual.

8. If a young person is motivated to participate in thedecision making process of a committee, he can get avery good training. It is one way of utilising theopportunity offered to him.

9. Normally the committee consists of specialists fromvarious fields. New ideas may be developed by thecommittee in the area of production, sales, customerservices and the like.

10. Whenever a decision is taken in an organisation, itshould be communicated to all the employees. Thecommittee members can disseminate the decisiontaken by the committee to the employees immediately.It saves a considerable time in communication.

11. The decision taken by the committee reveals thefeelings, ideas and thoughts of all the members of thecommittee. The decision is taken only after havingobtained the approval of all the persons who areparticipating in the decision making.

12. Sometimes, the decision is arrived at after getting theapproval of the majority of the members participatingin the decision making. So, the committee follows ademocratic process in the decision making.

13. Committee members are requested to express theirviews, ideas and feelings freely. It will minimise theclashes of interests among the employees of theorganisation. The discussion may be pertaining towages, salary, bonus, welfare schemes and the like.

14. The line executives are included in the committee fordecision making. It encourages the line executives.

15. If any problem is to be solved by the committee, itcan be done by following the principle of division oflabour. Each committee member can analyse theproblem from various angles simultaneously and takefruitful solution.

16. An individual is empowered to take decision andimplement it when he has full authority andresponsibility.

17. Normally, the committee is formed with the interestedpersons of the organisation.

DISADVANTAGES OF COMMITTEE ORGANISATION

1. Men from various fields are included in thecommittee. Each member expresses his own ideas anddecisions or solutions. It results in delay in taking adecision.

2. It increases the administrative expenses of theorganisation.

3. In case, if there is an absence of mutual co-operation,they fail to work efficiently and the committee isdissolved without any decision being taken.

4. The secrecy of the committee’s decision cannot bemaintained under committee organisation. The reasonis that there are a large number of members in acommittee.

5. The responsibility cannot be fixed on any person ifthe decision does not produce favorable results to theorganisation. Each one blames the other for faultydecision making and unfavourable results.

6. Sometimes, the decisions may be taken on the basisof compromise.

7. It has been observed that irrelevent matters aresometimes discussed. The decision should be taken bya committee within a short period of time.


8. In the committee organisation, each member isexpected to express his own ideas. It may result inheated argument among the committee members. Itdoes not give any benefit to the organisation.

9. The members of a committee do not use theirinitiative because of their ignorance, or dominance bythe committee members.

10. The committee members who meet frequently, maynot be able to devote full attention to their duties.

11. A committee is formed to reap benefits as in ademocracy. But, in majority of the cases thecommittee acts as a puppet of the management.

12. The committee members are not able to develop theirown ability or talents individually. Further, itdeteriorates the ability of the committee members invarious other fields.

V. PROJECT ORGANISATION

Project organisation is suitable for taking projects ofvarious types. Each project is organised as a separatedivision consisting of specialists in different fields. The

activities of the project team specialists are co-ordinated bya project manager. The success and failure of a project ismainly depends upon the activities of a manager. Once aproject is completed, the project team will take over the nextproject and so on.

Project organisation is designed with the object ofaccomplishing a programme or project. The projectorganisation is dispersed after the accomplishment of aprogramme or project. The project organisation is composedof a core of functional departments in addition to its specificprogrammes or projects. In other words, project organisationconsists of important functional departmental heads.

FEATURES OF PROJECT ORGANISATION

1. The success of the project organisation depends uponthe co-ordination of activities.

2. There is a grouping of activities for each project. Itleads to the introducing of a new line of authority.

3. The responsibility is fixed for each group with regardto the respective projects and it results in themeaningful control.

DRAWBACKS OF PROJECT ORGANISATION

1. The professionals are deputed for the project. Butthere is no assurance of continuous work for theprofessionals in a project organisation.

2. Under project organisation, there is absence of propercommunication and standards for comparing theperformance. It reduces the motivation and controlsthe staff in an organisation.

3. The decision is taken in the project organisation underpressure of the top management. It results indangerous consequences.

4. The top management does not extend its fullco-operation for the effective functioning of the projectorganisation. Some hindrance may be caused by thetop management.


VI. MATRIX ORGANISATION

There are several departments under Matrixorganisation. Each department is assigned with a specifiedtask. The available resources of the organisation can be usedby each department along with the co-ordination of otherdepartments in an organisation.

Matrix organisation is used to handle various projectsranging from small to large. It is a project organisationalong with functional organisation. The project teams areselected from the functional departments to carryout theproject work. After completion of the project, they arereturned to their respective departments. During the projectwork, they have to answer with two bosses. (ie) one fromthe functional department and another from the concerneddepartment.

MERITS OF MATRIX ORGANISATION

The merits of a matrix organisation are discussedbelow:

1. Achievement of objectives:

The matrix organisation reaps the benefits offunctional organisation and line and staff organisation. Itensures the achievement of objectives with technicalspecialisation.

2. Best utilisation of resources:

The available resources are used by the managers forthe specific project. At the same time, the resources areutilised by the manager with full understanding amongthem.

3. Appropriate structure:

Matrix organisation is an appropriate structure of anorganisation to adopt to the external changes. For example,in order to survive the competition, matrix organisation isused to meet customer demands according to theexpectations without affecting the marketing of the existingproduct.

4. Flexibility:

Matrix organisation is a highly flexible organisation.The rules and procedure are framed on the basis of theexperience of the organisation.

5. Motivation:

If any department is functioning slowly towards thecompletion of the particular project, proper motivation isprovided to the concerned department.

6. Personal development:

Matrix organisation gives an excellent scope fortraining and development of efficient persons.


DEMERITS OF MATRIX ORGANISATION

The following are the demerits

1. Complex relationship:

The matrix organisation does not follow the principleof scalar chain of command. Here, a single person gives thereport to more than one superior.

2. Struggle for power:

A subordinate is controlled by many superiors. Itmeans the power is used over the subordinate by manyauthority holders. It results in delay in the completion ofthe project.

3. Excessive emphasis on group decision-making:

The available resources are utilised by the departmentfor taking group decisions. There is no spirit ofaccommodation and understanding under the matrixorganisation. So, there is a delay in the completion of theproject.

4. Heterogeneous:

A matrix organisation is created by deputing the stafftemporarily. They are skilled professionals of variousdepartments. It is difficult to co-ordinate the work of theskilled staff members when there is a lack of unity ofcommand in an organisation.

VII. FREE FORM ORGANISATION

This type of organisation is formed whenever a needarises to form an organisation, for achieving a particularobject. It will be dissolved after achieving the object of theorganisations. In many ways, the Free Form Organisationresembles the project and matrix organisation. It isotherwise called organic or adhoc (ratio) organisation.

The formation of the Free Form Organisation dependsupon the external environment of the business. If thebusiness is highly affected by the external environment, theFree Form Organisation will be established.

Decision is taken under Free Form Organisationwithout following the policies or guidelines which aredetermined in advance. Normally, the decision is taken inany organisation by following the organisational policies,rules and regulations. These are framed well in advance andfollowed while taking decisions.

The structure of Free Form Organisation is related toindividual expertise used in resolution of the problems athand. The nature of problems may be changed according tothe situations prevailing in the business world. When thereis a change in structure of Free Form Organisation, no taskis assigned to it specifically. But tasks are assigned tosuperiors and subordinates according to level of experienceand competence. So, the authority is available to the personsaccording to their competence in performing the given taskunder this organisation.

There is no channel of communication due to theabsence of a formal structure in the Free FormOrganisation. So, the communications flows in any directionviz., upwards, downwards, and horizontally.


FORMS OF ORGANISATION

PRIVATE SECTOR [NON-CORPORATE ENTERPRISES]:

Selection of a suitable forms is very important whileestablishing a new business unit. This selection dependsupon a number of factors. Forms of organisation can bedivided into two main types from the point of view ofownership viz., Non-corporate forms and corporate formswhich can again be classified into three kinds. This can beillustrated with the help of the following chart.

