Principles of Business Management

Under Graduate Commerce Programmes

(Distance Mode)

Centre for Distance and Open Learning

JAMIA MILLIA ISLAMIA
New Delhi – 110025
EXPERT COMMITTEE

Prof. Talat Ahmad Prof. M. Mujtaba Khan

Patron Officer on Special Duty, CDOL
Vice-Chancellor,
Jamia Millia Islamia

Prof. Mohammad Miyan Mr. Prashant Negi

Hony. Chief Advisor, CDOL, Hony. Jt. Director, CDOL
Founder Director, CDOL

Prof. Y.P. Singh Dr. Arvind Kumar

Department of Commerce, Hony. Jt. Director, CDOL
University of Delhi

Prof. K.V. Bhanu Murthy Dr. Ritu Sapra

Department of Commerce, Department of Commerce,
University of Delhi University of Delhi

Prof. Madhu Tyagi Dr. Sunayana

School of Management, Centre for Management Studies,
IGNOU Jamia Millia Islamia

Prof. Attam Prakash

Indian Institute of Foreign Trade

PROGRAMME COORDINATOR
Juned Khan, CDOL, Jamia Millia Islamia
COURSE WRITER
Dr. Chandra Mohan Singh, CDOL, Jamia Millia Islamia, New Delhi
Block – 1 Business and Management an Introduction
Unit – 1 Nature and Forms of Business, Unit – 2 Nature and Scope of Management, Unit – 3 Approaches of Management
Unit – 4 Principles and Function of Management,

Block – 2 Planning and Organisation

Unit – 5 Fundamentals of Planning, Unit – 6 Plans, Policies, Methods, Procedures and Budget, Unit – 7 Organising: Basic
Concept
Unit – 8 Departmentation and Forms of Authority Relationships, Unit – 9 Delegation and Decentralisation

Block – 3 Staffing and Directing

Unit 10: Staffing, Unit 11: Directing, Unit 12: Motivation, Unit 13: Leadership, Unit 14: Communication

Block – 4 Coordination and Control

Unit 15: Co-ordination, Unit 16: Process of Controlling, Unit 17: Techniques of Controlling, Unit 18: Management of Change

All rights reserved. Printed and published on behalf of the CDOL by Maktaba Jamia Ltd., Jamia Nagar, New Delhi-110025
August, 2017
ISBN: 978-93-82997-68-9
All rights reserved. No part of this book may be reproduced in any form or by any means, electronic or mechanical, including
photocopying, recording or by any information storage or retrieval system, without permission in writing from the CDOL,
Jamia Millia Islamia, New Delhi.

Cover Credits: Anupma Kumari, Faculty of Fine Arts, Jamia Millia Islamia
EXPERT COMMITTEE

Prof. Talat Ahmad Prof. M. Mujtaba Khan

Patron Officer on Special Duty, CDOL
Vice-Chancellor,
Jamia Millia Islamia

Prof. Mohammad Miyan Mr. Prashant Negi

Hony. Chief Advisor, CDOL, Hony. Jt. Director, CDOL
Founder Director, CDOL

Prof. Y.P. Singh Dr. Arvind Kumar

Department of Commerce, Hony. Jt. Director, CDOL
University of Delhi

Prof. K.V. Bhanu Murthy Dr. Ritu Sapra

Department of Commerce, Department of Commerce,
University of Delhi University of Delhi

Prof. Madhu Tyagi Dr. Sunayana

School of Management, Centre for Management Studies,
IGNOU Jamia Millia Islamia

Prof. Attam Prakash

Indian Institute of Foreign Trade

PROGRAMME COORDINATOR
A. Mannan Farooqui, CDOL, Jamia Millia Islamia
COURSE WRITER
Dr. Chandra Mohan Singh, CDOL, Jamia Millia Islamia, New Delhi
Block – 1 Business and Management an Introduction
Unit – 1 Nature and Forms of Business, Unit – 2 Nature and Scope of Management, Unit – 3 Approaches of Management
Unit – 4 Principles and Function of Management,
Block – 2 Planning and Organisation
Unit – 5 Fundamentals of Planning, Unit – 6 Plans, Policies, Methods, Procedures and Budget, Unit – 7 Organising Basic
Concept
Unit – 8 Departmentation and Forms of Authority Relationships, Unit – 9 Delegation and Decentralisation

Block – 3 Staffing and Directing

Unit 10: Staffing, Unit 11: Directing, Unit 12: Motivation, Unit 13: Leadership, Unit 14: Communication

Block – 4 Coordination and Control

Unit 15: Co-ordination, Unit 16: Process of Controlling, Unit 17: Techniques of Controlling, Unit 18: Management of Change

All rights reserved. Printed and published on behalf of the CDOL by Maktaba Jamia Ltd., Jamia Nagar, New Delhi-110025
August, 2017
ISBN: 978-93-82997-68-9
All rights reserved. No part of this book may be reproduced in any form or by any means, electronic or mechanical, including
photocopying, recording or by any information storage or retrieval system, without permission in writing from the CDOL,
Jamia Millia Islamia, New Delhi.

Cover Credits: Anupma Kumari, Faculty of Fine Arts, Jamia Millia Islamia
 Contents

Block: 1 Business and Management an Introduction

Unit 1: Nature and Scope of Business, Forms of Business Organisation 5
Unit 2: Nature and Scope of Management 22
Unit 3: Approaches to Study of Management 39
Unit 4: Function and Principles Management 54

Block: 2 Planning and Organisation

Unit 5: Fundamentals of Planning 66
Unit 6: Plans, Policies, Methods, Procedures and Budget 78
Unit 7: Organising Basic Concept 87
Unit 8 : Departmentation and Forms of Authority Relationships 104
Unit9: Delegation and Decentralisation 121

Block: 3 Staffing and Directing

Unit 10: Staffing 138
Unit 11: Directing 161
Unit 12: Motivation 174
Unit 13: Leadership 187
Unit 14: Communication 202

Block: 4 Coordination and Control

Unit 15: Coordination 216
Unit 16: Process of Controlling 230
Unit 17: Techniques of Controlling 241
Unit 18: Management of Change 257
NOTE
 BLOCK - 1

Business and Management: An Introduction

The present block refers to the basic concepts of business its’ Meaning,
Characteristics and Forms along with the conceptual framework of Management.
The learners will learn the basics as well as operational parts of business and
management. They will have the opportunities to learn about the nature and scope
of management. What are the various approaches of management? Further, the
functions and principles of management are discussed along with its principles in
the present block. The present block includes the following units;

Unit 1: Nature and Scope of Business, Forms of Business Organisation

Unit 2: Nature and Scope of Management

Unit 3: Approaches to Study of Management

Unit 4: Function and Principles Management

4
 Nature and Scope
of Business …

UNIT – 1 NATURE AND SCOPE OF BUSINESS, FORMS OF BUSINESS

ORGANISATION

Structure

1.1 Introduction
1.2 Objectives of the Unit
1.3 Meaning of Business
1.4 Definitions of Business
1.5 Natures and characteristics of Business
1.6 Forms of Business
1.6.1 Sole Proprietorship
1.6.2 Feature of Sole Proprietorship
1.6.3 Check your Progress
1.6.4 Partnership
1.6.5 Limited Liability Partnership
1.6.6 Company
1.6.7 Co-operative Organisation
1.7 Summary
1.8 Term-End-Questions

1.1 INTRODUCTION

The term business refers to a state of being busy in productive activity. Every person is
engaged in some kind of economic activities e.g. a worker works in a factory, a teacher
teaches in the class, a clerk does his office work in his office, a farmer does his work in
the field, and a salesman is busy in selling the products of the organisation in which they
are working. The prime objective of all the persons engaged in aforesaid economic
activitiesare to earn their livelihood for their survival. Therefore, all the economic
activities which are being carried on by anyone for the purpose of earning their livelihood
is called business. The learner will learn the meaning, nature, characteristics as well as
the forms of business in this unit.

1.2 OBJECTIVES OF THE UNIT

The learners after going through this unit will be able to;

➢ Explain the concept of Business

➢ Define the term Business
➢ List the nature of Business
➢ Explain the characteristics of Business
➢ Discuss the Forms of Business

5
Principles of Business Management

1.3 MEANING OF BUSINESS

All human activities relating to the production of goods or services for satisfying human
needs are called ‘Business’. Generally the term business is perceived by the buying and
selling activities of products or services, which are being carried out for the sake of profit
making. However the concept of business is wider than the profit earning activities and
refers to all those activities which do value addition in the product and services for
satisfying of human needs. All human activities may be divided into two categories first
Economic and second Non-Economic. Economic activities refers to those activities
which are related to the production of wealth or value addition. All these activities create
utilities and thus it is called economic activity. Non-economic activities are those
activities which are being carried on for the purpose of social services, community as
well as family obligation. These activities are not undertaken with economic objectives.
In other words the element of ‘profit’ is not found in these activities. Therefore, the term
business is very wide and includes all the activities of commerce and trade. Business has
been developed over the years with the development of human civilisation. It has been
started in the form of barter system and converted into the present globalised form of
business where one can satisfy their needs while sitting in home.

1.4 DEFINITIONS OF BUSINESS

There is no single definition of the term business rather it has been define differently by
different scholars/writers. Some of the important definitions of business are as below;

1. According to L. H. Haney, “Business may be defined as human activity directed

towards producing or acquiring wealth through buying and selling goods.”
2. According to Prof. L. R. Dicksey, “Business is a form of activity pursued primarily
with the object of earning profits for the benefits of these on whose behalf the
activity is conducted.”
3. According to Wheeler, Bayard O. “Business is an institution organised and
operated to provide goods and services to society under the incentive of private
gain.”
4. According to Peterson and Polwman, “Business may be defined as an activity in
which different persons exchange something of value, whether goods or services
for mutual gain or profit.
5. According to F. C. Hooper, “ Business means the whole complex field of
commerce and Industry, the basic Industries, processing and manufacturing
industries and the net work of ancillary services, distribution, banking, insurance,
transport and so on, which serve and interpenetrate the world of business as a
whole.”

6
 Nature and Scope
of Business …

1.5 NATURES/CHARACTERISTICS OF BUSINESS

Business as discuss and defined above may be economic or non economic activities
which are being done for the satisfaction of the human needs. It may be business
activities of production, value addition, trading activities of buying and selling of goods
and services as well as the auxiliary business activities of commerce to facilitate the
buying & selling of goods and services from production to consumption. The following
are the essential natures/characteristics of a business;

1. Basis of Firms or business: it is the business man who recognises the need for a
product or service. The business man is an important persone in the process of
economic growth. It is the business man who visualises a business, combines
different factors of production and puts them into a going concern and that form the
basis of business.
2. Exchange of Goods and Services: the prime aims of business is toexchange of
goods and services. The exchange of goods and services is undertaken with a
motive of profit earning. The activity done to satisfy self-need cannot be a business
e.g. if a teacher who teaches his own children is not paid for this. On the other
hand, if he teachesother in exchange of money, it can be included in business
activity.
3. Profit earning motive: business cannot exists without a motive of profit making. An
activity undertaken without profit motive cannot be included in business. The
incentive of earning profits keeps a person in business and is also necessary for the
regularity and continuity of the business. This motive has, therefore, played a very
important role in the establishment, running and expansion of business.
4. Full of risk and uncertainty: without risk and uncertainty there is no business. The
factor on which business depends is quite uncertain. The success of a businessman
depends upon his correct forecasting; otherwise he may be forced out of the
business. Hence, the risk element in the business keeps the businessman vigilant.
5. Economic activities: the activities related to the production and distribution of
goods and services with a purpose of value addition and money making is treated
as economic activities. The non-economic activity will not be included in the
business.
6. Creation of utilities: it is important element of business. Business makes goods
more useful to satisfy human wants. Business creates various types of utilities in
goods so that consumers may make use of them to satisfy their needs.
7. Element of continuity of transaction: continuity of transaction is an important
element of business. In business, the transaction of goods is a must but it must be
regular and continuous. Only regular and continuous transactions are included in
business. A single transaction cannot be called business.

In the light of the above discussion, it can be concluded that business may be defined as
that economic activity of man which aims at earning profit and acquiring wealth through
continuous process of production, sale or exchange of goods and services.
7
Principles of Business Management

1.6 FORMS OF BUSINESS

Business can be divided in various categories on the basis of location, nature and product
of business. Business may be local, national, international, retail, wholesale or export-
import business. It completely depends on the ownership, nature and product of the
business. The forms of business on the basis of ownership are as below;

(1) Sole proprietorship

(2) Partnership
(3) Limited Liability Partnership (LLP)
(4) Company
(5) Co-operative

1.6.1 SOLE PROPRIETORSHIP:

1.6.1.1 Meaning of Sole Proprietorship

Sole Proprietorship business is the oldest and functioning from times immemorial in one
form or the other. This is the business in which an individual has all the authority and
responsibilities and take all the risks of ownership. Thus, it is the form of business
organisation, which is owned and operated, at the initiative and risk of only one
individual called the Sole proprietor. The main objective of this business is that the
individual carries on business exclusively for himself. He invests his own capital. The
full control of the business is with him. He bears all the risks and is the master of all the
profit.

According to James L. Lundy, “The Sole proprietorship is an informal type of business

owned by one person.”

According to L. H. Haney, “The individual proprietorship is the form of business

organisation at the head of which stands an individual as one who is responsible, who
directs its operations and who alone runs the risk of failure.”

1.6.2 FEATURE OF SOLE PROPRIETORSHIP:

These are the following salient features of the Sole-Proprietorship;

(i) There is individual ownership, in Sole-Proprietorship the individual carries on
business exclusively by and for himself. Sole-Proprietorship invests his own capital
and control the whole business. Sole-Proprietorship bears all the risks and is the
master of all the profits.
(ii) The sole proprietor is solely responsible for the management of his business
enterprise. The sole trader manages the whole business himself. He prepares the
plans and executes them under his own supervision. He is not supposed to consult
anyone else for decision taking. The ultimate authority to manage and control rests
with the proprietor.
8
 Nature and Scope
of Business …

(iii) The sole proprietor is solely responsible for arranging finances for his business.
(iv) The liability of sole proprietor is unlimited, i.e. his personal properties may be
utilized for payment of business debts, in case assets of business are insufficient to
pay business liabilities, in full.
(v) Secrecy of business affairs can be easily maintained. All the decisions are taken by
the proprietor himself. He is in a position to keep his affairs to himself and
maintain perfect secrecy in all matters.
(vi) There is no sharing of profit in sole proprietorship. All the profits of business
belong only to the sole proprietor. However, even all the losses of business fall on
him exclusively.

1.6.3 CHECK YOUR PROGRESS

1. What do you mean by the term business?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

2. What are the forms of Business?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

1.6.4 PARTNERSHIP:

1.6.4.1 Meaning of Partnership

The concept of partnership business arises from the limitation of sole proprietorship
business. In other words, partnership came into existence because of the limitation of sole
proprietorship. In sole proprietorship, financial resources and managerial skills were
limited. One person could provide only the limited amount of capital and could not start
the business on large scale to meet out the continuous increasing demand of the society
even cannot cope with the modern dynamic business world competition. A sole
proprietor could not provide even required managerial skills. Single owner could not
manage all activities efficiently and effectively.

When business activities started expanding, the need for more funds arose. When the size
of business extends, the sole proprietor finds it difficult to manage the business and is
forced to take the help of outsiders who will not only provide additional capital but also
help in managing the business activities efficiently and effectively. So more, persons
were associated to form groups to carry on business and consequently partnership form of
9
Principles of Business Management

business came into existence. Partnership is an association of two or more persons who
agree to carry on a lawful business together with the object of sharing profit of
partnership. The partners provide the capital and share the responsibility for running the
business on an agreed basis. The old saying that “two minds are better than one”,
provides a sufficient logic for the formation of a partnership business.

1.6.4.2 Definition of Partnership

The following are some important definitions of Partnership;
1. According to Kimball and Kimball, “A partnership or firm as it is often called, is
then a group of men who have joined capital or services for the prosecution of
some enterprise.”
2. According to L. H. Haney, “Partnership is an agreement between persons having
contractual capacity to carry on a business in common with a view to private gain.”
3. According to Charles W. Gesternberg, “The partnership may be defined as the
relation existing between persons who agree to carry on a business as co-owners
for profit.
4. According to Dr. William R. Spiegel, “Partnership has two or more members, each
of whom is responsible for the obligation of the partnership. Each of the partners
may bind the others, and the assets of each of the partners may be taken for the
debts of the partnership.”
5. According to Indian Partnership Act, 1932, “Partnership is the relation between (or
among) persons who have agreed to share the profits of a business carried on by all
or any of them acting for all.”

The most significant aspect of partnership on the basis of the above definition is that
partnership is a relation among persons and this relation is that of being a partner with
one another – very much like relations subsisting among members of a family.
Partnership relation is a relation of utmost good faith among persons, who want to be
partners with one another.

1.6.4.3 Features of Partnership

Following are the salient features of partnership:
(i) Agreement: Partnership business is the result of an agreement between/among
two or more persons. The agreement may be oral or written. A written
agreement of partnership is known as the Partnership Deed.
(ii) Two or more persons: There must be at least two persons to form a partnership.
The maximum number of persons in partnership is 10, in case of banking
business and 20 in other types of businesses.
(iii) Lawful business: A partnership can be formed for the purpose of carrying on
any lawful business.
(iv) Sharing of profits: The agreement of partnership must provide for sharing of
profits of a business among partners in the agreed ratio. In the absence of an
agreed ratio, profits are to be shared equally among by all the partners.

10
 Nature and Scope
of Business …

(v) Mutual agency: that every partner is an agent of the firm, for purposes of the
business of the firm and every partner is the principal to be bound by the acts of
other partners, who act as agents.
(vi) Unlimited liability: The liability of all partners is unlimited-jointly and
severally, i.e. each partner is liable to pay debts of the partnership business to an
unlimited extent along with other partners; and if the assets of other partners are
insufficient to pay business liabilities, then any one partner could be held liable
to pay business debts to an unlimited extent, in his individual capacity.
(vii) Ownership and control jointly held: all the partners have power to take part in
the management of the partnership business of the firm.
(viii) Non-transferability of share: No partner can transfer his/her share in the
partnership to any other person, without the prior consent of all other partners.
(ix) Registration not compulsory: Registration of a partnership firm is not
compulsory. However, a registered partnership business is always found to be
better for all partners as well as other stakeholders.

1.6.5 LIMITED LIABILITY PARTNERSHIP (LLP)

1.6.5.1 Meaning of LLP

LLP, as a new form of business organisation, under the Limited Liability Partnership Act,
2008, is an attempt of the Government to enable entrepreneurs, professionals and
enterprises providing services of any kind or engaged in scientific and technical
disciplines to have benefit of limited liability, while organising the internal structure of
their enterprise as partnership.

1.6.5.2 Features of LLP

LLP, as a form of business organisation is marked by the following salient features:
(i) Body corporate: LLP is a body corporate formed and incorporated under the
Limited Liability Partnership Act, 2008. On registration, a LLP is capable of suing
and being sued in its name. It can have a common seal, if it so desires.

(ii) Last words of name to be LLP:Every limited liability partnership shall have
either words “limited liability partnership” or the acronym LLP”, as the last words
of its name.
(iii) Perpetual succession: A LLP shall have perpetual succession. Any change in the
partners of a limited liability partnership, shall not affect the existence, rights or
liabilities of limited liability partnership.
(iv) No. of partners: Every LLP should have at least two partners. Any individual or
body corporate may be a partner in a LLP. However, an individual shall be
disqualified from being a partner of a LLP, if :
(1) he has been found to be of unsound mind by a competent court; OR
(2) he is an un-discharged insolvent; or
(3) he has applied to be adjudicated as an insolvent and his application is pending :

11
Principles of Business Management

(v) Liability of partners:A partner is not personally liable, directly or indirectly, for
any obligation of the LLP, arising out of any contract or otherwise.However, if at
any time, the number of partners of LLP is reduced below two and the LLP carries
on business for more than six months while the number is so reduced; the
remaining partner i.e. the only partner of LLP shall be personally liable for the
obligations incurred after those six months – provided he had the knowledge of
the fact that LLP was carrying on business with him alone.
(vi) Designated partners: Every LLP shall have at least two designated partners,
(concept of a designated partner is akin to that of the concept of a director of a
company) who are individuals and at least one of them shall be resident in India.
A designated partner is responsible for all acts, matters and things as are required
to be done by the LLP in respect of compliance of the provisions of LLP Act,
2008.
(vii) Partner as agent: Every partner of a LLP is for purposes of the business of LLP,
the agent of the LLP but not of other partners.
(viii) Profit-sharing: The right of a partner to share in the profits and losses of LLP
depends upon agreement between partners and LLP. In the absence of any
agreement on the issue of profit-sharing, all partners of LLP are entitled to share
equally in the capital, profits and losses of LLP.
(ix) Audit of accounts and annual return:Accounts of LLP shall be audited in
accordance with such rules, as may be prescribed by the Government. The Central
Government, may, however, exempt any class or classes of LLPs from this
provision.Every LLP shall file an annual return duly authenticated with the
Registrar within 60 days of the closure of its financial year.
(x) Winding-up and dissolution:The winding up of a LLP may be either voluntary
or by the Tribunal; and LLP so wound up may be dissolved.
(xi) Non-applicability of Partnership Act:Unless otherwise; provided, the provisions
of the Indian Partnership Act, 1932, do not apply to a LLP.

1.6.6 COMPANY:

1.6.6.1 Meaning of Company

The company form of business organisation came into existence as the most dominating
form of business organisation, as a result of some serious limitations of partnership, viz.
limited finances and unlimited liability.Power to assimilate huge finances coupled with
the features of limited liability and perpetual succession are the hallmarks of the company
(or corporate) form of business organisation. Literary meaning of the word company is an
association of persons formed for common object. A company is a voluntary association
of persons recognised by law, having a distinctive name and common seal, formed to
carry on business for profit, with capital divisible into transferable shares, limited
liability, a corporate body and perpetual succession. A company is an artificial person
created by law, having an entity absolutely distinct from the entity of its owners (i.e.
members).

12
 Nature and Scope
of Business …

1.6.6.2 Definition of Company

These are some important definitions;

1. According to Justice James, “A company is an association of persons united for a
common object.”
2. According to Lord Lindley, “By a company is meant an association of many
persons who contribute money or money’s worth to a common stock and employ it
for some common purpose. The common stock so contributed is denoted in money
and is the capital of the company. The persons who contribute it or to whom it
belongs are members. The proportion of capital to which each partner is entitled is
his share.
3. According to Kimball and Kimball, “A corporation is by nature an artificial person
created or authorised by the legal stature for some specific purpose.”
4. According to Prof. Haney, “A company is an artificial person created by law
having a separate entity with a perpetual succession and a common seal.”
5. According to James Stephenson, “A company is an association of any persons who
contribute money or money’s worth to a common stock and employs it in some
trade or business, and who share the profit and loss (as the case may be) arising
there from.”

1.6.6.3 Features of company

A company may have the following features;
(i) Artificial legal person
A company is a creation of law. Hence it is an artificial legal person. Being an
artificial person, it has no physical body and no soul that are possessed by natural
persons.

However, for its own business purposes, the company –

- can hold property in its own name.
- is competent to enter into contracts.
- Can sue and be sued by others.

(ii) Separate entity from the entity of members

The company has an entity or a personality, which is absolutely independent and
separate from the entity of its members.

The implications of separate entity concept of the company are :

(a) Members are not the joint owners of the assets of the company. All assets of the
company belong to the company itself.
(b) The company continues to exist, even if all its members die.
(c) Members can file a suit on the company and the company can file a suit on
members.
(d) Members are not agents of the company.

13
Principles of Business Management

(iii) Minimum and maximum no. of persons

The minimum number of persons required to form a company is two, in case of a private
company;and seven-in case of a public company. The maximum number of persons is
fifty, in caseof a private company. However, there is no limit to the maximum number of
persons, incase of a public company.

(iv) Perpetual succession

A company enjoys perpetual succession i.e. continuous life without interruptions, for all
times to come in future. The life of the company is independent from the life of its
members. Members may come and go but the company continues like flow of a running
river. The life of a company comes to an end only though prescribed legal procedures
suggests winding up till that time the company will continue.

(v) Limited liability

The most popular type of a company is a company with limited liability. Limited liability
implies that the maximum liability of a member is limited to the unpaid value of shares
held by the member.

(vi) Management by Board of Directors

Since a company is an artificial person, it needs some human agency to manage its
affairs. This human agency is provided in the form of a Board of Directors. Each
company must have a Board of Directors.
Directors are the elected representatives of the members of the company. Hence, through
the Board of directors, a company is managed in democratic manner i.e. managed by
members through their elected representatives called directors and collectively called
Board of Directors.

(vii) Capital-consisting of shares

Capital of company is divided into shares. Hence capital of a company is called share
capital. In fact, in a company capital is contributed by all those persons who buy its
shares. A person can buy any number of shares according to his financial capacity.
Because of joint contribution of capital a company is technically called a joint stock
company.

(viii) Transferability of shares

Shares in a company are quite freely transferable i.e. person who no longer desires to
hold shares of a company can transfer these to some-body else. In a private company,
there may be certain restrictions to transfer shares, but the right to transfer shares is not
denied by the company.

(ix) Common seal

Every company has a common seal with the name of the company encrypted on it.
Common seal is equivalent to the signatures of the company. Since the company, being

14
 Nature and Scope
of Business …

an artificial person cannot sign, the seal of the company must be affixed on all documents
etc., where signatures of the company are needed in order to bind the company.

(x) Compulsory audit

Accounts of all companies are subject to compulsory audit – to safeguard the interest of
its owners (i.e. members) who have no actual hand, in the management of the company.

1.6.6.4 TYPES OF COMPANY

One most outstanding classification of companies is public companies and private
companies, which are defined and distinguished below:

(i) Public company

A public company is one:
(a) Which is not a private company.
(b) Which has a minimum paid-up capital of Rs 5 lakhs.
(c) Which is a private company, being a subsidiary of a public company.

A company which holds more than 51% share capital of another company or which
controls the composition of the Board of directors of that company is called a holding
company. The other company in which shareholding is held by the holding company or
in which composition of Board of Directors is controlled by the holding company, is
called the subsidiary company.

(ii) Private company

A private company is one –
(a) which limits the number of its members to a maximum of fifty - excluding
present and past employees
(b) which prohibits any invitation to public to subscribe to its shares / debentures.
(c) which prohibits any invitation or acceptance of deposits from public.
(d) which restricts the rights of its members to transfer shares.
(e) which has a minimum paid-up capital of Rs. one lakh.

1.6.6.5 ADVANTAGES OF A COMPANY

a) Advantages
Following are the major advantages of the company form of business organisation:
(i) Huge financial resources
A company is able to accumulate huge finances from the public and undertake
projects beyond the contemplation of any other form of business organisation.
(ii) Limited liability
Members of a company enjoy the advantage of limited liability. The fact of limited
liability induces public to invest in companies.
15
Principles of Business Management

(iii) Permanent life

Company is the most stable form of business organization, as companies enjoy
perpetual succession r permanent life.

(iv) Democratic management

Company management is democratic in nature. Company is managed by a Board of
directors, directors being elected representatives of owners i.e. members of the
company.
(v) Efficient management
To conduct its operations, a company requires professionally expert managers, in
various areas of its functioning. A company can afford these experts, because of its
huge financial resources. These experts lead the operational life of the company
along most profitable and efficient lines.
(vi) Transferability of shares
Shares in a company are freely transferable. As such, many persons feel like
investing in companies, because they can liquidate that investment, as per their
choice.
(vii) Economies of large scale
Companies undertake production and marketing activities on a large scale. As such,
they can reap full advantages of large scale operation – a part of which advantage
may be passed on to consumers, in the form of cheaper products and services.
(viii) Capital formation
The company form of business organisation is responsible for capital formation in
the economy. Savings by people are encouraged by companies, because of a desire
of many people to buy shares of companies.
(ix) Public confidence
Companies enjoy public trust and confidence because of regulation of companies
by the Companies Act disclosure of profit and financial position by companies,
through publication of Final Accounts further helps to build public confidence in
companies.
(x) Goodwill for self and the nation
Big companies enjoy huge goodwill-nationally and internationally. Favourable
image of big companies increases the goodwill of the nation too in the international
commercial market.

b) Limitations of a company
Following are the major limitations of the company form of business organisation:
(i) Legal procedures
Numerous legal and procedural formalities have to be complied with for the
formation of company. This may discourage many enterprising people to think of
starting a company.
(ii) Maximum Governmental control

16
 Nature and Scope
of Business …

Companies are subject to maximum Governmental control through various

provisions of the Companies Act. This reduces flexibility of operations in a
company, which is very necessary to fully exploit business opportunities for gains.

(iii) Lack of motivation

Companies are managed by hired professional/mangers who often lack motivation
to work.
(iv) Growth of monopolistic tendencies
Companies, because of their large size, lead to growth of monopolistic tendencies.
The larger, in fact, is the size of a company; the more is the possibility of its
assuming monopolistic power. Because of their monopolistic position, companies
may never hesitate in resorting to consumer exploitation, through charging very
high prices of their products and services.
(v) Delays in decision-making
Red tape, bureaucracy and excessive provisions of the Companies Act, cause
delayed decision-making in a company.
(vi) Corrupt management
Now-a-days, in most of the companies, managements are highly corrupt. They
misuse their position and manipulate the working of the company to their own
petty self interests. In this way, innocent public are cheated and deprived of due
advantage of their hard-earned money invested in the company.
(vii) Lack of secrecy
There is lack of secrecy in corporate affairs. Public can inspect important
documents of the company by paying the prescribed fee. Annual Accounts of the
company have to published. This lack of secrecy does not allow companies to take
full advantage of their trade secrets.
(viii) Political corruption
Because of their huge financial resources, companies field their own candidates to
seek elections to the Parliament or State legislatures or other decision-making
bodies. Having won elections, these candidates make available undue advantages to
the ‘big-bosses’ of the company. Thus companies are largely responsible for
corrupting the political system of the country.

1.6.7 CO-OPERATIVE ORGANISATION:

1.6.7.1 Meaning of Co-operative Organisation

The term co-operation derived from Latin word ‘Co-Operari’ which means work. Co-
operation is understood as working together for a common goal. Where a group of
persons decides to work together in cooperation, with each other in the form of a club,
playground or educational institution, cooperation starts to play its role. Level of
cooperation may be local, regional, national or international. It is the judicious mix of
successful social, economic, cultural and political life. However, today it is being linked
more with economic rather than any other aspects of life. The cooperative form of
organisation is a democratic setup run by its members for serving the interests of
17
Principles of Business Management

themselves. It is self help through mutual help. The philosophy behind co-operative
movement is ‘Each for all and all for each. Co-operative organisation is different from
other forms of business organisation and does not aim at making profits. Rather, its aim is
to provide some benefit or service to its members by fighting against anti social activities
run by any individual, institutions or government.

1.6.7.2 Definition of Cooperative Organisation

Some of the important definitions of Co-operative organisation are as follows:

1. According to Prof. Seligman, “Co-operation in its technical sense, means

abandonment of competition in distribution and production and elimination of
middleman of all kinds.”
2. According to H. Calvert, “Co-operation is a form of organisation, wherein, persons
voluntarily associate together as human beings on a basis of equality for the
promotion of the economic interests of themselves.”
3. According to Herrick, “Co-operation is that act of persons voluntarily united, for
utilizing reciprocally their own forces, resources or both under their arrangement to
their common profit or loss.
4. According to Gordon and O’Briew, “Co-operation is a special form of economic
organisation in which people work together for definite business purposes under
certain definite business rules. The root of co-operative idea is a relation between
business and ethics which is greater than the commercial honesty of our present
industrial system.”
5. According to International Labour Organisation, “Co-operative organisation is an
association of persons usually of limited means who have voluntarily joined
together to achieve a common economic end through the formation of a
democratically controlled business organisation, making equitable contributions to
the capital required and accepting a fair share of risks and benefits of the
undertaking.

It is clear from the above definitions that co-operation is collective effort by weaker
people to pull on in a spirit of doing some work together, in the spirit of give and take
with a view to achieving some common goal.

1.6.7.3 Features of Co-operative Organisation

Fundamental features of a co-operative organisation are as follows:

(i) Registration :
A co-operative society must be registered under the Co-operative Societies Act, 1912 or
under a State Co-operative Societies Act. On registration, the society becomes a body
corporate, having a separate legal entity of its own, with perpetual succession and limited
liability of its members.

18
 Nature and Scope
of Business …

(ii) Voluntary Entry and Exit :

A co-operative organisation is a voluntary association of persons. Everyone having a
common interest it’s free to join a co-operative society – irrespective of caste, creed,
religion or political affiliation. A member after giving proper notice can leave the society
and will get back his capital according to the rules of the co-operative. But no member
can t4ansfer his shares to another person.

(iii) Minimum ten persons needed :

A minimum of ten adult persons are needed to form a co-operative organisation.
Maximum number of members is 100, in a co-operative credit society; with no such limit
in non-credit co-operative societies.

(iv) Service-motive :
The primary aim of a co-operative society is to provide some service or benefit to its
members (or even general public’s)-by fighting against some social evil.

(v) Finance :
The capital of a co-operative is raised from members through issue of shares. A co-
operative can also obtain loans from the Central of State Co-operative Banks.

(vi) Limited liability :

The liability of each member of a co-operative is limited to the extent of the value of
shares held by him, in the share capital of the co-operative.

(vii) Democratic management :

Business of a co-operative society is managed by a managing committee, which is elected
by the members. The members lay down the broad policy guidelines within which the
managing committee manages the affairs of the co-operative society.

(viii) ‘One-man one-vote’ rule :

Every member in a co-operative has one vote, irrespective of the number of shares held
by him.

(ix) Limited return on capital and disposal of surplus :

A limited interest upto 10% is paid to members on their capital contribution as an
incentive to invest money in the co-operative society. However, interest is paid only out
of profits.

Profits are distributed not in form of dividend but in form of a bonus which depends on
the volume of business done by a member with the co-operative.

(x) State control :

Governmental exercises control over co-operatives to protect the interest of members of
co-operatives, who, otherwise, are economically quite weak. Every co-operative society
19
Principles of Business Management

must furnish annual accounts and reports to the Registrar of Co-operatives. Further,
accounts of all co-operatives are subject to compulsory audit.

1.6.7.4 Advantages and Limitations of Co-operative Organisation

(a) Advantages

(i) Easy to form :

A co-operative society is easy to form. Its registration is very simple and does not involve
many legal formalities.

(ii) Universal brotherhood :

A Co-operative organisation represents universal brotherhood. Membership of a co-
operative is open to all having a common interest – irrespective of caste, creed, religion
and political affiliation.

(iii) Fully democratic management :

Managing committee of a co-operative is elected, by members. Further, ‘one-man one-
vote’ principle is followed in all co-operatives. As such, each member has equal rights
and equal voice in the management of the co-operative.

(iv) Perpetual succession :

After registration, a co-operative society acquires a separate legal status with perpetual
succession. Its life is not affected by the death, insolvency or lunacy of members.

(v) Limited liability :

Liability of members of a co-operative society is limited to the extent of the value of their
shares.

(vi) Governmental patronage :

As a matter of social welfare policy, Government extends all support to co-operatives e.g.
loans at low rates of interest, relief in taxation etc.

(vii) Internal financing :

A large part of the profits of a co-operative is transferred to general reserve every year.
Through ploughing back of profits, a co-operative can undertake schemes for its growth
and expansion.

(viii) Lower operating costs:

Operating costs of a co-operative are quite low, because:
- office bearers offer honorary services.
- there is no expenditure incurred on advertising and marketing activities.

(ix) Fair distribution of surplus :

20
 Nature and Scope
of Business …

Surplus of a co-operative is not distributed the way dividends are paid in companies.
Rather surplus is given away to members, on the basis of their dealings with society. This
approach to disposal of surplus is called ‘distributive justice’.

(x) Social welfare aspect :

Co-operatives are non-business organizations. They spread ideals of co-operation in
society.

1.7 SUMMARY

At the end it can be concluded that business is a value addition activities which is being
done for the satisfaction of human needs. Business is a risk taking profit making
activities. It can be done at various levels either at local, national or international level.
Further, it can be retail, wholesale, production or export-import business. It can be in the
various forms like sole trade, partnership, LLP, Company, etc. Therefore, the term
business is very wide and includes all the activities of commerce and trade. It has been
developed over the years with the development of human civilisation. It has been started
in the form of barter system and converted into the present globalised business scenario
where one can satisfy their needs while being at their home.

1.8 TERM-END-QUESTIONS

1. What is sole proprietorship? State its features. Explain the advantages and
limitations of this form of business organisation.
2. Define partnership. Explain its major advantages and limitations.
3. “A company is an artificial person created by law.” Comment. In the light of this
statement, define a company and explain its characteristics.
4. “Co-operatives run according to established principles of co-operation, in order to
fight against specific social evils.” Comment. What advantages do co-operatives
provide to their members and society?
5. Comment on the features, merits and limitations of One Person Company.
6. What is LLP? What are its characteristics?

21
Principles of Business Management

UNIT – 2 NATURE AND SCOPE OF MANAGEMENT

Structure

2.0 Introduction
2.1 Objectives of the Unit
2.2 Concepts of Management
2.2.1 Management as a Noun
2.2.2 Management as a Process
2.2.3 Management as a Discipline
2.3 Definitions of Management
2.4 Characteristics of Management
2.5 Objectives of Management
2.6 Nature of Management
2.7 Scope of Management
2.7.1 Check your Progress - I
2.8 Management and Administration
2.8.1 Management and Administration are different
2.8.2 Management includes Administration
2.8.3 Management and Administration are the same
2.9 Management as a Profession
2.10 Levels of Management
2.11 Social Responsibilities of Management
2.11.1 Check your Progress - II
2.12 Summary
2.13 Term-End Questions

2.0 INTRODUCTION

The term management is very common in the modern society and needed in the every
walk of human economic life. Most of the people undertake one or more
economic/business activities at a time, when these are done at small scale, managed by
the proprietor himself. As soon as the size of business increases, more and more persons
are involved and the activities become complicated. It is the place from where
management becomes very vital not only for controlling, co-ordinating, leading,
organising the group activities but also for achieving the established goals of the business
enterprises. All these managerial activities (planning, organising, coordinating,
controlling, decision making and supervising) are the essence of management and very
significantly decide the success and failure for every business enterprises. The personnel
performing these management functions are called managers and their task of getting
work done through is called management. Thus, management provides leadership to a
business enterprise, without able managers and effective managerial leadership the
resources of production remain merely resources and never become production. In the

22
 Nature & Scope
of Management

present business scenario of global marketing and throat cut competitive environment
where technology changes very fast, the quality and performance of managers determine
both the survival as well as success of business organisation. Which, cannot be ensured
without the sound knowledge of management concept?

