Download - Business Studies XII

BUSINESS STUDIESPART I

PRINCIPLES AND FUNCTIONS

OF MANAGEMENT

Textbook for Class XII

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First EditionMay 2007 Chaitra 1928

ReprintedDecember 2007 Agrahayana 1929March 2009 Chaitra 1930

PD 140T VK

© National Council of EducationalResearch and Training, 2007

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Printed on 80 GSM paper withNCERT watermark

Published at the PublicationDepartment by the Secretary, NationalCouncil of Educational Research andTraining, Sri Aurobindo Marg,New Delhi 110 016 and printed at ------------------------------------------------------------

ISBN 81-7450-697-7

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CoverShweta Rao

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FOREWORD

The National Curriculum Framework (NCF), 2005, recommends thatchildren’s life at school must be linked to their life outside the school.This principle marks a departure from the legacy of bookish learningwhich continues to shape our system and causes a gap between theschool, home and community. The syllabi and textbooks developed onthe basis of NCF signify an attempt to implement this basic idea. Theyalso attempt to discourage rote learning and the maintenance of sharpboundaries between different subject areas. We hope these measureswill take us significantly further in the direction of a child-centred systemof education outlined in the National Policy on Education (1986).

The success of this effort depends on the steps that school principalsand teachers will take to encourage children to reflect on their ownlearning and to pursue imaginative activities and questions. We mustrecognise that, given space, time and freedom, children generate newknowledge by engaging with the information passed on to them byadults. Treating the prescribed textbook as the sole basis of examinationis one of the key reasons why other resources and sites of learning areignored. Inculcating creativity and initiative is possible if we perceiveand treat children as participants in learning, not as receivers of a fixedbody of knowledge.

These aims imply considerable change in school routines and modeof functioning. Flexibility in the daily time-table is as necessary as rigourin implementing the annual calendar so that the required number ofteaching days are actually devoted to teaching. The methods used forteaching and evaluation will also determine how effective this textbookproves for making children’s life at school a happy experience, ratherthan a source of stress or boredom. Syllabus designers have tried toaddress the problem of curricular burden by restructuring andreorienting knowledge at different stages with greater consideration forchild psychology and the time available for teaching. The textbookattempts to enhance this endeavour by giving higher priority and spaceto opportunities for contemplation and wondering, discussion in smallgroups, and activities requiring hands-on experience.

The National Council of Educational Research and Training (NCERT)appreciates the hard work done by the textbook development committee

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responsible for this book. We wish to thank the Chairperson of theadvisory group in Social Sciences Professor Hari Vasudevan and the ChiefAdvisor for this book, Professor D.P.S. Verma (Retd.) Delhi School ofEconomics, University of Delhi and Dr. G.L. Tayal, Reader, Ramjas College,University of Delhi for guiding the work of this committee. Several teacherscontributed to the development of this textbook; we are grateful to theirprincipals for making this possible. We are indebted to the institutionsand organisations which have generously permitted us to draw upontheir resources, material and personnel. We are especially grateful to themembers of the National Monitoring Committee, appointed by theDepartment of Secondary and Higher Education, Ministry of HumanResource Development under the Chairpersonship of Professor MrinalMiri and Professor G.P. Deshpande, for their valuable time andcontribution. As an organisation committed to the systemic reform andcontinuous improvement in the quality of its products, NCERT welcomescomments and suggestions which will enable us to undertake furtherrevision and refinement.

DirectorNew Delhi National Council of Educational20 November 2006 Research and Training

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TEXTBOOK DEVELOPMENT COMMITTEE

CHAIRPERSON, ADVISORY COMMITTEE FOR TEXTBOOKS IN SOCIAL SCIENCES AT

SENIOR SECONDARY LEVEL

Hari Vasudevan, Professor, Department of History, University of Calcutta,Kolkata

CHIEF ADVISOR

D.P.S. Verma, Retired Professor, Department of Commerce, Delhi Schoolof Economics, University of Delhi, Delhi.

ADVISOR

G.L. Tayal, Reader, Ramjas College, University of Delhi, Delhi.

MEMBERS

Anand Saxena, Reader, Deen Dayal Upadhyaya College, University ofDelhi.

Davinder K. Vaid, Professor, Department of Education in Social Sciencesand Humanities, NCERT, New Delhi.

M.M. Goyal, Reader, PG DAV College, University of Delhi.

Narsimha Murthy, Principal, University Post-Graduate College, Subedari,Anam Konda, Distt. Warangal, Andhra Pradesh.

Pooja Dasani, PGT (Commerce) Convent of Jesus and Mary, GolDakkhana, New Delhi.

R.B. Solanki, Principal, B.R. Ambedkar College, University of Delhi.

Ruchi Kakkar, Lecturer, Acharya Narendra Dev College, University of Delhi.

Shruti Bodh Aggarwal, Vice-Principal, Rajkiya Pratibha Vikas Vidyalaya,Kishanganj, Delhi.

Sumati Verma, Reader, Sri Aurobindo College, University of Delhi.

Y.V. Reddy, Reader, Department of Commerce, Goa University, Goa.

MEMBER COORDINATOR

Minoo Nandrajog, Reader, Department of Education in Social Sciencesand Humanities, NCERT, New Delhi.

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NOTE TO THE TEACHER

This textbook is expected to provide a good understanding of theenvironment in which a business operates. A manager has to analysethe complex, dynamic situations in which a business is placed.Therefore, content enrichment in the form of business news andabstracts of articles from business journals and magazines has beengiven as inset material (boxes). This will encourage students to beobservant about all business activity and discover what is happeningin business organisations with the expectation that they will updatetheir knowledge through the use of libraries, newspapers, businessoriented TV programmes and the internet. Various types of questionsare given and case problems have been introduced to test theapplication of subject knowledge to realistic business situations.

ACKNOWLEDGEMENTS

The National Council of Educational Research and Trainingacknowledges the valuable contributions of the following persons inpreparing exercises, activities and projects for the textbook:

Seema Srivastava, Lecturer, Inservice Department, DIET, MotiBagh, New Delhi; Rajni Rawal, Vice–Principal, Rajkiya Pratibha VikasVidyalaya, Paschim Vihar, Delhi; Shruti Bodh Aggarwal, Vice Principal,Rajkiya Pratibha Vikas Vidyalaya, Kishanganj, Delhi; Manju Chawla,PGT Commerce, Rajkiya Pratibha Vikas Vidyalaya, Surajmal Vihar,Delhi; Shivani Nagrath, PGT Commerce, Summer Fields School, KailashColony, New Delhi.

Special thanks are due to Savita Sinha, Professor and Head,Department of Education in Social Sciences and Humanities, NCERTfor her support and guidance, during the development of this book.

The Council acknowledges the efforts of Computer Incharge,Dinesh Kumar; DTP Operator, Uttam Kumar, Archana Gupta andSr. Proof Reader, NCERT, Rishi Pal Singh.

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CONTENTS

FOREWORD

CHAPTER 1 NATURE AND SIGNIFICANCE OF MANAGEMENT 1

CHAPTER 2 PRINCIPLES OF MANAGEMENT 31

CHAPTER 3 BUSINESS ENVIRONMENT 72

CHAPTER 4 PLANNING 95

CHAPTER 5 ORGANISING 112

CHAPTER 6 STAFFING 146

CHAPTER 7 DIRECTING 178

CHAPTER 8 CONTROLLING 215

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After studying this chapter, you should be able to:

n Describe the characteristics of management and its importance in an organisation;

n Explain the nature of management as an art, science and profession;

n Explain the functions of management; and

n Appreciate the nature and importance of coordination.

NATURE AND SIGNIFICANCE

OF MANAGEMENT

L E A R N I N G O B J E C T I V E S

At a time when India had a total of 250 computers, Shiv Nadar led a young team which passionately believed in the growth of the indigenous IT industry. That vision in 1976, born out of a Delhi ‘barsaati’, has resulted three decades later in creating a US $ 3.5 billion global enterprise. HCL is today a leader in the IT industry, employing 41,000 professionals and having a global presence in 16 countries spanning locations in the US, Europe, Japan, ASEAN and the Pacific Rim. HCL’s business today spans IT hardware manufacturing and distribution, system integration, technology and software services, business process outsourcing, and infrastructure management. HCL Enterprises is a leader in global technology and IT services.

HCL’s basic plan of developing an indigenous microcomputer bore fruit in 1978 at the same time as Apple and three years before IBM. This was considered by many industry observers as the birth of the Indian computer industry. Under the able direction of its founding fathers it commenced global operations in the US in 1988. Shiv Nadar’s risk-taking ability is legendary and he has often made daring forays based on his conviction of the future. At a time when hardware was the name of the game, Nadar foresaw the huge potential in the area of IT education and learning from which NIIT was born. Yet again when software development was still in the nascent stages, Shiv Nadar took the lead and today HCL is a force to reckon with in the global markets. The organisation structure of HCL Enterprises consists of two listed companies in India – HCL Technologies and HCL Infosystems.

Shiv Nadar, Chairman and CEO, attributes the success of the group to its management team and their entrepreneurial spirit, which together have enabled it to handle rapid changes in environments and technologies, and to transform threats into opportunities. Fundamental to the process has been the development of new paradigms for the unprecedented situations into which the group ventures. These include guidelines for organisation restructuring, market creation, technology leveraging

1Management at HCLManagement at HCL

CHAPTER

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and business up-scaling. Like any other business enterprise profits are important for the survival and growth of HCL as an enterprise.

At HCL the management believes that a satisfied employee creates a satisfied customer, who in turn creates profits that lead to satisfied shareholders.

HCL has a strong sense of social responsibility. It has set up educational institutions in the fields of management, engineering and computer education, in which one-third of the students are girls.

According to Shiv Nadar, the future belongs to the global enterprise which is able to transform itself according to the challenges of global economy.

Source: www.hcl.in

IntroductIon The above case is an example of a successful organisation which is amongst the top companies in India. It has risen to the top because of i ts quality of management. Management is required in all kinds of organisations whether they are manufacturing computers or hand-looms, trading in consumer goods or providing hairstyling services and even in non-business organisations. Let us take another example.

Suhasini is the branch manager of Fabmart, an organisation that promotes the sales of Indian handloom and handicraft products while providing equitable employment to traditional artisans. Fabmart sources its products from over 7500 craft persons and artisans across India. Planning the products is a difficult task that is done by a team of marketing and design experts to ensure that whatever is produced is according to market demand. These plans are then communicated by

Suhasini to the rural artisans who actually implement them.

Fabmart is a private limited company with several branches all over the country. It has a complex organisation structure in which actual production is in the hands of several skilled artisans and marketing is done by staff at branches such as the one managed by Suhasini. This means constantly providing direction and motivation to her employees. She also has to ensure that production is carried out according to plans in order to ensure regular sales.

A typical day in Suhasini’s life consists of a series of interrelated and continuous functions. She has to plan a special festive collection for Diwali and Christmas. This means organising more funds and recruiting more artisans. She also has to regularly communicate with her suppliers to ensure that deadlines regarding delivery of goods are met. In the course of the day she meets customers for a general feedback

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Nature and Significance of Management 3

and any suggestions that they may have.

Suhasini is the manager of Fabmart. So is Nusli Wadia of Bombay Dyeing, Bill Gates of Microsoft, Shiv Nadar of HCL Enterprises, Indra Nooyi of Pepsico and the Principal of your school. They all manage organisations. Schools, hospitals, shops and large corporations are all organisations with diverse goals that are aimed at achieving something. No matter what the organisation is or what its goals might be, they all have something in common – management and managers.

You have observed that Suhasini’s work as a manager consists of a series of different activities or functions aimed at achieving the goals of the organisation. These interconnected and interdependent functions are part of management. Successful organisations do not achieve their goals by chance but by following a deliberate process called ‘management’.

Management is essential for all organisations big or small, profit or non-profit, services or manufacturing. Management is necessary so that individuals make their best contri-bution towards group objectives.

Management consists of a series of interrelated functions that are performed by all managers. Shiv Nadar, the CEO of HCL Enterprises performs all these functions and so does Suhasini at Fabmart. Later in this chapter you will understand that although both of them are managers, they function at different levels in the organisation. The time spent by managers in different functions however is different. Managers at the top level spend more time in planning and organising than managers at lower levels of the organisation.

conceptManagement is a very popular term and has been used extensively for all types of activities and mainly for taking charge of different activities in

Definitions of Management“Management is the process of designing and maintaining an environment in which

individuals, working together in groups, efficiently accomplish selected aims.” Harold Koontz and Heinz Weihrich

“Management is defined as t he process of planning, organising, actuating and controlling an organisation’s operations in order to achieve coordination of the human and material resources essential in the effective and efficient attainment of objectives.”

Robert L. Trewelly and M. Gene Newport“Management is the process of working with and through others to effectively achieve

organisational objectives by efficiently using limited resources in the changing environment.”Kreitner

Definitions of Management

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any enterprise. As you have seen from the above example and case study that management is an activity which is necessary wherever there is a group of people working in an organisation. People in organisations are performing diverse tasks but they are all working towards the same goal. Management aims at guiding their efforts towards achieving a common objective — a goal. Thus, management has to see that tasks are completed and goals are achieved (i.e., effectiveness) with the least amount of resources at a minimum cost (i.e., efficiency).

Management, has therefore, been defined as a process of getting things done with the aim of achieving goals effectively and efficiently. We need to analyse this definition. There are certain terms which require elaboration. These are (a) process, (b) effectively, and (c) efficiently.

Process in the definition means the primary functions or activities that management performs to get things done. These functions are planning, organising, staffing, directing and controlling which we will discuss later in the chapter and the book.

Being effective or doing work effectively basically means finishing the given task. Effectiveness in management is concerned with doing the right task, completing activities and achieving goals. In other words, it is concerned with the end result.

But it is not enough to just complete the tasks. There is another aspect

also, i.e., being efficient or as we say doing work efficiently.

Efficiency means doing the task correctly and with minimum cost. There is a kind of cost-benefit analysis involved and the relationship between inputs and outputs. If by using less resources (i.e., the inputs) more benefits are derived (i.e., the outputs) then efficiency has increased. Efficiency is also increased when for the same benefit or outputs, fewer resources are used and less costs are incurred. Input resources are money, materials, equipment and persons required to do a particular task. Obviously, management is concerned with the efficient use of these resources, because they reduce costs and ultimately lead to higher profits.

Effectiveness versus EfficiencyThese two terms are different but they are interrelated. For management, it is important to be both effective and efficient. Effectiveness and efficiency are two sides of the same coin. But these two aspects need to be balanced and management at times, has to compromise with efficiency. For example, it is easier to be effective and ignore efficiency i.e., complete the given task but at a high cost. Suppose, a company’s target production is 5000 units in a year. To achieve this target the manager has to operate on double shifts due to power

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failure most of the time. The manager is able to produce 5000 units but at a higher production cost. In this case, the manager was effective but not so efficient, since for the same output, more inputs (labour cost, electricity costs) were used.

At times, a business may con-centrate more on producing goods with fewer resources i.e., cutting down cost but not achieving the target production. Consequently, the goods do not reach the market and hence the demand for them declines and competitors enter the market. This is a case of being efficient but not effective since the goods did not reach the market.

Therefore, it is important for management to achieve goals (effectiveness) with minimum resources i.e., as efficiently as possible while maintaining a balance between effectiveness and efficiency. Usually high efficiency is associated with high effectiveness which is the aim of all managers. But undue emphasis on high efficiency without being effective is also not desirable. Poor management is due to both ineffi-ciency and ineffectiveness.

characterIstIcs of ManageMentAfter going through some of the definitions we find some elements that may be called the basic characteristics of management:

(i) Management is a goal-oriented process: An organisation has a set of basic goals which are the basic reason for its existence. These should be simple and clearly stated. Different organ-isations have different goals. For example, the goal of a retail store may be to increase sales, but the goal of The Spastics Society of India is to impart education to children with special needs. Management unites the efforts of different individuals in the organisation towards achieving these goals.

(ii) Management is all pervasive: The activities involved in managing an enterprise are common to all organisations whether economic, social or political. A petrol pump needs to be managed as much as a hospital or a school. What managers do in India, the USA, Germany or Japan is the same. How they do it may be quite different. This difference is due to the differences in culture, tradition and history.

(iii) Management is multidimen-sional: Management is a complex activity that has three main dimensions. These are:(a) Management of work: All

organisations exist for the performance of some work. In a factory, a product is manufactured, in a garment

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Jack Welch was appointed CEO of GE in 1981. At that time the firm had a market capitalisation of $13 billion. In 2000 when he stepped down the firm’s turnover had increased multifold to $500 billion. What was the secret of Welch’s success? He has laid down the following pointers for managers to be successful: n Create a vision and then ignite your organisation to make this vision a reality.

Get people so passionate about what they are doing that they cannot wait to execute this plan. Have great energy, competitive spirit and the ability to spark excitement and achieve results. Search for leaders who have the same qualities.

n Focus on strategic issues. Your job is to understand the vital issues within each of your businesses. Recognise the talent needed to win in those markets.

n Focus on the main issue . Your job is to see the big picture. Don’t manage every detail. Don’t get caught up in the minute details, but instead inspire others to execute some of your vision. Surround yourself with great people and trust them to do their job and contribute their best to the organisation.

n Involve everyone and welcome great ideas from everywhere. Anyone can be a leader, just so long as they contribute, and the most meaningful way for anyone to contribute is to come up with a good idea. Business is all about getting the best ideas from everyone. New ideas are the lifeblood of the organisation, the fuel that makes it run. “The hero is the person with a new idea.” There is simply nothing more important to an organisation than expressing ideas and creating a vision.

n Lead by example. To spark others to perform, you must lead by example. Jack Welch’s mastery of the four E’s of leadership – Energy, Energise, Edge, and Execution – was always in evidence. “He had great energy, sparked others, had incredible competitive spirit, and had a record of execution that was second to none. This is a key of the Welch phenomenon. Had he been lacking in any of the traits he espoused, he would not have commanded such acclaim.”

store a customer’s need is satisfied and in a hospital a patient is treated. Management translates this work in terms of goals to be achieved and assigns the means to achieve it. This is done in terms of problems to be solved, decisions to be made, plans to be established, budgets to be prepared, responsibilities to be assigned and authority to be delegated.

(b) Management of people: Human resources or people are an organisation’s greatest asset. Despite all developments in technology “getting work done through people” is still a major task for the manager. Managing people has two dimensions (i) it implies dealing with employees as individuals with diverse needs and behavior; (ii) it also means dealing with individuals as a group of people.

The Management Mantra from GEThe Management Mantra from GE

Source: www.ge.co.in

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The task of management is to make people work towards achieving the organisation’s goals, by making their strengths effective and their weaknesses irrelevant.

(c) Management of operations: No matter what the organisation, it has some basic product or service to provide in order to survive. This requires a prod-uction process which entails the flow of input material and the technology for transfor-ming this input into the desired output for consumption. This

is interlinked with both the management of work and the management of people.

(iv) Management is a continuous process: The process of manage-ment is a series of continuous, composite, but separate functions (planning, organising, directing, staffing and controlling). These functions are simultaneously performed by all managers all the time. You may have observed that Suhasini at Fabmart performs several different tasks in a single day. Some days she may spend more time in planning a future

Together Everyone Achieves More as

a TEAM

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gement should enable all its members to grow and develop as needs and opportunities change.

(vi) Management is a dynamic function: Management is a dynamic function and has to adapt itself to the changing environment. An organisation interacts with its external envi-ronment which consists of various social, economic and political factors. In order to be successful, an organisation must change itself and its goals according to the needs of the environment. You probably know that McDonalds, the fast food

exhibition and on another day she may spend time in sorting out an employee’s problem. The task of a manager consists of an ongoing series of functions.

(v) Management is a group activity: An organisation is a collection of diverse individuals with different needs. Every member of the group has a different purpose for joining the organisation but as members of the organisation they work towards fulfilling the common organisational goal. This requires team work and coordination of individual effort in a common direction. At the same time mana-

Management – a multidimensional activity

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giant made major changes in its menu to be able to survive in the Indian market.

(vii) Management is an intangible force: Management is an intangi-ble force that cannot be seen but its presence can be felt in the way the organisation functions. The effect of management is noticeable in an organisation where targets are met according to plans, employees are happy and satisfied, and there is orderliness instead of chaos.

objectIves of ManageMentManagement seeks to achieve certain objectives which are the desired result of any activity. They must be derived from the basic purpose of the business. In any organisation there are different objectives and management has to achieve all objectives in an effective and efficient manner. Objectives can be classified into organisational objectives, social objectives and personal or individual objectives.

(i) Organisational Objectives: Management is responsible for setting and achieving objectives for the organisation. It has to achieve a variety of objectives in all areas considering the interest of all stakeholders including, shareholders, employees, cust-omers and the government. The main objective of any organisation should be to utilise human

and material resources to the maximum possible advantage, i.e., to fulfill the economic objectives of a business. These are survival, profit and growth.

Survival: The basic objectives of any business is survival. Management must strive to ensure the survival of the organisation. In order to survive, an organisation must earn enough revenues to cover costs.

Profit: Mere survival is not enough for business. Management has to ensure that the organisation makes a profit. Profit provides a vital incentive for the continued successful operation of the enterprise. Profit is essential for covering costs and risks of the business.

Growth: A business needs to add to its prospects in the long run, for this it is important for the business to grow. To remain in the industry, management must exploit fully the growth potential of the organisation. Growth of a business can be measured in terms of sales volume increase in the number of employees, the number of products or the increase in capital investment, etc. There can be other indicators of growth.

(ii) Social objectives: It involves the creation of benefit for society. As a part of society, every organisation whether it is

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business or non-business, has a social obligation to fulfill. This refers to consistently creating economic value for various constituents of society. This includes using environmental friendly methods of production, giving employment opportunities to the disadvantaged sections of society and providing basic

A quiet digital revolution is reshaping the lives of farmers in remote Indian villages.In these villages, farmers grow soyabeans, wheat and coffee in small plots of land, as they have done for thousands of years. A typical village has no reliable electricity and has antiquated telephone lines. The farmers are largely illiterate and have never seen a computer. But farmers in these villages are conducting e-business through an initiative called E-Choupal, created by ITC, one of India’s largest consumer product and agribusiness companies.

ITC’s E-Chaupal initiative is a fine example of a business organisation fulfilling corporate social responsibility. The basic aim of the programme is to provide farmers in rural India with the opportunity to make use of a direct marketing channel eliminating multiple intermediation and wasteful handling and unnecessary transaction costs. It is the single-largest information technology-based intervention by a corporate entity in rural India, transforming the Indian farmer into a progressive knowledge-seeking citizen, enriching him with knowledge and elevating him to a new order of empowerment.

E-Choupal delivers real-time information and customised knowledge to improve the farmer’s decision-making ability, thereby better aligning farm output to market demands; securing better quality, productivity and improved price discovery. Given the low levels of literacy in the rural sector, the role of the Choupal Sanchalak, the lead farmer of the village, in facilitating physical interface between the computer terminal and the farmers is central to the project. E-Choupal Smart Cards enable farmer identification to provide customised information on the E-Choupal website. Online transactions are captured to reward farmers for volume and value of usage.

The E-Chaupal initiative has found its way into the Harvard Business School as a leading case study illustarating the use of modern technology by a leading business house for the benefit of the rural poor.

Source: Mohanbir Sawhney, McCormick Tribune Professor of Technology, Kellogg School of Management, USA.

amenities like schools and crèches to employees. The box given below illustrates how a company can fulfill its social responsibility.

(iii) Personal objectives: Organi-sations are made up of people who have different personalities, backgrounds, experiences and objectives. They all become part

ITC – Empowering Rural IndiaITC – Empowering Rural India

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of the organisation to satisfy their diverse needs. These vary from financial needs such as competitive salaries and perks, social needs such as peer recognition and higher level needs such as personal growth and development. Management has to reconcile personal goals with organisational objectives for harmony in the organisation.

IMportance of ManageMentHaving understood that management is a universal activity that is integral to any organisation we now examine some of the reasons that have made management so important: (i) Management helps in achieving

group goals: Management is required not for itself but for achieving the goals of the organisation. The task of a manager is to give a common direction to the individual effort in achieving the overall goal of the organisation.

(ii) Management increases effici-ency: The aim of a manager is to reduce costs and increase productivity through better planning, organising, directing, staffing and controlling the activities of the organisation.

(iii) Management creates a dynamic organisation: All organisations have to function in an environment which is constantly changing. It is generally seen that individuals in an organisation resist change

as it often means moving from a familiar, secure environment into a newer and more challenging one. Management helps people adapt to these changes so that the organisation is able to maintain its competitive edge.

(iv) Management helps in achieving personal objectives: A manager motivates and leads his team in such a manner that individual members are able to achieve personal goals while contributing to the overall organisational objective. Through motivation and leadership the management helps individuals to develop team spirit, cooperation and commitment to group success.

(v) Management helps in the development of society: An orga-nisation has multiple objectives to serve the purpose of the different groups that constitute it. In the process of fulfilling all these, management helps in the development of the organisation and through that it helps in the development of society. It helps to provide good quality products and services, creates employment opportu nities, adopts new techno-logy for the greater good of the people and leads the path towards growth and development.

nature of ManageMent Management is as old as civilisation. Although modern organisations are

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of recent origin, organised activity has existed since the time of the ancient civilisations. In fact, organisations may be considered the distinguishing feature that separated civilised society from uncivilised ones. The earliest management practices were a set of rules and regulations that grew out of the experiences of governmental and commercial activities. The development of trade and commerce gradually led to the development of management principles and practices.

The term ‘management’ today has several different connotations that highlight the different aspects of its nature. The study of management has evolved over a period of time along with the modern organisations; based both on the experience and practice of managers and a set of theoretical relationships. Over a period of time, it has grown into a dynamic subject with its own special characteristics. However, one question that needs to be addressed pertaining to the nature of management is whether it is a science or an art or both? In order to answer this let us examine the features of both science and art to see how far management fulfills them.

ManageMent as an artWhat is art? Art is the skillful and personal application of existing knowledge to achieve desired results. It can be acquired through study, observation and experience. Since

art is concerned with personal application of knowledge some kind of ingenuity and creativity is required to practice the basic principles learnt. The basic features of an art are as follows: (i) Existence of theoretical

knowledge: Art presupposes the existence of certain theoretical knowledge. Experts in their respective areas have derived certain basic principles which are applicable to a particular form of art. For example, literature on dancing, public speaking, acting or music is widely recognised.

(ii) Personalised application: The use of this basic knowledge varies from individual to individual. Art, therefore, is a very person-alised concept. For example, two dancers, two speakers, two actors, or two writers will always differ in demonstrating their art.

(iii) Based on practice and creativity: All art is practical. Art involves the creative practice of existing theoretical knowledge. We know that all music is based on seven basic notes. However, what makes the composition of a musician unique or different is his use of these notes in a creative manner that is entirely his own interpretation.

Management can be said to be an art since it satisfies the following criteria: (i) A successful manager practices

the art of management in the

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day-to-day job of managing an enterprise based on study, observation and experience. There is a lot of literature available in various areas of management like marketing, finance and human resources which the manager has to specialise in. There is existence of theoretical knowledge.

(ii) There are various theories of management, as propounded by many management thinkers, which prescribe certain universal principles. A manager applies these scientific methods and body of knowledge to a given situation, an issue or a problem, in his own unique manner. A good manager works through a combination of practice, creativity, imagination, initiative and innovation. A manager achieves perfection after long practice. Students of management also apply these principles differently depending on how creative they are.

(iii) A manager applies this acquired knowledge in a personalised and skillful manner in the light of the realities of a given situation. He is involved in the activities of the organisation, studies critical situations and formulates his own theories for use in a given situation. This gives rise to different styles of management

The best managers are committed and dedicated individuals; highly trained and educated, with personal

qualities such as ambition, self- motivation, creativity and imagination, a desire for development of the self and the organisation they belong to. All management practices are based on the same set of principles; what distinguishes a successful manager from a less successful one is the ability to put these principles into practice.

ManageMent as a scIenceScience is a systematised body of knowledge that explains certain general truths or the operation of general laws. The basic features of science are as follows: (i) Systematised body of knowledge:

Science is a systematic body of knowledge. Its principles are based on a cause and effect relationship. For example, the phenomenon of an apple falling from a tree towards the ground is explained by the law of gravity.

(ii) Principles based on experimen-tation: Scientific principles are first developed through observation and then tested through repeated experimentation under controlled conditions.

(iii) Universal validity: Scientific principles have universal validity and application.

Based on the above features, we can say that management has some characteristics of science. (i) Management has a systematised

body of knowledge. It has its

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Anthropology – Anthropology is the study of societies, which helps us learn about human beings and their activities. Anthropologists’ work on cultures and environments, for instance, has helped managers to better understand differences in fundamental values, attitudes, and behavior between people in different countries and within different organisations.Economics – Economics is concerned with the allocation and distribution of scarce resources. It provides us with an understanding of the changing economy as well as the role of competition and free markets in a global context. An understanding of free trade and protectionist policies is absolutely essential to any manager operating in the global marketplace, and these topics are addressed by economists.Philosophy – Philosophy courses inquire into the nature of things, particularly values and ethics. Ethics are standards that govern human conduct. These ethics have shaped today’s organisations by providing a basis for legitimate authority, linking rewards to performance, and justifying the existence of business and the corporate form.Political Science – Political science is the study of the behavior of individuals and groups within a political environment. Management is affected by a nation’s form of government – by whether it allows its citizens to hold property, by its citizens’ ability to engage in and enforce contracts, and by the appeal mechanisms available to redress grievances. A nation’s stand on property, contracts, and justice, in turn, shapes the type, form, and policies of its organisations.Psychology – Psychology is the science that seeks to measure, explain, and sometimes change the behaviour of humans and other animals. Today’s managers confront both a diverse customer base and a diverse set of employees. Psychologists’ efforts to understand gender and cultural diversity provide managers with a better perception of the needs of their changing customer and employee populations. Psychology courses are also relevant to managers in terms of gaining a better understanding of motivation, leadership, trust, employee selection, performance appraisals, and training techniques.Sociology – Sociology is the study of people in relation to their fellow human beings. What are some of the sociological issues that have relevance to managers? Here are a few. How are societal changes such as globalisation, increasing cultural diversity, changing gender roles, and varying forms of family life affecting organisational practices? What are the implications of schooling practices and education trends on future employees’ skills and abilities? Answers to questions such as these have a major effect on how managers operate their businesses.

Source: Fundamentals of ManagementStephen P. RobbinsDavid A. DeCenzo

Some Interesting Cross-disciplinary PerspectivesSome Interesting Cross-disciplinary Perspectives

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own theory and principles that have developed over a period of time, but it also draws on other disciplines such as Economics, Sociology, Psychology and Mathematics. Like all other organised activity, management has its own vocabulary of terms and concepts. For example, all of us discuss sports like cricket and soccer using a common vocabulary. The players also use these terms to communicate with each other. Similarly managers need to communicate with one another with the help of a common vocabulary for a better understanding of their work situation.

(ii) The principles of management have evolved over a period of time based on repeated experimentation and observation in different types of organisations. However, since management deals with human beings and human behaviour, the outcomes of these experiments are not capable of being accurately predicted or replicated. Therefore, management can be called an inexact science. Despite these limitations, management scholars have been able to identify general principles of management. For example, scientific management principles by F.W. Taylor and Functional Management principles by Henri

Fayol which you will study in the next chapter.

(iii) Since the principles of mana-gement are not as exact as the principles of science, their application and use is not universal. They have to be modified according to a given situation. However, they provide managers with certain standardised techniques that can be used in different situations. These principles are also used for training and development of managers.

You must have understood from the foregoing discussion that manage-ment has features of both art and science. The practice of management is an art. However, managers can work better if their practice is based on the principles of management. These principles constitute the science of management. Management as an art and a science are therefore not mutually exclusive, but complement each other.

ManageMent as a professIonYou have understood so far that all forms of organised activity need to be managed. You would also have observed that organisations look for individuals with specific qualifications and experience to manage them. It has also been observed that there has been an increase in the corporate form of business on the one hand and

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increasing emphasis on managed business concerns. Does this imply that management is a profession? To answer this question let us examine the salient features of a profession and see whether management satisfies them.

A profession has the following characteristics: (i) Well-defined body of know-

ledge: All professions are based on a well-defined body of knowledge that can be acquired through instruction.

(ii) Restricted entry: The entry to a profession is restricted through an examination or through acquiring an educational degree. For example, to become a chartered accountant in India a candidate has to clear a specified examination conducted by the Institute of Chartered Accountants of India.

(iii) Professional association: All professions are affiliated to a professional association which regulates entry, grants certificate of practice and formulates and enforces a code of conduct. To be able to practice in India lawyers have to become members of the Bar Council which regulates and controls their activities.

(iv) Ethical code of conduct: All professions are bound by a code of conduct which guides the behaviour of its members. All doctors, for example, take the

oath of ethical practice at the time they enter the profession.

(v) Service motive: The basic motive of a profession is to serve their client’s interests by rendering dedicated and committed service. The task of a lawyer is to ensure that his client gets justice.

Management does not meet the exact criteria of a profession. However, it does have some of the features of a profession: (i) All over the world there is

marked growth in management as a discipline. It is based on a systematic body of knowledge comprising well-defined principles based on a variety of business situations. This knowledge can be acquired at different colleges and professional institutes and through a number of books and journals. The subject of management is taught at different institutions. Some of these have been set up with the specific purpose of providing management education such as the Indian Institutes of Management (IIMs) in India. Entry to different institutes is usually through an examination.

(ii) There is no restriction on anyone being designated or appointed as manager in any business enterprise. Anyone can be called a manager irrespective of the educational qualifications possessed.

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Unlike professions such as medicine or law which require a practicing doctor or lawyer to possess valid degrees, nowhere in the world is it mandatory for a manager to possess any such specific degree. But professional knowledge and training is considered to be a desirable qualification, since there is greater demand for those who possess degrees or diplomas from reputed institutions. Therefore, as such the second criterion has not been strictly met.

(iii) There are several associations of practising managers in India, like the AIMA (All India Management Association) that has laid down a code of conduct to regulate the activities of their members. There is, however, no compulsion for managers to be members of such an association nor does it have any statutory backing.

(iv) The basic purpose of manage-ment is to help the organisation achieve its stated goal. This may be profit maximisation for a business enterprise and service for a hospital. However, profit maximisation as the objective of management does not hold true and is fast changing. Therefore, if an organisation has a good management team that is efficient and effective it automatically serves society by providing good quality products at reasonable prices.

LeveLs of ManageMentShiv Nadar and Suhasini are both managers of an enterprise. Shiv Nadar is the CEO of HCL and Suhasini is a branch manager at Fabmart. They manage their enterprise at different levels. Management is a universal term used for certain functions performed by individuals in an enterprise who are bound together in a hierarchy of relationships. Every individual in the hierarchy is responsible for successful completion of a particular task. To be able to fulfill that responsibility he is assigned a certain amount of authority or the right to take a decision. This authority-responsibility relationship binds individuals as superiors and subordinates and gives rise to different levels in an organisation. Generally speaking there are three levels in the hierarchy of an organisation. (i) Top Management: They consist

of the senior-most executives of the organisation by whatever name they are called. They are usually referred to as the chairman, the chief executive officer, chief operating officer, president and vice-president. Top management is a team consisting of managers from different functional levels, heading finance, marketing etc. For example chief finance officer, vice president (marketing). Their basic task is to integrate diverse elements and coordinate the activities of different departments

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according to the overall objectives of the organisation. These top level managers are responsible for the welfare and survival of the organisation. They analyse the business environment and its implications for the survival of the firm. They formulate overall organisational goals and strategies for their achievement. They are responsible for all the activities of the business and for its impact on society. The job of the top manager is complex and stressful, demanding long hours and commitment to the organisation.

(ii) Middle Management: is the link between top and lower level managers. They are subordinate to top managers and superior to the first line managers. They are usually known as division heads, for example production manager. Middle management is responsible for implementing and controlling plans and strategies developed by top management. At the same time they are responsible for all the activities of first line managers. Their main task is to carry out the plans formulated by the top managers. For this they need to: (i) interpret the policies framed by top management, (ii) ensure that their department has the necessary personnel, (iii) assign necessary duties and responsibilities to them,

(iv) motivate them to achieve desired objectives, and (v) co -operate with other departments for smooth functioning of the organisation. At the same time they are responsible for all the activities of first line managers.

(iii) Supervisory or Operational Management: Foremen and supervisors comprise the lower level in the hierarchy of the organisation. Supervisors directly oversee the efforts of the workforce. Their authority and responsibility is limited according to the plans drawn by the top management. Supervisory management plays a very important role in the organisation since they interact with the actual work force and pass on instructions of the middle

“You don’t learn management from books alone...”

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Managerial Levels

TOP MANAGEMENT

OPERATIONAL MANAGEMENT

MIDDLEMANAGEMENT

management to the workers. Through their efforts quality of output is maintained, wastage of materials is minimised and safety standards are maintained. The quality of workmanship and the quantity of output depends on the hard work, discipline and loyalty of the workers.

functIons of ManageMentManagement is described as the process of planning, organising, directing and controlling the efforts of organisational members and of using organisational resources to achieve specific goals. Planning is the function of determining in advance what is to

be done and who is to do it. This implies setting goals in advance and developing a way of achieving them efficiently and effectively. In Suhasini’s organisation the objective is procurement and sale of traditional Indian handloom and handicraft items. They sell fabrics, furnishings, readymades and household items made out of traditional Indian fabrics. Suhasini has to decide quantities, variety, colour and texture of all the above and then allocate resources for their purchase from different suppliers or for their inhouse development. Planning cannot prevent problems, but it can predict them and prepare contingency plans to deal with them if and when they occur.Organising is the management function of assigning duties, grouping tasks, establishing authority and allocating resources required to carry out a specific plan. Once a specific plan has been established for the accomplishment of an organisational goal, the organising function examines

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the activities and resources required to implement the plan. It determines what activities and resources are required. It decides who will do a particular task, where it will be done, and when it will be done. Organising involves the grouping of the required tasks into manageable departments or work units and the establishment of authority and reporting relationships within the organisational hierarchy. Proper organisational techniques help in the accomplishment of work and promote both the efficiency of operations and the effectiveness of results. Different kinds of business require different structures according to the nature of work. You will read more about this in a later chapter.Staffing simply stated, is finding the right people for the right job. A very important aspect of management is to make sure that the right people with the right qualifications are available at the right places and times to accomplish the goals of the organisation. This is also known as the human resource function and it involves activities such as recruitment, selection, placement and training of personnel. Infosys Technologies which develops software needs systems analysts and programmers, whereas Fabmart needs a team of designers and craftspeople. Directing involves leading, influ-encing and motivating employees to perform the tasks assigned to them. This requires establishing an atmosphere that encourages

employees to do their best. Motivation and leadership are two key components of direction. Directing also involves communicating effectively as well as supervising employees at work. Motivating workers means simply creating an environment that makes them want to work. Leadership is influencing others to do what the leader wants them to do. A good manager directs through praise and criticism in such a way that it brings out the best in the employee. Suhasini’s design team developed some prints for bedcovers in bright colours on silk. Although they looked very impressive, the use of silk made the product too expensive for the average customer. Praising their effort, Suhasini suggested that they keep the silk bedcovers for special occasions like Diwali and Christmas and offer the cotton bedcovers on a regular basis.

Controlling is the management function of monitoring organisational performance towards the attainment of organisational goals. The task of controlling involves establishing standards of performance, measuring current performance, comparing this with established standards and taking corrective action where any deviation is found. Here management must determine what activities and outputs are critical to success, how and where they can be measured and who should have the authority to take corrective action. When Suhasini

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discovered that her team of designers had produced bedcovers that were more expensive than they had planned to sell, she decided to change the fabric to keep costs in check.

The various functions of a manager are usually discussed in the order given above, suggesting that a manager first plans, then organises, puts staff in position, then directs, and finally controls. In reality, managers are rarely able to carry out these functions in isolation. The activities of a manager are interrelated and it is often difficult to pinpoint where one ended and the other began.

coordInatIon — the essence of ManageMentYou have understood by now that a manager has to perform five interrelated functions in the process of managing an organisation which is a system made up of different interlinked and interdependent subsystems. A manager has to link these diverse groups towards the achievement of a common goal. The process by which a manager synchronises the activities of different departments is known as coordination.

Coordination is the force that binds all the other functions of management. It is the common thread that runs through all activities such as purchase, production, sales, and finance to ensure continuity in the working of the organisation. Coordination is sometimes considered a separate function of management.

It is however, the essence of management, for achieving harmony among individual efforts towards the accomplishment of group goals. Each managerial function is an exercise contributing individually to coordination. Coordination is implicit and inherent in all functions of an organisation.

The process of coordinating the activities of an organisation begins at the planning stage itself. Top management plans for the entire organisation. According to these plans the organisational structure is developed and staffed. In order to ensure that these plans are executed according to plans directing is required. Any discrepancies between actual and realised activities are then taken care of at the stage of controlling. It is through the process of coordination that a manager ensures the orderly arrangement of individual and group efforts to ensure unity of action in the realisation of common objectives. Coordination therefore involves synchronisation of the different actions or efforts of the various units of an organisation. This provides the requisite amount, quality, timing and sequence of efforts which ensures that planned objectives are achieved with a minimum of conflict.

characterIstIcs of coordInatIonThe definitions given above highlight the following features of coordination:

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(i) Coordination integrates group efforts: Coordination unifies unrelated or diverse interests into purposeful work activity. It gives a common focus to group effort to ensure that performance is as it was planned and scheduled.

(ii) Coordination ensures unity of action: The purpose of coordination is to secure unity of action in the realisation of a common purpose. It acts as the binding force between departments and ensures that all action is aimed at achieving the goals of the organisation. You have observed that at Fabmart, the production and sales department have to coordinate their work, so that production takes place according to the demand in the market.

(iii) Coordination is a continuous process: Coordination is not a one-time function but a continuous process. It begins at the planning stage and continues till controlling. Suhasini plans her winter collection in the month of June itself. She has to then ensure that there is adequate workforce and continuously monitor whether production is proceeding according to plans. Her marketing department also has to be briefed in time to prepare their promotional and advertising campaigns.

(iv) Coordination is an all pervasive function: Coordination is required at all levels of management due to the interdependent nature of activities of various departments. It integrates the efforts of different departments and different levels. The purchase, production and sales departmental efforts have to be coordinated by Suhasini for achieving organisational objectives harmoniously. The purchase department is responsible for procuring fabric. This then becomes the basis of the activities of the production department and finally sales can take place. If fabric purchased is of an inferior quality or is not according to the specifications of the production department, further sales will also decline. In the absence of coordination there is overlapping

In the absence of coordination what results is chaos

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and chaos instead of harmony and integration of activities.

(v) Coordination is the responsibi-lity of all managers: Coordi-nation is the function of every manager in the organisation. Top level managers need to coordinate with their subordinates to ensure that the overall policies for the organisation are duly carried out. Middle level management coordinates with both the top level and first line managers. Operational level management coordinates the activities of its workers to ensure that work proceeds according to plans.

(vi) Coordination is a deliberate function: A manager has to coordinate the efforts of different people in a conscious and deliberate manner. Even where members of a department willingly cooperate and work, coordination gives a direction to that willing spirit. Cooperation in the absence of coordination may lead to wasted effort and

coordination without cooperation may lead to dissatisfaction among employees.

Coordination, therefore, is not a separate function of management, but its very essence. For an organisation to effectively and efficiently achieve its objectives coordination is required. Like a thread in a garland, coordination is a part of all management functions.

IMportance of coordInatIon

Coordination is important as it integrates the efforts of individuals, departments and specialists. The primary reason for coordination is that departments and individuals in the organisation are interdependent, i.e. they depend on each other for information and resources to perform their respective activities. Thus, managers need to reconcile differences in approach, timing, effort or interest. At the same time, there is a need to harmonise individual goals and organisational goals.

Coordination is balancing and keeping together the team by ensuring suitable allocation of tasks to the various members and seeing that the tasks are performed with harmony among the members themselves. E.F.L. Brech

Coordination is the process whereby an executive develops an orderly pattern of group efforts among his subordinates and secures unity of action in the pursuit of common purpose. McFarland

Coordination is the orderly synchronising of efforts of subordinates to provide proper amount, timing and quality of execution so that their united efforts lead to the stated objectives, namely, the common purpose of the enterprise. Theo Haimann

Definitions of CoordinationDefinitions of Coordination

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(i) Growth in size: As organisations grow in size, the number of people employed by the organisation also increases. At times, it may become difficult to integrate their efforts and activities. All individuals differ in their habits of work, background, approaches to situations and relationships with others. It becomes necessary to ensure that all individuals work towards the common goals of the organisation. But employees may have their own individual goals also. Therefore, for organisational efficiency, it is important to harmonise individual

goals and organisational goals through coordination.

(ii) Functional differentiation: Functions of an organisation are divided into departments, divisions and sections. In an organisation there may be separate departments of finance, production, marketing or human resources. All these departments may have their own objectives, policies and their own style of working. For example, the marketing department’s objective may be to increase sales by 10 per cent by offering discounts. But, the finance department may

The Dabbawallas of Mumbai is the story of a SIX SIGMA business enterprise. The success of the business lies in the complex yet well coordinated exercise that is carried out on the streets of Mumbai day after day. What is the secret behind the efficiency with which their business is conducted?

The story of the dabbawallas begins in the kitchens of Mumbai. After they step out of their door, someone begins the time-consuming process of preparing the worker a fresh, home-cooked lunch. What happens next for demonstrates the coordination of the dabbawallas system. The first dabbawalla picks up the tiffin from home and takes it to the nearest railway station.The second dabbawalla sorts out the dabbas at the railway station according to destination and puts them in the luggage carriage. The third one travels with the dabbas to the railway stations nearest to the destinations. The fourth one picks up dabbas from the railway station and drops them off at the offices.

By mid-morning, thousands of dabbawallas are bicycling through the streets of Mumbai, ensuring a hot home cooked lunch for their customers. The whole tiffin distribution requires negligible technology. The dabbawallas rely on low capital and use cycles, wooden carriages and local trains to achieve their target.There are several groups that work independently and network with each other to achieve their goal.

Each area is divided into several small distribution sectors and each sector is handled by a particular person. This person understands the address in that locality very well. Also, this perfection comes with practice. Many new employees work for months under the guidance of their seniors.

Punctuality and time management are on top of the agenda for dabbawallas. Whatever be the circumstances, the dabbawallas never get delayed even by a few minutes.

‘DABBAWALLAS’ – Excellence through Coordination‘DABBAWALLAS’ – Excellence through Coordination

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Rajat Lal is the director of a firm that develops software solutions for the travel industry on a global level. He represents a US software services firm that outsources project work to its delivery partners in Gurgaon, the software hub of North India. It develops software for companies in the technology, transportation and leisure sectors, across the world. Rajat is the interface between his global clients and his domestic technical team. That makes his job more challenging than that of a manager who functions in a totally domestic environment. This is what Rajat has to say about the challenges of his job:• In the capacity of the ‘country manager’ – the global manager has to deal with

establishing his company’s legal and business presence in the form of a local office or business partner, contacting and negotiating with clients, with legal bodies including lawyers and immigration authorities since the services involve having technical staff from India to be based in USA/Europe, as also with local companies offering recruitment services. Another key role he plays is establishing a sense of comfort in potential clients by stressing on the positive effects of cross-cultural and multi-cultural opportunities that outsourcing and global delivery entail, while addressing any concerns out of these.

• In the capacity of the ‘functional manager’ – the global manager has to ensure he is able to source the right technical skills, build a strong resource base of these skills, and be able to deliver on software projects with these skill-sets working in a globalised

The Challenge of Being a Global ManagerThe Challenge of Being a Global Manager

not approve of such discounts as it means loss of revenue. These kinds of conflict arise in organisations because each unit/department is performing activities in isolation from others and barriers between departments are becoming more rigid.

However, all departments and individuals are interdependent and they have to depend on each other for information to perform their activities. The activity of each department needs to be focused on attainment of common organisational goals. The process of linking the activities of various departments is accomplished by coordination.

(iii) Specialisation: Modern organisations are characterised by a high degree of specialisation.

Specialisation arises out of the complexities of modern technology and the diversity of tasks to be performed. Organisations, therefore, need to employ a number of specialists. Specialists usually think that they only are qualified to evaluate, judge and decide according to their professional criteria. They do not take advice or suggestions from others in matters pertaining to their area of specialisation. This often leads to conflict amongst different specialists as well as others in the organisation. Therefore, some coordination is required by an independent person to reconcile the differences in approach, interest or opinion of the specialists.

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work environment – in terms of multiple time-zones, understanding of client’s priorities based on the business cycles that the client’s business operates in, understanding and adapting to the processes and methodologies the client is familiar with. Finally this function also includes customer expectation management, where the functional manager has to coordinate activities in India and in USA/Europe according to the customer’s priorities, communicate what is possible and what is not possible, and accordingly also manage the expectations and satisfaction levels of his own employees.

• In the capacity of the ‘business leader’ – the global manager has to be alive to changing business situations and customer priorities – he has to keep track of the trends in outsourcing – and have the ability to envision upcoming opportunities as well as potential risks. For example, having a firm grip on the changing legislations on outsourcing is critical for a business manager to understand if his current clients are going to continue giving him business. The global manager also needs to be extremely responsive in what customers may perceive as gaps between the operating environment in India vis-à-vis their own countries. He has to position the advantages that outsourcing to India offers – in terms of lowered costs and access to a wide talent-base, while expertly addressing concerns on weak areas like infrastructure in India. What do all these mean for a global manager today?To summarise, a global manager today is one who possesses what can be termed as ‘hard’ types

of skills as well as ‘softer’ types of skills. Managers who understand analysis, strategy, engineering, and technology are still going to be needed, but extremely critical to global success are people who understand how teams work, how organisations work, how people are motivated.

A manager who really understands different cultures should be able to work in a West European, non-English speaking country, then move to a developing country like Malaysia or Kenya, and then be transferred to an office based in New York, USA, and be almost immediately productive in all three places.

It can thus be understood that the role of a global manager has evolved in much the same way that the global industry and economy have evolved. It has changed from being a single dimensional role in a defined business context, to being a multi-faceted role that calls for a diverse combination of technical skills, soft management and people skills, and the ability to imbibe and learn different cultural experiences.

Source: Harvard Business School, Working Knowledge

ManageMent In the twenty-fIrst century

Even as you read this chapter, the organisation and its management are changing. As boundaries between cultures and nations get blurred and new communication technology

makes it possible to think of the world as a ‘global village’, the scope of international and intercultural relationships is rapidly expanding. The modern organisation is a global organisation that has to be managed in a global perspective. What does this imply?

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ConceptManagement is the process of planning, organising, staffing, directing and controlling the enterprise resources efficiently and effectively for achieving the goals of the organisation. Effectiveness in management is concerned with doing the right task, completing activities and achieving goals. Efficiency means doing the task correctly and with minimum cost.Characteristics The key features of management are: (i) goal oriented process (ii) all pervasive (iii) multidimensional (iv) continuous process (v) group activity (vi) dynamic function (vii) tangible force. ObjectivesManagement fulfills three basic objectives: organisational, social and personal.ImportanceManagement is important because it helps in achieving group goals, increases efficiency, creates a dynamic organisation, helps achieve personal objectives and contributes to the development of society. NatureManagement is a combination of an organised body of knowledge (science) and its skillful application (art). Although it does not satisfy all the requirements of a profession, it is to a large extent professional in character.LevelsManagement is considered a three-tier activity. The top management focuses on determination of objectives and policies, middle management attempts to achieve these objectives through the effort of other managers and supervisory or operational management directly oversees the efforts of the workforce.FunctionsAll managers perform the following interrelated functions: Planning, Organising, Staffing, Directing and Controlling.CoordinationCoordination is the essence of management. It is the process of achieving unity of action among interdependent activities and departments of an organisation.

Key TermsManagement Process Efficiency Effectiveness Art

Science Profession Planning Organising Staffing

Directing Controlling Coordination

Summary

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ExercisesShort Answer Type

1. Define management.

2. Name any two important characteristics of management.

3. Ritu is the manager of the northern division of a large corporate house. At what level does she work in the organisation? What are her basic functions?

4. Why is management considered a multi-faceted concept?

5. Discuss the basic features of management as a profession.

Long Answer Type

1. Management is considered to be both an art and science. Explain.

2. Do you think management has the characteristics of a full fledged profession?

3. Coordination is the essence of management. Do you agree? Give reasons.

4. “A successful enterprise has to achieve its goals effectively and efficiently.” Explain.

5. Management is a series of continuous interrelated functions. Comment.

Multiple Choice

1. Which is not a function of management of the following (a) planning (b) staffing (c) cooperating (d) controlling

2. management is (a) an art (b) a science (c) both art and science (d) neither

3. the following is not an objective of management (a) earning profits (b) growth of the organisation (c) providing employment (d) policy making

4. policy formulation is the function of (a) top level managers

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(b) middle level managers (c) operational management (d) all of the above

5. coordination is (a) function of management (b) the essence of management (c) an objective of management (d) none of the above

1. Company X is facing a lot of problems these days. It manufactures white goods like washing machines, microwave ovens, refrigerators and air conditioners. The company’s margins are under pressure and the profits and market share are declining. The production department blames marketing for not meeting sales targets and marketing blames production department for producing goods, which are not of good quality meeting customers expectations. The finance department blames both production and marketing for declining return on investment and bad marketing.

What quality of management do you think the company is lacking? Explain briefly. What steps should the company management take to bring the company back on track?

2. A company wants to modify its existing product in the market due to decreasing sales. You can imagine any product about which you are familiar. What decisions/steps should each level of management take to give effect to this decision?

3. A firm plans in advance and has a sound organisation structure with efficient supervisory staff and control system. On several occasion it finds that plans are not being adhered to. It leads to confusion and duplication of work. Advise remedy.

These activities are meant to reinforce concepts and to make the learning joyful. They also aim to give pupils simulated experiences of the managerial activities relevant to their level of understanding.

Make groups of 5 – 6 students each according to the size of class. Let them run a garment manufacturing company. Assign the following tasks to each group.

Activity 1

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(i) Let group ‘A’ identify the activities that take place in the company.

(ii) Let group ‘B’ classify these activities into managerial and non-managerial activities.

(iii) Let group ‘C’ identify the planning activities.

(iv) Let group ‘D’ identify the organising activities.

(v) Let group ‘E’ identify the staffing activities.

(vi) Let group ‘F’ identify the directing activities.

(vii) Let group ‘G’ identify the controlling activities.

(viii) Let group ‘H’ identify the coordinating activities.The teacher can then summarise these activities and derive

appropriate conclusions. The above activity can be done for any sector such as software export house, or an auto company. The teacher should do some preparation in finding out the actual activities with the help of Internet and printed material relevant to the sector which is selected. The students can also be involved in the searching exercise by the teacher.

This activity involves classifying the activities identified in activity 1 into those taking place at higher management level, middle management level and lower management level. Accordingly 3 groups A, B and C can be formed for the three levels. If the teacher so desires she/he can form more groups. Then the findings of the groups can be summarised by the teacher.

Note: The teacher can organise a panel discussion for both these activities where the group leaders can give their findings and the students of the class can ask questions which can be answered by the panel members with the help of the teacher.It should be noted that no expertise is required for the students. This exercise is just to give the feel to the students of the real life work environment and relate it to what they have learnt.

Activity 2

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2PRINCIPLES OF PRINCIPLES OF

MANAGEMENTMANAGEMENTCHAPTER


Toyota follows certain well-defined business principles guiding its functioning. These are:1. Honour the language and spirit of law of every nation and

undertake open and fair corporate activities to be a good corporate citizen around the world.

2. Respect the culture and customs of every nation and contribute to economic and social development through corporate activities in local communities.

3. To provide clean and safe products and to enhance the quality of life everywhere.

4. Create and develop advanced technologies and provide outstanding products and services that fulfil the needs of customers worldwide.

5. Foster a corporate culture that enhances individual creativity and teamwork value, while honouring mutual trust and respect between management and labour.

6. Pursue growth and harmony with global community through innovative management.

7. Work with business partners in research and creativity to achieve stable, long-term growth and mutual benefits and be open to new partnerships. These principles, will guide the company in its global vision 2010. This global vision envisages continuous innovations in future, use of environment friendly technologies, respecting and working with different sections of society and establishing an interactive relationship with society.

After studying this chapter, you should be able to:

n State the meaning, nature and significance of principles of management;

nExplain Taylor’s principles and techniques of Scientific Management; and

n Explain Fayol’s principles of management.

Based on www.toyota.co.jp/en/enviornmental_rep/03 /rinen.html on 17.10.2006

It is clear from the foregoing case that managerial pursuits at Toyota Motor Corporation are driven by principles that serve as broad guidelines for

stating the vision as well as the ways to achieve it. Similarly, many other business enterprises have followed various principles in their working

Business Principles of Toyota Motor CorporationBusiness Principles of Toyota Motor Corporation

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over a period of time. A number of management thinkers, and writers have also studied principles of management from time-to-time. In fact, there is a long history of management thought. Management principles have evolved and are in the continuous process of evolution. (see box.)

You can see that the evolution of management thought has been very

fascinating. In this chapter we will study the contributions of Fredrick Winslow Taylor and Henri Fayol who as you have read are associated with the classical management theory. Both of them contributed immensely towards the study of management as a discipline. Whereas F.W. Taylor was an American mechanical engineer, Henri Fayol was a French mining engineer. Taylor gave the concept

In tracing the history of management, one comes across various schools of thought that have outlined principles to guide management practices. These schools of thought may be divided into 6 distinctive phases: 1. Early Perspectives; 2. Classical Management Theory; 3. Neo Classical Theory — Human Relations Approach; 4. Behavioural Science Approach — Organisational Humanism; 5. Management Science/Operational Research; 6. Modern Management.EARLY PRESPECTIVES The first known management ideas were recorded in 3000-4000 B.C. One

Pyramid built by Egyptian ruler Cheops required work to be done by 100,000 men for over twenty years in 2900 B.C. It covered 13 acres of land and measured 481 meters in height. The stone slabs had to be moved thousands of kilometres of distance. As folklore goes, even the sound of a hammer was not heard in the villages in the vicinity of the site of these pyramids. Such monumental work could not be completed without adherence to principles of sound management.

CLASSICAL MANAGEMENT THEORY Rational economic view, scientific management, administrative principles, and

bureaucratic organisation characterise this phase. While the rational economic view assumed that people are motivated by economic gains primarily; scientific management of F.W. Taylor and others emphasised one best way of production etc; administrative theorists personified by Henri Fayol etc looked at the best way to combine jobs and people into an efficient organisation; bureaucratic organisation theorists led by Max Weber looked at ways to eliminate managerial inconsistencies due to abuse of power which contributed to ineffectiveness. This was the era of the industrial revolution and factory system of production. Large scale production would not have been possible without adherence to the principles governing organising production based on division of labour and specialisation, relationship between man and the machine, managing people and so on.

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Principles of Management 33

of ‘Scientific Management’ whereas Fayol emphasised ‘Administrative Principles’.

But before we go into the details of their contributions let us study the meaning of the principles of management.

PrinciPles of ManageMent: PrinciPles of ManageMent: the concePtthe concePtA managerial principle is a broad and general guideline for decision-making and behaviour. For example while deciding about promotion of an employee one manager may consider

seniority, whereas the other may follow the principle of merit.

One may distinguish principles of management from those of pure science. Management principles are not as rigid as principles of pure science. They deal with human behaviour and, thus, are to be applied creatively given the demands of the situation. Human behaviour is never static and so also technology, which affects business. Hence all the principles have to keep pace with these changes. For example, in the absence of Information and

NEO CLASSICAL THEORY — HUMAN RELATIONS APPROACH This school of thought developed between 1920s to 1950s felt that employees

simply do not respond rationally to rules, chains of authority and economic incentives alone but are also guided by social needs, drives and attitudes. Hawthorne Studies at GEC etc., were conducted then. It was quite natural that in the early phases of the industrial revolution, the emphasis was on development of techniques and technology. The attention to the human factor was the salient aspect of this school of thought. This attention was to serve as a precursor to the development of behavioural sciences.

BEHAVIOURAL SCIENCE APPROACH — ORGANISATIONAL HUMANISM Organisational behaviourists like Chris Argyris; Douglas McGregor, Abraham

Maslow and Fredrick Herzberg used the knowledge of psychology, sociology and anthropology to develop this approach. The underlying philosophy of organisational humanism is that individuals need to use all of their capacities and creative skills at work as well as at home.

MANAGEMENT SCIENCE/OPERATIONAL RESEARCH It emphasises research on operations and use of quantitative techniques to aid

managers to take decisions.MODERN MANAGEMENT It sees modern organisations as complex systems and underlies contingency

approach and use of modern techniques to solve organisational and human problems.

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Communications Technology (ICT), a manager could oversee only a small work force that too within a narrow geographical space. The advent of ICT has expanded the capability of the managers to preside over large business empires spread across the globe. Infosys headquarters in Bangalore boast of the Asia’s largest flat screen in their conference room from where their managers can interact with their employees and customers in all parts of the world.

In developing an understanding of the meaning of principles of management, it is also useful to know what these are not. The principles of management should be distinguished from techniques of management. Techniques are procedures or methods, which involve a series of steps to be taken to accomplish desired goals. Principles are guidelines to take decisions or actions while practicing techniques. Likewise, principles should also be understood as being distinct from values. Values are something, which are acceptable or desirable. They have moral connotations. Principles are basic truths or guidelines for behaviour. Values are general rules for behaviour of individuals in society formed through common practice whereas principles of management are formed after research in work situations, which are technical in nature. However, while practicing principles of management values

cannot be neglected, as businesses have to fulfil social and ethical responsibilities towards society.

nature of PrinciPles of nature of PrinciPles of ManageMentManageMentBy nature is meant qualities and characteristics of anything. Principles are general propositions, which are applicable when certain conditions are present. These have been developed on the basis of observation and experimentation as well as personal experiences of the managers. Depending upon how they are derived and how effective they are in explaining and predicting managerial behaviour, they contribute towards the development of management both as a science and as an art. Derivation of these principles may be said to be a matter of science and their creative application may be regarded as an art. These principles lend credibility of a learnable and teachable discipline to the practice of management. As such, ascent to managerial position may not be a matter of birth, but a matter of requisite qualifications. Clearly, management principles have gained importance with increasing professionalisation of management.

These principles are guidelines to action. They denote a cause and effect relationship. While functions of management viz., Planning, Organising, Staffing, Directing and Controlling are the actions to be

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taken while practising management, Principles help managers to take decisions while performing these functions. The following points summarise the nature of principles of management. (i) Universal applicability: The

principles of management are intended to apply to all types of organisations, business as well as non-business, small as well large, public sector as well as private sector, manufacturing as well as the services sectors. However, the extent of their applicability would vary with the nature of the organisation, business activity, scale of operations and the like. For example, for greater productivity, work should be divided into small tasks and each employee should be trained to perform his/her specialised job. This principle is applicable to a government office where there is a diary/despatch clerk whose job is to receive and send mail or documents, a data entry operator whose task is to input data on the computer, a peon and an officer etc. This principle is also applicable to a limited company where there are separate departments like Production, Finance, Marketing and Research and Development etc. Extent of division of work, however, may vary from case to case.

(ii) General guidelines: The prin-ciples are guidelines to action

but do not provide readymade, straitjacket solutions to all managerial problems. This is so because real business situations are very complex and dynamic and are a result of many factors. However, the importance of principles cannot be underestimated because even a small guideline helps to solve a given problem. For example, in dealing with a situation of conflict between two departments, a manager may emphasise the primacy of the overall goals of the organisation.

(iii) Formed by practice and experimentation: The principles of management are formed by experience and collective wisdom of managers as well as experimentation. For example, it is a matter of common experience that discipline is indispensable for accomplishing any purpose. This principle finds mention in management theory. On the other hand, in order to remedy the problem of fatigue of workers in the factory, an experiment may be conducted to see the effect of improvement of physical conditions to reduce stress.

(iv) Flexibile: The principles of management are not rigid prescriptions, which have to be followed absolutely. They are flexible and can be modified by the manager when the situation

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so demands. They give the manager enough discretion to do so. For example, the degree of concentration of authority (centralisation) or its dispersal (decentralisation) will depend upon the situations and circumstances of each enterprise. Moreover individual principles are like different tools serving different purposes, the manager has to decide which tool to use under what circumstances.

(v) Mainly behavioural: Manage-ment principles aim at influencing behaviour of human beings. Therefore, principles of management are mainly behavioural in nature. It is not that these principles do not pertain to things and phenomenon at all, it is just a matter of emphasis. Moreover, principles enable a better understanding of the relationship between human and material resources in accomplishing organisational purposes. For example, while planning the layout of a factory, orderliness would require that workflows are matched by flow of materials and movement of men.

(vi) Cause and effect relationships: The principles of management are intended to establish relationship between cause and effect so that they can be used in similar situations in a large

number of cases. As such, they tell us if a particular principle was applied in a particular situation, what would be its likely effect. The principles of management are less than perfect since they mainly apply to human behaviour. In real life, situations are not identical. So, accurate cause and effect relationships may be difficult to establish. However,principles of management assist managers in establishing these relationships to some extent and are therefore useful. In situations of emergencies, it is desirable that someone takes charge and others just follow. But in situations requiring cross-functional expertise, such as setting up of a new factory, more participative approach to decision-making would be advisable.

(vii) Contingent: The application of principles of management is contingent or dependent upon the prevailing situation at a particular point of time. The application of principles has to be changed as per requirements. For example, employees deserve fair and just remuneration. But what is just and fair is determined by multiple factors. They include contribution of the employee, paying capacity of the employer and also prevailing

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wage rate for the occupation under consideration.

Having described the inherent qualities and characteristics of management principles, it should be easy for you to appreciate the significance of these principles in managerial decision-making. But before that you can read the following case study of ‘Kiran Mazumdar Shaw’ a highly successful Indian businesswoman and CEO of ‘Biocon’

in the accompanying box. You should be able to see how she was able to transform a little known sector of biotechnology into a very profitable company and earn titles which any one would dream of.

From the foregoing story it is clear that success of Biocon due to the efforts of Dr. Kiran Mazumdar Shaw was not a mere chance. It was a sincere effort, which involved application of qualities, which are

The story of Dr. Kiran Mazumdar Shaw is very inspiring. She foresaw the tremendous potential of biotechnology when no one dared to think about it. She started her own company Biocon India in her garage with a meagre capital of Rs 10,000 in collaboration with Biocon Biochemicals limited of Ireland.

When she wanted to take loans no financial institution was willing to help her because of three reasons: biotechnology was a new area of operation; her company lacked assets and thirdly women entrepreneurs were a rarity at that time in 1978. She even faced problems recruiting people. The initial operation of the company consisted of extracting an enzyme from papaya.

Now Biocon limited is an integrated biotechnology enterprise focused on the development of biopharmaceuticals, custom research, clinical research and enzymes. It delivers products and solutions to partners and customers in over 50 countries.

According to the company’s website, “At Biocon our success has been our ability to develop innovative technologies and products and to leverage them to adjacent domains. This unique ‘integrated innovation’ approach has yielded a host of patented products and technologies that have enabled multilevel relationships with our global clientele”. It has two subsidiary companies. The first one is Syngene International Private limited, which provides chemistry and molecular based custom research services in early stage drug discovery and development. The second subsidiary company is Clinigene International Private Limited, which conducts longitudinal research in diabetes and offers a wide range of comprehensive services in drug development and clinical trials. Biocon was the first biotechnology company of India to receive ISO 9001 certification.

Biocon Limited is what it is today due to adherence to the principles underlying good management practices.

Adapted from www.biocon.com and other sources

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such management principles increase managerial efficiency. For example, a manager can leave routine decision-making to his subordinates and deal with exceptional situations which require her/his expertise by following the principles of delegation.

(ii) Optimum utilisation of resources and effective administration: Resources both human and material available with the company are limited. They have to be put to optimum use. By optimum use we mean that the resources should be put to use in such a manner that they should give maximum benefit with minimum cost. Principles equip the managers to foresee the cause and effect relationships of their decisions and actions. As such the wastages associated with a trial-and-error approach can be overcome. Effective administration necessitates impersonalisation of managerial conduct so that managerial power is used with due discretion. Principles of management limit the boundary of managerial discretion so that their decisions may be free from personal prejudices and biases. For example, in deciding the annual budgets for different departments, rather than personal preferences,

a part of management principles directly or indirectly. Now you can see the significance of these principles.

significance of PrinciPles significance of PrinciPles of ManageMentof ManageMentThe principles of management derive their significance from their utility. They provide useful insights to managerial behaviour and influence managerial practices. Managers may apply these principles to fulfil their tasks and responsibilities. Principles guide managers in taking and implementing decisions. It may be appreciated that everything worthwhile is governed by an underlying principle. The quest of the management theorists has been and should be to unearth the underlying principles with a view to using these under repetitive circums-tances as a matter of management habit. The significance of principles of management can be discussed in terms of the following points:

(i) Providing managers with useful insights into reality: The principles of management provide the managers with useful insights into real world situations. Adherence to these principles will add to their knowledge, ability and understanding of managerial situations and circumstances. It will also enable managers to learn from past mistakes and conserve time by solving recurring problems quickly. As

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managerial discretion is bounded by the principle of contribution to organisational objectives.

(iii) Scientific decisions: Decisions must be based on facts, thoughtful and justifiable in terms of the intended purposes. They must be timely, realistic and subject to measurement and evaluation. Management principles help in thoughtful decision-making. They emphasise logic rather than blind faith. Management decisions taken on the basis of principles are free from bias and prejudice. They are based on the objective assessment of the situation.

(iv) Meeting changing enviornment requirements: Although the principles are in the nature of general guidelines but they are modified and as such help managers to meet changing requirements of the environment. You have already studied that management principles are flexible to adapt to dynamic business environment. For example, management principles emphasise division of work and specialisation. In modern times this principle has been extended to the entire business whereby companies are specialising in their core competency and divesting non-core businesses. In this context, one may cite the decision of Hindustan Lever

Limited in divesting non-core businesses of chemicals and seeds. Some companies are outsourcing their non-core activities like share-transfer management and advertising to outside agencies. So much so, that even core processes such as R&D, manufacturing and marketing are being outsourced today. Haven’t you heard of proliferation of ‘Business Process Outsourcing’ (BPO) and ‘Knowledge Process Outsourcing’ (KPO)?

(v) Fulfilling social responsibility: The increased awareness of the public, forces businesses especially limited companies to fulfill their social responsibilities. Management theory and management principles have also evolved in response to these demands. Moreover, the interpretation of the principles also assumes newer and contemporary meanings with the change in time. So, if one were to talk of ‘equity’ today, it does not apply to wages alone. Value to the customer, care for the environment, dealings with business associates would all come under the purview of this principle. As an application of this principle, we find that Public Sector Undertakings have developed entire townships as, for example, BHEL has developed Ranipur in Hardwar

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(Uttaranchal). One may also cite the story of Shri Mahila Griha Udyog Lijjat Papad as can be seen in the accompanying box on page 41.

(vi) Management training, education and research: Principles of management are at the core of management theory. As such these are used as a basis for management training, education and research. You must be aware that entrance to management institutes is preceded by management aptitude tests. Do you think that these tests could have been developed without an understanding of management principles and how they may be applied in different situations? These principles provide basic groundwork for the development of management as a discipline. Professional courses such as MBA (Master of Business Administration), BBA (Bachelor of Business Administration) also teach these principles as part of their curriculum at the beginner’s level.

These principles enable refinement of management practices as well by facilitating the development of new management techniques. Thus, we see that techniques like Operations Research (OR), cost accounting, ‘Just in Time’, ‘Kanban’ and ‘Kaizen’ have developed due to further research on these principles.

In conclusion it can be said that understanding the meaning, nature and significance of principles of management will help us to appreciate their applicability in real life situations.

As stated at the beginning of the chapter, management principles have undergone a long history of evolution. And, they continue to evolve. What follows is a description of the management principles pertaining to the classical school; more precisely, those propounded by F.W. Taylor and Henri Fayol.

taylor’s scientific taylor’s scientific ManageMent ManageMent Scientific management refers to an important stream of one of the earlier

1. Do you think innovativeness evident from the examples of Toyota and Kiran Mazumdar Shaw can be linked to the nature of management principles?

2. To what aspects of the significance of management principles would you attribute the endeavours of BHEL and Shri Mahila Griha Udyog Lijjat Papad?

Test Your UnderstandingTest Your Understanding

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The story of Shri Mahila Griha Udyog lijjat Papad is very inspiring for would be managers. It shows how an organisation can combine business with social responsibility and make its stakeholders self-reliant. The stakeholders are various women who, numbering over 40,000, are given the task of making lijjat papads, which are famous for their quality throughout the world. The organisation which started with a modest loan of Rs 80 now has a turnover of over Rs 301 crores. Its exports exceed Rs 10 crores. The profits are distributed to the stakeholders in proportion to their contribution. It has struck to its core values for over 40 years. It has shown how it is possible to combine Gandhian values with business. The company has at least 61 branches. Any woman subscribing to these core values can become a member of the organisation. According to the website of the organisation www.lijjat.com, Shri Mahila Griha Udyog Lijjat Papad is synthesis of three different concepts (core values) namely:

1. The concept of business2. The concept of family3. The concept of devotionAll these concepts are completely and uniformly followed in this institution.

As a result of this synthesis, a peculiar Lijjat way of thinking has developed therein.

The institution has adopted the concept of business from the very beginning. All its dealings are carried out on a sound and pragmatic footing-production of quality goods and at reasonable prices. It has never and nor will it in the future accept any charity, donation, gift or grant from any quarter. On the contrary, the member-sisters donate collectively for good causes from time-to-time according to their capacity.

Besides the concept of business, the institution along with all its member-sisters has adopted the concept of mutual family affection, concern and trust. All the affairs of the institution are dealt with in a manner similar to that of a family carrying out its own daily household chores.

But the most important concept adopted by the institution is the concept of devotion. For the member-sisters, employees and well-wishers, the institution is never merely a place to earn one’s livelihood — it is a place of worship to devote one’s energy not for his or her own benefits but for the benefit of all. In this institution work is worship. The institution is open to everybody who has faith in its basic concepts.

Source: Adapted from http/www.lijjat.com/organisation/core value

Shri Mahila Griha Udyog Lijjat Papad – Combining Business with Social Responsibility (An Organisation Of the Women, By the Women and For the Women)

Shri Mahila Griha Udyog Lijjat Papad – Combining Business with Social Responsibility (An Organisation Of the Women, By the Women and For the Women)

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schools of thought of management referred to as the ‘Classical’ school. The other two streams belonging to the classical school are Fayol’s Administrative Theory and Max Weber’s Bureaucracy. We will not be describing bureaucracy here. A discussion of Fayol’s principles, however, will follow the discussion of scientific management.

Fredrick Winslow Taylor (March 20,1856 – March 21, 1915) was an American mechanical engineer

who sought to improve industrial efficiency. In 1874, he became an apprentice mechanist, learning factory conditions at the grass roots level. He earned a degree in mechanical engineering. He was one of the intellectual leaders of the efficiency movement and was highly influential in reshaping the factory system of production. You must appreciate that he belonged to the era of the industrial revolution characterised by mass production.

LIFE TIME: March 20,1856 to March 21, 1915PROFESSION: American mechanical engineerEDUCATION: Degree in Mechanical Engineering from Stevens Institute of Technology in 1883. POSITIONS HELD— 1. Apprentice Machinist in 1874.2. Executive at Midville Steel Company in 1884.3. At Bethlehem Iron Company in 1898, which later became Bethlehem

Steel Company.4. Professor at ‘Tuck School of Business’ founded in 1900.5. President of ‘American Society of Mechanical Engineers’ from 1906 to

1907.WRITINGS:1. ‘The Principles of Scientific Management’ series of articles published in ‘The American Magazine’During march-may 1911, later published in book form.1. ‘Concrete, Plain and Reinforced’ in 1906.2. ‘Notes on Belting’ in 18933. ‘On the Art of Cutting Metals’ December 1906.4. ‘A Piece Rate System’ in June 1895.5. ‘The making of a putting green’ a series of articles published in 1915.6. ‘Not for the genius but for the average man’ published in ‘The

American Magazine’ in March 1918.

Adapted from www.wikipedia.org and www.stevens.edu/library

Fredrick Winslow Taylor – Founder of Scientific Management MovementFredrick Winslow Taylor – Founder of Scientific Management Movement

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You must also appreciate that every new development takes some time to be perfected. Taylor’s contribution must be seen in the light of the efforts made to perfect the factory system of production.

Taylor thought that by scientifically analysing work, it would be possible to find ‘one best way’ to do it. He is most remembered for his time and motion studies. He would break a job into its component parts and measure each to the second.

Taylor believed that contemporary management was amateurish and should be studied as a discipline. He also wanted that workers should cooperate with the management and thus there would be no need of trade unions. The best results would come from the partnership between a trained and qualified management and a cooperative and innovative workforce. Each side needed the other.

He is known for coinage of the term ‘Scientific Management’ in his article ‘The Principles of Scientific Management’ published in 1911. After being fired from Bethlehem Steel Company he wrote a book ‘Shop floor’ which sold well. He was selected to be the president of the American Society of Mechanical Engineers (ASME) from 1906 to 1907. He was a professor at Tuck School of Business at Dartmouth College founded in 1900.

In 1884 he became an executive at Midvale Steel Company by demonstrating his leadership

abilities. He instructed his fellow workers to work in phases. He joined the Bethlehem Iron Company in 1898, which later became Bethlehem Steel Company. He was originally employed to introduce piece rate wage system. After setting up the wage system, he was given authority and more responsibilities in the company. Using his newfound resources he increased the staff and made Bethlehem a show place for inventive work. Unfortunately, the company was sold to another group and he was discharged.

In 1910 his health started to fall. He died in 1915 due to pneumonia. A synoptic view of his contribution can be had from the accompanying box on the next page.

PrinciPles of scientific PrinciPles of scientific ManageMentManageMentIn the earlier days of the Industrial Revolution, in the absence of an established theory of factory organisation, factory owners or managers relied on personal judgment in attending to the problems they confronted in the course of managing their work. This is what is referred to as ‘rule of thumb’. Managing factories by rule of thumb enabled them to handle the situations as they arose but suffered from the limitation of a trial and error approach. For their experiences to be emulated, it was important to know what works and why does it work. For this, there was

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The following extracts are taken from Taylor’s testimony before the U.S. House of Representatives Special Committee in 1912 and also from his most important work “THE PRINCIPLES OF SCIENTIFIC MANAGEMENT” published in 1911.

“Scientific management requires first, a careful investigation of each of the many modifications of the same implement, developed under rule of thumb; and second, after time and motion study has been made of the speed attainable with each of these implements, that the good points of several of them shall be unified in a single standard implementation, which will enable the workman to work faster and with greater ease than he could before. This one implement, then is adopted as standard in place of the many different kinds before in use and it remains standard for all workmen to use until superseded by an implement which has been shown, through motion and time study, to be still better.” (Scientific management, page 119)

The main elements of the Scientific Management are: (page 129-130 sci-mgt) “Time Studies”

Functional or specialised supervision Standardisation of tools and implements Standardisation of work methodsSeparate Planning functionManagement by exception principleThe use of ‘slide-rules and similar time-saving devices’ Instruction cards for workmenTask allocation and large bonus for successful performance The use of the ‘differential rate’Mnemonic systems for classifying products and implements A routing systemA modern costing system etc. etc. Taylor called these elements “merely the elements or details of the

mechanisms of management” He saw them as extensions of the four principles of management. (Page 130, scientific management)1. The development of a true science.2. The scientific selection of the workman.3. The scientific education and development of the workman.4. Intimate and friendly cooperation between the management and the

employees.

Adapted from Taylorism (F.W. Taylor & Scientific Management) at http://www.quality.org/TQM-MSI/taylor.html

Taylor’s Contribution to Scientific ManagementTaylor’s Contribution to Scientific Management

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a need to follow an approach that was based on the method of science- defining a problem, developing alternative solutions, anticipating consequences, measuring progress and drawing conclusions.

In this scenario, Taylor emerged as the ‘Father of Scientific Management’. He proposed scientific management as opposed to rule of thumb. He broke up human activity into small parts and found out how it could be done effectively, in less time and with increased productivity. It implies conducting business activities according to standardised tools, methods and trained personnel in order to increase the output, improve its quality and reduce costs and wastes.

In the words of Taylor, “Scientific management means knowing exactly what you want men to do and seeing that they do it in the best and cheapest way. The Bethlehem Steel company where Taylor himself worked achieved three-fold increase in productivity by application of scientific management principles. Therefore, it would be in order to discuss these principles. (i) Science not Rule of Thumb:

Taylor pioneered the introduction of the method of scientific inquiry into the domain of management practice. We have already referred to the limitations of the rule of thumb approach of management. As different managers would follow their

indigenous rules of thumb, it is but a statement of the obvious that all would not be equally effective. Taylor believed that there was only one best method to maximise efficiency. This method can be developed through study and analysis. The method so developed should substitute ‘Rule of Thumb’ throughout the organisation. Scientific method involved investigation of traditional methods through work-study, unifying the best practices and developing a standard method, which would be followed throughout the organisation. According to Taylor, even a small production activity like loading pigs of iron into boxcars can be scientifically planned and managed. This can result in tremendous saving of human energy as well as wastage of time and materials. The more sophisticated the processes, greater would be the savings.

In the present context, the use of internet has brought about dramatic improvements in internal efficiencies and customer satisfaction.

(ii) Harmony, Not Discord: Factory system of production implied that managers served as a link between the owners and the workers. Since as managers they had the mandate to ‘get work done’ from the workers, it should not be

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state, Taylor called for complete mental revolution on the part of both management and workers. It means that management and workers should transform their thinking. In such a situation even trade unions will not think of going on strike etc.

Management should share the gains of the company, if any, with the workers. At the same time workers should work hard and

difficult for you to appreciate that there always existed the possibility of a kind of class-conflict, the mangers versus workers. Taylor recognised that this conflict helped none, the workers, the managers or the factory owners. He emphasised that there should be complete harmony between the management and workers. Both should realise that each one is important. To achieve this

Sharing of gains between management and workers leading to complete harmony

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be willing to embrace change for the good of the company. Both should be part of the family. According to Taylor, ‘Scientific management has for its foundation the firm conviction that the true interests of the two are one and the same; that prosperity for the employer cannot exist for a long time unless it is accompanied by prosperity for the employees and vice versa’.

Japanese work culture is a classic example of such a situation. In Japanese companies, paternalistic style of management is in practice. There is complete openness between the manage-ment and workers. If at all workers go to strike they wear a black badge but work more than normal working hours to gain the sympathy of the management.

(iii) Cooperation, Not Individualism: There should be complete cooperation between the labour and the management instead of individualism. This principle is an extension of principle of ‘Harmony not discord’. Competition should be replaced by cooperation. Both should realise that they need each other.

For this, management should not close its ears to any constructive suggestions made by the employees. They should be rewarded for

their suggestions which results in substantial reduction in costs. They should be part of management and, if any important decisions are taken, workers should be taken into confidence.

At the same time workers should desist from going on strike and making unreasonable demands on the management. In fact when there will be open communication system and goodwill there will be no need for even a trade union. Paternalistic style of management, whereby the employer takes care of the needs of employees, would prevail as in the case of Japanese companies.

According to Taylor, there should be an almost equal division of work and responsibility between workers and management. All the day long the management should work almost side by side with the workers helping, encouraging and smoothing the way for them.

(iv) Development of Each and Every Person to His or Her Greatest Efficiency and Prosperity: Industrial efficiency depends to a large extent on personnel competencies. As such, scientific management also stood for worker development. Worker training was essential also to learn the ‘best method’ developed as a consequence of

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the scientific approach. Taylor was of the view that the concern for efficiency could be built in right from the process of employee selection. Each person should be scientifically selected. Then work assigned should suit her/his physical, mental and intellectual capabilities. To increase efficiency, they should be given the required training. Efficient employees would produce more and earn more. This will ensure their greatest efficiency and prosperity for both company and workers.

From the foregoing discussion it is clear that Taylor was an ardent supporter of use of scientific method of production in business.

techniques of scientific techniques of scientific ManageMentManageMentLet us now discuss techniques as specified by him. These are based on the various experiments he conducted during his career.

functional foreManshiPfunctional foreManshiPIn the factory system, the foreman represents the managerial figure with whom the workers are in face-to-face contact on a daily basis. In the first chapter of the book, you have seen that the foreman is the lowest ranking manager and the highest ranking worker. He is the pivot around whom revolves the entire production

planning, implementation and control. Thus, Taylor concentrated on improving the performance of this role in the factory set-up. In fact, he identified a list of qualities of a good foreman/supervisor and found that no single person could fit them all. This prompted him to suggest functional foremanship through eight persons.

Taylor advocated separation of planning and execution functions. This concept was extended to the lowest level of the shop floor. It was known as functional foremanship. Under the factory manager there was a planning incharge and a production incharge. Under planning incharge four personnel namely instruction card clerk, route clerk, time and cost clerk and a disciplinarian worked. These four personnel would draft instructions for the workers, specify the route of production, prepare time and cost sheet and ensure discipline respectively.

Under Production incharge, personnel who would work were speed boss, gang boss, repair boss, and inspector. These respectively were responsible for timely and accurate completion of job, keeping machines and tools etc., ready for operation by workers, ensure proper working condition of machines and tools and check the quality of work.

Functional foremanship is an extension of the principle of division of work and specialisation to the shop floor. Each worker will have to

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take orders from these eight foremen in the related process or function of production. Foremen should have intelligence, education, tact, grit, judgment, special knowledge, manual dexterity, and energy, honesty and good health. Since all these qualities could not be found in a single person so Taylor proposed eight specialists. Each specialist is to be assigned work according to her/his qualities. For example, those with technical mastery, intelligence and grit may be given planning work. Those with energy and good health may be assigned execution work.

standardisation and standardisation and siMPlification of WorksiMPlification of WorkTaylor was an ardent supporter of standardisation. According to him scientific method should be used to analyse methods of production

prevalent under the rule of thumb. The best practices can be kept and further refined to develop a standard which should be followed throughout the organisation. This can be done through work-study techniques which include time study, motion study, fatigue study and method study, and which are discussed further in this chapter. It may be pointed out that even the contemporary techniques of business process including reengineering, kaizen (continuous improvement) and benchmarking are aimed at standardising the work.

Standardisation refers to the process of setting standards for every business activity; it can be standardisation of process, raw material, time, product, machinery, methods or working conditions. These standards are the benchmarks, which must be adhered to during production. The objectives of standardisation are:

Planning Incharge Production Incharge

Factory Manager

Instruction Card Clerk

Route Clerk

Time and Cost Clerk

InspectorRepairs Boss

Gang Boss

Speed Boss

Workman

Disciplinarian

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(i) To reduce a given line or product to fixed types, sizes and characteristics.

(ii) To establish interchange ability of manufactured parts and products.

(iii) To establish standards of exce-llence and quality in materials.

(iv) To establish standards of perfor-mance of men and machines.

Simplification aims at eliminating superfluous varieties, sizes and dim-ensions while standardisation implies devising new varieties instead of the existing ones. Simplification aims at eliminating unnecessary diversity of products. It results in savings of cost of labour, machines and tools. It implies reduced inventories, fuller utilisation of equipment and increasing turnover.

Most large companies like Nokia, Toyota and Microsoft etc. have successfully implemented standardi-sation and simplification. This is evident from their large share in their respective markets.

Method studyMethod studyThe objective of method study is to find out one best way of doing the job. There are various methods of doing the job. To determine the best way there are several parameters. Right from procurement of raw materials till the final product is delivered to the customer every activity is part of method study. Taylor devised the concept of assembly line by using method study. Ford Motor

Company used this concept very successfully. Even now auto companies are using it.

The objective of the whole exercise is to minimise the cost of production and maximise the quality and satisfaction of the customer. For this purpose many techniques like process charts and operations research etc are used.

For designing a car, the assembly line production would entail deciding the sequence of operations, place for men, machines and raw materials etc. All this is part of method study.

Motion studyMotion studyMotion study refers to the study of movements like lifting, putting objects, sitting and changing positions etc., which are undertaken while doing a typical job. Unnecessary movements are sought to be eliminated so that it takes less time to complete the job efficiently. For example, Taylor and his associate Frank Gailberth were able to reduce motions in brick layering from 18 to just 5. Taylor demonstrated that productivity increased to about four times by this process.

On close examination of body motions, for example, it is possible to find out: (i) Motions which are productive (ii) Motions which are incidental

(e.g., going to stores) (iii) Motions which are unproductive.

Taylor used stopwatches and various symbols and colours to identify different motions. Through motion

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studies, Taylor was able to design suitable equipment and tools to educate workers on their use. The results achieved by him were truly remarkable.

tiMe studytiMe studyIt determines the standard time taken to perform a well-defined job. Time measuring devices are used for each element of task. The standard time is fixed for the whole of the task by taking several readings. The method of time study will depend upon volume and frequency of the task, the cycle time of the operation and time measurement costs. The objective of time study is to determine the number of workers to be employed; frame suitable incentive schemes and determine labour costs.

For example, on the basis of several observations it is determined that standard time taken by the worker to make one cardboard box is 20 minutes. So in one hour she/he will make 3 boxes. Assuming that a worker has to put in 8 hours of work in a shift and deducting one hour for rest and lunch, it is determined that in 7 hours a worker makes 21 boxes @ 3 boxes per hour. Now this is the standard task a worker has to do. Wages can be decided accordingly.

fatigue studyfatigue studyA person is bound to feel tired physically and mentally if she/he does not rest while working. The

rest intervals will help one to regain stamina and work again with the same capacity. This will result in increased productivity. Fatigue study seeks to determine the amount and frequency of rest intervals in completing a task. For example, normally in a plant, work takes place in three shifts of eight hours each. Even in a single shift a worker has to be given some rest interval to take her/his lunch etc. If the work involves heavy manual labour then small pauses have to be frequently given to the worker so that she/he can recharge her/his energy level for optimum contribution.