1. NON-CORPORATE ENTERPRISES:

Non-corporate enterprises are the private sectororganisation and the earliest form of organisation. They maybe classified into three kinds as follows:

1. Sole Proprietorship concern.

2. Partnership Firm.

3. Joint Hindu Family Firm.

1. SOLE PROPRIETORSHIP CONCERN

It is also known as individual proprietorship concernor soletrading concern. It is the oldest and the simplest formof business organisation. Here, an individual invests theentire capital, uses his own skill and is solely liable for theresults of the concern. He has to assume all the risks andlosses and get all the profit and gains. He exercises directsupervision and controls over all the activities of thebusiness concern. It is a one man show, established throughthe initiative of a single man and managed as per his ownideas. Sole proprietorship is established financed, owned andmanaged by a single individual who bears all the risks andenjoy the profits and gains.

FEATURES OF SOLE TRADING CONCERN:

The salient features of a sole trading concern are as follows:

1. One-man Ownership and control: The proprietor isthe sole owner and master of the business. He is theultimate controller of the firm. He alone decides what is tobe done, when it is to be done and how should it be done.

2. No Legal Formalities: There are no legal formalitieswith regard to its formation. There is no separate law togovern the activities of the sole trading concern. It isestablished at the initiative of the trader and is carried outaccording to his wishes.

3. Unlimited Liability: The liability of the sole trader isunlimited. In other words, it extends beyond the capitalinvested in the business. Therefore, he is liable to pay allhis business debts even out of his private property.

4. No separate Entity of the firm: The proprietor ownsand owes the assets and liabilities of the concern. The proprietorand the business are one and the same. A sole proprietorshipconcern has no legal existence separate from its owner.

5. No Legal Dissolution: A sole trading concern is notcreated by any law. So there is no need for legal dissolutionunder any law. After the death of the sole trader, his


survivor can run the show validly. The death insolvency orlunacy of any member of the family of the sole proprietorwill not affect the running of the business enterprise.

6. Complete Secrecy: Since the entire control anddecision making power vests in the hands of the sole trader,business secrets can be maintained to the maximum extent.

MERITS OF SOLE PROPRIETORSHIP CONCERN:

1. Easy Formation: It is easy to form and dissolve a soleproprietary concern. No deed is necessary. There are no legalformalities and registration of the firm also is not necessary.Therefore, minimum time and cost are involved in theformation and dissolution of sole proprietorship concern.

2. Quick Decision and Prompt Action: The soleproprietor is its own boss and need not consult others whilemaking any decision. He exercises exclusive control over theaffairs of the firm. Therefore, he can take decisions withoutany delay in all matters connected to his business and canimplement them without any delay.

3. Highly Flexible: It is a highly flexible type oforganisation. The proprietor can adopt and adjust the activitiesof the business units to the changing market condition.

4. Direct Contact With The customers: The sole traderexercises direct control over the affairs of the business. Thisdirect relationship with the customer helps the proprietor toascertain the nature of attitudes, tastes, habits and needsof the customers. Therefore he can effectively satisfy therequirement of his customers which will enhance reputationof the concern.

5. Business Secrecy: Maintenance of business secrecy isvery easy in a sole proprietorship concern. He can retain importantbusiness secrets. This will avoid competition from outsiders.

6. Efficient management: In case of sole proprietorship,the entire profit goes to the proprietor. This motivates him towork hard which shall make him an efficient administrator.

7. Independent Living: Sole proprietorship businessprovides an independent way of the life for people who donot wish to work under others. The individual can earn theirlivelihood independently with the help of their business skilland professional drive. It makes people self-dependent.

8. Better Employee Relations: The sole proprietor hasdirect relationship with his employees who are alsocomparatively less in the number. Therefore, the chances forconflicts with his employees are remote.

9. Social Utility: It provides a scope for independentliving, development of personality and diffusion of economicpower which are useful to the society.

DEMERITS OF A SOLE TRADING CONCERN:

The sole trading concern suffers from the followingdrawbacks:

1. Limited Capital: The resource of an individual isgenerally limited to his personal savings and the capacityto borrow. This factor sets a limit to the size of the businessconcern. Therefore, the chances for expansion is also limitedand the business cannot avail the economies of large scaleoperations.

2. Unlimited Liability: Unlimited liability is the seriousdrawback of this type of business organisation. The soletrader has to bear the entire risk of his business. If thebusiness fails, he may lose everything. It also discouragesthe expansion of the business.

3. Limited Life: If there is any material change in thebusiness conditions, it makes it difficulty to continue thebusiness. If the proprietor dies, the continuity of thebusiness depends upon the willingness of his successors.Hence the life of the business is very much limited.

4. Limited Managerial Ability: The managerial ability ofthe proprietor is limited. The individual cannot specialise inall aspects of the business. He cannot avail the services ofexperts by employing them because of his limited finance.


With the result, he is not able to manage the concernproperty and efficiently.

5. No Economies of bulk Trade: In case of a soletrading concern, the scale of operation is less. So he cannotget the benefits of bulk purchase. Similarly he cannotincrease his turnover beyond a certain extent.

2. PARTNERSHIP FIRMS

Partnership form of organisation is an extension ofthe sole proprietorship. A sole proprietory form oforganisation suffers from several drawbacks such as limitedcapital, limited managerial ability, concentrated risk andless chances for expansion and growth etc. With the result,the sole trader is compelled to seek the co-operation ofothers so that he can meet the changing situation effectively.Generally when a sole trader finds it difficult to handle theproblems of growth and expansion, he takes a partner. Thusit represents the next stage in the evolution of businessorganisation.

DEFINITION OF PARTNERSHIP:

According to section 4 of the Indian partnershipAct, 1932. "Partnership is the relation between persons whohave agreed to share the profits of a business carried on byall or any one of them acting for all". It is an associationof two or more individuals who agreed to carry on a businesstogether for the purpose of sharing profits.

ESSENTIAL CHARACTERISTICS OF PARTNERSHIP:

As per the definition stated above, the essentialcharacteristics of partnership are as follows:

1. Agreement: Partnership is the result of an agreementbetween two or more persons. The partnership agreementmay be oral or written. But it is desirable to make a writtenagreement. It must satisfy all the requirements of a validcontract.

2. Business: The ultimate aim of the agreement must beto do some lawful business. Unless the object is for carrying

on a business or profession, it shall not be considered as apartnership under the Act. An agreement to carry on anillegal activity cannot be treated as partnership.

3. Profit motive: The very object of the business is toearn profit and the agreement should provide for sharing ofprofit and losses of the partnership business. A charitableor educational institution may not be classified aspartnership because it does not involve sharing of profits.

4. Management: Each partner in the firm has a right totake active part in the management of the affairs of thebusiness. The partnership business should be carried on byall. However with the consent of the all other partners, oneor two partners can manage the firm.

5. Implied Agency: Since the act of one partner binds theother partners and also the firm, every partner is an impliedagent of other partners of the firm.

6. Unlimited Liability: Each partner in the firm is jointlyand separately liable for the debts and obligations of thefirm. If the property of the firm is not enough to meet theclaims of creditors of the firm, the private property of thepartners can be attached to satisfy their claims.

"The greatest disadvantage of this form is that thepartners become fully liable for its losses upto the limit oftheir resources"

7. Utmost Good Faith: The successful functioning of thebusiness enterprise on the basis of partnership, dependsmainly upon the mutual trust and confidence between thepartners. Each and every partner is supposed to act withhonesty and fairness to all partners in the conduct of thebusiness of the partnership.

MERITS OF PARTNERSHIP:

1. Easy Formation: Its formation is very easy. It does notinvolve any cumbersome legal formalities. An oral or writtenagreement is enough for starting a business on partnershipbasis. Procedure for registration is also very simple.


