KARTHIK NEERADI's

BUSINESS
ORGANIZATION
MANAGEMENT
For
B.Com - I Year Students
(All Streams)

As per the New Syllabus

(W.e.f 2020-21)

SRK DEGREE & P.G. COLLEGE - KAMAREDDY

 BUSINESS ORGANIZATION MANAGEMENT
UNIT -I
Introduction and forms of business organization

Basic concepts
What Is a Business?

A business is defined as an organization or enterprising entity engaged in commercial, industrial, or

professional activities. Businesses can be for-profit entities or they can be non-profit organizations that
operate to fulfill a charitable mission or further a social cause.

The term "business" also refers to the organized efforts and activities of individuals to produce and sell
goods and services for profit. Businesses range in scale from a sole proprietorship to an international
corporation. Several lines of theory are engaged with understanding business administration including
organizational behavior, organization theory, and strategic management.

What is Trade?

Trade is a basic economic concept involving the buying and selling of goods and services, with
compensation paid by a buyer to a seller, or the exchange of goods or services between parties. Trade can
take place within an economy between producers and consumers. International trade allows countries to
expand markets for both goods and services that otherwise may not have been available to it. It is the reason
why an American consumer can pick between a Japanese, German, or American car. As a result of
international trade, the market contains greater competition and therefore, more competitive prices, which
brings a cheaper product home to the consumer.

What Is an Industry?

An industry is a group of companies that are related based on their primary business activities. In modern
economies, there are dozens of industry classifications, which are typically grouped into larger categories
called sectors.

Individual companies are generally classified into an industry based on their largest sources of revenue. For
example, while an automobile manufacturer might have a financing division that contributes 10% to the
firm's overall revenues, the company would be classified in the automaker industry by most classification
systems.

What is Commerce?

Commerce is the conduct of trade among economic agents. Generally, commerce refers to the exchange of
goods, services or something of value, between businesses or entities. From a broad perspective, nations are
concerned with managing commerce in a way that enhances the well-being of citizens, by providing jobs
and producing beneficial goods and services.

Understand the concept of Commerce

Commerce normally refers to the macroeconomic purchase and sale of goods and services by large
organizations at scale. The sale or purchase of a single item by a consumer is defined as a transaction, while
commerce refers to all transactions related to the purchase and sale of that item in an economy. Most
commerce is conducted internationally and represents the buying and selling of goods between nations.

When properly managed, commercial activity can quickly enhance the standard of living in a nation and
increase its standing in the world. However, when commerce is allowed to run unregulated, large businesses
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can become too powerful and impose negative externalities on citizens for the benefit of the business
owners. Many nations have established governmental agencies responsible for promoting and managing
commerce, such as the Department of Commerce.

Large organizations with hundreds of countries as members also regulate commerce across borders. For
example, the World Trade Organization (WTO) and its predecessor the General Agreement on Tariffs and
Trade (GATT) established rules for tariffs relating to import and export of goods between countries. The
rules are meant to facilitate commerce and establish a level playing field for member countries.

Characteristics of a business: (Nature/Features)

1. Economic activity:

Business is an economic activity of production and distribution of goods and services. It provides
employment opportunities in different sectors like banking, insurance, transport, industries, trade etc. it is an
economic activity corned with creation of utilities for the satisfaction of human wants.
It provides a source of income to the society. Business results into generation of employment opportunities
thereby leading to growth of the economy. It brings about industrial and economic development of the
country.

2. Buying and Selling:

The basic activity of any business is trading. The business involves buying of raw material, plants and
machinery, stationary, property etc. On the other hand, it sells the finished products to the consumers,
wholesaler, retailer etc. Business makes available various goods and services to the different sections of the
society.

3. Continuous process:

Business is not a single time activity. It is a continuous process of production and distribution of goods and
services. A single transaction of trade cannot be termed as a business. A business should be conducted
regularly in order to grow and gain regular returns.
Business should continuously involve in research and developmental activities to gain competitive
advantage. A continuous improvement strategy helps to increase profitability of the business firm.

4. Profit Motive:

Profit is an indicator of success and failure of business. It is the difference between income and expenses of
the business. The primary goal of a business is usually to obtain the highest possible level of profit through
the production and sale of goods and services. It is a return on investment. Profit acts as a driving force
behind all business activities.
Profit is required for survival, growth and expansion of the business. It is clear that every business operates
to earn profit. Business has many goals but profit making is the primary goal of every business. It is required
to create economic growth.

5. Risk and Uncertainties:

Risk is defined as the effect of uncertainty arising on the objectives of the business. Risk is associated with
every business. Business is exposed to two types of risk, Insurable and Non-insurable. Insurable risk is
predictable.
Predictable factors are controllable to some extent, such as:

a) Taxes
b) Change in the volume of expected sales
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c) Cost of supplies and equipment
d) Overhead costs
e) Salaries
f) Cost of goods and services offered
Unpredictable factors include:
a) Changes in trends and tastes of customers.
b) Impact of the local economy on customer base.
c) Any unexpected action taken by your competitors.

The calculation and management of the risk is vital to ensure the success of a business firm. Insurance and
Risk management helps in minimizing the risk associated with the business.

6. Creative and Dynamic:

Modern business is creative and dynamic in nature. Business firm has to come out with creative ideas,
approaches and concepts for production and distribution of goods and services. It means to bring things in
fresh, new and inventive way.
One has to be innovative because the business operates under constantly changing economic, social and
technological environment. Business should also come out with new products to satisfy the growing needs
of the consumers.

7. Customer satisfaction:

The phase of business has changed from traditional concept to modern concept. Now a day, business adopts
a consumer-oriented approach. Customer satisfaction is the ultimate aim of all economic activities.
Modern business believes in satisfying the customers by providing quality product at a reasonable price. It
emphasize not only on profit but also on customer satisfaction. Consumers are satisfied only when they get
real value for their purchase.

The purpose of the business is to create and retain the customers. The ability to identify and satisfy the
customers is the prime ingredient for the business success.

8. Social Activity:

Business is a socio-economic activity. Both business and society are interdependent. Modern business runs
in the area of social responsibility.
Business has some responsibility towards the society and in turn it needs the support of various social
groups like investors, employees, customers, creditors etc. by making goods available to various sections of
the society, business performs an important social function and meets social needs. Business needs support
of different section of the society for its proper functioning.

9. Government control:

Business organizations are subject to government control. They have to follow certain rules and regulations
enacted by the government. Government ensures that the business is conducted for social good by keeping
effective supervision and control by enacting and amending laws and rules from time to time.
Some important acts framed by the government include:

i. The Competition Act, 2002

ii. Foreign Exchange Management Act, 1999
iii. The Environment Act, 1986
iv. Indian Companies Act, 1956
v. Consumer protection Act

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10. Optimum utilization of resources:

Business facilitates optimum utilization of countries material and non-material resources and achieves
economic progress. The scarce resources are brought to its fullest use for concentrating economic wealth and
satisfying the needs and wants of the consumers.

5 Most Important Objectives of Business

Objectives of business may classified are as follows:

1. Economic objectives, 2. Social objectives, 3. Human objectives, 4. National objectives, 5. Global
objectives.

Objectives represent the purpose for which an organization has been started. Objectives guide and govern
the actions and behavior of businessmen.
According to William F. Glueck, “Objectives are those ends which the organization seeks to achieve
through its existence and operations.”

Another term for objectives is goals. Logically, objectives ought to specify ends or results sought that are
derived from and congruent with the mission the organization has set itself Attempts to set objectives should
always be guided by references to the mission they are meant to fulfill.

Business objectives are something which a business organization wants to achieve or accomplish over a
specified period of time. These may be to earn profit for its growth and development, to provide quality
goods to its customers, to protect the environment, etc.

Classification of Objectives of Business:

It is generally believed that a business has a single objective. That is, to make profit. But it cannot be the
only objective of business. While pursuing the objective of earning profit, business units do keep the interest
of their owners in view. However, any business unit cannot ignore the interests of its employees, customers,
the community, as well as the interests of society as a whole.

For instance, no business can prosper in the long run unless fair wages are paid to the employees and
customer satisfaction is given due importance. Again a business unit can prosper only if it enjoys the support
and goodwill of people in general. Business objectives also need to be aimed at contributing to national
goals and aspirations as well as towards international well-being. Thus, the objectives of business may be
classified as;
Now, we shall see objectives in detail.

A. Economic Objectives:

Economic objectives of business refer to the objective of earning profit and also other objectives that are
necessary to be pursued to achieve the profit objective, which include, creation of customers, regular
innovations and best possible use of available resources.

(i) Profit Earning:

Profit is the lifeblood of business, without which no business can survive in a competitive market. In fact
profit making is the primary objective for which a business unit is brought into existence. Profits must be
earned to ensure the survival of business, its growth and expansion over time.

Profits help businessmen not only to earn their living but also to expand their business activities by
reinvesting a part of the profits. In order to achieve this primary objective, certain other objectives are also
necessary to be pursued by business, which are as follows:
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(a) Creation of customers: A business unit cannot survive unless there are customers to buy the products
and services. Again a businessman can earn profits only when he/she provides quality goods and services at
a reasonable price. For this it needs to attract more customers for its existing as well as new products. This is
achieved with the help of various marketing activities.

(b) Regular innovations: Innovation means changes, which bring about improvement in products, process
of production and distribution of goods. Business units, through innovation, are able to reduce cost by
adopting better methods of production and also increase their sales by attracting more customers because of
improved products.

Reduction in cost and increase in sales gives more profit to the businessmen. Use of power looms in place of
handlooms, use of tractors in place of hand implements in farms etc. are all the results of innovation.

(c) Best possible use of resources: As we all know, to run any business we must have sufficient capital or
funds. The amount of capital may be used to buy machinery, raw materials, employ men and have cash to
meet day-to-day expenses. Thus, business activities require various resources like men, materials, money
and machines.

The availability of these resources is usually limited. Thus, every business should try to make the best
possible use of these resources. Employing efficient workers. Making full use of machines and minimizing
wastage of raw materials, can achieve this objective.

B. Social Objectives:

Social objective are those objectives of business, which are desired to be achieved for the benefit of the
society. Since business operates in a society by utilizing its scarce resources, the society expects something
in return for its welfare. No activity of the business should be aimed at giving any kind of trouble to the
society.

If business activities lead to socially harmful effects, there is bound to be public reaction against the business
sooner or later. Social objectives of business include production and supply of quality goods and services,
adoption of fair trade practices and contribution to the general welfare of society and provision of welfare
amenities.

(i) Production and Supply of Quality Goods and Services: Since the business utilizes the various
resources of the society, the society expects to get quality goods and services from the business he objective
of business should be to produce better quality goods and supply them at the right time and at a right price It
is not desirable on the part of the businessman to supply adulterated or inferior goods which cause injuries to
the customers.

They should charge the price according to the quality of e goods and services provided to the society. Again,
the customers also expect timely supply of all their requirements. So it is important for every business to
supply those goods and services on a regular basis.

(ii) Adoption of Fair Trade Practices: In every society, activities such as hoarding, black- marketing and
over-charging are considered undesirable. Besides, misleading advertisements often give a false impression
about the quality of products. Such advertisements deceive the customers and the businessmen use them for
the sake of making large profits.

This is an unfair trade practice. The business unit must not create artificial scarcity of essential goods or
raise prices for the sake of earning more profits. All these activities earn a bad name and sometimes make

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the businessmen liable for penalty and even imprisonment under the law. Therefore, the objective of
business should be to adopt fair trade practices for the welfare of the consumers as well as the society.

(iii) Contribution to the General Welfare of the Society: Business units should work for the general
welfare and upliftment of the society. This is possible through running of schools and colleges better
education opening of vocational training centers to train the people to earn their livelihood, establishing
hospitals for medical facilities and providing recreational facilities for the general public like parks, sports
complexes etc.

С. Human Objectives:

Human objectives refer to the objectives aimed at the well-being as well as fulfillment of expectations of
employees as also of people who are disabled, handicapped and deprived of proper education and training.
The human objectives of business may thus include economic well-being of the employees, social and
psychological satisfaction of employees and development of human resources.

(i) Economic Well-being of the Employees: In business employees must be provided with tan
remuneration and incentive for performance benefits of provident fund, pension and other amenities like
medical facilities, housing facilities etc. By this they feel more satisfied at work and contribute more for the
business.

(ii) Social and Psychological Satisfaction of Employees: It is the duty of business units to provide social
and psychological satisfaction to their employees. This is possible by making the job interesting and
challenging, putting the right person in the right job and reducing the monotony of work Opportunities for
promotion and advancement in career should also be provided to the employees.

Further, grievances of employees should be given prompt attention and their suggestions should be
considered seriously when decisions are made. If employees are happy and satisfied they can put then best
efforts in work.

(iii) Development of Human Resources: Employees as human beings always want to grow. Their growth
requires proper training as well as development. Business can prosper if the people employed can improve
their skills and develop their abilities and competencies in course of time. Thus, it is important that business
should arrange training and development programmes for its employees.

(iv) Well-being of Socially and Economically Backward People: Business units being inseparable parts of
society should help backward classes and also people those are physically and mentally challenged. This can
be done in many ways. For instance, vocational training programme may be arranged to improve the earning
capacity of backward people in the community. While recruiting its staff, business should give preference to
physically and mentally challenged persons. Business units can also help and encourage meritorious students
by awarding scholarships for higher studies.

D. National Objectives:

Being an important part of the country, every business must have the objective of fulfilling national goals
and aspirations. The goal of the country may be to provide employment opportunity to its citizen, earn
revenue for its exchequer, become self-sufficient in production of goods and services, promote social justice,
etc. Business activities should be conducted keeping these goals of the country in mind, which may be called
national objectives of business.

(i)Creation of Employment: One of the important national objectives of business is to create opportunities
for gainful employment of people. This can be achieved by establishing new business units, expanding
markets, widening distribution channels, etc.

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(ii) Promotion of Social Justice:
As a responsible citizen, a businessman is expected to provide equal opportunities to all persons with whom
he/she deals. He/ She is also expected to provide equal opportunities to all the employees to work and
progress. Towards this objective special attention must be paid to weaker and backward sections of the
society.

(iii) Production According to National Priority:

Business units should produce and supply goods in accordance with the priorities laid down in the plans and
policies of the government. One of the national objectives of business in our country should be to increase
the production and supply of essential goods at reasonable prices.

(iv) Contribute to the Revenue of the Country:

The business owners should pay their taxes and dues honestly and regularly. This will increase the revenue
of the government, which can be used for the development of the nation.

(v) Self-sufficiency and Export Promotion:

To help the country to become self-reliant, business units have the added responsibility of restricting import
of goods. Besides, every business units should aim at increasing exports and adding to the foreign exchange
reserves of the country.

E. Global Objectives:

Previously India had very restricted business relationships with other nations. There was a very rigid policy
for import and export of goods and services. But, now-a-days due to liberal economic and export-import
policy, restrictions on foreign investments have been largely abolished and duties on imported goods have
been substantially reduced.

This change has brought about an increase in competition in the market. Today because of globalisation the
entire world has become a big market. Goods produced in one country are readily available in other
countries. So, to face the competition in the global market every business has certain objectives in mind,
which may be called the global objectives. Let us learn about them.

(i) Raise General Standard of Living:

Growth of business activities across national borders makes quality goods available at reasonable prices all
over the world. The people of one country get to use similar types of goods that people in other countries are
using. This improves the standard of living of people.

(ii) Reduce Disparities among Nations:

Business should help to reduce disparities among the rich and poor nations of the world by expanding its
operation. By way of capital investment in developing as well as underdeveloped countries it can foster their
industrial and economic growth.

(iii) Make Available Globally Competitive Goods and Services:

Business should produce goods and services which are globally competitive and have huge demand in
foreign markets. This will improve the image of the exporting country and also earn more foreign exchange
for the country.

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FUNCTIONS OF BUSINESS ORGANIZATION

A business has to perform a number of functions in order to achieve its objectives. One of the major
functions of business produces goods from raw materials. Similarly transport
Five Functions of business Organization

1. Organizing Function:

One of the main functions of a business is organizing function. Man, machine, materials, and money
are essential factors for any business. organizing function collects and coordinates all the necessary factors
of the business. Proper organizing function is helpful in the smooth running of the business and helps to
achieve its objectives.

2 .Financing Function:

Finance is the life-blood and back bone of any business. The availability of factors of production
depends upon the availability of finance. So every business needs finance for its success. Therefore, under
this function of business required capital is estimated, accumulated and properly utilized. A proper capital
structure according to the size and nature of the business is essential for the success of the business.

3 .Production Function:

The production function is another important function of the business. Converting raw materials
into finished products to satisfy human wants by creating utility is known as production. Under this function,
raw materials and semi-finished products are processed and assembled to create utility. Hence the next
important function of business is to create utility for the satisfaction of the consumers by the production of
goods.

4.Marketing Function :

The function of business is not complete with the production of goods and services only. The main
goal of production is to satisfy human wants through the consumption of goods and services. Therefore,
marketing function helps to transfer goods and services from the producer to the ultimate consumer.
Marketing functions can be divided into concentrating and dispersing which include buying, selling,
transportation, storage, risk taking, market information, etc.

5 .Employment Function:

The next important function of business is to provide employment opportunities in the country. Every
business requires a large number of manpower to perform their activities. So they are helpful in solving
employment problem of the country by providing maximum employment opportunities.

Business sectors are possibly the largest employment generating sector in the world.

The success of any business depends upon the satisfaction of the consumers. Therefore, giving the priority
of consumer satisfaction the above functions of business must be conducted efficiently and effectively in
order to run a business successfully.

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CORPORATE SOCIAL RESPONSIBILITY(CSR)

CSR is a management concept whereby companies integrate social and environmental concerns in their
business operations and interactions with their stakeholders. CSR is generally understood as being the way
through which a company achieves a balance of economic, environmental and social imperatives (―Triple-
Bottom-Line- Approach‖), while at the same time addressing the expectations of shareholders and
stakeholders. In this sense it is important to draw a distinction between CSR, which can be a strategic
business management concept, and charity, sponsorships or philanthropy. Even though the latter can also
make a valuable contribution to poverty reduction, will directly enhance the reputation of a company and
strengthen its brand, the concept of CSR clearly goes beyond that.

Promoting the uptake of CSR amongst SMEs requires approaches that fit the respective needs and capacities
of these businesses, and do not adversely affect their economic viability. UNIDO based its CSR programme
on the Triple Bottom Line (TBL) Approach, which has proven to be a successful tool for SMEs in the
developing countries to assist them in meeting social and environmental standards without compromising
their competitiveness. The TBL approach is used as a framework for measuring and reporting corporate
performance against economic, social and environmental performance. It is an attempt to align private
enterprises to the goal of sustainable global development by providing them with a more comprehensive set
of working objectives than just profit alone. The perspective taken is that for an organization to be
sustainable, it must be financially secure, minimize (or ideally eliminate) its negative environmental impacts
and act in conformity with societal expectations.

Key CSR issues: environmental management, eco-efficiency, responsible sourcing, stakeholder engagement,
labor standards and working conditions, employee and community relations, social equity, gender balance,
human rights, good governance, and anti-corruption measures.

A properly implemented CSR concept can bring along a variety of competitive advantages, such as
enhanced access to capital and markets, increased sales and profits, operational cost savings, improved
productivity and quality, efficient human resource base, improved brand image and reputation, enhanced
customer loyalty, better decision making and risk management processes.

FORMS OF BUSINESS ORGANIZATIONS

Sole Proprietorship

Definition:

As the name suggests, ‗sole‘ means ‗only one‘ and ‗proprietorship‘ implies ‗ownership‘. Hence, a sole
proprietorship is a form of business organization, wherein a single person owns, manages and controls, all
the business activities and the individual who operates the business is called as a sole proprietor or, a sole
trader.

In this business unit, the sole proprietor is exclusively responsible for employing capital to commence
business, bearing all the risk of the enterprise and also for managing all the activities single-handedly. And
to do so, he/she pools and arranges various resources in an organized way, with the sole aim of earning
profit. The owner is exclusively responsible for all the decisions. All the profits earned by the business goes
to sole trader‘s pocket, and he is solely responsible for the loss suffered.

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Characteristics of Sole Proprietorship

Single Ownership: It is a type of business unit, in which a single person owns the entire business, i.e. all the
assets and property belongs to the proprietor. Accordingly, he bears all the risk associated with the
enterprise. Hence, the business ends up at his will or on his demise.

No sharing of Profit and Loss: Whatever income generated from the sole proprietorship business, it
belongs to the sole proprietor only. Consequently, he alone bears all the losses incurred by the firm. There is
no sharing of the business profits and losses.

One man‟s capital: The capital required to start the business or to continue operations, is arranged and
brought to the business by the sole proprietor only, either from his personal resources or by borrowing, i.e.
from the bank, financial institutions, friends, relatives, etc.

Unlimited Liability: This is one of the major con of sole proprietorship business, i.e. the liabilities are
unlimited. In the event of loss, the personal assets of the proprietor along with the business assets can be
utilized to discharge the dues of business.
Less Legal Formalities: The legal requirements for formation, operation and closure of a sole trader ship
business is almost nil, even it does not need registration. Although for the purpose of business, it can be
registered with local self-government, and obtain a certificate of registration.
One man Control: As only one person is in charge of all the activities, he has fully fledged control over it.
Thus, the sole proprietor takes all the decision and execute it, in the manner he wants.
There is no legal distinction between the proprietor and business; they are one and the same thing in the eyes
of the law. Sole proprietor uses his own skills, intelligence and expertise to operate the business.

Advantages of Sole proprietorship business

Single Owner

This is one of the important advantages of the sole proprietorship business. Here one person has full control
over the business. There are other persons working in these businesses but the owner is one only.

He himself manages & controls the affairs of business. He can easily take decisions without anyone‘s
consultation in less time. Sole trader can take all the decisions as per his interest.

Easy To Set Up

Sole proprietorship business is the easiest type of business to set up. These businesses need to follow very
fewer formalities. The government imposes a minimum restriction on sole proprietorship businesses.

Permits & Licenses for this business can be easily attained. A person can easily start a small business as per
his budget & can become a sole proprietor.

No Profit-Sharing

One of the major advantage of sole proprietorship is that profits are shared only by sole owner. Profit are not
shared by other persons working in an organization.

Other persons working there are paid salaries, wages & charges as per their work. However, sole owner need
to bear the full risk of business for enjoying full profit benefit.

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High Privacy

There is high secrecy in sole proprietorship type of business. In this type of business, there is only one
person who manages the whole business. All secrets & affairs of business are known to him.