There can be many causes for fatigue like long working hours, doing unsuitable work, having uncordial relations with the boss or bad working conditions etc. Such hindrances in good performance should be removed.

differential Piece Wage differential Piece Wage systeMsysteMTaylor was a strong advocate of piece wage system. He wanted to differentiate between efficient and inefficient workers. The standard time and other parameters should be determined on the basis of the work-study discussed above. The workers can then be classified as efficient or inefficient on the basis of these standards. He wanted to reward efficient workers. So he introduced different rate of wage payment for

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those who performed above standard and for those who performed below standard. For example, it is determined that standard output per worker per day is 10 units and those who made standard or more than standard will get Rs. 50 per unit and those below will get Rs. 40 per unit. Now an efficient worker making 11 units will get 11�50= Rs. 550 per day whereas a worker who makes 9 units will get 9××�40 = Rs. 360 per day.

According to Taylor, the difference of Rs. 190 should be enough for the inefficient worker to be motivated to perform better. From his own experience, Taylor gives the example of a worker named Schmidt who was able to earn 60% more wages from $1.15 to $1.85 on increasing pig iron loading from 12.5 tons per man per day to 47 tons per man per day in box cars at Bethlehem Steel works by following scientific management techniques.

It is important to have a relook at the techniques of scientific management as comprising a unified whole of Taylor’s prescription of efficiency. Search for efficiency requires the search for one best method and the chosen method must lead to the determination of a fair day’s work. There must be a compensation system that differentiates those who are able to accomplish/exceed the fair day’s work. This differential system must be based on the premise that efficiency is the result of the joint efforts of the managers and the workers. Thus,

rather than quarrelling over the share in the resultant surplus, the workers and managers should work in harmony for maximising the output rather than restricting it. Clearly the sum and substance of Taylor’s ideas lies not in the disjointed description of principles and techniques of scientific management, but in the change of the mindset, which he referred to as mental revolution. Mental revolution involves a change in the attitude of workers and management towards one another from competition to cooperation. Both should realise that they require one another. Both should aim to increase the size of surplus. This would eliminate the need for any agitation. Management should share a part of surplus with workers. Workers should also contribute their might so that the company makes profits. This attitude will be good for both of them and also for the company. In the long run only worker’s well-being will ensure prosperity of the business.

Now, having studied the elements, principles and techniques of scientific management we can consider the practical applications of the same at the time of F.W. Taylor and in the present.

We can also examine the present status of scientific management. Today, many new techniques have been developed as a sequel to scientific management. Operations research was developed in the second World War to optimise the deployment of war material. Similarly assembly line was

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also discovered by F.W. Taylor, which was used very successfully by Ford motor company for manufacturing ‘Model T’ car for the masses. This concept is much used now. The latest development in scientific management is ‘LEAN MANUFACTURING’. Now a days robotics and computers are being used in production and other business activities. This is part of scientific management of these activities. It has increased productivity levels. The techniques of operation research have also been developed and are being used as a result of scientific management. The box below gives meanings of some terms used in modern manufacturing.

fayol’s PrinciPles of fayol’s PrinciPles of ManageMentManageMentIn the development of classical school of management thought, Fayol’s administrative theory provides an important link. While Taylor succeeded in revolutionising the working of factory shop-floor in terms of devising the best method, fair day’s work, differential piece-rate system and functional foremanship; Henri Fayol explained what amounts to a managers work and what principles should be followed in doing this work. If workers’ efficiency mattered in the factory system, so does the managerial efficiency. Fayol’s contribution must

Applications of Scientific Management by Taylor and his Contemporaries

1. Taylor found out the optimum-shovelling load of 21 pounds per shovel per worker through a series of experiments in work-study at Bethlehem Steel Company. The implementation saved the company $ 75000 to $80000 per year.

2. Pig iron handling per person per day was increased from 12.5 tons to 47 tons. This also resulted in the wages increase to labourers by 60% but also savings to the company on account of less number of labourers from 500 to 140.

3. He had published a paper “The Art of cutting metals” which turned it into a science.

4. He designed a Piece Rate Wage System including incentives for Bethlehem Steel Company.

5. Taylor’s associate Frank Gilbreth applied scientific management to the art of ‘brick layering’ and through motion study was able to eliminate certain motions which were considered by the brick layers to be necessary (reduced motions from 18 to 5), designed simple apparatus like adjustable scaffold and its packets to hold the bricks and finally also taught brick layers to use both the hands at the same time. This is a classic example of application of Scientific Management to the simple art of brick layering.

Applications of Scientific Management by Taylor and his Contemporaries

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be interpreted in terms of the impact that his writings had and continue to have improvement in managerial efficiencies.

Henri Fayol (1841-1925) was a French management theorist whose

Glossary of Some Terms of Modern Production/Scientific Management1. Just In Time Manufacturing: It is an inventory management strategy to

improve return on investment by reducing in process inventory and its associated costs. The system is implemented by the use of visual signals or KANBAN, which tells whether the replenishment is required at any level of production process, or not.

2. Lean Manufacturing: It is a management philosophy focusing on reduction of seven wastes of overproduction, waiting time, transportation, processing, motion, inventory and scrap in any type of manufacturing process or any type of business. By eliminating waste, quality is improved, production time is reduced and cost is reduced.

3. Kaizen: It is a Japanese word, which means ‘change for better’ or ‘improvement’. It is an approach to improvement of productivity through application of works of American experts such as F.W. Taylor by Japanese after World War II. The goals of kaizen include elimination of waste (which is defined as those activities which add cost but not value to the product or service), just in time delivery, production load levelling of amount and types, standardised work, paced moving lines, right sized equipment and others. A closer Japanese use of the word means ‘to take apart and put it in a better way’. What is taken apart is usually a process, system, product or service. It is a daily activity which humanizes the workplace, eliminates hard work both physical and mental, teaches people how to do rapid experiments using scientific method and how to learn to see and eliminate waste in business processes.

4. Six Sigma: It is a data driven approach that can help any organisation- whatever sector or field it might be operating in, to bring down inefficiencies and save time and money by reducing ‘quality variations’. It has a strong customer oriented approach that relies on data to create more efficient processes or refine existing processes. There should not be more than 3-4 defects per million opportunities according to prescribed norms. It can be applied to any process but needs unstilted organisational support.

Glossary of Some Terms of Modern Production/Scientific Management

theories concerning scientific organisation of labour were widely influential in the beginning of twentieth century. He graduated from the mining academy of St. Etienne in 1860 in mining engineering. The

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19 year old engineer started at the mining company ‘Compagnie de commentary-Fourchambean-Decazeville, ultimately acting as its managing director from 1888 to 1918.

His theories deal with organisation of production in the context of a competitive enterprise that has to control its production costs. Fayol was the first to identify four functions of management – Planning, Organising, Directing and Controlling although his version was a bit different – Plan, Organise, Command, Coordinate and Control. According to Fayol, all activities of an industrial undertaking could be divided into: Technical; Commercial; Financial; Security; Accounting and Managerial. He also suggested that qualities a manager must possess should be — Physical, Moral, Education, Knowledge and experience. He believed that the number of management principles that might help to improve an organisation’s operation is potentially limitless.

Based largely on his own experience, he developed his concept of administration. The 14 principles of management propounded by him

were discussed in detail in his book published in 1917, ‘Administration industrielle et generale’. It was published in English as ‘General and Industrial Management’ in 1949 and is widely considered a foundational work in classical management theory. For his contribution he is also known as the ‘Father of General Management’

The 14 principles of management given by him are: (i) Division of Work: Work is divided

into small tasks/jobs. A trained specialist who is competent is required to perform each job. Thus, division of work leads to specialisation. According to Fayol, “The intent of division of work is to produce more and better work for the same effort. Specialisation is the most efficient way to use human effort.”

In business work can be performed more efficiently if it is divided into specialised tasks; each performed by a specialist or trained employee. This results in efficient and effective output. Thus, in a company we have separate departments for finance, marketing, production

Test Your UnderstandingSuppose you want to set up a small-scale industry to manufacture stationery items. What steps would you take to implement scientific management? Identify the elements of scientific management you would like to implement and list the benefits it would give.

Test Your Understanding

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1. Life Time: 1841 TO 19252. Profession: Mining Engineer and Management

Theorist (French national)3. Education: Graduated from Mining Academy at

St. Entinne. in 1880.4. Positions Held: Founded the mining company

‘Cmpagnie de Commentry- Fourchambeau-Decazeville’ and became its Managing Director in 1888 and remained till 1918.

5. Writings: Administration industrielle et générale. It was published in English as General and Industrial Management in 1949 and is widely considered a foundational work in classical management theory.

6. Contributions: Mainly 14 Management Principles, which are referred to as administrative in nature in that they have Top-Down approach concerning top management and other manager’s conduct.

Source: www.en.wikipedia.org Image source: www.image.google.com

Henri FayolHenri Fayol

and human resource development etc. All of them have specialised persons. Collectively they achieve production and sales targets of the company. Fayol applies this principle of division of work to all kinds of work – technical as well as managerial. You can observe this principle at work in any organisation like hospital or even a government office.

(ii) Authority and Responsibility: According to Fayol, “Authority is the right to give orders and obtain obedience, and responsibility is the corollary of authority. The two types of authority are official authority, which is the authority to command, and personal

authority which is the authority of the individual manager.”

Authority is both formal and informal. Managers require authority commensurate with their responsibility. There should be a balance between authority and responsibility. An organisation should build safeguards against abuse of managerial power. At the same time a manager should have necessary authority to carry out his responsibility. For example, a sales manager has to negotiate a deal with a buyer. She finds that if she can offer credit period of 60 days she is likely to clinch the deal which is supposed to fetch the company net margin of say Rs. 50 crores. Now the company

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gives power to the manager to offer a credit period of only 40 days. This shows that there is an imbalance in authority and responsibility. In this case the manager should be granted authority of offering credit period of 60 days in the interest of the company. Similarly, in this example this manager should not be given a power to offer a credit period of say 100 days because it is not required. A manager should have the right to punish a subordinate for wilfully not obeying a legitimate order but only after sufficient opportunity has been given to a subordinate for presenting her/his case. (iii) Discipline: Discipline is the

obedience to organisational rules and employment agreement which are necessary for the working of the organisation. According to Fayol, discipline requires good superiors at all levels, clear and fair agreements and judicious application of penalties.

Suppose management and labour union have entered into an agreement whereby workers have agreed to put in extra hours without any additional payment to revive the company out of loss. In return the management has promised to increase wages of the workers when this mission is accomplished. Here discipline when applied would mean that the workers and management both honour their commitments

without any prejudice towards one another.

(iv) Unity of Command: According to Fayol there should be one and only one boss for every individual employee. If an employee gets orders from two superiors at the same time the principle of unity of command is violated. The principle of unity of command states that each participant in a formal organisation should receive orders from and be responsible to only one superior. Fayol gave a lot of importance to this principle. He felt that if this principle is violated “authority is undermined, discipline is in jeopardy, order disturbed and stability threatened”. The principle resembles military organisation. Dual subordination should be avoided. This is to prevent confusion regarding tasks to be done. Suppose a sales person is asked to clinch a deal with a buyer and is allowed to give 10% discount by the marketing manager. But finance department tells her/him not to offer more than 5% discount. Now there is no unity of command. This can be avoided if there is coordination between various departments.

(v) Unity of Direction: All the units of an organisation should be moving towards the same objectives through coordinated

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and focussed efforts. Each group of activities having the same objective must have one head and one plan. This ensures unity of action and coordination. For example, if a company is manufacturing motorcycles as well as cars then it should have two separate divisions for both of them. Each division should have its own incharge, plans and execution resources. On no account should the working of two divisions overlap. Now let us differentiate between the two principles of unity of command and unity of direction.

(vi) Subordination of Individual Interest to General Interest: The interests of an organisation should take priority over the interests of any one individual employee according to Fayol. Every worker has some individual interest for working in a company. The company has got

its own objectives. For example, the company would want to get maximum output from its employees at a competitive cost (salary). On the other hand, an employee may want to get maximum salary while working the least. In another situation an individual employee may demand some concession, which is not admissible to any other employee like working for less time.

In all the situations the interests of the group/company will supersede the interest of any one individual. This is so because larger interests of the workers and stakeholders are more important than the interest of any one person. For example, interests of various stakeholders i.e., owners, shareholders, creditors, debtors, financers, tax authorities, customers and the society at large cannot be sacrificed for

Difference betweeen Unity of Command and Unity of Direction

Basis Unity of Command Unity of Direction

1. Meaning

One subordinate should receive orders from and should be responsible to only one superior.

Each group of activities having same objective must have one head and one plan.

2. AimIt prevents dual subordination.

It prevents overlapping of activities.

3. ImplicationsIt affects an individual employee.

It affects the entire organisation.

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one individual or a small group of individuals who want to exert pressure on the company. A manager can ensure this by her/his exemplary behaviour. For example, she/he should not fall into temptation of misusing her/his powers for individual/ family benefit at the cost of larger general interest of the workers/ company. This will raise her/his stature in the eyes of the workers and at the same time ensure same behaviour by them.

(vii) Remuneration of Employees: The overall pay and compensation should be fair to both employees and the organisation. The employees should be paid fair wages, which should give them at least a reasonable standard of living. At the same time it should be within the paying capacity of the company. In other words, remuneration should be just and equitable. This will ensure congenial atmosphere and good relations between workers and management. Consequently, the working of the company would be smooth.

(viii)Centralisation and Decentralisation: The concentration of decision-making authority is called centralisation whereas its dispersal among more than one person is known as decentralisation. According to Fayol, “There is a need to balance

subordinate involvement through decentra lisation with managers’ retention of final authority through centralisation.” The degree of centralisation will depend upon the circumstances in which the company is working. In general large organisations have more decentralisation than small organisations. For example, panchayats in our country have been given more powers to decide and spend funds granted to them by the government for the welfare of villages. This is decentralisation at the national level.

(ix) Scalar Chain: An organisation consists of superiors and subordinates. The formal lines of authority from highest to lowest ranks are known as scalar chain.

According to Fayol, “Organisa-tions should have a chain of authority and communication that runs from top to bottom and should be followed by managers and the subordinates.”

Let us consider a situation where there is one head ‘A’ who has two lines of authority under her/him. One line consists of B-C-D-E-F. Another line of authority under ‘A’ is L-M-N-O-P. If ‘E’ has to communicate with ‘O’ who is at the same level of authority then she/he has to traverse the route E-D-C-B-A-L-M-N-O. This is due to the principle of scalar

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A

B

C

D

E

F P

O

N

M

L

Fayol’s Scalar Chain

chain being followed in this situation. According to Fayol, this chain should not be violated in the normal course of formal communication. However, if there is an emergency then ‘E’ can directly contact ‘O’ through ‘Gang Plank’ as shown in the diagram. This is a shorter route and has been provided so that communication is not delayed. In practice you find that a worker cannot directly contact the CEO of the company. If at all she/he has to, then all the formal levels i.e., foreman, superintendent, manager, director etc have to know about the matter. However, in an emergency it can be possible that a worker can contact CEO directly.

(x) Order: According to Fayol, “People and materials must be in suitable places at appropriate time for maximum efficiency.” The principle of order states that ‘A place for everything (everyone) and everything (everyone) in its (her/his) place’. Essentially it means orderliness. If there is a fixed place for everything and it is present there, then there will be no hindrance in the activities of business/ factory. This will lead to increased productivity and efficiency.

(xi) Equity: Good sense and experience are needed to ensure fairness to all employees, who should be treated as fairly as possible,” according to Fayol. This principle emphasises kindliness and justice in the behaviour of managers towards workers. This will ensure loyalty and devotion. Fayol does not rule out use of force sometimes. Rather he says that lazy personnel should be dealt with sternly to send the message that everyone is equal in the eyes of the management. There should be no discrimination against anyone on account of sex, religion, language, caste, belief or nationality etc. In practice we can observe that now a days in multinational corporations people of various nationalities work together in a discrimination free environment.

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Equal opportunities are available for everyone in such companies to rise. Thus, we find India-born CEO’s such as Rajat Gupta who heads multinational like Mckinsey Inc. Lately India-born American Arun Sarin has become CEO of Vodaphone limited, a British telecom major.

(xii) Stability of Personnel: “Employee turnover should be minimised to maintain organisational efficiency”, according to Fayol.

Personnel should be selected and appointed after due and rigorous procedure. But once selected they should be kept at their post/position for a minimum fixed tenure. They should have stability of tenure. They should be given reasonable time to show results. Any adhocism in this regard will create instability/insecurity among employees. They would tend to leave the organisation. Recruitment, selection and

Employee suggestion system: Encourage initiative among trainee managers

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Name of Principle THEN NOW1. Division of Work Specialisation in workers

Job designGeneralisation in workers’ Job design

2. Authority & Responsibility

Managers are empowered Employees are empowered

3. Discipline Formalised Controls Informal, Peer pressure controls

4. Unity of Command Subordinates report to only one boss

Subordinates report to multiple bosses

5. Unity of Direction Functions have only one plan and one boss

Functions have multiple plans and multiple bosses

6. Subordination of individual interest to common good

Employees are committed to the organisation

Organisation is committed to the employees and vice versa

7. Remuneration of personnel

Reasonable Pay reward system

Performance based reward system

8. Centralisation Trickle down decision making

Task relevant ad hoc decision making

9. Scalar Chain Hierarchical, formalised communication channel

Less formalised, flatter communication structure.

10. Order Internal information system for control purposes

Internal information system for coordination purposes.

11. Equity Commitment obtained through kindness

Commitment obtained through a sense of ownership

12. Stability of tenure of personnel

Train employees and encourage them to remain

On-going employee training and development

13. Initiative Managers conceive and implement new ideas

Workers conceive and implement new ideas

14. Espirit de corps Maintaining high morale among employees is imperative

Maintaining high morale among employees is desirable.

Now let us see what Fayol’s principles means in the contemporary business situations especially service based and high tech economies like USA. Carl A. Rodrigues of Mont Clair State University, Upper Montclair, New Jersey, USA has come out with the following conclusions in his paper “Fayol’s 14 Principles of Management. Then and Now- A Framework For Managing Today’s Organisations Effectively” published in Journal “Management Decision” 39/10(2001) PP 880-889.

Fayol: Then and NowFayol: Then and Now

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training cost will be high. So stability in tenure of personnel is good for the business.

(xiii)Initative: Workers should be encouraged to develop and carry out their plans for improvements according to Fayol. Initiative means taking the first step with self-motivation. It is thinking out and executing the plan. It is one of the traits of an intelligent person. Initiative should be encouraged. But it does not mean going against the established practices of the company for the sake of being different. A good company should have an employee suggestion system whereby initiative/suggestions which result in substantial cost/time reduction should be rewarded.

(xiv) Espirit De Corps: Management should promote a team spirit of unity and harmony among employees, according to Fayol. Management should promote teamwork especially in large organisations because otherwise objectives would be difficult to realise. It will also result in a loss of coordination. A manager should replace ‘I’ with ‘We’ in all his conversations with workers to foster team spirit. This will give rise to a spirit of mutual trust and belongingness among team members. It will also minimise the need for using penalties.

From the foregoing discussion it is clear that Fayol’s 14 principles of management are widely applicable to managerial problems and have cast a profound impact on management thinking today. But with the change of environment in which business is done, the interpretation of these principles has changed. For example, authority and responsibility meant empowering of managers but now it means empowerment of empl-oyees because of flat organisational structures that are gaining ground. We are now in a position to understand the current connotations of Fayol’s principles discussed in the accompanying box.

fayol Versus taylor — a fayol Versus taylor — a coMParisoncoMParison

We are now in a position to compare the contributions of both Fayol and Taylor. Both of them have contributed immensely to the knowledge of management, which has formed a basis for further practice by managers. It must be pointed out that their contributions are complementary to each other. We can make out the following points of difference between their contributions.

You may also like to have some knowledge of contributions of Indians to the growth of management knowledge which can be seen in the accompanying box item.

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Sl. No. Basis of difference Henri Fayol F. W. Taylor

1. PerspectiveTop level of management

Shop floor level of a factory

2. Unity of Command Staunch Proponent

Did not feel that it is important as under functional foremanship a worker received orders from eight specialists.

3. ApplicabilityApplicable universally

Applicable to specialised situations

4. Basis of formation Personal experienceObservations and experimentation

5. FocusImproving overall administration

Increasing Productivity

6. Personality Practitioner Scientist

7. ExpressionGeneral Theory of Administration

Scientific Management

While we have been reading about American management gurus like Peter Ducker, Edward Peter, F.W. Taylor and Henry Fayol, lately Indians have made their mark on the international management scene.

The Top 50 thinkers list for 2005 named as many as four Indians — strategy guru C K Prahalad, itinerant executive coach Ram Charan, Tuck Business School professor Vijay Govindrajan and Rakesh Khurana of Harvard Business School (HBS). London Business School’s Sumantra Ghoshal, who is the author of Managing Across Borders: The Transnational Solution which made it to Financial Times’ list of the twentieth century’s 50 most influential books, would also have made it. Not to mention a marquee of superstars like Nitin Nohria, Tarun Khanna and Krishna Palepu at HBS, Dipak Jain and Mohanbir Sawhney at Northwestern’s Kellogg School, Jagdish Bhagwati at Columbia and Raj Reddy at Carnegie Mellon.

The list of luminaries is only expected to get longer as the enrolment of Indians in MBA programmes rises. ‘‘At the top 20 business schools in the US, one in every four or five is an Indian,’’ says Mohanbir Sawhney. At Kellogg where he teaches, 15%

Rise of Indian Management GurusRise of Indian Management Gurus

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of the faculty is Indian including the dean. But is it just about the numbers — one billion people so at least 20% have to be smart? ‘‘Of course, we’re talking about a huge population but it’s also about how driven we are to succeed and the value that Indians put on education. There is no safety net; all you have is your degree,’’ says Sawhney, who is often described as the John Maynard Keynes of the Internet age. In an interview to journal Across The Board, Vijay Govindarajan offered this explanation: ‘‘Indians have a strong work ethic, speak English and are good at conceptual thinking and analysis.’’ VG, who went to HBS on a Ford Foundation scholarship, is now one of the highest-paid executive coaches in the US. Be it boardroom or MBA programmes, Indians are also bringing in a new perspective on globalisation. ‘‘Most of us have been in the US for some time but what was till now not used was our knowledge of India. The unique challenges that emerging markets pose has changed all this,’’ says Sawhney.

With their strong sense of societal obligation, Indians are also tackling issues neglected by Western thinkers. Take C K Prahalad’s best-selling book The Fortune at the Bottom of the Pyramid, which stresses the need to take account of micro-markets among the world’s poor. Marketing guru Kash Rangan’s current research is focused on what marketing can do for the world’s poor. ‘Solving problems which matter for people who matter’ is how Sawhney sums up his philosophy. Are we looking at an Indian ethos of management? ‘‘Yes, and it’s rooted in spiritual wisdom. Not the dog-eat-dog management philosophy that’s been popular till now but something more in sync with businesses of the future,’’ says Sawhney, who often narrates tales from the Panchatantra and Bhagwad Gita to his students at Kellogg. So will there be a change in the way tomorrow’s corporations are run? Perhaps, the wind blowing from the Indian subcontinent will tell.

Adapted, based and taken from ‘MANAGEMENT GURU? THINK INDIAN NOW by NEELAM RAAJ published in http/www.economictimes.indiatimes.com datelined Sunday, August 27, 2006

Functional Foremanship Standardisation of Work

Time Study Motion Study Fatigue Study Method Study

Differential Piece Wage System Mental Revolution

Unity of Command Unity of Direction

Scalar Chain Gang Plank Espirit De Corps

Key Terms

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Summary

MeaningPrinciples of management are general guidelines, which can be used for conduct in work places under certain situations. They help managers to take and implement decisions.NatureThe nature of management principles can be discussed under the heads- formed by practice; general guidelines; universal; flexible; behavioural; contingent; and cause and effect relationship SignificanceProper understanding of significance of management principles is essential to make sound decisions by managers. The significance can be discussed under the following heads- Increase in efficiency; Optimum utilisation of resources; Scientific decision making; Adaptation to changing environment; Fulfilling social responsibilities; Proper research and development; Training managers; and Effective administration.Scientific ManagementTaylor’s principles of scientific management are — Science, not the rule of thumb; Harmony not discord; Cooperation not individualism; Maximum not restricted output; Development of each person to her/his greatest efficiency and prosperity. The techniques of scientific management as per Taylor were — Functional foremanship; Standardisation and simplification of work; Fatigue Study; Method Study; Time Study; Motion Study; and Differential Wage System. We can also point out differences between the contributions of Taylor and Fayol but essentially they were complementary in nature.Fayol’s Principles of ManagementAccording to Fayol, the functions of management are to plan, to organise, to command, to coordinate and to control. The activities of an industrial undertaking could be divided into; Technical; Commercial; Financial; Security; Accounting and Managerial. He also suggested that managers should have the following qualities- Physical; Moral; Education; Knowledge; and Experience. Fayol listed 14 principles of management — Division of work; Authority and responsibility; Discipline; Unity of command; Unity of direction; Subordination of individual interest to general interest; Remuneration of Personnel; Centralisation and decentralisation; Scalar Chain; Order; Equity; Stability in the tenure of Personnel; Initiative; and Espirit De corps.

We can also point out differences between the contributions of Taylor and Fayol but essentially they were complementary in nature.

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Multiple Choice

1. Principles of management are NOT (a) Universal (b) Flexible (c) Absolute (d) Behavioural

2. How are principles of management formed? (a) In a laboratory (b) By experiences of managers (c) By experiences of customers (d) By propagation of social scientists

3. The principles of management are significant because of (a) Increase in efficiency (b) Initiative (c) Optimum utilisation of resources (d) Adaptation to changing technology

4. Henri Fayol was a (a) Social Scientist (b) Mining Engineer (c) Accountant (d) Production engineer

5. Which of the following statement best describes the principle of ‘Division of Work’ (a) Work should be divided into small tasks (b) Labour should be divided (c) Resources should be divided among jobs (d) It leads to specialisation

6. ‘She/he keeps machines, materials, tools etc., ready for operations by concerned workers’. Whose work is described by this sentence under functional foremanship (a) Instruction Card Clerk (b) Repair Boss (c) Gang Boss (d) Route Clerk

7. Which of the following is NOT a Principle of management given by Taylor ? (a) Science, not rule of the Thumb (b) Functional foremanship (c) Maximum not restricted output (d) Harmony not discord

Exercises

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8. Management should find ‘One best way’ to perform a task. Which technique of Scientific management is defined in this sentence? (a) Time Study (b) Motion Study (c) Fatigue Study (d) Method Study

9. Which of the following statements best describes ‘Mental Revolution’? (a) It implies change of attitude. (b) The management and workers should not play the game

of one upmanship. (c) Both management and workers require each other. (d) Workers should be paid more wages.

10. Which of the following statements is FALSE about Taylor and Fayol? (a) Fayol was a mining engineer whereas Taylor was a

mechanical engineer (b) Fayol’s principles are applicable in specialised situations

whereas Taylor’s principles have universal application (c) Fayol’s principles were formed through personal

experience whereas Taylor’s principles were formed through experimentation

(d) Fayol’s principles are applicable at the top level of management whereas Taylor’s principles are applicable at the shop floor.

Short Answer Type

1. How is the Principle of ‘Unity of Command’ useful to management? Explain briefly.

2. Define scientific management. State any three of its principles.

3. If an organisation does not provide the right place for physical and human resources in an organisation, which principle is violated? What are the consequences of it?

4. Explain any four points regarding significance of Principles of management.

5. Explain the principle of ‘Scalar Chain’ and gang plank.

Long Answer Type

1. Explain the Principles of Scientific management given by Taylor.

2. Explain the following Principles of management given by Fayol with examples: (a) Unity of direction

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(b) Equity (c) Espirit de corps (d) Order (e) Centralisation and decentralisation (f ) Initiative

3. Explain the technique of ‘Functional Foremanship’ and the concept of ‘Mental Revolution’ as enunciated by Taylor.

4. Discuss the following techniques of Scientific Work Study: (a) Time Study (b) Motion Study (c) Fatigue Study (d) Method Study (e) Simplification and standardisation of work

5. Discuss the differences between the contributions of Taylor and Fayol.

6. Discuss the relevance of Taylor and Fayol’s contribution in the contemporary business environment.

1. From business magazines, annual reports, newspapers or internet find out what changes are taking place in companies relating to corporate governance, production practices etc. Prepare a scrapbook. Discuss these cases with your teacher and friends. Prepare a report of the same.

2. Visit a factory. Find about their production system and method of wage payment. Prepare a report and discuss it in your class and with your teacher.

Problem 1

‘F’ limited was engaged in the business of food processing and selling its products under a popular brand. Lately the business was expanding due to good quality and reasonable prices. Also with more people working the market for processed food was increasing. New players were also coming to cash in on the new trend. In order to keep its market share in the short run the company directed its existing workforce to work overtime. But this resulted in many problems. Due to increased pressure of work the efficiency of the workers declined. Sometimes the

Project Work

Case Problems

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subordinates had to work for more than one superior resulting in declining efficiency. The divisions that were previously working on one product were also made to work on two or more products. This resulted in a lot of overlapping and wasteage. The workers were becoming undisciplined. The spirit of teamwork, which had characterised the company, previously was beginning to wane. Workers were feeling cheated and initiative was declining. The quality of the products was beginning to decline and market share was on the verge of decrease.Actually the company had implemented changes without creating the required infrastructure.Questions

1. Identify the Principles of Management (out of 14 given by Henry Fayol) that were being violated by the company.

2. Explain these principles in brief.

3. What steps should the company management take in relation to the above principles to restore the company to its past glory?

Problem 2 (Related to case problem –1)The management of company ‘F’ Limited now realised its folly. In order to rectify the situation it appointed a management consultant ‘M’ consultants to recommend a restructure plan to bring the company back on the rails. ‘M’ consultants undertook a study of the production process at the plant of the company ‘F’ limited and recommended the following changes —

1. The company should introduce scientific management with regard to production.

2. Production Planning including routing, scheduling, dispatching and feedback should be implemented.

3. In order to separate planning from operational management ’Functional foremanship’ should be introduced.

4. ‘Work study’ should be undertaken to optimise the use of resources.

5. ‘Standardisation’ of all activities should be implemented to increase efficiency and accountability.

6. To motivate the workers ‘Differential Piece Rate System’ should be implemented.

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7. The above changes should be introduced apart from the steps recommended in case problem-1 (as an answer to question no 3 of that case problem).

It was expected that the changes will bring about a radical transformation in the working of the company and it will regain its pristine glory.

Questions

1. Do you think that introduction of scientific management as recommended by M consultants will result in intended outcome?

2. What precautions should the company undertake to implement the changes?

Give your answer with regard to each technique separately as enunciated in points 1 through 6 in the case problem.

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3BUSINESS ENVIRONMENTBUSINESS ENVIRONMENTCHAPTER

After studying this chapter you will be able to:

n Explain the meaning of business environment;

n Discuss the importance of business environment;

n Describe the various elements of business environment; and

n Examine the economic environment in India and the impact of Government policies on business and industry.


The soft-drinks giants, Pepsico and Coca-Cola, suffered a decline in sales of colas in India in the beginning of the year 2006 after an environmental group, Centre for Science and Environment (CSE) claimed to have found pesticides in their drinks upto 50 times the permissible health limits. These companies issued a number of press statements and conducted many publicity compaigns in India claiming that their beverages were perfectly safe. The Union Health Ministry’s expert committee also observes that Coke and Pepsi were safe. CSE, in turn, criticised the expert committees findings and said that 11 of Coke and Pepsi drinks contained average pesticide levels that were 24 times higher than the limits agreed by the Indian government. Despite health ministry’s clean chit to colas, several States continue to ban or restrict Coke and Pepsi. However, the pesticide controversy adversely affected the sales of both Coke and Pespi as consumers started watching their diet more closely. Organic food products suddenly became popular as the healthier option. By definition, organic means fruits, vegetables, foodgrains and processed products that have been produced with no pesticide or inorganic fertilisers. Meanwhile the soft drinks giants have been continuously advertising and trying to convince the consumers about the safety of their products.

The Pepsi Cola controversy raises an interesting question: Why are soft drinks giants, Coca-Cola and Pepsico putting in so much effort on publicity campaigns in India after the

decline in their sales? The answer lies in the fact that their success is dependent not merely on their internal management, but also on many external forces as, for example,

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decisions and actions of governments, consumers, other business firms and even non-government organisations (NGOs) like CSE. In this chapter, we shall identify certain important external forces (or environmental conditions) and their impact on the operations of business enterprises.

Meaning of Business Meaning of Business environMentenvironMentThe term ‘business environment’ means the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but that may affect its performance. As one writer has put it– “Just take the universe, subtract from it the subset that represents the organisation, and the remainder is environment”. Thus, the economic, social, political, technological and other forces which operate outside a business enterprise are part of its environment. So also, the individual consumers or competing enterprises as well as the governments, consumer groups, competitors, courts, media and other institutions working outside an enterprise constitute its environment. The important point is that these individuals, institutions and forces are likely to influence the performance of a business enterprise although they happen to exist outside its boundaries. For example, changes in government’s economic policies, rapid technological developments, political uncertainty, changes in

fashions and tastes of consumers and increased competition in the market — all influence the working of a business enterprise in important ways. Increase in taxes by government can make things expensive to buy. Technological improvements may render existing products obsolete. Political uncertainty may create fear in the minds of investors. Changes in fashions and tastes of consumers may shift demand in the market from existing products to new ones. Increased competition in the market may reduce profit margins of firms.

On the basis of the foregoing disc ussion, it can be said business environment, has the following features: (i) Totality of external forces:

Business environment is the sum total of all things external to business firms and, as such, is aggregative in nature.

(ii) Specific and general forces: Business environment includes both specific and general forces. Specific forces (such as investors, customers, competitors and supp-liers) affect individual enterprises directly and immediately in their day-to-day working. General forces (such as social, political, legal and technological conditions) have impact on all business enterprises and thus may affect an individual firm only indirectly.

(iii) Inter-relatedness: Different elements or parts of business

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environment are closely inter-related. For example, increased life expectancy of people and increased awareness for health care have increased the demand for many health products and services like diet Coke, fat-free cooking oil, and health resorts. New health products and services have, in turn, changed people’s life styles.

(iv) Dynamic nature: Business environment is dynamic in that it keeps on changing whether in terms of technological imp-rovement, shifts in consumer preferences or entry of new competition in the market.

(v) Uncertainty: Business envir-onment is largely uncertain as it is very difficult to predict future happenings, especially when environment changes are taking place too frequently as in the case of information tech nology or fashion industries.

(v i ) Complexity: Since business env-ironment consists of numerous interrelated and dynamic cond-itions or forces which arise from different sources, it becomes difficult to comprehend at once what exactly constitutes a given environment. In other words, environment is a complex pheno-menon that is relatively easier to understand in parts but difficult to grasp in its totality. For example, it may be difficult

to know the extent of the relative impact of the social, economic, political, technological or legal factors on change in demand of a product in the market.

(vii) Relativity: Business environment is a relative concept since it differs from country to country and even region to region. Political conditions in the USA, for instance, differ from those in China or Pakistan. Similarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France.

iMportance of Business iMportance of Business environMentenvironMent

Just like human beings, business enterprises do not exist in isolation. Each business firm is not an island unto itself; it exists, survives and grows within the context of the element and forces of its environment. While an individual firm is able to do little to change or control these forces, it has no alternative to responding or adapting according to them. A good understanding of environment by business managers enables them not only to identify and evaluate, but also to react to the forces external to their firms. The importance of business environment and its understanding by managers can be appreciated if we consider the following facts:

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(i) It enables the firm to identify opportunities and getting the first mover advantage: Opportunities refer to the positive external trends or changes that will help a firm to improve its performance. Environment prov-ides numerous opportunities for business success. Early identi-fication of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors. For example, Maruti Udyog became the leader in the small car market because it was the first to recognise the need for small cars in an environment of rising petroleum prices and a large middle class population in India.

(ii) It helps the firm to identify threats and early warning signals: Threats refer to the external environment trends and changes that will hinder a firm’s performance. Besides oppor-tunities, environment happens to be the source of many threats. Environmental awareness can help managers to identify various threats on time and serve as an early warning signal. For example, if an Indian firm finds that a foreign multinational is entering the Indian market with new substitutes, it should act as a warning signal. On the basis of this information, the Indian firms can prepare themselves to meet

the threat by adopting such measures as improving the quality of the product, reducing cost of the production, engaging in aggr essive advertising, and so on.

(iii) It helps in tapping useful resources: Environment is a source of various resources for running a business. To engage in any type of activity, a business enterprise assembles various resources called inputs like finance, machines, raw materials, power and water, labour, etc., from its environment including financiers, government and suppliers. They decide to provide these resources with their own expectations to get something in return from the enterprise. The business enterprise supplies the environment with its outputs such as goods and services for customers, payment of taxes to government, return on financial investment to investors and so on. Because the enterprise depends on the environment as a source of inputs or resources and as an outlet for outputs, it only makes sense that the enterprise designs policies that allow it to get the resources that it needs so that it can convert those resources into outputs that the environment desires. This can be done better by understanding what the environment has to offer.

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(iv) It helps in coping with rapid changes: Today’s business envir-onment is getting increasingly dynamic where changes are taking place at a fast pace. It is not the fact of change itself that is so important as the pace of change. Turbulent market conditions, less brand loyalty, divisions and sub-divisions (fragmentation) of markets, more demanding customers, rapid changes in technology and intense global competition are just a few of the images used to describe today’s business environment. All sizes and all types of enterprises are facing increasingly dynamic environment. In order to eff-ectively cope with these signifi-cant changes, managers must understand and examine the environment and develop suit-able courses of action.

(v) It helps in assisting in planning and policy formulation: Since environment is a source of both opportunities and threats for a business enterprise, its understanding and analysis can be the basis for deciding the future course of action (planning) or training guidelines for decision making (policy). For instance, entry of new players in the market, which means more competition may make an enterprise think afresh about how to deal with the situation.

(vi) It helps in improving performance: The final reason for underst anding business environment relates to whether or not it really makes a difference in the performance of an enterprise. The answer is that it does appear to make a difference. Many studies reveal that the future of an enterprise is closely bound up with what is happening in the environment. And, the enter-prises that continuously monitor their environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period.

DiMensions of Business DiMensions of Business environMentenvironMent

Dimensions of, or the factors cons-tituting the business environment include economic, social, techno-logical, political and legal conditions which are considered relevant for decision-making and improving the performance of an enterprise. In contrast to the specific environment, these factors explain the general environment which mostly influences many enterprises at the same time. However, management of every enterprise can benefit from being aware of these dimensions instead of being disinterested in them. For instance, scientific research has

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discovered a technology that makes it possible to produce an energy efficient light bulb that lasts at least twenty times as long as a standard bulb. Senior managers in the lighting divisions at General Electric and

Phillips recognised that this discovery had the potential to significantly affect their unit growth and profitability, So they have carefully followed the progress on this research and profitably used its findings. A brief

Business Environment

Economic Environment

Social Environment

Legal Environment

Technological Environment

Political Environment

Elements of Business Environment

Components of Economic Environmentn Existing structure of the economy in terms of relative role of private

and public sectors.

n The rates of growth of GNP and per capita income at current and constant prices

n Rates of saving and investment

n Volume of imports and exports of different items

n Balance of payments and changes in foreign exchange reserves

n Agricultural and industrial production trends

n Expansion of transportation and communication facilities

n Money supply in the economy

n Public debt (internal and external)

n Planned outlay in private and public sectors

Components of Economic Environment

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discussion of the various factors constituting the general environment of business is given below: (i) Economic Environment: Int-

erest rates, inflation rates, changes in disposable income of people, stock market indices and the value of rupee are some of the economic factors that can affect management practices in a business enterprise. Short and long term interest rates significantly affect the demand for product and services. For example, in case of construction companies and automobile manufacturers, low longer-term

rates are beneficial because they result in increased spending by consumers for buying homes and cars on borrowed money. Similarly, a rise in the disposable income of people due to increase in the gross domestic product of a country creates increasing demand for products. High inflation rates generally result in constraints on business enterprises as they increase the various costs of business such as the purchase of raw materials or machinery and payment of wages and salaries to employees.

Activity I ECONOMIC ENVIRONMENTRead the newspapers of the past fifteen days and note the changes in any five economic policies made by the government. Analyse their impact on the working of business enterprises.RBI is a key regulator of the country’s economic environment since it: n Influences the interest rates n Controls the flow of money in the economy n Regulates the working of banks

(An Extract)n Abolition of Service Tax on all exports of goods and servicesn Simplification of export proceduresn Establishment of Bio-Technology Parks and Special Economic Zones for

handicraftsn Establishment of Fresh Trade and Warehousing Zonesn Doing away with requirement of Bank Guarantee in case of exporters with

turnover of above Rs. 5 Crores.

Salient Features of New Trade Policy (1)Salient Features of New Trade Policy (1)

Based on newspaper reports of August 31st, 05

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and non-discriminatory employ-ment practices. Social trends present various opportunities and threats to business enterprises. For example, the health-and-fitness trend has become popular among large number of urban dwellers. This has created a demand for products like organic food, diet soft drinks, gyms, bottled (mineral) water and food supplements. This trend has, however, harmed business in other industries like dairy processing, tobacco and liquor.

(iii) Technological Environment: Technological environment inc-ludes forces relating to scientific improvements and innovations which provide new ways of prod-ucing goods and services and new methods and techniques of operating a business. For exa-mple, recent technological, adva-nces in computers and electro-nics have modified the ways in

(ii) Social Environment: The social environment of business include the social forces like customs and traditions, values, social trends, society’s expectations from business, etc. Traditions define social practices that have lasted for decades or even centuries. For example, the celebration of Diwali, Id, Christmas, and Guru Parv in India provides significant financial opportunities for gree-tings card companies, sweets or confectionery manufacturers, tailoring outlets and many other related business. Values refer to concepts that a society holds in high esteem. In India, individual freedom, social justice, equality of opportunity and national integration are examples of major values cherished by all of us. In business terms, these values translate into freedom of choice in the market, business’s responsibility tow ards the society

Major Elements of Social Environmentn Attitudes towards product innovations, lifestyles, occupational

distribution and consumer preferencesn Concern with quality of lifen Life expectancyn Expectations from the workforcen Shifts in the presence of women in the workforcen Birth and death ratesn Population shiftsn Educational system and literacy ratesn Consumption habitsn Composition of family

Major Elements of Social Environment

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Fashion industry (shifts towards formal wear)

Food habits (shift towards packed food)

Electronic gadgets (increase in demand

of these gadgets)

Cosmetic industry (increase in demand)

Activity II

SOCIAL ENVIRONMENTContact any ten families known to you. Find out the changes in their consumption habits over the last five years. Analyse the impact of these changes on the working of business enterprises.

Impact of shifts with the presence of women in the workforce

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Because of technological advancement, it has become possible to book railway tickets through Internet from home, office etc..

inDian railway catering anD tourisM corporation ltD.inDian railway catering anD tourisM corporation ltD.(A Government of India Enterprise)

E-TICKET BOOKING ON THIS WEBSITE - A GUIDE n Register as an individual. Registration is FREE. n Login by entering your user name and password. n The ‘Plan my travel and Book tickets’ page appears. n Use ‘HELP’ option for any help required to book tickets.

n Fill in the details, by following the guidelines given below.

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which companies advertise their products. It is common now to see CD-ROM’s, computerised inform ation kiosks, and Internet/ World Wide Web multimedia pages highlighting the virtues of products. Similarly, retailers have direct links with suppliers who replenish stocks when needed. Manufacturers have flexible man-ufacturing systems. Airline com-panies have Internet and World Wide Web pages where customers can look for flight times, desti-nations and fares and book their tickets online. In addition, cont-inuing innovations in different scientific and engineering fields such as lasers, robotics, biotech-nology, food preservatives, medi-cine, telecommunication and synthetic fuels have provided numerous opportunities and threats for many different enterprises. Shifts in demand

from vaccum tubes to transistors, from steam locomotives to die-seland electric engines, from fou-ntain pens to ballpoint, from propeller airplanes to jets, and from typewriters to computer based word processors, have all been responsible and creating new business.

(iv) Political Environment: Political environment includes politi-cal conditions such as general stability and peace in the country and specific attitudes that elected government representa-tives hold towards business. The significance of political conditions in business success lies in the predictability of business activities under stable political conditions. On the other hand, there may be uncertainty of business activities due to political unrest and threats to law and order. Political stability,

Major Elements of Political Environment n The Constitution of the country n Prevailing political systemn The degree of politicisation of business and economic issuesn Dominant ideologies and values of major political partiesn The nature and profile of political leadership and thinking of

political personalitiesn The level of political moralityn Political institutions like the government and allied agenciesn Political ideology and practices of the ruling partyn The extent and nature of government intervention in businessn The nature of relationship of our country with foreign countries

Major Elements of Political Environment

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thus, builds up confidence among business people to invest in the long term projects for the growth of the economy. Political instability can shake that confidence. Similarly, the attitudes of government officials towards business may have either positive or negative impact upon business. For example, even after opening up of our economy in 1991, foreign companies found it extremely difficult to cut through the bureaucratic red tape to get permits for doing business in India. Sometimes, it took months to process even their application for the purpose. As a result these companies were discouraged from investing in our country. The situation has improved over time.

(v) Legal Environment: Legal envi-ronment includes various legis-lations passed by the Government administrative orders issued by government authorities, court judgments as well as the decisions rendered by various commissions and agencies at every level of the government— centre, state or local. It is imperative for the management of every enterprise to obey the law of the land. Therefore, an adequate knowledge of rules and regulations framed by the Government is a pre-requisite for better business performance.

Non-compliance of laws can land the business enterprise into legal problems. In India, a working knowledge of Companies Act 1956; Industries (Development and Regulations) Act 1951; Foreign Exchange Management Act and the Imports and Exports (Control) Act 1947; Factories Act, 1948; Trade Union Act; 1926; Workmen’s Compensation Act, 1923; Industrial Disputes Act, 1947, Consumer Protection Act, 1986, Competition Act, 2002 and host of such other legal enactments as amended from time to time by the Parliament, is important for doing business. Impact of legal environment can be illustrated with the help of government regulations to protect consumer’s interests. For example, the advertisement of alcoholic beverages is prohibited. Advertisements, including pac-kets of cigarettes carry the statutory warning ‘Cigarette smoking is injurious to health’. Similarly, advertisements of baby food must necessarily inform the potential buyer that mothers milk is the best. All these regulations are required to be followed by advertisers.

econoMic environMent in econoMic environMent in inDiainDiaThe economic environment in India consists of various macro-level factors

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related to the means of production and distribution of wealth which have an impact on business and industry. These include:(a) Stage of economic development of

the country.(b) The economic structure in the

form of mixed economy which recognises the role of both public and private sectors.

(c) Economic policies of the Govern-ment, including industrial, mone-tary and fiscal policies.

(d) Economic planning, including five year plans, annual budgets, and so on.

(e) Economic indices, like national income, distribution of income, rate and growth of GNP, per capita income, disposal personal income, rate of savings and investments, value of exports and imports, balance of payments, and so on.

(f) Infrastructural factors, such as, financial institutions, banks, modes of transportation commu-nication facilities, and so on.

Business enterprises in India do realise the importance and impact of the economic environment on their working. Almost all annual company reports presented by their chairpersons devote considerable attention to the general economic environment prevailing in the country and an assessment of its impact on their companies.

The economic environment of business in India has been steadily

changing mainly due to the government policies. At the time of Independence:(a) The Indian economy was mainly

agricultural and rural in character;(b) About 70% of the working population

was employed in agriculture;(c) About 85% of the population was

living in the villages;(d) Production was carried out

using irrational, low productivity technology;

(e) Communicable diseases were widespread, mortality rates were high. These was no good public health system.

In order to solve economic problems of our country, the government took several steps including control by the State of certain industries, central planning and reduced importance of the private sector. The main objectives of India’s development plans were:(a) Initiate rapid economic growth to

raise the standard of living, reduce unemployment and poverty;

(b) Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries;

(c) Reduce inequalities of income and wealth;

(d) Adopt a socialist pattern of development — based on equality and prevent exploitation of man by man.

In accordance with the economic planning, the government gave a lead role to the public sector for

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Crisis of June 1991Major elements of the crisis situation which led the Government of India to announce economic reform were:n A serious fiscal crisis in which the fiscal deficit reached the level of 6.6 per

cent of GDP in 1990-91.n Heavy internal debt which rose to about 50 per cent of GDP with interest

payments draining about 39 per cent of total revenue collections of the central government.

n Low GNP growth rate which fell to 1.4 per cent from the peak level of 10.5 per cent in 1988-89 (at 1980-81 prices).

n Low overall agricultural production, foodgrain production and industrial production showed negative growth rates of –2.8 per cent, –5.3 per cent and –0.1 per cent respectively.

n Soaring inflation rate based both on wholesale price index and consumer price index (for industrial workers) at 13-14 per cent.

n Shrinkage of foreign trade, imports (in $ terms) fell by 19.4 per cent and exports by 1.5 per cent.

n Depreciation of rupee by 26.7 per cent vis-à-vis US dollars.n Fall of foreign exchange reserves to such a low level that they were

barely adequate to meet the import requirements of a few weeks. Non-resident Indians (NRIs) were withdrawing their deposits at an alarmingly high rate.

n The confidence of the international financial institutions was badly shaken and in just over a year its creditworthiness rating fell from AAA to BB+ (put on credit watch).

n The country was on the verge of defaulting on international financial obligations and the situation warranted immediate policy action to save the situation. In May 1991, the Government had to lease 20 tones of gold out of its stock to the State Bank of India to enable it to sell the gold with repurchase option after six months. In addition, Reserve Bank of India was allowed to pledge 47 tones of gold to the Bank of England to raise a loan of $600 million.

Crisis of June 1991

infrastructure industries whereas the private sector was broadly given the responsibility of developing consumer goods industry. At the same time, the government imposed several restrictions, regulations and controls on the working of private

sector enterprises. India’s experience with economic planning has delivered mixed results. In 1991 the economy faced a serious foreign exchange crisis, high government deficit and a rising trend of prices despite bumper crops.

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As a part of economic reforms, the Government of India announced a new industrial policy in July 1991.

The broad features of this policy were as follows:(a) The Government reduced the

number of industries under compulsory licensing to six.

(b) Many of the industries reserved for the public sector under the earlier policy, were dereserved. The role of the public sector was limited only to four industries of strategic importance.

(c) Disinvestment was carried out in case of many public sector industrial enterprises.

(d) Policy towards foreign capital was liberalised. The share of foreign equity participation was increased and in many activities 100 per cent Foreign Direct Investment (FDI) was permitted.

(e) Automatic permission was now granted for technology agree ments with foreign companies.

(f ) Foreign Investment Promotion Board (FIPB) was set up to promote and channelise foreign investment in India.

Appropriate measures were taken to remove obstacles in the way of growth and expansion of industrial units of large industrial houses. Small-scale sector was assured all help and accorded due recognition.

In essence, this policy has sought to liberate industry from the

shackles of the licensing system (liberalisation), drastically reduce the role of the public sector (privatisation) and encourage foreign private participation in India’s industrial development (globalisation).

Liberalisation: The economic reforms that were introduced were aimed at liberalising the Indian business and industry from all unnecessary controls and restrictions. They signalled the end of the licence-pemit-quota raj. Liberalisation of the Indian industry has taken place with respect to: (i) abolishing licensing requirement

in most of the industries except a short list,

(ii) freedom in deciding the scale of business activities i.e., no restrictions on expansion or contraction of business activities,

(iii) removal of restrictions on the movement of goods and services,

(iv) freedom in fixing the prices of goods services,

(v) reduction in tax rates and lifting of unnecessary controls over the economy,

(vi) simplifying procedures for imports and experts, and

(vii) making it easier to attract foreign capital and technology to India.

Privatisation: The new set of econo-mic reforms aimed at giving greater role to the private sector in the nation building process and a reduced role to the public sector. This was a reversal

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Some of the early major steps taken to manage the economic crisis were the following:n Fiscal correction aimed at reducing fiscal deficit by about Rs. 7,700 crore in

1991-92 (compared to 1990-91);n Announcement of New Industry Policy in July 1991 seeking to deregulate the industry

with the objective of promoting the growth of a more competitive and efficient industrial economy;

n Abolition of industrial licensing for all industrial projects except 18 industries of high strategic and environmental importance and with high import content. About 80 per cent of the industries were delicensed;

n Amendment of the MRTP Act to eliminate the need for prior approval of the Central Government by large companies for capacity expansion, diversification and merger and amalgamation.

n Nine areas in basic and core industries earlier reserved for the public sector were opened to the private sector;

n Limit of foreign equity holding raised from 40 per cent to 51 per cent in a wide range of priority industries;

n Foreign Investment Promotion Board (FIPB) established to negotiate proposals from large international firms and expedite clearances of the investment proposals;

n Rupee devaluation by 18 per cent during July 1-3, 1991 supported by a standby credit of $2.3 billion from the IMP over a 20 months period negotiated in October 1991;

n Negotiation of $500 million Structural Adjustment Loan from the World Bank in April 1992 and a loan totalling SDR 1.3 billion from the International Monetory Fund (IMF) between January-September 1991;

n Introduction of India Development Bond Scheme and Immunity Scheme for repatriation of funds held abroad in October 1991, under which more than $2 billion were mobilised during 1991-92;

n Bringing back of gold earlier pledged to the Bank of England and the Bank of Japan;n Continuance of the measures of import control and credit squeeze;n Administered licensing of imports replaced by freely tradeable import entitlements (called

Eximscrips) linked to export earnings. The measure was expected to introduce self-balancing mechanism in India’s foreign trade;

n Introduction of Liberalised Exchange Rate Management System (LERMS) under which a dual exchange rate system was established, one rate being effectively floated in the market; and

n Import licensing in most capital goods, raw materials, intermediates and components eliminated. Advance Licensing System considerably simplified.The initial series of measures set the tone for the future economic reforms. Any of the

measures taken above was continued to form a part of the ongoing reform process.

Early Crisis Met : Reform MeasuresEarly Crisis Met : Reform Measures

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of the development strategy pursued so far by Indian planners. To achieve this, the government redefined the role of the public sector in the New Industrial Policy of 1991, adopted the policy of planned disinvestments of the public sector and decided to refer the loss making and sick enterprises to the Board of Industrial and Financial Reconstruction. The term disinvestments used here means transfer in the public sector enterprises to the private sector. It results in dilution of stake of the Government in the public enterprise. If there is dilution of Government ownership beyond 51 percent, it would result in transfer of ownership and management of the enterprise to the private sector.

Globalisation: Globalisation means the integration of the various eco-

nomies of the world leading towards the emergence of a cohesive global economy. Till 1991, the Government of India had followed a policy of strictly regulating imports in value and volume terms. These regulations were with respect to (a) licensing of imports, (b) tariff restrictions and (c) quantitative restrictions. The new economic reforms aimed at trade liberalisation were directed towards import liberalisation, export promotion through rationalisation of the tariff structure and reforms with respect to foreign exchange so that the country does not remain isolated from the rest of the world. Globalisation involves an increased level of interaction and interdependence among the various nations of the global economy. Physical geographical gap or political

A Truly Globalised EconomyA truly global economy implies a boundaryless world where there is:(i) Free flow of goods and services across nations;(ii) Free flow of capital across nations;(iii) Free flow of information and technology;(iv) Free movement of people across borders;(v) A common acceptable mechanism for the settlement of

disputes;(vi) A global governance perspective.

Activity 3

GLOBALISATIONMake a list of five Indian companies which have global operations today. Find out the major products they sell and the countries where they operate.

A Truly Globalised Economy

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boundaries no longer remain barriers for a business enterprise to serve a customer in a distant geographical market. This has been made possible by the rapid advancement in technology and liberal trade policies by Governments. Through the policy of 1991, the government of India moved the country to this globalisation pattern.

iMpact of governMent iMpact of governMent policy changes on policy changes on Business anD inDustryBusiness anD inDustryThe policy of liberalisation, privati-sation and globalisation of the Gover nment has made a significant impact on the working of enterprises in business and industry. The Indian corporate sector has come face-to-face with several challenges due to government policy changes. These challenges can be explained as follows: (i) Increasing competition: As a

result of changes in the rules of industrial licensing and entry of foreign firms, competition for Indian firms has increased especially in service industries like telecommunications, airlines, banking, insurance, etc. which were earlier in the public sector.

(ii) More demanding customers: Customers today have become more demanding because they are well-informed. Increased competition in the market gives the customers wider choice in

purchasing better quality of goods and services.

(iii) Rapidly changing technological environment: Increased com-petition forces the firms to develop new ways to survive and grow in the market. New technologies make it possible to improve machines, process, products and services. The rapidly changing technological environment creates tough challe-nges before smaller firms.

(iv) Necessity for change: In a regulated environment of pre-1991 era, the firms could have relatively stable policies and practices. After 1991, the market forces have become turbulent as a result of which the enterprises have to continuously modify their operations.

(v) Need for developing human resource: Indian enterprises have suffered for long with inadequately trained personnel. The new market conditions require people with higher competence and greater commi tment. Hence the need for developing human resources.

(vi) Market orientation: Earlier firms used to produce first and go to the market for sale later. In other words, they had production oriented marketing operations. In a fast changing world, there is a shift to market orientation in as much as the firms have to study and analyse the market first and produce goods accordingly.

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Meaning of business environment: The term business environment means the totality of all individuals, institutions and other forces that are outside a business but that potentially affect its performance. Business environment can be characterised in terms of (a) totality of external forces(b) specific and general forces (c) inter-relatedness (d) dynamic nature (e) uncertainty (f ) complexity (g) relativityImportance of business environment: Business environment and its understanding are important for (i) enabling the identification of opportunities and getting the first mover advantage, (ii) helping in the identification of threats and early warning signals, (iii) coping with the rapid changes, (v) assisting in planning and policy and (vi) improving the performance.

Summary

(vii) Loss of budgetary support to the public sector: The central government’s budgetary support for financing the public sector outlays has declined over the years. The public sector undertakings have realised that, in order to survive and grow, they will have to be more efficient and generate their own resources for the purpose.

On the whole, the impact of Gove-rnment policy changes particularly in

respect of liber alisation, privatisation and globa lisation has been positive as the Indian business and industry has shown great resilience in dealing with the new economic order. Indian enterprises have developed strategies and adopted business processes and procedures to meet the challenge of competition. They have become more customer-focused and adopted measures to improve customer relationship and satisfaction.

Key TermsBusiness environment Opportunities Threats Economic

Environment Political environment Social environment Technological environment Legal environment Liberalisation Privatisation Globalisation

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Elements of business environment: Business environment consists of five important dimensions including economic, social, technological, political and legal. Economic environment includes such factors as interest rates, inflation rates, changes in disposable income of people, stock market indexes and the value of rupee. Social environment includes social forces like traditions, values, social trends, society’s expectations of business, and so on. Technological environment includes forces relating to scientific improvements and innovations which provide new ways of producing goods and services and new methods and techniques of operating a business. Political environment includes political conditions such as general stability and peace in the country and specific attitudes that elected government representatives hold toward business. Legal environment includes various legislations passed by the government, administrative orders issued by government authorities, court judgments as well as decisions rendered by various commissions and agencies at every level of the government— center, state or local.Economic environment in India: The economic environment in India consists of various macro-level factors related to the means of production and distribution of wealth which have an impact on business and industry. The economic environment of business in India has been steadily changing since Independence mainly due to government policies. In order to solve economic problems of our country at the time of Independence, the government took several steps including control by the state of key industries, central planning and reduced importance of the private sector. These steps delivered mixed results until 1991 when Indian economy happened to face serious foreign exchange crisis, high government deficit and a rising trend of prices despite bumper crops.Liberalisation, privatisation and globalisation: As a part of economic reforms, the Government of India announced a new industrial policy in July 1991 which sought to liberate the industry from the shackles of the licensing system (liberalisation), drastically reduce the role of the public sector (privatisation) and encourage foreign private participation in industrial development (globalisation).Impact of Government policy changes on business and industry: The government policy of liberalisation, privatisation

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Multiple Choice

1. Which of he following does not characterise the business environment? (a) Uncertainty (b) Employees (c) Relativity (d) Complexity

2. Which of the following best indicates the importance of business environment? (a) Identification (b) Improvement in performance (c) Coping with rapid changes (d) All of them

3. Which of the following is an example of social environment? (a) Money supply in the economy (b) Consumer Protection Act (c) The Constitution of the country (d) Composition of family

4. Liberalisation means (a) Integration among economies (b) Reduced government controls and restrictions (c) Policy of planned disinvestments (d) none of them

Exercises

and globalisation has made a definite impact on the working of enterprises in business and industry in terms of

(a) increasing competition (b) more demanding customers (c) rapidly changing technological environment (d) necessity for change (e) need for developing human resource (f ) market orientation (g) loss of budgetary support to the public sector. In the new

economic environment, the Indian enterprises have developed various strategies to meet the challenge of competition

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5. Which of the following does not explain the impact of Government policy changes on business and industry? (a) More demanding customers (b) Increasing competition (c) Change in agricultural prices (d) Market orientation

Short Answer Type

1. What do you understand by business environment?

2. Why it is important for business enterprises to understand their environment? Explain briefly.

3. Mention the various dimensions of business environment.

4. Briefly explain the following: (a) Liberalisation (b) Privatisation (c) Globlisation

5. Briefly discuss the impact of Government policy changes on business and industry.

Long Answer Type

1. How would you characterise business environment? Explain, with examples, the difference between general and specific environment.

2. How would you argue that the success of a business enterprise is significantly influenced by its environment?

3. Explain, with examples, the various dimensions of business environment.

4. What economic changes were initiated by the Government under the Industrial Policy, 1991? What impact have these changes made on business and industry?

5. What are the essential features of (a) Liberalisation, (b) Privatisation and (c) Globalisation?

1. Select a business enterprise with which you are familiar. From your recollection of current events (events you may have read about in newspapers or magazines or have heard about on television or radio) identify some of the important environmental force, which have had impact on this enterprise.

Activities

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2. Select a major Indian company for which there is considerable information available in your school library. Analyse the impact of changes in the Government policies on the working of this company.

Lately many companies have planned for significant investment in organised retailing in India. Several factors have prompted their decisions in this regard. Customer income is rising. People have developed a taste for better quality products even though they may have to pay more. The aspiration levels have increased. The government has also liberalised its economic policies in this regard and permitted even cent percent foreign direct investment in some sectors of retailing.

Questions

1. Identify changes in business environment under different heads — economic, social, technological, political and legal that have facilitated the companies’ decisions to plan significant investments in organised retailing.

2. What has been the impact of these changes with regard to globalisation and privatisation?

Case Problem

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PlanningCHAPTER

Gas Authority of India (GAIL) – New PlansGas Authority of India (GAIL) – New PlansGAIL India, which has had a monopoly in the gas transmission sector is set to see some tough competition in the coming days. While Reliance is poised to get into the trunk pipeline segment, British Gas is trying to get into the city gas distribution sector. GAIL’s new chairman, shares his thoughts on how he plans to take the company ahead.What are GAIL’s main priorities?Going by its business strategy, the focus areas are gas sourcing, transmission, marketing, processing, petrochemicals, globalisation and city gas distribution. We are focussing on sourcing of gas from indigenous finds and through LNG and crossborder pipelines. We intend to develop the gas market by extending our gas grid from 5,600 km to 10,000 km. The city gas project is expected to rise from 6 to 45 by the end of the 11th five year Plan.What are GAIL’s plans for acquiring an exploration and production (E&P) company abroad?GAIL has plans to strengthen its exploration and production activities. To become a formidable company, GAIL is exploring options - acquiring an E&P company is one such option.What are your Capex plans and how do you plan to fund it?GAIL’s budgeted Capex plan for FY 06-07 is Rs. 2967.28 crore. This includes capital expenditure of Rs. 2579.58 crore on pipeline and other projects and Rs. 387.7 crore on petrochemical projects. This will be funded through internal reserves. What are your plans on city gas distribution? Will GAIL continue with its plans on fuel management? We have already established the business successfully in Mumbai, Delhi, Vadodara, Vijaywada, Agra, Lucknow, Kanpur. Till date GAIL has formed eight joint venture companies to implement city gas projects. The projects have had an impact on the pollution levels. GAIL is in the process of forming state-wise Joint Ventures with oil marketing companies to implement city gas projects in Rajasthan.What are GAIL’s plans to diversify into telecom and what is the current status?

4After studying this chapter, you will be able to:

State the meaning of planning;

Describe the features and importance of planning;

Explain the limitations of planning;

Analyse the steps in the planning process; and

Identity the different types of plans.


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INTRODUCTIONYou have just read about the plans of Gas Authority of India Limited (GAIL), It is one of our leading public sector companies. The plans discussed by the Chairperson, GAIL are real plans of the company and how they would like to go about achieving their objectives. Of course, these are broad statements given by the company and they have to be broken down into steps for implementation. This is an example of a company in the public sector with a nation-wide reach striving to be one of the top companies in India. Further more, every organisation whether it is government-owned, a privately owned business or a company in the private sector requires planning. The government makes five year plans for the country, a small business has it’s own plans, while other companies have big plans, sales plans, production plans. All of them have some plans.

All business firms would like to be successful, increase their sales and earn profits. All managers dream of these and strive to achieve their goals. But to turn these dreams into reality managers need to work

hard in thinking about the future, in making business predictions and achieving targets. Dreams can be turned into reality only if business managers think in advance on what to do and how to do it. This is the essence of planning.

CONCEPTPlanning is deciding in advance what to do and how to do. It is one of the basic managerial functions. Before doing something, the manager must formulate an idea of how to work on a particular task. Thus, planning is closely connected with creativity and innovation. But the manager would first have to set objectives, only then will a manager know where he has to go. Planning seeks to bridge the gap between where we are and where we want to go. Planning is what managers at all levels do. It requires taking decisions since it involves making a choice from alternative courses of action.

Planning, thus, involves setting objectives and developing appropriate courses of action to achieve these obj-ectives. Objectives provide direction for all managerial decisions and actions. Planning provides a rational

Gailtel, the telecom service arm of GAIL, offers telecom services commercially to lead telecom operators across India. Gailtel owns and operates approximately 13,000 route km of fibre optic network, GAIL is evaluating various options to work out its future growth plans.

Source: The Economic Times, October 2006

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approach for achieving predetermined objectives. All members, therefore, need to work towards achieving organisational goals. These goals set the targets which need to be achieved and against which actual performance is measured. Therefore, planning means setting objectives and targets and formulating an action plan to achieve them. It is concerned with both ends and means i.e., what is to be done and how it is to be done.

The plan that is developed has to have a given time frame but time is a limited resource. It needs to be utilised judiciously. If time factor is not taken into consideration, conditions in the environment may change and all business plans may go waste. Planning will be a futile exercise if it is not acted upon or implemented.

Do you think from the above we can formulate a comprehensive definition

of planning? One of the ways to do so would be to define planning as setting objectives for a given time period, formulating various courses of action to achieve them, and then selecting the best possible alternative from among the various courses of action available.

IMPORTANCE OF PLANNINGYou must have seen in films and advertisements how executives draw up plans and make powerful presentations in boardrooms. Do those plans actually work? Does it improve efficiency? After all why should we plan? These are numerous questions to which we would like to find solutions. Planning is certainly important as it tells us where to go, it provides direction and reduces the risk of uncertainty by preparing forecasts. The major benefits of planning are given below: (i) Planning provides directions:

By stating in advance how work is to be done planning provides direction for action. Planning ens-ures that the goals or objectives are clearly stated so that they act as a guide for deciding what action should be taken and in which direction. If goals are well defined, employees are aware of what the organisation has to do and what they must do to achieve those goals. Departments and individuals in the organisation are able to work in coordination. If there was no planning, empl-oyees would be working in different

Planning: Keeping the objective in view and

being in action

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directions and the organisation would not be able to achieve its desired goals.

(ii) Planning reduces the risks of uncertainty: Planning is an activity which enables a manager to look ahead and anticipate changes. By deciding in advance the tasks to be performed, planning shows the way to deal with changes and uncertain events. Changes or events cannot be eliminated but they can be anticipated and managerial responses to them can be developed.

(iii) Planning reduces overlapping and wasteful activities: Plan-ning serves as the basis of coordinating the activities and efforts of different divisions, departments and individuals. It helps in avoiding confusion and misunderstanding. Since plan-ning ensures clarity in thought and action, work is carried on smoothly without interruptions. Useless and redundant activities are minimised or eliminated. It is easier to detect inefficiencies and take corrective measures to deal with them.

(iv) Planning promotes innovative ideas: Since planning is the first function of management, new ideas can take the shape of concrete plans. It is the most challenging activity for the management as it guides all future actions leading to growth and prosperity of the business.

(v) Planning facilitates decision making: Planning helps the manager to look into the future and make a choice from amongst various alternative courses of action. The manager has to eva-luate each alternative and select the most viable proposition. Planning involves setting targets and predicting future conditions, thus helping in taking rational decisions.

(vi) Planning establishes standards for controlling: Planning inv-olves setting of goals. The entire managerial process is concerned with accomplishing predeter-mined goals through planning, organising, staffing, directing and controlling. Planning provides the goals or standards against which actual performance is measured. By comparing actual performance with some standard, managers can know whether they have actually been able to attain the goals. If there is any deviation it can be corrected. Therefore, we can say that planning is a prerequisite for controlling. If there were no goals and standards, then finding deviations which are a part of controlling would not be possible. The nature of corrective action required depends upon the extent of deviations from the standard. Therefore, planning provides the basis of control.

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Planning 99

FEATURES OF PLANNING In the example of Polaris, the company has plans of expansion. Their objective is to increase their capacity so that they can employ 800 more professionals. Their target time is six months. The objective of the current year has also been clearly stated which is to increase capacity by 1500-2000 more professionals. Since planning is the primary function of management they have set their objectives first. Thus, all businesses follow a set pattern of planning. You will be able to find some similarities in the features of planning and what you see in real life. Try and identify them.

The planning function of the management has certain special features. These features throw light on its nature and scope. (i) Planning focuses on achieving

objectives: Organisations are set up with a general purpose in view. Specific goals are set out in the plans along with the

activities to be undertaken to achieve the goals. Thus, planning is purposeful. Planning has no meaning unless it contributes to the achievement of predet-ermined organisational goals.

(ii) Planning is a primary function of management: Planning lays down the base for other func-tions of management. All other managerial functions are perfor-med within the framework of the plans drawn. Thus, planning precedes other functions. This is also referred to as the primacy of planning. The various functions of management are interrelated and equally important. However, planning provides the basis of all other functions.

(iii) Planning is pervasive: Planning is required at all levels of management as well as in all departments of the organisation. It is not an exclusive function of top management nor of any

IT Company Polaris Software Lab is planning a new facility in Mumbai with a capacity for 800 professionals.

The company currently has 1,200 professionals across its three centers in Mumbai, and the new facility is expected to come up in the next six months.

Polaris chairman and CEO said that the company was well on the track to meet its earlier announcement to increase the headcount by 1,500-2,000 professionals in the current year to reach the 9,000 mark by March 2007. We will look at acquisition of small boutique consulting companies that are focused on banking, financial services and insurance (BFSI) space. This will strengthen customer service and account management capabilities.

Source: The Economic Times, October 06

Polaris Plans New Facility in MumbaiPolaris Plans New Facility in Mumbai

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particular department. But the scope of planning differs at diff-erent levels and among different departments. For example, the top management undertakes planning for the organisation as a whole. Middle management does the departmental planning. At the lowest level, day-to-day operational planning is done by supervisors.

(iv) Planning is continuous: Plans are prepared for a specific period of time, may be for a month, a quarter, or a year. At the end of that period there is need for a new plan to be drawn on the basis of new requirements and future conditions. Hence, planning is a continuous process. Continuity of planning is related with the planning cycle. It means that a plan is framed, it is implemented, and is followed by another plan, and so on.

(v) Planning is futuristic: Planning essentially involves looking ahead and preparing for the future. The purpose of planning is to meet future events effectively to the best advantage of an organisation. It implies peeping into the future, analysing it and predicting it. Planning is, therefore, regarded as a forward looking function based on forecasting. Through forecasting, future events and conditions are anticipated and plans are drawn accordingly. Thus,

for example, sales forecasting is the basis on which a business firm prepares its annual plan for production and sales.

(vi) Planning involves decision making: Planning essentially inv-olves choice from among various alternatives and activities. If there is only one possible goal or a possible course of action, there is no need for planning because there is no choice. The need for planning arises only when alternatives are available. In actual practice, planning pre supposes the existence of alternatives. Planning, thus, involves thorough examination and evaluation of each alternative and choosing the most appropriate one.

(vii) Planning is a mental exercise: Planning requires application of the mind involving foresight, intelligent imagination and sound

Planning: the first step to management

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judgement. It is basically an intellectual activity of thinking rather than doing, because planning determines the action to be taken. However, planning requires logical and systematic thinking rather than guess work or wishful thinking. In other words, thinking for planning must be orderly and based on the analysis of facts and forecasts.

LIMITATIONS OF PLANNINGWe have seen how planning is essential for business organisations. It is difficult to manage operations without formal planning. It is impo-rtant for an organisation to move towards achieving goals. But we have often seen in our daily lives also, that things do not always go according to plan. Unforeseen events and changes, rise in costs and prices, environmental changes, government

interventions, legal regulations, all affect our business plans. Plans then need to be modified. If we cannot adhere to our plans, then why do we plan at all? This is what we need to analyse. The major limitations of planning are given below: (i) Planning leads to rigidity: In

an organisation, a well-defined plan is drawn up with specific goals to be achieved within a specific time frame. These plans then decide the future course of action and managers may not be in a position to change it. This kind of rigidity in plans may create difficulty. Managers need to be given some flexibility to be able to cope with the changed circumstances. Following a pre-decided plan, when circum-stances have changed, may not turn out to be in the organisations interest.

The Essar group is looking to step up its global operations by entering the riskier but profitable markets of Africa, eastern Europe and the Middle East.

In its core business of steel, the Essar group is also looking at a proposal to acquire an integrated steel plant in Eastern Europe.

The group has also announced its intention of setting up Greenfield steel manufacturing operations in Sharjah, Qatar and Iran. It has plans to set up a 50-50 joint venture with state-owned Qatar Steel Company for a 1.5 million ton steel plant along with a 1 million ton steel rolling plant on the outskirts of Sharjah and another ton per annum steel plant in Iran, according to a recent Essar newsletter. Even the Indonesia branch of Essar, where the group runs a cold-rolling complex, is expected to look for merger and acquisitions (M & A) opportunities in the region.

Source: Business World, 25th September 06

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carry out orders. Thus, planning in a way reduces creativity since people tend to think along the same lines as others. There is nothing new or innovative.

(iv) Planning involves huge costs: When plans are drawn up huge costs are involved in their formulation. These may be in terms of time and money for example, checking accuracy of facts may involve lot of time. Detailed plans require scientific calculations to ascertain facts and figures. The costs incurred sometimes may not justify the benefits derived from the plans. There are a number of incidental costs as well, like expenses on boardroom meetings, discussions with professional experts and preliminary investigations to find out the viability of the plan.

(v) Planning is a time-consuming process: Sometimes plans to be drawn up take so much of time that there is not much time left for their implementation.

(vi) Planning does not guarantee success: The success of an enterprise is possible only when plans are properly drawn up and implemented. Any plan needs to be translated into action or it becomes meaningless. Mana-gers have a tendency to rely on previously tried and tested successful plans. It is not always true that just because a plan

(ii) Planning may not work in a dynamic environment: The business environment is dyn-amic, nothing is constant. The environment consists of a number of dimensions, economic, political, physical, legal and social dimensions. The organisation has to constantly adapt itself to changes. It becomes difficult to accurately assess future trends in the environment if economic policies are modified or political conditions in the country are not stable or there is a natural calamity. Competition in the market can also upset financial plans, sales targets may have to be revised and, accordingly, cash budgets also need to be modified since they are based on sales figures. Planning cannot foresee everything and thus, there may be obstacles to effective planning.

(iii) Planning reduces creativity: Planning is an activity which is done by the top management. Usually the rest of the members just implements these plans. As a consequence, middle manage-ment and other decision makers are neither allowed to deviate from plans nor are they permitted to act on their own. Thus, much of the initiative or creativity inherent in them also gets lost or reduced. Most of the time, employees do not even attempt to formulate plans. They only

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has worked before it will work again. Besides, there are so many other unknown factors to be considered. This kind of complacency and false sense of security may act ually lead to failure instead of success. However, despite its limitations, planning is not a useless exercise. It is a tool to be used with caution. It provides a base for analysing future courses of action. But, it is not a solution to all problems.

PLANNING PROCESS

Planning, as we all know is deciding in advance what to do and how to do. It is a process of decision making. How do we go about making a plan? Since planning is an activity there are certain logical steps for every manager to follow.

(i) Setting Objectives: The first and foremost step is setting objectives. Every organisation must have certain objectives. Objectives may be set for the entire organisation and each department or unit within the organisation. Objectives or goals specify what the organisation wants to achieve. It could mean an increase in sales by 20% which could be objective of the entire organisation. How all dep-artments would contribute to the organisational goals is the plan that is to be drawn up. Objectives should be stated clearly for all departments, units and employees. They give direction to all departments. Departments/units then need to set their own objectives within the broad framework of the organisation’s philosophy. Objectives have to percolate down to each unit

To give a boost to the financial health of state electricity boards (SEBs), the power ministry has outlined an 11-point agenda to initiate their financial turnaround by 2007-08. Suggestions include changes in the way distribution utilities submit tariff-fixation petitions to the regulators and introduction of the concept of a proper time-bound business plan.

The ministry has asked all utilities to adopt a multi-year tariff approach while filing the next tariff petition for 2007-08 before the state regulator. This must be undertaken before December 2006. It has also asked utilities to have a state-approved business plan with identifiable goals for a three, six and 12-month period. Also, approval needs to be sought from the state regulator for automatic tariff adjustment to recover additional fuel and other unanticipated costs.

Source: The Economic Times, September 06

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and employees at all levels. At the same time, managers must contribute ideas and participate in the objective setting process. They must also understand how their actions contribute to achieving objectives. If the end result is clear it becomes easier to work towards the goal.

(ii) Developing Premises: Planning is concerned with the future which is uncertain and every planner is using conjecture about what might happen in future. Therefore, the manager is required to make certain assumptions about the future. These assum-ptions are called premises. Assu-mptions are the base material upon which plans are to be drawn. The base material may be in the form of forecasts, existing plans or any past information about policies. The premises or assumptions must be the same for all and there should be total agreement on them. All managers involved in planning should be familiar with and use the same assumptions. For example, forecasting is important in developing premises as it is a technique of gathering inform-ation. Forecasts can be made about the demand for a particular product, policy change, interest rates, prices of capital goods, tax rates etc. Accurate forecasts, therefore become essential for successful plans.

(iii) Identifying alternative courses of action: Once objectives are set,

assumptions are made. Then the next step would be to act upon them. There may be many ways to act and achieve objectives. All the alternative courses of action should be identified. The course of action which may be taken could be either routine or innovative. An innovative course may be adopted by involving more people and sharing their ideas. If the project is important, then more alternatives should be generated and thoroughly discussed amongst the members of the organisation.

(iv) Evaluating alternative courses: The next step is to weigh the pros and cons of each alternative. Each course will have many variables which have to be weighed against each other. The positive and negative aspects of each proposal need to be evaluated in the light of the objective to be achieved. In financial plans, for example, the risk-return trade-off is very common. The more risky the investment, the higher the returns it is likely to give. To evaluate such proposals detailed calculations of earnings, earnings per share, interest, taxes, dividends are made and decisions taken. Accurate forecasts in conditions of certainty/uncertainty then become vital assumptions for these proposals. Alternatives are evaluated in the light of their feasibility and consequences.

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(v) Selecting an alternative: This is the real point of decision making. The best plan has to be adopted and implemented. The ideal plan, of course, would be the most feasible, profitable and with least negative conseq uences. Most plans may not always be subjected to a mathematical analysis. In such cases, subjectivity and the manager’s exp erience, judgement and at times, intuition play an impor-tant part in selecting the most viable alternative. Sometimes, a comb ination of plans may be selected instead of one best course. The manager will have to apply permutations and combinations and select the best possible course of action.

(vi) Implementing the plan: This is the step where other managerial functions also come into the picture. The step is concerned with putting the plan into action, i.e., doing what is required. For example, if there is a plan to increase production then more labour, more machinery will be required. This step would also involve organising for labour and purchase of machinery.

(vii) Follow-up action: To see whether plans are being implemented and activities are performed according to schedule is also part of the planning process. Monitoring the plans is equally important to ensure that objectives are achieved.

TYPES OF PLANS

Single-use and standing plans An organisation has to prepare a plan before making any decision related to business operation, or undertaking any project. Plans can be classified into several types depending on the use and the length of the planning period. Certain plans have a short-term horizon and help to achieve operational goals. These plans can be classified into single-use plans and standing plans.Single-use Plan: A single-use plan is developed for a one-time event or project. Such a course of action is not likely to be repeated in future, i.e., they are for non-recurring situations. The duration of this plan may depend upon the type of the project. It may span a week or a month. A project may sometimes be of only one day, such as, organising an event or a seminar or conference. These plans include budgets, programmes and projects. They consist of details, including the names of employees who are responsible for doing the work and contributing to the single-use plan. For example, a programme may consist of identifying steps, procedures required for opening a new department to deal with other minor work. Projects are similar to programmes but differ in scope and complexity. A budget is a statement of expenses, revenue and income for a specified period. Standing Plan: A standing plan is used for activities that occur regularly over a period of time. It is designed

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to ensure that internal operations of an organisation run smoothly. Such a plan greatly enhances efficiency in routine decision-making. It is usually developed once but is modified from time to time to meet business needs as required. Standing plans include policies, procedures, methods and rules.

Policies are general forms of standing plans that specifies the organisations response to a certain situation like the admission policy of an educational institution. Procedures describe steps to be followed in particular circumstances like the procedure for reporting progress in production. Methods provide the manner in which a task has to be performed. Rules are very clearly stated as to exactly what has to be done like reporting for work at a particular time.

There are other types of plans which usually are not classified as single- use or standing plans. A strategy, for example, is part of strategic planning or management. It is a general plan prepared by top management outlining resource allocation, priorities and takes into consideration the business environment and competition. Objectives are usually set by the top management and serve as a guide for overall planning. Each unit then formulates their own objectives keeping in view the overall organisational goals.

Single-use and standing plans are part of the operational planning process.

Based on what the plans seek to achieve, plans can be classified as

Objectives, Strategy, Policy, Procedure, Method, Rule, Programme, Budget.

OBJECTIVES

The first step in planning is setting objectives. Objectives, therefore, can be said to be the desired future position that the management would like to reach. Objectives are very basic to the organisation and they are defined as ends which the management seeks to achieve by its operations. Therefore, an objective simply stated is what you would like to achieve, i.e., the end result of activities. For example, an organisation may have an objective of increasing sales by 10% or earning a reasonable rate of return on investment, earn a 20% profit from business. They represent the end point of planning. All other managerial activities are also directed towards achieving these objectives. They are usually set by top management of the organisation and focus on broad, general issues. They define the future state of affairs which the organisation strives to realise. They serve as a guide for overall business planning. Different departments or units in the organ-isation may have their own objectives.

Objectives need to be expressed in specific terms i.e., they should be measurable in quantitative terms, in the form of a written statement of desired results to be achieved within a given time period.

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STRATEGY A strategy provides the broad contours of an organisation’s business. It will also refer to future decisions defining the organisations direction and scope in the long run. Thus, we can say a strategy is a comprehensive plan for accomplishing an organisation objectives. This comprehensive plan will include three dimensions, (i) determining long term objectives, (ii) adopting a particular course of action, and (iii) allocating resources necessary to achieve the objective.

Whenever a strategy is formulated, the business environment needs to be taken into consideration. The changes in the economic, political, social, legal and technological envi-ronment will affect an organisation’s strategy. Strategies usually take the course of forming the organisation’s identity in the business enviro-nment. Major strategic decisions will include decisions like whether the organisation will continue to be in the same line of business, or combine new lines of activity with the existing business or seek to acquire a dominant position in the same market. For example, a company’s marketing strategy has to address certain questions i.e., who are the customers? what is the demand for the product? which channel of distribution to use? what is the pricing policy? and how do we advertise the product. These and many more issues need to be resolved while formulating a marketing strategy for any organisation.

POLICYPolicies are general statements that guide thinking or channelise energies towards a particular direction. Policies provide a basis for interpreting strategy which is usually stated in general terms. They are guides to managerial action and decisions in the implementation of strategy. For example, the company may have a recruitment policy, pricing policy within which objectives are set and decisions are made. If there is an established policy, it becomes easier to resolve problems or issues. As such, a policy is the general response to a particular problem or situation.

There are policies for all levels and departments in the organisation ranging from major company policies to minor policies. Major company policies are for all to know i.e., customers, clients, competitors etc., whereas minor polices are applicable to insiders and contain minute details of information vital to the employees of an organisation. But there has to be some basis for divulging information to others.

Policies define the broad param-eters within which a manager may function. The manager may use his/her discretion to interpret and apply a policy. For example, the decisions taken under a Purchase Policy would be in the nature of manufacturing or buying decisions. Should a company make or buy its requirements of packages, transport services, printing of stationery, water and power supply and other items? How should vendors be selected

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for procuring supplies? How many suppliers should a company make purchases from? What is the criteria for choosing suppliers. All these queries would be addressed by the Purchase Policy.

PROCEDURE

Procedures are routine steps on how to carry out activities. They detail the exact manner in which any work is to be performed. They are specified in a chronological order. For example, there may be a procedure for requisi tioning supplies before production. Procedures are specified steps to be followed in particular circumstances. They are generally meant for insiders to follow. The sequence of steps or actions to be taken are generally to enforce a policy and to attain pre-determined objectives. Policies and procedures are interlinked with each other. Procedures are steps to be carried out within a broad policy framework.

METHODMethods provide the prescribed ways or manner in which a task has to be performed considering the objective. It deals with a task comprising one step of a procedure and specifies how this step is to be performed. The method may vary from task to task. Selection of proper method saves time, money and effort and increases efficiency. For imparting training to employees at various level from top

management to supervisory, different methods can be adopted. For example for higher level management orientation programmes, lectures and seminars can be organised whereas at the supervisory level, on the job training methods and work-oriented methods are appropriate.

RULERules are specific statements that inform what is to be done. They do not allow for any flexibility or discretion. It reflects a managerial decision that a certain action must or must not be taken. They are usually the simplest type of plans because there is no compromise or change unless a policy decision is taken.

PROGRAMMEProgrammes are detailed statements about a project which outlines the objectives, policies, procedures, rules, tasks, human and physical resources required and the budget to implement any course of action. Programmes will include the entire gamut of activities as well as the organisation’s policy and how it will contribute to the overall business plan. The minutest details are worked out i.e., procedures, rules, budgets, within the broad policy framework.

BUDGETA budget is a statement of expected results expressed in numerical terms. It is a plan which quantifies future facts and figures. For example, a sales budget may forecast the sales

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of different products in each area for a particular month. A budget may also be prepared to show the number of workers required in the factory at peak production times.

Since budget represents all items in numbers, it becomes easier to compare actual figures with expected figures and take corrective action subsequently. Thus, a budget is also a control device from which deviations can be taken care of. But making a budget involves forecasting, therefore, it clearly comes under planning. It is a fundamental planning instrument in many organisations.

Let us take an example of Cash Budget. The cash budget is a basic tool in the management of cash. It is a device to help the management to

plan and control the use of cash. It is a statement showing the estimated cash inflows and cash outflows over a given period. Cash inflows would generally come from cash sales and the cash outflows would gener ally be the costs and expenses associated with the operations of the business. The net cash position is determined by the cash budget i.e., inflows minus (–) outflows = surplus or deficiency.

The management has to hold adequate cash balances for various purposes. But at the same time, it should avoid excess balance of cash since it gives little or no return. The business has to assess and plan its need for cash with a degree of caution.

Planning Objectives Goals Decisions

Standards Controlling Premises Assumptions

Alternatives Strategy Policy Procedure

Rule Programme Budget

PlanningPlanning is deciding in advance what to do and how to do. It is one of the basic managerial functions.Planning therefore involves setting objectives and developing an appropriate course of action to achieve these objectives.Importance of PlanningPlanning provides directions, reduces risks of uncertainty, reduces overlapping and wasteful activities, promotes innovative ideas, facilitates decision making, establishes standards for controlling. Features of PlanningPlanning focuses on achieving objectives; It is a primary function of management; Planning is pervasive, continuous, futuristic and involves decision making; It is a mental exercise.

Key Terms

Summary

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Exercises

Limitations of PlanningPlanning leads to rigidity; reduces creativity; involves huge costs; It is a time consuming process; Planning does not work in a dynamic environment; and does not guarantee success.Planning ProcessSetting objectives: Objectives may be set for the entire organisation and each department or unit within the organisation.Developing premises: Planning is concerned with the future which is uncertain and every planner is using conjucture about what might happen in future.Identifying alternative courses of action: Once objectives are set, assumptions are made. Then the next step would be to act upon them.Evaluating alternative courses: The next step is to weigh the pros and cons of each alternative.Selecting an alternative: This is the real point of decision making. The best plan has to be adopted and implemented.Implement the plan: This is concerned with putting the plan into action.Follow-up action: Monitoring the plans are equally important to ensure that objectives are achieved.