2. Large Financial Resources: When compared to thesole trading concern a partnership firm can raise morecapital because it is contributed by more than one person.As every partner is personally and jointly liable for the debtsof the firm, credit worthiness of the firm is also higher.

3. Flexibility of Operations: The operation of thepartnership firm is flexible. The nature and place ofbusiness can be changed whenever the partners desire. Itsprice policy, capital, profit sharing ratio etc., can be changedeasily.

4. Division of Labour: There is a possibility of divisionof labour in case of partnership. The partner may havedifferent abilities which can be utilised for the bettermentof the firm.

5. Prompt Decision Making: "Two or more persons arebetter than one". Partners meet often and take decisionspromptly. Thus it avoids taking hasty business decisions.

6. Balanced Approach: Since the entire profit isdistributed amongst the partners, they will work hard.Responsibility and reward are easily balanced.

7. Easy borrowing: As the partners are jointly andseverally liable for all the debts and obligations of the firm,the public will not hesitate to lend money to the firm.

8. Easy Dissolution: A partnership firm can be dissolvedeasily at any time without undergoing any legal formalities.A mere fourteen days notice by one of the partners toother partners is sufficient to dissolve the firm.

9. Tax Advantage: The income tax liability is lower inpartnership as compared to a company. A registered firm istaxed as an individual. It is not subject to double taxationalso.

DEMERITS OF PARTNERSHIP:

1. Limited Finance: The maximum number of persons isrestricted to 10 in the case of banking and 20 in the case

of other business. So sufficient capital cannot be raisedbeyond a certain limit.

2. Unlimited Liability: The partner’s liability to debts ofthe firm is unlimited. That is, their private property is alsoliable for the firm’s debts.

3. Lack of Stability: In case of retirement, death,insolvency and lunacy of any one of the partner, thepartnership comes to an end. Sometimes it may be continuedby admitting new partner into the firm. But it is not alwayspossible. Hence, the partnership form of organisation lacksstability.

4. Delay in Decision Making: The decision has to betaken by all the partner unanimously. This may lead todelay in decision making.

5. No Transferability of interest: No partner cantransfer his interest in the firm to an outsider without theconsent of all other partners.

6. Lack of Secrecy: Business secrets may be leaked outby partners themselves.

7. Lack of harmony: Mutual understanding andco-operation among the partners are essential for the successof partnership business. But it is generally observed thatthere is friction and lack of harmony among the partnersafter the firm has operated for sometime. Quarrels are quitecommon amongst the partners.

PARTNERSHIP:

A partnership firm can be set up by an agreementbetween partners. The agreement may be oral or in writing.In order to avoid misunderstanding and disputes amongpartners, it is desirable to have the agreement in writing.Such a written agreement is called as partnership deed. Itshould be signed by all the partners. The partnership deedmust be stamped properly and each partner should be givena copy of the deed.


CONTENTS OF THE DEED:

1 Name of the firm.

2 Names and addresses of all the partners.

3 Capital contributed by each partner.

4 Nature of the business of the firm.

5 Principal place of the firm.

6 Date of the agreement.

7 Loans and advances by partners and interest payableon them.

8 Maximum amount of withdrawal allowed to be drawnand the rate of interest.

9 Interest chargeable on capital.

10 Salary, rent, commission and allowance if any payableto the partners.

11 The profit sharing ratio.

12 Duration of the partnership, if any.

13 Provision for admission of a new partner into the firmon retirement of an existing partner from the firm.

14 Maintenance of the accounts and their audit.

15 The management of the partnership firm.

16 Method of valuation of goodwill at the time ofadmission, retirement or death or retirement of apartner.

17 The method of revaluation of assets and liabilities onadmission, death or retirement of a partner.

18 Arrangement in case a partner becomes insolvent.

19 Arbitration in matters of dispute among partners.

20 Any other matter connected with the business of thefirm.

KINDS OF PARTNERSHIP:

There are five kinds of partnership. they are:

1 Limited partnership

2 Particular partnership

3 Partnership at Will

4 Partnership by Holding out

5 Joint Venture.

1. Limited Partnership: Limited partnership is apartnership in which the liability of certain partner of afirm is limited to the amount of capital which they haveagreed to contribute to the business. Hence it is calledLimited partnership.

A limited partner should have atleast one unlimitedpartner. The liability of the remaining partners is limitedto their capitals in the firm. Thus a limited partnership hastwo types of partners such as (i) Limited partner and(ii) General partner or Unlimited partner.

The limited partnership take part in the managementof the firm. He cannot inspect the books and accounts ofthe firm. The death, insolvency, insanity of a partner willnot affect the continuity of the firm. He cannot withdrawany part of his capital. He cannot assign his share to anoutsider without the consent of the unlimited partner.Limited partnership must be registered under the law of thecountry.

Law does not permit the existence of this kind ofpartnership in India. It is found only in countries likeEngland.

2. Particular Partnership: If a partnership is establishedfor a stipulated period of time or for the completion of aparticular venture, it is called as particular partnership.This kind of partnership will come to an end automaticallyon the expiry of the stipulated period or on the completionof a particular venture as the case may be.

3. Partnership-at-will: In this type of partnership, noprovision regarding the duration of the partnership is madein the agreement. The length of the life of thepartnership-at-will depends upon the will of the partners. It


can be dissolved by a partner at any time by giving a 14day’s notice of his intention to do so to his colleagues.

4. Partnership by Holding Out: This kind ofpartnership permits a person to act as partner though heis not a partner.

5. Joint Venture: It is a temporary partnership cominginto existence for limited purpose. Joint venture is a resultof a contract between two or more parties to undertake asmall commercial venture. Here, every partner does not havethe right of implied agency. Its existence is not terminatedon the death, insolvency or lunacy of a partner.

KINDS OF PARTNERS:

Partner of a firm may be classified into differentcategories based on their liabilities, interest and rights inthe business. They are as follows:

1. Working or Active partner: Active partner is one whocontributes capital and takes active part in the managementof the business. He is a full-fledged partner in the real senseof the phrase "partner".

2. Sleeping partner: If partners contribute only capital tothe business but do not take part in the management of thebusiness they are called sleeping partners or dormantpartners.

3. Nominal partner: He is a partner in the name only.He neither contributes capital nor takes part in themanagement of the firm. He just allows the other partnersto make use of his name as one of the partners in the firm.

4. Partner by Estoppel: If a person who is not a partnerof the firm but by his words and conduct leads the outsiderto believe that he is also a partner of the firm, he is calledpartner by Estoppel. He is not a true partner of the firmand is not entitled to any share in the profit of the firmalso.

5. Limited Partner: If the liability of a partner is limitedto the extent of his capital contribution in the firm, he iscalled limited partner. In India no one can be admitted intothe firm as a partner with limited liability. In foreigncountries like U.K. the law of the land permits theadmission of partner with limited liability.

6. Secret partner: A secret partner is one who does nothold out to the public as a partner of the firm and keepshis existence as secret. He is actually a partner of the firm.

7. Sub-partner: He has no direct connection with thefirm. He makes an arrangement directly with a partner toshare his profit. He is only next to a partner.

8. Partner by Holding out: He is not actually a partner.But knowingly he permits himself to be a partner of thefirm by his activities.

9. Minor partners: A minor cannot be a full fledgedpartner because he does not enjoy the capacity to enter intocontracts. He can, however, be admitted to the benefits ofpartnership. He cannot be called upon to pay anythingbeyond what is already invested in the firm. On attainingmajority, he has to choose whether to continue as a partneror not. In case he chooses to leave the firm, he should givepublic notice within 6 months of attaining majority. If suchnotice is not given, he is deemed to be a partner. If he isdeemed to be a partner or decides to be a partner, hisposition in the firm will be the same. In both cases, hebecomes entitled to all the rights of a partner and hisliability becomes unlimited.