Therefore, in this primary unit the learners will learn the meaning, nature, scope,
characteristics and how management is both science as well as art. The learners further
will learn the levels of managements, their activities, skills required and the social
responsibilities of management.

2.1 OBJECTIVES OF THE UNIT

The learners after going through this unit will be able to;
➢ Explain the concept of management
➢ Define the term management
➢ List the characteristics of management
➢ State the nature and scopes of management
➢ Discuss the various levels of management
➢ Describe the managerial skills and their responsibilities

2.2 CONCEPT OF MANAGEMENT

It is very difficult to have an all encompassing definition of management that could

reflect all its characteristics. Management has been discussed in a number of ways. An
e.g. in simple word, management is a process of getting work done through the others.
This concept is traditional and has been criticised on the various grounds. It does not
describe the functions of a manager. It gives the impression that management may adopt
manipulation and other unfair practices to achieve the objectives. Such impression is
unrealistic in the present environment of modern corporate governance.

The concept of modern management is broader. According to modern view, management

is much more than getting work done through others. It involves determination of
objectives, acquiring of capital, land, building, raw materials, machinery, more over
human resources and technology. Which are of peculiar nature? Thus, management is
required for efficient utilization of these lifeless and scare resources to accomplish the
pre-determined objective of the business organisation. This process of acquiring,
mobilising and utilising these limited resources for performing business activities is
called management.
a. Management as a noun
b. Management as a process
c. Management as a field of study/discipline

23
Principles of Business Management

2.2.1 Management as a Noun

Management in the general sense it is defined to be a group/class/section of people who
together perform various managerial functions for the attainment of the goal of the
organisation. Thus, as a group the term management connotes the group of personnel
occupying managerial positions. All the managers from the Chief Executive to First Line
supervisors are collectively addressed as management. Although technically all the
employees who have managerial duties are termed as management in common practice,
but many a time, the term is used to indicate only the top-level management of the
organisation. For example, the Chief Executive of Chairman of the Board, the Board of
Directors, or all of these or any combination of these. Similarly management as noun is
considered to be economic resource like entrepreneurship, capital and labour which
determine the organisational effectiveness to a large extent efficiency also. It is a system
of authority where the managers are responsible for making decisions and supervising the
work of others. Managers at different levels possess of varying degrees of authority.
Where higher level managers’ lead middle level managers and middle and lower levels
managers supervise and control their subordinates and workers.

2.2.2 Management as a Process

Management as a process by which managers create, direct, maintain and operate
purposive organisations through systematic, co-ordinated, cooperative human efforts. The
management process consists of setting objectives for an organisation and taking steps to
ensure that these objectives are achieved. The management as a process includes a series
of managerial actions e.g. planning, organising, staffing, coordinating and control. It is
an integrating process where managers undertake these functions with a systematic
approach, so as to integrate human, physical and financial resources into an effective
operating unit. Management is, thus, regard as a social process because the activities
involved in the achievement of goals are concerned mainly with relations between
people. Basically, all tasks are carried out when employees interact with one another.
Management is concerned with making such an interaction productive and useful for
achieving organisational goals. It is the pervasiveness of the human element that gives
management its special character as a social and continuous process.

2.2.3 Management as a field of Study

Any branch of knowledge must fulfil two requirements to qualify as a separate discipline.
First, the branch of knowledge in question must have scholars and thinkers who
communicate the relevant knowledge through research and publications especially
devoted to the field; secondly, there should be an effort to formally impart the knowledge
so generated to others. Management fulfils these requirements to qualify as a separate
discipline as follows:
1. All over the world scholars are doing research on the principles and practices of
management. Thus management is now recognised as a formal discipline having an
organised body of knowledge which can be learned through instructions and
teaching.

24
 Nature & Scope
of Management

2. A large number of new colleges and schools of management have been set up and
increasingly a large number of universities and colleges have introduced
management courses.

2.3 DEFINITIONS OF MANAGEMENT

There are the following some definitions;

According to Joseph Massie, “Management is defined as the process by which a co-

operative group directs action toward common goals”.

According to Henry Fayol, “To manage is to forecast and to plan, to organise, to

command, to co-odinate and to control”.

According to George R. Terry, “Management is a distinct process consisting of planning,

organising, actuating and controlling performed to determine and accomplish the
objectives by the use of people and resources”.

According to Peter F. Drucker, “Management is a multipurpose organ that manages a

business and manages managers and managers’ worker and work”.

According to J. N. Schulze, “Management is the force which leads guides and directs an
organisation in the accomplishment of a pre-determined object”.

According to Koontz and O’ Donnel, “Management is defined as the creation and

maintenance of an internal environment in an enterprise where individuals working together
in groups can perform efficiently and effectively towards the attainment of group goals”.

Thus, it is clear from the above definition that “management” is a technique of taking
work from others in an co-ordinated manner for realising the specific objectives by the
use of available resources. The purpose of management is to mobilise the physical,
human and financial resources and planning their utilisation for business operations in
such a manner as to reach the determined goals of business. Management is a universal
process in all organised social and economic activities. It is not merely restricted to
factory, shop or office. It is an operative force in all modern organisations trying to
achieve the defined objectives. Management is necessary for all the business firm
whether government enterprises, education and health services, military organisations,
trade associations and etc.

2.4 CHARACTERISTICS OF MANAGEMENT

Management is an activity concerned with guiding human and physical resources in such
a manner that organisational goals are achieved efficiently. The main characteristics that
highlight the nature of management may be listed as follow;

25
Principles of Business Management

1. Management is goal oriented: management is always aimed at achieving certain

organisational objectives or goals. Management exists as it helps in efficient and effective
use of available resources to accomplish the predetermined goals. Managerial success is
measured by the extent to which the predetermined objectives of the organisation are
achieved.

2. Management is a distinct activity: management is a distinct activity or a separate

branch of knowledge, which can be studied, experimented and practised. There is a set of
principles of management, which are applied by the managers. Managerial activities or
functions are planning, organising, staffing, directing, communicating, controlling and
coordinating.

3. Management is an integrating process: in an organisation management integrates

human efforts in relation to physical and financial resources like machines, materials,
technology, buildings, etc. Management undertakes to bring together the human, physical
and financial resources so that there is harmony among them. It creates mutual
cooperation between management and employees and also among employees so that
personnel can work together.

4. Management is a group activity: since management is essential to undertake any

organised activity, one may infer that management is concerned with a group activity. It
involves the use of group efforts in the achievement of predetermined objectives. No
managerial decision can be taken in isolation. A marketing manager cannot allow
additional credit period to a customer without consulting finance manager.

5. Management is a coordination force: one of the significant functions of

management is coordinating the effort of the employees. Each employee has its own
goals, aspirations and values. Managers have to strike a balance between individual gaols
and organisational goals. Employees perform varied activities. Managers have to
coordinate them to provide unity of action for the achievement of organisational
objective.

6. Management is a composite process: It is a process and consists of a series of

interrelated activities like planning, organising, staffing, directing and controlling.
Management is a composite process as these activities cannot be performed
independently e.g. without planning, there will be no organising and staffing. Directing
and controlling are also closely related with planning. No single function can be
performed without involving the others. All the managerial functions are interrelated.
Functional classification of managerial activities: finance, production, personnel and
marketing are also closely interrelated.

7. Management is getting things done: it is an art of getting things done through and
with people. If a manager wants to perform all the activities oneself, then it will be very
difficult to achieve the desired goals. He has to take help of others. Number of

26
 Nature & Scope
of Management

subordinates depends upon the work load. For better results, managers should resist
themselves to perform all the things themselves. Managers have to work with and
through others.

8. Management is all pervasive: management is a universal phenomenon. Its use is not

confined to business or other economic activities only but it is equally important in every
walk of life. Management knowledge is used in every economy, in every organisation
and at every levels or organisation. Thus, it is generic, pervasive and global need to
manage limited resources as to get maximum benefit.

9. Management is multi-disciplinary: to seek better results and improved

performance, in the field of management, concepts, ideas, generalisations and principles
of other disciplines are also used. To make superior quality of decisions, the use of
statistical devices and mathematical tools has become a style of the manager. Similarly,
use of knowledge of economics, psychology, sociology and anthropology for
understanding human behaviour and analysing the market forces has become regular
feature of it.

10. Management is a dynamic process: management is no more a stereotype

knowledge; rather it is ever-changing particularly in the context of changing
environment. To maintain survival of organisation, managers have to work out new
relationship, develop new approach and new ideas as to cope with changing environment.
By their innovativeness and creativity they make organisation capable of converting
threats and problems arising out of changing situation into opportunities.

2.5 OBJECTIVES OF MANAGEMENT

Management exists as it helps in efficient and effective use of human and physical
resources to accomplish the predetermined objectives. Managerial success is measured by
the extent to which the predetermined objectives are achieved. The objectives of
management may be classified as follows;

(I) Organisational Objectives: the management has to achieve the objective of the
organisation, which is managed by them. Organisational objectives are something which
an organisation seeks and towards which its resources and efforts are directed.
Organisational objectives includes the following:
1. Fair return of capital
2. Optimum utilisation of resources
3. Increasing efficiency of factors of production
4. Survival and growth
5. Creation of goodwill

27
Principles of Business Management

(II) Personal or Individual Objectives: these objectives are basically related to the
persons, who are working in the organisation. Personal objectives include:
1. Fair and competitive remuneration for the work performed.
2. Better working conditions
3. Opportunities for personal growth, training and development
4. Security of service and provision for social security
5. Job satisfaction, recognition, etc.

While determining the organisational objectives, management should keep in their mind
the personal objectives of the employees. If the personal objectives of the employees are
not achieved, they may lose interest in work and the organisation’s performance may be
affected adversely.

(III) Social Objective: it is the commitment of an organisation towards the society in

which it is working. Management is expected to achieve the following social objectives:
1. Supply of quality goods and services at reasonable prices
2. Avoidance of anti-social and unfair trade practices
3. Generation of employment opportunities
4. Conservation of environment and natural resources
5. Social and physical improvement of the community
6. Conducting business in lawful manner and complying with all legal requirements.
7. Paying taxes promptly and honestly

Thus, management should pursue the social objectives together with the organisational
objectives.

2.6 NATURE OF MANAGEMENT

A. Is management a science?
Science may be defined as a systematic body of knowledge pertaining to a particular
field, consisting universally accepted principles, which are base4d on observations and
experiments. Principles are exact and capable of verification. A science tries to establish
cause and effect relationship with regard to various phenomena and events. Thus,
following are the essential features of science:
1. Existence of systematised body of knowledge
2. Use of scientific methods of observation
3. Principles based on experiments
4. Establishing cause and effect relationship
5. Universal validity of principles

In order to be recognised as a science, a discipline must have the above mentioned

features. Let us now examine to what extent management satisfies the above requisites.

28
 Nature & Scope
of Management

1. Existence of systematised body of knowledge: management has a systematised

body of knowledge in the form of principles and techniques. These explain past events
and may be used to predict the outcome of specific actions.
2. Use of scientific methods of observation: management principles are evolved on the
basis of observation followed by management are not 100 percent objective because the
subjects are human beings whose behaviour cannot be predicted with absolute accuracy.
For example, observing dissatisfaction among the employees, it may be evolved that they
are less paid. But, this observation may be wrong. There are several other reasons also,
like lack of proper working conditions, lack of job security, lack of promotion
opportunities, etc.
3. Principles based on experiments: the principles of management are developed on
the basis of repeated experiments and research in various types of organisations.
F.W.Taylor conducted several experiments and then he developed a theory of
management, known as scientific management.
4. Established cause and effect relationship: management principles establish cause
and effect relationship. For example, appointment of two bosses for a group of
employees, will effect in confusion and indiscipline among the employees. This led to the
formation of the principle of unity of command.
5. Universal validity of principles: management principles are relevant for all types of
organisations-economic, social and political. The managerial principles have universal
application in different types of organisations. For example, principle of unity of
command, unity of direction, scalar chain, division of work, etc. Are universally applied.

From the above discussion it is clear that management is a science. It has a systematised
body of knowledge. Scientific methods of observation are followed by the managers.
Managerial principles are based on scientific observation and repeated experiments.
Management principles establish cause and effect relationship and have more or less
universal validity. However, management is not as exact a science as the other physical
sciences. This is because of following reasons;
1. Management uses rational approach and new methods, which are not
comprehensive as found in other discipline.
2. All the managers are not trained and experienced in using the scientific methods
and those, who are trained, do not use them in many situations.
3. Mangers have to use relative measurement where absolute measurement is not
possible, while in science, precision measuring instruments and tools are available.
The methods of observation followed by the management cannot be 100 percent
objective as the subjects are human beings and their behaviour cannot be predicted
accurately.
4. In science, stress is given on truth, while managers strive for reasonable results
under certain conditions and not for perfection.

29
Principles of Business Management

5. The management principles are flexible and can be used in different situations with
modification. Thus, these do not have universal applicability.

Thus, management may not be called as an exact science like physics, chemistry and
other physical sciences. Management is a behavioural science as it deals with human
beings. Moreover, it is a relatively new field of knowledge and most of its principles are
still being evolved.

B. Management as an Art
Art involves the practical application of theoretical knowledge and personal skills to
achieve desired results effectively. The function of art is to bring about concrete results
through deliberate efforts. Every artist has its own style and so it is a personalised
process. It is creative in nature. Thus, the main features of art practical knowledge,
personal skill, result-oriented approach, continuous practice and creativity. Management
is essentially an art as it fulfils the requisites mentioned above. It is explained in brief
below;

1. Practical knowledge: every art is based on theoretical and practical knowledge. An

artist is expected to learn theory as well as its practical application. Management
prescribes general principles for managing various aspects of business. Managers must
have the knowledge of these principles. He has to apply his knowledge and skill while
dealing with the managerial problems.

2. Personal skill: application of the principles depends on the experience and personal
skill of the managers. The manner in which the principles are applied is left to managers.
Every manager has his own approach and style and accordingly he tries to solve
managerial problems.

3. Result oriented approach: management has a result oriented approach. Managers

have to achieve concrete results, like profits, growth etc. To achieve the results, manager
applies his knowledge and personal skill. He uses human and physical resources. This
approach has given birth to management by objective.

4. Continuous practice: practice makes man perfect. One becomes an efficient

manager after a long practice. A manager gains experience through regular practice. He
becomes more efficient and effective after a long and continuous experience.

5. Creativity: each student learns the principles of management but applies them
differently depending on how much he has practiced them and how much creative he is.
To produce new goods and render new services with unique marketing strategy, a
manager requires imagination, intelligence and creativity.

C. Management as a Science and as an Art

It is proved from the above discussion that management is both a science as well as an
art. Management is a science as it has a systematised body of knowledge. Scientific

30
 Nature & Scope
of Management

methods of observation are followed by the managers. Managerial principles are based on
scientific observation and repeated experiments. Management principles establish cause
and effect relationship and have more or less universal validity. But it is not a pure
science like physics and chemistry. It is a social science as it involves the study of human
behaviour and is not possible to predict accurately the human behaviour. So management
is said to an inexact science.

Management is also an art as it involves achieving concrete results through the

application of knowledge and skill with creativity. A manager is also an artist. As an
artist he solves managerial problems and achieves the set objectives by applying his
knowledge, experience, skill and intuition. Thus, management is both a science as well as
an art. A manager is not only a scientist but also an artist. In the words of Koontz and
Donnel, “Essentially, managing is the art of doing and management is the body of
knowledge which underlies the art.”

2.7 SCOPE OF MANAGEMENT

It is very difficult to discuss precisely the scope of management. Because the theory,
concepts and principles of management related to managerial function differ from
organisation to organisation and situation to situation. However, there are some common
activities under every situation of management which refers to the scope of management.
1. Subject matter of management: it is a continuous process of planning, organising,
staffing, directing and controlling. These activities are the basic subject matter of
management.
2. Functional area of management: its scope refers the following functional areas:
3. Financial management: financial management includes forecasting, cost control,
management accounting, budgetary control, statistical control, financial planning
etc.
4. Personnel management: it covers the various aspects related to the employees of
the business organisation such as human resource planning, recruitment, selection,
placement, training, transfers, promotions, retirement, terminations, remuneration,
labour welfare and social security, industrial relation, etc.
5. Marketing management: refers to marketing of goods and services, sales
promotion, advertisement and publicity, channels of distributes and market
research etc.
6. Production management: includes products and production planning, quality
control and inspection, techniques of production etc.
7. Material management: includes purchase of materials issues of materials, storage of
materials, maintenance of records, materials control etc.
8. Purchasing management: refers inviting tenders for raw materials, placing orders,
entering into contracts etc.
9. Maintenance management: relates to the proper care and maintenance of buildings,
plant and machinery etc.

31
Principles of Business Management

10. Office management: refers to the overall management business activities with
office layout, office staffing and equipment of the office.
11. Management is a multi disciplinary approach: though, management is regarded as a
separate discipline, for the correct application of the management principles, study
of commerce, economies, sociology, psychology and mathematics is very essential.
The science of management draws ideas and concept from a number of discipliners
making it a multi-disciplinary subject.
12. Principles of management: it has universal application. These principles of
management given by the Henry Fayol and F. W. Taylor and other management
experts are applicable to any group activity undertaken for the achievement of
some common goals.
13. Management is a process of change: its techniques can be improved by proper
research and development.
14. The essentials of management: The essential of management includes scientific
method human relations and quantitative techniques.

2.7.1 Check Your Progress -I

1. What do you mean by the term Management?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

2. What are the Characteristics of Management?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

2.8 MANAGEMENT AND ADMINISTRATION

It has been a matter of controversy regarding the interpretation of these two terms among
the various authors. Practically both these two terms represents systematic integration,
mobilisation and utilisation of physical resources and direction of human efforts for
accomplishing predetermined objectives. Nevertheless, some thoughts may be given to
the view points of various authors. Some authors maintain that there is no difference
between these two terms and therefore these can be used interchangeably. They believe
that at all, if there is any difference between management and administration that may
perhaps arises out of usage of these terms in practice. The term management is used in
connection with the performance of economic activities. While as in non economic

32
 Nature & Scope
of Management

organisation for similar activities the term administration is used. This view point is
subscribed by William Newman, Peter Drucker etc.

But there is another group of management scientist who believe that there exit difference
between these two terms, like William Spriegel, R.H. Landsburgh, McFarland and Oliver
Sheldon, etc there are following three views on the subject of distinction between
administration and management;

2.8.1 Management and Administration are different

Oliver Sheldon was the first person to make a distinction between management and
administration. According to him, “Administration is the function in industry concerned
with the determination of the corporate policy, the coordination of finance, production
and distribution whereas, Management is the function concerned with the execution of
policy within the limits setup by administration.” Thus, administration is formulation of
policies and is and executive function. Florence and Tead also support this view,
“Administration involves the overall setting of major objectives, programmes, etc. While
management is the activities direction of human efforts with a view to getting this done.”

2.8.2 Management Includes Administration

According to Kimball and Kimball, “management is a generic term with wide functions
including administration, which is a narrow function.” According to E.F.L. Breach,
“Management is the generic term for the total process of executive control involving
responsibility for effective planning and guidance of the operations of an enterprise.
Administration is that part of management which is concerned with the installation and
carrying out of the procedures by which the programme is laid down and communicated
and the progress of activities is regulated and checked against plans.”Thus, first and
second viewpoints are exactly opposite to one another.

2.8.3 Management and Administration are the Same

According to third view, management and administration are the same. The functions
performed by the managers and administrators are more or less the same. There is no
difference between the nature of managerial and administrative functions. In order to
avoid the controversy, management may be classified into; (a) Administrative
management and (b) Operative management. Administrative management is primarily
concerned with determination of concerned with their implementation. Functions
performed by administrators are performed by the managers in a business organisation.
In order to avoid any controversy, we can classify management into (a) administrative
management and (b) operative management. Administrative management is primarily
concerned with lying down policies and determining goals whereas, operative
management is concerned with implementation of the policies for the achievement of
goals. But both these functions are performed by the same set of people. According to
Spriegal and Lansbugh, “At the higher levels, the managerial authority is concerned more
with administrative management and less with operations.” As shown in the figure below,

33
Principles of Business Management

every manager spends a part of his time in performing administrative management

functions and the remaining time on operative management functions.

Thus, administration and management are considered to be one and the same.

2.9 MANAGEMENT AS A PROFESSION

The quasi-characteristics of science and art as well as the emerging trend of separation of
management from owner and increasing professionalization of management has led to a
debate as to whether management is a profession like doctor, advocates, accountants,
teachers etc. Profession can be defined as an occupation for which specialised skills are
required, it is not only meant for self satisfaction but is used for the longer interests of the
society, and the success of these skills is not measured in terms of money alone.
According to McFarland, “A profession is a source of livelihood, based on substantial
body of knowledge and its formed acquisition the test of success in the service is not the
profit earned thereon.” A profession has the following characteristics.
1. Systematic body of knowledge: there exists a rapid expanding body of knowledge
underlying the management field. For being a successful manager, one has to study
management. A systematic body of knowledge for management has evolved during
the last six decades. However, the knowledge of management is still evolving and
new principles are being established.
2. Formal training: to enter into a profession, one has to possess certain knowledge
and skill through formal training. To impart management education there are many
formal institutions in almost all the countries. However, the entry to the managerial
cadre is not limited to management graduates only; through they put in better
performance in the organisation. Now a day there is an overall emphasis on taking
management graduates in the managerial cadre.
3. Fee as remuneration: profession is a source of income, but they get their
remuneration in the form of fees and not as salary or share in profit. Professionals
are expected to serve the society. The services of management consultants are used
by many business and non business firms in restructuring their business and
solving other problems.
4. Representative body: a representative body of professionals is considered essential
to regulate and develop the professional activities. There are management
association in many countries. In India too, we have All India Management
Association and Indian Management Development Association. These bodies
manage and coordinate research in management.
5. Ethical standards: for every profession same ethical standards are provided and
enemy individual professional is expected to follow these standards. There is an
absence of universally accepted formal ethical standards for management.
However, all India Management Association enforces a code of conduct, whereby,
it is the duty of the management to protect the interests of owners, labourers,
suppliers, consumers, etc. The Securities Exchange Board of India (SEBI) has
proposed a code of conduct for the directors.
34
 Nature & Scope
of Management

Thus, from the above discussion, it is clear that management has same characteristics
fully, while others exist partially. Management is a comparative new field of knowledge
and has been developed as a result of rapid industrialisation. It is increasingly being
treated as a profession because of the need for acquiring the management skills to solve
the complex problems of the organisations. Professional status for management showed
not be viewed as a matter of definition. The basic elements of professionalization are
important irrespective of whether they lead to professional status. So we can conclude
that management is a profession.

2.10 LEVELS OF MANAGEMENT

Management on the basis of authority and responsibility the entire activities of

management are categorised among three levels in a medium and large size business
organisation. These levels are clearly demarcated to ensure better coordination and
establishing authority responsibility relationship among the management and
subordinates to make every personnel accountable. These levels are as follow;

1. Top Level Management: it consists managers at the highest level in the management
hierarchy. This level consists of the Chairman, Managing Director, Board of Directors,
Chief Executive and General Managers. Generally these authorities are
selected/appointed from the owners or from the share holders. The top level management
concentrates more on thinking then doing. It lays down the overall objectives, plans and
policies. It controls the whole organisation. The functions generally performed by top-
level management in large organisation are as follow;
a. To determine the overall and long term objectives and goals.
b. To prepares strategic plans and policies for the organisation.
c. To provide direction and leadership to the organisation as a whole.
d. To appoint executives/managers for the middle level.
e. To control the whole organisation through reporting systems.
f. To maintain liaison with the outside world.

2. Middle Level Management: it is a link between top level and lower level
management because authority and responsibilities flows down ward from top to bottom.
The top level delegates authority to middle level management. The middle level
management consists of Departmental Managers, Deputy Heads of Department, Plant
Managers, Area Sales Managers, Branch Managers, Accountant, Purchase Officer etc.
Employees at this level devote more time to organising and directing functions of
management. These are the following main functions of middle level management;
a. To link the top and lower level of management.
b. To transmit plans, policies, orders and decisions to the lower management and their
execution.
c. To explain and interpret the policy decisions to the lower management.
d. To issue detail instructions to lower levels of management.

35
Principles of Business Management

e. To report the performance, suggestions, problems and other important data to the
top management.
f. To evaluate the performance of junior managers.
g. Coordination of various units and divisions.

3. Lower Level of Management: the lowest level of management consists of first line
supervisors. They generally have such designations as superintendent, section officers,
supervisors, foreman etc. They are directly in touch with workers, clerks, salesmen etc.
This level is entrusted with the task of getting work done by operatives or workers who
actually do the work. It is directly concerned with the operatives’ jobs and management
of workers. They are no managers below this level. Managers at this level supervise the
work of operatives to ensure that it is of required quality and is completed on time.
Following are the important functions of lower level management:
a. Planning the day to day activities for his group.
b. Arranging necessary machinery, tools and materials for workers.
c. Assigning jobs and tasks to the subordinates.
d. Providing training to the workers.
e. Supervising and guiding the operative workers.
f. Preparing and sending periodical reports about performance and other important
data to the middle management.
g. Maintaining cordial human relations in the organisation.

2.11 SOCIAL RESPONSIBILITY OF BUSINESS

Business organisation has close relationship with the society. They get various resources
or inputs from the society. They process and convert them into goods and services. These
goods and services are made available to the members of various sections of the society
for satisfying their needs and wants. On account of this relationship and interaction, both
have certain expectations from each other. As the business organisations have some
aspirations and expectations from each other. As the business organisation have some
aspirations and expectations from the society, in consideration of it, society also expect
that these organisations should conduct business operations in socially responsible
manner and discharge their obligation and commitment towards the society.

Thus, the term social responsibility has been considered as an obligation of business
organisation to utilise various resources which they have acquired from the society for
producing and distributing goods and services in the efficient manner. But this version
seems to be incomplete because an efficient utilisation of economic resources by the
organisations may result in higher profit and not necessarily any benefit to the society.
Therefore, social responsibility is something much more than effective and efficient
utilisation of resources in business. It may further be defined as an obligation of
organisation towards the constitution groups (customer, employees, investor community,
etc.) other than stockholders, beyond as prescribed by law and agreements. This

36
 Nature & Scope
of Management

interpretation indicates that social responsibility is an obligation towards various social

groups other than owners and that too on and above legal and contractual obligations.

Broadly, social responsibility refers to self-imposed obligation of making those decisions,

determining such course of action and formulating and implementing those policies for
conducting business which are desirable in terms of social values and objectives. While
defining social responsibility of organisation, more emphasis should be placed on means
rather than ends. All corporation need to analyse the social consequences of their
decisions before they make them and take necessary steps for minimising the social cost
of these decisions. It should also be ensured that while making decisions they incorporate
into their decision making process means by which broader social concerns are given full
consideration. This is how the corporate social responsibility as a means not as a set of
ends.

Commandments of business social responsibility

1. Organisation should take corrective action before it is required.
2. Organisation should work with affected constituents to resolve mutual problem.
3. Organisation should work to establish industry wide standards and self
regularisations.
4. Organisation should publicly admit their mistakes.
5. Organisation should get involved in appropriate social programmes.
6. Organisation should help correct environmental problems.
7. Organisation should monitor changing social environment.
8. Organisation should establish and enforce corporate code of conduct.
9. Organisation should take needed public stand on social issues.
10. Organisation strives to make profits on an ongoing basis.

2.11.1 Check Your Progress - II

3. What do you mean by the scope of management?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

4. Does Management and Administration different or same? Comment in brief.

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

37
Principles of Business Management

2.12 SUMMARY

The knowledge of management has universal application. It is widely used in every

society and economy and is needed in every walk of human life. It is more significant and
useful for business organisation. Business organisations are economic entities and profit-
earning bodies. They perform economic functions of producing and distributing goods
and services for the satisfaction of human needs and wants. In order to conduct these
business activities, both physical and human resources are acquired and used. Physical
resources such as land, building, capital, raw material, machine and technology, etc; are
of peculiar nature. They are lifeless and scarce resources. Thus, they need human
resources like labour and management for getting them utilised towards accomplishment
of pre-determined objectives. In the process of acquiring, mobilising and utilising these
limited resources for performing economic functions, a group of people commonly
known as managers assumes important position and perform key role. It is only by wide
range of activities and functions by these managers that physical resources are used
through labour for realising goals. Thus, in this context generally it is said that
management is to get the things done by others. It is one of the simplest versions of
management. But actually it is much more than that, involving a number of activities,
functions, approaches, skills and knowledge to be used by the managers for managing
affairs of the organisation efficiently.

2.14 TERM-END-QUESTIONS

1. Discuss the concept of Management? Explain its objectives and natures in details.
2. Management may be understood as a discipline, a group or a profession. Explain in
details.
3. What do you mean by social responsibility of business? How management help in
discharging the social responsibility of business discuss in detail?
4. Whether management is a science or an art or both comments?
5. Explain in details of the different levels of management generally existed in the
present business organisations?

38
 Approaches to
Study of….

UNIT – 3 APPROACHES TO STUDY OF MANAGEMENT

Structure

3.0 Introduction
3.1 Objectives of the Unit
3.2 Evolution of Management Thought
3.3 Scientific Management
3.4 Meaning of Scientific Managements
3.5 Principles of Scientific Management
3.6 Fayol’s Administrative Theory
3.6.1 Check your Progress
3.7 Human Relation Approach
3.7.1 The Hawthorne Studies
3.7.2 Findings of Hawthorne Studies
3.8 Behavioural Approach
3.9 Quantitative Approach
3.10 System Approach
3.11 Contingency Approach
3.12 Summary
3.13 Term-End-Questions

3.0 INTRODUCTION

Today management is a vital aspect of the economic life of man, which is an organised
group activity. It is considered as the indispensable institution in the modern business
organisation marked by scientific thought and technological innovations. One or the other
approaches of management is essential wherever human efforts are to be undertaken
collectively to satisfy wants through some productive activity, occupation or profession.
It is management approaches that regulate man’s productive activities through co-
ordinated use of material resources. Without the use of appropriate approach of
management, “the resources of production remain resources and never become
production.” In the words of Drucker management approaches adopted by a manager is
the life-giving dynamic element in every business. Productive resources-men, money,
materials, machines are entrusted to the organising skill, administrative ability and
enterprising initiative of management. The modern approaches adopted by managers to
motivate, supervise and control the employees are developed over the years and
categories in classical, behavioural as well as the modern approaches for which a number
of experiments have been conducted to develop the same. In the present unit the learners
will learn about the different approaches of management like scientific, administrative,
behavioural, systems and contingency approaches etc.

39
Principles of Business Management

3.1 OBJECTIVES OF THE UNIT

The learners after going through this unit will be able to;
➢ Understand the evaluation of management approaches
➢ Explain the different approaches of management
➢ Differentiate the different approaches of Management
➢ Enlist the use of different approaches of management in Business

3.2 EVOLUTION OF MANAGEMENT THOUGHT:

The application of management knowledge is as old as human civilisation. During the

initial stages of its development there was a good deal of confusion regarding the
contributions made by various management and social scientists to this field. It is because
at that time management knowledge was not in a organised and systematic form. The
existence and use of management knowledge during ancient times is clearly witnessed by
the various projects which were implemented efficiently and successfully such as
Pyramids of Egypt, Great Wall of China and many other major irrigation projects.
Though the practice of management relates back to thousands of years, but systematic
study and analysis of this discipline is relatively new. It is only from the beginning of 21st
century that concrete and serious attempts were made to develop this field as a separate
discipline and consequently it has emerged as one of the important branches of social
sciences. Before, 1990 century only three foreign university namely Pennsylvania,
Chicago and California offered business management courses. Over the last nine and half
decades management theory has developed in bits and pieces. In order to develop
management theory, contribution of various schools from different fields including
psychology, sociology, anthropology, mathematics, economics, political science has been
of great use. In addition, administrators and executives working in economic and non-
economic organisations including government, business health, education, armies and
churches have also contributed to the development of this field. Each group of scholars
and practitioners has formulated his own theory of management. In order to get proper
and balanced perspective of theory and practice of management that all developments and
changes taking place since the beginning of the 21st century till now may be placed under
three main categories.

3.3 SCIENTIFIC MANAGEMENT

Fredrick Winslow Taylor (1865-1915) is regarded as the father of ‘Scientific

Management’ movement. He was an American, who joined Midvale Steel Works,
Philadelphia (USA) as a machinist and gradually rose to the position of the Chief
Engineer. He conducted his experiments in three companies viz Midvale Steel Works,
Simonds Rolling Machine and Bethlehem Steel Works. His famous book is titled
‘Scientific Management’

40
 Approaches to
Study of….

3.4 MEANING OF SCIENTIFIC MANAGEMENT

Scientific Management refers to the use of scientific methods in decision making to

resolve management problems rather than depending on rule of thumb or trial-and-error
methods. F. W. Taylor is regarded as the father of scientific management movement. In
his words, “Scientific management means knowing exactly what you want men to do and
seeing that they do it in the best and cheapest way”. Essentially, scientific management
consists of observation and analysis of each task, determination of the standard of work,
selecting and training men to perform their jobs and ensuring that work is done in the
most efficient manner.

3.5 PRINCIPLES OF SCIENTIFIC MANAGEMENT

For the guidance of the practising managers, Taylor developed some principles, which
are known as the principles of scientific management. These are explained below:

1. Science, not rule of thumb: according to this principle, decisions should be

based on facts rather than rule of thumb. Rule of thumb is based on intuition, past
experience, personal opinion and prejudice. While doing any job or its element, scientific
methods should be applied. There should be a proper plan based on scientific inquiry and
analysis.

2. Scientific selection, training and development of workmen: it is essential for

efficiency in production that workers are selected with due care. Their skill and
experience must be matched with the requirements of the respective jobs they are to
perform. The employees should be selected on the basis of tests and interview. The
workmen so selected must be given training for the specific tasks assigned. Training must
also be arranged to develop their abilities to improve performance.

3. Cooperation, not individualism: there should be cooperation between workers and

management. It is only through cooperation with workmen that managers can ensure that
work is carried out in accordance with the plans and standards of performance.
Cooperation is based on mutual faith. Managers should develop understanding with
workers to secure their cooperation. The concerned employees should be involved in the
process of setting standard work and hours. Monetary and non-monetary incentives
should be used to motivate the workers. Appropriate working conditions, standard tools
and equipment’s should be provided to the workers. These steps can help in securing
cooperation.

4. Division of responsibility between managers and workers: Taylor advocated

separation of the two kinds of responsibilities-planning and execution, so that each work
should be the responsibility of workers. To achieve this objective, he suggested a form of
organisation, called ‘functional foremanship’, in which he has suggested a planning in-
charge and an operation in-charge. In the planning department, there should be a route
41
Principles of Business Management

clerk, instruction card clerk, time and cost clerk and shop disciplinarian. In operation
department, there should be a gang boss, a speed boss, a repair boss and an inspector.

5. Mental revolution: the worker and managers should have a complete change of
outlook with respect to their mutual relations and work efforts, which is called mental
revolution. It requires that management should create suitable working conditions and
resolve all problems scientifically. Managers should share the gains of increased
productivity and efficiency. Similarly, workers should attend to their jobs with discipline
and utmost devotion. They should not waste the resources of the organisation.

6. Maximum, not restricted output: a common cause of conflict between management

and workers is related to division of surplus. The aim of both management and the
workers should be to maximise output. This should be done by both parties in their own
self-interest. For management increased production means more profits, and lower cost of
production. For workers, increased output may offer attractive wages. In this way it is the
self-interest that impels both management and the workers to achieve maximum output.
Maximum output will also be in the interest of the society.

3.6 FAYOL’S ADMINISTRATIVE THEORY

Henry Fayol was born in France in 1841. He graduated in 1860 as a mining engineer. He
worked as a junior executive in a mining and manufacturing company. Later he was
promoted as general managers of the company. In 1898 he was appointed chief
executive. He turned the loss making company t a flourishing company. Among his
publications, the most widely read was the book ‘General and Industrial Management’
which was published in French in 1916. He is well known for the general principles of
management formulated by him on the basis of his long experience in the field of
management. Fourteen principles of management formulated by him are explained
below:

1. Division of Work: Fayol recommended that work of all kinds must be subdivided and
allocated to a number of persons. Subdivision makes each task simpler and results in
greater efficiency. By repeating a small part of work the individual acquires speed and
accuracy in its performance. This principle is applicable to both technical as well as
managerial work. If each person in the organisation specialises in his/her task, efficiency
of every individual and of the whole organisation is expected to improve. Division of
labour or work leads to specialisation which increases the efficiency of individual
employees. If this principle is not adopted then there will be the lack of specialisation and
efficiency in the organisation.

2. Principle of parity of authority and responsibility: authority refers to the right of a

superior to give orders to subordinates, take decisions on specified matters, use resources
of the organisation and guide and regulate the behaviour of subordinates. Responsibility
on the contrary includes obligation with respect to the performance of functions and

42
 Approaches to
Study of….

achieving goals in a satisfactory manner. The principle of parity suggest that there must
be parity between authority and responsibility. Giving authority without corresponding
responsibility can lead to arbitrary and unmindful use of authority. Similarly, if a person
is given some responsibility he must also be granted adequate authority. Lack of
necessary authority will make the individual ineffective.

3. Discipline: discipline in the context of management means obedience, proper conduct

in relation to others, and complying with the rule and regulations of the organisation.
Smooth running of business requires discipline. Discipline is required not only on the part
of workers but also on the part of management. It is facilitated if there are good
supervisors at all levels, rules are clear, and penalties are imposed with fairness.

4. Unity of Command: this principle state that a subordinate should receive orders and
be accountable to one and only one superior. No employee, therefore, should receive
instructions from more than one person. The principle is necessary to avoid confusion
and conflict. For instance, if there is more than one superior, each may want that work is
carried our according to his instructions. The subordinate will be confused regarding
whose instructions he should follow. Besides, when there is unity of command will create
confusion and conflict. It may be difficult to fix responsibility for mistakes.

5. Unity of direction: according to this principle the efforts of all the members of the
organisation should be directed towards common goals. The principle seeks to ensure
“unity of action coordination of strength and focusing of effort”. For this purpose there
should be one head and one plan for a group of activities having the same objectives. For
example, the production department should have a single plan and all must work to
achieve specified goals in terms of quantity and quality of goods to be produced.