Types of PlansObjectives: Objectives therefore can be said to be the desired future position that the management would like to reach.Strategy: A strategy provides the broad contours of an organisation’s business. It will also refer to future decisions defining the organisations direction and scope in the long run.Policy: Policies are general statements that guide thinking or channelise energies towards a particular direction.Procedure: Procedures are routine steps on how to carry out activities.Rule: Rules are specific statements that tell what is to be done.Programme: Programmes are detailed statements about a project which outlines the objectives, policies, procedures, rules, tasks, human and physical resources required and the budget to implement any course of action. Budget: A budget is a statement of expected results expressed in numerical terms. It is a plan which quantifies future facts and figures.

Short Answer Type 1. What are the main points in the definition of planning.

2. How does planning provide direction?

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Planning 111

3. Do you think planning can work in a changing environment? 4. If planning involves working out details for the future, why

does it not ensure success? 5. Why are rules considered to be plans? 6. What kind of strategic decisions are taken by business

organisations.

Long Answer Type 1. Why is it that organisations are not always able to accomplish

all their objectives? 2. What are the main features to be considered by the manag-

ement while planning? 3. What are the steps taken by management in the planning

process? 4. Is planning actually worth the huge costs involved? Explain.

Interview a local small-business manager about how their objectives are set and the time taken to achieve them. How do their answers compare with what you have learnt in the chapter.

An auto company C Ltd. is facing a problem of declining market share due to increased competition from other new and existing players in the market. Its competitors are introducing lower priced models for mass consumers who are price sensitive. For quality conscious consumers, the company is introducing new models with added features and new technological advancements.

Questions 1. Prepare a model business plan for C Ltd. to meet the existing

challenge. You need not be very specific about quantitative parameters. You may specify which type of plan you are preparing.

2. Identify the limitations of such plans.

3. How will you seek to remove these limitations?

Activities

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ORGANISINGORGANISINGCHAPTER5

It’s not quite there yet, but the goal is certainly within reach. One of India’s largest IT solutions providers, Wipro Technologies, is taking on the likes of IBM and Accenture in its effort to be included among the largest and most successful technology services companies in the world.

Currently Wipro employs 45,000 people at a growth rate of 30 percent annually over the coming years. “I don’t see growing to 150,000 or 200,000 people as an insurmountable challenge,” said Premji, Chairman, Wipro. He believes that if companies such as Accenture could grow by 20,000 people in two years, Wipro’s growth projections are not impossible.

Restructuring Wipro was considered the most important step in becoming a global giant, driven by the goal towards improved customer-orientation.

During the past few months, Wipro separated itself into several subsidiaries by product line: telecommunications, engineering, financial services, etc. Each subsidiary brings in about $300 million in annual earnings and is self-sufficient with their own accounting books, personnel and administrative functions.

Wipro shifted from a centralised to decentralised management system. All responsibilities for growth lay with the management of each entity.

“We tried to de-layer the organisation and empower our business leaders with a much higher degree of growth responsibility,” said Premji. “We removed an entire layer [of executives]”.

Between 2002 and 2003, Wipro acquired two IT consulting firms to break into the U.S. market. Wipro is also moving from a service provider to a product developer. Today, it partners with other companies to develop IT products to gain experience and achieve name recognition.

Way To Go, Wipro!Way To Go, Wipro!

Adapted from an article by Heide B. Malhotra for Epoch Times Washington D.C. May 01, 2006


After studying this chapter you should be able to:

n Explain the concept of organising;

n Explain the process of organising;

n Describe the importance of organising;

n Explain the meaning, advantages and disadvantages of functional organisation;

n Explain the meaning, advantages and disadvantages of divisional organisation;

n Explain the meaning, advantages and disadvantages of formal and informal organisation;

n Distinguish between formal and informal organisation;

n Explain the concept of delegation and decentralisation;

n Describe the importance of delegation and decentralisation; and

n Distinguish between delegation and decentralisation.

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Organising 113

Once the plans have been laid down and objectives specified therein, the next step is to organise resources in a manner which leads to the accomplishment of objectives. A critical issue in accomplishing the goals specified in the planning process is structuring the work of an organisation to adapt to the dynamic business environment. The activities of an enterprise must be organised in such a manner that plans can be successfully implemented.

For planning to be fruitful a number of considerations like resources that will be needed, optimum utilisation of the same translation of work into attainable tasks, empowering the workforce to accomplish these tasks etc., need to be understood and dealt with properly.

It is evident from the way Wipro has moved towards reaching for it’s goal of becoming a globally successful technology company, that organising plays a significant role in implementation of plans.

What has Wipro done to become a contending force among other global giants? Are there lessons to be learnt from Wipro’s approach?

Wipro organised itself in a manner that allowed customer orientation to dominate over other goals and diversified on the basis of product lines. It also modified the relationships within the management hierarchy to suit the goals.

The management function of organising ensures that efforts are

directed towards the attainment of goals laid down in the planning function in such a manner that resources are used optimally and people are able to work collectively and effectively for a common purpose. Thus, it is in the context of effective management that the organisation function earns due importance. It is a means for translating plans into action.

The organising function leads to the creation of an organisational structure which includes the designing of roles to be filled by suitably skilled people and defining the inter relationship between these roles so that ambiguity in performance of duties can be eliminated. Not only is this important for productive cooperation between the personnel but also for clarification of extent of authority, as well as responsibility for results and logical grouping of activities.

MeaningMeaningLet us take an example to understand how organising takes place. Have you ever paid attention to how, the school fete which you enjoy so much, actually takes place? What goes on behind the scene to make it the desired reality you want? The whole activity is divided into task groups each dealing with a specific area like the food committee, the decoration committee, the ticketing committee and so on. These are under the overall supervision of the official in

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charge of the event. Coordinating relationships are established among the various groups to enable smooth interaction and clarity about each group’s contribution towards the event. All the above activities are a part of the organising function.

Organising essentially implies a process which coordinates human efforts, assembles resources and integrates both into a unified whole to be utilised for achieving specified objectives.

Organising can be defined as a process that initiates implementation of plans by clarifying jobs and working relationships and effectively deploying resources for attainment of identified and desired results (goals).

StepS in the proceSS of StepS in the proceSS of organiSingorganiSingOrganising involves a series of steps that need to be taken in order to achieve the desired goal. Let us try and understand how organising

is carried out with the help of an example.

Suppose twelve students work for the school library in the summer vacations. One afternoon they are told to unload a shipment of new releases, stock the bookshelves, and then dispose of all waste (packaging, paper etc). If all the students decide to do it in their own way, it will result in mass confusion. However, if one student supervises the work by grouping students, dividing the work, assigning each group their quota and developing reporting relationships among them, the job will be done faster and in a better manner.

From the above description, the following steps emerge in the process of organising: (i) Identification and division of

work: The first step in the process of organising involves identifying and dividing the work that has to be done in accordance with previously determined plans. The work is divided into manageable activities so that duplication can

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

Louis Allen Organising is the process of defining and grouping the activities of the enterprise and establishing authority relationships among them.

Theo Haimman

Definition of OrganisingDefinition of Organising

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Organising 115

be avoided and the burden of work can be shared among the employees.

(ii) Departmentalisation: Once work has been divided into small and manageable activities then those activities which are similar in nature are grouped together. Such sets facilitate specialisation. This grouping process is called departmentalisation. Departments can be created using several criteria as a basis. Examples of some of the most popularly used basis are territory (north, south, west etc.) and products (appliances, clothes, cosmetics etc).

(iii) Assignment of duties: It is necessary to define the work of different job positions and accordingly allocate work to various employees. Once departments have been formed, each of them is placed under the charge of an individual. Jobs are then allocated to the members of each department in accordance to their skills and competencies. It is essential for effective performance that a proper match is made between

the nature of a job and the ability of an individual. The work must be assigned to those who are best fitted to perform it well.

(iv) Establishing reporting relation ships: Merely allocating work is not enough. Each individual should also know who he has to take orders from and to whom he is accountable. The establishment of such clear relationships helps to create a hierarchal structure and helps in coordination amongst various departments.

iMportance of organiSingiMportance of organiSingPerformance of the organising function can pave the way for a smooth transition of the enterprise in accordance with the dynamic business environment. The significance of the organising function mainly arises from the fact that it helps in the survival and growth of an enterprise and equips it to meet various challenges. In order for any business enterprise to perform tasks and successfully meet goals, the organising function must be properly performed. The following points highlight the crucial role that

Your school must have various societies for extra-curricular activities like the dramatics society, the quiz club, the economics society, the debating society and so on. Observe and list the way they have organised their activities using division of labour, chain of communication and the levels they have adopted for reporting on work. How far is this similar to the process you have read about?

Think About ItThink About It

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organising plays in any business enterprise: (i) Benefits of specialisation:

Organising leads to a systematic allocation of jobs amongst the work force. This reduces the workload as well as enhances productivity because of the specific workers performing a specific job on a regular basis. Repetitive performance of a particular task allows a worker to gain experience in that area and leads to specialisation.

(ii) Clarity in working relationships: The establishment of working relationships clarifies lines of communication and specifies who is to report to whom. This removes ambiguity in transfer of information and instructions. It helps in creating a hierarchical order thereby enabling the fixation of responsibility and specification of the extent of authority to be exercised by an individual.

(iii) Optimum utilization of resources: Organising leads to the proper usage of all material, financial and human resources. The proper assignment of jobs avoids overlapping of work and also makes possible the best use of resources. Avoidance of duplication of work helps in preventing confusion and minimising the wastage of resources and efforts.

(iv) Adaptation to change: The process of organising allows a business enterprise to accommodate changes in the business environment. It allows the organisation structure to be suitably modified and the revision of interrelationships amongst managerial levels to pave the way for a smooth transition. It also provides much needed stability to the enterprise as it can then continue to survive and grow inspite of changes.

(v) Effective administration: Organising provides a clear description of jobs and related duties. This helps to avoid confusion and duplication. Clarity in working relationships enables proper execution of work. Management of an enterprise thereby becomes easy and this brings effectiveness in administration.

(vi) Development of personnel:Organising stimulates creativity amongst the managers. Effective delegation allows the managers to reduce their workload by assigning routine jobs to their subordinates. The reduction in workload by delegation is not just necessary because of limited capacity of an individual but also allows the manager to develop new methods and ways of performing tasks. It gives them the time to explore areas for growth and the opportunity to innovate thereby

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strengthening the company’s competitive position. Delegation also develops in the subordinate the ability to deal effectively with challenges and helps them to realise their full potential.

(vii) Expansion and growth: Organising helps in the growth and diversification of an enterprise by enabling it to deviate from existing norms and taking up new challenges.

It allows a business enterprise to add more job positions, departments and even diversify their product lines. New geographical territories can be added to current areas of operation and this will help to increase customer base, sales and profit.

Thus, organising is a process by which the manager brings order out of chaos, removes conflict among people over work or responsibility sharing and creates an environment suitable for teamwork.

organiSation StructureorganiSation StructureOrganisation structure is the outcome of the organising process. An effective structure will result in increased profitability of the enterprise. The need for an adequate organisation structure is felt by

an enterprise whenever it grows in size or complexity. It is only those enterprises which do not focus on growth that can maintain a particular structure for a long period of time. However, it is important to understand that such stagnancy may prove to be detrimental to an enterprise as those companies which do not change at all will close down or cease to grow.

As an organisation grows, coordination becomes difficult due to the emergence of new functions and increase in structural hierarchies. Thus, for an organisation to function smoothly and face environmental changes, it becomes necessary to pay attention to its structure.

Peter Drucker emphasises on the importance of having an appropriate organisation structure when he says, “organisation structure is an indispensable means; and the wrong structure will seriously impair business performance and even destroy it.”

The organisation structure can be defined as the framework within which managerial and operating tasks are performed. It specifies the relationships between people, work and resources. It allows correlation

Think About ItOrganising leads to specialisation in work. A pitfall of this is that repetitive performance of the same job may lead to monotony, stress, boredom and absenteeism. What can managers do to improve the scenario?

Think About It

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and coordination among human, physical and financial resources and this enables a business enterprise to accomplish desired goals. The organisation structure of a firm is shown in an organisation chart.

The span of management, to a large extent gives shape to the organisational structure. Span of management refers to the number of subordinates that can be effectively managed by a superior. This determines the levels of management in the structure.

A proper organisation structure is essential to ensure a smooth flow of communication and better control

over the operations of a business enterprise.

An organisation structure provides the framework which enables the enterprise to function as an integrated unit by regulating and coordinating the responsibilities of individuals and departments. Let us try and understand this through an example.

For example: Smita opened her own travel agency, sometime back. She assigned work to her three employees in the following manner ‘Neha, you are incharge of air plane, train and bus reservations.’ ‘Karan, you will take care of accommodation booking’

Corporate February 21, 2006 TOKYO, Japan, February 21, 2006 – Honda Motor Co. Ltd. announced plans, effective April 1, 2006, to launch a new organisational structure for Honda R&D Co. Ltd., a wholly owned subsidiary of Honda responsible for research & development activities. Due to recent technological advancements and continued business expansion, the variety and complexity of technological components and the number of vehicles under development at Honda R&D have increased dramatically. The new structure will be launched both in response to this situation and to prepare for further expansion of business in the future. The new structure will enable each associate to demonstrate a high level of initiative, with more clear definition of roles and responsibilities and bold delegation of authority. Moreover, the new structure is designed to achieve smoother communication to help accelerate decision making within the organisation. The key elements of the new structure are as follows: Outline of the New Structure:1. Existing R&D centers including Asaka R&D Center, Wako R&D Center, and Tochigi

R&D Center, which are currently organised based on geographical location and will be reorganised into five centers based on specific functions. The names of the five centers will be Motorcycle Development Center, Automobile Development Center, Power Products Development Center, Aero Engine Development Center, and Basic Technology Research Center.

2. Each center will have separate offices for planning, product development, technology development and administration with clearly defined roles.

3. Primary authority to make operational decisions, currently held by the head of each center,

Honda to Strengthen Structure of its R&D OperationsHonda to Strengthen Structure of its R&D Operations

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will be delegated to the head of each office within each center to achieve an autonomous operational structure through which each office can make more decisions.

4. A flat and less-layered organisational structure will be employed to ensure smooth and direct communications between the head of the office and each associate.

5. The product development function of the Automobile Development Center will be further separated between the Honda brand and Acura brand. This structural change is a part of Honda’s continuous effort to strengthen the core

characteristics that makes Honda unique, and its purpose is to continue creating advanced and creative technologies and products that are unique to Honda, which in turn will enable Honda to continue to be a company that society wants to exist.

http://world.honda.com/news/2006/c060221RandDOperations/

A Board member in charge of the Development Centre (Board member

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‘Sahil, you will keep track of online queries and credit card payments’. I want regular reports from the three of you. Thus, in a few sentences an organisation structure has been created specifying lines of authority and areas of responsibility.

typeS of organiSation typeS of organiSation StructureSStructureSThe type of structure adopted by an organisation will vary with the nature

and types of activities performed by an organsation. The organisational structure can be classified under two categories which are as follows: (i) Functional structure and (ii) Divisional structure

Functional structure Grouping of jobs of similar nature under functional and organising these major functions as separate departments creates a functional

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structure. All departments report to a coordinating head. For example, in a manufacturing concern division of work into key functions will include production, purchase, marketing, accounts and personnel. These departments may be further divided into sections. Thus, a functional structure is an organisational design that groups similar or related jobs together.Advantages: The functional structure has many advantages to offer. Important among them are as follows:(a) A functional structure leads to

occupational specialisation since emphasis is placed on specific functions. This promotes efficiency in utilisation of manpower as employees perform similar tasks within a department and are able to improve performance.

(b) It promotes control and coordination within a department because of similarity in the tasks being performed.

(c) It helps in increasing managerial and operational efficiency and this results in increased profit.

(d) It leads to minimal duplication of effort which results in economies of scale and this lowers cost.

(e) It makes training of employees easier as the focus is only on a limited range of skills.

(f) It ensures that different functions get due attention.

Disadvantages: The functional structure has certain disadvantages which an organisation must take into consideration before it adopts it. Some of them are as follows:(a) A functional structure places less

emphasis on overall enterprise objectives than the objectives pursued by a functional head. Such practices may lead to functional empires wherein the importance of a particular function may be overemphasised. Pursuing departmental interests at the cost of organisational interests can also hinder the interaction between two or more departments.

(b) It may lead to problems in coordination as information has to

Managing Director

Human Resources MarketingResearch and Development Purchasing

Functional Structure

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Organising 121

be exchanged across functionally differentiated departments.

(c) A conflict of interests may arise when the interests of two or more departments are not compatible. For example, the sales department insisting on a customer friendly design may cause difficulties in production. Such dissension can prove to be harmful in terms of fulfillment of organisational interest. Interdepartmental conflicts can also arise in the absence of clear separation of responsibility.

(d) It may lead to inflexibility as people with same skills and knowledge base may develop a narrow perspective and thus, have difficulty in appreciating any other point of view. Functional heads do not get training for top management positions because they are unable to gather experience in diverse areas.

Suitability: It is most suitable when the size of the organisation is large, has a diversified activities and operations require a high degree of specialisation.

Divisional StructureMany large organisations with diversified activities have reorganised

themselves away from the simpler and basic functional structure towards a divisional structure which is more suited to their activities. This is particularly true of those enterprises which have more than one category of products to offer. This is because although every organisation performs a set of homogenous functions, as it diversifies into varied product categories, the need for a more evolved structural design is felt to cope with the emerging complexity.

In a divisional structure, the organisation structure comprises of separate business units or divisions. Each unit has a divisional manager responsible for performance and who has authority over the unit. Generally, manpower is grouped on the basis of different products manufactured. Each division is multifunctional because within each division functions like production, marketing, finance, purchase etc, are performed together to achieve a common goal. Each division is selfcontained as it develops expertise in all functions related to a product line.

In order words, within each division, the functional structure tends to be adopted. However, functions may vary across divisions in accordance with a

Think About ItRead newspapers regularly and try to identify the structures various business organisations being mentioned in the news have adopted. Have their structures led to improved and desired results in any way?

Think About It

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particular product line. Further, each division works as a profit center where the divisional head is responsible for the profit or loss of his division. For example, a large company may have divisions like cosmetics, clothing etc. Advantages: The divisional structure offers many benefits. Prominent among these are as follows:(a) Product specialisation helps in the

development of varied skills in a divisional head and this prepares him for higher positions. This is because he gains experience in all functions related to a particular product.

(b) Divisional heads are accountable for profits, as revenues and costs related to different departments can be easily identified and assigned to them. This provides a proper basis for performance measurement. It also helps in fixation of respons ibility in cases of poor performance

of the division and appropriate remedial action can be taken.

(c) It promotes flexibility and initiative because each division functions as an autonomous unit which leads to faster decision making.

(d) It facilitates expansion and growth as new divisions can be added without interrupting the existing operations by merely adding another divisional head and staff for the new product line.

Disadvantages: The divisional structure has certain disadvantages. Some of them are as follows:(a) Conflict may arise among diffe

rent divisions with reference to allocation of funds and further a particular division may seek to maximise its profits at the cost of other divisions.

(b) It may lead to increase in costs since there may be a duplication of activities across products.

Managing Director

Cosmetics Garments Footwear Skin care

Human Resources MarketingResearch and Development Purchasing

Organisation Chart Showing Divisional and Functional Structure

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Organising 123

Providing each division with separate set of similar functions increases expenditure.

(c) It provides managers with the authority to supervise all activities related to a particular division. In course of time, such a manager may gain power and in a bid to assert his independence may ignore organisational interests.

Suitability: Divisional structure is suitable for those business enterprises where a large variety of products are manufactured using different productive resources. When an organisation grows and needs to add more employees, create more departments and introduce new levels of management, it will decide to

adopt a divisional structure. Table 1 provides a comparison of functional and divisional structure to provide further clarity on the topic.

Thus, it can be said that business operates in a dynamic environment and those enterprises which fail to adapt to change are unable to survive. Hence, management must continuously review its plans and objectives and accordingly the organisation structure of the enterprise should also be subjected to periodic review to determine if modification is required. An organisation structure, at all times should contribute towards the achievement of the enterprise’s objectives and should provide scope

Comparative view: Functional and Divisional Structure

Basis Functional Structure Divisional Structure

Formation Formation is based on functions

Formation is based on product lines and is supported by functions.

Specialisation Functional specialisation. Product specialisation.

Responsibility Difficult to fix on a department.

Easy to fix responsiblity for performance.

Managerial Development

Difficult, as each functional manager has to report to the top management.

Easier, autonomy as well as the chance to perform multiple functions helps in managerial development.

Cost Functions are not duplicated hence economical

Duplication of resources in various departments, hence costly.

Coordination Difficult for a multiproduct company.

Easy, because all functions related to a particular product are integrated in one department.

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Organising 125

Do It YourselfYou have seen the structure of ONGC as an illustration in this text. Browse the websites of other business organisations and study their organisational chart. Try to identify the structure they are using.

Do It Yourself

for initiative so that contribution of personnel can be maximum and effective.

forforMal and inforMal Mal and inforMal orgaorganiSationniSation

In all organisations, employees are guided by rules and procedures. To enable smooth functioning of the enterprise, job description and rules and procedures related to work processes have to be laid down. This is done through the formal organisation.

Since its inception, ONGC has been instrumental in transforming the country’s limited upstream sector into a large viable playing field, with its activities spread throughout India and significantly in overseas territories.

The 1990s had begun on a grim note for ONGC. It took almost a decade for the Corporation to sort things out in most uncertain of times.

Among many problems, the Corporation was also suffering from the organisational atrophy.In order to survive ONGC sought help from Mc Kinsey.

Mc Kinsey’s mandate was to evolve an organisational structure that was far more responsive to its business needs than that based on business groups. The ONGC system run by functional heads often meant delays exceeding a year in matters requiring urgent decisions on fields. Also, since responsibilities were shared at production platforms between different business groups, the system degenerated into wrangling over responsibilities. Similarly, group loyalties often took precedence over the requirements of tasks. But, most importantly, it was found that the performance evaluation criteria based on business group yardstick were completely at loggerheads with requirements on fields. Mc Kinsey recommended an asset-based approach with clearly-defined responsibilities in its presentation titled ‘Organisation Transformation Project’

Though Mc Kinsey recommendations were broadly accepted, coordination issues concerning commonly-shared services needed to be sorted out.

Finally, the first control over all service personnel working with asset teams was vested in asset managers, on grounds that being responsible for the performance of their strategic business units they must rightfully exercise control over all personnel working with them. Even procurement powers were devolved. Finally, a new structure made up of 14 assets and 11 centralised services was rolled out .

Structural Transformation at ONGCStructural Transformation at ONGC

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Formal organisation refers to the organisation structure which is designed by the management to accomplish a particular task. It specifies clearly the boundaries of authority and responsibility and there is a systematic coordination among the various activities to achieve organisational goals.

The structure in a formal organisation can be functional or divisional. The formal organisation can be better understood by a study of its features which are as follows:(a) It specifies the relationships

among various job positions and the nature of their interrelationship. This clarifies who has to report to whom.

(b) It is a means to achieve the objectives specified in the plans, as it lays down rules and procedures essential for their achievement.

(c) Efforts of various departments are coordinated, interlinked and integrated through the formal organisation.

(d) It is deliberately designed by the top management to facilitate the smooth functioning of the organisation.

(e) It places more emphasis on work to be performed than interpersonal relationships among the employees.

Advantages: Formal organisation offers many advantages. Some of the important ones are:(a) It is easier to fix responsibility

since mutual relationships are clearly defined.

(b) There is no ambiguity in the role that each member has to play as duties are specified. This also helps in avoiding duplication of effort.

(c) Unity of command is maintained through an established chain of command.

(d) It leads to effective accomplishment of goals by providing a framework for the operations to be performed and ensuring that each employee knows the role he has to play.

(e) It provides stability to the organisation. This is because behaviour of employees can be fairly predicted since there are specific rules to guide them.

Limitations: The formal organisation suffers from the following limitations:

The formal organisation is a system of well-defined jobs, each bearing a definite measure of authority, responsibility and accountability.

Louis Allen Formal organisation is a system of consciously coordinated activities of two or more persons toward a common objective.

Chester Barnand

Formal OrganisationFormal Organisation

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(a) The formal communication may lead to procedural delays as the established chain of command has to be followed which increases the time taken for decision making.

(b) Poor organisation practices may not provide adequate recognition to creative talent, since it does not allow any deviations from rigidly laid down polices.

(c) It is difficult to understand all human relationships in an enterprise as it places more emphasis on structure and work. Hence, the formal organisation does not provide a complete picture of how an organisation works.

inforMal organiSationinforMal organiSationInteraction among people at work gives rise to a ‘network of social relationships among employees’ called the informal organisation.

Informal organisation emerges from within the formal organisation when people interact beyond their officially defined roles. When people have frequent contacts they cannot be forced into a rigid formal structure. Rather, based on their interaction and

friendship they tend to form groups which show conformity in terms of interest. Examples of such groups formed with common interest may be those who take part in cricket matches on Sundays, meet in the cafeteria for coffee, are interested in dramatics etc. Informal organisation has no written rules, is fluid in form and scope and does not have fixed lines of communication. The Table in the next page compares informal organisation with the formal organisation to provide better understanding of both types.

Informal organisation can be better understood with the help of the following features:(a) An informal organisation orig

inates from within the formal organisation as a result of personal interaction among employees.

(b) The standards of behaviour evolve from group norms rather than officially laid down rules and regulations.

(c) Independent channels of communication without specified direction of flow of information are developed by group members.

An informal organisation is an aggregate of interpersonal relationships without any conscious purpose but which may contribute to joint results.

Chester BarnandInformal organisation is a network of personal and social relations not established or required by the formal organisation but arising spontaneously as people associate with one another.

Keith Davis

Informal OrganisationInformal Organisation

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(d) It emerges spontaneously and is not deliberately created by the management.

(e) It has no definite strucure or form because it is a complex network of social relationships among members.

Advantages: The informal organisation offers many benefits. Important among them are given below:(a) Prescribed lines of commu

nication are not followed. Thus, the informal organisation leads to faster spread of information as well as quick feedback.

(b) It helps to fulfill the social needs of the members and allows them to find like minded people. This enhances their job satisfaction since it gives them a sense of belongingness in the organisation.

(c) It contributes towards fulfillment of organisational objectives by compensating for inadequacies in the formal organisation. For example, employees reactions towards plans and policies can be tested through the informal network.

Disadvantages: The informal organisation has certain disadvantages. Some of them are as follows:

Formal and informal organisation: A Comparative view

Basis Formal organisation Informal organisation

MeaningStructure of authority relationships created by the management

Network of social relationships arising out of interaction among employees

OriginArises as a result of company rules and policies

Arises as a result of social interaction

AuthorityArises by virtue of position in management

Arises out of personal qualities

Behavior It is directed by rulesThere is no set behaviour pattern

Flow of CommunicationCommunication takes place through the scalar chain

Flow of communication is not through a planned route. It can take place in any direction

Nature Rigid Flexible

Leadership Managers are leaders.Leaders may or may not be managers. They are chosen by the group.

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(a) Informal organisation may become a disruptive force when it spreads rumours. This may work against the interest of the formal organisation.

(b) The management may not be successful in implementing changes if the informal organisation opposes them. Such resistance to change may delay or restrict growth.

(c) It pressurises members to conform to group expectations. This can be harmful to the organisation if the norms set by the group are against organisational interests.

Informal organisation cannot be altogether eliminated. Thus, it would be in the best interest of the organisation if the existence of such groups is recognised and the roles that their members play are identified. The knowledge of such groups can be used to gather their support and consequently lead to improved organisational performance. Such groups can also provide useful

communication channels. Instead of confronting them, the management should skillfully take advantage of both the formal and informal organisation so that work continues smoothly.

delegationdelegationA manager, no matter how capable he is, cannot manage to do every task on his own. The volume of work makes it impractical for him to handle it all by himself. As a consequence, if he desires to meet the organisational goals, focus on objectives and ensure that all work is accomplished, he must delegate authority.

Delegation refers to the downward transfer of authority from a superior to a subordinate. It is a prerequisite to the efficient functioning of an organisation because it enables a manager to use his time on high priority activities. It also satisfies the subordinate’s need for recognition and provides them with opportunities to develop and exercise initiative.

Delegation is the process a manager follows in dividing the work assigned to him so that he performs that part which only he because of his unique organisational placement, can perform effectively and so that he can get others to help with what remains.

Louis AllenDelegation of authority merely means the granting of authority to subordinates to operate within prescribed limits.

Theo Haimman

DelegationDelegation

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Delegation helps a manager to extend his area of operations as without it, his activities would be restricted to only what he himself can do. However, delegation does not mean abdication. The manager shall still be accountable for the performance of the assigned tasks.Moreover, the authority granted to a subordinate can be taken back and redelegated to another person. Thus, irrespective of the extent of delegated authority ,the manager shall still be accountable to the same extent as before delegation.

Elements of Delegation

According to Louis Allen, delegation is the entrustment of responsibility and authority to another and the creation of accountability for performance.

A detailed analysis of Louis Allen’s definition brings to light the following essential elements of delegation:

(i) Authority: Authority refers to the right of an individual to command his subordinates and to take action within the scope of his position. The concept

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of authority arises from the established scalar chain which links the various job positions and levels of an organisation. Authority also refers to the right to take decisions inherent in a managerial position to tell people what to do and expect them to do it.

In the formal organisation authority originates by virtue of an individual’s position and the extent of authority is highest at the top management levels and reduces successively as we go down the corporate ladder. Thus, authority flows from top to bottom, i.e., the superior has authority over the subordinate.

Authority relationships helps to maintain order in the organisation by giving the managers the right to exact obedience and give directions to the workforce under them.

Authority determines the superior subordinate relationship wherein the superior communicates his decision to the subordinate, expecting compliance from him and the subordinate executes the decision as per the guidelines of the superior. The extent to which a superior can exact compliance also depends on the personality of the superior.

It must be noted that authority is restricted by laws and the rules and regulation of the organisation,

Creation of accountability for performance

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which limit its scope. However, as we go higher up in the management hierarchy, the scope of authority increases. (ii) Responsibility: Responsibility

is the obligation of a subordinate to properly perform the assigned duty. It arises from a superior–subordinate relationship because the subordinate is bound to perform the duty assigned to him by his superior. Thus, responsibility flows upwards i.e., a subordinate will always be responsible to his superior.

An important consideration to be kept in view with respect to both authority and responsibility is that when an employee is given responsibility for a job he must also be given the degree of authority necessary to carry it out. Thus, for effective delegation the authority granted must be commensurate

Overview of the elements of delegation

Basis Authority Responsibility Accountability

Meaning Right to command. Obligation to perform an assigned task.

Answerability for outcome of the assigned task.

Delegation Can be delegated. Cannot be entirely delegated.

Cannot be delegated at all.

Origin Arises from formal position .

Arises from delegated authority.

Arises from responsibility.

Flow Flows downward from superior to subordinate.

Flows upward from subordinate to superior.

Flows upward from subordinate to superior

with the assigned responsibility. If authority granted is more than responsibility, it may lead to misuse of authority, and if responsibility assigned is more than authority it may make a person ineffective. (iii) Accountability: Delegation of

authority, undoubtedly empowers an employee to act for his superior but the superior would still be accountable for the outcome:

Accountability implies being answerable for the final outcome. Once authority has been delegated and responsibility accepted, one cannot deny accountability. It cannot be delegated and flows upwards i.e., a subordinate will be accountable to a superior for satisfactory performance of work. It indicates that the manger has to ensure the proper discharge of duties by his subordinates. It is generally enforced through regular feedback on the extent of work accomplished. The subordinate will be

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Organising 133

expected to explain the consequences of his actions or omissions.

In conclusion, it can be stated that while authority is delegated, responsi

bility is assumed, accountability is imposed. Responsibility is derived from authority and accountability is derived from responsibility. The Table in the

knowledge.wharton.upenn.edu: April 20, 2006Azim Premji, owns more than 80 per cent of Bangalore-based Wipro, India’s third largest software exporter, which had annual revenues of US $ 1.8 billion in 2005. Forbes magazine reckons that his net worth exceeds US $ 13 billion, and it places him at No. 25 in its most recent ranking of the world’s richest people. Premji speaks with Ravi Aron, a professor of operations and information management at Wharton about Wipro’s reorganisation.Aron: After Vivek Paul [Wipro’s former CEO] left the company last year, you made radical changes in your organisational structure. How did they affect your markets and your vision for where Wipro is going? Premji: The most important thing you must appreciate is that, with the reorganisation, we tried to bring Wipro’s leadership closer to the customer. In the process, we tried to de-layer the organisation and empower our business leaders. That is why we removed an entire layer which was there previously. Our executives are seasoned enough in their jobs and they have performed long enough in their roles to be confident that they can deliver results through the new structure.Aron: As part of your new structure, have you started redefining the organisation with P&L responsibility at the level of the vertical? [Editor’s note: Wipro’s vertical structure divides the company into units such as Telecom Service Providers, Product Engineering Solutions, Finance Solutions, and Enterprise Solutions. These units further cater to industries such as banking, insurance, securities, and so on.] Premji: No. Each vertical is like a self-contained business. It is like a mid-sized company even by U.S. standards, because each vertical generates about $300 million in annual revenues. Though they work under a common structure, with resources such as Finance, HR, Quality and Marketing, each vertical has people who represent these functions. So, in effect, each vertical is like a separate company. Aron: Does that mean you intend to delegate more authority and responsibility to these self-contained companies? Premji: Absolutely. Aron: What is your thinking behind this? Premji: It all goes back to leadership. It speeds things up and gets decisions made faster. It empowers people more, and it allows them to further empower those who report to them, because their jobs have suddenly become much more responsible.

http://www.ibef.org/artdisplay.aspx?cat_id=105&art_id=11158

Interview with Azim PremjiInterview with Azim Premji

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previous page provides a summarised view of the elements of delegation.

iMportance of delegationiMportance of delegationDelegation ensures that the subordinates perform tasks on behalf of the manager thereby reducing his workload and providing him with more time to concentrate on important matters. Effective delegation leads to the following benefits: (i) Effective management: By

empowering the employees, the managers are able to function more efficiently as they get more time to concentrate on important matters. Freedom from doing routine work provides them with opportunities to excel in new areas.

(ii) Employee development: As a result of delegation, employees get more opportunities to utilise their talent and this may give rise to latent abilities in them. It allows them to develop those skills which will enable them to perform complex tasks and assume those responsibilities which will improve their career prospects. It makes them better leaders and decision makers. Thus, delegation helps by preparing better future managers. Delegation empowers the employees by providing them with the chance to use their skills, gain experience and develop themselves for higher positions.

(iii) M o t i v a t i o n o f employees:Delegation helps in developing the talents of the employees. It also has psychological benefits. When a superior entrusts a subordinate with a task, it is not merely the sharing of work but involves trust on the superior’s part and commitment on the part of the subordinate. Responsibility for work builds the selfesteem of an employee and improves his confidence. He feels encouraged and tr ies to improve his performance further.

(iv) Facilitation of growth: Delegation helps in the expansion of an organisation by providing a ready workforce to take up leading positions in new ventures. Trained and experienced employees are able to play significant roles in the launch of new projects by replicating the work ethos they have absorbed from existing units, in the newly set up branches.

(v) Basis of management hierarchy: Delegation of authority establishes superiorsubordinate relationships, which are the basis of hierarchy of management. It is the degree and flow of authority which determines who has to report to whom. The extent of delegated authority also decides the power that each job position enjoys in the organisation.

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The world’s most modern management in India; HCL Technologies is empow-ering its employees and pointing the way to the future of business.Fortune, April 14, 2006.

Every employee rates their boss, their boss’ boss, and any three other company managers they choose, on 18 questions using a 1-5 scale. Such 360-degree evaluations are not uncommon, but at HCL all results are posted online for every employee to see. That’s un-heard-of!

And that’s not all. Every HCL employee can at any time create an electronic ‘ticket’ to flag anything they think requires action in the company. Amazingly, such tickets can only be ‘closed’ by the employees themselves. And Nayar [Vineet Nayar is president of India’s 30,000-employee HCL Technologies (Research)] is vigilant that managers not intimidate employees about creating or closing tickets. Managers are evaluated partly based on how many tickets their departments are creating - the more the better.

In addition, every employee can post a question or comment on any subject in a public process called ‘U and I.’ About 400 come in each month, and questions and answers are all posted on the intranet.

“I want to be the company that gives superior service to my employees compared to everybody else,” he explains. He also firmly believes the ideas that will guide HCL into the future will come not from him, but from below. Early signs suggest his bold strategy is working. Nayar has only been president for a year, a tumultuous one in which most of these innovations have been implemented. But in that time the attrition rate has dropped in half, he says. HCL’s innovations are not only managerial. The company aims to become a strategic partner with customers by working with them on business process management and by managing infrastructure remotely, a business it has pioneered in India, says Nayar. The strategy has succeeded with AMD (Research), a marquee customer for which the company does the above mentioned business. Another key customer is Cisco (Research), a 10-year customer with whom HCL is now embracing another form of innovation- shared risk. Since February, HCL has been completely responsible for engineering one Cisco product. It gets paid based on how well the product sells. In engineering all this innovation, Nayar’s humility appears to be a potent managerial asset.

Adapted from an article by David Kirkpatrick on:http://www.indianembassy.org/newsite/News/US%20Media/2006/115.asp

Innovation at HClInnovation at HCl

(vi) Better coordination: The elements of delegation, namely authority, responsibility and accountability help to define the

powers, duties and answerability related to the various positions in an organisation. This helps to avoid overlapping of duties and

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duplication of effort as it gives a clear picture of the work being done at various levels. Such clarity in reporting relationships help in developing and maintaining effective coordination amongst the departments, levels and functions of management.

Thus, delegation is a key element in effective organising.

decentraliSationdecentraliSationIn many organisations the top management plays an active role in taking all decisions while there are others in which this power is given to even the lower levels of management. Those organisations in which decision making authority lies with the top management are termed as centralised organisations whereas those in which such authority is shared with lower levels are decentralised organisations.

Decentralisation explains the manner in which decision making responsibilities are divided among hierarchical levels. Put simply, decentralisation refers to delegation

of authority throughout all the levels of the organisation. Decision making authority is shared with lower levels and is consequently placed nearest to the points of action. In other words decision making authority is pushed down the chain of command.

When decisions taken by the lower levels are numerous as well as important an organisation can be regarded as greatly decentralised.

Centralisation and DecentralisationCentralisation and decentralisation are relative terms, as seen from the existing status of various business enterprises.

An organisation is centralised when decisionmaking authority is retained by higher management levels whereas it is decentralised when such authority is delegated.

Complete centralisation would imply concentration of all decision making functions at the apex of the management hierarchy. Such a scenario would obviate the need for a management hierarchy. On the other

Decentralisation refers to systematic effort to delegate to the lowest level all authority except that which can be exercised at central points.

Louis AllenEverything which goes to increase the importance of a subordinate’s role is decentralisation, everything that goes to reduce it is centralisation.

Henri Fayol

DecentralisationDecentralisation

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hand, complete decentralisation would imply the delegation of all decision making functions to the lower level of the hierarchy and this would obviate the need for higher managerial positions. Both the scenarios are unrealistic.

An organisation can never be completely centralised or decentralised. As it grows in size and complexity , there is a tendency to move towards decentralised decision making. This is because in large organisations those employees who are directly and closely involved with certain operations tend to have more knowledge about them than the top management which may only be indirectly associated with individual operations.

Hence, there is a need for a balance between these coexisting forces. Thus, it can be said that every organisation will be characterised by both centralisation and decentralisation.

iMportanceiMportanceDecentralisation is much more than a mere transfer of authority to the lower levels of management hierarchy. It is a philosophy that implies selective dispersal of authority because it propagates the belief that people are competent, capable and resourceful. They can assume the responsibility for the effective implementation of their decisions .Thus this philosophy recognises the decision maker’s need for autonomy. The management, however, needs to carefully select

those decisions which will be pushed down to lower levels and those that will be retained for higher levels. Table 4 provides a comparative look between delegation and decentralisation.

Decentralisation is a fundamental step and its importance can be understood from the following points: (i) Develops initiative among

subordinates: Decentralisation helps to promote selfreliance and confidence amongst the subordinates. This is because when lower managerial levels are given freedom to take their own decisions they learn to depend on their own judgment. It also keeps them in a state wherein they are constantly challenged and have to develop solutions for the various problems they encounter. A decentralisation policy helps to identify those executives who have the necessary potential to become dynamic leaders.

(ii) Develops managerial talent for the future: Formal training plays an important part in equipping subordinates with skills that help them rise in the organisation but equally important is the experience gained by handling assignments independently. Decentralisation gives them a chance to prove their abilities and creates a reservoir of qualified manpower who can be considered to fill up more challenging positions

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through promotions. It also helps to identify those who may not be successful in assuming greater responsibility. Thus, it is a means of management education as well as an opportunity for trained manpower to use its talent in real life situations.

(iii) Quick decision making: The management hierarchy can be looked upon as a chain of communication. In centralised organisation because every decision is taken by the top management the flow of information is slow as it has to traverse many levels. Response also takes time. This reduces the speed of decision making and makes it difficult for an enterprise to adapt to dynamic operating conditions. In a decentralised organisation, however ,since decisions are taken at levels which are nearest to the points of action and there is no requirement for approval from many levels, the process is much faster. There are also less chances of information getting distorted because it doesn’t have to go through long channels.

(iv) Relief to top management: Decentralisation diminishes the amount of direct supervision exercised by a superior over the activities of a subordinate because they are given the freedom to act and decide albeit within the

limits set by the superior. Also, personal supervision is generally replaced by other forms of control such as return on investment etc. Decentralisation also leaves the top management with more time which they can devote to important policy decisions rather than occupying their time with both policy as well as operational decisions. In fact decentralisation is greatest when checking required on decisions taken by lower levels of management is least.

(v) Facilitates growth: Decentralisation awards greater autonomy to the lower levels of management as well as divisional or departmental heads. This allows them to function in a manner best suited to their department and fosters a sense of competition amongst the departments. Consequently, with each department doing its best in a bid to outdo the other, the productivity levels increase and the organisation is able to generate more returns which can be used for expansion purposes.

(vi) Better control: Decentralisation makes it possible to evaluate performance at each level and the departments can be individually held accountable for their results. The extent of achievement of organisational objectives as well as the contribution of each department in meeting the overall

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objectives can be ascertained. Feedback from all levels helps to analyse variances and improve operations. In decentralisation, one of the challenges is the accountability of performance. In response to this challenge, better control systems are being evolved such as the balance score card and management information system. Decentralisation

compels the management to innovative performance measurement systems.

As a conclusion, it must be noted that in spite of its benefits decentralisation should be applied with caution as it can lead to organisational disintegration if the departments start to operate on their own guidelines which may be contrary to the interest of the

The McNeil name has been associated with the manufacturing and sale of pharmaceutical products since 1879, when Robert McNeil opened his first retail drug outlet in Pennsylvania. Growing as a producer of prescription pharmaceuticals, McNeil Laboratories, Inc. was incorporated in the U.S. in 1933, and became a member of the Johnson & Johnson family of companies in 1959. McNeil Consumer Healthcare began operations in Canada in an existing administrative Johnson & Johnson facility in Guelph, Ontario in 1980.

McNeil Consumer Healthcare (nonprescription pharmaceutical products) in Guelph, Ontario is a member of the Johnson & Johnson family of companies in Canada.

An important difference between Johnson & Johnson and most other companies — is the concept of decentralised management. Instead of operating as one large multi-billion dollar corporation, Johnson & Johnson is operated as 190 smaller companies, each focused on a specific medical or product franchise and/or geographic area, with each affiliate generating multiple options for growth. Through decentralisation we combine the advantages of being big with the agility and focus of smaller firms. Decentralisation enables each company to stay close to its customer, maintain short lines of communication with customers and employees, and accelerate the development of talent. The Johnson & Johnson - Merck Consumer Pharmaceuticals company also operates from our Woodlawn Road facility in Guelph.

http://www.mcneilcanada.com/eng/eco07pg1.shtm

Decentralisation : A Strength

Think About ItIf you were a manager, would you decentralise, knowing that it would mean dispersal of decision making authority?

Think About It

Decentralisation : A Strength

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Delegation and Decentralisation: A Comparative view

Basis Delegation Decentralisation

Nature Delegation is a compulsory act because no individual can perform all tasks on his own.

Decentralisation is an optional policy decision. It is done at the discretion of the top management.

Freedom of action More control by superiors hence less freedom to take own decisions.

Less control over executives hence greater freedom of action.

Status It is a process followed to share tasks.

It is the result of the policy decision of the top management.

Scope It has narrow scope as it is limited to superior and his immediate subordinate.

It has wide scope as it implies extension of delegation to the lowest level of management.

Purpose To lessen the burden of the manager.

To increase the role of the subordinates in the organisation by giving them more autonomy.

Key Terms

organisation. Decentralisation must always be balanced with centralisation in areas of major policy decisions.Organising Organisational structure

Departmentalisation Delegation Authority

Responsibility Accountability Functional structure

Divisional structure Formal organisation

Informal organisation Span of management

Centralisation Decentralisation

Organising is the process of defining and grouping activities and establishing authority relationships among them.Process: the process of organising consists of the following steps:

Summary

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(a) Identification and division of work

(b) Departmentalisation

(c) Assignment of Duties

(d) Establishing reporting relationshipsImportance: Organising is considered important because it leads to division of work, clarity in reporting relationships, optimum utilization of resources, growth, better administration and greater creativity.Organisational structure is the framework within which managerial and operating tasks are performed. It can be functional or divisional. Span of management is the number of subordinates under a superior.Functional structure groups activities on the basis of functions. The advantages of such a structure are specialisation, better control, managerial efficiency and ease in training employees. The disadvantages are functional empires, conflict of interest, inflexibility, and restriction in managerial development.Divisional structure groups activities on the basis of products. The advantages are integration, product specialisation, greater accountability, flexibility, better coordination and more initiative. The disadvantages are departmental conflicts, costly process, ignoring of organisational interests, increase in requirements of general managers. Formal organisation is designed by the management to achieve organisational goals. Its advantages are fixation of responsibility, clarity of roles, unity of command and effective accomplishment of goals. Its disadvantages are procedural delays, inadequate recognition of creativity, limited in scope. Informal organisation arises out of interaction amongst people at work. Its advantages are speed, fulfillment of social needs, fills inadequacies of formal structure. Its disadvantages are: disruptive force, resistance to change and priority to group interests. Delegation is the transfer of authority from superior to subordinate. It has three elements: Authority, Responsibility and Accountability. Importance of delegation is that it helps in effective management, employee development, motivation, growth and coordinationDecentralisation is delegation of authority throughout the organisation.Importance of decentralisation is that it helps in development of managerial talent, quick decision making reducing burden on top management, development of initiative, growth and better control.

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Multiple Choice

1. Which of the following is not an element of delegation? (a) Accountability (b) Authority (c) Responsibility (d) Informal organisation

2. A network of social relationship that arise spontaneously due to interaction at work is called: (a) Formal organisation (b) Informal organisation (c) Decentralisation (d) Delegation

3. Which of the following does not follow the scalar chain? (a) Functional structure (b) Divisional structure (c) Formal organisation (d) Informal organisation.

4. A tall structure has a (a) Narrow span of management (b) Wide span of management (c) No span of management (d) Less levels of management

5. Centralisation refers to (a) Retention of decision making authority (b) Dispersal of decision making authority (c) Creating divisions as profit centers (d) Opening new centers or branches

6. For delegation to be effective it is essential that responsibility be accompanied with necessary (a) Authority (b) Manpower (c) Incentives (d) Promotions

7. Span of management refers to (a) Number of managers (b) Length of term for which a manager is appointed

Exercises

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Organising 143

(c) Number of subordinates under a superior (d) Number of members in top management

8. The form of organisation known for giving rise to rumors is called (a) Centralised organisation (b) Decentralised organisation (c) Informal organisation (d) Formal organisation

9. Grouping of activities on the basis of product lines is a part of (a) Delegated organisation (b) Divisional organisation (c) Functional organisation (d) Autonomous organisation

10. Grouping of activities on the basis of functions is a part of (a) Decentralised organisation (b) Divisional organisation (c) Functional organisation (d) Centralised organisation

Short Answer Type 1. Define ‘Organising’? 2. What are the steps in the process of organising? 3. Discuss the elements of delegation. 4. What does the term ‘Span of management’ refer to? 5. Under what circumstances would functional structure prove

to be an appropriate choice? 6. Draw a diagram depicting a divisional structure. 7. Can a large sized organisation be totally centralised of

decentralised? Give your opinion. 8. Decentralisation is extending delegation to the lowest level.

Comment.

Long Answer Type

1. Why is delegation considered essential for effective organising? 2. What is a divisional structure? Discuss its advantages and

limitations 3. Decentralisation is an optional policy. Explain why an

organisation would choose to be decentralised. 4. How does informal organisation support the formal

organisation? 5. Distinguish between centralisation and decentralisation.

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6. How is a functional structure different from a divisional structure?

Application Type

1. Neha runs a factory wherein she manufactures shoes. The business has been doing well and she intends to expand by diversifying into leather bags as well as western formal wear thereby making her company a complete provider of corporate wear. This will enable her to market her business unit as the one stop for working women. Which type of structure would you recommend for her expanded organisation and why?

2. The production manager asked the foreman to achieve a target production of 200 units per day, but he doesn’t give him the authority to requisition tools and materials from the stores department. Can the production manager blame the foreman if he is not able to achieve the desired target? Give reasons.

3. A manager enhances the production target from 500 units to 700 units per month but the authority to draw raw material was not given by him. The production manager could not achieve the revised production target. Who is responsible and which principle was violated?

4. A company has its registered office in Delhi, manufacturing unit at Gurgaon and marketing and sales department at Faridabad. The company manufactures the consumer products. Which type of organisational structure should it adopt to achieve its target?

1. A company, which manufactures a popular brand of toys,

has been enjoying good market reputation. It has a functional organisational structure with separate departments for Production, Marketing, Finance, Human Resources and Research and Development.

Lately to use its brand name and also to cash on to new business opportunities it is thinking to diversify into manufacture of new range of electronic toys for which a new market is emerging.

Questions

Prepare a report regarding organisation structure giving concrete reasons with regard to benefits the company will derive from the steps it should take.

Case Problem

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Organising 145

2. A company manufacturing sewing machines set up in 1945 by the British promoters follows formal organisation culture in totality. It is facing lot of problems in delays in decision making. As the result it is not able to adapt to changing business environment. The work force is also not motivated since they cannot vent their grievances except through formal channels, which involve red tape. Employee turnover is high. Its market share is also declining due to changed circumstances and business environment.

Questions

You are to advise the company with regard to change it should bring about in its organisation structure to overcome the problems faced by it. Give reasons in terms of benefits it will derive from the changes suggested by you. In which sectors can the company diversify keeping in mind the declining market for the product the company is manufacturing?

3. A company X limited manufacturing cosmetics, which has enjoyed a preeminent position in business, has grown in size. Its business was very good till 1991. But after that, new liberalised environment has seen entry of many MNC’s in the sector.

With the result the market share of X limited has declined. The company had followed a very centralised business model with Directors and divisional heads making even minor decisions. Before 1991 this business model had served the company very well as consumers had no choice. But now the company is under pressure to reform.

Questions

What organisation structure changes should the company bring about in order to retain its market share?

How will the changes suggested by you help the firm? Keep in mind that the sector in which the company is FMCG.

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STAFFINGSTAFFINGCHAPTER

Management of Human Resources at INFOSYSManagement of Human Resources at INFOSYS“Our assets walk out of the door each evening. We have to make sure that they come back the next morning” (Narayana Murthy, CEO, Infosys).

At a time when organisations are debating the strategic importance of their human resources, Infosys, a consulting and software services organisation, includes its human resources on its balance sheet to affirm their asset value. The rationale for this is as follows: “The long term success of a company is usually examined on certain financial and non-financial parameters. Human resources are among these new non-financial parameters that challenge the usefulness of evaluating corporate success solely on traditional measures. Human resources represent the collective expertise, innovation, leadership, entrepreneurial and managerial skills endowed in the employees of an organisation.”

As a knowledge intensive company, Infosys recognises the value of its human assets in maintaining its competitive position. It realises that these assets can easily walk away, as competitors in India and abroad covet its IT talent. Consequently, the challenge facing Infosys is how to attract, retain and develop its human assets in a highly competitive and dynamic environment?

Most of the current human resource practices at Infosys result from the vision of the leaders and the culture that they have created. Narayana Murthy, known for his leadership and vision is the public image of Infosys. His leadership style is humble and straight-forward, quite uncommon in the world of Indian business. He believes in sharing wealth with his employees and in leading by example. In a knowledge-based business like Infosys, he sees the importance of consistency in rhetoric and action in empowering employees. He is credited with creating a culture of closeness and empowerment at Infosys. His management style, rare among Indian business leaders, is based on western management.

6After studying this chapter, you should be able to:

n define staffing;

n establish its relationship with Human Resource Management;

n state the need and importance of staffing;

n describe the steps in the staffing process;

n state the meaning of recruitment and selection;

n identify important sources of recruitment;

n describe the steps in the selection process;

n appreciate the need of training and development; and

n explain various on the job and off the job methods of training.

Source: Sumita Raghuram, Fordham Graduate School of Business


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Staffing 147

IntroductIonIntroductIonThe foundation of any organisation is the talented and hardworking people, who are the principal assets of any firm. It is an established fact that the growth of an organisation requires the continual infusion of quality staff. Thus, adequate staffing or the provision for appropriate human resources is an essential requirement for any organisation’s success. It is, therefore, believed that an organisation can achieve its objectives only when it has the right persons in the right positions.

MeanIngMeanIngAfter planning and selection of the organisation structure, the next step in the management process is to fill the various posts provided in the organisation. This is termed as the management of staffing function. In the simplest terms, staffing is ‘putting people to jobs’. It begins with workforce planning and includes different other function like recruitment, selection, training, development, promotion, compensation and performance appraisal of work force. In other words, staffing is that part of the process of management which is concerned with obtaining, utilising and maintaining a satisfactory and satisfied work force. Today, staffing may involve any combination of employees including daily wagers, consultants and contract employees. Staffing recognises the importance

of every single person employed by an organisation as it is the individual worker, who is the ultimate performer.

Staffing has been described as the managerial function of filling and keeping filled the positions in the organisation structure. This is achieved by, first of all, identifying requirement of work force, followed by recruitment, selection, placement, promotion, appraisal and development of personnel, to fill the roles designed into the organisation structure.

In a new enterprise, the staffing function follows the planning and organising functions. After deciding what is to be done, how it is to be done and after creation of the organisation structure, the management is in a position to know the human resource requirements of the enterprise at different levels. Once the number and types of personnel to be selected is determined, management starts with the activities relating to recruiting, selecting and training people, to fulfill the requirements of the enterprise. In an existing enterprise, staffing is a continuous process because new jobs may be created and some of the existing employees may leave the organisation.

IMportance of StaffIngIMportance of StaffIngIn any organisation, there is a need for people to perform work. The staffing function of management

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fulfills this requirement and finds the right people for the right job. Basically, staffing fills the positions as shown in the organisation structure.

Human resources are the foundation of any business. The right people can help you take your business to the top; the wrong people can break your business. Hence, staffing is the most fundamental and critical drive of organisational performance. The staffing function has assumed greater importance these days because of rapid advancement of technology, increasing size of orga nisation and complicated behaviour of human beings. Human resources are the most important asset of an organisation. The ability of an organisation to achieve its goal depends upon the quality of its human resources. Therefore, staffing is a very important managerial function. No organisation can be successful unless it can fill and keep filled the various positions provided for in the structure with the right kind of people.

Proper staffing ensures the following benefits to the organisation: (i) helps in discovering and obtai

ning competent personnel for various jobs;

(ii) makes for higher performance, by putting right person on the right job;

(iii) ensures the continuous survival and growth of the enterprise through the succession planning for managers;

(iv) helps to ensure optimum utilisation of the human resources. By avoiding overmanning, it prevents underutilisation of personnel and high labour costs. At the same time it avoids disruption of work by indicating in advance the shortages of personnel; and

(v) improves job satisfaction and morale of employees through objective assessment and fair reward for their contribution.

Staffing function must be performed efficiently by all organisations. If right kind of employees are not available, it will lead to wastage of materials, time, effort and energy, resulting in lower productivity and poor quality of products. The enterprise will not be able to sell its products profitably. It is, therefore, essential that right kind of people must be available in right number at the right time. They should be given adequate training so that wastage is minimum. They must also be induced to show higher productivity and quality by offering them proper incentives.

Staffing as part of Human Resource ManagementIt is a function which all managers need to perform. It is a separate and specialised function and there are many aspects of human relations to be considered. It is the job of managers to fill positions in their organisation and to make sure that

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they remain occupied with qualified people. Staffing is closely linked to organising since after the structure and positions have been decided, people are required to work in these positions. Subsequently, they need to be trained and motivated to work in harmony with the goals of the organisation. Thus, staffing is seen as a generic function of management.

The staffing function deals with the human element of management. Managing the human component of an organisation is the most important task because the performance of an organisation depends upon how well this function is performed. The success of an organisation in achieving its goals is determined to a great extent on the competence, motivation and performance of its human resource.

It is the responsibility of all managers to directly deal with and select people to work for the organisation. When the manager performs the staffing function his role is slightly limited. Some of these responsibilities will include placing the right person on the right job, introducing new employees to the organisation, training employees and improving their performance, developing their abilities, maintaining their morale and protecting their health and physical conditions. In small organisations, managers may perform all duties related to employees salaries, welfare and working conditions.

But as organisations grow and number of persons employed increases, a separate department called the human resource department is formed which has specialists in managing people. The management of human resource is a specialised area which requires the expertise of many people. The number of human resource specialists and size of this department gives an indication of the size of the business as well. For a very large company, the Human Resources Department itself will contain specialists for each function of this department.

Human Resource Management includes many specialised activities and duties which the human resource personnel must perform. These duties are:n Recruitment i.e., search for

qualified peoplen Analysing jobs, collecting inform

ation about jobs to prepare job descriptions.

n Developing compensation and incentive plans.

n Training and development of employees for efficient performance and career growth.

n Maintaining labour relations and union management relations.

n Hand l ing g r i e vances and complaints.

n Providing for social security and welfare of employees.

n Defending the company in law suits and avoiding legal complications.

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evolutIon of HuMan evolutIon of HuMan reSource ManageMent reSource ManageMent Human resource management has replaced the traditional concept of labour welfare and personnel management. Human Resource Management (HRM) in its present form has evolved from a number of significant interrelated developments, which date back to the era of industrial revolution. Emergence of trade union movement led to the need of a person who could act as an effective link between the owners and workers. Thus, the concept of labour welfare officer came into being. His role was limited to the bare minimum welfare activities of employees. In fact, he was looked down by both the workers and the owners.

With the introduction of factory system, thousands of persons began to be employed under one roof. The job of hiring people for the organisation was given to one man, who later on was assigned the responsibility of recruitment, selection and placement of personnel. This led to the emergence of personnel officer in the first place and personnel manager, later on.

Human relations approach recognises human factor as the most imprtant instrument of success in an organisation. Fast changing technological developments, however, necessitated new skill development and

training of employees. People came to be recognised as a valuable resource, which can be further developed. Increase in scope of the work led to replacement of personnel manager with human resource manager.

You may have observed that all these aspects are concerned with the human element in industry as distinct from the mechanical side of the enterprise. Thus, staffing is an inherent part of human resource management as it is the practice of finding, evaluating and establishing a working relationship with people, for a purpose.

It is important to understand that staffing is both a function of management just like planning, organising, directing, and controlling as well as a distinct functional area of management just as marketing management and financial management. Staffing, is therefore, referred to as both a line as well as a staff activity i.e., an essential function of the manager as well as an advisory role played by the Human Resource Department.

StaffIng proceSSStaffIng proceSS

As you are now aware, the prime concern of the staffing function in the management process is the timely fulfillment of the manpower requirements within an organisation. These requirements may arise in case of starting a new business or

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Staffing 151

expanding the existing one or they may arise as a matter of the need for replacing those who quit, retire or are transferred or promoted from or are fired from the job. In any case, need for ‘the right person for the right job’ hardly needs an over emphasis. But just as the phrase ‘water water everywhere and not a drop to drink’ amplifies the fact that despite 2/3rd of the earth being water, drinkable water is a scarce commodity, so may also be said of finding ‘the right person for the right job.’ As such, it is important to appreciate staffing as a process that starts from understanding the manpower requirements within the organisation and identifying the potential sources from where it can be met, either from within the organisation or from outside. And, given that ‘the right person’ is scarce, there is need to ‘market’ the job and the organisation to the people. Even in situations where a single job vacancy might attract a few hundreds of the applicants, there is a challenge of selecting the most appropriate one. Freshly appointed persons might need orientation or training to familiarise them with the way the things are done in an organisation. And, in case they have been selected only on the basis of academic qualifications and aptitude for learning, they might need training in specific skills as

well. For example, if one is selected by a Business Process Outsourcing (BPO) unit by virtue of being extrovert and wellversed in English speaking, one needs to be trained in the relevant business processes, telephone conversation etiquettes as well as diction adaptation before actual placement. The employee’s experiences during orientation and placement form his/her ‘first impression’ of the organisation. Even whilst on the job, the employees need training for upgradation of knowledge and skills and for preparing for higher responsibilities. So staff training and development is another important aspect of the staffing process.

What follows is a brief description of the above stages.

(i) Estimating the Manpower Requirements: You are aware that while designing the organisational structure, we undertake an analysis of the decisions and the decisionmaking levels, activities as well as relationship among them with a view to evolving the horizontal and vertical dimensions of the structure. Thus, various job positions are created. Clearly, performance of each job necessitates the appointment of a person with a specific set of educational qualifications, skills, prior experience and so on.

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Thus, understanding manpower requirements is not merely a matter of knowing how many persons we need but also of what type. Given that we need to encourage women, persons from backward communities and persons with special abilities (such as physically challenged, visually and hearing impaired) to assume responsible positions in our organisations, there is a need to understand, and if the need be, to redefine manpower requirements accordingly. Can you think why should we encourage such a diversity in the workforce?

Operationally, understanding the manpower requirements would necessitate workload analysis on the one hand and workforce analysis on the other. Workload analysis would enable an assessment of the number and types of human resources necessary for the performance of various jobs and accomplishment of organisational objectives. Workforce analysis would reveal the number and type available. In fact such an exercise would reveal whether we are understaffed, overstaffed or optimally staffed. It may be pointed out that neither overstaffing nor understaffing is a desirable situation. Can you think why? In fact this exercise would form the basis of the subsequent staffing actions. A

situation of overstaffing somewhere would necessitate employee removal or transfer elsewhere. A situation of understaffing would necessitate the starting of the recruitment process. However, before that can be done, it is important to translate the manpower requirements into specific job description and the desirable profile of its occupant — the desired qualifications, experience, personality characteristics and so on. This information becomes the base for looking for potential employees.

(ii) Recruitment: Recruitment may be defined as the process of searching for prospective employees and stimulating them to apply for jobs in the organisation. The information generated in the process of writing the job description and the candidate profile may be used for developing the ‘situations vacant’ advertisement. The advertisement may be displayed on the factory/office gate or else it may be got published in print media or flashed in electronic media. This step involves locating the potential candidate or determining the sources of potential candidates. In fact, there are a large number of recruitment avenues available to a firm which would be discussed latter when we talk about the various sources of recruitment. The essential objective is to create a pool of the prospective

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test and the interviews are offered an employment contract, a written document containing the offer of employment, the terms and conditions and the date of joining.

(iv) Placement and Orientation: Joining a job marks the beginning of socialisation of the employee at the workplace. The employee is given a brief presentation about the company and is introduced to his superiors, subordinates and the colleagues. He is taken around the workplace and given the charge of the job for which he has been selected. This process of familiarisation is very crucial and may have a lasting impact on his decision to stay and on his job performance. Orientation is, thus, introducing the selected employee to other employees and familiarising him with the rules and policies of the organisation. Placement refers to the employee

job candidates. Both internal and external sources of recruitment may be explored. Internal sources may be used to a limited extent. For fresh talent and wider choice external sources are used.

(iii) Selection: Selection is the process of choosing from among the pool of the prospective job candidates developed at the stage of recruitment. Even in case of highly specialised jobs where the choice space is very narrow, the rigour of the selection process serves two important purposes: (i) it ensures that the organisation gets the best among the available, and (ii) it enhances the selfesteem and prestige of those selected and conveys to them the seriousness with which the things are done in the organisation. The rigour involves a host of tests and interviews, described later. Those who are able to successfully negotiate the

Over-staffing: More play, less work

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occupying the position or post for which the person has been selected.

(v) Training and Development: What people seek is not simply a job but a career. Every one must have the opportunity to rise to the top. The best way to provide such an opportunity is to facilitate employee learning. Organisations have either inhouse training centers or have forged alliances with training and educational institutes to ensure continuing learning of their employees. The organisations too benefit in turn. If employee motivation is high, their competencies are strengthened, they perform better and thus, contribute more to organisational effectiveness and efficiency. By offering the opportunities for career advancement to their members, organisations are not only able to attract but also retain its talented people.

As discussed earlier, in most organisations there is a separate Human Resource Department, which takes care of the staffing function. But in small organisations the line manager is required to perform all the functions of management viz, planning, organising, staffing, directing and controlling. The process of staffing will then include three more stages.

(vi) Performance Appraisal

After the employees have undergone a period of training and they have been on the job for some time, there is a need to evaluate their performance. All organisations have some formal or informal means of appraising their employee’s performance. Performance appraisal means evaluating an employee’s current and/or past performance as against certain predetermined standards. The employee is expected to know what the standards are and the superior is to provide the employee feedback on his/her performance. The performance appraisal process, therefore, will include defining the job, appraising performance and providing feedback

(vii) Promotion and career planning

It becomes necessary for all organisations to address career related issues and promotional avenues for their employees. Managers need to design activities to serve employees’ longterm interests also. They must encourage employees to grow and realise their full potential. Promotions are an integral part of people’s career. They refer to being placed in positions of increased responsibility. They usually

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mean more pay, responsibility and job satisfaction.

(viii) Compensation

All organisations need to establish wage and salary plans for their employees. There are various ways to prepare different pay plans depending on the worth of the job. Basically the price of the job needs to be determined. Compensation, therefore, refers to all forms of pay or rewards going to employees. It may be in the form of direct financial payments like wages, salaries,

incentives, commissions and bonuses and indirect payments like employer paid insurance and vacations.

Direct financial payments are of two types : time based or performance based. A time based plan means salary and wages are paid either daily, weekly or monthly or annually. Performance based plans means salary/wages are paid according to piecework. For example, a worker may be paid according to the number of units produced by him/her. There are many methods

The BPO manager has more often than not been projected as a person who presides over hundreds of young professionals, with head-phones and attitudes, and whose biggest challenge is to keep his young wards from joining the competition.

A new industry, no experience, a young work force, stringent service-level agreements-the list is endless. Understanding these equally important facets to the BPO manager’s job will help reveal that the operation head’s is one of the most challenging jobs.

A BPO is often seen as a job and not a career – a mere stop-gap arrangement and stepping stone for those hoping to get an early start. But the BPO industry offers a challenging environment for growth and provides ample opportunities, not only at junior positions but for middle to senior-level executives to work in global teams and gain international and industry specific exposure. Playing a pivotal role in the BPO environment, a manager is the critical link between the customer and the delivery team. Putting the client’s business first is the starting rule to success.

Most BPO managers in the industry hail from fields like telecom, insurance, banking, hospitality, retail and manaufacturing. The challenge lies in extracting best practices from these diverse disciplines and crafting a unique system that is best suited to the needs of the outsourcing industry. This calls upon learning the intricacies of the job ‘on the job’. Although BPO companies impart comprehensive training at the entry level, managers have to use their professional experiences and translate those learnings into the BPO environment.

Source: The Economic Times, Nov. 06

Managers in Business Process Outsourcing (BPO) UnitsManagers in Business Process Outsourcing (BPO) Units

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a function. It has been defined as ‘the process of searching for prospective employees and stimulating them to apply for jobs in an organisation.’

Advertising is commonly part of the recruitment process, and can occur through several means, through newspapers, using newspaper dedicated to job advertisement, through professional publication, using advertisements placed in windows, through a job center, through campus interviews, etc.

Sources of RecruitmentThe object of recruitment is to attract potential employees with the necessary characteristics or qualification, in the adequate number for the jobs available. It locates available people for the job and invites them to apply for the job in the organisation. The process of recruitment precedes the process of selection of a right candidate for the given positions in the organisation. Recruitment seeks to attract suitable applicants to apply for available jobs. The various activities involved with the process of recruitment includes (a) identification of the different sources of labour supply, (b) assessment of their validity, (c) choosing the most suitable source or sources, and (d) inviting applications from the prospective candidates, for the vacancies.

The requisite positions may be filled up from within the organisation

to calculate the compensation under various incentive plans to reward performance. Certain pay plans can be created which are a combination of time based pay plus incentives for higher performance. Various plans may be formulated for paying employees time based wage or salary as well as performance based financial incentives and bonuses, and employee benefits.

Besides there are some other factors also which influence the design of any pay plan, like legal (labour laws), union, company policy and equity.

Thus, we see that as a process, staffing includes acquisition, rete ntion, development, performance appraisal, promotion and compensation of the most important resource of an organisation, that is, its human capital.

It needs to be kept in mind that several factors such as supply and demand of specific skills in the labour market, unemployment rate, labour market conditions, legal and political considerations, company’s image, policy, human resource planning cost, technological developments and general economic environment etc., will influence the way recruitment, selection and training will be actually carried out.

recruItMentrecruItMentRecruitment refers to the process of finding possible candidates for a job or

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Applicant(Person)

Organisation(Job)

Recruitment(identification and attraction)

Selection(assessment, evaluation and

final match)

Training(Acquainting and skill

development)

Aspects of Staffing

or from outside. Thus, there are two sources of recruitment – Internal and External.

Internal Sources There are two important sources of internal recruitment, namely, transfers and promotions, which are discussed below:

(i) Transfers: It involves shifting of an employee from one job to another, one department to another or from one shift to another, without a substantive change in the responsibilities and status of the employee. It may lead to changes in duties and responsibilities, working condition etc., but not necessarily salary. Transfer is a good source of filling the vacancies with

employees from overstaffed departments. It is practically a horizontal movement of employees. Shortage of suitable personnel in one branch may be filled through transfer from other branch or department. Job transfers are also helpful in avoiding termination and in removing individual problems and grievances. At the time of transfer, it should be ensured that the employee to be transferred

to another job is capable of performing it. Transfers can also be used for training of employees for learning different jobs.

(ii) Promotions: Business enterprises generally follow the practice of filling higher jobs by promoting employees from lower jobs. Promotion leads to shifting an employee to a higher position, carrying higher responsibilities, facilities, status and pay. Promotion is a vertical shifting of employees. This practice helps to improve the motivation, loyalty and satisfaction level of employees. It has a great psycho logical impact over the employees because a promotion at the higher level may lead to a chain of promotions at lower levels in the organisation.

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Merits of Internal Sources

Filling vacancies in higher jobs from within the organisation or through internal transfers has the following merits:

(i) Employees are motivated to improve their performance. A promotion at a higher level may lead to a chain of promotion at lower levels in the organisation. This motivates the employees to improve their performance through learning and practice. Employees work with commitment and loyalty and remain satisfied with their jobs. Also peace prevails in the enterprise because of promotional avenues;

(ii) Internal recruitment also simplifies the process of selection and placement. The candidates that are already working in the enterprise can be evaluated more accurately and economically. This is a more reliable way of recruitment since the candidates are already known to the organisation;

(iii) Transfer is a tool of training the employees to prepare them for higher jobs. Also people recruited from within the organisation do not need induction training;

(iv) Transfer has the benefit of shifting workforce from the surplus departments to those where there is shortage of staff;

(v) Filling of jobs internally is cheaper as compared to getting candidates from external sources.

Limitations of Internal Sources

The limitations of using internal sources of recruitment are as follows:

(i) When vacancies are filled through internal promotions, the scope for induction of fresh talent is reduced. Hence, complete reliance on internal recruitment involves danger of ‘inbreeding’ by stopping ‘infusion of new blood’ into the organisation;

(ii) The employees may become lethargic if they are sure of timebound promotions;

(iii) A new enterprise cannot use internal sources of recruitment. No organisation can fill all its vacancies from internal sources;

(iv) The spirit of competition among the employees may be hampered; and

(v) Frequent transfers of employees may often reduce the productivity of the organisation.

External Sources

An enterprise has to tap external sources for various positions because all the vacancies cannot be filled through internal recruitment. The existing staff may be insufficient or they may not fulfill the eligibility criteria of the jobs to be filled.

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External recruitment provides wide choice and brings new blood in the organisation. The commonly used external sources of recruitment are discussed below:

(i) Direct Recruitment: Under the direct recruitment, a notice is placed on the noticeboard of the enterprise specifying the details of the jobs available. Jobseekers assemble outside the premises of the organisation on the specified date and selection is done on the spot. The practice of direct recruitment is followed usually for casual vacancies of unskilled or semiskilled jobs. Such workers are known as casual or ‘badli’ workers and they are paid remuneration on daily wage basis. This method of recruitment is very inexpensive as it does not involve any cost of advertising the vacancies. It is suitable for filling casual vacancies when there is a rush of work or when some permanent workers are absent.

(ii) Casual Callers: Many reputed business organisations keep a database of unsolicited applicants in their offices. Such jobseekers can be a valuable source of man power. A list of such jobseekers can be prepared and can be screened to fill the vacancies as they arise. The major merit of this source

of recruitment is that it reduces the cost of recruiting workforce in comparison to other sources.

(iii) Advertisement: Advertisement in newspapers or trade and professional journals is generally used when a wider choice is required. Most of the senior positions of industry as well as commerce are filled by this method. The advantage of advertising vacancies is that more information about the organisation and job can be given in the advertisement. Advertisement gives the management a wider range of candidates from which to choose. Advertisements may be placed in leading newspapers. Its disadvantage is that it may bring in a flood of response, and many times, from quite unsuitable candidates.

(iv) Employment Exchange: Employment exchanges run by the Government are regarded as a good source of recruitment for unskilled and skilled operative jobs. In some cases, compulsory notification of vacancies to employment exchange is required by law. Thus, employment exchanges help to match personnel demand and supply by serving as link between jobseekers and employers. Unfortunately, the records of employment exchange are often

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not uptodate and many of the candidates referred by them may not be found suitable.

(v) Placement Agencies and Man-agement Consultants: In tech nical and professional areas, private agencies and professional bodies appear to be doing substantive work. Placement agencies provide a nationwide service in matching personnel demand and supply. These agencies compile biodata of a large number of candidates and recommend suitable names to their clients. Such agencies charge fee for their services and they are useful where extensive screening is required. These professional recruiters can entice the needed top executives from other companies by making the right offers.

Management consultancy firms help the organisations to recruit technical, professional and managerial personnel. They specialise in middle level and top level executive placements. They maintain data bank of persons with different qualifications and skills and even advertise the jobs on behalf of their clients to recruit right type of personnel.

(vi) Campus Recruitment: Colleges and institutes of management and technology have become a

popular source of recruitment for technical, professional and managerial jobs. Many big organisations maintain a close liaison with the universities, vocational schools and management insti tutes to recruit qualified personnel for various jobs. Recruitment from educational institutions is a wellestablished practice of businesses. This is referred to as campus recruitment.

(vii) Recommendations of Emp-loyees: Applicants introduced by present employees, or their friends and relatives may prove to be a good source of recruitment. Such applicants are likely to be good employees because their background is sufficiently known. A type of preliminary screening takes place because the present employees know both the company and the candidates and they would try to satisfy both.

(viii) Labour Contractors: Labour contractors maintain close contacts with labourers and they can provide the required number of unskilled workers at short notice. Workers are recruited through labour contractors who are themselves employees of the organisation. The disadvantages of this system are that if the contractor himself decides to leave the organisation, all the

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workers employed through him will follow suit.

(ix) Advertising on Television: The practice of telecasting of vacant posts over Television is gaining importance these days. The detailed requirements of the job and the qualities required to do it are publicised alongwith the profile of the organisation where vacancy exists.

(x) Web Publishing: Internet is becoming a common source of recruitment these days. There are certain websites specifically designed and dedicated for the purpose of providing information about both job seekers and job opening. In fact, websites such as www.naukri.com, www.jobstreet.com etc., are very commonly visited both by the prospective employees and the organisations searching for suitable people.

Merits of External SourcesThe advantages of using external sources of recruitment are as follows: (i) Qualified Personnel: By using

external sources of recruitment, the management can attract qualified and trained people to apply for vacant jobs in the organisation.

(ii) Wider Choice: When vacancies are advertised widely, a large number of applicants from outside the organisation apply. The management has a wider choice while selecting the people for employment.

(iii) Fresh Talent: The present employees may be insufficient or they may not fulfill the specifications of the jobs to be filled. External recruitment provide wider choice and brings new blood in the organisation. However, it is expensive and timeconsuming.

(iv) Competitive Spirit: If a company taps external sources, the extisting staff will have to compete with the outsiders. They will work harder to show better performance.

Limitations of External Sources 1. Dissatisfaction among existing staff:

External recruitment may lead to dissatisfaction and frustration among existing employees. They

Campus Recruitment

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may feel that their chances of promotion are reduced.

2. Lengthy process: Recruitment from external sources takes a long time. The business has to notify the vacancies and wait for applications to initiate the selection process.

3. Costly process: It is very costly to recruit staff from external sources. A lot of money has to be spent on advertisement and processing of applications.

SelectIonSelectIonSelection is the process of identifying and choosing the best person out of a number of prospective candidates for a job. Towards this purpose, the candidates are required to take a series of employment tests and interviews. At every stage many are eliminated and a few move on to the next stage until the right type is found. The process may start right from the screening of the applications. It may continue even after the offer of employment, acceptance and joining of the candidate. It is so because the process of selection, like any other managerial

Staffers across many IT companies have won themselves iPods or Asian holidays, motorbikes or even a Maruti Swift. Clearly, employee referrals or buddy recruitments are increasingly becoming big-ticket incentives with staffers enjoying freebies along with hefty bonuses.

On its part, the company not only gets the kind of talent it is eyeing, but also manages to cut recruitment cost considerably, notwithstanding the high payouts. Recruitments through a consultant would typically cost about 25% more. Referral incentives have risen by about 20% in the last two years. Companies have realised that they can bring down the recruitment cost by about 50% through this system.

At the $2.4 billion Juniper Networks, the referral system accounted for 50% of the 290 employees recruited this year.

Referral bonus helps encourage employees to bring like-minded people to the company. This, in turn, will improve retention rate, said Juniper India MD. Besides monetary benefit, ‘successful recruiters’ within Juniper also hold a chance to win gifts like motorbikes and flat screen TVs every quarter.

Referral system, corporates say, help minimise risks in a tight job market. Most companies allow employees to refer another person on the first day of the appointment itself in the form of a buddy list.

Besides lower costs, referrals help companies ensure the new recruit’s sound credentials. Unlike an unknown resume, a referred person is considered to be more reliable as employees also tend to share a certain responsibility in this case.

Source: The Economic Times, 10th December 06

IT Firms Depend upon Employee Referrals – Improves Retention RateIT Firms Depend upon Employee Referrals – Improves Retention Rate

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decision, involves judgment about the performance potential of the candidate. The effectiveness of the selection process would ultimately be tested in terms of onthejob of the chosen person.

Process of SelectionThe important steps in the process of selection are as follows:

(i) Preliminary Screening: Preliminary screening helps the manager eliminate unqualified or unfit job seekers based on the information supplied in the application forms. Preliminary interviews help reject misfits for

reasons, which did not appear in the application forms.

(ii) Selection Tests: An employment test is a mechanism (either a paper and pencil test or an exercise) that attempts to measure certain cha racteristics of individuals. These characteristics range from aptitudes, such as manual dexterity, to intelligence to personality.

Important Tests Used for Selection of Employees:

(a) Intelligence Tests: This is one of the important psychological tests used to measure the level of intelligence

Indian employees have never had it so good. Intense competition and rising attrition levels are forcing companies to hand out 15-20% mid-term salary hikes.

Reliance Industries, Marico and Dabur have offered mid-term increments and out-of-turn hikes of 15-20% to top performers in recent months. This is over and above the 15-20% salary hikes handed out during annual appraisals last year. This comes at a time when India Inc. is desperately trying to hold back talent, especially in telecom, IT, BPO and retail.

A massive recruitment spree in sunrise sectors like BPO, telecom and retail has led to a demand-supply mismatch and mid-term hikes going up to 40%. Average attrition rates in IT have moved up to 22% from 18% and those in BPOs to 50% from 46%. In the manufacturing sector, talent exodus is averaging 8-12%.

Several corporates are even offering bonuses and increments on a quarterly basis to top teams. An HR head said, “Although it is a short-term reaction, we have to react proactively to the market scenario and retain our performers. If one loses an employee, the average time taken for a new person to pick up the skills is up to six months, which is critical time lost for a company. Also, replacement costs like hiring consultants would in any case add up to a huge expense and a lot of pressure on HR,” said Dabur India HR chief.

Company are identifying people who may be tempted to leave and are devising ways of retaining such talent – offering learning and development facilities for freshers, sending them abroad on one-year bonds (for six-months postings), etc.

Source: The Economic Times, 1st Dec. 06

Intense Competition, Talent Crunch Push Companies to Hand Out 15-20% Pay Hikes

Intense Competition, Talent Crunch Push Companies to Hand Out 15-20% Pay Hikes

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quotient of an individual. It is an indicator of a person’s learning ability or the ability to make decisions and judgments.

(b) Aptitude Test: It is a measure of individuals potential for learning new skills. It indicates the person’s capacity to develop. Such tests are good indices of a person’s future success score.

(c) Personality Tests: Personality tests provide clues to a person’s emotions, her reactions, maturity and value system etc. These tests probe the overall personality. Hence, these are difficult to design and implement.

(d) Trade Test: These tests measure the existing skills of the individual. They measure the level of knowledge and proficiency in the area of professions or technical training. The difference between aptitude test and trade test is that the former measures the

potential to acquire skills and the later the actual skills possessed.

(e) Interest Tests: Every individual has fascination for some job than the other. Interest tests are used to know the pattern of interests or involvement of a person.

(iii) Employment Interview: Interview is a formal, indepth conversation conducted to evaluate the appli cant’s suitability for the job. The role of the interviewer is to seek information and that of the interviewee is to provide the same. Though, in present times, the interviewee also seeks information from interviewer.

(iv) Reference and Background Checks: Many employers request names, addresses, and telephone numbers of references for the purpose of verifying information and, gaining additional information on an applicant. Previous employers, known persons, teach ers and university professors can act as references.

Selection is the process of choosing from among the candidates from within the organisation or from the outside, the most suitable person for the current position or for the future position. Dale YoderSelection is a managerial decision making process as to predict which job applicants will be successful if hired. David and RobbinsSelection is the process of differentiating between applicants in order to identify and hire those with a greater likelihood of success in a job. Stone

Some DefinitionsSome Definitions

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Staffing 165

Sources of Application

Is Preliminary Screening

OK

External Sources Internal Sources

Preliminary Screening

Selection Tests Is Selection

TestOK

Is Employ

ment Interview OK

Is Reference and Back-

ground OK

Is Selection

Decision Positive

No …Reject

Yes

Yes

Yes

Start

Evaluation of the effectiveness of the selection

process

Employment contract

Rejected Applications

Job Offer

Yes No …Reject

No …Reject

No …Reject

No …Reject

Selection Decision

Reference and Background Analysis

YesEmployment Interview

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(v) Selection Decision: The final decision has to be made from among the candidates who pass the tests, interviews and reference checks. The views of the concerned manager will be generally considered in the final selection because it is he/she who is responsible for the performance of the new employee.

(vi) Medical Examination: After the selection decision and before the job offer is made, the candidate is required to undergo a medical fitness test. The job offer is given to the candidate being declared fit after the medical examination.

(vii) Job Offer: The next step in the selection process is job offer to those applicants who have passed all the previous hurdles. Job offer is made through a letter of appointment/confirm his acceptance. Such a letter generally contains a date by which the appointee must report on duty. The appointee must

be given reasonable time for reporting.

(viii)Contract of Employment: After the job offer has been made and candidate accepts the offer, certain documents need to be executed by the employer and the candidate. One such document is the attestation form. This form contains certain vital details about the candidate, which are authenticated and attested by him or her. Attestation form will be a valid record for future reference. There is also a need for preparing a contract of employment. Basic information that should be included in a written contract of employment will vary according to the level of the job, but the following checklists sets out the typical headings: Job Title, Duties, Responsibilities, Date when continuous employment starts and the basis for calculating service, rates of pay, allowances, hours of work, leave rules, sickness, grievance procedure,

Consider, for a moment that any selection decision can result in 4 possible outcomes. A decision is correct when an applicant was predicted to be successful and proved to be successful on the job, or when the applicant was predicted to be unsuccessful and would perform accordingly if hired. In the first case, we have successfully accepted; in the second case we have successfully rejected. Problems arise when errors are made in rejecting candidates who would have performed successfully on the job (reject errors) or accepting those who ultimately perform poorly (accept errors). Don’t you think, these problems can be significant and can result in costly mistakes?

Right/ Wrong Selection Decisions Matter a lot to the Organisations!Right/ Wrong Selection Decisions Matter a lot to the Organisations!

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disciplinary procedure, work rules, termination of employment.

traInIng and developMenttraInIng and developMentSomeone has rightly said:

“If you wish to plan for a year, sow seeds,

If you wish to plan for 10 years, plant trees,

If you wish to plan for a lifetime, develop people.”

Training and Development is an attempt to improve the current or future employee performance by increasing an employee’s ability to perform through learning, usually by changing the employee’s attitude or increasing his or her skills and knowledge.

Importance of Training and Development

When jobs were simple, easy to learn and influenced to only a small degree by technological changes, there was little need for employees to upgrade or alter their skills. But the rapid changes taking place during the last quarter century in our highly sophisticated and complex society have created increased pressures for organisations to readapt the products and services produced, the manner in which products and services are produced and offered, the types of jobs required and the types of skills necessary to complete these jobs. Thus, as jobs have become more

complex the importance of employee training has increased.

Training and development help both the organisation and the individual.

Benefits to the organisationThe benefits of training and development to an organisation are as follows: (i) Training is a systematic learning,

always better than hit and trial methods which lead to wastage of efforts and money.

(ii) It enhances employee productivity both in terms of quantity and quality, leading to higher profits.

(iii) Training equips the future manager who can take over in case of emergency.

(iv) Training increases employee morale and reduces absenteeism and employee turnover.

(v) It helps in obtaining effective response to fast changing environment – technological and economic.

Benefits to the EmployeeThe benefits of training and development activity to the employees are as follows: (i) Improved skills and knowledge

due to training lead to better career of the individual.

(ii) Increased performance by the individual help him to earn more.

(iii) Training makes the employee more efficient to handle machines. Thus, less prone to accidents.

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(iv) Training increases the satisfaction and morale of employees.

Training, Development and Education

The term training is used to indicate the process by which attitudes, skills and abilities of employees to perform specific jobs are increased. But the term development means growth of individual in all respects. Training is short term process but development is an on going process. Also, development includes training.

It also needs to be understood that training, education and development are distinct terms although they overlap to some extent.

Training is any process by which the aptitudes, skills and abilities of employees to perform specific jobs are increased. It is a process of learning new skills and application of knowledge. It attempts to improve their performance on the current job or prepare them for any intended job.

Education is the process of increasing the knowledge and understanding

of employees. It is the understanding and interpretation of knowledge. It does not provide definite answers, but rather develops a logical and rational mind that can determine relationships among pertinent variables and thereby understand a phenomenon. Education imparts qualities of mind and character and understanding of the basic principles and develop the capacities of analysis, synthesis and objectivity. Education is broader in scope than training. Training is tied to the goals of organisations more than to the goals of the individual.

Development refers to the learning opportunities designed to help employees grow. It covers not only those activities which improve job performance but also those which bring about growth of the personality, help individuals in the progress towards maturity and actualisation of their potential capacities so that they become not only good employees but better men and women.

The field of training and development concerned with improving deals with the design and delivery

Difference between Training and Development

Training Development

It is a process of increasing knowledge and skills.

It is a process of learning and growth.

It is to enable the employee to do the job better.

It is to enable the overall growth of the employee.

It is a job oriented process. It is a career oriented process.

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of learning to improve performance within organisations. In some organisations the term Learning and Development is used instead of Training and Development in order to emphasise the importance of learning for the individual and the organisation. In other organisations, the term Human Resource Development is used.

traInIng MetHodStraInIng MetHodSThere are various methods of training. These are broadly categorised into two groups: OntheJob and Offthe Job methods. OntheJob methods

refer to the methods that are applied to the workplace, while the employee is actually working. OfftheJob methods are used away from the work place. The former means learning while doing, while the latter means learning before doing.

on tHe Job MetHodS on tHe Job MetHodS (i) Apprenticeship Programmes:

Apprenticeship programmes put the trainee under the guidance of a master worker. These are designed to acquire

Dressed in traditional kurta-payjama and a Gandhi topi, these two swayed HR managers from across the country.

While the presentations made by HR managers from reputed companies on developing human potential; HR perspective at Ahmedabad Management Association were well-received, it were Dabbawalas from Nutan Mumbai Tiffin Box Supply Charity (NTBSC) Trust who stole the show. Both Gangaram Talekar and Raghunath Medge made power-point presentations from their laptops.