3. JOINT HINDU FAMILY FIRM

The Joint Hindu Family firm is another form oforganisation peculiar to India. It comes into existance bythe operation of law and not by an agreement or a contract.A joint Hindu family firm is owned by the members of aHindu undivided family who are called co-parceners. UnderHindu law a business is a separate inheritable asset. After


the death of a hindu, his heirs are entitled to the businesslike any other property. The firm shall be jointly owned byall the living male issue forming three successivegenerations. Son, grandson and great grandson become jointowners of the property by reason of their birth in the family.This interest in inheritance is called co-parcenary interest.

Hindu Law of inheritance are of two types viz.,

1 The Dayabhaga system and

2 The Mitakshara system

The Dayabhaga system is prevailing in West Bengaland Assam. Under this system both male and femalemembers continue to be the co-parceners in a family firm.

The Mitakshara system is followed in all parts ofIndia expect West Bengal and Assam. As per this system,only male members can become co-parceners. Under thissystem, three successive generation of the male line i.e., son,grandson and great grandson simultaneously inherit theancestral property from the moment of their birth. Theeldest member in the family is permitted to conduct,manage, control and organise the business. He is called‘karta’ of the family.

MERITS OF JOINT HINDU FAMILY FIRM:

1. Continuity: As it need not be dissolved due to insanityor death of any member, it enjoys stability in existence.

2. Assured Shares to all Members: Every member of ajoint Hindu family firm assured of a minimum share ofprofit, irrespective of his talents, capacity to work andefficiency.

3. Training to Younger Members: This form oforganisation enables the younger members of the family toget the benefit of knowledge and experience of the eldermembers.

4. Unrestricted Membership: There is no restriction toits membership as in the case of partnership firm.

5. Unity In Management: In this type of organisation,the management is vested in the hands of the Karta. Sothere is no chance for dispute in the management whichenables to ensure unity of command.

6. Division of Labour: The principles of the labour caneffectively be applied by alloting work among the membersof the family according to their specialisations, skills andabilities.

7. Limited Liability: Liability of the members are limitedexcept karta. It is also another merit of this form oforganisation.

8. Better Credit: It has better credit worthiness than thesole trading concern.

DEMERITS OF JOINT HINDU FAMILY FIRM:

1. Limited Capital: When compared to a partnership ora joint stock company, the capital and financial resourcesare limited.

2. Lack of Incentives: The entire control andmanagement are entrusted with the karta. He assumes theentire responsibilities. His liability is also limited. But thebenefits are shared by all the members. There is noincentive for the karta for the efficient management of thebusiness.

3. Lack of Stability: There is a possibility of differenceof opinion among the members of the joint family. Themodern ideas of the younger members may not be acceptedby the old members of the joint family. Besides quarrels andconflicts among female members of the joint family may leadto the discontinuation of joint family life. Ultimately thismay lead to partition of the family which in turn will bringan end to the business.

4. Misuse of Powers by the Karta: As the karta enjoysfull authority over the business, he may misuse the powerfor his own benefits. This will destroy the initiative,


sincerity and interest of the young members in the affairsof the business.

CORPORATE ENTERPRISES

The corporate enterprises takes three forms viz

4. Joint Stock Companies

5. Co-operative Societies

6. State Enterprises

Now let as discuss the various aspects of these formsof organisations in detail.

4. JOINT STOCK COMPANIES

The increased need of modern industry, trade andcommerce could not be satisfied by the sole trading concern(or) partnership firms. They proved incapable of meetingthese needs. In order to overcome the limitations of limitedresources, unlimited liability and instability, the companyform of organisation was developed.

MEANING AND DEFINITION:

The word ‘company’ is derived from the Latin words‘com’ and ‘panies’. It means an association of persons whotook their meals together. Company denotes an associationof like minded persons formed for the purpose of carryingsome business. A company is a voluntary association ofindividuals formed for the purpose of achieving a commonsocial or economic end. It is called a body corporate. It hasits own corporate and legal personality distinct and separatefrom that of its members.

Definition under The Indian Companies Act: As persection 3(1)(i) of the act "company means a company formedand registered under this Act or an existing company asdefined in clause(ii)"

As per clause (ii) of subsection (i) of the section 3 ofthe Indian companies Act, 1956, existing company means a

company formed and registered under any of the previouscompanies laws.

According to L.J. Lindley, company is an associationof many persons who contribute money or money’s worth toa common stock, and employ it for some common purpose.The common stock, so contributed is denoted in money andis called the capital of the company. The persons whocontribute it, or to Whom it belongs, are its members. Theproportion of capital to which each member is entitled ishis share. Shares are always transferable, although the rightto transfer them is often more or less restricted."

ADVANTAGE OF COMPANIES:

1. Limited liability: The liability of the member is limitedi.e., limited to the face value of the shares held by them.They cannot be called upon to pay even a single pie out oftheir property to pay off the company’s debts.

2. Large Financial Resources: There is no restriction asto the maximum number of membership in the case of publiccompanies and it is limited upto 50 persons in the case ofprivate limited companies. It enables the collection of largeamount of capital. The capital is also divided into a numberof small parts called shares. Therefore, people with limitedresource can afford to subscribe the shares of the company.This facilitate the company to undertake business. All thesethings pave way for its expansion.

3. Scope for Expansion: All the benefits of large scaleoperations are available to the companies. It also enjoys thebenefit of separation of ownership from control whichenables the company to employ experienced personnel to runthe business. All these things pave way for its expansion.

4. Stability: The company has a long life. It is not affectedby death, insolvency, lunacy of any or even all its members.In other words, it continues to exist even if all its membersdie or desert it.


5. Easy Transferability of Shares: Shares are movableproperty and transferable in the manner provided by theArticles of Association of the company. It provides liquidityto the investor as shares could be sold in the open marketand in stock exchange. At the sametime, the money is notwithdrawn from the company. Hence, it has assuredfinancial stability.

6. Democratic Management: As the shareholders of thecompany are more in number, it is not practicable for allthe shareholders to manage the affairs of the company.Thus, they elect a few persons amongst themselves asdirectors to manage the affairs of the company whichprovides for democratic management.

7. Diffused Risk: As the shareholders of the company aremore in number, the risk of an individual investor isreduced.

DEMERITS OF COMPANIES:

1. Formalities and Expenses: Incorporation of acompany has complex and detailed legal formalities whichinvolve considerable time and money. Even after thecompany is incorporated, it must conduct its activitiesstrictly according to the legal provisions. The various returnsand documents are required to be filed with the registrarof companies. Certain books and registers are compulsorilyrequired to be maintained by a company. Approval andsanction of the company law Board, the Government, thecourt, the Registrar of companies or other appropriateauthority, as the case may be, is necessarily required to beobtained for certain corporate activities.

2. Divorce of Control from Ownership: Members of acompany are not having control over its working. Nomember can act in his individual capacity for and behalf ofthe company and they are also not the agents of thecompany. Thus they do not have an active and completecontrol over the company’s working.

3. Rigid Government Control: The Government hasintroduced many rigid provisions in the companies Act inorder to exercise control over the affairs of the companies.These provisions are aimed at safeguarding the interest ofthe shareholders. But to observe these provisions, companiesspend much of their precious time in complying with theprovisions. It affects the conduct of the routine affairs. Quickdecisions cannot be made. All these things lead to inefficientand ineffective management.

4. Erosion of Limited Liability: The company is entirelydistinct from its members. It has a corporate personality ofits own separated from those of individuals members. Themembers have limited liability which is a distinct feature ofcompany business. But in recent years, the courts areempowered to lift the corporate veil and impose unlimitedliability on the directors and members, in the interest ofJustice, Equity and Good conscience because this corporateveil is sometimes used as vehicle of fraud or evasion of Taxetc.

5. Lack of Fundamental Rights: Though the company isa legal person, it is not a citizen. So, it cannot claim anyfundamental rights which are guaranteed by our constitutionto all persons.