There is no chance of leakage of business secrets to competitors. This privacy enables to compete easily
with competitors to attain an advantage.

Advantage Of Tax

Sole proprietorship business enjoys tax benefits. There is no possibility of double taxation like other
business in these businesses. All the earnings of the business are taxed as the personal income of the owner.
Here the whole income is taxed only once.

Less Capital Required

The fund required for starting a sole proprietorship business is very low. The sole owner can invest as per
his budget. This business requires less legal expenses & corporate tax. The business can be started either
with no employees & or small number of employees as per need. It helps in controlling expenses of the
business.

Direct Interaction With Customers

This is one of important advantage of the sole proprietorship business. This feature helps to maintain long
term & good relation with customers. Seller meets directly with their customers in this type of business. It
helps in better understanding their demand & serving them better.

Provides Employment Opportunities

Sole proprietor engages several other persons in his business. There are different persons who are working
in sole proprietorship type of businesses. These businesses, therefore, provide employment to many persons.
It helps in removing poverty & helps in improving economic conditions of country.
Social Benefits
Sole proprietor runs business & works for the welfare of society. He takes various initiatives through his
business for society like education, medical, transport etc. Whenever a new business came into existence, it
brings several benefits for the people of that area. It helps in improving skills like self-determination & self-
reliance of proprietor.

Easy In Dissolution
Sole proprietorship business is very easy to dissolve at any time. There are very less formalities to be
followed at the time of winding up of these businesses. There is a single owner in this business who need not
to consult with any other person before winding up. He runs the business as long as he wishes to.

Limitations of Sole Proprietorship

Limited Funds
This is one of the main disadvantages of a sole proprietorship business. All funds are arranged by the single
owner of the business. His sources of funds are limited that could be his relatives & friends.

Sometimes it becomes difficult for a single person to arrange the required amount of funds. If funds are not
arranged timely it could affect the business growth & functioning.

Unlimited Liability
The sole proprietor has unlimited liability for the sole proprietorship business. He alone has full
responsibility for business debts & losses. Even his personal property is used for paying off business debts.

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Due to this reason, owner hesitates from taking large risks. It avoids the owner from expanding the business
size.

Continuity Is Uncertain
The life of a sole proprietorship business is completed dependent on his sole owner life. There is no other
person to look after the business. Business is directly affected by the owner‘s death, illness & insolvency.
Therefore, the life of the sole proprietorship business is uncertain.

Lack Of Management
There is one person in sole proprietorship business who solely manages the business. He may not be a
management expert. He may lack the abilities to manage the business efficiently.

A professional manager cannot be hired due to limited financial resources. Sole proprietorship business
lacks professional management skills.

Size Is Limited
Sole proprietorship business has a very limited size. Its area of operation is limited to a small area. There is a
single person who manages the whole business.

It becomes difficult for him to manage & supervise business beyond a certain limit. It becomes one of
biggest problem in expanding the business size.

Loss In Absence
The presence of sole proprietor is must for the success of the business. Whole business responsibility lies
with a single person. His absence may lead to a loss in business. He needs to be punctual & fully careful for
his business. He can‘t take a holiday from his business.

Doubtful Secrecy
Large secrecy in sole proprietorship business is one of its biggest demerits. There is only one person to
whom the business secrets are none. This becomes the biggest problem for business in maintaining a good
credit rating in the market.

Moneylenders hesitate in providing loans to businesses. Hence acquiring proper finance become a problem
for business due to high secrecy.

Limited Business Area

Sole proprietorship business is fully controlled & managed by a single person. It is difficult for a single
person to manage the business operations after a certain limit.

Hence, it becomes difficult for a sole proprietorship to increase the business size after a certain limit. Sole
proprietorship business is carried on a small scale.

Partnership Business:
Section 4 in The Indian Partnership Act, 1932
4. Definition of ―partnership‖, ―partner‖, ―firm‖ and ―firm name‖.—‘‘Partnership‖ is 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.
Persons who have entered into partnership with one another are called individually ―partners‖ and
collectively a ―firm‖, and the name under which their business is carried on is called the ―firm name‖.

Main Features:
Based on the above definition, we can now list the main features of partnership form of business
ownership/organization in a more orderly manner as follows:

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1. More Persons:

As against proprietorship, there should be at least two persons subject to a maximum of ten persons for
banking business and twenty for non-banking business to form a partnership firm.

2. Profit and Loss Sharing:

There is an agreement among the partners to share the profits earned and losses incurred in partnership
business.

3. Contractual Relationship:

Partnership is formed by an agreement-oral or written-among the partners.

4. Existence of Lawful Business:

Partnership is formed to carry on some lawful business and share its profits or losses. If the purpose is to
carry some charitable works, for example, it is not regarded as partnership.

5. Utmost Good Faith and Honesty:

A partnership business solely rests on utmost good faith and trust among the partners.

6. Unlimited Liability:

Like proprietorship, each partner has unlimited liability in the firm. This means that if the assets of the
partnership firm fall short to meet the firm‘s obligations, the partners‘ private assets will also be used for the
purpose.

7. Restrictions on Transfer of Share:

No partner can transfer his share to any outside person without seeking the consent of all other partners.

8. Principal-Agent Relationship:

The partnership firm may be carried on by all partners or any of them acting for all. While dealing with
firm‘s transactions, each partner is entitled to represent the firm and other partners. In this way, a partner is
an agent of the firm and of the other partners.

Advantages:

As an ownership form of business, partnership offers the following advantages:

1. Easy Formation:

Partnership is a contractual agreement between the partners to run an enterprise. Hence, it is relatively ease
to form. Legal formalities associated with formation are minimal. Though, the registration of a partnership is
desirable, but not obligatory.

2. More Capital Available:

We have just seen that sole proprietorship suffers from the limitation of limited funds. Partnership
overcomes this problem, to a great extent, because now there are more than one person who provide funds to
the enterprise. It also increases the borrowing capacity of the firm. Moreover, the lending institutions also
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perceive less risk in granting credit to a partnership than to a proprietorship because the risk of loss is spread
over a number of partners rather than only one. .

3. Combined Talent, Judgment and Skill:

As there are more than one owners in partnership, all the partners are involved in decision making. Usually,
partners are pooled from different specialized areas to complement each other. For example, if there are
three partners, one partner might be a specialist in production, another in finance and the third in marketing.
This gives the firm an advantage of collective expertise for taking better decisions. Thus, the old maxim of
―two heads being better than one‖ aptly applies to partnership.

4. Diffusion of Risk:

You have just seen that the entire losses are borne by the sole proprietor only but in case of partnership, the
losses of the firm are shared by all the partners as per their agreed profit-sharing ratios. Thus, the share of
loss in case of each partner will be less than that in case of proprietorship.

5. Flexibility:

Like proprietorship, the partnership business is also flexible. The partners can easily appreciate and quickly
react to the changing conditions. No giant business organization can stifle so quick and creative responses to
new opportunities.

6. Tax Advantage:
Taxation rates applicable to partnership are lower than proprietorship and company forms of business
ownership.

Disadvantages:

In spite of above advantages, there are certain drawbacks also associated with the partnership form of
business organization.

Descriptions of these drawbacks/ disadvantages are as follows:

1. Unlimited Liability:

In partnership firm, the liability of partners is unlimited. Just as in proprietorship, the partners‘ personal
assets may be at risk if the business cannot pay its debts.

2. Divided Authority:

Sometimes the earlier stated maxim of two heads better than one may turn into ―too many cooks spoil the
broth.‖ Each partner can discharge his responsibilities in his concerned individual area. But, in case of areas
like policy formulation for the whole enterprise, there are chances for conflicts between the partners.
Disagreements between the partners over enterprise matters have destroyed many a partnership.

3. Lack of Continuity:

Death or withdrawal of one partner causes the partnership to come to an end. So, there remains uncertainty
in continuity of partnership.

4. Risk of Implied Authority:

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Each partner is an agent for the partnership business. Hence, the decisions made by him bind all the partners.
At times, an incompetent partner may lend the firm into difficulties by taking wrong decisions. Risk
involved in decisions taken by one partner is to be borne by other partners also. Choosing a business partner
is, therefore, much like choosing a marriage mate life partner.

Partnership Deed: Contents of a Partnership Deed

Partnership is an agreement between persons to carry on a business. The agreement entered into between
partners may be either oral or written. But, it is always desirable to have a written agreement so as to avoid
misunderstandings and unnecessary litigations in future. When the agreement is in written form, it is called
‗Partnership Deed.‘ It must be duly signed by the partners, stamped and registered. Any alteration in
partnership deed can be made with the mutual consent of all the partners.

Although it is left to the choice of the partners of the firm to decide themselves as to what should be
mentioned in their partnership deed, yet a partnership deed generally contains the following:

 Name of the firm.

 Nature of the business.
 Names of partners.
 Place of the business.
 Amount of capital to be contributed by each partner
 Profit sharing ratio between the partners.
 Loans and advances from the partners and the rate of interest thereon.
 Drawings allowed to the partners and the rate of interest thereon.
 Amount of salary and commission, if any, payable to the partners.
 Duties, powers and obligations of partners.
 Maintenance of accounts and arrangement for their audit.
 Mode of valuation of goodwill in the event of admission, retirement and death of a partner.
 Settlement of accounts in the case of dissolution of the firm.
 Arbitration in case of disputes among the partners.
 Arrangements in case a partner becomes insolvent.

Types of partners

The following list includes the types of partners we come across on a regular basis. The following list of the
partners are not exhaustive in nature, since the Partnership Act, 1932 does not restrict any type of
Partnership which the partners wish to define for themselves.

Active/Managing Partner

An active partner mainly takes part in the day-to-day running of the business and also takes active
participation in the conduct and management of the business firm. He carries the daily business activities on
behalf of other partners. He may act in different capacities such as manager, advisor, organizer and
controller of affairs of the firm. To be precise, he acts as an agent of all the other partners in order to run
main functions pertaining to business. Furthermore, subject to the clause in the partnership deed, the active
partner can withdraw remuneration from the firm

With regards to his role in the partnership, his role is of utmost importance. Therefore, if at all he wishes to
retire from the partnership firm he must give a public notice about his decision. He gives a public notice in
order to absolve himself from liability and acts done by the other partner. If he doesn‘t issue a public notice
declaring his retirement he would be held liable for the acts done by other partners post-retirement also.

Sleeping Partner

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A sleeping partner is also known as a ―dormant partner‖. This partner does not participate in the day-to-day
functioning activities of the partnership firm. A person who has sufficient money or interest in the firm, but
cannot devote his time to the business, can act as a sleeping partner in the firm. However, he is bound by all
the acts of the other partners.

A sleeping partner like any other partner brings share capital to the firm. He also continues to share the
profits and losses of the firm. If a dormant partner makes a decision to retire from the partnership firm, then
it is not mandatory for him to give a public notice for the same. As a dormant partner is not participating in
daily operations of the business, he is not allowed to withdraw remunerations from the firm. If at all the
partnership deed is providing remuneration to dormant partners, it is not deductible under the Income Tax
Act, 1961.

Nominal Partner

A nominal partner does not have any real or significant interest in the partnership firm. In simple words, he
is only lending his name to the firm and does not have a voice in the management of the firm. On the
strength of his name, the firm can promote its sales in the market or can get more credit from the market.

For example: A partnership is executed between the partner and the celebrity or a business tycoon for the
sake of value addition to the firm and also for promoting branding by using the person‘s fame and goodwill.

This partner does not share any profit and losses in the firm because he does not contribute any capital to the
firm. However, it is pertinent to note that a nominal partner is liable to the outsiders and third parties for the
acts done by other partners.

Partner by Estoppels

A partner by estoppels is a partner who displays by his words, actions or conduct that he is the partner of the
firm. In simple words, even though he is not the partner in the firm but he has represented himself in such a
manner which depicts that he has become a partner by estoppels or partner by holding out. It is pertinent to
note that, though he does contribute in capital or management of the firm but on the basis of his
representation in the firm he is liable for the credits and loans obtained by the firm.

There are two essential conditions of establishing a „holding out‟:

Firstly, the person who is held out must have made a representation of words, actions or conduct that he is a
partner in the firm.
Secondly, the other party must substantially prove that he had knowledge of such representation and he
acted on it.
Partner in Profits only

This partner of a firm will only share the profits of the firm and won‘t be liable for any losses of the firm.
Moreover, if a partner who is in ―partner in profits only‖ deals with any of the third parties or outsiders then
he will be liable for the acts of profit only and not any of the liability. He is not allowed to take part in
management of the firm. Such kinds of partners are associated with the firm for their goodwill and money.

Minor Partner

A minor is a person who is yet to attain the age of majority in the law of the land. According to Section 3 of
the Indian Majority Act, 1875 a person is deemed to have attained the age of majority when he attains 18
years of age. However, a minor can also be appointed to claim the benefits of the Partnership.

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It is pertinent to note that, Section 11 of the Indian Contract Act, 1872 prohibits a minor from entering into
an agreement, as the agreement entered by a minor is void ab initio. However, the Partnership Act, 1932
allows a minor to enjoy benefits of partnership when a set of rules and procedures are complied in
accordance with the law. A minor will share the profits of the firm, however, his liability for losses is only
limited to his share of the firm.

A minor person after attaining the age of majority (i.e. 18 years of age) needs to decide within 6 months if
he is willing to become a partner for the firm. If at all a minor partner decides to continue as a partner or
wishes to retire, in both the cases he needs to make such a declaration by a public notice.

Secret Partner

In a partnership, the position of secret partner lies between the active and sleeping partner. The membership
of the firm of a secret partner is kept secret from the outsiders and third parties. His liability is unlimited
since he holds a share in profit and shares liabilities for losses in the business. He can even take part in
working for the business.

Outgoing partner

An outgoing partner is a partner who voluntarily retires without dissolving the firm. He leaves the existing
firm, therefore he is called as an outgoing or retiring partner. Such a partner is liable for all his debts and
obligations incurred before his retirement. However, he can be held liable for his future obligations, if at all
he fails to give a public notice stating his retirement from the partnership firm.

Limited partner

A limited partner is a partner whose liability is only upto the extent of his contributions for the capital of the
partnership firm.

Sub-Partner

A sub-partner is a partner who associates someone else in his share of the firm. He gives a part of his share
to the person. It is pertinent to note that, the relationship is not between the sub-partner and the partnership
firm but is between him and the partner. Therefore, a sub-partner is a non-entity of the firm and he does not
hold any liability towards the firm.

A sub-partner usually agrees to share profits which are derived from the third party. Such a partner cannot
represent himself as a partner in the original firm. Furthermore, he doesn‘t reserve any right in the original
firm nor he is liable for acts done by partners of the firm. He can only claim his agreed share of profits from
the partner who has contracted him to be a sub-partner.

Hindu Undivided Family Business

Hindu Undivided Family business is a precise kind of business structure found only in India. This is one of
the classical methods of business structure in the nation. It is administered by the Hindu Law. The source of
membership in the company is birth in a family and 3 consecutive generations can be members of the
company.

Hindu Undivided Family

The business is managed by the head of the family (eldest member) and he is called Karta. However, all the
members hold equal ownership over the property of an ancestor and they are called as co-parceners.
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Meaning of Joint Hindu Family Business
It refers to a form of business organization which is owned and carried on jointly by the members of the
Hindu Undivided Family (HUF).
It is also known as Hindu Undivided Family Business.

Characteristics of Joint Hindu Family Business:

Formation

 There should be at least two male members in the family to form a HUF.
 Ancestral property should have been inherited by members of HUF.
 All of the members enjoy this property and have an equal share in that property.
 Thus, any child taking birth in that family becomes a member of the HUF.
 There is no requirement for an agreement to become a member.
Liability
There is limited liability of all the members or co-parceners in the Hindu Undivided Family business.
All the co-parceners have equal rights and shares in the property of Hindu Undivided Family business
The Karta has unlimited liability.
Control

Karta is the person who has full control over the Hindu Undivided Family business.
Karta can take advice from all the members but he is not bound to accept their decisions.
Continuity

After the ―Karta‖ is deceased, the very next eldest member takes up the position of Karta in Hindu
Undivided Family business.
The business can be divided and ended up by the mutual consent of the members.
Minor Members

The person who has taken birth in Hindu Undivided Family can be a member of the family business.
Therefore, a minor can also be a member of the family.

Important terms which are used in a Joint Hindu Family Business:

(1) Hindu Undivided Family

The family who runs or carry on the business organization.

Hindu Undivided Family includes an eldest male member ‗Karta‘ and the other male members called co-
parceners.

(2) Karta

He is the person who is the head and eldest member of the family.
Karta is the person who has full control over business activities.

(3) Ancestral Property

It is the property of forefather or an ancestor and over which the members have equal right.

(4) Co-parceners

The male members related to three successive generations.

They have equal ownership right over the property of an ancestor.
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Systems which are used in a Joint Hindu Family Business

There are two systems which are used in joint Hindu family business :

(1) Dayabhaga System

It prevails in West Bengal and allows both the male and female members of the family to be co-parceners.
A son gets right in the ancestral property only after the death of his father.

(2) Mitakashara System

It prevails all over India except West Bengal.

It allows only the male members to be co-parceners in the business.

The merits of the joint Hindu family business are as follows:

(1) Effective Control

The Karta has full control over the business activities and takes a decision quickly.
No one can interfere in the decision of Karta as every member is bound to accept his decision.
Hence, it avoids clashes among the members and results in very speedy decision making.

(2) Continued Business Existence

After the death of Karta, the next eldest member takes up his position. So, it does not affect the activities of
the business. Hence, all the business activities are done smoothly, continuously without any threat.

(3) Limited Liability of Members

As all the liability of the members is restricted to the extent of their share in the business.
But the Karta has unlimited liability due to his complete hold on the business.
Hence, in case of dissolution of the business, Karta‘s personal assets and his share will be liable.

(4) Expanded Loyalty and Cooperation

All the business operations are carried on by the members of a family jointly.
So, this increases loyalty and cooperation with each other without any hindrance.
Therefore, all the targets of the business can be achieved by the cooperation among the members and the
Karta.

Limitations of a Joint Hindu Family Business

Below mentioned are the few demerits of a joint Hindu family business:

(1)Limited Resources

All the members of Joint Hindu Family Business totally depend upon the ancestral property due to their
limited liability.
Many commercial banks resist extending the credit limit due to the weak financial position of the business.
Hence, this will result in limited expansion and growth of the business.

(2)Unlimited Liability of Karta

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All the important decision regarding management of various business activities are taken by Karta.
But there is a disadvantage with the Karta that he has unlimited liability.
Hence, all the business debts are paid by using the personal assets of the Karta.

(3)Dominance of Karta

The Karta takes all the decisions individually and manages the business
He also involves other members in decision making.
But Karta is not bound to accept the decisions of the members which may create conflicts between the Karta
and the other members.
Hence, due to clashes in decision making, lack of cooperation between Karta and other members occurs.

(4)Limited Managerial Skills

Sometimes the members suffer due to unfair decisions taken by the Karta in respect of business operations.
Unfair decisions are taken due to the lack of managerial skills.
So, the Karta cannot be knowledgeable or proficient in all managerial functions.
Nowadays, the joint Hindu family business is declining due to the decreasing number of joint Hindu families
in the nation.

Cooperative Society:

The philosophy of cooperative society is to serve the common man and to liberate him from the oppression
of the economically strong people and organizations. Mutual assistance and service are the objectives as
distinguished from the aim of the other forms of organization, which is primarily making of profit. It aims at
encouraging self-help on the part of economically weaker sections of the society by looking after a truly
cooperative society is the elimination of profit and provision of goods and services to members at cost. As a
form of organization, it is an enterprise ordinarily set up by ―economically weak‖ individuals to further their
common economic and social interests to eradicate capitalist exploitation, to eliminate middlemen, and to
bring the consumer and producer together. The cooperative movement is commenced among the poor
deprived labors and low-middle class people of the society in the post-industrial revolution.
It first begins in 1844 in Britain by 28 weavers. Later this organization revealed at different nations at
different times.

Definition of Cooperative Society

what is cooperative society

A cooperative society is a voluntary association that started with the aim of the service of its members. It is a
form of business where individuals belonging to the same class join their hands for the promotion of their
common goals. These are generally formed by poor people or weaker sections of people in society. It
reflects the desire of the poor people to stand on their legs or own merit. His philosophy of the formation of
a cooperative society is ―all for each and each for all‖. Cooperation work with the feeling of helping others.
A co-operative society is a special type of society, which is established by an economically weak person for
the betterment and upliftment of their economic condition through mutual help. Many business
organizations have the main motive to earn profit and also exploit customers. But this organization is based
on help each other through available resources and also provide goods to society members without profit or
at a lower price. Simply speaking, we know that cooperative means to work together to improve their
economic condition. This organization is based on ―all for each and each for all". So this organization will
function under the mutual cooperative of all the members. In this organization, all members will be equal
and free for their rights. Therefore ―one man one vote‖ system will prevail in this society. Many business
enterprises established to earn a profit, but cooperative society has a motive of service to the members of the
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society for common welfare not to earn a profit. The first cooperative society was initiated by Robert Owen
in 1844 A.D. named ―Rochdale Society of Equitable Pioneers". The main objective of this society was to
save poor people providing goods at a lower price from the market price and eliminate the middle mad and
supply better services to its members. So, we can say that a cooperative society is an association of a person
who joins the organization willingly to protect economic & social interest. In a cooperative society, people
can enter it as their wish, and also, they are free to leave a cooperative society, but they cannot transfer their
share. Cooperative is a society which has its objective the promotion of the economic interest of its members
following co-operative principles. According to Calvert, a cooperative denotes a form of organization
wherein persons voluntarily associate together as human beings based on equality for the promotion of
economic interests of themselves. Cooperative is only one aspect of a vast movement that promotes the
voluntary association of individuals having common needs who combine towards the achievement of
common economic ends.

Characteristics of Cooperative Society

Voluntary association

Everybody having a common interest is free to join a cooperative society. There is no restriction based on
caste, creed, religion, color, etc. Anybody can also leave it at any time after giving due notice to the society.
That is the specialty of any cooperative society. There should be a minimum of 10 members for a
cooperative society, but there is no maximum limit for the membership.

Separate legal entity

A cooperative society after registration is recognized as a separate legal entity by law. It acquires an identity
quite distinct and independent of its members can purchase, dispose of its assets, can sue, and also can be
sued.

Democratic management

Equalities are the essence of cooperative enterprises, governed by democratic principles. Every member has
got equal rights over the function management of that society. As such, each member has only single voting
right irrespective of the number of shares held or capital contributed by them. In the case of a cooperative
society, no member detects the terms and conditions of the functioning because ―one man one vote‖ is the
thumb rule.