6. Subordination of individual interest to general interest: according to this principle,

what is in the interest of the organisation as a whole must take precedence over the
interest of individuals? Generally, the effort should be to bring about convergence of
general and individual interests. But in case of conflict, individuals must sacrifice in the
larger interest.

7. Remuneration of employees: in Fayol’s view remuneration of employees should be

fair and reasonable. To be fair to the employees, wages should be determined on the basis
of work assigned, cost of living, financial position of the business and average wage rates
for similar work in the industry. While basic wages may be fixed according to the work
done, there should be provision for allowances based on changes in cost of living. At the
same time, the level of wages must be within the capacity of employer to pay. Worker’s
unions often try to push up wage rate. They must be within the capacity of employer to
pay. Workers unions often try to push up wage rate. They must do so only to the extent
that employers can afford it. If this principle (fair remuneration) is violated, there will be
lack of motivation among the employees. It may also lead to strike etc.

43
Principles of Business Management

8. Centralisation and Decentralisation: Centralisation is said to exist if top management

retains most of the decision-making authority. It is less if such an authority downwards
leads to decentralisation. Fayol says that an organisation should strive to achieve a
balance between complete centralisation and decentralisation. In small organisation,
where the range of activities is generally small, greater centralisation is possible. But also
on factors such as experience of the superior and dependability and ability of the
subordinates.

9. Scalar Chain: scalar chain as the chain of superiors ranging from the top management
to the lowest ranks. The chain also determines the line of authority. The manager has
subordinates below him but he is also a subordinate to his own superior. Thus, all
managers are linked step-wise through a chain. The principle of scalar chain suggest that
there should be clear line of authority from top to bottom linking managers at all levels.
Communication through scalar chain sometimes involves delays as there is a set line of
authority through which employees and managers communicate with each other.
Communication is required to flow through the chain at the same level in the hierarchy.
To avoid delays. Fayol suggested the concept of ‘Gang Plank’, which enables two
subordinates or employees at the same level to communicate directly with each other.

10. Order: this principle is concerned with arrangement of things is called material order
whereas arrangement of people is referred to as social order. If this principle (material
order) is violated, it will lead to wasteful movement in receiving materials and
instruments/tools. In case of violation of social order, needed employees may not be
easily contacted. For example, head of production department may be allotted an office
room, the typist a particular table, the foreman to supervise a workshop and so on.

11. Principle of equity: the principle of equity suggests that similar treatment is assured
to people in similar positions. This principle implies that managers should be fair and
impartial while dealing with their subordinates. Example: workers performing similar
jobs should be paid the same wage rate and perquisites. They should be provided the
same working conditions. Their performance should be appraised on the same basis.

12. Stability of tenure of employees: according to Fayol, employees should not be

transferred from their position frequently. The period of service in a position should be
fixed. It often takes time to get used to work. An employee cannot render useful service if
he is frequently transferred from his position before he gets accustomed to the work
assigned to him. However, it does not imply that he should not be promoted or
transferred tin the interest of the organisation. If this principle is violated, there will be
problems of absenteeism and higher turnover of employees, which affects productivity
and efficiency adversely.

13. Initiative: Employees at all the levels should be allowed to take initiative in work
related matters. Initiative means eagerness to initiate action without being asked to do so.
However, it does not imply freedom to do whatever people like. They must observe
discipline. Generally, managers at higher levels have greater discretion as well as
44
 Approaches to
Study of….

decision-making power. Encouraging initiative is likely to motivate employees to work

better and harder.

14. Principle of Esprit de Corps: it refers to team spirit that is harmony in work group
and mutual understanding among workers. Managers must take steps to develop a sense
of belonging among the members of a work-group. If there is team spirit, everyone comes
forward to help other. It helps develop an atmosphere of mutual trust and understanding.
It inspires them to work harder and improve the quality of work. When esprit de corps is
present the need to use penalties for default is minimised. If the degree of discipline is
higher, desire to contribute to the best of ability increase. Managers should not use
subordinates for their personal ends. They should not try to take the credit for the work
done by lower level workers.

3.6.1 Check Your Progress

1. What do you mean by the approaches of Management?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

2. What is Scientific Management?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

3.7 HUMAN RELATION APPROACH

Human Relation Movement was a remarkable attempt on the part of management

practitioners for making managers more sensitive to the needs of employees. This
movement is marked by threats of unionisation, findings of Hawthorne Studies conducted
between 1924 to 1932 at the Hawthorne works of the Western Electric Company, near
Chicago in the United States and philosophy of industrial humanism. Elton Mayo, Mary
Parker, Follett and Douglas McGregor have been main contributors to this movement.
The main features of human relation movement are as under;
1. Human organisation was considered as psycho-social system. Primary focus of
psychologists was placed on the employee as an individual, while sociologists
concentrated on employee’s interaction with other in a group which sociologists
concentrated on employee’s interaction with a others in a group which leads to
creation of inter personal relations.

45
Principles of Business Management

2. This movement took management theorists away from simple model of economic
man to more humanistic view, the social man model. They argued that apart from
economic needs, the employees have other social and psychological needs such as,
recognition, appreciation, self-respect and dignity, etc and these are also to be taken
care of.
3. Regarding human nature, optimistic assumptions were made such as they want to
work, assume responsibility are willing to co-operate and contribute for achieving
common goal provided they are given an opportunity. More so, it is a responsibility
of manager to seek their co-operation by establishing congenial interpersonal
relationship, adopting sympathetic and friendly attitude towards them and
recognising and providing for their social, psychological and other needs.
4. Advocates of human relation approach strongly believed that there should be no
conflicts or clashes in organisation and at all if it arises, it must be removed
completely because it is not desirable for a healthy organisational functioning.
5. As to secure maximum contribution, the managers should get alone with
employees and workers. By reducing social distance, fair and frank communication
would take place among them.
6. In order to motivate individual employee his motivating desire should be
ascertained in terms of his emotions, beliefs, attitudes, habits and needs.
7. Sense of belongingness should be created among employees by giving them more
importance and getting them involved in decision-making and other affairs of
organisation.
8. Human relation approach basically aims at providing high degree of satisfaction
and motivation to the employees through improved working conditions, effective
style of supervision and by creating sense of security among them.

In brief, early human relation theorists realised that satisfied employees would be less
inclined to join trade union movement. It is therefore, managers should be forced for
adopting morale boosting human relation techniques. Apart from providing satisfaction to
social, emotional and psychological needs, they should also recognise the importance of
psychological and social factors in the working of organisation.

3.7.1 The Hawthorne Studies

Hawthorne studies and its findings provided concrete base to humane relation approach.
It has definite significant impact on management thoughts. These studies began in 1924
in Western Electric Plant in USA spread over a period of eight years. These studies were
started to envisage the relationship between light and productivity as a part of scientific
management study. But at a later stage a team of behavioural research scientists headed
by Elton Mayo was called upon from Harvard for making more rigorous studies.
Hawthorne studies mainly consisted of the following experiments;
a. Relay assembly test room experiment
b. Massive interviewing programme
c. Bank wiring observation room experiment
The main purpose of conducting these experiment was to assess the effect of illumination
of output of employees. It revealed that productivity cannot be raised only by improving
46
 Approaches to
Study of….

physical working conditions but philosophy of human relation was needed to provide
better treatment to them to raise their output. The major findings of studies are us under;

❖ Hawthorne studies made it quite clear that the worker is not merely and ‘economic
man’ motivated solely by financial incentives. Rather his working behaviours is
more influenced by his social and psychological needs. These studies reinforced the
interest of management in the psychological and social factors of the work-setting.
❖ After extensive and rigorous studies it was also discovered that productivity of
workers is less affected by change in physical working conditions than by the
previous. The studies revealed that the worker responds to his total work setting
and of which social relations and interpersonal relations are parts of it.
❖ The studies fully realised the importance of informal groups based on personal and
social relations among workers and its impact on their working behaviour. It was
demonstrated that effective communication, relaxed and friendly supervision,
workers attitude and informal leadership are more contributory to productivity than
other physical factors like working conditions, etc.
❖ Hawthorne studies also revealed that people were important to productivity and
therefore approach of human relation was needed for treating them in a better
manner. They create their own informal and powerful workplace culture and
prescribe informal norms for the members. It also came into light that personal and
emotional factors were more important determinants of productivity than physical
and logical factors. The need was felt to humanise relation between management
and workers. Mayo urged the managers to provide work that would give personal
and subjective satisfaction to workers and would create new social order as to get
their whole hearted cooperation.

3.7.2 Findings of Hawthorne studies

❖ Contrary to the approach of scientific management which is primarily focused on
the study of tools and techniques, the human relation approach place more
emphasis on the people. The finding or conclusions of Hawthorne studies were
indeed an eye opener in this direction. the finding of Hawthorne were published in
1941 by Rowthlis Berger and William Dickson in the form of a book titled as
management and the worker major finding of studies are as under :
❖ Hawthorne studies made it quite clear that the is not merely an economic man
motivate solely by financial incentives rather his working behaviour is more
influenced by his social and psychological need these studies reinforced the insert
of management in the psychological and social factor of the work setting
❖ After extensive and rigorous studies it was also discovered that productivity of
workers is less affected by change in physical working condition that by the
relationship between members of work group and between workers and their
supervisors the studies revealed that worker responds to his total work setting and
of which social relation and interpersonal relation are parts of it .
❖ The studies fully realized the importance of informal groups based on personal and
social relation among worker and its impact on their working behaviour it was
47
Principles of Business Management

demonstrated that effective communication relaxed and friendly supervision

worker attitude and informal leadership are more contributory than other physical
factor like working condition etc.
❖ Hawthorne studies also revealed that people were important to productivity and
therefore approach of human relation was needed for treating them in a better
manner they create their own informal and powerful workplace culture and
prescribe informal norms for the member it also came into light that personal and
emotional factors were more important determinants of productivity than physical
and logical factors.
❖ The need was felt to humanize relation between management and workers mayo
urged the managers to provide work that would give personal and subjective
satisfaction to workers and would create new social order as to get their whole
hearted cooperation.
❖ Though the findings of Hawthorne studies forced management scientist to turn
away from economic man model to more humanistic approach of social man mode
but these studies were criticized mainly for type of methodology used and
statistical inaccuracies involved in it is argued that the finding of Hawthorne
studies are not based on scientific research, and scientific techniques have not been
used for deriving the conclusions. Regarding the findings it is also alleged that
these findings influenced by preoccupied notions about human behaviour lying in
the mind of managers. Further, the validity and applicability of these findings is
also questioned on the ground that since these have been drawn from the study and
experiment on small group of people therefore they may not enjoy wide and
general application in all kinds of work situations.

3.8 BEHAVIOURAL APPROACH

As management research continued in the 20th century, questions began to come up

regarding the interactions and motivations of the individual within organizations.
Management principles developed during the classical period were simply not useful in
dealing with many management situations and could not explain the behavior of
individual employees. In view of certain inadequacies and drawbacks associated with
human relation approach, serious efforts were made by many other social and
behavioural scientists for studying and analyzing human behaviours systematically. The
term behavioural science approach may be defined as systematic as s well as scientific
analysis of human behaviour with a view to determine causes of working behaviour of an
individual. This approach is also known ‘organizational behaviour consisting of
psychology, which deals with human behaviour, sociology dealings with behaviour of an
individual in group and anthropology is a study of physical, biological and cultural
variables affecting behaviour of individuals as members of a group. Behavioural science
approach has significant impact on modern management theory because it helps in
explaining why employees do behave as they do. This approach is based on the following
assumption;

48
 Approaches to
Study of….

1. Advocates of behavioural science approach strongly believe that organisation is a

socio-technical system which consists of individuals and their interpersonal and
social relationship with each other on one hand and on the other various techniques
methods and procedures used for performing several jobs assigned to them.
2. This approach highlights that individual goals and interest of employees can be
integrated with organizational goals as to avoid conflict and clash between them.
3. According to this approach conflict and co-operation coexist in organisation. To
some extent conflicts are inevitable and desirable. It is because organisation is
made of many interest group which are perhaps antagonistic and many individuals
of different background, perception, personality, aspirations and goals do work in
organisation. This type of diversity is bound to create some conflicts. Similarly, it
is in a conflicting situation the managers tend to behave carefully, cautiously and
act efficiently.
4. Behavioral scientists recognize individual differences in terms of their personality,
goals, beliefs, values and perceptions. These differences matter a lot specially at the
time of designing motivation process.
5. Behavioral approach also assumes that people are the key to productivity. The
technology, the work standards and other physical factors do not guarantee higher
performance, instead it depends on wide ranging variables such as satisfaction,
morale, motivation of employees and sensitivity of managers to employees needs
etc.
6. Different aspects of this approach were developed by various behavioral scientists
such as Douglas McGregor, Abraham Maslow, Chester Barnard, Rensis Likert and
Herbert Simon, etc.

Behavioral approach of management represents significant advance over human relation

approach. It may be considered as more refined and scientifically extended version of
human relation approach. It is because it fulfils some of the inadequacies left by human
relation scientists that too by retaining its focus on people in organisation. These two
approach may be compared as under.

3.9 QUANTITATIVE APPROACH

This approach is also known as management science approach, developed during 1950. It
is based on the approach of scientific management. It offers systematic and scientific
analysis and solution to the problems faced by managers. The quantitative approach aims
at achieving high degree of precision, perfection and objectivity by encouraging the use
of mathematical and statistical tool for solving complex problems. These quantitative
decision making tools are known as ‘operation research’ like linear programming,
simulation, queuing theory and game theory, etc. It also implies use of computer aided
technology in various fields like production, finance, costing, transportation and storage,
etc. In simple terms, operation research may be regarded as application of scientific
method for solving problems. These scientific methods consist of following stages.
a. Dividing problems into small simple components
49
Principles of Business Management

b. Gathering required information on each component

c. Analysis of data so collected
d. Findings out solution to problem in hand

The quantitative approach involves use of knowledge and skills of several other
disciplines such as statistics, engineering, electronics and accounting, etc. It has
contributed significantly to management theory and practice. It has led to increasing use
of information technology, electronic data processing system and other sophisticated
quantitative devices for making decisions. The consistent use of logic and reasoning for
solving problems may help in reducing personal bias and intuition of managers. But, on
the whole this approach has very limited application that too only in respect of problem
solving and decision making. Therefore, it is not considered as full-fledged approach of
management.

3.10 SYSTEM APPROACH

System approach of management represent new thinking and latest development

occurred in the field of organisation and management. It was developed after 1950,
placing emphasis on interdependence and interrelationship which exists among various
activities and components of organisation. Basically, this approach aims at identifying
and analyzing the nature of relationship among various components or sub-system of the
organisation.

The term system may be defined as a set of interrelated and interacting components
assembled in a particular sequence as to produce some results. These components may
also be viewed as subsystems of a larger system. It is only through these sub-systems, the
larger system operates. Thus, larger system can be viewed as a whole entity or totality.
The various sub-system which are involved in the functioning of larger one are closely
related to each other by getting influenced and influencing others. Every system has
subsystem and every sub-system may be considered as a system because it may have sub-
systems. Thus, in a system, there is a wheel within wheel making and contributing to
larger system. Every system has certain boundaries, and within these there lies internal
environment which mainly consist of internal and controllable variables such as
organizational and culture, motivation systems, quality of leadership and communication
network and nature of supervision etc. Beyond these set boundaries there exists external
environment which is outside the control of the system. It includes set of socio-cultural,
economic, legal, political and technical factors affecting the functioning of organisation.
For instance individual firm is a sub-system of industry which is sub-system of business,
which is further sub-system of larger economic system and which is again a part of
broader socio-economic system of the country which falls within international system.
The system approach defines organisation as a complex whole consisting of mutually
interdependent and interacting parts which are viewed as sub-system. Therefore, this
approach is said to be holistic in nature assuming that whole is greater than the sum of its
parts. The system approach encourage meaningful analysis of organisation, its various

50
 Approaches to
Study of….

sub systems or components and facilities their management. It provides sound basis for
understanding organisations and their problems. System theories strongly believe that the
actions and decisions of manager’s influence and in turn are influenced by many
organisational and environmental variables. The managers must take into account
interdependencies, interactions and interrelationship among the various components of
the system at the time of making decisions. He should also base his decisions on the
ground realities of both internal and external environment. Thus, system approach
facilitates application of both the process of analysis and synthesis and differentiation and
integration by relating sub-systems of organisation from the lowest to the highest level of
organisation. Another positive aspect of system approach is that it integrates various
management approaches in a meaningful way. Although classical approach and
behavioural approach place an emphasis on different aspects but these two are greatly
influenced by system approach.

In addition, some management scientists criticise system approach as being purely

theoretical, conceptual, vague and abstract. They argue that it has only an intellectual
appeal and cannot be applied to practical situation. In the context of management of
modern organisation it is considered simply a way of thinking rather than providing
solutions to a problems. The system approach neither offers any tool and technique for
analysis and synthesis nor it recognises the differences which exist between the various
systems. Nevertheless it represents significant departure from the past and provides new
style of thinking to management knowledge.

3.11 CONTINGENCY APPROACH

Contingency approach, is related to system approach, and represents comparatively new

line of thinking among management scientists. This approach basically discounts the
concept of universal application of managerial principles and recommends that the
application of these principles is subject to appropriateness of the situation. It is a
systematic attempt to determine package of management technique, approaches and
practices which are appropriate in a specific to appropriateness of the situation. It is a
systematic attempt to determine package of management technique, approaches and
practices which are appropriate in a specific given situation. Thus, according to the
advocates of this approach, managers instead of applying principles and practices of
management in the uniform manner to every situation should study, analyse and diagnose
the situation, understand situational requirements and then prepare package of
management principles and techniques to deal with it effectively. So this approach makes
it quite clear that instead of relying too much on preconceived assumptions, and
viewpoints differences in the situations should be taken into account as to design and
implement suitable management packages. In the context of management, contingency
approach has become synonymous with situations and environmental management.
According to one of its advocates, “The effectiveness of a given management pattern is
contingent upon multitudinous factors and their interrelationship in a particular
situation”. This means application of various management techniques must be made
51
Principles of Business Management

appropriate to the particular situation. It is because each situation is made of different

variables. This approach is also considered as pragmatic and open minded. It is because
this approach places more emphasis on situational variables and application of
managerial tools and techniques is contingent upon that specific situation. The
contingency approach offers following guidelines for the managers.
1. Contingency approach is situation oriented urging upon the managers to study,
analysis and diagnose the situation. It is to be done in terms of component variables
of the situation and external factors affecting the situation.
2. Subsequently, after the analysis of the situation, the managers are expected to
prepare inventories of management theory, principles, techniques and concepts.
3. In order to tackle the situation efficiently the validity and applicability of
management tools and techniques is to be examined. And finally package of these
tools and techniques is prepared which is appropriate for that specific situation. It is
because each situation differs and requires different managerial response.

It is evident from the foregoing discussion that contingency approach discounts the theme
of universal application of management principles. It is further upholds relevance and
utility of situations as well as eternal factors for developing suitable action programme.
Outwardly, it appears that contingency approach is merely based on common sense
because it has intuitive appeal that there cannot be a single one best way of doing the
things in every situation. It is merely a matter of common sense that one particular
characteristics and features. Thus, managers should have flexibility and freedom for
devising suitable course of action for a given situation. It is because in real life
management the success of any management technique is largely conditioned by the
situation. It may also be considered as common sense approach, because it widens the
horizon of management from management theory, principles, techniques and concepts to
situational variables and external environment. The manager has to apply innovativeness,
creativity, analytical abilities and foresightedness for developing suitable course of action
contingent upon specific situation.

In fact, the entire approach of contingency is much more than the mere application of
common sense. The application of this approach requires the managers to have through
knowledge of the situation in terms of situational variables and external factors. In
addition to apply this approach he must possesses enough knowledge about management
theory, principles, tools and techniques. It further calls for knowledge and analytical
abilities on the part of managers about the contingencies under which a particular
managerial response in the form of strategy or technique would work well. The
contingency approach suggests comparative analysis of various organisations operating
in different situation as to get adequate knowledge of their functioning which may further
help in formulating general guidelines for understanding the behaviour of situation.
Contingency approach seems to be a significant addition to existing body; of
management knowledge. It is because it places more emphasis on appropriateness of
management tools and techniques for a specific situation. It offers practical direction to
system approach for making choice of suitable form of departmentalisation for grouping
activities, style of leadership and supervision, for determining degree of centralisation
52
 Approaches to
Study of….

and decentralisation and more appropriate motivational process as per the demand of
situation. Some management scientists believe that contingency approach is compromise
between system, approach and purely situation perspective. It is based on open system
thinking, is pragmatic in nature and encourages multivariable analysis.

3.12 SUMMARY

It can be concluded on the whole that the approaches of management have been
developed and changed over the years with the changes of business scenario according
the increase in knowledge, awareness of consumers, employees as well as the
stakeholders of the business. Earlier, the use of management was limited to the concept of
getting work done through the others. Where employees were supposed to be a means of
production where they have to complete the assigned work at any cost. But with the
development of knowledge the scientific management approach was given by F. W.
Tailor to make the entire process of business efficient but they completely missed the
human factors. Later on the human relation approach was given by Elton Mayo in his he
advocated that it is the men who activate the rest means of production. Therefore they
should be given due respects as well as they should not be treated as machine. Further,
behaviour, quantitative, system and contingency approaches was developed to make the
entire management process efficient and effective.

3.13 TERM-END-QUESTIONS

1. Explain in detail the evolution of management approaches. How administrative

theory given by Hennery Fayol is relevant to the business organisation?
2. What do you mean by Scientific Management? Explain the meaning,
characteristics and principles of scientific management in detail.
3. How Human Relation Movement is related to Behavioural approaches of
Management?
4. What are the major findings of Hawthorne studies explain with suitable examples?
5. Write short notes on quantitative, system and contingency approaches.

53
Principles of Business Management

UNIT – 4 FUNCTION AND PRINCIPLES MANAGEMENT

Structure

4.0 Introduction
4.1 Objectives
4.2 Meaning Principles of Management
4.3 Nature of Principles of Management
4.4 Need for Principles of Management
4.5 Fayol’s Principles of Management
4.6 Meaning of Scientific Management
4.7 Principles of Scientific Management
4.7.1 Check your Progress
4.8 Functions of Management
4.9 Summary
4.10 Term-End-Questions

4.0 INTRODUCTION

Today management is considered as a separate discipline which is based on certain

principles for management decisions making and constructive results. In this present unit,
the learners will learn the meaning, natures, and need of management principles as well
as the principles formulated by management experts like Fayol and Taylor. In the next
para the major functions of management like planning, organising, coordinating,
cooperation and control will be discussed in details.

4.1 OBJECTIVES OF THE UNIT

On the completion of this unit the learners will be able to:

a) Understand and explain the meaning and nature of management principles
b) Justify the need for the study of management principles
c) Classify the different principles of management given by management thinkers
d) Outline the management principles and state their limitations.
e) Explain the functions of management

4.2 MEANING OF PRINCIPLES OF MANAGEMENT

A principle may be defined as “a fundamental statement of truth which establishes cause

and effect relationship between two or more variables in order to provide guidelines for
managerial decision-making and action. “The conceptual framework of management is
based on certain well tested, universal principles of management which have originated
as a result of past experiences and accomplishments. Principles are derived on the basis
of observation and analysis of certain events faced by the management in actual practice.
54
 Function and
Principles Management

The principle of scalar chain states that “the order or communication should pass through
proper channels of authority along the scalar chain. In case there is a need to shift
communication a direct contact through a Gang Plank may be created. This principle was
evolved when the management observed that there is a need to minimise delays and
difficulties in communications.

Apart from the direct observation, another method of deriving principles is conducting
experimental studies. Suppose we want to conduct an experimental study to confirm the
correctness or validity of the principle of stability of tenure of personnel. This principle
emphasises that the period of services of an employee in a position should be stable in
order to boost morale and develop loyalty and attachment. Now after experimentation on
two different groups, if it is noted that the group with greater stability of tenure is doing
better than the other, the principle may be taken as a valid one.

The following steps are taken to develop management principles;

1. Identification of the areas/problems where principles of management are lacking or
need modification.
2. Observation and deep study of the area/problem in different situations and from
different angles.
3. Formulation of a hypothesis under assumed situations on the basis of observations
and studies.
4. Reaching a logical conclusion and predicting certain events or behaviour under
assumed situations.
5. Scientific testing and verification of the principle

4.3 NATURE OF PRINCIPLES OF MANAGEMENT

Management is considered to be both a science and an art. Actually it is a social science.

The principles of management have been developed on the basis of the experiences of
happenings for the past and observations of facts. Hence these principles have following
elements in its nature;
1. Universality: As Henry Fayol pointed out, principles of management can be used in
every type organisation-business, government, social, military, hospital etc. Thus
management principles can be effectively used with equal utility by managers of
different organisations and at different levels of authority.
2. Evolutionary: the body of management principles has been developed on the basis
of organised quantitative facts or from the accumulated experiences. Thus these are
the expressions of the breadth and depth of the experiences of the leaders of
management thought. Therefore, they are evolutionary in nature.
3. Flexibility: management principles are not a set of rigid prescriptions but are
flexible guidelines which can be utilised under different conditions in different
ways. One has to keep in mind that enough allowance is needed to use any
principles of management depending upon the nature of enterprise, its size,
competitive situations etc. Principles of management are subject to adjustability.
55
Principles of Business Management

These need to be changed to meet the requirements of the ever-changing

conditions. This makes these principles dynamic in nature.
4. Aimed at Influencing Human Behaviour: Management principles have been
evolved, directing towards regulation of complex human behaviour. These
principles aim at influencing individual efforts and motivating them towards
maximisation of profits with minimum wastage and best possible utilisation of
available resources.
5. Limited Application: Human behaviour is very complex and unpredictable which
makes application of management principles difficult.

4.4 NEED OF PRINCIPLE OF MANAGEMENT

Proper understanding of management principles is necessary for managers. Such an

understanding would make them take more realistic view of the situation. These are
necessary for the following reasons:
1. To increase efficiency: the understanding of the principles helps in setting the
objectives of business enterprise and sustained efforts are made possible to get
economic results. The established principles of management enable the
management to make the proper use of the available resources by increasing
managerial efficiency.
2. To highlight the role of management: the principles facilitate in understanding
clearly the nature and scope of managerial functions. Principles act appropriate or
not. In short, principles act as a check list to define the scope of managerial
activities in practical terms.
3. To aid in training of managers: the management principles identify and specific the
present and prospective scope of management. Management identifies areas
wherein managers should be specially trained and management principles provided
conceptual framework for systematic training of future managers.
4. To ensure the constant supply of goods and services: basic principles of
management regarding management of finance, personnel, marketing are necessary
to make sure that the enterprise does not run out of stock both of raw materials and
finished products.
5. To attain the social objectives: business has its own responsibility not only to the
shareholder but also to its workers, customers, and the society and the government.
Management guided by these principles has to endeavour to meet all these
responsibilities by increasing efficiency.
6. To provide assistance to researches: principles of management would make the
continuous study of new finding in the field of business in particular and related
social sciences such as economies, social psychology, etc. possible. It is absolutely
essential to carry on researches for finding out innovative methods in the field of
marketing, production method etc.

56
 Function and
Principles Management

4.5 FAYOL’S PRINCIPLES OF MANAGEMENT

Henry Fayol was born in France in 1841. He graduated in 1860 as a mining engineer. He
worked as a junior executive in a mining and manufacturing company. Later he was
promoted as general managers of the company. In 1898 he was appointed chief
executive. He turned the loss making company t a flourishing company. Among his
publications, the most widely read was the book ‘General and Industrial Management’
which was published in French in 1916. He is well known for the general principles of
management formulated by him on the basis of his long experience in the field of
management. Fourteen principles of management formulated by him are explained
below:

1. Division of Work: Fayol recommended that work of all kinds must be

subdivided and allocated to a number of persons. Subdivision makes each task simpler
and results in greater efficiency. By repeating a small part of work the individual acquires
speed and accuracy in its performance. This principle is applicable to both technical as
well as managerial work. If each person in the organisation specialises in his/her task,
efficiency of every individual and of the whole organisation is expected to improve.
Division of labour or work leads to specialisation which increases the efficiency of
individual employees. If this principle is not adopted then there will be the lack of
specialisation and efficiency in the organisation.
2. Principle of parity of authority and responsibility: authority refers to the right
of a superior to give orders to subordinates, take decisions on specified matters, use
resources of the organisation and guide and regulate the behaviour of subordinates.
Responsibility on the contrary includes obligation with respect to the performance of
functions and achieving goals in a satisfactory manner. The principle of parity suggest
that there must be parity between authority and responsibility. Giving authority without
corresponding responsibility can lead to arbitrary and unmindful use of authority.
Similarly, if a person is given some responsibility he must also be granted adequate
authority. Lack of necessary authority will make the individual ineffective.
3. Discipline: discipline in the context of management means obedience, proper
conduct in relation to others, and complying with the rule and regulations of the
organisation. Smooth running of business requires discipline. Discipline is required not
only on the part of workers but also on the part of management. It is facilitated if there
are good supervisors at all levels, rules are clear, and penalties are imposed with fairness.
4. Unity of Command: this principle state that a subordinate should receive orders
and be accountable to one and only one superior. No employee, therefore, should receive
instructions from more than one person. The principle is necessary to avoid confusion
and conflict. For instance, if there is more than one superior, each may want that work is
carried our according to his instructions. The subordinate will be confused regarding
whose instructions he should follow. Besides, when there is unity of command will create
confusion and conflict. It may be difficult to fix responsibility for mistakes.
57
Principles of Business Management

5. Unity of direction: according to this principle the efforts of all the members of
the organisation should be directed towards common goals. The principle seeks to ensure
“unity of action coordination of strength and focusing of effort”. For this purpose there
should be one head and one plan for a group of activities having the same objectives. For
example, the production department should have a single plan and all must work to
achieve specified goals in terms of quantity and quality of goods to be produced.
6. Subordination of individual interest to general interest: according to this
principle, what is in the interest of the organisation as a whole must take precedence over
the interest of individuals? Generally, the effort should be to bring about convergence of
general and individual interests. But in case of conflict, individuals must sacrifice in the
larger interest.
7. Remuneration of employees: in Fayol’s view remuneration of employees
should be fair and reasonable. To be fair to the employees, wages should be determined
on the basis of work assigned, cost of living, financial position of the business and
average wage rates for similar work in the industry. While basic wages may be fixed
according to the work done, there should be provision for allowances based on changes in
cost of living. At the same time, the level of wages must be within the capacity of
employer to pay. Worker’s unions often try to push up wage rate. They must be within
the capacity of employer to pay. Workers unions often try to push up wage rate. They
must do so only to the extent that employers can afford it. If this principle (fair
remuneration) is violated, there will be lack of motivation among the employees. It may
also lead to strike etc.
8. Centralisation and Decentralisation: Centralisation is said to exist if top
management retains most of the decision-making authority. It is less if such an authority
downwards leads to decentralisation. Fayol says that an organisation should strive to
achieve a balance between complete centralisation and decentralisation. In small
organisation, where the range of activities is generally small, greater centralisation is
possible. But also on factors such as experience of the superior and dependability and
ability of the subordinates.
9. Scalar Chain: scalar chain as the chain of superiors ranging from the top
management to the lowest ranks. The chain also determines the line of authority. The
manager has subordinates below him but he is also a subordinate to his own superior.
Thus, all managers are linked step-wise through a chain. The principle of scalar chain
suggest that there should be clear line of authority from top to bottom linking managers at
all levels. Communication through scalar chain sometimes involves delays as there is a
set line of authority through which employees and managers communicate with each
other. Communication is required to flow through the chain at the same level in the
hierarchy. To avoid delays. Fayol suggested the concept of ‘Gang Plank’, which enables
two subordinates or employees at the same level to communicate directly with each other.
10. Order: this principle is concerned with arrangement of things is called material
order whereas arrangement of people is referred to as social order. If this principle

58
 Function and
Principles Management

(material order) is violated, it will lead to wasteful movement in receiving materials and
instruments/tools. In case of violation of social order, needed employees may not be
easily contacted. For example, head of production department may be allotted an office
room, the typist a particular table, the foreman to supervise a workshop and so on.
11. Principle of equity: the principle of equity suggests that similar treatment is
assured to people in similar positions. This principle implies that managers should be fair
and impartial while dealing with their subordinates. Example: workers performing similar
jobs should be paid the same wage rate and perquisites. They should be provided the
same working conditions. Their performance should be appraised on the same basis.
12. Stability of tenure of employees: according to Fayol, employees should not be
transferred from their position frequently. The period of service in a position should be
fixed. It often takes time to get used to work. An employee cannot render useful service if
he is frequently transferred from his position before he gets accustomed to the work
assigned to him. However, it does not imply that he should not be promoted or
transferred tin the interest of the organisation. If this principle is violated, there will be
problems of absenteeism and higher turnover of employees, which affects productivity
and efficiency adversely.
13. Initiative: Employees at all the levels should be allowed to take initiative in
work related matters. Initiative means eagerness to initiate action without being asked to
do so. However, it does not imply freedom to do whatever people like. They must
observe discipline. Generally, managers at higher levels have greater discretion as well as
decision-making power. Encouraging initiative is likely to motivate employees to work
better and harder.
14. Principle of Esprit de Corps: it refers to team spirit that is harmony in work
group and mutual understanding among workers. Managers must take steps to develop a
sense of belonging among the members of a work-group. If there is team spirit, everyone
comes forward to help other. It helps develop an atmosphere of mutual trust and
understanding. It inspires them to work harder and improve the quality of work. When
esprit de corps is present the need to use penalties for default is minimised. If the degree
of discipline is higher, desire to contribute to the best of ability increase. Managers
should not use subordinates for their personal ends. They should not try to take the credit
for the work done by lower level workers.

4.6 MEANING OF SCIENTIFIC MANAGEMENT

Scientific Management refers to the use of scientific methods in decision making to

resolve management problems rather than depending on rule of thumb or trial-and-error
methods. F. W. Taylor is regarded as the father of scientific management movement. In
his words, “Scientific management means knowing exactly what you want men to do and
seeing that they do it in the best and cheapest way”. Essentially, scientific management
consists of observation and analysis of each task, determination of the standard of work,

59
Principles of Business Management

selecting and training men to perform their jobs and ensuring that work is done in the
most efficient manner.

4.7 PRINCIPLES OF SCIENTIFIC MANAGEMENT

For the guidance of the practising managers, Taylor developed some principles, which
are known as the principles of scientific management. These are explained below:
1. Science, not rule of thumb: according to this principle, decisions should be
based on facts rather than rule of thumb. Rule of thumb is based on intuition, past
experience, personal opinion and prejudice. While doing any job or its element, scientific
methods should be applied. There should be a proper plan based on scientific inquiry and
analysis.
2. Scientific selection, training and development of workmen: it is essential for
efficiency in production that workers are selected with due care. Their skill and
experience must be matched with the requirements of the respective jobs they are to
perform. The employees should be selected on the basis of tests and interview. The
workmen so selected must be given training for the specific tasks assigned. Training must
also be arranged to develop their abilities to improve performance.
3. Cooperation, not individualism: there should be cooperation between workers
and management. It is only through cooperation with workmen that managers can ensure
that work is carried out in accordance with the plans and standards of performance.
Cooperation is based on mutual faith. Managers should develop understanding with
workers to secure their cooperation. The concerned employees should be involved in the
process of setting standard work and hours. Monetary and non-monetary incentives
should be used to motivate the workers. Appropriate working conditions, standard tools
and equipment’s should be provided to the workers. These steps can help in securing
cooperation.
4. Harmony not discards: Taylor has emphasised that attempts should be made to
obtain harmony in group action rather than discord. Group harmony suggested that there
should be mutual give and take situation and proper understanding so that group as a
whole contributes to the maximum.
5. Division of responsibility between managers and workers: Taylor advocated
separation of the two kinds of responsibilities-planning and execution, so that each work
should be the responsibility of workers. To achieve this objective, he suggested a form of
organisation, called ‘functional foremanship’, in which he has suggested a planning in-
charge and an operation in-charge. In the planning department, there should be a route
clerk, instruction card clerk, time and cost clerk and shop disciplinarian. In operation
department, there should be a gang boss, a speed boss, a repair boss and an inspector.
6. Mental revolution: the worker and managers should have a complete change of
outlook with respect to their mutual relations and work efforts, which is called mental
revolution. It requires that management should create suitable working conditions and
60
 Function and
Principles Management

resolve all problems scientifically. Managers should share the gains of increased
productivity and efficiency. Similarly, workers should attend to their jobs with discipline
and utmost devotion. They should not waste the resources of the organisation.
7. Maximum, not restricted output: a common cause of conflict between
management and workers is related to division of surplus. The aim of both management
and the workers should be to maximise output. This should be done by both parties in
their own self-interest. For management increased production means more profits, and
lower cost of production. For workers, increased output may offer attractive wages. In
this way it is the self-interest that impels both management and the workers to achieve
maximum output. Maximum output will also be in the interest of the society.

I. Check Your Progress

1. What do you mean by Principles of Management?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

2. What is the need for principles of Management?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

4.8 FUNCTIONS OF MANAGEMENT

Management has been described as a social process involving responsibility for

economical and effective planning & regulation of operation of an organisation in the
fulfilment of given purposes. It is a dynamic process consisting of various elements and
activities. The functions of management consist of actions which include setting
objectives and taking necessary steps to ensure that the objectives are achieved. The steps
required to be taken may be referred to as the functions of management. To put it
differently, the functions of management refer to the activities that need to be undertaken
for the creation of an environment conducive to the achievement of the set goals.
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,
61
Principles of Business Management

Organizing, Staffing, Directing and Controlling. It is to be noted that operative

functions of business should be differentiated from the managerial functions. Operative
functions of business are purchasing, production, marketing, finance and personnel.
These are not universal in nature and may differ from one business organisation to
another. For example, a trading organisation may not have production function. The
major management functions as per above discussion are;
1. Planning: is a process of taking decision in advance what to do, how to do and
when to do. It is a visionary action and futuristic aspect of management. Planning is the
most basic or primary function of management. It is a mental exercise requiring the use
of intelligence, foresight, imagination and sound judgement. It is a forward looking
activities i.e. where we are and where we have to go? Following are the key elements in
the concept of planning;
a) Establishing objectives and policies
b) Finding/identifying alternative procedures and programmes.
c) Making a choice of the best procedure and programme.