6. Delay in Administration: According to companies Act,many matters are to be decided only in general meeting.Therefore a number of meetings are to be convened to getthe approval of the shareholders. The administration of thecompany is entrusted with the Board of Directors who arealso more in number. All these things lead to delay inadministration.

7. Lack of Secrecy: A company is required under theCompanies Act to disclose a variety of information on itsworkings. Therefore, it is almost impossible for the companyto retain its business secrets.


DISTINCTION BETWEEN A PARTNERSHIP AND A COMPANY:

1. Formation: Partnership is the result of an agreementbetween the partners whereas a company is an associationof persons registered under the Act as a corporate body.

2. Law: A partnership firm is regulated by the partnershipAct. A company, on the other hand, is regulated by thecompanies Act.

3. Legal Status: A company has a separate legal entityindependent of its members. The members are not liable forthe acts of the company. But a partnership firm has no legalexistence different from its members. Partners and the firmare looked upon as identical.

4. Registration: Registration under the Partnership Act isnot compulsory. But a company should be compulsorilyregistered under the companies Act. Without registration, acompany cannot come into existence.

5. Liability: In partnership, the liability of the partner isunlimited. They are jointly and severally liable for the debtsand obligations of the firm. But in the case of a company,liability of the members is limited to the unpaid amount onthe shares held or the amount guarantied by them.

6. Life Time: As a company is a mere abstraction of law,its existence is not affected by the death, insolvency orlunacy of the members. But a partnership is only anaggregation of individuals. So its life ends by the death,insolvency or lunacy of any partner.

7. Transferability of Interest: A partner cannot transferhis interest in the firm without the consent of all the otherpartners. But the shares of a company are freelytransferable subject to the provision of the articles.

8. Number of members: The minimum number ofpersons required to form a partnership is 2 and themaximum is 10 in the case of banking business and 20 inother business. In a private company, the minimum numberof members is 2 and the maximum is 50. In public company

the minimum membership is 7 and there is no maximumlimit specified by law.

9. Majority Rule: In partnership, all decisions, are madewith the consent of all the partners whereas in a company,the decisions are made on the basis of majority opinion ofthe directors in a board meeting or of the shareholders ina general meeting.

10. Audit: The accounts of a company should be auditedby a qualified auditor. But it is not obligatory on the partof the partners to get the accounts of the firm audited. Eventhough they decide to arrange for the audit of their firm,the auditor need not be a qualified one.

11. Implied Agency: In partnership every partner has animplied authority on behalf of the other partners and thefirm. Thus he is an agent of the firm and the other partners.But in case of company, a shareholder does not have suchan implied authority.

12. Good Faith: In partnership, the partners are knownto each other. So they are to be just and honest one another.But in case of company, it is not possible because, theshareholder may not be knowing each other.

13. Management: In partnership, all the partners cantake part in the management of the firm. But in the caseof company, the management is in the hands of a group ofselected representatives of the shareholders. The shareholdercannot take active part in the day-to-day management.

14. Decision Making: In a partnership, decisions can betaken quickly. But in case of companies, it requires a fairlylong time.

15. Secrecy: The companies are required under the Act tofile a number of returns, reports, Annual accounts of thecompany etc. with the Registrar of Joint Stock Companies.Some documents are open to public for inspection onpayment of a specified fee. Hence, secrecy cannot bemaintained in the company. But in partnership concern, itsbusiness secrets are not disclosed to outsiders.


16. Property: The property of the firm is the property ofthe partners whereas the property of the company is notthe property of its members.

17. Winding Up: The Act provides elaborate and detailedprocedure for winding up of companies. But no such legalformalities are required in a partnership. It can be dissolved atwill.

18. Mobilisation of Resource: Mobilisation of hugeresources is possible in case of company form oforganisation. Even people with limited finance can buyshares of the reputed companies because the face value ofshares is very less say Rs.10/-But it is not possible in caseof a partnership.

5. CO-OPERATIVE INSTITUTIONS

The co-operative institution is another form oforganisation whose principle objective is not to earn profitbut to render service to its members. It is an enterprisegenerally set up by the individuals of the weaker sectionsto safeguard their own interest by eliminating middlemenand exploitation.

MEANING AND DEFINITION OF CO-OPERATIVES:

A co-operative society "is a voluntary association ofindividuals who join together on voluntary basis for thefurtherance of their common economic interests"

SALIENT FEATURES OF CO-OPERATIVE INSTITUTIONS:

1. Voluntary Association: A Co-operative society is avoluntary association of persons and not of capital. Themembership is open to all having a common interest. Personscan become membership at their free will and also free toleave it at any time by giving a due notice to the society.

2. Open Membership: Any person, irrespective of hiscaste, sex, creed, belief and religion can become a memberof a co-operative society. New members are always allowedto the society. As there is no restriction on the number ofmembers, the membership list is not closed at any time.

3. Equality in Voting: Each member irrespective of hiscapital contribution, has one vote and hence as equal rightto take part in its management "One man one vote"is theprinciple of the co-operative form of organisation.

4. Democratic Management: Co-operative societies aremanaged on democratic lines. It is the rule of the co-operatives.The Board of Directors are elected by the members fromamong themselves at the annual generation meeting and themanagement is entrusted to them. The Board is responsibleand answerable to the general body of shareholders.

5. Fixed Return on Capital: Under the co-operativesystem, capital is not given undue preference. It is rewardedin the form of a limited rate of interest which is normallyrestricted to the rate which ranges from 5% to 6% underthe Co-operative Societies Act.

6. Disposal of Surplus: The word ‘ surplus’ denotes theexcess of income over all the expenses including theprovisions made for the reserves. This surplus is distributedto the members in the form of bonus in proportion to thebusiness transacted by the individual members with thesociety. But in the other forms of organisations, the surplusis distributed on the basis of their capital contribution.

7. Body Corporate: A Co-operative company Society isformed and registered under the co-operative societies Act,which renders it a body corporate. It has perpetualsuccession. Being a legal person, it enjoys certain privilegeslike a company on its incorporation.

8. Service Motto: The primary objectives of co-operativessociety is to render service to its members.

9. Trading on Cash Basis: Most of the co-operativesprefer only cash transaction and avoid credit system. Hence,they follow cash and carry system in its operation which isthe universal feature of the co-operative organisation.However, a few societies give credit to its members undercertain circumstances.


TYPES OF CO-OPERATIVE SOCIETIES:

Various types of co-operative societies are operatingin our country. They are

1 Consumers Co-operative Societies.

2 Products or Industrial Co-operative Societies.

3 Marketing Co-operative Societies.

4 Co-operative Credit Societies.

5 Co-operative Farming Societies.

6 Co-operative Housing Societies.

1. Consumers Co-operative Societies: This type ofsociety aims at ensuring steady supply of consumer goodsand service of standard quality at reasonable proces to theirmembers. It purchases goods on wholesale basis and resellsthem to its members on fair price. Thereby, it eliminatesmiddlemen in the channel of distribution.

2. Producers or Industrial Co-operative Societies:These societies are organised to carry on certain industrialactivities. The main objective of industrial co-operative is toassist the small producers who are suffering from lack ofcapital and equipment. They aim at eliminating thecapitalist who controls production. This type of societies aresuitable for cottage and small scale industries. Thesesocieties supply raw materials, equipments, tools and financeto the small scale industrialists who are all their membersin order to enable them to provide specified goods. The goodsproduced by the members are purchased by the societies atfixed rates. Then the society sells them to the consumers.Hence they provide necessary marketing facilities to themembers. In our country, producer societies are popular inthe field of handloom weaving, pottery, manufacture of coirgoods, matches etc.

3. Marketing Co-operative Societies: These societiesare formed to enable their members to secure fair price fortheir products by removing the difficulties in marketingtheir products. The marketing societies provide services suchas assembling, grading, packing and storing. They collectthe products from their members and grade them and storethem till they are required in the markets. Whenever thedemand arises, they sell them at remunerative prices.