Service motive

The main objective being the formation of any cooperative society is for mutual benefit through self-help
and collective effort. Profit is not at all on the agenda of the cooperative society.But if members so like, they
can take up any activities of their choice to generate a surplus to meet the day-to-day expenses.

Utilization of surplus

The surplus arising from the operation of a business is partly kept in a separate reserve and partly distributed
as dividend among the members.

Cash trading

One exception in the cooperative society is that like other businesses, if never go for credit sales. It sells
goods based on cash only. Hence, the cooperative society hardly comes across financial hardship because of
the no collection of sales dues. Members can only purchase based on credit, which is an exception to the
present rule.
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Fixed-rate of return

All members are supposed to contribute capital for the formation of a cooperative society or at the time of
joining as a member of the cooperative society.

Government control

The government regulates all the cooperative societies of the country through its different rules and
regulations framed from time to time. Cooperative societies of the country are required to register, and
sometimes different State Governments also frame laws regarding the registration and functioning of
cooperative societies for their states.

Capital

The capital of the society is raised from its members by way of share capital.However, the major part of
finance is raised by the society by taking a loan from the government or by accepting grants and assistance
from the Central or State Government or from the apex cooperative institutions like state and cooperative
central banks operating in that state.

Principles of Cooperative Society

The followings are some of the principles on which a co-operative society stands:

Voluntary association

The membership of a cooperative society is voluntary and open to all adult persons having common
interests. Any person can become a member of the organization irrespective of caste, creed, color, sex, and
religion.

Autonomy

A cooperative society is a self-governing institution. It enjoys the status of autonomy because it is self-
sufficient, self-renewing, and self-controlling organization. It has a continuous existence because it is not
affected by the death of any member of society.

Capital

The capital of a cooperative society is raised from its members in the form of share capital. As the share
capital is not sufficient to meet its operational cost, it borrows loan from the government or apex cooperative
organization.

Service motive

It is organized to render service to its members and not to make a profit.

Democratic management

The management of a co-operative society is done on the democratic line. The management is vested in the
bands of a managing committee elected by the members.

The general body of the members determines rules and regulations for the management, the managing
committee functions within the framework of the principles framed by the general body.
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Government control

The cooperative organizations are subject to the rules and regulations of the government because it is
registered.

Status of the members

In a cooperative society, each member is given one vote irrespective of the number of shares held by him. In
this organization, nobody can control society based on his share capital.

Distribution of surplus

The income of the cooperative societies is distributed among the members based on their capital
contribution.

Cash Trading

The trading operation of the cooperative society is done based on cash. It never allows the principles of
credit in its trade practice.

Mutual help

It always aims at developing the spirit of co-operation among the members. Every member of the society is
required to act for the maximum benefit to other members. It is based on the principle ―all for each and each
for all‖.

Objectives of Cooperative Society

Such organizations are considered to be jointly controlled by those working at the organization and those
receiving services from the organization. So, in essence, there are high levels of cooperation between these
two parties of people.

Cooperative societies originally came about to unite business owners with their staff members. They led to
the practice of private companies being ‗split‘ into shares, which were given to employees at various levels
of the company. Essentially giving each individual within a firm a small piece of it raised productivity, as
people gained the sense that they were very much part of the organization, rather than just somebody
working for it.

The following points describe some of the main objectives a cooperative society has.

Enhancing cooperation

Cooperative societies aim to encourage complete cooperation between everybody involved with an
organization. They are generally against the idea of any sort of hierarchy, and consider everyone to be equal.
This can improve relationships between staff members and senior management, as well as between service
providers and customers.

High level of service

Better working relationships naturally lead to higher productivity levels, so a better service is given to
customers. This raises customer satisfaction levels, which is the primary aim of many cooperative societies.
For instance, student accommodation units may be cooperative societies. Students will be happier with their
accommodation and the staff remembers will find their working life much easier.
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Higher profits

Many cooperative societies are essentially out to make a profit and believe that enhancing relationships will
lead to high-profit levels. Of course, this plan may not always work, but in many cases, it has proved
effective. Some charities have also benefited from operating as a cooperative society, as charity members
become more focused on their work, raising more money for the cause in question.

Role of Cooperative society

Creation of unity

―Unity is strength‖ is the guiding principle of a cooperative society. In this purpose cooperative united the
weaker and guide them to go ahead with mutual cooperation which helps to endure social relationship.,

Awaking working zeal

Co-operate society helps to awake a new working spirit in the mind of those people who are defeated and
spiritless in the struggle of life. Cooperative society encourages people to dream a new dream and work with
new inspiration.

Bringing welfare for the members

A cooperative society is established just for bringing the economic and social welfare for its members. In
this purpose, cooperative society develops thinking working attitude as well as the mental condition of the
constituents. Besides by self retirement opportunity and giving dividends. It ensures economic development.

Reducing inequality of wealth

Capitalism creates inequality of wealth, and cooperative society helps to reduce this as well as helps the
equal distribution of wealth. It creates self-employment opportunities and encourages the members to
compete with others.

Establishing equal rights

To establish equal rights, cooperative society fixed the limitation of purchasing shares. Besides this,
democracy and equal voting rights are also followed. Equal right contributes to establishing social order and
justice.

The teaching of moral principles

Cooperative society plays an important role in mental improvement by teaching moral principles like unity,
trust, honesty, order, cooperation, which ensure social order.

Improving skill

Cooperative society leads a great role by providing a training program for improving the skill of uneducated
poor and unskilled members.

Removal of middle man

The cooperative society helps to protect the lower and middle-class people of the society who have fixed
income, from the greedy clutch of profiteering, capitalist, and the middle man. This society produces or

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collects goods from the manufacturer and supplies these goods to the members at a cheap rate. In this way,
it achieves its objectives.

Loan facilities

Poor producers suffer from capital problems. Cooperative credit society, multipurpose cooperative society
lend money to these people at a very low-interest rate.

Economic development

By developing agricultural and irrigation systems and to give loans and counseling for small industries and
cottage. It also helps to remove poverty and ensure economic development of the country.

Following are the important advantages or merits of cooperative societies;

Easy Formation

It is very easy to form a cooperative society as compared to a joint-stock company. The simple requirement
is ten or more members have to make written application to the Registrar with four copies of Bye-laws.

Open Membership

Cooperative societies work on the principle of open membership; therefore, many persons can become
members. The membership is not restricted to a few persons only.

Democratic Management

All the members of the society are jointly known as the general body, whereas the members who manage the
cooperative society are jointly known as the managing committee. They democratically manage a
cooperative society. ―One member one vote‖ is the rule, and thus members can have a voice in management.

Limited Liability

The liability of members remains limited to the extent of capital contributed by them. He is not personally
liable to pay the liability of a cooperative society. Generally, his liability is limited up to the face value of
shares.

Stability & Continuity

The cooperative society has perpetual succession because it is not affected due to death, insolvency, or
lunacy of any member. As it is a voluntary association the old members may go, new members may come,
but the life of society is not affected.

Low Prices

A cooperative society can make goods and services available at reasonable cost as the profit margin of the
society is very less other reason for a low price at a cooperative society is that it eliminates the middleman
from a chain of distribution i.e., goods are directly purchased from the manufacturers or producers and sold
to the customers.

Mutual Help

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The basic aim of the cooperative society is mutual help. Some of the members realizing this principle may
offer their services on an honorary basis; this brings a reduction in management expenses.

Social Advantage

A cooperative society discourages monopoly, brings a better distribution of wealth, works on the principle
of service, and controls exploitation. It also uses its surplus profit for social advantages by way of
establishing charitable hospitals, schools, etc. So it increases social welfare.

Mobilization of Savings

A cooperative society is a thrift institution. It provides an effective means of pooling together the resources
of the weaker sections of the society. By checking extravagance, it inculcates the habit of savings among the
people. Such mobilized financial resources are used for constructive purposes.

Remove Defects of Capitalism

This form of organization removes certain basic defects of capitalism.For example, monopoly, the undue
concentration of wealth in a few hands, profiteering, black-marketing, exploitation of workers and
consumers, etc. These glaring defects of capitalism have no place under a cooperative organization. Through
the process of integration, it removes middlemen.

Cash Trading

The cooperative society follows the principles of ―cash and carry‖.As a result of this, there are no bad debts,
and they can enjoy the benefit of various discounts and concessions. This also inculcates the habit of saving
among the members.

Government Support

A cooperative society is the people‘s movement. Moreover, it promotes moral, social, and educational
values. It also helps the economic enlistment of the people.That is why the government gives many
concessions and privileges to this organization.

Following are the demerits of cooperative societies:

Limitation of Capital

In a cooperative society, there is a limitation on capital because the membership of the society is indirectly
limited only up to local people. The members also generally belong to the poor class.

State Control

A cooperative society is governed by the provisions of the Cooperative Society Act or Law. The compulsion
of maintaining records, submission of audited returns, and inspections by the government are the ways
through which the state exercises control over societies.

Inefficient Management

The management of a cooperative society is inefficient because the working members of the managing
committee may not show a keen interest in the working of society. The members also lack the managerial
skill and intelligence because they generally belong to the lower class.

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Absence of Business Secrecy

The officers of co-operative societies are generally so much exposed to the members that it becomes
difficult for them to maintain proper secrecy, and it is compulsory to advertise the annual account and
annual reports in newspapers.

Lack of Motivation

There is a lack of motivation for the managing committee and other staff members because there is no
relation between efforts and rewards. The rate of dividends is also restricted to 15%; this discourages the
public from joining a cooperative society.

Political Interference

The cooperative society acts as a platform for political activities at the time of the election of the managing
committee, some of the political parties get involved in it due to which the basic principle of the
co-operation comes to an end. This also leads to the corruption of power and money in society and may
result in quarrels and disputes amongst the members.

Limited Scope

Like capitalism, the cooperative system cannot be extended to embrace the whole economic system.
It has limited scope in the sense that it cannot cover the entire economic system. The principles of
co-operation cannot be successfully applied to organize all types of economic activities.For example, a
cooperative society is not suitable for organizing big industrial enterprises. It is also not suitable where the
element of speculation plays a predominant role and where finer varieties with maximum skill are to be
produced.

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UNIT -II
JOINT STOCK COMPANY
Meaning: joint-stock company is a business entity in which shares of the company's stock can be bought
and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares
(certificates of ownership). Shareholders are able to transfer their shares to others without any effects to the
continued existence of the company.

In modern-day corporate law, the existence of a joint-stock company is often synonymous with
incorporation (possession of legal personality separate from shareholders) and limited liability (shareholders
are liable for the company's debts only to the value of the money they have invested in the company).
Therefore, joint-stock companies are commonly known as corporations or limited companies.
Definition: -
According to companies act ,2013 as per section 2(20) a joint stock company can be described as an
artificial person having a separate legal entity, perpetual succession and a common seal.
The Companies Act 1956 defines a joint stock company as an artificial person created by law, having
separate legal entity from its owner with perpetual succession and a common seal. Shareholders of
Joint Stock Company have limited liability i.e. liability limited by guarantee or shares.

What is a joint stock company? What are their characteristic features?

A Joint Stock Company is a voluntary association of persons to carry on the business. It is an association of
persons who contribute money which is called capital for some common purpose. These persons are
members of the company. The proportion of capital to which each member is entitled is his share and every
member holding such share is called shareholders and the capital of the company is known as share capital.
The Companies Act 1956 defines a joint stock company as an artificial person created by law, having
separate legal entity from its owner with perpetual succession and a common seal. Shareholders of Joint
Stock Company have limited liability i.e liability limited by guarantee or shares. Shares of such company are
easily transferable. From the above definition .

the following characteristics of a Joint Stock Company can be easily identified:

1. Artificial Person : A Joint Stock Company is an artificial person as it does not possess any physical
attributes of a natural person and it is created by law. Thus it has a legal entity separate from its members.

2. Separate legal Entity : Being an artificial person a company has its own legal entity separate from its
members. It can own assets or property, enter into contracts, sue or can be sued by anyone in the court of
law. Its shareholders cannot be held liable for any conduct of the company.

3. Perpetual Existence : A company once formed continues to exist as long as it is fulfilling all the
conditions prescribed by the law. Its existence is not affected by the death, insolvency or retirement of its
members.

4. Limited liability of shareholders : Shareholders of a joint stock company are only liable to the extent of
shares they hold in a company not more than that. Their liability is limited by guarantee or shares held by
them.

5. Common Seal : Being an artificial person a joint stock company cannot sign any documents thus this
common seal is the company‘s representative while dealing with the outsiders. Any document having
common seal and the signature of the officer is binding on the company.

6. Transferability of Shares : Members of a joint stock company are free to transfer their shares to anyone.

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7. Capital : A joint stock company can raise large amount of capital by issuing its shares.

8. Management : A joint stock company has a democratic management which is managed by the elected
representatives of shareholders, known as directors of the company.

9. Membership : To form a private limited company minimum number of members prescribed in the
companies Act is 2 and the maximum number is 50. But in the case of public limited company the minimum
limit is 7 and no limit on maximum number of members.

10. Formation : Generally a company is formed with the initiative of group of members who are also
known as promoters but it comes into existence after completing all the formalities prescribed in Companies
Act 1956.

WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF JOINT STOCK COMPANIES?

Following are the advantages of Joint Stock Company:

1. Limited Liability : Liability of members of Joint Stock Company is limited to the extent of shares held
by them. Hence shareholders assets will not be on stake. This feature attracts large number of investors to
invest in the company.

2. Perpetual Existence : A company is an artificial legal person created by law which has its own
independent legal status. Its existence is not affected by the death or insolvency of its members.

3. Large Scale Operation : The capacity of the corporate organizations to raise the funds is comparatively
high which provide capital for large scale operations. Hence opens the scope for expansion.

4. Transferability of Shares : In a joint stock company it is easy to transfer shares to anyone. But the same
is not permitted to private limited company.

5. Raising of Funds : It is easy to raise a large amount of funds as the number of persons contributing to the
capital are more.

6. Social Benefit : It offers employment to a large number of people. It facilitates promotion of various
ancillary industries. It also donates money for education, community service.

7. Research and Development : It invests a lot of money on research and development for improved
production process, improving quality of product, designing and innovating new products etc.

Disadvantages of Joint Stock Company:

1. Formation is not easy : To act as a legal entity a company has to fulfill various legal and procedural
formalities making it a complicated process.

2. Double Taxation : This is the biggest disadvantage which the company faces. Firstly, company needs to
pay tax for the earned profits and again the shareholders are taxed for the earned income.

3. Control by Board of Directors : After electing directors of the company which manage the business for
the company the shareholders become ignorant of their responsibilities. This may be due to lack of interest
and lack of proper and timely information.

4. Excessive Government Control : A company has to comply with provisions of several acts, non-
compliance of which can cause a company heavy penalty. This affects the smooth functioning of a company.
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5. Delay in Policy Decisions : All the legal and procedural formalities which are required to fulfill before
making policies of the company delay the policy decisions.

6. Speculation and Manipulation: As the shares of a joint stock company are easily transferable thus the
shares are purchased and sold in the stock exchanges on the value or price of a share based on the expected
dividend and the reputation of the company.

A. TYPES OF COMPANY ON THE BASIS OF INCORPORATION

1. Statutory Companies :

These companies are constituted by a special Act of Parliament or State Legislature. These companies are
formed mainly with an intention to provide the public services.Though primarily they are governed under
that Special Act, still the CA, 2013 will be applicable to them except where the said provisions are
inconsistent with the provisions of the Act creating them (as Special Act prevails over General Act).

Examples of these types of companies are Reserve Bank of India, Life Insurance Corporation of India, etc.

2. Registered Companies:

Companies registered under the CA, 2013 or under any previous Company Law are called registered
companies. Such companies comes into existence when they are registered under the Companies Act and a
certificate of incorporation is granted to it by the Registrar.

B. Types of Company on the basis of Liability

1. Companies limited by shares:

A company that has the liability of its members limited by the memorandum to the amount, if any, unpaid
on the shares respectively held by them is termed as a company limited by shares. The liability can be
enforced during existence of the company as well as during the winding up. Where the shares are fully paid
up, no further liability rests on them.

For example, a shareholder who has paid 75 on a share of face value 100 can be called upon to pay the
balance of 25 only. Companies limited by shares are by far the most common and may be either public or
private.

2. Companies limited by guarantee:

Company limited by guarantee is a company that has the liability of its members limited to such amount as
the members may respectively undertake, by the memorandum, to contribute to the assets of the company in
the event of its being wound-up. In case of such companies the liability of its members is limited to the
amount of guarantee undertaken by them. The members of such company are placed in the position of
guarantors of the company‘s debts up to the agreed amount. Clubs, trade associations, research associations
and societies for promoting various objects are various examples of guarantee companies.

3. Unlimited Liability Companies:

A company not having a limit on the liability of its members is termed as unlimited company. Here the
members are liable for the company‘s debts in proportion to their respective interests in the company and
their liability is unlimited.

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Such companies may or may not have share capital. They may be either a public company or a private
company.

C. Types of Company on the basis of number of members

1. Public Company:

Defined u/s 2(71) of the CA, 2013 – A public company means a company which is not a private company.
Section 3(1) of the CA, 2013– Public company may be formed for any lawful purpose by 7 or more persons.
Section 149(1) of the CA, 2013 – Every public company shall have minimum 3 director in its Board.
Section 4(1)(a) of the CA, 2013 – A public company is required to add the words ―Limited‖ at the end of its
name. It is the essence of a public company that its shares and debentures can be transferable freely to the
public unlike private company. Only the shares of a public company are capable of being dealt in on a stock
exchange. A private company that is a subsidiary of a public company, will be considered a public company.

2. Private company:

Defined u/s 2(68) of the CA, 2013 –

A private company means a company which by its articles—

a. Restricts the right to transfer its shares;

b. Limits the number of its members to 200 hundred (except in case of OPC)

Note:

Persons who are in the employment of the company; and persons who, having been formerly in the
employment of the company, were members of the company while in that employment and have continued
to be members after the employment ceased, shall be excluded. Where 2 or more persons hold 1 or more
shares in a company jointly they shall be treated as a single member. Prohibits any invitation to the public to
subscribe for any securities of the company;
Section 3(1) of the CA, 2013 – Private Company may be formed for any lawful purpose by 2 or more
persons.
Section 149(1) of the CA, 2013 – Every Private company shall have minimum 2 director in its Board.
Section 4(1)(a) of the CA, 2013 – A private company is required to add the words ―Private Ltd‖ at the end of
its name.
Special privileges – Private Companies enjoys several privileges and exemptions under the Companies Act.

3. One Person Company (OPC):

With the enactment of the Companies Act, 2013 several new concepts was introduced that was not in
existence in Companies Act, 1956 which completely revolutionized corporate laws in India. One of such
was the introduction of OPC concept. This led to the avenue for starting businesses giving flexibility which
a company form of entity can offer, while also offering limited liability that sole proprietorship or
partnerships does not offers.
Defined u/s 2(62) of the CA, 2013 – One Person Company means a company which has only one person as
a member.
Section 3(1) of the CA, 2013 – OPC (as private company) may be formed for any lawful purpose by 1
persons.
Section 149(1) of the CA, 2013 – OPC shall have minimum 1 director in its Board, its sole member can also
be director of such OPC.
Some Feature explained! –
Single-member: OPCs can have only 1 member or shareholder, unlike other private companies.
Nominee: A unique feature of OPCs that separates it from other kinds of companies is that the sole member
of the company has to mention a nominee while registering the company. Since there is only one member in
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 BUSINESS ORGANIZATION MANAGEMENT
an OPC, his death will result in the nominee choosing or rejecting to become its sole member. This does not
happen in other companies as they follow the concept of perpetual succession.
Special privileges: OPCs enjoys several privileges and exemptions under the Companies Act.

D. Types of Company on the basis of Domicile

1. Foreign company:

Defined u/s 2(42) of the CA, 2013 – ―foreign company‖ means any company or body corporate incorporated
outside India which,—
has a place of business in India whether by itself or through an agent, physically or through electronic mode;
and
conducts any business activity in India in any other manner.
Section 379 to Section 393 of the CA, 2013 prescribes the provisions which are applicable on such
companies.

2. Indian Company:

A company formed and registered in India is known as an Indian Company.

E. Other Types of Company:

1. Section 8 Company:

A section 8 company is registered as a limited company under section 8 of the CA, 2013 and holds the
license from Central Government (CG) and

1. has in its objects the promotion of commerce, art, science, sports, education, research, social welfare,
religion, charity, protection of environment or any such other object;
2. intends to apply its profits, if any, or other income in promoting its objects; and
3. intends to prohibit the payment of any dividend to its members.

Proviso to Section 4(1)(a) of the CA, 2013 – Section 8 Company is exempted from clause (a) of Section 4(1)
which means Section 8 Company is neither required to add the word ―Ltd‖ nor words ―Private Ltd‖ at the
end of its name.
Section 8 of the CA, 2013 also laid down the provision related to Incorporation, application for licence as
section 8 company, grant of licence by CG and revocation of licence by CG.
Special privileges: Section 8 Company enjoys several privileges and exemptions under the Companies Act.

2. Government Company:

Defined u/s 2(45) of the CA, 2013 – ―Government company‖ means any company in which not less than 51
% of the paid-up share capital is held by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly by one or more State Governments, and
includes a company which is a subsidiary company of such a Government company. Explanation – ―paid-up
share capital‖ shall be construed as ―total voting power‖, where shares with differential voting rights have
been issued. Special privileges: Government Company enjoys several privileges and exemptions under the
Companies Act.

3. Small Company:

Defined u/s 2(85) of the CA, 2013 – ―small company‖ means a company, other than a public company,—
1. paid-up share capital of which does not exceed 50 lakh rupees or such higher amount as may be
prescribed which shall not be more than 10 crore rupees; and
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 BUSINESS ORGANIZATION MANAGEMENT
2. turnover of which as per profit and loss account for the immediately preceding financial year does not
exceed 2 core rupees or such higher amount as may be prescribed which shall not be more than 100 core
rupees

Provided that nothing in this clause shall apply to—

a holding company or a subsidiary company;

a company registered under section 8; or
a company or body corporate governed by any special Act;
Special privileges: Small Company enjoys several privileges and exemptions under the Companies Act.

4. Subsidiary Company:

Defined u/s 2(87) of the CA, 2013 – ―subsidiary company‖ or ―subsidiary‖, in relation to any other
company (that is to say the holding company), means a company in which the holding company—
1. controls the composition of the Board of Directors; or
2. exercises or controls more than one-half of the total voting power either at its own or together with one or
more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of
subsidiaries beyond such numbers as may be prescribed.

