INDUSTRIAL ORGANISATION & MANAGEMENT

INDUSTRIAL ECONOMICS & MANAGEMENT

ECONOMICS AND BUSINESS MANAGEMENT
GENERAL MANAGEMENT

1. Objective: This course is designed to introduce the students to the basic concepts of
Economics and Management so as to enable them to give optimal performance
during professional life.

Details of Course
S. Contents
No
1 INDUSTRIAL ECONOMICS:
Meaning and importance of industrialisation. Organizations- various types of
organizations. Division of Economics, Basic Constituents(Micro & Macro
Economics)
2 CONSUMPTION AND MARKET STRUCTURE:
Law of Demand and Elasticity of Demand, Consumer’s surplus, Utility and its
measurement, Types of market structure – Perfect, Monopoly, Monopolistic
and Oligopoly, Demand forecasting techniques.
Meaning and factors influencing location of Industrial Units, Scale of
production- large vs Small Industrial Units
3 MANAGEMENT- INTRODUCTION TO MANAGEMENT:
Management and its nature, purpose and definitions. Process and functions of
management- Planning, Organising, Actuating and controlling, Functional
areas of management, skills and role of Management
4 PLANNING:
Nature and purpose of planning, types of plans, steps in planning process.
Objectives: nature and importance of objectives, Types of objectives,
primary, secondary, individual and personal objectives. Guidelines for setting
objectives
Decision Making: Importance and limitations of rational decision making,
types of decisions- programmed and non programmed decision making.
Process of decision making under certainty, uncertainty and risk.
5 ORGANISING:
Nature and purpose of organising: steps in organising/ process of organising,
formal and informal organizations; span of control & factors determining
effective span.
Decentralisation of Authority: Nature of decentralisation, degree of
decentralisation, decentralisation as philosophy and policy
Delegation of authority: Meaning of authority/delegation, steps in the
process of delegation, factors determining the degree of delegation, art of
delegation.
Line/staff organization: Line organization, staff organization, line and staff
organization, functional and committee organization, the nature of line and
staff relationship.
6 ACTUATING:
Nature and purpose of Actuating, steps in actuating process.
 Essentials of Human Resource Management: Importance and functions of
Human resource management, Importance of Human resource planning,
Recruitment, selection, training and development, performance appraisal,
compensation packages, promotions, transfers demotion and separation etc.
Leadership: Meaning and importance, Leadership qualities
Motivation: The need – want - satisfaction chain.
7 CONTROLLING:
Nature and purpose of controlling, steps in controlling/ process of
controlling, types of controls, recruitments of effective controls.

References
1. Industrial Organization and Management – Y.K. Bhushan
2. Principles of Management - A.K. Chatterjee
3. Principles of Management – George Terry
4. Industrial Organization and Management – V.D. Sinha and Gadgill
5. Management – Stoner, Freeman and Gilbert
6. Elementary Economics Theory – KK Dewett and JD Verma
7. An Introduction to Economics – ML Sethi
8. Advanced Economics - K.P.M
9. Indian Economics KK Dewett and JJ verma
 UNIT I
Industrial Economics

1. Meaning and importance of industrialization

Meaning & History of Industrialization
Industrialization is the process by which an economy is transformed from primarily
agricultural to one based on the manufacturing of goods. Individual manual labor is
often replaced by mechanized mass production, and craftsmen are replaced by
assembly lines. Characteristics of industrialization include economic growth, more
efficient division of labor, and the use of technological innovation to solve problems as
opposed to dependency on conditions outside human control.

Industrialization is most commonly associated with the European Industrial Revolution

of the late 18th and early 19th centuries. Industrialization also occurred in the United
States between the 1880s and the Great Depression. The onset of the Second World War
also led to a great deal of industrialization, which resulted in the growth and
development of large urban centers and suburbs. Industrialization is an outgrowth of
capitalism, and its effects on society are still undetermined to some extent; however, it
has resulted in a lower birthrate and a higher average income.

Industrial Revolution
The Industrial Revolution traces its roots to the late 18th century in Britain. Prior to the
proliferation of industrial manufacturing facilities, fabrication and processing were
generally carried out by hand in people's homes. The steam engine was a key invention,
as it allowed for many different types of machinery. Growth of the metals and textiles
industries allowed for the mass production of basic personal and commercial goods. As
manufacturing activities grew, transportation, finance, and communications industries
expanded to support the new productive capacities.

The Industrial Revolution led to unprecedented expansion in wealth and financial well
being for some. It also led to increased labor specialization and allowed cities to support
larger populations, motivating a rapid demographic shift. People left rural areas in large
numbers, seeking potential fortunes in budding industries. The revolution quickly
spread beyond Britain, with manufacturing centers being established in continental
Europe and the United States.

World War II created unprecedented demand for certain manufactured goods, leading
to a buildup of productive capacity. After the war, reconstruction in Europe occurred
alongside a massive population expansion in North America. This provided further
catalysts that kept capacity utilization high and stimulated further growth of industrial
activity. Innovation, specialization, and wealth creation were causes and effects of
industrialization in this period.
The late 20th century was noteworthy for rapid industrialization in other parts of the
world, notably East Asia. The Asian Tigers of Hong Kong, South Korea, Taiwan, and
Singapore are well known for economic growth that altered those economies. China
famously experienced its own industrial revolution after moving toward a more mixed
economy and away from heavy central planning.

Modes of Industrialization
Different strategies and methods of industrialization have been followed at different
times and places with varying degrees of success. The Industrial Revolution in Europe
and the United States initially took place under generally mercantilist and protectionist
government policies that fostered the early growth of industry but was later associated
with a more laissez-faire or free market approach that opened markets to foreign trade
as an outlet for industrial output.

In the post Second World War era, developing nations across Latin America and Africa
adopted a strategy of import substituting industrialization, which involved protectionist
barriers to trade coupled with direct subsidization or nationalization of domestic
industries. Nearly at the same time, parts of Europe and several East Asian economies
pursued an alternative strategy of export led growth. This strategy emphasized
deliberate pursuit of foreign trade to build exporting industries, and partly depended on
maintaining a weak currency to make exports more attractive to foreign buyers. In
general, export-led growth has outperformed import substituting industrialization.

Lastly, socialist nations of the 20th century repeatedly embarked on various deliberate,
centrally planned programs of industrialization almost entirely independent of either
domestic or foreign trade markets. These include the first and second five-year plans in
the Soviet Union and the Great Leap Forward in China. While these efforts did re-orient
the respective economies toward a more industrial base and an increase in output of
industrial commodities, they were also accompanied by harsh government repression,
deteriorating living and working conditions for workers, and even widespread
starvation.

The Importance of Industrialization In Development

 Provides market to other sectors
Industries provide a market for both producer and consumer goods from other
sectors of the economy. In the case of producer goods, industries buy raw
materials from the primary sector, e. g. cotton from agriculture, soda-ash from
mining, and timber from forestry. The industrial sector also buys services from
the tertiary sector, e. g. banking, insurance, transport and communication. At the
same time, industrial workers buy consumer goods from other sectors. By
providing a market to these other sectors, industries facilities the development
of the country.

 Provides inputs to other sectors

 The industrial sector provides the necessary inputs to other sectors of the
economy. For instance, it provides agriculture with farm inputs such as tractors,
fertilizers, chemicals and drugs. It also provides other sectors with machinery,
steel, oil, etc. This makes it possible for these other sectors to operate and
contribute to development.

 Provides consumer goods to other sectors

Workers from other sectors require consumer goods such as clothes, processed
food, radios, television sets, vehicles, and furniture, that are provided by the
manufacturing industry. This raises the living standards of workers as well as
their productivity.

 Creates employment opportunities

The industrial sector is an important employer for both skilled and unskilled
labour. Agriculture and other sectors cannot absorb all the labour force. As
industries expand, they account for a much share of employment. By so doing,
industries alleviate unemployment.

 Conserves and earns foreign exchange

Through industrialization, a country is able to conserve foreign exchange by
reducing on imports. This is particularly so when industries are established to
produce goods that were previously imported. At the same time, where a country
manufactures goods for export, it earns foreign exchange. This foreign exchange
can be used to import essential capital goods and stimulate capital formation.

 Adds value to primary products

Producers of primary products can benefit more by processing their products before
export. This is because processing adds value to a product. Instead of exporting fruits in
their raw form, they can be processed and tinned. By so doing, fruits will fetch a higher
price. Similarly, coffee can fetch a higher price by being processed before exportation.

 Facilitates technological change

Industrialization is conducive to development of ideas and facilitates invention
and innovation. It can be seen as an instrument of change since it transcends
cultural boundaries. Through industrialization, people from different
backgrounds have been able to improve on the utilization of resources.
Industries are breeding grounds for entrepreneurs and managers. They also help
train the skilled manpower needed in a country. In a way, the manufacturing
industry facilitates technological advancement, which is crucial for development.
 Students are advised to learn about history of industrialization in India along
with opportunities created and the problems associated with it.

2. Organizations- various types of organizations.

Organizations (Meaning)
Organization refers to a collection of people, who are involved in pursuing defined
objectives. It can be understood as a social system which comprises all formal human
relationships. The organization encompasses division of work among employees and
alignment of tasks towards the ultimate goal of the company.

It can also be referred as the second most important managerial function, that
coordinates the work of employees, procures resources and combines the two, in
pursuance of company’s goals.

Process of Organization
Step 1: Determination and classification of firm’s activities.
Step 2: Grouping of the activities into workable departments.
Step 3: Assignment of authority and responsibility on the departmental executives for
undertaking the delegated tasks.
Step 4: Developing relationship amidst superior and subordinate, within the unit or
department.
Step 5: Framing policies for proper coordination between the superior and subordinate
and creating specific lines of supervision.

Organization is a goal-oriented process, which aims at achieving them, through proper

planning and coordination between activities. It relies on the principle of division of
work and set up authority-responsibility relationship among the members of the
organization.

On the basis of relationship, an organization can be of two types—formal and

informal.

Formal organization refers to the structure of well-defined jobs, each bearing a definite
measure of authority, responsibility and accountability.

Informal organization refers to the relationship between people in the organization

based on personal attitudes, emotions and prejudices, likes and dislikes.

There are five common types of organizations on the basis of structure—Line,

functional, Line and Staff, Committee and matrix organization.

(1) Line organization —In this, there is a chain of authority which flows from upward to
down word.

Advantages. Main advantages of this form of organization are: (i) Simple, (ii) Fixed
responsibility, (iii)
Flexibility, (iv) Prompt decision, (v) Unified control, (vi) Well-defined authority, (vii)
Fixed channel of
promotions.

Disadvantages— The system claims the following disadvantages: (i) Unitary

administration, (ii)
Overloading with work, (iii) Lack of specialisation (iv) Lack of communication (v)
Succession
problem, (vi) Absence of conceptual thinking, (vii) Favourities, (viii) No co-ordination.

(2) Functional organization—In this form of organization all activities in the

organization are
grouped according to the basic functions, i.e., production, finance, marketing, headed by
a specialist.

Advantages- Main advantages of this form are: (i) Specialisation, (ii) Large-scale
production, (iii)
Improved efficiency, (iv) Flexibility, (v) Better industrial relations, (vi) Separation of
mental and physical
functions.

Disadvantages—Following are the disadvantages of this form of organization: (i)

Multiplicity of
authority, (ii) Indiscipline, (iii) Shifting of responsibility, (iv) Lack of co-ordination, (v)
impracticable, (vi)
delay in decision making.

(3) Line and Staff Organization—In this form of organization the structure is basically
that of line
organization but functional experts are appointed to advise the line authority in their
respective field.

Advantages: (i) Advantages of the line and the functional organizations, (ii)
Specialisation, (iii) Sound
decisions.

Disadvantages: (i) Conflicts between the line and the staff executives, (ii) Advice of the
staff executives is
ignored, (iii) No demarcation of authority, (iv) Lack of responsibility, (v) uneconomical.

(4) Committee Organization—Committee is a group of individuals formed permanently

or
temporarily for a particular purpose through free interchange of ideas.

Advantages—(I) Pooling of ideas, (2) Co-ordination, (3) Motivation through

participation, (4)
Representation of interest groups, (5) Easy communication, (6) No concentration of
power, (7) A tool of
management for development.
Disadvantages—(I) Slow decisions, (2) Divided responsibility, (3) Minority tyranny, (4)
other abuses.

(5) Project or Matrix Organization—In it authority flows vertically within functional

departments.

Advantages-It emphasises multiple inter-dependence among various functions,

horizontal relationships
and operational flexibility.

Disadvantages—It is of a temporary nature.

The different types of organizations on basis of ownership are: - 1. Single

Ownership (Private Undertaking). 2. Partnership. 3. Joint Stock Company 4.
Cooperative Organization (Or Societies) 5. Public Sector 6. Private Sector.

Single Ownership:
Ownership when applied to an industrial enterprise means title to and possession of the
assets of the enterprise, the power to determine the policies of operation, and the right
to receive and dispose of the proceeds. It is called a single ownership when an
individual exercises and enjoys these rights in his own interest. A business owned by
one man is called single ownership. Single ownership does well for those enterprises
which require little capital and lend themselves readily to control by one person.

Advantages of Single Ownership:

1. Easy to establish as it does not require to complete any legal formality.
2. Simplicity of organization.
3. The expenses in starting the business are minimal.
4. Owner is free to make all decisions.
5. This type of ownership is simple, easy to operate and extremely flexible.
6. The owner enjoys all the profits, thus,
7. There is a great deal of personal motivation and incentive to succeed.
8. Minimum legal restrictions are associated with this form of ownership.
9. Owner can keep secrecy as regards the raw materials used, method of manufacture,
etc.
10. Single ownership associates with it the great ease with which the business can be
discontinued.
Disadvantages of Single Ownership:
1. The owner is liable for all obligations and debts of the business.
2. The business may not be successful if the owner has limited money, lacks ability and
necessary experience to run the business.
3. Because of relatively unstable nature of the business, it is difficult to raise capital for
expanding the business.
4. If the business fails, creditors can take the personal property as well as the business
property of the (single) owner to settle their claims. This means single ownership
involves unlimited liability for debts and losses.
5. There is limited opportunity for employees as regards monetary rewards (e.g., profit
sharing, bonuses, etc.) and promotions.
6. Generally, single ownership firm has limited life, i.e., the firm may cease to exist with
the death of the proprietor. This is the cause of unstable nature of the firm (refer 3
above).

Partnership:
A single owner becomes inadequate as the size of the business enterprise grows. He
may not be in a position to do away with all the duties and responsibilities of the grown
business. At this stage, the individual owner may wish to associate with him more
persons who have either capital to invest, or possess special skill and knowledge to
make the existing business still more profitable.
Such a combination of individual traders is called Partnership. Partnership may be
defined as the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all.
Individuals with common purposes join as partners and they put together their
property, ability, skill, knowledge, etc., for the purpose of making profits. In brief,
partnership is an association of two or more (up to 20) persons to carry on as co-
owners of a business for profit.
Partnerships are based upon a partnership agreement which is generally reduced to
writing. It should cover all areas of disagreement among the partners. It should define
the authority, rights and duties of each partner. It should specify- how profits and losses
will be divided among the partners, etc.

Joint Stock Company:

Joint Stock Company overcomes many of the disadvantages associated with Partnership
types of industrial ownership, such as:
(i) Difficulties in raising capital,
(ii) Easy disruption,
(iii) Lack of facility for centralised management, and
(iv) Unlimited liability, etc.
A joint stock company is an Association of individuals, called shareholders, who join
together for profit and agree to supply capital divided into shares that are transferable
for carrying on a specific business. Death, insolvency, disablement or lunacy of the
shareholders does not affect the joint stock company. A joint stock company consists of
more than twenty persons for carrying any business other than the banking business.
These persons give a name to the company, mention the purpose for which it is formed,
and state the nature and the amount of capital (shares) to be issued, etc., and submit the
proposal to the Registrar of Companies. As the registrar issues a certificate in this
connection, the company starts operating. The managing body of a joint stock company
is Board of Directors elected by the shareholders.
The Board of Directors:
(i) Makes policies;
(ii) Takes decisions; and
(iii) Runs the company efficiently.
The liability of the members (or shareholders) of a joint stock company is limited to that
capital only of which they hold the shares. Finance is raised by issuing shares,
debentures, bank loans, loans from industrial and finance corporations.
Types of Joint Stock Company:
There are two types of joint stock companies:
(a) Private Limited Company:
(i) The capital is collected from the private partners; some of them may be active while
others being sleeping.
(ii) Private limited company restricts the right to transfer shares, avoids public to take
up shares or debentures.
(iii) The number of members is between 2 and 50, excluding employee and ex-employee
sharehold¬ers.
(iv) The company need not file documents such as consent of directors, list of directors,
etc., with the Registrar of Joint Stock Companies.
(v) The company need not obtain from the Registrar, a certificate of commencement of
business.
(vi) The company need not circulate the Balance Sheet, Profit and Loss Account, etc.,
among its members; but it should hold its annual general meeting and place such
financial statements in the meeting.
(vii) A private company must get its accounts audited.
(viii) A private company has to send a certificate along with the annual return to the
Registrar of Joint Stock Companies stating that it does not have shareholders more than
fifty excluding the employee and ex-employee shareholders.
Actually, a private joint stock company resembles much with partnership and has the
advantage that big capital can be collected, than could be done so in partnership.
(b) Public Limited Company:
(i) In Public limited company, the capital is collected from the public by issuing shares
having small face value (Rs. 50,20,10).
(ii) The number of shareholders should not be less than seven, but there is no limit to
their maximum number.
(iii) A public limited company has to file with the Registrar of Joint Stock Companies,
documents such as consent of the directors, list of directors, director’s contract, etc.,
along with the memorandum of association and articles of association.
(iv) A public company has to issue a prospectus to the public.
(v) It has to allot shares within 180 days from the date of prospectus.
(vi) It can start only after receiving the certificate to commence business.
(vii) It has to hold a Statutory Meeting and to issue a Statutory Report to all members
and also to the Registrar within a certain period.
(viii) There is no restriction on the transfer of shares. (be) Directors of the company are
subject to rotation.
(x) The public company must get its account audited every year by registered auditors.
(xi) It has to send financial statements to all members and to the Registrar.
(xii) It has to hold a general meeting every year.
(xiii) The Managing Agent gets a fixed percentage of net profit as remuneration.
Advantages of Joint Stock Companies:
(i) A huge sum of money can be raised.
(ii) It associates limited liability with it.
(iii) Shares are transferable.
(iv) Company’s life is not affected by the life (death) of shareholders.
(v) Services of specialists can be obtained.
(vi) Risk of loss is divided among many shareholders.
(vii) The company associates with it stability, efficiency and flexibility of management.
Disadvantages of Joint Stock Companies:
(i) A good deal of legal formalities is required for the formation of a joint stock
company.
(ii) Company is managed by big shareholders only.
(iii) High paid officials manage the whole shows; they cannot have as high interests in
the company as the proprietors can have.
(iv) People can commit frauds with the company.
(v) Board of directors and managers who remain familiar with the financial position of
the company may sell or purchase shares for their personal profits.
(vi) It is difficult to maintain secrecy as in partnership.
(vii) The team spirit with which partnership works, is lacking in a joint stock company.
(viii) Divided responsibility.
Applications of Joint Stock Companies:
(i) Steel mills,
(ii) Fertiliser factories, and
(iii) Engineering concerns, etc.

Cooperative Organisation (Or Societies):

It is a form of private ownership which contains features of large partnership as well as
some features of the corporation. The main aim of the cooperative is to eliminate profit
and provide goods and services to the members of the cooperative at cost.
Members pay fees or buy shares of the cooperative, and profits are periodically
redistributed to them. Since each member has only one vote (unlike in joint stock
companies), this avoids the concentration of control in a few hands.
In a cooperative, there are shareholders, a board of directors and the elected officers
similar to the corporation. There are periodic meetings of shareholders, also. Special
laws deal with the formation and taxation of cooperatives.
Cooperative organisation is a kind of voluntary, democratic ownership formed by some
motivated individuals for obtaining necessities of everyday life at rates less than those
of the market. The principle behind the cooperative is that of cooperation and self-help.
Forms of Cooperative Enterprises:
(i) Consumer’s Cooperatives, in retail trade and services.
(ii) Producer Cooperatives, for group buying and selling such items as dairy products,
grain, fruit, etc.
(iii) Cooperative farming for more and good quality yield from the farms.
(iv) Cooperative housing for constructing and providing houses to the members of the
association at relatively lesser rates.
(v) Cooperative credit society, to provide loans to the needy individuals.
Advantages of Cooperative Enterprises:
(i) Daily necessities of life can be made available at lower rates.
(ii) It is the democratic form of ownership.
(iii) Overheads are reduced as members of the cooperative may render honorary
services.
(iv) It promotes cooperation, mutual assistance and the idea of self-help.
(v) The chances of large stock-holding (hoarding) and black marketing are eliminated.
(vi) No one person can make huge profits.
(vii) Common man is benefited by cooperatives.
(viii) Monetary help can be secured from government.
(ix) Goods required can be purchased directly from the manufacturers and therefore
can be sold at less rates.
Disadvantages of Cooperative Enterprises:
(i) Since the members of the cooperative manage the whole show, they may not be
competent enough to make it a good success.
(ii) Finance being limited, specialist’s services cannot be taken.
(iii) Conflict may arise among the members on the issue of sharing responsibility and
enjoying authorities.
(iv) Members who are in position may try to take personal advantages.
(v) Members being in services may not be able to devote necessary attention and
adequate time for supervising the works of the cooperative enterprise.

Public Sector:
Concept of Public Sector:
A public enterprise is one that is:
(1) Owned by the state,
(2) Managed by the state, or
(3) Owned and managed by the state.
The sector of public enterprises is popularly known as the Public Sector. Public
enterprises are controlled and operated by the Government either solely or in
association with private enterprises. Public enterprises are controlled and operated by
the Government to produce and supply goods and services required by the society.
Ultimate control of public enterprises remains with the state and the stale runs it with a
service motto.
Its sphere embraces all units, irrespective of risks involved and profit expected. There is
no dearth of capital in public sector and business expansion is not difficult. Public sector
prevents concentration and unbalanced growth of industries.
Public sectors are accountable in terms of their results to Parliament and State
Legislature. A public enterprise is seldom as efficient as a private enterprise; wastage
and inefficiency can seldom be reduced to a minimum.
Evolution of Public Sector:
The Industrial Revolution gave rise to many bitter social evils. It also gave birth to
private capitalism. Consumers and workers were exploited and, therefore, there arose
the need of State Intervention in industrial field. The intervention led to evolution of
public sector/enterprises. The evolution of public sector in India is recent.
Prior to 1947, there was virtually no public sector barring the field of transport and
communication, i.e., Railways, Posts and Telegraphs etc., are being managed by the
Central Government since pre-independence period. Since independence, a large
number of public enterprises have been established both by Central and State
Governments.
The Hindustan Shipyard, The Hindustan Steels, the Hindustan Machine Tools, The
Bharat Heavy Electricals, Indian Telephone Industries, Indian Airlines, Life Insurance
Corporation are a few examples of public sector.
Objectives of Public Sector:
(1) To provide basic infrastructure facilities for the growth of economy.
(2) To promote rapid economic development.
(3) To undertake economic activity strategically important for the growth of the
country, which if left to private initiative would distort the national objective.
(4) To have balanced regional development and even dispersal of economic activity
throughout the country.
(5) To avoid concentration of economic power in a few hands.
(6) To create employment opportunities on an increasing scale.
(7) To earn foreign exchange in order to export commodities not available in the
country e.g., petro¬leum oil, sophisticated weapon systems etc.
(8) To look after well-being and welfare of public.
(9) To minimize exploitation of workers and consumers.
Merits of Public Sector:
(1) Public sector helps in the growth of those industries which require huge amount of
capital and which cannot flourish under the private sector.
(2) Public sector helps in the implementation of the economic plans and enables them
to reach the target of achievement within a prescribed period by taking initiative in- the
establishment of in¬dustries of its own accord.
(3) Due to the absence of project motive in the public sector, the consumers are
benefitted by greater, better and cheaper products.
(4) Public enterprise prevents the concentration of wealth in the hands of a few and
paves the way for equitable distribution of wealth among different sections of
community.
(5) Public enterprise encourages industrial growth of under-developed regions in the
country.
(6) Profits earned by public sector may be used for the general welfare of the
community.
(7) Public sector offers equitable employment opportunities to all; there is no
discrimination, as may be in a private sector.
(8) Capital, raw material, fuel, power and transport are easily made available to them.
Demerits of Public Sector:
(1) Public sector can rarely attain the efficiency of a private enterprise; wastage and
inefficiency can seldom be reduced to a minimum.
(2) Due to heavy administrative expenses, state enterprises are mostly run at a loss
leading to addi¬tional burden of taxation on the people.
(3) There is too much interference by the Government and Politicians in the internal
affairs of the public enterprises. As a result inefficiency increases.
(4) Delay in decisions is a very common phenomena in public enterprises.
(5) Incompetent persons may occupy high levels.
(6) Workers (unlike in private concerns) shirk work.

Private Sector:
Private sector serves personal interests and is a non-government sector. Profit (rather
than service) is the main objective. Private sector constitutes mainly consumer’s goods
industries where profit possibilities are high. Private sector does not undertake risky
ventures or those having low-profit margin. Private enterprises are run by
businessmen, capital is collected from the private partners.
Merits of Private Sector:
(i) The magnitude of profits incurred is high.
(ii) The efficiency of the private enterprise is high,
(iii) Wastage of material and labour is minimum.
(iv) Decision-making is very prompt.
(v) There is no interference in its internal affairs by politicians or Government.
(vi) Competent persons occupy high levels.
Demerits of Private Sector:
(i) There is exploitation motive, the workers and the consumers may not receive fair
deal.
(ii) There is dearth of capital to expand the business.
(iii) Private enterprise leads to concentration of wealth in the hands of a few.
(iv) Private enterprises lead to unbalanced growth of industries.
3. Division of Economics, Basic Constituents (Micro & Macro
Economics)

Economics (Meaning)
Economics can be defined in a few different ways. It’s the study of scarcity, the study of
how people use resources and respond to incentives, or the study of decision-making. It
often involves topics like wealth and finance, but it’s not all about money. Economics is
a broad discipline that helps us understand historical trends, interpret today’s
headlines, and make predictions about the coming years.

Economics ranges from the very small to the very large. The study of individual
decisions is called microeconomics. The study of the economy as a whole is called
macroeconomics. A microeconomist might focus on families’ medical debt, whereas a
macroeconomist might focus on sovereign debt.

Main Divisions of Economics

There are four main divisions of economics. They are consumption, production,
exchange and distribution. In modern times, economists add one more division and that
is public finance.

Main Divisions of Economics

There are four main divisions of economics. They are consumption, production,
exchange and distribution. In modern times, economists add one more division and that
is public finance. In public finance, we study about the economics of government. The
economic functions of the modern State have increased to a great extent. So public
finance has become an important branch of economics.

All the above divisions are interrelated. And they are dependent on each other.

Consumption
Consumption deals with the satisfaction of human wants. There is economic activity in
the world because there are wants. When a want is satisfied, the process is known as
consumption. Generally, in plain language, when we use the term 'consumption', what
we mean is usage. But in economics, it has a special meaning. We can speak of the
consumption of the services of a lawyer, just as we speak of the consumption of food.

In the sub-division dealing with consumption, we study about the nature of wants, the
classification of wants and some of the laws dealing with consumption such as the law
of diminishing marginal utility, Engel's law of family expenditure and the law of
demand.

Production
Production refers to the creation of wealth. Strictly speaking, it refers to the creation of
utilities. And utility refers to the ability of a good to satisfy a want. There are three kinds
of utility. They are form utility, place utility and time utility. Production refers to all
activities which are undertaken to produce goods which satisfy human wants. Land,
labour, capital and organization are the four factors of production. In the sub-division
dealing with production, we study about the laws which govern the factors of
production. They include Malthusian Theory of population and the laws of returns. We
also study about the localization of industries and industrial organization.

Exchange
In modern times, no one person or country can be self-sufficient. This gives rise to
exchange. In exchange, we give one thing and take another. Goods may be exchanged for
goods or for money. If goods are exchanged for goods, we call it barter. Modern
economy is a money economy. As goods are exchanged for money, we study in
economics about the functions of money, the role of banks and we also study how prices
are determined. We also discuss various aspects of international trade.

Distribution
Wealth is produced by the combination of land, labour, capital and organization. And it
is distributed in the form rent, wages, interest and profits. In economics, we are not
much interested in personal distribution. That is, we do not analyse how it is distributed
among different persons in the society. But we are interested in functional distribution.
As the four factors or agents of production perform different functions in production,
we have to reward them.

Public Finance
Public finance deals with the economics of government. It studies mainly about the
income and expenditure of government. So, we have to study about different aspects
relating to taxation, public expenditure, public debt and so on.

Micro & Macro Economics

Most people understand how physics is classified as a science, however, there might be
some confusion when including economics in the same category. In fact, economics is a
social science, as it shares the same qualitative and quantitative elements common to all
social sciences. Economics focuses on the manufacturing, distribution, and consumption
of goods and services, and how people, organisations, governments, and nations choose
to allocate resources in order to gain these goods and services. As with the studies of all
sciences, establishing different sections makes it easier to understand. Economics can
be broken into two sections: microeconomics and macroeconomics.3 Here we delve into
these sections; their differences, how they affect each other, and their impact on
business.

What is microeconomics?

Microeconomics can be defined as the study of decision-making behaviour of

individuals, companies, and households with regards to the allocation of their
resources.

Microeconomics strives to discover what factors contribute to peoples’ decisions, and

what impact these choices have on the general market as far as price, demand, and
supply of goods and services is concerned. It’s a ‘bottom-up’ approach with a focus on
the basic elements that make up the economy’s three sectors (agriculture,
manufacturing, and services/tertiary), such as land, entrepreneurship, and capital. It
aims to understand the pattern of wages, employment, and income, as well as consumer
behaviour, spending trends, wage-price behaviour, corporate policies, and how
regulations impact on companies. Microeconomics tries to determine decisions and
resource allocation at an individual level, as well as explain what happens when certain
conditions change.

To summarise, microeconomics determines to understand the following:

 How people and households spend their budgets

 What combination of products and services are the best fit for their needs and wants, in
the context of their available budget
 How individuals decide whether or not to work, and if they choose to work, whether or
not it will be full time or part time
 How people decide to save for the future, how much they choose to save, or whether
they decide to go into debt
 How a business decides to produce and sell certain products, how it will produce it, how
many of each it will sell, and for how much
 What causes them to decide how many workers it will hire
 How a firm will finance its business
 At what time a business will decide to expand, downsize, or even close

For example, microeconomics could use information from a company’s financial reports
in order to determine how an organisation could maximise its production and output
capacity, in order to lower prices and become more competitive.

What is macroeconomics?

Macroeconomics is the holistic study of the structure, performance, behaviour, and

decision-making processes of an economy, at a national level.9 Essentially,
macroeconomics is a ‘top-down’ approach. It seeks to understand changes in the
nation’s Gross Domestic Product (GPD), inflation and inflation expectations, spending,
receipts and borrowings at a governmental level (fiscal policies), unemployment, and
monetary policy. This is done to interpret and know the state of the economy, so that
policies can be formulated at a higher level, and macro research can be carried out for
academic purposes.

Macroeconomics analyses entire industries and economies, rather than singular

companies or individuals. It seeks to answer questions such as, “What should the
inflation rate be?” and, “What stimulates economic growth?”.

To summarise, macroeconomics strives to answer the following:

 Which factors determine how many goods and services a country can produce
 What determines the number of jobs available in an economy
 What determines a country’s standard of living
  What factors cause the economy to speed up or slow down
 What causes organisations to hire or fire more labour on a national scale
 What causes the economy to grow over the long term
 What the state of the nation’s economic health is, based on improvement in the standard of
living, low unemployment, and low inflation

Macroeconomics vs microeconomics: the key differences

Microeconomics and macroeconomics both explore the same elements, but from
different points of view. The main differences between them are:

 Macroeconomics seeks to find a general perspective, at a national level, while

microeconomics focuses on the individual’s perspective, at a consumer level.
 Even though supply and demand applies to both fields of economics, microeconomics is
based on the trends of buyers and sellers, where macroeconomics focuses on the
various cycles of an economy, such as short and long term debt cycle, and business
cycles.

Macroeconomics vs microeconomics: the overlap

Macroeconomics does not exist in isolation, but rather is entwined with

microeconomics, and works in tandem in order to be efficient. Choices based on
microeconomic factors, whether from individuals or businesses, can impact
macroeconomics in the long run. Similarly, a national policy that involves
microeconomics could affect how households and enterprises interact with their
economy. For example, if the government raises the tax on a certain product
(macroeconomics), an individual shop owner will have to increase the price, which will
impact on the consumer and their decision for or against the product at that price
(microeconomics)

Students are advised and encouraged to learn about role of economics in the area of
engineering (especially to the concerned branch).
 UNIT II
CONSUMPTION AND MARKET STRUCTURE:
Law of Demand and Elasticity of Demand

Law of Demand

 The law of demand states that a higher price leads to a lower quantity demanded and that
a lower price leads to a higher quantity demanded.
 Demand curves and demand schedules are tools used to summarize the relationship
between quantity demanded and price.

Demand for goods and services

Economists use the term demand to refer to the amount of some good or service
consumers are willing and able to purchase at each price. Demand is based on needs
and wants—a consumer may be able to differentiate between a need and a want, but
from an economist’s perspective they are the same thing. Demand is also based on
ability to pay. If you cannot pay, you have no effective demand.
What a buyer pays for a unit of the specific good or service is called price. The total
number of units purchased at that price is called the quantity demanded. An increase
in the price of a good or service almost always decreases the quantity demanded of that
good or service. Conversely, a decrease in price will increase the quantity demanded.
When the price of a gallon of gasoline goes up, for example, people look for ways to
reduce their consumption by combining several errands, commuting by carpool or mass
transit, or taking weekend or vacation trips closer to home. Economists call this inverse
relationship between price and quantity demanded the law of demand. The law of
demand assumes that all other variables that affect demand are held constant.

Demand schedule and demand curve

 A demand schedule is a table that shows the quantity demanded at each price.
 A demand curve is a graph that shows the quantity demanded at each price. Sometimes the
demand curve is also called a demand schedule because it is a graphical representation of
the demand schedule.

Here's an example of a demand schedule from the market for gasoline.

Price, in this case, is measured in dollars per gallon of gasoline. The quantity demanded
is measured in millions of gallons over some time period—for example, per day or per
year—and over some geographic area—like a state or a country.
Here's the same information shown as a demand curve with quantity on the horizontal
axis and the price per gallon on the vertical axis. Note that this is an exception to the
normal rule in mathematics that the independent variable (xxx) goes on the horizontal
axis and the dependent variable (yyy) goes on the vertical.
Wondering why it is different? Click here!
A Demand Curve for Gasoline

The graph shows a downward-sloping demand curve that represents the law of demand.
The demand schedule shows that as price rises, quantity demanded decreases, and vice
versa. These points are then graphed, and the line connecting them is the demand curve.
The downward slope of the demand curve again illustrates the law of demand—the
inverse relationship between prices and quantity demanded.

Demand curves will be somewhat different for each product. They may appear
relatively steep or flat, and they may be straight or curved. Nearly all demand curves
share the fundamental similarity that they slope down from left to right, embodying the
law of demand: As the price increases, the quantity demanded decreases, and,
conversely, as the price decreases, the quantity demanded increases.

The difference between demand and quantity demanded

In economic terminology, demand is not the same as quantity demanded. When
economists talk about demand, they mean the relationship between a range of prices
and the quantities demanded at those prices, as illustrated by a demand curve or a
demand schedule. When economists talk about quantity demanded, they mean only a
certain point on the demand curve or one quantity on the demand schedule. In short,
demand refers to the curve, and quantity demanded refers to a specific point on the
curve.
Elasticity of Demand

Introduction
Generally, elasticity of demand refers to price elasticity of demand, which is often called
own price elasticity of demand, though the notion of elasticity of demand also relates to
income, cross and substitution elasticities of demand.

Price Elasticity of Demand:

Meaning:
The elasticity of demand is the degree of responsiveness of demand to change in price.
In the words of Prof. Lipsey: “Elasticity of demand may be defined as the ratio of the
percentage change in demand to the percentage change in price.” Mrs. Robinson’s
definition is more clear: “The elasticity of demand at any price…. is the proportional
change of amount purchased in response to a small change in price, divided by the
proportional change of price.”

Thus, price elasticity of demand is the ratio of percentage change in amount demanded
to a percentage change in price. It may be written as Ep = Percentage change in amount
demanded/ Percentage change in price If we use ∆ (delta) for a change, q for amount
demanded and p for price, the algebraic equation is
Ep, the coefficient of price elasticity of demand is always negative because when price
changes demand moves in the opposite direction. It is, however, customary to disregard
the negative sign. If the percentages for quantity and prices are known the value of the
coefficient Ep can be calculated.
Price elasticity of demand may be unity, greater than unity, less than unity, zero or
infinite. These five cases are explained with the aid of the following figures. Price
elasticity of demand is unity when the change in demand is exactly proportionate to the
change in price. For example, a 20% change in price causes 20% change in demand, E =
20%/20% = 1. In the diagrams of Figure 1, ∆p represents change in price, ∆q change in
demand? And DD the demand curve. Price elasticity on the first demand curve in Panel
(A) is unity, for ∆q/∆p = 1.

When the change in demand is more than proportionate to the change in price, price
elasticity of demand is greater than unity. If the change in demand is 40% when price
changes by 20% then E = 40%/20% = 2, in Panel (B), i.e. ∆q /∆р> 1. It is also known as
relatively elastic demand.