From supply-chain management to organisation structure, each slide on the screen gave audience an insight into how NTBSC has successfully run their organisation for over 115 years.

This with error rate of just one in 16 million, six sigma of 99.9999%, without any technology back-up, standard pricing and no strikes. Above all, they also spoke about the zero attrition rate at NTBSC. Of the 5,000 people associated with the service, over 3,500 are illiterate. We don’t even known what six sigma means, but we believe in customer satisfaction, he added. The duo touched upon time management, customer care, value-system of the organisation and training.

“Our experienced members teach trainees. For them it is very important to understand the code, as most of the new people who come to us are illiterate. We conduct a training programme for them. That’s the reason why we have been able to maintain such a low error rate,” said Medge.

Source: The Economic Times, 15th Nov. 06

Training of Staff at NTBSC (Dabbawalas)Training of Staff at NTBSC (Dabbawalas)

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a higher level of skill. People seeking to enter skilled jobs, to become, for example, plumbers, electricians or ironworkers, are often required to undergo apprenticeship training. These apprentices are trainees who spend a prescribed amount of time working with an experienced guide, or trainer. A uniform period of training is offered to trainees, in which both fast and slow learn here, are placed together. Slow learners may require additional training.

(ii) Coaching: In this method, the superior guides and instructs the trainee as a coach. The coach or counselor sets mutually agreed upon goals, suggests how to achieve these goals, periodically reviews the trainees progress and suggests changes required in behavior and performance. The trainee works directly with a senior manager and the manager takes full responsibility for the trainee’s coaching. Classically the trainee is being groomed to replace the senior manager and relieve him from some of his duties. This gives a chance for the trainee to learn the job also.

(iii) Internship Training: It is a joint programme of training in which educational institutions and business firms cooperate.

Selected candidates carry on regular studies for the prescribed period. They also work in some factory or office to acquire practical knowledge and skills.

(iv) Job Rotation: This kind of training involves shifting the trainee from one department to another or from one job to another. This enables the trainee to gain a broader understanding of all parts of the business and how the organisation as a whole functions. The trainee gets fully involved in the departments operations and also gets a chance to test her own aptitude and ability. Job rotation allows trainees to interact with other employees facilitating future cooperation among departments. When employees are trained by this method, the organisation finds it easier at the time of promotions, replacements or transfers.

off tHe Job MetHodS off tHe Job MetHodS (i) Class Room Lectures/Confer-

ences: The lecture or conference approach is well adapted to conveying specific informationrules, procedures or methods. The use of audiovisuals or demonstrations can often make a formal classroom presentation more interesting while increasing retention and offering a vehicle for clarifying more difficult points.

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(ii) Films: They can provide information and explicitly demonstrate skills that are not easily represented by the other techniques. Used in conjunction with conference discussions, it is a very effective method in certain cases.

(iii) Case Study: Taken from actual experiences of organisations, cases represent attempts to describe, as accurately as possible real problems that managers have faced. Trainees study the cases to determine problems, analyse causes, develop alternative solutions, select what they believe to be the best solution, and implement it.

(iv) Computer Modelling: It simulates the work environment by programming a computer to imitate some of the realities of the job and allows learning to take place without the risk or high costs that would be incurred if

a mistake were made in real life situation.

(v) Vestibule Training: Employees learn their jobs on the equipment they will be using, but the training is conducted away from the actual work floor. Actual work environments are created in a class room and employees use the same materials, files and equipment. This is usually done when employees are required to handle sophisticated machinery and equipment.

(vi) Programmed Instruction: This method incorporates a prearranged and proposed acquisition of some specific skills or general knowledge. Information is broken into meaningful units and these units are arranged in a proper way to form a logical and sequential learning package i.e. from simple to complex. The trainee goes through these units by answering questions or filling the blanks.

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Staffing Personnel Management

Human Resource Management

Recruitment Selection

Training Development

Performance Appraisal Assessment Tests

Meaning: Staffing has been described as the managerial function of filling and keeping filled, the positions in an organisation structure. This is achieved by, first of all, identifying requirement of work force, followed by recruitment, selection, placement, promotion, appraisal and development of personnel, to fill the roles designed into the organisation structure.Need and Importance of Staffing: In any organisation, there is a need for people to perform work. The staffing function of management fulfills this requirement and finds the right people for the right job.The staffing function has assumed greater importance these days because of rapid advancement of technology, increasing size of organisation and complicated behaviour of human beings. The ability of an organisation to achieve its goal depends upon the quality of its human resources.Staffing as part of Human Resource Management: Staffing is a function which all managers need to perform. It is a separate and specialised function and there are many aspects of human relations to be considered.It is the responsibility of all managers to directly deal and select people to work for the organisation. When the manager performs the staffing function his role is slightly limited. In small organisations, managers may perform all duties related to employees salaries, welfare and working conditions.But as organisations grow and number of persons employed increases, a separate department called the human resource department is formed which has specialists in the field to manage people.

Key Terms

Summary

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Human Resource Management includes many specialised activities and duties which the human resource personnel must perform. Evolution of HRM: Human resource management has replaced the traditional concept of labour welfare and personnel management. HRM in its present form has evolved from a number of significant interrelated developments, which date back to the era of industrial revolution. Emergence of trade union movement led to the need of a person who could act as an effective link between the owners and workers.You may have observed that all these aspects are concerned with the human element in the industry as distinct from the mechanical side of the enterprise. Thus, staffing is an inherent part of human resource management as it is the practice of finding, evaluating and establishing a working relationship with people, for a purpose.Staffing Process: The prime concern of the staffing function in the management process is the timely fulfillment of the manpower requirements within an organisation. Estimating the Manpower Requirements: Performance of each job necessitates the appointment of a person with a specific set of educational qualifications, skills, prior experience and so on. Operationally, understanding the manpower requirements would necessitate workload analysis on the one hand and workforce analysis on the other. Recruitment: Recruitment may be defined as the process of searching for prospective employees and stimulating them to apply for jobs in the organisation.Selection: Selection is the process of choosing from among the pool of the prospective job candidates developed at the stage of recruitment.Placement and Orientation: Orientation is introducing the selected employee to other employees and familiarising him with the rules and policies of the organisation. Placement refers to the employee occupying the position or post for which the person has been selected. Training and Development: What people seek is not simply a job but a career. Every one must have the opportunity to rise to the top. The best way to provide such an opportunity is to facilitate employee learning. Recruitment Recruitment refers to the process of finding possible candidates for a job or function.

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Sources of Recruitment: The requisite positions may be filled up from within the organisation or from outside. Thus, there are two sources of recruitment – Internal and External. Internal Sources: Recruitment from within the enterprise. There are two important sources of internal recruitment, namely, transfers and promotions.External Sources: An enterprise has to tap external sources for various positions because all the vacancies cannot be filled through internal recruitment. The commonly used external sources of recruitment are Direct Recruitment, Casual Callers, Advertisements, Employment Exchange, Placement Agencies and Management Consultants, Campus Recruitment, Recommendations of Employees, Labour Contractors, Advertising on Television and Web Publishing.Process of Selection: (i) Preliminary Screening: Application Form (ii) Selection Tests: (a) Intelligence Tests (b) Aptitude Test (c) Personality Tests (d) Trade Test (e) Interest Tests (iii) Employment (iv) Interview, (v) Reference and Background Checks, (vi) Selection Decision, (vii) Medical Examination, (viii) Job Offer (ix) Contract of Employment

Training and DevelopmentNeed of Training and DevelopmentThe rapid changes taking place in our highly sophisticated and complex society have created increased pressures for organisations to readapt the products and services produced, the manner in which products and services are produced and offered, the types of jobs required and the types of skills necessary to complete these jobs. Training is any process by which the aptitudes, skills and abilities of employees to perform specific jobs are increased. Education is the process of increasing the knowledge and understanding of employees. It is the understanding and interpretation of knowledge. Development refers to the learning opportunities designed to help employees grow.

Training MethodsThere are various methods of training. These are broadly categorised into two groups: OntheJob and OfftheJob methods. On the Job Methods(i) Apprenticeship Programs (ii) Coaching (iii) Internship Training (iv) Job Rotation Off the Job Methods

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Exercises(i) Class Room Lectures/Conferences (ii) Films (iii) Case Study (iv) Computer Modelling (v) Vestibule Training (vi) Programmed Instruction.

Short Answer Type 1. Briefly enumerate the important sources of recruitment. 2. What is meant by recruitment? How is it different from

selection? 3. Define Training. How is it different from education? 4. Distinguish between training and development. 5. Why are internal sources of recruitment considered to be

more economical? 6. What is the importance of staffing function in today’s

environment?

Long Answer Type 1. Define the staffing process and the various steps involved in it? 2. Explain the procedure for selection of employees. 3. What are the advantages of training to the individual and to

the organisation? 4. The staffing function is performed by every manager and not

necessarily by a separate department. Explain.

Application Type

1. The workers of a factory are unable to work on new machines and always demand for help of supervisor. The Supervisor is overburdened with their frequent calls. Suggest the remedy.

2. The workers of a factory remain idle because of lack of knowledge of hitech machines. Frequent visit of engineer is made which causes high overhead charges. How can this problem be removed.

3. The quality of Production is not as per standards. On investigation it was observed that most of the workers were not fully aware of the proper operation of the machinery. What could be the way to improve the accuracy?

4. An organisation provides security services. It requires such candidates who are reliable and don’t leak out the secrets of their clients. What step should be incorporated in selection process?

5. A company is manufacturing paper plates and bowls. It produces 100000 plates and bowls each day. Due to local

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festival, it got an urgent order of extra 50,000 plates bowls. Advise how the company will fulfill its order and which method of recruitment would you suggest.

(i) A company X limited is setting up a new plant in India for manufacturing auto components. India is a highly competitive and cost effective production base in this sector. Many reputed car manufacturers source their auto components from here.

X limited is planning to capture about 40% of the market share in India and also export to the tune of at least $5 million in about 2 years of its planned operations. To achieve these targets it requires a highly trained and motivated work force. You have been retained by the company to advise it in this matter. While giving answers keep in mind the sector the company is operating.

Questions

1. Outline the process of staffing the company should follow.

2. Which sources of recruitment the company should rely upon. Give reasons for your recommendation.

3. Outline the process of selection the company should follow with reasons.

4. Which methods of training and development should be company initiate? Explain giving reasons.

(ii) A major insurance company handled all recruiting, screening and training processes for data entry/customer service representatives. Their competitor was attracting most of the qualified, potential employees in their market. Recruiting was made even more difficult by the strong economy and the ‘jobseeker’s market.’ This resulted in the client having to choose from candidates who had the ‘soft’ skills needed for the job, but lacked the proper ‘hard’ skills and training.

Questions

1. As an HR manager what problems do you see in the company?

2. How do you think it can be resolved?

(iii) A Public transport corporation has hired 1000 buses for the different routes for the passengers of metropolitan city. Most

Case Study

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of the 3000 crewmen (drivers, conductors, helpers etc.) of these buses have been found to be wanting in satisfactorily dealing with public and daily commuters. They seem to be little interested in the job and the job seem to have lost all meaning to them.

Questions

1. As manager of the public transport company what measures do you suggest to improve the working of crewman in question?

2. Is it possible to modify their behaviour by planning a suitable type of training? Suggest one.

(iv) Ms. Jayshree recently completed her Post Graduate Diploma in Human Resource Management. A few months from now a large steel manufacturing company appointed her as its human resource manager. As of now, the company employs 800 persons and has an expansion plan in hand which may require another 200 persons for various types of additional requirements. Ms. Jayshree has been given complete charge of the company’s Human Resource Department.

Questions 1. Point out, what functions is she supposed to perform? 2. What problems do you foresee in her job? 3. What steps is she going to take to perform her job

efficiently?

4. How significant is her role in the organisation?

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DIRECTINGCHAPTER7

LEARN ING OBJECT IVES

After studying this chapter, you should be able to: Explain the concept of directing

and its importance in business organisations;

Understand the principles guiding directing process;

Explain the meaning of supervision and its importance;

Explain the meaning of motivation and its importance in business management;

Understand and explain Maslow’s theory of hierarchy of needs and its application to motivation of employees in an organisation;

Explain the financial and non-financial incentives through which managers motivate their employees;

Explain the concept of leadership and its importance in management;

Describe the qualities of a good leader;

Explain about formal and informal communications in the organisations; and

Identify various barriers to effective communications and measures to overcome these barriers in the organisations.

Ford has always attracted and nurtured capable managers and technicians, but it has failed to do the same for change agents and leaders. So, as part of the automaker’s cultural overhaul, Ford is embarking on a sweeping attempt to mass-manufacture leaders. It wants to build an army of “warrior-entrepreneurs” — people who have the courage and skills to topple old ideas, and who believe in change passionately enough to make it happen.

Ford will send about 2,500 managers to its Leadership Development Center for one of its four programs — Capstone, Experienced Leader Challenge, Ford Business Associates, and New Business Leader — instilling in them not just the mind-set and vocabulary of a revolutionary but also the tools necessary to achieve a revolution. At the same time, through the Business Leaders Initiative, all 100,000 salaried employees worldwide will participate in business-leadership “cascades,” intense exercises that combine trickle-down communications with substantive team projects.

Ford views grassroot leadership as the best vehicle for creating a successful business.

Grassroot Leadership - Ford Motor Co.Grassroot Leadership - Ford Motor Co.

Adapted from an article on http://www.fastcompany.com/online/33/ford.html

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INTRODUCTIONThe above case reveals how important it is to instill leadership qualities in all managers. Business organisations have always given due importance to its managers who are capable of leading others. A manager needs to use various ways to lead, motivate and inspire the subordinates and to communicate with them suitably. These ways, discussed in the present chapter, are collectively called the directing function of management.

MEANINGIn the ordinary sense, directing means giving instructions and guiding people in doing work. In our daily life, we come across many situations like a hotel owner directing his employees to complete certain activities for organising a function, a teacher directing his student to complete an assignment, a film director directing the artists about how they should act in the film etc. In all these situations, we can observe that directing is done to achieve some predetermined objective.

In the context of management of an organisation, directing refers to the process of instructing, guiding, counselling, motivating and leading people in the organisation to achieve its objectives.

You can observe here that directing is not a mere issue of communication but encompasses many elements like supervision, motivation and leadership. It is one of the key managerial functions

performed by every manager. Directing is a managerial process which takes place throughout the life of an organisation.

The main characteristics of directing are discussed below: (i) Directing initiates action: Directing

is a key managerial function. A manager has to perform this function along with planning, organising, staffing and controlling while discharging his duties in the organisation. While other functions prepare a setting for action, directing initiates action in the organisation.

(ii) Directing takes place at every level of management: Every manager, from top executive to supervisor performs the function of directing. The directing takes place wherever superior – subordinate relations exist.

(iii) Directing is a continuous process: Directing is a continuous activity. It takes place throughout the life of the organisation irrespective of people occupying managerial positions. We can observe that in organisations like Infosys, Tata, BHEL, HLL and the managers may change but the directing process continues because without direction the organisational activities can not continue further.

(iv) Directing flows from top to bottom: Directing is first initiated at top level and flows to the bottom through organisational hierarchy.

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It means that every manager can direct his immediate subordinate and take instructions from his immediate boss.

IMPORTANCE OF DIRECTINGThe importance of directing can be understood by the fact that every action in the organisation is initiated through directing only. Directing guides towards achievement of common objectives. Through directing, managers not only tell the people in the organisation as to what they should do, when they should do and how they should do but also see that their instructions are implemented in proper perspective. Very often, this becomes an important factor in the efficient and effective functioning of the organisation. The points which emphasise the importance of directing are presented as follows: (i) Directing helps to initiate action by

people in the organisation towards attainment of desired objectives. For example, if a supervisor guides his subordinates and clarifies their doubts in performing a task, it will help the worker to achieve work targets given to him.

(ii) Directing integrates employees-efforts in the organisation in such a way that every individual effort contributes to the organisational performance. Thus, it ensures that the individuals work for organisational goals. For example,

a manager with good leadership abilities will be in a position to convince the employees working under him that individual efforts and team effort will lead to achievement of organisational goals.

(iii) Directing guides employees to fully realise their potential and capabilities by motivating and providing effective leadership. A good leader can always identify the potential of his employees and motivate them to extract work up to their full potential.

(iv) Directing facilitates introduction of needed changes in the organi-sation. Generally, people have a tendency to resist changes in the organisation. Effective directing through motivation, communication and leadership helps to reduce such resistance and develop required cooperation in introducing changes in the organisation. For example, if a manager wants to introduce new system of accounting, there may be initial resistance from accounting staff. But, if manager explains the purpose, provides training and motivates with additional rewards, the employees may accept change and cooperate with manager.

(v) Effective directing helps to bring stability and balance in the organisation since it fosters cooperation and commitment

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among the people and helps to achieve balance among various groups, activities and the departments.

PRINCIPLES OF DIRECTINGProviding good and effective directing is a challenging task as it involves many complexities. A manager has to deal with people with diverse background, and expectations. This comp licates the directing process. Certain guiding principles of directing may help in directing process. These principles are briefly explained below: (i) Maximum individual contribution:

This principle emphasises that directing techniques must help every individual in the organisation to contribute to his maximum potential for achievement of organisational objectives. It should bring out untappted energies of employees for the efficiency of organisation. For example, a good motivation plan with suitable monetary and non-monetary rewards can motivate an employee to contribute his maximum efforts for the organisation as he or she may feel that their efforts will bring them suitable rewards.

(ii) Harmony of objectives: Very often, we find that individual objectives of employees and the organisational objectives as understood are conflicting to each other. For example, an employee may expect attractive salary and monetary

benefits to fulfill his personal needs. The organisation may expect employees to improve productivity to achieve expected profits. But, good directing should provide harmony by convincing that employee rewards and work efficiency are complimentary to each other.

(iii) Unity of Command: This principle insists that a person in the organisation should receive instructions from one superior only. If instructions are received from more than one, it creates confusion, conflict and disorder in the organisation. Adherence to this principle ensures effective direction.

(iv) Appropriateness of direction tech-nique: According to this principle, appropriate motivational and leadership technique should be used while directing the people based on subordinate needs, capabilities, attitudes and other situational variables. For example, for some people money can act as powerful motivator while for others promotion may act as effective motivator.

(v) Managerial communication: Effe-ctive managerial communication across all the levels in the organisation makes direction effective. Directing should convey clear instructions to create total understanding to subordinates. Through proper feedback, the

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managers should ensure that subordinate understands his instructions clearly.

(vi) Use of informal organisation: A manager should realise that informal groups or organisations exist within every formal organi-sation. He should spot and make use of such organisations for effective directing.

(vii) Leadership: While directing the subordinates, managers should exercise good leadership as it can influence the subordinates positively without causing dissa-tisfaction among them.

(viii)Follow through: Mere giving of an order is not sufficient. Mana-gers should follow it up by reviewing continuously whether orders are being implemented accordingly or any problems are being encountered. If necessary, suitable modifications should be made in the directions.

ELEMENTS OF DIRECTIONThe process of directing involves guiding, coaching, instructing, moti-vating, leading the people in an organisation to achieve organisational objectives. Consider the following examples: (i) A supervisor explains a worker about operations to be carried by him on a lathe machine, (ii) A mining engineer explains about safety precautions to be followed while working in a coal mine, (iii) A Managing Director declares share in the profits

to the managers for their contribution to inhance profits of the company, and (iv) A manager inspires his/her employees by playing a lead role in performing a work.

All these examples and many other activities related to directing may broadly be grouped into four categories which are the elements of directing. These are: (i) Supervision (ii) Motivation (iii) Leadership (iv) Communication

To know more about directing, these elements are discussed in detail.

SUPERVISIONThe term supervision can be under-stood in two ways. Firstly, it can be understood as an element of directing and secondly, as a function performed by supervisors in the organisational hierarchy.

Supervision being an element of directing, every man ager in the organi-sation supervises his/her subordinates. In this sense, supervision can be understood as the process of guiding the efforts of employees and other resources to accomplish the desired objectives. It means overseeing what is being done by subordinates and giving instructions to ensure opti-mum utilisation of resources and achievement of work targets.

Secondly, supervision can be understood as the function to be perf-ormed by supervisor, a managerial

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Rashmi Joshi had been a district sales manager with Fine Productions for ten years. She was recognised by her peers and supervisors as a person who managed department in a good way. However, everyone realised that Rashmi was extremely ambitious and was seeking a higher-level management position. When one of her sales representatives did a good job, she would attempt to take the credit. However, if a problem arose, she thought it was not her fault. When the marketing manager retired, Rashmi applied for the position. The company decided to do a thorough search because of the responsibility and importance associated with the position. When the search was concluded, the decision was made to fill the position by a person from outside the company. The consensus of top management was that Rashmi, although a good district sales manager might have difficulties in working with her new peer groups. They felt that she might displease the other managers if she tried to take credit for their work and, as a result, their performance would suffer.

Rashmi was heart-broken. She had wanted that particular job for a long time and had dedicated all her energies towards obtaining it. She became very despondent and her work deteriorated. The department functioned inspite of her, not because of her. Decisions were made slowly if at all and she began to be late with her sales reports. Although her sales staff continued to be productive, Rashmi could not take the credit.

When the new marketing manager took over, one of the first major problems that he confronted was how to motivate and inspire Rashmi to her former level of performance. He recognised that Rashmi had been with the company for a long time but something had to be done to motivate her to perform really well.

Directing a Dissatisfied ManagerDirecting a Dissatisfied Manager

position in the organisation hier-archy at the operative level i.e., immedia tely above the worker. The functions and performance of the supervisor are vital to any organi-sation because he is directly related with workers whereas other mangers have no direct touch with bottom level workers.

Importance of SupervisionThe importance of supervision can be understood from multiple roles performed by a supervisor. These are explained below: (i) Supervisor maintains day-to-day

contact and maintains friendly

relations with workers. A good supervisor acts as a guide, friend and philosopher to the workers.

(ii) Supervisor acts as a link between workers and management. He conveys management ideas to the workers on one hand and workers problems to the manage-ment on the other. This role played by supervisor helps to avoid misunderstandings and conflicts between management and workers/employees.

(iii) Supervisor plays a key role in maintaining group unity among workers placed under his control. He sorts out internal differences

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and maintains harmony among workers.

(iv) Supervisor ensures performance of work according to the targets set. He takes responsibility for task achievement and motivates his workers effectively.

(v) Supervisor provides good on-the-job training to the workers and employees. A skilled and knowledgeable supervisor can build efficient team of workers.

(vi) Supervisory leadership plays a key role in influencing the workers in the organisation. A supervisor with good leadership qualities can build up high morale among workers.

(vii) A good supervisor analyses the work performed and gives feedback to the workers. He suggests ways and means of developing work skills.

MOTIVATIONThe case of Rashmi reveals an important fact of managerial work; it is not always possible to get the best of work from employees merely by exercising formal authority. What makes people to behave the way they do? Why are some people reluctant to do the work though they have ability to do? What should be done to make people work effectively?

For answering these questions, a manager should try to develop insights into causes of behaviour of people. A manager may come across

highly committed and hardworking staff or lazy, evasive and superficial workers. He or she may wonder what to do with workers not willing to work to their potential. Psychologists say it is motivation, which stimulates people to take up work voluntarily.

Let us try to understand something about motivation.Motivation: Motivation means inci-tement or inducement to act or move. In the context of an organisation, it means the process of making subordinates to act in a desired manner to achieve certain organisational goals.

While discussing about motivation, we need to understand three inter related terms — motive, motivation and motivators. Let us try to know about these terms.

(i) Motive: A motive is an inner state that energises, activates or moves and directs behaviour towards goals. Motives arise out of the needs of individuals. Realisation of a motive causes restlessness in the individual which prompts some action to reduce such restlessness. For example, the need for food causes hunger an account of which a man searches for food. Some such motives are – hunger, thirst, security, affiliation, need for comfort, recognition etc.,

(ii) Motivation: Motivation is the process of stimulating people to action to accomplish desired goals. Motivation depends upon satisfying needs of people.

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(ii) Motivation produces goal directed behaviour. For example, the promotion in the job may be given to employee with the objective of improving his performance. If the employee is interested in promotion, it helps to produce a behaviour to improve performance.

(iii) Motivation can be either positive or negative. Positive motivation provides positive rewards like increase in pay, promotion, recognition etc., Negative moti-vation uses negative means like punishment, stopping increments, threatening etc. which also may induce a person to act in the desired way.

(iv) Motivation is a complex process as the individuals are heterogeneous in their expectations, perceptions and reactions. Any type of motivation may not have uniform effect on all the members.

(iii) Motivators: Motivator is the technique used to motivate people in an organisation. Managers use diverse motivators like pay, bonus, promotion, recognition, praise, responsibility etc., in the organisation to influence people to contribute their best.

Some of the definitions to explain the concept of motivation are given in the above box.Features of Motivation: The ana-lysis of various definitions and viewpoints on motivation reveals the following features of motivation: (i) Motivation is an internal feeling.

The urge, drives, desires, aspi-rations, striving or needs of human being, which are internal, influence human behaviour. For example, people may have the urge or desire for possessing a motorbike, comfortable house, reputation in the society. These urges are internal to an individual.

Definitions on MotivationMotivation means a process of stimulating people to action to accomplish desired goals

William G. ScoutMotivation refers to the way in which urges, drives, desires, aspirations, strivings or needs direct, control and explain the behaviour of human beings.

Mc FarlandMotivation is a complex force starting with keeping a person at work in an organisation. Motivation is something which moves the person to action and continues him in the course of action already initiated.

DubinMotivation is a process which begins with a physiological or psychological need or deficiency which triggers behaviour or a drive that is aimed at a goal or incentive.

Fred Luthans

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Motivation Process: Motivation process is based on human needs. A simple model to explain motivation process is presented below.

The following example explains the process of satisfaction of human needs.

Ramu is very hungry since he did not have breakfast in the morning. By1.00 P.M., he became restless and started walking on the road in search of a hotel for snacks or meals. After

walking for 2 kms, he could find a hotel where roti and dal was available for Rs. 10. Since he had only Rs. 15 in his pocket, he paid Rs. 10 and had a satisfying meal. After taking a meal, he felt that he had regained energy.

An unsatisfied need of an individual creates tension which stimulates his or her drives. These drives generate a search behaviour to satisfy such need. If such need is satisfied, the individual is relieved of tension.

In Tata Steel several initiatives have been taken to further improve the motivation levels and participation in the decision making process of the officers, greater impetus to training through a formalised system of a personal development programme, talent review and job rotation systems, compensation linked to the performance management system, formal rewards and recognition systems, knowledge management systems linked with appraisals, leadership opportunities in quality circles, continuous improvement and value engineering programmes and an extremely transparent and credible multi-path communication system to address queries and concerns of all employees through various dialogues both formal and online, with such tools as video conferencing, ‘MD Online’, special dialogues with senior management, meetings, conferences and seminars. These initiatives have helped to build a homogeneous and focused team in Tata Steel, increasing motivation and binding to the vision of the company and spurred employees to deliver targets on a participatory management basis leading to ownership of processes.

Tata Steel is a company that actively promotes freedom to work, freedom to innovate and even the freedom to fail. It is a nimble, fast, modern and forward-looking company on a strong growth path. The company has undergone a revolutionary change in terms of its production facilities and the technology in the manufacturing process. These changes have resulted in creating greater opportunities for taking up newer challenges for young recruits work and for performance based on IT enabled systems and high levels of automation. These have led to making the company one of the lowest cost producers of steel and the only Indian company to be recognised by the World Steel Dynamics as one of the top most ‘World Class’ steel makers. Tata Steel hopes not only to consolidate but better its leadership by robust leadership development systems that have seen the company create many CEOs for other companies.

Motivating Employees in Tata Steel Motivating Employees in Tata Steel

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Importance of Motivation: In the example of Tata Steel you have seen how the direction, motivation and effective leadership has taken the company forward. Even commu-nication systems in the company have encouraged employees to achieve targets.

Motivation is considered important because it helps to identify and satisfy the needs of human resources in the organisation and thereby helps in improving their performance. It is the reason why every major organisation develops various kinds of motivational programmes and spends crores of rupees on these programmes. The importance of moti-vation can be pointed out by the following benefits: (i) Motivation helps to improve

performance levels of employees

as well as the organisation. Since proper motivation satisfies the needs of employees, they in turn devote all their energies for optimum performance in their work. A satisfied employee can always turnout expected performance. Good motivation in the organisation helps to achieve higher levels of performance as motivated employees contribute their maximum efforts for organisational goals.

(ii) Motivation helps to change nega-tive or indifferent attitudes of employee to positive attitudes so as to achieve organisational goals. For example, a worker may have indifferent or negative attitude towards his work, if he is not rewarded properly. If suitable rewards are given and supervisor gives positive encouragement and praise for the good work done, the worker may slowly develop positive attitude towards the work.

(iii) Motivation helps to reduce emp-loyee turnover and thereby saves the cost of new recruitment and training. The main reason for high rate of employee turnover is lack of motivation. If managers identify motivational needs of employees and provide suitable incentives, employees may not think of leaving the organisation. High rate of turnover compels management to go for new recrui-

Reduction of Tension

Satisfied Need

Search Behaviour

Drives

Tension

Unsatisfied Need

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these, Maslow’s Need Hierarchy Theory is considered fundamental to understanding of motivation. Let us examine it in detail.

Abraham Maslow, a well-known Psychologist in a classic paper published in 1943, outlined the elements of an overall theory of motivation.

His theory was based on human needs. He felt that within every human being, there exists a hierarchy of five needs. These are: (i) Basic Physiological Needs: These

needs are most basic in the hierarchy and corresponds to primary needs. Hunger, thirst, shelter, sleep and sex are some examples of these needs. In the organisational context, basic salary helps to satisfy these needs.

(ii) Safety/Security Needs: These needs provide security and protection from physical and emotional harm. Examples: job security, stability of income, Pension plans etc.,

(iii) Affiliation/Belonging Needs: These needs refer to affection, sense of belongingness, acceptance and friendship.

(iv) Esteem Needs: These include factors such as self-respect, auto-nomy status, recognition and attention.

(v) Self Actualisation Needs: It is the highest level of need in the hierarchy. It refers to the drive to become what one is capable of

tment and training which involve additional investment of money, time and effort. Motivation helps to save such costs. It also helps to retain talented people in the organisation.

(iv) Motivation helps to reduce abse-nteeism in the organisation. Some important reasons for absenteeism are–bad working conditions, inadequate rewards, lack of recognition, poor relations with supervisors and colleagues etc. Through sound motivational system, all these deficiencies can be covered. If motivation is adequately provided, work becomes a source of pleasure and workers attend to the work regularly.

(v) Motivation helps managers to introduce changes smoothly without much resistance from people. Normally, for any change introduced in the organisation, there may be resistance for changes. If manager can convince employees that proposed changes will bring additional rewards to employees, they may readily accept the change.

Maslow’s Need Hierarchy Theory of Motivation: Since motivation is highly complex, many researchers have studied about motivation from several dimensions and developed some theories. These theories help to develop understanding about motivation phenomenon. Among

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becoming. These needs include growth, self-fulfillment and achi-evement of goals.

Maslow’s theory is based on the following assumptions: (i) People’s behaviour is based on

their needs. Satisfaction of such needs influences their behaviour.

(ii) People’s needs are in hierarchical order, starting from basic needs to other higher level needs.

(iii) A satisfied need can no longer motivate a person; only next higher level need can motivate him.

(iv) A person moves to the next higher level of the hierarchy only when the lower need is satisfied.

Maslow’s Theory focuses on the needs as the basis for motivation. This theory is widely recognised and appreciated. However, some

of his propositions are questioned on his classification of needs and hierarchy of needs. But, despite such criticism, the theory is still relevant because needs, no matter how they are classified, are important to understand the behaviour. It helps managers to realise that need level of employee should be identified to provide motivation to them.

Financial and Non-Financial Incentives Incentive means all measures which are used to motivate people to improve performance. These incentives may be broadly classified as financial and non financial. Let us learn about these incentives in detail.Financial Incentives: In the context of existing economic system, money

Self fulfillment

Status

Friendship

Stability of Income

Hunger

Achievement of goals

Job title

Cordial relations with

colleagues

Pension plan

Basic Salary

Esteem needs

Affiliation/Belongingness

needs

Safety/Security needs

Basic Physiological Needs

Individual Example

Organisational Example

Self actualisation

needs

Maslow’s Need Hierarchy Theory

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has become a means to satisfy the physical needs of daily life and also of obtaining social position and power. Since, money has the purchasing power, it becomes a very important incentive for every individual.

Financial incentives refer to incentives which are in direct monetary form or measurable in monetary term and serve to motivate people for better performance. These incentives may be provided on individual or group basis. The financial incentives generally used in organisations are listed below: (i) Pay and allowances: For every

employee, salary is the basic monetary incentive. It includes basic pay, dearness allowance and other allowances. Salary system

consists of regular increments in the pay every year and enhancement of allowances from time-to-time. In some business organisations, pay hike and increments may be linked to performance.

(ii) Productivity linked wage incen-tives: Several wage incentive plans aims at linking payment of wages to increase in productivity at individual or group level.

(iii) Bonus: Bonus is an incentive offered over and above the wages/salary to the employees.

(iv) Profit Sharing: Profit sharing is meant to provide a share to employees in the profits of the org-anisation. This serves to motivate the employees to improve their

Profile of Abraham Maslow (1908 – 1970)Abraham H. Maslow was born in Brooklyn, New York, in 1908. He studied primate behavior at the University of Wisconsin, where he received his doctorate in psychology in 1934.

Early in his career, Maslow was drawn to the study of human motivation and personality. His work in this area upset strict behaviorists, whose explanations of motivation and personality failed to account for what Maslow called the whole person. His theory of the hierarchy of needs, which leads to the ‘self-actualised’ individual, was a strong catalyst for the founding of humanistic psychology. Maslow successfully bridged motivation and personality in his theories of needs, self-actualising persons, and peak experiences.

Maslow is considered an important figure in contemporary psychology. His career was a formidable one. For 14 years he taught at Brooklyn College, and then went to Brandeis University as chairman of the Psychology Department. In 1968 he was elected president of the American Psychological Association. In 1969 he went to the Laughlin Foundation in Menlo Park, California. He wrote two important books: Toward a Psychology of Being (1968) and Motivation and Personality (1970). Abraham Maslow died of a heart attack in 1970.

Profile of Abraham Maslow (1908 – 1970)

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performance and contribute to increase in profits.

(v) Co-partnership/ Stock option: Under these incentive schemes, employees are offered company shares at a set price which is lower than market price. Sometimes, management may allot shares in line of various incentives payable in cash. The allotment of shares creates a feeling of ownership to the employees and makes them to contribute for the growth of the organisation. In Infosys the scheme of stock option has been implemented as a part of managerial compensation.

(vi) Retirement Benefits: Several retirement benefits such as provident fund, pension, and gratuity provide financial security to employees after their retirement. This acts as an incentive when they are in service in the organisation.

(vii) Perquisites: In many companies perquisites and fringe benefits are offered such as car allowance, housing, medical aid, and education to the children etc., over and above the salary. These measures help to provide motivation to the employees/managers.

Non-Financial Incentives: All the needs of individuals are not satisfied by money alone. Psychological, social and emotional factors also play important role in providing motivation. Non-

financial incentives mainly focus on these needs. Some times, monetary aspect may be involved in non-financial incentives as well. However, the emphasis is to provide psychological and emotional satisfaction rather than money driven satisfaction. For example, if an individual gets promo-tion in the organisation, it satisfies him psychologically more as he gets a feeling of elevation, increase in status, increase in authority, challenge in the job etc., Though promotion involves payment of extra money, non-monetary aspects over-ride monetary aspects.

Some of the important non-financial incentives are discussed below: (i) Status: In the organisational

context, status means ranking of positions in the organisation. The authority, responsibility, rewards, recognition, perquisites and prestige of job indicate the status given to a person holding a managerial position. Psychological, social and esteem needs of an individual are satisfied by status given to their job.

(ii) Organisational Climate: Organi-sational climate indicates the characteristics which describe an organisation and distinguish one organisation from the other. These characteristics influence the behaviour of individuals in the organisation. Some of these characteristics are–individual autonomy, reward orientation, consideration to employees,

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risk-tasking etc., If managers take positive measures regarding these aspects, it helps to develop better organisational climate.

(iii) Career Advancement Opportunity: Every individual wants to grow to the higher level in the organisation. Managers should provide opportunity to employees to improve their skills and be promoted to the higher level jobs. Appropriate skill development programmes, and sound promotion policy will help employees to achieve promotions. Promotion works as a tonic and encourages employees to exhibit improved performance.

(iv) Job Enrichment: Job enrichment is concerned with designing jobs that include greater variety of work content, require higher level of knowledge and skill; give workers more autonomy and responsibility; and provide the opportunity for personal growth and a meaningful work experience. If jobs are enriched and made interesting, the job itself becomes a source of motivation to the individual.

(v) Employee Recognition programmes: Most people have a need for evaluation of their work and due recognition. They feel that what they do should be recognised by others concerned. Recognition means acknowledgment with a show of appreciation. When such

appreciation is given to the work performed by employees, they feel motivated to perform/work at higher level. Some examples of employee recognition are: Congratulating the employee

for good performance. Displaying on the notice board

or in the company news letter about the achievement of employee.

Installing award or certificate for best performance.

Distributing mementos, com-plimentaries like T-shirts in recognition of employee services.

Rewarding an employee for giving valuable suggestions.

(vi) Job security: Employees want their job to be secure. They want certain stability about future income and work so that they do not feel worried on these aspects and work with greater zeal. In India, this aspect is more important considering the inadequate job opportunities and too many aspirants for these. However, there is one negative aspect of job security. When people feel that they are not likely to lose their jobs, they may become complacent.

(vii) Employee participation: It means involving employees in decision making of the issues related to them. In many companies, these programmes are in practice in

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Leadership is the activity of influencing people to strive willingly for group objectives.George Terry

Leadership is the art or process of influencing people so that they will strive willingly and enthusiastically towards the achievement of group goals.

Harold Koontz and Heinz WeihrichLeadership is a set of interpersonal behaviours designed to influence employees to cooperate in the achievement of objectives.

GlueckLeadership is both a process and property. The process of leadership is the use of non-coercive influence to direct and coordinate the activities of the members of an organised group towards the accomplishment of group objectivities. As a property, leadership is the set of qualities or characteristics attributed to those who are perceived to successfully employ such influence.

Gay and Strake

Definitions of LeadershipDefinitions of Leadership

the form of joint management committees, work committees, canteen committees etc.,

(viii)Employee Empowerment: Empo-werment means giving more autonomy and powers to subordinates. Empowerment makes people feel that their jobs are important. This feeling contributes positively to the use of skills and talents in the job performance.

LEADERSHIPWhenever we hear the success stories of any organisation, we are immediately reminded of their leaders. Can you imagine Mircrosoft without Bill Gates, Reliance Industries without Ambanis, Infosys without Narayana Murthy, Tata without J.R.D. Tata or Wipro without Azim Premji. You would say it is not possible to achieve

success without such great leaders. The leaders always play a key role for the success and excellence of any organisation.

Let us understand the concept of leadership, its importance and qualities of good leaders. Leadership is the process of influencing the behaviour of people by making them strive voluntarily towards achievement of organisational goals. Leadership indicates the ability of an individual to maintain good interpersonal relations with followers and motivate them to contribute for achieving organisational objectives.

Features of leadershipAn examination of the above defi-nition reveals the following important features of leadership: (i) Leadership indicates ability of an

individual to influence others.

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Effective leadership is getting work done, tasks completed on time and goals achieved at minimum cost

(ii) Leadership tries to bring change in the behaviour of others.

(iii) Leadership indicates interperso-nal relations between leaders and followers.

(iv) Leadership is exercised to achieve common goals of the organisation.

(v) Leadership is a continuous process.

The term leader emerges from leadership. An individual possessing attributes of leadership is known as leader. While discussing about leadership, it is important to under-stand leader–follower rela tionship. Many times, the success of an organisation is attributed to the leader, but due credit is not given to the followers. Many followers

related factors like – their skills, knowledge, commitment, willingness to cooperate, team spirit etc., make a person an effective leader. It is said that followers make a person, a good leader by acceptance of leadership. Therefore, it is to be recognised that both leader and follower play key role in leadership process.Importance of Leadership: Lead-ership is a key factor in making any organisation successful. History reveals that, many times, difference between success and failure of an organisation is leadership. It is aptly mentioned by Stephen Covey, a famous management consultant, that managers are important but leaders are vital for lasting organisational success. A leader not only commits

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Leadership at Infosys It is interesting and inspiring to know about N. R. Narayana Murthy, Ex-Chairman of Infosys, an IT legend, institution builder, a leader par excellence and embodiment of directing abilities.

Born on August 20, 1946 in Karnataka State, Mr. Narayana Murthy graduated (B.E.) from University of Mysore (1967), and obtained master degree (M.Tech) from IIT, Kanpur in 1969. He started his career as head of the computer centre at IIM, Ahmedabad.

He started Infosys, a small software company along with his friends in 1981 and turned it into a global IT company by 2002. He was the chief mentor, CEO of the company for two decades. During that time he took the company to unimaginable heights. With an equity capital of Rs. 10,000 in 1981, Infosys market capitalisation reached Rs. 11 billion by 2001. Infosys became one of the biggest exporter of software from India. It is the first company to be listed in Nasdaq Stock Market in 1999.

Narayana Murthy is remembered as a top leader for many things. He had supreme confidence on his team members, executives and workers. He nurtured and developed leadership qualities through coaching and training. He started Infosys Leadership Institute in early 2001 to help promising infoscians to develop into global leaders.

Mr. Murthy leads by example and by trust. Very often he used to say “A true leader is one who leads by example and sacrifices more than any one else, in his or her pursuit of excellence”. He truly practiced and proved it in Infosys.

Mr. Murthy always motivated his team. He introduced number of motivational schemes including the novel Stock option scheme for the executives of Infosys.

Narayana Murthy was associated with many national and international bodies in different capacities and extended his services to the wide ranging activities. He received number of awards and rewards from academic, social and business community. Following the norms setup by himself, Narayana Murthy handed over reins of Infosys to his friend and co-founder Nandan Nilekani in 2002.

Leadership at Infosys

his followers to organisational goals but also pools needed resources, guides and motivates subordinates to reach the goals.

The importance of leadership can be discussed from the following benefits to the organisation: (i) Leadership influences the

behaviour of people and makes them to positively contribute their energies for the benefit of the organisation. Good leaders

always produce goods results through their followers.

(ii) A leader maintains personal relations and helps followers in fulfilling their needs. He provides needed confidence, support and encouragement and thereby creates congenial work environment.

(iii) Leader plays a key role in introducing required changes in the organisation. He persuades,

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clarifies and inspires people to accept changes whole-heartedly. Thus, he overcomes the problem of resistance to change and introduces it with minimum discontentment.

(iv) A leader handles conflicts effectively and does not allow adverse effects resulting from the conflicts. A good leader always allows his followers to ventilate their feelings and disagreement but persuades them by giving suitable clarifications.

(v) Leader provides training to their subordinates. A good leader always builds up his successor

and helps in smooth succession process.

Qualities of Good Leader: What are the qualities possessed by a good leader? Are there any common traits (qualities) applicable to all good leaders? How many such qualities should a leader possess to be successful?

One approach to leadership emphasises that a person should possess certain qualities or traits to become a successful leader. It assumes that leaders can be distinguished from non leaders by certain unique traits possessed by them. The qualities of

In all about 18,000 traits were identified by researchers. The qualities of a good leader as mentioned by some authorities on the subject are given below:Energy, emotional stability, knowledge of human relations, motivation, communication, skill, teaching ability, social skill and technical competence.

Geroge TerryVitality and endurance, decisiveness, persuasiveness, stability in behaviour, intellectual ability and knowledge.

Chester BarnardPhysical and nervous energy, enthusiasm, sense of purpose and direction, technical mastery, friendliness and affection, decisiveness.

Ordway TeadCourage, will power, judgment, flexibility, knowledge and integrity.

Vicout SlimSupervisory ability, achievement motivation, self-actualising, intelligence, self assurance, decisiveness.

GhiselliCourage, self-confidence, moral qualities, self sacrifice, paternalism, fairness.

HillPhysical and constitutional factors, intelligence, self-confidence, sociability, will, dominance.

Stodgil

Qualities of a Good LeaderQualities of a Good Leader

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HCL Technologies has formulated a rather innovative approach to management, where employees come before customers. Every employee ranks their boss, their boss’s boss, and at least three other company managers on a 1-to-5 scale. Then the results are posted online for everyone to see.

This company realizes that satisfied and secure employees can best focus on customer success. HCL has formed new strategic alliances, and is embarking on a rather innovative approach to shared risk with customers.

The point is that Indian companies aren’t just innovating manufacturing methods,techno-logies, and product design. Their leaders are also re-thinking leadership and management to create energised creative teams of employees focused on customer success.

Leadership and Team work in HCL TechnologiesLeadership and Team work in HCL Technologies

Source: http://www.evolvingexcellence.com/blog/2006/04/the_future_of_m.html

good leaders as identified by some researchers are shown in the box in previous page.

Some of these qualities are explained below: (i) Physical features: Physical

features like height, weight, health, appearance determine the physical personality of an individual. It is believed that good physical features attract people. Health and endurance help a leader to work hard which inspires others to work with same tempo.

(ii) Knowledge: A good leader should have required knowledge and competence. Only such person can instruct subordinates correctly and influence them.

(iii) Integrity: A leader should posses high level of integrity and honesty. He should be a role model to others regarding the ethics and values.

(iv) Initiative: A leader should have courage and initiative. He should not wait for opportunities come to his way, rather he should grab the opportunity and use it to the advantage of organisation.

(v) Communication skills: A leader should be a good communicator. He should have the capacity to clearly explain his ideas and make the people to understand his ideas. He should be not only good speaker but a good listener, teacher, counsellor and persuader.

(vi) Motivation skills: A leader should be an effective motivator. He should understand the needs of people and motivate them through satisfying their needs.

(vii) Self Confidence: A leader should have high level of self confidence. He should not loose his confidence even in most difficult times. In fact, if the leader lacks self

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confidence, he can not provide confidence to his followers.

(viii)Decisiveness: Leader should be decisive in managing the work. Once he is convinced about a fact, he should be firm and should not change opinions frequently.

(ix) Social skills: A leader should be sociable and friendly with his colleagues and followers. He should understand people and maintain good human relations with them.

However, we should remember that all good leaders may not necessarily posses all the qualities of a good leader. In fact, it is not possible for any individual to have all the qualities. But an understanding about these qualities help the managers to acquire them through training and conscious efforts.Leadership StyleThere are many theories of leadership behaviour and styles. Research studies have revealed certain traits and qualities which a leader might possess. However, these are not conclusive since many people may possess these qualities but may not be leaders.

There are several bases for classifying leadership styles. The most popular classification of leadership styles is based on the use of authority. Depending on the use of authority, there are three basic styles of leadership: (i) Autocratic (ii) Democratic, and (iii) Laissez-faire

(i) Autocratic or Authoritarian leader An autocratic leader gives orders

and expects his subordinates to obey those orders. If a manager is following this style, then communication is only one-way with the subordinate only acting according to the command given by the manager.

This leader is dogmatic i.e., does not change or wish to be contradicted. His following is based on the assumption that reward or punishment both can be given depending upon the result. This leadership style is effective in getting productivity in many situations like in a factory where the supervisor is responsible for production on time and has to ensure labour productivity. Quick decision-making is also facilitated.

But there are variations also, they may listen to everyone’s opinion, consider subordinates ideas and concerns but the decision will be their own.

(ii) Democratic or Participative leader

A democratic leader will develop action plans and makes decisions in consultation with his subordinates. He will encourage them to participate in decision-making. This kind of leadership style is more common now-a-days, since leaders also recognise that people perform best if they have set their own objectives. They also need to respect the other’s opinion and support subordinates

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Communication is the sum of all things one person does when he wants to create understanding in the mind of another. It involves systematic and continuous process of telling, listening and understanding.

Louis AllenCommunication is transfer of information from the sender to the receiver with the information being understood by the receiver.

Harold Koontz and Heniz WeihrichCommunication is a process by which people create and share information with one another in order to reach common understanding.

Rogers

Definitions of CommunicationDefinitions of Communication

to perform their duties and accomplish organisational objectives. They exercise more control by using forces within the group.

(iii) Laissez faire or Free-rein leader Such a leader does not believe

in the use of power unless it is absolutely essential. The followers are given a high degree of independence to formulate their own objectives and ways to achieve them. The group members work on their own tasks resolving issues themselves. The manager is there only to support them and supply them the required information to complete the task assigned. At the same time, the subordinate assumes responsibility for the work to be performed.

Depending upon the situation a leader may choose to exercise a combination of these styles when required. Even a laissez faire leader would have certain rules to be followed

while doing work and a democratic leader may have to take his own decision in an emergency situation.

COMMUNICATION Communication plays key role in the success of a manager. How much professional knowledge and intelligence a manager possesses becomes immaterial if he is not able to communicate effectively with his subordinates and create understanding in them. Directing abilities of a manager mainly depend upon his communication skills. That is why organisation always emphasise on improving communication skills of managers as well as employees.

The word communication has been derived from the Latin word ‘communis’ which means ‘common’ which consequently implies common understanding. Communication is defined in different ways. Generally, it is understood as a process of exchange of ideas, views, facts, feelings etc.,

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between or among people to create common understanding.

Some of the definitions given by management experts are presented in the box.

A close examination of above definitions reveals that communication is the process of exchange of infor-mation between two or more persons to reach common understanding.

Elements of Communication ProcessCommunication has been defined as a process. This process involves elements like source, encoding, media/channel, receiver, decoding, noise and feedback. The process is represented in the figure.

The elements involved in commu-nication process are explained below: (i) Sender: Sender means person who

conveys his thoughts or ideas to the receiver. The sender represents source of communication.

(ii) Message: It is the content of ideas, feelings, suggestions, order etc., intended to be communicated.

(iii) Encoding: It is the process of converting the message into communication symbols such as words, pictures, gestures etc.,

(iv) Media: It is the path through which encoded message is transmitted to receiver. The channel may be in written form, face to face, phone call, internet etc.,

(v) Decoding: It is the process of converting encoded symbols of the sender.

(vi) Receiver: The person who receives communication of the sender.

(vii) Feedback: It includes all those actions of receiver indicating that he has received and understood message of sender.

(viii) Noise: Noise means some obstruction or hindrance to communication. This hindrance may be caused to sender, message or receiver. Some examples of noise are:

(a) Ambiguous symbols that lead to faulty encoding.

(b) A poor telephone connection. (c) An inattentive receiver.(d) Faulty decoding (attaching

wrong meanings to message).(e) Prejudices obstructing the poor

understanding of message.(f ) Gestures and postures that

may distort the message.

Effective Communication increases managerial efficiency

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Importance of CommunicationCommunication is one of the most central aspects of managerial activities. It has been estimated that a manager spends 90 percent of his time in communicating-reading, writing, listening, guiding, instructing, approving, reprimanding, etc. Effect-iveness of a manager depends significantly on his ability to communicate effectively with his superiors, subordinates and external agencies such as bankers, suppliers, union and government.

An ex-president of American Management Association once observed that number one management problem today is communication. Bernard has called it the foundation of all group activities. Communication

serves as the lubricant fostering for the smooth operations of the management process. The importance of communication in management can be judged from the following: (i) Acts as basis of coordination:

Communication acts as basis of coordination. It provides coordination among departments, activities and persons in the organisation. Such coordination is provided by explaining about organisational goals, the mode of their achievement and inter relationships between different individuals etc.

(ii) Helps in smooth working of an enterprise: Communication makes possible for the smooth

Feedback

Receiver

Noise

MessageSender Media

DecodingEncoding

Communication Process

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and unrestricted working of the enterprise. All organisational interactions depend on comm-unications. The job of a manager is to coordinate the human and physical elements of an organisation into an efficient and active working unit that achieves common objectives. It is only communication which makes smooth working of an enterprise possible. Communication is basic to an organisation’s existence-right from its birth through its continuing life. When communication stops, organised activity ceases to exist.

(iii) Acts as basis of decision making: Communication provides needed information for decision making. In its absence, it may not be possible for the managers to take any meaningful decision. Only on the basis of communication of relevant information one can take right decision.

(iv) Increases managerial efficiency: Communication is essential for quick and effective performance of managerial functions. The management conveys the goals and targets, issues instructions, allocates jobs and responsibilities and looks after the performance of subordinates. Communication is involved in all these aspects. Thus, communication lubricates the entire organisation and keeps the organisation at work with efficiency.

(v) Promotes cooperation and indust-rial peace: Efficient operation is the aim of all prudent management. It may be possible only when there is industrial peace in the factory and mutual cooperation between management and workers. The two way communication promotes cooperation and mutual underst-anding between the management and workers.

(vi) Establishes effective leadership: Communication is the basis of leadership. Effective commu-nication helps to influence subordinates. While influencing people, leader should possess good communication skills.

(vii) Boosts morale and provides motivation: An efficient system of communication enables manage-ment to motivate, influence and satisfy the subordinates. Good communication assists the workers in their adjustment with the physical and social aspect of work. It improves good human relations in industry. Communication is the basis of participative and democratic pattern of management. Comm-unication helps to boost morale of employees and managers.

FORMAL AND INFORMAL COMMUNCIATIONCommunication taking place within an organisation may be broadly

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Communication Network

Chain Wheel Circular Free Flow Inverted V

classified as formal and informal communication.

Formal CommunicationFormal communication flows through official channels designed in the organisation chart. This communica-tion may take place between a superior and subordinate, a subordinate and superior or among same cadre emplo-yees or managers. The communications may be oral or written but generally recorded and filed in the office.

Formal communication may be further classified as – Vertical and Horizontal.

Vertical communication flows vertically i.e., upwards or downwards through formal channels. Upward communications refer to flow of communication from subordinate to superior whereas downward communication indicates commu-nication from a superior to subordinate. The examples of upward

communication are – application for grant of leave, submission of progress report, request for grants etc. Similarly, the examples of downward communication include – sending notice to employees to attend a meeting, ordering subordinates to complete an assigned work, passing on guidelines framed by top management to the subordinates etc.

Horizontal or lateral communication takes place between one division and another. For example, a production manager may contact marketing manager to discuss about schedule of product delivery, product design, quality etc.

The pattern through which communication flows within the organisation is generally indicated through communication network. Different types of communication networks may operate in formal organisation. Some of the popular communication networks are presented and discussed in given figure.

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(i) Single chain: This network exists between a supervisor and his subordinates. Since many levels exist in an organisation structure, communication flows from every superior to his subordinate through single chain.

(ii) Wheel: In wheel network, all subordinates under one superior communicate through him only as he acts as a hub of the wheel. The subordinates are not allowed to talk among themselves.

(iii) Circular: In circular network, the communication moves in a circle. Each person can communicate with his adjoining two persons. In this network, communication flow is slow.

(iv) Free flow: In this network, each person can communicate with others freely. The flow of commu-nication is fast in this network.

(v) Inverted V: In this network, a subordinate is allowed to comm-unicate with his immediate superior as well as his superiors superior. However, in later case, only prescribed communication takes place.

Informal CommunicationCommunication that takes place without following the formal lines of communication is said to be informal communication. Informal system of communication is generally referred to as the ‘grapevine’ because it spreads throughout the organisation with its

branches going out in all directions in utter disregard to the levels of authority.

The informal communication arises out of needs of employees to exchange their views, which cannot be done through formal channels. Workers chit chating in a canteen about the behaviour of the superior, discussing about rumours that some employees are likely to be transferred are some examples of informal communications. The grapevine/informal communication spreads rapidly and sometimes gets distorted. It is very difficult to detect the source of such communication. It also leads to generate rumours which are not authentic. People’s behaviour is affected by rumours and informal discussions and sometimes may hamper work environment. Sometimes, grapevine channels may be helpful as they carry information rapidly and, therefore, may be useful to the manager at times. Informal channels are used by the managers to transmit information so as to know the reactions of his/her subordinates. An intelligent manager should make use of positive aspects of informal channels and minimise negative aspects of this channel of communication.

Grapevine NetworkGrapevine communication may follow different types of network. Some of these networks are shown in figure on page 205.

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In single strand network, each person communicates to the other in sequence. In gossip network, each person communicates with all on non-selective basis. In probability network, the individual communicates rando-mly with other individual. In cluster, the individual communicates with only those people whom he trusts. Of these four types of networks, cluster is the most popular in organisations.

Barriers to CommunicationIt is generally observed that managers face several problems due to commu-nication breakdowns or barriers. These barriers may prevent a communication or filter part of it or carry incorrect meaning due to which misunder-standings may be created. Therefore, it is important for a manager to identity such barriers and take measures to overcome them.

The barriers to communication in the organisations can be broadly grouped

as: semantic barriers, psychological barriers, organisational barriers, and personal barriers. These are briefly discussed below:

Semantic barriers: Semantics is the branch of linguistics dealing with the meaning of words and sentences. Semantic barriers are concerned with problems and obstructions in the process of encoding and decoding of message into words or impressions. Normally, such barriers result on account of use of wrong words, faulty translations, different interpretations etc. These are discussed below: (i) Badly expressed message: Some

times intended meaning may not be conveyed by a manager to his subordinates. These badly expressed messages may be an account of inadequate vocabulary, usage of wrong words, omission of needed words etc.

Grapevine Communication Networks

Single Strand Netw

ork

Gossip Network Probability Network Cluster Network

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(ii) Symbols with different meanings: A word may have several mean-ings. Receiver has to perceive one such meaning for the word used by communicator. For example, consider these three sentences where the work ‘value’ is used:(a) What is the value of this ring? (b) I value our friendship.(c) What is the value of learning

computer skills? You will find that the ‘value’

gives different meaning in different contexts. Wrong perception leads to comm-unication problems.

(iii) Faulty translations: Sometimes the communications originally drafted in one language (e.g., English) need to be translated to the language understandable to workers (e.g., Hindi). If the translator is not proficient with both the languages, mistakes may creep in causing different meanings to the communication.

(iv) Unclarified assumptions: Some communications may have certain

assumptions which are subject to different interpretations. For example, a boss may instruct his subordinate, “Take care of our guest”. Boss may mean that subordinate should take care of transport, food, accommodation of the guest until he leaves the place. The subordinate may interpret that guest should be taken to hotel with care. Actually, the guest suffers due to these unclarified assumptions.

(v) Technical jargon: It is usually found that specialists use technical jargon while explaining to persons who are not specialists in the concerned field. Therefore, they may not understand the actual meaning of many such words.

(vi) Body language and gesture decoding: Every movement of body communicates some meaning. The body movement and gestures of communicator matters so much in conveying the message. If there is no match between what is said and what is expressed in body movements, communications may be wrongly perceived.

Psychological barriers: Emotional or psychological factors acts as barriers to communicators. For example, a worried person cannot communicate properly and an angry receiver cannot understand the real meaning of message. The state of mind of both sender and receiver of communication reflects in the effective communication. Some of the psychological barriers are:

Communication Grapevine

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(i) Premature evaluation: Some times people evaluate the meaning of message before the sender completes his message. Such premature evaluation may be due to pre-conceived notions or prejudices against the communication.

(ii) Lack of attention: The pre-occupied mind of receiver and the resultant non-listening of message acts as a major psy-chological barrier. For instance, an employee explains about his problems to the boss who is pre-occupied with an important file before him. The boss does not grasp the message and the employee is disappointed.

(iii) Loss by transmission and poor retention: When communication passes through various levels, successive transmissions of the message results in loss of, or transmission of inaccurate information. This is more so in case of oral communication.

Poor retention is another problem. Usually people cannot retain the information for a long time if they are inattentive or not interested.

(iv) Distrust: Distrust between comm unicator and communicate acts as a barrier. If the parties do not believe each other, they can not understand each others message in its original sense.

Organisational barriers: The fac-tors related to organisation struc-ture, authority relationships, rules and regulations may, sometimes, act

as barriers to effective communica-tion. Some of these barriers are: (i) Organisational policy: If the

organisational policy, explicit or implicit, is not supportive to free flow of communication, it may hamper effectiveness of communications. For example, in an organisation with highly centralised pattern, people may not be encouraged to have free communication.

(ii) Rules and regulations: Rigid rules and cumbersome procedures may be a hurdle to communica-tion. Similarly, communications through prescribed channel may result in delays.

(iii) Status: Status of superior may create psychological distance between him and his subordi-nates. A status conscious man-ager also may not allow his subordinates to express their feelings freely.

(iv) Complexity in organisation struc-ture: In an organisation where there are number of managerial levels, communication gets de-layed and distorted as number of filtering points are more.

(v) Organisational facilities: If facilities for smooth, clear and timely communications are not provided communications may be hampered. Facilities like frequent meetings, suggestion box, complaint box, social and cultural gathering, transparency in operations etc., will encourage free flow of communication. Lack of these facilities may create communication problems.

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Personal barriers: The personal factors of both sender and receiver may exert influence on effective communication. Some of the personal barriers of superiors and subordinates are mentioned below: (i) Fear of challenge to authority: If

a superior perceives that a par-ticular communication may ad-versely affect his authority, he or she may withhold or suppress such communication.

(ii) Lack of confidence of superior on his subordinates: If superiors do not have confidence on the com-petency of their subordinates, they may not seek their advice or opinions.

(iii) Unwillingness to communicate: Sometimes, subordinates may not be prepared to communicate with their superiors, if they perceive that it may adversely affect their interests.

(iv) Lack of proper incentives: If there is no motivation or incentive for communication, subordinates may not take initiative to communicate. For example, if there is no re-ward or appreciation for a good suggestion, the subordinates may not be willing to offer useful suggestions.

Improving Communication Effectiveness The barriers to effective communica-tion exists in all organisations to a greater or lesser degree. Organisa-tions keen on developing effective communication should adopt suit-able measures to overcome the bar-

riers and improve communication effectiveness. Some such measures are indicated below: (i) Clarify the ideas before com-

munication: The problem to be communicated to subordinates should be clear in all its perspec-tive to the executive himself. The entire problem should be studied in depth, analysed and stated in such a manner that is clearly conveyed to subordinates.

(ii) Communicate according to the needs of receiver: The level of understanding of receiver should be crystal clear to the communicator. Manager should adjust his communication according to the education and understanding levels of subordinates.

(iii) Consult others before communi-cating: Before actually commu-nicating the message, it is better to involve others in developing a plan for communication. Partici-pation and involvement of sub-ordinates may help to gain ready acceptance and willing coopera-tion of subordinates.

(iv) Be aware of languages, tone and content of message: The contents of the message, tone, language used, manner in which the message is to be communicated are the important aspects of effective communication. The language used should be understandable to the receiver and should not offend the sentiments of listeners. The message should be stimulating to evoke response from the listeners.

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(v) Convey things of help and value to listeners: While conveying message to others, it is better to know the interests and needs of the people with whom you are communicating. If the message relates directly or indirectly to such interests and needs it certainly evokes response from communicatee.

(vi) Ensure proper feedback: The communicator may ensure the success of communication by asking questions regarding the message conveyed. The receiver of communication may also be encouraged to respond to com-munication. The communica-tion process may be improved by the feedback received to make it more responsive.

(vii) Communicate for present as well as future: Generally, commun-ication is needed to meet the existing commitments to maintain consis tency, the communication should aim at future goals of the enterprise also.

(viii) Follow up communications: There should be regular follow up and review on the instructions given to subordinates. Such follow up measures help in removing hurdles if any in implementing the instructions.

(ix) Be a good listener: Manager should be a good listener. Patient and attentive listening solves half of the problems. Managers should also give indications of their interest in listening to their subordinates.

Summary

Directing Supervision Motives Motivation Incentives Self actualisation Egoistic needs Leadership Trait approach Communication Encoding Decoding Feedback

Semanticism Formal communication Informal communication Profit sharing Copartnership

Quality circles Stock options

Directing is a complex managerial function consisting of all the activities that are designed to encourage subordinates to work effectively. It includes supervision, motivation, communication and leading. The principles which guide effective directing may be classified as principles related to the purpose of directing and principles related to direction process. Supervision: It is an element of direction. It can be understood as a process as well as the functions performed by supervisor (a

Key Terms

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position at operative level). Supervision is very important as it is closely linked to overseeing the work, guiding and ensuring that targets are met by workers and employees. Motivation: Motivation is the process of stimulating people to action to accomplish desired goals of organisation. It is an internal feeling of an individual and leads to goal directed behaviour. Motivation is mainly based on needs of individuals. It helps individuals and groups in the organisation for improved performance.

Managers offer incentives to employees both financial and non financial. Financial incentives are monetary and may be in the form of salary, bonus, profit sharing, pension etc. Non financial incentives provide social and psychological satisfaction. These include status, promotion, responsibility, job enrichment, job recognition, job security, employee participation, delegation, empowerment etc.

One important theory of motivation is Maslow’s Need Hierarchy theory. According to this theory, motivation to be provided depends on needs which are hierarchical in nature. The needs in this hierarchy have been classified as physiological needs, safety needs, social needs, egoistic needs and self-actualisation needs. It assumes that a satisfied need seldom motivates and only higher level need can motivate a person. This theory is relevant even today, as it focuses on needs which are basis for motivation. Leadership: Leadership is most important factor in the success of an enterprise. It is the process of influencing people to strive willingly for group objectives. The qualities of a good leader have been researched by many experts. Some of the qualities of good leader include–courage, will power, judgement, knowledge, integrity, physical energy, faith, moral qualities, fairness, vitality, decisiveness, social skills etc. But all these qualities cannot be possessed by one individual nor always help in their success. Communication: Communication refers to process of exchange of ideas between or among persons and create understanding. Communication process involves the elements of source, encoding, channel, receiver, decoding and feedback. In organisations, both formal and informal communications simultaneously takes place. Formal communications refers to all official communications in the form of orders, memos, appeals, notes, circulars, agenda, minutes etc. Apart from formal communications, informal or grapevine communications also exist. Informal communications

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Exercises

are usually in the form of rumours, whispers etc. They are unofficial, spontaneous, unrecorded, spread very fast and usually distorted. A manager should learn to manage with informal communication also. In most of the organisations, several barriers may exist for effective communications. Some of these barriers include – semantic barriers, organisational barriers, language barriers, transmission barriers, psychological barriers and personal barriers. Managers should take appropriate measures to overcome these barriers and promote effective communication in the organisation.

Multiple Choice 1. Which one of the following is not an element of direction?

(a) Motivation (b) Communication (c) Delegation (d) Supervision

2. The motivation theory which classifies needs in hierarchical order is developed by

(a) Fred Luthans (b) Scott

(c) Abraham Maslow (d) Peter F. Drucker

3. Which of the following is a financial incentive?(a) Promotion (b) Stock Incentive (c) Job Security (d) Employee Participation

4. Which of the following is not an element of communication process? (a) Decoding (b) Communication (c) Channel (d) Receiver

5. Grapevine is(a) Formal communication (b) Barrier to communication(c) Lateral communication (d) Informal communication

6. Status comes under the following type of barriers(a) Semantic barrier (b) Organisational barrier (c) Non Semantic barrier (d) Psychological barrier

7. The software company promoted by Narayana Murthy is (a) Wipro (b) Infosys (c) Satyam (d) HCL

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8. The highest level need in the need Hierarchy of Abraham Maslow:(a) Safety need (b) Belongingness need(c) Self actualisation need (d) Prestige need

9. The process of converting the message into communication symbols is known as-(a) Media (b) Encoding (c) Feedback (d) Decoding

10. The communication network in which all subordinates under a supervisor communicate through supervisor only is:(a) Single chain (b) Inverted V (c) Wheel (d) Free flow

Short Answer Type 1. Distinguish between leaders and managers. 2. Define Motivation 3. What is informal communication? 4. What are semantic barriers of communication? 5. Who is a supervisor? 6. What are the elements of directing? 7. Explain the process of motivation? 8. Explain different networks of grapevine communications?

Long Answer Type 1. Explain the principles of Directing? 2. Explain the qualities of a good leader? Do the qualities alone

ensure leadership success? 3. Discuss Maslow’s Need Hierarchy theory of motivation. 4. What are the common barriers to effective communication?

Suggest measures to overcome them. 5. Explain different financial and non-financial incentives used

to motivate employees of a company?

Application type 1. The workers always try to show their inability when any new

work is given to them. They are always unwilling to take up any kind of work. Due to sudden rise in demand a firm wants to meet excess orders. The supervisor is finding it difficult to cope up with the situation. Suggest ways for the supervisor to handle the problem.

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Project Work

2. Workers of a factory often come to the Production Manager with the grievances. The production manager finds himself overburdened with so many tasks. Advise a way to relieve the production manager.

3. In an organisation employees always feel they are under stress. They take least initiative and fear to express their problems before the manager. What do you think is wrong with the manager ?

4. In an organisation all the employees take things easy and are free to approach anyone for minor queries and problems. This has resulted in everyone taking to each other and thus resulting in inefficiency in the office. It has also resulted in loss of secrecy and confidential information being leaked out. What system do you think the manager should adopt to improve communication.

Project Work and Assignments 1. The teacher will select five students as a group and one

student as a judge. Each student in the group prepares a talk on any topic about ten sentences. Each student shall present his talk while others listen carefully. Finally, the judge asks each person five questions from five presentations. Each successful answer carries two marks. This exercise helps to identify listening ability.

2. Conduct a survey on your classmates and ask them about their motives regarding the following: (i) Joining school (ii) Choosing course of study (ii) Buying a brand of pen (iv) Going to a movie (v) Viewing a TV channel/Programme

List out the motives common to most students for each of the above.

3. Identify barriers of communication (i) Between you and your teacher (ii) Between you and your friend (iii) Between you and your brother/sister

Suggest measures to overcome these barriers. Are they similar to what managers would do.

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4. Meet 10 people for each of the following product they have recently purchased (i) Detergent soap (ii) Fairness cream (iii) Motor bike

Ask them about their motives in buying the product/ brand. Identify the buying motives for each product and present it in the classroom.

Y limited is a bank functioning in India. It is planning to diversify into insurance business. Lately, the government of India has allowed the private sector to gain entry in the insurance business. Previously, it was the prerogative of LIC and GIC to do insurance business. But now with liberalisation of the economy and to make the field competitive other companies have been given licenses to start insurance business under the regulation of ‘Insurance Regulatory and Development Authority’.Y limited plans to recruit high quality employees and agents and exercise effective direction to capture a substantial part of life and non life insurance business.

Questions 1. Identify how the company can supervise its employees and

agents effectively. What benefits will the company derive from effective supervision?

2. What financial and non-financial incentives can the company use for employees and agents separately to motivate them. What benefits will the company get from them?

3. How can the company ensure that higher order needs i.e., esteem and self-actualisation as specified by Abraham Maslow are met?

4. Identify the qualities of leadership in this line of business that the company managers must possess to motivate employees and agents.

5. Give a model of formal communication system that the company can follow. Identify the barriers in this model. How can they be removed?

6. How can informal communication help to supplement formal communication model given by you in answer to question 5?

Case Problem

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CONTROLLINGCONTROLLINGCHAPTER


8After studying this chapter, you should be able to:

n Explain the meaning of controlling;

n State the importance of controlling;

n Describe the relationship between planning and controlling;

n Explain the steps in the process of controlling; and

n Describe the techniques of controlling.

Sterling Courier Systems based in Hendon, Virginia is a provider of same-day-delivery services. Although Sterling may do everything right to meet its delivery commitments, it relies on commercial airlines to transport its parcels, and occasionally fails to meet its deadlines. Delays are usually a result of packages being misplaced in airlines’ tracking systems. Such incidents are beyond Sterling’s control. But from the customer’s vantage point, the failure is Sterling’s problem.

To control the damage created by such delays, Sterling had to take some corrective measures. For example, for several months in late 1990 and early 1991 several Sterling deliveries disappeared in transit. The packages turned up later, but the customers had already suffered financial losses. Yet because the packages were eventually recovered, neither insurance nor the airlines was liable. The decision for president Glenn Smoak was whether to compensate the customers for their losses or simply not to charge them for the shipments. Smoak concluded that not charging for the shipment was an inadequate response, given the suffered downtime. But paying the $30,000 in losses would push the then-five-year-old $5 million company into a loss for the quarter. Smoak’s decision was to pay out the $30,000 in gratis service, the customer stayed, and Sterling continues to grow.

Source: Stoner, A.F. James, R. Edward Freeman and Daniel R. Gilbert, Jr., Management, Prentice-Hall of India Pvt. Ltd., 1998

Damage Control at Sterling Courier

The example of Sterling Courier brings out clearly how an adverse business situation may intelligently

be controlled by a manager. It is quite clear from the example that a manager needs to take some sort of

Damage Control at Sterling Courier

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corrective action before any major damage is done to the business. Controlling function of management comes to the rescue of a manager here. It not only helps in keeping a track on the progress of activities but also ensures that activities conform to the standards set in advance so that organisational goals are achieved.

Meaning of ControllingMeaning of ControllingControlling is one of the important functions of a manager. In order to seek planned results from the subordinates, a manager needs to exercise effective control over the activities of the subordinates. In other words, controlling means ensuring that activities in an organisation are performed as per the plans. Controlling also ensures that an organisation’s resources are being used effectively and efficiently for the achievement of predetermined goals. Controlling is, thus, a goal-oriented function.

Controlling function of a manager is a pervasive function. It is a primary function of every manager. Managers at all levels of management- top, middle and lower-need to perform controlling functions to keep a control over activities in their areas. Moreover, controlling is as much

required in an educational institution, military, hospital, and a club as in any business organisation.

Controlling should not be misunde-rstood as the last function of manage-ment. It is a function that brings back the management cycle back to the planning function. The controlling function finds out how far actual performance deviates from standards, analyses the causes of such deviations and attempts to take corrective actions based on the same. This process helps in formulation of future plans in the light of the problems that were identified and, thus, helps in better planning in the future periods. Thus, controlling only completes one cycle of management process and improves planning in the next cycle.

Importance of ControllingControl is an indispensable function of management. Without control the best of plans can go awry. A good control system helps an organisation in the following ways: (i) Accomplishing organisational

goals: The controlling function measures progress towards the organisational goals and brings to light the deviations, if any, and indicates corrective action.

Managerial Control implies the measurement of accomplishment against the standard and the correction of deviations to assure attainment of objectives according to plans.

Koontz and O’ Donnel

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It, thus, guides the organisation and keeps it on the right track so that organisational goals might be achieved.

(ii) Judging accuracy of standards: A good control system enables management to verify whether the standards set are accurate and objective. An efficient control system keeps a careful check on the changes taking place in the organisation and in the environment and helps to review and revise the standards in light of such changes.

(iii) Making efficient use of resources: By exercising control, a manager seeks to reduce wastage and spoilage of resources. Each activity is performed in accordance with predetermined standards and norms. This ensures that resources are used in the most effective and efficient manner.

(iv) Improving employee motivation: A good control system ensures that employees know well in advance what they are expected to do and what are the standards of performance on the basis of which they will be appraised. It, thus, motivates them and helps them to give better performance.

(v) Ensuring order and discipline: Controlling creates an atmosphere of order and discipline in the organisation. It helps to minimise dishonest behaviour on the part of the employees by keeping a close check on their activities. The box explains how an import-export company was able to track dishonest employees by using computer monitoring as a part of their control system.

(vi) Facilitating coordination in action: Controlling provides direction to all activities and

Managers at a New York City import-export company suspected that two employees were robbing it. Corporate Defense Strategies (CDS) of Maywood, New Jersey, advised the firm to install a software program that could secretly log every single stroke of the suspects’ computer keys and send an encrypted e-mail report to CDS. Investigators revealed that the two employees were deleting orders from the corporate books after processing them, pocketing the revenues, and building their own company from within. The programme picked up on their plan to return to the office late one night to steal a large shipment of electronics. Police hid in the rafters of the firm’s warehouse, and when the suspects entered, they were arrested. The pair was charged with embezzling $3 million over two and a half years, a sizable amount of revenue for a $25 million-a-year firm.

Source: Hellriegel Don, Susan E. Jackson and John W. Slocum Jr., Management: A Competency-based Approach, Thompson, 2002, chap.19, p.526

Control Through Computer MonitoringControl Through Computer Monitoring

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efforts for achieving organisational goals. Each department and employee is governed by pre-determined standards which are well coordinated with one another. This ensures that overall organisational objectives are accomplished.

Limitations of ControllingAlthough controlling is an important function of management, it suffers from the following limitations.

(i) Difficulty in setting quantitative standards: Control system loses some of its effectiveness when standards cannot be defined in quantitative terms. This makes measurement of performance and

their comparison with standards a difficult task. Employee morale, job satisfaction and human behaviour are such areas where this problem might arise.

(ii) Little control on external factors: Generally an enterprise cannot control external factors such as government policies, technological changes, competition etc.

(iii) Resistance from employees: Control is often resisted by empl-oyees. They see it as a restriction on their freedom. For instance, employees might object when they are kept under a strict watch with the help of Closed Circuit Televisions (CCTVs).

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(iv) Costly affair: Control is a costly affair as it involves a lot of expenditure, time and effort. A small enterprise cannot afford to install an expensive control system. It cannot justify the expenses involved. Managers must ensure that the costs of installing and operating a control system should not exceed the benefits derived from it.

The box on Control System at FedEx gives an overview of the control system used by FedEx and how it helped FedEx to increase its profits.

Relationship between Planning and ControllingPlanning and controlling are inseparable twins of management. A system of control presupposes the

existence of certain standards. These standards of performance which serve as the basis of controlling are provided by planning. Once a plan becomes operational, controlling is necessary to monitor the progress, measure it, discover deviations and initiate corrective measures to ensure that events conform to plans. Thus, planning without controlling is meaningless. Similarly, controlling is blind without planning. If the standards are not set in advance, managers have nothing to control. When there is no plan, there is no basis of controlling.

Planning is clearly a prerequisite for controlling. It is utterly foolish to think that controlling could be accomplished without planning. Without planning there is no

FedEx operates an $18 billion delivery system from its eight U.S. and seven international hubs. It operates more than 630 airplanes, 42,500 vehicles, and 44,400 drop-off locations. It delivers more than three million express packages to customers in more than 200 countries. Effective control was one of the key to FedEx’s increased profits during the past decade.

An important part of that control system was the ability to track customers’ parcels at each stage of collection, shipment and delivery. Also, at FedEx, its controls help identify which customers generate the greatest profits and which eventually end up costing the company. FedEx closes accounts that aren’t profitable to serve, such as those in small, widely scattered locations.

The Internet has enabled FedEx to attract and hold new customers by providing them with crucial information as needed. Customers can log onto the Internet and follow the progress of their packages. By providing timely information about services and costs, along with parcel progress to its customers, FedEx has been able to expand rapidly its customer base. More than 2.5 million customers are connected electronically with FedEx.

Source: Hellriegel Don, Susan E. Jackson and John W. Slocum, Jr., Management: A Competency-based Approach, Thompson, 2002

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predetermined understanding of the desired performance. Planning seeks consistent, integrated and articulated programmes while controlling seeks to compel events to conform to plans.

Planning is basically an intellectual process involving thinking, articulation and analysis to discover and prescribe an appropriate course of action for achieving objectives. Controlling, on the other hand, checks whether decisions have been translated into desired action. Planning is thus, prescriptive whereas, controlling is evaluative.

It is often said that planning is looking ahead while controlling is looking back. However, the statement is only partially correct. Plans are prepared for future and are based on forecasts about future conditions. Therefore, planning involves looking ahead and is called a forward-looking function. On the contrary, controlling is like a postmortem of past activities to find out deviations from the standards. In that sense, controlling is a backward-looking function. However, it should be understood that planning is guided by past experiences and the corrective action initiated by control function aims to improve future performance. Thus, planning and controlling are both backward-looking as well as a forward-looking function.

Thus, planning and controlling are interrelated and, in fact, reinforce each other in the sense that

1. Planning based on facts makes controlling easier and effective; and

2. Controlling improves future pla-nning by providing information derived from past experience.

Controlling ProcessControlling is a systematic process involving the following steps. 1. Setting performance standards 2. Measurement of actual perfor-

mance 3. Comparison of actual perfor-

mance with standards 4. Analysing deviations 5. Taking corrective action

Step 1: Setting Performance Standards: The first step in the controlling process is setting up of performance standards. Standards are the criteria against which actual performance would be measured. Thus, standards serve as benchmarks towards which an organisation strives to work.

Standards can be set in both quantitative as well as qualitative terms. For instance, standards set in terms of cost to be incurred, revenue to be earned, product units to be produced and sold, time to be spent in performing a task, all represents quantitative standards. Sometimes standards may also be set in qualitative terms. Improving goodwill and motivation level of employees are examples of qualitative standards. The table in the next page gives a glimpse of standards used in

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different functional areas of business to gauge performance.

At the time of setting standards, a manager should try to set standards in precise quantitative terms as this would make their comparison with actual performance much easier. For instance, reduction of defects from 10 in every 1,000 pieces produced to 5 in every 1,000 pieces produced by the end of the quarter. However, whenever qualitative standards are set, an effort must be made to define them in a manner that would make their measurement easier. For instance, for improving customer satisfaction in a fast food chain having self-service, standards can be set in terms of time taken by a customer to wait for a table, time taken by him to place the order and time taken to collect the order.

It is important that standards should be flexible enough to be modified whenever required. Due to changes taking place in the internal and external business environment,

standards may need some modification to be realistic in the changed business environment.Step 2: Measurement of Actual Performance: Once performance standards are set, the next step is measurement of actual performance. Performance should be measured in an objective and reliable manner. There are several techniques for measurement of performance. These include personal observation, sample checking, performance reports, etc. As far as possible, performance should be measured in the same units in which standards are set as this would make their comparison easier.

It is generally believed that meas-urement should be done after the task is completed. However, wherever possible, measurement of work should be done during the performance. For instance, in case of assembling task, each part produced should be checked before assembling. Similarly, in a manufacturing plant, levels

Standards used in Functional Areas to Gauge Performance

Production Marketing Human ResourceManagement

Finance andAccounting

Quantity Sales volume Labour relations Capital expenditures

Quality Sales expense Labour turnover Inventories

Cost Advertising expenditures

Labour absenteeism Flow of capital

Individual job Individual Liquidity

Performance Sales-person’s performance

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Step 4: Analysing Deviations: Some deviation in performance can be expected in all activities. It is, therefore, important to determine the acceptable range of deviations. Also, deviations in key areas of business need to be attended more urgently as compared to deviations in certain insignificant areas. Critical point control and management by exception should be used by a manager in this regard. 1. Critical Point Control: It is neither

economical nor easy to keep a check on each and every activity in an organisation. Control should, therefore, focus on key result areas (KRAs) which are critical to the success of an organisation. These KRAs are set as the critical points. If anything goes wrong at the critical points, the entire organisation suffers. For instance, in a manufacturing organisation, an increase of 5 per cent in the labour cost may be more troublesome than a 15 per cent increase in postal charges.

2. Management by Exception: Management by exception, which is often referred to as control by exception, is an important principle of management control based on the belief that an attempt to control everything results in controlling nothing. Thus, only significant deviations which go beyond the permissible limit

of gas particles in the air could be continuously monitored for safety.

Measurement of performance of an employee may require preparation of performance report by his superior. Measurement of a company’s performance may involve calculation of certain ratios like gross profit ratio, net profit ratio, return on investment, etc., at periodic intervals. Progress of work in certain operating areas like marketing may be measured by considering the number of units sold, increase in market share etc., whereas, efficiency of production may be measured by counting the number of pieces produced and number of defective pieces in a batch. In small organisations, each piece produced may be checked to ensure that it conforms to quality specifications laid down for the product. However, this might not be possible in a large organisation. Thus, in large organisations, certain pieces are checked at random for quality. This is known as sample checking.

Step 3: Comparing Actual Performance with Standards: This step involves comparison of actual performance with the standard. Such comparison will reveal the deviation between actual and desired results. Comparison becomes easier when standards are set in quantitative terms. For instance, performance of a worker in terms of units produced in a week can be easily measured against the standard output for the week.

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should be brought to the notice of management. Thus, if the plans lay down 2 per cent increase in labour cost as an acceptable range of deviation in a manufacturing organisation, only increase in labour cost beyond 2 per cent should be brought to the notice of the management. However, in case of major deviation from the standard (say, 5 per cent), the matter has to receive immediate action of management on a priority basis.

The box below highlights the advantages of critical point control and management by exception.

After identifying the deviations that demand managerial attention, these deviations need to be analysed for their causes. Deviations may have multiple causes for their origin. These include unrealistic standards, defective process, inadequacy of resources, structural drawbacks, organisational constraints and environmental factors beyond the control of the organisation.

It is necessary to identify the exact cause(s) of deviations, failing which, an appropriate corrective action might not be possible. The deviations and their causes are then reported and corrective action taken at appropriate level.Step 5: Taking Corrective Action: The final step in the controlling process is taking corrective action. No corrective action is required when the deviations are within acceptable limits. However, when the deviations go beyond the acceptable range, especially in the important areas, it demands immediate managerial attention so that deviations do not occur again and standards are accomplished.

Corrective action might involve training of employees if the production target could not be met. Similarly, if an important project is running behind schedule, corrective action might involve assigning of additional workers and equipment to the project and permission for overtime work. In

Advantages of Critical Point Control and Management by ExceptionWhen a manager sets critical points and focuses attention on significant deviations which cross the permissible limit, the following advantages accrue:1. It saves the time and efforts of managers as they deal with only significant deviations.2. It focuses managerial attention on important areas. Thus, there is better utilisation of

managerial talent.3. The routine problems are left to the subordinates. Management by exception, thus,

facilitates delegation of authority and increases morale of the employees.4. It identifies critical problems which need timely action to keep the organisation in right

track.

Advantages of Critical Point Control and Management by Exception

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case the deviation cannot be corrected through managerial action, the standards may have to be revised. The table below cites some of the causes of deviations and the respective

corrective action that might be taken by a manager.

The information in the box in next page gives an account of how Saco Defense was able to control a crisis situation.

Remedial Plan of Action: Analysing deviations

Some examples of Corrective Action

Causes of deviation Corrective action to be taken

1. Defective material Change the quality specification for the material used

2. Defective machinery Repair the existing machine or replace the machine if it cannot be repaired

3. Obsolete machinery Undertake technological upgradation of machinery

4. Defective process Modify the existing process

5. Defective physical conditions of work

Improve the physical conditions of work

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Controlling 225

At Saco Defense, lack of quality had created a crisis. When the government shut it down because it wasn’t meeting quality standards, Saco brought back a TQM programme that had restored quality, increased production, and decreased costs. Based in Saco, Maine, the 178-year-old defense company was unable to adhere to the U.S. Navy’s quality standards. Although Saco’s weapons worked well, the government questioned the company’s quality practices and policies. For example, if an employee discovered a defective bolt near the completion of an assembly process, the operator would replace the bolt but not document the problem. The presence of one defective bolt might mean that others from the same supplier or batch were also bad but were going undetected. Without follow-up, the underlying materials problem would not be identified and resolved.

To solve these problems Saco Defense went through an organisational transformation. The key elements were: (1) empowering employees by giving them the responsibility and accountability for their performance, including the authority to halt production to correct problems; (2) forming work cells, that is, small businesses within the company that manage their production with limited supervision; and (3) reducing the workforce from 760 to about 450 employees and eliminating several layers of management. In addition, ongoing improvement projects at the company range from reducing cycle time and product cost to implementing programmes for skill integration. Productivity has increased, turnover is down, and the company plans to expand its international business.

Source: Stoner, A.F. James, R. Edward Freeman and Daniel R. Gilbert, Jr., Management, Prentice-Hall of India Pvt. Ltd., 1998

(Ref: Joyce E. Santora, ‘A Quality Program Transforms Saco Defense’, Personnel Journal, May 1993)

How Saco Defense Controlled the Situation?How Saco Defense Controlled the Situation?

teChniques of Managerial teChniques of Managerial ControlControlThe various techniques of managerial control may be classified into two broad categories: traditional techniques, and modern techniques.

Traditional TechniquesTraditional techniques are those which have been used by the companies for a long time now. However, these techniques have not become obsolete and are still being used by companies. These include:

(a) Personal observation (b) Statistical reports (c) Breakeven analysis (d) Budgetary control

Modern TechniquesModern techniques of controlling are those which are of recent origin and are comparatively new in management literature. These techniques provide a refreshingly new thinking on the ways in which various aspects of an organisation can be controlled. These include:

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(a) Return on investment (b) Ratio analysis (c) Responsibility accounting (d) Management audit (e) PERT and CPM (f ) Management information system

traditional teChniquestraditional teChniques

Personal ObservationThis is the most traditional method of control. Personal observation enables the manager to collect first hand information. It also creates a psychological pressure on the employees to perform well as they are aware that they are being observed personally on their job. However, it is a very time-consuming exercise and cannot effectively be used in all kinds of jobs.

Statistical ReportsStatistical analysis in the form of averages, percentages, ratios, correla-tion, etc., present useful information to the managers regarding performance of the organisation in various areas. Such information when presented in the form of charts, graphs, tables, etc., enables the managers to read them more easily and allow a comparison to be made with performance in previous periods and also with the benchmarks.

Breakeven AnalysisBreakeven analysis is a technique used by managers to study the relationship between costs, volume and profits. It determines the probable profit and losses at different levels of activity. The sales volume at which

Sales Volume (in thousand units)

Total Revenue

Total Cost

Breakeven Point

Variable Cost

Fixed CostCost

an

d R

even

ue

(Rs.

Lak

hs)

50

Loss

Profit

7525

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Controlling 227

there is no profit, no loss is known as breakeven point. It is a useful technique for the managers as it helps in estimating profits at different levels of activities.