2. Organising: it is a function of identifying the task to be executed, grouping

similar task together and assigning them to different department. It is a process of
creating job positions at various levels and establishing mutual relationship between them
in terms of authority and responsibility. The purpose of organising is to enable people to
relate each other and to work together for a common purpose. Thus, organising is an
effort to bring together physical, financial and human resources and building up a stable
framework or structure of various interrelated parts of enterprise for the attainment of
organisational goals.

3. Staffing: it is a managerial function of selecting, recruiting and developing the

required employees to fill in various positions in the organisation. This function involves
determining of the size and categories of required personnel at various levels. It is
concerned with employing the right people and developing their skills through training.
The staffing function focuses on improving the competence and performance of the
employees in the organisation. It is a continuous managerial function, where need
assessment, hiring of personnel, their training and developmental process have to be
arranged on a regular intervals.

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
62
 Function and
Principles Management

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:
e. Establishment of standard performance.
f. Measurement of actual performance.
g. Comparison of actual performance with the standards and finding out deviation if
any.
h. Corrective action.

4.9 SUMMARY

The modern globalised business scenario is very complex and technical which made the
importance of management very crucial as well as important. In this competitive business
world the managers have to take a number of decisions on regular basis regarding
product, capital, market, employees, capital required for the growth and development of
business which is not easy task. This throat competitive globalise market has created a
need for valid and updated principles of management. The principles of management
provide a guidelines for managerial decisions. The principles of management has been
developed on the basis of various experiments, observation and researches. The
principles of management should be universal, valid, flexible and up to date. Otherwise
the managerial decisions will not be accurate and beneficial for the organisation. Whereas
the functions of management is concerned it refers to the planning, organising, staffing,
directing and controlling.

63
Principles of Business Management

4.10 TERM-END-QUESTIONS

1. Discuss in detail the meaning and natures of Principles of Management.

2. What is the need for management principles? Justify your answer in today’s
business scenario.
3. Explain in detail the principles of management given by Henry Fayol with suitable
examples.
4. What do you mean by Scientific Management? What is its relevance in Indian
Business scenario?
5. What are the functions of management? Explain in detail with suitable examples.

64
 BLOCK - 2

Planning and Organisation

The present block refers to the fundamentals of planning, organizing,

departmentation, delegation and decentralization. The learners will learn the
meaning, types of planning as well as organizing. They will have the
opportunities to learn about the nature and scope of departmentation as well as the
forms of authority relationships. In the present unit the need for delegation of
authority and responsibility along with decentralization is highlighted too.
Further, the learners will have the opportunities to learn how to do planning and
organizing in their day to day personal and professional life in the ongoing block.
The present block includes the following units;

Unit 5: Fundamentals of Planning

Unit 6: Plans, Policies, Methods, Procedures and Budget

Unit 7: Organizing

Unit 8: Departmentation and Forms of Authority Relationships

Unit 9: Delegation and Decentralization

65
Principles of Business Management

UNIT – 5 FUNDAMENTALS OF PLANNING

Structure

5.0 Introduction
5.1 Objectives
5.2 Meaning of Planning
5.3 Definitions of Planning
5.4 Features of Planning
5.5 Importance of Planning
5.6 Principles of Planning
5.7 Process of Planning
5.8 Limitations of Planning
5.9 Characteristics of a good plan
5.10 Business forecasting
5.11 Forecasting and planning
5.12 Summary
5.13 Term-End-Questions

5.0 INTRODUCTION

The first and foremost function of management is planning. Planning means to making
decisions regarding what to do, when to do, where to do, who is to do and how to do? It
precedes all managerial functions and is closely related to controlling. It is required for
all organization - business and non-business and for every level of business organization.
It is done for all sizes of organization; small, medium and large. Planning is a managerial
function that deals with framing organisational objectives and devising ways to achieve
them. Managers plan business activities at all levels: top, middle and low, though more
planning is required at top levels than lower levels. In this unit the learners will learn the
fundamental of planning like, meaning, characteristics, importance and process of
planning.

5.1 OBJECTIVES OF THE UNIT

On the completion of this unit the learners will be able to:

a) Understand the meaning, definitions and importance of Planning.

b) Explain the principles of planning
c) Discuss the process of planning
b) Enlist the limitation of planning
c) Outline the characteristics of a good plan
e) State business forecasting and planning
66
 Fundamentals
of Planning

5.2 MEANING OF PLANNING

Planning is a process of taking decision in advance. It is the first step in the process of
management. It is the primary or basic function of management. According to George R.
Terry, “Planning is the foundation of most successful action of all enterprise.” Planning
not only helps in determining the objectives, but also in achieving them, Planning is
thinking before doing. Effective planning is always must for success. In the planning
process, managers anticipate the future and accordingly decide what activities must be
undertaken. More specifically, planning consists of deciding in advance what to do, when
to do and by whom to do. Planning, thus, involves decision making, that is, deciding a
course of action for framing and achieving objectives.

Following are the key elements in the concept of Planning:

a. Establishing objectives and Policies
b. Finding or identifying alternative procedures and programmes
c. Making a choice of the best procedure and programme

5.3 DEFINITIONS OF PLANNING

The following are some important definitions which were given by some famous
management:

1. According to Terry and Franklin, "Planning is selecting information and making

assumptions regarding the future to formulate activities necessary to achieve
organisational objectives.”

2. According to Louis A. Allen, "Planning involves the definition of objectives and

planning of operations in terms of policies, plans, and budgets which will establish the
most advantageous course for the company. Planning also requires that managers keep
currently informed on all matters which will contribute to improved planning and
performance in the position.”

3. According to Koontz and Weihrich, “Planning involves selecting missions and

objectives and the actions to achieve them; it requires decision-making that is, choosing
from alternative future course of action. Plans, thus, provide a rational approach to
achieving pre-selected objectives.”

5.4 FEATURES OF PLANNING

On the basis of definitions of Planning the following features are derived:

1. Planning is goal oriented: organisation is set up with a general purpose in view.

Specific goals are set out in the plans along with the activities to be under taken to
achieve the goals. Thus, planning is purposeful; planning has no meaning unless it
contributes to the achievements of predetermined organisational goals.
67
Principles of Business Management

2. Primacy of planning: planning may be defined as deciding in advance what is to be

done in future. In the planning process the managers anticipate the future and accordingly
decide what activities must be undertaken. Planning lays down the base for other
functions of management. All other managerial functions are performed within the
framework of plans drawn. Thus, planning precedes other functions. This is also referred
to as the primacy of planning. The various functions of management are interrelated and
equally important. However, planning provides the basis of all other functions.
3. Planning is pervasive: planning is required at all levels of management as well as in
all departments of the organization. It is neither an exclusive function of top management
nor of any particular department. But the scope of planning differs at different levels and
among different department. For example, the top management undertakes planning for
the organisation as a whole. Middle management does the departmental planning. At the
lowest level day to day operational planning is done by supervisors. Thus, planning is a
pervasive function of management.
4. Planning is flexible: plans are draw on the basis of forecasts. Since the future is
uncertain, planning must cope with changes in future conditions. Activities planned with
certain assumptions about the future may not come true. Under the circumstances the
original plan of action must be revised in the light of changing conditions. For example,
suppose a firm has planned to sell 2000 TV sets during 2013 in a particular area and that
area is affected by flood. The company will have to change its plan and prepare itself to
achieve the sales target elsewhere. In practice, new situations emerge quite often to
achieve the sales target elsewhere. In practice, new situations emerge quite often and
quite unexpectedly. To meet these, managers must make changes in the existing plans.
5. Planning is continuous: plans are prepared for a specific period of time, may be for a
month, a quarter, or a year. At the end of that period there is need for a new plan to be
drawn on the basis of new requirements and future conditions. Hence planning is a never
ending activity. It is a continuous process. Continuity of planning is related with planning
cycle. It means that a plan is framed, it is implemented, and is followed by another plan
and so on.
6. Planning is futuristic: planning essentially involves looking ahead and preparing for
the future. The purpose of planning is to meet future events effectively to the organisation
will have to function. In order to anticipate the future accurately, scientific techniques of
forecasting are applied. Planning involves determination of a future course of action
based on forecasting. Through forecasting, future events and conditions are anticipated
and plans are drawn accordingly. For example, sales forecasting is the basis on which a
business firm prepares its annual plan for production and sales. Thus, planning is looking
ahead.
7. Planning involves choice: planning essentially involves choice from among various
alternatives and activities. If there is one possible goal or only one possible course of
action, there is no need for planning because there is no choice. The need for planning
arises only when alternatives are available. In actual practice, planning pre suppose the

68
 Fundamentals
of Planning

existence of alternatives. Planning thus involves thorough examination and evaluation of

each alternative and choosing the most appropriate one.
8. Planning is an intellectual process: planning requires application of the mind
involving foresight, intelligent imagination and sound judgement. It is basically an
intellectual activity of thinking rather than doing, because planning determines the action
to be taken. However, thinking for planning requires logical and systematic thinking
rather than guessing or wishful thinking. In other words, thinking for planning must be
orderly and based on the analysis of facts and forecasts.

5.5 IMPORTANCE OF PLANNING

Planning is of vital importance in the managerial process. Regarding the importance of

planning, Koontz and O’ Donnel has rightly remarked, “Without planning business
becomes random in nature and decisions become meaningless adhoc choices.” No
enterprise can achieve its objectives without systematic planning. Advantages of planning
are as follows:

1. Focus on objective: every organisation is established to achieve certain objectives.

The planning exercise makes the goals clear and specific. It begins with the determination
of objectives and is directed towards their achievement. The planners concentrate not
only on immediate objectives but also keep in mind the long term objectives. It is
planning which keeps the executives alive and alert. They have to check periodically the
progress made and introduce improvement to achieve the objectives.
2. Offsets the uncertainties of the future: there is a close relation between business and
uncertainties. It is impossible to eliminate uncertainties and risks from the business.
Planning helps in reducing the risks associated with uncertainties. In the process of
planning, attempt is made to look into the future and predict the changes and consider
their impact. Planning helps in identifying potential dangers and in overcoming the
adverse effects to a large extent.
3. Facilitate decision making by managers: decisions making is a process of searching
for various alterative courses of action, evaluating them and selecting the best. Planning
helps in this process. Planned targets are indicators on whose basis alternative course of
action are considered. Without planning decisions may lead to undesirable results. By
predicting future conditions decisions can be taken with greater confidence. Hasty and
random decisions may be avoided with the help of planning, since plans lay down in
advance what is to be done and when. Thus, planning facilitates decision-making by
managers.
4. Facilitates coordination: planning makes coordination of various activities,
departments and groups relatively easy. Plans lay down in advance what should be done,
by whom and when, planned programmes of activity serve as the basis of harmonising
the efforts of different divisions, departments and people. Thus, for example,
69
Principles of Business Management

manufacturing and sales activities can be coordinated only if plans of the production
department are drawn on the basis of sales plans. In the absence of proper planning of
interrelated activities the production department may turn out goods that the sales
department may not be able to sell, and conflict may also occur between the heads of two
departments. Confusion and misunderstanding may also occur in the absence of
integrated planning of different activities. Coordination of department operations is
facilitated by planning through the establishment of common goals as guide posts.
5. Provides the basis of control: plans provide the standards/target against which actual
performance is compared. Deviation of actual results from the standards indicates the
nature of corrective action needed. Therefore, planning may be said to provide the basis
of control. For example, a firm has planned to sell 1000 units of its product. Performance
of sales department shall be compared with the planned sale. If actual sale is less than this
planned sale, corrective actions would be taken. Thus, planning provides the basis of
control.
6. Promotes innovation and creativity: planning provides opportunity to the managers to
give suggestions for improving their performance and achieving higher targets. There is a
challenge before management to achieve the desired objectives. They have to overcome
the existing problems, face the problems arising out of unfavourable conditions and to
take maximum advantage of favourable conditions. This induces creative thinking and
innovation in the methods and procedures of operation.
7. Leads to economy and efficiency of operations: planning helps in best utilisation of
resources by avoiding needless efforts, confusions and reducing wastage. When we use
planning, there is no scope for trial and error methods. In the process of planning the best
methods are selected out of the available choices planning also reduces overlapping and
wasteful activities. Thus, planning leads to economy and efficiency of operations.

5.6 PRINCIPLES OF PLANNING

Principles provide the basis for sound planning. Koontz et al describe the following
principles for effective planning:
1. Principle of contribution to objectives: Plans must be directed towards
organizational objectives.
2. Principle of objectives: Since objectives are the basis for planning, they must be
clear, specific, measurable and unambiguous. They must be understood and accepted by
all the organisational members.
3. Principle of primacy of planning: Planning is pre-requisite to other ma It must
be effectively done so that other functions of management also contributed to the overall
organisational goals.
4. Principle of efficiency of plans: Plans must be efficient in their contribution to
objectives i.e., the returns must exceed their costs.
70
 Fundamentals
of Planning

5. Principle of planning premises: Since planning is based on forecasts, clear

planning premises lead to efficient planning process. Planning premises are assumptions
or forecasts about future on which plans are based. They are "the anticipated
environment in which plans are expected to operate. They include assumptions or
forecasts of the future and known conditions that will affect the operation of plans.
Premises form the foundation of plans. Sound planning premises help in making
sound plans. They reduce uncertainty in achieving planned targets.
Premises or assumptions are based on the information that managers generate by
forecasting. Forecasting, thus, precedes planning premises and premises precede
planning.
6. Principle of strategy and policy framework: Strategies and policies
help to attain organisational objectives. Clear policies and strategies lead to clear and
effective plans.
7. Principle of limiting factor: Limiting factor limits the capacity of the
organization to achieve its goals. While selecting a course of action, managers narrow
their search for alternatives and try to overcome them. The principle of limiting
factor states: "By recognizing and overcoming those factors that stand critically in
the way of a goal, the best alternative course of action can be selected."
8. Principle of commitment: Plans should cover a time span that allows
managers to fulfil their commitment to the decisions.
9. Principle of flexibility: Plans must be flexible to adjust to environmental
changes.
10. Principle of navigational change: This principle is closely related to the
principle of flexibility. It reviews the plans from time to time and reframes them if the
need arises (according to future changes and expectations) as the navigator does when
the ship is not going in the right direction.

5.7 PROCESS OF PLANNING

Planning is a process of thinking before doing. It involves determination of goal as well

as the activities required to be undertaken to achieve the goals. Planning may be defined
as deciding in advanced what is to be done in future. In the planning process, managers
anticipate the future and accordingly decide what activities must be undertaken. The
following are the important steps in the process of planning.
1. Setting objectives: the first step in planning exercise i.e. setting the objectives,
provide the rationale for undertaking various activities as well as indicate the direction of
efforts. Moreover, objectives point to the end result of planning activity. The objectives
provide guidelines for many vital decisions relating to resources allocation, schedule of
work, nature of actions, etc. Planned objectives and goals must, therefore, be clear
specific and unambiguous. Otherwise the activities undertaken are sure to be ineffective.

71
Principles of Business Management

2. Establishing the planning premises or forecasting: once goal have been set the
second step involves establishing the planning premises or assumptions. It consists of
forecasting future conditions and events that are likely to have bearing on the pursuit of
goal like market demand for goods, cost of raw materials, state of technology, intensity of
competition, government policies, etc. Such forecasts have and insight of how the future
is likely to shape. Certain assumptions about the conditions expected to prevail are
derived from the forecast. These are known as the planning premises, which form the
base of plans. Planning premises may be internal and external. Internal premises are
related with internal factors, like strategy of the management, investment and marketing
policies of the organisation, etc. External premises related to the external factors, like
government policies, social and technological factors, etc.
3. Identifying alternatives: when the forecasts are available and premises are
established, a number of alternative course of action have to be considered. A manager
should list all the possible alternatives to achieve the predetermined objectives. For this
purpose, participation of employees may also be helpful. While identifying alternatives, a
manager should not go for their merits and demerits.
4. Selection of the best alternative: planning requires that each alternative should be
evaluated taking into account the relevant facts, merits and demerits of each alternative.
Different alternatives are based on different premises. While examining, if a premise on
which an alternative is based, is found unreasonable, the alternative should be excluded
from further consideration. After evaluation of all the alternative, a managers or planning
committee has to decide the best alternative t accomplish organisational objectives.
5. Formulation of derivative plans: having decided upon the course of action, it is
necessary that detailed plans and programmes should be drawn up including specific
plans for different types of activities. These are known as derivative plans. Derivative
plans are required to support the basic or overall plans because the latter cannot be
executed effectively unless derivative plans or sub-plans support them. These are
developed within the framework of the basic plan. For example, an entrepreneur decides
to manufacture passenger cars using Japanese technology. He must draw derivative plans
for import of technology, location of plant, recruitment of staff, sales and distribution
network etc.
6. Implementation of plans: planning is essentially goal-oriented. Hence the plans
formulated must be implemented effectively. For this purpose, cooperation of all the
members of the organisation is required. Accordingly, plans must be communicated and
explained in detail to the workers so that they have an understanding of what is proposed
to be done and why. If employees are participating in the process of planning, they are
motivated to execute the plan to the best of their ability.
7. Follow up: as planning is a continuous process, existing plans are reviewed at
intervals to ensure their relevance and effectiveness. As the plans are implemented
certain facts often come to light which would not have been thought of earlier. If
necessary, the plans must be revised in the light of these facts. Review of ongoing plans

72
 Fundamentals
of Planning

also helps the management in drawing up subsequent plans on the basis of experience
derived in the process of implementing the previous plans.

I. Check Your Progress

1. What is Planning?
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

2. What are the importance of Planning?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

5.8 LIMITATION OF PLANNING

Planning, though an important tool of management, even than is not a remedy for all
types of problems. It has also certain limitation. Limitations of planning may be classified
into two categories: Internal and external. Internal limitations are those limitations on
which the organisation has significant control and by best efforts these may be overcome.
External limitations are those limitation of planning on which the organisation does not
have a significant control. Limitations of planning are explained below;

1. Rigidity: planning has many advantages and some limitations. One of the
limitations is rigidity. The existence of a plan puts managerial activities in a rigid
framework. Programmes are carried out according to the plan and deviations are
considered to be highly undesirable. This attitude makes managers and employees
inflexible in their operation. They become more concerned with observance of rules and
procedures as laid down in the plan rather than achieving the goals. Existing plans are
strictly adhered to irrespective of changes in the environmental factors. Thus, rigidity due
to planning is hindrance in imitativeness and flexibility.
2. Misdirected planning: planning may be used by particular individuals or groups to
serve their own interests. Attempts are made by them to influence setting of objective,
formulation of plans and programmes to suit their limited aims and objectives, ignoring
the interest of the organisation. As a result planning may not serve any useful purpose.

73
Principles of Business Management

3. Expensive and time consuming: formulation of plans involves too many expenses and
a lot of time. Planning is a time consuming process and is not practicable during
emergency or crisis. It requires a lot of time to collect information, its analysis and
interpretation before preparing plans. If the benefits derived from the plan are not more
than its cost, then it has adverse effect on the financial performance of the organisation.
4. Probabilistic: plans are based on forecasts and therefore, do not reflect the reality.
Predictions may not be correct and accordingly, plans based on these predictions may
also be wrong and misleading. A minor change in circumstances may need a review of
the plan.
5. Delay in actions: in case of emergencies, decisions are taken immediately. If a plan is
to be made to deal the situation arise suddenly, it will delay the action. There are many
circumstances and situations for which no planning is made in advanced. For example, in
a factory, a generator is installed to supply the power when there is no power supply from
the power supplier. If there is no power supply and there is a mechanical fault in the
generator, which cannot be repaired immediately. No plan is made to deal this situation.
The action shall be delayed.
6. Change in government policies: business is greatly affected by the government
policies. Managers have no control over government policies. Attitude of the government
towards certain industries, taxation policy, regulation of business, credit policy, etc may
change against the forecast by planners. Government being the major supplier of certain
raw materials, finances through financial institutions may affect the business organisation
considerably.
7. Technological changes: technological changes affect the success of planning.
Technological changes also have an adverse effect on its success. An organisation is
engaged in its process with a given technology. Whenever there is a change in
technology, it has to face many problems in the form of comparatively higher cost of
production due to obsolete technology, less competitive competence in the market, and
higher capital outlay to replace the old technology. Thus higher rate of technological
changes is certainly a limitation of planning.
8. Natural calamities: natural calamities are beyond the control of managers. These
events, if happen, always have a significant impact on the business plans. For example,
flood, earthquake, famine, etc may be a reason for failure in planning.
9. Strategies of competitors: sometimes competitors may change their strategies and
planning of our organisation may fail, for example, introduction of improved model of
existing product by a competitor may affect the demand for our product.
10. Change in Fashion, Taste etc: demand is a function of price of the substitute goods,
income of the consumers, change in fashion, taste, preference, etc. Unexpected change in
these factors may affect the demand forecasts of a firm’s product. For example, use of
jeans in place of trousers, use of fast food etc.

74
 Fundamentals
of Planning

5.9 CHARACTERISTICS OF A GOOD PLAN

In order to overcome the limitations of planning, a plan should be ideal; following are the
important characteristics of a sound and ideal plan:
1. Clear-cut-objectives: the objectives should be well defined and clear. It will be
better to express objectives in terms of quantity. The objectives stated in terms of
numbers are helpful not only in effective planning, but also in implementation of the
plans.
2. Simple: the plan should be simple to understand and operate. Plans are prepared
by the top level and middle level management and these are executed at lower levels of
the management employees to understand them, consequently these may not be executed
properly.
3. Flexibility: one of the limitations is rigid. The existence of a plan puts managerial
activities in a rigid framework. Programmes are carried out according to the plan and
deviations are considered to be highly undesirable. To overcome this problem, plans
should be flexible so that modifications can be introduced according to the change in
circumstances.
4. Based on rational forecasting: plans based on forecasts may not reflect the
reality. Predictions may also be wrong and misleading. Therefore, it is necessary that
forecasting should be rational, i.e. based on scientific approach. Rational forecasting
provides a base for sound planning premises.
5. Economical: an ideal plan must be economical or efficient. It means that cost of
formulation and implementation of plan should be less than the benefits derived from the
plan. ‘Cost-benefit analysis is the important technique to measure efficiency of a plan.
While measuring the efficiency of a plan both types of cost and benefits- monetary and
non-monetary should be considered.
6. Participation of employees: it is necessary for an ideal plan that employees
should participate in the process of planning. This ensures the effective implementation
of plans as these are prepared with their consultation.
7. Competitive Strategies: while preparing plans a manager should consider the
strategies of the competitors. The planners should also predict the reactions of their
competitors and a proper strategy should be used to counter attack the same.
8. Timing: plans should be prepared and be informed to the subordinates well in
time. The plans can contribute efficiently and effectively towards the achievement of
organisational objectives, if plans and sub-plans are properly timed.

5.10 BUSINESS FORECASTING

All organisations operate in the external environment. Plans should forecast future
events for efficient working of the organisation. Organisations should analyse the
75
Principles of Business Management

environment through various techniques of forecasting, identify their strengths and

weaknesses and formulate their plans. Forecasting is closely associated with planning
premises. Premising means formulating plans under a set of assumptions or forecasts
which may affect the plans. "Planning premises are defined as the anticipated
environment in which plans are expected to operate. They include assumptions or
forecasts of the future and known conditions that will affect the operation of plan."

If forecast is a pre-requisite of planning, it is a planning premise. For example, planning

based on future economic conditions of the country is a planning premise. If forecast is
made after the plans are put into action, it is not a planning premise. For example, a
new machine is purchased and put to use. Forecasts about revenues from this
machine is not a planning premise but a mere forecast of the future expectations.

5.11 FORECASTING AND PLANNING

Forecasting is a technique to assess the environment. It is the essence of planning. As

planning is future oriented, forecasting helps in predicting the future. It estimates, predicts
and projects future trends and events and provides important inputs to managers to
frame meaningful plans. Business firms need information about various aspects of future
like economic policies, price conditions, competitors' strength, growth of the
economy, change in technology, consumers' tastes, availability of inputs etc.
Organisation can virtually forecast any component of the environment depending on their
size and nature.

Though forecasts relate to future, they are based on past and current economic and
non-economic information. This information is obtained from sources within and
outside the organisation. How good are the forecasts depends upon how accurate is
the information upon which these estimates are based.

The forecasts can range from months to a few years depending upon the size and nature
of industry. Short term forecasts are generally less complex and more reliable. Longer the
period of forecasts, lesser is their reliability. Some forecasts, however, cannot be predicted
like natural disasters, take over and acquisitions etc.

5.12 SUMMARY

Planning is the primary function of management. Its purpose is to ensure optimum

utilisation of human resources in the business process. It precedes all other activities of
the business undertaking. It is a process of chalking out the path for attaining the ultimate
purpose of business operations by outlining the sequence of events forecast with
reasonable degree of certainty. It involves not only anticipating the consequences of
decisions but also predicting events that may have effects on business. Planning is
deciding in the present what to do in future on the basis of past experiences or vision.

76
 Fundamentals
of Planning

Planning requires both creativity and analysis in defining business opportunities and
constraints. Hence, it is called the art of the possible. It is the process of guiding the
business organisation toward clearly specified objectives with the clearest possible view
of the future. Thus, planning is known as the process of matching the resources with
opportunities. Planning should be clear, specific and goal oriented.

5.13 TERM-END-QUESTIONS

1. What do you mean by planning? Discuss in detail the features and importance of
planning.
2. What are the principles of planning? Explain with suitable examples
3. Discuss in detail the process of planning and enlist the limitation of it.
4. What are the characteristics of a good plan?
5. What is business forecasting? How is it related to planning?

77
Principles of Business Management

UNIT – 6 PLANS, POLICIES, METHODS, PROCEDURES AND BUDGET

Structure

6.0 Introduction
6.1 Objectives of the Unit
6.2 Plans
6.3 Goals
6.4 Objective
6.5 Policies
6.6 Procedures
6.7 Methods
6.8 Rules
6.8.1 Check your progress
6.9 Budget
6.10 Programmes
6.11 Summary
6.12 Term-End-Question

6.0 INTRODUCTION

Planning consists of several individual plans or component parts which are bound
together in a consistent structured operation. Identifying these components illustrates the
breadth of planning. Planning process generally results into several specific plans. Some
of these are in the form of standing plans while some others are single use plans.
Examples of standing plans are objectives, policy, rules, procedures etc. Budget, targets
and quotas are the examples of single use plan. The basic difference between standing
and single use plan lies in their use over a period of time; standing plans are used over a
longer period of time, while single use plans are used for only specific periods. Thus,
Plans are required to provide guidance to the managers for making decisions, taking
action and solving problems. These plans serve as ready reference for the decisions and
action of the managers, with the help of these plans the managers solves the problems
arising in the course of managing an organisation. In this present unit the learners will
learn about the types of plans its need and characteristics.

6.1 OBJECTIVES OF THE UNIT

On the completion of this unit the learners will be able to:

a) Understand the meaning and types of plans.

b) Explain the concept of plans, policies, procedures and budget
c) Discuss the use of the different plans in the management of business

78
 Plans, Policies, Methods
Procedures And Budget

6.2 PLANS

Plan is a guideline which provides a basis for managerial decisions that in which situation
which kind of decisions can be taken. Every business organisation formulates the
following plans for their future course of action as per the natures and purpose of
business.

1. Single Use Plans: single use plans are developed for solving non-repetitive, novel
and unique problems which arise only once in a while. These plan may be
considered as detailed course of action designed for achieving objectives in a
specific situation. They are tailored to fit specific situation and once the objectives
are achieved in that situation such plans become useless and outdated. Single use
plans include objectives, strategies, programmes and budget.

2. Standing Plans: the standing plans are usually made for a longer period of time. It is
because they are applied repeatedly to various situations. Basically, these plans are
formulated for handling similar type of problems and situations faced by the managers
in an organisation. More often they are considered as ready guidance, and repeated
reference for solving problems. They provide suggested course of action, broad
guidelines and framework of parameters and constraints within which the manager
make decisions and initiates action for tackling the situations. These plans may be used
as a device for achieving coordination, to bring uniformity in action and maintaining
consistency with regard to decision making behaviours of managers. The standing
plans are prepared in advanced and aimed at handling repetitive and recurring problems
faced by the managers in day to day operations. The standing plans include policies,
procedures, methods and rules. These plans are also considered as a labour saving
device, because whenever a problem of recurring nature arises the managers get it
solved by applying pre-decided plan without any loss of time as well as efforts. They
also facilitate delegation of authority to lower level managers but without losing control
over them. Use of these standing plans reduces personal bias, likes and dislikes of the
managers in relation with actions and decisions. It because they have to solve the
problem and tackle the situation by applying predetermined policies and procedures. In
addition, standing plans also provide criteria for evaluating performance of the
managers in terms of their understanding, applications and observance of these plans in
managing organisational affairs.

6.3 GOALS

An organisational goal may be defined as something, which an organisation wants to

achieve. Resources and efforts of a business organisation are directed to achieve its
predetermined goal. It may also be called a destination on organisation wants to reach.
All activities are goal oriented and therefore, determination of organisation goals is very
important. Goals should be clear and specific.

Goals may be primary and secondary. Primary goal of a business organisation is earning
profits, but may have several secondary goals, like customers satisfaction, earning foreign
79
Principles of Business Management

exchange, brand building, etc. Some organisation has a single goal, while others may
have multiple goals. Goals may be long term or short term. Short term goals should
support and merge into the long term goals. Goals may be tangible or intangible.
Tangible goals can be easily identified and measured exactly. Creation of goodwill is an
intangible goal of all the business organisations.

Significance: determination of clear and specific goals is significant due to following

reasons:
1. Goals provide a direction towards which organisation direct their resources and
activities.
2. Goals legitimise the role of an organisation in a society.
3. Goals provide a motive for the activities and employees of an organisation.

6.4 OBJECTIVES

Objectives are the end results, towards which all managerial efforts and organisational
activities are directed. Objectives are standing plans and guide for overall business
planning. While determining the objective, it should be kept in mind that these should be
clear and realisable. Objectives may be long-term as well as short term, but there should
be integration between them. Short term objectives should be the part of long term
objective. Long term objectives are usually general and vague, while short term
objectives are specific. Following are the important features of the objectives.
1. Objectives are multiple in nature
2. Objectives may be long-term or short term
3. Objectives may be general or specific
4. Objectives are realistic and operational
5. Objectives are responsive to changes that take place in the business environment

Significance: objectives provide rationale for the creation and existence of organisation.
Determination of clear and specific objectives is significant due to following reasons.

1. Objectives of an organisation provide legitimacy to its existence

2. Objectives are key to organisational planning
3. Objectives provide direction for organisational resources and efforts.
4. Organisational performance is evaluated in terms of objectives. Objectives provide
the motive force for an organisation’s activities, whether individual or group.
5. Objectives are helpful in bringing coordination of various activities.

Goal and objectives – A comparison

According to Joseph L. Massie, “Goals of organisation are the general and ultimate
ends towards which they are aimed.”

According to Luis Allen, “Objectives are goals established to guide the efforts of the
company and each of its components.” Thus, in practice goals and objectives are used
interchangeably by most of the management experts.
80
 Plans, Policies, Methods
Procedures And Budget

6.5 POLICIES

Policies are guiding statements, which govern the way of working in specified
circumstances. According to Joseph L. Massie, “Policy is an understanding by members of
a group that makes the actions of each member of the group in a given set of circumstances
more predictable to other members. A policy is a guide for making decisions.” In the words
of G. R. Terry, “A policy provides a range of freedom or limits within which managers can
take decisions. Following are the important features of a policy:
1. Based on objectives: Policies are based on the objectives of the enterprise, as these
are guidelines to achieve the predetermined objectives.
2. General and specific policies: Policies are general, covering the whole
organisation, as well as specific, relating to a particular department or activity.
3. Policies may be implied: all policies may not be statements. Some of the policies
are based on practices and conventions. For example, a company has the practice
of appointing mangers by promotions from within. It shall be interpreted as policy.
4. Policies exist at all levels: policies may relate to particular department; like
marketing policies, production policies, personnel policies, etc. There may be
minor policies applicable to the small segment of the organisation.
5. A means of discretion and initiative, policies provides opportunities to use
discretion and take initiative, but within limits. Managers have freedom to take
decision, within the limits prescribed by the policy. The amount of freedom
depends upon the policy and position held by the manager.

Distinction between Objectives and Policies

Basis of Difference Objectives Policies

1. Meaning Objectives are ends towards Policies are guidelines to
which the activities of an achieve the predetermined
organisation are directed objectives.
2. Contents Objectives include what is to be Policies include the mode
done and manner in which
objectives can be achieved
3. Need Objectives are very important, Policies may or may not be
as no organisation can be determined
established without objectives
4. Determination The owners or the top Policies concerned with the
management determines company as a whole, are
objectives of the organisation determined by the top
management and concerned
with the departments are
formulated by the
departmental managers.

81
Principles of Business Management

6.6 PROCEDURE

A procedure provides a sequence of steps or actions to be taken to enforce a policy and to

attain predetermined objectives. G.R. Terry has defined a procedure, “as series of related
tasks that make up the chronological sequence and the established way of performing the
work to be accomplished.” Procedures are laid down for repetitive activities so that same
steps are taken each time to perform the same activity. A business organisation may
establish the procedure for the purchase of goods/materials, selection of employees,
holding and conducting meetings, etc. Following are the important feature of procedures:

1. A procedure provides a sequence of steps or actions to be taken to enforce a policy

and to attain predetermined objectives.
2. Procedures are detailed and rigid, having no scope for discretion.
3. Procedures help in implementation of policies.
4. Procedures are pervasive in nature and are concerned with many departments.

Distinction between Policies and Procedures

Basis of Difference Policies Procedures

1. Meaning Policies are guidelines to achieve A procedure provides a
the predetermined sequence of steps/actions to
be taken to enforce a policy
and to attain predetermined
objectives.
2. Nature Policies are broad and general Procedures are detailed and
specific
3. Advantages Policies help in achieving the Procedures help in
objectives implementation of policies
4. Range Policies have some range within Procedures are detailed and
which managers can use their rigid having no scope for
discretion discretion
5. Flexibility Policies are flexible A procedure is more or less
rigid

6.7 METHODS

A method is a systematic or clearly defined manual or mechanical way of accomplishing

one step of procedure. It explains in detail how a particular activity will be complete. The
scope of a method is limited in comparison of a procedure, but it is more specific and
detailed. A method is helpful in simplification, standardisation and systematisation of
work. The best method is developed over a period of time based on research and analysis.
It helps in bringing efficiency in performance of activities and thus, reduces cost

82
 Plans, Policies, Methods
Procedures And Budget

Distinction between Policies and Procedures

Basis of Procedures Methods

Difference
Meaning A procedure provides a sequence of A method is a systematic or
steps/actions to be taken to enforce clearly defined manual or
a policy and to attain predetermined mechanical way of
objectives. accomplishing one step of
procedure.
Explanation Under a procedure only sequence It explains in detail how a
of activities is determined particular activity will be
completed
Advantages Procedures help in implementation It helps in bringing
of policies efficiency in performance of
activities and thus, reduces
cost
Relation with Procedures are related to all Methods are related to only
departments departments. one department.

6.8 RULES

Rules are specific instruction stating what is to be done or not to be done in a given
situation. According to Joseph L. Massie, “Rule is a statement of precisely what is to be
done (not done) in the same way every time, with no permitted deviation. Rules allow no
range for decision making.” Rules are enforced rigidly. No exceptions or deviations are
allowed. With regard to rule, the managers have no scope for discretion. Generally, there
is a fine or penalty for the violation of rules. Rules are different from policies and
procedures. A rule may or may not be a part of a procedure.
Distinction between Policies and Rules

Basis of Difference Policies Rules

1. Meaning Policies are guidelines to Rules are specific
achieve the predetermined instructions stating what is
objectives. to be done or not to be done
in a given situation
2. Nature Policies are broad and general A rule is specific statement
3. Guide Policies are guide to decision Rules are guide to
making behaviour
4. Discretion Policies have some range within Rules are rigid and provide
which managers can use their no scope for discretion.
discretion.

83
Principles of Business Management

6.8.1 Check Your Progress

1. What do you mean by the term Objectives?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

2. What are the forms of Methods?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

6.9 BUDGET

A budget may be defined as a periodic plan, in which activities to be performed are

mentioned in terms of quantity or numbers. In other words, a budget is a statement of
expected results expressed in numerical terms. The period of a budget may be a week,
fortnight, month, quarter, half-year, a year or several years, depending upon the type of
budgets. For example, cash budgets are prepared on month’s basis. Most of the people
think that the budgets are plans expressed in terms of money. However, this term also
includes non-monetary information expressed in numerical terms. For example, units of
product, number of workers, labour hours, machine hours, etc.

Budgets prepared by a business firm may include sales budget, production budget,
materials budget, labour budget, overheads budget, cost of production budget, master
budget, cash budget, capital budget etc. Responsibility for preparing and coordinating the
budget usually rests on the controller or a budget committee.

Examples of Budgets and information given in them

Production Budget
Monetary Information: Cost of production
Non-Monetary Information: Number of units to be produced

Sales Budget
Monetary Information: Price and value of goods sold
Non-Monetary Information: Quantity of goods sold

Purchase Budget
Monetary Information: Amount to be spent on purchase
Non-Monetary Information: Quantity to be purchased
84
 Plans, Policies, Methods
Procedures And Budget

Materials Consumed Budget

Monetary Information: Cost of materials consumed
Non-monetary Information: Quantity of materials consumed

Merits of Budgets:

1. Activities and targets: Budgets provides the activities to be performed and targets
to be achieved by different departments and employees.
2. Helps in controlling: Budgetary control is a popular technique of controlling.
Budgets acts as standards against which the actual performance is measured and
compared deviations are noted and remedial measures are initiated.
3. Helps in coordination: In addition, the budgeting process serves as a tool for
coordinating the activities of various departments of the firm.

Limitations of Budgets:

1. Expensive and time consuming: preparing budgets add to the costs of operating a
business. It is time consuming as time is required to collect information, preparing
budgets, reviewing budgets, etc.
2. Rigidity: usually people tend to work exactly in accordance with the budget targets.
Therefore, budgets introduce rigidity.

6.10 Programmes

A programme is a complete and concrete scheme of actions to be taken by the managers

to accomplish a certain objective. It specifies resources to be used, steps to be taken and
also the time limits, within which the task is to be completed. According t Joseph L.
Massie, “A program is an explicit statement of steps to be taken in order to achieve an
objective. The development of a program requires that the programmer anticipate the
what, who and when of action.”