Explanation: For the purposes of this clause-

1. a company shall be deemed to be a subsidiary company of the holding company even if the control
referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

2. the composition of a company‘s Board of Directors shall be deemed to be controlled by another company
if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all
or a majority of the directors;
3. the expression ―company‖ includes anybody corporate;
4. ―layer‖ in relation to a holding company means its subsidiary or subsidiaries.

5. Holding Company:

Defined u/s 2(46) of the CA, 2013 –―holding company‖, in relation to one or more other companies, means
a company of which such companies are subsidiary companies;
Explanation: For the purposes of this clause, the expression ―company‖ includes any body corporate.

6. Associate Company:

Defined u/s 2(6) of the CA, 2013 – ―associate company‖, in relation to another company, means a company
in which that other company has a significant influence, but which is not a subsidiary company of the
company having such influence and includes a joint venture company.
Explanation: For the purpose of this clause:

1. the expression ―significant influence‖ means control of at least 20% of total voting power, or control of or
participation in business decisions under an agreement;

2. the expression ―joint venture‖ means a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement;

7. Producer Company:

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 BUSINESS ORGANIZATION MANAGEMENT
Common parlance- A producer company can be defined as a legally recognized body of farmers/
agriculturists with the aim to improve the standard of their living, and ensure a good status of their available
support, incomes and profitability.

Definition- “Producer Company‖ means a body corporate having objects or activities specified in section
581B and registered as Producer Company under the Companies Act, 1956.
Proviso to section 465(1) of the CA, 2013 prescribes – that the provision of Part IX A of the Companies Act,
1956 shall be applicable mutatis mutandis to a Producer Company in a manner as if the Companies Act,
1956 has not been repealed until a special Act is enacted for Producer Companies.
Note: Recently the Companies (Amendment) Bill, 2020 was introduced in LokSabha i.e. on March 17, 2020.
Thus with this bill aims to remove these provisions and adds a new chapter in the Act with similar
provisions on producer companies.

Some Conditions for Producer Company explained! :

Only persons engaged in an activity connected with, or related to, primary produce can participate in the
ownership .The members have necessarily to be primary producers. Name of the company shall end with the
words ―Producer Company Limited―. On registration, the Producer Company shall become as if it is a
private limited company for the purpose of application of law and administration of the company, However
it shall comply with the specific provisions of part IXA until a special Act is enacted for Producer
Companies. To incorporate Producer Company any of the following combination of producers is required:
10 or more producers (individuals); or 2 or more producer institutions; or Combination of the above 2.Every
Producer Company shall have at least 5 director but not more than 15. (Provided that in the case of an inter-
State co-operative society incorporated as a Producer Company, such Company may have more than 15
directors for a period of one year from the date of its incorporation as a Producer Company.)
PART IXA of Companies Act 1956 comprises of XII Chapters which prescribes different provisions to be
compiled by the Producer Company.

8. Dormant Company:

In case a company is formed and registered under this Act for a future project or to hold an asset or
intellectual property and has no significant accounting transaction, such a company or an inactive company
may make an application to the Registrar for obtaining the status of a dormant company. Thereafter
Registrar on consideration of the application shall allow the status of a dormant company to the applicant
and issue a certificate.“Inactive company‖ means a company which has not been carrying on any business
or operation, or has not made any significant accounting transaction during the last two financial years, or
has not filed financial statements and annual returns during the last two financial years. In case of a
company which has not filed financial statements or annual returns for two financial years consecutively, the
Registrar shall issue a notice to that company and enter the name of such company in the register maintained
for dormant companies. Registrars have power to strike off the name of a dormant company from the
register of dormant companies, which has failed to comply with the requirements of this section.

What Is Promotion?
In business, promotion is any communication that attempts to influence people to buy products or services.
Businesses generally promote their brand, products, and services by identifying a target audience and
finding ways to bring their message to that audience.
Here's a full definition of what promotion is, and examples of the different types of promotions that
businesses can use.

Promotion?
Promotion is a catch-all term that includes all the ways a business can attempt to enhance the visibility of its
products, services, or brand. A poster ad at a bus stop is a form of promotion. So is a sale that discounts the
price of a product or service for a set amount of time.

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The words "promotion" and "advertising" may be used interchangeably, but they're not the same thing.
Advertising is one specific action you could take to promote your product or service. In other words, it's one
type of promotion.

Promotions can refer to an effort (like an ad), a concept (like a temporary price reduction), or an item (like a
branded t-shirt). In practice, promotions usually combine these forms of promotion. For example, a clothing
store might plan a sale on jeans and take out an ad in a local newspaper to let people know when and where
the sale will happen.

How Does Promotion Work?

Promotion is a vital aspect of any business. Without at least some level of promotion, a business can't get
customers, and without them, it's only a matter of time before the business will have to close its doors.

While all businesses need some kind of promotion, they don't all need the same kinds or the same levels of
promotion. No two businesses will have the exact same promotional needs, and tactics vary significantly
between industries. A corner store might just need a sign that can be seen from the sidewalk that lets
customers know the establishment exists. Other businesses may need to invest in direct selling efforts or buy
ad time on a streaming service, for instance.

New businesses may have to go through a trial-and-error period of experimenting with different promotional
styles before they find the one that's best suited for them. Even established businesses experiment with new
promotional strategies in addition to continuing their tried-and-true promotions.

Following are the main stages of promotion: 1. Discovery of an Idea 2. Detailed Investigation 3.
Assembling 4. Financing the Proposition.

1. Discovery of an Idea:
When a person or persons get an idea that there is the possibility of starting a new business to take advantage
of the untapped natural resources or a new invention, discovery of some business opportunities begins.
Such an idea may also be to start a business unit to supply the product at a lower price by breaking the
monopoly of existing concern in a particular line of business or to expand an existing concern by converting
partnership into private limited company or into public limited company or by combining some going
concerns. But the promoter cannot go ahead immediately after such an idea strikes him. When a person or
persons called promoters, understand that there is a possibility of starting some business concern, the idea is
said to have been conceived.

2. Detailed Investigation:
Before money is invested to exploit the idea conceived through a detailed investigation of commercial
feasibility of idea with reference to sources of supply, extent of demand, present and potential competition,
the amount of capital necessary etc. is absolutely essential. The idea must be put to ―the rigid test of cold
fact of costs and inflexible law of supply and demand.‖ For this purpose promoters have to acquire the
services of experts like engineers, values, accountants, statisticians, marketing experts etc. who prepare a
report on the position of the market, present and potential competition, amount required for the fixed assets
like land, building, machinery, furniture etc. The report would also include the survey of supply positions of
raw material, labour, transport facilities and other relevant items of expenditure. Such an investigation gives
the critical appraisal of the idea conceived and reveals whether the idea is commercially feasible or not.

3. Assembling:
After a detailed investigation of the proposition has been made, the promoter decides whether he wants to
take the risk of promotion and decide upon a plan of capitalization. After this he starts to assemble the
proposition. By assembling we mean projecting the fundamental idea, securing all the property needed by
enterprise and making contract with all those who are selected to file the chief management positions.

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 BUSINESS ORGANIZATION MANAGEMENT
4. Financing the Proposition:
The promoter decides about the capital structure of a company. First of all the requirements of finances are
estimated and after that the sources from which this money will come are determined. The financial
requirements of short period and long period are estimated so that capital figures may be presented in the
Memorandum of Association of a company.

Kinds of Promotion

Definition: The Promotion is a mode of communication that companies use to create awareness among the
prospective customers about the product, product line, brand and the company with an objective to generate
sales and create a brand loyalty.

The companies having different objectives choose different kinds of promotion. These are:

Kinds of Promotion

Informative Promotion: The primary objective of every promotional activity is to disseminate information
about the product, product line, brand, and the company. The informative promotion is prevalent at every
stage of product life cycle and is an essential ingredient for creating the primary demand. The marketers
adopt this promotion strategy to convince customers to try a product at least once. It is based on the notion
that the customer will purchase the product only if he has the adequate information about it.

Persuasive Promotion: The persuasive promotion is prevalent at the growth stage of a product where the
primary objective of the management is to persuade people to buy. The basic purpose of this promotion
strategy is to stimulate purchase and create a positive image of the product in the minds of customers in
order to influence their long-term behaviors. Many firms do not adopt this kind of promotion as it involves
high-pressure selling.

Reminder Promotion: The reminder promotion is often adopted at the stage when a product reaches its
maturity. The purpose of such promotion is to keep the product alive in the minds of the customers. Here,
the firm emphasizes on the product‘s utility, features, brand names with the intent to make customers remind
the product. This promotion strategy acts as a ―memory jogger‖ that enables the customers to remember the
product and influences their long-term buying behavior.

Buyer behavior Modifications: The effect of promotional strategies could be accessed through the
modifications in the consumer behavior. The constant personal selling and repeated advertisements could be
used to measure the effectiveness of such promotional schemes.
Thus, the companies can choose any of the promotions depending on the nature of the product and the
pursued objectives.

Types of Promotion
Below are just a few examples of the countless ways you can promote your business; include a variety of
them in your marketing plan.

 Word of Mouth
 Website
 Social Media
 The Elevator Pitch
This quick promotional technique is used by business people to give a short two or three sentence
description of what their business does and how their products or services might benefit potential customers.
A business owner might prepare an elevator pitch before going to a networking event so they can be ready to
effectively promote their business at a moment's notice.

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 Business Cards
 Vehicle Decorations (Wraps)
 Charity Events

Promoter:

According to section 2(69) of the Companies Act, 2013 the term ‗Promoter‘ can be defined as the following:

A person who has control over the affairs of the company, directly or indirectly as a shareholder, director or
otherwise; or
A person who has been named as such in a particular or is identified by the company in the annual return
referred to in section 92; or
A person in accordance with whose advice, directions or instructions the Board of Directors of the company
is accustomed to act:
Provided that sub-clause (c) shall not apply to a person who is acting merely in a professional capacity.

CHARACTERISTICS OF A PROMOTER

A promoter comes up with an idea for setting up a business or a company.

He initially investigates and makes sure about the future prospects of the company.
Various people are brought by the promoter who wants to associate with him to share the responsibilities of
the company. The documents for the incorporation of the company are prepared by the promoter.
Funds and capitals are raised by him, which lets the company going.

FUNCTIONS OF A PROMOTER

 Promoter has to form ideas for the formation of the company and explore the possibilities for the
company.
 Promoter conducts negotiation for the purchase of the business.
 Promoter collects the number for signing of the AOA and MOA.
 Promoter decides the name of the company, the location of the registered office and the amount and
the form of the share capital.
 Promoter gets the MOA and AOA drafted and printed.
 He arranges the minimum subscription for the company.
 He also arranges the certificate of incorporation and the registration of the company.

KINDS OF PROMOTERS

1. Professional Promoters

Professional Promoters are the specialists in the promotion of a company. When the business starts, they
give up companies to the shareholders. We lack professional promoters in India. Other countries are highly
helped by professional promoters in the growth of the companies.

2. Occasional Promoters

They take interest in promoting only some companies and they doesn‘t involve in promotion on regular
basis and take up promotions of some company and then go back to their previous profession.

3. Financial Promoters
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Some financial institutions take up the promotion of the company when the financial situation or
environment is favorable.

4. Managing Agents as Promoters

The Managing Agents played an important role in promoting new companies in India. They used to float
new companies and then got their Managing Agency rights. But Managing Agency system of promotion of a
company has been abolished in India since a long time.

IMPORTANT DOCUMENTS

Memorandum of Association
Definition: The Memorandum of Association or MOA is the legal document that has to be filed with the
registrar of companies at the time of incorporation of the company. It is often called as a memorandum and
is comprised of fundamental conditions on the basis of which a company operates.

The memorandum of association is the most important document that needs to be formulated with utmost
care. It is the document that governs the relationship between the company and the outside. Memorandum of
Association serves as the constitution of the company that defines all the rules and regulations that must be
complied by every company. It is mandatory for every company that wants to get registered as a
private/public limited to prepare the memorandum of association.

Once the document is prepared the company cannot perform anything beyond the limit as mentioned in the
memorandum of association. Thus, this is considered as a supreme document and comprises of following
important clauses:

Name Clause: The name of the company that must end with the term ―limited‖. Also, it must be ensured
that the name selected for the company should not resemble with the name of any existing company.
Registered Office Clause: This clause requires to mention the registered office address of the company.
Objective Clause: The objective clause requires to mention clearly the objective behind the incorporation of
the company, i.e. the purpose for which the company is being established.
Liability Clause: This clause requires to mention the extent to which the shareholders are liable to pay off
the debt obligations in the event of the dissolution of the company.
Capital Clause: Company‘s authorized capital along with the nominal value of all kinds of shares need to
be disclosed here. Also, the company is required to state the list of its assets over here.
Association Clause: As per this clause, the willingness of shareholders is required with respect to their
association with the company. For a public limited company minimum, seven members are required to sign
the memorandum, whereas in a case of a private limited company minimum two members are required to do
the same.
Note: This document is required to be published and presented to the shareholders, creditors and others
associated with the company so that everybody knows the lines on which a company shall operate.

Articles of Association
Definition: The Articles of Association or AOA are the legal document that along with the memorandum of
association serves as the constitution of the company. It is comprised of rules and regulations that govern the
company‘s internal affairs.

The articles of association are concerned with the internal management of the company and aims at
carrying out the objectives as mentioned in the memorandum. These define the company‘s purpose and lay
out the guidelines of how the task is to be carried out within the organization. The articles of association
cover the information related to the board of directors, general meetings, voting rights, board proceedings,
etc.

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The articles of association are the contracts between the shareholders and the organization and among the
shareholder themselves. This document often defines the manner in which the shares are to be issued,
dividend to be paid, the financial records to be audited and the power to be given to the shareholders with
the voting rights.

The articles of association can be considered as the user manual for the organization that comprises of the
methodology that can be used to accomplish the company‘s day to day operations. This document is a
binding on the shareholders and the organization and has nothing to do with the outsiders. Thus, the
company is not accountable for any claims made by any external party.

The articles of association is comprised of following provisions:

● Share capital, call of share, forfeiture of share, conversion of share into stock, transfer of
shares, share warrant, surrender of shares, etc.
● Directors, their qualifications, appointment, remuneration, powers, and proceedings of the
board of directors meetings.
● Voting rights of shareholders, by poll or proxies and proceeding of shareholders general
meetings.
● Dividends and reserves, accounts and audits, borrowing powers and winding up.
It is mandatory for the following types of companies to have their own articles:

● Unlimited Companies: The article must state the number of members with which the company is to
be registered along with the amount of share capital, if any.
● Companies Limited by Guarantee: The article must define the number of members with which the
company is to be registered.
● Private Companies Limited by Shares: The private company having the share capital, then the
article must contain the provision that, restricts the right to transfer shares, limit the number of
members to 50, prohibits the invitation to the public for the further subscription of shares in the form
of shares or debentures.
Note: In the case of a public company limited by shares, the articles may be framed by the company itself or
in case company does not register articles then it might adopt all of any of the regulations as contained in
Table A in the Companies Act.

Prospectus:

Section 2(70) of the Companies Act, 2013 defines a prospectus as ――A prospectus means Any documents
described or issued as a prospectus and includes any notices, circular, advertisement, or other documents
inviting deposit from the public or documents inviting offer from the public for the subscription of shares or
debentures in a company.‖ A prospectus also includes shelf prospectus and red herring prospectus. A
prospectus is not merely an advertisement.

A document shall be called a prospectus if it satisfy two things:

1. It invites subscription to shares or debentures or invites deposits.
2. The aforesaid invitation is made to the public.

Contents of a prospectus:
1. Address of the registered office of the company.
2. Name and address of company secretary, auditors, bankers, underwriters etc.
3. Dates of the opening and closing of the issue.
4. Declaration about the issue of allotment letters and refunds within the prescribed time.
5. A statement by the board of directors about the separate bank account where all monies received out of
shares issued are to be transferred.
6. Details about underwriting of the issue.
7. Consent of directors, auditors, bankers to the issue, expert‘s opinion if any.
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 BUSINESS ORGANIZATION MANAGEMENT
8. The authority for the issue and the details of the resolution passed therefore.
9. Procedure and time schedule for allotment and issue of securities.
10. Capital structure of the company.
11. Main objects and present business of the company and its location.
12. Main object of public offer and terms of the present issue.
13. Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash.
14. Details of directors including their appointment and remuneration.
15. Disclosure about sources of promoter‘s contribution.
16. Particulars relation to management perception of risk factors specific to the project, gestation period of
the project, extent of progress made in the project and deadlines for completion of the project.

Various Categories of Prospectus

1. Statement in lieu of Prospectus: A public company, which does not raise its capital by public issue,
need not issue a prospectus. In such a case a statement in lieu of prospectus must be filed with the Registrar
3 days before the allotment of shares or debentures is made. It should be dated and signed by each director
or proposed director and should contain the same particulars as are required in case of prospectus proper.

2. Deemed Prospectus: Section 25 of the companies Act, 2013 provides that all documents containing offer
of shares or debentures for sale shall be included within the definition of the term prospectus and shall be
deemed as prospectus by implication of law.

Unless the contrary is proved an allotment of or an agreement to allot shares or debentures shall be deemed
to have been made with a view to the shares or debentures being offered for sale to the public if it is shown
a. That the offer of the shares or debentures of or any of them for sale to the public was made within 6
month after the allotment or agreement to allot; or
b. That at the date when the offer was made the whole consideration to be received by the company in
respect of the shares or debentures had not been received by it.
All enactments and rules of law as to the contents of prospectus shall apply to deemed prospectus.

3. Abridged Prospectus [Sec. 2(1)]: Abridged prospectus means a memorandum containing such salient
features of a prospectus as may be specified by the SEBI by making regulations in this behalf. No form of
application for the purchase of any of the securities of a company shall be issued unless such form is
accompanied by an abridged prospectus. A copy of the prospectus shall, on a request being made by any
person before the closing of the subscription list and the offer, be furnished to him.

Legal requirement regarding issue of prospectus: (Sec. 26 of the Companies Act, 2013)
The Companies Act has defined some legal requirements about the issue and registration of a prospectus.
The issue of the prospectus would be deemed to be legal only if the requirements are met.

1. Issue after the incorporation: As a rule, the prospectus of a company can only be issued after its
incorporation. A prospectus issued by, or on behalf of a company, or in relation to an intended company,
shall be dated, and that date shall be taken as the date of publication of the prospectus.

2. Registration of prospectus: it is mandatory to get the prospectus registered with the Registrar of
Companies before it is issued to the public. The procedure of getting the prospectus registered is as under:
A. A copy of the prospectus, duly signed by every person who is named therein as a director or a proposed
director of the company must be filed with Registrar of Companies before the prospectus is issued to the
public.
B. The following document must be attached thereto:
i) Consent to the issue of the prospectus required under any person as an expert confirming his written
consent to the issue thereof, and that he has not withdrawn his consent as aforesaid appears in the
prospectus.

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ii) Copies of all contracts entered into with respect to the appointment of the managing director, directors
and other officers of the company must also be filed with Registrar.
iii) If the auditor or accountant of the company has made any adjustments in the company‘s account, the said
adjustments and the reasons thereof must be filed with the documents.
iv) There must be a copy of the application which is to be filled for the issue of the company‘s shares and
debentures attached with the prospectus.
v) The prospectus must have the written consent of all the persons who have been named as auditors,
solicitors, bankers, brokers, etc.

C. Every prospectus must have, on the face of it, a statement that:

i) A copy of the prospectus has been delivered to the Registrar for registration.
ii) Specifies that any documents required to be endorsed by this section have been delivered to the Registrar.

D. A copy of the prospectus must be filed with the Registrar of Companies.

E. According to the Section 26, no prospectus shall be issued more than ninety days after the date on
which a copy thereof is delivered for registration.
If a prospectus issued in contravention of the above –stated provisions, then the company and every person
who knows a party to the issue of the prospectus shall be punishable with a fine.

Misleading Prospectus or Mis-statement in prospectus:

A prospectus is said to be misleading or untrue in two following cases:

1. A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the
form and context in which it is included.
2. Omission from prospectus of any matter to mislead the investors.

CRIMINAL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS (SECTION 34):

Where a prospectus, issued, circulated or distributed:

1. includes any statement which is untrue or misleading in form or context in which it is included; or
2. where any inclusion or omission of any matter is likely to mislead;
Every person who authorizes the issue of such prospectus shall be liable under section 447 i.e. fraud.

Defences available in this section are:

1. Person prove that statement or omission was immaterial;
2. Person has reasonable ground to believe and did believe that statement was true; or
3. Person has reasonable ground to believe and did believe that the inclusion or omission was necessary.

CIVIL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS (SECTION 35):

Where a person has subscribed for securities of a company acting upon any misleading statement, inclusion
or omission and has sustained any loss or damage as its consequence, the company and every person who:
1. is a director at the time of the issue of prospectus;
2. has named as director or as proposed director with his consent;
3. is a promoter of the company;
4. has authorized the issue of the prospectus; and
5. is an expert;
shall be liable to pay compensation to effected person. This civil liability shall be in addition to the criminal
liability under section 36. Where it is proved that a prospectus has been issued with intent to defraud the
applicants for the securities of a company or any other person or for any fraudulent purpose, every person
shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that
may have been incurred by any person who subscribed to the securities on the basis of such prospectus.

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 BUSINESS ORGANIZATION MANAGEMENT
UNIT-3
FUNCTIONS OF MANAGEMENT
DEFINITION & MEAN OF MANAGEMENT

The word 'management' has its origin in the Greek word 'nomos' which means management. It is
concerned with human beings whose behavior is highly unpredictable. A group of people, who accept the
responsibility to run an organization forms the management of that organization. Management can be
described as a process of getting things done through the people in an effective manner.

FEATURES OF MANAGEMENT

1. Management is goal oriented process:

Management always aims at achieving the organizational objectives.
The functions and activities of manager lead to the achievement of organizational objectives; for example, if
the objective of a company is to sell 1000 computers then manager will plan the course of action, motivate
all the employees and organize all the resources keeping in mind the main target of selling 1000 computers.
2. Management is Pervasive:
Management is a universal phenomenon. The use of management is not restricted to business firms only it is
applicable in profit-making, non-profit-making, business or non-business organizations; even a hospital,
school, club and house has to be managed properly. Concept of management is used in the whole world
whether it is USA, UK or India.
3. Management is Multidimensional:
Management does not mean one single activity but it includes three main activities:
i. Management of work

ii. Management of people

iii. Management of operations

(a) Management of work:

All organizations are set up to perform some task or goal. Management activities aim at achieving goals or
tasks to be accomplished. The task or work depends upon the nature of Business for example, work to be
accomplished in a school is providing education, in hospital is to treat patients, in industry to manufacture
some product. Management makes sure that work is accomplished effectively and efficiently.