The figure 1 shows breakeven chart of a firm. Breakeven point is determined by the intersection of Total Revenue and Total Cost curves. The figure shows that the firm will break even at 50,000 units of output. At this point, there is no profit no loss. It is beyond this point that the firm will start earning profits.

Breakeven point can be calculated with the help of the following formula:

Breakeven Point = Fixed Costs

Selling price per unit – Variable cost per unit

Breakeven analysis helps a firm in keeping a close check over its variable costs and determines the level of

activity at which the firm can earn its target profit.

Budgetary ControlBudgetary control is a technique of managerial control in which all operations are planned in advance in the form of budgets and actual results are compared with budgetary standards. This comparison reveals the necessary actions to be taken so that organisational objectives are accomplished.

A budget is a quantitative statement for a definite future period of time for the purpose of obtaining a given objective. It is also a statement which reflects the policy of that particular period. It will contain figures of forecasts both in terms of time and quantities. The box shows the most common types of budgets used by an organisation.

Budgeting offers the following advantages:

Types of Budgetsn Sales Budget: A statement of what an organisation expects to sell

in terms of quantity as well as value n Production Budget: A statement of what an organisation plans to

produce in the budgeted periodn Material Budget: A statement of estimated quantity and cost of

materials required for productionn Cash Budget: Anticipated cash inflows and outflows for the

budgeted periodn Capital Budget: Estimated spending on major long-term assets

like new factory or major equipmentn Research and Development Budget: Estimated spending for

the development or refinement of products and processes

Types of Budgets

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1. Budgeting focuses on specific and time-bound targets and thus, helps in attainment of organisational objectives.

2. Budgeting is a source of motiva-tion to the employees who know the standards against which their performance will be appraised and thus, enables them to perform better.

3. Budgeting helps in optimum utilisation of resources by allocating them according to the requirements of different departments.

4. Budgeting is also used for achieving coordination among different departments of an organisation and highlights the interdependence between them. For instance, sales budget cannot be prepared without knowing production programmes and schedules.

5. It facilitates management by exception by stressing on those operations which deviate from budgeted standards in a significant way.

However, the effectiveness of budgeting depends on how accurately estimates have been made about future. Flexible budgets should be prepared which can be adopted if forecasts about future turn out to be different, especially in the face of changing environmental forces. Managers must remember that budgeting should not be viewed

as an end but a means to achieve organisational objectives.

Modern teChniquesModern teChniques

Return on InvestmentReturn on Investment (RoI) is a useful technique which provides the basic yardstick for measuring whether or not invested capital has been used effectively for generating reasonable amount of return. RoI can be used to measure overall performance of an organisation or of its individual departments or divisions. It can be calculated as under.

Net Income SalesRoI= ×××� Sales Total Investment

Net Income before or after tax may be used for making comparisons. Total investment includes both working as well as fixed capital invested in business. According to this technique, RoI can be increased either by increasing sales volume proportionately more than total investment or by reducing total investment without having any reductions in sales volume.

RoI provides top management an effective means of control for measuring and comparing performance of diff-erent departments. It also permits departmental managers to find out the problem which affects RoI in an adverse manner.

Ratio AnalysisRatio Analysis refers to analysis of financial statements through

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Controlling 229

computation of ratios. The most commonly used ratios used by organisations can be classified into the following categories: 1. Liquidity Ratios: Liquidity ratios

are calculated to determine short-term solvency of business. Analysis of current position of liquid funds determines the ability of the business to pay the amount due to its stakeholders.

2. Solvency Ratios: Ratios which are calculated to determine the long-term solvency of business are known as solvency ratios. Thus, these ratios determine the ability of a business to service its indebtedness.

3. Profitability Ratios: These ratios are calculated to analyse the profitability position of a business. Such ratios involve analysis of profits in relation to sales or funds or capital employed.

4. Turnover Ratios: Turnover ratios are calculated to determine the efficiency of operations based on effective utilisation of resources. Higher turnover means better utilisation of resources.

The table given below gives examples of some ratios commonly used by managers.

responsibility aCCountingresponsibility aCCountingResponsibility accounting is a system of accounting in which different sections, divisions and departments of an organisation are set up as ‘Responsibility Centres’. The head of the centre is responsible for achieving the target set for his centre.

Responsibility centres may be of the following types: 1. Cost Centre: A cost or expense

centre is a segment of an orga-nisation in which managers are held responsible for the cost

Examples of Commonly used Ratios

Type of Ratio Examples

Liquidity Current RatioQuick Ratio

Solvency Debt-Equity RatioProprietary RatioInterest Coverage Ratio

Profitability Gross Profit RatioNet Profit RatioReturn on Capital Employed

Turnover Inventory Turnover RatioStock Turnover RatioDebtors Turnover Ratio

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incurred in the centre but not for the revenues. For example, in a manufacturing organisation, production department is class-ified as cost centre.

2. Revenue Centre: A revenue centre is a segment of an organisation which is primarily responsible for generating revenue. For example, marketing department of an organisation may be classified as a revenue center.

3. Profit Centre: A profit centre is a segment of an organisation whose manager is responsible for both revenues and costs. For example, repair and maintenance department of an organisation may be treated as a profit center if it is allowed to bill other produc-tion departments for the services provided to them.

4. Investment Centre: An inve-stment centre is responsible not only for profits but also for investments made in the centre in the form of assets. The investment made in each centre is separately ascertained and return on investment is used as a basis for judging the performance of the centre.

ManageMent auditManageMent auditManagement audit refers to systematic appraisal of the overall performance of the management of an organisation. The purpose is to review the efficiency and effectiveness of management and

to improve its performance in future periods. It is helpful in identifying the deficiencies in the performance of management functions. Thus, management audit may be defined as evaluation of the functioning, performance and effectiveness of management of an organisation.

The main advantages of mana-gement audit are as follows. 1. It helps to locate present and

potential deficiencies in the performance of management functions.

2. It helps to improve the control system of an organisation by continuously monitoring the performance of management.

3. It improves coordination in the functioning of various depart-ments so that they work together effectively towards the achieve-ment of organisational objectives.

4. It ensures updating of existing managerial policies and strategies in the light of environmental changes.

Conducting management audit may sometimes pose a problem as there are no standard techniques of management audit. Also, management audit is not compulsory under any law. Enlightened managers, however, understand its usefulness in improving overall performance of the organisation.

pert and CpMpert and CpMPERT (Programme Evaluation and Review Technique) and CPM (Critical

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Controlling 231

Path Method) are important network techniques useful in planning and controlling. These techniques are especially useful for planning, scheduling and implementing time bound projects involving performance of a variety of complex, diverse and interrelated activities. These techniques deals with time scheduling and resource allocation for these activities and aims at effective execution of projects within given time schedule and structure of costs.

The steps involved in using PERT/CPM are as follows: 1. The project is divided into a

number of clearly identifiable activities which are then arranged in a logical sequence.

2. A network diagram is prepared to show the sequence of activities, the starting point and the termination point of the project.

3. Time estimates are prepared for each activity. PERT requires the preparation of three time estimates – optimistic (or shortest time), pessimistic (or longest time) and most likely time. In CPM only one time estimate is prepared. In addition, CPM also requires making cost estimates for completion of project.

4. The longest path in the network is identified as the critical path. It represents the sequence of those activities which are important for timely completion of the project and where no delays can

be allowed without delaying the entire project.

5. If required, the plan is modified so that execution and timely completion of project is under control.

PERT and CPM are used extensively in areas like ship-building, cons-truction projects, aircraft manu-facture, etc.

Management Information SystemManagement Information System (MIS) is a computer-based informa-tion system that provides information and support for effective managerial decision-making. A decision-maker requires up-to-date, accurate and timely information. MIS provides the required information to the managers by systematically processing a massive data generated in an organisation. Thus, MIS is an important commun-ication tool for managers.

MIS also serves as an important control technique. It provides data and information to the managers at the right time so that appropriate corrective action may be taken in case of deviations from standards.

MIS offers the following advantages to the managers: 1. It facilitates collection, manag-

ement and dissemination of information at different levels of management and across different departments of the organisation.

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2. It supports planning, decision-making and controlling at all levels.

3. It improves the quality of infor-mation with which a manager works.

4. It ensures cost effectiveness in managing information.

5. It reduces information overload on the managers as only relevant information is provided to them.

Controlling Critical point control Management by exception

Breakeven analysis Budgetary control Return on investment

Ratio analysis Responsibility accounting Management audit

PERT and CPM Management Information system

n Controlling is the process of ensuring that actual activities conform to planned activities.

n The importance of managerial control lies in the fact that it helps in accomplishing organisational goals. Controlling also helps in judging accuracy of standards, ensuring efficient utilization of resources, boosting employee morale, creating an atmosphere of order and discipline in the organisation and coordinating different activities so that they all work together in one direction to meet targets.

n Controlling suffers from certain limitations also. An organisation has no control over external factors. The control system of an organisation may face resistance from its employees. Sometimes controlling turns out to be a costly affair, especially in case of small organisations. Moreover, it is not always possible for the management to set quantitative standards of performance in the absence of which controlling exercise loses some of its effectiveness.

n The process of control involves setting performance standards, measurement of actual performance, comparison of actual performance with standards, analysis of deviations and taking corrective action.

Key Terms

Summary

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Controlling 233

n Planning and controlling are inseparable twins of management. Planning initiates the process of management and controlling completes the process. Plans are the basis of control and without control the best laid plans may go astray.

n Personal observation, statistical reports, breakeven analysis and budgetary control are traditional techniques of managerial control.

n Return on investment, ratio analysis, responsibility accounting, management audit, PERT and CPM and Management Information System are modern techniques of managerial control.

Multiple Choice

For the following, choose the right answer.

1. An efficient control system helps to (a) Accomplishes organisational objectives (b) Boosts employee morale (c) Judges accuracy of standards (d) All of the above

2. Controlling function of an organisation is (a) Forward looking (b) Backward looking (c) Forward as well as backward looking (d) None of the above

3. Management audit is a technique to keep a check on the performance of (a) Company (b) Management of the company (c) Shareholders (d) Customers

4. Budgetary control requires the preparation of (a) Training schedule (b) Budgets (c) Network diagram (d) Responsibility centres

5. Which of the following is not applicable to responsibility accounting (a) Investment centre (b) Accounting centre (c) Profit centre (d) Cost centre

Exercises

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Short Answer Type 1. Explain the meaning of controlling. 2. ‘Planning is looking ahead and controlling is looking back.’

Comment. 3. ‘An effort to control everything may end up in controlling

nothing.’ Explain. 4. Write a short note on budgetary control as a technique of

managerial control. 5. Explain how management audit serves as an effective

technique of controlling.

Long Answer Type 1. Explain the various steps involved in the process of control. 2. Explain the techniques of managerial control. 3. Explain the importance of controlling in an organisation. What

are the problems faced by the organisation in implementing an effective control system?

4. Discuss the relationship between planning and controlling.

Application Type

Following are some behaviours that you and others might engage in on the job. For each item, choose the behaviour that management must keep a check to ensure an efficient control system.

1. Biased performance appraisals 2. Using company’s supplies for personal use 3. Asking a person to violate company’s rules 4. Calling office to take a day off when one is sick 5. Overlooking boss’s error to prove loyalty 6. Claiming credit for someone else’s work 7. Reporting a violation on noticing it 8. Falsifying quality reports 9. Taking longer than necessary to do the job 10. Setting standards in consultation with workers You are also required to suggest the management how the

undesirable behaviour can be controlled.

A company ‘M’ limited is manufacturing mobile phones both for domestic Indian market as well as for export. It had enjoyed a substantial market share and also had a loyal customer following. But lately it has been experiencing problems because its targets have

Case Problem

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Controlling 235

not been met with regard to sales and customer satisfaction. Also mobile market in India has grown tremendously and new players have come with better technology and pricing. This is causing problems for the company. It is planning to revamp its controlling system and take other steps necessary to rectify the problems it is facing.

Questions

1. Identify the benefits the company will derive from a good control system.

2. How can the company relate its planning with control in this line of business to ensure that its plans are actually implemented and targets attained.

3. Give the steps in the control process that the company should follow to remove the problems it is facing.

4. What techniques of control can the company use?

In all the answers keep in mind the sector of business the company is in.

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BUSINESS STUDIESPART II

Business Finance and Marketing

Textbook for Class XII

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First EditionMay 2007 Jyaistha 1929

ReprintedFebruary 2008 Magha 1929March 2009 Chaitra 1929January 2010 Magha 1931January 2011 Magha 1932January 2012 Magha 1933January 2013 Pausha 1934

PD 100T MJ

© National Council of EducationalResearch and Training, 2007

`̀̀̀̀ 60.00

Printed on 80 GSM paper withNCERT watermark

Published at the PublicationDivision by the Secretary, NationalCouncil of Educational Research andTraining, Sri Aurobindo Marg,New Delhi 110 016 and printed at .....?

ISBN 81-7450-697-7 (Part I) 81-7450-756-6 (Part II)

ALL RIGHTS RESERVED No part of this publication may be reproduced, stored in a retrieval

system or transmitted, in any form or by any means, electronic,mechanical, photocopying, recording or otherwise without the priorpermission of the publisher.

This book is sold subject to the condition that it shall not, by way oftrade, be lent, re-sold, hired out or otherwise disposed of withoutthe publisher’s consent, in any form of binding or cover other thanthat in which it is published.

The correct price of this publication is the price printed on thispage, Any revised price indicated by a rubber stamp or by a stickeror by any other means is incorrect and should be unacceptable.

OFFICES OF THE PUBLICATIONDIVISION NCERT

NCERT CampusSri Aurobindo MargNew Delhi 110 016 Phone : 011-26562708

108, 100 Feet RoadHosdakere Halli ExtensionBanashankari III StageBangalore 560 085 Phone : 080-26725740

Navjivan Trust BuildingP.O.NavjivanAhmedabad 380 014 Phone : 079-27541446

CWC CampusOpp. Dhankal Bus StopPanihatiKolkata 700 114 Phone : 033-25530454

CWC ComplexMaligaonGuwahati 781 021 Phone : 0361-2674869

Publication TeamHead, Publication : Ashok SrivastavaDivisionChief Production : Shiv KumarOfficerChief Editor (Incharge) : Naresh Yadav

Chief Business : Gautam GangulyManagerEditorial Assistant : Mathew John

Production Assistant : ?

CoverShweta Rao

IllustrationsSuresh Lal

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FOREWORD

The National Curriculum Framework (NCF), 2005, recommends thatchildren’s life at school must be linked to their life outside the school.This principle marks a departure from the legacy of bookish learningwhich continues to shape our system and causes a gap between theschool, home and community. The syllabi and textbooks developed onthe basis of NCF signify an attempt to implement this basic idea. Theyalso attempt to discourage rote learning and the maintenance of sharpboundaries between different subject areas. We hope these measureswill take us significantly further in the direction of a child-centred systemof education outlined in the National Policy on Education (1986).

The success of this effort depends on the steps that school principalsand teachers will take to encourage children to reflect on their ownlearning and to pursue imaginative activities and questions. We mustrecognise that, given space, time and freedom, children generate newknowledge by engaging with the information passed on to them byadults. Treating the prescribed textbook as the sole basis of examinationis one of the key reasons why other resources and sites of learning areignored. Inculcating creativity and initiative is possible if we perceiveand treat children as participants in learning, not as receivers of a fixedbody of knowledge.

These aims imply considerable change in school routines and modeof functioning. Flexibility in the daily time-table is as necessary as rigourin implementing the annual calendar so that the required number ofteaching days are actually devoted to teaching. The methods used forteaching and evaluation will also determine how effective this textbookproves for making children’s life at school a happy experience, ratherthan a source of stress or boredom. Syllabus designers have tried toaddress the problem of curricular burden by restructuring andreorienting knowledge at different stages with greater consideration forchild psychology and the time available for teaching. The textbookattempts to enhance this endeavour by giving higher priority and spaceto opportunities for contemplation and wondering, discussion in smallgroups, and activities requiring hands-on experience.

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iv

The National Council of Educational Research and Training (NCERT)appreciates the hard work done by the textbook development committeeresponsible for this book. We wish to thank the Chairperson of theadvisory group in Social Sciences Professor Hari Vasudevan and the ChiefAdvisor for this book, Professor D.P.S. Verma (Retd.) Delhi School ofEconomics, University of Delhi and Dr. G.L. Tayal, Reader, Ramjas College,University of Delhi for guiding the work of this committee. Several teacherscontributed to the development of this textbook; we are grateful to theirprincipals for making this possible. We are indebted to the institutionsand organisations which have generously permitted us to draw upontheir resources, material and personnel. We are especially grateful to themembers of the National Monitoring Committee, appointed by theDepartment of Secondary and Higher Education, Ministry of HumanResource Development under the Chairpersonship of Professor MrinalMiri and Professor. G.P. Deshpande, for their valuable time andcontribution. As an organisation committed to the systemic reform andcontinuous improvement in the quality of its products, NCERT welcomescomments and suggestions which will enable us to undertake furtherrevision and refinement.

DirectorNew Delhi National Council of Educational20 November 2006 Research and Training

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TEXTBOOK DEVELOPMENT COMMITTEE

CHAIRPERSON, ADVISORY COMMITTEE FOR TEXTBOOKS IN SOCIAL SCIENCES AT

SENIOR SECONDARY LEVEL

Hari Vasudevan, Professor, Department of History, University of Calcutta,Kolkata

CHIEF ADVISOR

D.P.S. Verma, Retired Professor, Department of Commerce, Delhi Schoolof Economics, University of Delhi, Delhi.

ADVISOR

G.L. Tayal, Reader, Ramjas College, University of Delhi, Delhi.

MEMBERS

Anand Saxena, Reader, Deen Dayal Upadhyaya College, University ofDelhi.

Davinder K. Vaid, Professor, Department of Education in Social Sciencesand Humanities, NCERT, New Delhi.

M.M. Goyal, Reader, PG DAV College, University of Delhi.

Narsimha Murthy, Principal, University Post-Graduate College, Subedari,Anam Konda, Distt. Warangal, Andhra Pradesh.

Pooja Dasani, PGT (Commerce) Convent of Jesus and Mary, Gol Dak-khana, New Delhi.

R.B. Solanki, Principal, B.R. Ambedkar College, University of Delhi.

Ruchi Kakkar, Lecturer, Acharya Narendra Dev College, University of Delhi.

Shruti Bodh Aggarwal, Vice-Principal, Rajkiya Pratibha Vikas Vidyalaya,Kishanganj, Delhi.

Sumati Verma, Reader, Sri Aurobindo College, University of Delhi.

Y.V. Reddy, Reader, Department of Commerce, Goa University, Goa.

MEMBER COORDINATOR

Minoo Nandrajog, Reader, Department of Education in Social Sciencesand Humanities, NCERT, New Delhi.

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ACKNOWLEDGEMENTS

The National Council of Educational Research and Trainingacknowledges the valuable contributions of the following persons inpreparing exercises, activities and projects for the textbook:

Seema Srivastava, Lecturer, Inservice Department, DIET, MotiBagh, New Delhi; Rajni Rawal, Vice–Principal, Rajkiya Pratibha VikasVidyalaya, Paschim Vihar, Delhi; Shruti Bodh Aggarwal, Vice Principal,Rajkiya Pratibha Vikas Vidyalaya, Kishanganj, Delhi; Manju Chawla,PGT Commerce, Rajkiya Pratibha Vikas Vidyalaya, Surajmal Vihar,Delhi; Shivani Nagrath, PGT Commerce, Summer Fields School, KailashColony, New Delhi.

Special thanks are due to Savita Sinha, Professor and Head,Department of Education in Social Sciences and Humanities, NCERTfor her support and guidance, during the development of this book.

The Council acknowledges the efforts of Computer Incharge,Dinesh Kumar; DTP Operator, Uttam Kumar, Archana Gupta andSr. Proof Reader, NCERT, Rishi Pal Singh.

NOTE TO THE TEACHER

This textbook is expected to provide a good understanding of theenvironment in which a business operates. A manager has to analysethe complex, dynamic situations in which a business is placed.Therefore, content enrichment in the form of business news andabstracts of articles from business journals and magazines has beengiven as inset material (boxes). This will encourage students to beobservant about all business activity and discover what is happeningin business organisations with the expectation that they will updatetheir knowledge through the use of libraries, newspapers, businessoriented TV programmes and the internet. Various types of questionsare given and case problems have been introduced to test theapplication of subject knowledge to realistic business situations.

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CONTENTS (PART I)

CHAPTER 1 NATURE AND SIGNIFICANCE OF MANAGEMENT 1

CHAPTER 2 PRINCIPLES OF MANAGEMENT 31

CHAPTER 3 BUSINESS ENVIRONMENT 72

CHAPTER 4 PLANNING 95

CHAPTER 5 ORGANISING 112

CHAPTER 6 STAFFING 146

CHAPTER 7 DIRECTING 178

CHAPTER 8 CONTROLLING 215

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CONTENTS

FOREWORD iii

CHAPTER 9 FINANCIAL MANAGEMENT 237

CHAPTER 10 FINANCIAL MARKETS 267

CHAPTER 11 MARKETING 296

CHAPTER 12 CONSUMER PROTECTION 369

CHAPTER 13 ENTREPRENEURSHIP DEVELOPMENT 388

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CONSTITUTION OF INDIA

Fundamental Duties

Fundamental Duties – It shall be the duty of every citizen of India —

(a) to abide by the Constitution and respect its ideals and institutions, the NationalFlag and the National Anthem;

(b) to cherish and follow the noble ideals which inspired our national struggle forfreedom;

(c) to uphold and protect the sovereignty, unity and integrity of India;

(d) to defend the country and render national service when called upon to do so;

(e) to promote harmony and the spirit of common brotherhood amongst all the peopleof India transcending religious, linguistic and regional or sectional diversities; torenounce practices derogatory to the dignity of women;

(f) to value and preserve the rich heritage of our composite culture;

(g) to protect and improve the natural environment including forests, lakes, rivers,wildlife and to have compassion for living creatures;

(h) to develop the scientific temper, humanism and the spirit of inquiry and reform;

(i) to safeguard public property and to abjure violence;

(j) to strive towards excellence in all spheres of individual and collective activity sothat the nation constantly rises to higher levels of endeavour and achievement;

(k) who is a parent or guardian, to provide opportunities for education to his child or,as the case may be, ward between the age of six and fourteen years.

Part IV A (Article 51 A)

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Notes

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LEARNING OBJECTIVES

After studying this chapter, youshould be able to:

explain the meaning of businessfinance;

describe financial management;

explain the role of financialmanagement in our enterprise;

discuss objectives of financialmanagement and how theycould be achieved;

explain the meaning andimportance of financialplanning;

state the meaning of capitalstructure;

analyse the factors affecting thechoice of an appropriate capitalstructure;

state meaning of fixed capitaland working capital; and

analyse the factors affecting therequirement of fixed andworking capital.

CHAPTER

9FINANCIAL MANAGEMENT

TATA STEEL ACQUIRES CORUS

Tata Steel, the biggest steel producerin the Indian private sector has acquiredCorus, (formerly known as British Steel)in a deal worth $8.6 billion. This makesTata Steel the fifth largest steelproducer in the world. A financialdecision of this magnitude hassignificant implicitness for both TataSteel and Corus as well as theiremployees and shareholders. Tomention some of them:

Tata Steel will become the fifthlargest producer of steel in the world.

Tata Steel will raise a debt of over$ 8 billion to finance the transaction.The deal will be paid for by Tata SteelUK, a special purpose vehicle (SPV)set up for the purpose. This SPV willget funds from Tata Steel routedthrough a Singapore subsidiary.Another company of the Tata group,Tata Sons Ltd., will invest $ 1 billiondollars for preference shares alongwith Tata Steel which will invest anequal amount.

Tata Steel, the acquirer company, shallhave to arrange about 36,500 croresof rupees to finance the take-over.

Tata Steel will have to raise thisamount through debt or equity or acombination of both. Some amountmay come from internal accruals also.This financing decision will affect thecapital structure of Tata Steel.

Tata Steel hopes to increase theproduction to 40 million tonnes andrevenue to 32 billion US dollars by2012.

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tangible like machinery, factories,buildings, offices; or intangible suchas trademarks, patents, technicalexpertise, etc. Also, finance is centralto running the day-to-day operationsof business, like buying material,paying bills, salaries, collecting cashfrom customers, etc. needed at everystage in the life of a business entity.Availability of adequate finance is,thus, very crucial for the survival andgrowth of a business.

FINANCIAL MANAGEMENT

All finance comes at some cost. It isquite imperative that it needs to becarefully managed. FinancialManagement is concerned with optimalprocurement as well as the usage offinance. For optimal procurement,different available sources of financeare identified and compared in termsof their costs and associated risks.Similarly, the finance so procuredneeds to be invested in a manner thatthe returns from the investment exceedthe cost at which procurement hastaken place. Financial Managementaims at reducing the cost of fundsprocured, keeping the risk under

INTRODUCTION

In the above case, these decisionsrequire careful financial planning, anunderstanding of the resultant capitalstructure and the riskiness andprofitability of the enterprise. All thesehave a bearing on shareholders as wellas employees. They require anunderstanding of business finance,major financial decision areas,financial risk, and working capitalrequirements of the business. Finance,as we all know, is essential for runninga business. Success of businessdepends on how well finance isinvested in assets and operations andhow timely and cheaply the financesare arranged, from outside or fromwithin the business.

MEANING OF BUSINESS FINANCE

Money required for carrying outbusiness activities is called businessfinance. Almost all business activitiesrequire some finance. Finance isneeded to establish a business, to runit, to modernise it, to expand, ordiversify it. It is required for buying avariety of assets, which may be

It may affect the competitiveness of Tata Steel because the cost of production ofsteel in all probability, will change.

The dividend paying capacity of Tata Steel may be affected because of this hugecash outflow and because of a significantly higher debt which would need to beserviced before paying any dividends to shareholders.

The degree of risk shall also be affected. Needless to emphasise, decisions likethis affect the future of the organisation. These decisions are almost irrevocableafter they have been formalised.

Source: The Economic Times

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control and achieving effectivedeployment of such funds. It also aimsat ensuring availability of enough fundswhenever required as well as avoidingidle finance. Needless to emphasise, thefuture of a business depends a greatdeal on the quality of its financialmanagement.

Importance : The role of financialmanagement cannot be over -emphasised, since it has a directbearing on the financial health of abusiness. The financial statements,such as Balance Sheet and Profit andLoss Account, reflect a firm’s financialposition and its financial health.Almost all items in the financialstatements of a business are affecteddirectly or indirectly through somefinancial management decisions. Someprominent examples of the aspectsbeing affected could be as under:

(i) The size and the composition offixed assets of the business: Forexample, a capital budgetingdecision to invest a sum of Rs. 100crores in fixed assets would raisethe size of fixed assets block by thisamount.

(ii) The quantum of current assets andits break-up into cash, inventory andreceivables: With an increase in theinvestment in fixed assets, there isa commensurate increase in theworking capital requirement. Thequantum of current assets is alsoinfluenced by financialmanagement decisions. In addition,decisions about credit andinventory management affect the

amount of debtors and inventorywhich in turn affect the totalcurrent assets as well as theircomposition.

(iii) The amount of long-term and short-term funds to be used: Financialmanagement, among others,involves decision about theproportion of long-term and short-term funds. An organisationwanting to have more liquid assetswould raise relatively more amounton a long-term basis. There is achoice between liquidity andprofitability. The underlying ass-umption here is that currentliabilities cost less than long termliabilities.

(iv) Break-up of long-term financing intodebt, equity etc: Of the total long-term finance, the proportions to beraised by way of debt and/or equityis also a financial managementdecision. The amounts of debt,equity share capital, preferenceshare capital are affected by thefinancing decision, which is a partof financing management.

(v) All items in the Profit and LossAccount, e.g., Interest, Expense,Depreciation, etc. : Higher amountof debt means higher interestexpense in future. Similarly, useof higher equity may entail higherpayment of dividends. Similarly, anexpansion of business which is aresult of capital budgeting decisionis likely to affect virtually all itemsin the profit and loss account ofthe business.

It can, thus, be stated that thefinancial statements of a business are

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largely determined by financialmanagement decisions taken earlier.Similarly, the future financialstatements would depend upon pastas well as current financial decisions.Thus, the overall financial health of abusiness is determined by the qualityof its financial management. Goodfinancial management aims atmobilisation of financial resources ata lower cost and deployment of thesein most lucrative activities.

OBJECTIVES

The primary aim of financialmanagement is to maximiseshareholders’ wealth, which is referredto as the wealth-maximisationconcept. The market price of acompany’s shares is linked to the threebasic financial decisions which you willstudy a little later. This is because acompany funds belong to theshareholders and the manner in whichthey are invested and the returnearned by them determines theirmarket value and price. It meansmaximisation of the market value ofequity shares. The market price ofequity share increases, if the benefitfrom a decision exceeds the costinvolved. All financial decisions aim atensuring that each decision is efficientand adds some value. Such valueadditions tend to increase the marketprice of shares. Therefore, thosefinancial decisions are taken which willultimately prove gainful from the pointof view of the shareholders. Theshareholders gain if the value of shares

in the market increases. Thosedecisions which result in decline in theshare price are poor financialdecisions. Thus, we can say, theobjective of financial management isto maximise the current price of equityshares of the company or to maximisethe wealth of owners of the company,that is, the shareholders.

Therefore, when a decision is takenabout investment in a new machine,the aim of financial management is toensure that benefits from theinvestment exceed the cost so thatsome value addition takes place.Similarly, when finance is procured,the aim is to reduce the cost so thatthe value addition is even higher.

In fact, in all financial decisions,major or minor, the ultimate objectivethat guides the decision-maker is thatsome value addition should take place.All those avenues of investment,modes of financing, ways of handlingvarious components of working capitalmust be identified which willultimately lead to an increase in theprice of equity share. It can happenthrough efficient decision-making.Decision-making is efficient if, out ofthe various available alternatives, thebest is selected.

FINANCIAL DECISIONS

Financial management is concernedwith the solution of three major issuesrelating to the financial operations ofa firm corresponding to the threequestions of investment, financing and

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divident decision. In a financialcontext, it means the selection of bestfinancing alternative or bestinvestment alternative. The financefunction, therefore, is concerned withthree broad decisions which areexplained below:

Investment Decision

A firm’s resources are scarce incomparison to the uses to which theycan be put. A firm, therefore, has tochoose where to invest theseresources, so that they are able to earnthe highest possible return for theirinvestors. The investment decision,therefore, relates to how the firm’sfunds are invested in different assets.

Investment decision can be long-term or short-term. A long-terminvestment decision is also called aCapital Budgeting decision. It involvescommitting the finance on a long-termbasis. For example, makinginvestment in a new machine toreplace an existing one or acquiring anew fixed asset or opening a newbranch, etc. These decisions are verycrucial for any business since theyaffect its earning capacity in the longrun. The size of assets, profitability andcompetitiveness are all affected bycapital budgeting decisions. Moreover,these decisions normally involve hugeamounts of investment and areirreversible except at a huge cost.Therefore, once made, it is often almostimpossible for a business to wriggle outof such decisions. Therefore, they needto be taken with utmost care. These

decisions must be taken by those whounderstand them comprehensively. Abad capital budgeting decisionnormally has the capacity to severelydamage the financial fortune of abusiness.Short-term investmentdecisions (also called working capitaldecisions) are concerned with thedecisions about the levels of cash,inventory and receivables. Thesedecisions affect the day-to-day workingof a business. These affect the liquidityas well as profitability of a business.Efficient cash management, inventorymanagement and receivablesmanagement are essential ingredientsof sound working capital management.

Factors affecting CapitalBudgeting Decision

A number of projects are oftenavailable to a business to invest in. Buteach project has to be evaluatedcarefully and, depending upon thereturns, a particular project is either

Wealth Maximisation Concept

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selected or rejected. If there is only oneproject, its viability in terms of the rateof return, viz., investment and itscomparability with the industry’saverage is seen. There are certainfactors which affect capital budgetingdecisions.

(a) Cash flows of the project: When acompany takes an investmentdecision involving huge amount itexpects to generate some cashflows over a period. These cashflows are in the form of a series ofcash receipts and payments overthe life of an investment. Theamount of these cash flows shouldbe carefully analysed beforeconsidering a capital budgetingdecision.

(b) The rate of return: The mostimportant criterion is the rate ofreturn of the project. Thesecalculations are based on theexpected returns from eachproposal and the assessment of therisk involved. Suppose, there aretwo projects, A and B (with thesame risk involved), with a rate ofreturn of 10 per cent and 12 percent, respectively, then undernormal circumstance, project Bshould be selected.

(c) The investment criteria involved:The decision to invest in aparticular project involves anumber of calculations regardingthe amount of investment, interestrate, cash flows and rate of return.There are different techniques toevaluate investment proposals

which are known as capitalbudgeting techniques. Thesetechniques are applied to eachproposal before selecting aparticular project.

Financing Decision

This decision is about the quantum offinance to be raised from variouslong-term sources. Short-term sourcesare studied under the ‘working capitalmanagement’.

It involves identification of variousavailable sources. The main sourcesof funds for a firm are shareholders’funds and borrowed funds. Theshareholders’ funds refer to the equitycapital and the retained earnings.Borrowed funds refer to the financeraised through debentures or otherforms of debt. A firm has to decidethe proportion of funds to be raisedfrom either sources, based on theirbasic characteristics. Interest onborrowed funds have to be paidregardless of whether or not a firmhas earned a profit. Likewise, theborrowed funds have to be repaidat a fixed time. The risk of defaulton payment is known as financialrisk which has to be considered bya firm likely to have insufficientshareholders to make these fixedpayments. Shareholders’ funds, on theother hand, involve no commitmentregarding the payment of returns orthe repayment of capital. A firm,therefore, needs to have a judiciousmix of both debt and equity in makingfinancing decisions, which may bedebt, equity, preference share capital,and retained earnings.

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The cost of each type of finance hasto be estimated. Some sources may becheaper than others. For example, debtis considered to be the cheapest of allthe sources, tax deductibility of interestmakes it still cheaper. Associated riskis also different for each source, e.g., itis necessary to pay interest on debt andredeem the principal amount onmaturity. There is no such compulsion

to pay any dividend on equity shares.Thus, there is some amount of financialrisk in debt financing. The overallfinancial risk depends upon theproportion of debt in the total capital.The fund raising exercise also costssomething. This cost is calledfloatation cost. It also must beconsidered while evaluating differentsources. Financing decision is, thus,

Financial Decisions

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concerned with the decisions abouthow much to be raised from whichsource. This decision determines theoverall cost of capital and the financialrisk of the enterprise.

Factors Affecting FinancingDecisions

The financing decisions are affected byvarious factors. Important amongthem are as follows:

(a) Cost: The cost of raising fundsthrough different sources aredifferent. A prudent financialmanager would normally opt for asource which is the cheapest.

(b) Risk: The risk associated with eachof the sources is different.

(c) Floatation Costs: Higher the floatationcost, less attractive the source.

(d) Cash Flow Position of the Company:A stronger cash flow position maymake debt financing more viablethan funding through equity.

(e) Fixed Operating Costs: I f abusiness has high fixed operatingcosts (e.g., building rent,Insurance premium, Salaries,etc.), It must reduce fixedfinancing costs. Hence, lower debtfinancing is better. Similarly, iffixed operating cost is less, moreof debt f inancing may bepreferred.

(f) Control Considerations: Issues ofmore equity may lead to dilutionof management’s control over thebusiness. Debt financing has nosuch implication. Companiesafraid of a takeover bid wouldprefer debt to equity.

India Inc. Issues Bonus Shares and Dividends

Corporate India has opened its purse strings to shareholders with interimdividends and bonus shares. At least 60 companies have declared interim dividendor announced plans to do so in the first three weeks of January. In addition, around12 companies have announced bonus share issues this month, about three timesmore than January 2006.

There are range of things that a company can do for maximising shareholdervalue and dividend is the most direct and simple form of it. Ideally companies needto balance it up between paying cash and building value of the stock for totalshareholder returns.

This trend of dividends and bonuses is in synchronisation with the good profitsbeing posted by companies. It’s a way of rewarding shareholders.

A number of companies have also announced plans of bonus shares for theirshareholders. Most of the companies who have already declared bonus issues orannounced that they would be taking it up in their next board meeting are small ormid-sized companies.


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(g) State of Capital Market: Health ofthe capital market may also affectthe choice of source of fund. Duringthe period when stock market isrising, more people invest in equity.However, depressed capital marketmay make issue of equity sharesdifficult for any company.

Dividend Decision

The third important decision thatevery financial manager has to takerelates to the distribution of dividend.Dividend is that portion of profitwhich is distributed to shareholders.The decision involved here is howmuch of the profit earned by company(after paying tax) is to be distributedto the shareholders and how much ofit should be retained in the business.While the dividend constitutes thecurrent income re-investment asretained earning increases the firm’sfuture earning capacity. The extent ofretained earnings also influences thefinancing decision of the firm. Sincethe firm does not require funds to theextent of re-invested retainedearnings, the decision regardingdividend should be taken keeping inview the overall objective ofmaximising shareholder’s wealth.

Factors Affecting Dividend Decision

How much of the profits earned by acompany will be distributed as profitand how much will be retained in thebusiness is affected by many factors.

Some of the important factors arediscussed as follows:

(a) Amount of Earnings: Dividends arepaid out of current and pastearning. Therefore, earnings is amajor determinant of the decisionabout dividend.

(b) Stability Earnings: Other thingsremaining the same, a companyhaving stable earning is in a betterposition to declare higherdividends. As against this, acompany having unstable earningsis likely to pay smaller dividend.

(c) Stability of Dividends: Companiesgenerally follow a policy ofstabilising dividend per share.The increase in dividends isgenerally made when there isconfidence that their earningpotential has gone up and notjust the earnings of the currentyear. In other words, dividend pershare is not altered if the changein earnings is small or seen to betemporary in nature.

(d) Growth Opportunities: Companieshaving good growth opportunitiesretain more money out of theirearnings so as to finance therequired investment. The dividendin growth companies is, therefore,smaller, than that in the non–growth companies.

(e) Cash Flow Position: The paymentof dividend involves an outflow ofcash. A company may be earningprofit but may be short on cash.Availability of enough cash in the

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company is necessary fordeclaration of dividend.

(f) Shareholders’ Preference: Whiledeclaring dividends, managementsmust keep in mind the preferencesof the shareholders in this regard.If the shareholders in generaldesire that at least a certainamount is paid as dividend, thecompanies are likely to declare thesame. There are always someshareholders who depend upon aregular income from theirinvestments.

(g) Taxation Policy: The choice betweenthe payment of dividend andretaining the earnings is, to someextent, affected by the differencein the tax treatment of dividendsand capital gains. If tax on dividendis higher, it is better to pay less byway of dividends. As compared tothis, higher dividends may bedeclared if tax rates are relativelylower. Though the dividends are freeof tax in the hands of shareholders,a dividend distribution tax is leviedon companies. Thus, under thepresent tax policy, shareholders arelikely to prefer higher dividends.

(h) Stock Market Reaction: Investors,in general, view an increase individend as a good news and stockprices react positively to it.Similarly, a decrease in dividendmay have a negative impact on theshare prices in the stock market.Thus, the possible impact ofdividend policy on the equity shareprice is one of the important factors

considered by the managementwhile taking a decision about it.

(i) Access to Capital Market: Large andreputed companies generally haveeasy access to the capital marketand, therefore, may depend less onretained earning to finance theirgrowth. These companies tend topay higher dividends than thesmaller companies which haverelatively low access to the market.

(j) Legal Constraints: Certainprovisions of the Companies Actplace restrictions on payouts asdividend. Such provisions must beadhered to while declaring thedividend.

(k) Contractual Constraints: Whilegranting loans to a company,sometimes the lender may imposecertain restrictions on the paymentof dividends in future. Thecompanies are required to ensurethat the dividend does not violatethe terms of the loan agreement inthis regard.

FINANCIAL PLANNING

Financial planning is essentially thepreparation of a financial blueprint ofan organisation’s future operations.The objective of financial planning isto ensure that enough funds areavailable at right time. If adequatefunds are not available the firm willnot be able to honour its commitmentsand carry out its plans. On the otherhand, if excess funds are available, itwill unnecessarily add to the cost and

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may encourage wasteful expenditure.It must be kept in mind that financialplanning is not equivalent to, or asubstitute for, financial management.Financial management aims atchoosing the best investment andfinancing alternatives by focusing ontheir costs and benefits. Its objectiveis to increase the shareholders’ wealth.Financial planning on the other handaims at smooth operations by focusingon fund requirements and their

availability in the light of financialdecisions. For example, if a capitalbudgeting decisions is taken, theoperations are likely to be at a higherscale. The amount of expenses andrevenues are likely to increase.Financial planning process tries toforecast all the items which are likelyto undergo changes. It enables themanagement to foresee the fundrequirements both the quantum aswell as the timing. Likely shortage and

Rising Dividends can Support Valuations

Over the next few years, companies cannot afford to ignore dividends. Investors arelooking for higher payouts and need the assurance of a stated dividend policy.In India, though, there are few companies that are as consistent in dividendpayments, even over the past five years.

The dividend yield, though, has steadily declined and is now at an average of 1.1per cent for a set of 800 companies. These companies form part of the various BSEand NSE indices. Not only has the dividend yield gone down, there is not one companyin this list that has increased dividends in line with profit growth in each of the pastfive years.

Among companies in the set, those that have steadily increased the payout overthe years include a number of multinational companies that also earn a high returnon net worth. Companies such as Astrazeneca Pharma, Nestle India, HindustanLever, Clariant, Pfizer, GlaxoSmithKline Consumer and Cummins India haveenhanced dividends to deliver value to shareholders. These companies do not seemto be constrained for growth, either. Some Indian companies that have also shownthe way forward include Automotive Axles, Ranbaxy Labs, Hero Honda Motors,Asian Paints, Thermax and a number of banking and non-banking financecompanies. These companies, too, are growing fast, and the declaration of dividendshas not dampened prospects.

Companies that have held on to profits and not declared dividends include e-Serve, Cranes Software, Sesa Goa, Tata Motors, Moser Baer, ABB, MICO, AztecSoftware, Havells India, Amtek India and Sterlite Industries. This is only an indicativelist and includes many more. The dividend payout ratio in the case of the indicatedcompanies is less than 20 per cent. Investors, however, need dividends to rise andthey also need a stated dividend policy. The earnings yield (inverse of PE ratio) isnow at about 6 per cent. If the payout ratio were stepped up to 40 per cent then thedividend yield would rise to about 2.5 per cent.

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surpluses are forecast so thatnecessary activities are taken inadvance to meet those situations.Thus, financial planning strives toachieve the following twin objectives.

(a) To ensure availability of fundswhenever required: This include aproper estimation of the fundsrequired for different purposessuch as for the purchase of long-term assets or to meet day-to-dayexpenses of business etc. Apartfrom this, there is a need toestimate the time at which thesefunds are to be made available.Financial planning also tries tospecify possible sources of thesefunds.

(b) To see that the firm does not raiseresources unnecessarily: Excessfunding is almost as bad asinadequate funding. Even if thereis some surplus money, goodfinancial planning would put it tothe best possible use so that thefinancial resources are not leftidle and don’t unnecessarily addto the cost.

Thus, a proper matching of fundsrequirements and their availability issought to be achieved by financialplanning. This process of estimatingthe fund requirement of a businessand specifying the sources of funds iscalled financial planning. Financialplanning takes into consideration thegrowth, performance, investments andrequirement of funds for a given

period. Financial planning includesboth short-term as well as long-termplanning. Long-term planning relatesto long term growth and investment.It focuses on capital expenditureprogrammes. Short-term planningcovers short-term financial plan calledbudget.

Typically, financial planning isdone for three to five years. For longerperiods it becomes more difficult andless useful. Plans made for periods ofone year or less are termed as budgets.Budgets are example of financialplanning exercise in greater details.They include detailed plan of actionfor a period of one year or less.

Financial planning usually beginswith the preparation of a salesforecast. Let us suppose a company ismaking a financial plan for the nextfive years. It will start with an estimateof the sales which are likely to happenin the next five years. Based on these,the financial statements are preparedkeeping in mind the requirement offunds for investment in the fixedcapital and working capital. Then theexpected profits during the period areestimated so that an idea can be madeof how much of the fund requirementscan be met internally i.e., throughretained earnings (after dividendpayouts). This results in an estimationof the requirement for external funds.Further, the sources from which theexternal funds requirement can be metare identified and cash budgets aremade, incorporating these factors.

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IMPORTANCE

Financial planning is an important partof overall planning of any businessenterprise. It aims at enabling thecompany to tackle the uncertainty inrespect of the availability and timing ofthe funds and helps in smoothfunctioning of an organisation. Theimportance of financial planning canbe explained as follows:

(i) It helps in forecasting what mayhappen in future under different

business situations. By doing so,it helps the firms to face theeventual situation in a better way.In other words, it makes the firmbetter prepared to face the future.For example, a growth of 20% insales is predicted. However, it mayhappen that the growth rateeventually turns out to be 10% or30%. Many items of expensesshall be different in these threesituations. By preparing ablueprint of these three situations

Cutting Back on Debt

Even successful businesses have debt, but how much is too much? Learning howto manage debt is what can put you ahead.

Taking on the right amount of debt can mean the difference between a businessstruggling to survive and one that can respond nimbly to changing economic ormarket conditions. A number of circumstances may justify acquiring debt. As ageneral rule, borrowing makes the most sense when you need to bolster cash flowor finance growth or expansion. But while debt can provide the leverage you need togrow, too much debt can strangle your business. So the question is: How muchdebt is too much?

The answer, experts say, lies in a careful analysis of your cash flow as well asyour industry. A business that doesn’t grow dies. You’ve got to grow, but you’ve gotto grow within the financial constraints of your business. What is the ideal capitalstructure a business needs in its industry to remain viable? The higher thevolatility (in your industry), the less debt you should have. The smaller the volatility,the more debt you can afford.

Although banks and other financial institutions look for a satisfactory debt-to-equity ratio before agreeing to make a loan, don’t assume a creditor’s willingness toextend funds is evidence that your business is in a strong debt position. Some financialinstitutions are overzealous lenders, particularly when trying to lure or hold on topromising business customers. “The bank may be looking more at collateral thanwhether the (business’s) earnings are going to come in to justify the debt service.

To avoid these and other credit pitfalls, it’s up to you to get the financial factson your business and make sound borrowing decisions. Unfortunately, manyentrepreneurs fail to recognise how important financial analysis is to running asuccessful business. Even business owners who receive detailed financial statementsfrom their accountants often do not take advantage of the valuable informationcontained in the documents.

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the management may decide whatmust be done in each of thesesituations. This preparation ofalternative financial plans to meetdifferent situations is clearly ofimmense help in running thebusiness smoothly.

(ii) It helps in avoiding businessshocks and surprises and helpsthe company in preparing for thefuture.

(iii) If helps in co-ordinating variousbusiness functions, e.g., sales andproduction functions, by providingclear policies and procedures.

(iv) Detailed plans of action preparedunder financial planning reducewaste, duplication of efforts, andgaps in planning.

(v) It tries to link the present with thefuture.

(vi) It provides a link betweeninvestment and financing decisionson a continuous basis.

(vii) By spelling out detailed objectivesfor various business segments, itmakes the evaluation of actualperformance easier.

CAPITAL STRUCTURE

One of the important decisions underfinancial management relates to thefinancing pattern or the proportion ofthe use of different sources in raisingfunds. On the basis of ownership, thesources of business finance can bebroadly classified into two categoriesviz., ‘owners’ funds’ and ‘borrowedfunds’. Owners’ funds consist of equity

share capital, preference share capitaland reserves and surpluses or retainedearnings. Borrowed funds can be in theform of loans, debentures, publicdeposits etc. These may be borrowedfrom banks, other financial institutions,debentureholders and public.

Capital structure refers to the mixbetween owners and borrowed funds.These shall be referred as equity anddebt in the subsequent text. It can becalculated as debt-equity ratio

i.e.,Debt

Equity

⎛⎝⎜

⎞⎠⎟ or as the proportion of

debt out of the total capital i.e.,

DebtDebt +Equity

⎛⎝⎜

⎞⎠⎟ .

Debt and equity differ significantlyin their cost and riskiness for the firm.The cost of debt is lower than the cost ofequity for a firm because the lender’s riskis lower than the equity shareholder’srisk, since the lender earns an assuredreturn and repayment of capital and,therefore, they should require a lowerrate of return. Additionally, interest paidon debt is a deductible expense forcomputation of tax liability whereasdividends are paid out of after-taxprofit. Increased use of debt, therefore,is likely to lower the over-all cost ofcapital of the firm provided that the costof equity remains unaffected. Impactof a change in the debt-equity ratioupon the earning per share is dealt within detail later in this chapter.

Debt is cheaper but is more riskyfor a business because the payment ofinterest and the return of principal is

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obligatory for the business. Any defaultin meeting these commitments mayforce the business to go into liquidation.There is no such compulsion in case ofequity, which is therefore, consideredriskless for the business. Higher use ofdebt increases the fixed financialcharges of a business. As a result,increased use of debt increases thefinancial risk of a company.

Financial risk is the chance that afirm would fail to meet its paymentobligations.

Capital structure of a company,thus, affects both the profitabilityand the financial risk. A capitalstructure will be said to be optimalwhen the proportion of debt andequity is such that it results in anincrease in the value of the equityshare. In other words, all decisionsrelating to capital structure shouldemphasise on increasing theshareholders’ wealth.

The proportion of debt in theoverall capital is also called financial

Example I

Company X Ltd.

Total Funds used Rs. 30 Lakh

Interest rate 10% p.a.

Tax rate 30%

EBIT Rs. 4 Lakh

Debt

Situation I Nil

Situation II Rs. 10 Lakh

Situation III Rs. 20 Lakh

EBIT-EPS Analysis

Situation I Situation II Situation III

EBIT 4,00,000 4,00,000 4,00,000

Interest NIL 1,00,000 2,00,000

EBT 4,00,000 3,00,000 2,00,000

(Earnings before taxes)

Tax 1,20,000 90,000 60,000

EAT 2,80,000 2,10,000 1,40,000

(Earnings after taxes)

No. of shares of Rs.10 3,00,000 2,00,000 1,00,000

EPS 0.93 1.05 1.40

(Earnings per share)

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leverage. Financial leverage is

computed asDE

orD

D+ E when D is

the Debt and E is the Equity. As thefinancial leverage increases, the costof funds declines because ofincreased use of cheaper debt but thefinancial risk increases. The impactof f inancial leverage on theprofitability of a business can be seenthrough EBIT-EPS (Earning beforeInterest and Taxes-Earning perShare) analysis as in the followingexample.

Three situations are considered.There is no debt in situation-I i.e.(unlevered business). Debt of Rs. 10lakh and 20 lakh are assumed insituations-II and III, respectively. Alldebt is at 10% p.a.

The company earns Rs. 0.93 pershare if it is unlevered. With debt of Rs.10 lakh its EPS is Rs. 1.05. With a stillhigher debt of Rs. 20 lakh, its, EPS risesto Rs. 1.40. Why is the EPS rising withhigher debt? It is because the cost of

debt is lower than the return thatcompany is earning on funds employed.The company is earning a return oninvestment (RoI)

of 13.33%EBIT

Total Investment100

⎛⎝⎜

⎞⎠⎟ ,

4Lakh30Lakh

100⎛⎝⎜

⎞⎠⎟ . This is higher than

the 10% interest it is paying on debtfunds. With higher use of debt, thisdifference between RoI and cost of debtincreases the EPS. This is a situationof favourable financial leverage. In suchcases, companies often employ more ofcheaper debt to enhance the EPS. Suchpractice is called Trading on Equity.

Trading on Equity refers to theincrease in profit earned by the equityshareholders due to the presence offixed financial charges like interest.

Now consider the following case ofCompany Y. All details are the sameexcept that the company is earning aprofit before interest and taxes ofRs. 2 lakh.

Example II

Company Y Ltd.

Situation I Situation II Situation III

EBIT 2,00,000 2,00,000 2,00,000

Interest NIL 1,00,000 2,00,000

EBT 2,00,000 1,00,000 NIL

Tax 60,000 30,000 NIL

EAT 1,40,000 70,000 NIL

No. of shares of Rs.10 3,00,000 2,00,000 1,00,000

EPS 0.47 0.35 NIL

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In this example, the EPS of thecompany is falling with increased useof debt. It is because the Company’s rateof return on investment (RoI) is less thanthe cost of debt. The RoI for company Y

is 2Lakh30Lakh

100, i.e., 6.67%, whereas

the interest rate on debt is 10%. In suchcases, the use of debt reduces the EPS.This is a situation of unfavourablefinancial leverage. Trading on Equity isclearly unadvisable in such a situation.

Even in case of Company X,reckless use of Trading on Equity isnot recommended. An increase in debtmay enhance the EPS but as pointedout earlier, it also raises the financialrisk. Ideally, a company must choosethat risk-return combination whichmaximises shareholders’ wealth. Thedebt-equity mix that achieves it, is theoptimum capital structure.

Factors affecting the Choice ofCapital StructureDeciding about the capital structureof a firm involves determining therelative proportion of various types offunds. This depends on variousfactors. For example, debt requiresregular servicing. Interest paymentand repayment of principal areobligatory on a business. In additiona company planning to raise debt musthave sufficient cash to meet theincreased outflows because of higherdebt. Similarly, important factorswhich determine the choice of capitalstructure are as follows:

1. Cash Flow Position: Size ofprojected cash flows must beconsidered before borrowing. Cash

flows must not only cover fixed cashpayment obligations but there must besufficient buffer also. It must be keptin mind that a company has cashpayment obligations for (i) normalbusiness operations; (ii) for investmentin fixed assets; and (iii) for meeting thedebt service commitments i.e., paymentof interest and repayment of principal.

2. Interest Coverage Ratio (ICR): Theinterest coverage ratio refers to thenumber of times earnings beforeinterest and taxes of a company coversthe interest obligation. This may becalculated as follows:

ICR = EBIT

Interest

The higher the ratio, lower shall bethe risk of company failing to meet itsinterest payment obligations. However,this ratio is not an adequate measure.A firm may have a high EBIT but lowcash balance. Apart from interest,repayment obligations are also relevant.

3. Debt Service Coverage Ratio(DSCR): Debt Service Coverage Ratiotakes care of the deficiencies referredto in the Interest Coverage Ratio (ICR).The cash profits generated by theoperations are compared with the totalcash required for the service of the debtand the preference share capital. It iscalculated as follows:Profit after tax + Depreciation + Interest + Non Cash exp.

Pref. Div + Interest + Repayment obligation

A higher DSCR indicates better abilityto meet cash commitments andconsequently, the company’s potentialto increase debt component in itscapital structure.

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Who funds Indian industry, why it matters?

Using data on listed Indian firms from the mid-1980s to the 1990s, severalissues relating to Indian industry were investigated. One aspect then was theextremely limited extent to which promoters and entrepreneurs actually ownedshares in the various companies they had control of

Proportions of the total capital of the firm

Percentage Share

Where did the borrowing come from?

Borrowing from Commercial Bank 26.69Borrowings from Financial Institutions 19.89Debentures 7.78

Fixed deposits 3.86Other borrowings 8.78

Who owned the shares?

Shares held by the public at large 10.88Foreign shareholding 3.54Government shareholding 5.49

Institutional shareholding 8.44Directors’ shareholding 2.81Top 50 shareholders shareholding 1.85

Total Debt and Equity Capital of a Company 100

Nevertheless, in spite of the relative lack of ownership, the majority of listedentities, mostly private sector companies, were managed by these founders, theirsuccessive family members and other promoters as if they were fiefdoms.

By and large, Indian companies were essentially financed by debt. This wasunlike in the West. If the total debt plus nominal equity capital in the average.Indian company was 100, then 67 per cent of that amount came in the form of debtcapital while equity capital contributed only 33 per cent.

If the share of government ownership in corporate equity and the share offinancial institutions’ equity was added, then over 60 per cent (26.69 + 19.89 +5.49 + 8.44) of firms’ finances were funded by the state in one form or another.

Foreign shareholders, in spite of a lot a clamour about their role in India’scorporate economy, hardly owned more than 4 per cent (3.54) of the shares inIndia’s listed companies. While the public at large provided about 11 per cent of thefinances of an average Indian listed company, the share of the Top 50 shareholderswas less than 2 (1.85) per cent.

It is within this particular shareholding category that promoters, entrepreneurs andthe other large shareholders’ equity stakes fall under for the purposes of classification.

The public at large provides five times as much money for the company as theentrepreneurs. Yet, a group of individuals, whose financial contributions towards acompany are exceedingly small in magnitude, effectively control the company.

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4. Return on Investment (RoI): If theRoI of the company is higher, it canchoose to use trading on equity toincrease its EPS, i.e., its ability to usedebt is greater. We have alreadyobserved in Example I that a firm canuse more debt to increase its EPS.However, in Example II, use of higherdebt is reducing the EPS. It is becausethe firm is earning an RoI of only6.67% which lower than its cost ofdebt. In example I the RoI is 13.33%,and trading on equity is profitable. Itshows that, RoI is an importantdeterminant of the company’s abilityto use Trading on equity and thus thecapital structure.

5. Cost of debt: A firm’s ability toborrow at a lower rate increases itscapacity to employ higher debt. Thus,more debt can be used if debt can beraised at a lower rate.

6. Tax Rate: Since interest is adeductible expense, cost of debt isaffected by the tax rate. The firms inour examples are borrowing @ 10%.Since the tax rate is 30%, the after taxcost of debt is only 7%. A higher taxrate, thus, makes debt relativelycheaper and increases its attractionvis-à-vis equity.

7. Cost of Equity: Stock ownersexpect a rate of return from the equitywhich is commensurate with the riskthey are assuming. When a companyincreases debt, the financial risk facedby the equity holders, increases.Consequently, their desired rate ofreturn may increase. It is for thisreason that a company can not usedebt beyond a point. If debt is used

beyond that point, cost of equity maygo up sharply and share price maydecrease inspite of increased EPS.Consequently, for maximisation ofshareholders’ wealth, debt can be usedonly upto a level.

8. Floatation Costs: Process of raisingresources also involves some cost.Public issue of shares and debenturesrequires considerable expenditure.Getting a loan from a financialinstitution may not cost so much.These considerations may also affectthe choice between debt and equityand hence the capital structure.

9. Risk Consideration: As discussedearlier, use of debt increases thefinancial risk of a business. Financialrisk refers to a position when acompany is unable to meet its fixedfinancial charges namely interestpayment, preference dividend andrepayment obligations. Apart from thefinancial risk, every business has someoperating risk (also called businessrisk). Business risk depends uponfixed operating costs. Higher fixedoperating costs result in higherbusiness risk and vice-versa. The totalrisk depends upon both the businessrisk and the financial risk. If a firm’sbusiness risk is lower, its capacity touse debt is higher and vice-versa.

10. Flexibility: If a firm uses its debtpotential to the full, it loses flexibilityto issue further debt. To maintainflexibility, it must maintain someborrowing power to take care ofunforeseen circumstances.

11. Control: Debt normally does notcause a dilution of control. A public

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issue of equity may reduce themanagements’ holding in the companyand make it vulnerable to takeover. Thisfactor also influences the choicebetween debt and equity especially incompanies in which the current holdingof management is on a lower side.

12. Regulatory Framework: Everycompany operates within a regulatoryframework provided by the law e.g.,public issue of shares and debentureshave to be made under SEBIguidelines. Raising funds from banksand other financial institutions requirefulfillment of other norms. The relativeease with which these norms can, bemet or the procedures completed mayalso have a bearing upon the choice ofthe source of finance.

13. Stock Market Conditions: If thestock markets are bullish, equity sharesare more easily sold even at a higherprice. Use of equity is often preferredby companies in such a situation.However, during a bearish phase, acompany, may find raising of equitycapital more difficult and it may opt fordebt. Thus, stock market conditionsoften affect the choice between the two.

14. Capital Structure of otherCompanies: A useful guideline in thecapital structure planning is the debt-equity ratios of other companies in thesame industry. There are usually someindustry norms which may help. Carehowever must be taken that thecompany does not follow the industrynorms blindly. For example, if thebusiness risk of a firm is higher, it cannot afford the same financial risk. It

should go in for low debt. Thus, themanagement must know what theindustry norms are, whether they arefollowing them or deviating from themand adequate justification must bethere in both cases.

FIXED AND WORKING CAPITAL

Meaning

Every company needs funds to financeits assets and activities. Investment isrequired to be made in fixed assets andcurrent assets. Fixed assets are thosewhich remains in the business formore than one year, usually for muchlonger, e.g., plant and machinery,furniture and fixture, land andbuilding, vehicles, etc.

Decision to invest in fixed assetsmust be taken very carefully as theinvestment is usually quite large.Such decisions once taken areirrevocable except at a huge loss.Such decisions are called capitalbudgeting decisions.

Current assets are those assetswhich, in the normal routine of thebusiness, get converted into cash orcash equivalents within one year, e.g.,inventories, debtors, bills receivables,etc.

Management of Fixed Capital

Fixed capital refers to investment inlong-term assets. Management of fixedcapital involves allocation of firm’scapital to different projectsor assets with long-term implications forthe business. These decisions are calledinvestment decisions or capital

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budgeting decisions and affect thegrowth, profitability and risk ofthe business in the long run. These long-term assets last for more than one year.

It must be financed throughlong-term sources of capital such asequity or preference shares,debentures, long-term loans andretained earnings of the business.Fixed Assets should never be financedthrough short-term sources.

Investment in these assets wouldalso include expenditure onacquisition, expansion, modernisationand their replacement. These decisionsinclude purchase of land, building,plant and machinery, launching a newproduct line or investing in advancedtechniques of production. Majorexpenditures such as those onadvertising campaign or research anddevelopment programme having longterm implications for the firm are alsoexamples of capital budgetingdecisions. The management of fixedcapital or investment or capitalbudgeting decisions are important forthe following reasons:(i) Long-term growth: These decisions

have bearing on the long-termgrowth. The funds invested in long-term assets are likely to yieldreturns in the future. These willaffect the future prospects of thebusiness.

(ii) Large amount of funds involved:These decisions result in asubstantial portion of capital fundsbeing blocked in long-term projects.Therefore, these investments areplanned after a detailed analysis is

undertaken. This may involvedecisions like where to procurefunds from and at what rate ofinterest.

(iii) Risk involved: Fixed capitalinvolves investment of hugeamounts. It affects the returns ofthe firm as a whole in the long-term. Therefore, investmentdecisions involving fixed capitalinfluence the overall business riskcomplexion of the firm.

(iv) Irreversible decisions: Thesedecisions once taken, are notreversible without incurring heavylosses. Abandoning a project afterheavy investment is made is quitecostly in terms of waste of funds.Therefore, these decisions shouldbe taken only after carefullyevaluating each detail or else theadverse financial consequencesmay be very heavy.

Factors affecting the Requirementof Fixed Capital

1. Nature of Business: The type ofbusiness has a bearing upon the fixedcapital requirements. For example, atrading concern needs lowerinvestment in fixed assets comparedwith a manufacturing organisation;since it does not require to purchaseplant and machinery, etc.

2. Scale of Operations: A largerorganisation operating at a higherscale needs bigger plant, more spaceetc. and therefore, requires higherinvestment in fixed assets whencompared with the small organisation.

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and starting a cement manufacturingplant. Obviously, its investment infixed capital will increase.

7. Financing Alternatives: Adeveloped financial market may provideleasing facilities as an alternative tooutright purchase. When an asset istaken on lease, the firm pays leaserentals and uses it. By doing so, itavoids huge sums required to purchaseit. Availability of leasing facilities, thus,may reduce the funds required to beinvested in fixed assets, therebyreducing the fixed capital requirements.Such a strategy is specially suitable inhigh risk lines of business.8. Level of Collaboration: At times,certain business organisations shareeach other’s facilities. For example, abank may use another’s ATM or someof them may jointly establish aparticular facility. This is feasible if thescale of operations of each one of themis not sufficient to make full use of thefacility. Such collaboration reduces thelevel of investment in fixed assetsfor each one of the participatingorganisations.

WORKING CAPITAL

Apart from the investment in fixedassets every business organisationneeds to invest in current assets. Thisinvestment facilitates smooth day-to-day operations of the business. Currentassets are usually more liquid butcontribute less to the profits than fixedassets. Examples of current assets, inorder of their liquidity, are as under.

3. Choice of Technique: Someorganisations are capital intensivewhereas others are labour intensive. Acapital-intensive organisation requireshigher investment in plant andmachinery as it relies less on manuallabour. The requirement of fixed capitalfor such organisations would be higher.Labour intensive organisations on theother hand require less investment infixed assets. Hence, their fixed capitalrequirement is lower.4. Technology Upgradation: In certainindustries, assets become obsoletesooner. Consequently, their replace-ments become due faster. Higherinvestment in fixed assets may,therefore, be required in such cases. Forexample, computers become obsoletefaster and are replaced much soonerthan say, furniture. Thus, suchorganisations which use assets whichare prone to obsolescence require higherfixed capital to purchase such assets.5. Growth Prospects: Higher growth ofan organisation generally requireshigher investment in fixed assets. Evenwhen such growth is expected, acompany may choose to create highercapacity in order to meet the anticipatedhigher demand quicker. This entailslarger investment in fixed assets andconsequently larger fixed capital.6. Diversification: A firm maychoose to diversify its operations forvarious reasons, With diversification,fixed capital requirements increasee.g., a textile company is diversifying

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1. Cash in hand/Cash at Bank

2. Marketable securities

3. Bills receivable

4. Debtors

5. Finished goods inventory

6. Work in progress

7. Raw materials

8. Prepaid expenses

These assets, as noted earlier, areexpected to get converted into cash orcash equivalents within a period of oneyear. These provide liquidity to thebusiness. An asset is more liquid if itcan be converted into cash quicker andwithout reduction in value. Insufficientinvestment in current assets may

make it more dif ficult for anorganisation to meet its paymentobligations. However, these assetsprovide little or low return. Hence, abalance needs to be struck betweenliquidity and profitability.

Current liabilities are thosepayment obligations which are due forpayment within one year; such as billspayable, creditors, outstandingexpenses and advances received fromcustomers, etc.

Some part of current assets isusually financed through short-termsources, i.e., current liabilities. Therest is financed through long-termsources and is called net workingcapital. Thus, NWC = CA – CL (i.e.Current Assets - Current Liabilities.)

Working Capital Position

”Its been a rather glamorous 18 months, with sales just huge,” says, CFO of PT AstraInternational, the US $4 billion in sales Indonesian automaker. Indonesia is on thegrowth path again, and a new breed of consumer is eager for a first vehicle – motorcycles– as well as Astra’s more premium brands of Hondas and Toyotas. And one of themost beautiful parts of the proposition is that working capital management seems tobe taking care of itself. “Depending on the business, and counting trade receivablesonly, we have between eight and 19 days working capital,” which is manageable giventhe company’s steady growth. One of the reasons that working capital has not expandedat the rate of the business is inventory, or rather the dearth of it. “We’re in a marketthat responds very strongly to new products,” says the manager “and the presales ofproducts are very high. We have advanced orders from four to six months, withdeposits paid, and this helps our cash position.” Best of all, as soon as a vehicle is offthe assembly line, it’s out to the dealer. “We have low inventory costs and the productlines are very easy to move.” The salutary role of banks in working capital managementis one reason that cashflow has improved in his business. Better management is aresult of banking competition that has allowed the company to move from traditionalbankers, the state-owned Indian institutions, to more competitive private institutionsand the foreign banks that partner with them. These banks have invested in technology,allowing a visibility over cashflow unheard of five years ago.

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Thus, net working capital may bedefined as the excess of current assetsover current liabilities.

FACTORS AFFECTING THE WORKING

CAPITAL REQUIREMENTS

1. Nature of Business: The basicnature of a business influences theamount of working capital required. Atrading organisation usually needs asmaller amount of working capitalcompared to a manufacturingorganisation. This is because there isusually no processing. Therefore, thereis no distinction between raw materialsand finished goods. Sales can beeffected immediately upon the receiptof materials, sometimes even beforethat. In a manufacturing business,however, raw material needs to beconverted into finished goods beforeany sales become possible. Otherfactors remaining the same, a tradingbusiness requires less working capital.Similarly, service industries whichusually do not have to maintaininventory require less working capital.

2. Scale of Operations: For organisationswhich operate on a higher scale ofoperation, the quantum of inventory anddebtors required is generally high. Suchorganisations, therefore, require largeamount of working capital as comparedto the organisations which operate on alower scale.

3. Business Cycle: Different phasesof business cycles affect therequirement of working capital by afirm. In case of a boom, the sales aswell as production are likely to be

larger and, therefore, larger amount ofworking capital is required. As againstthis, the requirement for workingcapital will be lower during the periodof depression as the sales as well asproduction will be small.4. Seasonal Factors: Most businesshave some seasonality in theiroperations. In peak season, because ofhigher level of activity, larger amountof working capital is required. Asagainst this, the level of activity as wellas the requirement for working capitalwill be lower during the lean season.5. Production Cycle: Production cycleis the time span between the receipt ofraw material and their conversion intofinished goods. Some businesses havea longer production cycle while somehave a shorter one. Duration and thelength of production cycle, affects theamount of funds required for rawmaterials and expenses. Consequently,working capital requirement is higherin firms with longer processing cycleand lower in firms with shorterprocessing cycle.6. Credit Allowed: Different firms allowdifferent credit terms to theircustomers. These depend upon the levelof competition that a firm faces as wellas the credit worthiness of theirclientele. A liberal credit policy resultsin higher amount of debtors, increasingthe requirement of working capital.7. Credit Availed: Just as a firmallows credit to its customers it alsomay get credit from its suppliers. Tothe extent it avails the credit onpurchases, the working capitalrequirement is reduced.

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8. Operating Efficiency: Firmsmanage their operations with varieddegrees of efficiency. For example, afirm managing its raw materialsefficiently may be able to manage witha smaller balance. This is reflected ina higher inventory turnover ratio.Similarly, a better debtors turnoverratio may be achieved reducing theamount tied up in receivables. Bettersales effort may reduce the averagetime for which finished goods inventoryis held. Such efficiencies may reducethe level of raw materials, finishedgoods and debtors resulting in lowerrequirement of working capital.

9. Availability of Raw Material: If theraw materials and other requiredmaterials are available freely andcontinuously, lower stock levels maysuffice. If, however, raw materials donot have a record of un-interruptedavailability, higher stock levels may berequired. In addition, the time lagbetween the placement of order andthe actual receipt of the materials (alsocalled lead time) is also relevant. Largerthe lead time, larger the quantity ofmaterial to be stored and larger shallbe the amount of working capitalrequired.

10. Growth Prospects: If the growthpotential of a concern is perceived tobe higher, it will require larger amountof working capital so that it is able tomeet higher production and salestarget whenever required.

11. Level of Competition: Higherlevel of competitiveness maynecessitate larger stocks of finishedgoods to meet urgent orders fromcustomers. This increases the workingcapital requirement. Competition mayalso force the firm to extend liberalcredit terms discussed earlier.

12. Inflation: With rising prices,larger amounts are required even tomaintain a constant volume ofproduction and sales. The workingcapital requirement of a businessthus, become higher with higher rateof inflation. It must, however, be notedthat an inflation rate of 5%, does notmean that every component ofworking capital will change by thesame percentage. The actualrequirement shall depend upon therates of price change of differentcomponents (e.g., raw material,finished goods, labour cost,) Finishedgoods as well as their proportion inthe total requirement.

KEY TERMS

Financial Management Wealth Maximisation Investment Decision

Financing Decision Dividend Decision Capital Budgeting

Working Capital Financial Planning Capital Structure

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SUMMARY

Business finance: The money required for carrying out business activities iscalled business finance. Almost all business activities require some finance.Finance is needed to establish a business, to run it, to modernise it, to expand,and diversify it.

Financial Management: Financial Management is concerned with optimalprocurement as well as usage of finance. For optimal procurement, differentavailable sources of finance are identified and compared in terms of their costsand associated risks.

Objectives and Financial Decisions The primary aim of financial managementis to maximise shareholders’ wealth which is referred to as the wealthmaximisation concept. The market price of a company’s shares are linked tothe three basic financial decisions

Financial decision-making is concerned with three broad decisions which areInvestment Decision, Financing Decision, Dividend Decision

Financial Planning and Importance Financial planning is essentiallypreparation of a financial blueprint of an organisation’s future operations. Theobjective of financial planning is to ensure that enough funds are available atright time.

Financial planning strives to achieve the following twin objectives.

(a) To ensure availability of funds whenever these are required:(b) To see that the firm does not raise resources unnecessarily:Financial planning is an important part of overall planning of any business

enterprise. It aims at enabling the company to tackle the uncertainty in respectof the availability and timing of the funds and helps in smooth functioning ofan organisation.

Capital Structure and Factors One of the important decisions under financialmanagement relates to the financing pattern or the proportion of the use ofdifferent sources in raising funds. On the basis of ownership, the sourcesof business finance can be broadly classified into two categories viz., ‘ownersfunds’ and ‘borrowed funds’. Capital structure refers to the mix between ownersand borrowed funds.

Deciding about the capital structure of a firm involves determining therelative proportion of various types of funds. This depends on various factorswhich are: Cash Flow Position, Interest Coverage Ratio (ICR), Debt ServiceCoverage Ratio (DSCR), Return on Investment (RoI), Cost of debt, Tax Rate,Cost of Equity, Floatation Costs, Risk Consideration, Flexibility, Control,

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Regulatory Framework, Stock Market Conditions, and Capital Structure ofother Companies.

Fixed and Working Capital Fixed capital refers to investment in long-termassets. Management of fixed capital involves around allocation of firm’s capitalto different projects or assets with long-term implications for the business.These decisions are called investment decisions or capital budgeting decisions.They affect the growth, profitability and risk of the business in the long run.

Factors affecting the Requirement of Fixed Capital are: Nature of Business,Scale of Operations, Choice of Technique, Technology Upgradation, GrowthProspects, Diversification, Financing Alternatives and Level of Collaboration.

Apart from the investment in fixed assets, every business organisationneeds to invest in current assets. This investment facilitates smooth day-to-day operations of the organisation. Current assets are usually more liquid butcontribute less to the profits than fixed assets.

Factors affecting the working capital requirement are: Nature of Business,Scale of Operations, Business Cycle, Seasonal Factor, Production Cycle, CreditAllowed, Credit Availed, Operating Efficiency, Availability of Raw Material,Growth Prospects, Level of competition, and rate of Inflation.

EXERCISES

Objective–type questions

1. The cheapest source of finance is:

a. debenture b. equity share capital

c. preference share d. retained earning

2. A decision to acquire a new and modern plant to upgrade an old one is a:

a. financing decision

b. working capital decision

c. investment decision

d. None of the above

3. Other things remaining the same, an increase in the tax rate on corporateprofits will:

a. make the debt relatively cheaper

b. make the debt relatively the dearer

c. have no impact on the cost of debt

d. we can’t say

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4. Companies with a higher growth pattern are likely to:

a. pay lower dividends

b. pay higher dividends

c. dividends are not affected by growth considerations

d. none of the above

5. Financial leverage is called favourable if:

a. Return on Investment is lower than the cost of debt

b. ROI is higher than the cost of debt

c. Debt is easily available

d. If the degree of existing financial leverage is low6. Higher debt-equity ratio results in:

a. lower financial risk

b. higher degree of operating risk

c. higher degree of financial risk

d. higher EPS7. Higher working capital usually results in:

a. higher current ratio, higher risk and higher profits

b. lower current ratio, higher risk and profits

c. higher equity, lower risk and lower profits

d. lower equity, lower risk and higher profits

8. Current assets are those assets which get converted into cash:

a. within six months b. within one year

c. between one and three years d. between three and five years

9. Financial planning arrives at:

a. minimising the external borrowing by resorting to equity issues

b. entering that the firm always have significantly more fund thanrequired so that there is no paucity of funds

c. ensuring that the firm faces neither a shortage nor a glut of unusablefunds

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10. Higher dividend per share is associated with:

a. high earnings, high cash flows, unstable earnings and higher growthopportunities

b. high earnings, high cash flows, stable earnings and high growthopportunities

c. high earnings, high cash flows, stable earnings and lower growthopportunities

d. high earnings, low cash flows, stable earnings and lower growthopportunities

11. A fixed asset should be financed through:

a. a long-term liability b. a short-term liability

c. a mix of long and short-term liabilities

12. Current assets of a business firm should be financed through:

a. current liability only b. long-term liability only

c. both types (i.e. long and short term liabilities)

Short answer questions

1. What is meant by capital structure?

2. Discuss the two objectives of financial planning.

3. What is ‘Financial Risk?’ Why does it arise?

4. Define ‘Current Assets’. Give four examples of such assets.

5. Financial management is based on three broad financial decisions. Whatare these?

6. What are the main objectives of financial management? Briefly explain.

7. How does working capital affect both the liquidity as well as profitabilityof a business?

Long answer questions

1. What is working capital? How is it calculated? Discuss five importantdeterminants of working capital requirement.

2. “Capital structure decision is essentially optimisation of risk-returnrelationship.” Comment.

3. “A capital budgeting decision is capable of changing the financial fortunesof a business.” Do you agree? Give reasons for your answer?

4. Explain the factors affecting the dividend decision.

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5. Explain the term ‘Trading on Equity’. Why, when and how it can be usedby a company?

Case Problem

‘S’ Limited is manufacturing steel at its plant in India. It is enjoying a buoyantdemand for its products as economic growth is about 7%-8% and the demandfor steel is growing. It is planning to set up a new steel plant to cash on theincreased demand. It is estimated that it will require aboutRs. 5000 crores to set up and about Rs 500 crores of working capital to startthe new plant.

Questions

1. Describe the role and objectives of financial management for this company.

2. Explain the importance of having a financial plan for this company. Givean imaginary plan to support your answer.

3. What are the factors which will affect the capital structure of this company?

4. Keeping in mind that it is a highly capital-intensive sector, what factorswill affect the fixed and working capital. Give reasons in support of youranswer.

Project Work

1. Pick up the annual reports of 2 or more companies engaged in the sameline of business. You can access this data on the respective website of thecompanies and other sources. Compare their capital structures. Analysethe reasons for the difference. You can also use ratio analysis for this.Prepare a report of your findings and discuss it in the class with the help ofyour teacher.

2. From the annual reports that you use in activity, analyse the working capitalof the companies. You can use short-term solvency ratios. Study theoperating cycle of the line of business you have choosen and prepare areport as to the soundness of the working capital management of thecompanies you are studying. Prepare a report of your findings and discussit in class with the help of your teacher.© NCERT

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10FINANCIAL MARKETS

IDEA SEEKS TO CAPITALISE ON

MARKET MOMENTUM

With the explosive growth of theirsubscriber base, telecom companiesare all looking at capital markets toraise funds to fuel their expansionplan. Idea Cellular, the fifth largestoperator in the country and theflagship telecom venture of AV BirlaGroup, has decided to enter the capitalmarket to raise between Rs. 1,700 andRs. 2,000 crore.

The company has appointed J.M.Morgan Stanley, Merrill Lynch amongother as book-runners for theproposed Initial Public Offer (IPO),which is expected to be ready byJanuary end.

Since, under SEBI norms, theminimum float size is 10 per cent, thecompany will divest between 10and 12 per cent, “The last privateplacement made by the promoters isat a market capitalisation ofRs. 15,000 crore. The proposed floatis expected to be at 10 to 20 per centpremium of the private placementprice,” AV Birla Group recentlydivested 35 per cent stake in thecompany to a clutch of private equityfirms. However, this is a fresh issue ofshares, where the proceeds will beutilised by Ideal Cellular for capitalexpenditure. After the proposedissues, the promoters stake will comedown to around 58 per cent.

Source: www.hindustantimes.com

LEARNING OBJECTIVES


Ø explain the meaning ofFinancial Market;

Ø explain the meaning of MoneyMarket and describe its majorInstruments;

Ø explain the nature and types ofCapital Market;

Ø distinguish between MoneyMarket and Capital Market;

Ø explain the meaning andfunctions of Stock Exchange;

Ø describe the functioning of NSEIand OTCEI; and

Ø describe the role of SEBI ininvestor protection.

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INTRODUCTION

You all know that a business needsfinance from the time an entrepreneurmakes the decision to start it. It needsfinance both for working capitalrequirements such as payments forraw materials and salaries to itsemployees, and fixed capitalexpenditure such as the purchase ofmachinery or building or to expand itsproduction capacity. The aboveexample gives a fair picture of howcompanies need to raise funds from thecapital markets. Idea Cellular decidedto enter the Indian capital market forits needs of expansion. In this chapteryou will study concepts like privateplacement, Initial public Offer (IPO) andcapital markets which you come acrossin the example of Idea Cellular.Business can raise these funds fromvarious sources and in different waysthrough financial markets. Thischapter provides a brief description ofthe mechanism through which financesare mobilised by a business organisationfor both short term and long termrequirements. It also explains theinstitutional structure and the regulatorymeasures for different financial markets.

CONCEPT OF FINANCIAL MARKET

A business is a part of an economicsystem that consists of two main

sectors – households which save fundsand business firms which invest thesefunds. A financial market helps to linkthe savers and the investors bymobilizing funds between them. Indoing so it performs what is known asan allocative function. It allocates ordirects funds available for investmentinto their most productive investmentopportunity. When the allocativefunction is performed well, twoconsequences follow:

• The rate of return offered tohouseholds would be higher

• Scarce resources are allocated tothose firms which have the highestproductivity for the economy.

There are two major alternativemechanisms through which allocationof funds can be done: via banks orvia financial markets. Households candeposit their surplus funds withbanks, who in turn could lend thesefunds to business firms. Alternately,households can buy the shares anddebentures offered by a businessusing financial markets. The processby which allocation of funds is doneis called financial intermediation.Banks and financial markets arecompeting intermediaries in thefinancial system, and give householdsa choice of where they want to placetheir savings.

HOUSEHOLDS BUSINESS FIRMS

INVESTORSSAVERS

BANKS FINANCIAL MARKETS

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wherever a financial transactionoccurs. Financial transactions couldbe in the form of creation of financialassets such as the initial issue ofshares and debentures by a firm or thepurchase and sale of existing financialassets like equity shares, debenturesand bonds.

FUNCTIONS OF FINANCIAL MARKET

Financial markets play an importantrole in the allocation of scarceresources in an economy by performingthe following four important functions.

facilitates the transfer of savings fromsavers to investors. It gives savers thechoice of different investments and thushelps to channelise surplus funds intothe most productive use.

2. Facilitating Price Discovery: Youall know that the forces of demand andsupply help to establish a price for acommodity or service in the market. Inthe financial market, the households aresuppliers of funds and business firmsrepresent the demand. The interactionbetween them helps to establish a pricefor the financial asset which is beingtraded in that particular market.

A financial market is a market forthe creation and exchange of financialassets. Financial markets exist

Financial System

1. Mobilisation of Savings andChanneling them into the mostProductive Uses: A financial market

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3. Providing Liquidity to FinancialAssets: Financial markets facilitate easypurchase and sale of financial assets.In doing so they provide liquidity tofinancial assets, so that they can beeasily converted into cash wheneverrequired. Holders of assets can readilysell their financial assets through themechanism of the financial market.

4.Reducing the Cost of Transactions:Financial markets provide valuableinformation about securities beingtraded in the market. It helps to savetime, effort and money that bothbuyers and sellers of a financial assetwould have to otherwise spend to tryand find each other. The financialmarket is thus, a common platformwhere buyers and sellers can meet forfulfillment of their individual needs.

Financial markets are classified onthe basis of the maturity of financialinstruments traded in them.Instruments with a maturity of less

than one year are traded in the moneymarket. Instruments with longermaturity are traded in the capitalmarket.

MONEY MARKET

The money market is a market forshort term funds which deals inmonetary assets whose period ofmaturity is upto one year. These assetsare close substitutes for money. It is amarket where low risk, unsecuredand short term debt instruments thatare highly liquid are issued andactively traded everyday. It has nophysical location, but is an activityconducted over the telephone andthrough the internet. It enables theraising of short-term funds for meetingthe temporary shortages of cash andobligations and the temporarydeployment of excess funds for earningreturns. The major participants in themarket are the Reserve Bank of India

Classification of Financial Markets

FINANCIAL MARKET

MONEY MARKET CAPITAL MARKET

Primary market Secondary Market

Debt Equity Debt Equity

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(RBI), Commercial Banks, Non-Banking Finance Companies, StateGovernments, Large Corporate Housesand Mutual Funds.

MONEY MARKET INSTRUMENTS

1. Treasury Bill: A Treasury bill isbasically an instrument of short-termborrowing by the Government of Indiamaturing in less than one year. Theyare also known as Zero Coupon Bondsissued by the Reserve Bank of India onbehalf of the Central Government tomeet its short-term requirement offunds. Treasury bills are issued in theform of a promissory note. They arehighly liquid and have assured yieldand negligible risk of default. They areissued at a price which is lower thantheir face value and repaid at par. Thedifference between the price at whichthe treasury bills are issued and theirredemption value is the interestreceivable on them and is calleddiscount. Treasury bills are availablefor a minimum amount of Rs 25,000and in multiples thereof.

Example: Suppose an investorpurchases a 91 days Treasury bill witha face value of Rs. 1,00,000 forRs. 96,000. By holding the bill until thematurity date, the investor receivesRs. 1,00,000. The difference ofRs. 4,000 between the proceedsreceived at maturity and the amountpaid to purchase the bill represents theinterest received by him.

2. Commercial Paper: Commercialpaper is a short-term unsecuredpromissory note, negotiable and

transferable by endorsement anddelivery with a fixed maturity period. Itis issued by large and creditworthycompanies to raise short-term funds atlower rates of interest than market rates.It usually has a maturity period of 15days to one year. The issuance ofcommercial paper is an alternative tobank borrowing for large companiesthat are generally considered to befinancially strong. It is sold at a discountand redeemed at par. The originalpurpose of commercial paper was toprovide short-terms funds for seasonaland working capital needs. For examplecompanies use this instrument forpurposes such as bridge financing.

Example: Suppose a company needslong-term finance to buy somemachinery. In order to raise the longterm funds in the capital market thecompany will have to incur floatationcosts (costs associated with floating ofan issue are brokerage, commission,printing of applications and advertisingetc.). Funds raised through commercialpaper are used to meet the floatationcosts. This is known as Bridge Financing.

3. Call Money: Call money is shortterm finance repayable on demand, witha maturity period of one day to fifteendays, used for inter-bank transactions.Commercial banks have to maintain aminimum cash balance known as cashreserve ratio. The Reserve Bank of Indiachanges the cash reserve ratio from timeto time which in turn affects the amountof funds available to be given as loansby commercial banks. Call money is amethod by which banks borrow fromeach other to be able to maintain the

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cash reserve ratio. The interest rate paidon call money loans is known as the callrate. It is a highly volatile rate that variesfrom day-to-day and sometimes evenfrom hour-to-hour. There is an inverserelationship between call rates andother short-term money marketinstruments such as certificates ofdeposit and commercial paper. A rise incall money rates makes other sourcesof finance such as commercial paperand certificates of deposit cheaper incomparison for banks raise funds fromthese sources.

4. Certificate of Deposit: Certificatesof deposit (CD) are unsecured,negotiable, short-term instruments inbearer form, issued by commercialbanks and development financialinstitutions. They can be issued toindividuals, corporations andcompanies during periods of tightliquidity when the deposit growth ofbanks is slow but the demand for

credit is high. They help to mobilise alarge amount of money for shortperiods.

5. Commercial Bill: A commercialbill is a bill of exchange used to financethe working capital requirements ofbusiness firms. It is a short-term,negotiable, self-liquidating instrumentwhich is used to finance the credit salesof firms. When goods are sold on credit,the buyer becomes liable to makepayment on a specific date in future.The seller could wait till the specifieddate or make use of a bill of exchange.The seller (drawer) of the goods drawsthe bill and the buyer (drawee) acceptsit. On being accepted, the bill becomesa marketable instrument and is calleda trade bill. These bills can bediscounted with a bank if the sellerneeds funds before the bill matures.When a trade bill is accepted by acommercial bank it is known as acommercial bill.

Sterlite Industries

Sterlite Industries, part of the London listed Vedanta Resources Group, isscheduled to be listed on the New York Stock Exchange through an initialpublic offering (IPO) of about $2 billion. The proceeds will be used to fund its$1.9 billion, Greenfield power project in Orissa and to expand its aluminiumand copper facilities.

The IPO is a part of an enabling resolution passed by Sterlite to raise upto12,500 crores through American Depository Shares (ADS). Consequently, thecompany has increased its authorised capital from Rs 150 crore toRs 185 crore by creating an additional 17.5 crore equity shares of Rs 2 each.The shares of Sterlite, which will be among the first metal firms from India tolist on NYSE, outpaced Sensex and rose by 1.4% to close at Rs 545.2 on BSEon the day of the announcement.


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CAPITAL MARKET

The term capital market refers to facilitiesand institutional arrangements throughwhich long-term funds, both debt andequity are raised and invested. Itconsists of a series of channels throughwhich savings of the community aremade available for industrial andcommercial enterprises and for thepublic in general. It directs these savingsinto their most productive use leadingto growth and development of theeconomy. The capital market consistsof development banks, commercialbanks and stock exchanges.

An ideal capital market is one wherefinance is available at reasonable cost.The process of economic developmentis facilitated by the existence of a wellfunctioning capital market. In fact,development of the financial system isseen as a necessary condition foreconomic growth. It is essential thatfinancial institutions are sufficientlydeveloped and that market operationsare free, fair, competitive andtransparent. The capital market shouldalso be efficient in respect of theinformation that it delivers, minimisetransaction costs and allocate capitalmost productively.