If, however, the change in demand is less than proportionate to the change in price,
price elasticity of demand is less than unity. When a 20% change in price causes 10%
change in demand, then E p= 10%/20% = 1/2 =<1, in Panel (C), i.e. ∆q/∆р<1. It is also
known as relatively inelastic demand.
Zero elasticity of demand is one when whatever the change in price, there is absolutely
no change in demand. Price elasticity of demand is perfectly inelastic in this case. A 20%
rise or fall in price leads to no change in the amount demanded, Ep= 0/20% = 0, in Panel
(D), i.e.0/∆p = 0. It is perfectly inelastic demand.
Lastly, price elasticity of demand is infinity when as infinitesimal small change in price
leads to an infinitely large change in the amount demanded. Visibly, no change in price
causes an infinite change in demand, Ep = /0 = , in Panel (E), at OD price, the quantity
demanded continues to increase from Ob to Ob1 …..n. It is perfectly elastic demand.
Methods of Measuring Price Elasticity of Demand:
There are four methods of measuring elasticity of demand they are the percentage
method, point method, arc method and expenditure method.
(a) The Percentage Method:
The price elasticity of demand is measured by its coefficient

(Ep). This coefficient (Ep) measures the percentage change in the quantity of a
commodity demanded resulting from a given percentage change in its price. Thus

Where q refers to quantity demanded, p to price and A to change. If Ep> 1, demand is

elastic. If Ep <1 demand is inelastic, and if Ep =1, demand is unitary elastic. With this
formula, we can compute price elasticities of demand on the basis of a demand
schedule.
Table. 1: Demand Schedule
Combination Price (Rs.) Per Kg. of X Quantity Kgs. of X
A 6 0
В 5 10
С 4 20
D 3 30
E 2 40
F 1 50
G 0 60
Let us first take combinations В and D.

(i)Suppose the price of commodity X falls from Rs. 5 per kg. to Rs. 3 per kg. and its
quantity demanded increases from 10 kgs. to 30 kgs. Then

This shows elastic demand or elasticity of demand greater than unitary.

Note:
The formula can be understood like this:
∆q = q2-q1 where q2 is the new quantity (30 kgs.) and q2 the original quantity (10 kgs.).
∆P = p2-p1 where p2 is the new price (Rs.3) and p, the original price (Rs. 5).
In the formula, p refers to the original price (p1) and q to original quantity (q1). The
opposite is the case in example (ii) below, where Rs. 3 becomes the original price and
30 kgs. as the original quantity.
(ii) Let us measure elasticity by moving in the reverse direction. Suppose the price of X
rises from Rs. 3 per kg. to Rs. 5 per kg. and the quantity demanded decreases from 30
kgs. to 10 kgs. Then
This shows unitary elasticity of demand. Notice that the value of Ep in example (i)
differs from that in example (ii) depending on the direction in which we move. This
difference in the elasticities is due to the use of a different base in computing percentage
changes in each case. Now consider combinations D and F.

(iii) Suppose the price of commodity X falls from Rs. 3 per kg to Re. 1 per kg. and its
quantity demanded increases from 30 kgs. to 50 kgs. Then

This is again unitary elasticity.

(iv) Take the reverse order when the price rises from Re. 1 per kg. to Rs. 3 per kg. And
the quantity demanded decreases from 50 kgs. to 30 kgs. Then

This shows inelastic demand or less than unitary.

The value of Ep again differs in this example than that given in example (iii) for the
reason stated above.
(b) The Point Method:
Prof. Marshall devised a geometrical method for measuring elasticity at a point on the
demand curve. Let RS be a straight line demand curve in Figure. 2. If the price falls from
PB (= OA) to MD (= ОС), the quantity demanded increases from OB to OD.

Elasticity at point P on the RS demand curve according to the formula is:

EP= ∆q/∆p × p/q
Where ∆q represents change in quantity demanded ∆p changes in price level while p
and q are initial price and quantity levels.
From Figure 2.
∆q = BD = QM
∆p = PQ
p = PB
q = OB
Substituting these values in the elasticity formula:
EP = QM/PQ× PB/OB
Moreover, QM/PQ × BS/PB

[<PQM=<PBS are similar ∆s]

... BS/PB× PB/OB = BS/OB
Since, ∆ PBS and ∆ROS are similar,

Ep at point p = BS/OB = OA/AR = PS/PR =Lower Segment/Upper Segment

With the help of the point method, it is easy to point out elasticity at any point along a
demand curve. Suppose that the straight line demand curve DC in Figure. 3 is 6
centimeters. Five points L, M, N, P and Q are taken on this demand curve. The elasticity
of demand at each point can be known with the help of the above method. Let point N
be in the middle of the demand curve. So elasticity of demand at point.

N = CN (Lower Segment) / ND (Upper Segment) = 3/3 = 1 (Unity)

Elasticity of demand at point

M = CM/MD = 5/1 = 5 or > 1.

(Greater than Unity)

Elasticity of demand at point

L = CL/LD = 6/0 = ∞ (infinity).

Elasticity of demand at Point

P = CP/PD = 1/5 = (Less than Unity).

Elasticity of demand at point

Q = CQ/QD = 0/6 = 0(Zero)

We arrive at the conclusion that at the mid-point on the demand curve, the elasticity of
demand is unity. Moving up the demand curve from the mid-point, elasticity becomes
greater. When the demand curve touches the Y- axis, elasticity is infinity. Ipso facto, any
point below the midpoint towards the X-axis will show elastic demand. Elasticity
becomes zero when the demand curve touches the X -axis.

(c) The Arc method:

We have studied the measurement of elasticity at a point on a demand curve. But when
elasticity is measured between two points on the same demand curve, it is known as arc
elasticity. In the words of Prof. Baumol, “Arc elasticity is a measure of the average
responsiveness to price change exhibited by a demand curve over some finite stretch of
the curve.”

Any two points on a demand curve make an arc. The area between P and M on the DD
curve in Figure. 4 is an arc which measures elasticity over a certain range of price and
quantities. On any two points of a demand curve, the elasticity coefficients are likely to
be different depending upon the method of computation. Consider the price-quantity
combinations P and M as given in Table. 2.

Table 2: Demand Schedule:

Point Price (Rs) Quantity (Kg)
P 8 10
M 6 12
If we move from P to M, the elasticity of demand is

EP = ∆Q/∆P × p/q = (12 – 10) / (6-8) × 8/10 = 2/-2 × 8/10 = 4/5

If we move in the reverse direction from M to P, then

(10-20) / (6-8) × 6/12 = -2/2 × 6/12 = -1/2

Thus the point method of measuring elasticity at two points on a demand curve gives
different elasticity coefficients because we used a different base in computing the
percentage change in each case.

To avoid this discrepancy, elasticity for the arc (PM in Figure 4) is calculated by taking
the average of the two prices [(p1 + p2)1/2] and the average of the two quantities [(q1 +
q2 )1/2]. The formula for price elasticity of demand at the mid-point (C in Figure 4) of the
arc on the demand curve is

On the basis of this formula, we can measure arc elasticity of demand when there is a
movement either from point P to M or from M to P.

From P to M at point P, p1 =8, q1 = 10, and at point M, p2 = 6, q2 = 12.

Applying these values, we get

EP = ∆q/∆p × p1 + p2 / q1 + q2 = (12-10) / 8-6 × (8 + 6) × (10+12) = 2/-2 × 14/22 = -7/11

From M to P at point M, P1= 6, q1 = 12 and at point, p2 = 8, q2 = 10.
Now we have EP = (10-12) / (8-6) × (6+8)/12+10) = -2/2 × 14/22 = -7/11
Thus whether we move from M to P or P to M on the arc PM of the DD curve, the
formula for arc elasticity of demand gives the same numerical value. The closer the two
points P and M are, the more accurate is the measure of elasticity on the basis of this
formula. If the two points which form the arc on the demand curve are so close that they
almost merge into each other, the numerical value of arc elasticity equals the numerical
value of point elasticity.

(d) The Total Outlay Method:

Marshall evolved the total outlay, or total revenue or total expenditure method as a
measure of elasticity. By comparing the total expenditure of a purchaser both before
and after the change in price, it can be known whether his demand for a good is elastic,
unity or less elastic.

Total outlay is price multiplied by the quantity of a good purchased:

Total Outlay = Price x Quantity Demanded. This is explained with the help of the
demand schedule in Table.3.

(i) Elastic Demand:

Demand is elastic, when with the fall in price the total expenditure increases and with
the rise in price the total expenditure decreases. Table.3 shows that when the price falls
from Rs. 9 to Rs. 8, the total expenditure increases from Rs. 18 to Rs. 24 and when price
rises from Rs. 7 to Rs. 8, the total expenditure falls from Rs. 28 to Rs. 24. Demand is
elastic (Ep>1) in this case.

(ii) Unitary Elastic Demand:

When with the fall or rise in price, the total expenditure remains unchanged, the
elasticity of demand is unity. This is shown in the table when with the fall in price from
Rs. 6 to Rs. 5 or with the rise in price from Rs. 4 to Rs. 5, the total expenditure remains
unchanged at Rs. 30, i.e., Ep =1.

(iii) Less Elastic Demand:

Demand is less elastic if with the fall in price, the total expenditure falls and with the
rise in price the total expenditure rises. In Table 3 when the price falls from Rs. 3 to Rs.
2, total expenditure falls from Rs. 24 to Rs 18, and when the price rises from Re. 1 to Rs.
2, the total expenditure also rises from Rs. 10 to Rs. 18. This is the case of inelastic or
less elastic demand, Ep< 1.

Table 4 summarises these relationships:

Total 4: Total Outlay Method
The measurement of elasticity of demand in terms of the total outlay method is
explained in Fig. 5 where we divide the relationship between price elasticity of demand
and total expenditure into three stages:

In the first stage, when the price falls from OP4 to OP3 and to OP2 respectively, the total
expenditure rises from P4 E to P3D and Р2 С respectively. On the other hand, when the
price increases from OP2 to OP3 and OP4, the total expenditure decreases from P2 С to
P3 D and P4 E respectively.
Thus EC segment of total expenditure curve shows elastic demand (Ep> 1).

In the second stage, when the price falls from OP2 to OP1 or rises from OP1 to OP2 the
total expenditure equals, P2 C = P1B, and the elasticity of demand is equal to the unity
(Ep =1).
In the third stage, when the price falls from Op1 to Op2 the total expenditure also falls
from P1 В to PA. Thus with the rise in price from OP to Op1 the total expenditure also
increases from PA to P1B and the elasticity of demand is less than unity (Ep< 1).
Factors Affecting Price Elasticity of Demand:
Elasticity of demand for any commodity is determined or influenced by a number
of factors which are discussed as under:
(1) Nature of the Commodity:
The elasticity of demand for any commodity depends upon the category to which it
belongs, i.e., whether it is a necessity, comfort, or luxury. The demand for necessaries of
life or conventional necessaries is generally less elastic. For example, the demand for
necessaries like food, salt, matches, etc. does not change much with rise or fall in their
prices. Similar is the case with commodities which are required at the time of marriage,
death ceremonies, etc.
The demand for necessaries of efficiency (such as milk, eggs, butter, etc.), and for
comforts is moderately elastic because with the rise or fall in their prices, the demand
for them decreases or increases moderately. On the other hand, the demand for luxuries
is more elastic because with a small change in their prices there is a large change in
their demand. But the demand for prestige goods, like jewels, rare coins, rare stamps,
paintings by Tagore or Picasso, etc. is inelastic because they possess unique utility for
the buyers who are prepared to buy them at all costs.

(2) Substitutes:
Commodities having substitutes have more elastic demand because with the change in
the price of one commodity, the demand for its substitute is immediately affected. For
example, if the price of coffee rises, the demand for coffee will decrease and that for tea
will increase, and vice versa. But the demand for commodities having no good
substitutes is inelastic.

(3) Variety of Uses:

The demand for a commodity having composite demand or variety of uses is more
elastic. Such commodities are coal, milk, steel, electricity, etc. For example, coal is used
for cooking and heating, for power generation, in factories, in locomotives, etc. If there
is a slight fall in the price of coal, its demand will increase from all quarters.

On the other hand, a rise in its price will bring a considerable decrease in demand in
less important uses (domestic) and in more important uses efforts will also be made to
economise its use, as in railways and factories. Thus the overall effect will be a
reduction in demand. A commodity which cannot be put to more than one use, has less
elastic demand.

(4) Joint Demand:

There are certain commodities which are jointly demanded, such as car and petrol, pen
and ink, bread and jam, etc. The elasticity of demand of the second commodity depends
upon the elasticity of demand of the major commodity. If the demand for cars is less
elastic, the demand for petrol will also be less elastic. On the other hand, if the demand
for, say, bread is elastic the demand for jam will also be elastic.

(5) Deferred Consumption:

Commodities whose consumption can be deferred have an elastic demand. This is the
case with durable consumer goods, like cloth, bicycle, fan, etc. If the price of any of these
articles rises, people will postpone their consumption. As a result, their demand will
decrease, and vice versa.

(6) Habits:
People who are habituated to the consumption of a particular commodity, like coffee,
tea or cigarette of a particular brand, the demand for it will be inelastic. We find that the
prices of coffee, tea and cigarettes increase almost every year but there has been little
effect on their demand because people are in the habit of consuming them.

(7) Income Groups:

The elasticity of demand also depends on the income group to which a person belongs.
Persons who belong to the higher income group, their demand for commodities is less
elastic. It is immaterial to a rich man whether the price of a commodity has fallen or
risen, and hence his demand for the commodity will be unaffected.

On the other hand, the demand of persons in lower income groups is generally elastic. A
rise or fall in the prices of commodities will reduce or increase the demand on their
part. But this does not apply in the case of necessities, the demand for which on the part
of the poor is less elastic.

(8) Proportion of Income Spent:

If the consumer spends a small proportion of his income on a commodity at a time, the
demand for that commodity is less elastic because he does not bother much about small
expenditure. Such commodities are shoe polish, pen, pencil, thread, needle, etc. But
commodities which entail a large proportion of the income of the consumer, the
demand of them is elastic, such as bicycle, watch, etc.

(9) Level of Prices:

The level of prices also influences the elasticity of demand for commodities when the
price level is high, the demand for commodities is elastic, and when the price level is
low, and the demand is less elastic.

(10) Time Factor:

Time factor plays an important role in influencing the elasticity of demand for
commodities. The shorter the time in which the consumer buys a commodity, the lesser
will be the elasticity of demand tor that product. On the other hand, the longer the time
which the consumer takes in buying a commodity, the higher will be the elasticity of
demand for that product.

Prof. Stigler mentions three possible reasons for the long-period elasticity being higher
than the short-period elasticity. In the long run, the consumer has a better knowledge of
the price changes, takes time to readjust his budget, and might change his consumption
pattern due to possible technological changes.

(11) Brand:
The price of demand for a given brand of product may be elastic. If its price increases,
people turn towards the other brands easily. This is substitution effect For example, if
the price of the Hero bicycle increases, the consumer will buy the Atlas bicycle.

(12) Recurring Demand:

Goods which have recurring demand, their prices are more elastic than the goods which
are not demanded time and again.

(13) Distribution of Income:

If a country has equal distribution of income and wealth, the demand for majority of
goods is elastic because there are more middle class people whose purchasing power is
almost equal.

3. Cross Elasticity of Demand:

The cross elasticity of demand is the relation between percentage change in the
quantity demanded of a good to the percentage change in the price of a related good.
The cross elasticity of demand between good X and Y

Where, Qx = Quantity of good X, P = Price of good Y and A = change. Given the price of X,
this formula measures the change in the quantity demanded of X as a result of change in
the price of Y. The cross elasticity of demand for good X may be positive, negative or
zero which depends on the nature of relation between the goods X and Y. This relation
may be as substitutes, complementary or unrelated goods.
a. Substitute Goods:
If X and Y are substitute goods, a fall in the price of good Y will reduce the quantity
demanded of good X. Similarly, an increase in the price of good Y will raise the demand
for good X. Their cross elasticity is positive because, given the price of X, a change in the
price of Y will lead to a change in the quantity demanded of X in the same direction as in
the price of Y. The cross elasticity of substitute goods is explained in Table 5.

Table 5: Cross Elasticity of Substitutes:

Commodity Before Change After Change
Price in Rs. Per K.G. Quantity (K.G) Price Quantity
in Rs. (K.G.)
Per
(KG.)
X (Tea) 20 400 20 500
Y (Coffee) 30 500 40 300
Exy =∆Qx/∆Py × Py /Qx = 500- 400/40-30 × 30/400
= 100/10 × 30/400 = (+) 3/4 or (+) 0.75
It is clear from the above that the coefficient of cross elasticity of substitute goods such
as tea (X) and coffee (Y) is positive (+0.75) when with the rise in price of coffee, the
price of tea being constant, the demand for tea also increases.

This is shown in Fig. 6 where the quantity of good X (tea) is taken on X-axis and the
quantity of good Y is plotted on X-axis. When the price of Y increases from OY to OY1the
quantity demanded of X rises from OX to OX1. The slope of the demand curve
downwards to the right shows positive elasticity of both the goods.

b. Complementary Goods:
If two goods are complementary (jointly demanded), rise in the price of one leads to a
fall in the demand for the other. Rise in the prices of cars will bring a fall in their
demand together with the demand for petrol. Similarly, a fall in the prices of cars will
raise the demand for petrol. Since price and demand vary in the opposite direction, the
cross elasticity of demand is negative.

The cross elasticity of complementary goods is explained in Table 6.

Table 6: Cross Elasticity of Complementary:

Goods Before the Price Change After the Price
Change
Price in Rs. Per K.G. Quantity (K.G.) Price in Rs. Quantit
Per K.G. y (K.G.)
X (Tea) 150 40 150 30
Y 15 100 20 80
(Sugar
)

Exy = ∆Qx/∆Py × Py/Qx = 30-40 / 20-15 × 15/40

= -10/5 × 15/40 = -15/20 = -3/4 = (-) 0.75.

In this case, the cross elasticity coefficient of complementary goods such as tea and
sugar or car and petrol is negative.
This is explained in Fig.7 where with the rise in the price of Y (Sugar) from OY to
OY1, the demand for X (tea) falls from OX to OX1. The slope of the demand curve
downwards to the right indicates negative cross elasticity.
c. Unrelated Goods:
If the two goods are unrelated, a fall in the price of good У has no effect whatsoever on
the demand for good X. In such a case, the cross elasticity of demand is zero. For
example, a fall in the price of tea has no effect on the quantity demanded of car. The
cross elasticity of demand for unrelated goods is shown in Fig. 8. Even an increase in the
price of good Y from OY to OY1, the demand for good X remains the same as OD. Hence,
the cross elasticity of demand for unrelated goods is zero.

Some Conclusions:
We may draw certain inferences from this analysis of the cross elasticity of demand.

(a) The cross elasticity between two goods, whether substitutes or complementaries, is
only a one-way traffic. The cross elasticity between butter and jam may not be the same
as the cross elasticity of jam to butter. A 10% fall in the price of butter may cause a fall
in the demand for jam by 5%. But a 10% fall in the price of jam may lower the demand
for butter by 2%. It shows that in the first case the coefficient is 0.5 and in the second
case 0.2. The superior the substitute whose price changes, the higher is the cross
elasticity of demand.

This rule also applies in the case of complementary goods. If the price of car falls by 5%,
the demand for petrol may go up by 15%, giving a high coefficient of 3. But a fall in the
price of petrol by 5% may lead to a rise in the demand for cars by 1%, giving a low
coefficient of 0.2.
(b) Cross elasticities for both substitutes and complementaries vary between zero and
infinity. Generally, cross elasticity for substitutes is positive, but in exceptional
circumstances it may also be negative.

(c) Commodities which are close substitutes have high cross elasticity and commodities
with low cross elasticities are poor substitutes for each other. This distinction helps to
define an industry. If some goods have high cross elasticity, it means that they are close
substitutes. Firms producing them can be regarded as one industry.

A good having a low cross elasticity in relation to other goods may be regarded a
monopoly product and its manufacturing firm becomes an industry by determining the
boundary of an industry. Thus cross elasticities are simply guidelines.

Application of Cross Elasticity in Management:

The cross elasticity of demand has much practical importance in the solution of
various business problems:
1. In Production:
A firm wants to know the cross elasticity of demand for its goods while considering the
effect of change in the price of its competitor’s goods on the demand for its own goods.
It is important for a firm to have knowledge of it while making its production plan.

2. in Demand Forecasting and Pricing:

Its knowledge helps the firm in estimating the potential impact of the pricing decisions
of its competitors and associates on its sales so that it prepares its pricing strategies.

3. in International Trade and Balance of Payments:

The utility of this concept is significant in the area of international trade and balance of
payments. The government wants to know how the change in domestic prices affects
the demand for imports.

Domestically produced goods being close substitutes if the cross elasticity of demand
for imports is high and if the prices of domestic goods increase due to inflation, the
demand for imports will increase substantially which will deteriorate the balance of
payments position.

4. Income Elasticity of Demand:

The concept of income elasticity of demand (Ey) expresses the responsiveness of a
consumer’s demand (or expenditure or consumption) for any good to the change in his
income. It may be defined as the ratio of percentage change in the quantity demanded
commodity to the percentage change in income. Thus
Ey = Percentage change in quantity demanded / Percentage change in income
= ∆Q/Q / ∆Y/Y = ∆Q/Q × Y/∆Y = ∆Q/∆Y × Y/Q

Where ∆is change, Q quantity demanded and Y is income.

The coefficient E may be positive, negative or zero depending upon the nature of a
commodity. If an increase in income leads to an increased demand for a commodity, the
income elasticity coefficient (Ey) is positive. A commodity whose income elasticity is
positive is a normal good because more of it is purchased as the consumer’s income
increases.
On the other hand, if an increase in income leads to a fall in the demand for a
commodity, its income elasticity coefficient (Ey) is negative. Such a commodity is called
inferior good because less of it is purchased as income increases. If the quantity of a
commodity purchased remains unchanged regardless of the change in income, the
income elasticity of demand is zero (Ey =0).
Normal goods are of three types:
Necessaries, luxuries and comforts. In the case of luxuries, the coefficient of income
elasticity is positive but high, Ey >1. Income elasticity of demand is high when the
demand for a commodity rises more than proportionate to the increase in income.
Assuming prices of all other goods as constant, if the income of the consumer increases
by 5% and as a result his purchases of the commodity increase by 10%, then Ey = 10/5 =
2(>1). Taking income on the vertical axis and the quantity demanded on the horizontal
axis, the increase in demand Q1 income Q2 in more than the rise in income Y1, Y2 as
shown in Fig 9. The curve Dy shows a positive and elastic income demand.

In the case of necessities, the coefficient of income elasticity is positive but low, Ey <1.
Income elasticity of demand is low when the demand for a commodity rises less than
proportionate to the rise in the income. If the proportion of income spent on a
commodity increases by 2% when the consumer’s income goes up by 5%, Ey = 2/5(<1)
Figure 10 shows a positive but inelastic income demand curve Dy because the increase
in demand Q1 Q2 is less than proportionate to the rise in income Y1 Y2.

In the case of comforts, the coefficient of income elasticity is unity (Ey =1) when the
demand for a commodity rises in the same proportion as the increase in income. For
example, a 5% increase in income leads to 5% rise in demand, E y=5/5 = 1. The curve Dy
in Figure 11 shows unitary income elasticity of demand. The increase in quantity
demanded Q1 Q2 exactly equals the increase in income Y1Y2.

The coefficient of income elasticity of demand in the case of inferior goods is negative.
In the case of inferior goods, the consumer will reduce his purchases of it, when his
income increases. If a 5% increase in income leads to 2% reduction in demand, Ey = -2/5
(<0). Figure 12 shows the Dy curve for inferior goods which bends upwards from A to В
when the quantity demanded decreases by good with the rise in income by Y1Y2.
If with increase in income, the quantity demanded remains unchanged, the coefficient of
income elasticity, Ey = 0. If, say, with 5% increase in income, there is no change in the
quantity demanded, then Ey = 0/5 = 6. Figure 13 shows a vertical income demand curve
Dy with zero elasticity.

Measuring Income Elasticity of Demand: The Engel Curve:

Each Dy curve expresses the income-quantity relationship. Such a curve is known as an
Engel curve which shows the quantities of a commodity which a consumer would buy at
various levels of income. In Figure 9, we have explained income elasticity of demand
with the help of linear Engle curves. Income elasticity in terms of non-linear Engel
curves can be measured with the point formula. In general, the Engel curves look like
the curves E1 E2 and E3, as shown in Figures 14, 15 and 16.
(1) Consider Figure. 14 where LA is tangent to the Engel curve E1 at point A. The
coefficient of income elasticity of demand at point A is
Ey = ∆Q/∆Y Y/Q = LQ/QA.QA.OQ = LQ/QA > 1
This shows that the curve E1 is income elastic over much of its range. When the Engel
curve is positively sloped and Ey >1, it is the case of a luxury goods.
(2) Take Figure 15 where NB is tangent to the Engel curve ED2 at point B. The coefficient
of income elasticity at point B is
Ey = ∆Q/∆Y Y/Q = NQ/QB.QB/OQ = NQ/OQ < 1.
This shows that the income elasticity of E2 curve over much of its range is larger than
zero but smaller than 1. When the Engel curve is positively sloped and Ey <1, the
commodity is a necessity and is income inelastic.
(3) In Figure 16, the Engel curve E2 is backward-sloping after point B. In the backward-
sloping range, draw a tangent GC at point C. The coefficient of income elasticity at point
C is
Ey = -GQ/GC GC/OQ = -GQ/OQ < 0
This shows that over the range the Engel curve E3 is negatively sloped. Ey is negative and
the commodity is an inferior good. But before it bends backward, the Engel curve
E3 illustrates the case of a necessary good having income inelasticity over much of its
range.
Determinants of Income Elasticity of Demand:
There are certain factors which determine the income elasticity of demand:
1. The Nature of Commodity:
Commodities are generally grouped into necessities, comforts and luxuries. We have
seen above that in the case of necessities, Ey <1, in the case of comforts, Ey = 1, and in the
case of luxuries, Ey > 1.
2. Income Level:
This grouping of commodities depends upon the income level of a country. A car may be
a necessity in a high-income country and a luxury in a poor low-income country.

3. Time Period:
Income elasticity of demand depends on the time period. Over the long-run, the
consumption patterns of the people may change with changes in income with the result
that a luxury today may become a necessity after the lapse of a few years.

4. Demonstration Effect:
The demonstration effect also plays an important role in changing the
tastes, preferences and choices of the people and hence the income elasticity of demand
for different types of goods.

5. Frequency:
The frequency of increase in income also determines income elasticity of demand for
goods. If the frequency is greater, income elasticity will be high because there will be a
general tendency to buy comforts and luxuries.

Use of Income Elasticity in Business Decisions:

The income elasticity of a product has great significance in long-term planning
and in the solution of strategic problems, particularly during trade cycles:
a. Planning of the Firm’s Growth:
The knowledge of income elasticity of demand is very important for both the firms and
the government. Firms whose demand function is income elastic, the scope of their
growth is generally wide in an expanding economy but they are very insecure during
recession. So such firms must consider their all economic activities and their potential
growth rate in future.

On the contrary, firms whose products are less income elastic, they will neither obtain
more profit with the expansion of the economy nor will they incur specific loss during
recession in the economy. Such firms consider it necessary to bring variety in different
products or in a different industry.

For example, agricultural products are less income elastic while industrial products are
income elastic. Moreover, since the coefficient of income elasticity of inferior goods is
negative, the sale of such products will decline with economic growth.

b. In Formulation of Farm Policy:

Farmers’ products are less income elastic because they cannot generally bring variety in
their products like income elastic products. Hence, in the coming years the danger of
such agricultural problems is likely to remain particularly in developing countries.
Therefore, the Government of India has considered it necessary to continue and
increase various agricultural subsidies.

c. In Forecasting Demands:
The concept of income elasticity can be used in forecasting future demand provided the
firm knows the growth rate of income and income elasticity of demand for the good. It is
often believed that the demand for goods and services increases with the rise in GNP
that depends on the marginal propensity to consume.

But it may be proved true in the context of aggregate national demand while it is not
necessary to be true for a particular good. For this, the income of the related income
class should be used. It is also useful for avoiding the problem of overproduction or
under-production.

d. In Formulating Marketing Strategies:

The income elasticity of demand of potential buyer class for products affects the
number, nature and location of sales centers, nature and level of advertising and the
policies related to other sales promotion activities. For instance, the sales centers of ice
creams will be located in the prosperous town areas where the people have sufficient
income and their incomes are likely to increase sufficiently in future. Here, the expected
rise in demand in the context of increased income has been discussed. But this rise will
be compensated in more or less quantity by the expected fall in demand with the
increase in price.

5. Advertising or Promotional Elasticity of Demand:

In the modem competitive or partial competitive market economy, advertising has a
great significance. Under advertising, various visible or verbal activities are done by the
firm for the purpose of creating or increasing demand for its goods or services.
Informative advertising is very helpful for the consumer in making rational purchase
decisions.
But the extension of demand through advertising can be measured by advertising or
promotional elasticity of demand (EA) which measures the expected changes in demand
as a result of change in other promotional expenses. The demand for some goods is
affected more by advertising such as the demand for cosmetics. Following is the formula
for advertising elasticity,
Ex = ∆Q/ ∆Q × a/Q
Where, Q = quantity sold of good X; A = units of advertising expenses on good X; ∆Q =
change in quantity sold of good X; and∆ A = change in advertising expenses on good X.

The elasticity of demand for a good should be positive because there is the possibility of
extension of demand and market for the good with advertising expenditure. The higher
the value of this elasticity, the greater will be the inducement of the firm to advertise
that product. It is on the basis of advertising elasticity that a firm decides how much to
spend on advertising a product.

Factors Influencing Advertising Elasticity of Demand:

The main factors influencing advertising elasticity are as follows:
1. Stage of Product’s Development:
The advertising elasticity of demand for a product may vary with different levels of
sales of the same product. It is different for new and established products.

2. Degree of Competition:
The advertising effect in a competitive market is also determined by the relative effect
of advertising by competing firms.

3. Effects of Advertising in Terms of Time:

The advertising elasticity of demand depends upon the time interval between
advertising expenditure and its effect on sales. This depends on general economic
environment, selected media and type of the product. This time interval is large for
durable goods than for non-durable goods.

4. Effect of Advertising by Rival Firms:

The advertising elasticity also depends as to how other rival firms advertise in
comparison to the advertisement of the firm. This, in turn, depends on the levels of
advertisement and advertisements done in the past and present by rival firms.

6. Importance of Elasticity of Demand in Management

The elasticity of demand is of great importance in managerial decision making. It
is more significant in the following areas:
1. In the Determination of Output Level:
For making production profitable, it is essential that the quantity of goods and services
should be produced corresponding to the demand for that product.

Since the changes in demand are due to the change in price, the knowledge of elasticity
of demand is necessary for determining the output level.

2. In the Determination of Price:

The elasticity of demand for a product is the basis of its price determination. The ratio
in which the demand for a product will fall with the rise in its price and vice versa can
be known with the knowledge of elasticity of demand. If the demand for a product is
inelastic, the producer can charge high price for it, whereas for an elastic demand
product he will charge low price. Thus, the knowledge of elasticity of demand is
essential for management in order to earn maximum profit.

3. In Price Discrimination by Monopolist:

Under monopoly discrimination the problem of pricing the same commodity in two
different markets also depends on the elasticity of demand in each market. In the
market with elastic demand for his commodity, the discriminating monopolist fixes a
low price and in the market with less elastic demand, he charges a high price.

4. In Price Determination of Factors of Production:

The concept of elasticity for demand is of great importance for determining prices of
various factors of production. Factors of production are paid according to their
elasticity of demand. In other words, if the demand of a factor is inelastic, its price will
be high and if it is elastic, its price will be low.

5. In Demand Forecasting:
The elasticity of demand is the basis of demand forecasting. The knowledge of income
elasticity is essential for demand forecasting of producible goods in future. Long-term
production planning and management depend more on the income elasticity because
management can know the effect of changing income levels on the demand for his
product.

6. In Dumping:
A firm enters foreign markets for dumping his product on the basis of elasticity of
demand to face foreign competition.

7. In the Determination of Prices of Joint Products:

The concept of the elasticity of demand is of much use in the pricing of joint products,
like wool and mutton, wheat and straw, cotton and cotton seeds, etc. In such cases,
separate cost of production of each product is not known.

Therefore, the price of each is fixed on the basis of its elasticity of demand. That is why
products like wool, wheat and cotton having an inelastic demand are priced very high as
compared to their by-products like mutton, straw and cotton seeds which have an
elastic demand.

8. In the Determination of Government Policies:

The knowledge of elasticity of demand is also helpful for the government in determining
its policies. Before imposing statutory price control on a product, the government must
consider the elasticity of demand for that product. The government decision to declare
public utilities those industries whose products have inelastic demand and are in
danger of being controlled by monopolist interests depends upon the elasticity of
demand for their products.

9. Helpful in Adopting the Policy of Protection:

The government considers the elasticity of demand of the products of those industries
which apply for the grant of a subsidy or protection. Subsidy or protection is given to
only those industries whose products have an elastic demand. As a consequence, they
are unable to face foreign competition unless their prices are lowered through subsidy
or by raising the prices of imported goods by imposing heavy duties on them.

10. In the Determination of Gains from International Trade:

The gains from international trade depend, among others, on the elasticity of demand. A
country will gain from international trade if it exports goods with less elasticity of
demand and import those goods for which its demand is elastic.

In the first case, it will be in a position to charge a high price for its products and in the
latter case it will be paying less for the goods obtained from the other country. Thus, it
gains both ways and shall be able to increase the volume of its exports and imports.

Application of Elasticity in Managerial Decisions:

Now we shall consider the application of concepts of elasticity. Economists measure
how responsive or sensitive consumers are to change in the price or income or a change
in the price of some other product. Managerial economists measure the degree of
elasticity by the elasticity co-efficient.

Managerial decisions aim at the best alternative. Managerial decisions are of two types:
programmed decisions and non-programmed decisions. But the decision making
process may be required in four areas of work: location decision, growth decision,
financial decision and operating decision. The price- quantity relationship comes under
operating decision.

Managerial Decision and Income Elasticity:

Income elasticity measures the ratio of percentage change in quantity demanded to
percentage change in income. Positive income elasticity suggests a more than
proportionate increase in expenditure with an increase in income. If income elasticity is
negative it implies that the commodity is inferior.
Among the several income concepts, the most commonly used term is the personal
disposable income per head. The other income concepts important for durable goods
are that of transitory income i.e., fluctuation in the short run income and discretionary
income i.e., that part of the income which is left over after deductions.

Economic development will be closely associated with increase in die sales of quality
goods. An efficient businessman is really interested in knowing whether the sale of his
goods will lead to economic development. The relationship between demand and
income changes is not always positive.

It depends on the permanent change in income. If the income elasticity is greater than
one, the sales of his goods will increase more quickly than general economic
development. If the income elasticity is greater than zero but less than one, sales of the
goods will increase but at a lower rate than economic development.

Managerial Decision and Industry Elasticity:

From the managerial point of view, it is thought useful to explain industry elasticity. We
know from the law of demand that when the price of a commodity falls, the quantity
demanded increases and vice versa. The relation of price to sales is known in economics
as the demand. The relation of price to demand or sales has been a major interest of
economist for a long time.

If we like to have a good knowledge of their relations, it gives better results to

management. The industry elasticity means that there is a change in complete industry
sales with a change in the general level of prices for the industry. The industry demand
has elasticity due to competition from other industries.

Managerial Decision and Expectation Elasticity:

Expectation elasticity indicates the responsiveness of sales to buyers guesses about the
future values of demand determinants. In most companies, knowledge of condition in
the immediate future is essential for evolving a suitable production policy. Formulating
suitable production policy is necessary to avoid the problem of over production or the
problem of short supply.

Once the demand potential is assessed it will be easier for the company to engage in
long term planning. Like the future price of a commodity or of its substitute, future
income of buyers, prospects of easy availability or otherwise in the future or future
outlays, price and income expectations are the most important among them.

Managerial Decision and Market Share Elasticity:

As regards a particular firm, the market share elasticity is most important. This is
influenced by rival’s changes in prices and promotional efforts both qualitative and
quantitative. A thorough knowledge of market share elasticity will help the managerial
economist to the profitable results of the concern. The market share elasticity indicates
that there has been a change in company’s wide sales to the price differential between
the company’s price and the industry-wide price level.

Managerial Decision and Promotional Elasticity:

Many of the firms spend huge amounts every year on advertising their products to
boost up sales. There is a direct relationship between the extent of advertisement and
volume of sales. The promotional elasticity of demand is also called the advertising
elasticity of demand. It measures the responsiveness of demand to change in
advertising. The reason for finding out the advertisement elasticity of demand by the
company manager is to determine the effects of advertisement on sales.

Consumer’s surplus

The price which a consumer pays for a commodity is always less than what he is willing
to pay for it, so that the satisfaction which he gets from its purchase is more than the
price paid for it and thus he derives a surplus satisfaction which Marshall calls
Consumer’s Surplus (CS). In the words of Marshall, “The excess of the price which he
would be willing to pay rather than go without the thing, over that which he actually
does pay, is the economic measure of the surplus satisfaction.

It may be called “consumer’s surplus.” Instances of commodities from which we derive

consumer’s surplus in our daily life are salt, newspapers, postcard, matches, etc.
Consumer’s surplus, according to Marshall, is a part of the benefit which a person
derives from his environment or conjuncture.

To illustrate, let us suppose that a consumer is willing to buy 1 orange if its price were
Re 1, 2 oranges if the price were 75 paise, 3 oranges at 50 paise and 4 oranges if it were
25 paise. Suppose the market price is 25 paise per orange. At this price, the consumer
will buy 4 oranges and enjoy a surplus of Rs. 1.50 (.75 + .50 +.25). This is shown in Table
1.

Table 1: Marshall’s Measure of Consumer’s Surplus

Units of Orange Marginal Utility (Price Actual Price Paise C.S.
willing to pay) Paise
1 1.00 .25 .75
2 .75 .25 .50
3 .50 .25 .25
4 .25 .25
Total Utility = Rs 2.50; Total Price =Re 1; CS = Rs 1.50

The consumer’s surplus can also be defined as the difference between what a consumer
is willing to pay for a commodity and what he actually does pay for it. Our hypothetical
consumer is prepared to pay Rs. 2.50 (= 1.00+ .75 +.50 + .25) for four oranges but
actually pays Re 1, and therefore derives a surplus of Rs. 1.50 (Rs 2.50-1.00).
It can also be expressed as:
CS = Total Utility-Marginal Utility or (Price) x No. of Units of the commodity. On the
basis of this formula, consumer’s surplus of Rs 1.50 = 2.50 [Total Utility] -1.00 (= .25 x
4). It is based on the assumption that the price of the commodity equals its marginal
utility.