(b) Management of people:

People refer to Human resources and Human resources are the most important assets of an organization. An
organization can win over competitors with efficient employees only because two organizations can have the
same physical, technological and financial resources but not human resources. Management has to get tasks
accomplished through people only.

● Managing people has two dimensions:

(i) Taking care of employee‘s individual needs

(ii) Taking care of group of people

(c) Management of operations:

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Operations refer to activities of the production cycle such as buying inputs, converting them into semi-
finished goods, finished goods.

Management of operations concentrates on mixing management of work with management of people, i.e.,
deciding what work has to be done, how it has to be done and who will do it.

4. Management is a continuous process:

Management is a continuous or never ending function. All the functions of management are performed
continuously, for example planning, organizing, staffing, directing and controlling are performed by all the
managers all the time. Sometimes, they are doing planning, then staffing or organizing etc. Managers
perform an ongoing series of functions continuously in the organization.

5. Management is a group activity:

Management always refers to a group of people involved in managerial activities. The management
functions cannot be performed in isolation. Each individual performs his/her role at his/her status and
department, and then only management functions can be executed.

Even the result of management affects every individual and every department of the organization so it
always refers to a group effort and not the individual effort of one person.

6. Management is a dynamic function:

Management has to make changes in goal, objectives and other activities according to changes taking place
in the environment. The external environment such as social, economical, technical and political
environment has great influence over the management. As changes take place in these environments, same
are implemented in organization to survive in the competitive world.

7. Intangible:
Management function cannot be physically seen but its presence can be felt. The presence of management
can be felt by seeing the orderliness and coordination in the working environment. It is easier to feel the
presence of mismanagement as it leads to chaos and confusion in the organization.
For example, if the inventory of finished products is increasing day by day it clearly indicates
mismanagement of marketing and sales.

8. Composite process:
Management consists of series of functions which must be performed in a proper sequence. These functions
are not independent of each other.
They are interdependent on each other. As the main functions of management are planning, organizing,
staffing, directing and controlling; organizing cannot be done without doing planning, similarly, directing
function cannot be executed without staffing and planning and it is difficult to control the activities of
employees without knowing the plan. All the functions interdependent on each other that is why
management is considered as a composite process of all these functions.

9. Balancing effectiveness and efficiency:

Effectiveness means achieving targets and objectives on time. Efficiency refers to optimum or best
utilization of resources. Managements always try to balance both and get the work done successfully. Only
effectiveness and only efficiency is not enough for an organization: a balance must be created in both.

For example, if the target of an employee is to produce 100 units in one month's time and achieve the target
by wasting resources and mishandling the machinery, it will not be in the interest of the organization. On the
other hand, if the employee spends a lot of time handling the machine carefully and managing the resources
carefully and fails to complete the target on time, it will also not be in the interest of organization. Manager
sees to it that this target is achieved on time-and with optimum use of resources.

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 BUSINESS ORGANIZATION MANAGEMENT
FUNCTIONS OF MANAGEMENT

Management has been described as a social process involving responsibility for economical and effective
planning & regulation of operation of an enterprise in the fulfillment of given purposes. It is a dynamic
process consisting of various elements and activities. These activities are different from operative functions
like marketing, finance, purchase etc. Rather these activities are common to each and every manger
irrespective of his level or status.

Different experts have classified functions of management. According to George & Jerry, ―There are four
fundamental functions of management i.e. planning, organizing, actuating and controlling”.

According to Henry Fayol, ―To manage is to forecast and plan, to organize, to command, & to control”.
Whereas Luther Gullick has given a keyword ‟POSDCORB‟ where P stands for Planning, O for
Organizing, S for Staffing, D for Directing, Co for Co-ordination, R for reporting & B for Budgeting. But
the most widely accepted are functions of management given by KOONTZ and O‟DONNEL i.e.
Planning, Organizing, Staffing, Directing and Controlling.

For theoretical purposes, it may be convenient to separate the function of management but practically these
functions are overlapping in nature i.e. they are highly inseparable. Each function blends into the other &
each affects the performance of others.

Functions of Management

1.Planning
It is the basic function of management. It deals with chalking out a future course of action & deciding in
advance the most appropriate course of actions for achievement of pre-determined goals. According to
KOONTZ, ―Planning is deciding in advance - what to do, when to do & how to do. It bridges the gap from
where we are & where we want to be‖. A plan is a future course of actions. It is an exercise in problem
solving & decision making. Planning is determination of courses of action to achieve desired goals. Thus,
planning is a systematic thinking about ways & means for accomplishment of pre-determined goals.
Planning is necessary to ensure proper utilization of human & non-human resources. It is all pervasive, it is
an intellectual activity and it also helps in avoiding confusion, uncertainties, risks, wastages etetc
2.Organizing
It is the process of bringing together physical, financial and human resources and developing productive
relationships amongst them for achievement of organizational goals. According to Henry Fayol, ―To
organize a business is to provide it with everything useful or its functioning i.e. raw material, tools, capital
and personnel‘s‖. To organize a business involves determining & providing human and non-human
resources to the organizational structure. Organizing as a process involves:

● Identification of activities.
● Classification of grouping of activities.
● Assignment of duties.
● Delegation of authority and creation of responsibility.
● Coordinating authority and responsibility relationships.
3.Staffing
It is the function of manning the organization structure and keeping it manned. Staffing has assumed greater
importance in the recent years due to advancement of technology, increase in size of business, complexity of
human behavior etc. The main purpose o staffing is to put right man on right job i.e. square pegs in square
holes and round pegs in round holes. According to Kootz & O‘Donell, ―Managerial function of staffing
involves manning the organization structure through proper and effective selection, appraisal &
development of personnel to fill the roles designed un the structure‖. Staffing involves:

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 BUSINESS ORGANIZATION MANAGEMENT
Manpower Planning (estimating man power in terms of searching, choose the person and giving the right
place).
Recruitment, Selection & Placement.
Training & Development.
Remuneration.
Performance Appraisal.
Promotions & Transfer.
4.Directing
It is that part of managerial function which actuates the organizational methods to work efficiently for
achievement of organizational purposes. It is considered life-spark of the enterprise which sets it in motion
the action of people because planning, organizing and staffing are the mere preparations for doing the work.
Direction is that inert-personnel aspect of management which deals directly with influencing, guiding,
supervising, motivating sub-ordinate for the achievement of organizational goals. Direction has following
elements: Supervision ,Motivation, Leadership, Communication

Supervision- implies overseeing the work of subordinates by their superiors. It is the act of watching &
directing work & workers.

Motivation- means inspiring, stimulating or encouraging the sub-ordinates with zeal to work. Positive,
negative, monetary, non-monetary incentives may be used for this purpose.

Leadership- may be defined as a process by which manager guides and influences the work of subordinates
in desired direction.

Communications- is the process of passing information, experience, opinion etc from one person to
another. It is a bridge of understanding.

5.Controlling
It implies measurement of accomplishment against the standards and correction of deviation if any to ensure
achievement of organizational goals. The purpose of controlling is to ensure that everything occurs in
conformities with the standards. An efficient system of control helps to predict deviations before they
actually occur. According to Theo Haimann, ―Controlling is the process of checking whether or not proper
progress is being made towards the objectives and goals and acting if necessary, to correct any deviation‖.
According to Koontz & O‘Donell ―Controlling is the measurement & correction of performance activities of
subordinates in order to make sure that the enterprise objectives and plans desired to obtain them as being
accomplished‖. Therefore controlling has following steps:

Establishment of standard performance.

Measurement of actual performance.
Comparison of actual performance with the standards and finding out deviation if any.
Corrective action.

Levels of Management

The term ―Levels of Management‘ refers to a line of demarcation between various managerial positions in
an organization. The number of levels in management increases when the size of the business and work
force increases and vice versa. The level of management determines a chain of command, the amount of
authority & status enjoyed by any managerial position. The levels of management can be classified in three
broad categories:

Top level / Administrative level

Middle level / Executors
Low level / Supervisory / Operative / First-line managers
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Managers at all these levels perform different functions. The role of managers at all the three levels is
discussed below:

Top Level of Management

It consists of board of directors, chief executive or managing director. The top management is the ultimate
source of authority and it manages goals and policies for an enterprise. It devotes more time on planning and
coordinating functions.

The role of the top management can be summarized as follows -

● Top management lays down the objectives and broad policies of the enterprise.
● It issues necessary instructions for preparation of department budgets, procedures, schedules etc.
● It prepares strategic plans & policies for the enterprise.
● It appoints the executive for middle level i.e. departmental managers.
● It controls & coordinates the activities of all the departments.
● It is also responsible for maintaining a contact with the outside world.
● It provides guidance and direction.
● The top management is also responsible towards the shareholders for the performance of the
enterprise.

Middle Level of Management

The branch managers and departmental managers constitute middle level. They are responsible to the top
management for the functioning of their department. They devote more time to organizational and
directional functions. In small organization, there is only one layer of middle level of management but in big
enterprises, there may be senior and junior middle level management. Their role can be emphasized as -

● They execute the plans of the organization in accordance with the policies and directives of the top
management.
● They make plans for the sub-units of the organization.
● They participate in employment & training of lower level management.
● They interpret and explain policies from top level management to lower level.
● They are responsible for coordinating the activities within the division or department.
● It also sends important reports and other important data to top level management.
● They evaluate performance of junior managers.
● They are also responsible for inspiring lower level managers towards better performance.

Lower Level of Management

Lower level is also known as supervisory / operative level of management. It consists of supervisors,
foreman, section officers, superintendent etc. According to R.C. Davis, ―Supervisory management refers to
those executives whose work has to be largely with personal oversight and direction of operative
employees‖. In other words, they are concerned with direction and controlling function of management.
Their activities include -

● Assigning jobs and tasks to various workers.

● They guide and instruct workers for day to day activities.
● They are responsible for the quality as well as quantity of production.
● They are also entrusted with the responsibility of maintaining good relation in the organization.
● They communicate workers problems, suggestions, and recommendatory appeals etc to the higher
level and higher level goals and objectives to the workers.
● They help to solve the grievances of the workers.
● They supervise & guide the sub-ordinates.
● They are responsible for providing training to the workers.
● They arrange necessary materials, machines, tools etc for getting the things done.
● They prepare periodical reports about the performance of the workers.
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● They ensure discipline in the enterprise.
● They motivate workers.
● They are the image builders of the enterprise because they are in direct contact with the workers.

SKILLS OF MANAGEMENT

The success and failure of an organization is directly proportional to the effectiveness of the management.
The superiors must share a healthy relationship with the employees for them to deliver their level best.
Leaders need to acquire certain skill sets for an efficient functioning:

Management needs to be impartial towards its employees. Rules and policies should be same for
everyone. Favoritism is a strict no at the workplace. No employee should be granted special favors.
The leaders must promote healthy discussions at the workplace. Make the employees work in teams for
them to know each other well. Encourage morning meetings or weekly meetings for the employees to come
up with their problems. Issues should not be left unattended. Try not to meet employees separately in closed
cabins. Discussions on a common platform are more fruitful and generate better results. Meet the employees
once in a week or month as per your schedule. Don‘t make the meetings too formal. Allow the employees to
bring their cups of coffee as well. Individuals do not open up much in formal discussions.
The superiors must ensure that employees do not fight amongst themselves. Conflicts must be avoided
at the workplace as nothing productive can be gained out of it. Make sure individuals do not have problems
with each other and gel well. In cases of conflicts, management must intervene and sort out differences
immediately. Make the employees sit face to face and let them discuss things amongst themselves.
Make sure employees adhere to the rules and regulations of the organization. Set clear objectives for
the employees. Targets must be predefined and the employees must know what they are supposed to do at
the workplace. Discipline must be maintained at the workplace. The employees must come to work on time
and strict action must be taken against those who do not follow company‘s policies.
Be a good listener. The management must interact with the employees more often. Such initiatives go a
long way in motivating the employees and make them stick to the organization for a longer span of time.
The “Hitler approach” does not work in the current scenario. Be a mentor to your employees rather than
being a strict boss. Guide them in their work. Try to help them in their assignments. Help them come out
with innovative solutions.
Motivate the employees from time to time. Design lucrative incentive plans and schemes to bring out the
best in them. Appreciate each time they do good work.
Encourage subordinates to celebrate birthday parties and important festivals at the workplace. Let the
employees enjoy together. The seniors must also participate in such activities.
Review the performance of the employees on a regular basis. Make sure employees are satisfied with
their job responsibilities. The duties assigned to them must be as per their interests and specialization.
Employees not performing up to the mark must be dealt with patience.
The leaders must promote necessary training programmes to upgrade the skills of the existing
employees. Team building activities also strengthen the bond amongst the employees.
Make sure employees achieve their targets and organizations earn their profits. Salaries must be distributed
on time. The employees must be happy with their job.
Encourage effective communication at the workplace. Communicate more through emails

SCIENTIFIC MANAGEMENT

Scientific management is a management theory that analyzes work flows to improve economic efficiency,
especially labor productivity. This management theory, developed by Frederick Winslow Taylor, was
popular in the 1880s and 1890s in U.S. manufacturing industries.

While the terms ―scientific management” and “Taylorism‖ are often treated as synonymous, a more
accurate view is that Taylorism is the first form of scientific management. Taylorism is sometimes called the
―classical perspective,‖ meaning that it is still observed for its influence but no longer practiced exclusively.
Scientific management was best known from 1910 to 1920, but in the 1920s, competing management
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theories and methods emerged, rendering scientific management largely obsolete by the 1930s. However,
many of the themes of scientific management are still seen in industrial engineering and management today.

Scientific management has at its heart four core principles that also apply to organizations today.
They include the following:

● Look at each job or task scientifically to determine the ―one best way‖ to perform the job. This is a
change from the previous ―rule of thumb‖ method where workers devised their own ways to do the
job.
● Hire the right workers for each job, and train them to work at maximum efficiency.
● Monitor worker performance, and provide instruction and training when needed.
● Divide the work between management and labor so that management can plan and train, and workers
can execute the task efficiently.

Over all view: The Scientific Management Theory is well known for its application of engineering science
at the production floor or the operating levels. The major contributor of this theory is Fredrick Winslow
Taylor, and that‘s why the scientific management is often called as ―Taylorism‖.

This theory focused on improving the efficiency of each individual in the organization. The major emphasis
is on increasing the production through the use of intensive technology, and the human beings are just
considered as adjuncts to machines in the performance of routine tasks.

The scientific management theory basically encompasses the work performed on the production floor as
these tasks are quite different from the other tasks performed within the organization. Such as, these are
repetitive in nature, and the individual workers performing their daily activities are divided into a large
number of cyclical repetition of same or closely related activities. Also, these activities do not require the
individual worker to exercise complex-problem solving activity. Therefore, more attention is required to be
imposed on the standardization of working methods and hence the scientific management theory laid
emphasis on this aspect.

The major principles of scientific management, given by Taylor, can be summarized as follows:

● Separate planning from doing.

● The Functional foremanship of supervision,i.e. Eight supervisors required to give directions and
instructions in their respective fields.
● Time, motion and fatigue studies shall be used to determine the fair amount of work done by each
individual worker.
● Improving the working conditions and standardizing the tools, period of work and cost of production.
● Proper scientific selection and training of workmen should be done.
● The financial incentives should be given to the workers to boost their productivity and motivate them
to perform well.
Thus, the scientific management theory focused more on mechanization and automation, i.e., technical
aspects of efficiency rather than the broader aspects of human behavior in the organization.

Criticism of Scientific Management

Although it is accepted that the scientific management enables the management to put resources to its best
possible use and manner, yet it has not been spared of severe criticism.

Workers Viewpoint

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Unemployment - Workers feel that management reduces employment opportunities from them through
replacement of men by machines and by increasing human productivity less workers are needed to do work
leading to chucking out from their jobs.
Exploitation - Workers feel they are exploited as they are not given due share in increasing profits which is
due to their increased productivity. Wages do not rise in proportion as rise in production. Wage payment
creates uncertainty & insecurity (beyond a standard output, there is no increase in wage rate).
Monotony - Due to excessive specialization the workers are not able to take initiative on their own. Their
status is reduced to being mere cogs in wheel. Jobs become dull. Workers loose interest in jobs and derive
little pleasure from work.
Weakening of Trade Union - To everything is fixed & predetermined by management. So it leaves no
room for trade unions to bargain as everything is standardized, standard output, standard working
conditions, standard time etc. This further weakens trade unions, creates a rift between efficient & in
efficient workers according to their wages.
Over speeding - the scientific management lays standard output, time so they have to rush up and finish the
work in time. These have adverse effect on health of workers. The workers speed up to that standard output,
so scientific management drives the workers to rush towards output and finish work in standard time.
Employer‟s Viewpoint
Expensive - Scientific management is a costly system and a huge investment is required in establishment of
planning dept., standardization, work study, training of workers. It may be beyond reach of small firms.
Heavy food investment leads to increase in overhead costs.
Time Consuming - Scientific management requires mental revision and complete reorganizing of
organization. A lot of time is required for work, study, standardization & specialization. During this
overhauling of organization, the work suffers.
Deterioration of Quality

HENRI FAYOL 14 PRINCIPLES OF MANAGEMENT

Henry Fayol, also known as the ‗father of modern management theory‘ gave a new perception of the concept
of management. He introduced a general theory that can be applied to all levels of management and every
department. The Fayol theory is practiced by the managers to organize and regulate the internal activities of
an organization. He concentrated on accomplishing managerial efficiency.

Henri Fayol

The fourteen principles of management created by Henri Fayol are explained below.

1. Division of Work-
Henri believed that segregating work in the workforce amongst the workers will enhance the quality of the
product. Similarly, he also concluded that the division of work improves the productivity, efficiency,
accuracy and speed of the workers. This principle is appropriate for both the managerial as well as a
technical work level.

2. Authority and Responsibility-

These are the two key aspects of management. Authority facilitates the management to work efficiently, and
responsibility makes them responsible for the work done under their guidance or leadership.

3. Discipline-
Without discipline, nothing can be accomplished. It is the core value for any project or any management.
Good performance and sensible interrelation make the management job easy and comprehensive.
Employees' good behavior also helps them smoothly build and progress in their professional careers.

4. Unity of Command-
This means an employee should have only one boss and follow his command. If an employee has to follow
more than one boss, there begins a conflict of interest and can create confusion.

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5. Unity of Direction-
Whoever is engaged in the same activity should have a unified goal. This means all the person working in a
company should have one goal and motive which will make the work easier and achieve the set goal easily.

6. Subordination of Individual Interest-

This indicates a company should work united towards the interest of a company rather than personal interest.
Be subordinate to the purposes of an organization. This refers to the whole chain of command in a company.

7. Remuneration-
This plays an important role in motivating the workers of a company. Remuneration can be monetary or
non-monetary. However, it should be according to an individual‘s efforts they have made.

8. Centralization-
In any company, the management or any authority responsible for the decision-making process should be
neutral. However, this depends on the size of an organization. Henri Fayol stressed on the point that there
should be a balance between the hierarchy and division of power.

9. Scalar Chain-
Fayol on this principle highlights that the hierarchy steps should be from the top to the lowest. This is
necessary so that every employee knows their immediate senior also they should be able to contact any, if
needed.

10. Order-
A company should maintain a well-defined work order to have a favourable work culture. The positive
atmosphere in the workplace will boost more positive productivity.

11. Equity-
All employees should be treated equally and respectfully. It‘s the responsibility of a manager that no
employees face discrimination.

12. Stability-
An employee delivers the best if they feel secure in their job. It is the duty of the management to offer job
security to their employees.

13. Initiative-
The management should support and encourage the employees to take initiatives in an organization. It will
help them to increase their interest and make then worth.

14. Esprit de Corps-

It is the responsibility of the management to motivate their employees and be supportive of each other
regularly. Developing trust and mutual understanding will lead to a positive outcome and work environment.

These 14 principles of management are used to manage an organization and are beneficial for prediction,
planning, decision-making, organization and process management, control and coordination.

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UNIT-4
PLANNING & ORGANIZING

Definitions of Planning in Management:

Planning is a pre-decided course of action which will be taken in future. It deals with the determination of
objectives to be achieved and the activities required achieving the objectives.

Planning is a mental exercise that requires Imagination, forecasting and sound decision making; it requires a
lot of thinking before doing. Planning is looking forward, anticipating the future and deciding the
appropriate course of action to be taken.

Some important definitions of planning are given as under:

―Planning is deciding in advance what is to be done. When a manager plans, he projects a course of action
for the future, attempting to achieve a consistent, coordinated structure of operations aimed at the desired
results.‖ – Theo Haimann.

―Planning is selecting information and making assumptions regarding the future to formulated activities
necessary to achieve organizational objectives.‖ – Terry and Franklin.

―The plan of action is, at one and the same time the result envisaged, the line of action to be followed, the
stages to go through and the methods to use.‖ – Henri Fayol.

―Planning is fundamentally a mental predisposition to do things in an overly way, to think before and to act
in the light of the fact rather than of guesses.‖ – L. F. Urwick.

―Planning is deciding in advance what to do, how to do it, where to do it and who is to do it. Planning
bridges the gap from where we want to go. It makes possible for things to occur while would not otherwise
happen.‖ – Koontz and o‟ Donnell.
Peter Drucker defined as “planning is the continuous process of making present entrepreneurial
decisions systematically and with best possible knowledge their future, organizing systematically the
efforts needed to carry out these decisions and measuring the results of these decisions against the
expectation through organized systematic feedback.”

FEATURES OF PLANNING

(1) Primary Function

Planning precedes other function because it lays down the base for all other functions of management.
All other management functions like organizing, staffing, directing and controlling are performed within the
framework of the plans drawn.
Without planning other functions of management is not possible.
Planning is the basic function of management and it is also referred to as the ―Primacy of Planning‖.

(2) Achieving Objectives

When we make plans, we focus on two things, specific goals to be achieved and activities involved to
achieve these specific goals.
These specific activities become objectives to achieve goals and objectives are quantifiable.
Planning cannot be done in the absence of objectives.

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In the absence of planning, employees would be working in different directions and the organisation would
not be able to achieve its desired goals.

(3) Futuristic/ Forward-Looking

Planning means looking ahead and meeting future events effectively.
Planning is regarded as a forward-looking function based on forecasting.
On the basis of forecasting, future conditions and events are anticipated and plans are prepared.