The Capital Market can be dividedinto two parts: a. Primary Marketb. Secondary Market

Distinction between Capital Marketand Money Market

The major points of distinction betweenthe two markets are as follows:

(i) Participants: The participants in thecapital market are financial

institutions, banks, corporateentities, foreign investors andordinary retail investors frommembers of the public. Participationin the money market is by and largeundertaken by institutionalparticipants such as the RBI, banks,financial institutions and financecompanies. Individual investorsalthough permitted to transact in thesecondary money market, do notnormally do so.

(ii) Instruments: The main instrumentstraded in the capital market are –equity shares, debentures, bonds,preference shares etc. The maininstruments traded in the moneymarket are short term debtinstruments such as T-bills, tradebills reports, commercial paper andcertificates of deposit.

(iii) Investment Outlay: Investment in thecapital market i.e. securities does notnecessarily require a huge financialoutlay. The value of units ofsecurities is generally low i.e. Rs 10,Rs 100 and so is the case withminimum trading lot of shares whichis kept small i.e. 5, 50, 100 or so. Thishelps individuals with small savingsto subscribe to these securities. In themoney market, transactions entailhuge sums of money as theinstruments are quite expensive.

(iv) Duration: The capital market dealsin medium and long term securitiessuch as equity shares anddebentures. Money marketinstruments have a maximumtenure of one year, and may evenbe issued for a single day.

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(v) Liquidity: Capital market securitiesare considered liquid investmentsbecause they are marketable onthe stock exchanges. However, ashare may not be actively traded,i.e. it may not easily find a buyer.Money market instruments on theother hand, enjoy a higher degreeof liquidity as there is formalarrangement for this. The DiscountFinance House of India (DFHI) hasbeen established for the specificobjective of providing a readymarket for money marketinstruments.

(vi) Safety: Capital marketinstruments are riskier both withrespect to returns and principalrepayment. Issuing companiesmay fail to perform as perprojections and promoters maydefraud investors. But the moneymarket is generally much saferwith a minimum risk of default.This is due to the shorter durationof investing and also to financialsoundness of the issuers, whichprimarily are the government,banks and highly ratedcompanies.

(vii) Expected return: The investmentin capital markets generally yielda higher return for investors thanthe money markets. The possibilityof earnings is higher if thesecurities are held for a longerduration. First, there is the scopeof earning capital gains in equityshare. Second, in the long run, theprosperity of a company is sharedby shareholders by way of highdividends and bonus issues.

PRIMARY MARKET

The primary market is also known asthe new issues market. It deals withnew securities being issued for the firsttime. The essential function of a primarymarket is to facilitate the transfer ofinvestible funds from savers toentrepreneurs seeking to establish newenterprises or to expand existing onesthrough the issue of securities for thefirst time. The investors in this marketare banks, financial institutions,insurance companies, mutual fundsand individuals.

A company can raise capitalthrough the primary market in the formof equity shares, preference shares,debentures, loans and deposits. Fundsraised may be for setting up newprojects, expansion, diversification,modernisation of existing projects,mergers and takeovers etc.

Methods of Floatation

There are various methods of floatingnew issues in the primary market :

1. Offer through Prospectus: Offerthrough prospectus is the mostpopular method of raising funds bypublic companies in the primarymarket. This involves invitingsubscription from the public throughissue of prospectus. A prospectusmakes a direct appeal to investors toraise capital, through an advertisementin newspapers and magazines. Theissues may be underwritten and alsoare required to be listed on at least onestock exchange. The contents of theprospectus have to be in accordance

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with the provisions of the CompaniesAct and SEBI disclosure and investorprotection guidelines.

2. Offer for Sale: Under this methodsecurities are not issued directly to thepublic but are offered for sale throughintermediaries like issuing houses orstock brokers. In this case, a companysells securities enbloc at an agreed priceto brokers who, in turn, resell them tothe investing public.

3. Private Placement: Privateplacement is the allotment of securitiesby a company to institutional investorsand some selected individuals. It helpsto raise capital more quickly than apublic issue. Access to the primary

market can be expensive on account ofvarious mandatory and non-mandatory expenses. Some companies,therefore, cannot afford a public issueand choose to use private placement.

4. Rights Issue: This is a privilege givento existing shareholders to subscribeto a new issue of shares according tothe terms and conditions of thecompany. The shareholders are offeredthe ‘right’ to buy new shares inproportion to the number of sharesthey already possess.

5. e-IPOs: A company proposing toissue capital to the public through theon-line system of the stock exchangehas to enter into an agreement with the

PRIMARY AND SECONDARY MARKETS —A COMPARISON

Primary Market Secondary Market(New Issue Market) (Stock Exchange)

(i) There is sale of securities by newcompanies or further (new issuesof securities by existing companiesto investors).

(ii) Securities are sold by the companyto the investor directly (or throughan intermediary).

(iii) The flow of funds is from savers toinvestors, i.e. the primary marketdirectly promotes capital formation.

(iv) Only buying of securities takesplace in the primary market,securities cannot be sold there.

(v) Prices are determined and decidedby the management of the company.

(vi) There is no fixed geographicallocation.

(i) There is trading of existing sharesonly.

(ii) Ownership of existing securities isexchanged between investors. Thecompany is not involved at all.

(iii) Enhances encashability (liquidity) ofshares, i.e. the secondary marketindirectly promotes capital formation.

(iv) Both the buying and the selling ofsecurities can take place on thestock exchange.

(v) Prices are determined by demandand supply for the security.

(vi) Located at specified places.

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History of the Stock Market in India

The history of the stock market in India goes back to the end of the eighteenthcentury when long-term negotiable securities were first issued. In 1850 theCompanies Act was introduced for the first time bringing with it the feature oflimited liability and generating investor interest in corporate securities. Thefirst stock exchange in India was set-up in 1875 as The Native Share andStock Brokers Association in Bombay. Today it is known as the Bombay StockExchange (BSE). This was followed by the development of exchanges inAhmedabad (1894), Calcutta(1908) and Madras(1937). It is interesting to notethat stock exchanges were first set up in major centers of trade and commerce.

Until the early 1990s, the Indian secondary market comprised regionalstock exchanges with BSE heading the list. After the reforms of 1991, theIndian secondary market acquired a three tier form. This consists of:• Regional Stock Exchanges

• National Stock Exchange (NSE)

• Over the Counter Exchange of India (OTCEI)

stock exchange. This is called an InitialPublic Offer (IPO). SEBI registeredbrokers have to be appointed for thepurpose of accepting applications andplacing orders with the company. Theissuer company should also appoint aregistrar to the issue having electronicconnectivity with the exchange. Theissuer company can apply for listing ofits securities on any exchange otherthan the exchange through which it hasoffered its securities. The lead managercoordinates all the activities amongstintermediaries connected with the issue.

SECONDARY MARKET

The secondary market is also knownas the stock market or stock exchange.It is a market for the purchase and saleof existing securities. It helps existinginvestors to disinvest and freshinvestors to enter the market. It alsoprovides liquidity and marketability to

existing securities. It also contributesto economic growth by channelisingfunds towards the most productiveinvestments through the process ofdisinvestment and reinvestment.Securities are traded, cleared andsettled within the regulatory frameworkprescribed by SEBI. Advances ininformation technology have madetrading through stock exchangesaccessible from anywhere in thecountry through trading terminals.Along with the growth of the primarymarket in the country, the secondarymarket has also grown significantlyduring the last ten years.

STOCK EXCHANGE

A stock exchange is an institutionwhich provides a platform for buyingand selling of existing securities. As amarket, the stock exchange facilitatesthe exchange of a security (share,

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debenture etc.) into money and viceversa. Stock exchanges helpcompanies raise finance, provideliquidity and safety of investment to theinvestors and enhance the creditworthiness of individual companies.

Meaning of Stock Exchange

According to Securities Contracts(Regulation) Act 1956, stock exchangemeans any body of individuals, whetherincorporated or not, constituted for thepurpose of assisting, regulating orcontrolling the business of buying andselling or dealing in securities.

Functions of a Stock Exchange

The efficient functioning of a stockexchange creates a conducive climatefor an active and growing primarymarket for new issues. An active andhealthy secondary market in existingsecurities leads to positive environmentamong investors. The following aresome of the important functions of astock exchange.

1. Providing Liquidity and Market-ability to Existing Securities: Thebasic function of a stock exchange is thecreation of a continuous market wheresecurities are bought and sold. It givesinvestors the chance to disinvest andreinvest. This provides both liquidity andeasy marketability to already existingsecurities in the market.

2. Pricing of Securities: Share priceson a stock exchange are determined bythe forces of demand and supply. Astock exchange is a mechanism ofconstant valuation through which theprices of securities are determined.Such a valuation provides importantinstant information to both buyers andsellers in the market.

3. Safety of Transaction: Themembership of a stock exchange is well-regulated and its dealings are welldefined according to the existing legalframework. This ensures that theinvesting public gets a safe and fair dealon the market.

4. Contributes to Economic Growth:

A stock exchange is a market in whichexisting securities are resold or traded.Through this process of disinvestmentand reinvestment savings getchannelised into their most productiveinvestment avenues. This leads tocapital formation and economic growth.

5. Spreading of Equity Cult: The stockexchange can play a vital role inensuring wider share ownership byregulating new issues, better tradingpractices and taking effective steps ineducating the public about investments.

Bombay Stock Exchange

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6. Providing Scope for Speculation:

The stock exchange provides sufficientscope within the provisions of law forspeculative activity in a restricted andcontrolled manner. It is generallyaccepted that a certain degree of healthyspeculation is necessary to ensureliquidity and price continuity in thestock market.

TRADING AND SETTLEMENT PROCEDURE

Trading in securities is now executedthrough an on-line, screen-basedelectronic trading system. Simply put,all buying and selling of shares anddebentures are done through acomputer terminal.

There was a time when in the openoutcry system, securities were boughtand sold on the floor of the stockexchange. Under this auction system,deals were struck among brokers,prices were shouted out and the sharessold to the highest bidder. However,now almost all exchanges have gone

electronic and trading is done in thebroker’s office through a computerterminal. A stock exchange has its maincomputer system with many terminalsspread across the country. Trading insecurities is done through brokers whoare members of the stock exchange.Trading has shifted from the stockmarket floor to the brokers office.

Every broker has to have access toa computer terminal that is connectedto the main stock exchange. In thisscreen-based trading, a member logson to the site and any informationabout the shares (company, member,etc.) he wishes to buy or sell and theprice is fed into the computer. Thesoftware is so designed that thetransaction will be executed when amatching order is found from a counterparty. The whole transaction is carriedon the computer screen with both theparties being able to see the prices ofall shares going up and down at alltimes during the time that business istransacted and during business hoursof the stock exchange. The computerin the brokers office is constantlymatching the orders at the best bid andoffer price. Those that are not matchedremain on the screen and are open forfuture matching during the day.

Electronic trading systems orscreen-based trading has certainadvantages:

1. It ensures transparency as it allowsparticipants to see the prices of allsecurities in the market whilebusiness is being transacted. They

Electronic Trading System

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are able to see the full marketduring real time.

2. It increases efficiency of informationbeing passed on, thus helping infixing prices efficiently. Thecomputer screens displayinformation on prices and alsocapital market developments thatinfluence share prices.

3. It increases the efficiency ofoperations, since there is reductionin time, cost and risk of error.

4. People from all over the countryand even abroad who wish toparticipate in the stock market canbuy or sell securities throughbrokers or members withoutknowing each other. That is, theycan sit in the broker’s office, log onto the computer at the same timeand buy or sell securities. Thissystem has enabled a large numberof participants to trade with eachother, thereby improving theliquidity of the market.

5. A single trading platform has beenprovided as business is transactedat the same time in all the tradingcentres. Thus, all the tradingcentres spread all over the countryhave been brought onto onetrading platform, i.e., the stockexchange, on the computer.

Now, screen-based trading or on-linetrading is the only way in which youcan buy or sell shares. Shares can beheld either in physical form or anelectronic book entry form of holding

and transferring shares can also beadopted. This electronic form is calleddematerialised form.

Steps in the Trading andSettlement Procedure

It has been made compulsory to settleall trades within 2 days of the tradedate, i.e., on a T+2 basis, since 2003.Prior to the reforms, securities werebought and sold, i.e., traded and allpositions in the stock exchange weresettled on a weekly/fortnightlysettlement cycle whether it was deliveryof securities or payment of cash. Thissystem prevailed for a long time as itincreased the volume of trading on theexchange and provided liquidity to thesystem. However, since trades were tobe settled on specified dates, this gaverise to speculation and price of sharesused to rise and fall suddenly due totrading and defaults by brokers. A newsystem, i.e, rolling settlement, wasintroduced in 2000, so that whenevera trade took place it would be settledafter some days. Since 2003, all shareshave to be covered under the rollingsettlement system on a T+2 basis,meaning thereby that transactions insecurities are settled within 2 days afterthe trade date. Since rolling settlementimplies fast movement of shares, itrequires effective implementation ofelectronic fund transfer anddematerialisation of shares.

The following steps are involved inthe screen-based trading for buyingand selling of securities:

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1. If an investor wishes to buy or sellany security he has to firstapproach a registered broker orsub-broker and enter into anagreement with him. The investorhas to sign a broker -clientagreement and a client registrationform before placing an order to buyor sell securities. He has also toprovide certain other details andinformation. These include:• PAN number

(This is mandatory)

• Date of birth and address.

• Educational qualification andoccupation.

• Residential status (Indian/NRI).

• Bank account details.

• Depository account details.

• Name of any other broker withwhom registered.

• Client code number in the clientregistration form.

The broker then opens a tradingaccount in the name of the investor.

2. The investor has to open a ‘demat’account or ‘beneficial owner’ (BO)account with a depositoryparticipant (DP) for holding andtransferring securities in the dematform. He will also have to open abank account for cash transactionsin the securities market.

3. The investor then places an orderwith the broker to buy or sellshares. Clear instructions have to

be given about the number ofshares and the price at which theshares should be bought or sold.The broker will then go ahead withthe deal at the above mentionedprice or the best price available. Anorder confirmation slip is issued tothe investor by the broker.

4. The broker then will go on-line andconnect to the main stock exchangeand match the share and best priceavailable.

5. When the shares can be bought orsold at the price mentioned, it willbe communicated to the broker’sterminal and the order will beexecuted electronically. The brokerwill issue a trade confirmation slipto the investor.

6. After the trade has been executed,within 24 hours the broker issuesa Contract Note. This note containsdetails of the number of sharesbought or sold, the price, the dateand time of deal, and the brokeragecharges. This is an importantdocument as it is legally enforceableand helps to settle disputes/claimsbetween the investor and thebroker. A Unique Order Codenumber is assigned to eachtransaction by the stock exchangeand is printed on the contract note.

7. Now, the investor has to deliver theshares sold or pay cash for theshares bought. This should be doneimmediately after receiving the

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contract note or before the day whenthe broker shall make payment ordelivery of shares to the exchange.This is called the pay-in day.

8. Cash is paid or securities aredelivered on pay-in day, which isbefore the T+2 day as the deal hasto be settled and finalised on theT+2 day. The settlement cycle is onT+2 day on a rolling settlementbasis, w.e.f. 1 April 2003.

9. On the T+2 day, the exchange willdeliver the share or make paymentto the other broker. This is calledthe pay-out day. The broker thenhas to make payment to theinvestor within 24 hours of the pay-out day since he has alreadyreceived payment from theexchange.

10.The broker can make delivery ofshares in demat form directly to theinvestor’s demat account. Theinvestor has to give details of hisdemat account and instruct hisdepository participant to takedelivery of securities directly in hisbeneficial owner account.

Dematerialisation andDepositories

All trading in securities is now donethrough computer terminals. Since allsystems are computerised, buying andselling of securities are settled throughan electronic book entry form. This ismainly done to eliminate problems liketheft, fake/forged transfers, transfer

delays and paperwork associated withshare certificates or debentures held inphysical form.

This is a process where securitiesheld by the investor in the physicalform are cancelled and the investor isgiven an electronic entry or number sothat she/he can hold it as an electronicbalance in an account. This process ofholding securities in an electronic formis called dematerialisation. For this, theinvestor has to open a demat accountwith an organisation called adepository. In fact, now all Initial PublicOffers (IPOs) are issued indematerialisation form and more than99% of the turnover is settled bydelivery in the demat form.

The Securities and Exchange Boardof India (SEBI) has made it mandatoryfor the settlement procedures to takeplace in demat form in certain selectsecurities. Holding shares in dematform is very convenient as it is just like a bank account. Physical sharescan be converted into electronic formor electronic holdings can bereconverted into physical certificates(rematerialisation). Dematerialisationenables shares to be transferred tosome other account just like cash andensures settlement of all tradesthrough a single account in shares.These demat securities can even bepledged or hypothecated to get loans.There is no danger of loss, theft orforgery of share certificates. It is thebroker’s responsibility to credit theinvestor’s account with the correctnumber of shares.

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Working of the Demat System

1. A depository participant (DP),either a bank, broker, or financialservices company, may beidentified.

2. An account opening form anddocumentation (PAN card details,photograph, power of attorney)may be completed.

3. The physical certificate is to begiven to the DP along with adematerialisation request form.

4. If shares are applied in a publicoffer, simple details of DP anddemat account are to be given andthe shares on allotment wouldautomatically be credited to thedemat account.

5. If shares are to be sold through abroker, the DP is to be instructedto debit the account with thenumber of shares.

6. The broker then gives instructionto his DP for delivery of the sharesto the stock exchange.

7. The broker then receives paymentand pay the person for the sharessold.

8. All these transactions are to becompleted within 2 days, i.e.,delivery of shares and paymentreceived from the buyer is on a T+2basis, settlement period.

Depository

Just like a bank keeps money in safecustody for customers, a depositoryalso is like a bank and keeps securities

in electronic form on behalf of theinvestor. In the depository a securitiesaccount can be opened, all shares canbe deposited, they can be withdrawn/sold at any time and instruction todeliver or receive shares on behalf of theinvestor can be given. It is a technologydriven electronic storage system. It hasno paper work relating to sharecertificates, transfer, forms, etc. Alltransactions of the investors are settledwith greater speed, efficiency and useas all securities are entered in a bookentry mode.

In India, there are two depositories.National Securities DepositoriesLimited (NSDL) is the first and largestdepository presently operational inIndia. It was promoted as a jointventure of the IDBI, UTI, and theNational Stock Exchange.

The Central Depository ServicesLimited (CDSL) is the second depositoryto commence operations and waspromoted by the Bombay StockExchange and the Bank of India. Boththese national level depositories operatethrough intermediaries who areelectronically connected to thedepository and serve as contact pointswith the investors and are calleddepository participants.

The depository participant (DP)serves as an intermediary between theinvestor and the Depository (NSDL orCSDL) who is authorised to maintainthe accounts of dematerialised shares.Financial institutions, banks, clearingcorporations, stock brokers and non-banking finance corporations are

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permitted to become depositoryparticipants. If the investor is buyingand selling the securities through thebroker or the bank or a non-bankingfinance corporation, it acts as a DP forthe investor and complete the

formalities.

NATIONAL STOCK EXCHANGE OF INDIA

(NSE)

The National Stock Exchange is thelatest, most modern and technologydriven exchange. It was incorporated in1992 and was recognised as a stockexchange in April 1993. It startedoperations in 1994, with trading on thewholesale debt market segment.Subsequently, it launched the capitalmarket segment in November 1994 as atrading platform for equities andthe futures and options segment in June2000 for various derivative instruments.

NSE has set up a nationwide fullyautomated screen based trading system.

The NSE was set up by leadingfinancial institutions, banks, insurancecompanies and other financialintermediaries. It is managed byprofessionals, who do not directly orindirectly trade on the exchange. Thetrading rights are with the tradingmembers who offer their services to theinvestors. The Board of NSE comprisessenior executives from promoterinstitutions and eminent professionals,without having any representation fromtrading members.

OBJECTIVES OF NSE

NSE was set up with the followingobjectives:

a. Establishing a nationwide tradingfacility for all types of securities.

b. Ensuring equal access to investors all

Stock Market Index

A stock market index is a barometer of market behaviour. It measures overallmarket sentiment through a set of stocks that are representative of the market.It reflects market direction and indicates day-to-day fluctuations in stockprices. An ideal index must represent changes in the prices of securities andreflect price movements of typical shares for better market representation. Inthe Indian markets the BSE, SENSEX and NSE, NIFTY are important indices.Some important global stock market indices are:• Dow Jones Industrial Average is among the oldest quoted stock market

index in the US.

• NASDAQ Composite Index is the market capitalisation weightages of pricesfor stocks listed in the NASDAQ stock market.

• S and P 500 Index is made up of 500 biggest publicly traded companies inthe US. The S and P 500 is often treated as a proxy for the US stock market.

• FTSE 100 consists of the largest 100 companies by full market value listedon the London Stock Exchange. The FTSE 100 is the benchmark index ofthe European market.

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over the country through anappropriate communication network.

c. Providing a fair, efficient andtransparent securities marketusing electronic trading system.

d. Enabling shorter settlement cyclesand book entry settlements.

e. Meeting international benchmarksand standards.

Within a span of ten years, NSE hasbeen able to achieve its objectives forwhich it was set up. It has been playinga leading role as a change agent intransforming the Indian capital market.NSE has been able to take the stockmarket to the door step of the investors.It has ensured that technology has beenharnessed to deliver the services to theinvestors across the country at the lowestcost. It has provided a nation wide screenbased automated trading system with ahigh degree of transparency and equalaccess to investors irrespective ofgeographical location.

MARKET SEGMENTS OF NSE

The Exchange provides trading in thefollowing two segments.

(i) Whole Sale Debt Market Segment:This segment provides a tradingplatform for a wide range of fixedincome securities that includecentral government securities,treasury bills, state developmentloans, bonds issued by publicsector undertakings, floating ratebonds, zero coupon bonds, indexbonds, commercial paper, certificateof deposit, corporate debenturesand mutual funds.

(ii) Capital Market Segment: The capitalmarket segment of NSE provides anefficient and transparent platform fortrading in equity, preference,debentures, exchange traded funds aswell as retail Government securities.

OVER THE COUNTER EXCHANGE OF INDIA

(OTCEI)

The OTCEI is a company incorporatedunder the Companies Act 1956. It wasset-up to provide small and mediumcompanies an access to the capitalmarket for raising finance in a costeffective manner. It was also meant toprovide investors with a convenient,

Some Common Stock Market Terms

You would have often come across the following terms in magazines or newspaperswhen you read about the stock market.

BOURSES is another word for the stock market

BULLS and BEARS – The term does not refer to animals but to market sentiment ofthe investors. A Bullish phase refers to a period of optimism and a Bearish phase toa period of perssimism on the Bourses.

BADLA – This refers to a carry forward system of settlement, particularly at the BSE.It is a facility that allows the postponement of the delivery or payment of a transactionfrom one settlement period to another.

ODD LOT TRADING – Trading in multiples of 100 stocks or less.

PENNY STOCKS – These are securities that have no value on the stock exchange butwhose trading contributes to speculation.

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transparent and efficient avenue forcapital market investment. It is fullycomputerised, transparent, singlewindow exchange ‘which commencedtrading in 1992. This exchange isestablished on the lines of NASDAQ(National Association of SecuritiesDealers Automated Quotations) theOTC exchange in USA. It has beenpromoted by UTI, ICICI, IDBI, IFCI, LIC,GIC, SBI Capital markets and CanBank Financial Services.

Over the counter market may bedefined as a place where buyers seeksellers and vice-versa and then attemptto arrange terms and conditions forpurchase/sale acceptable to both theparties. It is a negotiated market placethat exists any where as opposed to theauction market place, represented bythe activity on securities exchanges.Thus, in the OTC exchange, trading

takes place when a buyer or sellerwalks up to an OTCEI counter, taps onthe computer screen, finds quotes andeffects a purchase or sale dependingon whether the prices meet theirtargets. There is no particular marketplace in the geographical sense. Theobjectives of OTCEI are to providequicker liquidity to securities at afixed and fair price, liquidity for lesstraded securities or that of smallcompanies, a simplified process ofbuying and selling and easy andcheaper means of making public saleof new issues. However, the OTCEI hasnow been withdrawn.

Advantages of OTC Market

1. It provides a trading platform tosmaller and less liquid companiesas they are not eligible for listing ona regular exchange.

SENSEX — The Bombay Stock Exchange Sensitive Index

Have you counted the number of times newspaper headlines in the past fewweeks have been screaming about the SENSEX? It goes up and down all thetime and seems to be a very important part of business and economic news. Hasthat made you wonder what the SENSEX actually is?

The SENSEX is the benchmark index of the BSE. Since the BSE has been theleading exchange of the Indian secondary market, the SENSEX has been animportant indicator of the Indian stock market. It is the most frequently usedindicator while reporting on the state of the market. An index has just one job: tocapture the price movement. So a stock index will reflect the price movements ofshares while a bond index captures the manner in which bond prices go up ordown. If the SENSEX rises, it indicates the market is doing well. Since stocks aresupposed to reflect what companies expect to earn in the future, a rising indexindicates that investors expect better earnings from companies. It is also a measureof the state of the Indian economy. If Indian companies are expected to do well,obviously the economy should do well too.

The SENSEX, launched in 1986 is made up of 30 of the most actively tradedstocks in the market. In fact, they account for half the BSE’s market capitalisation.They represent 13 sectors of the economy and are leaders in their respectiveindustries.

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2. It is a cost effective method forcorporates as there is a lower costof new issues and lower expensesof servicing the investors.

3. Family concerns and closely heldcompanies can go public throughOTC.

4. Dealers can operate both in newissues and secondary market attheir option.

5. It gives greater freedom of choice toinvestors to choose stocks bydealers for market making in bothprimary and secondary markets.

6. It is a transparent system of tradingwith no problem of bad or shortdeliveries.

7. Information flows are free and moredirect from market makers tocustomers since there is closecontact between them.

BSE (BOMBAY STOCK EXCHANGE LTD.)

BSE Ltd (formerly known as BombayStock Exchange Ltd) was establishedin 1875 and was Asia’s first StockExchange. It was granted permanentrecognition under the SecuritiesContract (Regulation) Act, 1956. It hascontributed to the growth of thecorporate sector by providing aplatform for raising capital. It is knownas BSE Ltd but was established as theNative Share Stock Brokers Associationin 1875. Even before the actuallegislations were enacted, BSE Ltdalready had a set of Rules andRegulations to ensure an orderlygrowth of the securities market. As

discussed earlier, a stock exchange canbe set up as a corporate entity withdifferent individuals (who are notbrokers) as members or shareholders.BSE is one such exchange set up as acorporate entity with a broadshareholder base. It has the followingobjectives:

(a) To provide an efficient andtransparent market for trading inequity, debt instruments,derivatives, and mutual funds.

(b) To provide a trading platform forequities of small and mediumenterprises.

(c) To ensure active trading andsafeguard market integrity throughan electronically-driven exchange.

(d) To provide other services to capitalmarket participants, like riskmanagement, clearing, settlement,market data, and education.

(e) To conform to internationalstandards.

Besides having a nation-widepresence, BSE has a global reach withcustomers around the world. It hasstimulated innovation and competitionacross all market segments. It hasestablished a capital market institute,called the BSE Institute Ltd, whichprovides education on financialmarkets and vocational training to anumber of people seeking employmentwith stock brokers. The exchange hasabout 5000 companies listed from allover the country and outside, and hasthe largest market capitalisation in

India.

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SECURITIES AND EXCHANGE BOARD OF

INDIA (SEBI)

The Securities and Exchange Board ofIndia was established by theGovernment of India on 12 April 1988as an interim administrative body topromote orderly and healthy growth ofsecurities market and for investorprotection. It was to function under theoverall administrative control of theMinistry of Finance of the Governmentof India. The SEBI was given a statutorystatus on 30 January 1992 throughan ordinance. The ordinance was laterreplaced by an Act of Parliament knownas the Securities and Exchange Boardof India Act, 1992.

Reasons for the Establishment ofSEBI

The capital market has witnessed atremendous growth during 1980’s,characterised particularly by theincreasing participation of the public.This ever expanding investorspopulation and market capitalisationled to a variety of malpractices on thepart of companies, brokers, merchantbankers, investment consultants andothers involved in the securities market.The glaring examples of thesemalpractices include existence of self –styled merchant bankers unofficialprivate placements, rigging of prices,unofficial premium on new issues, non-adherence of provisions of theCompanies Act, violation of rules andregulations of stock exchanges andlisting requirements, delay in deliveryof shares etc. These malpractices and

unfair trading practices have erodedinvestor confidence and multipliedinvestor grievances. The Governmentand the stock exchanges were ratherhelpless in redressing the investor’sproblems because of lack of properpenal provisions in the existinglegislation. In view of the above, theGovernment of India decided to set-upa separate regulatory body known asSecurities and Exchange Board ofIndia.

Purpose and Role of SEBI

The basic purpose of SEBI is to createan environment to facilitate efficientmobilisation and allocation of resourcesthrough the securities markets. It alsoaims to stimulate competition andencourage innovation. This environmentincludes rules and regulations,institutions and their interrelationships,instruments, practices, infrastructureand policy framework.

This environment aims at meetingthe needs of the three groups whichbasically constitute the market, viz,the issuers of securities (Companies),the investors and the marketintermediaries.

• To the issuers, it aims to provide amarket place in which they canconfidently look forward to raisingfinances they need in an easy, fairand efficient manner.

• To the investors, it should provideprotection of their rights andinterests through adequate,accurate and authentic informationand disclosure of information on acontinuous basis.

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• To the intermediaries, it should offera competitive, professionalised andexpanding market with adequateand efficient infrastructure so thatthey are able to render better serviceto the investors and issuers.

Objectives of SEBI

The overall objective of SEBI is toprotect the interests of investors and topromote the development of, andregulate the securities market. Thismay be elaborated as follows:1. To regulate stock exchanges and

the securities industry to promotetheir orderly functioning.

2. To protect the rights and interestsof investors, particularly individualinvestors and to guide and educatethem.

3. To prevent trading malpractices andachieve a balance between selfregulation by the securities industryand its statutory regulation.

4. To regulate and develop a code ofconduct and fair practices byintermediaries like brokers,merchant bankers etc., with a viewto making them competitive andprofessional.

Functions of SEBI

Keeping in mind the emerging natureof the securities market in India, SEBIwas entrusted with the twin task ofboth regulation and development of thesecurities market. It also has certainprotective functions.

Regulatory Functions

1. Registration of brokers and sub-

brokers and other players in themarket.

2. Registration of collective investmentschemes and Mutual Funds.

3. Regulation of stock brokers, portfolioexchanges, underwriters andmerchant bankers and the businessin stock exchanges and any othersecurities market.

4. Regulation of takeover bids bycompanies.

5. Calling for information by under-taking inspection, conductingenquiries and audits of stockexchanges and intermediaries.

6. Levying fee or other charges forcarrying out the purposes of the Act.

7. Performing and exercising suchpower under Securities Contracts(Regulation) Act 1956, as may bedelegated by the Government ofIndia.

Development Functions

1. Training of intermediaries of thesecurities market.

2. Conducting research andpublishing information useful to allmarket participants.

3. Undertaking measures to developthe capital markets by adapting aflexible approach.

Protective Functions

1. Prohibition of fraudulent and unfairtrade practices like making mis-leading statements, manipulations,price rigging etc.

2. Controlling insider trading andimposing penalties for suchpractices.

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3. Undertaking steps for investorprotection.

4. Promotion of fair practices and codeof conduct in securities market.

The Organisation Structure of SEBI

As SEBI is a statutory body there hasbeen a considerable expansion in therange and scope of its activities. Each ofthe activities of the SEBI now demandsmore careful, closer, co-ordinated andintensive attention to enable it to attainits objectives. Accordingly, SEBI hasbeen restructured and rationalised intune with its expanded scope. It hasdecided its activities into five operationaldepartments. Each department isheaded by an executive director. Apartfrom its head office at Mumbai, SEBI hasopened regional offices in Kolkalta,Chennai, and Delhi to attend to investorcomplaints and liaise with the issuers,

intermediaries and stock exchanges inthe concerned region.

The SEBI also formed two advisorycommittees. They are the PrimaryMarket Advisory Committee and theSecondary Market AdvisoryCommittee. These committees consistof the market players, the investorsassociations recognised by the SEBIand the eminent persons in the capitalmarket. They provide important inputsto the SEBI’s policies.

The objectives of the twoCommittees are as follows:

a. To advise SEBI on matters relatingto the regulation of intermediariesfor ensuring investors protection inthe primary market.

b. To advise SEBI on issues related tothe development of primary marketin India.

SEBI Violations

SEBI on Thursday unearthed yet another abuse of IPO norms in the IDFC’sInitial Public Offering (IPO) where a few investors opened over 14,000dematerialised accounts to corner large number of shares of the company.

This is the second such incident, after a similar such violations weredetected in the YES Bank’s IPO.

SEBI said in IDFC’s IPO too four investors opened as many as 14,807dematerialised accounts with Karvy-DP and ‘Strangely’, all these accountholders have their bank accounts with Bharat Overseas Bank Ltd.,Ahmedabad.

SEBI order said: “Further probe is required for examining the systemicfault, if any, of the registrar Karvy-RTI, i.e., Karvy Computer Shares P Ltd.,and the lead managers Kotak Mahindra Capital Company Ltd., DSP MerrillLynch Ltd. and SBI Capital Markets Ltd. in identifying and weeding out thebenami applications.”Reference is being made to the RBI to examine the role of BOB, HDFC Bank,Indian Overseas Bank, ING Vysya Bank and Vijaya Bank in opening thebank accounts of these benami entities and apparently funding them.


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KEY TERMS

Financial Market Money Market Treasury Bills

Commercial Paper Call Money Certificate of DepositCommercial Bill Money Market Mutual Fund CapitalMarket Primary Market Secondary MarketStock Exchange SEBI, NSE OTCEI

SUMMARY

Financial Market is a market for creation and exchange of financial assets. Ithelps in mobilisation and channelising the savings into most productive uses.Financial markets also helps in price discovery and provide liquidity tofinancial assets.

Money Market is a market for short-term funds. It deals in monetory assetswhose period of maturity is less than one year. The instruments of money marketincludes treasury bills, commercial paper, call money, Certificate of deposit,commercial bills, participation certificates and money market mutual funds.

Capital Market is a place where long-term funds are mobilised by the corporateundertakings and Government. Capital Market may be devided into primarymarket and secondary market. Primary market deals with new securities whichwere not previously tradable to the public. Secondary market is a place whereexisting securities are bought and sold.

Stock Exchanges are the organisations which provide a platform for buyingand selling of existing securities. Stock exchanges provide continuous marketfor securities, helps in price discovery, widening share ownership and providescope for speculation.

The National Stock Exchange of India is the latest, most modern and technologydriven exchange and was incorporated in 1992. OTCEI was incorporated in

c. To advise SEBI on disclosurerequirements for companies.

d. To advise for changes in legalframework to introducesimplification and transparency inthe primary market.

e. To advise the board in mattersrelating to the development andregulation of the secondary market

in the country.

The committees are however non-statutory in nature and the SEBI is notbound by the advise of the committee.These committees are a part of SEBI’sconstant endeavor to obtain a feedbackfrom the market players on variousissues relating to the regulations anddevelopment of the market.

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1992 to provide listing facility for small companies with paid up capital of lessthan 3 crores.

Securities and Exchange Board of India was established in 1988 and wasgiven statutory status through an Act in 1992. The SEBI was set-up to protectthe interests of investors, development and regulation of securities market.

EXERCISES

Multiple choice questions

1. Primary and secondary markets:

a. Compete with each other

b. Complement each other

c. Function independently

d. Control each other

2. The total number of Stock Exchanges in India is:

a. 20 b. 21 c. 22 d. 23

3. The settlement cycle in NSE is:

a. T + 5 b. T + 3 c. T + 2 d. T+1

4. The National Stock Exchange of India was recognized as stock exchange inthe year:

a. 1992 b. 1993 c. 1994 d. 1995

5. NSE commenced futures trading in the year:

a. 1999 b. 2000 c. 2001 d. 2002

6. Clearing and settlement operations of NSE are carried out by:

a. NSDL b. NSCCL c. SBI d. CDSL

7. OTCEI was started on the lines of:

a. NASDAQ b. NYSE c. NASAQ d. NSE

8. To be listed on OTCEI, the minimum capital requirement for a company is:

a. Rs. 5 crores b. Rs. 3 crores c. Rs. 6 crores d. Rs. 1 crore

9. A Treasury Bill is basically:

a. An instrument to borrow short-term funds

b. An instrument to borrow long-term funds

c. An instrument of capital market

d. None of the above

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1. What are the functions of a financial market?

2. “Money Market is essentially a Market for short term funds.” Discuss.

3. What is a Treasury Bill ?

4. Distinguish between Capital Market and Money Market.

5. What are the functions of a Stock Exchange?

6. What are the objectives of the SEBI?

7. State the objectives of the NSE.

8. What is the OTCEI?

Long-answer questions

1. Explain the various Money Market Instruments.

2. What are the methods of floatation in Primary Market?

3. Explain the recent Capital Market reforms in India.

4. Explain the objectives and functions of the SEBI

5. Explain the various segments of the NSE.

Projects and Assignments

1. Collect the information about the companies that have recently mobilisedresources through primay market.

2. Collect the information on various measures taken by SEBI to protect theinterests of investors since its inception.

3. Send a group of students to a trading terminal in your city to gain first handinformation on securities trading and prepare a report.

4. Collect data about the movements in SENSEX and NIFTY during the lastone month. Find out whether the two move in same or opposite direction.

5. Collect information about the SEBI action for Investor Protection taken duringlast two years.

6. Collect information about e-IPO’s in the Indian Market in the last one year.

TRY AND SOLVE THE CROSSWORD

Clues to the Crossword

Across

1. Commission Agent who transacts in securities on behalf of non membersor members (6).

2. Changes in the price of securities in the stock market. (12)

4. Inclusion of securities in the official trade list of securities in stock market (7)

8. Place of trade I securities (6)

9. Result of selling shares at a price lower than the purchase price. (4)

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13. An independent dealer in securities (6)

15. Includes shares, scripts, bonds, debentures (10)

16. Speculator who expects the prices to go down (4)

17. Buying and selling of securities to manipulate the market (7)

18. Speculator who deals in new securities only (4)

Down

1. Speculator expecting a rise in the prices (4)

3. Means ‘with’ (3)

5. Means a part or fraction of capital (6)

6. Fraction of profit paid to government (3)

7. Illegal, game based on chance (8)

9. Official statement of securities in the stock market (5)

10. Those who buy and sell securities with objective of profit (10)

11. Money invested in business (7)

12. Return on shares out of profits (8)

14. Instrument acknowledging a debt (9)

16. Govt. document acknowledging a debt (5)

19. Profit or yield (4)

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Case Problem I

‘R’ Limited is a real estate company which was formed in 1950. In about 56years of its existence the company has managed to carve out a niche for itself inthis sector. Lately, this sector is witnessing a boom due to the fact that the Indianeconomy is on the rise. The incomes of middle class are rising. More people canafford to buy homes for themselves due to easy availability of loans andaccompanying tax concessions.

To expand its business in India and abroad the company is weighing variousoptions to raise money through equity offerings in India. Whether to tap equity ordebt. market whether to raise money from domestic market or international marketor Combination of both? Whe their to raise the necessary financé from moneymarket or capital market. It is also planning to list itself in New York Stock Exchangeto raise money through ADR’s. To make its offerings attractive it is planning tooffer host of financial plans products to its stakeholders and investors and alsoexpand it’s listing at NSE after complying with the regulations of SEBI.

(i) What benefits will the company derive from listing at NSE?

(ii) What are the regulations of SEBI that the company must comply with?

(iii) How does the SEBI exercise control over ‘R’ Limited in the interest ofinvestors?

Case Problem IINSE Indices World Markets

Index Current Prev. %CHG Index Current Prev. % Change

S&P CNX Nifty 3641.1 3770.55 -3.43% NYSE Composite 8926.88 9120.93 -2.13%

CNX Nifty Junior 6458.55 6634.85 -2.66% NASDAQ Composite 2350.57 2402.29 -2.15%

CNX IT 5100.5 5314.05 -4.02% DOW Jones I. A. 12076 12318.6 -1.97%

Bank Nifty 5039.05 5251.55 -4.05% S&P 500 1377.95 1406.6 -2.04%

CNX 100 3519.35 3640.35 -3.32% Nikkei 225 16676.9 17178.8 -2.92%

More

Source: www.nseindia.com

The above figures are taken from the website of national stock exchange ofIndia. They illustrate the movement of NSE stock indices as well as world stockindices on the date indicated.

Questions

1. What do you mean by a stock index? How is it calculated?

2. What conclusions can you draw from the various movements of NSE stockindices?

3. What factors affect the movement of stock indices? Elaborate on the natureof these factors.

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4. What relationship do you see between the movement of indices in worldmarkets and NSE indices?

5. Give details of all the indices mentioned above. You can find information onthe web or business magazines.

(The teacher should help the students in answering these questions. Theycan look at the website mentioned above and also website of SEBI, i.e.,www.sebi.gov.in for educational material. This exercise will help the studentsin understanding the stock markets clearly and also create interest therein.)

Project Work

1. Study the wwebsite of Mumbai Stock Exchange, i.e., www.bseindia.com andcompile information which you find useful. Discuss it in your class and findout how it can help you should you decide to invest in the stock market.Prepare a report on your findings with the help of your teacher.

2. Prepare a report on the role of SEBI in regulating the Indian stock market.You can get this information on its website namely www.sebi.gov.in. Do youthink something else should be done to increase the number of investors inthe stock market?

Answers to the Crossword

Across 1. Broker 2. Fluctuations 4. Listing 8. Market 9. Loss

13. Jobber 15. Securities 16. Bear 17. Rigging 18. Stag

Down 1. Bull 3. Cum 5. Stocks 6. Tax 7. Gambling

9. Lists 10. Speculator 11. Capital 12. Dividend 14. Debenture

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LEARNING OBJECTIVES


Ø explain the meaning of‘marketing’;

Ø distinguish between ‘marketing’and ‘selling’;

Ø list out important functions ofmarketing;

Ø examine the role of marketing inthe development of an economyin a firm, to the society and toconsumers;

Ø explain the elements ofmarketing-mix;

Ø classify products into differentcategories;

Ø analyse the factors affectingprice of a product;

Ø list out the types of channels ofdistribution; and

Ø explain the major tools ofpromotion, viz. advertising,personal selling, salespromotion and publicity.

CHAPTER

11MARKETING

WHERE DO COMPANIES DO THEIR

BUSINESS?

In the Markets or in the Society?

It is an undisputed fact that a company’ssurvival does not depend upon itsconsumers alone, but a diverse set ofstakeholders like the government,religious leaders, social activists, NGOs,media, etc. Hence, earning thesatisfaction of these segments is also asimperative as they add to the power ofthe brand by word of mouth.

The social concern adds to thestrength of the brand. Corporates thatembraced the deepest social values,have been successful in buildingpowerful brand, and, eventually, robustcustomer relationship. The area ofcorporate social justice fall under twobroad categories. The issues such as thenutrition of children, child care, old-agehomes, amelioration of hunger, offeringaid to those affected by naturalcalamities, etc. needing instant attentionwith humanitarian perspective, comesunder the first category.

The issues that contribute tomaking society a pleasant place to livein the long run, may be grouped underthe second category. The issues whichcome under this category are healthawareness and aid, education,environmental protection, women’semployment and empowerment,preventing unjust discriminations (onthe basis of caste, community, religion,ethnicity, race, and sex), eradication ofpoverty through employment,preservation of culture, values, andethics, contribution to research, etc.

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Let us consider a typical day in our life.Right from the time we get up in themorning to the time we go to bed, weuse number of products to satisfy ourdifferent needs. Beginning with thebreakfast, we take such items as bread,butter, milk, and rice, to satisfy ourhunger; use the services of a bus or anauto or a cycle to reach to our schoolor place of work; read books, magazinesand newspapers, to keep ourselvesinformed and acquire knowledge; usecomputers, cell phone, television andother gadgets for communication/entertainment; and purchase manyother products like gifts, shoes,clothing, furniture, etc., from marketto satisfy our different needs.

Who makes these products andwhy? These products are manufacturedand marketed by different firms. Forexample, Lifebouy soap, Closeuptoothpaste, Surf detergent powder aremanufactured by Hindustan Lever;Ariel detergent powder by Procter andGamble, Dairy Milk Chocolate by

Nestle, Atlas Cycles by Atlas cyclecompany, Kwality Ice-creams byKwality Walls, LG Televisions by LGElectronics and so on. These firms arecalled marketers. These firmsundertake various activities tostimulate the demand for theirproducts and earn profit by satisfyingcustomer’s needs and wants. Peoplepurchase products because thesesatisfy some of their needs.

Number of activities are performedby the marketers to facilitate exchangeof goods and services betweenproducers and the users of suchproducts. These activities are referredto as marketing activities.

For a proper understanding ofmarketing, number of questions needto be answered. These include: Whatdo we mean by a market? What can bemarketed? Is it products or services orsomething more? Who is a marketer?What is marketing management?These points have been taken up fordiscussion in the following sections.

Infosys Technologies, the leading software consulting service provider, has beencertified ISO 14001, compliant by Det Norske Veritas for its development centers inPune, Chennai, Bangalore, Bhubaneshwar, Hyderabad, Mangalore, Mohali, andMysore, for its ‘Ozone Initiative’. Through this initiative, Infosys has committed forcontinual improvement.

Procter and Gamble’s (P&G) philosophy is that it should lead the industry inimplementing a global environmental programme. P&G is one of the first companiesin the world to actively study the influence of consumer products on the environmentand introduce concentrated products, recycled plastic bottles, and refill packagesto the industry. The overall packaging per case has been reduced by an average of27% and a reduction of 37% in air, waste, and water emissions has been achievedconsistently since 1990. P&G contributes to sustainable development and addressesenvironmental and social issues connected with its products and services.

Source: Adapted from ‘Effective Executive’, Feb. 2006

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WHAT IS A MARKET

In the traditional sense, the term‘market’ refers to the place wherebuyers and sellers gather to enter intotransactions involving the exchange ofgoods and services. It is in this sensethat this term is being used in day today language, even today. The otherways in which this term is being usedis in the context of a product market(cotton market, gold or share market),geographic market (national andinternational market), type of buyers(consumer market and industrialmarket) and the quantity of goodstransacted (retail market andwholesale market).

But in modern marketing sense,the term market has a broadermeaning. It refers to a set of actual andpotential buyers of a product or service.For example, when a fashion designerdesigns a new dress and offers it forexchange, all the people who are willingto buy and offer some value for it canbe stated to be the market for thatdress. Similarly, market for fans orbicycles or electric bulbs or shampoosrefers to all the actual and potentialbuyers for these products.

WHAT IS MARKETING

The term marketing has been describedby different people in different ways.Some people believe that marketing issame as ‘shopping’. Whenever they goout for shopping of certain products orservices, they describe it as marketing.There are some other people whoconfuse marketing with ‘selling’ andfeel that marketing activity starts aftera product or service has beenproduced. Some people describe it tomean ‘merchandising’ or designing aproduct. All these descriptions may bepartly correct but marketing is a muchbroader concept, which is discussed asfollows:

Traditionally, marketing has beendescribed in terms of its functions oractivities. In this respect, marketinghas been referred to as performanceof business activities that direct theflow of goods and services fromproducers to consumers.

As we know, most of themanufacturing firms do not producegoods for their own consumption butfor the consumption or use by others.Therefore, to move the goods andservices from the producer to consumers,

“Business is not financial science, it’s about trading, buying and selling. It’sabout creating a product or service so good that people will pay for it.”

— Anta Roddick

“Marketing takes a day to learn. Unfortunately it takes time to master.”

— Philip Kotler

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a number of activities, such as productdesigning or merchandising, packaging,warehousing, transportation, branding,selling, advertising and pricing arerequired. All these activities arereferred to as marketing activities.

Thus, ‘merchandising’, ‘selling’ anddistribution are all parts of a largenumber of activities undertaken by a firm,which are collectively called marketing.

It may be noted here that marketingis not merely a post-production activity.It includes many activities that areperformed even before goods areactually produced, and continue evenafter the goods have been sold. Forexample, activities such asidentification of customer needs,collection of information for developingthe product, designing suitable productpackage and giving it a brand nameare performed before commencementof the actual production. Similarly,many follow up activities are requiredfor maintaining good customerrelations for procuring repeat sale.

In modern times, emphasis isplaced on describing marketing as asocial process. It is a process wherebypeople exchange goods and services formoney or for something of value tothem. Taking the social perspective,Phillip Kolter has defined marketing as,“a social process by which individualgroups obtain what they need and wantthrough creating offerings and freelyexchanging products and services ofvalue with others”.

Thus, marketing is a social processwhere in people interact with others,in order to persuade them to act in a

particular way, say to purchase aproduct or a service, rather than forcingthem to do so. A careful analysis of thedefinition shows the followingimportant features of marketing:

1. Needs and Wants: The process ofmarketing helps individuals andgroups in obtaining what they need andwant. Thus, the primary reason ormotivation for people to engage in theprocess of marketing is to satisfy someof their needs or wants. In other words,the focus of the marketing process ison satisfaction of the needs and wantsof individuals and organisations.

A need is a state of felt deprivationor feeling of being deprived ofsomething. If unsatisfied, it leaves aperson unhappy and uncomfortable.For example, on getting hungry, webecome uncomfortable and startlooking for objects that are capable ofsatisfying our hunger.

Needs are basic to human beingsand do not pertain to a particularproduct. Wants, on the other hand,are culturally defined objects that arepotential satisfiers of needs. In otherwords, human needs shaped by suchfactors as culture, personality andreligion are called wants. A basic needfor food, for example, may takevarious forms such as want for dosaand rice for a South Indian andchapatti and vegetables for a NorthIndian person.

A marketer’s job in an organisationis to identify needs of the targetcustomers and develop products andservices that satisfy such needs.

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2. Creating a Market Offering: On thepart of the marketers, the effortinvolves creation of a ‘market offering.Market offering refers to a completeoffer for a product or service, havinggiven features like size, quality, taste,etc; at a certain price; available at agiven outlet or location and so on. Letus say the offer is for a cell phone,available in four different versions, onthe basis of certain features such assize of memory, television viewing,internet, camera, etc., for a given price,say between Rs. 5,000 and Rs. 20,000(depending on the model selected),available for sale at say firm’s exclusiveshops in and around all metropolitancities in the country. A good ‘marketoffer’ is the one which is developed afteranalysing the needs and preferencesof the potential buyers.

3. Customer Value: The process ofmarketing facilitates exchange ofproducts and services between thebuyers and the sellers. The buyers,however, make buying decisions ontheir perceptions of the value of theproduct or service in satisfying theirneed, in relation to its cost. A productwill be purchased only if it is perceivedto be giving greatest benefit or valuefor the money. The job of a marketer,therefore, is to add to the value of theproduct so that the customers preferit in relation to the competing productsand decide to purchase it.

4. Exchange Mechanism: Theprocess of marketing works throughthe exchange mechanism. Theindividuals (buyers and sellers) obtain

what they need and want through theprocess of exchange. In other words,the process of marketing involvesexchange of products and services formoney or something consideredvaluable by the people.

Exchange refers to the processthrough which two or more partiescome together to obtain the desiredproduct or service from someone,offering the same by giving somethingin return. For example, a personfeeling hungry may get food by offeringto give money or some other productor service in return to someone whois willing to accept the same for food.

In the modern world, goods areproduced at different places and aredistributed over a wide geographicalarea through various middlemen,involving exchanges at different levelsof distribution. Exchange is, therefore,referred to as the essence ofmarketing. For any exchange to takeplace, it is important that the followingconditions are satisfied:

(i) involvement of at least two partiesviz., the buyer and the seller.

(ii) each party should be capable ofoffering something of value to theother. For example, the seller offersa product and the buyer, money.

(iii) each party should have the abilityto communicate and deliver theproduct or service. No exchangecan take place if the buyers andsellers are not able tocommunicate with each other or ifthey can not deliver something ofvalue to the other.

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(iv) each party should have freedom toaccept or reject other party’s offer.

(v) the parties should be willing toenter into transaction with eachother. Thus, the acceptance orrejection of the offer takes place onvoluntary basis rather than on thebases of any compulsion.

The points listed above are thenecessary conditions for an exchange

to take place. Whether the exchangeactually takes place or not dependson the suitability of the act of exchangeto both the parties, whether it makesthe parties better off or at least notworse off.

Another important point to benoted is that Marketing is not merely abusiness phenomena or confined onlyto business organisations. Marketingactivities are equally relevant to non-

What can be Marketed?

Physical Products : DVD player, Motor cycle, ipods, Cell phone, Footwear,Television, Refrigerator.

Services : Insurance, Health Care, Business Process Outsourcing,Security, Easy Bill service, Financial Services(Investment),Computer Education, Online Trading.

Ideas : Polio Vaccination, Helpage, Family Planning, Donation ofBlood (Red cross), Donation of money on Flag Day (NationalFoundation for Communal Harmony).

Persons : For Election of Candidates for Certain Posts.

Place : ‘Visit Agra – ‘City of Love’, ‘Udaipur – ‘The City of Lakes’,‘Mysore – The City of Gardens’, ‘When Orisa celebrates,Eleven the God Join In’.

Experience : Customised Experiences as Dinner with a cricketer (sayDhoni); Lunch with a celebrity (say Bill Gates or AishwaryaRoy) or experience of Baloon Riding, mountaineering, etc.

Properties : Intangible rights of ownership of real estate in financialproperty (Shares, Debentures).

Events : Sports events (say Olympics, Cricket series), diwali mela,fashion show, music concert, film festival, elephant race(Kerala Tourism).

Information : Production packaging and distribution of information byorganisations such as by universities, research organisation,providing information as market information (marketingresearch agencies), technology information.

Organisations : For boosting their public image organisations such asHindustan Lever, Ranbaxy, Dabur, Proctor and Gamble,communicate with people. Example, Phillips says, Let’s makeThings Better’.

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profit organisations such as hospitals,schools, sports clubs and social andreligious organisations. It helps theseorganisations in achieving their goalssuch as spreading the message offamily planning, improving the literacystandards of people and providingmedication to the sick.

WHAT CAN BE MARKETED?

The question commonly coming to themind is what can be marketed. Is it aproduct or service or something else. Letus first understand what is a product?

A product is a ‘bundle of utilities’or ‘source of satisfaction’, that can beused to satisfy human needs andwants. It is not confined to physicalobjects, such as motor cycle, biscuit,bulb and pencil but also refers to otherthings of value such as services, ideas,places, etc., that can be offered to thepotential buyers for their use. In themarketing literature, anything that canbe of value to the buyer can be termedas a ‘product’. It can be tangible, i.e.,which can be felt, seen and touchedphysically such as a pencil, a cycle oran intangible such as services renderedby a doctor, hairdresser or a lawyer.

Apart from the product, what canbe marketed is a service or a person(say political parties persuading tovote for a particular candidate) or an

idea (say Red Cross persuading todonate blood) or a place (say KeralaTourism persuading people to visitKerala for health tourism). Thus,anything that is of value to the othercan be marketed. It can be a productor a service or a person or a place oran idea or an event or an organisationor experience or properties. (see box)

Who is a marketer? Marketer refersto any person who takes more activepart in the process of exchange.Normally it is the seller who is moreactive in the exchange process as he/she analyses the needs of the potentialbuyers, develops a market offering andpersuades the buyers to buy theproduct. However, there may becertain situations where the buyermay be taking more active role in theexchange process. Let us say insituations of rare supply, the buyermay be taking extra ef forts inpersuading the seller to sell theproduct to him/her. This may behappening in defence deals or take asituation where a country havinginstalled a nuclear plant needs thesupply of nuclear fuel or ‘Heavy Water’.It may need to convince the supplierof the products to supply the same toit, by promising that it will be usedfor peaceful purposes only. In thiscase, the buyer will be treated as themarketer. Thus, any body, who takes

Do it yourself

Collect five advertisements each for the marketing of (a) ideas and (b) placesfrom a newspaper or a magazine. Write in your notebook, the messages conveyedthrough these and discuss in the class indicating which of these messages aremore appealing to you. Give reasons in support of your answer.

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more active role in the exchangeprocess will be taken as the marketer.

MARKETING MANAGEMENT

Marketing management meansmanagement of the marketingfunction. In other words, marketingmanagement refers to planning,organising, directing and control of theactivities which facilitate exchange ofgoods and services between producersand consumers or users of productsand services. Thus the focus ofmarketing management is on achievingdesired exchange outcomes with thetarget markets. Taking a managementperspective, the term marketing hasbeen defined as “the process ofplanning and executing the conception,pricing, promotion and distribution ofideas, goods and services to createexchanges that satisfy individual andorganisational goals” by AmericanManagement Association, similarlyPhilip Kotler has defined Marketingmanagement as the art and science ofchoosing target markets and getting,keeping and growing customersthrough creating, delivering andcommunicating superior customervalues of management.

A careful analysis of the definitionreveals that the process ofmanagement of marketing involves:

(i) Choosing a target market, say amanufacturer may choose to makereadymade garments for childrenup to the age of 5 years;

(ii) In respect of the target marketchosen, the focus of the process of

management is on getting, keepingas well as growing the customers.That means the marketer has tocreate demand for his products sothat the target customerspurchase the product, keep themsatisfied with the firm’s productsand also attract more customersto the firm’s products so that thefirm can grow; and

(iii) The mechanism for achieving theobjective is through creating,developing and communicatingsuperior values for the customers.That means, the primary job of amarketing manager is to createsuperior values so that thecustomers are attracted to theproducts and services andcommunicate these values to theprospective buyers and persuadethem to buy these products.

Marketing management involvesperformance of various functions suchas analysing and planning themarketing activities, implementingmarketing plans and setting controlmechanism. These functions are to beper formed in such a way thatorganisation’s objectives are achievedat the minimum cost.

Marketing management generallyis related to creation of demand.However, in certain situations, themanager has to restrict the demand.For example, if there is a situation of‘overfull demand’, i.e., the demandbeing more than what the companycan or want to handle, (like what thesituation in our country was before theadoption of policies of liberalisation

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and globalisation, in early 90’s, in mostconsumer products be it automobilesor electronics goods or other durableproducts. The job of marketingmangers, in these situations would beto find ways to reduce the demandtemporarily by say reducing theexpenditure on promotion orincreasing the prices. Similarly, if thedemand is ‘irregular’, such as in caseof seasonal products, (say fans, woollenclothes) the marketer’s job is to changethe time pattern of demand throughsuch methods as providing short-termincentives, to the buyers. Thus, themarketing management in not onlyconcerned with creating demand butwith managing the demand effectively,as per the situation in the market.

MARKETING AND SELLING

Many people confuse ‘selling’ for‘marketing’. They consider these twoterms as one and the same. Marketingrefers to a large set of activities of whichselling is just one part. For example, amarketer of televisions, before makingthe sale, does a lot of other activities suchas planning the type and model oftelevisions to be produced, the price atwhich it would be sold and selecting thedistribution outlets at which the samewould be available, etc. In short,marketing involves whole range ofactivities relating to planning, pricing,promoting and distributing theproducts that satisfy customer’s needs.

The function of selling, on the otherhand, is restricted to promotion

of goods and services throughsalesmanship, advertising, publicityand short-term incentives so that titleof the product is transferred from sellerto buyer or in other words product isconverted into cash.

The major differences betweenselling and marketing are listed asbelow:

(i) Part of the Process vs Wider Term:Selling is only a part of the processof marketing and is concerned withpromoting and transferringpossession and ownership of goodsfrom the seller to the buyer.Marketing is a much wider termconsisting of number of activitiessuch as identification of thecustomer’s needs, developing theproducts to satisfy these needs,fixing prices and persuading thepotential buyers to buy the same.Thus, selling is merely a part ofmarketing.

(ii) Transfer of Title vs SatisfyingCustomer Needs: The main focusof selling is on affecting transferof title and possession of goodsfrom sellers to consumers or users.In contrast, marketing activitiesput greater thrust on achievingmaximum satisfaction of thecustomer’s needs and wants.

(iii) Profit through Maximising Sales vsCustomer Satisfaction: All sellingactivities are directed at maximisingsales and, thereby, the profits of thefirm. In other words, the emphasisis on profit maximisation throughmaximisation of sales. Marketing,

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on the other hand, is concerned withcustomer satisfaction and therebyincreasing profit in the long run. Amarketing organisation, thus,attaches highest importance tocustomer satisfaction as a route toprofit maximisation.

(iv) Start and End of the Activities:Selling activities start after theproduct has been developed while,marketing activities start muchbefore the product is produced andcontinue even after the producthas been sold.

(v) Difference in the Emphasis: Inselling, the emphasis is on bendingthe customer according to theproduct while in marketing, theattempt is to develop the productand other strategies as per thecustomer needs.

vi. Difference in the Strategies: Sellinginvolves efforts like promotion andpersuasion while marketing usesintegrated marketing ef fortsinvolving strategies in respect ofproduct, promotion, pricing andphysical distribution.

MARKETING MANAGEMENT PHILOSOPHIES

In order to achieve desired exchangeoutcomes with target markets, it isimportant to decide what philosophyor thinking should guide the marketingefforts of an organisation. Anunderstanding of the philosophy or theconcept to be adopted is important asit determines the emphasis or theweightage to be put on different factors,in achieving the organisational

objectives. For example, whether themarketing efforts of an organisation willfocus on the product—say designing itsfeatures etc or on selling techniques oron customer’s needs or the socialconcerns.

The concept or philosophy ofmarketing has evolved over a periodof time, and is discussed as follows.

The Production Concept

During the earlier days of industrialrevolution, the demand for industrialgoods started picking up but thenumber of producers were limited. Asa result, the demand exceeded thesupply. Selling was no problem.Anybody who could produce the goodswas able to sell. The focus of businessactivities was, therefore, on productionof goods. It was believed that profitscould be maximised by producing atlarge scale, thereby reducing theaverage cost of production. It was alsoassumed that consumers wouldfavour those products which werewidely available at an affordable price.Thus, availability and affordability ofthe product were considered to be thekey to the success of a firm. Therefore,greater emphasis was placed onimproving the production anddistribution efficiency of the firms.

The Product Concept

As a result of emphasis on productioncapacity during the earlier days, theposition of supply increased over periodof time. Mere availability and low priceof the product could not ensure

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increased sale and as such the survivaland growth of the firm. Thus, with theincrease in the supply of the products,customers started looking for productswhich were superior in quality,performance and features. Therefore,the emphasis of the firms shifted fromquantity of production to quality ofproducts. The focus of business activitychanged to bringing continuousimprovement in the quality,incorporating new features etc. Thus,product improvement became the keyto profit maximisation of a firm, underthe concept of product orientation.

The Selling Concept

With the passage of time, themarketing environment underwentfurther change. The increase in thescale of business further improved theposition with respect to supply ofgoods, resulting in increasedcompetition among sellers. Theproduct quality and availability did notensure the survival and growth offirms because of the large number ofsellers selling quality products. Thisled to greater importance to attractingand persuading customers to buy theproduct. The business philosophychanged. It was assumed that thecustomers would not buy, or not buyenough, unless they are adequatelyconvinced and motivated to do so.Therefore, firms must undertakeaggressive selling and promotionalefforts to make customers buy theirproducts. The use of promotionaltechniques such as advertising,personal selling and sales promotion

were considered essential for selling ofproducts. Thus, the focus of businessfirms shifted to pushing the sale ofproducts through aggressive sellingtechniques with a view to persuade,lure or coax the buyers to buy theproducts. Making sale through anymeans became important. It wasassumed that buyers can bemanipulated but what was forgottenwas that in the long run what mattersmost is the customer satisfaction,rather than anything else.

The Marketing Concept

Marketing orientation implies thatfocus on satisfaction of customer’sneeds is the key to the success of anyorganisation in the market. It assumesthat in the long run an organisationcan achieve its objective ofmaximisation of profit by identifyingthe needs of its present andprospective buyers and satisfyingthem in an effective way. All thedecisions in a firm are taken from thepoint of view of the customers. In otherwords, customer’s satisfaction becomethe focal point of all decision makingin the organisation. For example, whatproduct will be produced, with whatfeatures and at what price shall it besold, or where shall it be madeavailable for sale will depend on whatdo the customers want. If thecustomers want features like doubledoor in a refrigerator or a separateprovision for water cooler in it, theorganisation would produce arefrigerator with these features, wouldprice it at a level which the customers

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bought not merely because of theirquality, packing or brand name, butbecause they satisfy a specific need ofa customer. A pre-requisite for thesuccess of any organisation, therefore,is to understand and respond tocustomer needs.

are willing to pay and so on. If allmarketing decisions are taken with thisprospective, selling will not be anyproblem. It will automatically follow.The basic role of a firm then is to‘identify a need and fill it’. The conceptimplies that products ad-services are

Differences in the Marketing Management Philosophies

Philosophies/ Production Product Selling Marketing Societal Bases Concept Concept Concept Concept Concept

1. Starting Factory Factory Factory Market Market,Point Society

2. Main Quantity of Quality, Existing Customer CustomerFocus product performance, product needs needs and

features of society’sproduct well being

3. Means Availability Product Selling Integrated Integratedand improve- and marketing marketing

affordability ments promotingof product

4. Ends Profit through Profit through Profit Profit Profitvolume of product through through through

production quality sales customer customervolume satisfaction satisfaction

and socialwelfare

Test Your Understanding I

State whether the following statements are true or false:(i) focus of marketing activities is on facilitating exchange of goods from producers

to consumers or users;(ii) in modern marketing, the term market refers to the place where buyers and

sellers meet for the exchange of goods and services;(iii) marketing is same thing as shopping for goods and services;(iv) marketing is a post production activity only;(v) marketing is equally relevant to non-profit organisations;(vi) The terms ‘need’ and ‘want’ are used interchangeably in the marketing literature;(vii) marketing management means management of the marketing function; and(viii) Product designing does not come under the purview of marketing activities.

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To sum up, the marketing conceptis based on the following pillars:

(i) Identification of market orcustomer who are chosen as thetarget of marketing effort.

(ii) Understanding needs and wantsof customers in the target market.

(iii) Development of products orservices for satisfying needs of thetarget market.

(iv) Satisfying needs of target marketbetter than the competitors.

(v) Doing all this at a profit.

Thus, the focus of the marketingconcept is on customer needs and thecustomer satisfaction becomes themeans to achieving the firms’ objectiveof maximising profit. The purpose ofmarketing is to generate customervalue at a profit.

The Societal Marketing Concept

The marketing concept, as describedin the preceeding section cannot beconsidered as adequate if we look atthe challenges posed by socialproblems like environmentalpollution, deforestation, shortage ofresources, population explosion andinflation. It is so because any activitywhich satisfies human needs but isdetrimental to the interests of thesociety at large cannot be justified. Thebusiness orientation should,therefore, not be short-sighted to serveonly consumers’ needs. It should alsoconsider large issues of long-termsocial welfare, as illustrated above.

The societal marketing conceptholds that the task of any organisationis to identify the needs and wants ofthe target market and deliver thedesired satisfaction in an effective andefficient manner so that the long-termwell-being of the consumers and thesociety is taken care of. Thus, thesocietal marketing concept is theextension of the marketing concept assupplemented by the concern for thelong-term welfare of the society. Apartfrom the customer satisfaction, it paysattention to the social, ethical andecological aspects of marketing. Thereare large number of such issues thatneed to be attended.

FUNCTIONS OF MARKETING

Marketing is concerned with exchangeof goods and services from producersto consumers or users in such a waythat maximises the satisfaction ofcustomers’ needs. From the view pointof management function, number ofactivities are involved, which havebeen described as below:

1. Gathering and Analysing MarketInformation: One of the importantfunctions of a marketer is to gatherand analyse market information. Thisis necessary to identify the needs ofthe customers and take variousdecisions for the successful marketingof the products and services. This isimportant for making an analysis ofthe available opportunities and threatsas well as strengths and weaknessesof the organisation and help in

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deciding what opportunities can bestbe pursued by it. For example, rapidgrowth is predicted in several areas inthe Indian economy, say in the use ofthe Internet, market for cell phones andseveral other areas. Which of theseareas a particular organisation shouldenter, or in which area should it expand,requires a careful scanning of thestrengths and weaknesses of theorganisation, which is done with thehelp of careful market analysis.

With the growth of computers, anew trend has emerged in thecollection of market information. Moreand more companies are usinginteractive sites on the internet, togather customer views and opinions,before taking important businessdecisions. (see the box on GlobalBrands) One of the popular TV NewsChannel (in Hindi) seeks viewerschoice (through SMS) on which of thegiven four or five main news stories of

The Future of Global Brands

Role of Digital connection and consumer cooperation

In China and India, booming middle classes and fast-rising disposable incomeshave created a still-under-tapped consumer culture. Let’s not forget the lessonsbeing learned about the brand-building, power of digital connections and consumerco-creation. Since the advent of the internet, sites that offer social interaction andconnectivity have been at the forefront of our digital revolution, reshaping the wayconsumers expect to interact with each other and, ultimately, with brands.

Online tag-sale site e-Bay, for example was one of the first sites to teach us thatyou can trust people online as well as you might trust a friendly neighbour. Thatsocial interaction paved the way for Friendster and MySpace and You Tube, a socialnetworking tool that, in the past year, has empowered consumers to create theirown content and post it to a global audience. Anyone who doubts the real marketpotential of such a platform only needs to check out October’s biggest businessheadlines: Google purchased the site for $ 1.65 billion.

HSBC effort attempted a similar goal, to give consumers a forum for conversation.At your pointofview.com, consumers in 76 countries can weigh in and give theiropinions on subjects including cloning, fashion, wind farms and video games.

Teenagers in Chinese cities surf the web for 5.1 hours a week, and the onlinead-market is booming—by more than 75% annually for the past three years,according to Business Week, Mobile phones are among the most coveted pieces oftechnology. And 17.5 million bloggers (and their 75 million readers), many of whomfall within the coveted 18–25 age groups, are shaping consumer opinions in Chinawith more intensity than they do in the US.

The internet age has put advertisers and branding experts face-to-face with anempowered consumer. And those consumers are happy to listen to our messages,as long as we are willing to listen to them.

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the day would be broadcasted asdetailed story at the prime time, toensure that the viewers get to listen tothe story of their own choice.

2. Marketing Planning: Anotherimportant activity or area of work of amarketer is to develop appropriatemarketing plans so that the marketingobjectives of the organisation can beachieved. For example a marketer ofcolour TV, having 10 per cent of thecurrent market share in the country,aims at enhancing his market share to20 per cent, in the next three years. Hewill have to develop a completemarketing plan covering variousimportant aspects including the plan forincreasing the level of production,promotion of the products, etc. andspecify the action programmes toachieve these objectives.

3. Product Designing andDevelopment: Another importantmarketing activity or decision arearelates to product designing anddevelopment. The design of theproduct contributes to making theproduct attractive to the targetcustomers. A good design can improveperformance of a product and also giveit a competitive advantage in themarket. For example, when we planto buy any product say a motorbike,we not only see its features like cost,mileage, etc. but also the designaspects like its shape, style, etc.

4. Standardisation and Grading:Standardisation refers to producinggoods of predetermined specifications,which helps in achieving uniformity and

consistency in the output. Standardisationensures the buyers that goods conformto the predetermined standards of quality,price and packaging and reduces the needfor inspection, testing and evaluation ofthe products.

Grading is the process ofclassification of products into differentgroups, on the basis of some of itsimportant characteristics such asquality, size, etc. Grading is particularlynecessary for products which are notproduced according to predeterminedspecifications, such as in the case ofagricultural products, say wheat,oranges, etc. Grading ensures thatgoods belong to a particular quality andhelps in realising higher prices for highquality output.

5. Packaging and Labelling:Packaging refers to designing anddeveloping the package for theproducts. Labelling refers to designingand developing the label to be put onthe package. The label may vary froma simple tag to complex graphics.

Packaging and labelling havebecome so important in modern daymarketing that these are consideredas the pillars of marketing. Packagingis important not only for protection ofthe products but also serves as apromotional tool. Sometimes, thequality of the product is assessed bythe buyers form packaging. We haveseen that in the success of many ofthe consumer brands in recent timessuch as Lays or Uncle Chips potatowafers Clinic Plus shampoos, andColgate Toothpaste, etc., packaginghas played an important role.

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6. Branding: A very important decisionarea for marketing of most consumerproducts is whether to sell the productin its generic name (name of the categoryof the product, say Fan, Pen, etc.) or tosell them in a brand name (such asPollar Fan or Rottomac Pen). Brandname helps in creating productdifferentiation, i.e., providing basis fordistinguishing the product of a firmwith that of the competitor, which inturn, helps in building customer’sloyality and in promoting its sale. Theimportant decision areas in respect ofbranding include deciding the brandingstrategy, say whether each product willbe given a separate brand name or thesame brand name will be extended toall products of the company, sayPhillips bulbs, tubes and television orVideocon washing machine, television,and refrigerator. Selection of the brandname plays an important role in thesuccess of a product.

7. Customer Support Services: A veryimportant function of the marketingmanagement relates to developingcustomer support services such as aftersales services, handling customercomplaints and adjustments,procuring credit services, maintenanceservices, technical services andconsumer information. All theseservices aim at providing maximumsatisfaction to the customers, which isthe key to marketing success inmodern days. Customer supportservices are very effective in bringingrepeat sales from the customers anddeveloping brand loyality for a product.

8. Pricing of Product: Price of productrefers to the amount of moneycustomers have to pay to obtain aproduct. Price is an important factoraffecting the success or failure of aproduct in the market. The demand fora product or service is related to itsprice. Generally lower the price, higherwould be the demand for the productand vice-versa. The marketers haveto properly analyse the factorsdetermining the price of a product andtake several crucial decisions in thisrespect, including setting the pricingobjectives, determining the pricingstrategies, determining the price andchanging the prices.

9. Promotion: Promotion of productsand services involves informing thecustomers about the firm’s product,its features, etc. and persuading themto purchase these products. The fourimportant methods of promotioninclude advertising, Personal Selling,Publicity and Sales Promotion. Amarketer has to take several crucial,decisions in respect of promotion ofthe products and services such asdeciding the promotion budget, thepromotion mix, i.e., the combinationof the promotional tools that will beuse, the promotion budget, etc.

10. Physical Distribution: Managingphysical distribution is another veryimportant function in the marketingof goods and services. The two majordecision areas under this functioninclude (a) decision regardingchannels of distribution or themarketing intermediaries (like whole

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salers, retailers) to be used and (b)physical movement of the product fromwhere it is produced to a place where itis required by the customers for theirconsumption or use. The importantdecision areas under physicaldistribution include managinginventory (levels of stock of goods),storage and warehousing andtransportation of goods from one placeto the other.

11. Transportation: Transportationinvolves physical movement of goodsfrom one place to the other. Asgenerally the users of products,particularly consumer products arewide spread and geographicallyseparated from the place these areproduced, it is necessary to move themto the place where it is needed forconsumption or use, For example, teaproduced in Assam has to betransported not only within the statebut to other far off places like TamilNadu, Punjab, Jammu and Kashmirand Haryana, Rajasthan, where it isconsumed.

A marketing firm has to analyseits transportation needs after takinginto consideration various factorssuch as nature of the product, costand location of target market and takedecisions in respect of mode oftransportation to be chosen and otherrelated aspects.

12. Storage or Warehousing: Usuallythere is a time gap between theproduction or procurement of goodsand their sale or use. It may bebecause of irregular demand for the

products such as in the case of woollengarments or Raincoats or there maybe irregular supply because ofseasonal production such as in thecase of agricultural products(sugarcane, rice, wheat, cotton, etc.). Inorder to maintain smooth flow ofproducts in the market, there is a needfor proper storage of the products.Further, there is a need for storage ofadequate stock of goods to protectagainst unavoidable delays in deliveryor to meet out contingencies in thedemand. In the process of marketing,the function of storage is performed bydifferent agencies such asmanufacturers, wholesalers andretailers.

ROLE OF MARKETING

All marketing organisations operateeither to earn profit or pursue someother goals such as communityservice, improvement of quality of lifeor promotion of a cause, say UNICEFworking for the welfare of children or‘Helpage’ working for the cause ofsenior citizens. Whether it is aprofit organisation or a non-profitorganisation, marketing playsan important role in achieving itsobjectives. It helps the individualconsumers in raising their standardof living by making available theproducts and services that satisfy theirneeds and wants. It also plays asignificant role in the economicdevelopment of a nation. The role ofmarketing in different situations maybe described in brief as follows.

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Role in a Firm

The modern concept of marketing playsa significant role in achieving theobjectives of a firm. It emphasises thatcustomer satisfaction is the key to thesurvival and growth of an organisationin the contemporary competitivemarketing environment. By adoptingmarketing orientation, an organisationwhether profit making or non-profitmaking, can achieve its goals in themost effective manner. It helps infocusing the activities of anorganisation on the needs and wantsof the customers. For example, whatproducts or services will be marketedby a firm will depend upon what doits customers need. Thus, an analysisof the needs of the customers shall beundertaken in order to decide what toproduce and sell. The product willthen be designed according to theneeds of the potential buyers and bemade available through the outletsconvenient to customers and be pricedat a level which the target customerscan afford. In other words, marketingas a business philosophy helps inserving the customers by satisfyingtheir needs. It is a well known fact thata satisfied customer is the mostvaluable asset of any firm. Thus,marketing plays a crucial role in thesurvival and growth of a firm.

Role in the Economy

Marketing plays a significant role in thedevelopment of an economy. It acts asa catalyst in the economic development

of a country and helps in raising thestandards of living of the people.

Development of a nation can bejudged by the level of standard of livingof its people. Another importantcriteria, which is related to the firstone, is the per capita income of anaverage citizen of a country. On thisbasis, an underdeveloped country maybe stated to be one which ischaracterised by factors like poverty,scarcity of goods and services,predominance of agriculture, etc.

Marketing can play a significantrole in the economic development of anation. It can inspire people toundertake new activities and to set upenterprises for producing goods thatare needed by the customers.Marketing can help in overcomingobstacles posed by high prices due toimbalances in the levels of productionand consumption. It can also ensuresmooth flow of goods through efficientphysical distribution arrangements.

In other words, marketing can helpin finding out right type of productsand services that a firm shouldmanufacture, the places where itshould make such products availablefor sale, the price at which theproducts should be sold and thechannels that should be used formoving the products to the ultimateplace of consumption or use. Thislinkage between the business andconsumption centres, accelerates theeconomic activity leading to higherincomes, more consumption andincreased savings and investment.

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MARKETING MIX

As stated in an earlier section, theprocess of marketing involves creatinga market offering, to satisfy the needsand wants of the present and potentialbuyers. The real question is how tocreate a market offering. Let us say aprofitable business opportunity isseen by some firm in the field ofproducing soft drinks. To develop andmarket a new brand of soft drinks, anumber of important decisions willhave to be taken for example whetherto go for any collaboration with aforeign manufacturer of soft drinks,whether to produce for the localmarket or for a wider market, what willbe the features of the new product,and so on.

There are large number of factorsaffecting marketing decisions. Thesecan broadly be divided into twocategories: (i) controllable factors, and(ii) non-controllable factors. Controllablefactors are those factors which can beinfluenced at the level of the firm. Inthe previous illustration, for example,whether the drink will be packed inglass bottles or plastic cans; what willbe the name (brand name) of the drink;

at what price it will be sold, (at parwith the price at which othercompetitive brands are sold or belowit or above it); what distributionnetwork will be used to make theproduct available (e.g., hotels,restaurants, groceries shops, kiosksselling cigarette, paan, etc.) to thebuyers whether the new soft drink willbe promoted by putting upadvertisements in newspaper ormagazine or on radio or television; orsay if newspaper, whether in a localnewspaper or a national daily; whetherin a paper of regional language or anEnglish daily, etc. is decided at thelevel of marketing manager of the firm.

However, there are certain otherfactors which affect the decision butare not controllable at the firm’s level.These are called environmentalvariables. For example, the politicalfactors such as the government policyon whether to allow any technical orfinancial collaboration in the area ofsoft drinks, production or economicfactors such as rate of inflationprevailing in a given period or a creditpolicy of the central bank affecting thetotal availability of money in the

Test your Understanding II

State whether the following statements are true or false:

(i) packaging serves as a promotional tool;

(ii) storage adds time value to the product;

(iii) financing is important for marketing only high value products;

(iv) marketing play important role from the point of view of individualconsumers only; and

(v) marketing acts as a catalyst in the economic development of a country.

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market, all of which affect the sale ofa particular product but can not becontrolled or influenced by thedecisions at the level of a firm. To besuccessful, the decisions regarding‘controllable factors’ are to be takenkeeping the environmental variablesinto consideration.

The controllable variables becomemarketing tools, which are constantlyshaped and reshaped by marketingmanagers, to achieve marketingsuccess. For example, a firm canreshape a market offering by bringingin a change in any of the variable underits own control, say introducing achange in the price or promotion offeror product features or channel used tomake the product available to buyers.Thus, from a number of alternativesavailable a firm chooses a particularcombination to develop a marketoffering. The combination of variables

chosen by a firm to prepare its marketoffering is also called marketing mix.Thus, marketing mix is described as theset of marketing tools that a firm usesto pursue its marketing objectives in atarget market.

ELEMENTS OF MARKETING MIX

The marketing mix consists of variouselements, which have broadly beenclassified into four categories,popularly known as four Ps ofmarketing. These are: (i) Product, (ii)Price, (iii) Place, and (iv) Promotion.These are briefly discussed as follows:

1. Product: Product means goodsor services or ‘anything of value’,which is offered to the market forsale. For example, Hindustan levero f fers number o f consumerproducts like toiletries (Close-Uptoothpaste, Lifebuoy soap, etc.),

Marketing Mix: Elements

Product Price

Product Mix Price Level

Product Quality Margins

New Product Pricing Policy

Design and Development Pricing Strategies

Packaging Price Change

Labelling

Branding

Place Promotion

Channel Strategy Promotion Mix

Channel Selection Advertising

Channel Conflict Personal Selling

Channel Cooperation Sales Promotion

Physical Distribution Publicity

Public Relations

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detergent powder (Surf, Wheel), foodproducts (Refined Vegetable Oil); Tataoffers Tata Steel, Trucks, Salt and alarge number of other products; LGElectronics offers televisions,refrigerators, colour monitors forcomputers, etc; Amul offers a numberof food products (Amul milk, ghee,butter, cheese, chocolates, etc.).

The concept of product relates tonot only the physical product asmentioned in the above examples butalso the benefits offered by it fromcustomer’s view point (for exampletoothpaste is bought for whiteningteeth, strengthening gums, etc.). Theconcept of product also include theextended product or what is offeredto the customers by way of after salesservices, handling complaints,availability of spare parts etc.These aspects are very important,particularly in the marketing ofconsumer durable products (likeAutomobiles, Refrigerators, etc.). Theimportant product decisions includedeciding about the features, quality,packaging, labelling and branding ofthe products.

2. Price: Price is the amount of moneycustomers have to pay to obtain theproduct. In case of most of theproducts, level of price affects the levelof their demand. The marketers havenot only to decide about the objectivesof price setting but to analyse thefactors determining the price and fixa price for the firm’s products.Decisions have also to be taken inrespect of discounts to customers,

traders and credit terms, etc. so thatcustomers perceive the price to be inline with the value of the product.

3. Place: Place or Physical Distributioninclude activities that make firm’sproducts available to the targetcustomers. Important decision areas inthis respect include selection of dealersor intermediaries to reach thecustomers, providing support to theintermediaries (by way of discounts,promotional campaigns, etc.). Theintermediaries in turn keep inventoryof the firm’s products, demonstratethem to potential buyers, negotiateprice with buyers, close sales and alsoservice the products after the sale. Theother decision areas relate to managinginventory, storage and warehousingand transportation of goods from theplace it is produced to the place it isrequired by the buyers.

4. Promotion: Promotion of productsand services include activities thatcommunicate availability, features,merits, etc. of the products to thetarget customers and persuadethem to buy it. Most marketingorganisations, undertake variouspromotional activities and spendsubstantial amount of money on thepromotion of their goods throughusing number of tools such asadvertising, personal selling and salespromotion techniques (like pricediscounts, free samples, etc.). A largenumber of decisions are to be takenin each of the area specified above. Forexample, in the respect of advertisingit is important to decide about themessage, the media to be used(example, print-media–newspaper,

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magazines, etc. the objections ofcustomers, etc.).

The success of a market offer willdepend on how well these ingredientsare mixed to create superior value forthe customers and simultaneouslyachieve their sale and profit objectives.Let us say a firm would like to achievenecessary volume of sale at a cost thatwill permit a desired level of profit. Butso many alternative mixes can beadopted by a firm to achieve thisobjectives. The issue before a firm thenis to decide what would be the mosteffective combination of elements toachieve the given objectives.

PRODUCT

In common parlance, the word‘product’, is used to refer only to thephysical or tangible attributes of aproduct. For example, we say we have

bought a car or a pen or a Cell phoneor a tractor.

Our decision to buy a product isnot only affected by its physicalqualities, but also by certain non-tangible and psychological factors,e.g., brand name, reputation,guaranty, packaging etc. Let us say,when a person buys a car, he/she isnot just buying a few nuts and bolts,an engine, four wheels and so on.Rather he/she is buying a means oftransport, a status symbol, guaranteesand warranties accompanying theproduct, image of the company andmany other such attributes. Thus, inmarketing, product is a mixture oftangible and intangible attributes,which are capable of being exchangedfor a value, with ability to satisfycustomer needs. Besides physicalobjects, we also include services,ideas, persons, and places in the

PepsiCo Eyes New Products, Acquisitions

Aims at Adding Production Capacity for Gatorade and other Non-carbonated Drinks

PepsiCo on Monday said it will launch new healthier products next year andfocus on growth in emerging markets, a continuation of the strategy that helped theworld’s No. 2 beverage company stay profitable ever as sales growth of its flagshipsoft drinks has slowed.

PepsiCo’s new CEO Indra Nooyi, who took the reins on October 1, also said thecompany was on track to meet its annual target of volume and revenue growth inthe mid-single digits and earnings per share growth in the low double digits.

PepsiCo evolved from being known mostly for selling soda and salty snacks intoa $33-billion food company that has embraced the push into healthier options likeTropicana juice, Aquafina water and whole grain Quaker Oats Cereals.

The company said that moving forward, its capital expenditure as a percentageof sales would increase, and that most of the increased spending will go to expansionin developing and emerging markets and adding manufacturing capacity for Gatoradeand other non-carbonated drinks.

Source: Adopted from Economic Times, Oct. 25, 2006

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concept of product. Thus, product maybe defined as anything that can beoffered to a market to satisfy a wantor need. It is offered for attention,acquisition, use or consumption.

From the customer’s point of view,a product is a bundle of utilities, whichis purchased because of its capabilityto provide satisfaction of certain need.A buyer buys a product or service forwhat it does for her or the benefit itprovides to her. There can be threetypes of benefits a customer may seekto satisfy from the purchase of aproduct, viz., (i) functional benefits, (ii)psychological benefits, and (iii) socialbenefits. For example, the purchase ofa motorcycle provides functional utilityof transportation, but at the same timesatisfies the need for prestige andesteem and provides social benefit bythe way of acceptance from a group,

by riding a motorbike. Thus, all theseaspects should be considered whileplanning for a product.

It is customer for companies toreview the progress of their presentproducts and constantly look foropportunities of diversifying into neverareas. (see box on PepsiCo.)

LET US DO IT

Enlist the functional, psychologicaland social benefits that canbe achieved by the purchase of(i) Personal computer, (ii) Colourtelevision, (iii) Wrist watch.

CLASSIFICATION OF PRODUCTS

Products may broadly be classifiedinto two categories — (i) consumers’products, and (ii) industrial products.The consumer products may further

Products

Consumer Products Industrial Products

Durability Basis Shopping Efforts Involved

Non- Durable Services Conven- Shopping SpecialityDurable ience Products Products

Products

Classification of Products

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be classified into different groups, asdetailed below:

CONSUMER PRODUCTS

Products, which are purchased by theultimate consumers or users forsatisfying their personal needs anddesires are referred to as consumerproducts. For example, soap, edible oil,eatables, textiles, toothpaste, fans, etc.which we use for our personal and non-business use are consumer goods.

The consumer products have beenclassified on the basis of two importantfactors: (A) the extent of shoppingefforts involved, and (B) durability ofthe product. These have beenexplained as below:

A. Shopping Efforts Involved

On the basis of the time and effortbuyers are willing to spend in thepurchase of a product, we can classifythe consumer product into the followingthree categories as here under:

1. Convenience Products: Thoseconsumer products, which arepurchased frequently, immediately andwith least time and efforts are referredto as convenience goods. Examples ofsuch products are cigarettes, icecreams, medicines, newspaper,stationery items toothpaste. etc. Theseproducts have low unit-value and arebought in small qualities. Some of theimportant characteristics of suchproducts are:

Convenience Products

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(a) These products are purchased atconvenient locations, with leastefforts and time;

(b) Convenience products have aregular and continuous demand,as these generally come under thecategory of essential products;

(c) These products have small unit ofpurchase and low prices. Forexample the eggs are sold at Rs.28 per dozen and the customerspurchase them in small numbers;

(f) Sales promotion schemes or short-term incentives such as salescontests, discount offers, etc playan important role in the marketingof such products.