Consumer’s surplus is represented diagrammatically in Figure 1 where DD/ is the

demand curve for the commodity. It OP is the price, OQ units of the commodity are
purchased and the price paid is OP x OQ = area OQRP. But the total amount of money he
is prepared to pay (total utility) for OQ units is OQRD. Therefore, CS = OQRD – OQRP =
DRP. In other words, consumer’s surplus is the area between the demand curve (DD1)
and the price line (PR) and is equal to the triangle that is formed under the demand
curve.

Consumer’s Surplus In Terms of Indifference Curve Analysis: Hicks’ Formulation:

The Marshallian measure of consumer’s surplus is beset with numerous difficulties due
to the unrealistic assumptions of the utility analysis.

But the two basic assumptions which underlie the doctrine of consumer’s surplus
are:
(i) Utility is quantitatively measurable and
(ii) Marginal utility of money remains constant.

Utility is something subjective which cannot be expressed in cardinal numbers and

therefore, it is not possible either to add or subtract it. The indifference curve technique
avoids this difficulty by measuring utility in ordinal numbers. Consumer’s satisfaction is
based on his scale of preferences shown on an indifference map, all points on an
indifference curve represent equal satisfaction. The assumption of constancy of
marginal utility of money is also not acceptable for it ignores the income effect of the
change in the price of a good. We study below Hicks’ formulation.
Hicks measure the Marshallian consumer’s surplus with constant MU of money in terms
of the indifference curve analysis. Take Figure. 2 where money is measured along the
vertical axis and good X along the horizontal axis. Suppose the budget line of the
consumer is MN.
Its slope equals the price of good X, assuming that the price of one unit of money is
equal to 1. Given the price of good X, the consumer is in equilibrium at point A where
the indifference curve I1 is tangent to the budget line MN. At this point A, he has the
combination of OQ quantity of good X and OB of money. He thus spends BM of his
income in buying OQ quantity of X.
In order to find out the amount of money which the consumer would be willing to spend
for OQ quantity of good X rather than go without it, we draw an indifference curve I,
from point M which is vertically parallel to the indifference curve I2, at point C, as shown
by the dotted line drawn parallel to the line MN.
Thus the two curves have the same slope at OQ quantity of X. The indifference curve
I1 show’s that the consumer is prepared to spend DM amount of money for OQ quantity
of X. But in actuality, he spends BM on buying the same quantity of X. Hence DM-BM =
DB = CA is the consumer’s surplus.
It may be noted that Marshall assumed constant MU of money in his concept and to
explain the Marshallian measure, Hicks assumed vertically parallel indifference curves.
Thus, when the slopes of indifference curves I1 and I2 at points С and A are equal, the
assumption of constant MU of money is fulfilled.
Students are encouraged to learn about practical uses of Consumer`s Surplus in
economics.

Utility and its measurement

Although the concept of ‘taste’ and ‘satisfaction’ are familiar for all of us, it is much more
difficult to express these concepts in concrete terms. For example, suppose you have
just eaten an ice-cream and a chocolate.
Can you tell how much are you satisfied from each of these items? Probably you can tell
which item you liked more. But, it is very difficult to express “how much” you liked one
over the other. It is evident, that we need a more quantitative measure of satisfaction.
Due to this reason, economists developed the concept of utility.

Meaning of Utility:
Utility refers to want satisfying power of a commodity. It is the satisfaction, actual or
expected, derived from the consumption of a commodity. Utility differs from person- to-
person, place-to-place and time-to-time. In the words of Prof. Hobson, “Utility is the
ability of a good to satisfy a want”.
In short, when a commodity is capable of satisfying human wants, we can conclude
that the commodity has utility.

How to Measure Utility?

After understanding the meaning of utility, the next big question is: How to measure
utility? According to classical economists, utility can be measured, in the same way, as
weight or height is measured. For this, economists assumed that utility can be measured
in cardinal (numerical) terms. By using cardinal measure of utility, it is possible to
numerically estimate utility, which a person derives from consumption of goods and
services. But, there was no standard unit for measuring utility. So, the economists
derived an imaginary measure, known as ‘Util’.

Utils are imaginary and psychological units which are used to measure satisfaction
(utility) obtained from consumption of a certain quantity of a commodity.

Example – Measurement of satisfaction in utils:

Suppose you have just eaten an ice-cream and a chocolate. You agree to assign 20 utils
as utility derived from the ice-cream. Now the question is: how many utils be assigned
to the chocolate? If you liked the chocolate less, then you may assign utils less than 20.
However, if you liked it more, you would give it a number greater than 20. Suppose, you
assign 10 utils to the chocolate, then it can be concluded that you liked the ice-cream
twice as much as you liked the chocolate.

One more way to measure utility:

Utils cannot be taken as a standard unit for measurement as it will vary from individual
to individual. Hence, several economists including Marshall, suggested the
measurement of utility in monetary terms. It means, utility can be measured in terms of
money or price, which the consumer is willing to pay.

In the above example, suppose 1 util is assumed to be equal to Rs. 1. Now, an ice-cream
will yield utility worth Rs. 20 (as 1 util = Rs. 1) and chocolate will give utility of Rs. 10.
This utility of Rs. 20 from the ice-cream or f I0 from the chocolate is termed as value of
utility in terms of mone

The advantage of using monetary values instead of utils is that it allows easy
comparison between utility and price paid, since both are in the same units.

It must be noted that it is impossible to measure satisfaction of a person as it is inherent

to the individual and differs greatly from person-to-person. Still, the concept of utility is
very useful in explaining and understanding the behaviour of consumer.

The measurement of utility has always been a controversial issue. Neo-classical

economists, such as Alfred Marshall, Leon Walrus, and Carl Meneger believed that utility
is cardinal or quantitative like other mathematical variables, such as height, weight,
velocity, air pressure, and temperature.

Therefore, these economists developed cardinal utility concept to measure the utility
derived from a good. They developed a unit of measuring utility, which is known as
utils. For example, according to the cardinal utility concept, an individual gains 20 utils
from ice-cream and 10 utils from coffee.

However, modern economists, such as J.R. Hicks, gave the concept of ordinal utility of
measuring utility. According to this concept, utility cannot be measured numerically, it
can only be ranked as 1, 2, 3, and so on. For instance, an individual prefers ice-cream
than coffee, which implies that utility of ice-cream is given rank 1 and coffee as rank 2.

1. Cardinal Utility Concept:

The neo-classical economists propounded the theory of consumption (consumer
behavior theory) on the assumption that utility is cardinal. For measuring utility, a term
‘util’ is coined which means units of utility.
Following are the assumptions of the cardinal utility concept that were followed by
economists while measuring utility:

a. One util equals one unit of money

b. Utility of money remains constant

However, over a passage of time, it has been felt by economists that the exact or
absolute measurement of utility is not possible. There are a number of difficulties
involved in the measurement of utility. This is because of the fact that the utility derived
by a consumer from a good depends on various factors, such as changes in consumer’s
moods, tastes, and preferences.

These factors are not possible to determine and measure. Therefore, no such technique
has been devised by economists to measure utility. Utility; thus, is not measureable in
cardinal terms. However, the cardinal utility concept has a prime importance in
consumer behavior analysis.

2. Ordinal Utility Concept:

Cardinal utility approach is based on the fact that the exact or absolute measurement of
utility is not possible. However, modern economists rejected the cardinal utility
approach and introduced the concept of ordinal utility for the analysis of consumer
behavior.
According to them, it may not be possible to measure exact utility, but it can be
expressed in terms of less or more useful good. For instance, a consumer consumes
coconut oil and mustard oil. In such a case, the consumer cannot say that coconut oil
gives 10 utils and mustard oil gives 20 utils.
Instead he/she can say that mustard oil gives more utility to him/her than coconut oil.
In such a case, mustard oil would be given rank 1 and coconut oil would be given rank 2
by the consumer. This assumption lays the foundation for the ordinal theory of
consumer behavior.

According to neo-classical economists, cardinal measurement of utility is possible in

practical situations. Moreover, they believed that the concept of cardinal utility is useful
in analyzing consumer behavior. However, modern economists believed that utility is
related to psychological aspect of consumers; therefore, it cannot be measured in
quantitative terms.

In addition, they advocated that the ordinal utility concept plays a significant role in
consumer behavior analysis. Modern economists also believed that the concept of
ordinal utility meets the theoretical requirements of consumer behavior analysis even
when there is no cardinal measure of utility is available.

Total Utility (TU):

Total utility refers to the total satisfaction obtained from the consumption of all possible
units of a commodity. It measures the total satisfaction obtained from consumption of
all the units of that good. For example, if the 1st ice-cream gives you a satisfaction of 20
utils and 2nd one gives 16 utils, then TU from 2 ice-creams is 20 + 16 = 36 utils. If the
3rd ice-cream generates satisfaction of 10 utils, then TU from 3 ice-creams will be 20+ 16
+ 10 = 46 utils.
TU can be calculated as:
TUn = U1 + U2 + U3 +……………………. + Un
Where:

TUn = Total utility from n units of a given commodity

U1, U2, U3,……………. Un = Utility from the 1st, 2nd, 3rd nth unit
n = Number of units consumed

Marginal Utility (MU):

Marginal utility is the additional utility derived from the consumption of one more unit
of the given commodity. It is the utility derived from the last unit of a commodity
purchased. As per given example, when 3rd ice-cream is consumed, TU increases from 36
utils to 46 utils. The additional 10 utils from the 3rd ice-cream is the MU.
In the words of Chapman, “Marginal utility is addition made to total utility by
consuming one more unit of a commodity”.

MU can be calculated as: MUn = TUn – TUn-1

Where: MUn = Marginal utility from nth unit; TUn = Total utility from n units;
TUn-1 = Total utility from n – 1 units; n = Number of units of consumption
MU of 3rd ice-cream will be: MU3 = TU3 – TU2 = 46 – 36 = 10 utils One More way to
Calculate MU
MU is the change in TU when one more unit is consumed. However, when change in
units consumed is more than one, then MU can also be calculated as:

ATU

MU = Change in Total Utility/ Change in number of units = ∆TU/∆Q

Total Utility is Summation of Marginal Utilities:

Total utility can also be calculated as the sum of marginal utilities from all units, i.e.

TUn= MU1 + MU2 + MU3 +……………………… + MUn or simply,

TU = ∑MU

The concepts of TU and MU can be better understood from the following schedule and
diagram:

Table 2.1: TU and MU

Ice-creams Consumed Marginal Utility (MU) Total Utility (TU)
1 20 20
2 16 36
3 10 46
4 4 50
5 0 50
6 -6 44
In Fig. 2.1, units of ice-cream, are shown along the X-axis and TU and MU are measured
along the Y-axis. MU is positive and TU is increasing till the 4th ice-cream. After
consuming the 5th ice-cream, MU is zero and TU is maximum.
This point is known as the point of satiety or the stage of maximum satisfaction. After
consuming the 6th ice-cream, MU is negative (known as disutility) and total utility starts
diminishing. Disutility is the opposite of utility. It refers to loss of satisfaction due to
consumption of too much of a thing.

Types of market structure – Perfect, Monopoly, Monopolistic and Oligopoly

Market structure refers to the nature and degree of competition in the market for goods
and services. The structures of market both for goods market and service (factor) market
are determined by the nature of competition prevailing in a particular market.

Meaning of Market:
Ordinarily, the term “market” refers to a particular place where goods are purchased
and sold. But, in economics, market is used in a wide perspective. In economics, the
term “market” does not mean a particular place but the whole area where the buyers
and sellers of a product are spread.

This is because in the present age the sale and purchase of goods are with the help of
agents and samples. Hence, the sellers and buyers of a particular commodity are spread
over a large area. The transactions for commodities may be also through letters,
telegrams, telephones, internet, etc. Thus, market in economics does not refer to a
particular market place but the entire region in which goods are bought and sold. In
these transactions, the price of a commodity is the same in the whole market.

According to Prof. R. Chapman, “The term market refers not necessarily to a place but
always to a commodity and the buyers and sellers who are in direct competition with
one another.” In the words of A.A. Cournot, “Economists understand by the term
‘market’, not any particular place in which things are bought and sold but the whole of
any region in which buyers and sellers are in such free intercourse with one another
that the price of the same goods tends to equality, easily and quickly.” Prof. Cournot’s
definition is wider and appropriate in which all the features of a market are found.

The essential features of a market are:

(1) An Area:
In economics, a market does not mean a particular place but the whole region where
sellers and buyers of a product ate spread. Modem modes of communication and
transport have made the market area for a product very wide.

(2) One Commodity:

In economics, a market is not related to a place but to a particular product.

Hence, there are separate markets for various commodities. For example, there are
separate markets for clothes, grains, jewellery, etc.

(3) Buyers and Sellers:

The presence of buyers and sellers is necessary for the sale and purchase of a product in
the market. In the modem age, the presence of buyers and sellers is not necessary in the
market because they can do transactions of goods through letters, telephones, business
representatives, internet, etc.

(4) Free Competition:

There should be free competition among buyers and sellers in the market. This
competition is in relation to the price determination of a product among buyers and
sellers.

(5) One Price:

The price of a product is the same in the market because of free competition among
buyers and sellers.

On the basis of above elements of a market, its general definition may be as

follows:
The market for a product refers to the whole region where buyers and sellers of that
product are spread and there is such free competition that one price for the product
prevails in the entire region.

Market Structure:
Market structure refers to the nature and degree of competition in the market for goods
and services. The structures of market both for goods market and service (factor)
market are determined by the nature of competition prevailing in a particular market.

Determinants:
There are a number of determinants of market structure for a particular good.

They are:
(1) The number and nature of sellers.
(2) The number and nature of buyers.
(3) The nature of the product.
(4) The conditions of entry into and exit from the market.
(5) Economies of scale.

They are discussed as under:

1. Number and Nature of Sellers:
The market structures are influenced by the number and nature of sellers in the market.
They range from large number of sellers in perfect competition to a single seller in pure
monopoly, to two sellers in duopoly, to a few sellers in oligopoly, and to many sellers of
differentiated products.

2. Number and Nature of Buyers:

The market structures are also influenced by the number and nature of buyers in the
market. If there is a single buyer in the market, this is buyer’s monopoly and is called
monopsony market. Such markets exist for local labour employed by one large
employer. There may be two buyers who act jointly in the market. This is called
duopsony market. They may also be a few organised buyers of a product.

This is known as oligopsony. Duopsony and oligopsony markets are usually found for
cash crops such as rice, sugarcane, etc. when local factories purchase the entire crops
for processing.

3. Nature of Product:
It is the nature of product that determines the market structure. If there is product
differentiation, products are close substitutes and the market is characterised by
monopolistic competition. On the other hand, in case of no product differentiation, the
market is characterised by perfect competition. And if a product is completely different
from other products, it has no close substitutes and there is pure monopoly in the
market.

4. Entry and Exit Conditions:

The conditions for entry and exit of firms in a market depend upon profitability or loss
in a particular market. Profits in a market will attract the entry of new firms and losses
lead to the exit of weak firms from the market. In a perfect competition market, there is
freedom of entry or exit of firms.

But in monopoly and oligopoly markets, there are barriers to entry of new firms.
Usually, governments have a monopoly in public utility services like postal, air and road
transport, water and power supply services, etc. By granting exclusive franchises,
entries of new supplies are barred. In oligopoly markets, there are barriers to entry of
firms because of collusion, tacit agreements, cartels, etc. On the other hand, there are no
restrictions in entry and exit of firms in monopolistic competition due to product
differentiation.

5. Economies of Scale:
Firms that achieve large economies of scale in production grow large in comparison to
others in an industry. They tend to weed out the other firms with the result that a few
firms are left to compete with each other. This leads to the emergency of oligopoly. If
only one firm attains economies of scale to such a large extent that it is able to meet the
entire market demand, there is monopoly.

Forms of Market Structure:

On the basis of competition, a market can be classified in the following ways:
1. Perfect Competition
2. Monopoly
3. Duopoly
4. Oligopoly
5. Monopolistic Competition

1. Perfect Competition Market:

A perfectly competitive market is one in which the number of buyers and sellers is very
large, all engaged in buying and selling a homogeneous product without any artificial
restrictions and possessing perfect knowledge of market at a time. In the words of A.
Koutsoyiannis, “Perfect competition is a market structure characterised by a complete
absence of rivalry among the individual firms.” According to R.G. Lipsey, “Perfect
competition is a market structure in which all firms in an industry are price- takers and
in which there is freedom of entry into, and exit from, industry.”

Characteristics of Perfect Competition:

The following are the conditions for the existence of perfect competition:
(1) Large Number of Buyers and Sellers:
The first condition is that the number of buyers and sellers must be so large that none of
them individually is in a position to influence the price and output of the industry as a
whole. The demand of individual buyer relative to the total demand is so small that he
cannot influence the price of the product by his individual action.

Similarly, the supply of an individual seller is so small a fraction of the total output that
he cannot influence the price of the product by his action alone. In other words, the
individual seller is unable to influence the price of the product by increasing or
decreasing its supply.

Rather, he adjusts his supply to the price of the product. He is “output adjuster”. Thus no
buyer or seller can alter the price by his individual action. He has to accept the price for
the product as fixed for the whole industry. He is a “price taker”.

(2) Freedom of Entry or Exit of Firms:

The next condition is that the firms should be free to enter or leave the industry. It
implies that whenever the industry is earning excess profits, attracted by these profits
some new firms enter the industry. In case of loss being sustained by the industry, some
firms leave it.
(3) Homogeneous Product:
Each firm produces and sells a homogeneous product so that no buyer has any
preference for the product of any individual seller over others. This is only possible if
units of the same product produced by different sellers are perfect substitutes. In other
words, the cross elasticity of the products of sellers is infinite.

No seller has an independent price policy. Commodities like salt, wheat, cotton and coal
are homogeneous in nature. He cannot raise the price of his product. If he does so, his
customers would leave him and buy the product from other sellers at the ruling lower
price.

The above two conditions between themselves make the average revenue curve of the
individual seller or firm perfectly elastic, horizontal to the X-axis. It means that a firm
can sell more or less at the ruling market price but cannot influence the price as the
product is homogeneous and the number of sellers very large.

(4) Absence of Artificial Restrictions:

The next condition is that there is complete openness in buying and selling of goods.
Sellers are free to sell their goods to any buyers and the buyers are free to buy from any
sellers. In other words, there is no discrimination on the part of buyers or sellers.

Moreover, prices are liable to change freely in response to demand-supply conditions.

There are no efforts on the part of the producers, the government and other agencies to
control the supply, demand or price of the products. The movement of prices is
unfettered.

(5) Profit Maximisation Goal:

Every firm has only one goal of maximising its profits.

(6) Perfect Mobility of Goods and Factors:

Another requirement of perfect competition is the perfect mobility of goods and factors
between industries. Goods are free to move to those places where they can fetch the
highest price. Factors can also move from a low-paid to a high-paid industry.

(7) Perfect Knowledge of Market Conditions:

This condition implies a close contact between buyers and sellers. Buyers and sellers
possess complete knowledge about the prices at which goods are being bought and sold,
and of the prices at which others are prepared to buy and sell. They have also perfect
knowledge of the place where the transactions are being carried on. Such perfect
knowledge of market conditions forces the sellers to sell their product at the prevailing
market price and the buyers to buy at that price.

(8) Absence of Transport Costs:

Another condition is that there are no transport costs in carrying of product from one
place to another. This condition is essential for the existence of perfect competition
which requires that a commodity must have the same price everywhere at any time. If
transport costs are added to the price of the product, even a homogeneous commodity
will have different prices depending upon transport costs from the place of supply.

(9) Absence of Selling Costs:

Under perfect competition, the costs of advertising, sales-promotion, etc. do not arise
because all firms produce a homogeneous product.

Perfect Competition vs Pure Competition:

Perfect competition is often distinguished from pure competition, but they differ only in
degree. The first five conditions relate to pure competition while the remaining four
conditions are also required for the existence of perfect competition. According to
Chamberlin, pure competition means, competition unalloyed with monopoly elements,”
whereas perfect competition involves perfection in many other respects than in the
absence of monopoly.” The practical importance of perfect competition is not much in
the present times for few markets are perfectly competitive except those for staple food
products and raw materials. That is why, Chamberlin says that perfect competition is a
rare phenomenon.”

Though the real world does not fulfil the conditions of perfect competition, yet perfect
competition is studied for the simple reason that it helps us in understanding the
working of an economy, where competitive behaviour leads to the best allocation of
resources and the most efficient organisation of production. A hypothetical model of a
perfectly competitive industry provides the basis for appraising the actual working of
economic institutions and organisations in any economy.

2. Monopoly Market:
Monopoly is a market situation in which there is only one seller of a product with
barriers to entry of others. The product has no close substitutes. The cross elasticity of
demand with every other product is very low. This means that no other firms produce a
similar product. According to D. Salvatore, “Monopoly is the form of market
organisation in which there is a single firm selling a commodity for which there are no
close substitutes.” Thus the monopoly firm is itself an industry and the monopolist faces
the industry demand curve.

The demand curve for his product is, therefore, relatively stable and slopes downward
to the right, given the tastes, and incomes of his customers. It means that more of the
product can be sold at a lower price than at a higher price. He is a price-maker who can
set the price to his maximum advantage.
However, it does not mean that he can set both price and output. He can do either of the
two things. His price is determined by his demand curve, once he selects his output
level. Or, once he sets the price for his product, his output is determined by what
consumers will take at that price. In any situation, the ultimate aim of the monopolist is
to have maximum profits.

Characteristics of Monopoly:
The main features of monopoly are as follows:
1. Under monopoly, there is one producer or seller of a particular product and there is
no difference between a firm and an industry. Under monopoly a firm itself is an
industry.

2. A monopoly may be individual proprietorship or partnership or joint stock company

or a cooperative society or a government company.

3. A monopolist has full control on the supply of a product. Hence, the elasticity of
demand for a monopolist’s product is zero.

4. There is no close substitute of a monopolist’s product in the market. Hence, under

monopoly, the cross elasticity of demand for a monopoly product with some other good
is very low.

5. There are restrictions on the entry of other firms in the area of monopoly product.

6. A monopolist can influence the price of a product. He is a price-maker, not a price-

taker.

7. Pure monopoly is not found in the real world.

8. Monopolist cannot determine both the price and quantity of a product

simultaneously.

9. Monopolist’s demand curve slopes downwards to the right. That is why, a monopolist
can increase his sales only by decreasing the price of his product and thereby maximise
his profit. The marginal revenue curve of a monopolist is below the average revenue
curve and it falls faster than the average revenue curve. This is because a monopolist
has to cut down the price of his product to sell an additional unit.

3. Duopoly:
Duopoly is a special case of the theory of oligopoly in which there are only two sellers.
Both the sellers are completely independent and no agreement exists between them.
Even though they are independent, a change in the price and output of one will affect
the other, and may set a chain of reactions. A seller may, however, assume that his rival
is unaffected by what he does, in that case he takes only his own direct influence on the
price.

If, on the other hand, each seller takes into account the effect of his policy on that of his
rival and the reaction of the rival on himself again, then he considers both the direct and
the indirect influences upon the price. Moreover, a rival seller’s policy may remain
unaltered either to the amount offered for sale or to the price at which he offers his
product. Thus the duopoly problem can be considered as either ignoring mutual
dependence or recognising it.

4. Oligopoly:
Oligopoly is a market situation in which there are a few firms selling homogeneous or
differentiated products. It is difficult to pinpoint the number of firms in ‘competition
among the few.’ With only a few firms in the market, the action of one firm is likely to
affect the others. An oligopoly industry produces either a homogeneous product or
heterogeneous products.

The former is called pure or perfect oligopoly and the latter is called imperfect or
differentiated oligopoly. Pure oligopoly is found primarily among producers of such
industrial products as aluminium, cement, copper, steel, zinc, etc. Imperfect oligopoly is
found among producers of such consumer goods as automobiles, cigarettes, soaps and
detergents, TVs, rubber tyres, refrigerators, typewriters, etc.

Characteristics of Oligopoly:
In addition to fewness of sellers, most oligopolistic industries have several
common characteristics which are explained below:
(1) Interdependence:
There is recognised interdependence among the sellers in the oligopolistic market. Each
oligopolist firm knows that changes in its price, advertising, product characteristics, etc.
may lead to counter-moves by rivals. When the sellers are a few, each produces a
considerable fraction of the total output of the industry and can have a noticeable effect
on market conditions.

He can reduce or increase the price for the whole oligopolist market by selling more
quantity or less and affect the profits of the other sellers. It implies that each seller is
aware of the price-moves of the other sellers and their impact on his profit and of the
influence of his price-move on the actions of rivals.

Thus there is complete interdependence among the sellers with regard to their price-
output policies. Each seller has direct and ascertainable influences upon every other
seller in the industry. Thus, every move by one seller leads to counter-moves by the
others.

(2) Advertisement:
The main reason for this mutual interdependence in decision making is that one
producer’s fortunes are dependent on the policies and fortunes of the other producers
in the industry. It is for this reason that oligopolist firms spend much on advertisement
and customer services.

As pointed out by Prof. Baumol, “Under oligopoly advertising can become a life-and-
death matter.” For example, if all oligopolists continue to spend a lot on advertising
their products and one seller does not match up with them he will find his customers
gradually going in for his rival’s product. If, on the other hand, one oligopolist advertises
his product, others have to follow him to keep up their sales.

(3) Competition:
This leads to another feature of the oligopolistic market, the presence of competition.
Since under oligopoly, there are a few sellers, a move by one seller immediately affects
the rivals. So each seller is always on the alert and keeps a close watch over the moves
of its rivals in order to have a counter-move. This is true competition.

(4) Barriers to Entry of Firms:

As there is keen competition in an oligopolistic industry, there are no barriers to entry
into or exit from it. However, in the long run, there are some types of barriers to entry
which tend to restraint new firms from entering the industry.

They may be:

(a) Economies of scale enjoyed by a few large firms; (b) control over essential and
specialised inputs; (c) high capital requirements due to plant costs, advertising costs,
etc. (d) exclusive patents and licenses; and (e) the existence of unused capacity which
makes the industry unattractive. When entry is restricted or blocked by such natural
and artificial barriers, the oligopolistic industry can earn long-run super normal profits.

(5) Lack of Uniformity:

Another feature of oligopoly market is the lack of uniformity in the size of firms. Finns
differ considerably in size. Some may be small, others very large. Such a situation is
asymmetrical. This is very common in the American economy. A symmetrical situation
with firms of a uniform size is rare.

(6) Demand Curve:

It is not easy to trace the demand curve for the product of an oligopolist. Since under
oligopoly the exact behaviour pattern of a producer cannot be ascertained with
certainty, his demand curve cannot be drawn accurately, and with definiteness. How
does an individual seller s demand curve look like in oligopoly is most uncertain
because a seller’s price or output moves lead to unpredictable reactions on price-output
policies of his rivals, which may have further repercussions on his price and output.
The chain of action reaction as a result of an initial change in price or output, is all a
guess-work. Thus a complex system of crossed conjectures emerges as a result of the
interdependence among the rival oligopolists which is the main cause of the
indeterminateness of the demand curve.

If the oligopolist seller does not have a definite demand curve for his product, then how
does he affect his sales. Presumably, his sales depend upon his current price and those
of his rivals. However, a number of conjectural demand curves can be imagined.

For example, in differentiated oligopoly where each seller fixes a separate price for his
product, a reduction in price by one seller may lead to an equivalent, more, less or no
price reduction by rival sellers. In each case, a demand curve can be drawn by the seller
within the range of competitive and monopoly demand curves.

Leaving aside retaliatory price movements, the individual seller’s demand curve under
oligopoly for both price cuts and increases is neither more elastic than under perfect or
monopolistic competition nor less elastic than under monopoly. It may still be indefinite
and indeterminate.

This situation is shown in Figure 1 where KD1 is the elastic demand curve and MD is the
less elastic demand curve. The oligopolies’ demand curve is the dotted kinked KPD. The
reason is quite simple. If a seller reduces the price of his product, his rivals also lower
the prices of their products so that he is not able to increase his sales.

So the demand curve for the individual seller’s product will be less elastic just below the
present price P (where KD1and MD curves are shown to intersect). On the other hand,
when he raises the price of his product, the other sellers will not follow him in order to
earn larger profits at the old price. So this individual seller will experience a sharp fall in
the demand for his product.
Thus his demand curve above the price P in the segment KP will be highly elastic. Thus
the imagined demand curve of an oligopolist has a comer or kink at the current price P.
Such a demand curve is much more elastic for price increases than for price decreases.

(7) No Unique Pattern of Pricing Behaviour:

The rivalry arising from interdependence among the oligopolists leads to two
conflicting motives. Each wants to remain independent and to get the maximum
possible profit. Towards this end, they act and react on the price-output movements of
one another in a continuous element of uncertainty.

On the other hand, again motivated by profit maximisation each seller wishes to
cooperate with his rivals to reduce or eliminate the element of uncertainty. All rivals
enter into a tacit or formal agreement with regard to price-output changes. It leads to a
sort of monopoly within oligopoly.

They may even recognise one seller as a leader at whose initiative all the other sellers
raise or lower the price. In this case, the individual seller’s demand curve is a part of the
industry demand curve, having the elasticity of the latter. Given these conflicting
attitudes, it is not possible to predict any unique pattern of pricing behaviour in
oligopoly markets.

5. Monopolistic Competition:
Monopolistic competition refers to a market situation where there are many firms
selling a differentiated product. “There is competition which is keen, though not perfect,
among many firms making very similar products.” No firm can have any perceptible
influence on the price-output policies of the other sellers nor can it be influenced much
by their actions. Thus monopolistic competition refers to competition among a large
number of sellers producing close but not perfect substitutes for each other.

It’s Features:
The following are the main features of monopolistic competition:
(1) Large Number of Sellers:
In monopolistic competition the number of sellers is large. They are “many and small
enough” but none controls a major portion of the total output. No seller by changing its
price-output policy can have any perceptible effect on the sales of others and in turn be
influenced by them. Thus there is no recognised interdependence of the price-output
policies of the sellers and each seller pursues an independent course of action.

(2) Product Differentiation:

One of the most important features of the monopolistic competition is differentiation.
Product differentiation implies that products are different in some ways from each
other. They are heterogeneous rather than homogeneous so that each firm has an
absolute monopoly in the production and sale of a differentiated product. There is,
however, slight difference between one product and other in the same category.

Products are close substitutes with a high cross-elasticity and not perfect substitutes.
Product “differentiation may be based upon certain characteristics of the products itself,
such as exclusive patented features; trade-marks; trade names; peculiarities of package
or container, if any; or singularity in quality, design, colour, or style. It may also exist
with respect to the conditions surrounding its sales.”

(3) Freedom of Entry and Exit of Firms:

Another feature of monopolistic competition is the freedom of entry and exit of firms.
As firms are of small size and are capable of producing close substitutes, they can leave
or enter the industry or group in the long run.

(4) Nature of Demand Curve:

Under monopolistic competition no single firm controls more than a small portion of
the total output of a product. No doubt there is an element of differentiation
nevertheless the products are close substitutes. As a result, a reduction in its price will
increase the sales of the firm but it will have little effect on the price-output conditions
of other firms, each will lose only a few of its customers.

Likewise, an increase in its price will reduce its demand substantially but each of its
rivals will attract only a few of its customers. Therefore, the demand curve (average
revenue curve) of a firm under monopolistic competition slopes downward to the right.
It is elastic but not perfectly elastic within a relevant range of prices of which he can sell
any amount.

(5) Independent Behaviour:

In monopolistic competition, every firm has independent policy. Since the number of
sellers is large, none controls a major portion of the total output. No seller by changing
its price-output policy can have any perceptible effect on the sales of others and in turn
be influenced by them.

(6) Product Groups:

There is no any ‘industry’ under monopolistic competition but a ‘group’ of firms
producing similar products. Each firm produces a distinct product and is itself an
industry. Chamberlin lumps together firms producing very closely related products and
calls them product groups, such as cars, cigarettes, etc.

(7) Selling Costs:

Under monopolistic competition where the product is differentiated, selling costs are
essential to push up the sales. Besides, advertisement, it includes expenses on salesman,
allowances to sellers for window displays, free service, free sampling, premium coupons
and gifts, etc.

(8) Non-price Competition:

Under monopolistic competition, a firm increases sales and profits of his product
without a cut in the price. The monopolistic competitor can change his product either by
varying its quality, packing, etc. or by changing promotional programmes.
The features of market structures are shown in Table 1.

Demand forecasting techniques

Meaning:
Forecasts are becoming the lifetime of business in a world, where the tidal waves of
change are sweeping the most established of structures, inherited by human society.
Commerce just happens to the one of the first casualties. Survival in this age of
economic predators, requires the tact, talent and technique of predicting the future.

Forecast is becoming the sign of survival and the language of business. All requirements
of the business sector need the technique of accurate and practical reading into the
future. Forecasts are, therefore, very essential requirement for the survival of business.
Management requires forecasting information when making a wide range of decisions.

The sales forecast is particularly important as it is the foundation upon which all
company plans are built in terms of markets and revenue. Management would be a
simple matter if business was not in a continual state of change, the pace of which has
quickened in recent years.

It is becoming increasingly important and necessary for business to predict their future
prospects in terms of sales, cost and profits. The value of future sales is crucial as it
affects costs profits, so the prediction of future sales is the logical starting point of all
business planning.
A forecast is a prediction or estimation of future situation. It is an objective assessment
of future course of action. Since future is uncertain, no forecast can be percent correct.
Forecasts can be both physical as well as financial in nature. The more realistic the
forecasts, the more effective decisions can be taken for tomorrow.

In the words of Cundiff and Still, “Demand forecasting is an estimate of sales during a
specified future period which is tied to a proposed marketing plan and which assumes a
particular set of uncontrollable and competitive forces”. Therefore, demand forecasting
is a projection of firm’s expected level of sales based on a chosen marketing plan and
environment.

Forecasting Techniques:
Demand forecasting is a difficult exercise. Making estimates for future under the
changing conditions is a Herculean task. Consumers’ behaviour is the most
unpredictable one because it is motivated and influenced by a multiplicity of forces.
There is no easy method or a simple formula which enables the manager to predict the
future.

Economists and statisticians have developed several methods of demand forecasting.

Each of these methods has its relative advantages and disadvantages. Selection of the
right method is essential to make demand forecasting accurate. In demand forecasting,
a judicious combination of statistical skill and rational judgement is needed.

Mathematical and statistical techniques are essential in classifying relationships and

providing techniques of analysis, but they are in no way an alternative for sound
judgement. Sound judgement is a prime requisite for good forecast.

The judgment should be based upon facts and the personal bias of the forecaster should
not prevail upon the facts. Therefore, amid way should be followed between
mathematical techniques and sound judgment or pure guess work.

The more commonly used methods of demand forecasting are discussed below:
The various methods of demand forecasting can be summarised in the form of a chart as
shown in Table.
1. Opinion Polling Method:
In this method, the opinion of the buyers, sales force and experts could be gathered to
determine the emerging trend in the market.

The opinion polling methods of demand forecasting are of three kinds:

(a) Consumer’s Survey Method or Survey of Buyer’s Intentions:
In this method, the consumers are directly approached to disclose their future purchase
plans. I his is done by interviewing all consumers or a selected group of consumers out
of the relevant population. This is the direct method of estimating demand in the short
run. Here the burden of forecasting is shifted to the buyer. The firm may go in for
complete enumeration or for sample surveys. If the commodity under consideration is
an intermediate product then the industries using it as an end product are surveyed.

(i) Complete Enumeration Survey:

Under the Complete Enumeration Survey, the firm has to go for a door to door survey
for the forecast period by contacting all the households in the area. This method has an
advantage of first hand, unbiased information, yet it has its share of disadvantages also.
The major limitation of this method is that it requires lot of resources, manpower and
time.

In this method, consumers may be reluctant to reveal their purchase plans due to
personal privacy or commercial secrecy. Moreover, at times the consumers may not
express their opinion properly or may deliberately misguide the investigators.

(ii) Sample Survey and Test Marketing:

Under this method some representative households are selected on random basis as
samples and their opinion is taken as the generalised opinion. This method is based on
the basic assumption that the sample truly represents the population. If the sample is
the true representative, there is likely to be no significant difference in the results
obtained by the survey. Apart from that, this method is less tedious and less costly.

A variant of sample survey technique is test marketing. Product testing essentially

involves placing the product with a number of users for a set period. Their reactions to
the product are noted after a period of time and an estimate of likely demand is made
from the result. These are suitable for new products or for radically modified old
products for which no prior data exists. It is a more scientific method of estimating
likely demand because it stimulates a national launch in a closely defined geographical
area.

(iii) End Use Method or Input-Output Method:

This method is quite useful for industries which are mainly producer’s goods. In this
method, the sale of the product under consideration is projected as the basis of demand
survey of the industries using this product as an intermediate product, that is, the
demand for the final product is the end user demand of the intermediate product used
in the production of this final product.

The end user demand estimation of an intermediate product may involve many final
good industries using this product at home and abroad. It helps us to understand inter-
industry’ relations. In input-output accounting two matrices used are the transaction
matrix and the input co-efficient matrix. The major efforts required by this type are not
in its operation but in the collection and presentation of data.

(b) Sales Force Opinion Method:

This is also known as collective opinion method. In this method, instead of consumers,
the opinion of the salesmen is sought. It is sometimes referred as the “grass roots
approach” as it is a bottom-up method that requires each sales person in the company
to make an individual forecast for his or her particular sales territory.

These individual forecasts are discussed and agreed with the sales manager. The
composite of all forecasts then constitutes the sales forecast for the organisation. The
advantages of this method are that it is easy and cheap. It does not involve any elaborate
statistical treatment. The main merit of this method lies in the collective wisdom of
salesmen. This method is more useful in forecasting sales of new products.

(c) Experts Opinion Method:

This method is also known as “Delphi Technique” of investigation. The Delphi method
requires a panel of experts, who are interrogated through a sequence of questionnaires
in which the responses to one questionnaire are used to produce the next
questionnaire. Thus any information available to some experts and not to others is
passed on, enabling all the experts to have access to all the information for forecasting.

The method is used for long term forecasting to estimate potential sales for new
products. This method presumes two conditions: Firstly, the panellists must be rich in
their expertise, possess wide range of knowledge and experience. Secondly, its
conductors are objective in their job. This method has some exclusive advantages of
saving time and other resources.