(4) All Pervasive

Planning is required in all types of organizations and at all levels of management. However, the scope of
planning differs.
Top-level management plans for the organizational as a whole. They think from the perspective of the
whole organization.
Middle-level management thinks from the perspective of their departments and are involved in departmental
planning.
Lower level management plans for the day-to-day operations of the concern.

(5) Continuous Process

Planning is an ongoing process and plans are prepared for a specific period of time.
These may be prepared for a day, week, a month, a quarter or a year.
At the end of a specific period, new plans are drawn and revised
regularly on the basis of feedback on previous plans, new requirements, and future conditions.

(6) Decision Making

Decision making means choosing the best alternative among the alternatives available.
Planning cannot be imagined in the absence of alternatives.
If there is no alternative available then there is no need for planning.
A thorough analysis of all the alternatives helps us choose the best one
and hence the need for planning arises.

(7) Planning is Mental Exercise

Planning is the outcome of a mental process rather than wishful thinking and guesswork.
Planning is a thinking process and it is separate from organisational activities.
It is based on logical reasoning, facts, foresight, vision, intelligent imagination, and sound judgment.

Types of Planning:
The process of planning may be classified into different categories on the following basis:

(i) Nature of Planning:

a. Formal planning. b. Informal planning.

(ii) Duration of planning:

a. Short term planning. b. Long term planning.

(iii) Levels of Management:

a. Strategic planning. b. Intermediate planning.

c. Operational planning.

(iv) Use:

a. Standing plans b. Single-use plans.

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(i) Nature of Planning:
a. Formal Planning:

Planning is formal when it is reduced to writing. When the numbers of actions are large it is good to have a
formal plan since it will help adequate control.

The term formal means official and recognised. Any planning can be done officially to be followed or
implemented. Formal planning is aims to determine and objectives of planning. It is the action that
determine in advance what should be done.
Advantages:

1. Proper Cooperation among employees,

2. Unity of Action,

3. Economy,

4. Proper coordination and control,

5. Choosing the right objectives, and

6. Future plan.

b. Informal Planning:

An informal plan is one, which is not in writing, but it is conceived in the mind of the manager. Informal
planning will be effective when the number of actions is less and actions have to be taken in short period.

(ii) Duration of Planning:

a. Short term Planning:

Short term planning is the planning which covers less than two years. It must be formulated in a manner
consistent with long-term plans. It is considered as tactical planning. Short-term plans are concerned with
immediate future; it takes into account the available resources only and is concerned with the current
operations of the business.

These may include plans concerning inventory planning and control, employee training, work methods etc.

Advantages:

1. It can be easily adjustable.

2. Changes can be made and incorporated.

3. Easy to Gauge.

4. Only little resources required.

Disadvantages:

1. Very short period-left over things will be more.

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2. Difficult to mobilize the resources.

3. Communication cycle will not be completed.

b. Long-Term Planning:

Long-term planning usually converse over a period of more than five years, mostly between five and fifteen
years. It deals with broader technological and competitive aspects of the organisation as well as allocation of
resources over a relatively long time period. Long-term planning is considered as strategic planning.

Short-term planning covers the period of one year while long term planning covers 5-15 years. In between
there may be medium-term plans. Usually, medium term plans are focusing on between two and five years.
These may include plan for purchase of materials, production, labour, overhead expenses and so on.

Advantages:

1. Sufficient time to plan and implement.

2. Effective control.

3. Adjustment and changes may be made gradually.

4. Periodic evaluation is possible.

5. Thrust areas can be identified easily.

6. Weakness can be spotted and rectified then and there.

Disadvantages:

1. Prediction is difficult.

2. Full of uncertainties.

3. Objectives and Targets may not be achieved in full.

4. More resources required.

(iii) Levels of Management:

a. Strategic Planning:

The strategic planning is the process of determining overall objectives of the organisation and the policies
and strategies adopted to achieve those objectives. It is conducted by the top management, which include
chief executive officer, president, vice-presidents, General Manager etc. It is a long range planning and may
cover a time period of up to 10 years.

It basically deals with the total assessment of the organisation‘s capabilities, its strengths and its weaknesses
and an objective evaluation of the dynamic environment. The planning also determines the direction the
company will be taking in achieving these goals.

b. Intermediate Planning:

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Intermediate planning cover time frames of about 6 months to 2 years and is contemplated by middle
management, which includes functional managers, department heads and product line mangers. They also
have the task of polishing the top managements strategic plans.

The middle management will have a critical look at the resources available and they will determine the most
effective and efficient mix of human, financial and material factors. They refine the broad strategic plans
into more workable and realistic plans.

c. Operational Planning:

Operational planning deals with only current activities. It keeps the business running. These plans are the
responsibility of the lower management and are conducted by unit supervisors, foremen etc. These are short-
range plans covering a time span from one week to one year.

These are more specific and they determine how a specific job is to be completed in the best possible way.
Most operational plans .ire divided into functional areas such as production, finance, marketing, personnel
etc.

Thus even though planning at all levels is important, since all levels are integrated into one, the strategic
planning requires closer observation since it establishes the direction of the organisation.

(iv) Use:

a. Standing Plan:

Standing plan is one, which is designed to be used over and over again. Objectives, policies procedures,
methods, rules and strategies are included in standing plans. Its nature is mechanical. It helps executives to
reduce their workload. Standing plan is also called routine plan. Standing or routine plan is generally long
range.

b. Single Use Plan:

Single use plan is one, which sets a course of action for a particular set of circumstances and is used up once
the particular goal is achieved. They may include programme, budgets, projects and schedules. It is also
called specific planning. Single use plan is short range.

Components of Planning/Planning Techniques:

Planning consists of several individual plans or components of planning, which are usually bound together.

i. Forecasting:

Forecasting becomes an integral part of the planning process. It is a prediction of future events and
conditions. It, therefore, includes both the assessment of the future and the provision for it. It helps to reduce
the uncertainties that surround management, decision making.

ii. Objectives:

Objectives are the ends toward which activity is aimed— they are the results to be achieved. They represent
not only the end point of planning but also the end toward which organizing, staffing, leading and
controlling are aimed.
Organization can grow without any difficulty if it has well-defined objectives. These objectives should be
clearly defined and communicated throughout the organization. Such objectives must be realistic.

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iii. Policies:

KoontZ and O‘Donnell defines ―policies are general statements or undertakings which guide or channel
thinking in decision-making of subordinates.‖ So, policies act as guides to thinking and action of
subordinates in the organizations. It should be clearly prescribed and understandable by all.

iv. Programmes:

It refers to the course of action of work to be carried out in proper sequence for the purpose of achieving
specific objectives.

v. Strategies:

Konnoz and Heinz Weihrich defined strategies as ―a general programme of action and deployment of
resources to attain comprehensive objectives‖ or ‖ the determination of the basic long-term objectives of an
enterprise ―and the adoption of courses of action and allocation of resources necessary to achieve these
goals. It is specific type of plan for achieving organizational goals.

vi. Schedules:

Fixing a time sequence for every operation is known as schedules. Normally it forms part of programming a
part of action plan.

vii. Procedures:

Procedures are plans that establish a required method of handling future activities. They are guides to action,
rather than to thinking and they detail the exact manner in which certain activities must be accomplished.
They are chronological sequences of required actions.

viii. Rules:

Rules spell out specific required actions or non-actions, following no direction. They are usually the
simplest type of plan.

ix. Budgets:

A budget is a statement of expected results expressed in numerical terms. It may be referred to as a

numberised programme. A budget may be expressed either in financial terms or in terms of labor-hours,
units of product, machine hours, or any other numerically measurable term. It helps the organization to
control the action by comparing budget and actual results.

Advantages of Planning:
1. Primacy of Planning:

Even though there are other managerial functions such as organizing, staffing, directing and controlling
which helps to achieve the organizational goals, planning precedes all other managerial functions. It
establishes objectives necessary for all group effort.

2. Helping to Management:

Since the planning is a future course of action, managers are able to define their objectives and get direction.
Also it creates a unity of purpose.

3. Effective Utilization of Resources:

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Proper planning helps to proper and effective utilization of resources. Resources are identified for optimum
utility through planning. So waste or minimum waste of resources will not result and thereby idle time for
workers and downtime for machines will be reduced. This will result in a minimum cost of operations.

4. Minimum Cost:

Planning helps to minimize cost by providing greater utilization of the available resources. All kinds of
wastage of men, materials, money and machines are prevented with the help of planning.

5. To help in Motivation:

All employees of the organization can feel that we have taken this plan, if the plans are communicated to
them. In this case the sense of belonging of employees increases and therefore they will be highly motivated.

6. To Offset Uncertainty and Change:

There may be continuous change in the environment and organization has to work in accelerating change.
This change is reflected in both tangible and intangible forms. Tangible changes are in the form of changes
in technology, market forces, and government regulations.

Intangible changes reflect changes in attitudes, values, cultures etc. In order to cope up with the
requirements of such changes, organizations must roll ahead for its future course of action, which is
basically provided by the planning process. Planning does not stop changes in the environment, but gears the
organization to take suitable actions so that it is successful in achieving its objectives.

7. Help in Coordination:

Proper planning is made by unifying all areas of departments of the organisation. It will lead to coordination
and harmony among the departments.

8. Facilities Control:

Planning provides performance standards and standards for measuring the progress of the organisations.
Therefore management can compare the actual performance with the standards. Manager can control action
by looking at different if any deviation.

9. Facilitates Decision-making:

Planning provides a framework for decision-making. Since the planning provides for feedback, periodic
evaluation, and indication for any deviation, corrective action can be taken which leads to better decision-
making.

10. Encourage Innovation and Creativity:

It brings about rationality in managerial approach and improvement in executive thinking. D. F. Hussey said
that, ―A good planning process will provide avenues for individual participation will throw up more ideas
about the company and its environment, will encourage an atmosphere of frankness and corporate self-
criticism and will stimulate managers to achieve more.‖

11. Improves Competitive Strength:

Since the operations are planned in advance, company can take its action concretely. It improves the
competitive strength of the organization.
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Limitations of Planning:
1. Corporate Planning is not Integrated into the Total Management System:

The top management fails to identify and associate properly the formal planning with the central concept of
the organization's mission.

2. There is a Lack of Understanding of the Different Steps of the Planning Process:

The management may not be knowledgeable or skilled in understanding all steps of the planning
requirements.

3. Non-Availability of Correct Information and Data:

Planning is made by having information and data available. Generally correct information and data not
available.

4. Management at Different Levels in the Organization has not Properly Contributed to Planning Activities:

Generally all strategic planning are made and conducted at top management. So sometimes middle level and
lower level of management, which are closer to the operation, may not understand all aspects of planning.
This will affect their fullest contribution.

5. Costly or Uneconomical:

Planning is expensive. The cost of planning should not be in excess of its contribution and managerial
judgment is necessary to balance the expenses of preparing the plans against the benefits derived from them.

6. The management is not always willing to cancel or modify your plans.

7. In starting formal planning, too much is attempted at once.

8. Resistance to change by organisational members.

9. Lack of contingency plans.

MANAGEMENT BY OBJECTIVES - MEANING, NEED AND ITS LIMITATIONS

An effective management goes a long way in extracting the best out of employees and make them work as a
single unit towards a common goal. The term Management by Objectives was coined by Peter Drucker in
1954.

What is Management by Objective ?

The process of setting objectives in the organization to give a sense of direction to the employees is called as
Management by Objectives. It refers to the process of setting goals for the employees so that they know
what they are supposed to do at the workplace..Management by Objectives defines roles and responsibilities
for the employees and help them chalk out their future course of action in the organization. Management by
objectives guides the employees to deliver their level best and achieve the targets within the stipulated time
frame.

Need for Management by Objectives (MBO)

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● The Management by Objectives process helps the employees to understand their duties at the
workplace.
● KRAs are designed for each employee as per their interest, specialization and educational
qualification.
● The employees are clear as to what is expected out of them.
● Management by Objectives process leads to satisfied employees. It avoids job mismatch and
unnecessary confusions later on.
● Employees in their own way contribute to the achievement of the goals and objectives of the
organization. Every employee has his own role at the workplace. Each one feels indispensable for the
organization and eventually develops a feeling of loyalty towards the organization. They tend to stick
to the organization for a longer span of time and contribute effectively. They enjoy at the workplace
and do not treat work as a burden.
● Management by Objectives ensures effective communication amongst the employees. It leads to a
positive ambience at the workplace.
● Management by Objectives leads to well defined hierarchies at the workplace. It ensures
transparency at all levels. A supervisor of any organization would never directly interact with the
Managing Director in case of queries. He would first meet his reporting boss who would then pass on
the message to his senior and so on. Everyone is clear about his position in the organization.
● The MBO Process leads to highly motivated and committed employees.
● The MBO Process sets a benchmark for every employee. The superiors set targets for each of the
team members. Each employee is given a list of specific tasks.

Limitations of Management by objectives Process

● It sometimes ignores the prevailing culture and working conditions of the organization.
● More emphasis is being laid on targets and objectives. It just expects the employees to achieve their
targets and meet the objectives of the organization without bothering much about the existing
circumstances at the workplace. Employees are just expected to perform and meet the deadlines. The
MBO Process sometimes do treat individuals as mere machines.
● The MBO process increases comparisons between individuals at the workplace. Employees tend to
depend on nasty politics and other unproductive tasks to outshine their fellow workers. Employees
do only what their superiors ask them to do. Their work lacks innovation, creativity and sometimes
also becomes monotonous.

ORGANIZING

Definition: Organizing is the second key management function, after planning, which coordinates human
efforts, arranges resources and incorporates the two in such a way which helps in the achievement of
objectives. It involves deciding the ways and means with which the plans can be implemented.

It entails defining jobs and working relationships, assigning different tasks associated with the plans,
arranging and allocating resources, design a structure which distinguishes duties, responsibilities and
authorities, scheduling activities, in order to maintain smoothness and effectiveness in operations.

Characteristics of Organizing

Division of Labour: Work is assigned to the employee who is specialized in that work.
Coordination: Different members of the organization are given different tasks to perform when all the tasks
are put together logically and sequentially, it results in the objectives, so coordination is required.

Objectives: Objectives need to be specifically defined.

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Authority-Responsibility Structure: For an effective authority responsibility structure, the position of each
manager and executive is specified, as per the degree of the authority and responsibility assigned to them,
while performing the duties.

Communication: The techniques, flow and importance of communication must be known to all the
members.

Process of Organizing

Organizing is the core function which binds all the activities and resources together in a systematic and
logical sequence. It encompasses a number of steps which are pursued to achieve organizational goals. Now,
we will discuss those steps in detail: process-of-organizing(fig)

Identification and division of work: Organizing process begins with identifying the work and dividing
them as per the plans. Basically, the work is classified into different manageable activities, to avoid
redundancy, and sharing of work is encouraged.

Departmentalization: After classifying the work into different activities, the activities having a similar
nature are grouped together. This process is called as departmentalization which facilitates specialization
and forms the basis for creating departments.

Assignment of the task: After the formation of departments, employees are placed in different departments
under a manager, called as a departmental manager. Thereafter, employees are assigned the jobs as per their
skills, qualifications and competencies. For the effectiveness of the performance, the manager must ensure
that there is a proper match between the job and the incumbent, i.e. the right person has to be placed at the
right job.
Establishment of organizational hierarchy: Deployment of work is not all, the employees must be aware of
whom they have to report and who can give them orders. Hence, work relationships need to be established
clearly, which helps in the creation of a hierarchical structure of the organization.

Provision of resources to the members: Arrangement and deployment of resources such as money,
materials, supplies, and machines, etc. which are important to carry out day to day operations of the
organization.
Coordination of efforts and scheduling of activities: The final step to this process is the coordination of
efforts and scheduling the activities in a logical and systematic manner so that the common objectives can be
achieved effectively.

Importance of Organizing

Organizing is integral to management as it facilitates the smooth functioning of the enterprise. The
importance of organizing is as under: importance-of-organizing

Advantage of Specialization: Organizing helps in the classification of jobs systematically amongst the
workforce, which helps in the reduction of workload, as well as improved productivity. This is because the
organization will get the benefit of specialization wherein workers will perform specific work on a regular
basis, according to their competency.
Describes work relationships: The definition of work relationships describes the flow of communication and
determines the superior-subordinate relationship. This removes confusion and chaos, in getting orders and
instructions.

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Effective utilization of resources: Organizing function ensures the best possible utilization of resources
whether it is human, material, financial or technical. This is because jobs are assigned to the employees
which avoid overlapping and duplication of work.

Adaptation to change: Organizing process helps the organization to survive and adapt the changes, by
making substantial changes in the strategies, hierarchy, relationships, etc.

Development of personnel: Organizing encourages creativity in executives. Delegation of authority reduce

their workload and they get time to identify new methods to perform the work. It also enables them to
explore new areas for their growth and development.
In a nutshell, with organizing the manager brings order out of disorder, removes confusion with respect to
work and responsibility, and frames an ideal environment where all the members of the organization can
work in tandem.

The following are the five principles of Organizing −

Five Organizing Principles

Work Specialization
Also called division of labor, work specialization is the degree to which organizational tasks are divided into
separate jobs. Each employee is trained to perform specific tasks related to their specialized function.

Specialization is extensive, for example running a particular machine in a factory assembly line. The groups
are structured based on similar skills. Activities or jobs tend to be small, but workers can perform them
efficiently as they are specialized in it.

In spite of the obvious benefits of specialization, many organizations are moving away from this principle as
too much specialization isolates employees and narrows down their skills to perform routine tasks.

Also it makes the organization people dependent. Hence organizations are creating and expanding job
processes to reduce dependency on particular skills in employees and are facilitating job rotation among
them.

Authority
Authority is the legitimate power assigned to a manager to make decisions, issue orders, and allocate
resources on behalf of the organization to achieve organizational objectives.

Authority is within the framework of the organization structure and is an essential part of the manager‘s job
role. Authority follows a top-down hierarchy. Roles or positions at the top of the hierarchy are vested with
more formal authority than are positions at the bottom.

The extent and level of authority is defined by the job role of the manager. Subordinates comply with the
manager‘s authority as it is a formal and legitimate right to issue orders.

Chain of Command
The chain of command is an important concept to build a robust organization structure. It is the unbroken
line of authority that ultimately links each individual with the top organizational position through a
managerial position at each successive layer in between.

It is an effective business tool to maintain order and assign accountability even in the most casual working
environments. A chain of command is established so that everyone knows whom they should report to and
what responsibilities are expected at their level. A chain of command enforces responsibility and
accountability. It is based on the two principles of Unity of command and Scalar Principle.
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Unity of command states that an employee should have one and only one manager or supervisor or reporting
authority to whom he is directly accountable to. This is done to ensure that the employee does not receive
conflicting demands or priorities from several supervisors at once, placing him in a confused situation.

However, there are exceptions to the chain of command under special circumstances for specific tasks if
required. But for the most part organizations to a large extent should adhere to this principle for effective
outcomes.

Scalar principle states that there should exist a clear line of authority from the position of ultimate authority
at the top to every individual in the organization, linking all the managers at all the levels. It involves a
concept called a gang plank using which a subordinate may contact a superior or his superior in case of an
emergency, defying the hierarchy of control. However, the immediate superiors must be informed about the
matter.

Delegation
Another important concept closely related to authority is delegation. It is the practice of turning over work-
related tasks and/or authority to employees or subordinates. Without delegation, managers do all the work
themselves and underutilize their workers. The ability to delegate is crucial to managerial success.

Authority is said to be delegated when discretion is vested in a subordinate by a superior. Delegation is the
downward transfer of authority from a manager to a subordinate. Superiors or managers cannot delegate
authority they do not have, however, high they may be in the organizational hierarchy.

Delegation as a process involves establishment of expected outcomes, task assignment, delegation of

authority for accomplishing these tasks, and exaction of responsibility for their accomplishment. Delegation
leads to empowerment, as employees have the freedom to contribute ideas and do their jobs in the best
possible ways.

Span of Control
Span of control (also referred to as Span of Management) refers to the number of employees who report to
one manager. It is the number of direct reporters that a manager has and whose results he is accountable for.

Span of control is critical in understanding organizational design and the group dynamics operating within
an organization. Span of control may change from one department to another within the same organization.

The span may be wide or narrow. A wide span of control exists when a manager has a large number of
employees reporting to him. Such a structure provides more autonomy. A narrow span of control exists
when the number of direct reporters that a manager has is small. Narrow spans allow managers to have more
time with direct reports, and they tend to spark professional growth and advancement.

TYPES OF ORGANIZATIONS

Formal Organization:
When the managers are carrying on organizing process then as a result of organizing process an
organizational structure is created to achieve systematic working and efficient utilization of resources. This
type of structure is known as formal organizational structure.

Formal and Informal Organization

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Formal organizational structure clearly spells out the job to be performed by each individual, the authority,
responsibility assigned to every individual, the superior- subordinate relationship and the designation of
every individual in the organization. This structure is created intentionally by the managers for achievement
of organizational goal.

Features of Formal organization:

(1) The formal organizational structure is created intentionally by the process of organizing.

(2) The purpose of formal organization structure is achievement of organizational goal.

(3) In formal organizational structure each individual is assigned a specific job.

(4) In formal organization every individual is assigned a fixed authority or decision-making power.

(5) Formal organizational structure results in creation of superior-subordinate relations.

(6) Formal organizational structure creates a scalar chain of communication in the organisation.

Advantages of Formal Organization:

1. Systematic Working:

Formal organization structure results in systematic and smooth functioning of an organisation.

2. Achievement of Organizational Objectives:

Formal organizational structure is established to achieve organizational objectives.

3. No Overlapping of Work:

In formal organization structure work is systematically divided among various departments and employees.
So there is no chance of duplication or overlapping of work.

4. Co-ordination:

Formal organizational structure results in coordinating the activities of various departments.

5. Creation of Chain of Command:

Formal organizational structure clearly defines superior subordinate relationship, i.e., who reports to whom.

6. More Emphasis on Work:

Formal organizational structure lays more emphasis on work than interpersonal relations.

Disadvantages of Formal Organization:

1. Delay in Action:

While following scalar chain and chain of command actions get delayed in formal structure.

2. Ignores Social Needs of Employees:

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Formal organizational structure does not give importance to psychological and social need of employees
which may lead to de motivation of employees.

3. Emphasis on Work Only:

Formal organizational structure gives importance to work only; it ignores human relations, creativity,
talents, etc.

Informal Organization:

In the formal organizational structure individuals are assigned various job positions. While working at those
job positions, the individuals interact with each other and develop some social and friendly groups in the
organization. This network of social and friendly groups forms another structure in the organization which is
called informal organizational structure.