4. Co-operative Credit Societies: Co-operative creditsocieties are formed to provide financial assistance in theform of direct loans to their members. This type of societiesare popular in India. They raise funds by way of acceptingdeposits from the members as well as from the public butthey give loans to their needy members. Credit societies canbe classified into two i.e., (1)Urban Banks and (2) Ruralcredit societies or primary societies.

The Urban Banks are established in Urban areas bysalary earners or industrial workers. The Rural creditsocieties or primary societies are established by agricultureor artisans in rural areas.

5. Co-operative Farming Societies: In this type ofsocieties, the farmers pool their land and cultivate themjointly. The main object of forming such type of societies isto overcome the defects of small scale operation and toenjoy the economies of large scale farming. These societiesprovide for the introduction of scientific organisation ofagriculture in order to increase the production and improvethe economic position of the agriculturists.

6. Co-operative Housing Societies: Co-operative housingsocieties are formed to provide houses to their memberseither on ownership basis or on rental basis. These societiesenable the middle class and even the poor people to ownhouse. They grant loans to the members for construction ofhouses. Sometimes, the society itself constructs houses forits members.


MERITS OF CO-OPERATIVE SOCIETIES:

Being a body corporate, the co-operative society getsall the advantages and benefits which are derived bycompanies. In addition, it enjoys the following advantagesalso.

1. Easy Formation: Its formation is very easy because-

(a) The formalities involved in its formation are verysimple in nature.

(b) There is no requirements as to the payment ofregistration fee, stamp duty, etc.

(c) The Government itself encourages the forming ofco-operative societies by providing various incentives,aids, etc.

2. Service Motive: The co-operative societies are generallyformed with the aim of serving the common man andliberate him from the oppression of economically strong men.

3. Democratic Management: The management ofco-operative is carried on democratic principles. All themembers have equal rights in working of the society. Eachmember has only one vote irrespective of the number ofshares held by them. Thus, it prevents the domination bya small group in the management of the societies.

4. Avoidance of Exploitation: The co-operative societyprotects the economically weaker sections of the society fromexploitation of the capitalists.

5. Suitability: These societies can function successfullyunder all economic conditions. They can flourish insocialistic as well as in capitalistic countries.

6. Minimum Overhead Cost: As these societies are notaiming at capturing the market, thay are not spending hugemoney on advertisement and marketing. With the result,overhead cost is minimised which enables them to supplygoods to their member at fair prices.

7. Scope of Self-Government: Being the members of thesocieties, various categories of people such as workers,farmers, customers, small industries, salary earners andmiddle class people-get training in different aspects of itsbusiness. Hence, it provides a scope for self Government.

LIMITATIONS OF CO-OPERATIVE SOCIETIES:

1. Unsuitable for Large Business: Co-operative societiescannot mobilise adequate capital for running large scalebusiness units since they are unable to get any supportfrom the rich people. So it is not suitable to run a largescale business unit.

2. Inefficient Management: Experts cannot be employeddue to relatively low scales of pay. Thus there is a possibilitythat the management of the society may be inefficient, verypoor and inexperienced.

3. Absence of Motivation: Generally, the directors of thesocieties work on honorary basis. The remuneration ofemployees is very low when compared to the remunerationpayable for similar jobs in other forms of organisation.Hence there is less motivation.

4. Attitude of the Members: The success of theco-operative society depends largely on the loyalty of themembers. It cannot always be assured. If they turn to otherforms of organisation to satisfy their economic needs, thesociety will collapse.

5. Weaknesses in its Lending system: The co-operativecredit societies suffer from the burden of bad debts. Theylend loans to their members without obtaining sufficientsecurity which in turn become bad.

6. Lack of Secrecy : Maintaining business secrets is animportant factor for the success of any business. But theco-operatives are not in a position to maintain the secretsof its activities.


7. Red Tapism: The Government exercise rigid controlover the affairs of the societies. All their activities areregulated. They are required to get sanction of theGovernment even for performing their routine activities.

6. PUBLIC ENTERPRISES

When the Government cannot exercise effectivecontrol over private ownership for varied reasons, the onlyalternative is to take over such business units in theinterests of the public at large.

An enterprise, owned, managed and controlled by thestate Government for the welfare of the public at large isknown as state enterprise or public enterprise. Stateownership can be acquired either by taking over the existingunits or by establishing new units out of the funds of theexchequer. When the Government takes over an existingunit ( i.e., an enterprise which is already functioning underprivate sector), it is called as nationalisation.

Case for Public Ownership:

The advocates of public ownership claim that it isjustifiable on the following grounds:

1. Elimination of Monopoly: Public ownershipeliminates or atleast minimise the opportunities for thegrowth of private monopolies.

2. Service Motive: Profit is the ultimate motive of allindustrial undertakings functioning under private sector.The private entrepreneurs adopt all sorts of undesirablemeans to maximise their profit. The public enterprise, as itsultimate motto is service, should alone be allowed to producesuch things so that the public shall get them at fair andreasonable prices.

3. Balanced Production: Over-production is the featureof the private enterprises. But a public enterprise, as it isowned and controlled by a central authority, canconveniently arrange for a balanced production of goods.

4. Balanced Regional Development: Privateentrepreneurs cannot be compelled to start theirundertaking in backward regions. Further, they areconcerned more with economic considerations rather thansocial and regional considerations. Therefore, theGovernment can ensure a balanced regional developmentonly by starting industries and enterprise of its own.

5. Stability: A public enterprise enjoys more stability thana private enterprise. It can plan its investments over a longperiod and maintain stability inspite of a temporary fall inthe demand for its goods.

6. Economic Development: The profits earned by suchenterprise goes to the exchequer. Thus it augments theresource of the Government which ultimately directed forthe development of the economic schemes of the nationalimportance.

7. Fullest Employment: Fullest employment is possibleonly under socialised production. No country has solved itsunemployment problem where the private sector is in fullswing.

Case against Public Ownership:

The critics of public enterprise oppose it on the basisof the following grounds.

1. Poor Management: Efficient management is almostabsent in most of the public enterprises. Personnel from thetop to the bottom lack initiative and efficiency. Red-tapismhas become the principal feature of all the state enterprises.

2. Political Interference: Politicians very often interferein the working of the public enterprise. They influence thetop executives and get things done in their favour.

3. Unsatisfactory Control: Public enterprises, as a rule,lack effective control. This leads to wastage of money andmaterials and dislocation of work. The cumulative effect ofall such factors is loss without limits.


4. Bad Staffing Practice: Nepotism and Favoritism playa vital role in the selection of personnel. Hence, misfits canbe selected to higher posts. They can contribute nothingexcept a loss to the enterprise.

5. Rigid Policies: The policies of the state enterprises aretoo rigid. They follow standardised procedures, even if theyhave become out-dated. As such, they can not cope withprivate enterprises which can follow flexible policies to suitto the changing conditions.

FORMS OF PUBLIC ORGANISATION

There are three principal forms of public organisationemployed for the administration of public undertakings.They are (a) Departmental Organisation (b) Governmentcompany, and (c) Public corporation.

6. a DEPARTMENTAL ORGANISATION

Department organisation is the oldest form ofbusiness organisation and is common in many countries.One of the best example of the departmental form oforganisation is the post office. In our country Railways,Defence Industries, Radio, Public Utility services, etc, arebeing run on departmental basis.

Features of the Departmental Organisation:

1. The enterprise is managed by a Governmentdepartment with a Minister at the top responsible tothe parliament for its operations.

2. The downward delegation of authority is effected fromthe top executive to every part of the organisation i.e.,it represents the line type of authority relationshipbetween the executives at various levels.

3. It is financed through annual budget appropriationsmade by the legislature and its revenues are directlypaid to the treasury.

4. For procedures as to budgeting, account and auditing,it is treated at par with other Governmentdepartments.

5. Since it is an integral part of the Government, thestaff of the enterprise are treated at par with othercivil servants for all purposes.