2. Shopping Products: Shoppingproducts are those consumer goods,in the purchase of which buyersdevote considerable time, to comparethe quality, price, style, suitability,etc., at several stores, before makingfinal purchase. Some of the examples

Shopping Products

(d) Convenience products havestandardised price as most of theseproducts are branded products;

(e) The competition in these productsis high as the supply is greaterthan the demand. The marketershave, therefore, to heavily advertisefor these products; and

of shopping products are clothes,shoes, jewellery, furniture, radio,television, etc. The importantcharacteristics of shopping productsare as below:

(a) The shopping products aregenerally of durable nature, i.e.,they normally survive many uses;

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(b) The unit price as well as profitmargin of shopping products isgenerally high;

(c) As these products have high unitprice, customers compare theproducts of different companiesbefore making selection;

(d) Purchases of shopping productsare generally pre-planned andthere is little degree of impulsebuying in these products; and

(e) Retailers generally play animportant role in the sale ofshopping products as lot ofpersuasive effort is needed toconvince the buyers to purchasethem.

3. Speciality Products: Specialityproducts are those consumer goodswhich have certain special featuresbecause of which people make specialefforts in their purchase. Theseproducts are such, which havereached a brand loyalty of the highest

order, with a significant number ofbuyers. The buyers are willing to spenda lot of time and efforts on the purchaseof such products. For example, if thereis a rare collection of artwork or ofantiques, some people may be willingto spend a lot of shopping effort andtravel long distance to buy suchproducts. In our day-to-day life, we seepeople going to a particular hair-cutting saloon or restaurant, or a tailor.The demand for these goods is relativelyinelastic, i.e., even if the price isincreased, the demand does not comedown. Some of the importantcharacteristics of the specialityproducts may be summed up asfollows:

(a) The demand for speciality productsis limited as relatively smallnumber of people buy theseproducts;

(b) These products are generally costlyand their unit price is very high;

Speciality Products

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(c) These products are available forsale at few places as the numberof customers is small and arewilling to take extra efforts in thepurchase of these products;

(d) An aggressive promotion is requiredfor the sale of speciality products,in order to inform people abouttheir availability, features, etc.; and

(e) After sales services are veryimportant for many of thespeciality products.

B. Durability of Products

On the basis of their durability, theconsumer products have beenclassified into three categories—Durable, Non-durable and Services.

1. Non-durable Products: Theconsumer products which are

normally consumed in one or few usesare called non-durable products. Forexample, we purchase products liketoothpaste, detergents, bathing soapand stationary products etc. From themarketing point of view, theseproducts generally command a smallmargin, should be made available inmany locations and need to be heavilyadvertised.

2. Durable Products: Thosetangible consumer products whichnormally survive many uses, forexample, refrigerator, radio, bicycle,sewing machine and kitchen gadgetsare referred to as durable products.These goods are generally used for alonger period, command a higher perunit margin, require greaterpersonal-selling efforts, guarantees

Marketing of Services

India Post Has 28% Market Share Against Blue Dart’s 20%

Speed Post Leads the Race in Express Mail

Speed Post has emerged as a market leader in the express mail category with a27.55% volume share, a study commissioned by the Department of Post (DOP) andgovernment of India shows.

According to the study, almost 46.67% crore articles were sent by express mailin 05-06. The study values the express mail industry alone (excluding logistics andcargo which account for almost 35-40% of private firm’s turnover) at around Rs1,500 crore. In value terms, while Speed Post is the leader, Blue Dart is a closesecond with a 20% market share, followed by DTDC with a 11.91% share and FirstFlight with a 10.89% share.

“This has been possible because of our competitive pricing. We are offering thesame services as other private couriers do, with the same efficiency but at half therates”, added Mr. Samuel. In fact, Speed Post claims that its volumes have increasedby almost 30-40% after the introduction of the One India One Rate scheme.

Express companies are hopeful that the market is going to grow further withthe setting up of SEZs and greater economic activity in the country fuelled by theincreasing throughput from the manufacturing sector.


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and after sales services, on the partof the seller.

3. Services: The durable and non-durable goods are tangible in thesense that these have a physicalexistence and can be seen andtouched. Services are intangible inform. By services we mean thoseactivities, benefits or satisfactions,which are offered for sale, e.g., drycleaning, watch repairs, hair cutting,postal services, services offered by adoctor, an architect and a lawyer. Someof the distinguishing characteristics ofservices are as follows:

(a) By their very nature, services areintangible, i.e., we can not see, feelor touch them;

(b) A service is inseparable from itssource. That means we cannotseparate the service from theperson providing the service;

(c) The services cannot be stored.They are highly perishable. Forexample, if a tailor does not workfor one week, the services he wouldhave provided during such periodgo waste; and

(d) Services are highly variable as theirtype and quality depends on theperson providing them. That iswhy, there is a difference in theextent of satisfaction we get fromthe services provided by differentpeople.

INDUSTRIAL PRODUCTS

Industrial products are thoseproducts, which are used as inputs

in producing other products. Theexamples of such products are rawmaterials, engines, lubricants,machines, tools, etc. In other words,industrial products are meant for non-personal and business use forproducing other products.

The market for industrial productsconsists of manufacturers, transportagencies, banks and insurancecompanies, mining companies andpublic utilities. The importantcharacteristics of industrial productsare given below:

1. Number of Buyers: As comparedto the consumer products, thenumbers of buyers of industrialproducts are limited. For example,sugarcane is purchased by fewproducers of sugar, but sugar, whichis a consumer product, is purchasedby crores of people in our country.

2. Channel Levels: Because of limitednumber of buyers, the sale ofindustrial products is generally madewith the help of shorter channels ofdistribution, i.e., direct selling or onelevel channel.

3. Geographic Concentration:Because of location of industries atcertain points or regions, industrialmarkets are highly concentrated,geographically. For instance, thedemand for power loom comes fromBombay, Sholapur, Bangalore, etc.where the textile industry isconcentrated in our country.

4. Derived Demand: The demand forindustrial products is derived from thedemand for consumer products. For

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example, the demand for leather will bederived from demand for shoes andother leather products in the market.

5. Role of Technical Considerations:Technical considerations assumegreater significance in the purchaseof industrial products because theseproducts are complex products,bought for use in business operations.

6. Reciprocal Buying: Some bigcompanies from basic industries likeoil, steel, rubber, and medicines resortto the practice of reciprocal buying. Forexample, Ashok Leyland may buy tyresand tubes from MRF, which in turnmay buy trucks from Leyland,whenever it feels the need for the same.

7. Leasing Out: A growing trend inindustrial product market is to leaseout rather than to purchase theproducts on outright basis because ofthe heavy price of these products.

Classification

The industrial goods are classified intothe following major categories:

(i) Materials and Parts: Theseinclude goods that enter themanufacture’s productscompletely. Such goods are oftwo types: (a) Raw material:including farm products likecotton, sugar cane, oil seed andnatural products such asminerals (say crude petroleum,iron ore), fish and lumber; and(b) manufactured material andparts. These are again of twotypes – component materialslike glass, iron, plastic andcomponent parts such as tyre,electric bulb, steering, andbattery.

(ii) Capital Items: These are suchgoods that are used in the

Industrial Goods

Materials and Capital Items Supplies and

Parts Business Services

Raw Manufactured Installations Equipments Maintanence Operating

Material Material and Parts and Repair Supplies

items

Farm Natural Component Component

Products Products Material Parts

Classification of Industrial Goods

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production of finished goods.These include: (a) installationslike elevators, mainframeComputers, and (b) equipmentslike Hand Tools, PersonalComputer, Fax Machines, etc.

products have different buyingmotives and have different attitudesand use different approaches in thepurchase of the products. Forexample, an industrial buyer isexpected to be more rational who will

Test Your Understanding III

Please check whether the following statements are true or false:

(i) Products purchased by ultimate consumers for satisfying their personalneeds are referred to as industrial products.

(ii) Speciality products are generally costly and their unit price is high.

(iii) Purchase of convenience products in generally pre-planned.

(iv) Shopping products are purchased frequently, immediately and with leastefforts.

(v) Sales promotional schemes play important role in the sale of industrialproducts.

(vi) Product is anything that can be offered to a market to satisfy a want or need.

(vii) Durable products are normally consumed in one or few uses.

(viii) Services can not be stored.

(ix) Furniture is an example of consumer non-durable product.

(x) Toothpaste is an example of consumer product.

(iii) Supplies and Business

Services: These are shortlasting goods and services thatfacilitate developing ormanaging the finished product.These include: (a) maintenanceand repair items like Paint,Nails, etc., and (b) operatingsupplies like Lubricant,Computer Stationary, WritingPaper, etc.

The difference in the nature ofconsumer products and industrialproducts is important because of thefact that the buyers of the two sets of

study the cost of different availablebrands, their technical specificationsand the goodwill of the supplier.Whereas, the buyer of a consumerproduct may be more impulsive andemotional who is susceptible toadvertising and various salespromotion schemes.

BRANDING

One of the most important decisionsthat a marketer has to take in the areaof ‘product’ is in respect of branding.He has to decide whether the firm’sproducts will be marketed under abrand name or a generic name.

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Generic name refers to the name of thewhole class of the product. Forexample, a book, a wristwatch, tyre,camera, toilet soap, etc. We know thata camera is a lens surrounded byplastic or steel from all sides and havingcertain other features such as a flashgun and so on. Similarly book is abunch of papers, which are in a boundform, on which some useful informationabout a subject is printed. Thus, allproducts having these characteristicswould be called by the generic namesuch as camera or book.

If products were sold by genericnames, it would be very difficult for themarketers to distinguish their productsfrom that of their competitors. Thus,

most marketers give a name to theirproduct, which helps in identifying anddistinguishing their products from thecompetitors’ products. This process ofgiving a name or a sign or a symbol etc.,to a product is called branding. Thevarious terms relating to branding areas follows:

1. Brand: A brand is a name, term,sign, symbol, design or somecombination of them, used to identifythe products—goods or services of oneseller or group of sellers and todifferentiate them from those of thecompetitors. For example, some of thecommon brands are Bata, Lifebuoy,Dunlop, Hot Shot, and Parker. Brandis a comprehensive term, which has

Brands and Branding

Branding is creating a corporate brand identity for consumer, and gettingthat brand identity imprinted on the minds of consumer, and this requiresbrand positioning and brand management.

A brand today is an entity (product. service, company, person, technology,etc.), that offers a set of value exchange measures between what the owner/market seeks and the price he is willing to pay for.

It has always seemed to me that your brand is formed primarily, not by whatyour company says about itself, but what the company does.

— Jeff Bezos

A product is something made in a factory; a brand is something that is bought bythe customer. A product can be copied by a competitor; a brand is unique. Aproduct can be quickly outdated; a successful brand is timeless.

— Stephen King

Your brand’s power lies in dominance. It is better to have 50% of one market,instead of 10% of five markets.

— Al Ries

Your brand image is primarily an emotional construct. Emotion is probably alwaysmore powerful in swaying people than reason. but people like to be able torationalise their choices.

— Drayton Bird

Source: Adopted from Effective Executive, 2006

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two components—brand name andbrand mark. For example, Asian Paintshas the symbol of Gattu on its pack,which is its brand mark.

2. Brand Name: That part of a brand,which can be spoken, is called a brandname. In other words, brand name isthe verbal component of a brand. Forexample, Asian Paints, Safola, Maggie,Lifebuoy, Dunlop, and Uncle Chips arethe brand names.

3. Brand Mark: That part of a brandwhich can be recognised but which isnot utter able is called brand mark. Itappears in the form of a symbol,design, distinct colour scheme orlettering. For example, the Gattu ofAsian Paints or Devil of Onida orsymbol of Yogkshma of LIC, or fourfingers and a palm of Anacin are allbrand marks.

4. Trade Mark: A brand or part of abrand that is given legal protection iscalled trademark. The protection isgiven against its use by other firms.Thus the firm, which got its brandregistered, gets the exclusive right forits use. In that case, no other firm canuse such name or mark in the country.

Though branding adds to the coste.g., to the cost of packaging, labelling,legal protection, and promotion, itprovides several advantages to thesellers as well as the consumers.

Advantages to the Marketers

(i) Enables Marking ProductDifferentiation: Branding helps a

firm in distinguishing its productfrom that of its competitors. Thisenables the firm to secure andcontrol the market for its products.

(ii) Helps in Advertising and DisplayProgrammes: A brand aids a firmin its advertising and displayprogrammes. Without a brandname, the advertiser can onlycreate awareness for the genericproduct and can never be sure ofthe sale for his product.

(iii) Differential Pricing: Brandingenables a firm to charge differentprice for its products than thatcharged by its competitors. This ispossible because if customers likea brand and become habitual ofit, they do not mind paying a littlehigher for it.

(iv) Ease in Introduction of NewProduct: If a new product isintroduced under a known brand,it enjoys the reflected glory of thebrand and is likely to get off to anexcellent start. Thus, manycompanies with established brandnames decide to introduce newproducts in the same name. Forexample, Food Specialties Ltd. hada successful brand Maggie(Noodles), it extended this name tomany of its new productsintroduced such as TomatoKetchup, Soups, etc. SimilarlySamsung extended the brandname of its Television to WashingMachines and other durableproducts, like Microwave oven.

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Advantages to Customers

(i) Helps in Product Identification:Branding helps the customers inidentifying the products. Forexample, if a person is satisfiedwith a particular brand of aproduct, say tea leaves or detergentsoap, he need not make a closeinspection every time, he has tobuy that product. Thus, brandinggreatly facilitates repeat purchaseof the products.

(ii) Ensures Quality: Branding ensuresa particular level of quality of theproduct. Thus, whenever there isany deviation in the quality, thecustomers can have recourse to themanufacturer or the marketer. Thisbuilds up confidence of thecustomers and helps in increasinghis level of satisfaction.

(iii) Status Symbol: Some brandsbecome status symbols because oftheir quality. The consumers ofthose brands of products feel proudof using them and adds to the levelof satisfaction of the customers.

Characteristics of Good BrandName

Choosing the right brand name is notan easy decision. What makes this

decision important is the fact that once abrand name is chosen and the productis launched in the market, changing thebrand name is very difficult. So, gettingit right the first time is very essential.Following are some of theconsiderations, which should be keptin mind while choosing a brand name.(i) The brand name should be short,

easy to pronounce, spell,recognise and remember e.g.,Ponds, VIP, Rin, Vim, etc.

(ii) A brand should suggest theproduct’s benefits and qualities.It should be appropriate to theproduct’s function. e.g., Rasika,Genteel, Promise, My Fair Ladyand Boost.

(iii) A brand name should bedistinctive e.g., Liril, Sprit, Safari,Zodiac.

(iv) The brand name should beadaptable to packing or labellingrequirements, to dif ferentadvertising media and to differentlanguages.

(v) The brand name should besuf ficiently versatile toaccommodate new products,which are added to the productline e.g., Maggie, Colgate.

(vi) It should be capable of beingregistered and protected legally.

Do it Yourself

Visit a retail store in your locality and prepare a list of the (i) number of brandsavailable, (ii) the price of each brand, and (iii) most selling brand in respect ofany three consumer non-durable products such as Toilet Soap, DetergentPowder, Cooking, Oil, Toothpaste, Tea, etc. used in your family. Which brandof each of the product selected is used in your family? Give reasons.

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(vii) Chosen name should have stayingpower i.e., it should not get out ofdate.

PACKAGING

One of the most importantdevelopments affecting the businessworld in recent years has been in thearea of packaging. Many products,which we thought could never lendthemselves to packing because of theirnature, have been successfully packede.g., Pulses, Ghee, Milk, Salt, ColdDrinks, etc. Packaging refers to the actof designing and producing thecontainer or wrapper of a product.Packaging plays a very important rolein the marketing success or failure ofmany products, particularly the

consumer non-durable products. Infact if one makes an analysis of thereasons for the success of some of thesuccessful products in the recent past,it can be noted that packaging hasplayed its due role. For example, it wasone of the important factors in thesuccess of products like Maggie’sNoodles, Uncle Chips or Crax wafers.

Levels of Packaging

There can be three different levels ofpackaging. These are as below:

1. Primary Package: It refers to theproduct’s immediate container. Insome cases, the primary package iskept till the consumer is ready to usethe product (e.g., plastic packet forsocks); whereas in other cases, it is

Levels of Packaging

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kept throughout the entire life of theproduct (e.g., a toothpaste tube, amatch box, etc.).

2. Secondary Packaging: It refers toadditional layers of protection that arekept till the product is ready for use,e.g., a tube of shaving cream usuallycomes in a card board box. Whenconsumers start using the shavingcream, they will dispose off the boxbut retain the primary tube.

3. Transportation Packaging: It refersto further packaging componentsnecessary for storage, identification ortransportation. For example atoothpaste manufacturer may send thegoods to retailers in corrugated boxescontaining 10, 20, or 100 units.

Importance of Packaging

Packaging has acquired greatsignificance in the marketing of goodsand services, because of followingreasons:

(i) Rising Standards of Health andSanitation: Because of theincreasing standards of living inthe country, more and more peoplehave started purchasing packedgoods as the chances ofadulteration in such goods areminimised.

(ii) Self Service Outlets: The self-serviceretail outlets are becoming verypopular, particularly in major citiesand towns. Because of this, someof the traditional role assigned topersonal selling in respect ofpromotion has gone to packaging.

(iii) Innovational Opportunity: Some ofthe recent developments in the areaof packaging have completelychanged the marketing scene inthe country. For example, milk cannow be stored for 4-5 days withoutrefrigeration in the recentlydeveloped packing materials.Similarly, in the area ofpharmaceuticals, soft drinks, etc.,lots of new innovations have comein respect of packaging. As aresult, the scope for the marketingof such products has increased.

(iv) Product Differentiation: Packaging isone of the very important means ofcreating product differentiation.The colour, size, material etc., ofpackage makes real difference inthe perception of customers aboutthe quality of the product. Forexample, by looking at thepackage of a product say Paint orHair Oil, one can make someguess about quality of the productcontained in it.

Functions of Packaging

As stated above, packaging performsa number of functions in themarketing of goods. Some of theimportant functions are as follows:

(i) Product Identification: Packaginggreatly helps in identification of theproducts. For example, Colgate inred colour, or Ponds cream jar canbe easily identified by its package.

(ii) Product Protection: Packagingprotects the contents of a product

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from spoilage, breakage, leakage,pilferage, damage, climatic effect, etc.This kind of protection is requiredduring storing, distribution andtransportation of the product.

(iii) Facilitating Use of the Product: Thesize and shape of the packageshould be such that it should beconvenient to open, handle and usefor the consumers. Cosmetics,medicines and tubes of toothpastesare good examples of this.

(iv) Product Promotion: Packaging isalso used for promotion purposes.A startling colour scheme,photograph or typeface may beused to attract attention of thepeople at the point of purchase.Sometimes it may work even betterthan advertising. In self-servicestores, this role of packagingbecomes all the more important.

Labelling

A simple looking but important taskin the marketing of goods relates todesigning the label to be put on thepackage. The label may vary from asimple tag attached to the product(such as in case of local unbrandedproducts like sugar, wheat, pulses,etc.) indicating some information

about the quality or price, to complexgraphics that are part of the package,like the ones on branded products (saythe graphic of Boat and Patwar on thepackage of a popular brand of AfterShave Lotion or of a lady offering a pento solicit the views of the users, on thelabel of a detergent powder). Lables areuseful in providing detailed informationabout the product, its contents,method of use, etc. The variousfunctions performed by a label are asfollows:

1. Describe the Product and Specifyits Contents: Let us look at some ofthe labels of the products used by usin our day to day life. The label on thepackage of a local tea companydescribes the company as ‘ Mohini TeaCompany, an ISO 9001:200C CertifiedCompany’; a popular brand of PricklyHeat Powder, describes how theproduct provides relief from pricklyheat and controls bacterial growth andinfection, giving caution forbidding itsapplication on cuts and wounds.Package of fast food products likeready to eat Dosa, Idli or Noodles,describe the procedure of cookingthese products; the Package of atoothpaste brand lists the ‘Ten Teethand Gum Problems’, which theproduct claims to fight with its

Do it Yourself

Visit a local Grocery Shop and find out any two products which are sold bothin packaged form and in loose (unpackaged) form and find out i) The productfor which the sale in packaged form is greater ii) The product for which sale inloose form is greater. iii) the benefit, to the retailer in selling goods on i)packaged form and ii) unpackaged form.

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‘Complete Germicheck Formula’; thePackage of a brand of Coconut Oildescribes the product as pure coconutoil with Heena, Amla, Lemon andspecifies how these are good for Hair.Thus, one of the most importantfunctions of labels is to describe theproduct, its usage, cautions in use,etc. and specify its contents.

2. Identification of the Product orBrand: The other importantfunction performed by labels is tohelp in identifying the product orbrand. For example, the brand nameof any product, say Biscuits orPotato Chips imprinted on i tspackage helps us to identify, fromnumber of packages, which one isour favourite brand. Other commonidentification information providedby the labels include name andaddress of the manufacturer, netweight when packed, manufacturingdate, maximum retail price andBatch number.

3. Grading of Products: Anotherimportant function performed by labelsis to help grading the products intodifferent categories. Sometimesmarketers assign different grades toindicate different features or quality ofthe product. For example, a popular

brand of Hair Conditioners comes indifferent categories for different hair, sayfor ‘normal hair’ and for other categories.Different type of tea is sold by somebrands under Yellow, Red and GreenLabel categories.

4. Helps in Promotion of Products:An important function of label is to aidin promotion of the products. Acarefully designed label can attractattention and give reason to purchase.We see many product labels providingpromotional messages for example, thepack of a popular Amla Hair Oil states,‘Baalon mein Dum, Life mein Fun’. Thelabel on the package of a brand ofDetergent Powder says, ‘Keep cloth lookgood and your machine in topcondition’. Labels play important role insales promotional schemes launched bycompanies. For example the label onthe package of a Shaving Creammentions, ‘40% Extra Free’ or packageof a toothpaste mentioning, ‘FreeToothbrush Inside’, or ‘Save Rs15’.

5. Providing Information Requiredby Law: Another important functionof labeling is to provide informationrequired by law. For example, thestatutory warning on the package ofCigarette or Pan Masala, ‘Smoking isInjurious to Health’ or ‘Chewing

Do it Yourself

1. Examine the label on the package of any three branded products recentlypurchased for use in your family and list out the type of information containedon these.

2. Find out the promotional messages given on the package of any three consumerproducts of your choice and comment how can these help in the sale of theseproducts.

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Tobacco is Injurious to Health’. Suchinformation is required on processedfoods, drugs and tobacco products. Incase of hazardous or poisonousmaterial, appropriate safety-warningneed to be put on the label.

Thus, labels perform number ofimportant functions relating tocommunicating with the potentialbuyers and promoting the sale of theproducts.

PRICING

When a product is bought, some moneyis paid for it. This money represent thesum of values that consumersexchange for the benefit of having orusing the prdocut and is referred to asthe price of the product. Similarly,money paid for the services such as farefor the transport service, premium foran insurance policy, and fee to a doctorfor his medical advise represent theprice of these services. Price maytherefore be defined as the amount ofmoney paid by a buyer (or received bya seller) in consideration of thepurchase of a product or a service.

Pricing occupies an importantplace in the marketing of goods andservices by a firm. No product can belaunched without a price tag or at leastsome guidelines for pricing. Pricing isoften used as a regulator of thedemand of a product. Generally, if theprice of a product is increased, itsdemand comes down, and vice-versa.

Pricing is considered to be aneffective competitive weapon. In theconditions of perfect competition,

most of the firms compete with eachother on the basis of this factor. It isalso the single most important factoraffecting the revenue and profits of afirm. Thus, most marketing firms givehigh importance to the fixation of pricefor their products and services.

Factors Affecting PriceDetermination

There are number of factors whichaffect the fixation of the price of aproduct. Some of the important factorsin this regard are discussed as below:

1. Product Cost: One of the mostimportant factor affecting price of aproduct or service is its cost. Thisincludes the cost of producing,distributing and selling the product.The cost sets the minimum level or thefloor price at which the product maybe sold. Generally all marketing firmsstrive to cover all their costs, at leastin the long run. In addition, they aimat earning a margin of profit over andabove the costs. In certain circumstance,for example, at the time of introducinga new product or while entering a newmarket, the products may be sold ata price, which does not cover all thecosts. But in the long run, a firmcannot survive unless at least all itscosts are covered.

There are broadly three types ofcosts: viz., Fixed Costs, Variable Costsand Semi Variable Costs. Fixed costsare those costs, which do not vary withthe level of activity of a firm say withthe volume of production or sale. Forexample, rent of a building or salary

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of a sales manager remains the samewhether 1000 units or 10 units areproduced in a week.

Those costs which vary in directproportion with the level of activity arecalled variable costs. For example, thecosts of raw material, labour and powerare directly related with the quantityof goods produced. Let us say, if thecost of wood for manufacturing onechair comes to Rs.100 the cost of woodfor 10 chairs would be Rs. 1000.Obviously, there will be no cost of woodif no chair is produced.

Semi variable costs are those costswhich vary with the level of activitybut not in direct proportion with it.For example, compensation of a salesperson may include a fixed salary ofsay Rs. 10,000 plus a commission of5 per cent on sales. With an increasein the volume of sales, the totalcompensation will increase but not indirect proportion with the change inthe volume of sale.

Total Costs are the sum total of thefixed, variable and semi-variable costsfor the specific level of activity, sayvolume of sales or quantity produced.

2. The Utility and Demand: While theproduct costs set the lower limits ofthe price, the utility provided by theproduct and the intensity of demandof the buyer sets the upper limit ofprice, which a buyer would beprepared to pay. In fact the price mustreflect the interest of both the partiesto the transaction—the buyer and theseller. The buyer may be ready to payup to the point where the utility fromthe product is at least equal to the

sacrifice made in terms of the pricepaid. The seller would, however, try toat least cover the costs. According tothe law of demand, consumers usuallypurchase more units at a low price thanat a high price.

The price of a product is affectedby the elasticity of demand of theproduct. The demand is said to beelastic if a relatively small change inprice results in large change in thequantity demanded. Here numerically,the price elasticity is greater than one.In the case of inelastic demand, thetotal revenue increases when the priceis increased and goes down when theprice is reduced. If the demand of aproduct is inelastic, the firm is in abetter position to fix higher prices.

3. Extent of Competition in theMarket: Between the lower limit andthe upper limit where would the pricesettle down? This is affected by thenature and the degree of competition.The price will tend to reach the upperlimit in case there is lesser degree ofcompetition while under conditions offree competition, the price will tend tobe set at the lowest level.

Competitors’ prices and theiranticipated reactions must beconsidered before fixing the price of aproduct. Not only the price but thequality and the features of thecompetitive products must be examinedcarefully, before fixing the price.

4. Government and Legal Regulations:In order to protect the interest ofpublic against unfair practices in thefield of price fixing, Government canintervene and regulate the price of

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commodities. Government can declarea product as essential product andregulate its price. For example, the costof a drug manufactured by a companyhaving monopoly in the production ofthe same come to Rs 20 per strip of tenand the buyer is prepared to pay anyamount for it, say Rs 200. In theabsence of any competitor, the sellermay be tempted to extort the maximumamount ofRs 200 for the drug and intervene toregulate the price. Usually in such acase, the Government does not allowthe firms to charge such a high priceand intervene to regulate the price ofthe drug. This can be done by theGovernment by declaring the drug asessential commodity and regulating itsprice. (see box)

5. Pricing Objectives: Pricingobjectives are another important factoraffecting the fixation of the price of aproduct or a service. Generally theobjective is stated to be maximise the

profits. But there is a difference inmaximising profit in the short run andin the long run. If the firm decides tomaximise profits in the short run, itwould tend to charge maximum pricefor its products. But if it is to maximiseits total profit in the long run, it wouldopt for a lower per unit price so that itcan capture larger share of the marketand earn greater profits throughincreased sales.

Apart from profit maximisation, thepricing objectives of a firm may include:

(a) Obtaining Market Share Leadership:If a firms objective is to obtain largershare of the market; it will keep theprice of its products at lower levelsso that greater number of people areattracted to purchase the products;

(b) Surviving in a Competitive Market:If a firm is facing difficulties insurviving in the market because ofintense competition or introductionof a more efficient substitute bya competitor, it may resort to

NPPA Sets 20% annual Cap for drug Price Rise

Drug price watchdog National Pharmaceutical Pricing Authority (NPPA) has decidedto invoke the ‘public interest’ clause in the drugs law more often to pressurecompanies to reduce prices of medicines that go up more than 20% in a year.

The pricing body has also decided to limit its communication with companiesto just one reminder asking them to respond to the show-cause notice on whythe drug should not be recommended for price control, sources told ET.

NPPA has now started scrutinising the fluctuations in the price-to-retailer of48,600 formulation packs every month. Every month, two to three formulations arelikely to get caught on an average.

So far, NPPA has recommended 45 cases of alleged abnormal price increase tothe Chemicals Ministry for appropriate action, on which the ministry has sent noticesto 11 companies asking them to reduce prices or face price control.

Source: Adopted from The Economic Times, Nov. 3, 2006

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discounting its products or runninga promotion campaign to liquidateits stock; and

(c) Attaining Product QualityLeadership: In this case, normallyhigher prices are charged to coverhigh quality and high cost ofResearch and Development.

Thus, the price of a firm’s productsand services is affected by the pricingobjective of the firm.

6. Marketing Methods Used: Pricefixation process is also affected byother elements of marketing such asdistribution system, quality ofsalesmen employed, quality andamount of advertising, salespromotion ef forts, the type ofpackaging, product differentiation,credit facility and customer servicesprovided. For example, if a companyprovides free home delivery, it hassome of flexibility in fixing prices.Similarly, uniqueness of any of theelements mentioned above gives thecompany a competitive freedom infixing prices of its products.

PHYSICAL DISTRIBUTION

The fourth important element ofmarketing mix is the physicaldistribution of products and services.It is concerned with making the goodsand services available at the rightplace, so that people can purchase thesame. There are two importantdecisions relating to this aspect—oneregarding physical movement of goodsfrom producers to consumers or usersand two, regarding the channels

or using intermediaries in thedistribution process. These aredescribed as follows:

Channels of Distribution

In case of large number of consumerproducts, the potential buyers arescattered over a wide geographical area.In order to contact these peopleefficiently and effectively, it is importantto take the help of number ofintermediaries as contacting themdirectly may not be cost effective andmay be difficult even otherwise. Forexample, a manufacturer of detergentpowder in Gujarat would find it verydifficult to directly approach customers,say in Delhi, Thiruvananthapuram,Bhuvaneshwar, Hyderabad Srinagarand other far off places. Therefore, he/she would supply a large quantity ofhis/her product to a big merchant, sayin Hyderabad. This big merchant wouldthen supply detergent powder torelatively small sellers in various townsof Hyderabad. These sellers would, inturn, resell the goods to customers. Inthis manner, goods are distributed fromthe place of production to the place ofconsumption. These people, institutions,merchants, and functionaries, who takepart in the distribution function, arecalled ‘Channels of Distribution’.(see figure on channels)

Channels of Distribution are set offirms and individuals that take title,or assist in transferring title, toparticular goods or services as itmoves from the producers to theconsumers. In other words, channelrefers to a team of merchants, agents,

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and business institutions thatcombine physical movement and titlemovement of products to reach specificdestinations.

Mostly goods and services aredistributed through a network ofmarketing channels. For example webuy merchandise of our need such assalt, bulb, tea, sugar, soap, paper,books, flour, etc., from retail sellers.

The channels bring economy ofeffort. This can be better understoodwith the help of an example. Let ussay you have to buy four things, viz.,Sugar, Bulb, Coffee and Ink. Mostprobably you would walk into aGeneral Merchant’s Shop and buy allthe articles form one place. Imaginewhat would happen if there were nomiddlemen or general merchantsavailable. In that case you would haveto buy directly from the manufacturersof these products. You will have tomake four contacts, each with theproducer of Sugar, Bulb, Coffee andInk. Compared to this, there was onlyone contact when all the things were

bought from the same generalmerchant. Now let us assume thatthere are four customers needing thesame four articles. In all sixteencontacts would have to be made. Incase middleman are used, as shownin the part II of the figure, only eightcontacts could be needed. Thus, useof middlemen brings economy of effort.This situation is illustrated in thepreceeding figure.

Apart from the economy of effort,middlemen help to cover largegeographical area and bring efficiencyin distribution, including transportation,storage and negotiation. They bringconvenience to customers as theymake various items available at onestore and also serve as authenticsource of market information as theyare in direct contact with the customer.

Functions of DistributionChannels

Channels of distribution smoothen theflow of goods by creating possession,place and time utilities. They facilitate

Channels of Distribution used for a Consumer Product

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movement of goods by overcomingvarious time, place and possessionbarriers that exist between themanufacturers and consumers. Theimportant functions performed bymiddlemen are as follows:

1. Sorting: Middlemen procuresupplies of goods from a variety ofsources, which is often not of the samequality, nature, and size. For example,a wholesaler of cashew nuts mayprocure a large quantity from differentcashew nut producing areas, whichwould contain nuts of varied qualityand sizes. He/She then sorts the nutsinto homogenous groups on the basisof the size or quality.

2. Accumulation: This functioninvolves accumulation of goods intolarger homogeneous stocks, whichhelp in maintaining continuous flowof supply.

3. Allocation: Allocation involvesbreaking homogenous stock intosmaller, marketable lots. For example,

once cashew nuts are graded and largequantities are built, these are dividedinto convenient packs of say 1 kg, 500gms and 250 gms, to sell them todifferent types of buyers.

4. Assorting: Middlemen buildassortment of products for resale.There is usually a difference betweenthe product lines made bymanufacturers and the assortment orcombinations desired by the users. Forexample, a cricket player may need abat, a ball, wickets, gloves, helmet, aT-shirt, and a pair of shoes. Perhapsno one manufacturer produces theseproducts in desired combination.Middlemen procure variety of goodsfrom different sources and deliver themin combinations desired by customers.

5. Product Promotion: Mostlyadvertising and other sales promotionactivities are organised bymanufacturers. Middlemen alsoparticipate in certain activities such asdemonstrations, special displays,

Economy of Efforts with the use of Channels

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contests, etc., to increase the sale ofproducts.

6. Negotiation: Channels operate withmanufacturers on the one hand andcustomers one, the other. Arriving atdeals that satisfy both the parties isanother important function of themiddlemen. They negotiate the price,quality, guarantee and other relatedmatters with customers so thattransfer of ownership is properlyaffected.

7. Risk Taking: In the process ofdistribution of goods the merchantmiddlemen take title of the goods andthereby assume risks on account ofprice and demand fluctuations,spoilage, destruction, etc.

Types of Channels

A manufacturer may choose fromdirect distribution to indirectdistribution and from a short channelconsisting of few intermediaries to along channel of distribution consistingof large number of middlemen. Eachform of channel network differs innumber and type of middlemeninvolved. The major types of channelsare as follows:

Direct Channel (Zero Level)

The most simple and the shortestmode of distribution is directdistribution, where in the goods aremade directly available by themanufacturers to customers, without

(i) Direct Channel (zero level)

Manufacturer Customer

Indirect Channel

(ii) One level Channel

Manufacturer Retailer Customer

(iii) Two level Channel

Manufacturer Wholesaler Retailer Customer

(iv) Three level Channel

Manufacturer Agent Wholesaler Retailer Customer

Types of Channels

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involving any intermediary. This isalso called zero level channel. Astraight and direct relationship isestablished between the manufacturerand the customer. For example, whena manufacturer sells his goodsthrough his own retail outlets (e.g.,Mc Donald, Bata); it is referred to asdirect channel. Similarly, mail orderselling, internet selling and sellingthrough own sales force, (e.g., EurekaForbes) are example of direct selling orzero level channel.

Indirect Channels

When a manufacturer employs one ormore intermediary to move goods fromthe point of production to the point ofconsumption, the distributionnetwork is called indirect. This maytake any of the following forms:

1. Manufacturer-Retailer Consumer(One Level Channel): In this form ofarrangement one intermediary i.e.,retailers is used between themanufacturers and the customers.That is, goods pass from themanufacture to the retailers who, inturn, sell them to the final users. Forexample, Maruti Udyog sells its carsand vans through company approvedretailers. This type of distributionnetwork enables the manufacturers tocover wide area of market whileretaining control over the Channels.

2. Manufacturer-Wholesaler-Retailer-Consumer (Two Level Channel): Thisis the most commonly adopteddistribution network for most

consumer goods like soaps, oils,clothes, rice, sugar and pulses. Herethe wholesaler and retailer function asconnecting links between themanufacturer and consumer. Use oftwo middlemen in the channel networkenables the manufacturer to cover alarger market area.

3. Manufacturer-Agent-Wholesaler-Retailer-Consumer (Three LevelChannel): In this case, manufactures usetheir own selling agents or brokers whoconnect them with wholesalers andthen the retailers. Thus, one more levelis added to the levels discussed in theproceeding arrangement. It is doneparticularly when the manufacturercarries a limited product line and hasto cover a wide market. An agent ineach major area is appointed, who inturn contact the wholesalers.

Factors Determining Choice ofChannels

Choice of appropriate channel ofdistribution is a very importantmarketing decision, which affects theperformance of an organisation.Whether an organisation will adoptdirect marketing channels or longchannels involving number ofintermediaries is a strategic decision.The choice of channels depends onvarious factors, which are discussedas follows:

1. Product Related Factors: Theimportant product relatedconsiderations in deciding thechannels include whether the product

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is an industrial or a consumer product,whether it is a perishable or a non-perishable product, what is the unitvalue of the product and the degree ofcomplexity of the product.

Industrial products are usuallytechnical, made to order andexpensive products purchased by fewbuyers. These products require shortchannels i.e., direct channel orinvolving few middlemen.

Consumer products, on the otherhand, are usually standardised, lessexpensive, less bulky, non-technicaland frequently bought products.These can be better distributed by longnetwork of channels, involving manymiddlemen. Perishable products likefruits, vegetables, and dairy productsare best sold through short channels,while non-perishable products liketoiletry products (e.g., soap,toothpaste, hair oil etc.), groceries

(vegetable oil, tea leaf etc.), fabricsrequire longer channels to reach widespread consumers.

If the unit value of a product is lowas in case of most convenienceproducts, long channels are preferredwhile in case of high value products,shorter channels may be used.Similarly, in case of complex productsrequiring technical details as in caseof most industrial or engineeringproducts, short channels are preferredbut if the product is a non-complexone, it is sold through long channels,involving number of intermediaries.

2. Company Characteristics: Theimportant company characteristicsaffecting the choice of channels ofdistribution include the financialstrength of the company and the degreeof control it wants to hold on otherchannel members. Direct sellinginvolves lot of funds to be invested in

India to have Variants of $ Store

It’s the cheap and cheerful concept that has worked all over the world. Now, itscoming to your friendly neighbourhood mall but retail marketers are offering it witha weak or two.

Though the concept, relatively new to the Indian market, retailers are trying toaggressively foray region’s low-cost daily-use retail segment. Idea is to enable acustomer buy a range of products its for or less than Rs 99. This being the template,retailers have introduced nations to suit there business models. The store range oflargely food, healthcare and products.

Home stores has gone a step further to introduce some interesting modificationsto the basic idea of a dollar-and-dime store. “We believe that pricing all products ata flat Rs 99 will be a rigid approach. We have introduced four different price slabs tomake it more attractive and reach a broader customer profile.

Homemaker’s group has modified the idea even further by introducing bargainpricing on its products with the help of a two-digit price band. So customers visitingthe Homemakers shops will not only get products between Rs 10 and Rs 99, theywill also have more price positioning options.

Source: Adopted from The Economic Times, Dec. 16, 2005

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fixed assets say for starting own retailoutlets or engaging large number ofsales force. Indirect selling throughintermediary does not involvedeployment of huge funds on theseaspects. Thus, if the firm has plenty offunds it may go for direct distribution.If spare funds are not available, it maygo for indirect channels.

Similarly if the management wantto have greater control on the channelmembers, short channels are used butif the management do not want morecontrol over the middlemen, it can goin for longer channel or large numberof intermediaries.

3. Competitive Factors: The choiceof channel is also affected by thechannel selected by competitors in thesame industry. If the competitor’s haveselected a particular channel sayChemist shops for the sale of toiletryproducts like hair oil, the other firmmay also like to select the similarchannel. In some cases producers maywant to avoid the channels used bycompetitors. For example if othercosmetic producers have chosen bigretail stores for the sale of theirproducts, a particular firm may like toadopt door to door selling. Thus, it willdepend upon the policy of the firm –whether it wants to go with thecompetitors or be different from them.The changing global marketingenvironment has lead to adoption ofnewer channels. (see box)

4. Market Factors: Important marketfactors affecting the choice of channelof distribution include size of market,geographical concentration of

potential buyers and quantitypurchased. In case the number ofbuyers is small, like for most industrialproducts, short channels are used. Butif the number of buyers is large, as incase of most convenience products likesoft drink, toothpaste etc., longerchannels involving large number ofintermediaries are used.

If the buyers are concentrated in asmall place, short channels may beused but if the buyers are widelydispersed over a large geographicalarea, longer channels may be used.Similarly if the size of order is small,as in case of most consumer products,large number of intermediaries maybe used. But if the size of order is large,direct channels may be used.

5. Environmental Factors: Otherimportant factors affecting the choiceof channels of distribution includeenvironmental factor such as economiccondition and legal constraints. In adepressed economy marketers useshorter channels to distribute theirgoods in an economical way.

PHYSICAL DISTRIBUTION

Once goods are manufactured,packaged, branded, priced, andpromoted, these must be madeavailable to customers at the rightplace, in right quantity and at the righttime. For example, a person convincedabout the quality etc. of a product, say,a detergent bar, wants to purchase thesame. He/She goes to a retail outletand asks for the product. If thatproduct is not available in that shop,

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he/she may purchase some of thealternative brand available. This way asure sale is lost because goods were notavailable at the place where thecustomer wanted to purchase. Thus, itis an important responsibility of themarketers to make the productphysically available at a place wherethe customers would like them to buy.The physical handling and movementof goods from place of production tothe place of distribution is referred toas physical distribution, which is a veryimportant element of marketing mix.

Physical distribution covers all theactivities required to physically movegoods from manufacturers to thecustomers. Important activities involvedin the physical distribution includetransportation, warehousing, materialhandling, and inventory control. Theseactivities constitute major componentsof physical distribution.

Components of PhysicalDistribution

The main components of physicaldistribution are explained as follows:

1. Order Processing: In a typicalbuyer -seller relationship orderplacement is the first step. Productsflow from manufacturers to customersvia channel members while orders flowin the reverse direction, fromcustomers to the manufacturers. Agood physical distribution systemshould provide for an accurate andspeedy processing of orders, in theabsence of which goods would reachthe customers late or in wrong quantity

or specifications. This would result incustomer dissatisfaction, with thedanger of loss of business and goodwill.

2. Transportation: Transportation isthe means of carrying goods and rawmaterials from the point of productionto the point of sale. It is one of themajor elements in the physicaldistribution of goods. It is importantbecause unless the goods arephysically made available, the salecannot be completed.

3. Warehousing: Warehousing refersto the act of storing and assortingproducts in order to create time utilityin them. The basic purpose ofwarehousing activities is to arrangeplacement of goods and providefacilities to store them. The need forwarehousing arises because there maybe difference between the time aproduct is produced and the time it isrequired for consumption. Generallythe efficiency of a firm in serving itscustomers will depend on where thesewarehouses are located and where arethese to be delivered.

Generally larger the number ofwarehouses a firm has, lesser wouldbe the time taken in serving customersat different locations but greater wouldbe the cost of warehousing and vice-versa. Thus the firm has to strike abalance between the cost ofwarehousing and the level of customerservice.

For products requiring long-termstorage (such as agricultural products)the warehouses are located nearproduction sites. This helps in

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minimising the charges ontransportation of the goods. On the otherhand, the products which are bulky andhard to ship (machinery, automobiles)as well as perishable products (bakery,meat, vegetables) are kept at differentlocations near the market.

4. Inventory Control: Linked towarehousing decisions are the inventory

decisions which hold key to success formany manufacturers, especially thosewhere the perunit cost is high. A veryimportant decision in respect ofinventory is deciding about the level ofinventory. Higher the level of inventory,higher will be the level of service tocustomers but the cost of carrying theinventory will also be high because lot

Nothing Beats Word of Mouth in India

Nothing sways an Indian buyer’s choice more than a word of reassurance fromthe people he knows. Now even high octane media blitz. A global online surveyconducted by ACNielsen puts word of mouth communication and referencing asthe biggest influence than conventional advertising on consumers in their buyingdecisions. In big ticket purchases like cars, mobile phones and home loans, thestudy says that almost 50% of consumers in India rely on the references fromtheir friends and relatives while making their decisions.

The story is different in developed economies. Take the case of automobiles.In markets like the US, Canada and Japan more people are influenced byconventional advertising by automobile companies, in developing markets likeIndia, Malaysia and Thailand it’s the neighbour or the colleague who tips thescales one way or the other. “In case of luxury goods, the psyche of Indians hasalways been different. Buying a car is a family decision, so it is only natural thatall the members of the family will talk to all the other users of a similar products,who they know”, General Motors India director P Balendran said:

“No wonder, large automakers in India spend as much on customersatisfaction as advertising, and recognitions like the JD Power CustomerSatisfaction awards taken so seriously.”

When the whole world is going crazy with Internet and mobile marketing, itis interesting that for Indians it’s still conventional advertising and word of mouthcampaigns that sways their choices. Unlike in the West, Indians come from a veryclosely-knit society where people get influenced by their peers, relatives and localcelebrities. People are more than willing to accept a brand if it’s endorsed by theirfavourite superstar or is recommended by their close associates,” AC Nielsen (southAsia) ED Sarang Panchal says:

“However, in markets like the US, previous experience with the products is thestrongest influencer overall and particularly when it came to buying cars (49%),choosing a banks (46%), mobile phone (39%) and loans (35%). World of mouth is apriority while buying weight loss products and mobile phones.”


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of capital would be tied up in the stock.Thus, a balance is to be maintained inrespect of the cost and customersatisfaction. With advancements incomputers and information technologythe need for keeping higher inventoryis reducing and the new concept of Just-in-Time-Inventory decision is becomingpopular in an increasing number ofcompanies.

The decision regarding level ofinventory involves prediction aboutthe demand for the product. A correctestimate of the demand helps to holdinventory and cost level down to aminimum. This not only helps the firmin terms of the cash flows but also interms of its ability to maintainproduction at a consistent level.

The major factors determininginventory levels include:

(a) firm’s policy regarding the level ofcustomer service to be offered.Higher the level of service greaterwill be the need to keep moreinventories;

(b) degree of accuracy of the salesforecasts. In case more accurateestimates are available, the need

for keeping very high level ofinventory can be minimised;

(c) responsiveness of the distributionsystem i.e., ability of the systemto transmit inventory needs backto the factory and get products inthe market. In case the timerequired to respond to theadditional demand for the productsis high there is a need to maintainhigher inventory. But if theadditional demand can be met inless time, the need for inventorywill also be low; and

(d) cost of inventory, which includesholding cost such as cost ofwarehousing, tied up capital, etcand the manufacturing cost.

PROMOTION

A company may produce a good qualityproduct, price it appropriately and makeit available at the selling points, whichare convenient to customers. But inspite of all this, the product may notsell well in the market. There is a needfor developing proper communicationwith the market. In the absence ofcommunication, the customers would

M CA UR SK TE OT ME ER R

ADVERTISING PERSONAL SELLING

PUBLICITY SALES PROMOTION

Promotion Mix

Marketing Communications

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not be able to know about the productand how it can satisfy their needs andwants or may not be convinced about itsutility and benefits.

Promotion refers to the use ofcommunication with the twin objectiveof informing potential customersabout a product and persuading themto buy it. In other words, promotionis an important element of marketingmix by which marketers makes use ofvarious tools of communication toencourage exchange of goods andservices in the market.

PROMOTION MIX

Promotion mix refers to combinationof promotional tools used by anorganisation to achieve itscommunication objectives. Varioustools of communication are used bythe marketers to inform and persuadecustomers about their firm’s products.These include: (i) Advertising, (ii)Personal Selling, (iii) Sales Promotion,and (iv) Publicity. These tools are alsocalled elements of promotion mix andcan be used in different combinations,to achieve the goals of promotion. Forexample consumer goods firms mayuse more of advertising through mass

media while the industrial goods firmsmay be using more of personal selling.What combination of these elements isused by a firm will depend uponvarious factors such as nature ofmarket, nature product, thepromotions budget, objectives ofpromotion, etc. Let us first know aboutthese elements in some details.

ADVERTISING

We generally come across hundredsof advertising messages everyday,which tell us about various productssuch as toilet soaps, detergent powder,soft drinks and services such ashotels, insurance policies, etc.

Advertising is perhaps the mostcommonly used tool of promotion.It is an impersonal form ofcommunication, which is paid for bythe marketers (sponsors) to promotesome goods or service. The mostcommon modes of advertising are‘newspapers’, ‘magazines’, ‘television’,and ‘radio’.

The important distinguishingfeatures of advertising are as follows:

(i) Paid Form: Advertising is a paidform of communication. That is, thesponsor has to bear the cost of

Advertising

“If you’re trying to persuade people to do something, or buy something, itseems to me you should use their language, the language in which they think.”

—David Ogilvy

“We find that advertising works the way the grass grows. You can never see it,but every week you have to move the lawn.”

—Andy Travis

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communicating with the prospects.

(ii) Impersonality: There is no directface-to-face contact between theprospect and the advertiser. It istherefore, referred to as impersonalmethod of promotion. Advertisingcreates a monologue and not adialogue.

(iii) Identified Sponsor: Advertising isundertaken by some identifiedindividual or company, who makesthe advertising efforts and alsobears the cost of it.

Merits of Advertising

Advertising, as a medium ofcommunication, has the followingmerits:

(i) Mass Reach: Advertising is amedium through which a largenumber of people can be reachedover a vast geographical area. Forexample, an advertisementmessage placed in a national dailyreaches lakhs of its subscribers.

(ii) Enhancing Customer Satisfactionand Confidence: Advertisingcreates confidence amongstprospective buyers as they feelmore comfortable and assuredabout the product quality andhence feel more satisfied.

(iii) Expressiveness: With thedevelopments in art, computerdesigns, and graphics, advertisinghas developed into one of the mostforceful medium of communication.With the special effects that canbe created, even simple products

and messages can look veryattractive.

(iv) Economy: Advertising is a veryeconomical mode of communicationif large number of people are to bereached. Because of its wide reach,the overall cost of advertisinggets spread over numerouscommunication links established.As a result the per-unit cost ofreach comes low.

Limitations of Advertising

The following are the major limitationsof advertising as a tool of promotion:

(i) Less Forceful: Advertising is animpersonal form of communication.It is less forceful than the personalselling as there is no compulsionon the prospects to pay attentionto the message.

(ii) Lack of Feedback: The evaluationof the effectiveness of advertisingmessage is very difficult as thereis no immediate and accuratefeedback mechanism of themessage that is delivered.

(iii) Inflexibility: Advertising is lessflexible as the message isstandardised and is not tailormade to the requirements of thedifferent customer groups.

(iv) Low Effectiveness: As the volumeof advertising is getting more andmore expanded it is becomingdif ficult to make advertisingmessages heard by the targetprospects. This is affecting theeffectiveness of advertising.

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OBJECTIONS TO ADVERTISING

In the proceeding sections, you havenoted the merits and limitations ofadvertising. Though advertising is oneof the most frequently used mediumof promotion of goods and services,it attracts lot of criticism. Theopponents of advertising say that theexpenditure on advertising is a socialwaste as it adds to the cost, multipliesthe needs of people and underminessocial values. The proponents,however, argue that advertising is

very useful as it increases the reach,brings the pay unit cost of productiondown and adds to the growth of theeconomy. It is therefore, important toexamine the major criticisms againstadvertising and see the extent towhich these are true. This is takenup as follows:

1. Adds to Cost: The opponents ofadvertising argue that advertisingunnecessarily adds to the cost ofproduct, which is ultimately passedon to the buyers in the form of high

Value AD

Government Shining

It’s not the heavy weight in the FMCG sector which are ruling the roost as topadvertisers on the tube, but surprisingly it’s the government departments andpublic sector units. Apart from Procter & Gamble, Bajaj Consumer Care, Joycoand Eicher Motors, the list of top advertisers across television and print isdominated by Sarkari outfits flaunting their new found passion for mass-medialed public communication.

Top Five Advertisers on Television

Ad Time(in ‘000 seconds)

Procter & Gamble Home Products 799Central Excise Department 375West Bengal Information and Culture 275Joyco India Ltd. 227Bajaj Consumer Care Ltd. 165

PrintAd Volume(Col.com in’000)

Sikkim/Royal Govt. Of Bhutan 416Ratan Ayurvedic Sansthan 388Government Of Mizoram 251Ministry Of Petroleum and Natural Gas 209Eicher Motors Ltd. 157

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prices. An advertisement on TV, for afew seconds, for example, costs themarketers several lakhs of rupees.Similarly an advertisement in printmedia say in a newspaper or amagazine costs the marketers a largeamount of money. The money spentadds to the cost, which in animportant factor in fixation of the priceof a product.

True, advertisement of a productcosts lot of money but it helps toincrease the demand for the productas large number of potential buyerscome to know about the availabilityof the products, its features etc. andare persuaded to buy it. The increaseddemand leads to higher production,which brings with it the economies ofscale. As a result, the per unit cost ofproduction comes down as the totalcost is divided by larger number ofunits. Thus, the expenditure onadvertisement adds to the total costbut the per unit cost comes downwhich in fact lessens the burden ofconsumers rather than adding to it.

2. Undermines Social Values: Anotherimportant criticism of advertising isthat it undermines social values andpromotes materialism. It breedsdiscontent among people as they cometo know about new products and feeldissatisfied with their present state ofaffairs. Some advertisements show newlife styles, which don’t find socialapproval.

This criticism is not entirely true.Advertisement in fact helps buyers byinforming them about the newproducts, which may be improvement

over the existing products. If thebuyers are not informed about theseproducts, they may be using inefficientproducts. Further, the job of anadvertisement is to inform. The finalchoice to buy or not to buy anywayrests with the buyers. They will buy ifthe advertised product satisfies someof their needs. They may be motivatedto work harder to be able to purchasethese products.

3. Confuses the Buyers: Anothercriticism against advertisement is thatso many products are being advertisedwhich makes similar claims that thebuyer gets confused as to which oneis true and which one should be reliedupon. For example, we may notesimilar claims of whiteness or stainremoving abilities in competingbrands of detergent powder or claimsof whiteness of tooth or ‘feelings offreshness’ in competing brands oftoothpaste that it is sometimesconfusing to us as to which one to buy.

The supporters of advertisement,however, argue that we are all rationalhuman beings who make our decisionsfor purchase of products on factorssuch as price, style, size, etc. Thus thebuyers can clear their confusion byanalysing the information provided onthe advertisements and other sourcesbefore taking a decision to purchase aproduct. However, this criticism cannotbe completely overruled.

4. Encourages Sale of InferiorProducts: Advertising does notdistinguish between superior andinferior products and persuade peopleto purchase even the inferior products.

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In fact superiority and inferioritydepends on the quality, which is arelative concept. The desired level ofquality will depend on the economicstatus and preferences of the targetcustomers. Advertisements sellproducts of a given quality and thebuyers will buy if it suits theirrequirements. No advertisementshould however, make false claimabout the quality of a product. If a firmmakes a false claims it can beprosecuted for the same.

5. Some Advertisements are in BadTaste: Another criticism againstadvertising is that some advertise-mentsare in bad taste. These show somethingwhich in not approved by some peoplesay advertisements showing womendancing when not required or runningafter a man because he is wearing aparticular suit or using a particularperfume are certainly not good. Someadvertisements distort the relationshiplike employer employee and are quiteoffensive.

Celebrities’ Influence on Brands’ Performance

Example of ad campaigns featuring celebrities, which resulted in brand buildingand growth in volumes.

Cadbury’s and Amitabh Bachchan: The commercial, a testimonial by Bachchanon a factory visit, was launched to rebuild the trust in the brand. Twelve weeksafter the campaign was launched, the sales reached 90 per cent of volumes prior tothe worm crisis. Big B’s presence helped the company to get media coverage thatadded to the campaign’s impact.

Santro and Shah Rukh Khan: Shah Rukh was roped in Santro ad to strike animmediate bond with the consumers. Shah Rukh Khan is an unconventionalsuperhero with a quirky acting style that matched the image of Santro.

Titan and Aamir Khan: Both are considered to be Indian icons and have made amark internationally; the obsession with detail is common to both, as also a senseof style. The Mangal Pandey look, which was unconventional, made the advertisementstand out, along with the fact that Aamir is less exposed than the other celebrities.

Munch and Rani Mukherjee: The campaign for Munch was aired on TV roped RaniMukherjee to give “a big brand feel”. The company got incredibly good result inrecall and the ad was a big hit with kids. Rani was used as a consumer and not asa filmstar.

Sachin Tendulkar and Boost: Research indicated that the brand’s associationwith Sachin has consistently been successful in strengthening the brand’s corevalues and building brand stature. Kids look up to Sachin as a true hero, want toemulate everything that he does and can’t seem to get enough of him.

Source: Adopted from Indian Journal of Marketing, Oct. 5, 2006

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Personal Selling

‘Most people think ‘selling’ is the same as ‘talking’. But the most effectivesalespeople know that listening is the most important part of their job.’

—Roy Bartell

‘You don’t close a sale, you open a relationship if you want to build a long-term,successful enterprise.’

—Patricia Fripp

We have seen the views of theopponents and the proponents ofadvertising. There may be somechances of misuse of advertising as atool, which can be properlysafeguarded by the law or bydeveloping a code of conduct by theadvertisers, for their self regulation.However, most of the criticism againstadvertising are not entirely true. In thechanged economic environment ofglobalisation, advertising isconsidered as an important tool ofmarketing. It helps a firm in effectivelycommunicating with its target market,increasing the sale and there byreducing the per unit cost ofproduction. It is not a social waste,rather it adds value to the social causeby giving a boost to production andgenerating employment.

PERSONAL SELLING

Personal selling involves oralpresentation of message in the form ofconversation with one or moreprospective customers for the purposeof making sales. It is a personal form ofcommunication. Companies appointsalespersons to contact prospective

buyers and create awareness aboutthe product and develop productpreferences with the aim of making sale.

Features of Personal Selling

(i) Personal Form: In personal sellinga direct face-to-face dialogue takesplace that involves an interactiverelationship between the seller andthe buyer.

(ii) Development of Relationship:Personal selling allows asalesperson to develop personalrelationships with the prospectivecustomers, which may becomeimportant in making sale.

Merits of Personal Selling

(i) Flexibility: There is lot of flexibilityin personal selling. The salespresentation can be adjusted to fitthe specific needs of the individualcustomers.

(ii) Direct Feedback: As there is directface-to-face communication inpersonal selling, it is possible totake a direct feed back from thecustomer and to adapt thepresentation according to theneeds of the prospects.

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(iii) Minimum Wastage: The wastage ofefforts in personal selling canbe minimised as company candecide the target customers beforemaking any contact with them.

ROLE OF PERSONAL SELLING

Personal selling plays a very importantrole in the marketing of goods andservices. The importance of personalselling to businessmen, customersand society may be described asbelow.

Importance to Businessmen

Personal selling is a powerful tool forcreating demand for a firm’s productsand increasing their sale. Theimportance of personal selling to abusiness organisation may bedescribed as follows:

(i) Ef fective Promotional Tool:Personal selling is very effectivepromotional tool, which helps ininfluencing the prospects aboutthe merits of a product andthereby increasing its sale.

(ii) Flexible Tool: Personal selling ismore flexible than other tools ofpromotion such as advertisingand sales promotion. It helpsbusiness persons in adoptingtheir offer in varying purchasesituations.

(iii) Minimises Wastage of Efforts:Compared with other tools ofpromotion, the possibility ofwastage of efforts in personal

selling is minimum. This helpsthe business persons in bringingeconomy in their efforts.

(iv) Consumer Attention: There is anopportunity to detect the loss ofconsumer attention and interestin a personal selling situation.This helps a business person insuccessfully completing the sale.

(v) Lasting Relationship: Personalselling helps to develop lastingrelationship between the salespersons and the customers, whichis very important for achieving theobjectives of business.

(vi) Personal Rapport: Development ofpersonal rapport with customersincreases the competitive strengthof a business organisation.

(vii) Role in Introduction Stage:Personal selling plays veryimportant role in the introductionstage of a new product as it helpsin persuading customers aboutthe merits of the product.

(viii) Link with Customers: Sales peopleplay three different roles, namelypersuasive role, service role andinformative role, and thereby linka business firm to its customers.

Importance to Customers

This role of personal selling becomesmore important for the illiterate andrural customers, who do not havemany other means of getting productinformation.

The customers are benefited bypersonal selling in the following ways:

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(i) Help in Identifying Needs:Personal selling helps thecustomers in identifying theirneeds and wants and in knowinghow these can best be satisfied.

(ii) Latest Market Information:Customers get latest marketinformation regarding pricechanges, product availability andshortages and new productintroduction, which help them intaking the purchase decisions ina better way.

(iii) Expert Advice: Customers getexpert advice and guidance inpurchasing various goods andservices, which help them inmaking better purchase.

(iv) Induces Customers: Personalselling induces customers topurchase new products thatsatisfy their needs in a better wayand thereby helps in improvingtheir standards of living.

Importance to Society

Personal selling plays a veryproductive role in the economicprogress of a society. The more specificbenefits of personal selling to a societyare as follows:

(i) Converts Latest Demand:Personal selling converts latestdemand into effective demand. Itis through this cycle that theeconomic activity in the societyis fostered, leading to more jobs,more incomes and more productsand services. That is how

economic growth is influenced bypersonal selling.

(ii) Employment Opportunities: Personalselling offers greater income andemployment opportunities to theunemployed youth.

(iii) Career Opportunities: Personalselling provides attractive careerwith greater opportunities foradvancement and job satisfactionas well as security, respect,variety, interest and independenceto young men and women.

(iv) Mobility of Sales People: There isa greater degree of mobility insales people, which promotetravel and tourism in the country.

(v) Product Standardisation: Personalselling increases productstandardisation and uniformityin consumption pattern in adiverse society.

SALES PROMOTION

Sales promotion refers to short-termincentives, which are designed toencourage the buyers to makeimmediate purchase of a product orservice. These include all promotionalef forts other than advertising,personal selling and publicity, used bya company to boost its sales. Salespromotion activities include offeringcash discounts, sales contests, free giftoffers, and free sample distribution.Sales promotion is usually undertakento supplement other promotionalef forts such as advertising andpersonal selling.

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Companies use sales promotiontools specifically designed to promoteto customers (e.g., free samples,discounts, and contests), tradesmen ormiddlemen (e.g., cooperativeadvertising, dealer discounts anddealer incentives and contests) andto sales person (e.g., bonus, salesmencontests, special of fers). Salespromotions include only thoseactivities that are used to provideshort term incentives to boost thesales of a firm.

Merits of Sales Promotion

(i) Attention Value: Sales promotionactivities attract attention of thepeople because of the use ofincentives.

(ii) Useful in New Product Launch:Sales promotion tools can be veryeffective at the time of introductionof a new product in the market. Itinduces people to break away fromtheir regular buying behaviour andtry the new product.

(iii) Synergy in Total PromotionalEfforts: Sales promotion activitiesare designed to supplement thepersonal selling and advertisingefforts used by a firm and add tothe over all effectiveness of thepromotional efforts of a firm.

Limitation of Sales Promotion

(i) Reflects Crisis: If a firm frequentlyrely on sales promotion, it may givethe impression that it is unable tomanage its sales or that there areno takers of its product.

(ii) Spoils Product Image: Use of salespromotion tools may affect theimage of a product. The buyers maystart feeling that the product is notof good quality or is notappropriately priced.

Commonly used Sales PromotionActivities

1. Rebate: Offering products at specialprices, to clear off excess inventory.Example, a car manufacturer’s offer tosell a particular brand of car at adiscount of Rs 10,000, for a limitedperiod.

2. Discount: Offering products at lessthan list price. Example, a shoecompany’s offer of ‘Discount Up to50%’ or a shirt marketer’s offer of‘50+40% Discount’.

3. Refunds: Refunding a part of pricepaid by customer on some proof ofpurchase, say on return of emptyfoils or wrapper. This is commonlyused by food product companies, toboost their sales.

4. Product Combinations: Offeringanother product as gift along with thepurchase of a product, say offer of apack of ½ kg of rice with the purchaseof a bag of Aatta (wheat flour), or ‘Get128 KB Memory Card Free with aDigicam’ or Buy a TV of 25+ and Get aVacuum Cleaner Free’ or ‘100 Gm Bottleof Sauce Free With 1 kg Detergent.’

5. Quantity Gift: Offering extraquantity of the product commonlyused by marketer of toiletry products.For example, a shaving cream’s offerof ‘40% Extra’ or A Hotel’s offer of

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“Take a 2 Night 3 Days Package At theHotel and Get an Extra Night Stay AtJust Rs 500” or ‘Buy 2 Get 1 Free’ offerof a marketer of shirts.

6. Instant Draws and Assigned Gift:For example, ‘Scratch a Card’ or ‘Bursta Cracker’ and instantly win aRefrigerator, Car, T-shirt, Computer,with the purchase of a TV.

7. Lucky Draw: For example, the offerof a bathing soap to win a gold coin on

lucky draw coupon for free petrolon purchase of certain quantityof petrol from given petrol pumpor lucky draw coupon on purchaseof easy undergarment and win a caroffer.

8. Usable Benefit: ‘Purchase goods worthRs 3000 and get a holiday package worthRs 3000 free’ or ‘Get a Discount Voucherfor Accessories on Apparel Purchase ofRs 1000 and above.’

Sales Promotion

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9. Full finance @ 0%: Manymarketers of consumer durables suchas Electronic goods, automobiles etcoffer easy financing schemes such as‘24 easy instalments, Eight Up Frontand 16 To Be Paid as Post DatedCheques’. However, one should becareful about the file charges, whichsometimes is nothing but interestrecovered in advance.

10. Sampling: Offer of free sample of aproduct, say a detergent powder ortooth paste to potential customers atthe time of launch of a new brand.

11. Contests: Competitive eventsinvolving application of skills or luck,say salving a quiz or answering somequestions.

PUBLICITY

Publicity is similar to advertising, in thesense that it is a non-personal form ofcommunication. However, as againstadvertising it is a non-paid form ofcommunication. Publicity generallytakes place when favourable news ispresented in the mass media about aproduct or service. For example, if amanufacturer achieves a breakthroughby developing a car engine, which runson water instead of petrol, and this newsis covered by television or radio ornewspapers in the form of a news item.It would be termed as publicity becausethe engine manufacturer would benefitfrom such dissemination of informationabout its achievement by the media butwould not bear any cost for the same.Thus, the two important features ofpublicity are that:

(i) Publicity is an unpaid form ofcommunication. It does not involveany direct expenditure by themarketing firm; and

(ii) There is no identified sponsor forthe communication as the messagegoes as a news item.

In publicity, as the information isdisseminated by an independentsource, e.g., the press in the form ofnews stories and features, the messagehas more credibility than if that comesas a sponsored message in advertising.

Also, as the message goes in theform of a news rather than direct salescommunication, it can reach even tothose persons who otherwise may notpay attention to paid communication.

However, an important limitation ofpublicity is that as a medium ofpromotion, it is not within the controlof a marketing firm. The media wouldcover only those pieces of information,which are news worthy and whichsymbolise some achievement in thefield. Thus, a firm can’t use publicityto actively promote its products.

PUBLIC RELATIONS

Managing public opinion of anorganisation is an important task whichcan be performed by the marketingdepartment. The business needs tocommunicate effectively to customers,suppliers, and dealers, since they areinstrumental in increasing the salesand profit. Besides those who come intodirect contact with the organisation orits products, there are other membersof the general public whose voice oropinion is equally important. This

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public may be interested in thecompany and its product and have animpact on the business ability toachieve its objectives. Thus, it becomesimperative to manage public opinionand the company’s relation with thepublic on a regular basis. Therefore,public relations involve a variety ofprogrammes designed to promote orprotect a company’s image and itsindividual products in the eyes of thepublic.

The business relates with a numberof groups including suppliers,shareholders, intermediaries, activistgroups, and the government. Forexample, active support of middlemenis needed if the firm wants to survive ina competitive selling environment.Similarly, consumer activist groupsneed to be satisfied because they canimpose restriction on the sales of thefirm’s products directly by urgingcustomers to refrain from buying themor through the imposition of laws. Mostorganisations, business or otherwisenowadays, have a separate departmentto manage public relations. They mayalso utilize the services of any outsidepublic relations agency.

Their main task is to disseminateinformation and build goodwill aboutthe business. Concrete steps are to betaken to monitor the attitude of thegeneral public and generate positivepublicity. They are especially usefulwhen there is negative publicity aboutthe company or its products. At thattime, the situation has to be tackled likean emergency to improve public image.The public relations department then

has to do something drastic so thatdamage to company’s images iscontrolled and minimised. They alsoadvise top management to adoptcertain programmes which will add totheir public image and ensure thatnegative publicity does not take placeat all.Role of Public RelationsThe role of public relations can bediscussed with respect to the functionswhich the department performs. Publicrelations itself is an important tool inthe hands of the marketing department,which can be used to the advantage ofthe business. The public relationsdepartment performs five functions:

1. Press relations: Information aboutthe organisation needs to bepresented in a positive manner inthe press. Generating news requiresskill in developing and researchinga story and getting the media toaccept press releases is a difficulttask. The public relationsdepartment is in contact with themedia to present true facts and acorrect picture about the company.Otherwise news can get distorted iftaken from other sources.

2. Product publicity: New productsrequire special effort to publicisethem and the company has tosponsor such programmes. Thepublic relations departmentmanages the sponsoring of suchevents. The company can drawattention to new products byarranging sports and culturalevents like news conferences,seminars and exhibitions.

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3. Corporate Communication: Theimage of the organisation needs tobe promoted through communicat-ing with the public and theemployees within the organisation.This is usually done with thehelp of newsletter, annualreports, brochures, articles andaudio-visual materials. Companiesrely on these materials to reach andinfluence their target markets.Speeches by the company’sexecutives at a meeting of tradeassociations or trade fairs can reallyboost the company’s image. Eveninterviews with TV channels andresponding to queries from themedia go a long way in promotingpublic relations.

4. Lobbying: The organisation has todeal with government officials anddifferent ministers in charge ofcorporate affairs, industry, financewith respect to policies relating tobusiness and the economy. Thegovernment also seeks to maintaina healthy relationship withassociations of commerce andindustry and solicits the opinion ofmajor stakeholders whileformulating industrial, telecom,taxation policies, etc. The publicrelations department then has to bereally proactive in promoting ordefeating regulations that affectthem.

5. Counselling: The public relationsdepartment advises themanagement on general issueswhich affect the public and theposition the company would like to

the take on a particular issue. Thecompany can build goodwill bycontributing money and time tocertain causes like environment,wildlife, children’s rights, education,etc. Such cause-related activitieshelp in promoting public relationsand building goodwill.

In addition, maintaining goodpublic relations also helps in achievingthe following marketing objectives:(a) Building awareness: Public

relations department can placestories and dramatise the productin the media. This will buildmarketplace excitement before theproduct reaches the market ormedia advertising takes place. Thisusually creates a favourableimpression on the target customer.

(b) Building credibility: If news abouta product comes in the mediawhether print or electronic it alwayslends credibility and people believein the product since it is in the news.

(c) Stimulates sales force: It becomeseasier for the sales force to deal withthe retailers and convince dealers ifthey have already heard about theproduct in the news before it islaunched. Retailers and dealers alsofeel it is easier to sell the product tothe ultimate consumer.

(d) Lowers promotion costs:Maintaining good public relationscosts much less than advertisingand direct mail. However, it requiresa lot of communication andinterpersonal skills to convince themedia to give space or time for theorganisation and its product.

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Difference between Advertising and Personal Selling

S. Advertising Personal SellingNo.

Personal selling is a personal formof communication.

In personal selling, the sales talk isadjusted keeping view customer’sbackground and needs.

Personal selling is highly flexible. asthe message can be adjusted.

Only a limited number of people canbe contacted because of time and costconsiderations.

The cost per person is quite high inthe case of personal selling.

Personal selling efforts take a lot oftime to cover the entire market.

Personal selling makes use of salesstaff, which has limited reach.

Personal selling provides direct andimmediate feed back. Sales personscome to know about the customers’reactions immediately.

Personal selling plays important roleat the awareness stage of decisionmaking.

Personal selling is more helpful inselling products to the industrialbuyers or to intermediaries such asdealers and retailers who are relativelyfew in numbers.

1. Advertising is an impersonal formof communication.

2. Advertising involves transmission ofstandardised messages, i.e., samemessage is sent to all the customersin a market segment.

3. Advertising is inflexible as themessage can’ t be adjusted to theneeds of the buyer.

4. It reaches masses, i.e., a large numberof people can be approached.

5. In advertising the cost per personreached is very low.

6. Advertising can cover the market in ashort time.

7. Advertising makes use of mass mediasuch television, radio, newspaper, andmagazines.

8. Advertising lacks direct feedback.Marketing research efforts are neededto judge customers’ reactions toadvertising.

9. Advertising is more useful in creatingand building interest of theconsumers in the firms products.

10. Advertising is more useful inmarketing to the ultimate consumer’swho are large in numbers

The major differences between advertising and personal selling are as follows:

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SUMMARY

In the traditional sense, the term ‘market’ refers to the place where buyers andsellers gather to enter into transactions involving the exchange of goods andservices. But in modern marketing sense, it refers to a set of actual and potentialbuyers of a product or service.

What is Marketing: The term marketing has been described as performance ofbusiness activities that direct the flow of goods and services from producers toconsumers. Marketing is not merely a post-production activity. It includes manyactivities that are performed even before goods are actually produced andcontinue even after the goods have been sold.

In Modern Times: Marketing is described as a social process by whichindividual groups obtain what they need and want through creating offeringsand freely exchanging products and services of value with others. Marketing isnot merely a business phenomena or confined only to business organisations.Marketing activities are equally relevant to non-profit organisations

What can be Marketed: Anything that is of value to the other can be marketed.It can be a product or a service or a person or a place or an idea. It can also bean experience, properties, events, information or organisation.

Marketing management means management of the marketing function. It refersto ‘The art and science of choosing target markets and getting, keeping andgrowing customers through creating, delivering and communicating superiorcustomer value of management.’

Marketing and Selling: Many people confuse ‘selling’ for ‘marketing’. However,selling is only a part of the process of marketing. The main focus of selling ison affecting transfer of title and possession of goods from sellers to users.Marketing activities put greater thrust on maximising customer’s satisfaction.

KEY TERMS

Marketing Brand Mark Market Packaging

Marketing Management Labelling Marketing MixChannels of Distribution Marketing Offering Physical Distribution

Consumer Product Promotion Industrial ProductPromotion Mix Convenience Product Advertising

Shopping Product Personal Selling Speciality ProductPublicity Generic Name Sales Promotion

Brand Brand Name Trade Mark

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Marketing Management Philosophies: The different business philosophiesor concepts guiding the marketing efforts are: (i) Production Concept whichassumes that availability and affordability of the product are the key to thesuccess of a firm and puts greater emphasis on improving the production anddistribution efficiency of the firms. (ii) Product Concept assumes that productimprovement is, the key to profit maximisation of a firm; (iii) Sales Conceptassumes that the customers would not buy, or not buy enough, unless they areadequately convinced and motivated to do so, It is believed that aggressive sellingand promotional efforts are important to make customers buy their products.(iv) Marketing Concept implies that focus on satisfaction of customer’s needs isthe key to the success of any organisation in the market. (v) The SocietalMarketing Concept is the extension of the marketing concept as supplementedby the concern for the long-term welfare of the society.

Functions of Marketing: The important functions of marketing includeGathering and Analysing Market Information, Marketing Planning, ProductDesigning and Development, Standardisation and Grading, Packaging andLabelling, Branding, Customer Support Services, Pricing of Products, Promotion,Physical distribution, Transportation, Storage or Warehousing.

Role of Marketing: By adopting marketing orientation, an organisationwhether profit making or non-profit making, can achieve its goals in the mosteffective manner. Also marketing acts as a catalyst in the economic developmentof a country and helps in raising the standards of living of people.

Marketing Mix is a set of marketing tools that the firm uses to pursue itsmarketing objectives in a target market. The variables or elements of marketingmix have been classified in to four categories, popularly known as four Ps ofmarketing viz., Product, Price, Place and Promotion. These elements arecombined to create an offer.

Product: In common parlance, the word ‘product’, is used to refer only to thephysical or tangible attributes of a product. In marketing, product is a mixtureof tangible and intangible attributes, which are capable of being exchangedfor a value, with ability to satisfy customer needs. It is anything that can beoffered to a market to satisfy a want or need. Products may broadly be classifiedinto two categories—industrial products and consumers’ products. Products,which are purchased, by the ultimate consumers or users for satisfying theirpersonal needs and desires are referred to as consumer products. On the basisof shopping efforts involved, the products are classified as Convenience Product,Shopping Products and Speciality Products. On the basis of their durability,consumer products have been classified into categories—Durable, Non-durableand Services.

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Those activities, benefits or satisfactions, which are offered for sale, e.g., drycleaning, watch repairs, hair cutting, are called services.

Industrial products are those products, which are used as inputs in producingother products. These are broadly classified in to (i) Materials and Parts, (ii)Capital Items, and (iii) Supplies and Business Services.

Generic name refers to the name of the whole class of the product. For example,a book, a wristwatch, and tyre. A brand is a name, term, sign, symbol, designor some combination of them, used to identify the products—goods or servicesof one seller or group of sellers and to differentiate them from those of thecompetitors. That part of a brand, which can be spoken, is called a brandname.

That part of a brand which can be recognized but which is not utter able iscalled brand mark. Brand mark appears in the form of a symbol, design, distinctcolour scheme or lettering. Brand or part of a brand that is given legal protectionis called trademark.

A good brand name should be short, easy to pronounce, spell, recognize andremember; Should suggest the product’s benefits and qualities; be distinctive;be adaptable to packing or labelling requirements; be sufficiently versatile toaccommodate new products; be capable of being registered and protected legallyand have staying power i.e. it should not get out of date.

Packaging: The act of designing and producing the container or wrapper of aproduct is referred as packaging. There can be three different levels ofpackaging. viz Primary package, Secondary packaged, Transport package.Packaging performs a number of functions in the marketing of goods. Some ofthe important functions, include Product identification; Product protection;Facilitating the use of the product and Promotion of goods and services.

Labelling: A simple looking but important task in the marketing of goodsrelates to designing the label to be put on the package. The label may varyfrom a simple tag attached to the product to complex graphics that are part ofthe package. The most important functions of labels include i) describing theproduct ii) help in identifying the product or brand; iii) help in grading theproducts into different categories; and aids in promotion of the products.

Pricing: Price may be defined as the amount of money paid by a buyer orreceived by a seller in consideration of the purchase of a product or service.Generally, if the price of a product is increased, its demand comes down, andvice-versa. Pricing is considered to be an effective competitive weapon. It is alsothe single most important factor affecting the revenue and profits of a firm.

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The factors affecting price determination are (i) Product Cost (ii) The Utility andDemand (iii) Competition (iv) Government and Legal Regulations and v) MarketingMethods Used.

Physical Distribution: There are two important decisions relating to this aspect-one regarding physical movement of goods and two, regarding the channels.

Channels of Distribution are set of firms and individuals that take title, orassist in transferring title, to particular goods or services as it moves from theproducers to the consumers. Channels of distribution smoothen the flow ofgoods by creating possession, place and time utilities. The important functionsperformed by middlemen are: (i) Sorting; (ii) accumulation; (iii) allocation; (iv)assorting; (v) product promotion; (vi) negotiation; and (vii) risk taking:

Types of Channels: (I) Direct distribution channels are those where in thegoods are made directly available by the manufacturers to customers, withoutinvolving any intermediary; include (II) Indirect Distribution Channels includei. Manufacturer - Retailer – Consumer (One Level Channel) ii. Manufacturer -Wholesaler - Retailer- Consumer (Two Level Channel) iii. Manufacturer - Agent- Retailer- Consumer (Three Level Channel) Factors Determining Choice ofChannels include i. Product Related Factors; ii. Company Characteristics iii.Competitive Factor iv. Market Factor; and v. Environmental Factor.

Physical Distribution Covers all the activities required to physically movegoods from manufacturers to the customers. The main component of physicaldistribution are. i. Order Processing; ii. Transportation; iii. Warehousing; andiv. Inventory Control: Just-in-Time-Inventory.

Promotion: Promotion refers to the use of communication with the twinobjective of informing potential customers about a product and persuadingthem to buy it. There are four major tools, or elements of promotion mix,which are. (i) Advertising, (ii) Personal Selling, (iii) Sales Promotion, and (iv)Publicity. These tools are used in different combinations to achieve the goalsof promotion.

Advertising is the most commonly used tool of promotion. It is an impersonalform of communication, which is paid for by the marketers (Sponsors) topromote some goods or service. The merits of advertising, as a medium ofcommunication, include i. Mass reach ; ii. Enhancing customer satisfaction andconfidence iii. Expressiveness; and iv. Economy

The limitations of advertising are that it is (i) less forceful (ii) lacks Feedback (iii)inflexibility (iv) low effectiveness The most common Objections to Advertisingare that it i. adds to cost; ii. undermines social Values; iii. confuses the buyers;and iv. encourages sale of Inferior Products:

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Most of the criticisms against advertising are not fully true. Advertising istherefore considered an essential function of marketing.

Personal Selling involves oral presentation of message in the form of conversationwith one or more prospective customers for the purpose of making sales. PersonalSelling plays important role for the business persons as well as for the society

Sales Promotion refers to short-term incentives, which are designed toencourage the buyers to make immediate purchase of a product service. Theseinclude promotional efforts other than advertising, personal selling andpublicity, used by a company to boost its sales. Commonly used Sales PromotionActivities include Rebate, Discount, Refunds, Product Combinations, QuantityGift, Instant Draws and Assigned Gift, Lucky Draw, Usable Benefit, Full Finance@ 0%, sampling, and contests

Publicity is similar to advertising, in the sense that it is a non-personal form ofcommunication. However, as against advertising it is a non-paid form ofcommunication. In publicity, as the information is disseminated by anindependent source. However, an important limitation of publicity is that as amedium of promotion, it is not within the control of a marketing firm.

EXERCISES

Very short answer questions

(i) Explain the advantages of branding to marketers of goods and services.

(ii) List the characteristics of a good brand name.

(iii) What is the societal concept of marketing?

(iv) List the characteristics of convenience products.

(v) Enlist the advantages of packaging of a consumer products.

(vi) What are the limitations of a advertising as a promotional tool? Enlist

(vii) List five shopping products purchased by you or your family duringthe last few months.

Short answer question

(i) What is marketing ? What functions does it perform in the process ofexchange of goods and services? Explain.

(ii) Distinguish between the product concept and production concept ofmarketing.

(iii) Product is a bundle of utilities? Do you agree? Comment.

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(iv) What are industrial products? How are they different from consumerproducts? Explain.

(v) Distinguish between convenience product and shopping product.

(vi) ‘Products is a mixture of tangible and intangible attributes’. Discuss

(vii) Describe the functions of labeling in the marketing of products.

(viii) Discuss the role of intermediaries in the distribution of consumer nondurable products.

(ix) Explain the factors determining choice of channels of distribution.

(x) Explain briefly the components of physical distribution.

(xi) Define advertising. What are its main features? Explain.

(xii) Discuss the role of ‘sales promotion’ as an element of promotion mix.

Long answer type questions

(i) Define Marketing. How is it different from selling? Discuss.

(ii) What is the Marketing concept? How does it help in the effectivemarketing of goods and services.

(iii) What is marketing mix? What are its main elements? Explain.

(iv) How does branding help in creating product differentiation? Does it helpin marketing of goods and services? Explain.

(v) What are the factors affecting determination of the price of a productor service? Explain.

(vi) What do you mean by ‘channels of distribution’ ? What functions dothey play in the distribution of goods and services? Explain.

(vii) Explain the major activities involved in the physical distribution ofproducts.

(viii) ‘Expenditure on advertising is a social waste.’ Do you agree? Discuss.

(ix) Distinguish between advertising and personal selling.

Projects/Assignment

(i) Visit in a team of four-five students to different marketing organisationsin your locality (retailers, wholesalers, distributors, etc). Find whatmarketing activities are undertaken by them. Do you find any differencein the activities in the organisations visited by you? What commonactivities are found in these organisations? Write a report.

(ii) Collect ten advertisements appearing in newspapers, magazines, etcabout recent sales promotional schemes about some consumers durable

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or non durable products of your choice. Also collect some promotionalmaterial about these products written on the package of these products(cartons/wrappers/bottles, etc.) and write important features of thescheme in your notebook. Make a presentation in your class about thesales promotional schemes.

Application based questions

(i) As marketing manager of a big hotel located at an important touristdestination, what societal concerns would be faced by you and whatsteps would you plan to take care of these concerns? Discuss.

(ii) Suppose you are the marketing vice president of an insurance company,planning to design a new mediclaim policy for senior citizens. Whatinformation would you like to collect to perform this task and how willyou collect such information? Discuss.

(iii) What shopping products have been purchased by you/your family inthe last six months. Make a list and specify what factors influenced thepurchase of each of these products.

(iv) What information is generally placed on the package of a food product.Design a label for one of the food products of your choice.

(v) For buyers of consumer durable products, what ‘customer care services’would you plan as a manager of a firm marketing new brand ofmotorcycle. Discuss.

Case Problems

Nokia takes four-lane road to consumers.

NEW DELHI: After having grabbed a king-size 79% share of the Rs 15,000-crore mobile handset market in India, Nokia India has found a new way ofconnecting people.

The mobile handset manufacturer has embarked upon a brand new retailstrategy that is based on a classification of its consumers into four majorgroups that separates people in terms of usage, income level and lifestyle.

The classification is based on an extensive survey – the Nokia SegmentationStudy —that was carried over two years involving 42,000 consumers from 16countries. It studied the impact lifestyle choices and attitudes have on themobile devices consumers buy and how they use them.

The strategy, which was announced globally in June last year, is beingunfolded in India now. While the nitty-gritty of the new strategy is still being

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worked out, it is likely that the company would follow separate marketingstrategies for the four different segments. The advertising campaigns could bedifferent for the segments.

Nokia’s entire product portfolio has now been re-aligned towards these fourgroups to address the specific needs of each. The first of these segments Live,aimed a first time users whose basic need is to stay in touch with voice as themain driver, would have basic handsets low on features and price.

“These may be functional phones but the target group for these phonesrange from SEC C (low socio-economic class) to SEC A1+ (very high socio-economic class) markets,” says Nokia India marketing head Devinder Kishore.The second segment Connect looks at more evolved users who look for morefunctionality and features and connectivity. Accordingly, phones in thissegment would have GPRS, camera and music capabilities.

The next two categories, Achieve and Explore, are aimed at high-end usersand have Nokia’s top-end handsets. For example, Achieve segment looks atenterprise users who need to have business functionalities in their phones.Nokia’s new E-series has been put under this segment with handsets havingQWERTY keyboards and full Internet capabilities.

Aimed at high-end lifestyle users, Explore would be the most prominentsegment for the company in the coming years. Says Nokia India multimediabusiness director Vineet Taneja, “This segment would see the most vibrantgrowth in the coming year. It will look at five different areas – applications,imaging, mobile TV, music and gaming. We are fast developing the ecosystemto support these areas.”

Nokia acquired music solution and content provider LoudEye and GPSsolution provider Gate5. It is all slated to launch its most high-profile handset,which boasts of having a 5 mega pixel camera and GPS capabilities apartfrom iPod quality music, in February.

Says Taneja, “There is increasing demand for convergence and multiplefunctionalities in high-end handsets. The N-series will try to address that.” Nokiafeels that the new platform strategy wherein different handsets are launchedunder a platform, like the N-Series, will become a status and style statementand drive numbers.

Source: www.economictimes.indiatimes.com

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Questions

1. Identify the four market segments that Nokia plans to address as per thenews report above.

2. What is the basis of classification of the market used by the company?

3. What do you mean by realignment of product portfolio? Illustrate this fromthe case above.

4. Identify the points that can be highlighted in marketing campaigns foreach segment.

5. What are the different considerations in the mind of consumers of eachsegment while purchasing mobile phones as given in the above case?

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LEARNING OBJECTIVES


Ø state the importance of

consumer protection;

Ø briefly explain legal framework

for consumer protection inIndia;

Ø describe consumer rights in

India;

Ø list out consumer responsibilities;

Ø briefly describe the ways and

means of consumer protection;and

Ø describe the role of consumer

organisations and NGOs inprotecting consumers’ interests.

CHAPTER

12CONSUMER PROTECTION

MAHARASHTRA CONSUMER COMMISSION

SLAPS FINE OF RS ONE LAKH ON

COCA COLA

The Maharashtra State Consumer

Commission has asked Coca Cola, one

of the international fizzy drinks

manufacturer, its bottler and

distributor to pay Rs one lakh in

damages to a consumer who found

impurities in a bottle of soft drink that

he had bought.

Chandrashekhar Paradkar, a

resident of Shankar Nagar area here,

filed a complaint with the Nagpur

district Consumer Grievances Fourm

seeking compensation of Rupees four

lakh after he found some solid objects

inside a sealed bottle of a soft drink.

He had bought six various brands of

the soft drink— two bottles each of

Mazaa, Coca Cola and Sprite from a

shop near his house.

Based on that, the District Forum

earlier gave a ruling after finding Coca

Cola, its bottlers Superior Drinks Pvt.

Ltd. and distributors Balaji Sales guilty

of supplying drinks unfit for human

consumption, which was upheld by the

State Consumer Commission.

The District Forum had found

objects resembling pieces of mosquito

repellent mats floating inside the sealed

bottle. Having conducted the tests by a

Public Health Laboratory, they found

the drink unfit for human consumption.