It is a single use plan. Once the objective is accomplished, the programme made for
that is automatically lapsed. A programme is a combination of objectives, policies,
procedures, task assignment, resources to be used, time period or achievement of the
objectives, etc. The business programmes may be prepared for development of a new
product, launching a new product, purchase of machinery, issue of shares or debentures,
training of employees, etc. At any point of time, a business organisation may follow a
number of programmes. A primary programme may call for many supporting
programmes, which need coordination and timing. The failure of any supporting
programme may delay the major programme, resulting in unnecessary costs and loss of
profits.

85
Principles of Business Management

6.11 SUMMARY

Planning consists of several individual plans or component parts which are bound
together in a consistent structured operation. These plans are the basis for overall
planning of a business organisation. Planning process generally results into several
specific plans. Some of these are in the form of standing plans while some others are
single use plans. Examples of standing plans are objectives, policy, rules, procedures etc.
Budget, targets and quotas are the examples of single use plan. These aforesaid plans are
the guidelines for a managers that in which situation? What will the suitable decisions
and actions? Further it helps in making the business environment vibrant and conducive
which makes the overall process of management efficient and productive. Thus, Plans
are required to provide guidance to the managers for making decisions, taking action and
solving problems. These plans serve as ready reference for the decisions and action of the
managers, with the help of these plans the managers solves the problems arising in the
course of managing an organisation.

6.12 TERM-END-QUESTIONS

1. What do you mean by plans? How a single use plan is different from standing
plans?
2. Write short notes on goals, objectives, policies and procedures.
3. Discuss in brief the concept of budget also enlist the merit and demerit of a budget?
4. What do you mean by Programmes? Comments.

86
 Organising

UNIT – 7 ORGANISING

Structure

7.0 Introduction
7.1 Objectives of the Units
7.2 Meaning of Organizing
7.3 Definitions of Organisation
7.4 Characteristics of Organisation
7.5 Principles of Organisation
7.6 Process of Organisation
7.7 Importance of Organisation and Organizational Structure
7.8 Forms of Organisation
7.8.1 Line Organisation
7.8.2 Line and Staff Organisation
7.8.3 Functional Organisation
7.8.4 Divisional Organisation
7.8.5 Formal Organisation
7.8.6 Informal Organisation
7.8.7 Matrix Organisation
7.9 Summary
7.10 Term-End-Questions

7.0 INTRODUCTION

The term organisation is used in structural as well as in functional sense. As a structure it

means a developed enterprise being operated to achieve the given goals. As a function it
refers to establishing relationship between activities and authority pertaining to an
enterprise. Organizing is the second step in the process of management. The end result of
organizing process is organization structure. The term organization is used as a process as
well as a structure. As a process, organization is defining and grouping the activities of an
enterprise and establishing the authority – responsibility relationships among them.
Organization structure is the formal relationship among positions and jobs. Informal
organizations also exist within the framework of formal organizations. The present unit
will provide an overview to the learners regarding the basics of organizing along with its
types and principles.

7.1 OBJECTIVES OF THE UNIT

The learners after going through this unit will be able to;
➢ Explain the concept of organizing
➢ Define the term organisation
➢ List the importance and characteristics of organizing

87
Principles of Business Management

➢ Discuss the various forms of organisation

7.2 MEANING OF ORGANIZING

As a function of management, organizing is regarded as a process. Organizing refers to

the process of bringing together physical, financial and human resources and establishing
productive relations among them for the achievement of specific goals. It is concerned
with building up a stable framework or structure of various inter-related parts of an
enterprise. Each part has its own functions and is centrally regulated. The aim of
organizing is to enable people to relate to each other and to work together for a common
purpose. The organized group of people in a collective sense is known as 'Organisation'.
Following are the important definitions of organizing as a process. Organizing is the
process of defining and grouping the activities of the enterprise and establishing authority
responsibility relationship among them. On performing the organizing function, the
manager defines, departmentalizes and assigns activities so that they can be most
effectively executed. As a basic function of management, it is the mechanism through
which the management divides, coordinates and controls the business operations.

7.3 DEFINITIONS OF ORGANIZING;

The following are the some major and well accepted definitions of organizing;

1. According to Theo Haimann, "Organisation is a process of defining and grouping

the activities of the enterprise and establishing the authority relationships among
them. In performing the organizing function, the manager defines, departmentalizes
and assigns activities so that they can be most effectively executed".
2. According to Louis A. Allen, “ Organisation is the process of identifying and
grouping work to be performed, defining and delegating responsibility and
authority and establishing relationships for the purpose of enabling people to work
most effectively together in accomplishing objectives."
3. According to Oliver Sheldon, “Organisation is the process of combining the work
which individuals and group have to perform with the facilities necessary for its
execution that the duties so formed provided the best channels for efficient,
systematic, positive and coordinated application of available effort.”
4. According to McFarland, “Organisation is an identifiable group of people
contributing their efforts towards the attainment of goals.”
5. According to Haney, "Organisation is a harmonious adjustment of specialized parts
for the accomplishment of some common purpose or purposes."

7.4 CHARACTERISTICS OF ORGANIZATION

Following are the important characteristics of organization structure:

88
 Organising

i. Formal relationship. Organization as a structure is the formal relationships

among positions and jobs of the enterprise to a greater extent. It also stresses close
relationship among, the individuals of all groups, whether large or small.
ii. Types of relationships. An organization structure shows the authority and
responsibility relationships between the various positions in the organization by
showing who reports to whom. Following are the types of relationships shown by
organizational structure. (a) Vertical or Superior – Subordinate relationships or
authority – responsibility relationships: and (b) Lateral/Horizontal relationships or
coordinating relationships.
iii. A tool to achieve the goals. Organisation is a means to implement the plans and
to achieve the predetermined goals of the business.
iv. Coordination and integration. In order to achieve the common goal of the
business individual efforts are coordinated and integrated through organizing.
v. Established rules and regulations. The established rules and regulations govern
formal structure of the organisation. The authority and responsibility of various
positions is clearly defined.
vi. Communication. The persons occupying positions have communication links
among themselves and share their views as and when required.

7.5 PRINCIPLES OF ORGANISATION

Principles of organisation refer to the well-established and accepted general statements

which provide guidance to thinking and action in the organizing process. Organisation
principles are meant to guide managers in designing a sound organisation structure. The
important principles of organisation are explained briefly here.

1) Principle of division of labour. The activities of an organisation should be

divided into several small parts or jobs. Thereby tasks are likely to be repeated frequently
so as to improve the efficiency of employees through job specialization. An individual
worker repeatedly performing a specific job becomes an expert in that job. Division of
labour is thus considered necessary to increase the output of workers and machines. For
example, in a furniture manufacturing unit, some workers shape the wooden pieces, some
smoothen the same, some fit them together and some polish them. Hence, division of
work increases the overall efficiency of the whole group. Division of labour is not
confined to workers; managerial work is also divided into compact managerial jobs.

2) Principle of functional definition. According to this principle, the functions to

be performed by an individual employee or by a department have to be well- defined.
This requires several steps. First, the tasks have to be clearly specified. Second, how
much and what kind of authority the job- holder will have must be laid down. Third, the
results or desired performance levels have to be established. These are several aspects of
functional definition which are expected to induce a sense of responsibility among
employees. It also helps employees to meet the organizational goals.

89
Principles of Business Management

3) Principle of scalar chain of command. This is also known as scalar principle.

The principle states that in every organisation there is an unbroken chain of superior-
subordinate relations. Which starts at the top management and ends at the supervisory
level? The chain of command or chain of authority links all the managerial positions from
top to bottom. Scalar chain means a step wise chain. The amount of command or
authority decreases as one goes down the chain. The principle suggests a clearly defined
and uninterrupted chain of authority from top management to all the managerial levels
down the line. Such a chain of command promotes smooth communication between
higher and lowers level managers. It also gives a sense of confidence to managers for
making decisions based on their authority.

4) Principle of span of control. The principle of span of control is an important

guide in the organizing function. The term ‘span of control’ (also known as span of
management) refers to the number of subordinates placed under a manager’s direct
supervision and control. The principle of span of control states that there is limit to the
number of subordinates which a manager can supervise and control. Early writers on
management used to set a limit of five or six subordinates as the ideal span of control. In
practice, the span of control varies widely. It may be wide or narrow.

5) Wide span of supervision. When the span of supervision is wider, the number of
executives needed to supervise the workers will be less. This will make the organisation
structure wide. Such a structure would be less expensive because of less overhead costs
of supervision. Since the number of levels is less, there will be better communication
between the worker and the management and better coordination. However, the quality of
performance is likely to deteriorate because one executive supervise a large number of
subordinates. He will not be able to devote sufficient time in directing each and every
subordinate.

I. Check Your Progress

1. What do you mean by the term organisation?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

2. What are the importance of organisation?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

90
 Organising

7.6 PROCESS OF ORGANIZATION

Organizing refers to the process of bringing together physical, financial and human
resources and establishing productive relations among them for the achievement of
specific goals. It is concerned with building up a stable framework or structure of various
inters related parts of enterprises, each part having its own function and being centrally
regulated. The aim of organizing is to enable people to relate to each other and to work
together for a common purpose. The organized group of people in a collective sense is
known as 'organisation'. Organisation is a process, which involves the following step:

1) Division of work. The first step in organizing is to identify the various necessary
activities that must be performed in order to achieve the organizational objectives. In this
step the total work to be done is divided into specific jobs. Each job consists of
specialized tasks and objectives of the organization. The job of typing includes typing the
letters and other matter as per the instructions. Dividing the total work into jobs is
necessary because the entire work cannot be done by one individual.

'Division of work' facilitates specialization of efforts and skills. While classifying and
reclassifying the activities, it should be borne in mind that unnecessary duplication
should be avoided.

2) Grouping jobs and Departmentalization. The second step in organizing is to

grouping jobs into larger units. Such larger units may be called divisions, departments or
sections. This grouping process is called 'Departmentalization'. The aim of
Departmentation is to facilitate unity of efforts. The departments or work units are linked
together on the basis of their interdependence. Divisions are largest units producing a
particular type of products. Departments are smaller units within a big unit or divisions.
Sections are smallest units, which a department may consist of Jobs may be grouped into
department in various ways of the functions, products, customers and process basis.

3) Establishing authority relationships. In this step, superior subordinate relationship

is created. Channels of communication are also established. Authority and responsibilities
of the job holder or a t job positions are to be defined. The various members of the
organisation, who perform the jobs, are linked by authority-responsibility relations. It
should be very clear that who will report to whom. This creates a chain of command and
superior- subordinate relationship. According to Kimball and Kimball. "Organisation
embraces the duties of designating the department and individuals".

Authority may be defined as the decision making right. While designing the organisation
structure, authority is allocated to a position. The various managerial jobs grouped into
different levels of authority. Which is called a hierarchy? The term hierarchy implies a
definite ranking order. In a hierarchy, the ranking of management positions is done by
grant of different degrees of authority to different positions.

91
Principles of Business Management

Top managerial positions have more authority than middle and lower managerial
positions. Authority flows from the top managerial positions to the middle managerial
positions and below it in a graded manner. As it flows downwards, it decreases in its
content gradually.

7.7 IMPORTANCE OF ORGANIZING AND ORGANIZATIONAL STRUCTURE

Organization is a process of defining and grouping the activities of the enterprise and
establishing the authority relationships among them. Importance of organisation as a
function of management is discussed below:

1) Specialization. In the process of organizing, the activities are divided and

subdivided into compact and convenient jobs. The principle of division of work is
adopted. Jobs are grouped on the basis of similarity in such a way that these can be
performed by the employees effectively and efficiently. Organizing thus promotes
specialization, leading to speedy performance of tasks and efficiency.

2) Well-defined jobs. The jobs of various positions are clearly defined and
differentiated. A document, called ‘Job Description’ is prepared to describe the tasks and
activities to be carried out at the designed positions and levels. Thus, organizing helps in
avoiding duplication of work and overlapping in responsibilities. It also helps the process
of recruitment and selection of employees and fitting the right person to right job. A
training programme for the employees working in a particular department can be
designed on the basis of job description; it also helps in performance appraisal and
compensation.

3) Clarifies authority and power. A clear-cut definition of authority enjoyed each

manager and his jurisdiction of activity is shown in the organisation chart. Managers
know their authority and subordinates, whom they can order. Subordinates known what
are their responsibilities and to whom they are accountable. It minimizes conflict and
confusion.

4) Coordination and communication. The organisation structure is helpful in

unifying and harmonizing the efforts of employees and their groups. Managers exercise
their authority over interrelated activities of their subordinates and bring coordination,
whenever required. Channels of communication are based on the lines of authority
prescribed in the organisation structure. Coordination and effective communication - both
are must for the successful implementation of pl-ans.

5) Source of security and support. Organizational structure recognizes the active

status and levels of members who enjoy a definite status and position in the organisation.
A definite status granted to a manager provides him security, support d satisfaction. It
helps managers and workers in performing their assigned tasks.

6) Adaptation. Organizational structure facilitates adjustment to changes in work

load caused by changing conditions in the external environment. Changes may be related

92
 Organising

to technology, markets, products and resources. The system of jobs, departments and
authority is designed in such a way that work is done irrespective of people moving in
and out of the jobs in the organisation. For example, if a manager is absent, the assistant
manager or deputy manager or the senior most supervisors will enjoy his authority, at
least to perform the necessary tasks.

7) Better use of human resources. Sound organisation structure ensures that every
individual is placed on the job for which he is best suited. The policy of promotion and
transfer helps to fit the right person on the right job. Delegation of authority provides
opportunities to the subordinates to develop themselves for higher level jobs. Thus, a
sound organisation is helpful in better use and development of human resources.

8) Flexibility. The organization structure should be flexible so that it can be easily

and economically adapted to the changes in the nature of business as well as conical
innovation. Flexibility of organization structure ensures the ability to change with the
environment before something serious may occur. So the organization structure should be
such that it permits expansion and contract on without disrupting the basic activities.

7.8 FORMS AND TYPES OF ORGANISATION

It is true that without making proper distribution and allocation of authority to various
departmental heads, the smooth functioning of organisation cannot be maintained. The
activities performed by the different departments cannot be properly coordinated to
achieve organizational goals. The problem in organizing is to select and combined the
efforts of personnel so as to produce the desired result. As per the classical management
theorists the following organizational structures exists on the basis of authority
responsibility relationship. These structures are therefore known as traditional
organizational structures which are listed below;
1. Line Structure
2. Line and Staff Structures
3. Functional Structures

7.8.1 Line Organisation

This is the simplest and oldest type of organisation all other forms are modifications it.
Line structure is most basic and indispensable to all kinds of organised efforts which are
made for achieving common goals. it is still considered as backbone of group efforts in
this organisation authority flows from top to bottom levels through all managerial
positions. These positions are created around basic or core activities which are essential
for achieving organizational goal. In the line of authority each manager is attached with
the relationship of superior and subordinate. There is direct vertical relationship among
them. In the line structure there is no separate service or supportive units and these
activities are also included in line departments. The line of authority therefore consists of
those executive who are directly responsible for accomplishing organizational goals. It
assumes direct straight line responsibility and control from general managers to plant
man.
93
Principles of Business Management

7.8.1.1 Characteristics of Line Organisation

1. In line organisation, authority flows from top to bottom level through various
managerial positions.
2. Flow of responsibility starts from lower levels to higher levels. Every subordinate
is responsible to his immediate superior for performing work assigned to him.
3. There is direct reporting relationship between superior to subordinate.
4. All managers work in line of authority in the relationship of superior and
subordinates and are known as line managers.
5. Line manager has line authority and performs line activities and functions and is
directly responsible for achieving objectives of organisation.
6. Line activities are those activities which are core and essential for achieving
organizational goals.
7. The principle of unity of command is followed for designing line structures.

7.8.1.2 Advantages of Line Organisation

1. Line organisation is quite simple to understand and implement and no
complications are involved in it.
2. There is clear cut division of authority and responsibility among various positions
in organisation.
3. The operational cost of line structure is minimum as compared to other
organisation.
4. In line organisation, there is a high degree of flexibility because when organisation
grows in size and volume, additional work either can be shared by existing
departments or new department can be created easily.
5. Line structure serves as a ground for training and development of all managerial
personnel.
6. In line structure, decisions can be made promptly by the managers because enough
authority is delegated to them for this purpose.
7. It is an ideal form of organisation especially for small sized enterprise engaged in
simple nature of business.
8. It facilitates communication by providing line of command as a channel.
9. Due to unity of command, discipline can be maintained among employees, their
activities can be effectively controlled and they cannot sidetrack their
responsibility.

7.8.1.3 Disadvantages of Line Organisation

1. As it is headed and run by one man, often there is a danger that one man may rule
arbitrarily or even on dictatorial basis.
2. It results in leaders of the organisation being over worked as there is no staff to
assist them.
3. The leader may place unduly heavy reliance on the subordinates which may result
in ineffective operation sometimes.

94
 Organising

4. It may create problems of replacement when the leader leaves or dies as, in line
organisation; there is no provision for training or developing persons who may later
replace the leaders when necessary.
5. There is no scope for specialization and we cannot expect an individual to be an
expert in various fields.

7.8.2 Line and Staff Organisation:

As the business organisation grew from simple to complex organisation, a need was felt
to devise an organisation in which advantages of line as wells as functional organisation
both may be available. Line and staff organisation may be considered more refined and
extended form of line organisation. In line and staff organisation, a distinction is made
between line positions those in formal line of authority and staff positions those serving
in an advisory capacity outside formal line of authority. The line managers have authority
to make decisions, and give orders to subordinates in the chain of command. But those
who occupy staff positions merely advise, help and support line managers. They do not
have any relationship of authority. The rationale behind the development of this form is
to separate out line activities which are basic and core in nature from other supportive or
auxiliary activities, which are to be performed by specialized staff. Hence, in line and
staff organisation both line activity units as well as staff activity units coexist. Staff units
render various types of services to line activity units, so as to facilitate performance of
line activities in satisfactory manner. However the role of specialized staff is purely
advisory in nature.

7.8.2.1 Characteristics of Line and Staff Organisation

1. In line and staff organisation, there are two types of relationship, i.e. line and staff.
2. Line managers work in line of authority, give orders to subordinates and are
directly responsible for achieving organizational objectives.
3. Staffs specialists are having specialized knowledge of their respective areas,
perform supportive and auxiliary activities and guide, help and advise to line
managers.
4. Line managers and staff specialists are not in the relationship of superior and
subordinate, because staff specialists are appointed beyond line of authority and
they work independently.
5. Like line organisation, this structure is also marked by unity of command.

7.8.2.2 Advantages of Line and Staff Organisation

1. It enables the line authority to get expert or specialist advice on the line various
problems which he might face and which he may not be able to solve due to
shortage of time or lack or expert knowledge.
2. It increases the opportunity for the members of the organisation to get a higher
post, as in such type of organisation the number of posts increases.
3. Line managers are relieved of routine, supportive and auxiliary activities, there
workload is reduced and they find enough time to concentrate on key and basic
activities which are directly related to achievement of organizational goals.
95
Principles of Business Management

4. With the help of staff specialist belonging to various areas of operation, research
and development work is encouraged and creativity and innovativeness get
developed.
5. In line and staff organisation, the quality of decisions made by line managers
improves. It is because by making mutual exchange of ideas and viewpoints and
seeking the advice of expert on the matter, they can make proper and balanced
decisions.

7.8.2.3 Disadvantages of Line and Staff Organisation

1. The allocation of authority and responsibility of the staff with respect to the line
supervisors may not be very clearly made which may result in confusion and create
difficulties.
2. Fractions and jealousies may develop among line and staff authorities.
3. Often the staff man, if aggressive in nature may usury some of the authorities of the
line man, causing irritation in the mind of the latter.
4. The original thought, action and initiative of the line supervisors may be depended
because, in the presence of the staff men, they start depending too much upon
them.
5. By introducing staff relationship in the line structure the overall organizational
structure becomes more complicated and complex.

7.8.3 Functional Organization

The functional organisation is based on the concept of functional foremanship developed
by F. W. Taylor. It may be considered as more improved and effective form of line and
staff organisation. It is because this particular structure has been developed as to counter
inadequacies and drawbacks associated with line and staff organisation particularly in
respect of role, relationship and position of experts in organisation. In a functional
organisation activities of the organisation are grouped into various units and sub-units on
the basis of functions which are to be performed with regard to that group of activities.
Each functional head is given full authority over those functions irrespective of level at
which they are performed. In functional organisation authority does not follow from top
to bottom in the line. Instead each activity is divided according to functions.

7.8.3.1 Characteristics of Functional Organisation

1. In functional organisation activities of organisation are grouped in different
departments or division on the basis of functions which are required to be
performed for that group.
2. Each functional department is to be headed by the manager who has specialized
knowledge of that function.
3. The functional head will exercise final authority over that function irrespective of
level at which it is being performed.
4. In this kind of structure unity of command is broken because one subordinate has
to seek orders and instructions from two or more functional managers. The

96
 Organising

functional authority of the managers extends to similar activities of several work

units.

7.8.3.1 Advantages of Functional Organisation

i. Specialization. Every functional unit or sub-unit specializes in a single activity and
the whole organization gets the benefits of specialization.
ii. Competitiveness. On the basis of efficiencies and economies, small organizations
are in a position to compete with large organizations.
iii. Unity of direction. The chief executive is able to maintain direct touch with
people. This enables the leader to inculcate his philosophy throughout the
organization.
iv. Control. There is a direct control of the chief executive on the functional heads.
v. Coordination. As all the functional heads are directly reporting to him, all inter-
functional problems can be sorted out.

7.8.3.2 Disadvantages of Functional Organisation

i. Not suitable for a large organization. As the organization grows, the functional
arrangement proves inappropriate to handle the problems that arise.
ii. Problems of coordination and control. As a number of sub-units get created
within a functional unit, personal contact is lost, shortage of staff may occur,
communication becomes slow and problems of coordination and control develop.
iii. It is also found in functional structure that specialisation exceeds desired limit and
beyond which its advantages may be outnumbered by the cost incurred to achieve it.
iv. The principle of unity of command is violated as a result of which indiscipline
crops in among the employees. They tend to sidetrack their responsibility and their
activities cannot be controlled efficiently.
v. Divided loyalty of head of the work units may also result in the creation of
conflicting situations.

Fig. 5.3 Functional Organization Structure

97
Principles of Business Management

7.8.4. Divisional Organisation: Under the divisional structure, an organization is divided

or broken into different divisions on the basis of products or geographical area. Each
division is a self-contained, semi-autonomous business unit. Head of each division is
granted sufficient authority to handle problems relating to its division. Each division
works as an independent business unit and contributes a profit. There are certain matters,
which are determined at the apex level only, viz., goal determination and policy
formation. It is necessary to maintain coordination among various divisions. In the initial
stage, functional structure is adopted. When the size of business grows beyond a certain
limit and functional structure begins to appear weak and inefficient, divisional structure is
adopted. The conversion of functional structure into a divisional structure is called a
radical surgery because it involves serious financial costs, disturbs the existing authority-
responsibility relationships and may affect motivation adversely.

7.8.4.1 Advantages of Divisional Organisation

1. Suitable for large organizations. Divisional structure is adopted when due to
expansion of business, functional structure becomes inefficient, Decentralization.
Decentralization of authority can be adopted easily in a divisional structure. Head
of each division is granted sufficient authority to handle problems relating to its
division.
2. High motivation for managerial staff: divisional structure provides a chance to
management to exploit the full potential and improves efficiency through healthy
competition among various divisions.
3. Provides high productivity visibility
4. Suited for rapid changes
5. Allows parallel processing of multiple tasks
6. Clearly defines responsibility
7. Permits full time concentration on tasks
8. Fosters the training of general

7.8.4.2 Disadvantages of Divisional Organisation

1. Not suitable for small organizations. Small size business firms cannot adopt the
divisional structure as it involves considerable administrative expenses.
2. Costly. Divisional structure involved a large number of managers and employees
and thus is costly.
3. Promotes neglects of long term priorities
4. Causes conflict between divisional tasks and corporate priorities
5. Fails to encourage the coordination of activities
6. Allows in depth competencies to decline
7. Adverse impact on motivation. The breaking down organization into divisions
involves breaking up of certain established ties which may affect human
motivation adversely

98
 Organising

Basis of Functional Structure Divisional Structure

differenced
Under this structure focus on functions Under this structure focus is
1. Focus such as production, marketing, finance on products or product lines
etc. or on geographical areas.
This type of structure is comparatively This type of structure is
2. Nature
simple. comparatively complex.
Emphasis is given on
Emphasis is given to functional
3. Specialization product or product line
specialization.
specialization.
Under this structure, authority is Under this structure.
4. Centralization
centralized at the top level of the Authority is decentralized at
of authority
organization. the divisional level.

99
Principles of Business Management

Such type of structure is suitable for This type of structure is

5. Suitability medium sized organizations having suitable. for large sized
single or selected products. organizations having
multiple products.
Modern management authors and practioners considered all traditional structures of
business organisation some time in adequate to fulfill the requirements of modern
business. They strongly believes that traditional forms of organisation can operate
properly only in stable and close ended business environment. The increasing complexity
of markets, varieties of products, changes in science and technology and changes in the
functioning of organisation. The result of these challenges was a desired to look at
organizations in some new ways, as system, project, matrix and formal and informal
organisation. The some of them are as follow;

7.8.5 Formal Organisation: The organisation structure designed and established by

management is called formal organisation. The formal organisation is officially set up to
achieve certain goals. C.L. Barnard defined formal organisation as “a system of
consciously coordinated activities or forces of two or more persons." A formal
organisation refers to the structure of well-defined jobs, each bearing a definite measure
of authority, responsibility and accountability, it is a system of clearly defined activities
and relationships which are intended to divide and integrate the activities of the
organisation. Authority flows from top to bottom in formal organisation. Its direction is
downward.

7.8.6 Informal Organisation: Keith Davis has described informal organisation "as a
network of personal and social relations not established or required by formal
organisation." According to C. I. Bernard. "Informal organisation is joint personal
activity without conscious common purpose though contributing to joint
results."Informal organisation originates from within the formal organisation to meet the
cultural and social needs of members of the organisation. When several individuals work
together for achieving certain organizational goals, they come to know each other's
cultural interests and needs. They associate informally to fulfill such interests and needs.
The network of these social groups based on friendship is called informal organisation. In
informal organisation flow of authority is horizontal as well as vertical. The informal
organisation is thus a system of social relationships among the members. It emerges on
its own in a natural manner within the formal organisation.

7.8.6.1 Importance of Informal Organisation

Informal organisation refers to a network of personal and social relations not established
or required by formal organisation but arising spontaneously as people associated with
one another. Following benefits may derive from informal organisation:
(i) Communication channel. It serves as useful channels of communication in the
organisation. The informal communication is very fast.
(ii) Sense of belonging. It brings a feeling of belonging, status, self-respect and
satisfaction. It recognizes the individuals on the basis of their personality.
100
 Organising

8. Social and cultural needs. Informal organisation satisfies social and cultural
needs of the members. It provides an opportunity to the members to socialize with
each other. Cultural activities are also organized by these groups.
9. Personality of the individuals. It helps in maintaining the personality of the
individual against certain effects of formal organisation winch tends to
disintegrate personality.
10. Support to formal organisation. Informal organisation gives support to formal
organisation. It makes the organizational structure flexible and workable.

7.8.6.2 Distinction between Formal and Informal Organisation

Basis of Difference Formal Organization Informal Organization

1.Purpose Formal organisation is established Informal organisation

to achieve the organizational goals originates to satisfy social
like, production of goods, making and cultural needs and fulfill
purchases, sale of goods, and soon. common interests of m-
2.Behaviour In the formal organisation, the In the informal
embers organisation,
for example, fellow-
standards of behavior and die standards
feeling, esteem,ofsense
expected
of
performance of members are laid behavior
belongingandetc.performance
down and enforced by management. are evolved by common
For example, how much work should consent among member.
a worker do is fixed by his Themselves.
supervisor.
3.Communication In die formal organisation, members Members of informal
are required to use official lines of organisation, develop their
communication, which are based on own channels of
authority and responsibility. Thus, communication for
die direction and flow of interaction with each other.
communication are fixed and The channels of
predetermined. communication in the
4.Relationship Relationship among members is informal
There organisation
is no specific andare
clear
among members well-defined and established in often compared to a ‘grape-
relationship in informal
formal organisation according to vine’.
organisation. Relationship in
authority - responsibility these organizations is natural
relationship. and evolved by interaction.

101
Principles of Business Management

5. Formation Formal organisation is deliberately Informal organisation emerges

planned and created by management for spontaneously and naturally
conscious coordination of activities. within the formal organisation
as a result of social interaction
6. Structure Formal organization has a clear and among
Informalmembers.
organization does not
well-defined structure which is pyramid have a clear structure. It has no
shaped and which can be shown in the definite form because it is a
form of a chart. complex network of social
7. Emphasis Emphasis in formal organizations is on relation
Informalamong members.
organization
jobs and potions, functions of enterprise. emphasizes emotions and social
needs of members.
8. Flow of Authority flows from top to bottom in In informal organisation flow of
authority formal organizations. Its direction is authority is horizontal as well as
downward. vertical.
9. Tenure. The tenure of formal organization is While informal organizations
normally long. have uncertain and short tenure.

7.8.7 Matrix Organisation: it is created by superimposing a set of project structures

on top of a functional structure. Members of each project team are selected or assigned
from the functional department. The matrix design features a multiple command
structures in which an individual may have any number of superiors, including one
functional superior and one or more project manager. The matrix structure has been
found to be successful under three major situations. First, when there is strong
environmental pressure, such as intense competition, which calls for stronger marketing
efforts, while the diversity of firm’s products call for individualized marketing
programme. Second, when there is a need to share and integrate vast amounts of
information within the company. Third, when there are limited resources to be shared.

7.8.7.1 Merits of Matrix Organisation:

1. Involves and challenges matrix team members
2. Provides enlarged tasks for people
3. Develops employee skills
4. Encourages people to identify with end products.
5. Fosters flexibility throughout the organisation.
6. Motivates interdisplinary cooperation
7. Provides for integration of organizational information
8. Fosters the development of managerial skills
9. Frees top management for effective planning

7.8.7.2 Disadvantages of Matrix Organisation:

1. Demands high level of interpersonal skills
2. Leaves negative impact on morale when personnel are reshuffled
3. Fosters confusion and frustration from its multiple command structure
102
 Organising

4. Leads to power struggles between functional and project managers

5. Causes to lose sight of broader organizational goals
6. Causes duplication of efforts by project groups
7. Costly to implement and maintain

II. Check Your Progress

3. What is line organisation?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

4. What is formal organisation?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

7.9 SUMMARY

It can be concluded on the basis of aforesaid going explanation that organisation is a

process of establishing working relationship among the members of an organisation. The
working relationship is known as authority responsibility relationship for the
accomplishment of the organizational goals. It refers to a process of integrating, unifying,
balancing and coordinating the activities being performed by the members for the
accomplishment of pre-determined objectives of the organisation. Organizing also
implies pattern of ways in which large number of people engaged in group efforts related
themselves to each other in the conscious and systematic manner for the accomplishment
of mutually agreed purpose.

7.10 TERM-END-QUESTION

1. What do you mean by organizing? Explain the meaning, characteristics of

organizing.
2. What are the principles of organizing? Explain in detail the process of organizing?
3. Explain in details the line and staff organisation. How is it different from the line
organization?
4. How formal organisation is different from the informal organisation? Discuss in
your own words with suitable examples.
5. Write short notes on the following;
a. Line Organisation
b. Matrix organisation

103
Principles of Business Management

UNIT – 8 DEPARTMENTATION AND FORMS OF AUTHORITY

RELATIONSHIPS

Structure

8.1 Introduction
8.2 Objectives of the Unit
8.3 Meaning of Departmentation
8.4 Definition of Departmentation
8.5 Importance of Departmentation
8.6 Basis of Departmentation
8.7 Divisional Departmentation
8.8 Product Departmentation
8.9 Process Departmentation
8.10 Customers Departmentation
8.11 Territory or Geographic Departmentation
8.12 Choice of Method of Departmentation
8.13 Meaning and Types of Authority
8.14 Responsibility and Accountability – A Comparison
8.15 Summary
8.16 Term-End-Questions

8.1 INTRODUCTION

Departmentation is the process of dividing the work of organisation into various units or
departments. The term used to denote the departments that result from Departmentation
vary a great deal. In business organisation, such terms as division, department and section
are used: in government, these are called branch, department, bureau, and section; in
military, regiment, battalion, group and company are used. Moreover the terminology
may vary in different types of organisations or in organisations of the same nature. The
process of departmentaion may however be the same though the nature of activities will
be different. The bases for Departmentation have general applicability and can be applied
in many different situations. The bases more commonly used are- functions, products,
territory, customers, process, time and market. . In this present unit the learners will learn
about the basics of department, meaning, characters, type, and forms of authority.

8.2 OBJECTIVES OF THE UNIT

The learners after going through this unit will be able to;
➢ Explain the concept of department
➢ Define the term department
➢ List the basis for departmentaion
➢ Discuss the various forms of departmentaion
104
 Departmentation & Forms
of Authority Relationships

8.3 MEANING OF DEPARTMENTATION

Departmentation is the foundation of organisation structure, that is, organisation structure

depends upon departmentation. Departmentation means division of work into smaller
units and their re-grouping into bigger units (departments) on the basis of similarity of
features.As the organisation grows in size, the need for developing units and sub-units
arises. Departments are created where all activities of similar nature are grouped in one
unit. Each department is headed by a person known as departmental manager. The
globalized business scenario has created the need for the departmentaion of business
organisation to facilitate specialization as well as the overall process of business efficient.
It not only makes employees from top to bottom responsible but also promotes creativity
among them. It facilitates the consumer friendly environment where they can put their
view and get the products and services of their choice without wasting of time.

8.4 DEFINITIONS OF DEPARTMENTATION

These are the some important definitions given by management authors and practitioner;
1. According to Louis A. Allen, "Divisionalisation is a means of dividing the large
and monolithic functional organisation into smaller, flexible administrative units".
2. According to Pearce and Robinson, "Departmentalization is the grouping of jobs,
processes and resources into logical units to perform some organizational task."
3. According to Terry and Franklin, “Departmentalization is the clustering of
individuals into units and of units into departments and larger units in order to
facilitate achieving organisational goals."

8. 5 IMPORTANCE OF DEPARTMENTATION

The following points highlight the importance of departmentation:

1. Organisation structure: Division of work into units and sub-units creates
departments.Supervisors and managers are appointed to manage these
departments. The departmentalheads ensure efficient functioning of their
departments within the broad principles oforganisation (scalar chain, unity of
command, unity of direction etc.). Thus, organisationstructure is facilitated through
departmentation.
2. Flexibility: In large organizations, one person cannot look after all the managerial
functions(planning, organizing etc.) for all the departments. He cannot adjust his
organisation to itsinternal and external environment. Such an organisation would
become an inflexible organisation. Creating departments and departmental heads
makes an organisation flexible and adaptive to environment.
3. Specialisation: Division of work into departments leads to specialisation as people
of onedepartment perform activities related to that department only.

105
Principles of Business Management

4. Sharing of resources: If there are no departments, the organisational resources,

physicaland human, will be commonly shared by different work units.
Departmentation helps in sharingresources by different departments according to
their need.
5. Co-ordination: "The organisation is a system of integrated parts, and to give
undue emphasisto any functional part at the expense of the entire organisation
creates organisational islands,thus, resulting in inefficiency and significant
behavioral problems". Creating departments,with focus on departmental activities
facilitates coordination.
6. Control: Managers cannot control organisational activities if all the activities have
to becollectively supervised. Departmentation facilitates control by each
departmental managerover the activities of his department only.
7. Efficiency: Flow of work from one level to another and for every department,
le.,verticaland horizontal flow of work in the organisation increases organisational
efficiency.
8. Scope for growth and diversification: In the absence of departmentation,
managers cansupervise a limited number of activities, depending upon their skills
and abilities.
Departmentation enables them to expand their area of operation into new product
lines andgeographical divisions. Departmentation provides scope for organisation's
growth (along thesame product lines) and expansion (addition of new product
lines).
9. Responsibility: Since similar activities are grouped in one department headed
bydepartmental managers, it becomes easy for top managers to fix responsibility of
respectivemanagers for achieving the desired results. If planned performance is not
achieved, thedepartment responsible becomes answerable.
10. Development of managers: Departmentation enables departmental heads to use
creativityin making decisions with respect to their departmental activities. This
develops their potentialto be promoted to higher managerial positions in the
organisation. It also facilitates recruitmentand selection of top managers from
within the organisation rather than depending on outsidesources.

8.6 BASIS OF DEPARTMENTATION

The form of organisation structure depends upon the basis of departmentation. With
growing size of organizations, departments are created for activities of similar nature.
Creating departments and sub-dividing the work of departments into smaller units creates
organisation structure.

There are two broad forms of organisation structure or departmentation:

15.3.1. Functional departmentation

15.3.2. Divisional departmentation

106
 Departmentation & Forms
of Authority Relationships

8.7 FUNCTIONAL DEPARTMENTATION

Functional organisation is the one where departments are created along activities or
functions of the undertaking (functions do not refer to managerial functions of planning,
organizing, staffing, directing and controlling).It is grouping of activities on the basis of
similarities of functions. The nature of activities performed by different organizations is
different. For example, activities carried by a manufacturing concern are production,
finance, personnel and sales. For a trader, the major activities are buying and selling, a
bank performs the activities of borrowing and lending. Functional departmentation is,
"the grouping of jobs and resources within the company in such a way that employees
who perform the same or similar activities are in the same department".

It is the simplest, logical and most widely accepted form of creating departments. It is
suitable for organizations where limited number of products is produced.The major
functional departments further have derivative departments. Production
department, for example, has departments to handle purchasing, production planning
and control, manufacturing etc. Finance department creates departments to look into
matters like financing for capital budgeting (fixed assets) and current assets, cash
management and budgets. Personnel department has departments that take care of
appointment, training, placement and promotion of workers.