2. Statistical Method:
Statistical methods have proved to be immensely useful in demand forecasting. In order
to maintain objectivity, that is, by consideration of all implications and viewing the
problem from an external point of view, the statistical methods are used.

The important statistical methods are:

(i) Trend Projection Method:
A firm existing for a long time will have its own data regarding sales for past years. Such
data when arranged chronologically yield what is referred to as ‘time series’. Time
series shows the past sales with effective demand for a particular product under normal
conditions. Such data can be given in a tabular or graphic form for further analysis. This
is the most popular method among business firms, partly because it is simple and
inexpensive and partly because time series data often exhibit a persistent growth trend.

Time series has got four types of components namely, Secular Trend (T), Secular
Variation (S), Cyclical Element (C), and an Irregular or Random Variation (I). These
elements are expressed by the equation O = TSCI. Secular trend refers to the long run
changes that occur as a result of general tendency.

Seasonal variations refer to changes in the short run weather pattern or social habits.
Cyclical variations refer to the changes that occur in industry during depression and
boom. Random variation refers to the factors which are generally able such as wars,
strikes, flood, famine and so on.

When a forecast is made the seasonal, cyclical and random variations are removed from
the observed data. Thus only the secular trend is left. This trend is then projected. Trend
projection fits a trend line to a mathematical equation.

The trend can be estimated by using any one of the following methods:
(a) The Graphical Method,

(b) The Least Square Method.

a) Graphical Method:
This is the most simple technique to determine the trend. All values of output or sale for
different years are plotted on a graph and a smooth free hand curve is drawn passing
through as many points as possible. The direction of this free hand curve—upward or
downward— shows the trend. A simple illustration of this method is given in Table 2.

Table 2: Sales of Firm

Year Sales (Rs. Crore)
1995 40
1996 50
1997 44
1998 60
1999 54
2000 62

In Fig. 1, AB is the trend line which has been drawn as free hand curve passing through
the various points representing actual sale values.

(b) Least Square Method:

Under the least square method, a trend line can be fitted to the time series data with the
help of statistical techniques such as least square regression. When the trend in sales
over time is given by straight line, the equation of this line is of the form: y = a + bx.
Where ‘a’ is the intercept and ‘b’ shows the impact of the independent variable. We have
two variables—the independent variable x and the dependent variable y. The line of
best fit establishes a kind of mathematical relationship between the two variables .v and
y. This is expressed by the regression у on x.

In order to solve the equation v = a + bx, we have to make use of the following
normal equations:
Σ y = na + b ΣX
Σ xy =a Σ x+b Σ x2
(ii) Barometric Technique:
A barometer is an instrument of measuring change. This method is based on the notion
that “the future can be predicted from certain happenings in the present.” In other
words, barometric techniques are based on the idea that certain events of the present
can be used to predict the directions of change in the future. This is accomplished by the
use of economic and statistical indicators which serve as barometers of economic
change.

Generally forecasters correlate a firm’s sales with three series: Leading Series,
Coincident or Concurrent Series and Lagging Series:
(a) The Leading Series:
The leading series comprise those factors which move up or down before the recession
or recovery starts. They tend to reflect future market changes. For example, baby
powder sales can be forecasted by examining the birth rate pattern five years earlier,
because there is a correlation between the baby powder sales and children of five years
of age and since baby powder sales today are correlated with birth rate five years
earlier, it is called lagged correlation. Thus we can say that births lead to baby soaps
sales.

(b) Coincident or Concurrent Series:

The coincident or concurrent series are those which move up or down simultaneously
with the level of the economy. They are used in confirming or refuting the validity of the
leading indicator used a few months afterwards. Common examples of coinciding
indicators are G.N.P itself, industrial production, trading and the retail sector.

(c) The Lagging Series:

The lagging series are those which take place after some time lag with respect to the
business cycle. Examples of lagging series are, labour cost per unit of the manufacturing
output, loans outstanding, leading rate of short term loans, etc.

(iii) Regression Analysis:

It attempts to assess the relationship between at least two variables (one or more
independent and one dependent), the purpose being to predict the value of the
dependent variable from the specific value of the independent variable. The basis of this
prediction generally is historical data. This method starts from the assumption that a
basic relationship exists between two variables. An interactive statistical analysis
computer package is used to formulate the mathematical relationship which exists.

For example, one may build up the sales model as:

Quantum of Sales = a. price + b. advertising + c. price of the rival products + d. personal
disposable income +u

Where a, b, c, d are the constants which show the effect of corresponding variables as
sales. The constant u represents the effect of all the variables which have been left out in
the equation but having effect on sales. In the above equation, quantum of sales is the
dependent variable and the variables on the right hand side of the equation are
independent variables. If the expected values of the independent variables are
substituted in the equation, the quantum of sales will then be forecasted.

The regression equation can also be written in a multiplicative form as given

below:
Quantum of Sales = (Price)a + (Advertising)b+ (Price of the rival products) c + (Personal
disposable income Y + u
In the above case, the exponent of each variable indicates the elasticities of the
corresponding variable. Stating the independent variables in terms of notation, the
equation form is QS = P°8. Ao42 . R°.83. Y2°.68. 40
Then we can say that 1 per cent increase in price leads to 0.8 per cent change in
quantum of sales and so on.

If we take logarithmic form of the multiple equation, we can write the equation in
an additive form as follows:
log QS = a log P + b log A + с log R + d log Yd + log u
In the above equation, the coefficients a, b, c, and d represent the elasticities of variables
P, A, R and Yd respectively.
The co-efficient in the logarithmic regression equation are very useful in policy decision
making by the management.

(iv) Econometric Models:

Econometric models are an extension of the regression technique whereby a system of
independent regression equation is solved. The requirement for satisfactory use of the
econometric model in forecasting is under three heads: variables, equations and data.

The appropriate procedure in forecasting by econometric methods is model building.

Econometrics attempts to express economic theories in mathematical terms in such a
way that they can be verified by statistical methods and to measure the impact of one
economic variable upon another so as to be able to predict future events.

Utility of Forecasting:
Forecasting reduces the risk associated with business fluctuations which generally
produce harmful effects in business, create unemployment, induce speculation,
discourage capital formation and reduce the profit margin. Forecasting is indispensable
and it plays a very important part in the determination of various policies. In modem
times forecasting has been put on scientific footing so that the risks associated with it.

Factors influencing location of Industrial Units

Factors Influencing the Location of Industries: Geographical and Non-Geographical
Factors!
Many important geographical factors involved in the location of individual industries
are of relative significance, e.g., availability of raw materials, power resources, water,
labour, markets and the transport facilities.

But besides such purely geographical factors influencing industrial location, there are
factors of historical, human, political and economic nature which are now tending to
surpass the force of geographical advantages. Consequently, the factors influencing the
location of industry can be divided into two broad categories i.e.
(I) Geographical factors, and
(II) Non-geographical factors.

I. Geographical Factors:
Following are the important geographical factors influencing the location of industries.

1. Raw Materials:
The significance of raw materials in manufacturing industry is so fundamental that it
needs no emphasising. Indeed, the location of industrial enterprises is sometimes
determined simply by location of the raw materials. Modem industry is so complex that
a wide range of raw materials is necessary for its growth.
Further we should bear in mind that finished product of one industry may well be the
raw material of another. For example, pig iron, produced by smelting industry, serves as
the raw material for steel making industry. Industries which use heavy and bulky raw
materials in their primary stage in large quantities are usually located near the supply
of the raw materials.
It is true in the case of raw materials which lose weight in the process of manufacture or
which cannot bear high transport cost or cannot be transported over long distances
because of their perishable nature. This has been recognised since 1909 when Alfred
Weber published his theory of location of industry.
The jute mills in West Bengal, sugar mills in Uttar Pradesh, cotton textile mills in
Maharashtra and Gujarat are concentrated close to the sources of raw materials for this
very reason. Industries like iron and steel, which use very large quantities of coal and
iron ore, losing lot of weight in the process of manufacture, are generally located near
the sources of coal and iron ore.
Some of the industries, like watch and electronics industries use very wide range of
light raw materials and the attractive influence of each separate material diminishes.
The result is that such industries are often located with no reference to raw materials
and are sometimes referred to as ‘footloose industries’ because a wide range of
locations is possible within an area of sufficient population density.

2. Power:
Regular supply of power is a pre-requisite for the localisation of industries. Coal,
mineral oil and hydro-electricity are the three important conventional sources of
power. Most of the industries tend to concentrate at the source of power.
The iron and steel industry which mainly depends on large quantities of coking coal as
source of power are frequently tied to coal fields. Others like the electro-metallurgical
and electro-chemical industries, which are great users of cheap hydro-electric power,
are generally found in the areas of hydro-power production, for instance, aluminium
industry.
As petroleum can be easily piped and electricity can be transmitted over long distances
by wires, it is possible to disperse the industry over a larger area. Industries moved to
southern states only when hydro-power could be developed in these coal-deficient
areas.
Thus, more than all other factors affecting the location of large and heavy industries,
quite often they are established at a point which has the best economic advantage in
obtaining power and raw materials.
Tata Iron and Steel Plant at Jamshedpur, the new aluminium producing units at Korba
(Chhattisgarh) and Renukoot (Uttar Pradesh), the copper smelting plant at Khetri
(Rajasthan) and the fertilizer factory at Nangal (Punjab) are near the sources of power
and raw material deposits, although other factors have also played their role.

3. Labour:
No one can deny that the prior existence of a labour force is attractive to industry unless
there are strong reasons to the contrary. Labour supply is important in two respects (a)
workers in large numbers are often required; (b) people with skill or technical expertise
are needed. Estall and Buchanan showed in 1961 that labour costs can vary between 62
per cent in clothing and related industries to 29 per cent in the chemical industry; in the
fabricated metal products industries they work out at 43 per cent.

In our country, modern industry still requires a large number of workers in spite of
increasing mechanisation. There is no problem in securing unskilled labour by locating
such industries in large urban centres. Although, the location of any industrial unit is
determined after a careful balancing of all relevant factors, yet the light consumer goods
and agro-based industries generally require a plentiful of labour supply.

4. Transport:
Transport by land or water is necessary for the assembly of raw materials and for the
marketing of the finished products. The development of railways in India, connecting
the port towns with hinterland determined the location of many industries around
Kolkata, Mumbai and Chennai. As industrial development also furthers the
improvement of transport facilities, it is difficult to estimate how much a particular
industry owes to original transport facilities available in a particular area.

5. Market:
The entire process of manufacturing is useless until the finished goods reach the
market. Nearness to market is essential for quick disposal of manufactured goods. It
helps in reducing the transport cost and enables the consumer to get things at cheaper
rates.
It is becoming more and more true that industries are seeking locations as near as
possible to their markets; it has been remarked that market attractions are now so great
that a market location is being increasingly regarded as the normal one, and that a
location elsewhere needs very strong justification.
Ready market is most essential for perishable and heavy commodities. Sometimes,
there is a considerable material increase in weight, bulk or fragility during the process
of manufacture and in such cases industry tends to be market oriented.

6. Water:
Water is another important requirement for industries. Many industries are established
near rivers, canals and lakes, because of this reason. Iron and steel industry, textile
industries and chemical industries require large quantities of water, for their proper
functioning.
Significance of water in industry is evident from Table. Also, it requires 36,400 litres of
water to produce one kwh of thermal electricity. Further, it is worth noting that water
used in industries gets polluted and is therefore not available for any other purpose.

Table Requirement of Water in Industry:

Name of the industry Amount of water required in litres/tonne
Steel 300,000
Sulphite paper 290,000
Oil refining 25,600
Rayon 1,000,000
Paper from wood 173,000

7. Site:
Site requirements for industrial development are of considerable significance. Sites,
generally, should be flat and well served by adequate transport facilities. Large areas
are required to build factories. Now, there is a tendency to set up industries in rural
areas because the cost of land has shot up in urban centres.
8. Climate:
Climate plays an important role in the establishment of industries at a place. Harsh
climate is not much suitable for the establishment of industries. There can be no
industrial development in extremely hot, humid, dry or cold climate.
The extreme type of climate of north-west India hinders the development of industries.
In contrast to this, the moderate climate of west coastal area is quite congenial to the
development of industries. Because of this reason, about 24 per cent of India’s modem
industries and 30 per cent of India’s industrial labour is concentrated in Maharashtra-
Gujarat region alone.
Cotton textile industry requires humid climate because thread breaks in dry climate.
Consequently, majority of cotton textile mills are concentrated in Maharashtra and
Gujarat. Artificial humidifiers are used in dry areas these days, but it increases the cost
of production.

II. Non-Geographical Factors:

Now-a-days alternative raw materials are also being used because of modern scientific
and technological developments. Availability of electric power supply over wider areas
and the increasing mobility of labour have reduced the influence of geographical factors
on the location of industries.
The non-geographical factors are those including economic, political, historical and
social factors. These factors influence our modern industries to a great extent. Following
are some of the important non- geographical factors influencing the location of
industries.

1. Capital:
Modem industries are capital-intensive and require huge investments. Capitalists are
available in urban centres. Big cities like Mumbai, Kolkata, Delhi, and Chennai are big
industrial centres, because the big capitalists live in these cities.
2. Government Policies:
Government activity in planning the future distribution of industries, for reducing
regional disparities, elimination of pollution of air and water and for avoiding their
heavy clustering in big cities, has become no less an important locational factor.
There is an increasing trend to set up all types of industries in an area, where they
derive common advantage of water and power and supply to each other the products
they turn out. The latest example in our country is the establishment of a large number
of industrial estates all over India even in the small-scale industrial sector.
It is of relevance to examine the influence of India’s Five Year plans on industrial
location in the country. The emergence of suitable industries in south India around new
nuclei of public sector plants and their dispersal to backward potential areas has taken
place due to Government policies.
The state policy of industrial location has a greater hand in the establishment of a
number of fertiliser factories, iron and steel plants, engineering works and machine tool
factories including railway, shipping, aircraft and defence installations and oil refineries
in various parts in the new planning era in free India.
We may conclude by noting that the traditional explanation of a location of industry at a
geographically favourable point is no longer true. Location of oil refinery at Mathura,
coach factory at Kapurthala and fertiliser plant at Jagdishpur are some of the results of
government policies.

3. Industrial Inertia:
Industries tend to develop at the place of their original establishment, though the
original cause may have disappeared. This phenomenon is referred to as inertia,
sometimes as geographical inertia and sometimes industrial inertia. The lock industry
at Aligarh is such an example.

4. Efficient Organisation:
Efficient and enterprising organisation and management is essential for running modem
industry successfully. Bad management sometimes squanders away the capital and puts
the industry in financial trouble leading to industrial ruin.
Bad management does not handle the labour force efficiently and tactfully, resulting in
labour unrest. It is detrimental to the interest of the industry. Strikes and lock-outs lead
to the closure of industries. Hence, there is an imperative need of effective management
and organisation to run the industries.

5. Banking Facilities:
Establishment of industries involves daily exchange of crores of rupees which is
possible through banking facilities only. So the areas with better banking facilities are
better suited to the establishment of industries.

6. Insurance:
There is a constant fear of damage to machine and man in industries for which
insurance facilities are badly needed.

Scale of production- large vs Small Industrial Units

If a firm carries on production with large or more plants, it is known as large scale
production. On the contrary, if the production is small and the size of plants smaller, it is
called small scale production. The scale of production may have certain advantages and
disadvantages. The economies of scale may be divided into two parts— Internal
economies and external economies.

Internal economies:
These are economies available to a firm or a factory and which are not dependent upon
the actions or activities of other firms. They depend upon the scale of operation of a
firm. There are two main causes for internal economies: Indivisibilities and
Specialization.

There are some factors of production which cannot be divided into parts. Machines,
management, research are examples of indivisibilities. Some factors like labour and
machines can get specialized when production is done on a large scale.

Internal economies may be divided into five parts:

(i) Technical economies:
In large scale production, huge and modern machines are used. The machines have less
operational costs and more production. Thus, production is increased with a little
increase in costs. Labor can get specialized and result is increased efficiency and
production.

(ii) Managerial economies:

Managerial specialization is also possible when the scale of production is large. In
increased production, the managerial costs are distributed over a wide range. Services
of most efficient managers can be hired if they are suitably paid. Large scale production
makes it possible.

(iii) Marketing economies:

These are concerned with the buying of raw materials and selling of finished products.
Heavy purchases of raw materials may cause a concession in cost of their supply and
make it possible to have better quality. There may be economy in transportation costs.
Similarly, large firms enjoy some facilities in selling their goods. They can have their
own arrangement of transportation, advertisement and sales promotion.

(iv) Financial economies:

Large firms have a market reputation due to their assets and properties and volume of
production. Their goodwill helps them exercise influence on financial institutions in
obtaining funds in desired volumes at a reasonable rate of interest. They do generally
face financial difficulties.

(v) Risk-bearing economies:

Risks in large firms are dispersed over different activities and volume of production.
Diversification of production may lessen risks.

External economies:
These are economies available to all the firms in an industry when the scale of
production goes up in that industry or a group of industries. These economies are
available of localization of an industry at a particular place. These economies include
economies due to centralization and invention and research.

Internal economies, therefore, depend upon the size of the firm whereas external
economies depend upon the size of the industry. For the economies, they are all internal
economies.

Limits to Scale of Production:

The size of a firm cannot be increased to an unlimited extent.

There are limits to growth on account of the following factors:

1. With large size, difficulties in management of the firm may arise. A large firm gets
unmanageable.
2. There are some activities which are difficult to be undertaken on a large scale. It
depends on the nature of the activity.
3. Sometimes technical facilities are not available in desired amounts limiting the
growth of the enterprise.
4. Factors of production may not be available in desired amounts.
5. Capital may not be available in sufficient quantities and at reasonable rates.
6. Demand for the commodity produced by a firm can also limit its size.
 UNIT III
INTRODUCTION TO MANAGEMENT
Management and its Nature

Management: Definitions, Concept, Objectives and Scope!

The term ‘management’ has been used in different senses. Sometimes it refers to the
process of planning, organizing, staffing, directing, coordinating and controlling, at
other times it is used to describe it as a function of managing people. It is also referred
to as a body of knowledge, a practice and discipline. There are some who describe
management as a technique of leadership and decision-making while some others have
analyzed management as an economic resource, a factor of production or a system of
authority.

Definitions:
Various definitions of management are discussed as follows:

(A) Art of Getting Things Done:

Mary Parker Follett:
“Management is the art of getting things done through others.” Follett describes
management as an art of directing the activities of other persons for reaching enterprise
goals. It also suggests that a manager carries only a directing function.

Harold Koontz:
“Management is the art of getting things done through and with people in formally
organized groups.” Koontz has emphasized that management is getting the work done
with the co-operation of people working in the organization.

J.D. Mooney and A.C. Railey:

“Management is the art of directing and inspiring people.” Management not only directs
but motivates people in the organization for getting their best for obtaining objectives.

As per the above mentioned definitions, management is the art of getting things done
through people who may be managers or non-managers. At the level of chief executive,
the work is got done through functional managers, at middle level the things are
implemented through supervisors and at lower level of management through workers.
Human and technical skills play an important role for getting things done. These
definitions represent the traditional view point of management while workers are
treated as a factor of production only. They are paid wages for doing their work.
This view point suffers from the following deficiencies:
(i) This concept does not specify what type of functions is required to be performed for
getting things done from others.

(ii) Management is treated as an art. These days management has also acquired the
status of science.

(iii) The workers are treated as means of getting results. The needs and aspirations of
workers are not taken into account.

Management is much more than just getting the things done through others.
Management may be a technique for getting things done through others by satisfying
their needs and helping them grow. Harold Koontz emphasized the attainment of
business goals with the co-operation of people working in the organization.

(B) Management as a Process:

Some authors view management as a process because it involves a number of functions.
Management refers to all Involves different a manager does. Various functions which
are performed by managers to make the efficient use of the available material and
human resources so as to achieve the desired objectives are summed up as
management. Thus, the functions of planning, organizing, staffing, directing, co-
coordinating and controlling fall under the process of management.

Henry Fayol:
“To manage is to forecast and plan, to organize, to command, to co-ordinate, and to
control.” Fayol described management as a process of five functions such as planning,
organizing, commanding, coordinating and controlling. Modern authors, however, do
not view co-ordination as a separate function of management.

George R. Terry:
“Management is a distinct process consisting of activities of planning, organizing,
actuating and controlling, performed to determine and accomplish stated objectives
with the use of human beings and other resources.” Though Terry has described four
functions to be a part of management process but managerial functions are classified
into five categories.

James L. Lundy:
“Management is principally the task of planning, coordinating, motivating and
controlling the efforts of others towards a specific objective.” Lundy has also specified
some functions which management has to perform for achieving organizational goals.

Louis Allen:
“Management is what a manager does.” This is a broad definition linking all the
activities of the manager to the concept of management. Whatever work is undertaken
by a manager forms a part of management. Above definitions associate management
with the functions undertaken for running a business. There may be a difference as to
what functions are required to be taken up by the management but functions such as
planning, organizing, staffing, directing and controlling form the process of
management.

These functions are continuously taken up. On the completion of last function, the first
function starts again. The functions of management are interdependent and interlinked.
In order to achieve the objectives, a manager has to perform various functions
simultaneously.

(C) Management as a Discipline:

Sometimes the term ‘management’ is used to connote neither the activity nor the
personnel who performs it, but as a body of knowledge, a practice and a discipline. In
this sense, management refers to the principles and practices of management as a
subject of study. Management is taught as a specialized branch of knowledge in
educational institutions. It has drawn heavily from Psychology, Sociology, and
Anthropology etc. A person acquiring degree or diploma in management can try for a
managerial job.

Management is treated both as an art as well as science. An art is often regarded as the
systematic application of skill or knowledge in effecting accomplishment of results. In
management one has to use personal skill and knowledge in solving many complicated
problems to achieve enterprise objectives. Management is regarded as a science
because it has developed certain principles, generalizations and techniques which have
more or less universal application. So management is a study of a specific discipline.
When one says that a particular person is in management stream then it is assumed that
he is studying a particular field of learning.

(D) Art and Science of Decision-Making and Leadership:

Decision-making and guiding others is considered an important element of
management. A manager has to take various decisions every day for properly running
an enterprise.

Donald J. Clough:
“Management is the art and science of decision-making and leadership.” The author
views management as an art and science of decision-making. The quality of decisions
determines the performance of a manager. He has also to provide leadership to
subordinates for motivating them to undertake their work.

Rose Moore:
“Management means decision-making.” Decision-making cannot be the only function of
management even though it is very important.
Stanley Vance:
“Management is simply the process of decision-making and control over the action of
human beings for the express purpose of attaining predetermined goals.” Stanley Vance
has emphasized decision-making and control over the actions of employees for reaching
the enterprise goals.

Association of Mechanical Engineers, U.S.A.: “Management is the art and science of

preparing, organizing and directing human efforts applied to control the forces and
utilize the materials of nature for the benefit of man.” The association has given a wide
definition where it has emphasized that management controls and directs human
efforts for utilizing natural resources for the benefit of man. The above mentioned
definitions describe management as a science and art of decision making and
controlling the activities of employees for obtaining enterprise objectives.

(E) An Art of Increasing Productivity:

Some authors are of the view that the science of management is used to increase
productivity of the enterprise.

John F. Mee:
“Management may be defined as the art of securing maximum prosperity with a
minimum of effort so as to secure maximum prosperity and happiness for both
employees and employer and give public the best possible service.”

F.W. Taylor:
“Management is the art of knowing what you want to do in the best and cheapest way.”

Management is the art of securing maximum productivity at the minimum of cost so

that it helps employers, employees and public in general. Public is also a stake holder in
business, it should also benefit from good performance of business.

(F) Integration of Efforts:

Management makes use of human and physical resources for the benefit of the
enterprise.

Keith and Gubellini:

“Management is the force that factors integrates men and physical plant into an
effective operating unit.” Management integrates physical and human resources for
operating the manufacturing process in a better way.

Barry M. Richman:
“Management entails the coordination of human and material resources towards the
achievement of organizational objectives as well as the organization of the productive
functions essential for achieving stated or accepted economic goals.” Management alms
to co-ordinate and integrate various resources in the organization for achieving
enterprise objectives. The thrust of above mentioned definitions is that integration and
co-ordination of various factors of production is essential for running a business
properly and this function is undertaken by management.

(G) Management as a Group of Managers:

The term management is frequently used to denote a Refers to managerial group of
managerial personnel. When one says that personnel management of such and such
company is efficient, he refers to the group of persons who are looking after the
working of the enterprise. These persons individually are called managers.
“Management is the body or group of people which performs certain managerial
functions for the accomplishment of pre-determined goals.”

All managers perform managerial functions of planning, organizing, staffing, directing

and controlling. These persons collectively arc called ‘body of managerial personnel.’ In
actual practice the term ‘management’ is used to denote top management of the
organization. Top management is mainly concerned with determination of objectives,
strategic planning, policy formulation and overall control of the organization.

Concept of Management:

Objectives of Management:
The primary objective of management is to run the enterprise smoothly. The profit
earning objective of a business is also to be kept in mind while undertaking various
functions.

Following are the broad objectives of management:

1. Proper Utilization of Resources:

The main objective of management is to use various resources of the enterprise in a
most economic way. The proper use of men, materials, machines and money will help a
business to earn sufficient profits to satisfy various interests. The proprietors will want
more returns on their investments while employees, customers and public will expect a
fair deal from the management. All these interests will be satisfied only when physical
resources of the business are properly utilized.

2. Improving Performance:
Management should aim at improving the performance of each and every factor of
production. The environment should be so congenial that workers are able to give their
maximum to the enterprise. The fixing of objectives of various factors of production will
help them in improving their performance.

3. Mobilizing Best Talent:

The management should try to employ persons in various fields so that better results
are possible. The employment of specialists in various fields will be increasing the
efficiency of various factors of production. There should be a proper environment which
should encourage good persons to join the enterprise. The better pay scales, proper
amenities, future growth potentialities will attract more people in joining a concern.

4. Planning for Future:

Another important objective of management is to prepare plans. No management
should feel satisfied with today’s work if it has not thought of tomorrow. Future plans
should take into consideration what is to be done next. Future performance will depend
upon present planning. So, planning for future is essential to help the concern.

Scope or Branches of Management:

Management is an all pervasive function since it is required in all types of organized
endeavour. Thus, its scope is very large.

The following activities are covered under the scope of management:

(i) Planning,
(ii) Organization
(iii) Staffing.
(iv) Directing,
(v) Coordinating, and
(vi) Controlling.
The operational aspects of business management, called the branches of
management, are as follows:
1. Production Management
2. Marketing Management
3. Financial Management.
4. Personnel Management and
5. Office Management.
1. Production Management:
Production means creation of utilities. This creation of utilities takes place when raw
materials are converted into finished products. Production management, then, is that
branch of management ‘which by scientific planning and regulation sets into motion
that part of enterprise to which has been entrusted the task of actual translation of raw
material into finished product.’

It is a very important field of management ,’for every production activity which has not
been hammered on the anvil of effective planning and regulation will not reach the goal,
it will not meet the customers and ultimately will force a business enterprise to close its
doors of activities which will give birth to so many social evils’.

Plant location and layout, production policy, type of production, plant facilities, material
handling, production planning and control, repair and maintenance, research and
development, simplification and standardization, quality control and value analysis, etc.,
are the main problems involved in production management.

2. Marketing Management:
Marketing is a sum total of physical activities which are involved in the transfer of
goods and services and which provide for their physical distribution. Marketing
management refers to the planning, organizing, directing and controlling the activities
of the persons working in the market division of a business enterprise with the aim of
achieving the organization objectives.

It can be regarded as a process of identifying and assessing the consumer needs with a
view to first converting them into products or services and then involving the same to
the final consumer or user so as to satisfy their wants with a stress on profitability that
ensures the optimum use of the resources available to the enterprise. Market analysis,
marketing policy, brand name, pricing, channels of distribution, sales promotion, sale-
mix, after sales service, market research, etc. are the problems of marketing
management.

3. Financial Management:
Finance is viewed as one of the most important factors in every enterprise. Financial
management is concerned with the managerial activities pertaining to the procurement
and utilization of funds or finance for business purposes.

The main functions of financial management include:

(i) Estimation of capital requirements;
(ii) Ensuring a fair return to investors;
(iii) Determining the suitable sources of funds;
(iv) Laying down the optimum and suitable capital
Structure for the enterprise:
(i) Co-coordinating the operations of various departments;
(ii) Preparation, analysis and interpretation of financial statements;
(iii) Laying down a proper dividend policy; and
(iv) Negotiating for outside financing.

4. Personnel Management:
Personnel Management is that phase of management which deals with the effective
control and use of manpower. Effective management of human resources is one of the
most crucial factors associated with the success of an enterprise. Personnel
management is concerned with managerial and operative functions.

Managerial functions of personnel management include:

(i) Personnel planning;
(ii) Organizing by setting up the structure of relationship among jobs, personnel and
physical factors to contribute towards organization goals;
(iii) Directing the employees; and
(iv) Controlling.

The operating functions of personnel management are:

(i) Procurement of right kind and number of persons;
(ii) Training and development of employees;
(iii) Determination of adequate and equitable compensation of employees;
(iv) Integration of the interests of the personnel with that of the enterprise; and
(v) Providing good working conditions and welfare services to the employees.

5. Office Management:
The concept of management when applied to office is called ‘office management’. Office
management is the technique of planning, coordinating and controlling office activities
with a view to achieve common business objectives. One of the functions of
management is to organize the office work in such a way that it helps the management
in attaining its goals. It works as a service department for other departments.

The success of a business depends upon the efficiency of its administration. The
efficiency of the administration depends upon the information supplied to it by the
office. The volume of paper work in office has increased manifold in these days due to
industrial revolution, population explosion, increased interference by government and
complexities of taxation and other laws.

Harry H. Wylie defines office management as “the manipulation and control of men,
methods, machines and material to achieve the best possible results—results of the
highest possible quality with the expenditure of least possible effect and expense, in the
shortest practicable time, and in a manner acceptable to the top management.”
Purpose, Process & Functions of management- Planning, Organising,
Actuating and controlling

Nature of Management Process:

Management is a process which brings the scarce human and material resources
together and motivates people for the achievement of objectives of the organization.
Management is not a onetime act but an on-going series of interrelated activities. The
sum total of these activities is known as management process. It consists of a set of
interrelated operations or functions necessary to achieve desired organizational goals.
A process is a systematic way of doing things. It is concerned with conversion of inputs
into outputs. An analysis of management process will enable us to know the functions
which managers perform.

Features of Management Process:

Management process is characterized by the following features:

1. Social Process:
The entire management process is regarded as a social process as the success of all
organizational efforts depends upon the willing co-operation of people. Managers guide,
direct, influence and control the actions of others to achieve stated goals. Even people
outside the organization are influenced by the actions of managers.

2. Continuous Process:
The process of management is on-going and continuous. Managers continuously take up
one or the other function. Management cycle is repeated over and over again, each
managerial function is viewed as a sub-process of total management process.

3. Universal:
Management functions are universal in the sense that a manager has to perform them
irrespective of the size and nature of the organization. Each manager performs the same
functions regardless of his rank or position in the organization. Even in a non-business
organization managerial functions are the same.

4. Iterative:
Managerial functions are contained within each other the performance of the next
function does not start only when the earlier function is finished. Various functions are
taken together. For example, planning, organizing, directing and controlling may occur
within staffing function. Similarly, organizing may require planning, directing and
controlling. So all functions can be thought of as sub-functions of each other.

5. Composite:
All managerial functions are composite and integrated. There cannot be any sequence
which can be strictly followed for performing various functions. The sequential concept
may be true in a newly started business where functions may follow a particular
sequence but the same will not apply to a going concern. Any function may be taken up
first or many functions may be taken up at the same time.

Classification of Management Functions:

Different authors have given different managerial functions. Henry Fayol was the first to
define specific functions of management. In his words, “To manage is to forecast and
plan, to organize, to command, to co-ordinate and to control.”

He has given the following functions:

(i) Forecasting and planning
(ii) Organizing
(iii) Commanding
(iv) Co-ordination
(v) Control

Luther Gulick used the word POSDCORB to describe various functions.

This initial describes the following functions: Planning (P). Organizing (O),
Staffing (S), Directing (D), Controlling (CO), Reporting (R) and Budgeting (B).

Ralph Davis gave three functions of management: Planning, Organizing and Control. He
was of the view that command and co-ordination facilitate control so these should be
part of it.

Koontz and O’ Donnell have adopted the following functions:

(i) Planning
(ii) Organizing
(iii) Staffing
(iv) Directing and
(v) Controlling.

Earnest Dale has included innovation and representation to the earlier mentioned
functions. G.R. Terry classified managerial functions under four heads Planning,
Organising, Actuating and Controlling. It can be seen that there is no agreement about
specific functions to be performed by the management.

However, the following comprehensive classification can be given of various

managerial functions:
1. Planning
2. Organizing
3. Staffing
4. Directing
(a) Leadership (c) Motivation
5. Coordinating
Brief outlines of these functions are given below:

1. Planning:
Planning is a basic managerial function. Planning helps in determining the course of
action to be followed for achieving various organizational objectives. It is a decision in
advance, what to do when to do, how to do and who will do a particular task. Planning is
a process which involves thinking before doing’. Planning is concerned with the mental
state of a manager. He thinks before undertaking a work. Other functions of
management such as organizing, staffing, directing, coordinating and controlling are
also undertaken after planning.

Hart defines planning as “the determination in advance of a line of action by which

certain results are to be achieved.” According to Terry, “Planning is the selecting and
relating of facts and the making and using of assumptions regarding the future in the
visualization and formulations of proposed activities believed necessary to achieve
desired results.”

Planning is a process of looking ahead. The primary object of planning is to achieve

better results. It involves the selection of organizational objectives and developing
policies, procedure, programmes, budgets and strategies. Planning is a continuous
process that takes place at all levels of management. A detailed planning is done in the
beginning but the actual performance is reviewed and suitable changes are made in
plans when actual execution is done. Plans may be of many kinds, such as short range
plans, medium range plans, long range plans, standing plans, single use plans, strategic
plans, administrative plans and operational plans.

The process of Planning involves a number of steps:

(i) Gathering information;
(ii) Laying down objectives;
(iii) Developing planning premises;
(iv] Examining alternative courses of action;
(v) Evaluation of action patterns;
(vi) Reviewing limitations
(vii) Implementation of plans.

2. Organizing:
Every business enterprise needs the services of a number of persons to look after its
different aspects. The management way sets up the objectives or goals to be achieved by
its personnel. The energy of every individual is channelized to achieve the enterprise
objectives.

The function of organizing is to arrange, guide, co-ordinate, direct and control the
activities of other factors of production, viz., men, material, money and machines so as
to accomplish the objectives of the enterprise. In the words of Koontz and O ‘Donnel,
“Organizing is that part of managing that involves establishing and intentional structure
of roles for people in an enterprise to fill.” Organization provides the necessary
framework within which people associate for the attainment of business objectives.

Louis A. Allen describes organization as, “the process of identifying and grouping 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.”

The process of organization involves the following steps:

(i) To identifying the work to be performed;
(ii) To classify or group the work;
(iii) To assign these groups of activities or work to individuals;
(iv) To delegate authority and fix responsibility; and
(v) To co-ordinate these authority-responsibility relationships of various activities.

The character and type of organization depends upon the size and nature of the
enterprise.
Though there are many types of organizations but generally three types of
organizations are in vogue:

(i) Line organization

(ii) Functional organization; and
(iii) Line and staff organization
In line organization authority flows vertically from the top of the hierarchy to the
bottom. Under functional organization, the work is divided into different departments.
Each department deals in one type of work and it specializes in one work only. A
workman has to work under many superiors who specialize in different functions.

Line and staff organization provides for specialists with line executives. It is a
combination of line and functional form of organization. A sound organization
contributes greatly to the continuity and success of the enterprise. However, an
organization is not an end in itself. The organization structure should be flexible.

3. Staffing:
The function involves manning the positions created by Concerned with human
organization process. It is concerned with human resources of resource planning an
organization. In the words of Koontz and O ‘Donnel, “staffing is filling, and keeping filled,
positions in the organization structure through defining work-force requirements,
appraising, selecting, compensating and training.”

Thus, staffing consists of the following:

(i) Manpower planning, i.e., assessing manpower requirements in terms of quantity and
quality.
(ii) Recruitment, selection and training;
(iii) Placement of man power;
(iv) Development, promotion, transfer and appraisal;
(v) Determination of employee remuneration.

Every manager in an organization has to perform the staffing function in one form or
the other, in order to get things done through others. But it is decidedly a difficult
managerial function as it concerns human beings whose behaviour and actions cannot
be predicted, and that is why it has become a distinct and specialized branch of
management.
4. Directing:
Directing is concerned with carrying out the desired through people plans. It initiates
organized and planned action and ensures effective performance by subordinates
towards the accomplishment of group activities. Direction is called management in
action. In the words of George R. Terry, “Direction is moving to action and supplying
simulative power to the group.”

After planning, organizing and staffing, the manager has to guide and supervise his
subordinates. According to Massie, “Directing concerns the total manner in which a
manager influences the actions of subordinates. It is the final action of a manager in
getting others to act after all preparations have been completed.” Directing is a
continuous function and is performed at all levels of management.

The main activities involved in direction are as follows:

(a) Leadership
(b) Communication
(c) Motivation; and
(d) Supervision.

(a) Leadership:
A manager has to issue orders and instructions and guide and counsel his subordinates
in their work with a view to improve their performance and achieve enterprise
objectives. Leadership is ‘the process by which an executive or manager imaginatively
directs/guides and influences the work of others in choosing and attaining specified
goals by mediating between the individual and organization in such a manner that both
will get maximum satisfaction’.

Leadership is the ability to build up confidence and zeal among people and to create an
urge in them, to be led. To be a successful leader, a manager must possess the qualities
of foresight, drive, initiative, self-confidence and personal integrity. Different situations
may demand different types of leadership, viz., autocratic leadership, democratic
leadership and free rein leadership.

(b) Communication:
Communication constitutes a very important function of management. It is said to be
the number one problem of management, today. It is an established fact that managers
spend 75 to 90 per cent of their working time in communicating with others.
Communication is the means by which the behaviour of the subordinate is modified and
change is effected in their actions.