The informal organizational structure gets created automatically and the main purpose of such structure is
getting psychological satisfaction. The existence of informal structure depends upon the formal structure
because people working at different job positions interact with each other to form informal structure and the
job positions are created in formal structure. So, if there is no formal structure, there will be no job position,
there will be no people working at job positions and there will be no informal structure.

Features of informal organization:

(1) Informal organizational structure gets created automatically without any intended efforts of managers.

(2) Informal organizational structure is formed by the employees to get psychological satisfaction.

(3) Informal organizational structure does not follow any fixed path of flow of authority or communication.

(4) Source of information cannot be known under informal structure as any person can communicate with
anyone in the organization.

(5) The existence of informal organizational structure depends on the formal organization structure.

Advantages of Informal Organization:

1. Fast Communication:

Informal structure does not follow scalar chain so there can be faster spread of communication.

2. Fulfills Social Needs:

Informal communication gives due importance to psychological and social need of employees which
motivate the employees.

3. Correct Feedback:

Through informal structure the top level managers can know the real feedback of employees on various
policies and plans.

Strategic Use of Informal Organization. Informal organization can be used to get benefits in the formal
organization in the following way:
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1. The knowledge of informal group can be used to gather support of employees and improve their
performance.

2. Through grapevine important information can be transmitted quickly.

3. By cooperating with the informal groups the managers can skillfully take the advantage of both formal
and informal organizations.

Disadvantages of Informal organization:

1. Spread Rumors:

According to a survey 70% of information spread through informal organizational structure are rumors
which may mislead the employees.

2. No Systematic Working:

Informal structure does not form a structure for smooth working of an organization.

3. May Bring Negative Results

If informal organization opposes the policies and changes of management, then it becomes very difficult to
implement them in organization.

4. More Emphasis to Individual Interest:

Informal structure gives more importance to satisfaction of individual interest as compared to organizational
interest.

Line and Staff Organization

Line and staff organization is a modification of line organization and it is more complex than line
organization. According to this administrative organization, specialized and supportive activities are
attached to the line of command by appointing staff supervisors and staff specialists who are attached to the
line authority. The power of command always remains with the line executives and staff supervisors guide,
advice and council the line executives. Personal Secretary to the Managing Director is a staff official.

MANAGING DIRECTOR
↓ ↓ ↓
Production Manager Marketing Manager Finance Manager
↓ ↓ ↓
Plant Supervisor Market Supervisor Chief Assistant
↓ ↓ ↓
Foreman Salesman Accountant

Features of Line and Staff Organization

There are two types of staff :

Staff Assistants- P.A. to Managing Director, Secretary to Marketing Manager.

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Staff Supervisor- Operation Control Manager, Quality Controller, PRO

Line and Staff Organization is a compromise of line organization. It is more complex than line concern.
Division of work and specialization takes place in line and staff organization.
The whole organization is divided into different functional areas to which staff specialists are attached.
Efficiency can be achieved through the features of specialization.

There are two lines of authority which flow at one time in a concern :

1.Line Authority 2.Staff Authority

Power of command remains with the line executive and staff serves only as counselors.

Merits of Line and Staff Organization

Relief to line of executives- In a line and staff organization, the advice and counseling which is provided to
the line executives divides the work between the two. The line executive can concentrate on the execution of
plans and they get relieved of dividing their attention to many areas.

Expert advice- The line and staff organization facilitates expert advice to the line executive at the time of
need. The planning and investigation which is related to different matters can be done by the staff specialist
and line officers can concentrate on execution of plans.

Benefit of Specialization- Line and staff through division of whole concern into two types of authority
divides the enterprise into parts and functional areas. This way every officer or official can concentrate in its
own area.

Better co-ordination- Line and staff organization through specialization is able to provide better decision
making and concentration remains in few hands. This feature helps in bringing co-ordination in work as
every official is concentrating in their own area.

Benefits of Research and Development- Through the advice of specialized staff, the line executives, the
line executives get time to execute plans by taking productive decisions which are helpful for a concern.
This gives a wide scope to the line executive to bring innovations and go for research work in those areas.
This is possible due to the presence of staff specialists.

Training- Due to the presence of staff specialists and their expert advice serves as ground for training to line
officials. Line executives can give due concentration to their decision making. This in itself is a training
ground for them.

Balanced decisions- The factor of specialization which is achieved by line staff helps in bringing co-
ordination. This relationship automatically ends up the line official to take better and balanced decision.

Unity of action- Unity of action is a result of unified control. Control and its affectivity take place when co-
ordination is present in the concern. In the line and staff authority all the officials have got independence to
make decisions. This serves as effective control in the whole enterprise.

Demerits of Line and Staff Organization

Lack of understanding- In a line and staff organization, there are two authority flowing at one time. This
results in the confusion between the two. As a result, the workers are not able to understand as to who is
their commanding authority. Hence the problem of understanding can be a hurdle in effective running.

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Lack of sound advice- The line official get used to the expertise advice of the staff. At times the staff
specialist also provide wrong decisions which the line executive have to consider. This can affect the
efficient running of the enterprise.

Line and staff conflicts- Line and staff are two authorities which are flowing at the same time. The factors
of designations, status influence sentiments which are related to their relation, can pose a distress on the
minds of the employees. This leads to minimizing of co-ordination which hampers a concern‘s working
.
Costly- In line and staff concern, the concerns have to maintain the high remuneration of staff specialist.
This proves to be costly for a concern with limited finance.

Assumption of authority- The power of concern is with the line official but the staff dislikes it as they are
the one more in mental work.

Staff steals the show- In a line and staff concern, the higher returns are considered to be a product of staff
advice and counseling. The line officials feel dissatisfied and a feeling of distress enters a concern. The
satisfaction of line officials is very important for effective results.

Causes of Conflicts Between Line and Staff

Whatever may be the way of structuring an organization, basically organiza-tions are tightly knotted
together by the cord of authority relationships. Such relationships act as a cohesive force and integrate the
whole organization.

The types and de-grees of authority vary with the decision-making levels. Different authority relationships
basically revolve around line and staff relationships. Line func-tions are those that directly influence the
accomplishment of objectives of an organization, while staff functions help the line staff to work effectively
and accomplish organizational objectives.

However, in reality it is difficult for us to separate direct and supportive functions. In fact, functions are
based on the nature of the organization. Hence such categorization of line and staff func-tions varies from
organization to organization. In a manufacturing organization, production and sales are considered as line
functions, while fi-nance, purchase, personnel, maintenance, quality control, etc. are considered as staff
functions.

Line and staff distinctions are made on the basis of two viewpoints—functional viewpoint and authority
relationships viewpoint. Allen defined line and staff functions thus—‖Line functions are those which have
direct responsibility for accomplishing the objectives of the enterprise and staff refers to those elements of
the organizations that help the line to work more effectively in accomplishing the primary objectives of the
enterprise.‖ Since organizational objectives determine the line and staff functions, any change in objectives
may result in changes in the line and staff functions. The principal distinctions between line and staff are

Line and Staff distinction

Line and Staff Conflicts:

Line and staff managers are supposed to work harmoniously to achieve the organizational goals. But their
relationship is one of the major sources of conflict in most organizations. Since such conflicts lead to loss of
time and organizational effectiveness, it is always desirable to identify the sources of such conflicts and
initiate necessary action to overcome them.

Theoretically, it is impossible to differentiate between line and staff functions and because of this, conflicts
cannot be avoided. However, line and staff conflicts can be grouped into three categories—conflicts due to
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line viewpoint, conflicts due to staff viewpoint, and conflicts due to the very nature of line and staff
relation-ships.

Conflicts due to Line Viewpoint:

1. Lack of accountability:

Line managers generally perceive that staff managers are not accountable for their actions. Such lack of
account-ability on the part of staff leads to ignoring of the overall organizational objectives. Staff takes the
credit for achieving the results, which is actu-ally achieved by the line people. But if anything goes wrong,
they blame the line. Such perception among the line managers is one of the most important sources of line
and staff conflict.

2. Encroachment on line authority:

Line managers often allege that staff managers encroach upon their authority by giving recommendations on
matters that come within their purview. Such encroachments influ-ence the working of their departments
and often lead to hostility, resent-ment, and reluctance to accept staff recommendations.

3. Dilution of authority:

Staff managers often dilute the authority and be- little the responsibilities of line managers. Line managers
fear that their responsibilities may be reduced and they even suffer from a feeling of insecurity.

4. Theoretical basis:

Staff being specialists, they generally think within the ambit of their specialization. They fail to relate their
suggestions to the actual reality and are unable to understand the actual dimensions of the problems. This is
because staff is cut-off‖ from the day-to-day opera-tions. This results in impractical suggestions, making it
difficult to achieve organizational goals.

Conflicts due to Staff Viewpoint:

1. Lack of proper use of staff:

Staff managers allege that line managers often take decisions without any input from them. Line just informs
staff after taking decisions. This makes staff managers feel that line do not need staff. But even in such cases
(where line takes its own decisions without consulting staff), if anything goes wrong, staff is made
respon-sible.

2. Resistance to new ideas:

Line managers resist new ideas as they feel implementing new ideas means something is wrong with the
present way of working. Such rigidity of line managers dissuades staff from implementing new ideas in the
organization and adds to their frustra-tion.

3. Lack of proper authority:

Staff often alleges that despite having the best solutions to the problems being faced in their areas of
specialization, they fail to contribute to organizational goals. This is because the staff lack the authority to
implement the solutions and are unable to persuade the line managers (who have the authority) to implement
them.

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Conflicts Due to the Very Nature of Line and Staff Relationships:

1. Different backgrounds:

Line and staff managers are usually from dif-ferent backgrounds. Normally line managers are seniors to staff
in terms of organizational hierarchy and levels. On the contrary, staff managers are relatively younger and
better educated. Staff often looks down upon the line. Such complexes create an atmosphere of mistrust and
hatred between the line and staff.

2. Lack of demarcation between line and staff authority:

In practice it is difficult to make a distinction between line and staff authority. Overlap-ping and duplication
of work creates a gap between the authority and responsibility of line and staff. Each tries to shift the blame
to the other.

3. Lack of proper understanding of authority:

Failure to understand au-thority causes misunderstandings between the line and staff. This leads to
encroachment and creates conflict.

TO OVERCOME THE LINE AND STAFF CONFLICT, IT IS NECESSARY FOR AN

ORGANIZATION TO FOLLOW CERTAIN APPROACHES:

1. Clarity in relationships:

Duties and responsibilities of both line and staff should be clearly laid down. Relationships of staff with the
line and their scope of authority need to be clearly defined. Similarly, line man-agers should also be made
responsible for decision making and they should have corresponding authority for the same. Line should
enjoy the freedom to modify, accept, or reject the recommendations or advice of the staff.

2. Proper use of staff:

Line managers must know how to maximize orga-nizational efficacy by optimizing the expertise of staff
managers. They need to be trained on the same. Similarly, staff managers should also help the line to
understand how they can improve their activities.

3. Completed staff work:

Completed staff work denotes careful study of the problem, identifying possible alternatives for the problem,
and pro-viding recommendations based on the compiled facts. This will result in more staff work and
pragmatic suggestions.

4. Holding staff accountable for results:

Once staff becomes accountable, they would be cautious about their recommendations. Line also would
have confidence on staff recommendations, as staff is accountable for the results.

Span of Management or Span of Control

Span of management, also known as ‗span of control‟, refers to the number of people a manager directly
manages. In a wider span of control, a manager has many subordinates who report to him. In a narrow span
of control, a manger has fewer subordinates under him.
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In a classical type of organizational structure, which is the most common form, the effectiveness and
efficiency of operations is determined by the number of people under direct supervision of a manager. For
most effective operations, it is necessary to have the optimum number of subordinates to supervise.

The informal groups have a significant impact on the span of management. If the supervisor has cordial
relations with his subordinates and the subordinates are dedicated to their work for professional as well as
social reasons, then more subordinates can be assigned to each supervisor and less managerial time will be
needed to deal with the subordinates.

FACTORS AFFECTING SPAN OF CONTROL / MANAGEMENT

Obviously , the number of subordinates that can effectively be managed for supervision and delegation of
authority would be finite and depend upon a number of factors. Some of these factors are:

Similarity of Functions: If the subordinates are involved in the same or similar activities, then it is possible
for the manager to supervise more subordinates. Since the problems that may arise would be similar in
nature, these would be easier to handle. Conversely, if these subordinates are involved in diversified
operations, the situation would be more complex and hence the span of control would be narrow.

Complexity of Functions: If the operations that the employees are performing are complex and
sophisticated and require constant supervision, then it would be more difficult for the manager to manage
too many employees and hence a narrow span of control would be desirable.

Geographical Closeness of Employees: The closer the subordinates are to each other in a physical location,
the easier it will be for the manager to manage more employees.

Direction and Coordination: The span of control would also be determined by the degree of coordination
required, both within the units and with units in other departments. If the units need continuous directions
and extra time of managers in coordinating these activities, then fewer subordinates would be better
supervised.

Capacity of Subordinates: Subordinates who are well trained, professionally developed and experienced,
need little supervision in discharging their duties. In such situations, more subordinates can be effectively
supervised. These subordinates can further be assisted by providing them with ‗standing plans‘ that ore
applicable in repetitive operations and routine recurring problems, thus requiring less supervisory assistance.

The Working staff of the Manager: If the manager has a supporting staff that is equally skilled in handling
situations, then it would be possible to manage a wider span of control because the responsibilities of
supervision would be shared.

The optimum number of subordinates under any one manager would vary and directly depend upon the type
of relationship between the manager and subordinates, not only on a one-to-one basis but also with
subordinates as groups, taking into consideration the cross relationships among the employees themselves.

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UNIT-5

AUTHORITY, CO-ORDINATION &CONTROL

AUTHORITY, RESPONSIBILITY AND ACCOUNTABILITY

In laymen terms, authority means nothing but power. Responsibility means an obligation to do anything.
Accountability means responsibility to answer for the work. But it is not that simple as it seems to be. Authority,
Responsibility, and Accountability are very deep terms and are equally important in management. In this article,
we will discuss each of them and try to find some common difference between authority and responsibility.

Authority
Authority is nothing but the rights or the powers with the executives which the organization provides them with
the aim of accomplishment of certain common organizational goals. Hence, it includes the powers to assign
duties to the subordinates and make them accept and follow it. Without authority, a manager ceases to be a
manager because he will be able to make his juniors or subordinates work towards the accomplishment of the
goals. An organization cannot think of its existence without proper assignment and detailing of authority
throughout the organization. Authority flows downwards as the top management provides it to the managers
and executives at different levels of management. It needs to be accepted from the below too, i.e., from the
subordinates.

Definition of Authority
As per Henri Fayol, ―Authority is the right to give orders and the power to exact obedience.‖

As per Mooney and Reily, ―Authority is the principal at the root of Organization and so important that it is
impossible to conceive of an Organization at all unless some person or persons are in a position to require an
action of others.‖

Definition of power
 ability to act or produce an effect
 ability to get extra-base hits
 capacity for being acted upon or undergoing an effect of legal or official authority, capacity, or
right
 possession of control, authority, or influence over others

Responsibility

Responsibility is nothing but the duty that comes along with the job. In other words, it is the obligation of the
person to complete the task given to him/her. It becomes his responsibility. Moreover, it shows that the
authority is properly used and work is done accordingly. Under this, a person is eligible to delegate the work to
the subordinate but not the ultimate accountability. That means, even if he transfers his work, he will remain
responsible for the obligation of the accomplishment of the work

Definition of Responsibility
As per Davis, ―Responsibility is an obligation of an individual to perform assigned duties to the best of his
ability under the direction of his leader.‖ In the words of Theo Haimann, ―Responsibility is the obligation of a
subordinate to perform the duty as required by his superior‖.
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As per McFarland, responsibility means, ―the duties and activities assigned to a position or an executive‖.

Characteristics

1. Its importance lies in the creation of the obligation to perform the work.

2. It arises from the superior-subordinate relationship.

3. Unlike Authority, it flows from bottom to top.

4. It is always in the form of a continuing obligation.

5. No one can delegate responsibility.

Accountability

It is nothing but the liability created for the transfer of authority. Accountability creates the obligation of the
subordinate and makes him answerable for the work done by him/her. Hence, it is the answerability for the
performance of the assigned duties. Once a person accepts authority, he deems to accept Responsibility and
Accountability at that time only.

Definition of Accountability
As per McFarland, ―accountability is the obligation of an individual to report formally to his superior about the
work he has done to discharge the responsibility.‖

Delegation of Authority - Meaning, Importance and its Principles

A manager alone cannot perform all the tasks assigned to him. In order to meet the targets, the manager
should delegate authority. Delegation of Authority means division of authority and powers downwards to
the subordinate. Delegation is about entrusting someone else to do parts of your job. Delegation of authority
can be defined as subdivision and sub-allocation of powers to the subordinates in order to achieve effective
results.

Elements of Delegation

1. Authority - in context of a business organization, authority can be defined as the power and right of
a person to use and allocate the resources efficiently, to take decisions and to give orders so as to
achieve the organizational objectives. Authority must be well- defined. All people who have the
authority should know what is the scope of their authority is and they shouldn‘t misutilize it.
Authority is the right to give commands, orders and get the things done. The top level management
has greatest authority.

Authority always flows from top to bottom. It explains how a superior gets work done from his
subordinate by clearly explaining what is expected of him and how he should go about it. Authority
should be accompanied with an equal amount of responsibility. Delegating the authority to someone
else doesn‘t imply escaping from accountability. Accountability still rest with the person having the
utmost authority.

2. Responsibility - is the duty of the person to complete the task assigned to him. A person who is
given the responsibility should ensure that he accomplishes the tasks assigned to him. If the tasks for
which he was held responsible are not completed, then he should not give explanations or excuses.
Responsibility without adequate authority leads to discontent and dissatisfaction among the person.
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Responsibility flows from bottom to top. The middle level and lower level management holds more
responsibility. The person held responsible for a job is answerable for it. If he performs the tasks
assigned as expected, he is bound for praises. While if he doesn‘t accomplish tasks assigned as
expected, then also he is answerable for that.
3. Accountability - means giving explanations for any variance in the actual performance from the
expectations set. Accountability cannot be delegated. For example, if ‘A‘ is given a task with
sufficient authority, and ‘A‘ delegates this task to B and asks him to ensure that task is done well,
responsibility rest with ‘B‘, but accountability still rest with ‘A‘. The top level management is most
accountable. Being accountable means being innovative as the person will think beyond his scope of
job. Accountability, in short, means being answerable for the end result. Accountability can‘t be
escaped. It arises from responsibility.

For achieving delegation, a manager has to work in a system and has to perform following steps : -

1. Assignment of tasks and duties

2. Granting of authority
3. Creating responsibility and accountability

Delegation of authority is the base of superior-subordinate relationship, it involves following steps: -

1. Assignment of Duties - The delegator first tries to define the task and duties to the subordinate. He
also has to define the result expected from the subordinates. Clarity of duty as well as result expected
has to be the first step in delegation.
2. Granting of authority - Subdivision of authority takes place when a superior divides and shares his
authority with the subordinate. It is for this reason, every subordinate should be given enough
independence to carry the task given to him by his superiors. The managers at all levels delegate
authority and power which is attached to their job positions. The subdivision of powers is very
important to get effective results.
3. Creating Responsibility and Accountability - The delegation process does not end once powers are
granted to the subordinates. They at the same time have to be obligatory towards the duties assigned
to them. Responsibility is said to be the factor or obligation of an individual to carry out his duties in
best of his ability as per the directions of superior. Responsibility is very important. Therefore, it is
that which gives effectiveness to authority. At the same time, responsibility is absolute and cannot be
shifted. Accountability, on the others hand, is the obligation of the individual to carry out his duties
as per the standards of performance. Therefore, it is said that authority is delegated, responsibility is
created and accountability is imposed. Accountability arises out of responsibility and responsibility
arises out of authority. Therefore, it becomes important that with every authority position an equal
and opposite responsibility should be attached.

Therefore every manager ,i.e. ,the delegator has to follow a system to finish up the delegation process.
Equally important is the delegate's role which means his responsibility and accountability is attached with
the authority over to here.

Relationship between Authority and Responsibility

Authority is the legal right of person or superior to command his subordinates while accountability is the
obligation of individual to carry out his duties as per standards of performance Authority flows from the
superiors to subordinates, in which orders and instructions are given to subordinates to complete the task. It
is only through authority, a manager exercises control. In a way through exercising the control the superior
is demanding accountability from subordinates. If the marketing manager directs the sales supervisor for 50
units of sale to be undertaken in a month. If the above standards are not accomplished, it is the marketing
manager who will be accountable to the chief executive officer. Therefore, we can say that authority flows
from top to bottom and responsibility flows from bottom to top. Accountability is a result of responsibility
and responsibility is result of authority. Therefore, for every authority an equal accountability is attached.

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DIFFERENCES BETWEEN AUTHORITY AND RESPONSIBILITY

Authority Responsibility

It is the legal right of a person or It is the obligation of subordinate to perform the

a superior to command his work assigned to him.
subordinates.

Authority is attached to the Responsibility arises out of superior-subordinate

position of a superior in concern. relationship in which subordinate agrees to carry
out duty given to him.

Authority can be delegated by a Responsibility cannot be shifted and is absolute

superior to a subordinate

It flows from top to bottom. It flows from bottom to top.

Importance of Delegation
Delegation of authority is a process in which the authority and powers are divided and shared amongst the
subordinates. When the work of a manager gets beyond his capacity, there should be some system of sharing
the work. This is how delegation of authority becomes an important tool in organization function. Through
delegation, a manager, in fact, is multiplying himself by dividing/multiplying his work with the
subordinates. The importance of delegation can be justified by -

1. Through delegation, a manager is able to divide the work and allocate it to the subordinates. This
helps in reducing his work load so that he can work on important areas such as - planning, business
analysis etc.
2. With the reduction of load on superior, he can concentrate his energy on important and critical issues
of concern. This way he is able to bring effectiveness in his work as well in the work unit. This
effectiveness helps a manager to prove his ability and skills in the best manner.
3. Delegation of authority is the ground on which the superior-subordinate relationship stands. An
organization functions as the authority flows from top level to bottom. This in fact shows that
through delegation, the superior-subordinate relationship become meaningful. The flow of authority
is from top to bottom which is a way of achieving results.
4. Delegation of authority in a way gives enough room and space to the subordinates to flourish their
abilities and skill. Through delegating powers, the subordinates get a feeling of importance. They get
motivated to work and this motivation provides appropriate results to a concern. Job satisfaction is an
important criterion to bring stability and soundness in the relationship between superior and
subordinates. Delegation also helps in breaking the monotony of the subordinates so that they can be
more creative and efficient.