Organisation chart showing functional departmentation

8.7.1 Advantages of functional Departmentation

It offers the following advantages to the organisation:
1. Simple and logical basis of creating departments: Production, marketing,
finance andpersonnel are so widely accepted and recognized functions of a
manufacturing orga1nisation,that it is quite logical to accept this as the basis of
departmentation.
107
Principles of Business Management

2. Specialisation: Since workers in one functional area focus on that area only, they
acquireexpertise and specialised skills in performing their duties. This offers the
organisation thebenefits of specialisation.
3. Co-ordination: People working in one department are closely knitted and work
collectivelytowards achievement of departmental goals. The departmental
managers can co-ordinatevarious derivative activities.
4. Training and control: The departmental manager is accountable for functions
performedby his department. He ensures that activities are performed strictly
according to rules andprocedures laid down for the department. He can thus,
exercise control over his departmentalactivities. If workers are not able to carry out
the activities efficiently, managers can train them to do so.
5. Supervision: It is easy for managers to supervise their departmental activities as
they haveto supervise a narrow set of functional skills.
6. Suitable for stable organizations: Organizations which do not frequently change
theirwork units and work force are suitable for creating departments on the basis of
functionalactivities.
7. Suitable for small organizations: This basis of departmentation is suitable for
small sized organizations which produce a limited line of products.

8.7.2 Disadvantages of Functional Departmentation

This form of departmentation suffers from the following drawbacks:
1. Overall organisational goals: The employees become so focused in achieving their
departmental goals that they may lose sight of the overall organisational goals.
2. Delayed decisions: Since decisions are made by each departmental head for his
respectivedepartment, it may delay decision-making for the organisation as a whole.
3. Co-ordination: Water-tight compartments are sometimes created amongst
differentdepartments as people show loyalty towards their departmental managers. Top
managerfinds it difficult to co-ordinate various functional activities.
4. Holding of accountability: Top managers find it difficult to hold accountability of a
particulardepartment for failure of the product in the market. For example, if the product
does notearn sufficient profits, top managers cannot say whether the product has failed
because ofinefficiency of production department or sales department.
5. Unsuitable for dynamic organizations: As this is a suitable form of departmentation
forstable organization, organizations operating in a dynamic environment cannot
acceptfunctional activities as the basis of departmentation.
6. Complexity: As organizations become complex in terms of size and operations, they
addmore product lines to their line of products and also expand into new geographical areas
formarketing the existing products. Functional departmentation is not suitable in such cases.

108
 Departmentation & Forms
of Authority Relationships

8.7 DIVISIONAL DEPARTMENTATION

Divisional structures are created on the basis of smaller divisions where each division has
its own functional activities (production, finance, personnel and marketing). Major
divisions that determine the organisation structure are as follows:

8.8. PRODUCT DEPARTMENTATION

This form of departmentation is suitable for companies that produce multiple products.
Product departmentation is grouping of jobs and resources around the products or product
lines that a company sells. With increase in operations of a company, it adds more
products to its line of products which require various functional activiti es
(production, marketing etc.). Organisation selling stationery, for example, also starts
selling cosmetics and pharmaceuticals. While marketing strategies for cosmetics need to
be intensive, it is not so in case of stationery or pharmaceuticals. Similarly, funds
required for each product line are different. The focus is on the product line and all
functional activities associated with the product line. Departments are created on the basis
of products and product manager has the authority to carry out functional activities for
his department. Each product manager is incharge of his product line though general
managers of various functional areas provide them the necessary support.

Organisation Chart Showing Product Departmentation: Product departmentation,

along with various functional areas appear on the organisation chart as follows:
Board of Directors

GM GM GM GM
Production Finance Personnel Marketing

Manager Manager Manager

Product Product Product
A B C

Production Production Production

Finance Finance Finance
Accounting Accounting Accounting
R&D R&D R&D

Product Departmentation

Advantages of Product Departmentation: Departmentation on the basis of product

lines has the following advantages:

109
Principles of Business Management

(i) Better performance: One manager may not have skills to carry out all
operations for different product lines. By creating departments where each
department looks after one product line only, decision-making, assessment of
responsibilities and assessment of performance can be done efficiently. Sales people
for one product will concentrate on sales promotion of that product only. This
ensures better performance of all employees.
(ii) Flexibility: Firms operating in the dynamic environment are well suited for this
form of departmentation as it helps them respond to environmental changes,
analysescompetitorsproducts and change their product line, if necessary.
(iii) Faster decisions: Since all the decisions related to a product are taken by
product manager (under the expert guidance of General Manager production),
decisions are taken quickly.
(iv) Co-ordination: All the primary and auxiliary activities are managed by one
manager. He can co-ordinate efforts of all those working under him,
(v) Control: The aim of every product manager is to maximize profits of his product.
For this, he has the authority which he delegates to people of his department and
establishes authority-responsibility relationships. Training is also provided to
subordinates to carry out functions related to each product line. He, thus, controls
activities of his department to ensure that the product line contributes to the
organisational goals.
(vi) Responsibility: Product managers are accountable for results of their
product departments. Profitability of different products is, thus, ensured.
(vii) Efficiency: The costs and revenues of each product line can be compared. This
increases the overall efficiency by eliminating the unprofitable product lines and
extending or growing the profitable ones.

Limitations of Product Departmentation: Some of the limitations of product

departmentalization are as follows:
(i) Co-ordination: Co-ordination becomes a problem when departments focus
excessive I attention on activities of their departments without linking their
performance with other departments.
(ii) Expensive:This is comparatively a costlier basis of departmentation than the
functional one because each department appoints people to look after specialised
activities, like accounting and finance.
(iii) Control: If every product division works as an autonomous structure, tries to
maximizeits goals/profits ignoring the overall organisational needs, it will be difficult
for top management to control the overall organisational activities.

110
 Departmentation & Forms
of Authority Relationships

8.9. PROCESS DEPARTMENTATION

In manufacturing organizations, where the product passes through different stages of

production, each stage is designated as a process and departments created on the basis
of processes is called process departmentation. Manufacturing paper, for example,
requires processes like crushing the bamboo, making pulp, purifying the pulp, making
paper rolls, and cutting it into rims. For each process, departments are created and
headed by people who are skilled and competent to carry that process. Since finished
product goes through different processes, each process is assigned to a different
department. This form of departmentation is suitable for medium and large-sized
organizations.
Board of Directors

GM GM GM GM
Production Finance Personnel Marketing

Manager Manager Manager Manager Manager

Crushing Making Pulp Purifying Pilp Paper Rolls Cutting
Finance Finance

Organisation Chart Showing Process Departmentation

8.9.1 Advantages of Process Departmentation: The benefits of process

departmentation are as follows:
(i) Specialization: As work is divided into different processes, the process manager
and his team specialize in that process by constantly carrying out activities
related to that process only.
(ii) Economic considerations:Specialisation results in economy of time, money and
managerial skills.
(iii) Technological consideration: Large sized organizations, where each process
requires a different technological set up, operate most suitably under process
departmentation.
(iv) Facilitates training: Since employees carry out only one operation or process on
the work activity, managers find it easy to train people to efficiently carry out that
process.

8.9.2 Limitations of process departmentation: Process departmentation suffers from

the following limitations:
111
Principles of Business Management

(i) Co-ordination: Output of one process department is input of the other. If different
I departments work atdifferent speed, co-ordination amongst different processes I
becomes difficult.
(ii) Boredom: Repeated handling of the same job with a very short cycle (time
required to complete that process) leads to boredom. This can affect operational
efficiency of the process.

An alternative to this is parallel pattern of process departmentation against the serial

pattern (work moves in a series of steps) as described above. In the parallel process of j
departmentation, the number of steps to accomplish the task is the same. Say, a job
requires three steps for its completion. Step 1, Step 2 and Step 3. Rather than A (a
worker) handling step 1, B handling step 2 and C handling step 3, A may carry out all the
steps on product X, B carries out the same set of steps for product Y and C for product Z.
Though this reduces boredom on the work process, it requires trained workers who can
carry out all the processes. This form of departmentation is suitable for small
organisations where limited number of products with limited processes is produced.

I. Check Your Progress

1. What do you mean by the term departmentation?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

2. What are the various types of departmentation?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

8.10 CUSTOMER DEPARTMENTATION

When organizations sell goods to customers with different needs, departments on the
basis of customers is the suitable form of departmentation. It is "the organizing of jobs
and resources in such a way that each department can carefully understand and respond
to the different needs of specific customer groups", A lending institution, for example,
gives loans to meet different customer requirements like housing loan, car loan,
commercial loan etc. An educational institution which provides academic and non-
academic subjects (vocational subjects), full-time or part-time courses, morning or
evening shifts is a typical case of customer departmentation. Clear identification of
customers and their needs is the basis of departmentalization.
112
 Departmentation & Forms
of Authority Relationships

Organisation Chart Showing Customer Departmentation: The organisation chart for

customer departmentation (for a lending company) appears as follows:

Board of Directors

Managing Directors

Manager Manager Manager Manager

Car Loans Housing Loans Electronic Loans Commercial
Loans

Customer Departmentation

8.10.1 Advantages of Customer Departmentation: Customer departmentation offers

the following benefits:
i. Competitive advantage:By catering to varied customer needs, the companies
have an edge over competitors and, therefore, better chances of survival and
growth.
ii. Customer orientation: The goal of an organisation is to earn profits. An
organisation where the basis of departmentation is to produce and sell goods
according to customer needs, justifies its existence.
iii. Specialisation: A department created for satisfying customer requirements
becomes specialised in that area resulting in cost efficiency.

8.10.2 Disadvantages of Customer Departmentation: Customer departmentation

has the following limitations:
(i) Co-ordination: Excessive involvement of employees in their respective
departments | makes it difficult for top managers to co-ordinate the functions of different
departments.
(ii) Identification of consumer groups: It is not easy to identify various
consumer groups. A large industrial buyer for one product, for example, may be a small
buyer for another product. The same product may be of industrial use for one buyer
and personal use for another. Identifying buyers as industrial and non-industrial may
not be feasible.
(iii) Change in consumer behavior: Consumer department managers cannot
easily frame policies for their departments because of changing consumer behavior.
Demand for the same product for same set of consumers differs during recessionary
and boom conditions.

113
Principles of Business Management

(iv) Specialised staff: Changes in consumer behavior, their demand for different
goods at different times cannot be easily predicted. The departmental managers,
therefore, must have specialised skills to ascertain consumer needs.

8.11 TERRITORY OR GEOGRAPHIC DEPARTMENTATION

Meaning: In territorial departmentation, organisation creates departments (i) close to

its customers because they are geographically dispersed over different areas, or (ii)
near the sources of deposits.

Each geographic unit has resources to cater to the needs of consumers of that area.
The production, purchase, personnel and marketing activities are looked after by
departmental managers but finance is vested at the headquarters. General Manager
of every department looks after functional activities of his geographical area while
overall functional managers provide supporting services to the managers of different
areas. Thus, people of different regions with different tastes and preferences for the
same product are looked after by geographical departments set up by the companies.
The product or customer differentiationboth can be the basis of geographic or
territorial departmentation.

Organisation Chart Showing Geographic Departmentation: Division of organisation on

the basis of geographic dispersal of activities appears on the organisation chart as follows:

Board of Directors

Managing Director

GM GM GM GM
Production Finance Personnel Marketing

Manager Manager Manager

Product Product Product
A B C

Production Production Production

Purchase Purchase Purchase
Personnel Personnel Personnel
Marketing Marketing Marketing
&D
Geographic Departimentation

8.11.1 Advantages of Geographic Departimentation: It offers the following benefits:

i. Training and development: Employees are trained to sell goods in specific
areas according to customer needs.
114
 Departmentation & Forms
of Authority Relationships

ii. Customer orientation: The emphasis is on selling goods in different regions

according to customer needs. The fact that 'Consumer is the king' in the modern
markets, is given its due importance.
iii. Low cost of production: If firms establish their areas of operation near the sources
of raw material, they will be able to produce at low cost and take advantage of
economies of operation.
iv. Communication: The salesmen belong to local areas of operation. They can
directly communicate with the consumers and frame policies to satisfy their
needs.

8.11.2 Disadvantages of Geographic Departmentation: Territorial departmentalization

has the following limitations:
i. Co-ordination and control: Since departments are widely dispersed, top
managers find it difficult to control and co-ordinate their activities.
ii. Expensive: Since each department has auxiliary departments like personnel,
accounting etc. which offer specialised services to managers, this method of
departmentation is costly. Therefore, before adopting this basis of
departmentation, benefits must be compared with costs. This method is suitable
for large-scale organizations who can afford its cost.
iii. Managerial skills: Managers must be competent to perform functional
activities (production, marketing etc.) related to their departments.

8.11.1 Departmentation by Time: This method of departmentation is used in situations

where work is done round the clock because—
1. The machine cannot be stopped before finishing the work, or
2. The demand is high and the machine has to work overtime, or
3. The nature of work entrusted to the organizations is such, or
4. The services are essential in nature (health and fire services), workers work in
shifts; morning, afternoon and night, so that work can progress continuously.

These points are illustrated below:

1. The machine cannot be stopped in manufacturing steel and workers, therefore,
haveto work in shifts.
2. During boom conditions, the demand increases and, therefore, extra load has to
beborne by machines. This is possible through shift duties.
3. Airlines, where flights arrive and depart, work throughout the day.
4. Essential services like hospitals and fire stations deal with emergencies and, thus,
peoplework in shifts.

This method of departmentation has the advantage of optimum utilisation of machines

which can work continuously but are otherwise lying idle. It is advantageous for workers
who cannot work during day time. They can be gainfully employed during evening or
night shifts.

115
Principles of Business Management

There are problems of co-ordination and supervision of employees who work in shifts.
Employees have to explain to the workers joining the next shift about the stage of
completion at which they are leaving the work which may not always be possible.

It is also a costly form of departmentation as each shift has separate functional departments

8.11.2 Departmentation by Size: This method is followed in army where number of workers
it
the unit is important. The company's performance is judged by the number of people working
with it, and therefore, it adopts departmentation by size.

8.11.3Departmentation by Task Force: When organisation takes up different projects, it

forms task forces, which consist of people from different units having different skills to
develop those projects. These groups are formed temporarily to work till completion of the
project they are similar to project organisations.

8.12 CHOICE OF METHOD OF DEPARTMENTATION

Though departments can be created on different basis, no method can be described as the
best. Depending on the situations that organisations face, market conditions, need for
specialisation, co-ordination and control, cost effectiveness and training facilities available, a
specific basis of departmentation or combination of different basis may be adopted by the
organisation. The factors that must be considered while choosing a basis of
departmentation are:
1. The work and the process involved: Departments should be created on the basis of
workI that the organisation performs and the processes involved in carrying out that
work. If thework is simple, functional structure can be the basis of departmentation.
However, if thework involves a number of processes, process departments is the
suitable form ofdepartmentation.
2. The extent of specialisation: Whatever the basis of departmentation, it should
group organisational activities in a manner that leads to specialisation. Specialisation
leads toeconomy of efforts, time and money. However, over specialisation should be
avoided as it creates water-tight compartments amongst departments and complicates
the process of coordination.
3. The capabilities of workers: Departmentation should not only consider technical
aspectsof the job but also abilities of the workers who perform that job. Human values,
cultures,beliefs and attitudes play important role in creating departments in the
organisation.
4. The technology employed: Technological factors are an important determinant
ofdepartmentation. The basis of departmentation should be ability to produce goods at
minimumcost and contribute to organisational goals within the technological framework of the
company.
116
 Departmentation & Forms
of Authority Relationships

Where different technology is required for different products, the suitable form
ofdepartmentation is product departmentation and where the same product has to go
throughdifferent processes, process departmentation is the suitable form of organisation
structure.
5. The competitor's approach: Two firms selling the same product to same customers
insame geographical areas should have the common basis of departmentation to
remaincompetitive in the market.
6. The extent to which co-ordination and control is centralized or decentralized:
Managershave to coordinate the activities of various departments to ensure their optimum
contributionto organisational goals. Control by measurement of actual performance
with plannedperformance is also necessary. The suitable basis of departmentation is the one
that facilitatescoordination and control.
7. The environment, internal and external to the organisation: Modern organisations
operatein the dynamic environment where economic, social, political and technological
factors arechanging rapidly. The basis of departmentation should ensure that
organizations can adaptto environmental changes.
8. Optimum utilization of resources: Organisations operate with scarce resources.
Somebasis of departmentation (product and geographic) require duplication of facilities.
Commonfacilities are invested for each department. The most suitable basis of
departmentation is theone that optimizes the use of resources.

8.13 MEANING AND TYPES OF AUTHORITY

Authority may be defined as the decision-making right. When a right to take decision in
regard to a particular matter is vested in a particular position, that position is said to
assess the said authority. It is allocated to a position. Individuals come and go, but
authority remains attached to the position. Authority is given by the institution and is,
therefore, legal or legitimate. Authority flows downwards. An authority is a central part
of vertical dimension of organisation and it is vested in the position created therein. It is
regarded as positional right rather than personal right. Once a person vacates position he
ceases to have authority. Generally, authority refers to relationship which exists between
two employees, i.e. superior and subordinate. It may be considered as a power or right of
superior to make decisions and to guide the actions of subordinates. The concept of
authority is basic to organizational theory and practices.

According to Henri Fayol, “Authority is right to give orders and power to exact
obedience”. Thus, he has defined authority as a power to exact other and make action
which is considered appropriate for the achievement of predetermined objectives.”

According to Koontz O’Donnell, “authority is the power to command others, to act or not
to act in a manner deemed by the possessor of the authority to further enterprise or
departmental purpose.”
117
Principles of Business Management

In the context of management, authority includes the following rights

1. Rights to make decisions on the problems, situations and issues which are related
to activities assigned to the employees.
2. Right to use resources for performing assigned activities in satisfactory manner.
3. Right to give orders and instructions to the subordinates regarding work being
performed by them and to seek compliance to give orders.

8.13.1 Forms of Authority: On the basis of nature, authority may be of following types:
1. Line Authority. Line authority refers to those positions and elements of the
organization which have responsibility and authority and are accountable for
accomplishment of primary objectives. “Line authority, the basic authority in an
organization, s the ultimate authority to command, act, decide, approve or disapprove —
directly or indirectly - all the activities of the organization.” It is the authority to direct
the work if others and to require them to conform to decisions, plans, policies, systems,
procedures and goals. Line authority is the heart of the relationship between superiors and
subordinates.

2. Staff Authority. Staff refers to those elements which have responsibility and
authority for providing advice and services to line in attainment of objectives. Fayol
described staff an adjunct reinforcement and a sort of extension of the manager’s
personality. Line managers make the salient decisions by exercising command authority,
whereas staff officials advise and counsel, with no authority to command by within their
own staff chain of command.

3. Functional Authority. Functional authority occupies a midway position between

line and staff authority. It is a means of putting the staff specialists in top positions for the
entire enterprise and it confers upon the holders a limited power to command over the
people of their departments concerning their function. For empowering the persons in
charge of various functional areas to maintain the quality and uniformity of the functions
throughout the enterprise, functional authority is granted to them in addition to the line
authority over their own subordinates. Functional authority remains confined to
functional guidance of different departments.

8.14 RESPONSIBILITY AND ACCOUNTABILITY - A COMPARISON

The term responsibility should not be confused with ‘accountability’. Responsibility

refers to work or task to be performed, while accountability refers to answerability to
perform the work. Responsibility can be assigned or delegated to the subordinates.
Accountability cannot be delegated to the subordinates. Responsibility moves downward.
Responsibility is always assigned to the subordinates. Accountability moves upward. A
person is always accountable to his superior. The extent of accountability depends upon
the extent of delegation of authority and responsibility. A person cannot be held
answerable for the tasks not assigned to him.
According to Theo Haimainn, “Responsibility is an obligation of subordinate to perform
118
 Departmentation & Forms
of Authority Relationships

the duty as required by his superior.”

According to McFarland, “Responsibility is the duties and activities assigned to a

position or to an executive.”

Basis of Difference Responsibility Accountability

1. Meaning Responsibility refers to work or Accountability refers to
task to be performed answer ability to perform
the work.
2. Delegation Responsibility can be delegate Accountability cannot be
delegated.
3. Movement Responsibility moves downward. Accountability moves
upward
4. Extent The extent of responsibility is The extent of
decided by the manager, who accountability depends
delegates the authority. upon the extent of
delegation of authority and
responsibility.

8.14.1 Features of Responsibility

1. The essence of responsibility is an obligation to perform assigned work in a
satisfactory manner.
2. It arises from division and assignment of work. The person becomes responsible
when he accepts the assigned work.
3. It is corollary of authority which implies that the subordinate has to obey orders
and instructions of superior who has given a part of his authority to him.
4. Responsibility cannot be transferred. By assigning a part of work to subordinate,
the superior gets his help in discharging his responsibility. But if subordinate fails
to perform assigned work in satisfactory manner the ultimate responsibility of it
lies on superior.
5. In organisation, the employee who assumes responsibility also becomes
accountable to his superior.

8.14.2 Difference between Responsibility and Accountability

8.15 SUMMARY

Departmentation is one of the important process through which the formal structure of
organisation is brought into an existence. It is only through departmentation other two sub-
processes involved in organizing, i.e. differentiations and integration are conducted. It is a
process of dividing and sub dividing activities of organisation into smaller jobs and tasks and
further integrating, combining and grouping them into convenient, administrative and easily

119
Principles of Business Management

identifiable units. It ultimately involves grouping of activities and employees into different
departments or divisions. Departmentation is also considered as a process of making activity
structure of organisation. Different departments so created are placed in horizontal line. It is
also considered more as integrating process. All these factors help management in choosing
an appropriate basis of departmentation which may be one of these or a mixed type of
departmentation. By far, most of the organisations follow a hybrid basis of
departmentation, for different organizational levels and for different organizational
activities. It is rare to find organisations, where departments are created purely on the basis
of functions, products, processes, customers or geographical locations. It is possible for
organisations to divide their activities on the basis of functional grouping along with
product and customer basis of departmentation. A company selling consumer and
industrial goods to wholesale and retail buyers will follow a combination of product and
customer departmentation.

8.16 TERM-END-QUESTION

1. Define the term departmentation. Explain its need and importance.

2. Define product departmentation and explain its benefits.
3. What is functional departmentation? Explain its advantages and limitations.
4. Define product departmentation and explain its benefits.
5. Write short notes on the following
a. Responsibility and Accountability
b. Authority
c. Product departmentation
d. Functional departmentation

120
 Delegation &
Decentralisation

UNIT – 9 DELEGATION AND DECENTRALISATION

Structure

9.1 Introduction
9.2 Objectives of the Unit
9.3 Meaning of Delegation
9.4 Features of Delegation
9.5 What should be Delegated
9.6 Process of Delegation
9.7 Forms of Delegation
9.8 Importance of Delegation
9.9 Principles of Delegation
9.10 Elements of Delegation
9.11 Barriers of Delegation
9.12 Centralization and Decentralization
9.13 Meaning of Decentralization
9.14 Importance of Decentralization
9.15 Limitation of Decentralization
9.16 Factors affecting Decentralization
9.17 Difference between Delegation and Decentralization
9.18 Summary
9.19 Term-End-Questions

9.1 INTRODUCTION

Delegation helps in coordinating organizational activities at various organizational levels.

It is an important way of increasing efficiency of the organization. It helps managers
concentrate on important organizational matters and pass the routine matters to
subordinates. Delegation takes place when a manager passes on to his subordinates some
of his tasks or functions, together with the necessary authority to perform the tasks or
functions. The manager who delegates also holds his subordinates answerable for due
performance of the assigned tasks. Thus, the process of delegation involves the
assignment of tasks or functions, entrustment of authority and imposition of
accountability by a manager with respect to his subordinate, to whom responsibility has
been given. In this process the learners will learn the basics of delegations, its process,
forms, principles and many more with the concept of decentralization.

9.2 OBJECTIVE OF THE UNIT

The learners after going through this unit will be able to;
➢ Explain the concept of delegation
➢ state the principles and process of delegation

121
Principles of Business Management

➢ List the forms of delegation

➢ Discuss the various forms of delegation
➢ Understand the meaning and characteristics of Decentralization
➢ Enumerate the barriers of Decentralization

9.3 MEANING OF DELEGATION

If all organizational activities, strategic and routine, could be managed by one person, the
need for formal organization structure with different functional departments, staffed with
people of different caliber, carrying out different activities would not arise. Since it is not
possible, because of physical and mental limitations, for any person to perform all
activities with respect to all functional areas, it becomes essential that he gives part of his
workload to subordinates along with authority to carry out the assigned task. Any type of
task cannot be assigned to subordinates. Managers have to choose between tasks that can
be performed by subordinates and those which have to be carried out by them only. Thus,
the entire workload is divided into various units, a part is assigned to subordinates and
authority is given to them to carry out the assigned task. This concept of division of work
and assignment to people down the scalar chain is called delegation. "Delegation is a
process the manager uses in distributing work to the subordinates."

Management is defined as the art of getting things done through others and managers can
get others to do things only if they delegate them the authority and responsibility.
Delegation is one of the important skills a manager should possess to effectively manage
his organisation. Allen puts it very aptly, "How well a manager delegates determines how
well he can manage." Delegation relieves managers of their burden and creates healthy
atmosphere in the organisation. Companies identify the capabilities of their managers by
judging their skills in how effectively they can get the work done through others by the
process of delegation.

Lounsbury Fish observes, "An individual is only one manpower. Single-handed, he can
accomplish only so much in a day. The only way he can achieve more is through
delegation through dividing his load and sharing his responsibilities with others."
Martin and Bartol define it as "The assignment of part of a manager's work to others
along with both the responsibility and the authority necessary to achieve expected
results."

According to Pearce and Robinson, "Delegation is the process by which a manager

assigns tasks and authority to subordinates who accept responsibility for those jobs."

9.4 FEATURES OF DELEGATION: it has the following features:

1. Delegation is a process: Managers delegate tasks to subordinates in a sequential

order of Steps
122
 Delegation &
Decentralisation

2. On-going process: Delegation is a continuous process. Managers continue to delegate

tasks to their subordinates and get them delegated by their superiors to achieve the
organizational goals.
3. It is an art, not science: Delegating tasks to subordinates does not necessarily mean
that subordinates will perform those tasks well. There is no cause and effect relationship
between the task assigned to subordinates and their actual performance. Delegation is,
thus, not a science. It is the art of how well and what the manager delegates to his
subordinates.
4. Delegation of authority and not accountability: Managers can only delegate work
and authority to perform that work to the subordinates. Delegation does not mean that
managers are not accountable to their superiors for the part of task assigned to
subordinates. They remain accountable for the tasks assigned to subordinates and are
answerable to their superiors for its performance.
5. Necessary organizational activity: Managers cannot avoid delegation. They cannot
perform all the tasks themselves. They have to learn the art of delegation that is, how to
delegate and what to delegate. Companies' performance is judged by how good their
managers are in getting the work done through others by the process of delegation.
6. It has different forms: Delegation can take different forms. It can be downward,
upward or lateral

9.5 WHAT SHOULD BE DELEGATED?

Managers exercise great degree of care before initiating the process of delegation. If
routine jobs are retained by them and important matters are delegated, the entire process
of delegation becomes ineffective. The manager, therefore, must determine the authority
and responsibility that must be retained by him and that which should be delegated. The
authority and responsibility which he retains for his own performance is called reserved
responsibility. According to Louis A Allen "a manager cannot effectively delegate
responsibility and authority for initiating and making final decisions for planning,
organizing, coordinating, motivating and controlling the activities and positions that
report to him,"

Preparing various types of plans; single use or multiple uses, strategic plans, policies,
procedures rules etc. cannot be delegated to subordinates. These are the activities of
supreme importance for the organization and managers cannot delegate them to
subordinates. These are the base which provide meaning and substance to the
organization. Though not delegated, managers can seek assistance of other line and staff
managers in framing these plans. While organizing determines the framework of the
organization structure with well defined authority-responsibility relationships amongst
various individuals at various levels, the base for providing structure to an organization,
whether functional or divisional or matrix, is again the sole responsibility of managers
and cannot be delegated to subordinates.
123
Principles of Business Management

The kind of people to be recruited, selected, trained, placed on different jobs, the kind of
leadership style to be adopted, the measures of reward or coercion used as motivational
factors are the important business decisions that cannot be delegated to subordinates.
These are, thus, the important areas of management where delegation will not prove to be
effective. What then are the areas where delegation will be effective?

With reference to overall plans and objectives of the organization, the important
managerial functions of planning, organizing, staffing, directing, and controlling are
looked by managers themselves and routine activities with respect to each functional area
of production, finance, personnel and marketing should be delegated to subordinates, i.e.,
responsibility entrusted to lower level managers should be handling the routine jobs in
the specific functional area. In the finance department, for example, the sources of raising
funds, designing the capital structure, determining the optimum debt-equity ratio,
apportioning funds between fixed and current assets are determined by the top managers.
Once decided, the routine matters of accepting applications, returning excess funds and
issuing share certificates to shareholders can be delegated to lower level managers (if
funds are raised by means of issue of shares). Launching a new product, planning a
market survey, feasibility and project report are done by top managers but actually
conducting the feasibility studies and market surveys is delegated to lower level
managers.

Once responsibilities to be delegated are determined, authority to carry out those

responsibilities must also be delegated. The authority must be commensurate with
responsibilities so that subordinates can effectively discharge their obligations or duties.
The matters which are of routine nature for top managers are of major importance for
subordinates and they need to be delegated authority to carry out those responsibilities.

9.6 PROCESS OF DELEGATION

The process of delegation involves the following steps:

1. Determining the goals: The manager establishes the goal or the objective of the
position/post so that the person concerned knows what is expected of him. If
delegation is to be initiated in the sales department, the objective should be made
clear, say sales promotion or sales retention.
2. Define responsibility: Once requirement of the job is defined, the responsibility of
individuals is determined in terms of tasks assigned to them. This helps in knowing
who their bosses are and who the subordinates to whom they can issue instructions
are.
3. Define authority: The job having been assigned, authority should be given so that
people can efficiently discharge the responsibilities related to that job.
4. Motivation of subordinates: The duty of manager does not end by delegating the
authority and responsibilities to subordinates. He makes sure that subordinates
124
 Delegation &
Decentralisation

willingly contribute to the job assigned so that organizational goals are optimally
achieved. Managers motivate the subordinates to do their work with zeal and
enthusiasm. They use financial and non-financial (participative decision-making,
recognition etc.) incentives to motivate the subordinates. The need for acceptance and
recognition are important motivators that boost employee’s morale to perform the
delegated tasks. As Rensis Likert puts it, "the desire for recognition or ego
satisfaction is central to other incentives in motivating people."
5. Holding accountability: Whatever the nature and extent of delegation, manager
constant observes the activities of subordinates to review their progress and provides
guidance, whenever necessary. He holds them accountable for the work assigned but
remains ultimately accountable or responsible to his superiors for completion of each
task and its coordination with the overall organizational work.
6. Training of subordinates: Despite giving the authority commensurate with
responsibility, subordinates may not be able to effectively carry out the delegated
tasks. Managers, therefore, organize training programmes to enhance their
knowledge on the subject.
7. Establishing control: Specific standards of performance are framed and
communicated to subordinates to enable them to assess their performance against
standards, self-control their activities and coordinate them with overall goals of the
organisation.

9.7 FORMS OF DELEGATION

There are the following three major forms of delegation:

1. Top to bottom delegation: The process of delegation described above where superiors
delegate part of their workload to subordinates is top to bottom delegation.
2. Bottom to top delegation: This form of delegation recognizes the importance of
informal groups in the formal organization structures. The force of attraction of group
members is so strong that if it comes to obeying the superior or group members, they
choose the latter. Managers, in such cases, have to be careful in issuing orders and
directions to subordinates to carry out the delegated tasks. They motivate subordinates as
members of the group and not as individual members. According to Allen, "to the extent
that the manager convinces the members of the group that their needs, his own, and those
of the company coincide, he can motivate them to produce according to the standards he
sets."
3. Lateral delegation: When managers delegate duties to subordinates in the hierarchy,
subordinates further delegate the tasks informally to people at the same level in other
units, For example, if general manager of sales department asks sales manager to compile
the figures of sales and sales personnel for the month of January, the sales manager will
seek the assistance of finance manager and personnel manager. Thus, authority and
125
Principles of Business Management

responsibility delegated to the sales manager is shared by him with managers of other
departments working at the same level. This is a form of lateral delegation. Peer groups
in this case come together and carry out the task as a team.

9.8 IMPORTANCE OF DELEGATION

Delegation is unavoidable. Managers have to be skilled in the art of delegation. It is

because of the following advantages of delegation:
1. Relief to top managers: Delegation relieves top managers of the burden to carry out
every activity on their own. By delegating routine activities to lower levels, top
manager’s concentration important policy matters and increase efficiency of the
organization.
2. Development of managers: The more the managers delegate authority and
responsibility to subordinates, more are the tasks and responsibilities they accept
from their superiors. By delegating routine jobs down the hierarchy, they can take
more challenging projects and expand their skills and knowledge as competent
managers.
3. Development of subordinates: When routine and innovative tasks are delegated to
subordinates, their skill in handling the delegated tasks increases. Training facilities
can also be provided to develop them as potential managers.
4. Better decision-making: Through delegation, decisions relating to routine matters
are taken by those who are closest to the decision-making situation. This increases
the quality of decisions.
5. Faster decisions : Not only are the decisions effective, they are also taken quickly as
subordinates have the authority to do the jobs assigned to them without going to the
superiors every time they face a problem. They have the authority to solve the
problems on their own.
6. Specialization: Division of work into sub-units and delegation of responsibilities
according to skill, knowledge and competence of subordinates enhances
specialization on the job and results in greater and better output. "Delegation
provides a way to break down there responsibilities of a manager and assign them
across several subordinate managers based on their specialized capability.
7. Job satisfaction: Delegation provides job satisfaction to subordinates and motivates
them to perform better when they achieve the delegated standards of performance.
8. Promotes inter-personal relationships: Delegation increases interaction of
managers with their subordinates and promotes healthy relationships amongst them.

9.9 PRINCIPLES OF DELEGATION

The following principles make the process of delegation effective:

126
 Delegation &
Decentralisation

1. Authority, responsibility and accountability: These are the elements of delegation

that make it an effective process,

2. Parity of authority and responsibility: Though authority exactly equal to

responsibility cannot be delegated, it must be commensurate with the responsibility
so that delegates can give instructions to their subordinates for getting the work done.
Authorities without responsibility and responsibility without authority have no
meaning.

3. Scalar chain: Every member should know his position in the scalar chain to know
his superiors who have the power to delegate duties to him and his subordinates to
whom he can delegate the duties. The responsibility can be assigned if every person
knows his position in the hierarchy.

4. Completeness of delegation: No part of the total work (except the one which is
reserved by managers) should be left out from being delegated. If so done, gaps
would arise in respect of the work not so assigned and the work will not be
completed properly.

5. Unity of command: Every individual should have one boss to whom he should
report. If people have more than one boss, the}' develop the tendency of shifting the
blame of their non-achievements to their bosses. For example, if a person cannot
accomplish the task assigned to him by boss A, he may say that he was busy carrying
out instructions of boss B and vice-versa while it may not actually be so. He, thus,
avoids responsibility of carrying out the assigned tasks.

6. Absoluteness of responsibility: Though the task and authority to carry out that task
is delegated to subordinates, the delegator continues to remain responsible for the
acts of his subordinates to his superiors. If the district manager cannot achieve the
sales target of say, 1,000 units of product A in one month, the branch manager
(delegator) remains responsible to the General Manager of sales department.

7. Delegation by results: Managers should first determine the objective of delegation,

that is, what they want their subordinates to do and then delegate the tasks along with
authority to them. If the production manager wants to increase production of
Northern Branch by 1,000units per month he should delegate this task to his branch
manager, Northern Region. The branch manager will carry out the tasks when things
are clear to him.

8. Delegate within defined limits: Managers cannot delegate what they are themselves
not authorized to do. If a manager, for example, does not have authority to raise
funds from financial market without sanction of top managers, he cannot delegate
this task to his subordinates.

9.10 ELEMENTS OF DELEGATION

Delegation has three important elements:

127
Principles of Business Management

1. Responsibility: Responsibility is the activity or task entrusted by the manager to

subordinates. Though delegated, the ultimate responsibility (accountability) for
completion of the task rests with the manager.

2. Authority: To carry out the responsibility assigned, there is need for authority to hire
and fire people, spend resources, command people, issue directions and make
decisions. The authority must, therefore, be delegated to subordinates to enable them
to carry out the responsibility assigned.

3. Accountability: When managers delegate a part of their work-load to subordinates,

they remain accountable for accomplishment of that task. The responsibility and
authority thus can be delegated but accountability cannot.

I. Check Your Progress

1. What is delegation?
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

2. What do you mean by importance of delegation?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

9.11 BARRIERS TO DELEGATION

Though delegation enhances efficiency of the organization by dividing work amongst

organizational members (according to their capabilities), it is not free from obstacles.
Various barriers to delegation can be grouped in three main headings. These are:

16.10.1. Barriers related to superiors or delegator

16.10.2. Barriers related to subordinates or delegate
16.10.3. Barriers related to organization

9.11.1 Barriers Related to Superiors

Despite knowing how important it is to delegate, superiors sometimes do not delegate
work to subordinates. This is because of the following reasons:

1. Wanting to do things personally: Some managers do not delegate because they

feel they can do the work better than others. Since ultimate responsibility is that of
128
 Delegation &
Decentralisation

the delegator, they prefer doing the work themselves rather than getting it done
through others.

2. Insecurity: If managers feel that subordinates perform better than them, they avoid
delegation. The exposure of their inabilities to take decisions creates a feeling of
insecurity and, therefore, they fear to delegate.

3. Retention of power: Some managers like to take added responsibility, make their
importance felt by everyone in the organization and want the subordinates to come
to them to get their problems solved. Their desire to retain power and dominate is a
hindrance to the effective.

4. Lack of confidence in subordinates: The reward for risk is return. Unless

managers assume the risk of subordinates not performing well, they cannot
contribute to the development of skilled managers in future. A manager who does
not take risk in his subordinates and lacks confidence in them will not be able to
delegate effectively.

5. Unwillingness to set standards of control: Having delegated the duties, managers

remain accountable for overall performance of the work. They supervise the
activities of subordinates to ensure that actual performance is according to planned
performance. A manager who fails to establish standards of control will not be able
to effectively delegate duties to subordinates.

9.11.2 Barriers Related to Subordinates

Subordinates may also present the following barriers to effective delegation:

1. Lack of confidence: Some subordinates do not want to take responsibility for the
fear of not being able to perform well. They lack confidence and do not want to take
any risk. They prefer to depend on their bosses to make decisions.

2. Fear of making mistakes: Some subordinates fear that if they make mistakes in
carrying out the delegated responsibilities, their superiors will criticize and insult
them in front of others. This fear dissuades them from taking added responsibility.