The District Forum came down

heavily on the company saying

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in unscrupulous, exploitative andunfair trade practices like defectiveand unsafe products, adulteration,false and misleading advertising,hoarding, black-marketing etc. Thismeans that a consumer might beexposed to risks due to unsafeproducts, might suffer from bad healthdue to adulterated food products,might be cheated because ofmisleading advertisements or sale ofspurious products, might have to paya higher price when sellers engage inoverpricing, hoarding or black-marketing etc. Thus, there is a needfor providing adequate protection toconsumers against such practices ofthe sellers. Let us now discuss theimportance of consumer protection.

IMPORTANCE OF CONSUMER

PROTECTION

Consumer Protection has a wideagenda. It not only includes educatingconsumers about their rights andresponsibilities, but also helps ingetting their grievances redressed. Itnot only requires a judicial machinery

for protecting the interests of

consumers but also requires the

consumers to get together and form

The above case is just one of theexamples of the many problems thatconsumers might have to face in thepurchase, use and consumption ofgoods and services. The case alsohighlights the need for an appropriatelegal protection to be provided toconsumers to protect them fromvarious forms of exploitation from theseller. Have you ever thought whatwould be the plight of consumers ifadequate protection is not provided tothem? Can the present day businessesafford to ignore the interests ofconsumers? The area of consumerprotection has emerged as a veryimportant area of study havingsignificance for both the consumersand businesses alike.

INTRODUCTION

A consumer is said to be a king in afree market economy. The earlierapproach of caveat emptor, whichmeans “Let the buyer beware”, hasnow been changed to caveat venditor(“Let the seller beware”). However, withgrowing competition and in an attemptto increase their sales and marketshare, manufacturers and service-providers may be tempted to engage

multinational giants would not be allowed to have a free run and exploit a poor country

like India by manufacturing and marketing sub-standard products.

While giving its ruling, the District Forum relied upon the historic Donald versus

Stevenson case, wherein heavy compensation had been awarded to a consumer,

who had found rusted nails inside a bottle of ginger beer.

Source: http://www.indlaw.com/guest/news

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themselves into consumer associations

for protection and promotion of their

interests. At the same time, consumer

protection has a special significance for

businesses too.

From Consumers’ point of view

The importance of consumerprotection from the consumers’ pointof view can be understood from thefollowing points:

(i) Consumer Ignorance: In the lightof widespread ignorance ofconsumers about their rights andreliefs available to them, it becomes

necessary to educate them about thesame so as to achieve consumerawareness.

(ii) Unorganised Consumers: Con-sumers need to be organised in theform of consumer organisations whichwould take care of their interests.Though, in India, we do have consumerorganisations which are working in thisdirection, adequate protection isrequired to be given to consumers tillthese organisations become powerfulenough to protect and promote theinterests of consumers.

(iii) Widespread Exploitation ofConsumers: Consumers might be

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exploited by unscrupulous, exploitativeand unfair trade practices like defectiveand unsafe products, adulteration,false and misleading advertising,hoarding, black-marketing etc.Consumers need protection againstsuch malpractices of the sellers.

From the point of view ofBusiness

A business must also lay emphasis onprotecting the consumers and adequatelysatisfying them. This is importantbecause of the following reasons:

(i) Long-term Interest of Business:Enlightened businesses realise that itis in their long-term interest to satisfytheir customers. Satisfied customersnot only lead to repeat sales but alsoprovide good feedback to prospectivecustomers and thus, help inincreasing the customer-base ofbusiness. Thus, business firms shouldaim at long-term profit maximisationthrough customer satisfaction.

(ii) Business uses Society’sResources: Business organisations useresources which belong to the society.They, thus, have a responsibility tosupply such products and render suchservices which are in public interestand would not impair public confidencein them.

(iii) Social Responsibility: A businesshas social responsibilities towardsvarious interest groups. Businessorganisations make money by sellinggoods and providing services toconsumers. Thus, consumers form animportant group among the many

stakeholders of business and likeother stakeholders, their interest hasto be well taken care of.

(iv) Moral Justification: It is the moralduty of any business to take care ofconsumer’s interest and avoid any formof their exploitation. Thus, a businessmust avoid unscrupulous, exploitativeand unfair trade practices like defectiveand unsafe products, adulteration,false and misleading advertising,hoarding, black marketing etc.

(v) Government Intervention: Abusiness engaging in any form ofexploitative trade practices wouldinvite government intervention oract ion . Th is can impair andtarnish the image of the company.Thus, it is advisable that businessorganisations voluntarily resort tosuch practices where the customers’needs and interests will well be takencare of.

In view of the above, the governmentof India has enacted several regulationsdesigned to provide adequate protectionto consumers. We shall now discusssome of these regulations.

LEGAL PROTECTION TO CONSUMERS

The Indian legal framework consists ofa number of regulations which provideprotection to consumers. Some of theseregulations are as under.

1. The Consumer Protection Act,1986: The Consumer Protection Act,1986 seeks to protect and promote theinterests of consumers. The Actprovides safeguards to consumers

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against defective goods, deficientservices, unfair trade practices, andother forms of their exploitation. TheAct provides for the setting up of athree-tier machinery, consisting ofDistrict Forums, State Commissionsand the National Commission. It alsoprovides for the formation of consumerprotection councils in every Districtand State, and at the apex level.

2. The Contract Act, 1982: The Actlays down the conditions in which thepromises made by parties to a contractwill be binding on each other. The Actalso specifies the remedies availableto parties in case of breach of contract.

3. The Sale of Goods Act, 1930: TheAct provides some safeguards andreliefs to the buyers of the goods incase the goods purchased do notcomply with express or impliedconditions or warranties.

4. The Essential Commodities Act,1955: The Act aims at controllingproduction, supply and distribution ofessential commodities, checkinginflationary trend in their prices andensuring equal distribution ofessential commodities. The Act alsoprovides for action against anti-socialactivities of profiteers, hoarders andblack-marketers.

Protection against malpractices and exploitation

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5. The Agricultural Produce(Grading and Marking) Act, 1937:The Act prescribes grade standards foragricultural commodities and live-stock products. The Act stipulates theconditions which govern the use ofstandards and lays down theprocedure for grading, marking andpacking of agricultural produce. Thequality mark provided under the Actis known as AGMARK, an acronym forAgricultural Marketing.

6. The Prevention of FoodAdulteration Act, 1954: The Act aimsto check adulteration of food articlesand ensure their purity so as tomaintain public health.

7. The Standards of Weights andMeasures Act, 1976: The provisionsof this Act are applicable in case ofthose goods which are sold ordistributed by weight, measure ornumber. It provides protection toconsumers against the malpractice ofunder-weight or under-measure.

8. The Trade Marks Act, 1999: ThisAct has repealed and replaced the Tradeand Merchandise Marks Act, 1958. TheAct prevents the use of fraudulentmarks on products and thus, providesprotection to the consumers againstsuch products.

9. The Competition Act, 2002: ThisAct has repealed and replaced theMonopolies and Restrictive TradePractices Act, 1969. The Act providesprotection to the consumers in caseof practices adopted by business firmswhich hamper competition in themarket.

10. The Bureau of Indian StandardsAct, 1986: The Bureau of IndianStandards has been set up under theAct. The Bureau has two majoractivities: formulation of qualitystandards for goods and theircertification through the BIS certificationscheme. Manufacturers are permittedto use the ISI mark on their productsonly after ensuring that the goodsconform to the prescribed qualitystandards. The Bureau has also setupa grievance cell where consumers canmake a complaint about the qualityof products carrying the ISI mark.

The most important of theseregulations is the ConsumerProtection Act which provides for sixconsumer rights and helps consumersin getting their grievances redressedfor any shortcoming in the goodspurchased or services availed.

THE CONSUMER PROTECTION ACT,1986

The Consumer Protection Act (CPA)seeks to protect and promote theconsumers’ interest through speedyand inexpensive redressal of theirgrievances.

The scope of the Act is very wide.It is applicable to all types ofundertakings, big and small, whetherin the private or public sector, or inthe co-operative sector, whether amanufacturer or a trader, and whethersupplying goods or providing services.

The Act confers certain rights toconsumers with a view to empoweringthem and to protect their interests.

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CONSUMER RIGHTS

The Consumer Protection Act providesfor six rights of consumers. Theconsumer protection councils set upunder the Act are intended to promoteand protect the various rights ofconsumers. These rights include thefollowing:

1. Right to Safety: The consumer hasa right to be protected against goodsand services which are hazardous tolife and health. For instance, electricalappliances which are manufacturedwith substandard products or do notconform to the safety norms mightcause serious injury. Thus, consumersare educated that they should useelectrical appliances which are ISImarked as this would be an assuranceof such products meeting qualityspecifications.

2. Right to be Informed: Theconsumer has a right to have completeinformation about the product heintends to buy including itsingredients, date of manufacture,price, quantity, directions for use, etc.It is because of this reason that thelegal framework in India requires themanufactures to provide suchinformation on the package and labelof the product.

3. Right to Choose: The consumerhas the freedom to choose from avariety of products at competitiveprices. This implies that the marketersshould offer a wide variety of productsin terms of quality, brand, prices, size,etc. and allow the consumer to makea choice from amongst these.

4. Right to be Heard: The consumerhas a right to file a complaint and tobe heard in case of dissatisfaction witha good or a service. It is because of thisreason that many enlightened businessfirms have set up their own consumerservice and grievance cells. Manyconsumer organisations are alsoworking towards this direction andhelping consumers in redressal of theirgrievances.

5. Right to seek Redressal: Theconsumer has a right to get relief incase the product or service falls shortof his expectations. The ConsumerProtection Act provides a number ofreliefs to the consumers includingreplacement of the product, removalof defect in the product, compensationpaid for any loss or injury suffered bythe consumer, etc.

6. Right to Consumer Education: Theconsumer has a right to acquireknowledge and to be a well informedconsumer throughout life. He shouldbe aware about his rights and thereliefs available to him in case of aproduct or service falling short of hisexpectations. Many consumerorganisations and some enlightenedbusinesses are taking an active part ineducating consumers in this respect.

The Consumer Protection Act byconferring these rights on theconsumers empowers them to fightagainst any unscrupulous, exploitativeand unfair trade practices adopted bysellers. The Box on East Delhi eateryshows how a restaurant owner wasfined for overpricing bottled water.

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Consumer rights, by themselves,cannot be effective in achieving the

objective of consumer protection.Consumer protection can, in effect, be

achieved only when the consumers alsounderstand their responsibilities.

CONSUMER RESPONSIBILITIES

A consumer should keep in mind the

following responsibilities whilepurchasing, using and consuming

goods and services.

(i) Be aware about various goodsand services available in themarket so that an intelligent andwise choice can be made.

(ii) Buy only standardised goods asthey provide quality assurance.Thus, look for ISI mark onelectrical goods, FPO mark on foodproducts, Hallmark on jewelry etc.

(iii) Learn about the risks associatedwith products and services, followmanufacturer’s instructions anduse the products safely.

(iv) Read labels carefully so as to haveinformation about prices, netweight, manufacturing and expirydates, etc.

(v) Assert yourself to ensure that youget a fair deal.

(vi) Be honest in your dealings.Choose only from legal goods andservices and discourageunscrupulous practices likeblack-marketing, hoarding etc.

(vii) Ask for a cash memo on purchaseof goods or services. This wouldserve as a proof of the purchasemade.

(viii) File a complaint in an appropriateconsumer forum in case of a

Eatery fined for Overpricing Bottled Water

A restaurant owner in east Delhi has been directed to pay a fine of Rs. 5,000 to acustomer who was asked to shell out Rs. 34 for a water bottle which had a maximumretail price (MRP) of Rs.12. The fine comes at a time when consumer courts areturning the heat on shop-owners who overcharge. In a recent landmark decision, thestate consumer commission had slapped a fine of Rs. 50,000 on a cineplex for similarmalpractice. Goel was awarded the compensation by east district consumer forumpresident and members directing Zaika Bazaar, Karkardooma Complex, to compensateGoel for overcharging. The Forum said: “The present complaint is covered by thejudgment of the state consumer commision in case of Nirulas vs Ankit Jain in whichit said no trader or service provider can charge more price than an item’s MRP printedon the packed item, if delivered packed”. Ordering the restaurant owner to discontinuethe malpractice, the forum said charging higher amount than MRP, if delivered inpacked form, was against the law of the land. Goel had bought a bottle of Aquafinawater from the restaurant in November last year and was asked to pay Rs.34 for it,including a VAT of Rs. 4, when the bottle had a MRP of Rs.12 printed on it.

Source: www.corecentre.org

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shortcoming in the quality of goodspurchased or services availed. Donot fail to take an action even whenthe amount involved is small.

(ix) Form consumer societies whichwould play an active part ineducating consumers andsafeguarding their interests.

(x) Respect the environment. Avoidwaste, littering and contributingto pollution.

A consumers’ awareness about hisrights and responsibilities is just oneof the ways in which the objective ofconsumer protection can be achieved.There are other ways in which thisobjective may be achieved.

WAYS AND MEANS OF CONSUMER

PROTECTION

There are various ways in which theobjective of consumer protection canbe achieved.

1. Self Regulation by Business:Enlightened business firms realisethat it is in their long-term interest toserve the customers well. Sociallyresponsible firms follow ethicalstandards and practices in dealingwith their customers. Many firms haveset up their customer service andgrievance cells to redress the problemsand grievances of their consumers.

2. Business Associations: Theassociations of trade, commerce and

Marks indicating quality in different products

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business like Federation of IndianChambers of Commerce of India(FICCI) and Confederation of IndianIndustries (CII) have laid down theircode of conduct which lay down fortheir members the guidelines in theirdealings with the customers.

3. Consumer Awareness: A consumer,who is well informed about his rightsand the reliefs available to him, wouldbe in a position to raise his voiceagainst any unfair trade practices orunscrupulous exploitation. In additionto this, an understanding of hisresponsibilities would also enable aconsumer to safeguard his interests.

4. Consumer Organisations:Consumer organisations play animportant role in educating consumersabout their rights and providingprotection to them. These organisationscan force business firms to avoidmalpractices and exploitation ofconsumers.

5. Government: The government canprotect the interests of the consumersby enacting various legislations. Thelegal framework in India encompassesvarious legislations which provideprotection to consumers. The mostimportant of these regulations is theConsumer Protection Act, 1986. The

Consumer Awareness

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Act provides for a three-tier machineryat the district, state and national levelsfor redressal of consumer grievances.The redressal mechanism under thisthree-tier machinery has beenexplained hereunder.

REDRESSAL AGENCIES UNDER THE

CONSUMER PROTECTION ACT

For the redressal of consumer

grievances, the Consumer Protection

Act provides for setting up of a three-

tier enforcement machinery at the

District, State, and the National levels,

known as the District Consumer

Dispute Redressal Forum, State

Consumer Disputes Redressal

Commission, and the National

Consumer Disputes Redressal

Commission. They are briefly referred

to as the ‘District Forum’, ‘State

Commission’, and the ‘National

Commission’, respectively. While the

National Commission is set up by the

Central Government, the State

Commissions and the District Forums

are set up, in each State and District,respectively, by the State Governmentconcerned. The Figure on redressalagencies shows the hierarchicalstructure of this three-tire machinery.

Before studying the set-up andfunctioning of these redressal agencieslet see how the Consumer ProtectionAct defines a consumer and who canfile a complaint under the ConsumerProtection Act.

Consumer: A ‘consumer’ is generallyunderstood as a person who uses orconsumes goods or avails of any service.Under the Consumer Protection Act, aconsumer is defined as:

(a) Any person who buys any goods fora consideration, which has beenpaid or promised, or partly paid andpartly promised, or under anyscheme of deferred payment. Itincludes any user of such goods,when such use is made with theapproval of the buyer, but does notinclude a person who obtains goodsfor re-sale or any commercialpurpose.

National Commission

State Commission

District Forum

Redressal Agencies under the Consumer Protection Act

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(b) Any person who hires or avails ofany service, for a considerationwhich has been paid or promised, orpartly paid and partly promised, orunder any system of deferredpayment. It includes any beneficiaryof services when such services areavailed of with the approval of theperson concerned, but does notinclude a person who avails of suchservices for any commercial purpose.

Who can file a complaint?: Acomplaint before the appropriateconsumer forum can be made by:

(i) Any consumer;

(ii) Any registered consumers’association;

(iii) The Central Government or anyState Government;

(iv) One or more consumers, on behalfof numerous consumers havingthe same interest; and

(v) A legal heir or representative of adeceased consumer.

Let us now see how the consumergrievances are redressed by the three-tire machinery under the ConsumerProtection Act.

1. District Forum: The District Forumconsists of a President and two othermembers, one of whom should be awoman. They all are appointed by theState Government concerned. Acomplaint can to be made to theappropriate District Forum when thevalue of the goods or services inquestion, along with the compensationclaimed, does not exceed Rs. 20 lakhs.On receiving the complaint, the District

Forum shall refer the complaint to theparty against whom the complaint isfiled. If required, the goods or a samplethereof, shall be sent for testing in alaboratory. The District Forum shallpass an order after considering the testreport from the laboratory and hearingto the party against whom thecomplaint is filed. In case the aggrievedparty is not satisfied with the order ofthe District Forum, he can appealbefore the State Commission within 30days of the passing of the order.

2. State Commission: Each StateCommission consists of a Presidentand not less than two other members,one of whom should be a woman. Theyare appointed by the State Governmentconcerned. A complaint can to be madeto the appropriate State Commissionwhen the value of the goods or servicesin question, along with thecompensation claimed, exceeds Rs. 20lakhs but does not exceed Rs. 1 crore.The appeals against the orders of aDistrict Forum can also be filed beforethe State Commission. On receiving thecomplaint, the State Commission shallrefer the complaint to the party againstwhom the complaint is filed. If required,the goods or a sample thereof, shall besent for testing in a laboratory. TheState Commission shall pass an orderafter considering the test report fromthe laboratory and hearing to the partyagainst whom the complaint is filed.In case the aggrieved party is notsatisfied with the order of the StateCommission, he can appeal before theNational Commission within 30 daysof the passing of the order.

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3. National Commission: TheNational Commission consists of aPresident and at least four othermembers, one of whom should be awoman. They are appointed by theCentral Government. A complaint canto be made to the National Commissionwhen the value of the goods or servicesin question, along with thecompensation claimed, exceeds Rs. 1crore. The appeals against the ordersof a State Commission can also be filedbefore the National Commission. Onreceiving the complaint, the NationalCommission shall refer the complaintto the party against whom thecomplaint is filed. If required, the goodsor a sample thereof, shall be sent fortesting in a laboratory. The NationalCommission shall pass an order afterconsidering the test report from thelaboratory and hearing to the partyagainst whom the complaint is filed.

An order passed by the NationalCommission in a matter of its originaljurisdiction is appealable before theSupreme Court. This means that onlythose appeals where the value of goodsand services in question, along withthe compensation claimed, exceeded Rs.1 crore and where the aggrieved partywas not satisfied with the order of theNational Commission, can be taken tothe Supreme Court of India. Moreover,in a case decided by the District Forum,the appeal can be filed before the StateCommission and, thereafter, the orderof the State Commission can bechallenged before the NationalCommission and no further.

Relief Available

If the consumer court is satisfied aboutthe genuineness of the complaint, itcan issue one or more of the followingdirections to the opposite party.

(i) To remove the defect in goods ordeficiency in service.

(ii) To replace the defective productwith a new one, free from anydefect.

(iii) To refund the price paid for theproduct, or the charges paid forthe service.

(iv) To pay a reasonable amount ofcompensation for any loss orinjury suffered by the consumerdue to the negligence of theopposite party.

(v) To pay punitive damages inappropriate circumstances.

(vi) To discontinue the unfair/restrictive trade practice and notto repeat it in the future.

(vii) Not to offer hazardous goods forsale.

(viii) To withdraw the hazardous goodsfrom sale.

(ix) To cease manufacture ofhazardous goods and to desistfrom offering hazardous services.

(x) To pay any amount (not less than5% of the value of the defectivegoods or deficient servicesprovided), to be credited to theConsumer Welfare Fund or anyother organisation/person, to beutilised in the prescribed manner.

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(xi) To issue corrective advertisement to

neutralise the effect of a misleadingadvertisement.

(xii) To pay adequate costs to theappropriate party.

Brings out some decided caseswhere a complaint was filed in a

consumer court for defective goodsand deficient services.

ROLE OF CONSUMER ORGANISATIONS

AND NGOS

In India, several consumerorganisations and non-governmentalorganisations (NGOs) have been setup for the protection and promotionof consumers’ interests. Non-governmental organisations are non-profit organisations which aim at

Some Decided Cases

Under the Consumer Protection Act, a consumer can file a complaint against themanufacturers or sellers for any defective good supplied to him or any deficientservices rendered to him.

In Jose Philip Mampillil vs. M/s Premier automobiles Ltd. & Anr, a diesel carpurchased by the appellant (consumer) was found defective. The defects in the carwere not removed by the defendants (manufacturer and dealer). The Commissionerappointed by the District Forum found a large number of defects in the car.Consequently, the District Forum directed repair of car free of cost and replacementof engine. The order was upheld by the State Commission except for the directionfor replacement of engine.

In the case of Sashikant Krishnaii Dole vs. Shikshan Prasarak Mandali, theNational Commission held that failure to amount basic safeguards in the swimmingpool amounts to deficiency in service. A school owned a swimming pool and offeredswimming facilities to the public on payment of a fee. The school conducted winterand summer training camps to train boys in swimming and for this purpose engageda coach. The plaintiffs enrolled their only son for learning swimming under theguidance of the coach. It was alleged that due to the negligence of the coach, theboy drowned and died. The school denied any responsibility on its part. The coachclaimed that he had considerable experience in coaching young boys is swimming.When the deceased was found to have been drowned, the coach immediately tookhim out of the water and removed the water from his stomach and gave him artificialrespiration and thereafter took him to a doctor. The doctor advised that the boy betaken to the nearest hospital where the boy died. The State Commission held theschool and the coach deficient in rendering service to the deceased. On appeal, theorder was upheld by the National Commission.

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promoting the welfare of people. Theyhave a constitution of their own andare free from government interference.Consumer organisations and NGOsperform several functions for theprotection and promotion of interestof consumers. These include:

(i) Educating the general publicabout consumer rights byorganising training programmes,seminars and workshops.

CERS Wins Case against Railways

In a case filed by Consumer Education and Research Society (CERS), Ahmedabad,and a senior couple, the Consumer Dispute Redressal Forum, Ahmedabad City,has held the Railways responsible for negligence and directed it to pay Rs. 2000to the couple for its mental agony and Rs. 3000 towards cost.

Mr. Man Mohan Singh and his wife Kamlesh had bought a railway journey-cum-reservation ticket at Ahmedabad for travel from New Delhi to Kanpur Centralby the Shatabdi Express on 2 December 2001. The details on the ticket, includingthe coach number, the date of journey, etc., were illegible. Hence, they wereforced to buy another ticket for journey from New Delhi to Kanpur. They appliedfor a refund for the earlier ticket but, as the Forum noted, they had to suffermuch for the purpose. In spite of the couple’s giving the Ahmedabad residentialaddress for sending the refund, the Railways sent it to their Delhi address. Theyapproached CERS for help.

CERS filed a complaint against the Railways before the Consumer DisputeRedressal Forum, Ahmedabad City, under Sections 2(1)(g) and 2(1)(o) of theConsumer Protection Act, 1986. CERS claimed that the two senior citizens hadto face mental harassment due to the deficiency in service by the Railways. TheRailways contended, among other things, that the Forum had no territorialjurisdiction after cancellation of the ticket, the couple were no more consumersin the eye of the law, the complaint was time-barred and the Railway ClaimTribunal was the proper forum to entertain the complaint about refund.

The Forum, however, observed that the couple’s difficulties amounted to theRailways’ deficiency in service and ordered it to pay Rs. 2000 to the couple forthe mental agony suffered by them and Rs. 3000 as cost. The Forum did notdecide on the amount of refund, which it said, was “to be exclusively dealt withby the Railway Claim Tribunal”.

Source: www.corecentre.org

(ii) Publishing periodicals and otherpublications to impart knowledgeabout consumer problems, legalreporting, reliefs available andother matters of interest.

(iii) Carrying out comparative testingof consumer products in accreditedlaboratories to test relative qualitiesof competing brands andpublishing the test results for thebenefit of consumers.

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(iv) Encouraging consumers tostrongly protest and take anaction against unscrupulous,exploitative and unfair tradepractices of sellers.

(v) Providing legal assistance toconsumers by way of providingaid, legal advice etc. in seekinglegal remedy.

(vi) Filing complaints in appropriateconsumer courts on behalf of theconsumers.

(vii) Taking an initiative in filing casesin consumer courts in theinterest of the general public, notfor any individual.

Some of the important consumerorganisations and NGOs engaged inprotecting and promoting consumers’interests include the following.

(i) Consumer Coordination Council,Delhi

(ii) Common Cause, Delhi

(iii) Voluntary Organisation inInterest of Consumer Education(VOICE), Delhi

(iv) Consumer Education and ResearchCentre (CERC), Ahmedabad

(v) Consumer Protection Council(CPC), Ahmedabad

(vi) Consumer Guidance Society ofIndia (CGSI), Mumbai

(vii) Mumbai Grahak Panchayat,Mumbai

(viii) Karnataka Consumer ServiceSociety, Bangalore

(ix) Consumers’ Association, Kolkata

(x) Consumer Unity and TrustSociety (CUTS), Jaipur

KEY TERMS

Consumer Protection Consumer Rights Consumer Responsibilities

Redressal of grievance Grades Standards

SUMMARY

Importance of Consumer Protection: From the point of consumers, consumerprotection is important because consumers are ignorant, unorganised andexploited by sellers. Consumer Protection is also important for a businessbecause (i) It is in the long-term interest of business, (ii) Business uses society’sresources, (iii) It is a social responsibility of business, (iv) It has moral justification,(v) It avoids government intervention in the functioning of business.

Legal Protection to Consumers: The Indian legal framework consists of anumber of regulations which provide protection to consumers. These include(i) The Consumer Protection Act, 1986, (ii) The Indian Contract Act, 1872,(iii) The Sale of Goods Act, 1930, (iv) The Essential Commodities Act,1955, (v) The

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Agricultural Produce (Grading and Marking) Act, 1937, (vi) The Preventionof Food Adulteration Act, 1954, (vii) The Standards of Weights and MeasuresAct, 1976, (viii) The Trade Marks Act, 1999, (ix) The Competition Act, 2002,(x) The Bureau of Indian Standards Act, 1986.

Consumer Rights: The Consumer Protection Act, 1986, provides for sixconsumer rights. These are: (i) Right to safety, (ii) Right to be informed,(iii) Right to choose, (iv) Right to be heard, (v) Right to seek redressal,(vi) Right to consumer education.

Consumer Responsibilities: In addition to exercising his rights, a consumershould also keep in mind his responsibilities while purchasing, using andconsuming goods and services.

Ways and Means of Consumer Protection: There are various ways in whichthe objective of consumer protection can be achieved. These Include (i) Selfregulation by business, (ii) Business associations, (iii) Consumer awareness,(iv) Consumer organisations, (v) Government.

Redressal Agencies under the Consumer Protection Act: The ConsumerProtection Act provides for setting up of a three-tier enforcement machineryat the District, State, and the National levels. They are referred to as the‘District Forum’, ‘State Commission’, and the ‘National Commission’. Thereare various reliefs available to a consumer under the Act. The appropriateconsumer court may pass an order for removal of defect in goods, replace adefective product, refund the price of the product, pay compensation for theloss suffered, etc.

Consumer Organisations and NGOs: In India, several consumer organisationsand non-governmental organisations (NGOs) are playing an active role inprotection and promotion of consumers’ interests.

EXERCISES

True or False

State whether the following statements are true or false.

(i) Consumer protection has a moral justification for business.

(ii) In addition to rights, a consumer also has some responsibilities.

(iii) A complaint can to be made to a District Forum when the value of thegoods or services in question, along with the compensation claimed,exceeds Rs. 20 lakhs.

(iv) The Consumer Protection Act provides for six consumer rights.

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(v) ISI is the quality certification mark used in case of food products.

(vi) Under the Consumer Protection Act, a complaint can be filed by aconsumer for a defective good and also for deficiency in service.


(i) Explain the importance of consumer protection from the point of view ofa business.

(ii) Enumerate the various Acts passed by the Government of India whichhelp in protection of consumers’ interests.

(iii) What are the responsibilities of a consumer?

(iv) Who can file a complaint in a consumer court?

(v) What kind of cases can be filed in a State Commission?

(vi) Explain the role of consumer organisations and NGOs in protecting andpromoting consumers’ interests.


(i) Explain the rights and responsibilities of a consumer.

(ii) What are various ways in which the objective of consumer protection canbe achieved? Explain the role of consumer organisations and NGOs inthis regard.

(iii) Explain the redressal mechanism available to consumers under theConsumer Protection Act, 1986.

Application based questions

(i) Visit a consumer organisation in your town. List down the variousfunctions performed by it.

(ii) Collect some newspaper cuttings of some consumer cases and the rulingsgiven therein.

Case Problem

Now, filing complaint is just a click away. Filing a complaint in a consumercourt’s going to get a lot easier by the end of this year, virtually. No matterwhich part of the country you’re in, it’s going to happen at the click of a mouse.

The project, called Confonet (Computerisation and Computer Networking ofConsumer Fora), is being executed on a turnkey basis by the NationalInformatics Centre (NIC).

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”Online registration of complaints, the government hopes, will promotee-governance, transparency, efficiency and streamlining of consumer fora,” saidan official in the consumer affairs ministry. Of Rs 48.64 crore set aside for theproject, the government has released Rs 30.56 crore so far, the official added.

”Besides software development and testing, networking and projectimplementation, integration and site preparation, it will include purchase ofhardware for all the 600 district fora, 35 state commissions and the NationalCommission,” the official said.

At present, computer systems and system software have been delivered to 25state commissions and 300 district fora — never mind the fact that it’ssometimes a long wait before the hardware is finally unpacked and set up insome of the districts. Meanwhile, training of staff, sometimes in the classroomand sometimes through e-learning sessions, are in full swing.

”But just setting up an online complaint filing system won’t ensure a strongconsumer protection movement in the country — for that we’re working onGenNext and the best way to do that is to go to schools,” the official said.

The government is, therefore, involving school children to form consumer clubsso as to involve them in various consumer welfare activities.

Part of the funding for running the club is to come from various stategovernments, with an equally matching grant from the Centre. However, anumber of state governments are yet to sanction the fund — some of theseinclude Uttar Pradesh, Madhya Pradesh and Kerala.

Source: www.economictimes.indiatimes.com

Questions

1. What new measures is the ministry of consumer affairs taking to makefiling of complaint easy?

2. What role can you, as a student, play to contribute to the cause of consumerprotection?

3. What scenario of consumer protection do you foresee when the measuresproposed in the above news report are implemented?

(Teachers are advised to help students to study judgements of various consumerforums including National Consumer Disputes Redressal Commission atwww.ncdrc.nic.in. This initiative will help the pupils to understand the role ofconsumer protection in India better. Various published material can also beused. Consumer clubs in schools can also help the students in this regard.)

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LEARNING OBJECTIVES


Ø state the meaning of theterms, ‘entrepreneur,’‘entrepreneurship’ and ‘enterprise’;

Ø distinguish betweenentrepreneurship andmanagement and discuss thecharacteristics ofentrepreneurship;

Ø explain the need forentrepreneurship;

Ø describe the roles and functionsof the entrepreneurs;

Ø identify the entrepreneurialcompetencies;

Ø explain and follow the processof entrepreneurshipdevelopment; and

Ø identify the values, attitudesand motivation for a plunge inentrepreneurship.

CHAPTER

13ENTREPRENEURSHIP

DEVELOPMENT

SEEDS OF VIRCHOW

Until 1981 Narayan Reddy, M.Sc.Organic Chemistry, had been workingfor a pharmaceutical company where hehad developed a molecule. He wascontemplating commercial utilisation ofthat molecule by setting up a small-scaleunit – much smaller than what heactually started. Actually, he met twomedicos, who had just returned from aGulf country and were looking for someproductive avenue for investment oftheir savings (remember the Gulfcrisis?), Reddy’s idea appealed to them.Thus, the willing entrepreneurs met–where there is a will there is a way–and the seeds for the venture weresown. After a detailed study of thetechnical, economic, commercial andfinancial feasibility of the idea ofmanufacturing a bulk drug from themolecule, ‘Virchow Laboratories’ wasstarted in 1982 as a SSI with an initialinvestment of Rs. 28 lakhs – Rs. 8 lakhin the form of equal contribution by thethree promoters and Rs. 20 lakhfunding from the Andhra PradeshState Finance Corporation (APSFC).Project implementation was even morechallenging as he set out to acquire land,construct factory, purchase equipment,negotiate with suppliers, potentialcustomers and obtain environmental,drug control and other clearances.Initially, it was he who acted as the pivotof the enterprise wheel. In the course oftime, a strong managerial team was putin place and thanks to persistentemphasis on good management

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And, in the process, entrepreneurshipbecomes crucial for overall economicdevelopment of a nation.

Given its important role in theoverall scheme of economic development,it is interesting to note that notmany persons opt for a career inentrepreneurship. Traditionally, it wasbelieved that entrepreneurs are born.

No society can wait for the chanceof ‘birth’ of entrepreneurs to pursue itsdevelopmental plans. In fact, plans foreconomic development would bearlittle fruit unless entrepreneurshipdevelopment is regarded as a deliberateprocess of making people aware ofentrepreneurship as a career at an earlyage and creating situations where theymay actually make a choice to becomeentrepreneurs.

When you make this choice, youbecome a job-provider rather than ajob-seeker, besides enjoying a host ofother financial and psychologicalrewards. Taking to entrepreneurship issurely more a matter of aspiring tobecome an entrepreneur rather asbeing born as one.

INTRODUCTION

Entrepreneurship is the process ofsetting up one’s own business as distinctfrom pursuing any other economicactivity, be it employment or practisingsome profession. The person whoset-up his business is called anentrepreneur. The output of the process,that is, the business unit is called anenterprise. You may invoke ‘subject-verb-object (SVO)’ relationship in Englishgrammar to clearly understand theseterms. (See Figure on SVO Analogy)

It is interesting to note thatentrepreneurship besides providingself-employment to the entrepreneur isresponsible to a great extent for creationand expansion of opportunities for theother two economic activities, that is,employment and profession. (Can youthink why and how?) Further, eachbusiness gives rise to other businesses–the suppliers of raw materials andcomponents, service providers (be ittransport, courier, telecom, distributormiddlemen and advertising firms,accounting firms and advocates etc.

practices, Virchow emerged as the world’s largest and the best producer of the basicdrug from the chosen molecule. In fact, web search on ‘Virchow Laboratories’ takesyou to the home page saying “Welcome to Virchow Group of Companies”, the groupcomprising 4 companies with Virchow Laboratories being the flagship company.

Entrepreneur Entrepreneurship Enterprise

The Person/The Actor The Process/The Act The OutcomeSubject Verb Object

SVO Analogy

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THE CONCEPT OF ENTREPRENEURSHIP

You are aware that entrepreneurshipis regarded as one of the four majorfactors of production, the other threebeing land, labour and capital.However, it should surprise you thatas regards its French origin, the term‘entrepreneurship’ (derived from theverb ‘entreprende’ meaning ‘toundertake’) pertained not to economicsbut to undertaking of militaryexpeditions. So is true of many termsin management such as strategy (acourse of action to beat the competition,the ‘enemy’) and logistics (movement ofmen and machines for timelyavailability), etc. Historically, as warsare followed by economic recons-truction, it should be no surprise thatmilitary concepts are used ineconomics and management. It may be

pointed out that whereas the wars arerare and far between, in today’scompetitive world, entrepreneurs wagewars everyday. There is a tremendouspressure to continually develop newproducts, explore new markets, updatetechnology and devise innovative waysof marketing and so on.

The term ‘entrepreneur’ was firstintroduced in economics by the early18th century French economist RichardCantillon. In his writings, he formallydefined the entrepreneur as the “agentwho buys means of production at certainprices in order to sell the produce atuncertain prices in the future”. Since thena perusal of the usage of the term ineconomics shows that entrepreneurshipimplies risk/uncertainty bearing;coordination of productive resources;introduction of innovations; and theprovision of capital.

Entrepreneurship: All in your Hands

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We would like to define entrepre-neurship as a systematic, purposefuland creative activity of identifying aneed, mobilising resources andorganising production with a view todelivering value to the customers,returns for the investors and profits forthe self in accordance with the risksand uncertainties associated withbusiness. This definition points to certaincharacteristics of entrepreneurship thatwe turn our attention to.

CHARACTERISTICS OF ENTREPRENEURSHIP

In the SVO formulation of the conceptsof entrepreneur, entrepreneurship andenterprise, we saw that entrepreneur-ship is about the process of setting upa business. One cannot help butmarvel at the beauty of the process: how

does one first of all decide to choose ownbusiness as a career; how does onesense a market opportunity; how doesone muster up courage to embarkupon it, and mobilise the requisiteresources, etc.; so much so thatrecourse to entrepreneurship, incommon parlance, is considered as anexclusive preserve of a few giftedindividuals. In the following paragraphs,our effort would be to establishentrepreneurship as a career that youshould aspire for. Remember, resourcesmay be limited, aspiration need not be.So, you can aspire for somethinggreater, bigger than your present statusand resources. And start today.Remember, aspiration means desiremultiplied by action.

1. Systematic Activity: Entrepre-neurship is not a mysterious gift or

Nurturing Success

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charm and something that happensby chance! It is a systematic, step-by-step and purposeful activity. It hascertain temperamental, skill and otherknowledge and competency requirementsthat can be acquired, learnt anddeveloped, both by formal educationaland vocational training as well as byobservation and work experience. Suchan understanding of the process ofentrepreneurship is crucial for dispellingthe myth that entrepreneurs are bornrather than made.

2. Lawful and Purposeful Activity:The object of entrepreneurship is lawfulbusiness. It is important to take noteof this as one may try to legitimiseunlawful actions as entrepreneurshipon the grounds that just asentrepreneurship entails risk, so doesillicit businesses. Purpose of entrepre-neurship is creation of value forpersonal profit and social gain.

3. Innovation: From the point ofview of the firm, innovation may be costsaving or revenue-enhancing. If it doesboth it is more than welcome. Even if itdoes none, it is still welcome asinnovation must become a habit!

Entrepreneurship is creative in thesense that it involves creation of value.You must appreciate that in theabsence of entrepreneurship ‘matter’does not become a “resource.” Bycombining the various factors ofproduction, entrepreneurs producegoods and services that meet the needsand wants of the society. Everyentrepreneurial act results in incomeand wealth generation. Even wheninnovations destroy the existing

industries, for example, zerox machinesdestroyed carbon paper industry,mobile telephony threatens landline/basic telephony, net gains accruing tothe economy lend such entrepreneurialactions as commendable as the acts ofcreative destruction.

Entrepreneurship is creative alsoin the sense that it involvesinnovation- introduction of newproducts, discovery of new marketsand sources of supply of inputs,technological breakthroughs as well asintroduction of newer organisationalforms for doing things better, cheaper,faster and, in the present context, in amanner that causes the least harm tothe ecology/environment. It is possiblethat entrepreneurs in developingcountries may not be pioneering/innovative in introducing path-breaking, radical innovations. Theymay be the first or second adopters oftechnologies developed elsewhere.That does not make their achievementsmall. For imitating technologies fromdeveloped world to the indigenoussetting is quite challenging. A ladyentrepreneur wanting to introducethermal pads for industrial heatingfaced tremendous reluctance form theowners of chemical and sugar millsdespite the established superiority ofher products over the conventionalheating of the vessels by burning ofwood/coke or using LPG. Moreover,there is no need to suffer from “it wasnot invented here” complex– there isno need to reinvent the wheel. Theglobal electronics major, Sony did notinvent the transistor! It used the

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transistor to build entertainmentproducts that are world leaders.

4. Organisation of Production:Production, implying creation of form,place, time personal utility, requiresthe combined utilisation of diversefactors of production, land, labour,capital and technology. Entrepreneur,in response to a perceived businessopportunity mobilises these resourcesinto a productive enterprise or firm.It may be pointed out that theentrepreneur may not be possessingany of these resources; he may justhave the ‘idea’ that he promotes amongthe resource providers. In an economywith a well-developed financial system,he has to convince just the fundinginstitutions and with the capital soarranged he may enter into contractsof supply of equipment, materials,utilities (such as water and electricity)and technology. What lies at the coreof organisation of production is theknowledge about availability andlocation of the resources as well as theoptimum way to combine them. Anentrepreneur needs negotiation skillsto raise these in the best interests ofthe enterprise. Organisation ofproduction also involves productdevelopment and development of themarket for the product. Besides,entrepreneur may be required todevelop even the sources of supply ofrequisite inputs. For example, whetherit is a matter of putting together anautomobile manufacturing unit ormanufacture of burger/pizza, besidescultivating a market and developingproducts to suit its tastes and

preferences, there would be a need todevelop a pool of suppliers of thediverse components or elements thatgo into their manufacture.

5. Risk-taking: As the entrepreneurcontracts for an assured supply of thevarious inputs for his project, he incursthe risk of paying them off whether ornot the venture succeeds. Thus,landowner gets the contracted rent,capital providers gets the contractedinterest, and the workforce gets thecontracted wages and salaries.However, there is no assurance of profitto the entrepreneur.

It may be pointed out that thepossibility of absolute ruin may be rareas the entrepreneur does everythingwithin his control to de-risk thebusiness. For example he may enterinto prior contract with the customersof his production. So much so that hemay just be contract manufacturer ormarketer of someone else’s products!What is generally implied by risk-taking is that realised profit may beless than the expected profit.

It is generally believed thatentrepreneurs take high risks. Yes,individuals opting for a career inentrepreneurship take a bigger riskthat involved in a career in employmentor practice of a profession as there isno “assured” payoff. (See Box above)In practice, for example, when a personquits a job to start on his own, he triesto calculate whether he or she wouldbe able to earn the same level of incomeor not. To an observer, the risk ofquitting a well-entrenched andpromising career seems a “high” risk,

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but what the person has taken is acalculated risk. The situation issimilarly to a motorcyclist in the ‘ringof death’ or a trapeze artist in circus.While the spectators are in the awe ofthe high-risk, the artists have taken acalculated risk given their training,skills, and of course, confidence anddaring. It is said that the entrepreneursthrive on circumstances where oddsfavouring and against success areaeven, that is 50:50 situations. They areso sure of their capabilities that theyconvert 50% chances into 100%success. They avoid situations withhigher risks as they hate failure asanyone would do; they dislike lower

risk situations as business ceases tobe a game/fun! Risk as such morethan a financial stake, becomes a matterof personal stake, where less thanexpected performance causesdispleasure and distress.

The characteristics of entrepreneur-ship discussed as above apply indiverse contexts, so does the usageof the term, viz., Agricultural/RuralEntrepreneurship, Industrial entrepre-neurship, Technopreneurship, Netpre-neurship, Green/Environmental orEcopreneurship, Intra-corporate/firmor Intrapreneusrhip and Socialentrepreneurship. In fact, entrepre-neurship has come to be regarded as a

Understanding Entrepreneurial Returns and Risks

Entrepreneurial returns are based on a mathematical expectation, E (Ri) where

the subscript ‘i’ shows that there are a number of possible rates of returnfrom a business decision, say, 20%, 18%, 17% and 15%. Actually, there maybe quite a large distribution of alternative returns from an investment decision,we have taken just 4 observations to keep it simple. Supposing all these returnsare equally likely, then E (R

i) would be the simple average of these returns.

That is, E (Ri) = φ = 20+18+17+15/4= 17.5%. In other words, the expected

returns from the entrepreneurial decision in this case are 17.5 %. Risk canbe measured in terms of a measure of variation around this expectation, moreprecisely it is the standard deviation of the distribution of returns or ó

Ri. In

this case it works out be 1.8 %. In other words, actual or realised returns maydeviate from expected returns to the extent of 1.8%. Clearly, higher the valueof standard deviation, larger the risk. It is often said that higher the riskgreater the returns. What this means is as under:(a) for a given risk, a rational person would prefer a higher than or equal to

the expected returns.(b) for a given return, a rational person would prefer a lower risk.(c) should the risk increase, there should be at least a proportional increase

in returns.(d) because the risk runs either ways, that is, realised returns may be more

or less that the expected returns, entrepreneurs who are incorrigiblyoptimistic, tend to believe that variation would only be one-sided, that is,on the higher side.

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‘type of behaviours’, whereby one,(i) rather than becoming a part of theproblem, proactively tries to solve it;(ii) uses personal creativity and intellectto develop innovative solutions;(iii) thinks beyond resources presentlycontrolled in exploiting the emergingopportunities or attending to theimpending problems; (iv) has theconviction to convince others of one’sideas and seek their commitmenttowards the project; and (v) has thecourage of heart to withstandadversities, persist despite setbacksand be generally optimistic.

RELATIONSHIP BETWEEN

ENTREPRENEURSHIP AND MANAGEMENT

Entrepreneurship is about businessstart-ups and renewals. That is, itappears at the time of starting a newbusiness, disappears for some time inthe course of stabilising the venture asan on-going business and reappears incase there is a need for introducingchanges in product, market, technology,structure and so on. In fact, it is said thateveryone is an entrepreneur when heactually ‘carries out new combinations,’and loses that character as soon as hehas built up his business, when hesettles down to running it as other peoplerun their businesses. In developedcountries, the distinction between theentrepreneurial focus on start-ups andmanagerial focus on routine is so sharpthat it is argued that once the projecthas reached a level of maturity, theentrepreneurs must move out and themanagers must come in.

In developing countries, however, theconcept of owner-manager seems moreapt for entrepreneurship as theentrepreneur remains attached even tothe day-to-day operations of the venture.In fact, their lacking in managerial skillsis often forwarded as the cause ofbusiness failures. Just as managers areexpected to play entrepreneurial roles inthe times of need, likewise theentrepreneurs must also demonstratemanagerial abilities for the success oftheir ventures. Irrespective of whether theentrepreneurs pave way for the managersor they themselves assume themanagerial responsibilities, it is possibleto distinguish between the termsentrepreneurship and management. (Seethe table on next page)

NEED FOR ENTREPRENEURSHIP

Every country, whether developed ordeveloping, needs entrepreneurs.Whereas, a developing country needsentrepreneurs to initiate the process ofdevelopment, the developed one needsentrepreneurship to sustain it. In thepresent Indian context, where on theone hand, employment opportunitiesin public sector and large-scale sectorare shrinking, and on the other,vast opportunities arising fromglobalisation are waiting to be exploited;entrepreneurship can really take Indiato the heights of becoming a supereconomic power. (See the Box entitled‘India Needs Entrepreneurs’)

Studies by Global Entrepre-neurship Monitor, a research programeminvolving annual assessment of the

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Differences between Entrepreneurship and Management

S. Basis of Differentiation Entrepreneurship ManagementNo.

1. Focus Business start-up Ongoing operations ofan existing business

2. Resource orientation The entrepreneur A manager isdoes not feel constrained by theconstrained by resources at hisresource. disposalEntrepreneurmobilises theresources

3. Approach to the task Informal Formal

4. Primary motivation Achievement Power

5. Status vis-à-vis the Owner Employeeenterprise

6. Primary economic reward Profit Salary

7. Innovation orientation Challenges the Maintains thestatus quo, that status quois, the existing

8. Risk orientation Risk-taker Risk-averse

9. Approach to decision- Driven by inductive Driven by deductivemaking logic and personal logic and research

courage anddetermination

10. Scale of operations Small business Large business

11. Primary skill requirement Opportunity Organising, systemsspotting, initiative, design and operatingresource procedures, peoplenegotiation management

12. Specialisation orientation Generalist has to Specialistknow and do allthe tradesby himself

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national level of entrepreneurial activityacross a number of countries (visit,www.gemconsortium.org) show thatdifferences in the levels of entrepreneurialactivity account for the differences inthe level of economic growth to theextent of as much as 33%.

What is that the entrepreneurs doto affect economic development? Thisleads us to a discussion of the functionsof the entrepreneurs in relation toeconomic development. As theenterprise is the object of theirendeavour, it is also necessary that weexamine their functions in relation tothe enterprise as well.

Thus, the need for entrepre-neurship arises from the functions theentrepreneurs perform in relation to theprocess of economic development andin relation to the business enterprise.

FUNCTIONS OF ENTREPRENEURS INRELATION TO ECONOMIC DEVELOPMENT

You are aware that entrepreneurs“organise” the production process. In

the absence this function, all otherresources, namely land, labour andcapital would remain idle. They maynot be inventing/discovering theproducts, their role in commercialexploitation of the advancements inscience and technology via organisationof the productive apparatus makes theother resources productive and useful.So much so that it is said that in theabsence of entrepreneurial intervention,every plant would remain a weed andevery mineral would remain a rock.

1. Contribution to GDP: Increase inthe Gross Domestic Product or GDP isthe most common definition of economicdevelopment. You are aware that incomeis generated in the process ofproduction. So, entrepreneurs generateincome via organisation of production beit agriculture, manufacturing or services.

You are also aware that incomegenerated is distributed among thefactors of production where land getsrent, labour gets wages and salaries,capital gets interest and the residualincome accrues to the entrepreneur in

India needs Entrepreneurs

It needs them for two reasons: to capitalise on new opportunities and to createwealth and new jobs. A McKinsey and Company–Nasscom report estimates thatIndia needs at least 8,000 new businesses to achieve its target of building a $ 87billion IT sector by 2008. Similarly, in the next 10 years, 110-130 million Indiancitizens will be searching for jobs, including 80-100 million looking for their firstjobs; that’s seven times Australia’s population. This does not include disguisedunemployment of over 50% among the 230 million employed in rural India. Sincetraditional large employers – including the government and the old economy players –may find it difficult to sustain this level of employment in the future, it isentrepreneurs who will create these new jobs and opportunities.

Source: http://www.uwcsea.edu. (First published in India Today,February 2001)

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the form of profits. As rent and interestaccrue to those few who have land andcapital respectively whereas largermasses are destined to earn theirincomes via wage employment, thebiggest contribution of theentrepreneurship lies in capitalformation and generation ofemployment. This is what we turn ourattention to.

2. Capital Formation: The entrepre-neurial decision, in effect, is aninvestment decision that augments theproductive capacity of the economyand hence results in capital formation.In fact, GDP and capital formation arerelated to each other via Capital Output

Ratio (COR); more precisely IncrementalCapital Output Ratio (ICOR) thatmeasures the percentage increase incapital formation required obtaining apercentage increase in GDP. So, if acountry desires to grow @ 10.0 % p.a.and its ICOR is 2.6, then it must ensurecapital formation @ 26.0% p.a.Entrepreneurs, by investing their ownsavings and informally mobilising thesavings of their friends and relativescontribute to the process of capitalformation. These informal fundingsupplements the funds made availableby the formal means of raisingresources from banks, financialinstitutions and capital markets.

Capital Formation

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3. Generation of Employment: Everynew business is a source of employmentto people with different abilities, skillsand qualifications. As suchentrepreneurship becomes a source oflivelihood to those who do neither havecapital to earn interest on nor have theland to earn rent . In fact, what they earnis not only a livelihood or means ofsustenance but also a lifestyle forthemselves and their families as well aspersonal job satisfaction. As suchentrepreneurs touch the lives of many,directly as well as indirectly.

4. Generation of BusinessOpportunities for Others: Every newbusiness creates opportunities for thesuppliers of inputs (this is referred toas backward linkages) and themarketers of the output (what isreferred to as forward linkages). As apen manufacturer you would createopportunities for refill manufacturersas well as wholesalers and retailers ofstationery products. These immediatelinkages induce further linkages. Forexample greater opportunities for refillmanufacturers would mean expansionof business for ink manufacturers. Ingeneral, there are greater opportunitiesfor transporters, advertisers, and, so on.So, via a chain-reaction, entrepreneurshipprovides a spur to the level of economicactivity.

5. Improvement in EconomicEfficiency: You are aware thatefficiency means to have greater outputfrom the same input. Entrepreneursimprove economic efficiency by,

a. Improving processes, reducingwastes, increasing yield ,and,

b. Bringing about technical progress,that is, by altering labour-capitalratios. You are aware that if labouris provided with good implements(capital), its productivity increases.

6. Increasing the Spectrum andScope of Economic Activities:Development does not merely mean‘more’ and ‘better’ of the existing, italso and more crucially meansdiversification of economic activities–across the geographic, sectoral andtechnological scope.

You are aware that underdevelopedcountries are caught in the vicious cycleson the demand as well as supply side.Entrepreneurs penetrate into and breakthese cycles, for example, by organisingand orienting domestic production forexports. Thus, production (and therebygeneration of income) is not constrainedby the inadequacy of domestic demand.(Demand-side Vicious Cycle). In today’scontext, you are aware that India is poisedto become a manufacturing hub for theglobal markets for diverse products.

Economic development is alsoconstrained by the supply-sidepressures resulting into absence ofcapacity to meet the demand whetherdomestic or overseas. Entrepreneursmobilise local and even overseasresources to augment the productivecapacity of a country. IndianMultinational Giants is fast becominga reality.

Entrepreneurs lead the process ofeconomic development via bringing

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Small-Scale Entrepreneurship among Marginalised Groups in India

Marginalised Groups Proportional Representationin Overall Entrepreneurship (%)

Women Entrepreneurs 8

Scheduled Caste (SC) Entrepreneurs 8

Scheduled Tribes (ST) Entrepreneurs 4

Entrepreneurs from the Other 49Backward Classes (OBC)

Source: Third Census of Small Scale Industries in India, Ministry of SmallScale Industries, Government of India

about sectoral change. You must beaware that as the economies grow,percentage of GDP originating fromagriculture decreases and thatoriginating in industry and servicessectors goes up. Entrepreneurs throughtheir decisions to divest from the stalesectors and invest in green-field sectorsbring about a virtual transformation ofthe economy from ‘underdeveloped’ toan ‘emerging’ and ‘developed’ status.

7. Impact on Local Communities:Entrepreneurship, in its naturalhabitat, that is, small business is a greatleveler. You may see from table onmarginalised groups. That small-scaleentrepre-neurship enables suchmarginalised groups as women, SC, STand OBC to pursue their economicdreams. As there are no entry barriersin terms of educational qualifications,entrepreneurship is an even moreattractive career option for suchmarginalised groups.

Agro-based rural industries and craft-based cottage industries can really catapultlocal communities to socio-economic

success stories. Local governments dotheir bit in developing theseentrepreneurship clusters with a view toencouraging inter-firm collaboration anddevelopment of common facilities. entitled,‘Entrepreneurship Clusters in India.’

In regard to the development ofentrepreneurship for impacting localcommunities, some corporate-sectorinitiatives also deserve a mention. ITCthrough their ‘e-Chaupal’ (visit http:/www.itcportal.com agri_exports/e-choupal_new.htm) and HLL throughtheir ‘Shakti’ (visit www.hllshakti.com)initiatives have sought to mobilisenative entrepreneurs for improving thelot of those lying at the bottom of theeconomic pyramid.

8. Fostering the Spirit of Exploration,Experimentation and Daring:Economic development, among otherthings, requires breaking away fromthe shackles of traditions and beliefsthat restrict growth. For example if‘crossing the seas’ were a taboo, therewould not have been international tradeand the resultant economic growth.

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The established ways of life need to bechallenged and change must be seenas an opportunity to improve ratherthan something to be scared of.Entrepreneurs, through their urge todo something new, seeing change as anopportunity, experimenting with thenovel ideas and showing the courageto try them prepare a fertile ground forpersistent economic development. Haveyou seen the Hindi movie ‘Lagaan,’where the protagonist Bhuvan raises a

cricket team from the villagers who hadnot even seen the game? Don’t the featsof Karasn Bhai of ‘Nirma’ whochallenged ‘Surf’ from the mightyHindustan Lever Limited make youproud of the daring of theentrepreneurs?

Thus, whether one looks at economicdevelopment narrowly in terms of theincrease in GDP or in the wider contextof economic, institutional and socialchange, entrepreneurship plays a

Indian Small and Medium Enterprises (SME) Clusters

With a contribution of 40% to the country’s industrial output and 35% todirect exports, the Small-Scale Industry (SSI) sector has achieved significantmilestones for the industrial development of India. Within the SSI sector, animportant role is played by the numerous clusters that have been in existencefor decades and sometimes even for centuries. According to a United NationsIndustrial Development Organisation (UNIDO), there are 388 SSI clustershaving 4,90,000 enterprises, employing 7.5 million persons with an output ofRs. 160,000 crore p.a. The number. of entrepreneurs in these clusters hasbeen growing @ 15-18% p.a. over the last ten years. Besides, there areapproximately 2000 rural and artisan based clusters in India.

Some Indian SSE clusters are so big that they account for 90 per cent ofIndia’s total production output in selected products. As for example, theknitwear cluster of Ludhiana and Hosiery cluster in Tripur in Tamil Nadu.Almost the entire Gems and Jewellery exports are from the clusters of Suratand Mumbai. Similarly, the clusters of Chennai, Agra and Kolkata are wellknown for leather and leather products.

However, the majority of Indian clusters, especially in the handicrafts sector,are very small with no more than hundred workers, so specialised that noother place in the world matches their skills and the quality of their output.This is the case, for example, of the Paithani sarees cluster in Maharashtra.However, only a tiny minority of such artisan clusters are globally competitive.

The formidable challenges created for the SSE sector by the liberalisationof the Indian economy, as well as its closer integration within the globaleconomy, have generated a great deal of interest within India on novelapproaches to SSE development. As a result, both private and public sectorinstitutions at the Central as well as the State levels are increasinglyundertaking cluster development initiatives.

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crucial role. Global EntrepreneurshipMonitor studies report a lag of 1-2years between entrepreneurialactivity and economic development,suggesting that it takes time for theimpact of entrepreneurship oneconomic development.An important observation needs bemade here. While entrepreneurshipleads to economic development, thevice-versa is also true. That is,economic development also fostersentrepreneurship development. Growingeconomies provide a fertile soil for theflourishing of entrepreneurship, an aspectthat we will take up while discussingentrepreneurship development.

ROLE OF ENTREPRENEURS IN RELATION

TO THEIR ENTERPRISE

Drawing an analogy from musicologyin explaining the role of theentrepreneurs in relation to theirenterprise, one may say that anentrepreneur is not only the composerof the musical score and the conductorof orchestra but also a one man band.His roles and functions get muchbroader in scope in a developingcountry context like ours. entitled ‘Roleand Functions of the Entrepreneur inRelation to his/her enterprise.’

These elements are no sequential asthe figure may convey, the entrepreneurmay have to address to all these elementssimultaneously. Yet, depending upontheir backgrounds, the individualentrepreneur may prefer one over theother. For example, technicians tend tobe over obsessed with the production

aspect; those with marketing backgroundmay over emphasise creation of market.Investor type entrepreneurs may beover concerned with the returns fromthe project. One should resist thetemptation of looking at the businessonly from one’s own narrow perspective.Having said this, it is apt that weprovide a brief description of thevarious issues that may be relevant ateach stage.

Opportunity Scouting: Entrepreneurialopportunities have to be activelysearched for. One may rely onpersonal observation, discovery orinvention. Personal/professionalcontacts/networks and experience ormay also help in identifying businessopportunities. Alternatively, one mayrely on published reports, surveysand the like. Narayan Reddy ofVirchow Laboratories relied on thepersonal discovery of the molecule duringhis employment with a pharmaceuticalcompany. As observation meansseeing/hearing/smelling with apurpose, opportunity spottingpresupposes tendency to look at thethings and phenomenon from anentrepreneurial mindset. Most of ushave a consumer’s mindset. If we seeany object of desire, may be a pen,laptop, latest model of the mobilephone or somebody eating pizza orburger, we crave to have the same thingfor ourselves. The entrepreneurialmind, on the other hand startsworking out, what would be themarket size, where to procure it fromand at what price, will I able to woothe customers from the existing

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Roles and Functions of the Entrepreneur in relation the Enterprise

Developing Exchange Relationships

1. Perceiving market opportunities

2. Gaining command over scarce resources

3. Purchasing inputs

4. Marketing of Products and responding to competition

Political Administration

5. Dealing with public bureaucracy (approvals, concessions, taxes)

6. Managing human relations within the firm

7. Managing customer and supplier relations.

Management Control

8. Managing finance

9. Managing production

Technology

10. Acquiring and overseeing assembly of the factory

11. Industrial engineering (minimising inputs with a given productionprocess)

12. Upgrading the production process and product quality

13. Introducing new production techniques and products.

Note: The scope of the entrepreneurial functions varies with the level ofeconomy in which the entrepreneur operates; scale of production/operations;and entrepreneurs’ comparative efficiency in utilising managerial employees.In developed countries, entrepreneurship assumes upon themselves theresponsibility of introducing innovations and after some time, pave way forthe managers. In large-scale organisations, entrepreneurs provide leadershipand there is a team of managers to look after specific aspects of enterprise.Likewise, those entrepreneurs who have the ability and willingness to delegatemay concentrate on a select few, strategic aspects of enterprise.

In terms of the process of setting up a business, therefore, an entrepreneuris on the look out for and spots the business opportunity, assesses its value,develops it in the form of a product/service idea, assembles he resourcesand gets going.

Source: Peter Kilby, (ed.), Entrepreneurship and EconomicDevelopment,? New York: The Free Press, 1971.

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players and how– by sell ing itcheaper, by providing more value orby better service and so on.

Entrepreneurial opportunities mayalso be identified through a process ofresearch of international, domestic,sectoral/ industrial analysis.

For example, post WTO,international trade and investment havebecome freer of restrictions. Textilequotas are being phased out, and, thereare greater opportunities for textile andtextile made-ups from India. Globaloutsourcing is on the rise and India

offers a huge and varied pool oftechnical manpower that makes it acost effective destination for in-boundglobal outsourcing in manufacturingas well as Information TechnologyEnabled Services (ITES).

Identification of Specific ProductOffering: While the environment scanleads to the discovery of moregeneralised business opportunities,there is a need to zero in on to a specificproduct or service idea. For example,trade liberalisation since WTOs hasresulted in export opportunities, but

Resource mobilisation

Scanning the environment for entrepreneurial opportunities

Development of product/service idea

Assessment of feasibility of the idea and preparation of a business plan

Appraisal by the funding agencies

Project Commissioning and launch

Adaptation and management of growth

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the question is what to export andwhere? You may be required to compilea country-product matrix to be able todecide. (See proforma)

This way you may arrive at theproduct-market combination showingthe fastest growing import and fromyour point of view export potential.

Deciding on the product offeringmakes the highest demand on theentrepreneur’s creativity andinnovativeness. Yet, in a competitiveenvironment, it is possible todifferentiate your product offering evenif the generic product is the same andserves the same need.

Clearly decision on specificproduct offering necessitates decisionson who is buying, why, and what arethe value expectations. You will be ableto succeed when the value deliverednot only meets but also exceedscustomers’ expectations and create a‘Vow!’ impact.

Feasibility Analysis: The productoffering idea must be technically feasible,that is it should be possible with theavailable technology to convert the ideainto a reality. And this should bepossible at a cost that can be coveredby the price it will fetch; in other words,the idea must be economically feasibletoo. The project cost should be withinthe resources available and the resourceproviders should be reasonably sure ofan appropriate return on (profit) and

return of (safety and liquidity) of theirinvestments. That is, the idea must befinancially viable as well. There shouldbe enough sales in the immediate andthe prospect of growth in the foreseeablefuture; there should be adequateassurance on the commercial viabilityof the chosen product offering. Now aday, it is also important to be sure thatthere aren’t any environmental andother legal restrictions/necessity of priorapprovals for setting up the business.It is also to be decided as to whether thebusiness will be organised as aproprietary concern/partnership firm/company or cooperative entity.

Clearly the chosen product offeringmust be feasible from the diverseperspectives. You must compile thesefindings in the form of a business planthat would have to be submitted to thefunding authorities, in the Indiancontext, the State Finance Corporationof your area. They may be having aprescribed proforma in which the detailsof the business plan are required to befurnished and, as such there may aneed to adapt the contents accordingly.An idea about the generic contents of abusiness plan may be had from.

The business plan may beappraised by the funding institution,and upon satisfying itself about thedesirability of assisting your projectand upon the furnishing of somemargin money it may sanction the loan

International State of the State of theEnvironment Domestic Economy Sector/Industry

IDS Analysis for Entrepreneurial Opportunities

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amount. Recall, Narayan Reddy and histwo other associates provided Rs. 8lakhs and the APSFC contributedRs. 20 lakhs toward the overall projectcost of Rs. 28 lakhs. Upon the projectapproval, the entrepreneur can proceedfor project commissioning, that isputting up the factory premises,installing the equipment, obtaining thesupplies of the input materials with a

view to starting the manufacture andmarketing the product.

As noted earlier too, entrepreneurialfunctions do not come to an end withthe business start-up. He often looksafter its day-to-day operations andstrives for its stability and growth.

Entrepreneurial roles andfunctions clearly seem onerous.Perhaps that is why many shy away

Countries

A B C D E

Import Statistics for Immediately Preceding Years

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

X1

X2

X3

X4

X5

Proforma Country-Product Matrix

Pro

ducts

Need of the Generic Product Examples of Differentiating

Customer Specific Offering

• Size

• Zero Waiting time

• Dine- in/Carry AwayDelivery

Food Burger • Add-ons e.g., Beverage/Chips or No-frills

• Choice of Fried/Grilled

• Customisation of topping,choice of ingredients

Product Differentiation

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to simpler, softer and safer options ofemployment and practice ofprofession. Entrepreneurial going maybe tough; but then that is where thetough get going! Do not worry ifpresently you may find yourself shorton those competencies, values andattitudes. It is just a matter of makingup your mind for a career inentrepreneurship and groomingyourselves for it. This takes us to thediscussion of the process ofentrepreneurship development.

THE PROCESS OF ENTREPRENEURSHIP

DEVELOPMENT

Entrepreneurship does not emergespontaneously. Rather it is the outcomeof a dynamic process of interaction

between the person and theenvironment. Ultimately the choice ofentrepreneurship as a career lies withthe individual, yet he must see it as adesirable as well as a feasible option. Inthis regard, it becomes imperative tolook at both the factors in theenvironment as well as the factors in theindividual as having a nearing on theperception of desirability and feasibilityand thereby entrepreneurshipdevelopment. One may, therefore, modelthe process of entrepreneurshipdevelopment in terms.

In general, capitalist economy withits emphasis on individual achievementis more suitable for entrepreneurship.Lower rates of taxation on personalincome, lower rates of interest andmoderate inflation stimulate

Technical

Administrative/Legal Economic

Commercial Financial

Aspects of Feasibility Analysis

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entrepreneurial activity. (Can you thinkwhy it is so?) Moderately low externalvalue of domestic currency or in otherwords, moderately lower exchangerates, stimulate import substitutingand export promoting entrepre-neurship. (Can you rationalise why?).Well developed financial system, goodinfrastructure, helpful bureaucracy allthese have a favourable impact onentrepreneurship. Specially designedand dedicated institutions such asNational Institute for Entrepreneurshipand Small Business Development (visit,niesbud.nic.in), EntrepreneurshipDevelopment Institute of India (visit,www.ediindia.org) that conductentrepreneurship awareness andentrepreneurship developmentprogrammes (EAPs and EDPs) a furtherfillip to this activity.

An important enabler or disabler ofentrepreneurship is the prevailingsocio-cultural milieu. Those societiesthat respect individual freedom tochoose among occupations, thatencourage the spirit of enquiry,exploration and experimentation,celebrate individual accomplishmentand in general accord important statusto the entrepreneurs are likely to haveself-sustaining supply of able andwilling men and women for taking toentrepreneurship as a career.

THE ROLE OF THE INDIVIDUAL INENTREPRENEURSHIP DEVELOPMENT

Mr. Narayan Reddy was desirous ofstarting a small scale industry and alsohad a sense of efficacy or readiness topursue it given his qualifications,

Business Plan

1. Executive Summary

2. Business/industry background

3. Product/service to be offered

4. Market analysis

5. Sales and marketing strategy

6. Production/operations strategy

7. Management

8. Risk factors

9. Funds required

10. Return on and off investment and exit routes

11. Use of the sales proceeds

12. Financial summaries

13. Appendices, e.g., Reports on Market Survey,

Financial Statements, Track Record etc.

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experience and the necessary values,attitudes and motivation (the openingcase does not elaborate this. We willdiscuss these at suitable places). Evenyou may like to see as to where do youfind yourself on the desirability(willingness)-efficacy (ability) matrix,won’t you?

As you may see from the matrixfigure able and willing men and womenare a “ready” source of entrepreneurship.Such persons leap up the firstopportunity comes their way to be ontheir own. Recall, Narayan Reddy leaptup the opportunity as he met the twomedicos who had returned from the Gulf.

At any point of time, there aremany men and women who “want” toset up a business of their own butexperience self-perceived barriers to

entrepreneurship. They could be havinga low perception of self-efficacy eitheron account of lack of resources (or to bemore correct, resourcefulness),knowledge or know-how, and the skills.Collectively, these are referred to ascompetencies, which now we turn ourattention to.

ENTREPRENEURIAL COMPETENCIES

Every opportunity and successfulperformance of every role and functionhas a competence requirement. Its trueof entrepre-neurship as well. entitled‘Cash OR KASH?’

The term ‘competence’ refers to acomposite of knowledge, skills and ahost of psychosocial attributes(including Attitudes and Motivation that

Individual Personality: Environmental Influences:competencies, motivations, Economic Development, Economic

values and attitudes Policy and Institutional Framework

Shape

Individual perception that Individual perception thatentrepreneurship is a “I can live up to the challengedesirable career option of being on my own”

EntrepreneurshipDevelopment

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The Role of Environment in Entrepreneurship Development

Entrepreneurs bring about economic growth and development, and thelatter in turn provides a fertile soil for the flourishing of entrepreneurship.There certainly is a mutually facilitating reciprocity between economicgrowth and entrepreneurship development.

EconomicDevelopment

we will be discussing separately) in aperson that mark his/her effectivenessfor a task. The phrase ‘composite’ iscrucial. For example, the competence“ability to communicate vision” is muchmore than proficiency in writing/speaking skills. It would involve, just toillustrate, vision clarity, understandingthe audience background, interest andreadiness, knowledge about the mediaand choosing the most appropriate one,attracting attention, delivery, leaving notmerely an impression but also animpact and, assessing effectiveness. So,when the entrepreneur in the televisioninterview pointed out KASH as thedeterminants of successfulentrepreneurship, he was indeedreferring to the competencies.

Competency approach to humanresource development in general andentrepreneurship development inparticular was pioneered by DavidMcClelland, a Harvard Universitypsychologist in the late 1960’s and early1970’s. (You will be learning more on

McClelland’s work when we discussentrepreneurial motivation.) McClellandset out to define competency variablesthat could be used in predicting jobperformance and that were not biasedby race, gender, or socio-economicfactors. As a result, it becomes moreimportant to learn what a person doesrather than who he/she is. That is whymanagement and also entrepreneurshipis better defined as what a manager oran entrepreneur does. Becausecompetencies can be built via a processof education and development, we maysay that entrepreneurs are made.

What are the distinct competencies forentrepreneurship? In this regard one mayrefer to the efforts of EntrepreneurshipDevelopment Institute of India (EDI), anational resource institution in the areaof entrepreneurship education researchand development (visit, www.ediindia.org).

EDI has identified a set of 15competencies that contribute towardentrepreneurial performance and success.These are briefly stated hereunder.

Entrepreneurship

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Persistence: A ‘never say die’ attitude,not giving up easily, strivingcontinuously until success is achieved.

Information seeking: Knowing andknowing who knows, consulting experts,reading relevant material and an overallopenness to ideas and information.

Concern for High Quality of Work:Attention to details and observance ofestablished standards and norms.

Commitment to Work Contract:Taking personal pains to complete atask as scheduled.

attending to production, marketing andfinancial aspects (parts) of the overallbusiness strategy (the whole).

Problem-solving: Observing thesymptoms, diagnosing and curing.

Self-confidence: Not being afraid of therisks associated with business andrelying on one’s capabilities tosuccessfully manage these.

Assertiveness: Conveying emphaticallyone’s vision and convincing others ofits value.

Initiative: Acting out of choice ratherthan compulsion, taking the leadrather than waiting for others to start.

Sees and Acts on Opportunities: Amindset where one is trained to look forbusiness opportunities from everydayexperiences. Recall ‘oranges’ example.

Efficiency Orientation: Concern forconservation of time, money and effort.

Systematic Planning: Breaking upthe complex whole into parts, closeexamination of the parts and inferringabout the whole; e.g. simultaneously

Eager ReadyEntrepreneur Entrepreneur

Not Ready PotentialEntrepreneur Entrepreneur

Low High

Self-Efficacy

Des

irabilit

y

Low

Hig

h

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Persuasion: Eliciting support of othersin the venture.

Use of Influence Strategies: Providingleadership.

Monitoring: Ensuring the progress ofthe venture as planned.

Concern for Employee Welfare:Believing in employee well being as thekey to competitiveness and success andinitiating programmes of employeewelfare.

You would, now, be interested inknowing as to how to build thesecompetencies. Knowledge competencies(what you know regarding facts,technologies, a profession, procedures,a job, an organisation, etc.) can bedeveloped by, for example by readingand interacting with people who know.Skill competencies (what you say or dothat results in good or poorperformance) can be acquired bypractice, haven’t you heard “practice

Cash or KASH

“What do you need to be a business person?” was the opening question the anchor ofa television interview asked an eminent business personality. “Caash” she heard andthough that her interview is going to be a spoil, for it was an answer so obvious andexhaustive that there was not anything else to talk. Or this is what she thought.

The entrepreneur saved her day, “young lady,” he continued, “you seem to have got itwrong!” “What I meant was not C_a_s_h_=Cash, but K_A_S_H= KASH!”

Interview was off to a flying start! And the interviewee went on to elaborate what hemeant, K=Knowledge, A=Attitude, S=Skills and H=Habits.

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makes a man perfect”? For example,‘persuasion,’ and ‘use of influencestrategies’ require presentation skills.You may do double the homework onwhat you want to say, how you wantto say, who is your audience and whatare their backgrounds, what could bethe possible questions that may beasked, what would be their answersand so on. Practice it all over a numberof times, may be before mirror or yourfriends, so that when you are actuallyin that situation, you perform well.

ENTREPRENEURIAL MOTIVATION

Men and women who have a perceptionof self-efficacy and are yet to feelinterested in or motivated by the ideaof being on their own comprise apotential, future source ofentrepreneurship. What motivates aperson is a question easier asked thananswered. Mr. Narayan Reddy wasdriven by the desire to utilise hisdiscovery of the molecule as a businessopportunity. In terms of Maslow’s needhierarchy theory, one may say that Mr.Narayan Reddy was driven by the needfor self-actualisation. Sinceentrepreneurial situation is characterisedby personal accomplishment incompetitive situations and involvinghigher standards of excellence, oneoften come across reference to ‘need forachievement’ or N-ach for short as theprimary driver of entrepreneurialbehaviour. See Box entitled ‘How N-Ach. Drives Entrepreneurship andEconomic Development’.

Need for Achievement (N-Ach.): Needfor achievement implies a desire toaccomplish something difficult. Tomaster, manipulate, or organisephysical objects, human beings orideas. To do this as rapidly and asindependently as possible. To overcomeobstacles and attain a high standard.To excel one’s self. To rival and surpassothers. To increase self–regard bysuccessful exercise of talent. Yesentrepreneurship provides you with thebest opportunity for making the bestuse of your talents as in employmentthe 9-5 routine, pressure to adhere torules and regulations, preference forcompliance of boss’s instructions overthe use of personal creativity andinnovativeness stifles your progressand self-development. You can createa work environment that suits yourabilities and interests.

Need for Power (N-Pow): Need forPower is the concern for influencingpeople or the behaviour of others formoving in the chosen direction andattaining the envisioned objectives. Incommon perception, politicians, social-religious leaders Chief Executive Officers(CEOs), Government Bureaucrats/CivilServants typify the need for power. Sucha perception seems more based on thebelief that the source of power lies inthe “position” a person occupies inorganisational/societal context. In thesame vein, business ownership too mayimply a need for power. Moreover, youwould appreciate that the process offounding a business, one has to winthe commitment of capital providers,

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suppliers of equipment and materials,the employees and that of thecustomers. Power may not be used tofurther one’s self- interests alone, it maybe also be used to touch the lives ofothers, to make a difference.Entrepreneurs driven by this socialisedface of the need for power. They foundorganisations that are a source ofsustenance and self- respect for many.

needs. Entrepreneurs are believed to below on affiliation, as they are andexpected to be, innovative, trendsettersand tradition breakers. However, it is notnecessary that affiliation should onlyinterfere with achievement. In certaincultures, family comprises the bedrockon which the successful careers arebuilt. One works, as if, not for personalgratification but for family. Desire to

Need for Affiliation (N-Aff.): Often youmust have heard your parents sayingthat whatever they do they do it for theirchildren. If a man thinks aboutinterpersonal relationships, he has aconcern for affiliation. It implies, amongother things a tendency of the people toconform to the wishes and norms ofthose whom they value. Apparently,social activists, environmentalists,teachers, and doctors and nurses mayseem as predominantly driven by these

carry on the tradition of business in thefamily and the community to which onebelongs, may be interpreted as reflectingneed for affiliation as well. In thecountries with the colonial past, suchas ours, the first generation ofentrepreneurs in Independent India wasdriven by patriotic fervor and the desireto rebuild the economy left stagnatedby the alien rulers. One can certainlytrace some elements of affiliationmotivation in such instances.

How N-Ach. Drives Economic and Entrepreneurship Development

Credit for investigating and bringing to the fore the role of need for achievementgoes to McClelland, the Harvard professor whom we referred to also in thediscussion of competency based approach to human resource andentrepreneurship development. He set out to investigate why some countriesare more developed than others He sought to find answer to this question byexamining the proposition that ‘differences in the level of achievementmotivation are responsible for ‘differences in the level of economic development’.For this he examined the popular stories and folklore and readers up to primaryclasses of 39 countries for finding out whether they focused on personalaccomplishment, triumph of human courage and effort over the circumstancesand so on. McClelland’s research upheld the proposition that differences inthe levels of achievement motivation as revealed by the analysis of the storiesand the readers accounted for the differences in the level of economicdevelopment. How? What would be the process? McClelland observed thatentrepreneurship becomes the medium through which the achievementmotivation manifests the best and through which the development takes off.© N

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Need for Autonomy (N-Aut.): Theneed for autonomy is a desire forindependence and being responsibleand accountable to oneself rather thansome external authority forperformance. It is the desire for anopportunity for the fullest expressionof one’s abilities. In the context ofentrepreneurship, it is usuallyinterpreted as the determination not towork for someone else. In most jobsituations, employees are given littlefreedom to exercise their discretion intaking decisions and choosing a courseof action so much so that absence of itdrives them into starting their ownventures. As such n-pow. becomesmore a desire for preserving one’s ethosrather than the freedom from the boss.Take the example of anotherHyderabad based entrepreneur entitledEntrepreneurship for PreservingPersonal Work Ethos).

What does the above discussionmean for entrepreneurship development?It means that for promoting entrepre-neurship it is important to kindle andarouse the right motivation. In theabsence of motivation, even able menand women may not take to entrepre-neurship. Hence. In every Entrepre-neurship Awareness Programme (EAP)or Entrepreneurship DevelopmentProgramme (EDP), there are specialsessions on entrepreneurial motivation,besides sessions on entrepreneurialcompetencies.

You may note that motivation andability can positively reinforce eachother. Persons having abilities search

for the avenues for their expression andhence are drawn to entrepreneurship.Persons eager to be on their own maystrive hard to acquire the necessarycompetencies to realise their dreams.How truly one has said thatentrepreneurs are the dreamerswho do!

In explaining and developingentrepreneurial motivation, it isimportant to learn that differentindividuals are motivated differently, andthat one may be trying to satisfy morethan one need through one’s pursuit.This is an important observation aseconomic theory very simply says thatthe objective of the firm or that of theentrepreneur is profit maximisation.

ENTREPRENEURIAL VALUES AND

ATTITUDES

While explaining human behaviour,one often comes across the termsvalues and attitudes. Rather thanattempting to distinguish between thesetwo terms, it would be sufficient to sayhere that taken together, entrepreneurialvalues and attitudes refer to thebehavioural choices individuals makefor success in entrepreneurship. Theword ‘choice’ is important, as there arealternative ways of behaving too.In entrepreneurship, a host ofbehavioural tendencies or orientationshave been reported as having a bearingon success. The entrepreneur in ‘Cashor KASH’ labeled these as ‘Habits’,some researches have called these aspolicies or strategies. Be it the decision

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to make a choice about entrepreneurshipas a career, be it the decision to choosethe product line, growth strategy, profitmaking and social responsibility youwould be required to make choices. Thechoice that you make may have atremendous impact on yourperformance. What we do here is to

profile some of the dimensions relatingto starting and managing a businessand the associated behaviouralalternatives, we have considered heretwo to keep the things simple. We havehighlighted those alternatives that havebeen generally observed to beassociated with superior performance.

Entrepreneurship for Preserving Personal Work Ethos

In industries having captive power plants, a day’s downtime can cause a lossof crores of rupees. While working for a public sector electrical major, anengineer found it really difficult to cope with the bureaucratic attitude inservicing the customers. It clashed with his personal value, ‘client’s problemsbe attended first, paperwork can wait’. He quit the job and started a turbinerepairing and furbishing company. Incidentally, it takes more money to travelor to transport than to repair or refurbish the turbine. But the downtime isreduced and the clients are happy. Later the company also diversified intothe manufacture of the parts and commissioning of the captive power plantson a turnkey basis.

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Behavioural Choices for Entrepreneurial Success

S. No. Dimensions Behavioural Alternatives

1. Type of Entrepreneurship Choose pioneering/innovative productsChoose tried and tested products

2. Business Decision Choose business as per qualifications/experienceGrab whatever opportunity comes your way

3. HRM: Recruitment Policy Recruit trustworthy, dependable and obedient employeesRecruit qualified and trained professionals

4. Managing Growth: Pace Grow only at/to manageable pace/extentMake a hay while the sun shines

5. Organising: Ability Supervise closelyto Delegate Delegate and decentralise

6. Marketing Management: Sell hard what you produceMarketing Concept Produce according to customers’ requirements

7. HRM: Compensation Reward good performance by additionalincrements/promotionsReward just as you please

9. Managing Growth: Grow around core-competenceDirection Grab whatever opportunity comes your way

10. Marketing Management: Change the product only if absolutely necessaryProduct Planning Innovate/improvise continuallyand Development

11. Operations Management: Locate the business near social contactsLocational Decision Locate purely on economic merits

12. Operations Management: Increase profit by negotiating hard with suppliers,Cost Rationalisation workers and customers

Reduce cost by cutting the overheads andimproved efficiency

13. Managing Competition Fight the competitionAvoid competition

14. Planning: Approach to Scan the environment for business informationDecision-making Rely on intuition/judgment

15. Organising: Formalisation Do everything by yourselfAppoint specialists and professionalise the systems

16. Ethics Never compromise on business ethicsEverything is fair in love, war and business

17. Succession Planning Plan and train a successorBusiness will find a successor

18. Planning: Time Horizon Have a long term perspectiveLive your business day-by-day

19. Operations Management: Invest in R and DResearch and Development R and D is an ill-affordable luxury

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KEY TERMS

Entrepreneurship Enterprise

Entrepreneurial Risks Experimentation

Exploration Rural Entrepreneurship

Entrepreneurial Opportunities Entrepreneurial Competencies

SUMMARY

The terms ‘entrepreneur,’ ‘entrepreneurship’ and ‘enterprise’ can be understoodby drawing an analogy with the structure of a sentence in English language.Entrepreneur is the person (the subject), entrepreneurship is the process (theverb) and enterprise is the creation of the person and the output of the process(the object).

Entrepreneurs play important roles both in relation to economic developmentand in relation to the enterprise. In relation to economic development, entrepreneurscontribute to growth in GDP, capital formation and employment generation besidescreating business opportunities for others and bringing about an improvementin the quality of life in the community in which they operate. In relation to theenterprise, they perform a number of roles right from the conception of a businessidea, examining its feasibility and mobilisation of resources for its eventualrealisation as a business firm. They bear the uncertainties and risks associatedwith the business activity, introduce product, market, technological and a host ofother innovations. In the developing country context they also assume theresponsibility for the day-to-day management of the enterprise.

Given its critical role in economic development at a broader level and businessstart-ups at the micro level, it is imperative that a conscious effort be made topopularise entrepreneurship as a career option. In this regard, EAPs and EDPscan play an important role. Besides, there is a need to create an entrepreneurshipfriendly environment. Since, entrepreneurship is the outcome of a dynamicinteraction between the person and the environment, there is need also fordeveloping entrepreneurial competencies, motivations, values and attitudes.

EXERCISES

Multiple choice questions

Put a tick against the most appropriate answer to the following questions.

1. Entrepreneurs undertake

a. Calculated risks

b. High risks

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c. Low risks

d. Moderate and calculated risks

2. In economics, which of the following is not a function of the entrepreneur?

a. Risk-taking

b. Provision of capital and organisation of production

c. Innovation

d. Day to day conduct of business

3. Which of the following statements does not clearly distinguish betweenentrepreneurship and management?

a. Entrepreneurs found the business; managers operate it

b. Entrepreneurs are the owners of their businesses; managers areemployees

c. Entrepreneurs earn profits; managers earn salaries

d. Entrepreneurship is once for all activity; management is acontinuous activity

4. In the roles and functions of the entrepreneur identified by Kilby, whichof the following is not an aspect of ‘political administration’?

a. Dealing with public bureaucracy

b. Managing human relations within the firm

c. Introducing new production techniques and products

d. Managing customer and supplier relations

5. Which of the following attitudes is not generally associated withsuccessful entrepreneurship

a. Investing in R and D

b. Live your business day by day

c. Innovate and improvise continually

d. Produce as per customers’ requirements


1. Clarify the meaning of the terms ‘entrepreneur,’ ‘entrepreneurship,’ and‘enterprise.’

2. Why is entrepreneurship regarded as a creative activity?

3. “Entrepreneurs undertake ‘moderate’ risks.” Elaborate this statement.

4. How does entrepreneurship result in increasing the spectrum and scopeof economic activities?

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5. Describe briefly the role of achievement motivation in entrepreneurship.


1. Describe briefly the steps involved in starting a new business.

2. Examine the nature of relationship between entrepreneurship andeconomic development.

3. Clarify how motivation and abilities impact an individual’s decision tochoose entrepreneurship as a career.

Application question

Anshuman was a very industrious sales executive with a small herbal cosmeticmanufacturer. He earned a good salary and commission on the business hebrought for the firm and had very good command over the Delhi market forwhich he had virtually become indispensable. He was aware of the enviableposition he held in the firm and thought aloud:“The key to success in any business is the sale of its products. The beginningand end of the business cycle is nothing but sale and “other” people working inthe factory to manufacture products are mere cogs in the business machine setin motion by sales people. So why carry this burden and get only a tiny share ofthe prosperity of the firm? Instead others enjoying the fruits of my labour, whyshould I not start my own business?”Should Anshuman take a leap? Give reasons for your answer.

Case Problem

Inspiring Feat: Dailywage Labourer Turns Entrepreneur

A landless woman from Bihar has been nominated among the top 25 farmers inAsia by a Mexican website.

Forty-five-year old Lalmuni Devi was a daily wage labourer when she decided totake destiny into her own hands and transformed herself into a successfulmushroom farmer. Today she manages to make Rs. 12,000 every year for aninvestment of only Rs. 600.

Her feat finds mention on a Mexican website that has grouped her as the top 25inspirational farmers in its photo gallery.

”I am a poor woman. I thought that mushroom farming would profit henceforthI started it. Now I can earn a living for my family,” said Lalmuni Devi.

Successful enterprise

The success story has caught on with many women in the Azadpur village onthe outskirts of Patna.

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”It is effortless farming, which we can even do in our village. Working in thescorching heat is very tiring. Mushroom farming generates more profit,” saidUrmila Devi.

Lalmuni and other landless women have been encouraged by the Indian Councilfor Agriculture Research to take up mushroom farming.

”It is to help the poorest of the poor through alternative livelihood support system.For that we have chosen a village where people have no land and they have toshare croppers,” said Dr A.R. Khan, Principal Scientist, ICAR, Patna.

Lalmuni’s efforts have paved the way for many other landless women to take upmushroom farming and earn a livelihood for their family with little effort.

Source: - www.ndtv.com/features downloaded on 15/3/2006 at 1.35 am

Question

1. What inspiring feat did Lalmuni Devi perform?

2. Do you feel that you can also become an entrepreneur? Elaborate.

3. What qualities of an entrepreneur did Lalmuni Devi exhibit?

4. What are the benefits and risks of becoming an entrepreneur? How can youguard against the risks?

(Teachers should highlight the qualities of an entrepreneur and motivatestudents to do so. Help that is available from the government of India islisted on the website www.india.gov.in.).

Project Work

1. Visit a newly started small business in your neighbourhood and interviewthe owner. Prepare a report on how he/she decided to start the enterpriseand the difficulties he/she faced. Also include steps taken by the owner toovercome them. Discuss the findings in the class.

2. Study the life history of great entrepreneurs, such as Dhirubai Ambani,Jamshedji Tata, G.D.Birla or Kiran Mazumdar Shaw etc. Prepare a list ofcommon traits of these people and discuss them in your class. Can youimbibe some of these qualities and start some enterprise later on in life?

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NOTES

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