The word ‘communication’ has been derived from the Latin word ‘communis’ which
means ‘common’. Thus, communication means sharing of ideas in common. The essence
of communication is getting the receiver and the sender tuned together for a particular
message. It refers to the exchange of ideas, feelings, emotions and knowledge and
information between two or more persons. Nothing happens in management till
communication takes place.

Communication is a two-way process as it involves both information and

understanding. It may be written, oral, and gestural. Communication is said to be formal
when it follows the formal channels provided in the organization structure. It is
informal communication, when it does not follow the formal channels. Communication
flows downward from a superior to subordinates and upward from subordinates to a
superior. It also flows between two or more persons operating at the same level of
authority.

Communication is essential at all levels of management for decision- making and

planning. It increases managerial capacity and facilitates control. It has been rightly said
that good managers are good communicators and poor managers are poor
communicators.

(c) Motivation:
The term motivation is derived from the word ‘motive’ which means a need, or an
emotion that prompts an individual into action. Motivation is the psychological process
of creating urge among the subordinates to do certain things or behave in the desired
manner. It is a very important function of management. The importance of motivation
can be realized from the fact that performance of a worker depends upon his ability and
the motivation.

There are many strategies adopted by managers for increasing the motivation of
subordinates. According to Michel Jucius, “Motivation means the act of stimulating
someone or oneself to get a desired course of action to push the right button to get a
desired reaction, a compliment, dollar raise, a smile, a promise of a rise, a new
typewriter, a preferred location or a new desk.” Thus, a manager has to provide some
personal incentive to the subordinates to motivate, persuade and inspire them for
contributing their best towards the achievement of enterprise objectives.

The incentives to be proved may be financial, such as increase in wages, or non-

financial, like better working conditions, job security, recognition, etc. A sound
motivational system must be productive, competitive, comprehensive and flexible, and
it must consider the psychological, social, safety, ego and economic needs of the
workers.

(d) Supervision:
Supervision is another important element of directing function of management. After
issuing instructions, the manager or the supervisor has to see that the given
instructions are carried out. This is the aim of supervision. Supervision refers to the job
of overseeing subordinates at work to ensure maximum utilization of resources, to get
the required and directed work done and to correct the subordinates whenever they go
wrong. Though supervision is performed at all levels of management, the major
responsibility for supervision lies with the first line of management. Sound
organizational set up, effective delegation, human approach, effective communication
and management by exception make supervision effective.

5. Co-ordination:
Co-ordination is one of the most important functions of management. It is essential to
channelize the activities of various individuals in the organization for the achievement
of common goals. Every department or section is given a target to be achieved and they
should concentrate only on their work and should not bother about the work of other
organs.

It is left to the management to see that the work of different segments is going
according to pre-determined targets and corrective measures have to be taken if there
is any deviation. Co-ordination creates a team spirit and helps in achieving goals
through collective efforts. It is the orderly arrangement of group effort to provide unity
of action in the pursuit of common objectives. Dalton McFarland defines co-ordination
as the “process whereby an executive develops an orderly pattern of group effort among
his subordinates and secures unity of action in the pursuit of common purposes.”

Co-ordination can be classified under two categories:

(i) Vertical and horizontal co-ordination, and
(ii) Internal and external co-ordination.
Whereas vertical co-ordination is the co-ordination between different levels of
management, the term horizontal co-ordination is used when co-ordination has to be
achieved between departments of the same level of authority. Co-ordination is internal
when it is between different sections of the same concern and external when it is
required with persons outside the organization.
Co-ordination is regarded as the very essence of management as in order to co-ordinate
the activities of his subordinates, a manager has to perform all the other functions of
management, viz., planning, organizing, staffing, directing and controlling. It must also
be noted by the readers that co-ordination and co-operation do not mean the same
thing.

6. Co-ordination and Co-operation:

Co-ordination is much wider term than co-operation. Co-operation indicates the
willingness of individuals to help each other. It is an attitude of a group of people and is
largely the result of voluntary action. Co-ordination, on the other hand, is a conscious
managerial effort which is the result of a deliberate action. Co-operation is essential for
the achievement of co-ordination but it is not a substitute for co-ordination. However,
both co-operation and co-ordination are essential in management.

7. Controlling:
Controlling can be defined as “determining what is being accomplished, that is
evaluating the performance, if necessary, applying corrective measures so that the
performance takes place according to plans.” Control is essential for achieving
objectives of an enterprise. The planning of various activities does not ensure automatic
implementation of policies. Control is the process which enables management to get its
policies implemented and take corrective actions if performance is not according to the
pre-determined standards.

If planning is the beginning of the management process, controlling may be said to be

the final stage. If planning is looking ahead, controlling is looking back. Control is not
possible without planning and planning is meaningless without control. Control is a line
function and executives at various levels of management continuously assess the
performance of their subordinates. The main purpose of control is to see that the
activity is achieving the desired results. A control system, to be effective, must conform
to the nature of activity, report deviations promptly, reflect organization structure,
assure corrective action and be economical.

The process of controlling involves the following steps:

(i) Establishing standards of performance;
(ii) Measuring actual performance;
(iii) Comparing the actual performance with the standard;
(iv) Finding variances or deviations, if any; and
(v) Taking corrective action or measures.

Skills and Role of Manager

Functions of Managers at Different Levels:
There is no basic distinction between managers, executives, administrators, and
supervisors. To be sure, a given situation may differ considerably among various levels
in an organization or various types of enterprises. Similarly, the scope of authority held
may vary and the types of problems dealt with may be considerable different.

Furthermore, the person in a managerial role may be directing people in the sales,
engineering, or finance department. But the fact remains that, as managers, all obtain
results by the establishing environment for effective group endeavour.

All manager carry out managerial functions. However, the time spent for each function
may differ. Fig. 27.2 shows an approximation of the relative time spent for each
function.

Thus, top-level managers spend more time on planning and organizing than do lower-
level managers. Leading, on the other hand, takes a great deal of time for first-line
supervisors. The difference in the amount of time spent on controlling various functions
only slightly for managers at various levels.

Skills of Managers in the Organizational Hierarchy:

Following are the managerial skills:

(i) Technical Skill:

It is knowledge of and proficiency in activities involving methods, processes, and
procedures. Thus, it involves working with tools and specific techniques. For examples,
mechanics work with tools, and their supervisor should have the ability to teach them
how to use these tools. Similarly, accountants apply specific techniques in doing their
job.

(ii) Human Skill:

It is the ability to work with people; it is cooperative efforts; it is teamwork; it is the
creation of an environment in which people feel secure and free express their opinions.

(iii) Conceptual Skill:

It is the ability to see the ‘big picture’ to recognize significant elements in a situation,
and to understand the relationships among the elements.

(iv) Design Skill:

It is the ability to solve problems in ways that will benefit the enterprise. To be effective,
particularly at upper organizational levels, managers must be able to do more than see a
problem. They must have, in addition, the skill of a good design engineer in working out
a practical solution to a problem.
If managers merely see the problem and become ‘problem watchers,’ They will fail.
Managers must also have that valuable skill of being able to design a workable solution
to the problem in the light of the realities they face.

The relative importance of these skills may differ at various levels in the organization
hierarchy. As shown in Fig. 27.3 technical skills are of greatest importance at the
supervisory level. Human skills are also helpful in the frequent interactions with
subordinates. Conceptual skills, on the other hand, are usually not critical for lower-
level supervisors.

At the middle management level, the need for technical skills decreases human skill is
still essential; the conceptual skills gain in importance.

At the top management level, conceptual and design abilities and human skills are
especially valuable, but there is relatively little need for technical abilities. It is assumed,
especially in large companies, that chief executives can utilize the technical abilities of
their subordinates. In smaller firms, however, technical experience may still be quite
important.

Role of a Manager:
Non-business executive sometimes say that the aim of business managers is simple-to
make a profit. But profit is really only a measure of a surplus of sales rupees over
expense rupees. In a very real sense, in all kinds of organizations, whether business or
non-business, the logical and publicly desirable aim of all managers should be a surplus.

Thus, managers must establish an environment in which people can accomplish group
goals with the least amount of time, money, materials, and personal dissatisfaction or in
which they can achieve as much as possible of a desired goal with available resources.

In a non-business enterprise such as a police department, as well as in units of a

business (such as an accounting department) that are not responsible for total business
profits, managers still have goals and should strive to accomplish them with the
minimum of resource or to accomplish as much as possible with available resources.

Interpersonal Roles:
(1) The figure head role (performing ceremonial and social duties as the organisation’s
representative

(2) The leader role and

(3) The liaison role (communicating particularly with outsiders).

Informational Roles:
(1) The recipient role (receiving information about the operation of an enterprise)

(2) The disseminator role (passing information to subordinates) and

(3) The spokesperson role (transmitting information to those outside the organisation).

Decision Roles:
(1) The entrepreneurial role.
(2) The disturbance handler role.
(3) The resource allocator role.
(4) The negotiator role.
 UNIT IV
PLANNING
Nature and purpose of planning, types of plans, steps in planning
process.

All organizations whether it is the government, a private business or small businessman

require planning. To turn their dreams of increase in sale, earning high profit and
getting success in business all businessmen have to think about future; make
predictions and achieve target. To decide what to do, how to do and when to do they do
planning.

Meaning:
Planning can be defined as “thinking in advance what is to be done, when it is to be
done, how it is to be done and by whom it should be done”. In simple words we can say,
planning bridges the gap between where we are standing today and where we want to
reach.

Planning involves setting objectives and deciding in advance the appropriate course of
action to achieve these objectives so we can also define planning as setting up of
objectives and targets and formulating an action plan to achieve them.

Another important ingredient of planning is time. Plans are always developed for a fixed
time period as no business can go on planning endlessly.
Keeping in mind the time dimension we can 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 the different courses of actions”.

Features/Nature/Characteristic of Planning:

1. Planning contributes to Objectives:

Planning starts with the determination of objectives. We cannot think of planning in
absence of objective. After setting up of the objectives, planning decides the methods,
procedures and steps to be taken for achievement of set objectives. Planners also help
and bring changes in the plan if things are not moving in the direction of objectives.

For example, if an organisation has the objective of manufacturing 1500 washing

machines and in one month only 80 washing machines are manufactured, then changes
are made in the plan to achieve the final objective.

2. Planning is Primary function of management:

Planning is the primary or first function to be performed by every manager. No other
function can be executed by the manager without performing planning function because
objectives are set up in planning and other functions depend on the objectives only.

For example, in organizing function, managers assign authority and responsibility to the
employees and level of authority and responsibility depends upon objectives of the
company. Similarly, in staffing the employees are appointed. The number and type of
employees again depends on the objectives of the company. So planning always
proceeds and remains at no. 1 as compared to other functions.

3. Pervasive:
Planning is required at all levels of the management. It is not a function restricted to top
level managers only but planning is done by managers at every level. Formation of
major plan and framing of overall policies is the task of top level managers whereas
departmental managers form plan for their respective departments. And lower level
managers make plans to support the overall objectives and to carry on day to day
activities.

4. Planning is futuristic/Forward looking:

Planning always means looking ahead or planning is a futuristic function. Planning is
never done for the past. All the managers try to make predictions and assumptions for
future and these predictions are made on the basis of past experiences of the manager
and with the regular and intelligent scanning of the general environment.

5. Planning is continuous:
Planning is a never ending or continuous process because after making plans also one
has to be in touch with the changes in changing environment and in the selection of one
best way.

So, after making plans also planners keep making changes in the plans according to the
requirement of the company. For example, if the plan is made during the boom period
and during its execution there is depression period then planners have to make changes
according to the conditions prevailing.

6. Planning involves decision making:

The planning function is needed only when different alternatives are available and we
have to select most suitable alternative. We cannot imagine planning in absence of
choice because in planning function managers evaluate various alternatives and select
the most appropriate. But if there is one alternative available then there is no
requirement of planning.

For example, to import the technology if the licence is only with STC (State Trading Co-
operation) then companies have no choice but to import the technology through STC
only. But if there is 4-5 import agencies included in this task then the planners have to
evaluate terms and conditions of all the agencies and select the most suitable from the
company’s point of view.

7. Planning is a mental exercise:

It is mental exercise. Planning is a mental process which requires higher thinking that is
why it is kept separate from operational activities by Taylor. In planning assumptions
and predictions regarding future are made by scanning the environment properly. This
activity requires higher level of intelligence. Secondly, in planning various alternatives
are evaluated and the most suitable is selected which again requires higher level of
intelligence. So, it is right to call planning an intellectual process.

Importance/Significance of Planning:
1. Planning provides Direction:
Planning is concerned with predetermined course of action. It provides the directions to
the efforts of employees. Planning makes clear what employees have to do, how to do,
etc. By stating in advance how work has to be done, planning provides direction for
action. Employees know in advance in which direction they have to work. This leads to
Unity of Direction also. If there were no planning, employees would be working in
different directions and organisation would not be able to achieve its desired goal.

2. Planning Reduces the risk of uncertainties:

Organisations have to face many uncertainties and unexpected situations every day.
Planning helps the manager to face the uncertainty because planners try to foresee the
future by making some assumptions regarding future keeping in mind their past
experiences and scanning of business environments. The plans are made to overcome
such uncertainties. The plans also include unexpected risks such as fire or some other
calamities in the organisation. The resources are kept aside in the plan to meet such
uncertainties.

3. Planning reduces over lapping and wasteful activities:

The organisational plans are made keeping in mind the requirements of all the
departments. The departmental plans are derived from main organisational plan. As a
result there will be co-ordination in different departments. On the other hand, if the
managers, non-managers and all the employees are following course of action according
to plan then there will be integration in the activities. Plans ensure clarity of thoughts
and action and work can be carried out smoothly.

4. Planning Promotes innovative ideas:

Planning requires high thinking and it is an intellectual process. So, there is a great
scope of finding better ideas, better methods and procedures to perform a particular
job. Planning process forces managers to think differently and assume the future
conditions. So, it makes the managers innovative and creative.

5. Planning Facilitates Decision Making:

Planning helps the managers to take various decisions. As in planning goals are set in
advance and predictions are made for future. These predictions and goals help the
manager to take fast decisions.

6. Planning establishes standard for controlling:

Controlling means comparison between planned and actual output and if there is
variation between both then find out the reasons for such deviations and taking
measures to match the actual output with the planned. But in case there is no planned
output then controlling manager will have no base to compare whether the actual
output is adequate or not.

For example, if the planned output for a week is 100 units and actual output produced
by employee is 80 units then the controlling manager must take measures to bring the
80 unit production upto 100 units but if the planned output, i.e., 100 units is not given
by the planners then finding out whether 80 unit production is sufficient or not will be
difficult to know. So, the base for comparison in controlling is given by planning
function only.

7. Focuses attention on objectives of the company:

Planning function begins with the setting up of the objectives, policies, procedures,
methods and rules, etc. which are made in planning to achieve these objectives only.
When employees follow the plan they are leading towards the achievement of
objectives. Through planning, efforts of all the employees are directed towards the
achievement of organisational goals and objectives.

Limitations of Planning:
1. Planning leads to rigidity:
Once plans are made to decide the future course of action the manager may not be in a
position to change them. Following predefined plan when circumstances are changed
may not bring positive results for organisation. This kind of rigidity in plan may create
difficulty.

2. Planning may not work in dynamic environment:

Business environment is very dynamic as there are continuously changes taking place in
economic, political and legal environment. It becomes very difficult to forecast these
future changes. Plans may fail if the changes are very frequent.

The environment consists of number of segments and it becomes very difficult for a
manager to assess future changes in the environment. For example there may be change
in economic policy, change in fashion and trend or change in competitor’s policy. A
manager cannot foresee these changes accurately and plan may fail if many such
changes take place in environment.

3. It reduces creativity:
With the planning the managers of the organisation start working rigidly and they
become the blind followers of the plan only. The managers do not take any initiative to
make changes in the plan according to the changes prevailing in the business
environment. They stop giving suggestions and new ideas to bring improvement in
working because the guidelines for working are given in planning only.

4. Planning involves huge Cost:

Planning process involves lot of cost because it is an intellectual process and companies
need to hire the professional experts to carry on this process. Along with the salary of
these experts the company has to spend lot of time and money to collect accurate facts
and figures. So, it is a cost-consuming process. If the benefits of planning are not more
than its cost then it should not be carried on.

5. It is a time-consuming process:
Planning process is a time-consuming process because it takes long time to evaluate the
alternatives and select the best one. Lot of time is needed in developing planning
premises. So, because of this, the action gets delayed. And whenever there is a need for
prompt and immediate decision then we have to avoid planning.

6. Planning does not guarantee success:

Sometimes managers have false sense of security that plans have worked successfully in
past so these will be working in future also. There is a tendency in managers to rely on
pretested plans.

It is not true that if a plan has worked successfully in past, it will bring success in future
also as there are so many unknown factors which may lead to failure of plan in future.
Planning only provides a base for analysing future. It is not a solution for future course
of action.

7. Lack of accuracy:
In planning we are always thinking in advance and planning is concerned with future
only and future is always uncertain. In planning many assumptions are made to decide
about future course of action. But these assumptions are not 100% accurate and if these
assumptions do not hold true in present situation or in future condition then whole
planning will fail.

For example, if in the plan it is assumed that there will be 5% inflation rate and in future
condition the inflation rate becomes 10% then the whole plan will fail and many
adjustments will be required to be made.

External Limitations of Planning:

Sometimes planning fails due to following limitations on which managers have no
control.

(i) Natural calamity:

Natural calamities such as flood, earthquake, famine etc. may result in failure of plan.

(ii) Change in competitors’ policies:

Sometimes plan may fail due to better policies, product and strategy of competitor
which was not expected by manager.

(iii) Change in taste/fashion and trend in the market:

Sometimes plans may fail when the taste/fashion or trend in market goes against the
expectation of planners.

(iv) Change in technologies:

The introduction of new technologies may also lead to failure of plans for products
using old technology.

(v) Change in government/economic policy:

Managers have no control over government decisions. If government economic or
industrial policies are not framed as expected by manager then also plans may fail.

Planning Process:
1. Setting up of the objectives:
In planning function manager begins with setting up of objectives because all the
policies, procedures and methods are framed for achieving objectives only. The
managers set up very clearly the objectives of the company keeping in mind the goals of
the company and the physical and financial resources of the company. Managers prefer
to set up goals which can be achieved quickly and in specific limit of time. After setting
up the goals, the clearly defined goals are communicated to all the employees.

2. Developing premises:
Premises refer to making assumptions regarding future. Premises are the base on which
plans are made. It is a kind of forecast made keeping in view existing plans and any past
information about various policies. There should be total agreement on all the
assumptions. The assumptions are made on the basis of forecasting. Forecast is the
technique of gathering information. Common forecast are made to find out the demand
for a product, change in government or competitor policy, tax rate, etc.

3. Listing the various alternatives for achieving the objectives:

After setting up of objectives the managers make a list of alternatives through which the
organisation can achieve its objectives as there can be many ways to achieve the
objective and managers must know all the ways to reach the objectives.

For example, if the objective is to increase in sale by 10% then the sale can be increased:

(a) By adding more line of products;

(b) By offering discount;
(c) By increasing expenditure on advertisements;
(d) By increasing the share in the market;
(e) By appointing salesmen for door-to-door sale etc.
So, managers list out all the alternatives.

4. Evaluation of different alternatives:

After making the list of various alternatives along with the assumptions supporting
them, the manager starts evaluating each and every alternative and notes down the
positive and negative aspects of every alternative. After this the manager starts
eliminating the alternatives with more of negative aspect and the one with the
maximum positive aspect and with most feasible assumption is selected as best
alternative. Alternatives are evaluated in the light of their feasibility.

5. Selecting an alternative:
The best alternative is selected but as such there is no mathematical formula to select
the best alternative. Sometimes instead of selecting one alternative, a combination of
different alternatives can also be selected. The most ideal plan is most feasible,
profitable and with least negative consequences.

After preparing the main plan, the organisation has to make number of small plans to
support the main plan. These plans are related to performance of routine jobs in the
organisation. These are derived from the major plan. So, they are also known as
derivative plans. These plans are must for accomplishing the objective of main plan. The
common supportive plans are plans to buy equipment, plan for recruitment and
selection of employees, plan to buy raw material, etc.

6. Implement the plan:

The managers prepare or draft the main and supportive plans on paper but there is no
use of these plans unless and until these are put in action. For implementing the plans
or putting the plans into action, the managers start communicating the plans to all the
employees very clearly because the employees actually have to carry on the activities
according to specification of plans. After communicating the plan to employees and
taking their support the managers start allocating the resources according to the
specification of the plans. For example, if the plan is to increase in sale by increasing the
expenditure on advertisement, then to put it into action, the managers must allot more
funds to advertisement department, select better media, hire advertising agency, etc.

7. Follow-up:
Planning is a continuous process so the manager’s job does not get over simply by
putting the plan into action. The managers monitor the plan carefully while it is
implemented. The monitoring of plan is very important because it helps to verify
whether the conditions and predictions assumed in plan are holding true in present
situation or not. If these are not coming true then immediately changes are made in the
plan.

During follow up many adjustments are made in the plan. For example, if the
expenditure planning is done keeping in mind 5% inflation rate but in present situation
if the inflation rate rises to 10% then during follow up the managers make changes in
the plans according to 10% inflation rate.

Plan:
Plan is a document that outlines how goals are going to be met. It is a specific action
proposed to help the organization achieve its objectives. There may be more than one
way and means of reaching a particular goal but with the help of logical plans, objectives
of an organization could be easily achieved.

Single Use Plans:

Single use plans are one time use plan. These are designed to achieve a particular goal
that once achieved will not reoccur in future. These are made to meet the needs of
unique situations. The duration or length of single use plan depends upon the activity or
goal for which it is made. It may last one day or it may last for weeks or months if the
project for which it is made is long.

Standing Plans:
Standing plans are also known as Repeat Use Plans. These plans focus on situations
which occur repeatedly. Standing plans are used over and over again. They are made
once but retain their value over a period of years. Although some revisions and updates
are made in these plans from time to time.

Types of Plans:
Planning is a pervasive function which means it is not the task of top level managers
only but managers working at different levels perform planning function. The plans
framed by top level manager may differ from the plans formed by middle and lower
level managers. The different types of plans or common plans formed by the managers
at different levels are:

 Objectives – Rules
 Strategy – Programmes
 Policies – Methods
 Procedures – Budgets
1. Objectives:
Objectives are the ends towards which the activities are directed. They are the end
result of every activity. An objective:

(a) Should be related to single activity;

(b) Should be related to result and not to activity to be performed;
(c) It should be measurable or must be measured in quantitative term;
(d) It must have a time limit for achievement of objective;
(e) It must be achievable or feasible.
For example, increase in sale by 10% or decrease in rejections by 2%.

2. Strategy:
A strategy is a comprehensive plan to achieve the organisational objectives. The
dimensions of strategy are:
(i) Determining long term objectives.
(ii) Adopting a particular course of action.
(iii) Allocating resources for achieving the objectives.
Strategy formulation is the task of top level people and it is must to scan and
understand clearly the business environment before framing the strategy. The common
decisions in strategy are whether to introduce a new product or not. If to introduce then
how, finding out customer for your products making changes in existing products etc.
All the strategic decisions are greatly influenced by the business environment. Strategy
defines the future decisions regarding the organisation’s direction and scope in the long
run.

For example, Choice of advertising media, sales promotion techniques, channels of

distribution, etc.

3. Policies:
Policy can be defined as organisation’s general response to a particular problem or
situation. In simple words, it is the organisation’s own way of handling the problems.
Policies are made at every level because the managers at every level need to decide or
predetermine the way of handling a situation and policy acts as a guide to take decisions
in unexpected situation.

Policy formation always encourages initiatives of employees because employees have to

deal with situations and the way of handling the situation is decided in consultation
with the employees. Then they will be able to handle the situation in a much better way.
For example, a school may have policy of issuing admission form only to students who
secured more than 60% marks.

“No credit sale policy”, etc. Introduction of new product in the market.

4. Procedures:
Procedures are required steps established in advance to handle future conditions. The
sequence of steps to be followed by employees in different situations must be
predetermined so that everyone follows same steps.

The procedure can be defined as the exact manner in which an activity has to be
accomplished.
For example, the procedure for admission in a particular school can be:
(a) Set up a file for applicants;
(b) Accept the field forms and put them in a file;
(c) Ask for other certificates to verify score or marks of students;
(d) Put those documents also in the file;
(e) Give the file to admission in-charge.
Procedures are made common for all the departments to co-ordinate their activities. So
procedures cut across all the departmental lines. For example, the procedure to handle
the order by manufacturing department may involve sales department also.

5. Rules:
Rules spell out special actions or non-actions of the employees. There is no discretion
allowed in rules, i.e., they must be followed strictly and if rules are not followed then
strict actions can be taken against employees who are disobeying the rules. Rules are
spelt out to create the environment of discipline in the organisation. For example, there
can be rule of no smoking in the organisation. Rules generally guide the general
behaviour of the employees and employees cannot make any changes in them.

6. Programmes:
Programmes are the combination of goals, policies, procedures and rules. All these
plans together form a program. The programmes are made to get a systematic working
in the organisation. The programmes create relation between policies, procedures and
goals. The programmes are also prepared at different levels. A primary programme is
prepared by the top level and then to support the primary programme supportive
programmes of different levels are prepared for smooth function of the company.

For example, construction of shopping mall, Development of new product.

7. Methods:
Methods can be defined as formalized or systematic way of doing routine or repetitive
jobs. The managers decide in advance the common way of doing a job. So, that
(a) There is no doubt in the minds of employees;
(b) There can be uniformity in actions of the employees;
(c) These help in applying the techniques of standardization and simplification;
(d) Act as guide for employees.
If the common way of doing the job is not decided in advance then there will be
confusion and comparison will not be possible. For example, for the valuation of stock,
the organisation must decide in advance what method has to be adopted (lifo or fifo). So
that everyone follows the same method and comparison with the past value of stock can
be done, method for calculation of depreciation.

8. Budget:
Budget is the statement of expected result expressed in numerical terms. In budgets the
results are always measurable and most of the time these are financial in nature but it
does not mean that company prepares only financial budget. Financial budget is also
known as profit plan of the company because it includes the expected income and
related expenditures with that income and the profit which the company will earn in the
coming year.

Along with financial budget capital budget is prepared to find out the expected capital
requirement. Operational budget is prepared where instead of finance hourly units are
used stating expected hours the employees will be working. Budgets are prepared by
managers at every level and lower level managers generally prepare operational
budgets.

The most common budget prepared by managers at different levels is cash budget. This
budget estimates the expected cash inflow and cash outflow over a period of time. Cash
inflow comes from sales and cash outflow is in the form of expenses. Businessmen can
find out net cash position by subtracting cash outflow from cash inflow.

For example, Sale budget

Sales in unit = Rs 1, 00,000

Price per unit = Rs 20

Total Sale budget = Rs 2,000,000

Objectives: nature and importance of objectives, Types of objectives,

primary, secondary, individual and personal objectives.

Meaning of Objectives:
Objectives are the ends for the achievement of which managerial activities are directed.
Effective management is possible only through the setting up of objectives and all
managerial efforts should be directed to achieve these objectives. Objectives constitute
the purpose, the attainment of which is necessary for the business. An organization can
grow in an orderly way if well-defined goals have been set. Objectives are a pre-
requisite for planning. No planning is possible without setting up of objectives.

Objectives are not only helpful in planning but also in other managerial functions like
organizing, directing and controlling. Clear cut objectives help in proper decision-
making and in achieving better results. The objectives of the organization should be
supported by sub-objectives. The objectives have hierarchy and a network. The
organizations and managers may have multiple goals and at times they may be
incompatible and may lead to conflicts within the organization and within the groups
too.

Personal interests may have to be subordinated to organizational goals. The words

objectives and goals are generally used interchangeably and various authors and
practitioners have not made any distinction between the two, so these words will be
used for the same meaning here.

Mc. Farland defines objectives, “Objectives are the goals, aims, or purposes that
organizations wish to achieve over varying periods of time.”

In the words of Terry, “A managerial objective is the intended goal which prescribes
definite scope and suggests direction to efforts of a manager.”

Mc. Farland suggests that objectives are the goals which an organization wants to
achieve whereas Terry describes objectives as the parameters within which an
organization has to work and make efforts to achieve them.
Features of Objectives:
Following are the features of objectives:

1. Every organization has objectives rather it is started to achieve certain objectives. All
the members of an organization channelize their energies to achieve the stated goals.

2. The objectives of a business organization may be broad as well specific. These may be
set for the whole organization or different segments of it. The objectives may be for long
term or short periods. The overall objectives of the organization are supported by the
sub objectives. For example, the objective of earning a certain percentage of profit in a
particular year will be achievable only if objectives of manufacturing, marketing, finance
departments support it.

3. Objectives have hierarchy. At organizational level broad objectives are fixed by the
top level management. The broad objectives are specified at departmental level and
then they are derived for different sections. Various objectives at different levels try to
achieve organizational objectives.

4. An organization tries to fulfill the needs and aspirations of society. The organizational
objectives should have social sanctions since these are social units. The aspirations of
society should be reflected from the business objectives.

5. Business objectives may change as per the environmental changes or change in social
needs. The present objectives may have to be changed as per the new situations. The
objective of earning profits has of late been associated with the social responsibility of
business. Similarly, new objectives may be added or old objectives may be modified or
changed.

6. All organizational objectives are inter-related. The achievement of main objectives

will require the achievement of subordinate objectives also. The non- achievement of
small objectives will also mean the non- achievement of main objective. So all the
objectives are inter-related and they cannot be taken up independently.

7. Another important characteristic of objectives is their multiplicity. There may be a

number of objectives for which a concern may strive to achieve at the same time. The
major objectives may also be more. At every hierarchical level too, the objectives may
be many. Different areas of business have their own objectives. Management should try
to achieve all the objectives efficiently and effectively.

8. The objectives should be based on practical situations. They should also take into
account the philosophy and thinking of the management. The objectives should be
realistic so that they may be converted into actual performance. Unrealistic objectives
do more harm than good because they discourage the employees rather than
encouraging them.

Classification of Objectives (Types):

Management objectives can be classified as follows:

1. Primary Objectives:
These are the objectives for which a company has been started. Every business aims to
earn more and more profits out of its working. Primary objectives are related to the
company and not to individuals. Earning of profits out of providing goods and services
to the customers is the primary objective of a company. The goods and services are
provided as per the requirements of customers. Earning profits through customer
satisfaction helps in earning goodwill and regular clientele. The production of goods and
services as per determined targets will be achieved through individual goals of
employees in the organization.

2. Secondary Objectives:
These objectives help in achieving primary objectives. The targets are identified and
efforts are made to increase efficiency and economy in the performance of work. The
goals dealing with analysis, advice and interpretation provide support to goals directed
by primary objectives. Secondary objectives, like primary objectives, are impersonal in
nature. The primary goal of earning profits through providing goods and services will
be achieved if there is a plan to add new products in the market at regular intervals. The
goal of adding new products will be a secondary goal which will help in achieving the
primary objective.

3. Individual Objectives:
These are the goals which individual members in an organization try to achieve on
daily, weekly, monthly or yearly basis. These objectives are achievable as subordinate to
primary and secondary goals. Most of the individual objects are economic, psychological
or non-financial rewards which an individual tries to achieve by using resources of time,
skill and effort. An individual tries to satisfy his needs and desires by working in an
organization. In order to motivate individuals for raising their performance,
organizations offer varied incentives.

4. Social Objectives:
These are the goals of an organization towards society. These include the obligations
required by the community, government agencies etc. These also include goals intended
to further social, physical and cultural improvement of the society. Social obligations of
business has become essential these days. Business has to produce goods and services
by taking into consideration health requirements of people. There are expectations that
business should also spent a part of its profits for the welfare of community.
Hierarchy of Objectives:
Objectives form a hierarchy ranging from the broad aim to specific individual objectives.
At the top of it the main goals of the organization are set. The organization has to see its
responsibilities towards society and then towards herself. The organization is required
to contribute to the welfare of society by providing good quality products at reasonable
cost. The main purpose of the business is to provide a specific level of services or a
proper type of goods. The overall objectives of the organization are specified at the top
level management.

The objectives of the key areas are also determined at the higher level management. The
next in hierarchy comes the objectives of divisions and departments and units and these
are decided at middle level management comprising Vice-president or functional
managers. The objectives of individuals are decided at the bottom of the hierarchy. The
junior level management sets performance standards of individuals.

The hierarchy of objectives is shown in the diagram:

Top Down and Bottom up Approach:

There is some controversy whether the objectives should be fixed at top down or
bottom up. In the top down approach upper level managers set objectives for the
subordinates while in the bottom up approach subordinates initiate the setting of
objectives of their positions and present them to their superiors. The proponents of the
top down approach are of the view that overall objectives of the organization should be
set at Chief Executive Officer level of top level of management. It will provide a proper
synchronization of objectives of different areas and individuals.

On the other hand, the supporters of bottom up approach argue that top management
needs to have information from lower levels in the form of objectives. Since
subordinates fix their own goals they will be motivated and committed to their
performance. It may not be advisable to rely entirely on one approach. Both the
approaches should be used wisely for better results. In a practical situation such
decisions are linked to factors such as the size of the organization, the organization
culture, leadership style of the executive and the urgency of the plan.

Guidelines for setting objectives

Before initiating the process of setting objectives the planner should study the
conditions prevailing inside and outside the organization. The strength and weakness of
the concern should also be considered. An attempt should be made to improve the
inefficient spots.

The following factors should be taken into consideration while formulating

business objectives:

1. Classifying the Objectives:

The first important thing to be done in setting objectives is related to the classification
of objectives. The objectives are classified into basic, outstanding, major or derivative
etc. The basic objectives are essential for the present. The outstanding objectives will
need more efforts than normal for their attainment. The major objectives will relate to
the organizations while derivative objectives are concerned with departments, sections
or individuals. The ultimate aim is to achieve organizational objectives and all other
objectives will mingle into main objectives.

2. Determining the Areas of Objectives:

The next thing in setting objectives is the specification of areas for which objectives are
to be set. The business is divided into functional areas such as production, marketing,
personnel, finance, etc. The objectives for each area are set differently. These objectives
are set in conformity with the major organizational objectives. The division of areas
enables a proper planning and control.

3. Coordinating Various Objectives:

The objectives of different departments are set separately. The objectives of various
departments are coordinated so as to plan main organizational goals. The objectives for
key-factor are decided first and then other departmental objectives are set. The key-
factor here means strategic factor. Finance may be a key-factor in one concern, output
may be in another, materials may be in third, etc. The planning of key-factors is
important because other objectives will depend upon it. All the factors should be
coordinated in order to achieve overall objectives.

4. Objectives Should be Realistic:

The objectives should be realistic so that they may be attainable by the present men and
resources. The objective should take into consideration all the available resources
otherwise they will not be realistic. Too high goals will discourage the employees
because they will not be achieved. Too low objectives on the other hand, will not
enthuse the employees to give their maximum. So, objectives should be realistic and
reasonable.

5. Possibility of Adjustment:
There should not be any rigidity in objectives because these are based on future
estimates. Any change in the circumstances will have an effect on the objectives too. The
objectives should be modified as and when a situation demands. The production object
may have to be modified if the raw materials of a particular type are not available. So,
there should be a scope for adjustment to make the objectives practicable.

Decision Making: Importance and limitations of rational decision

making, types of decisions- programmed and non-programmed
decision making. Process of decision making under certainty,
uncertainty and risk.

Decision-making is an important job of a manager. Every day he has to decide about

doing or not doing a particular thing. A decision is the selection from among
alternatives. “It is a solution selected after examining several alternatives chosen
because the decider foresees that the course of action he selects will be more than the
others to further his goals and will be accompanied by the fewest possible objectionable
consequences. It is the selection of one course of action from two or more alternative
courses of action. In the words of Mac Farland, “A decision is an act of choice wherein an
executive forms a conclusion about what must be done in a given situation.

A decision represents a course of behaviour chosen from a number of possible

alternatives.” The way an executive acts or decides the course of action from among
various alternatives is an act of decision-making. George Terry says, “Decision-making is
the selection based on some criteria from two or more possible alternatives.” Though
there are many alternatives available for a manager but he has to choose the best out of
them.

Characteristics:
Following are the characteristics of decision-making:
1. Decision-making is based on rational thinking. The manager tries to foresee various
possible effects of a decision before deciding a particular one.
2. It is a process of selecting the best from among alternatives available.
3. It involves the evaluation of various alternatives available. The selection of best
alternative will be made only when pros and cons of all of them are discussed and
evaluated.
4. Decision-making is the end product because it is preceded by discussions and
deliberations.
5. Decision-making is aimed to achieve organizational goals.
6. It also involves certain commitment. Management is committed to every decision it
takes.
Nature of Decision-Making:
A decision is always related to some problem, difficulty or conflict. Decisions help in
solving problems or resolving conflicts. There are always differences of opinions,
judgments, etc. Managerial decision helps in maintaining group effectiveness. All
problems may not require decision- making but merely the supply of information may
be sufficient. For example, when will different groups report for re-orientation? The
supply of information about training programme may be enough.

Decision problems necessitate a choice from different alternatives. A number of

possibilities are selected before making a final selection. Decision-making requires
something more than a selection. The material requiring a decision may be available but
still a decision may not be reached. A decision needs some sort of prediction for the
future on the basis of past and present available information. The effect of a decision is
to be felt in future so it requires proper analysis of available material and a prediction
for the future. If decision premises do not come true, then decision itself may be wrong.

Sometimes decisions are influenced by adopting a follow- the-leader practice. The

leader of the group or an important manager of a concern sets the precedent and others
silently follow that decision. Whatever has been decided by the leader becomes a guide
for others and they also follow suit. The decisions may also emerge from answers to
pertinent questions about the problem. Such answers try to narrow down the choice
and help in making a decision.

Techniques or Basis for Decision-Making:

Decision-making has become a complex problem. A number of techniques, extending
from guessing to mathematical analyses, are used for decision-making process. The
selection of an appropriate technique depends upon the judgment of decision-maker.

Following techniques of decision-making are generally employed:

1. Intuition:
Decision-making by intuition is characterized by inner feeling of the person. He takes a
decision as per the dictates of his conscious. He thinks about the problem and an
answer is found in his mind. The decision-maker has his own preferences, influences,
psychological make-up and these things play a vital role in taking a decision. The past
knowledge, training and experience of the decision-maker plays an important role in
intuitive decisions.