3. Lack of incentives: Motivation, through financial and non-financial incentives,

makes delegation effective. Subordinates are reluctant to accept delegation in the
absence of incentives.

4. Absence of access to various resources: If subordinates do not have access to

resources (financial and non-financial) to carry out their work, they will not accept
delegation of responsibilities. This happens when there is delegation of
responsibility without commensurate authority.

5. Convenience: Sometimes subordinates prefer the work is done by superiors rather

than assuming responsibility for the same, for the sake of convenience. They simply
want their bosses to make the decisions.

129
Principles of Business Management

9.11.3 Barriers Related to Organisation

The barriers related to organization structure are as follows:

1. Size of the organization: A small-sized organization will not have too many jobs to
delegate to subordinates.

2. No precedent of delegation: Merely because organizations have not earlier been

following the practice of delegation sometimes makes them continue with the
practice of not delegating the jobs.

3. Degree of centralization or decentralization: Efficient delegation is affected by

the degree to which organization distributes the decision-making power to various
organizational units. A highly centralized organization is obstructive to the process of
effective delegation.

9.11.4 Ways to Overcome Barriers to Delegation

Barriers to delegation can be overcome through the following measures:

1. Accept the need for delegation: When superiors are reluctant to delegate because
they want to do everything themselves rather than allowing subordinates to do, they
should realize the need for delegation. In fact, more the delegation, more successful
will be an organization.

2. Develop confidence in subordinates: Rather than feeling that subordinates are not
capable of accepting responsibilities so that delegator does not take the risk of
delegation, the delegation I should understand that a man learns through mistakes
and if he commits mistakes, he shall try to find out solutions to the problem also. If
subordinates make mistakes, superiors should guide them rather than not delegating
at all.

3. Communication: Where delegation becomes ineffective because subordinates do

not have the information for making decisions, an effective system of
communication should be developed so that information flows freely from superiors
to subordinates.

4. Motivation: Subordinates should be motivated to accept the responsibilities by

providing financial and non-financial rewards like recognition, status etc.

5. Develop an effective system of control: Since ultimate responsibility for the work
assigned is that of the delegator, he must ensure that subordinates perform well by
setting reasonable standards of performance against which actual performance shall
be measured. Delegator should keep check on the activities of delegates rather than
not delegate at all.

6. Choose the right person for the right job: Lack of confidence in subordinates
should be overcome by dividing the workload into sub-units and assigning each sub-
unit to persons most suitable for performing them.

130
 Delegation &
Decentralisation

7. Freedom to subordinates: When managers accept the need for delegation to

subordinates, they must also give freedom to make decisions with respect to the
delegated tasks. Rather than not delegating at all or delegating less responsibility,
for the fear of subordinates making mistakes, managers must give the subordinates
authority to find solutions to their problems and learn not to make mistakes in
future.

8. Clarity of tasks: The responsibilities or the tasks delegated to subordinates must be

clearly defined in terms of results expected out of those tasks. Knowing what is
exactly expected them will enable the subordinates perform the delegated tasks
better.

9. Matching the job with the abilities of the subordinates: Round pegs in the round
holes shall make delegation effective as the right job will be given to the right
person.

10. Open communication: Though delegates are given the authority to solve problems
related to the assigned tasks, yet, they should be allowed to freely discuss the
problems with their delegators.

11. Monitoring the critical deviations: Subordinates may make mistakes, however
efficient they are at work. The superiors should overlook minor deviations with
respect to the delegated tasks and pinpoint only major deviations in the tasks
assigned. This promotes better response and a sense of responsibility amongst the
employees.

12. Develop trust and confidence in subordinates: Delegation should be a continuous

process; Managers should appreciate the work of subordinates when they perform
well. They should delegate them more tasks and express trust and confidence in
them. This will boost their morale to perform better in future.

9.12 CENTRALIZATION AND DECENTRALIZATION

Centralization and decentralization help to coordinate organizational activities. While

delegation refers to assigning responsibility and authority to people from one level in the
organizational hierarchy to the other, centralization and decentralization refer to the
extent to which authority and responsibility are passed to people at lower levels. If
authority to make decisions is retained at top levels, the organization is said to be
centralized; if the decision-making authority is distributed widely throughout the
organization and lower level managers have the authority to use financial and non-
financial resources, the organization is said to be decentralized.

To begin with, the authority is retained at the top. As the organization size increases, the
scope of authority gets narrow at top levels and gets distributed to lower-level managers.
To what extent it flows down the level depends on the degree to which the organization is
decentralized.
131
Principles of Business Management

Centralization is "the extent to which power and authority are retained at the top
organizational Levels" and decentralization is "the extent to which power and authority
are delegated to lower levels."

No organization can be completely centralized or decentralized. In a completely

centralized organization, all decisions will be taken by top managers and there will be no
subordinate managers. In a completely decentralized organization, authority to make
decisions is delegated to lower-level managers and, therefore there will be no top
managers. Both the structures cannot exist. Overall planning and organizing are initiated
by top managers and some authority is decentralized to operating units to carry out the
work within the overall policy framework. As per the syllabus unit 9 the focus is on
decentralization rather centralization. Thus, the basic discussion of decentralization is as;

9.13 MEANING OF DECENTRALIZATION

Decentralization is passing of authority to make decisions to the lowest possible level in

the organizational hierarchy. Decentralization is delegation of authority to the maximum
possible extent. According to Allen puts it, "Decentralization refers to the systematic
effort to delegate to the lowest levels all authority except that which can only be
exercised at central points." Decentralization is essential but how much should the
managers decentralize depends on various factors like size of the company (decentralized
decision-making authority increases with increase in size of organizations), cost control
(when companies want to maintain strict cost control, decision-making authority is
centralized), desire of managers (if managers desire to take all decisions on their own, the
organization tends to be centralized), functional areas (decisions related to finance and
personnel are generally centralized and those related to production and marketing are
decentralized), ability of subordinates (if subordinates are inspiring and hard-working,
decision-making authority can be decentralized).

1.14 IMPORTANCE OF DECENTRALIZATION

Decentralization is important because of the following reasons:

1. Reduction in the burden of top managers: Managers who look after both strategic
and routine matters often become so involved in handling routine problems that they
do not have time to look after strategic issues of the organization. The time they
should spend on strategic planning is often not spent. Through decentralization,
routine decisions can be delegated down the scalar chain and important decision can
be retained at the top.
2. Development of subordinates: One learns through mistakes. If top executives do
not delegate authority to subordinates for the fear that subordinates will make
mistakes, they will not be able to develop potential managers. The subordinates
should be allowed to make mistakes and also rectify them so that they learn not to

132
 Delegation &
Decentralisation

repeat them in future. This is possible only in a decentralized organization.

3. Faster decisions: In a decentralized organization, people do not have to approach
the higher authorities every time they face a problem. As they are closer to the
problem area, they can make decisions related to that problem. The decisions are,
thus, faster and better.
4. Promotes diversification: If top managers retain authority to make every decision,
then will be able to look after limited lines of products only. Decentralization
enables them to search new markets. They can diversify into new markets and add
new products to the existing line of products.
5. Promotes motivation: Rather than offering financial rewards to motivate
subordinates to improve their performance, allowing them to make decisions in their
respective areas of specialization serves as a better motivational force. Thus,
decentralization motivates managers to promote the efficiency of workers resulting
in higher production and sales.
6. Flexibility: A decentralized organization is more flexible as managers at different
levels can change their policies according to changes in environment.
7. Better communication: A decentralized organisation has less levels in the scalar
chain Communication amongst people at different levels is faster and efficient.
Chances of information distortions (due to increased levels) are reduced.
8. Control: Managers at different levels lay standards of performance for their
respective units and exercise control on those activities. This facilitates the process
of control.

9.15 LIMITATIONS OF DECENTRALIZATION

Decentralization suffers from the following limitations:

1. Coordination: Managers find it difficult to coordinate the organizational activities
when there is high degree of decentralization.
2. Control: Difficulty in coordination also makes it difficult for top managers to control
the organizational activities.
3. Costly: Though useful, it is expensive since each department manages activities in its
own way. There is duplication of efforts and physical facilities in the organisation.
4. Adaptability: In the fast changing environment, unless strategic decisions are
centralized different units will react to changes differently and working of the
organisation will become difficult.
5. Lack of uniformity: A highly decentralized organisation lacks the advantage of
uniform policies followed by all the organizational units. Each unit formulates its
own policies. The policies are more uniformly followed in a centralized organisation

133
Principles of Business Management

(as the control is centralizing at a single point).

6. Ability of lower level managers: In a decentralized organisation, decisions are taken
by managers of different units at their respective levels. If lower level managers are
not competent and skilled to make decisions, efficiency of a decentralized
organisation will get reduced.

9.16 FACTORS AFFECTING DECENTRALIZATION

The factors affecting decentralization can be classified into two following categories:
• External factors
• Internal factors

9.16.1 External Factors affecting Decentralization: these are some external factor
affecting decentralization;
1. Environment: If firms are operating in an environment where customers and
suppliers are dispersed, competition is not intense, markets provide wide area for
company to penetrate into (by adding new products to its product line), and there is
need for the organisation to decentralize.
2. Regulation of the Government: If the Government lays strict policies and
procedures for the business firms, managers cannot take the risk of delegating
decision-making powers to people at lower levels. They have the fear of being
penalized for not observing the rules. The tendency to decentralize in such cases is
low.
3. Market features: If firms operate in a market where homogeneous products are
produced by all the firms, the power to make decisions can be decentralized to
lower level managers.
4. Bargaining with trade unions: If trade unions agree to bargain with lower level
managers for their rights, decision-making power can be decentralized but if trade
unions bargain only with top management, the organisation tends to be more
centralized.

9.16.2 Internal Factors affecting Decentralization: the following are some internal
factors affecting decentralization;
1. Size of the company: As size of the company increases, it becomes difficult for
managers to take decisions single handedly. Decision-making will be time
consuming. Therefore, with increase in size of the firms, the decision-making power
is delegated to functional managers and lower level managers. This increases
efficiency of the organisation since top executives can concentrate on strategic
matters and routine matters can be managed at the lower levels.
2. Cost control: Decisions which require huge amount of funds, for example, the
134
 Delegation &
Decentralisation

decision to buy a plant or machine, are normally taken by top executives and
decisions where financial outlay is not too large can be taken at lower levels. Thus,
where firms want to maintain strict cost control over activities of the organisation, the
degree of decentralization is less. To maintain financial control, organizations can
frame a policy that spending money up to Rs. 10,000 pe rmonth on petty items is left
at the discretion of lower level managers but expenditure beyond this amount has to
be sanctioned by top managers.
3. Philosophy of management: Management philosophy refers to management's desire
to centralize or decentralize. Some managers prefer to retain power and authority to
make decisions and, therefore, believe in centralization of authority. Others, who
want the decisions to be taken at lower levels, decentralize the decision-making
authority.
4. History of the enterprise: Enterprises which have always worked as centralized
organizations continue to do so in future also. Past precedents are followed in future
and are not easily changed unless a strong desire or outside influence is created
within or outside the organisation.
5. Functional areas: Some degree of centralization or decentralization is essential in
every functional area. However, some areas like finance and personnel tend to be
more centralized while others such as production and sales tend to be more
decentralized.
6. Ability of subordinates: If lower level managers are inspiring and innovative,
decision- making power can be given to them. There is greater tendency for
decentralization in such enterprises.
7. Growth rate of enterprise: Top managers of a growing enterprise in terms of
financial and physical parameters spend more time on important and strategic
organizational matters. Thus, there is greater tendency for decentralization.
8. Communication system: An effective communication system helps to coordinate
diverse organizational activities. An organisation whose communication system is
based on modern management information systems can decentralize its operations.
9. Control system: An effective system of control where regular appraisal of actual
performance against planned performance is done facilitates decentralization.

9.17 DIFFERENCE BETWEEN DELEGATION AND DECENTRALIZATION:

S. No. Delegation Decentralization

1. Delegation is complete when It is complete when authority is delegated
there is transfer of authority from to the fullest possible extent. It is the end
one person to another. result of delegation.
2. The delegator continues to The top management exercises control only
exercise control over the strategic issues. Control over routine
135
Principles of Business Management

activities of subordinates. matters is exercised by lower level

managers.
3. Delegation is possible without Decentralization is not possible without
decentralization delegation. In fact, delegation is a
prerequisite to decentralization
4. Lower level managers of each Managers of each unit frame their own
unit carry out the plans framed plans.
by their superiors.
5. Power to control the delegation Power to control is delegated to lower level
tasks vests with the delegator. managers.

9.18 SUMMARY

The process by which a manager shares some of his work and authority with his
subordinates is known as delegation of authority. Delegation of authority is based on the
elementary principle of division of work. No manager can perform the entire work assigned
to him. He gets part of it carried out by his subordinates. Getting things done by
subordinates is an important aspect of the job of a manager. Delegation takes place when a
manager passes on to his subordinates some of his tasks or functions, together with the
necessary authority to perform the tasks or functions. Thus, we can say that “Delegation of
authority is based on the elementary principle of division of work.'' These are assignment of
tasks and duties, grant of authority, and creation of responsibility and accountability.
Centralization of authority means concentration or retention of authority for decision
making at higher or top levels of management. It refers to a situation where all decisions on
specific matters are taken by one or a few managers at relatively higher levels.

Decentralization of authority refers to systematic delegation of authority at all levels of

management and in all departments of the organization for taking decisions and actions
appropriate at the respective levels. In a decentralized organisation, authority is retained
at the top management level for taking major decisions and framing policies concerning
the entire organisation.

9.19 TERM-END-QUESTIONS

1. What do you mean delegation? Discuss the process of delegation of authority in

details?
2. What are the elements of delegations? Explain the principles of delegation in
details?
3. What do you mean by decentralization? Discuss in details the process and barriers
of decentralization of powers?
4. What should be delegated? Discuss in details the forms of delegations with
examples.
5. Differentiate between decentralization and delegation? What are the advantages of
decentralizations? Discuss.
136
 BLOCK - 3

Staffing and Directing

The present block refers to the conceptual framework of Staffing, Directing,

Motivating, Leadership and Communication. The learners will learn the meaning,
characteristics, sources and types of staffing. They will have the opportunities to
learn about the nature and scope of directing, motivation and leadership. These all
are the functional areas of management. The meaning, characteristics and types of
communication is highlighted. The emphasis will be given on the importance of
motivation, leadership and communication too. Further, the learner will learn that
how communication part all the gaps between authority and subordinates. The
present block includes the following units;

Unit 10: Staffing

Unit 11: Directing

Unit 12: Motivating

Unit 13: Leadership

Unit 14: Communication

137
 UNIT-10 STAFFING

STRUCTURE

10.1 Introduction
10.2 Objectives
10.3 Meaning of Staffing
10.4 Nature of Staffing
10.5 Need of Staffing
10.6 Importance of Staffing
10.7 Staffing and HRM
10.8 Process of Staffing
10.9 Recruitment
10.10 Selection process
10.11 Training of Staff
10.12 Compensation of Staff
10.13 Employees Development
1014 Method of Wage Payments
10.15 Summary
10.16 Term-End-Question

10.1 INTRODUCTION

Staffing is a process of inviting, selecting right people and placing them in the right place
as per the nature of the works. If right persons are not placed on various positions, the
organisation will remain only a structure and not an enterprise. It involves determining
the need for people at various organizational posts, appointing and retaining them at those
posts by training and developing their abilities and skills. Due to increasing size of
organizations, and fast changing technology, staffing has become an important function
of management. Modern management gives proper importance to manpower planning.
They adopt scientific methods of recruitment, selection, training, performance appraisal
and proper remuneration of employees. In this unit, learners will learn staffing functions-
recruitment, selection, training, development, compensation, incentives and method of
wage payment.

10.2 OBJECTIVES OF THE UNIT

The learners after going through this unit will be able to;

➢ Explain the concept of staffing

➢ discuss the need of staffing
➢ List the importance of staffing
➢ State the process of staffing
➢ Enumerate the process of training and development

138
 Staffing

10.3 MEANING OF STAFFING

Staffing is a managerial function of hiring and developing the required employees to fill
in various positions in the organisation. This function involves determination of the size
and categories of required employees as per need and natures of the job. It is concerned
with employing the right people and developing their skills through training. The staffing
function focuses on improving the competence and performance of the employees in the
organisation. According to Koontz and O’ Donnel, “The managerial function of staffing
involves manning the organizational structure through the proper and effective selection,
appraisal and development of personnel to fill the roles designed into the structure."

10.4 NATURE OF STAFFING

(i) A continuous function: The managerial function of staffing is of a continuous

nature. Managers have to give attention to the staffing needs of the organisation
not only at its inception, but also in future. Hiring of personnel, their training
and development have tobe arranged at regular intervals.

(ii) Related to human resources: Staffing function is related to the procurement,

development and maintenance of the human resources. Managers have to apply
human behavior approach, while dealing with employees' matters.

(iii) A pervasive function: It is a pervasive function of management as all the

managers throughout the organisation perform it.

(iv) Wide Scone: Staffing has a very wide scope. It includes all the activities related
to human resources, like manpower planning, recruitment, selection, placer tent,
training, appraisal, promotion, transfer, compensation of employees, etc.

(v) Cordial relationship: It aims at establishing harmonious relationship within the

organisation. It aims to develop relations on the basis of mutual trust and
confidence.

10.5 NEED OF STAFFING

Staffing is an important function and it is needed in all the organizations, whether small
or large. It is needed due to the following reasons:

(1) Filling the roles: Organizational roles are performed by the suitable employees,
which are provided by the personnel department. If right person is not fitted at
the right place, the organizational structure will remain only structure. It is
staffing, which makes the structure a sound organisation to achieve the
organizational goals.

139
Principles of Business Management

(2) Effective use of physical resources: without human resources, physical

resources are idle and unproductive. Scientific staffing and training is necessary
to ensure effective use of technology and other physical resources. Managers
having specialization in procurement of employees can make available
competent, able and efficient staff.

(3) Optimum utilization of human resources: Personnel department of the

organisation takes necessary Step to use the surplus staff and recruit and select
the employees, whenever needed. Transfer and promotion policies are designed
in such way that these are helpful in better utilization of resources.

(4) Motivation and morale: Staffing as a separate function is needed to motivate

the employees for better performance. Counseling, training, development
programmes, incentive plans, staff welfare and other personnel activities can be
effectively undertaken. All these functions motivate employees and develop
higher employee morale.

(5) Availability of knowledge: Personnel management has developed as an

important function through constant research in the area of manpower planning,
recruitment. Selection, training and development. There is a need to use such
knowledge to improve the performance of every organisation.

(6) Specialization: Earlier, staffing functions were performed by all the managers.

(7) All managers may not be well equipped in terms of qualification, experience,
attitude and aptitude to perform staffing functions. Now some managers have
gained specialization in the field of personnel management. They should be
assigned the job of staffing.

10.6 IMPORTANCE OF STAFFING

(1) Key to other managerial functions: Staffing is an important primary function of

management. All other functions of management depend on it because it provides
the right personnel to the job. The staffing function affects not only planning but
also the functions of direction and control of the efforts of people. In fact the
effectiveness of other managerial functions depends on the effectiveness of the
staffing function. An organisation, which employs the right persons for the right
jobs, will be more dynamic and efficient in the globalized business environment.

(2) Building a sound human organisation: The staffing function aids in building a
sound human organisation in which the members' job performance and personal
satisfaction are high. All the aspects of staffing are equally important for building a
healthy and sound human organisation.

140
 Staffing

(3) Development of human resources as assets: The staffing function gains its
rightful place when we recognize that people are the most valuable assets and
resources of the organisation. All other physical assets are of no use and remain
inactive unless there are competent people willing and able to operate them. The
quality of the human assets of an organisation is its major source of advantage over
other competing organizations.

(4) Execution of plans: Plans have no meaning if they are not implemented
effectively. Staffing provides competent and efficient employees who are
responsible for execution and implementation of all plans, policies and
programmes of the enterprise.

(5) Increase in productivity: Staffing department aims to increase production,

productivity and profitability of the organisation. For this purpose, training and
development programmes are arranged for the employees. Incentive plans are also
made to increase production and productivity.

10.7 STAFFING AND HUMAN RESOURCE MANAGEMENT

Human resource management is the branch of management, concerned with the

obtaining, maintaining and proper use of human factor of an organisation. According to
Edwin B. Philippo, “Personnel management may be defined as the planning, organizing,
directing, and controlling of the procurement, development, compensation, integration
and maintenance and separation of human resources to the end that individual,
organizational and societal objectives are accomplished " Dale Yoder has defined human
resource management in his book titled 'Personnel Management and Industrial Relations
as “the process of planning and directing the application, development and utilization of
human resources in management."

10.7.1 Features of human resource management

(1) Related to human factors: Personnel management is related to the human resources
o an organisation. It motivates and encourages employees to offer their best services
and contribution to the enterprise.

(2) Cordial relationship: It aims at establishing harmonious relationship within the

organisation. It aims to develop relations on the basis of mutual trust arid confidence.

(3) A continuous process: Personnel management is a continuous process as it requires

a constant alertness and awareness of human relations and their importance in
everyday operations.

(4) A pervasive function: It is a pervasive function of management as it is performed in

all enterprises and at all levels in the organisation.
141
Principles of Business Management

(5) Wide Scope: The personnel management has a very wide scope. It includes all he
activities related to human resources, like manpower planning, recruitment, selection,
placement, training, appraisal, promotion, and transfer, compensate n of employees, etc.

(6) Multiple objectives: The personnel management has multiple objectives. It has to
achieve individual objectives as well as organizational objectives; it has to achieve
social objectives also, like maintaining industrial peace.

10.7.2 Staffing as a part of Human Resource Management

Staffing is a managerial function of hiring and developing the required employees to in

various positions in the organisation. It is an integral part of human resource management
as discussed below:

(1) Related to people: Human resource management is all about people at work, h as
individuals and groups. Staffing is concerned with procurement, development I
maintenance of human resources. It is concerned with all types of employees -
managers as well as workers, technical as well as non-technical employees.

(2) A pervasive function: it is a basic and pervasive function as it is performed by all

enterprises at all levels of the organisation. Staffing activities - recruitment, selection,
training, performance appraisal, etc. - are performed by every manager relating to his
subordinates.
(3) Human behavior approach: while performing staffing functions, manager has to
apply human behavior approach. Staffing activities give more emphasis on
developing human resources in the organisation to make the organisation strong and
efficient. It helps in maintaining cordial human relations between the managers and
employees as well as among the employees.

(4) A continuous process: Staffing is a continuous function. It requires a continuous

alertness and awareness for human resources required and available in the
organisation. Training, development programmes, compensation, performance
appraisal etc. is important staffing functions to be performed continuously.

I. Check Your Progress

1. What do you mean by nature of staffing?

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

2. What is the importance of staffing?

142
 Staffing

...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................

10.8 PROCESS OF STAFFING

The staffing process consist a few interrelated activities such as planning of human
resource requirements, recruitment, selection, placement, training and development,
remuneration, performance appraisal, promotion and transfers. Staffing starts with the
estimation of manpower requirements and proceeds towards searching for talented
personnel to fill the various positions in an organisation. Staffing, therefore, should
follow a logical step by step process. Following are the important steps involved in the
process of staffing:

10.8.1 Manpower Planning:

Manpower planning may be regarded as a process of determining quantitative and

qualitative needs in relation to manpower in an organisation. It may be expressed as a
process by which the management ensures the right number and right kind of people, at
right job, at the right time and doing right things for which they are suited for. Manpower
planning is a continuous process. The manpower requirement is subject to change
according to changes in the business environment, like production schedules, demand
forecasts, etc. Following are the important factors which must be kept in mind while
estimating manpower requirement:

(i) Demand for organization's goods and services: if other factors are held constant,
increase in demand for organization's goods or services, will lead to an increased
demand for employees and vice-versa.

(ii) Replacement needs: arises on account of retirement, death, resignation and

termination of employees. It is estimated on the basis of past experience.

(iii) Productivity: increase in productivity affects the manpower requirement in several

ways. If the change in productivity is due to change in technology, on the one hand
there will be demand for the employees having knowledge of new technology,
while on the other hand some existing employees may be idle.

(iv) Growth and expansion: the growth and expansion plans of the organisation should
be carefully reviewed to assess their probable effects on the number of employees
required in each group.

143
Principles of Business Management

(v) Absenteeism and labour turnover: Rate of absenteeism and labour turnover also
affects manpower requirement. Absenteeism is a situation when a person fails to
work when he is scheduled to work. Labour turnover is the ratio between the
number of employees leaving and joining the organisation to the total number of
employees working in the organisation.

10.8.2 Job Analysis

Job analysis is a methodical compilation and study of the work data in order to define and
characterize each occupation in such a manner as to distinguish it from all others. It is a
process of collecting information about the job and its analysis according to the pre-
decided priorities. Then, the job analyst prepares job description and job specification.
The report is submitted to the top management for their consideration. The objectives of
job analysis include determination of tasks and responsibilities involved in a job,
relations of one job to other jobs, etc.

10.8.2.1 Uses of Job Analysis:

(i) Human resources planning: it serves as the foundation for organizational and
human resource planning. It helps in determining the number and kinds of jobs and
qualifications needed to fill these jobs.

(ii) Recruitment and selection: it is particularly helpful in personnel recruitment and

selection as people can be selected according to the requirements of the job.

(iii) Training and development: in developing training and development programmes

the description of duties is of primary importance.

(iv) Basis of job evaluation: in job evaluation where the worth of a job in terms of
money is determined job analysis serves as the basis.

(v) Performance appraisal: the data provided by job analysis can be used to establish
standards of performance for the job, which is the basis of performance evaluation.

10.8.3 Recruitment and Selection

The second step after manpower planning is recruitment and selection. These are two
separate functions, which usually go together. Recruitment aims at stimulating and
attracting job applicants for positions in the organization. Sources of recruitment are
classified into two categories - internal and external. It enables managers to select
suitable and competent employees for the organization. Selection consists of making
choice among applicants. To choose those most suited to the job requirements keeping in
view the job analysis information. Selection process should be purposeful. It must begin
by precisely identifying the task to be performed and also drawing a line between
144
 Staffing

successful and unsuccessful performance. Thereafter, the process of selection tries to find
out how far a job applicant fulfills those characteristics or traits needed to successfully
perform the job.

10.8.4 Placement

Selection is followed by the placement. Placement refers to placing the appointed person
on the job for which he has been selected. Once the selected candidate has accepted the
job offer, he is placed on his new job. Proper placement of an employee reduces
absenteeism, employee turnover, wastage and stagnation.

10.8.5 Induction or Orientation

Induction is concerned with the process of introduction or orienting a new employee to

the organization. The new employee is introduced to his new colleagues, his superiors
and his subordinates. He is given a tour of the company and the department. He is
informed about the details as attendance system, hours of work, overtime, lunch period,
lunching facilities, rest rooms, recreation facilities, etc. They are usually informed about
the company, the job and work environment. They are encouraged to approach their
superiors with questions and problems.

10.8.6 Training

Training is the organized procedure by which employees learn knowledge and skill to
accomplish a particular job efficiently. The objective of training is to provide the
technical as well as the conceptual knowledge about the assigned job to the newly
inducted employees as well as to bring change in the employee’s behaviours as per the
norms of the organisation. Training is useful for new employees as well as the existing
employees. On the job training methods are more useful for the new recruits. For
technical work, apprenticeship training for a specified period is a common practice.
Period of training may vary organisation to organisation depending upon the nature of
job.

10.8.7 Performance Appraisal

Performance appraisal is a systematic evaluation of the individual with respect to his

performance on the job and his potential for development. Performance appraisal rates
the person and not the job as it is concerned with evaluating the characteristics, ability
and aptitude of the individuals. It is also called merit-rating. According to Dale Yoder,
“Performance appraisal refers to all formal procedures used in working organizations to
evaluate personalities and contributions and potentials of group members."In fact, it
measures the employee’s worth to the organisation to which he belongs. Performance
appraisal includes:

145
Principles of Business Management

(i) To analyse the strength and weaknesses of current employees for placing the right
man on the right job.
(ii) To identify employees who have the potential for future growth and advancement.

10.8.8 Compensation

Compensation is what employees receive in consideration of their services rendered to

the organisation. Compensation decision is very important as it affects employee’s
performance directly. Designing a suitable compensation method is a difficult task. The
wage and salary structure should be fair. The incentive should be provided to the
employees on regular basis. If appropriate compensation will not be provided to the
employees in terms of monetary and non-monetary benefits the productivity will be low
which cause wastage and stagnation in the working process of the organisation.

10.8.9 Promotions and Transfers

Employees having qualifications, experience and skill should be placed at higher

positions. This is called promotion. If an employee is not fit at his present job, he should
be shifted to a job according to his skill and interest. This is called transfer. Promotions
and transfers are necessary to place the right person at the right job. The process of
selection and transfer motivate employees to perform up to the levels and prevent them to
become hostile.

10.8.10 Separation

Separation of an employee means that he loses his job in the organization. This may
happen by retirement at a particular age, death, resignation by the employee or
termination. Termination of an employee may affect industrial relations adversely. So it
is a critical decision. When employees are in surplus, they may be offered voluntary'
retirement scheme (VRS), under which they may opt for retirement

10.9 RECRUITMENT

10.9.1 Meaning of Recruitment

Recruitment is the process of identifying the sources for prospective candidates to

stimulate them to apply for the jobs in the organisation. Recruitment aims to develop
and maintain adequate manpower resources upon which an organisation can depend.
It involves seeking and attracting a pool of people from which qualified candidates
for job vacancies can be chosen. Accordingly, the purpose of recruitment is to locate
sources of manner to meet job requirements and job specifications. In simplest terms
recruitment involves placing the right person on the right job.

146
 Staffing

10.9.2 Sources of Recruitment: the sources of recruitment are of following two

types;

(A) Internal Sources of Recruitment

When the existing employees fill vacancies in the organisation, it is called recruitment
using internal source. They leave their previous job and join new job in the same
organisation. Following are the internal sources of recruitment:

(1) Transfers: Transfer involves the shifting of an employee from one job to another or
from one department to another. At the time of transfer it must be ensured that the
employee to be transferred to the new job or department is capable of performing it.
In fact, transfer does not involve any drastic change in the responsibilities and status
of the employee. The transfers may be helpful in avoiding lay off, replacement, job
enrichment, shift change and removing individual grievance.

(2) Promotions: Promotion involves shifting an employee to a higher position carrying

higher responsibilities. It changes the status of the employee, is fixed in higher pay
scale. Promotions may be based on employee seniority or it. Some organizations
have developed merit-cum- seniority promotion scheme.

(3) Lay-off: It is a temporary separation of the employee from the employer on

initiative of the employer due to lack of work. Laid-off employees are recalled by
employer, whenever there is need. Thus, vacant positions may be filled up by the -
off employees, if available.

(B) External Sources of Recruitment

There are a number of external sources of recruitment. In this case employees are
recruited from outside the organisation. The external sources of recruitment are
advertisement, recommendation of employees by trade union, employment agencies,
campus visits,and casual or at factory gate, etc. Following are the important external
sources of recruitment:

(1) Advertisements: Advertisement in newspapers or trade and professional journals is

generally used when qualified and experienced personnel are not available from
other sources. Most of the senior positions in industry as well as commerce are filled
by this method. The advantage of advertising is that more information about the
organisation, job descriptions and job specifications can be given in advertisement
to allow self- screening by the prospective candidates.

(2) Educational institutions/Campus visits: Jobs in industry have become

increasingly technical and complex to the point where college degrees are widely
required. Consequently, many big organizations maintain a close liaison with the
universities, vocational institutes, engineering institutes and management institutes
147
Principles of Business Management

for recruitment to various jobs. Recruitment from educational institutions is the

well- established practice of thousands of business and other organizations. For
example, organizations which require large number of clerks or which seek
applicants for a continuing apprenticeship programme usually recruit from
vocational institutes. Most educational institutions operate placement services where
prospective employers can review credentials and interview the students, who are
passing out from these institutes.

(3) Employees’ recommendations: Applicants introduced by friends and relatives may

prove to be a good source of recruitment and indeed, many employers prefer to take
such persons because something about their background is known. When a present
employee or a business friend recommends a person, a type of preliminary screening
takes place. Some organizations have agreements with the unions of employees to
give preference to relatives of existing or retired employees if their qualifications
and experience suit the requirements of vacant jobs.

(4) Employment agencies: Organizations may use employment agencies for

recruitment of employees. There are three types of employment agencies. State
agencies or public employment exchanges are most suitable for semi-skilled, blue-
collar workers and clerks. Private employment agencies provide a more complete
line of services. Management consultants specialized in middle level and top level
executive placement.

(5) Recommendation of trade unions: Firms look to labour unions in their recruitment
efforts. Labour unions operate placement services for the benefit of their members
and employees. These organizations publish rosters of job vacancies and distribute
these to members. This helps in saving recruitment costs.

(6) Casual or Factory gate: Unsolicited applicants both at the factory gate and through
walk-in interviews constitute an important source of personnel. The qualification of
unsolicited applicants will depend on economic considerations, the organization's
image and the perceived type of jobs that might be available. These can be
developed through provision of office facilities.

(7) Jobbers and contractors: Jobbers and contractors are the persons, who are ready to
supply required number of workers on payment of commission. They keep in touch
with the potential workers and jobseekers in the villages and local areas. They are
also in constant touch of potential employers. Sometime they agree to finish a
particular job against for agreed amount and arrange laborers themselves Payment
made by them to laborers is usually less than the contract price. The difference is the
gain to the contractor.

(8) Personnel consultants. There are many firms of personnel and management
consultant, which specializes in the recruitment of different type of employees. Such
148
 Staffing

firm’s charges commission for recruitment. They maintain a complete record of

persons seeking job or the persons interested in change of their present job.

10.9.3 Difference between internal sources and external sources of recruitment

Base of Internal Sources External Sources

Difference
1. Economy Internal sources are For using external sources
economical in comparison amount is to be spent on
of external sources. advertisement or hiring the
services of private employment
exchanges or management
consultants, which is not
2. Time Involved Less time is consumed in required in
External case of
source of recruitment
internal is
recruitment from internal sources.
comparatively more time
sources. consuming.
3.Quality of Internal source provides In case of external source of
recruitment only limited choice, i.e., recruitment, the organisation has
candidates available within extensive choice as so many
the organisation only. candidates from other
organizations send their
applications.

10.10 SELECTION PROCESS

10.10.1 Meaning of selection:

Selection process begins when recruitment ends. Selection is a process of ascertaining

whether or not candidate's posses the requisite qualifications, training and experience to
perform the job which has fallen vacant in the organisation. It is a process of selecting the
most suitable candidates, out of the pool of applicants. Selection process may be simple
or complex depending upon the nature of job. Selection process for workers may be
comparatively simple: while the same for middle level and top level managers may be
complex.

Selection process divides the candidates into two categories, namely, selected and
rejected candidates. This process could be called ‘rejection’ since more candidates can be
turned away than are employed. Due to this reason, selection is frequently described as a
negative process. The employees selected from outside may suffer from the danger of

149
Principles of Business Management

adjustment to the new work environment. It is uncertain even after joining, whether they
will continue or not.

10.10.2 Selection Process

Staffing is an important managerial function. The staffing function of the manager means
to selection, recruitment and training of personnel. The personnel department performs
this function. However, the actual process of selection depends upon the policy of the
management. Following are the commonly used steps in the process of election:

1. Scrutiny of Applications: After receiving the applications, the same are screened to
eliminate the candidates who do not possess the requisite qualifications, age and
experience. A list of eligible candidates is prepared for further processing. In
practice, the candidates, who are not eligible, are not informed. Some firms may
follow the policy of informing such candidates that their applications will not be
considered due the reason mentioned.

2. The Preliminary Screening or Short Listing: when a large number of applications

are received, it may not be economical to assess all the applicants thoroughly.
Usually, the firms adopt a method of short-listing the candidates. Candidates may be
short-listed through preliminary interview or screening test.

a) Preliminary interview: The preliminary or screening interview is for a short

duration. It may last for about five to fifteen minutes. The interviewer generally
asks questions relating to age, place of residence, qualifications, experience,
marital status, etc to eliminate the less suitable candidates.

b) Screening test: If the number of applicants is quite large then preliminary

interview may not be practicable as it requires a lot of time. In this case short
listing is done through screening test. Usually, it is an objective type test based
on average general knowledge and intelligence.

c) Specialized Application Form: the candidates selected in the preliminary

interview/screening test are given printed standardized application forms. Each
firm should develop its own form, which may vary according to the requirements
of the job. The application should cover only those questions, which are relevant
for the job success. The candidates usually fill these forms in their own
handwriting. The application may also accompany a photograph of the applicant.

Uses of information recorded in the specialized application. The information recorded in

the application blank can be used for the following:

150
 Staffing

(i) Basis of short listing and interview: It provides the basic information, which
helps first for short listing and then provides the interviewer with necessary data
and points for a good formal job interview.
(ii) Progress of the applicant: it indicates whether the applicant has consistently
progressed to better jobs.
(iii) Pattern of education and occupational experience: Whether his education and
occupational experience have been logically patterned.
(iv) Reference Checking: It provides information for reference checking. After
selection, the reference given by the candidate in the application form is verified.
(v) Part of personnel records: If the applicant is selected, the application of the
candidate becomes the part of permanent personnel records for the company.

10.10.3 Testing

The short listed candidates are usually required to appear for selection/employment test.
This forms the basis for selecting candidates for the final interview. Different types of
tests are used in business and industry for the selection of personnel. These tests riot only
save the time, but also help in improving the accuracy and effectiveness of the selection
of employees. Important types of selection tests are discussed below.

(i) Achievement or Proficiency tests. These tests are designed to measure the
knowledge and skill acquired by the candidates relating to the job. They are used to
test the level of knowledge and proficiency acquired by the applicants. These tests
may be of two types: verbal and motor. In a verbal test, candidates are given
questions involving problem situations for which the candidates have to suggest the
solution. Motor tests involve physical manipulation of things. These are designed
to measure the capabilities and actual performance of the candidates on the specific
job. Achievement and proficiency is tested through such tests.