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Delegation of authority is not only helpful to the subordinates but it also helps the managers to
develop their talents and skills. Since the manager get enough time through delegation to concentrate
on important issues, their decision-making gets strong and in a way they can flourish the talents
which are required in a manager. Through granting powers and getting the work done, helps the
manager to attain communication skills, supervision and guidance, effective motivation and the
leadership traits are flourished. Therefore it is only through delegation, a manager can be tested on
his traits.

5. Delegation of authority is help to both superior and subordinates. This, in a way, gives stability to a
concern‘s working. With effective results, a concern can think of creating more departments and
divisions flow working. This will require creation of more managers which can be fulfilled by
shifting the experienced, skilled managers to these positions. This helps in both virtual as well as
horizontal growth which is very important for a concern‘s stability.

Therefore, from the above points, we can justify that delegation is not just a process but it is a way by which
manager multiples himself and is able to bring stability, ability and soundness to a concern.

Principles of Delegation
There are a few guidelines in form of principles which can be a help to the manager to process of delegation.
The principles of delegation are as follows: -

1. Principle of result excepted- suggests that every manager before delegating the powers to the
subordinate should be able to clearly define the goals as well as results expected from them. The
goals and targets should be completely and clearly defined and the standards of performance should
also be notified clearly. For example, a marketing manager explains the salesmen regarding the units
of sale to take place in a particular day, say ten units a day have to be the target sales. While a
marketing manager provides these guidelines of sales, mentioning the target sales is very important
so that the salesman can perform his duty efficiently with a clear set of mind.
2. Principle of Parity of Authority and Responsibility- According to this principle, the manager
should keep a balance between authority and responsibility. Both of them should go hand in hand.

According to this principle, if a subordinate is given a responsibility to perform a task, then at the
same time he should be given enough independence and power to carry out that task effectively. This
principle also does not provide excessive authority to the subordinate which at times can be misused
by him. The authority should be given in such a way which matches the task given to him. Therefore,
there should be no degree of disparity between the two.

3. Principle of absolute responsibility- This says that the authority can be delegated but responsibility
cannot be delegated by managers to his subordinates which means responsibility is fixed. The
manager at every level, no matter what is his authority, is always responsible to his superior for
carrying out his task by delegating the powers. It does not means that he can escape from his
responsibility. He will always remain responsible till the completion of task.

Every superior is responsible for the acts of their subordinates and are accountable to their superior
therefore the superiors cannot pass the blame to the subordinates even if he has delegated certain
powers to subordinates example if the production manager has been given a work and the machine
breaks down. If repairmen is not able to get repair work done, production manager will be
responsible to CEO if their production is not completed.

4. Principle of Authority level- This principle suggests that a manager should exercise his authority
within the jurisdiction/framework given. The manager should be forced to consult their superiors
with those matters of which the authority is not given that means before a manager takes any
important decision, he should make sure that he has the authority to do that on the other hand,
subordinate should also not frequently go with regards to their complaints as well as suggestions to
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their superior if they are not asked to do. This principle emphasizes on the degree of authority and
the level up to which it has to be maintained.

Centralization and Decentralization

Centralization is said to be a process where the concentration of decision making is in a few hands. All the
important decision and actions at the lower level, all subjects and actions at the lower level are subject to the
approval of top management. According to Allen, ―Centralization‖ is the systematic and consistent
reservation of authority at central points in the organization.

The implication of centralization can be : -

1. Reservation of decision making power at top level.

2. Reservation of operating authority with the middle level managers.
3. Reservation of operation at lower level at the directions of the top level.

Under centralization, the important and key decisions are taken by the top management and the other levels
are into implementations as per the directions of top level. For example, in a business concern, the father &
son being the owners decide about the important matters and all the rest of functions like product, finance,
marketing, personnel, are carried out by the department heads and they have to act as per instruction and
orders of the two people. Therefore in this case, decision making power remain in the hands of father & son.

On the other hand, Decentralization is a systematic delegation of authority at all levels of management and
in all of the organization. In a decentralization concern, authority in retained by the top management for
taking major decisions and framing policies concerning the whole concern. Rest of the authority may be
delegated to the middle level and lower level of management.

The degree of centralization and decentralization will depend upon the amount of authority delegated to
the lowest level. According to Allen, ―Decentralization refers to the systematic effort to delegate to the
lowest level of authority except that which can be controlled and exercised at central points.

Decentralization is not the same as delegation. In fact, decentralization is all extension of delegation.
Decentralization pattern is wider is scope and the authorities are diffused to the lowest most level of
management.

Delegation of authority is a complete process and takes place from one person to another. While
decentralization is complete only when fullest possible delegation has taken place. For example, the general
manager of a company is responsible for receiving the leave application for the whole of the concern. The
general manager delegates this work to the personnel manager who is now responsible for receiving the
leave applicants. In this situation delegation of authority has taken place. On the other hand, on the request
of the personnel manager, if the general manager delegates this power to all the departmental heads at all
level, in this situation decentralization has taken place.

There is a saying that “Everything that increasing the role of subordinates is decentralization and that
decreases the role is centralization”. Decentralization is wider in scope and the subordinate‘s
responsibility increase in this case. On the other hand, in delegation the managers remain answerable even
for the acts of subordinates to their superiors.

Implications of Decentralization

1. There is less burden on the Chief Executive as in the case of centralization.

2. In decentralization, the subordinates get a chance to decide and act independently which develops
skills and capabilities. This way the organization is able to process reserve of talents in it.
3. In decentralization, diversification and horizontal can be easily implanted.
4. In decentralization, concern diversification of activities can place effectively since there is more
scope for creating new departments. Therefore, diversification growth is of a degree.
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5. In decentralization structure, operations can be coordinated at divisional level which is not possible
in the centralization set up.
6. In the case of decentralization structure, there is greater motivation and morale of the employees
since they get more independence to act and decide.
7. In a decentralization structure, co-ordination to some extent is difficult to maintain as there are lot
many department divisions and authority is delegated to maximum possible extent, i.e., to the bottom
most level delegation reaches. Centralization and decentralization are the categories by which the
pattern of authority relationships became clear. The degree of centralization and de-centralization can
be affected by many factors like nature of operation, volume of profits, number of departments, size
of a concern, etc. The larger the size of a concern, a decentralization set up is suitable in it.

DELEGATION AND DECENTRALIZATION

Basis Delegation Decentralization

Managers delegate some of their

Right to take decisions is shared by top
Meaning function and authority to their
management and other level of management.
subordinates.

Scope of delegation is limited as

Scope is wide as the decision making is shared
Scope superior delegates the powers to the
by the subordinates also.
subordinates on individual bases.

Responsibility remains of the

Responsibility Responsibility is also delegated to subordinates.
managers and cannot be delegated

Freedom is not given to the Freedom to work can be maintained by

Freedom of
subordinates as they have to work as subordinates as they are free to take decision
Work
per the instructions of their superiors. and to implement it.

Nature It is a routine function It is an important decision of an enterprise.

Delegation is important in all

Decentralization becomes more important in
Need on concerns whether big or small. No
large concerns and it depends upon the decision
purpose enterprises can work without
made by the enterprise, it is not compulsory.
delegation.

Grant of The authority is granted by one It is a systematic act which takes place at all
Authority individual to another. levels and at all functions in a concern.

Grant of Authority with responsibility is delegated to

Responsibility cannot be delegated
Responsibility subordinates.

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Degree of delegation varies from Decentralization is total by nature. It spreads
Degree concern to concern and department throughout the organization i.e. at all levels and
to department. all functions

Delegation is a process which It is an outcome which explains relationship

Process explains superior subordinates between top management and all other
relationship departments.

Delegation is essential of all kinds of Decentralization is a decisions function by

Essentiality
concerns nature.

Delegation is essential for creating Decentralization is an optional policy at the

Significance
the organization discretion of top management.

It is considered as a general policy of top

Delegated authority can be taken
Withdrawal management and is applicable to all
back.
departments.

Freedom of Very little freedom to the

Considerable freedom
Action subordinates

Decentralization can be called as extension of delegation. When delegation of authority is done to the fullest
possible extent, it gives use to decentralization.

Definition of Coordination
Co-ordination is the unification, integration, synchronization of the efforts of group members so as to
provide unity of action in the pursuit of common goals. It is a hidden force which binds all the other
functions of management. According to Mooney and Relay, “Co-ordination is orderly arrangement of
group efforts to provide unity of action in the pursuit of common goals”. According to Charles Worth,
“Co-ordination is the integration of several parts into an orderly hole to achieve the purpose of
understanding”.

Management seeks to achieve co-ordination through its basic functions of planning, organizing, staffing,
directing and controlling. That is why, co-ordination is not a separate function of management because
achieving of harmony between individuals efforts towards achievement of group goals is a key to success of
management. Co-ordination is the essence of management and is implicit and inherent in all functions of
management.

A manager can be compared to an orchestra conductor since both of them have to create rhythm and unity in
the activities of group members. Co-ordination is an integral element or ingredient of all the managerial
functions as discussed below: -

a. Co-ordination through Planning - Planning facilitates co-ordination by integrating the various

plans through mutual discussion, exchange of ideas. e.g. - co-ordination between finance budget and
purchases budget.
b. Co-ordination through Organizing - Mooney considers co-ordination as the very essence of
organizing. In fact when a manager groups and assigns various activities to subordinates, and when
he creates department‘s co-ordination uppermost in his mind.
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c. Co-ordination through Staffing - A manager should bear in mind that the right no. of personnel in
various positions with right type of education and skills are taken which will ensure right men on the
right job.
d. Co-ordination through Directing - The purpose of giving orders, instructions & guidance to the
subordinates is served only when there is a harmony between superiors & subordinates.
e. Co-ordination through Controlling - Manager ensures that there should be co-ordination between
actual performance & standard performance to achieve organizational goals.

From above discussion, we can very much affirm that co-ordination is the very much essence of
management. It is required in each & every function and at each & every stage & therefore it cannot be
separated.

PRINCIPLES OF CO ORDINATION

1. Early Beginning:

The first principle is that coordination must be attempted and arranged in the early stage of the management
process and policy making. It may be impossible to secure co – ordination in an enterprise if not started at
the planning stage. Early coordination improves the quality of plans and influences timely decisions on
matters of policy.

2. Direct Personal Contact:

Direct personal contact removes misunderstanding and conflict between departments or between personnel.
It involves direct face to face communication, personal discussion, settlement of differences, exchanges of
ideas between the personnel.

3. Reciprocal Relationship of Factors:

No department can work in isolation from the other departments. That is, when purchase department works
with sales department, which in turn works with finance department and personnel department, each of the
four departments finds itself influenced by the other department in the total situation.

Similarly, in a group every person influences all others and is in turn influenced by others. When reciprocal
relationships are maintained cordially, adequate coordination can be secured in an enterprise.

4. Continuous Process:

Coordination is a continuous process and must go on all the time. In contrast to the principle of continuity,
difference of opinions and information gap may appear and misunderstanding in inter departmental
operations may crop up in the absence of coordination. By keeping the process of coordination as a
continuous flow of information, sound coordination can be ensured in an enterprise.

5. Action Plan is the Fundamental Element of All Coordination Activities:

Most individual human interactions are modeled by an action plan in which a performer delivers a condition
satisfying a customer. The action plan has a requester, performer and four time segments culminating in
request, promise, delivery, and acceptance. Each of the four segments can be linked to further action plans
that respond to requests from components of the segment. The resulting network of action plan is called an
action process or workflow.

6. Coordination Tasks Can Be Delegated to Computational Processes:

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Humans delegate tasks to agents by designing computational processes to perform the tasks.

There are three categories of coordination systems according to the amount of task delegation:

i. Human-human with computer assistance- all interaction is between humans, but computational processes
track their joint progress states to assist them to complete tasks. (Known as Computer Supported
Cooperative Work, CSCW.)

ii. Human-computer- the performer role is delegated to a computational system. Humans interact with the
system through an interaction language and interaction interface. (Known as Human Computer Interaction,
HCI.)

iii. Computer-computer- all requester and performer roles are delegated to computational processes. All
interactions are carried out automatically between machines. (Known as Concurrency Control, CC)

7. Coordination is a Solution to the Concurrency Control Problems of Arbitration, Synchronization,

Serialization, Determinacy, and Deadlock:

Concurrency means that tasks can be executed in parallel. A concurrent system is a set of tasks, some of
which are- ordered and the rest concurrent (unordered). Ordered tasks can never be executed at the same
time; concurrent tasks can. Arbitration arises when a task is required to select only one of two (or more)
potentially simultaneous activities, deferring action on the unselected ones without losing them.

A complete solution to the arbitration problem possible only if the tasks involved can wait for the selection
to be made. If there is a deadline, there is a probability of arbitration failure. The solutions to all the
following problems depend on a satisfactory solution to arbitration in the underlying system.
Synchronization is a requirement that a task cannot proceed past a point until another task is completed.

TECHNIQUES OF EFFECTIVE COORDINATION IN ORGANIZATION

Some of the techniques that are used to achieve effective coordination are given below:

1. Direct Contact: One of the most effective means of achieving coordination is direct contact. Written
communication, modern electronic, mechanical devices, etc., can also be used.

2. Group Meetings: Group meetings are said to be an effective means of achieving coordination. At the
time of meeting, superior comes into personal contact with those connected with the actual problems. Such
meetings encourage the people to integrate their efforts. Coordination can be achieved through regular
meetings of superiors and subordinates.

3. Organizational Structure: Coordination can be achieved only when the authority and responsibility of
each and every person are clearly defined. In this connection, it was quoted by J.O. Shaughnessy as follows

“You cannot always bring together the results of department activities and expect to co-ordinate
them. You must have an organization which will permit inter-weaving all along the line “

In other words, the organizational structure should be designed properly so as to permit coordination among
various activities along the line itself.

4. Effective Communication: In achieving coordination, effective communication plays a vital role.

Communication greatly helps in coordination. The purpose of communication is to promote deep
understanding among members by bringing and maintaining coordination in order to achieve the ultimate
goals.

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Effective Communication is a process whereby ideas and images of one person are transmitted to another
person. Coordination between various individuals and activities is brought out by communication. Effective
communication facilitates information and exchange of ideas which helps to achieve the common purpose.
Coordination is facilitated by exchange of such ideas and information and brings people together.

5. Committees: In order to coordinate the various activities, various types of committees may be appointed.
Committees provide the means for synchronizing various efforts. Committees develop better understanding
and morale among the members. They are greatly advisory in nature and make use of the best efforts of the
members.

The success of the committee depends very much on its composition and the manner in which it functions.
Examples of such committees are – committees on manufacturing methods, complaint committee,
suggestion committee on welfare work, etc.

6. Staff Meetings: Staff meetings at regular intervals helps in achieving effective coordination because such
meetings provides opportunities for frank discussions and better exchange of ideas of people from different
sections. This infuse a feeling of unity among the members which makes them to jointly work for the
organization.

7. Effective Leadership: Leader inculcates a feeling of collectivism in the employees and forces them to
work as a team. Individuals within the group, may possess varied interests and multiple goals. Leader
reconciles these conflicting goals and restores equilibrium. A good leader can achieve coordination at all
stages. Hence, effective leadership is essential for achieving coordination.

8. Informal Coordination: Many organizations adopt informal means of coordination through processes of
social, unofficial interactions, relationship and mutual adjustments. They are very often more effective than
formal means.

DEFINITION OF CONTROL:

Controlling is the integral part of managerial process. It is a monitoring function of ascertaining whether
organizational efforts are heading towards the stated objectives or not. There will be no purpose of
planning, organizing and directing if there is no effort to ascertain whether they are right or wrong and bring
them on the right track, if they are deviating from the desired performance. It is an effective tool of
ascertaining and improving performance. It creates both positive and negative forces to keep the
organizational efforts on the right track. The managerial function of controlling is mainly concerned with
measuring and recoding variations in performance and taking necessary corrective actions for the future.

Eminent authors have defined controlling as:

“Control consists in verifying whether everything occurs in conformity with the plans adopted the
instructions issued and principles established. It has the object to point out weaknesses and errors in
order to rectify them and prevent reoccurrence.” —Henry Fayol

“Control, checking current performance against predetermined standard contained in the plans with
a view to ensuring adequate progress and satisfactory performance, also recording the experience
gained from the working of these plans as to guide to possible future operations.” —E. F. L. Brech

“The management function of control is the measurement and correction of the performance of
subordinates in order to make sure that enterprise objectives and plans devised to attain them are
accomplished.” —Koontz & O‟Donnell

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RELATIONSHIP BETWEEN PLANNING AND CONTROLLING

Planning and controlling are two separate functions of management, yet they are closely related. The scope
of activities if both are overlapping to each other. Without the basis of planning, controlling activities
becomes baseless and without controlling, planning becomes a meaningless exercise. In absense of
controlling, no purpose can be served by. Therefore, planning and controlling reinforce each other.
According to Billy Goetz, " Relationship between the two can be summarized in the following points

1. Planning precedes controlling and controlling succeeds planning.

2. Planning and controlling are inseparable functions of management.
3. Activities are put on rails by planning and they are kept at right place through controlling.
4. The process of planning and controlling works on Systems Approach which is as follows :

Planning → Results → Corrective Action

5. Planning and controlling are integral parts of an organization as both are important for smooth
running of an enterprise.
6. Planning and controlling reinforce each other. Each drives the other function of management.

In the present dynamic environment which affects the organization, the strong relationship between the two
is very critical and important. In the present day environment, it is quite likely that planning fails due to
some unforeseen events. There controlling comes to the rescue. Once controlling is done effectively, it give
us stimulus to make better plans. Therfore, planning and controlling are inseperate functions of a business
enterprise.

A FIVE-STEP PROCESS OF CONTROL

Controlling

Controlling involves ensuring that performance does not deviate from standards. Controlling consists of
five steps: (1) set standards, (2) measure performance, (3) compare performance to standards, (4) determine
the reasons for deviations and then (5) take corrective action as needed (see Figure 1, below). Corrective
action can include changes made to the performance standards—setting them higher or lower or identifying
new or additional standards. Performance standards are often stated in monetary terms such as revenue,
costs, or profits but may also be stated in other terms, such as units produced, number of defective products,
or levels of quality or customer service.

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Five-Step Control Process (DIG.)

The measurement of performance can be done in several ways, depending on the performance standards,
including financial statements, sales reports, production results, customer satisfaction, and formal
performance appraisals. Managers at all levels engage in the managerial function of controlling to some
degree.

The managerial function of controlling should not be confused with control in the behavioral or
manipulative sense. This function does not imply that managers should attempt to control or to manipulate
the personalities, values, attitudes, or emotions of their subordinates. Instead, this function of management
concerns the manager‘s role in taking necessary actions to ensure that the work-related activities of
subordinates are consistent with and contributing toward the accomplishment of organizational and
departmental objectives.

Effective controlling requires the existence of plans, since planning provides the necessary performance
standards or objectives. Controlling also requires a clear understanding of where responsibility for
deviations from standards lies. Two traditional control techniques are budget and performance audits. An
audit involves an examination and verification of records and supporting documents. A budget audit
provides information about where the organization is with respect to what was planned or budgeted for,
whereas a performance audit might try to determine whether the figures reported are a reflection of actual
performance. Although controlling is often thought of in terms of financial criteria, managers must also
control production and operations processes, procedures for delivery of services, compliance with company
policies, and many other activities within the organization.

Controls also come at a cost. It is useful to know that there are trade-offs between having and not having
organizational controls. Let‘s look at some of the costs and benefits of organizational controls.

Three basic types of control systems are available to executives:

(1) output control,

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(2) behavioral control,

and (3) clan control.

Different organizations emphasize different types of control, but most organizations use a mix of all three
types. Controls at every level focus on inputs, processes and outputs. It is very important to have effective
controls at each of these three stages.

Effective control systems tend to have certain common characteristics. The importance of these
characteristics varies with the situation, but in general effective control systems have following
characteristics.

1. Accuracy:

Effective controls generate accurate data and information. Accurate information is essential for effective
managerial decisions. Inaccurate controls would divert management efforts and energies on problems that do
not exist or have a low priority and would fail to alert managers to serious problems that do require
attention.

2. Timeliness:

There are many problems that require immediate attention. If information about such problems does not
reach management in a timely manner, then such information may become useless and damage may occur.
Accordingly controls must ensure that information reaches the decision makers when they need it so that a
meaningful response can follow.

3. Flexibility:

The business and economic environment is highly dynamic in nature. Technological changes occur very
fast. A rigid control system would not be suitable for a changing environment. These changes highlight the
need for flexibility in planning as well as in control.

Strategic planning must allow for adjustments for unanticipated threats and opportunities. Similarly,
managers must make modifications in controlling methods, techniques and systems as they become
necessary. An effective control system is one that can be updated quickly as the need arises.

4. Acceptability:

Controls should be such that all people who are affected by it are able to understand them fully and accept
them. A control system that is difficult to understand can cause unnecessary mistakes and frustration and
may be resented by workers.

Accordingly, employees must agree that such controls are necessary and appropriate and will not have any
negative effects on their efforts to achieve their personal as well as organizational goals.

5. Integration:

When the controls are consistent with corporate values and culture, they work in harmony with
organizational policies and hence are easier to enforce. These controls become an integrated part of the
organizational environment and thus become effective.

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6. Economic feasibility:

The cost of a control system must be balanced against its benefits. The system must be economically
feasible and reasonable to operate. For example, a high security system to safeguard nuclear secrets may be
justified but the same system to safeguard office supplies in a store would not be economically justified.
Accordingly the benefits received must outweigh the cost of implementing a control system.

7. Strategic placement:

Effective controls should be placed and emphasized at such critical and strategic control points where
failures cannot be tolerated and where time and money costs of failures are greatest.

The objective is to apply controls to the essential aspect of a business where a deviation from the expected
standards will do the greatest harm. These control areas include production, sales, finance and customer
service.

8. Corrective action:

An effective control system not only checks for and identifies deviation but also is programmed to suggest
solutions to correct such a deviation. For example, a computer keeping a record of inventories can be
programmed to establish ―if-then‖ guidelines. For example, if inventory of a particular item drops below
five percent of maximum inventory at hand, then the computer will signal for replenishment for such items.

9. Emphasis on exception:

A good system of control should work on the exception principle, so that only important deviations are
brought to the attention of management, In other words, management does not have to bother with activities
that are running smoothly. This will ensure that managerial attention is directed towards error and not
towards conformity. This would eliminate unnecessary and uneconomic supervision, marginally beneficial
reporting and a waste of managerial time.

*ALLTHE BEST*

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Notes By: KARTHIK NEERADI, Lect. in Commerce