With this technique of decision-making, decisions are taken quickly and the decision-
making capability of the person is also used. In case the intuition of the decision-maker
is wrong then decision will also be incorrect. The other techniques of decision-making
are also neglected.

2. Facts:
Facts are considered to be the best basis of decision-making. A decision based on facts
has its roots in factual data. Such decisions will be sound and proper. The increasing use
of computers has helped in systematic analysis of data. The information has become a
major tool in managerial decision-making. It may not be possible to secure all relevant
facts for taking decisions. Managers, generally, complain of insufficient information. It is
also essential that facts should be properly diagnosed, classified and interpreted. Facts
alone may not be sufficient for decision-making. The imagination, experience and beliefs
of the decision-making also required to comprehend the facts in proper perspective.

3. Experience:
Past experience of a person becomes a good basis for taking decisions. When a similar
situation arises then the manager can rely on his past decisions and takes similar
decisions. The person sees and understands things in terms of concepts with which he is
familiar. Experience should not be followed blindly. The new situations should be
analyzed on the basis of past knowledge. A successful decision in the past may not prove
useful this time also, on the other hand, a decision once failed need not be avoided for
all times in future. Though past experience is a good basis but present situations should
be properly analyzed and assessed before taking a decision.

4. Considered Opinions:
Some managers use considered opinions as a basis for decision-making. Besides
pertinent statistics, opinions are also given due weightage. Something discussed and
considered by more persons become logical and may form a sound basis for decision-
making. A marketing manager, before deciding whether to market a new product or not,
will like to see marketing statistics as well as considered opinions before finally making
a choice.

5. Operations Research:
The traditional methods of taking decision on the basis of intuition, experience, etc. are
replaced by systematic techniques based on analysis of data. The operations research is
one of the techniques used by modern management for deciding important matters. It
helps managers by providing scientific basis for solving organizational problems
involving interaction of components of the organization.

6. Linear Programming:
This technique is used to determine the best use of limited resources for achieving given
objectives. This method is based on this assumption that there exists a linear
relationship between variables and that the limits of variations could be ascertained.
Linear programme can be used for solving problems in areas like production,
transportation, warehousing, etc.

Decision Making Conditions:

Decision making involves the selection of one of the alternatives available. A decision
taken at present will have effect in future. A decision-maker tries to visualize the
conditions in future and take decisions accordingly. So decisions are made in an
environment of at least some uncertainty. There are certain risks involved in decision
making and the conditions vary from certainty to complete uncertainty. The strategy of
taking decisions under different conditions vary.

The conditions under which decisions are taken are as follows:

Certainty:
Under the conditions of certainty, people are reasonably sure about what will happen
when they take a decision. The required information is available and it is reliable and
the cause and effect relationships are known. The manager makes decisions under such
situations at different times with the same results. Under such situations a deterministic
model is used, in which all factors are assumed to be exact with the chance playing no
role.

Risk:
In a risk situation, factual information may exist but it may be insufficient. Most of the
business decisions are taken under risk conditions. The available information does not
answer overall questions about the outcome of the decision. A manager has to develop
estimates of the likelihood of the various states of events occurring. The estimates may
be based on past experience, other available information or intelligence.

In order to improve decision-making under these conditions, one may estimate the
objective probabilities of an outcome by using, for example, mathematical models. On
the other hand, subjective probability, based on judgment and experiences, may be
used. There are a number of tools available which help a manager in taking decisions
under such conditions.

Uncertainty:
Under conditions of uncertainty a manager has only little information and he is not sure
about its reliability also. Since the manager does not have proper information on which
he can develop, the best he can do is to be aware that he has no chance of predicting the
events. The interaction of various variables cannot be evaluated for taking decisions.
The decision making under uncertainty is a difficult proposition. For example, if a
company wants to enter a foreign market, if may not be sure about the consumer
preference for the product, economic situation, above all the political conditions.
The conditions in a new market may so fluctuate that proper decision taking becomes a
problem. The use of a number of modern techniques may improve the quality of
decisions under uncertain conditions. The use of risk analysis, decision trees and
preference theory can help in making proper decisions under those situations.

Types of Decisions:
Different decisions differ in nature and significance. Some decisions are taken in routine
while some may have to be carefully evaluated.

Various decisions are discussed as follows:

1. Programmed and Non-Programmed Decisions:
Programmed decisions are of a routine nature and are taken within the specified
procedures. These decisions are made with regard to routine and recurring problems
which require structured solutions. A manager is not required to go through the
problem solving procedures again and again for taking programmed decisions.

The decision rules for programmed decisions should be prepared carefully and
intelligently so that lower level executives are able to take the decisions without making
references to higher managerial levels. No judgment or discretion is needed to find out
solutions to such problems. These decisions remain consistent for a relatively longer
period of time and over many solutions.

Non-programmed decisions are related to problems which are unique and non-
repetitive. The information and knowledge about such decisions is not available. Such
decisions are made under new and unfamiliar circumstances. The standard and pre-
determined procedures and rules are rendered ineffective in programmed decisions
because every decision will have to be taken separately. Non-programmed decisions are
usually grade for solving unstructured problems which keep on changing from time to
time.

Every problem has to be restructured and analyzed by the manager by using his skill,
judgment and creativity. For example, a decision regarding adding a new product,
purchase of new machinery, opening a new branch, appointment of a new chief
executive are all non- programmed decisions and require separate attention for each
decision.

2. Strategic and Tactical Decisions:

Strategic decisions relate to policy matters and need the development and analysis of
alternatives. These decisions influence organizational structure, objectives, working
conditions, finances etc. Strategic decisions exercise great influence on the functioning
and direction of the organization and have long-term implications. They also define and
establish the relationship of the organization with external environment. Such decisions
require more resources, judgment and skill. Because of their importance, strategic
decisions are taken at top managerial levels.

The decisions such as adding a new product or service, introduction of new technology,
taking over of another organization, selection of a location are all strategic decisions.
These decisions once taken cannot be easily reversed. The impact of these decisions is
fairly long because expansion, growth, development and profitability of the
organization is linked to them. Strategic decisions somewhat resemble to non-
programmed decisions because they possess the characteristics of the latter.

In order to implement strategic decisions, management has to make some tactical,

operational or routine decision. One strategic decision may require many operational
decisions. These decisions are concerned with routine and repetitive matters arising out
of the working of the organization. Such decisions do not require managerial judgment
and are taken at lower levels of the management. Tactical decisions are more specific,
functional and have short-term implications. Such decisions are taken by referring to
established rules, procedures and standards.

3. Individual and Group Decisions:

A decision taken by one person is known as individual decision. In a small concern
normally the owner takes most of the decisions, in a bigger concern the routine or
simple decisions may be left to a particular manager. Such decisions are generally taken
as per predetermined rules and procedures and require less application of judgment
and skill. When a manager is required to take a decision, he is supplied with information
and other inputs needed for this purpose. All managers, whether at top level or at lower
level, take decisions for carrying out their activities.

When decisions are taken by two or more persons, these are known as group decisions.
Generally, strategic or other important decisions are taken by groups instead of
individuals because of risk involved. The decisions of Board of Directors or Committees
come under this category.

Group decisions are normally important and have long-term implications for the
concern. A decision regarding introducing a new product, shifting to latest technology,
trying labour saving devices etc. may be better taken by a group of specialists than by an
individual. Group decisions are generally time consuming but otherwise these are well
discussed decisions.
 UNIT V
ORGANISING
Nature and purpose of organising: steps in organising/ process of
organising, formal and informal organizations; span of control &
factors determining effective span.

Organising might be defined as follows:

Organising is that managerial process which seeks to define the role of each individual
(manager and operator) towards the attainment of enterprise objectives; with due
regard to establishing authority-responsibility relationships among all; and providing
for co-ordination in the enterprise-as an in-built device for obtaining harmonious
groups action.

As a function of management, organizing is a process; broadly consisting of the

following steps:

(i) Determination of the Total Work-Load:

The very first step in the process of organizing is to make a determination of all the
activities which are necessary to be undertaken for the attainment of the enterprise
objectives. This step of organizing is, in fact, nothing but an estimation of the total work-
load that must be done for realizing objectives.

(ii) Grouping and Sub-Grouping of Activities i.e. Creation of Departmentation:

Total activities determined for achieving enterprises objectives must be classified i.e.
putting similar or related activities at one place in the form of a group or sub-group.

This step of organizing directly leads to the process of creating departments. If an

enterprise is compared to a building; the creation of departments within it would
amount to construction of rooms within the building each room meant for a specified
special purpose.

(iii) Creation of Manager-Ship through Delegation of Authority:

After the scheme of departmentation is finalized; the next step in the process of
organizing would be to entrust the responsibility for the functioning of each department
to a distinct manager. Creation of manager-ship, in this manner, requires a requisite
delegation of authority to each manager to enable the manager to take care of the job
assigned to him.

(iv) Division of Work within the Departmental Set-Up-Human Organization:

Since no single individual can undertake the performance of the whole of the work
assigned to one department; it becomes necessary to resort to division of work-
assigning to each person only one part of the total job. As a result to undertaking
division of work for all departments; there emerges a human organization within the
enterprise.

(v) Arrangement of Physical Facilities to Personnel within the Departmental Set-Up-

Material Organisation:
Each individual of the enterprise, working in whatever capacity, in any department,
must need the basic physical facilities-raw materials, machines and tools, technology
and other inputs-for the proper execution of the assigned task.

When physical facilities are made available to all personnel in all departments; there
emerges a material organization (or a physical-technical organization) within the
enterprise.

(vi) Definition and Establishment of Authority-Responsibility Relationships;

Having created manager-ship and a human organization within the enterprise; it
becomes necessary to devise a system which provides for defining and establishing
authority-responsibility relationships among all personnel-managers and operators.
As a matter of fact, such relationships must be defined and established throughout the
enterprise both-horizontally and vertically.

Points of comment:
Some of the note-worthy comments on the above description of the managerial
function of organizing are as follows:
(a) As a result of undertaking the process of organizing, there emerges a structure,
called the organisational structure (or simply the organisation). In fact, organizing is a
managerial process; an organization is the outcome of it.

(b) While designing the organizational structure, the management must plan and
provide for co-ordination throughout the organization both, horizontally and vertically.
In fact, co-ordination is an in-built device for ensuring harmonious, effective and
economical organizational functioning.

(c) The question of a rightful compromise between centralization and decentralization

of authority must also be settled, at least initially, at the organization-processing stage.
In fact, while delegating authority to departmental heads and subordinate managers at
middle and lower levels of the organization, the top management should decide about
the issue, as to whether to equip small managers with more of decision making powers
or less of it.

Following are some popular definitions of organizing:

1. “Organising is the establishment of authority relationships with provisions for co-
ordination between them, both vertically and horizontally in the enterprise structure”.

-Koontz and O ‘Donnell

2. “Organising is the process of identifying and grouping the work to be performed,
defining and delegating the responsibility and authority and establishing a pattern of
relationship for the purpose of enabling people work most effectively to accomplish the
objective”.

– Louis A. Allen.

Principles of Organisation:

Principles of organization, for sake of clarity of discussion and a better

comprehension of these, have been classified in the following manner:
(I) Overall Principles:
(i) Principle of unity of objective
(ii)Principle of simplicity
(iii)Principle of flexibility

(II) Structural Principles:

(iv)Principle of division of work
(v)Principle of functional definition
(vi)Principle of optimum departmentation
(vii) Principle of unity of direction
(viii) Span of management principle
(III) Operational Principles:
(ix) Principle of adequate delegation
(x) Scalar chain principle
(xi) Principle of unity of comment
(xii) Authority-level principle

Following is a brief comment on each of the above-stated principles of

organisation under appropriate categories:

(I) Overall Principles:

Under this classification, some of the very fundamental principles of organization are
included i.e. principles which are absolutely essential for an effective and logical
functioning of the organization.

A brief explanation of the principles under this category is as follows:

(i) Principle of unity of objective:
Very simply stated, this principle requires that individual and departmental objectives
throughout the enterprise must be perfectly harmonized; and that all objectives must be
mutually supportive and collectively contributing to overall common objectives.

(ii) Principle of simplicity:

The observance of this principle requires that the management must, as far as possible,
design a simple organizational structure. A simple structure facilitates a better
understanding of superior- subordinate relationships; and provides background for
better co-operation among people.

(iii) Principle of flexibility:

While designing the organizational structure, the management must provide for in-built
devices within the structure itself; which would facilitate changes in the organizational
structure to be effected as and when environmental factors-internal and/or external- so
demand.

(II) Structural Principles:

Structural principles of organization relate to those aspects of the organization, which
have a bearing on the structuring (or the development) of the organization; its
fundamental design and shape.

Some of the important principles, in this context, might be the following ones:
(iv) Principle of division of work:
Since the total work of the enterprise cannot be performed by only one person; it is
imperative that such work must be suitably divided among a number of persons. In fact,
the total managerial work ought to be divided among a number of managers; and the
total operational work being divided among a number of operating personnel.

(v) Principles of functional definition:

The above stated principle implies that the role (or job) of each individual and of each
department of the enterprise must be suitably defined, in terms of the-work content, the
authority and facilities required for job performance and the relationship of the job with
those of others, in the enterprise.

(vi) Principle of optimum departmentation:

There are many ways and bases for creating departments within an organization.
According to the principle of optimum departmentation, departments in an
organization must be so created and maintained-as to facilitate the best attainment of
the common objectives of the enterprise.

(vii) Principle of unity of direction:

The principle implies that each group of activities having the same objective must have
only one overall head and only one overall or master plan.

As a principle of organization, this concept of unity of direction must be so embedded in

designing the organizational structure that for each group of similar activities, there is a
provision for only one overall head-having authority over all personnel performing the
same function, anywhere, in the organization.
(viii) Span of management principle:
The span of management principle is variously called as- the span of control or the span
of supervision. However, the phrase ‘span of management’ is the widest; including also
the notions of span of control and span of supervision.

The span of management principle implies that there is a limit to the number of
subordinates; whose work could be effectively managed (controlled or supervised) by a
superior.

Points of comment:
Certain useful observations in the context of span of management principle could
be made as under:
(a) There is a limit only to effective management; for ineffective or inefficient
management, well, there is no limit. Hence, span of management principle is valid, only
in the context of effective management. An example would illustrate the significance of
this idea.

For example, in school or college class-room, the number of students must be limited; as
no teacher, howsoever competent, could effectively impart learning to an indefinite
number of pupils.

As against this situation, take the case of a public speaker who could well address a
giant gathering of audience; for therein, it does not matter whether and how far the
audience is receptive to the speech of the speaker or how effective is the process of
communication between the speaker and the audience. In this latter case, span of
management principle is neither valid nor applicable.

(b) What exactly is or must be the number of subordinate’s less than one superior
cannot be asserted with precision or certainty; as the span of management principle is
situational. There is no hard and fast number of subordinates which would determine
an optimum span of management under all managerial situations.

Among other factors, the competence of the superior and the abilities, skills and
requirements of subordinate, are the most dominating factors- likely to determine span
of management, in a particular managerial situation.

(c) Span of management principle explains the raison d’eter for the structure of the
organization; in case otherwise, a single manager might be in a position to handle and
manage the work of all the subordinates; and there would not be any need for a
structured organizational structure.

(d) Span of management principle has must to do with the shape of the organizational
structure; i.e. whether it would be a tall or a flat-organisational structure. This is the
notion implied behind the concepts of narrow vs. wide spans of management.
A narrow span of management is one where a superior can handle rather a smaller
number of subordinates; while in a wide span of management, the number of
subordinates is ‘larger’ than manageable under a narrow span of management.

Accordingly, a narrow span of management would result in a somewhat taller shape of

the organization; and a wide span of management would lead to a comparatively ‘flat’
organization structure. Let us take a hypothetical example to illustrate how a ‘tall’ or a
‘flat’ organization structure would shape out-depending on whether it is a narrow or a
wide span of management.

Suppose in an enterprise there are 10 subordinates to managed by the management.

Further suppose the span of management is also 10. In this situation, only manager
would be required to handle and manage the work of all the ten subordinates.

The organizational structure would appear as follows:

Now, suppose the span of management is only 5. In this case, the manager would be
aided by two assistant managers; and controlling 10 subordinates via two assistants-
each assistant manager managing the work of 5 subordinates.

The organizational structure in this case would look like somewhat taller than its
counterpart under wide span; and will have more layers of the organization. The
following chart illustrates this concept.

Without going into the details of the discussion, it would suffice to say that the shape of
the organizational structure- tall or flat-has implications for organizational efficiency on
grounds of costs of administration, effectiveness of communication and facilities in co-
ordination.

(III) Operational Principles:

Operational principles of organization could be suggested to be those which have a
bearing on the running or functioning of the organization.

Some important principles, under this category, are as follows:

(ix) Principle of adequate delegation:
By the principle of adequate delegation, we mean that each managerial position be
provided with adequate (or necessary or requisite) authority-to enable the holder of the
position i.e. the manager to cope successfully with the requirements of his job.

(x) Scalar chain principle:

Scalar chain implies a chain of superiors-ranging from the highest rank to the lowest
rank-in an organization. The scalar chain forms the base of authority-responsibility
relationships among managers and subordinates, in the organisation; thus promoting
mutual understanding among superiors and subordinates at different levels of the
organization.

As a principle of organization, scalar chain principle requires its incorporation into the
design of the organisation, for ensuring smooth running of the enterprise life.

(xi) Principle of unity of command:

The above-sated principle implies that an employee must receive orders and
instructions, only from one superior, at a time. The observance of this principle is
desirable for reasons of removing doubts and confusions from the mind of the
employees; and for facilitating exact fixation of responsibility on individuals for the
results expected of them.

(xii) Authority-level principle:

The authority-level principle implies that managers at particular levels in the
management hierarchy must decide only those matters which fall within the purview of
the authority vested in their managerial positions.

A natural extension of this principle is that if a manager at any level of the management
hierarchy comes across a matter not covered by his authority; the matter must either be
referred upwards in the hierarchy or pushed down the hierarchy at the appropriate
level for decision.

Importance (or Advantages) of Organisation:

The importance of organization could be highlighted by reference to the role it
plays in the enterprise life, considered in the following analytical manner:
(i) Basic role of the organization

(ii) Other aspects of role

Let us consider the roles of the organization as planned above:

(i) Basic Role of the Organization:
The basic role of the organisation could be expressed by comparing it to a vehicle;
which is devised and designed for the attainment of the enterprise objectives.

Just as with the help of a vehicle a person is enabled to reach up to his/her destination;
in a similar manner, a group of persons (comprised in the enterprise) is made in a
position to reach their destination i.e. the attainment of common objectives via the
vehicle of the organisation.

In fact, for the attainment of enterprise objectives, action on the part of individuals,
comprised in a group activity, is necessary; and undertaking such action is facilitated in
a planned and systematic manager by the organizational structure, i.e. the organisation.

(II) Other Aspects of the Role:

Some important aspects of the role of the organisation could be stated as follows:
(i) Facilitates specialization:
An organisation exists basically to take care of and implement the division of work of
various types-among managers, subordinates and operators. Such division of work,
leading to specialization in various spheres, is instrumental in bringing about increased
human efficiency in the organization functioning.

Point of comment:
Division of work, not only enables an enterprise to take advantages of specialization, in
managerial and operational work; it also makes for order and system, in the functioning
of the organisation.

(ii) Avoids omissions, overlapping and duplication of efforts:

While dividing work among departments and individuals, during the process of
organizing, care is exercised by management to see that:
(a) No part of work, necessary for attainment of objectives, is lost sight of

(b) There is no overlapping or duplication of activities and efforts, while assigning work
to individuals and departments.

That way, the organisation leads to an economical, effective and efficient functioning of
the enterprise.
(iii) Defines (or clarifies) authority responsibility relationships:
An organizational structure defines and clarifies, authority responsibility relationships
among managers and subordinates in the enterprise all through horizontally and
vertically. Such clarification of authority responsibility relationships not only means a
smooth functioning of the organizational life; but also promotes good human relations,
in the organisation through facilitating mutual understanding of one another.

(iv) Facilitates staffing:

The organizational structure is a great aid to efficient staffing. It, by clearly defining
various organizational positions-managerial and operational, not only points out to the
need for appropriate personnel who must man these positions; but also specifies the
requirements to be sought after in various personnel in terms of the abilities and skills
needed to perform those jobs.

Point of comment:
A well-defined organizational structure facilitates personnel development, specially of
managers, by allowing job-rotation system. Top management can resort to job-
rotational technique, as the requirements of jobs defined in the structure indicate the
possibility or otherwise for taking an appropriate decision on matters of shifting among
different positions.

(v) Provides for co-ordination:

An organisation facilitates co-ordination; as the latter is provided for in the structure of
organisation as an in-built device. Needless to say, that a well-designed and defined
organizational structure provides for thorough co-ordination-horizontally and
vertically; and enables management to relish the essence of manager-ship and take the
enterprise to the heights of success.

(vi) Establishes channels of communication:

Communication among the personnel in the enterprise is not only the basis of the
operational life of the organisation; but also is instrumental in fostering good human
relations-through creating a base for mutual understanding. An organizational structure
helps to establish various channels of communication; relating people to one another
through the scalar chain and other organizational links.

But for the organisation, communication could only be casual, erratic and least
authentic or there could be a situation of an absolute communication gap.

(vii) Facilitates ‘Management by Exception’:

Management by exception is a philosophy in which the top management would
concentrate only on exceptional or critical matters (like strategy formulation, policy-
making, controlling significant deviations in performance by personnel etc.); leaving the
rest of routine and operational matters to subordinates throughout the enterprise.

Such a system of management i.e. management by exception could not be initiated and
installed in the enterprise, just casually or all of a sudden; rather a sound organizational
structure paves the Way and creates an environment for the introduction of this
philosophy in a gradual and systematic manner.

As a matter of fact, management by exception is noting, but the highest state of

decentralization of authority; and the latter could be provided for while designing and
structuring the organisation.

(viii) Copes with environmental changes:

Environmental changes being reflected in conditions like-super fast changing
technology, accentuating competition, emerging latest social and cultural values,
extending State regulation of trade and industry etc. are well taken care of by a sound
organisation.

The organisation could, of course, face such challenges by resorting to changes in the
systems of management styles, reorganization of departments, providing facilities for
research and development and effecting improvements in the operational life and
undertaking other like measures.

(ix) Leads to growth and expansion:

A sound organisation leads an enterprise along growth lines. Growth and expansion of
the enterprise, which is imperative even for survival in a highly dynamic economy is
much facilitated by the organisation through- creating more departments, enlarging
existing departments, widening span of management, providing for better and more
effective co-ordination and communication devices and all this taking place within the
existing system, structure and functioning of the enterprise.

(x) Produces synergism:

A sound organisation through ensuring effective integration of departmental
functioning helps the enterprise to take advantage of the synergy feature of the
business system. The more compact and responsible is the organizational structure; the
more would be the advantages of the synergy effect.
Span of Control

Let us define the principle in the words of Nicholas Henry: “Span of control means that a
manager can properly control only a limited number of subordinates, after a certain
number is exceeded, communication of commands grows increasingly garbed and
control becomes increasingly ineffective and loose”. In other words, there is a limit to
everything and in public administration an officer cannot control unlimited number of
subordinates.

The concept was originally applied in military department and later on the members of
scientific school- borrowing it from the military department-introduced it to public
administration. Some administrationists believed that the management of an
organisation could remarkably be improved by increasing the number of subordinates.
But subsequently it was found that the idea or process was wrong. The authority could
increase the number of subordinates but that failed to make any impact upon the
improvement of the organisation.

After prolonged experimentation it was found that there was a limit to the span of
control which means that an executive can never control the activities of unlimited
employees. Peter Self argues, “The most specific of the principles of the “scientific”
school was that the span of direct supervision should be limited” .It has been suggested
that a chief executive can control at most six subordinates and if more employees are
put under his supervision that will lead to chaos or mismanagement. It has been
maintained that even an officer with high degree of efficiency and large amount of
administrative knowledge cannot control large number of workers.

There are several factors that influence or determine the span Control in a
particular organization, the most important of these are as follows:

1. The Capacity and Ability of the Executive:

The characteristics and abilities such as leadership, administrative capabilities, ability
to communicate, to Judge, to listen, to guide and inspire, physical vigour etc. differ from
person to person. A person having better abilities can manage effectively a large
number of subordinates as compared to the one who has lesser capabilities.

2. Competence and Training of Subordinates:

Subordinates who are skilled, efficient, knowledgeable, trained and competent require
less supervision, and therefore, the supervisor may have a wider span in such cases as
compared to inexperienced and untrained subordinates who require greater
supervision.

3. Nature of Work:
Nature and importance of work to be supervised is another factor that influences the
span of supervision. The work involving routine, repetitive, unskilled and standardized
operations will not call much attention and time on the part of the supervisor. As such,
the supervisors at the lower levels of organization can supervise the work of a large
number of subordinates. On the other hand, at higher levels of management, the work
involves complex and a variety of Jobs and as such the number of subordinates that can
be effectively managed should be limited to a lesser number.

4. Time Available for Supervision:

The capacity of a person to supervise and control a large number of persons is also
limited on account of time available at his disposal to supervise them. The span of
control would be generally narrow at the higher levels of management because top
managers have to spend their major time on planning, organizing, directing and
controlling and the time available at their disposal for supervision will be lesser. At
lower levels of management, this span would obliviously be wide because they have to
devote lesser time on such other activities.

5. Degree of Decentralization and Extent of Delegation:

If a manager clearly delegates authority to undertake a well- defined task, a well trained
subordinate can do it with a minimum of supervisor’s time and attention. As such, the
span could be wide. On the contrary, “if the subordinate’s task is not one he can do, or if
it is not clearly defined, or if he does not have the authority to undertake it effectively,
he will either fail to perform it or take a disproportionate amount of the manager’s time
in supervising and guiding his efforts.”

6. Effectiveness of Communication System:

The span of supervision is also influenced by the effectiveness of the communication
system in the organization. Faulty communication puts a heavy burden on manager’s
time and reduces the span of control. On the other hand, if the system of communication
is effective, larger number of managerial levels will be preferred as the information can
be transmitted easily. Further, a wide span is possible if a manager can communicate
effectively.

7. Quality of Planning:
If plans and policies are clear and easily understandable, the task of supervision
becomes easier and the span of management can be wider. Effective planning helps to
reduce frequent calls on the superior for explanation, instructions and guidance and
thereby saves in time available at the disposal of the supervisor enabling him to have a
wider span. Ineffective plans, on the other hand, impose limits on the span of
management.

8. Degree of Physical Dispersion:

If all persons to be supervised are located at the same place and within the direct
supervision of the manager, he can supervise relatively more people as compared to the
one who has to supervise people located at different places.

9. Assistance of Experts:
The span of supervision may be wide where the services of experts are available to the
subordinate on various aspects of work. In case such services are not provided in the
organization, the supervisor has to spend a lot of time in providing assistance to the
workers himself and as such the span of control would be narrow.

10. Control Mechanism:

The control procedures followed in an organization also influence the span of control.
The use of objective standards enables a supervisor ‘management by exception’ by
providing quick information of deviations or variances. Control through personal
supervision favours narrow span while control through objective standards and reports
favour wider span.

11. Dynamism or Rate of Change:

Certain enterprises change much more rapidly than others. This rate of change
determines the stability of policies and practices of an organization. The span of control
tends to be narrow where the policies and practices do not remain stable.

12. Need for Balance:

According to Koontz and O ‘Donnel, “There is a limit in each managerial position to the
number of persons an individual can effectively manage, but the exact number in each
case will vary in accordance with the effect of underlying variable and their impact on
the time requirements of effective managing.”
Decentralisation of Authority: Nature of decentralisation, degree of
decentralisation, decentralisation as philosophy and policy.

Decentralisation of Authority: Definition and Meaning:

‘Decentralisation of Authority’ refers to the dispersal of authority for decision-making in
various levels of organisational operations throughout the organisation.

In the words of Louis A. Allen:

“Decentralisation is the systematic effort to delegate to the lowest levels of
authority except that which can be exercised at central points.”
Decentralisation is actually an extension of the concept of delegation.
Delegation can take place from one superior to one subordinate and is a complete
process, but decentralisation takes place only when the fullest possible delegation or
distribution of authority is made to all—or most of the people in the organisation—in
respect of the specific function, activity or responsibility.

It is, however, to be remembered that decentralisation does not necessarily mean

distribution of authority in respect of all activities.

One function may be decentralized and another stay centralised.

For example, in an automobile manufacturing concern, the sales function may be

distributed or decentralised to product division, while labour relations may remain
centralised. The extent to which decentralisation exists in any organisation depends on
the extent to which clear-cut decision-making authority is vested in levels below the top
management level.

Therefore, when delegation is widespread and authority is delegated to lower levels of

management, to all, or most of the people who are entrusted with responsibilities,
decentralisation of authority takes place.

On the other hand, when delegation is restricted to the top level of management, and
the subordinates are simply to implement the decisions taken at the top level, the
authority is said to be centralised to that extent.

Decentralisation is a question of degree. It is not what is delegated but how much is

delegated. Henry Fayol pointed out “everything that goes to increase the importance
of the subordinate’s role is decentralisation, everything which goes to reduce it is
centralisation.”
However, there cannot be any absolute centralisation or absolute decentralisation in an
organisation. Absolute centralisation is possible if there is one person with absolute
authority and there is no other subordinate manager under him that means there is no
structured organisation.

Similarly, there is no absolute decentralisation. Actually centralisation and

decentralisation are inclinations,
tendencies or bents towards
reservation of authority in varied
degrees. In an organisation, authority may
be centralised, but some amount of
decentralisation also becomes
necessary.
Importance of Decentralisation of Authority:
Decentralisation is useful basically to large organisations with multiple products or
operating in different geographical locations. Decentralisation becomes inevitable in an
industry with every growth in size.

Its importance may be noted as follows:

1. Relief to the Top Executives:
Diminishing the work-load of the senior executives who are already over-burdened,
decentralisation helps to reduce the volume of their routine affairs. They can devote
greater time and attention to important policy matters by decentralizing authority for
routine operational decisions.

2. Motivation of the Subordinates:

Decentralisation motivates the lower level managers by increasing their chances of
recognition, improving their status and offering them a feeling of accomplishment. The
facility to make decision and function independently activates strong drives among the
individuals and, thus, results in increased productivity.

3. Improvement of Work Performance:

The operating decisions in a decentralised setting tend to be of higher quality. Decisions
will be more appropriate, timely and quick because they are made nearest to the points
of the problem, information and actions. Decisions will also be democratic and
acceptable as these are made by the people who are responsible for implementing them.

4. Promotion of the Subordinate’s Morale:

Decentralisation tends to promote the subordinate’s morale due to relative equalisation
of power and authority at all levels of the organisation, scope for participating in
problem identification, decision-making and implementation, increased job satisfaction,
and reduced gap between problems and decisions, and also between decisions and
actions.

5. Increasing Flexibility:
Decentralisation is a structural strategy to manage organisational growth and
diversification and to cope with the complexity, uncertainty and volatility of the
external environment.

Advantages of Decentralisation:

The advantages of decentralisation may be listed as follows:

1. Increasing Efficiency of Management:
Decentralisation reduces the burden of the top executives, relieves them of the anxiety
of details, allows them to concentrate on other important tasks of planning, co-
ordination and controlling etc. and increases overall efficiency of the management.
2. Facilitating Diversification of Activities:
Decentralisation facilitates the growth and diversification of product lines. As one single
product or a group of related products is made the basis for creating divisions, all
important features like present position, future prospects and comparative efficiency of
each product can be readily ascertained.

3. Minimisation of Risk:
Decentralisation not only spreads over decision-making authority among various
executives of middle and lower level management but also facilitates the availability of
the benefits of expert advice of the specialists and thus helps the business in minimising
possibilities of loss.

4. Ensuring Quick Performance:

The close contact and consequent greater understanding between the managers and the
managed can cope successfully with constant business changes. Thus, it provides a
dynamic character to the business and ensures quick decision and prompt action.

5. Developing Future Executives:

When authority is decentralised, the subordinates get the opportunity of exercising
their own judgement. They learn how to decide and develop managerial skills. Thus,
decentralisation provides a better means of developing future managers and executives.

This is probably the most important benefit, particularly in our country where shortage
of competent managers is the major limiting factor of the rapid growth of our economy
and principal industries.

6. Motivating the Subordinates for Better Performance:

By consistent and adequate delegation of managerial work, the organisation structure
promotes individual initiative and mutual understanding and motivates the
subordinates for higher performance.

7. Improvement of Morale:
Decentralisation stimulates the formation of small cohesive groups. Since local
managers are given a large degree of authority, they weld their people into well-knit
groups. With high degree of participation, constant effort to communicate, and
continuous interest in the welfare of the members of the group, they are able to secure a
high degree of morale among the subordinates.

Disadvantages of Decentralisation:
Decentralisation offers marked benefits and no large organisation can hope to sustain
without it. In spite of that, there are many disadvantages or limitations in
decentralization process.

Some of the major problems of decentralisation are noted below:

1. Problem of Co-ordination:
Decentralisation calls for a high degree of differentiation of functions and tasks. The top
management authority may find it difficult to co-ordinate the diverse goals, functions
and activities of different autonomous decision-making units or divisions.

The executives may develop narrow outlook and sectional interests may overshadow
the organisational goals. Therefore, maintaining co-ordination among the departments
becomes more difficult.

2. Lack of Uniformity:
Decentralisation may lead to inconsistencies in the organisation when uniform
procedures are not followed by various departments. Each department may formulate
its own policies and procedures.

3. Costly and Uneconomical:

Decentralisation tends to increase the cost of operation of the enterprise. It involves
duplication of procedure, equipment and services as there are autonomous and self-
sufficient units or departments in terms of physical facilities and trained personnel.

4. Delay in Decision-making:
Decentralisation becomes an important handicap in case of quick emergency decisions.
Some executives do not like to share the responsibility of decision-making.

5. Limitation of Scale:
To bring about decentralisation it is necessary to create departments and divisions. This
is possible only when an enterprise is large enough and tends itself to departmentation
and divisionalisation. Thus, small organisations do not have much scope for
decentralisation.

Basic Principles of Decentralisation:

The basic principles of decentralisation may be stated as follows:
1. Proximity of Decision-making Points:
All schemes of decentralisation must aim at providing for the proximity of the decision-
making points nearer to the place of action.

2. Real Delegation of Authority:

Successful and proper decentralisation demands full and real delegation of authority.
Reporting or checking of details before arriving at decisions by the subordinates will
make decentralization ineffective.

3. Confidence in the Subordinates:

The superiors must place full confidence in the abilities of the subordinates in taking
correct decisions at the right time without interfering in their day-to-day functioning.
4. Conciliation between Line and Staff Personnel:
Staff Personnel, with their experience and talent, must advise and encourage the
inexperienced Line Operators so that correct decisions may be taken by them.

5. Parity of Responsibility and Authority:

In order to make decentralisation effective and successful, the subordinate must
shoulder responsibility commensurate with the authority which is exercised by him.

6. Conviction about the Superiority of Decentralised Decision:

The top managers must be convinced that the aggregate of many individuals’ decision
will always be better and superior in the general interest than the centrally planned and
controlled decisions.

7. Result-oriented Personnel Policies:

Result of personnel policies must be capable of being measured and compared with the
standards already laid down. There should be arrangements for offering reward or
inflicting penalty, respectively, in respect of the success or failure of these personnel
policies.

Factors Determining the Degree of Decentralisation:

The degree and nature of decentralisation are generally influenced by the
following factors:
1. Size of the Organisation:
Decentralisation depends on the size of the organisation. The larger the size of the
concern, the greater shall be the number of decisions and the need for decentralisation
of authority.

2. History of the Enterprise:

Decentralisation of authority depends on the way the organisation has been built up
over the period of time. Organisations built under the direction of the owner-founders
are likely to show a marked tendency to minimise decentralisation. On the contrary, the
enterprises created through combination, amalgamation or merger tends to be more
decentralised.

3. Outlook of the Top Managers:

The character and philosophy of the top level managers have considerable influence on
the extent to which authority is decentralised. When the top executives believe in
individual freedom, there will be a high degree of decentralisation. But if the top
managers is conservative and prefers centralised control, there is likely to be
centralisation of authority.

4. Availability of Competent Managers:

Availability of qualified managers directly affects the degree of decentralisation,
because the exercise of authority requires competence on the part of those who exercise
authority. When the managers at lower levels are able and experienced there is more
chance for decentralisation. Lack of trained executives restricts decentralisation.

5. Dispersal of Operations:
Authority tends to be decentralised when the operations of the organisation are
dispersed over different territories. Geographical dispersion of activities makes
communication difficult under centralised decision-making. For example, the activities
of banking, insurance and transport organisations have to be decentralised.

6. Uniformity of Policy:
Decentralisation will tend to be limited in all those cases where uniformity of policy is of
a critical importance to the business such as policy of fixation of wages or prices or
public relations, etc.

7. Control Techniques:
Poor control techniques or inefficient business systems tend to encourage
centralisation. Effective techniques to control the work of the subordinates, well-
established systems and procedures, improvement in accounting techniques enable
greater decentralisation in bigger concerns.

8. Importance of Decision:
Greater the impact of a decision on the success and survival of the enterprise, higher is
the degree of centralisation. Vital and crucial decisions involving investment of huge
capital funds are taken at the top level, because top officials are better trained and more
experienced and, hence, the authority is not decentralised.

9. Rate of Change in the Organisation:

The rate of change in the organisation also affects the degree to which authority may be
decentralised. If the business is fast developing and it is facing problems of expansion,
there is more chance that authority will be decentralised. As against this, in old and,
well-established or slow-moving organisations, there is a natural tendency to centralize
authority.

10. Environmental Influence:

External factors like government policies, trade union activities, tax policies etc. also
have significant influence on the degree of decentralisation. Many of the problems of
industry such as labour disputes, price fixation, etc. are to be tackled at the top level of
management, thus encouraging centralisation rather than decentralisation.
Delegation of authority: Meaning of authority/delegation, steps in the
process of delegation, factors determining the degree of delegation,
art of delegation.

Delegation of Authority is an important step in organising. It means granting of

authority by the superior manager to his subordinates in order to accomplish particular
assignments.