6. It enjoys the sovereign immunity of the state. Hence,it can be used only by following the specifiedprocedure.

Merits of Departmental Organisation

1. Control over the enterprise is direct and absolute.

2. The revenues of the enterprise directly go to theGovernment.

3. The personnel are generally low salaried. Hence, theadministrative overhead charges are less.

4. Since these undertakings are subject to strict control,changes for misuse of funds are remote.

Demerits of Departmental Organisation:

This type organisation is severely criticised by manyauthors because of the several defects in it. Some of themare given below:

1. Excessive centralisation of control leads to delay inaction. Red-tapism and bureaucracy have become theilluminating features of these organisations.

2. The Government officials who are in the helm ofaffairs generally lacks business acumen. They run thedepartment in their own fashion without consideringthe sovereignty of the consumers.

3. There is no space for the initiative and skill as theprocedures and policies are subject to criticism in theparliament.

4. It lacks flexibility which is fundamental for thesuccess of any business.


5. Treasury holds the financial strings of the concern.The profits, if any are mostly used to give relief tothe tax payers rather than the consumers. Similarly,the losses are also not viewed with any seriousness.

6. For each and everything, the sanction of the Ministeror the top executive is essential. The executives at thelower level cannot take any decision.

6. b. GOVERNMENT COMPANY

The use of the commercial company as a form ofpublic enterprise is very popular in almost all the countriesthroughout the world. This form of organisation is free fromthe evils of red-tapism and bureaucracy and has definite usein the case of genuine joint ventures of public and privateinterests. These enterprises are established under theprovisions of the companies Act. A Government companymay be wholly owned by the state or both by the privateand the Government.

According to sec.617 of the Indian Companies Act, aGovernment company means "any company in which not lessthan 51% of the paid-up share capital is held by the CentralGovernment or by any State Government or Governments orpartly by the Central Government and partly by one or moreof the State Governments and includes a company which isa subsidiary of a Government company". Thus a Governmentcompany is an enterprise wherein the Government is adominant shareholder having the bulk of controllinginterests. The rules and regulations laid down in theCompanies Act are equally applicable to Governmentcompanies. However, the act has laid down certain specificrules which are meant only for Government companies.

Features of a Government Company:

1. A Government company, just like other companies inthe private sector, is registered and incorporatedunder the companies Act.

2. The whole or atleast 51% of the total share capital isheld by the Government.

3. All or majority of the directors are nominated by theGovernment.

4. Public can also subscribe the share capital of suchcompanies, if offered to them.

5. It is created by an executive decision of theGovernment and so specific approval of the parliamentis not necessary.

6. It is an autonomous unit with full discretion in thenormal administration of the affairs of theundertakings.

7. The employees , except the officers deputed from theGovernment, are not civil servants.

8. However, the company is subject to the ministerialcontrol. Its auditor is appointed by the Government.The annual reports of company must be placed beforeboth the Houses of the parliament.

Merits of a Government Company:

1. The greatest merit of this of organisation lies in itsflexibility in running the business of the enterprise.It can follow a flexible policy to the changing businessconditions.

2. The formation of a Government company iscomparatively easy. No prior approval of theparliament is required.

3. It enjoys greater authority and is free from theprotracted and time consuming regulations of theGovernment.

4. It enables the Government to procure andaccommodate managerial skill, technical know-how ofthe private enterprise or foreign countries byconveniently collaborating with them.


5. The workings of the company is open to publiccriticism in the parliament. Hence, the managementcannot avoid its responsibility.

Demerits of a Government Company:

1. The Government company, in reality, does not enjoyany autonomy in its dealing. The interference of theMinisters has become very frequent.

2. The law regulating the limited companies has becomea mere fiction because most of the functions thatnormally vest in the shareholders and in themanagement are reserved to the Government.

3. The directors, being the servants of Government, donot have necessary skill and ability to run thebusiness on sound business lines.

4. The Government companies are not answerable to theparliament. Even the Auditor General has no right toaudit its accounts. Hence, it evades the constitutionalresponsibilities which a state enterprise should haveto the parliament.

5. The control exercised by the Government is more wideand the powers of the Board of Directors are limitedand subject to the approval of the concerned Ministry.Hence, they cannot effect major policy changes ontheir own accord. The defects of departmentorganisation are also thus, bound to appear.

When is a Government Company Suitable?

The Governments all over the world also favour thistype of organisation for varied reasons. In our country also,majority of the state enterprises are organised in thisfashion. A company form of organisation is found moresuitable in the following subjects:

1. When the government wants to take over an existingenterprise in an emergency.

2. When the state wants to launch an undertaking incollaboration with private enterprises or with foreigncountries.

3. When there is a need for flexibility in the operationsof the enterprises.

4. When the Government wishes to start the enterpriseswith view to transferring it eventually to the privatemanagement.

6. c. PUBLIC CORPORATIONS

Public corporations are those institutions which areestablished through separate Acts of the legislature.Therefore, they are also known as statutory corporations.The functions and power of the corporations are clearlydefined in the Acts through which they are established. Thisform of organisation has its origin in the Great Britain. Allpolitical parties in Birth accept this form of organisationsas an appropriate instrument for operating the state ownedundertakings.

Meaning and Definition of Corporations:

Basically, a public corporation is an extended idea ofthe form of joint stock companies. A public corporations canbe defined as a corporate body specially created by alegislative enactment with clearly defined powers andfunctions and enjoying considerable financial andadministrative autonomy. It is a creation of law andrepresents the most significant development in the field ofmanagement of state enterprises in the present century.

Features of a Public Corporation:

The distinguishing features of a statutory corporationcan be summed up as follows:

1. Creation of Law: A public corporation is created by aspecial legislative enactment, defining its objectives, powers,privileges and the form of management and its relationshipwith the government.


2. Body Corporate: It is considered as a person in thecontemplation of law. As such, it can acquire, hold and sellproperties in its own name. It can sue or may be sued byothers.

3. Wholly Owned by the State: The capital of thecorporation is generally provided by the Government. OtherGovernment agencies and financial institution can alsocontribute to the capital of the corporation. But individualinvestors are generally deprived from acquiring the share ofsuch corporations.

4. Free from Government Controls: Such corporationsare relatively free from political, parliamentary anddepartmental interferences in the exercise of the powersvested in them under the Act.

5. Financial Autonomy: Public corporation not only enjoyadministrative autonomy but also financial autonomy.Except for appropriation to provide capital or to cover thelosses, the public corporations are usually financedindependently. They prepare their own budgets and havethe power to retain their earnings. They can also borrowfunds from the public or from the Government of otherfinancial institutions. They are generally exempted frommost of the regulatory and prohibitory status applicable tothe expenditure of public funds.

6. Service Motive: The management of the corporationgenerally vests with the Board of Directors nominated bythe Government. The directors may be Government officialsor non-officials.

7. Management: A corporation is expected to behavecommercially in the same manner as a private enterprisei.e., they are supposed to function efficiently on soundcommercial principles. This does not mean that thecorporations are expected to make profits. They can makeprofit but not at the expense of the consumers. Thus, the

public corporations primarily work for service and profit isonly a secondary consideration.

8. Public Accountability: Public accountability is anotherimportant feature of a public corporation. Though it enjoyscomplete autonomy in its administrative areas, it isaccountable to the legislature. Its accounts are audited bythe corporation and the Auditor General, and its annualreport must be placed before the legislature.

9. Status of Staff: The employees of the corporation arenot the servants of the Government and are not governedby Civil Service Rules.They are employed and paid out ofthe funds of the corporation.

The above referred characteristics of the corporationreveal that it is a combination of public accountability andbusiness management. It thus gives us the best of bothpublic ownership and private enterprise.

Merits of the Public Corporation:

1. Effective Form of Organisation: The publiccorporation is considered as an effective administrativeinstrument which follows a middle course between thedepartmental organisations on the one side and privatelyowned and managed companies on the other side.