When the work of an executive increases so much in volume that he cannot cope with it,
he has to divide it among his subordinates.
This process of dividing the work with others and giving them authority to do it is
referred to as ‘Delegation’.
So, Delegation may be defined as the process of entrusting some part of the work of
operations or management to others; thus sharing one’s responsibilities with others. It
involves granting the right to decision-making in certain defined areas and charging the
subordinates with responsibility for carrying out the assigned tasks.
In the words of N. R. Spriegel:
“Delegation is the act of conferring authority by higher source of authority.”
The process of dividing up the work of an enterprise among people creates a number of
jobs or positions for both the managers and the operators. Organisation being a
mechanism to provide for integrated and co-operative action, all managerial and
operating jobs are to be tied together in a consistent manner. Delegation is the element
that holds the jobs or positions together.
The chief executive of an enterprise cannot personally manage all the activities.
Obviously, for the individual departments, there must be departmental managers and,
for the divided sections of a particular department, there should exist sectional
managers. These departmental and sectional managers derive their authority from the
chief executive.

The chief executive delegates a part of his authority to different subordinates for
enabling them to discharge the work responsibilities or duties in all areas of the
business.
In delegating authority, the chief executive retains some reserved authority for his own
performance as well as the power of demanding accountability from the subordinates
for ensuring satisfactory performance on their part. This accountability can never be
delegated by a manager to his subordinates.
Thus, delegation is the means by which a manager can share his duties with his
immediate subordinates who, in turn, delegate to their subordinates, and the process is
continued until managerial work reaches the supervisors at the lowest level of
management and operating work is assumed by the workers.
By means of delegation, the manager extends his area of operation. Delegation enables
the managers to distribute their load of work to others—thus leaving them free to
concentrate on the other important functions of management. Besides, it influences the
relationship between the subordinate and his superior and the performance of the
subordinate.

Features of Delegation of Authority:

Delegation of authority has the following features or characteristics:

1. Delegation is authorization to a manager to act in a certain manner. The degree of
delegation prescribes the limits within which a manager has to decide the things. Since
the formal authority originates at the top level, it is distributed throughout the
organisation through delegation and re-delegation.

2. Delegation has dual characteristics. As a result of delegation, a subordinate employee

receives authority from his superior, but, at the same time, his superior still retains all
his original authority. George Terry comments on this concept: “It is something like
imparting knowledge. You share with others who then possess the knowledge,
but you still retain the knowledge too.” Delegation does not imply reduction in the
authority of a manager.

3. Delegation does not mean a manager loses control and power. Authority once
delegated can be enhanced, reduced or withdrawn depending on the situation or
requirement. For example, change in the organisation structure, policy, procedure,
methods etc. may require change in the degree of delegation of authority.

4. A manager delegates authority out of the authority vested in him. He cannot delegate
which he himself does not possess. Moreover, he does not delegate his full authority to
his subordinates, because if he delegates all his authority, he passes his position to the
subordinates.

5. Delegation of authority is always made to the position created through the process of
organising. The individual occupying a position may exercise the authority so long as he
holds the position. Therefore, the authority is recovered fully from the individual when
he moves from the particular position.

6. The extent of authority to be delegated depends upon several factors, like the ability
and willingness of the executive to delegate, the ability of the subordinates to accept
delegation, the confidence of the superior in his subordinates, the philosophy of
management, etc.

7. Delegation of authority may be specific or general. It is specified when the courses of

action for particular objectives are specified. It is general when these are not specified,
though objectives may be specified.
Necessity of Delegation of Authority:
Delegation of authority is the most essential requirement for successful management. It
is the key to organisation and a cementing force for binding the formal organisation
together. In a big concern, due to its complexities, delegation is a must.
It is not possible and practicable for a chief executive to manage and control everything.
In spite of the fact that the ultimate responsibilities rest on him, he delegates some of
his activities and authority to many of his subordinates.
The delegation of authority arises from the natural limitations of the human being. As
the organisation grows up or becomes more complex, a point may be reached at which
the single manager is no longer able to cope with the full load of responsibilities.
He finds that neither time nor his own capacity and knowledge permits him to give
adequate attention to the proper utilisation of human and material factors upon which
effective management is based. This is the reason that gives rise to the need for
delegation.
Apart from physical limitation the need for delegation arises in a big complex
organisation for securing expert’s services. It is also not practicable for a chief executive
to give specialist’s advice on every matter. He may have time and energy but he may not
have the skill.
A business has different kinds of jobs, some of which may require specialist persons for
their accomplishment. The top executive delegates these responsibilities to the experts,
viz., secretary, accountant, and legal adviser. Moreover, for a business with branches
situated at different places, there is no alternative to delegation.
Delegation also ensures continuity in business because the managers at lower levels are
enabled to acquire valuable experience in decision-making. They get an opportunity to
develop their abilities and gain enough competence to fill higher positions in case of
need.
Process or Elements of Delegation:

The process of delegation involves the following three essential elements:

1. Assignment of Duties:
As one manager cannot perform all the tasks, he must allocate a part of his work to the
subordinates. The sharing of duties between a manager and his subordinates can only
be done when the work is divided into parts. In delegating duties, the manager has to
decide what part of the work he will keep for himself and what parts should be
transferred to his subordinates.
Defining the work of the subordinates by their superior manager is known as
assignment of duties. It also covers defining of the results expected from the
subordinates. The manager may assign various duties in terms of goals, functions or
results.

Duties may also be assigned in terms of job description. Expressing the duties in terms
of goals will probably result in more effective delegation, because it provides mental
satisfaction to the subordinates of being involved in fulfilling a mission through the
performance of certain allotted activities. Duties should be allocated according to the
qualification, experience and aptitude of the subordinates.
2. Granting of Authority:
If the delegated duties are to be discharged by the subordinates, they must be granted
requisite authority for enabling them to perform such duties. Assignment of duties is
meaningless unless adequate authority is given to the subordinates. The same rights
and powers as would have been necessary on the part of a manager for his self-
performance are to be conferred upon his subordinates.
In the process of delegating authority, the executive gives power or permission to the
subordinate to use certain rights— such as the right to spend money, to direct the work
of other people, to use raw materials and other property, or to represent the
organisation to outsiders. Effective delegation, however, requires that the limits of
authority should be made clear to each subordinate.
The superior and the subordinate should clearly understand the subordinate’s right to
act, to request others to act, and to maintain discipline. The superior can delegate only
that for which he has the authority and power to perform. He, however, does not give
away the total authority; he only delegates a part of it, retaining the ultimate authority
and responsibility to himself.

3. Creation of Obligation or Accountability for Performance:

The last step in the process of delegation of authority is the creation of moral
compulsion or obligation on the part of the subordinates for the satisfactory
performance of their duties. The subordinates to whom authority is delegated must be
made answerable for the proper performance of the assigned duties and for the exercise
of delegated authority.
The creation of obligation is—in real sense—assumption of responsibility by the
subordinates. By accepting an assignment (i.e. a delegated task), a subordinate, in effect,
gives his promises to do his best in carrying out his duties. His obligation to do the task
assigned makes him accountable to the delegator for discharge of his duties.
As the manager himself remains ever accountable to his superior for the satisfactory
performance of the work, he has to exercise control over the performance of his
subordinates. This control is exercised through demanding accountability from the
subordinates. Duty and authority can be delegated by a manager to his subordinates,
but accountability flows from subordinates to the superior in an upward direction.
The process of delegation is shown in the following diagram:
Benefits of Delegation of Authority:

Delegation provides the following advantages:

1. Basis of Effective Functioning:
Delegation lays down the basis of effective functioning of an organisation. By
establishing structural relationships throughout the organisation, delegation helps in
securing co-ordination of various activities for accomplishing the enterprise objectives.

2. Reduction in Work-Burden of the Chief Executive:

Delegation reduces the executive burden by way of relieving the superior of the need to
attend to minor or routine duties. It, thus, enables him to devote greater attention and
effort towards broader and more important responsibilities.

3. Benefits of Specialised Service:

Delegation enables the manager to utilise the specialised knowledge and experience of
the persons at lower levels.

4. Efficient Running of Branches:

In the modern world, where a business rarely confines its activities to a single place,
only delegation can provide the key to smooth and efficient running of the various
branches of the business at places far and near.

5. Aid to Expansion and Diversification of Business:

As delegation provides the means of extending and multiplying the limited capacity of
the superior, it is instrumental for encouraging expansion and diversification of the
business.

6. Aid to Employee Development:

Delegation permits the subordinates to enlarge their jobs, to develop their capacity and
to broaden their understanding. By forcing the subordinates to assume greater
responsibilities and to make important decisions, the superior insists on the
development of subordinates executive talents. Delegation improves the morale of the
subordinates by way of raising their status and importance in the organisation.

Difficulties and Problems in Delegation of Authority:

Delegation is apparently a simple process, but, in practice, certain difficulties and
problems generally crop up to hamper this process. This is often partly on account of
the superior manager’s attitude towards delegating authority and partly due to the
subordinate’s hesitation in accepting delegation.

These difficulties or obstacles in the way of proper delegation may be

summarised as follows:
(A) Reluctance on the Part of the Executives:
A superior manager is likely to delegate less authority in the following situations:

1. Superiority complex:
Some executives tend to feel that they can do the job better themselves, and, for this
reason, they do not delegate their authority. They consider themselves
indispensable—neither they respect the ideas of others nor do they give the
subordinates a chance to prove their merit.

2. Maintenance of tight control:

A manager does not delegate authority because he wants to maintain tight control over
the operation assigned to him.

3. Lack of confidence in the subordinates:

A manager may not delegate authority because he feels that his subordinates are not
capable and reliable. He lacks confidence in his subordinates. If delegation is not made,
the future manager has no opportunity to gain experience. Confidence is built up
gradually and on the basis of success.

4. Lack of ability to direct:

Many managers have difficulty in giving suitable directions to guide the efforts of the
subordinates. Sometimes the boss may like to delegate authority but may not be able to
do it effectively due to his inability to identify, interpret and communicate the essential
features of his plans. So, an executive who lacks ability to direct cannot delegate.

5. Absence of control techniques that warn of coming troubles:

In the cases where the executive in charge of operations has practically no means of
knowing serious difficulties in the working of the organisation in advance, he may
hesitate in delegating authority.

6. Conservative and cautious temperament:

A conservative and over-cautious manager will never like to take any risk. Since
delegation of the task to a subordinate involves some elements of chance or risk, the
executive may hesitate to delegate anything to anyone.

7. Fear of exposure:
A superior manager, specially an incompetent one, may not like to delegate simply
because adequate delegation may reveal his weakness and shortcomings. This may
happen specially when the superior has poor operating procedures, methods and
practices. He feels that delegation may undermine his influence and prestige in the
organisation. He keeps all the authority to himself for fear of being exposed.

8. Fear of the subordinates:

A manager may not delegate adequate authority because of his fears of the
subordinates. The fear of a subordinate’s growth may be real. It can take two forms.
First, the subordinate might show that he can perform the superior’s work so well that
he becomes entitled to the manager’s position, status or prestige.
Second, the subordinate’s increasing ability might earn him a promotion to some other
part of the organisation and the superior may lose his best subordinate. In this case, the
superior may adopt a defensive behaviour. He simply fails to delegate the kind of
authority that would have such a result.

9. Love for authority:

A superior may not delegate his authority specially if he is an autocrat. Such a manager
has intense desire to dominate others, to make his importance felt in the organisation,
and to see that his subordinates come frequently for approval. He thinks that delegation
will lead to reduction of his influence in the organisation.

(B) Reluctance on the Part of the Subordinates:

The subordinates may not always like to accept delegation and shoulder responsibility.
A subordinate may shrink from accepting authority for the following reasons:

1. Dependence on the boss for decisions:

If a subordinate finds it easier to depend upon his boss for taking decisions while
tackling problems, he may avoid accepting authority even when his boss is ready to
delegate it,

2. Fear of criticism:
The subordinates sometimes fear criticism on the part of their superiors. This fear is
often justified. In fact, some superiors tend to criticize any action taken by a subordinate
and even a small genuine mistake. This discourages initiative, causes resentment, and
destroys a subordinate’s self-confidence.

3. Lack of information or resources:

A subordinate will generally be unwilling to accept authority when adequate
information, working facilities, and resources required for the proper performance of a
task are not available.

4. Lack of self-confidence and fear of failure:

A subordinate who does not possess self-confidence will generally try to shirk
responsibility even though the executive is prepared to delegate. Such subordinates
often feel that they will fail, and so, do not want additional responsibilities through
delegation.

5. Inadequacy of positive incentive:

A subordinate hesitates in accepting more work delegated to him by the boss if he does
not get sufficient positive incentives in the form of recognition, credit, and other
rewards.

6. Over-work:
When the subordinates are already over-burdened with duties, they may avoid
delegation because they feel that they will not be able to do an additional task along
with those which they presently have been assigned. This may be a perfectly legitimate
reason.

Basic Principles of Delegation of Authority:

Delegation, to be effective, must be governed by certain working rules or principles.
The following rules or principles are fundamental in relation to delegation of
authority:
1. Functional Definition:
Before delegating authority, a manager should define clearly the functions to be
performed by the subordinates. The objectives of each job, the activities involved in it,
and its relationship with other jobs should be clearly defined.
2. Delegation by Result Expected:
Authority should be delegated to a position according to the results expected from that
position. Duties of the subordinates become clear to them only when they understand
what activities they must undertake and what results they must show. By spelling out
the duties in terms of goals or expected results, advance notice is to be given to the
subordinates as to the criteria on which their performance will be judged.
3. Clarity of Lines of Authority:
Each position in the organisation is linked with others through authority relationships,
some directly through line authority, others indirectly. More clearly these lines of
authority are defined more effective is the delegation of authority. A clear
understanding of the lines of authority is needed for smooth functioning of the
organisation. Everyone must know from whom he gets authority and to whom his
authority must be referred.
4. Level of Authority:
It implies delegation of decision-making authority to the competent managers at some
level. The superior is not expected to interfere with the decision-making process which
is, by delegation, within the competence of the subordinate manager at the lower
organisation levels concerned.
5. Absoluteness of Responsibility:
Responsibility cannot be delegated. An executive cannot free himself from his own
obligations to his superior by delegating duties. In fact, by delegating authority he
increases his responsibility as he will be now accountable to his superior for the acts of
his subordinates also. The ultimate responsibility for the accomplishment of the task is
his, even though it has been assigned to his subordinates.
6. Parity of Authority and Responsibility:
A subordinate should be given necessary authority to perform his assigned duties.
Authority must correspond to perform his responsibility. There must be a proper
balance between authority and responsibility of a subordinate. It is unfair to hold a
person responsible for something over which he has no authority.
Responsibility without authority will make a subordinate ineffective as he cannot
discharge his duties. Similarly, authority without responsibility will make the
subordinate irresponsible. Therefore, authority and responsibility should be co-
extensive.
7. Motivation:
It should be the policy of the managers to provide material and psychological incentives
to the subordinates so that they spontaneously accept the delegated responsibility and
duty and exercise the authority delegated to them. Higher wages, bonus, promotion to
better positions, greater recognition and prestige etc. may have a stimulating effect for
productive performance of duties.

A number of factors influence the decision about delegation. Some of these are
discussed as follows:
1. Company’s History:
The history of the company influences the degree of delegation. A company grown over
a period of time has a tendency to centralize powers. When a concern is small then most
of the decision-making is done by the owner. With the growth of business, the tendency
to centralize powers remains. On the other hand if a concern is the outcome of a merger,
amalgamation or combination there may be a great amount of decentralization. If a
company is working on a decentralized pattern it will be run in the same way even on
its acquisition. So the growth history a concern influences the degree of delegation.

2. Availability of Capable Persons:

The element of delegation is linked to the availability of subordinate managers. If
sufficient persons are available who can take responsibility then delegation can easily
be done. Generally, managers complain that sufficient subordinate managers are not
available who can be assigned important duties. Unless subordinates are delegated the
powers they will not learn the art of management. With additional experience and
training their judgment would be improved and they will become more capable
subordinates.

Many large firms push decision-making to the lower ranks of the organization for the
purpose of developing and training managerial manpower. A subordinate may be given
small powers in the beginning. As he develops his managerial capabilities he can be
assigned more important work. One thing should be clear that unless otherwise powers
are delegated to lower levels, the concern will not be able to develop subordinate
managers. The delegation process should be continually pursued so that people are
trained to undertake more responsibilities.

3. Importance and Costliness of Decisions:

The importance and costliness of decisions greatly influences the degree of delegation.
Generally speaking, the costlier and more important the decision, the greater the
probability of its being made at the upper level of the managerial hierarchy. Decision-
making also requires various facts and figures about the issue. A manager will ensure
that he gets all required information for deciding the issue. This type of information is
easily available at higher levels of management.
A manager knows that he can delegate authority and not responsibility. Some decisions
can influence the whole organization. Any wrong decision on such important matters
can damage the enterprise beyond control. Such decisions are taken at higher level
because these persons have the past experience of deciding such things. In a manager’s
career he should first be given authority to take decisions which are not too costly so
that he is able to learn from his experience.

4. Size of the Enterprise:

The extent of delegation is linked to the size of the enterprise. In a large unit more
decision making is needed at various levels of management. The problems of
communication and co-ordination often arise in such units. If decision-making is closer
to the place of action it will save time, paper work is reduced, misunderstandings in
communication can largely be eliminated. There is a tendency to decentralize in big
units for avoiding many difficulties.

5. Available Controls:
A manager delegating authority wants to be sure that it is used in accordance with his
intentions and the general objectives of the organization. In order to achieve this there
must be control devices. Generally, managers hesitate to delegate due to the reason that
they do not know how to control. They have a feeling that it takes more time to exercise
control than exercising the authority themselves. It will be better to set up some control
devices. The better the control devices, the more will be the delegation of authority.
6. Types of Enterprise:
The degree of delegation of authority may also be influenced by the type of enterprise. If
the enterprise is in an industry which is rapidly expanding, as in the electronic field, top
management will have to delegate otherwise it will be over burdened with many
decisions. Decentralization of authority will take place even if the subordinate managers
do not have adequate experience to exercise authority. Management should make
guidelines for subordinate managers for taking proper decision.
If the enterprise operates in a static industry then all decision-making is done at the
central level. In case of banking and insurance the growth is slow and decision making
remains at the top. So delegation of authority depends upon the nature of the
enterprise.
7. Environmental Factors:
In addition to internal factors delegation may be influenced by internal factors too.
These factors may be natural unions, government control over business and tax policies.
Some large concerns have to deal with workers’ unions at national level. All the
negotiations are done and decisions are taken at national level. In such a situation the
things are decided at head quarter level and are applicable at all levels. It, therefore,
follows that within the area of labour relations, decision-making is decentralized. The
same holds true as applied to government control over business, and tax laws.

Line/staff organization: Line organization, staff organization, line and staff

organization, functional and committee organization, the nature of line and staff
relationship.

Forms of Organisational Structure: Line , Functional, and Line and Staff

Organisation (with respective advantages and disadvantages)
The adoption of a particular form of organisational structure largely depends upon the
nature, scale and size of the business. The organisational structure is primarily
concerned with the allocation of activities or tasks and delegation of authority.

1. Line Organisation:
Line organisation is the simplest and the oldest type of organisation. It is also known as
scalar organisation or military type of organisation. In the words of J.M. Lundy, “It is
characterized by direct lines of authority flowing from the top to the bottom of the
organizational hierarchy and lines of responsibility flowing in an opposite but equally
direct manner.”

An important characteristic of such type of organisation is superior-subordinate

relationship. Superior delegates authority to another subordinate and so on, forming a
line from the very top to the bottom of the organisation structure. The line of authority
so established is referred as “line authority.” Under this type of organisation authority
flows downwards, responsibility moves upwards in a straight line. Scalar principle and
unity of command are strictly followed in line organisation.
This type of organisation resembles with the army administration or military type of
organisation. As in case of military, commander-in-chief holds the top most position and
has the entire control over the army of the country, which in turn is developed into
main area commands under major-generals.
Each area has brigade under brigadier-generals, each brigade is fabricated into
regiments under its colonels, each regiment into battalions under majors, each battalion
into companies under captains, each company sub-divided under its lieutenants and so
on drawn to corporal with his squad.

Types of line organization:

Line organisation is of two type’s viz. (a) Simple or Pure Line Organisation (b)
Departmental Line Organisation

(a) Simple or Pure Line Organisation:

In the ‘Pure Line organisation’ the activities (at any level of management) are the same
with each man performing the same type of work and the divisions primarily exist for
the purpose of control and direction. In practice, such type of organisation rarely exists.
The following diagram shows the pure line organisation:

In this type of organisation all the workers perform the same type of work. The
departmental divisions are made only for the sake of convenience of supervision and
management.

(b) Departmental line organisation:

Under this type of organisation, an organisation is divided into various departments
headed by different departmental heads. All the departments operate under the
ultimate control of general manager. The orders flow directly from the general manager
to all the departmental heads that in turn pass on to their respective subordinates.
Likewise, the subordinates, in turn, communicate the orders to the workers under them.
The various departmental heads will be perfectly independent of each other and they
will enjoy equal status the central idea, in the formation of such departments is not
similarly or dis-similarity of functions or activities, but unity of control and line
authority and responsibility from the top of the organisation to the bottom.
Suitability of line organization:
The line organisation can be successfully followed where (a) scale of operations is
limited or business is on small scale basis, (b) work is simple and routine in nature, (c)
business is being done in continuous type of industries like oil refining, sugar, spinning
and weaving etc., (d) the labour management problems are not complex and can be
easily resolved, (e) the machinery is automatic, and (J) the workers are disciplined.

Characteristics of line organization:

The main features of line organisation are as follows:
1. Orders and instructions flow from top to the bottom, whereas requests and
suggestions move from bottom to top.
2. The principle of unity of command is the most salient feature of this type of
organisation. In simple words, the orders are received by the subordinates from one
boss.
3. The subordinates are accountable to their immediate superior.
4. There are limited numbers of subordinates under one superior.
5. This is simple to operate and control.
6. Co-ordination can be easily achieved.

Advantages of line organization:

Following are the main advantages of line organisation:
1. Simplicity:
It is very simple to establish and operate. It can be easily understood by the employees.
2. Fixed responsibility:
Duties and responsibilities are clearly defined for each individual with reference to the
work assigned to him. As a result everybody knows to whom he is responsible and who
are responsible to him. Nobody can avoid responsibility.
3. Discipline:
This type of organisation ensures better discipline in the enterprise. Singleness of
responsibilities facilitates discipline in the organisation. The workers at the lower levels
will be more loyal and responsible to one single boss rather than to a number of bosses.
4. Flexibility:
It is flexible in the sense that it is subject to quick adjustments to suit to changing
conditions. In the words of Wheeler, “It permits rapid and orderly decisions in meeting
problems at various levels of organisation”. In simple words, it is more adaptive to the
changed circumstances.
5. Co-ordination:
It helps to achieve effective co- ordination. All the activities pertaining to single
department are controlled by one person.
6. Direct communication:
As there will be direct communication between the superior and the subordinates at
different levels it would be helpful in achieving promptness in performance.
7. Unity of command:
Every worker is accountable to one boss in the department under this type of
organisation. In this manner it is in accordance with the principle of unity of command.
8. Economical:
It is not complex and expensive. It is simple and economical in operation. It does not
need any expert and specialised personnel.
9. Quick decisions:
On account of its simple operation and unified control and responsibility, decisions can
be taken promptly. The process of decision-making is further quickened as the decision
is taken by one person.
10. Executive development:
Under this organisation, the department head is fully responsible for every activity in
his department. He discharges his responsibilities in an efficient manner. He comes
across many problems and obstacles in performing his duties.
This provides him an ample opportunity to enhance his capabilities and organisational
abilities and is greatly helpful in his overall development and performance.

Disadvantages of line organization:

Following are the main drawbacks of line organisation:
1. Overloading:
The main disadvantage of this system is that it tends to overload the existing executive
with too many responsibilities. The work may not be performed effectively on account
of innumerable tasks before the single executive.
2. Lack of specialization:
Absence of managerial specialisation is the major drawback of this system. On account
of many functions and complexities it is very difficult for a single individual to control
all the matters effectively.
The executive may not be expert in all aspects of managerial activities. The burden of
responsibilities on the shoulders of the manager can crush him under the heavy
workload.
3. Scope for favoritisms:
There may be a good deal of favouritism and nepotism under this type of organization.
As the concerned officer will judge the performance of the persons at work according to
his own norms, it is possible that efficient people may be left behind and inefficient or
‘yes men’ may get higher and better posts.
4. Lack of co-ordination:
In reality it is very difficult to achieve proper coordination among various departments
operating in an organisation. This is because each departmental manager or head
carries the functioning of his department in accordance with the ways and means
suitable to him.
This leads to lack of uniformity in operation among various departments which is
detrimental in achieving proper coordination in the overall functioning of the various
departments operating in the organisation.
5. Lack of initiative:
Under line organization, ultimate authority lies in the hands of top management and
departmental managers or heads have little powers. This adversely affects their
initiative and enthusiasm to motivate the subordinates working under them.
6. Lack of communication from lower ranks:
Under line organisation suggestions move from down to upwards the superiors usually
do not pay attention to suggestions sent by lower ranks. This leads to inadequacy of
communication from subordinates to superiors.

2. Functional Organisation:
F.W. Taylor, who is better known as the father of scientific management developed the
concept of ‘Functional Organisation’. As the very name suggests, functional organisation
implies that the organisation should be based on various functions. Taylor’s functional
approach is mainly based on principle of specialization and tries to bring about
organisational balance.
The principle of specialisation embodies the concept that both the workers and the
supervisors can develop a higher degree of proficiency by separating the manual from
the mental requirements. Taylor recommended that there should be functionalisation
even at the shop level where workers have to produce goods. He felt that the usual
practice of putting one foreman incharge of some 40 to 50 workers should be avoided.
Taylor’s concept of Functional Foremanship (as he puts it), is a system comprising of
eight different foremen discharging different functions. Every worker in the
organisation is directly connected with these foremen.
The eight specialist foremen are:
(a) Route Clerk, (b) Instructions Card Clerk, (c) Time and Cost Clerk, (d) Shop
Disciplinarian, (e) Gang Boss, (f) Speed Boss, (g) Repair Boss, and (h) Inspector. The
first four bosses operate from Planning Department, whereas the other four are known
as Executive Functional Bosses. They function in the production department.
A brief explanation of these eight functional foremen is given below:
(a) Route clerk:
He lays down the exact path or route to be followed by raw material transforming it into
finished product.
(b) Instruction card clerk:
He prepares detailed instructions to be followed in doing the work as per the route laid
down by the route clerk.
(c) Time and cost clerk:
He determines the total time to be taken in the completion of a product and also works
out the cost of production per unit and total cost. He prepares various work schedules
and cost sheets in order to have proper control over time and cost incurred in
producing goods.
(D) Shop disciplinarian:
He is responsible for maintaining proper discipline in the organisation. In fact, he is the
guardian of orderliness in the factory. In the words of Kimball and Kimball Jr. “The shop
disciplinarian is responsible for discipline and good order, fie is also the peacemaker
and assists in adjusting wages.”
He is helpful in resolving minor disputes regarding wages, holidays, working conditions
and hours of work etc. He initiates a proper code of conduct in the organisation.
(e) Gang boss:
He makes the availability of different machines and tools required by workers to carry
out their work. He also provides various production designs, drawings, raw materials
etc.
(f) Speed boss:
He controls the speed of different machines operating in the organisation. He
sometimes demonstrates the workers the proper speed with which the machines
should operate. He undertakes proper supervision over speed of machines.
(g) Repair boss:
He is concerned with proper maintenance and repairs of machines for keeping them in
working order. In the words of Spriegel, “His job of maintenance includes cleaning the
machine, keeping it free from rust and scratches, oiling it properly and preserving the
standards which have been set up for the auxiliary equipment connected with the
machine such as belts, counter shafts and clutches.” His main task is to undertake
immediate repair of the defective machines so that the work may not suffer.
(h )Inspector:
He checks and certifies the quality of work i.e., whether or not it is up to pre-determined
standards. Achievement of pre-set standards is confirmed by the inspector. He develops
the feeling of quality consciousness among the workers. In order to carry out his job
effectively, an inspector must possess proper knowledge and the technicalities involved
in quality control.
The following diagram shows Taylor’s Functional Foremanship:
While developing the concept of Functional Foremanship, F.W. Taylor suggested that it
is unscientific to overload a foreman with entire responsibility of running a department.
He advocated that direction of work should be decided by functions and not be mere
authority.
He thought that to be successful in performing his duties a foreman should possess
various qualities viz., education, special or technical knowledge, manual dexterity or
strength, tact, energy, honesty, common sense and good health”.
Spriegel has nicely explained Functional Organization. “Each worker, instead of coming
into contact with one superior, would receive his orders from a group of specialised
supervisors, each of whom performs a particular function.”

Functional organisation also operates at higher level of management. The whole work
in the organisation is divided in various departments. Similar type of work and
transactions are put in one department under the control of a departmental manager or
head. Various departments are also known as functional areas of management viz.,
Purchases, Sales, Finance, Production, and Personnel etc. The respective managers of
these departments will be responsible for carrying out various activities of their
departments in the organisation.
For example, marketing manager will be responsible for carrying out marketing
activities and personnel manager will be responsible for looking after the personnel
matters in all the departments of the organisation.
The underlying idea of functional organisation at the top level of management is that a
subordinate anywhere in the organization will be controlled and commanded directly
by number of managers operating in different departments.

Advantages of functional organisation. Following are the main benefits derived from
functional organisation:
1. Specialisation:
This system derives the benefits of specialisation. As every functional incharge is an
expert in his area, he will guide using his specialisation and with the help of the
subordinates, try to attain the specified objectives.
2. Increased efficiency:
This type of organisation ensures enhanced efficiency as the workers operate under the
expert and competent personnel and perform limited operations.
3. Limited duties:
The functional foremen have to carry out the limited number of duties concerning their
area of work. This considerably reduces the burden of work and makes possible for the
foreman to carry out the work in the best possible manner.
4. Scope for expansion:
Functional organisation offers a great scope for expansion of business enterprise
without any dislocation and loss of efficiency as each man grows on account of his own
speciality.
5. Flexibility:
It is flexible pattern of organisation. A change in organisation can be made without
disturbing the whole organisation. In the words of Louis A. Allen, “Function as a whole
can he cut by eliminating positions at the lower levels without seriously affecting its
total performance.”

Disadvantages of Functional Organization:

Despite the above advantages, this type of organization suffers from the following
disadvantages:
1. Conflict in authority:
The authority relationship violates the principle of ‘unity of command’. It creates
several bosses instead of one line authority. It leads to conflict and confusion in the
minds of the workers to whom they should obey and whom they should ignore.
2. Difficulty in pinpointing responsibility:
On account of the non-application of the principle of ‘unity of control’, it is very difficult
for the top management to fix the responsibility of a particular foreman. There arises a
tendency for shirking of responsibility.
3. Expensive:
This pattern of organisation is quite impracticable and expensive. Multiplicity of experts
increases the overhead expenditure. The small organisations cannot afford to install
such a system.
4. Discipline is slackened:
Discipline among the workers as well as lower supervisory staff is difficult to maintain
as they are required to work under different bosses and this may hamper the progress
of the organisation.
5. Lack of co-ordination:
Appointment of several experts in the organisation creates the problem of co-ordination
and delay in decision-making especially when a decision requires the involvement of
more than one specialist.
3. Line and Staff Organisation:
The line and staff organisation is an improvement over the above mentioned
two systems viz, line organisation and functional organisation. The line organisation
concentrates too much on control whereas the functional system divides the control too
much.
The need was, therefore, for a system that will ensure a proper balance between the
two. The need has been fulfilled by line and staff organisation. The system like line
organisation also owes its birth to army.
The commanders in the field who are line officers are assisted by the staff that helps
them in formulating strategies and plans by supplying valuable information. Similarly in
organisation, line officers get the advice of the staff which is very helpful in carrying on
the task in an efficient manner. However, staff’s role is advisory in nature. Line officers
are usually assisted by staff officers in effectively solving various business problems.
The staff is usually of three types viz:
(a) Personal Staff:
This includes the personal staff attached to Line Officers. For example, personal
assistant to general manager, secretary to manager etc. The personal staff renders
valuable advice and assistance to Line Officers.
(b) Specialised Staff:
This category includes various experts possessing specialised knowledge in different
fields like accounting, personnel, law, marketing, etc. They render specialised service to
the organisation.
For example, a company may engage a lawyer for rendering legal advice on different
legal matters. Similarly, it may engage a chartered accountant and a cost accountant for
tackling accounting problems.
(c) General Staff:
This comprises of various experts in different areas who render valuable advice to the
top management on different matters requiring expert advice.
Advantages of Line and Staff Organization

Important advantages of Line and Staff Organisation are:

1. Specialisation:
This type of organisation is based on planned specialisation and brings about the expert
knowledge for the benefit of the management.
2. Better decisions:
Staff specialists help the line manager in taking better decisions by providing them
adequate information of right type at right time.
3. Lesser Burden on line officers:
The work of the line officers is considerably reduced with the help of staff officers.
Technical problems and specialised matters are handled by the Staff and the routine
and administrative matters are the concern of Line Officers.
4. Advancement of research:
As the work under this type of organisation is carried out by experts, they constantly
undertake the research and experimentation for the improvement of the product. New
and economical means of production are developed with the help of research and
experimentation.
5. Training for line officer:
Staff services have proved to be an excellent training medium for Line Officers.
Disadvantages of Line and Staff Organisation:
1. Conflict between line and staff authorities:
There may be chances of conflict between line and staff authorities. Line Officers resent
the activities of staff members on the plea that they do not always give correct advice.
On other hand staff officials complain that their advice is not properly carried out.
2. Problems of line and staff authority:
There may be confusion on the relationship of line and staff authorities. Line Officers
consider themselves superior to Staff Officers. The Staff Officers object to it.
3. Lack of responsibility:
As the staff specialists are not accountable for the results, they may not perform their
duties well.
4. The system is quite expensive:
The appointment of experts involves a heavy expenditure. Small and medium size
organisations cannot afford such a system.
5. More reliance on staff:
Some of the line officers excessively rely on the staff. This may considerably reduce the
line control.
UNIT VI
ACTUATING
Nature and purpose of Actuating,

From the whole set of management processes, implementation (actuating) is the most
important management function. In planning and organizing functions more related to
abstract aspects of the management process, while the actuating functions are even
more emphasis on activities that relate directly to the people in the organization
In this case, George R. Terry (1986) suggested that the actuating an attempt to move the
group members in such a way that they desire and strive to achieve corporate goals and
objectives of the members of the company because its members had also wanted to
achieve those goals.

From the above definition, implementation (actuating) nothing but an attempt to make
the plan a reality, with the various directives and motivating for each employee to carry
out activities in an optimal fit with the role, duties and responsibilities.

The important thing to consider in the conduct (actuating) is that an employee will
be motivated to do something if: (1) feels confident will be able to do, (2) believes that
the work has added value for themselves, (3) not being encumbered by personal
problems or other more important tasks, or urgent, (4) the task is for the relevant trust
and (5) the relationship between friends in the harmonious organization.

Steps in actuating process.

1. Building an organization, that possess the capability to put the strategies into action
successfully.
2. Supplying resources, in sufficient quantity, to strategy-essential activities.
3. Developing policies which encourage strategy.
4. Such policies and programs are employed which helps in continuous improvement.
5. Combining the reward structure, for achieving the results.
6. Using strategic leadership.

Essentials of Human Resource Management: Importance and

functions of Human resource management, Importance of Human
resource planning, Recruitment, selection, training and development,
performance appraisal, compensation packages, promotions,
transfers demotion and separation etc.

Human Resource Management: Meaning, Objectives, Scope and Functions!

Meaning:
Before we define HRM, it seems pertinent to first define the term ‘human resources’. In
common parlance, human resources means the people. However, different management
experts have defined human resources differently. For example, Michael J. Jucius has
defined human resources as “a whole consisting of inter-related, inter-dependent and
interacting physiological, psychological, sociological and ethical components”.

According to Leon C. Megginson “From the national point of view human resources are
knowledge, skills, creative abilities, talents, and attitudes obtained in the population;
whereas from the view-point of the individual enterprise, they represent the total of the
inherent abilities, acquired knowledge and skills as exemplified in the talents and
aptitude of its employees”.

Sumantra Ghosal considers human resources as human capital. He classifies human

capita into three categories-intellectual capitals, social capital and emotional capital.
Intellectual capital consists of specialized knowledge, tacit knowledge and skills,
cognitive complexity, and learning capacity.

Social capital is made up of network of relationships, sociability, and trustworthiness

Emotional capital consists of self-confidence, ambition and courage, risk-bearing ability,
and resilience. Now it is clear from above definitions that human resources refer to the
qualitative and quantitative aspects of employees working in an organisation.

Let us now define human resource management.

In simple words, HRM is a process of making the efficient and effective use of human
resources so that the set goals are achieved. Let us also consider some important
definitions of HRM.

According to Flippo “Personnel management, or say, human resource management is

the planning, organising, directing and controlling of the procurement development
compensation integration, 4intenance, and separation of human resources to the end
that individual, organisational and social objectives are accomplished”.

The National Institute of Personnel Management (NIPM) of India has defined human
resource/personnel management as “that part of management which is concerned with
people at work and with their relationship within an enterprise. Its aim is to bring
together and develop into an effective organisation of the men and women who make
up an enterprise and having regard for the well-being of the individuals and of working
groups, to enable them to make their best contribution to its success”.

According to Decenzo and Robbins “HRM is concerned with the people dimension in
management. Since every organisation is made up of people, acquiring their services,
developing their skills, motivating them to higher levels of performance and ensuring
that they continue to maintain their commitment to the organisation are essential to
achieving organisational objectives. This is true, regardless of the type of organisation-
government, business, education, health, recreation, or social action”.

Thus, HRM can be defined as a process of procuring, developing and maintaining

competent human resources in the organisation so that the goals of an organisation are
achieved in an effective and efficient manner. In short, HRM is an art of managing
people at work in such a manner that they give their best to the organisation for
achieving its set goals.

Objectives:
The primary objective of HRM is to ensure the availability of right people for right jobs
so as the organisational goals are achieved effectively.