2. Flexibility: The public corporations enjoy maximumautonomy in dealing with its affairs. It is almost free fromthe rigid and persistent control of the Government.Therefore, it can mange affairs with initiative and flexibility.

3. Free from Red Tapism: Since the Board of Directorsare entrusted with powers to make important decisions,quick decisions are possible. it can also adjust its policiesaccording to the changing business conditions and takeprompt actions. Thus it is free from the evils of red tapismassociated with the departmental organisations.


4. Initiative: Being an autonomous body, it canexperiment new lines and exercise initiative in the businessaffairs.

5. Service Motive: The evils generally associated withprivate enterprise such as profiteering exploitation,illegitimate speculation are absolutely absent in theworkings of the corporation. Its principal motive is service.Hence, the interests of the consumers are well protected.

6. Easy Financing: The public corporations can raisefunds very easily from various sources. The investing publicalso readily subscribe to the loans floated by them as theyconsider the loan bonds more safe and sound.

7. No Exploitation of the Workers: The employees ofthe public corporations are generally well paid. Since theiraim is not to maximise profits, they are in a position to payhigher wages and bonus to their employees. They are actingas model employers.

8. Expertised management: The Government canappoint even an outsider as the managing director of thecorporation. By appointing business experts, the corporationcan avail their valuable and expertised services. It can alsoappoint representative of the various interests like labour,consumers, etc. Therefore, there is no possibility forexploitation of any section of the society.

9. Economies of Large Scale Operations: Publiccorporations are considered as a viable form of organisationfor launching enterprises on large scale. Besides, businesseswhich do not produce enough profits during the initial stagescan be organised only as corporations. Only this form oforganisation can do justice where public utilised and socialservices are involved.

Demerits of Public Corporations:

Experience of the working of the public corporationshave shown some of its defects and raised certain problems.The important defects are outlined below:

1. Limited Autonomy: The corporations, in practice,enjoy neither complete autonomy nor flexibility. Theirautonomy is some what limited.

2. Political Interference: The Minister and thepoliticians frequently interfere with the working of thecorporations and influence their policies. In many cases,politicians are appointed as the Chairman or ManagingDirectors of such corporations. They possess no sufficientexperience in the business lines of the corporations. Thus,the management of the corporations are also very poor.

3. Evils of Big Business: As large undertakings aregenerally organised as public corporations, the evils of bigbusiness are bound to exist in all the activities of thecorporations

4. Labour Problems: Bridging the gulf between thelabour and management really poses a difficult problem tothe management which is already ineffcient. In reality, theexperiences are more bitter and painful. The workersgenerally demand abnormal increase in their wages even ifthe corporation is working at a loss. Increased wages willfurther increase the volume of losses which are to be madegood out of the Government funds. In our country, we canhardly find one or two public corporations like BHEL,Neyveli Lignite Corporations which are making profits.

Public Corporation and Government Company- A comparison:

A Government company closely resembles to a publiccorporation in many respects.

1. Both are body corporate with perpetual succession andcommon seal.

2. Both enjoy financial autonomy.

3. Both have autonomy in administration.


4. The accounts are subject to audit and the audit reportshould be submitted before both Houses of theParliament or State Legislature

However, the points of distinction between the twocan be summed up as follows:

1. Method of Creation: A Government company iscreated under the companies Act and no special enactmentis needed. It is purely an executive decision, whether to floata company or not. But a public corporation is created by aspecial enactment of the parliament only. The statelegislature has no power to create a public corporation.

2. Rights and Powers: A Government company derivesits rights and powers from the Memorandum with which itis registered, whereas a public corporation derives its powersfrom the respective enactment by which it is created.

3. Voting rights of the Shareholders: The rights of theshareholder of a Government company is similar to therights of the shareholder of a public limited company.Because in a Government company, private individuals canalso hold shares. But in a public corporation, the whole ofthe capital is owned by the state. Its capital carries novoting or ownership rights in the enterprise. Therefore, thequestion of Annual General Meetings etc., shall not arise incase of a public corporation.

4. Shares and Debentures: A Government company shallissue specific number of shares with a specified face value.The shares are also available for public subscription in somecases. Its shares can also be quoted in the stock exchanges.It can also issue debentures. A public corporation, on theother hand, has no specified number of shares i.e., its sharecapital is not divided into specified number of shares. It hasonly stock and it is held only by the Government. Its stockis not open to public subscription nor it is quoted in thestock exchanges. However, it can accept deposits from thepublic.

The Use of the terms ‘Corporation’ and ‘company’ -Clarification:

The words ‘Corporation’ and ‘Company’ are often usedsynonymously in all the literatures on company law andliteratures dealing with corporate enterprises and there is nouniformity in the use of the term corporation. The followingpoints are noteworthy.

1. Enterprises like Neyveli Lignite Corporation, TamilnaduTourism Development Corporation etc., are onlyGovernment companies but not statutory corporations.

2. State Enterprises like State Bank of India, IndustrialDevelopment Bank of India are public corporations.But the word Corporation is not used here.

3. Some public corporations are also named differentlywithout the word corporations in their name. Forinstance, The Oil and Natural Gas Commission (ONGC)is a public corporation but uses the word Commissionin its name. Similarly Air India, is a public corporationbut the word corporation is not used.

4. Even joint stock companies in the private also use theword corporation in their name. For instance, TheSouth India Corporation Ltd., The Mercantile CreditCorporation Ltd., etc., are only public limitedcompanies in the private sector.

5. Much confusion is also prevailing in the use of word‘Limited’. A company is required to use the word‘Limited’ at the end of its name. However this is aclear way to find out whether an enterprise is aGovernment company or a statutory corporation.

6. Here also some confusion prevails. Because companieslike Indian Tourism Development Corporations etc., donot use the word Limited since they are non-tradingcompanies. Therefore, it is clear that no uniformpolicy is followed in naming the public corporationsand Government companies use the wordsCorporations as well as Limited in their names.


Comparision of Different forms of Industrial Ownership

Sl.No.

FACTOR FORMS OF OWNERSHIP

SOLEOWNERSHIP

PARTNERSHIPLIMITED

JOINT STOCK COMPANY CO-OPERATIVESOCIETY

PRIVATE PUBLIC

1. Ownership Single 2 members 10

2 members 50

members 7.No upper limit

members 10.No upper limit

2. Formation Easy.No legalformality

Moderatelyeasy

Different legalformalities

Major legalformalities

Moderate legalformalities

3. CapitalRequired

Very less Limited Large Major Not substantial

4. Management By owner By owner (s)and shared

By hiredexperts

Seperate fromowner

Few electedmembers

5. Secrecy Completesecrecy ismaintained

Shared amongpartners

Shared amongmembers

No secrecy No secrecy

6. GovermentRegulation

No Fairly low Fairly high Highlyregulative

Moderate

Historical Development 1.93

Sl.No.

FACTOR FORMS OF OWNERSHIP

SOLEOWNERSHIP

PARTNERSHIPLIMITED

JOINT STOCK COMPANY CO-OPERATIVESOCIETY

PRIVATE PUBLIC

7. Owner’sLiability

Unlimited Unlimited Limited Limited Governed byby- laws

8. Profit sharing Complete byowner

Shared amongpartners

Proportionate to share beingheld

Based onvolume ofbusiness.

9. Tranfer ofownership

Any time Relativelydifficult

Relativelydifficult

Very easytransfer

Restricted

10. Audit No No Must Must Must

11. Suitability Small business Mediumbusiness

Medium to large busines Mediumbusiness

12. Stability Life of owner Depends uponall partnerswillingness

Continous Continuous Continous.

Principles of Management1.94

Date post:	27-Mar-2018
Category:	Documents
Upload:	lenhan
View:	220 times
Download:	1 times

and - airwalkbooks.comairwalkbooks.com/images/pdf/pdf_41_1.pdfManagement and Administration 1.2 ......

Documents