This primary objective can further be divided into the following sub-objectives:
1. To help the organisation to attain its goals effectively and efficiently by providing
competent and motivated employees.

2. To utilize the available human resources effectively.

3. To increase to the fullest the employee’s job satisfaction and self-actualisation.

4. To develop and maintain the quality of work life (QWL) which makes employment in
the organisation a desirable personal and social situation.

5. To help maintain ethical policies and behaviour inside and outside the organisation.

6. To establish and maintain cordial relations between employees and management.

7. To reconcile individual/group goals with organisational goals.

Werther and Davis have classified the objectives of HRM into four categories as shown
in table 1.2.

Table 1.2: HRM Objectives and Functions:

Scope:
The scope of HRM is, indeed, very vast and wide. It includes all activities starting from
manpower planning till employee leaves the organisation. Accordingly, the scope of
HRM consists of acquisition, development, maintenance/retention, and control of
human resources in the organisation (see figure 1.1). The same forms the subject matter
of HRM. As the subsequent pages unfold, all these are discussed, in detail, in seriatim.
The National Institute of personnel Management, has specified the scope of HRM
as follows:
1. The Labour or Personnel Aspect:
This is concerned with manpower planning, recruitment, selection, placement, transfer,
promotion, training and development, lay-off and retrenchment, remuneration,
incentives, productivity, etc.

2. Welfare Aspect:
It deals with working conditions, and amenities such as canteen, creches, rest and lunch
rooms, housing, transport, medical assistance, education, health and safety, recreation
facilities, etc.

3. Industrial Relations Aspects:

This covers union-management relations, joint consultation, collective bargaining,
grievance and disciplinary actions, settlement of disputes, etc.

Functions:
We have already defined HRM. The definition of HRM is based on what managers do.
The functions performed by managers are common to all organizations. For the
convenience of study, the function performed by the resource management can broadly
be classified into two categories, viz.

(1) Managerial functions, and

(2) Operative functions (see fig. 1.2).

These are discussed in turn.

(1) Managerial Functions:

Planning:
Planning is a predetermined course of actions. It is a process of determining the
organisational goals and formulation of policies and programmes for achieving them.
Thus planning is future oriented concerned with clearly charting out the desired
direction of business activities in future. Forecasting is one of the important elements in
the planning process. Other functions of managers depend on planning function.

Organising:
Organising is a process by which the structure and allocation of jobs are determined.
Thus organising involves giving each subordinate a specific task establishing
departments, delegating authority to subordinates, establishing channels of authority
and communication, coordinating the work of subordinates, and so on.

Staffing:
TOs is a process by which managers select, train, promote and retire their subordinates
This involves deciding what type of people should be hired, recruiting prospective
employees, selecting employees, setting performance standard, compensating
employees, evaluating performance, counseling employees, training and developing
employees.

Directing/Leading:
Directing is the process of activating group efforts to achieve the desired goals. It
includes activities like getting subordinates to get the job done, maintaining morale
motivating subordinates etc. for achieving the goals of the organisation.

Controlling:
It is the process of setting standards for performance, checking to see how actual
performance compares with these set standards, and taking corrective actions as
needed.

(2) Operative Functions:

The operative, also called, service functions are those which are relevant to specific
department. These functions vary from department to department depending on the
nature of the department Viewed from this standpoint, the operative functions of HRM
relate to ensuring right people for right jobs at right times. These functions include
procurement, development, compensation, and maintenance functions of HRM.

The operative functions of human resource or personnel department are

discussed below:
1. Employment:
The first operative function of the human resource of personnel department is the
employment of proper kind and number of persons necessary to achieve the objectives
of the organisation. This involves recruitment, selection, placement, etc. of the
personnel.

Before these processes are performed, it is better to determine the manpower

requirements both in terms of number and quality of the personnel. Recruitment and
selection cover the sources of supply of labour and the devices designed to select the
right type of people for various jobs. Induction and placement of personnel for their
better performance also come under the employment or procurement function.

Each element of recruitment and selection has a contribution to make in helping to find
the most suitable candidates for any given post and you should view recruitment and
retention as entailing the eight stages that follow.
Stage 1 – Job Vacancy
Stage 2 – Job Analysis
Stage 3 – Attracting Candidates
Stage 4 – Screening Candidates
Stage 5 – Interviewing Candidates
Stage 6 – Selecting and Appointing Candidates
Stage 7 – Induction & Training
Stage 8 – Employee Evaluation

2. Development:
Training and development of personnel is a follow up of the employment function. It is a
duty of management to train each employee property to develop technical skills for the
job for which he has been employed and also to develop him for the higher jobs in the
organisation. Proper development of personnel is necessary to increase their skills in
doing their jobs and in satisfying their growth need.
For this purpose, the personnel departments will device appropriate training programs.
There are several on- the-job and off-the-job methods available for training purposes. A
good training program should include a mixture of both types of methods. It is
important to point out that personnel department arranges for training not only of new
employees but also of old employees to update their knowledge in the use of latest
techniques.

3. Compensation:
This function is concerned with the determination of adequate and equitable
remuneration of the employees in the organisation of their contribution to the
organisational goals. The personnel can be compensated both in terms of monetary as
well as non-monetary rewards.

Factors which must be borne in mind while fixing the remuneration of personnel are
their basic needs, requirements of jobs, legal provisions regarding minimum wages,
capacity of the organisation to pay, wage level afforded by competitors etc. For fixing
the wage levels, the personnel department can make use of certain techniques like job
evaluation and performance appraisal.

4. Maintenance (Working Conditions and Welfare):

Merely appointment and training of people is not sufficient; they must be provided with
good working, conditions so that they may like their work and workplace and maintain
their efficiency. Working conditions certainly influence the motivation and morale of
the employees.

These include measures taken for health, safety, and comfort of the workforce. The
personnel department also provides for various welfare services which relate to the
physical and social well-being of the employees. These may include provision of
cafeteria, rest rooms, counseling, group insurance, education for children of employees,
recreational facilities, etc.

5. Motivation:
Employees work in the organisation for the satisfaction of their needs. In many of the
cases, it is found that they do not contribute towards the organisational goals as much
as they can. This happens because employees are not adequately motivated. The human
resource manager helps the various departmental managers to design a system of
financial and non-financial rewards to motivate the employees.

6. Personnel Records:
The human resource or personnel department maintains the records of the employees
working in the enterprise. It keeps full records of their training, achievements, transfer,
promotion, etc. It also preserves many other records relating to the behaviour of
personnel like absenteeism and labour turnover and the personnel programs and
policies of the organisation.

7. Industrial Relations:
These days, the responsibility of maintaining good industrial relations is mainly
discharged by the human resource manager. The human resource manager can help in
collective bargaining, joint consultation and settlement of disputes, if the need arises.
This is because of the fact that he is in possession of full information relating to
personnel and has the working knowledge of various labour enactments.

The human resource manager can do a great deal in maintaining industrial peace in the
organisation as he is deeply associated with various committees on discipline, labour
welfare, safety, grievance, etc. He helps in laying down the grievance procedure to
redress the grievances of the employees. He also gives authentic information to the
trade union leaders and conveys their views on various labour problems to the top
management.

8. Separation:
Since the first function of human resource management is to procure the employees, it
is logical that the last should be the separation and return of that person to society.
Most people do not die on the job. The organisation is responsible for meeting certain
requirements of due process in separation, as well as assuring that the returned person
is in as good shape as possible. The personnel manager has to ensure the release of
retirement benefits to the retiring personnel in time.

3. Advisory Functions:
Human resource manager has specialised education and training in managing human
resources. He is an expert in his area and so can give advise on matters relating to
human resources of the organisation.

He offers his advise to:

1. Advises Top Management:
Personnel manager advises the top management in formulation and evaluation of
personnel programs, policies and procedures. He also gives advice for achieving and
maintaining good human relations and high employee morale.

2. Advises Departmental Heads:

Personnel manager offers advice to the heads of various departments on matters such
as manpower planning, job analysis and design, recruitment and selection, placement,
training, performance appraisal, etc.

Human Resource Planning :

Objectives:
The main objective of having human resource planning is to have an accurate number of
employees required, with matching skill requirements to accomplish organisational
goals.
In other words, the objectives of human resource planning are to:
1. Ensure adequate supply of manpower as and when required.
2. Ensure proper use of existing human resources in the organisation.
3. Forecast future requirements of human resources with different levels of skills.
4. Assess surplus or shortage, if any, of human resources available over a specified
period of time.
5. Anticipate the impact of technology on jobs and requirements for human resources.
6. Control the human resources already deployed in the organisation.
7. Provide lead time available to select and train the required additional human
resource over a specified time period.

According to Sikula “the ultimate purpose/objective of human resource planning is to

relate future human resources to future enterprise need so as to maximise the future
return on investment in human resources”.

Need for and Importance of HRP:

The need for human resource planning in organisation is realised for the
following reasons:

1. Despite growing unemployment, there has been shortage of human resources with
required skills, qualification and capabilities to carry on works. Hence the need for
human resource planning.
2 Large numbers of employees, who retire, die, leave organisations, or become
incapacitated because of physical or mental ailments, need to be replaced by the new
employees. Human resource planning ensures smooth supply of workers without
interruption.
3. Human resource planning is also essential in the face of marked rise in workforce
turnover which is unavoidable and even beneficial. Voluntary quits, discharges,
marriages, promotions and seasonal fluctuations in business are the examples of factors
leading to workforce turnover in organisations. These cause constant ebb and flow in
the work force in many organisations.

4. Technological changes and globalisation usher in change in the method of products

and distribution of production and services and in management techniques. These
changes may also require a change in the skills of employees, as well as change in the
number of employees required. It is human resource planning that enables
organisations to cope with such changes.
5. Human resource planning is also needed in order to meet the needs of expansion and
diversification programmes of an organisation.
6. The need for human resource planning is also felt in order to identify areas of surplus
personnel or areas in which there is shortage of personnel. Then, in case of surplus
personnel, it can be redeployed in other areas of organisation. Conversely, in case of
shortage of personnel, it can be made good by downsizing the work force.
Human resource planning is important to organisation because it benefits the
organisation in several ways.

The important ones are mentioned below:

1. Human resource planning meets the organisation need for right type of people in
right number at right times.
2. By maintaining a balance between demand for and supply of human resources,
human resource planning makes optimum use of human resources, on the one hand,
and reduces labour cost substantially, on the other.
3. Careful consideration of likely future events, through human resource planning might
lead to the discovery of better means for managing human resources. Thus, foreseeable
pitfalls might be avoided.
4. Manpower shortfalls and surpluses may be avoided, to a large extent.
5. Human resource planning helps the organisation create and develop training and
succession planning for employees and managers. Thus, it provides enough lead time
for internal succession of employees to higher positions through promotions.
6. It also provides multiple gains to the employees by way of promotions, increase in
emoluments and other perquisites and fringe benefits.
7. Some of the problems of managing change may be foreseen and their consequences
mitigated. Consultations with affected groups and individuals can take place at an early
stage in the change process. This may avoid resistance for change.
8. Human resource planning compels management to asses critically the strength and
weaknesses of its employees and personnel policies on continuous basis and, in turn,
take corrective measures to improve the situation.
9. Through human resource planning, duplication of efforts and conflict among efforts
can be avoided, on the one hand, and coordination of worker’s efforts can be improved,
on the other.
10. Last but no means the least, with increase in skill, knowledge, potentialities,
productivity and job satisfaction, organisation becomes the main beneficiary.
Organisation is benefitted in terms of increase in prosperity/production, growth,
development, profit and, thus, an edge over its competitors in the market.

Levels of Human Resource Planning:

Human resource planning is useful at different levels.
At the National Level:
Human resource planning by Government at the national level covers population
projections, programme of economic development, educational and health facilities,
occupational distribution and growth, mobility of personnel across industries and
geographical regions.
At the Sector Level:
This would cover manpower requirements of the agricultural sector, industrial sector
and service sector.
At the Industry Level:
This would forecast manpower need for specific industries, such as engineering, heavy
industries, textile industries, plantation industries, etc.
At the Level of Industrial Unit:
It relates to the manpower needs of a particular enterprise.

Leadership: Meaning and importance, Leadership qualities

Meaning:
Leadership is an important element of the directing function of management. Wherever,
there is an organized group of people working towards a common goal, some type of
leadership becomes essential. “The power of leadership is the power of integrating. The
leader stimulates what is best in us he unites and concentrates what we feel only
gropingly and shatteringly. He is a person who gives form to the uncoarctate energy in
every man. The person who influences me most is not he who does great Deeds, but he
who makes me feel that I can do great deeds.” Marry Parker Follet.

Leadership is the ability to build up confidence and zeal among people and to create an
urge in them to be led. To be a successful leader, a manager must possess the qualities
of foresight, drive, initiative, self-confidence and personal integrity. Different situations
may demand different types of leadership.

Definitions:
Leadership has been defined in various ways. Stogdill has rightly remarked that there
are almost as many definitions of leadership as there are people who have tried to
define it.

The definitions given by some famous authors and management experts are given
below:
1. Koontz and O’Donnell, Leadership is the ability of a manager to induce subordinates
to work with confidence and zeal.

2. Dubin, R.Leadership is the exercise of authority and making of decisions.

3. Allford and Beaty, Leadership is the ability to secure desirable actions from a group of
followers voluntarily, without the use of coercion.
4. George R. Terry, Leadership is the activity of influencing people to strive willingly for
group objectives.

5. Hemphill, J.K., Leadership is the initiation of acts which result in a consistent pattern
of group interaction directed towards the solution of a mutual problem.

6. Jame J.Cribbin, Leadership is a process of influence on a group in a particular

situation at a given point of time, and in a specific set of circumstances that stimulates
people to strive willingly to attain organisational objectives and satisfaction with the
type of leadership provided.

7. Peter Drucker, Leadership is not making friends and influencing people, i.e.,
salesmanship it is the lifting of man’s visions to higher sights, the raising of man’s
personality beyond its normal limitations.

In the various definitions of leadership the emphasis is on the capacity of an individual

to influence and direct group effort towards the achievement of organizational goals.
Thus, ‘ we can say that leadership is the practice of influence that stimulates
subordinates or followers to do their best towards the achievement of desired goals.

Nature and Characteristics of Leadership:

An analysis of the definitions cited above reveals the following important
characteristics of leadership:
1. Leadership is a personal quality.
2. It exists only with followers. If there are no followers, there is no leadership?
3. It is the willingness of people to follow that makes person a leader.
4. Leadership is a process of influence. A leader must be able to influence the behaviour,
attitude and beliefs of his subordinates.
5. It exists only for the realization of common goals.
6. It involves readiness to accept complete responsibility in all situations.
7. Leadership is the function of stimulating the followers to strive willingly to attain
organizational objectives.
8. Leadership styles do change under different circumstances.
9. Leadership is neither bossism nor synonymous with; management.

Leadership Functions:
Following are the important functions of a leader:
1. Setting Goals:
A leader is expected to perform creative function of laying out goals and policies to
persuade the subordinates to work with zeal and confidence.

2. Organizing:
The second function of a leader is to create and shape the organization on scientific
lines by assigning roles appropriate to individual abilities with the view to make its
various components to operate sensitively towards the achievement of enterprise goals.

3. Initiating Action:
The next function of a leader is to take the initiative in all matters of interest to the
group. He should not depend upon others for decision and judgment. He should float
new ideas and his decisions should reflect original thinking.

4. Co-Ordination:
A leader has to reconcile the interests of the individual members of the group with that
of the organization. He has to ensure voluntary co-operation from the group in realizing
the common objectives.

5. Direction and Motivation:

It is the primary function of a leader to guide and direct his group and motivate people
to do their best in the achievement of desired goals, he should build up confidence and
zeal in the work group.

6. Link between Management and Workers:

A leader works as a necessary link between the management and the workers. He
interprets the policies and programmes of the management to his subordinates and
represents the subordinates’ interests before the management. He can prove effective
only when he can act as the true guardian of the interests of his subordinates.

Importance of Leadership in Management:

The importance of leadership in any group activity is too obvious to be over-
emphasized. Wherever, there is an organized group of people working towards a
common goal, some type leadership becomes essential. Lawrence A. Appley remarked
that the time had come to substitute the word leadership for management.

Although the concern for leadership is as old as recorded history, it has become more
acute during the last few decades due to the complexities of production methods, high
degree of specialization and social changes in the modern organizations. A good
dynamic leader is compared to a ‘dynamo generating energy’ that charges and activates
the entire group in such a way that near miracles may be achieved. The success of an
enterprise depends to a great extent, upon effective leadership.’

The importance of leadership can be highlighted from the following:

1. It Improves Motivation and Morale:
Through dynamic leadership managers can improve motivation and morale of their
subordinates. A good leader influences the behaviour of an individual in such a manner
that he voluntarily works towards the achievement of enterprise goals.
2. It Acts as a Motive Power to Group Efforts:
Leadership serves as a motive power to group efforts. It leads the group to a higher
level of performance through its persistent efforts and impact on human relations.

3. It Acts as an Aid to Authority:

The use of authority alone cannot always bring the desired results. Leadership acts as
an aid to authority by influencing, inspiring and initiating action.

4. It is Needed at All Levels of Management:

Leadership plays a pivotal role at all levels of management because in the absence of
effective leadership no management can achieve the desired results.

5. It Rectifies the Imperfectness of the Formal Organisational Relationships:

No organizational structure can provide all types of relationships and people with
common interest may work beyond the confines of formal relationships. Such informal
relationships are more effective in controlling and regulating the behaviour of the
subordinates. Effective leadership uses there informal relationships to accomplish the
enterprise goals.

6. It Provides the Basis for Co-operation:

Effective leadership increases the understanding between the subordinates and the
management and promotes co-operation among them.

Process or Techniques of Effective Leadership:

The following are the techniques of effective leadership:
1. The leader should consult the group in framing the policies and lines of action and in
initiating any radical change therein.
2. He should attempt to develop voluntary co-operation from his subordinates in
realizing common objectives.
3. He should exercise authority whenever necessary to implement the policies. He
should give clear, complete and intelligible instructions to his subordinates.
4. He should build-up confidence and zeal in his followers.
5. He should listen to his subordinates properly and appreciate their feelings.
6. He should communicate effectively.
7. He should follow the principle of motivation.

Qualities of a Good Leader:

A successful leader secures desired behaviour from his followers. It depends upon the
quality of leadership he is able to provide. A leader to be effective must possess certain
basic qualities. A number of authors have mentioned different qualities which a person
should possess to be a good leader.

Some of the qualities of a good leader are as follows:

1. Good personality.
2. Emotional stability.
3. Sound education and professional competence.
4. Initiatives and creative thinking.
5. Sense of purpose and responsibility.
6. Ability to guide and teach.
7. Good understanding and sound judgment.
8. Communicating skill.
9. Sociable.
10. Objective and flexible approach.
11. Honesty and integrity of character.
12. Self-confidence, diligence and industry.
13. Courage to accept responsibility

Motivation: The need – want - satisfaction chain.

As consumers begin to identify and feel that a need exists, there occurs an inner urge or
a drive towards taking an action so as fulfil the need. This inner urge and the impelling
action to put in efforts to fulfill the need and attempt at satisfaction is referred to as
motivation. In terms of consumer behavior, when a consumer realizes that there exists a
state of felt deficiency (need), it gets translated into a variety of options (wants) from
which a consumer may chose. The need/want lead to a state of tension in the mind of
the consumer and an urge to act (buy/consume), so as to fulfill the need or want. This
manifests itself into a goal, which is actually the behavior (act to purchase or consume),
which puts an end to the urge to act. The entire action may ultimately lead to feelings of
satisfaction, neutrality or dissatisfaction. Thus, the study of consumption behavior
begins with when an individual recognizes a need and begins to take action to satisfy it.
What he desires is an ultimate goal i.e. satisfaction of a need/want.
 UNIT VII
CONTROLLING
Nature and purpose of controlling, steps in controlling/ process of
controlling, types of controls, Requirements of effective control
systems.

An effective organization is one where managers understand how to manage and

control. The objective of control as a concept and process is to help motivate and direct
employees in their roles. Understanding managerial control process and systems is
essential for the long- term effectiveness of an organization.
Without enough control systems in place, confusion and chaos can overwhelm an
organization. However, if control systems are “choking” an organization, the
organization will suffer from erosion of innovation and entrepreneurship.

Concept of Control:
The term control has different connotations depending upon the context of the use of
the term. In manufacturing it refers to a Device or mechanism installed or instituted to
guide or regulates the activities or operation of an apparatus, machine, person, or
system; in law it refers to controlling interest and in management as an authority to
order and manage the workings and management of an entity.
Control is a management process to aim at achieving defined goals within an
established timetable and comprises of three components: (1) setting standards, (2)
measuring actual performance, and (3) taking corrective action.

Characteristics of Control:
Following characteristics of control can be identified:

1. Control is a Managerial Process:

Management process comprises of five functions, viz., planning, organizing, staffing,
directing and controlling. Thus, control is part of the process of management.
2. Control is forward looking:
Whatever has happened has happened, and the manager can take corrective action only
of the future operations. Past is relevant to suggest what has gone wrong and how to
correct the future.
3. Control exists at each level of Organization:
Anyone who is a manager, has to involve into control – may be Chairman, Managing
Director, CEO, Departmental head, or first line manager. However, at every level the
control will differ – top management would be involved in strategic control, middle
management into tactical control and lower level into operational control.
4. Control is a Continuous Process:
Controlling is not the last function of management, but it is a continuous process.
Control is not a one-time activity, but a continuous process. The process of setting the
standards needs constant analysis and revision depending upon external forces, plans,
and internal performance.
5. Control is closely linked with Planning:
Planning and controlling are closely linked. The two are rightly called as ‘Siamese twins’
of management. “Every objective, every goal, every policy, every procedure and every
budget become standard against which actual performance is compared.
Planning sets the ship’s course and controlling keeps it on course. When the ship begins
to veer off the course, the navigator notices it and recommends a new heading designed
to return the ship to its proper course. Once control process is over its findings are
integrated into planning to prescribe new standards for control.
6. Purpose of Controlling is Goal Oriented and hence Positive:
Control is there because without it the business may go off the track. The controlling has
positive purpose both for the organization (to make things happen) and individuals (to
give up a part of their independence for the attainment of organizational goals).

Process of Control:
Following are the steps involved into the process of control:
1. Establish the Standards:
Within an organization’s overall strategic plan, managers define goals for organizational
departments in specific, precise, operational terms that include standards of
performance to compare with organizational activities. However, for some of the
activities the standards cannot be specific and precise.
Standards, against which actual performance will be compared, may be derived from
past experience, statistical methods and benchmarking (based upon best industry
practices). As far as possible, the standards are developed bilaterally rather than top
management deciding unilaterally, keeping in view the organization’s goals.
Standards may be tangible (clear, concrete, specific, and generally measurable) –
numerical standards, monetary, physical, and time standards; and intangible (relating
to human characteristics) – desirable attitudes, high morale, ethics, and cooperation.
2. Measure Actual Performance:
Most organizations prepare formal reports of performance measurements both
quantitative and qualitative (where quantification is not possible) that the managers
review regularly. These measurements should be related to the standards set in the first
step of the control process.
For example, if sales growth is a target, the organization should have a means of
gathering and reporting sales data. Data can be collected through personal observation
(through management by walking around the place where things are happening),
statistical reports (made possible by computers), oral reporting (through conferencing,
one-to-one meeting, or telephone calls), written reporting (comprehensive and concise,
accounting information – normally a combination of all. To be of use, the information
flow should be regular and timely.

3. Compare Performance with the Standards:

This step compares actual activities to performance standards. When managers read
computer reports or walk through their plants, they identify whether actual
performance meets, exceeds, or falls short of standards.
Typically, performance reports simplify such comparison by placing the performance
standards for the reporting period alongside the actual performance for the same
period and by computing the variance—that is, the difference between each actual
amount and the associated standard.
The manager must know of the standard permitted variation (both positive and
negative). Management by exception is most appropriate and practical to keep
insignificant deviations away. Timetable for the comparison depends upon many factors
including importance and complexity attached with importance and complexity.

4. Take Corrective Action and Reinforcement of Successes:

When performance deviates from standards, managers must determine what changes, if
any, are necessary and how to apply them. In the productivity and quality-centered
environment, workers and managers are often empowered to evaluate their own work.
After the evaluator determines the cause or causes of deviation, he or she can take the
fourth step— corrective action.
The corrective action may be to maintain status quo (reinforcing successes), correcting
the deviation, or changing standards. The most effective course may be prescribed by
policies or may be best left up to employees’ judgment and initiative. The corrective
action may be immediate or basic (modifying the standards themselves).

Importance of Control:

1. Guides the Management in Achieving Pre-determined Goals:

The continuous flow of information about projects keeps the long range of planning on
the right track. It helps in taking corrective actions in future if the performance is not up
to the mark.

2. Ensures Effective Use of Scarce and Valuable Resources:

The control system helps in improving organizational efficiency. Various control devices
act as motivators to managers. The performance of every person is regularly monitored
and any deficiency if present is corrected at the earliest.
Controls put psychological pressure on persons in the organization. On the other hand
control also enables management to decide whether employees are doing right things.
3. Facilitates Coordination:
Control helps in coordination of activities through unity of action. Every manager will
try to coordinate the activities of his subordinates in order to achieve departmental
goals.
Similarly the chief executive also coordinates the functioning of various departments.
The control acts as a check on the performance and proper results are achieved only
when activities are coordinated.
4. Leads to Delegation and Decentralization of Authority:
A decision about follow-up action is also facilitated. Control makes delegation
easier/better. Decentralization of authority is necessary in big enterprises. The
management cannot delegate authority without ensuring proper control.
The targets or goals of various departments are used as a control technique. Various
control techniques like budgeting, cost control; pre action approvals etc. allow
decentralization without losing control over activities.

5. Spares Top Management to Concentrate on Policy Making:

For control processes management’s attention is not required every now and then. The
management by exception enables top management to concentrate on policy
formulation.

Why do people Oppose Control?

Many people are averse to the concept of control for the following reasons:
(i) New, more “organic” forms of organizations (self-organizing organizations, self-
managed teams, network organizations, etc.) allow organizations to be more responsive
and adaptable in today’s rapidly changing world. These forms also cultivate
empowerment among employees, much more than the hierarchical, rigidly structured
organizations of the past.

(ii) Many people assert that as the nature of organizations has changed so must the
nature of management control. Some people go so far as to claim that management
shouldn’t exercise any form of control whatsoever.
They claim that management should exist to support employee’s efforts to be fully
productive members of organizations and communities – therefore, any form of control
is completely counterproductive to management and employees.

(iii) Some people even react strongly against the phrase “management control”. The
word itself has a negative connotation, e.g., it can sound dominating, coercive and
heavy-handed. It seems that writers of management literature now prefer use of the
term “coordinating” rather than “controlling”.

(iv) People also oppose controls as they are thought of decreasing autonomy, stifling
creativity, threatening security, and perpetuating oppression. This may lead to change
in expertise and power structure, and social structure in the organisation.

Types of Control:
Controls can be numerous in kind. These may be classified on the basis of (a) timing, (b)
designing systems, (c) management levels, and (d) Responsibility
On the basis of timing:
Control can focus on events before, during, or after a process. For example, a local
automobile dealer can focus on activities before, during, or after sales of new cars. Such
controls may be respectively called as Preventive, Detective, and Corrective.
On this basis the control may be:
(i) Feed forward Control
(ii) Concurrent Control
(iii) Feedback Control

1. Feed forward Control:

The objective of feed forward control or preliminary control is to anticipate the likely
problems and to exercise control even before the activity has started or problem has
occurred or been reported. It is future directed.
This kind of control is very popular in airlines. They go in for preventive maintenance
activities to detect and prevent structural damage, which may result in disaster. These
controls are evident in the selection and hiring of new employees. It helps in taking
action beforehand.
In case of feedback control, one relies on historical data, which will come after the
activity has been performed. This means information is late and the rectification is not
possible. One can make correction only for future activities.
That means whatever wrong has been done is done, and it cannot be undone. Though,
future-directed control is largely disregarded in practice, because managers have been
excessively dependent on accounting and statistical data for the purpose of control. In
the absence of any means of looking forward, reference to history is considered better
than no reference at all.
However, the concept of feed forwarding has been applied now and then. One common
way managers have practised it is through careful and repeated forecasts using the
latest available information, comparing what is desired with the forecasts, and
introducing program changes so that forecasts can be made more promising.

2. Concurrent Control:
Concurrent control monitors ongoing employee activity to ensure consistency with
quality standards takes place while an activity is on or in progress. It involves the
regulation of ongoing activities that are part of transformation process to ensure that
they conform to organizational standards.
The technique of direct supervision is the best-known form of concurrent control.
Concurrent control is designed to ensure that employees’ activities produce the correct
results and to correct the problems, if any, before they become costly.
In case of computer typing, if the spelling is wrong or construction is incorrect, the
programme immediately alerts the user. Many manufacturing operations include
devices that measure whether the items being produced meet quality standards.
Since concurrent control involves regulating ongoing tasks, it requires a complete
understanding of the specific tasks involved and their relationship to the desired and
product.
Concurrent control sometimes is called steering, screening or yes-no control, because it
often involves checkpoints at which decisions are made about whether to continue
progress, take corrective action, or stop work altogether on products or services.

3. Feedback Control:
The control takes place after the job is over. Corrective action is taken after analysing
variances with the planned standards at the end of the activity. It is also known as ‘post
action control’, because feedback control is exercised after the event has taken place.
Such control is used when feed forward or concurrent is not possible or very costly; or
when exact processes involved in performing a work is difficult to specify in advance.
The twin advantages of feedback control are that meaningful information is received
with regard to planning efforts, and feedback control enhances employee motivation.

On the basis of designing Control Systems:

Three approaches may be followed while designing control systems, viz., Market
Control, Bureaucratic Control, and Clan Control. However, most organisations do not
depend only on just one of them.

1. Market Control:
Control is based upon market mechanisms of competitive activities in terms of price
and market share. Different divisions are converted into profit centres and their
performance is evaluated by segmental top line (turnover), bottom line (profit) and the
market share.
Using market control will mean that the managers in future will allocate resources or
create departments or other activities in line with the market forces.

2. Bureaucratic Control:
Bureaucratic control focuses on authority, rule and regulations, procedures and policies.
Most of the public sector units in India go in for bureaucratic control.
If they do not go by the rulebook, the legislative committees and the ministries under
whom they work will reprimand them. In a hospital no medicine can be used unless the
prescription is there and it is recorded in the issue register, even if the patient may die
in between.

3. Clan Control:
The control systems are designed in a way that give way to shared vision, shared values,
norms, traditions and beliefs, etc., part of the organisational culture.
It is not based upon hierarchical mechanisms, but work-related and performance
measures. This kind of control is most suitable for the organisations which use team
style of work groups and where technology changes very fast.
On the basis of Levels:
People at different level have different planning responsibilities, so do they undertake
controlling. On the basis of levels controls, can be categorised as Operational, Structural,
Tactical, and Strategic.

1. Operational Control:
Its focus remains upon the processes used by the organisation for transforming the
inputs (resources) into outputs (products/services). Operational controls are used at
the lower management. It is exercised almost every day. Quality control, financial
controls are part of operational controls.

2. Structural Control:
Are the different elements of organisation structure serving their intended aims? Is
there overstaffing? Is the ratio of staff to line increasing? Necessary action is to be
undertaken.
Two important forms of structural control can be bureaucratic control and clan control,
about which we have already talked. Structural control is exercised by top and middle
management.

3. Tactical Control:
Since tactical control deals with the departmental objectives, the controls are largely
exercised by middle management levels.

4. Strategic Control:
Strategic controls are early warning systems. Strategic control is the process to
determine whether the effectiveness of a corporate, business and functional strategies
are successful in helping organisations to meet its goals. Strategic controls are exercised
by top level management.

On the basis of Responsibility:

Who has the responsibility of controlling? The responsibility may rest with the person
executing the things or with the supervisor or manager. This way control may be
internal and external.
Internal control permits highly motivated people to exercise self-discipline. External
control means that the thread of control is in the hands of supervisor or manager and
control is exercised through formal systems.

Requirements of Effective Control System:

A control system is not an automatic phenomenon but deliberately created. Though
different organisations may design their control systems according to their unique and
special characteristics or conditions, yet in designing a good and effective control
system the following basic requirements must be kept in view:

1. Focus on Objectives and Needs:

The effective control system should emphasise on attainment of organizational
objectives. It should function in harmony with the needs of the enterprise. For example,
the personnel department may use feed forward control for recruiting a new employee,
and concurrent control for training.
At the shop level, control has to be easy, but more sophisticated and broad ranging
controls may be developed for higher level managers. Thus, controls should be tailored
to plans and positions.

2. Immediate Warning and Timely Action:

Rapid reporting of variations is at the core of control. An ideal control system could
detect, not create bottlenecks and report significant deviation as promptly as possible
so that necessary corrective action may be taken well in time. This needs an efficient
system of appraisal and timely flow of information.
3. Indicative, Suggestive as well as corrective:
Controls should not only be able to point to the deviations, but they should also suggest
corrective action that is supposed to check the recurrence of variations or problems in
future.
Control is justified only if indicated or experienced deviations from plans are corrected
through appropriate planning, organizing, staffing and directing. Control should also
lead to making valuable forecasts to the managers so that they become aware of the
problems likely to confront them in the future.

4. Understandable, Objective, and Economical:

Controls should be simple and easy to understand, standards of performance are
quantified to appear unbiased, and specific tools and techniques should be
comprehensive, understandable, and economical for the managers.
They must know all the details and critical points in the control device as well as its
usefulness. If developed and complex statistical and mathematical techniques are
adopted, then proper training has to be imparted to managers.
Standards should be determined based on facts and participation. Effective control
systems must answer questions such as, “How much does it cost?” “What will it save?”
or “What are the returns on the investment?”
The benefits of controls should outweigh the costs. Expensive and elaborate control
systems will not suit, for example to small enterprise.

5. Focus on Functions and Factors:

Control should emphasise the functions, such as production, marketing, finance, human
resources, etc and focus on four factors – quality, quantity, timely use and costs. Not
one, but multiple controls should be adopted.
6. Strategic Points Control:
Control should be selective and concentrate on key result areas of the company. Every
detail or thing cannot and is not to be controlled in order to save time, cost and effort.
Certain strategic, critical or vital points must be identified along with the expectations at
those points where failures cannot be tolerated and appropriate control devices should
be designed and imposed at those stages.
Controls are applied where failure cannot be tolerated or where costs cannot exceed a
certain amount. The critical points include all the areas of an organization’s operations
that directly affect the success of its key operations.

7. Flexibility:
Control must not become ends in themselves. It must be environment friendly and be
able to make modifications or revisions necessitated by the rapidly changing and
complex business environment. Flexibility in control system is generally achieved by
the use of alternative plans or flexible budgets.

8. Attention to Human Factor:

Excess control causes corruption. It should not arouse negative reactions but positive
feelings among people through focus on work, not on people. The aim of control should
be to create self-control and creativity among members through enmeshing it in the
organisational culture. Employee involvement in the design of controls can increase
acceptance.

9. Suitability:
Controls have to be consistent with the organization structure, where the responsibility
for action lies, position, competence, and needs of the individuals who have to interpret
the control measures and exercise control. The higher the quality of managers and their
subordinates, the less will be the need for indirect controls.

Control Techniques:
Many techniques have been developed to control the activities in management. The list
is very long, and it is difficult to describe them all.
Some of the important techniques are:

Financial Control:
Finance is related with mobilization of funds and their utilization and the return
on them. Financial control is exercised through the following:
1. Financial Statements:
Income statement (telling about expenses, segmental incomes, overall income and
expenses, and the net profit/loss), and Balance Sheet (shows the net worth at a single
point of time and the extent to which the debt or equity finance the assets)
2. Financial Audits:
Financial audits, either internal or external are conducted to ensure that the financial
management is done in line with the generally accepted policies, procedures, laws, and
ethical guidelines. Audits may be internal (by Organisation’s own staff), external
(statutory audit by chartered accountants), and management audit (by experts).
3. Ratio Analysis:
Ratio analysis monitors liquidity, profitability, debt, and activity related aspects.
4. Budgetary Controls:
Budgetary control is the process of constructing budgets, comparing actual
performance with the budget one and revising budgets or activities in the light of
changed conditions.
Budgetary control is as such not related only to finance area, but all functional areas do
take help of budgetary control. Budgets help not only in planning but also help to keep a
tab on overall spending.
Budgeting may be top-down (managers prepare the budget and ask subordinates to
use); bottom-up (figures come from lower levels and adjusted at upper levels); zero-
based (justifying allocation of funds on the basis of activities or goals); and flexible
budgeting (varying standards and varying allocations).
5. Break-even Analysis:
It is a tool of profit planning and deals with cost-volume-profit relationships.
6. Accounting:
Accounting includes responsibility accounting, cost accounting, standard cost approach,
direct costing, and marginal costing.

Marketing Control:
In the field of marketing, to see that customer gets right product at the right price at the
right place and through right communication, the control is exercised through the
following:
Market Research:
It is to assess customers’ needs, expectations and the delivery; and the competitive
scenario.
Test Marketing:
To assess consumer acceptance of a new product, a small-scale marketing is done. HUL
uses Chennai for most of its test marketing.
Marketing Statistics:
Marketing managers control through marketing ratios and other statistics.

Human resource control:

Human resource control is required to have a check on the quality of new personnel and
also to monitor performances of existing employees so as to determine firm’s overall
effectiveness.
Goal setting, instituting policies and procedures to guide them are to help them.
Common controls include performance appraisals, disciplinary programmes,
observations, and development assessments.

Information Control:
All organizations have confidential and sensitive information to be kept secret. How to
control access to computer databases is very important. This has become a key
contemporary issue in control. Organizations keep a watch on employee’s computer
usage in general and internet in particular.

Production Control:
To ensure quality production in right quantity at right time economically production
controls are required. Two of the important techniques include: Inventory control (ABC
Analysis, Economic Order Quantity, Just-in time inventory control), and quality control
(through inspection, statistical quality control).

Project Control:
Network analysis is most suitable for the projects which are not routine in minimizing
cost and completing project well in time. Network analysis makes use of two techniques
– Programme Evaluation and Review Technique (PERT), and Critical Path Method
(CPM).