(ii) Psychological tests: Such tests are designed to measure the human behavior. These
tests are based on the assumption that human behavior at work can be predicted by
giving various tests to the individuals. Such tests include:

(a) Intelligence tests. These tests are used to judge the mental capacity of the
applicants. They measure the individual learning ability, i.e. ability to catch or
understand instructions and also ability to make decision and judgment. There are
many verbal as well as non-verbal intelligence tests constructed by the
psychologists for different jobs.
(b) Aptitude tests. Aptitude means the potential, which an individual has for learning
the skills required to do a job efficiently. Aptitude tests measure an applicant’s
capacity and his potential for development. Aptitude tests are the most promising
indices for predicting workers’ success.

151
Principles of Business Management

(c) Motivation or interest tests. These tests are designed to measure the motivation
or interest of the applicants. On the basis of such tests, it is suggested what type of
job may satisfy the candidate.
(d) Situational tests. These tests combine aspects of both achievements and
personality testing. In such tests candidates are shown a real life situation and then
asked to take decision. These tests are designed to observe how job applicants
react to stressful but realistic situations.

It should be noted that the performance in tests may not be reliable indicator of
knowledge and skill of a candidate, due to various reasons, candidates afraid of
examination may not do well Testing may be misused by dishonest persons.

10.10.4 Selection Interview

An interview is a phase of testing on the basis of face-to-face interaction between the

interviewer (s) and the applicant with a view to finding the suitability of a person(s),
keeping in view the job requirements. The factual data of the applicant given in the
application form regarding suitability, attitude, information and understanding may be
checked. Capability and personality of the applicant is checked.

It tends to assess the mental ability and work competence of the candidates against the
background of the organization and job requirements. The validity of the test scores is
checked in so far as it is reflected in the verbal and conceptual performance of the
candidates. During the interview, the members of the selection committee appraise each
candidate according to merit. At the end of the interview of each candidate, the chairman
consults the members and after a brief discussion finalizes the grading of the candidate.
After all the candidates have been interviewed, a panel is prepared.

10.10.4 Reference Checking

The next step is to gather more information about the candidates from indirect personal
sources such as previous employer, Principle of the College or Institution last attended by
the candidate. This investigation is based on the reference supplied by the candidate and
is carried with the objective of vouching the personal reputation, financial condition etc.
The letter for reference checking is usually marked as 'Private and confidential. The
answers received from referees -e kept secret.

10.10.5 Medical or Physical Examination

The selection process is not complete without the medical or physical examination. The
physical examination should disclose the physical characteristics of the candidate, from
the points, of view of requirements of the job. It is helpful in maintaining a standard of
health and physical fitness of employees. It will also ensure that the candidate selected

152
 Staffing

does not suffer from nay serious or communicable disease, which may create problem in
future. It reduces the rate of absenteeism, labour turnover and rate of accident.

10.10.6 Final Selection

A candidate, who successfully crosses all the process and passes the medical
examination, is recommended for appointment. The candidate selected is formally
appointed by issuing him an appointment letter. He is asked to join his job by a fixed
date. The broad terms and conditions of employment (designation, pay scale, etc.) are
mentioned in the letter. Some firms may have a separate agreement of employment.

10.11 TRAINING OF STAFF

10.11.1 Meaning of Training

Training is a service function, providing management with professional support in

meeting the organizational objectives. Training is the organized procedure by which
employees learn knowledge and skill to accomplish a particular job efficiently. The
objective of training is to achieve a change in the behavior of the employees to bring
about improvement in the performance of work. It includes the learning of such
techniques as are required for the better performance of assigned tasks.

10.11.2 Need of Training

In an organization the need for training employees arises due to many reasons. The
important reasons are as follows:

(i) New and inexperienced employees. New and inexperienced employees must be
given training not only in the specific tasks for which they are employed, but also
in the general principles of the overall trade.

(ii) An effective tool of controlling. Modem management uses training as an effective

tool of controlling. Training has been a successful method of reducing the cost of
supervision, accidents, and wastage and improving the quality of the product.

(iii) Frequently changing technology. The frequently changing technology results in

new job designs which in turn make training a continuous process to keep the
employees updated in new methods of doing the work.

(iv) To reduce labour turnover. Where labour turnover is unusually high on account of
accidents or physical incapacity, diseases, deaths and promotion, change of
occupation, training becomes a necessity.

153
Principles of Business Management

10.11.3 Importance of training

I. Benefits of Training to Organisation

Training is a necessary activity in all organizations. It plays a large part in determining

the efficiency of the organisation. Some of the major benefits of training are explained
below.

1. Economic operations: Trained personnel will make economic and efficient use of
resources — men, money, material, machines and methods. This will lead to the
reduction in the cost of production per unit. There will be a great saving as training
reduces wastage and spoilage. Thus, training expenditure is treated as an
investment in human resources.

2. Increase in productivity: It helps to improve employee’s knowledge and skills,

which in turn increases the quality and quantity of production. Higher productivity
means higher profitability' for the organization.

3. Reduced supervision: Training gives employees greater confidence. Trained

employees need less supervision. They require greater freedom to handle their jobs
without close supervision. Properly trained employees are more self-reliant because
they are more confident about what to do and how to do it.

4. Standardization of procedures: Training helps in standardization of procedures.

With the help of training, the best available method of performing the work can be
standardized and taught to all the employees.

5. High motivation and morale: Training reduces the rate of labour turnover and
absenteeism and increases job satisfaction. This improves staff morale and self-
esteem. With the help of training employees are able to direct the staff towards
management philosophy, mission, attitudes, work ethics, team work and greater
cooperation and loyalty.

6. Development of prospective managers: Training equips the employees with

knowledge and skills needed for higher jobs. It can be used to identify promising
men with exceptional talent, creativity and initiative. These employees can then be
further trained for higher positions. It is better to promote people from within the
organization. Thus, training prepares and develops future managers.

II. Benefits of Training to Employees

Following are the benefits of training to employees trained:

154
 Staffing

1. New skill: Trained employees acquire new knowledge, attitude and skills, which
enhances their market value. Skills are the valuable personal asset of the workers.

2. Better prospects: The acquisition of new knowledge increases their future

prospects within and outside the organization for higher jobs and better
remuneration.

3. Increased safety: Trained workers are able to handle the machines safely. They
also know the use of various safety devices installed in the factory. Trained
workers are comparatively less prone to accidents.

4. Promotion: Training enables the workers to acquire know ledge and skill for
higher level jobs. Trained workers are given preference in promotion. Thus,
training helps the employees in their career growth.

5. Higher earnings: Efficiency of trained workers is more than that of others They
get higher remuneration and incentives.

10.11.4 Types of Training

Different types of training are provided to the employees depending upon the
requirement. Following are the important types of training:

1. Induction training: Induction training programmes are arranged for the new
employees. The purpose is to introduce them with the organization. It is a very short
term informative training given immediately after recruitment

2. Job training: The object of job training is to increase the knowledge of workers
about the jobs with which they are concerned, so that their efficiency and skill of
performance are improved. In job training, workers are enabled to learn correct
methods of handling machines and equipment, avoiding accidents, removing
bottlenecks and minimizing wastes, etc.

3. Training for promotion: Many concerns follow a policy of filling some of the
vacancies at higher levels by promoting existing employees. When the existing
employees are promoted to superior positions in the organization, they are required
to shoulder new responsibilities. For this, training has to be given to them so that
they may not experience any difficulty to shoulder the responsibilities of the new
position to which they have been promoted.

4. Refresher training: Refresher training is arranged for existing employees in order

to provide them an opportunity to revive and also to improve their knowledge. With
the passage of time, employees may forget some of the methods which were taught
to them or they might have become outdated because of technological development
and improved techniques of management and production.
155
Principles of Business Management

10.11.5 Methods of training

There are a variety of methods of training workers and managers. These may be
classified under the following two categories: on the job training methods and off the job
training methods. On the job training methods are used to train workers and off the job
training methods are used to provide training to managers. These are listed below in the
tables:

Methods of Training

On the job training methods Off the job training methods

(1) Coaching (1) Vestibule Training.

(2) Job rotation (2) Conference
(3) Apprenticeship Programme (3) Seminar
(4) Internship (4) Lecture-cum-Discussions
(5) Case Study
(6) Role Play

10.12 EMPLOYEES DEVELOPMENT

10.12.1 Meaning of Employees Development

A major activity of personnel department is that of training and development of

organization members at all levels. Training is essential for upgrading human knowledge
and skills, both for managers and non-managers. Employees’ development means with of
the employees in all respects. An organization works for the development its executives
in order to enable them to be more effective in performing their jobs, is, the word
‘development’ is used in the context of managerial development.

10.12.2 Distinction between Training and Development

The terms ‘training’ and ‘development’ are often confused with each other. Training is
the art of learning basic skills and know ledge necessary for a particular job or a group of
jobs. On the other hand, development means growth of an individual in all respect. An
organization works for the development of its executives enable them to more effective in
performing their jobs. So the word ‘development’ is used in the context of managerial
development.

156
 Staffing

10.12.3 Distinction between Training and Development

1.Levels of persons/trainees The word ‘Training’ is

mostly used in relation The term ‘development’ is
to first level managers applied to the growth of
or non-managerial managerial personnel, i.e.,
personnel, i.e., the the second and third level
operative employees. managers.
2. Purpose/ Objective Training is used to add Development involves
to the skills and abilities improving the capacity
of the workers. and capability of the
managerial personnel to
take up more difficult and
risky ventures with
greater success besides
increasing their skill and
competency in their
present jobs.
3. J. Depth of knowledge Training means Development means the
learning skills and growth of an employee in
knowledge for doing a all respects. It shapes their
particular job. attitude.
4. Scope of learning The scope of training is Scope of learning is wider
limited to imparting in development than in
specific skills to training. The term
operative workers and development is associated
employees. with the overall growth of
the executives.
5. Initiative in learning. Workers generally have Managers have initiative
no initiative in learning. in learning. They take
interest in development
programmes.

10.13 COMPENSATION

10.13.1 Meaning of Compensation

Compensation is what employees receive in consideration of their services rendered to

the organization. Both monetary and non-monetary forms of compensation are prevalent
in most of the organizations. Monetary compensation is in the form of wages or salaries.
The word ‘wages’ is used to denote payments made to workers engaged in the
production, while the word ‘salary’ is used to denote payments to clerical, supervisory
and managerial employees. But monetary compensation is the basic element, which
attracts the employees to an organization. Compensation decision is very important as it
157
Principles of Business Management

affects employees’ performance directly. In an organization, having a good compensation

plan, employees are happier in their work, co-operation and loyalty are higher, output is
up and quality is better.

10.13.2 Component of Compensation: the following are the major components;

(1) Basic Pay (BP). It includes wages or salaries payable to an employee under the
contract with his employer. It may also be referred as minimum wages, fair wages or
living wages. In India, basic pay is determined by bargain between the employer and
employees or their union. The provisions of various Acts are also applicable.

(2) Dearness Allowance (DA). Dearness allowance is paid to employees in order to

enable them to face the increasing cost of living due to increase in price-level. The
dearness allowance is paid to neutralize the effect of inflation. When prices go up. In
our country, dearness allowance is linked to price index, time factor and point
factor.

(3) Bonus. Third important component of compensation is bonus. In simple words,

bonus is an extra payment to the workers beyond the normal wages. It is defined
differently by the different persons. Payment of bonus has been a matter of dispute
between the employees and employers. At present, payment of bonus is governed in
India by the payment of Bonus Act, 1965.

(1) Productive linked incentive bonus. It refers to extra payment for the
performance higher than the standard performance. Incentive bonus is designed
to stimulate human efforts over and above the normal efforts. Different
management experts have designed different incentive wage plans. Different
piece rate plan is one of the incentive plans. The main objective of incentive
bonus is to link wages and productivity.

(2) Non-monetary compensation or Fringe benefits. Now-a-days non-monetary

compensation is also popular together with monetary compensation. The term
fringe benefits refer to the extra benefits provided to employees in addition to
normal compensation paid in the form of wages or salary. These are
supplementary forms of compensation. These are not directly linked to
performance. These are usually allowed as a condition of employment. These
may be statutory or voluntary. These generally allowed to all employees. These
are helpful in raising living conditions of employees.

10.14 METHODS OF WAGE PAYMENT

Compensation may be defined as wages, salaries, allowances or any free or concessional

facility allowed to an employee or worker for his contribution towards the achievement
of organizational goals. Thus, “compensation or remuneration consists of payments in
158
 Staffing

cash and kind made by an employer to the workers for performing various jobs in the
organization.” There are two major systems of wage and salary payments:

10.14.1 Time Rate System of Wage Payment

Under this system, a worker undertakes to perform the duties required during a specified
period in return for an agreed sum of money. The period may vary according to the
nature of the work, the status of the employment and the customers of the industry. It is
the oldest and most widespread method used for living wages. Most employees are paid
on the basis of the time they put in on the job. For example, blue- collar workers are
usually paid hourly or daily wages. Some employees, managerial professional and
usually secretarial and clerical persons are compensated on the basis of a month or year
rather than hourly or daily. It is secure as well as simple for both employees as well as
employer.

10.14.2 Piece Rate Method of Wage Payment

Piece-rate is the traditional system of wage payment. It is also the oldest and most
commonly used system of wage payment. Earnings are tied to what the worker produces
by paying him a piece-rate for each unit produced. There are basically two types of price
rates:

(a) Simple piece rate. Straight piece-rate in which an individual's wage is calculated by
multiplying the number of units produced by the rate for each unit; and
(b) Differential piece rate. Differential piece-rate in which one rate is paid for all
acceptable pieces produced up to some standard or set amount, and then higher rate
for all pieces produced, if the output exceeds the standard.

10.15 SUMMARY

Staffing deals with appointing people and placing them at the appropriate jobs. It is
filling and keeping filled positions in the organisation structure. Staffing is related to
performing a set of activities which aim at inviting, selecting, placing and training
individuals at various jobs as per the natures and requirements of the job to achieve the
organizational goals. It is a very crucial task of management because the overall success
and failure of the organisation depends on the process of staffing. The staff can be
recruited from a number of process and through internal as well as external sources. The
training of the selected employees is again very technical as well as crucial task of
management. It is required to provide the basic as well as the mechanical aspects of the
organisation as per the requirements and natures of the work. Further, compensation is
very significant work of staffing in which the monetary as well as the non-monetary
benefits are given in response to the work of the employees. While staffing the managers
have to ensure for the timely development and promotion of the employee which is
compulsory to prevent an employee to become hostile or unproductive one.
159
Principles of Business Management

10.16 TERM-END-QUESTIONS

1. Explain the term staffing. Describe in detail the process of staffing.

2. Discuss in detail the nature and importance of staffing in details.
3. What is the process of recruitment? Which one internal or external sources of
recruitments is more suitable for an organisation? Please comment.
4. What do you mean by training? Explain in detail the various types of training?
5. What is compensation in staffing? Discuss in detail the various types of
compensation provided to an employee.

160
UNIT-11 DIRECTING

STRUCTURE

11.1 Introduction
11.2 Objectives of the Unit
11.3 Meaning of Directing
11.4 Definitions of Directing
11.5 Natures of Directing
11.6 Importance of Directing
11.7 Principles of Directing
11.8 Techniques of Directing
11.9 Elements of Directing
11.9.1 Supervision
11.9.1.1 Meaning of Supervision
11.9.1.2 Types of Supervision
11.9.1.3 Methods of Supervision
11.9.1.4 Importance of Supervision
11.9.1.5 Meaning and functions of Supervisors
11.9.1.6 Role of Supervisors
11.9.1.7 Quality of a Supervisor
11.9.2 Motivation
11.9.3 Leadership
11.9.4 Communication
11.10 Summary
11.11 Term-End-Question

11.1 INTRODUCTION

Directing involves communicates and providing leadership to the subordinates and

motivating them to contribute to the best of their capability for the achievement of
organizational objectives. It is concerned with influencing the behaviour of human
resources for the accomplishment of organisation objectives. Directing concerns the total
manner in which a manager influences the actions of his subordinates. It is the final
action of managers getting other to act after all preparations have been completed.

It starts with issuing orders and instructions to the subordinates and ends with getting the
work done. To initiate actual action and implement the plans, direction is required. It is a
complex managerial function, which includes all those activities which are required to
carry out plans. It is performance oriented. The direction consists of various elements.
These are supervising, motivating, leading and communicating. No objectives can be
achieved without actual action. In this unit the learners will learn meaning and
importance of directing as a function of management and various elements of direction.

161
Principles of Business Management

11.2 OBJECTIVES OF UNIT

The learners after going through this unit will be able to;

➢ Explain the concept of directing

➢ Enlist the need of directing
➢ discuss the Importance of directing
➢ List the elements of directing
➢ State the functions of supervisors

11.3 MEANING OF DIRECTING

Directing includes, communicating effectively with subordinates, supervising, leading

and motivating the employees in the organisation to achieve the predetermined
objectives. It involves issuing instructions, overseeing people at work, providing
leadership to the subordinates, making provision for necessary facilities and creating a
work environment whereby employees may perform to the best of their abilities.
Managers try to bring about balance between individual interests of employees and
organizational interests through directing. It is a process of providing vision and mission
to the employees of the organisation in a particular direction for the attainments of the
establish objectives. Directing is not only a process of getting works done from the
employees but to protect the interest of the employees by taking into account the
grievances and need on priority basis.

11.4 DEFINITIONS OF DIRECTING

1. According to Earnest Dale, "Directing is telling people what to do and seeing that
they do it to the best of their ability."
2. According to Koontz and O’Donnel, "Direction is a complex function that
includes all those activities which are designed to encourage a subordinate to
work effectively and efficiently."
3. According to Pearce and Robinson, “Directing is a managerial function that
involves the responsibility of managers for communicating to others what their
roles are in achieving the company plan.”
4. According to Terry and Franklin, “It is getting all the members of the group to
want and to strive to achieve objectives of the enterprise and of the members
because the members want to achieve these objectives.”

11.5 NATURE OF DIRECTING

Directing as a function of management is concerned with instructing, guiding, and

motivating people in the organisation to achieve its objectives. The natures of direction of
directing are as follows:

162
 Directing

1. Concerned with human factor: to convert the plans into performance, it

influences the behavior of the subordinates. It is the interactive activity of the
management.

2. A pervasive function: It is a pervasive function of management. It is performed

at all levels of management. Time spent on direction at lower level is more than
the time spent at higher level.

3. A continuous process: Direction is a continuous process. It continues

throughout the life of the organisation. A manager needs to give order to his
subordinate, motivate them, lead them and guide them on continuous basis.

4. A result-oriented function: Direction converts plans into performance. It aims

to achieve the organizational goals by initiating action and motivation.

5. Directing is situational: managers influence the behaviour of employees

according to situation. The directions change from situation to situation. Factors
like environment, nature of workers, group behaviours, attitude towards work etc
affect directing.

6. Understanding the group behaviour: no person can work alone. While

working in the organisation, they become part of the informal group (formed on
the basis of common interests of individual). The behaviour of a person is
different as an individual and as member of the group. It is therefore, essential
that managers understand the importance and nature of group behaviour in order
to direct effectively.

7. Participative in nature: directions issued by managers initiate action on the part

of employees. To ensure greater participation of workers in carrying out the
organizational activities, they should take part in the meetings to discuss various
direction policies.

11.6 IMPORTANCE OF DIRECTING: THE FOLLOWING ARE THE

IMPORTANCE OF DIRECTING;

1. Initiate action: directing is an initiative process taken by top managers that

motivates people to convert the resources into productive outputs. It gives
substance to managerial functions of planning, organizing, staffing and
controlling. The purpose of direction is to activate employees to work towards
the realization of predetermined goals. Plans are converted into results by
directing.

2. Integrates and coordinates employees’ efforts: The directing functions

integrate and coordinate the activities of the subordinates by supervision
163
Principles of Business Management

guidance and counseling. Mutual understanding and team spirit is created among
the employees through directing. Managers’ harmonies the individual interests of
the employees with organizational interests.

3. Improves efficiency: Directing improves efficiency through motivation and

leadership. Motivated employees work willingly and perform well to the best of
their abilities. Directing motivates employees to contribute their maximum
efforts towards the achievement of organizational goals. The managers use full
potential of the employees through effective directive.

4. Balance in the organisation: Managerial direction involves interpersonal

communication, effective leadership and motivation, which helps to maintain a
balance between the individual goals and organizational goals. Sometimes, there
may be a conflict between individual and organizational goals. Managers resolve
these conflicts, as and when they arise. Through directing, managers tell the
employees that their personal goals can be achieved by satisfying organizational
goals. Employees are inspired to give greater importance to organizational
interests than their personal interests.

5. Facilitates change: Business organizations have to operate in the changing

environment. As per business environmental the changes are require to be
introduced in the organisation also. Direction through better communication and
Leadership facilitates organizational adjustment to cope with the changing
conditions. For example, change in technology may necessitate changes in the
manufacturing process, a computer may have to be installed and manual work be
reduced to improve the efficiency of operations. Such changes are often resisted
by employees on account of fear that the changes will adversely affect their
employment. Such fears may be removed if the employees are informed about
the nature of changes and the benefits that are likely to follow.

6. Development of managers: managers who are personally motivated to work can

also direct others to work. Managers develop their skills and competence to
direct others to follow. If managers and employees cooperate with each other and
work in harmony, it promotes skills of the employees and develops managers to
assume responsibilities of higher levels in the organisation.

7. Increase in productivity: personally satisfied employees contribute towards

output and efficiency of the organisation.

8. Facilitates control: coordination of employees’ efforts brings actual

performance in conformity with planned performance. The controlling function
is, thus, facilitated through effective directing.

164
 Directing

9. Facilitates growth: an organisation where managers direct the actions of

employees in a coordinated and balanced manner can adapted to environmental
changes. This facilitates organizational success and growth.

11.7 PRINCIPLES OF DIRECTING

The importance of directing can be viewed by the fact that every action is initiated
through direction. Since, human beings in the organisation handle the physical resources
that are men, money, material, machinery, etc to accomplish certain function by which
organizational objectives are to be achieved. This necessitates the importance of the
direction function as an important factor for achieving organizational efficiency and
effectiveness. In this context the following principles are adopted by the managers while
directing;

1. Appropriate selection of employees: direction is related to the function of

staffing. While selecting employees, managers ensure that they adjust to the
organisation structure and willingly carry out the directions issued by their
superiors. Changes of demotions and separation should be reduced to as low as
possible.

2. Participation: since direction influences the behaviour of others, managers follow

the principle of participation (while preparing the directives) of those who
actually carry out the directions.

3. Communication: to make direction effective, managers ensures two way flow of

communication between them and the employees. Employees should be allowed
to express their feeling to director.

4. Counseling and guidance: when employees face problems in carrying out their
tasks, managers provided them the necessary counselling and guidance. This
makes direction effective as employees can approach their superiors for
counselling whenever required.

5. Unity of command: the basic principles that makes direction effective is one boss
for one subordinates i.e. all directions, orders and instructions should come from
one boss. If one subordinate receives instructions from more than one superior,
he may not be able to carry out the instructions of any of them.

6. Unity of direction: one subordinate should have one boss and one plan or related
act of activities should have one head. All activities related to marketing must be
headed by the manager. This avoids duplication of actions and instructions and
results in optimum use of scare resources.

165
Principles of Business Management

7. Synthesis of conflicting objectives: every group of people, whether owners,

managers or workers has its personal interest as supreme while carrying out the
organizational activities. This can lead to conflicting interests which may hamper
the organizational growth. Effective directions, motivation, guidance and
counselling make people understand that their goals are subordinate to
organizational goals. This enables different groups of people move towards the
same direction. The conflicting objectives are, thus, synthesized into a single
plan, one objective, one direction and one goal, that is, to maximize the
organizational goals.

8. Direct supervision: direct supervision of employees helps then know deviation in

their work talent to the best. Employees can generally contribute more than their
present performance and direction helps in enhancing their contribution.

9. Use of informal organisation: though directions are issued to people in a format

organizational set up, managers should make use of informal organisation also to
speed up the process of direction.

10. Direction provides stability and balance in the organisation: effective leadership,
communication and motivation provide stability and maintain balance in
individual and organizational interest. The organisation with the help of direction
expands and grows in the right direction in order to achieve a stable existence

11. Follow up: managers should receive constant feedback on their directions. They
must know whether or not employees are working according to their directions
and solve their problems or revise the directions if need arises.

11.8 TECHNIQUES OF DIRECTING

There are following three main techniques of direction:

1. Consultative Direction Technique: under this technique of direction, the executive

consults with his subordinate concerning the feasibility, the workability, and the
extent and the content of a problem before the superior makes a decision and issues a
directive. It does not weaken the managers formal authority because right to decide
still remains with him. Here, participation can occur in every level of organisation.
To make this technique a success, it is essential that the subordinate must be in
favour of it. If the subordinate is the kind of a person who believes that the boss
knows best and that making decisions and giving directives is none of his concern
then there is a little likelihood that the opportunity to participate induces better
motivation and better morale. One of the main disadvantages of this technique is that
the directive emerging from this consultation does not appear to the subordinate as an
order, but as a solution which came directly from him or in which he participated.

166
 Directing

This assures the subordinates best cooperation and enthusiasm in carrying it out.
Some other disadvantages of this technique are as follows;

(a) There is a danger that the executive, in his desire to consult with his subordinates,
might give them the impression of being not able to come to a decision.

(b) At times the subordinates consider it their right and prerogative to be consulted
before a directive is given to them by their superior.

2. Free Rein Direction Technique: this technique of direction encourages and enables
the subordinate to contribute his own initiative, independent thought, drive
perspicacity and ingenuity to the solution of the problem. This does not mean no-rein
technique. He assigns the tasks not in specific way but in general terms. In this
technique the initiative remains with the subordinate. The subordinate will have to
select the solution and carry it out. This technique of direction will probably show the
best and quickest results if the subordinate is brilliant young man, highly educated,
who has a sincere desire to become a top level managers. Who has a sincere desire to
become a top level manager?

3. Autocratic Direction techniques: it is opposite of free rein technique is the

autocratic method where the executive substitutes commands for the more informal
method where the executive substitute commands for the more informal methods
and hands down detailed and precise orders in connection with close supervision of
subordinates.

When autocratic technique is adopted, the manager gives direct, clear and precise
order to his subordinates with detailed instructions as to how and what is to be done.
The most democratic manager will find himself forced in issuing autocratic
commands.

I. Check Your Progress

1. What is the nature of Directing?

...............................................................................................................................................
...............................................................................................................................................
...............................................................................................................................................
................................................................................................................................................
2. What are the techniques of Directing?
...............................................................................................................................................
...............................................................................................................................................
...............................................................................................................................................
................................................................................................................................................

167
Principles of Business Management

11.9 ELEMENTS OF DIRECTING

Directing as a function of management is concerned with instructing, guiding, and

inspiring people in the organization to achieve its objectives. The process of direction
includes four elements: supervision, motivation, leadership and communication. A brief
outline of the elements of directing is as follow;

11.9.1 SUPERVISION

11.9.1.1 Meaning of Supervision: Supervision means supervise the subordinates at

work. It is an important function of every manager. It implies observing the subordinates
at the work to see that they are doing the job according to plan and policies of the
organization and following the standard norms. Supervision is a process to carry out
managerial functions of planning, organizing etc at various levels of management.
Managers at the top supervise the activities of middle level managers who supervise the
activities of lower level managers who finally supervise the working behaviour of the
employees or workers at grass root level of the organisation. He also helps them in
solving their work problems.

According to U. C. Davis, "Supervision is the function of assuring that the work is being
done in accordance with the plans and instructions."

According to Viteles, "Supervision refers to direct and immediate guidance and control of
subordinates in the performance of their tasks."

11.9.1.2 Types of Supervision:

It is divided into two following parts;

a. Close Supervision: reduces the workers’ effectiveness. Most of the workers want
enough supervision to be sure that they are doing their work correctly. Close
supervision implies that the workers are incompetent and might lack in morale. Job
requiring high quality and low time limit need close supervision. New workers need
close supervision than old workers. This helps to develop good working habits.
b. General Supervision: general supervision gives the employees a chance to develop
their talents; they learn to make decisions by being in a position to make them. Since
the work is a result of their own efforts, they take pride in their work, improve
productivity and show less absenteeism. It is likely that an employee takes a better
since he is closest to the problems. The supervisor also gets more time to spend on
his other functions.

11.9.1.3 Method of Supervision: the employees’ activities can be supervised by the

following method of supervision;

168
 Directing

a. Personal Contact: Supervisors personally check the working of employees,

analyze problems, correct them and explain better methods of work to them.

b. Correspondence: Supervisors contact employees through correspondence. They

send them instructions in writing and receive written replies from them.

c. Reports: Workers prepare periodic reports of their performance and send them to
the head office. In case of sales reports, they contain information about number of
calls made by them, number of customers made, new products sold etc. the sales
supervisors go through the report, evaluate the salesman’s performance and offer
sales advice to enhance their sale efforts.

d. Telecommunication: modern means of communication like telephone, electronic

mail, voice mail, video conferencing etc help supervisors contact the workers,
supervise their efforts and provide the necessary support and help.

11.9.1.4 Importance of Supervision

1) Ensures issuing instructions. While performing supervision function, orders and

instructions are issued to the workers for completion of task. He tells them what to
do and how to do.
2) Optimum utilization of resources. Supervision helps in optimal utilization of
resources. Due to effective supervision, wastage of materials is minimized; tools and
other resources are used carefully. This results in optimum and efficient utilization
of resources.
3) Maintenance of discipline. Effective supervision helps in maintenance of
discipline. Punctuality is maintained by the employees. Due to monitoring and
guidance, plans are implemented according to schedules. If any deviation is noticed,
it is rectified immediately.
4) Improves communication. While performing supervision function, a manager
interacts with subordinates frequently. It improves communication between the
managers and subordinates. Manager gets regular feedback in the form of progress
report, suggestions, grievances and complaints. Suggestions may be given by the
employees to improve the working conditions and efficiency. This improves the
quality l of management decisions.
5) Improves motivation. While carrying out supervision, the manager motivates his
subordinates for higher productivity and better quality through appreciation and
recognition. He creates team spirit among them.
6) Facilitates control. The supervision facilitates control on the performance of the
workers by comparing their performance with the standards. The performance of the
employees is evaluated during supervision. He also takes necessary action to ensure
that production is done according to the predetermined standards.

169
Principles of Business Management

11.9.1.5 Meaning and Functions of Supervisor:

A supervisor is a person who is primarily in charge of a group of workers. The group may
be called a section, a department or a unit. He may be designated as Foreman, Overseer,
Section Officer, superintendent or section-in-charge. He is responsible for quantity as
well as quality of production. He is also responsible for the performance of the
employees under his charge and for their efficiency, training and morale. He has also to
ensure the efficient utilization of the tools and equipments. A supervisor may be called a
foreman, overseer, section officer, superintendent or a gang boss. Following are the
important functions of supervisors:

1. Planning the work. The supervisor has to determine work schedule for even and
steady flow of work. He then assigns the work to different workers according their
Abilities. He also makes arrangements for raw materials, machines, tools and
equipment.
2. Issuing orders. The supervisor issues orders and instructions to the workers for
completion of task and for achieving coordination in his section. He tells them
what to do and how to do.
3. Providing guidance and leadership. The supervisor guides and leads the workers
of his department. He fixes production targets for them and provides them the
necessary guidance for doing the work assigned to them.
4. Motivation. The supervisor motivates his subordinates for higher productivity and
better quality. He creates team spirit among them. He uses various financial and
non-financial incentives provided by the management.
5. Preserving records. The supervisor prepares and maintains records of output and
other related aspects of each employee. He sends necessary information to the top
management.
6. Controlling output. The supervisor controls the performance of the workers by
comparing their performance with the standards. He also takes necessary action to
ensure that production is done according to the predetermined standards.
7. Liaison between management and workers. The supervisor is an important link
between the management and the workers. He explains management policies to the
workers and also passes on the management’s instructions. He has a close contact
with the workers and tries to understand their problems. He brings workers’
problems to the notice of the top management.
8. Grievance handling. A supervisor is in direct touch with the workers, so he can
handle their grievances effectively. He should maintain good relations with the
workers so that the workers come to him if they have any grievance. When a
grievance is reported, he should try to remove it. But if he can’t redress the
grievance, he should report it to the upper level management.
9. Industrial safety. Ensuring safety of workers is an important responsibility of the
supervisors. For this purpose, they should give proper education and training to the
workers regarding the safety aspect of their jobs. He should train them in the use of
safety devices. He should also undertake regular inspection of machines, tools, etc.,
to minimize chances of accidents.
170
 Directing

11.9.1. 6 Role of a Supervisor

The supervisor occupies a key position in the organization which turns plans and policies
into actual results through the efforts of operatives. The supervisor is expected to secure
not only the efficiency of operations but also the team spirit, cooperation and discipline
among the employees. The role of a supervisor may be explained as follows:

1. As a linking pin. The supervisor holds an intermediate position between the top or
middle management and the operatives. Acting as a link, the supervisor bridges the
gap between what the management expects and what the operatives want.
2. As a leader and motivator. A supervisor leads his subordinates as he is in direct
contact with them. The supervisor motivates his subordinates by providing financial
and non-financial incentives. He inspires them for higher quality and productivity.
3. As a mediator. A supervisor also plays a role of mediator between labour and
management. He represents workers before the higher management and brings
workers’ problems in their notice. He persuades workers on management's plans and
policies.

11.9.1.7 Quality of a Good Supervisor

The supervisors lead the subordinates. The supervisors should possess the following
qualities;

1. He should have leadership qualities. He should be able to influence the behaviour of

his subordinates.
2. He should have the ability to give instructions and issue orders to the subordinates.
3. He should be honest as well as sincere.
4. He should be man of integrity. The workers should have faith in him.
5. He should have ability to secure cooperation from the workers.
6. He should not lose temper quickly. Rather he should have patience in dealing with
workers.
7. He should have necessary competence so that he is able to solve the workers
problems. He should be an efficient administrator. He should have the ability to
perform the various functions of management.
8. He should be sympathetic towards human beings. He should have respect for the
feeling of the workers.
9. He should be tactful and should know when to change the approach in dealing with
particular kind of people.
10. He should be imaginative to achieve better results. He should be in the habit of
having up to date knowledge about the work, organisation and subordinates.

11.9.2 Motivation

Motivation may be defined as the process of stimulating people for action to accomplish
sired goals. It involves arousing needs and desires in people to initiate and direct their
171
Principles of Business Management

behaviour in a purposive manner. Motivation includes creation and sustenance of the sire
to work for certain goals among the people in an organization. In other words, motivation
is related to need satisfaction which is significant for directing. According to Dalton E.
McFarland, “Motivation refers to the ways in which urges, drives, desires, aspirations,
strivings needs direct, control or explain the behavior of human beings.” Therefore,
motivation is the prime motive of directing without motivation the employees will be
direction less and the establish objective of the organisation will not be attained. A
director should always keep in mind that what are the factors whether monetary or non-
monetary which motivate the employees for work and try to provide the suitable system
of working. (For detail overview of Motivation kindly refers unit-12).

11.9.3 Leadership

Leadership may be defined as the process of influencing other people to work willingly
for the achievement of group goals like directing. A managerial leader influences the
attitude and behavior of his subordinates without using leadership in such a way that they
strive towards the achievement of specified goals. According to C. I. Bernard,
"Leadership refers to the quality of the behavior of the individual whereby they guide
people on their activities in organized work."Thus, Leadership is the process by which a
manager imaginatively directs guides and influences the work of others in choosing and
attaining specified goal mediating between the individuals and the organization in such a
manner that both will obtain maximum satisfaction. Without a sound leadership quality a
managers cannot direct their subordinates. Thus leadership a very crucial aspect of for
directing without which it cannot be done. (For detail overview of Leadership kindly
refers unit-13).

11.9.4 Communication

Communication is the process of transmission of message, information etc. and creation

of understanding between two parties. It involves sending a message to another, who
receives the message and responds to it. Communication is a media of exchanging plan,
policy and opinions among the employees. It is life blood of business through which all
the gap between superiors and subordinates can be part. According to Louis A. Allen,
“Communication is the sum total of all things one person does when he wants to create
understanding in the mind of another. It is a bridge of meaning. It involves a systematic
and continuing process of telling, listening and understanding. Thus communication is
the process of passing information and understanding from one person to another.
Communication, fundamental and vital to all directing functions, is the process imparting
ideas and making one understood by others.”without an effective directing cannot be
done because the employees will not get the proper and correct information that what
their managers want. Therefore, communication is a crucial element of directing. (For
detail overview of communication kindly study unit-14)

172
 Directing

11.10 SUMMARY

Direction is the function of management which follows planning, organizing, and

staffing. Once objectives have been formulated and plans have been drawn, it is
necessary to implement the plans. This can be accomplished by directing the people and
their activities. It is through directing that managers get the work done through people.
Directing is the process of guiding, supervising, leading and motivating the subordinates
to work in a way that is beneficial to the organisation. The manager not only shows the
right path but also leads the subordinates to achieve the objectives of the organisation.
They create a sense of belongingness, faith and loyalty among the subordinates.

The importance of direction in an organisation can be viewed by the fact that every action
is initiated through direction. Since, human beings in the organisation handle the physical
resources that is men, machine, material, money etc. to be accomplish certain functions
by which organizational objectives are to be achieved. This necessitates the importance
of the direction function as an important factor for achieving organizational efficiency
and effectiveness.

11.11 TERM-END-QUESTIONS

1. What do you mean by direction? Discuss in detail the nature and importance of
direction.
2. Explain in detail the principles of directing with suitable example. What are the
different techniques of directing?
3. What is supervision? State the types and methods of supervision.
4. Discuss the role and importance of supervisor in an organisation. What are the
qualities of a good supervisor?
5. Write a short notes on the following as an element of supervision;
a. Motivation
b. Leadership
c. Communication

173
 UNIT-12 MOTIVATION

STRUCTURE

12.1 Introduction
12.2 Objectives of the Unit
12.3 Meaning of Motivation
12.4 Definitions of Motivation
12.5 Importance of Motivation
12.6 Natures of Motivation
12.7 Approaches of Motivation
12.8 Motivational Techniques
12.9 Theories of Motivation
12.9.1 Maslow Need Hierarchy Theory
12.9.2 Herzberg’s Two Factor Theory
12.9.3 McGregor’s Theory X and Theory Y
12.9.4 Vroom’s Valence –Expectancy Theory
12.9.5 Alderfer’s ERG Theory
12.10 Summery
12.111 Term-end-Question

12.1 INTRODUCTION

The main function of managers is to get things done from their subordinates on time and
for this they have to develop a cordial relation with subordinates as well as the superiors
by exercising the human skills. Therefore, it is significant for a manager to find out what
makes people do things and to discover source of motivation for work. For this a manager
has to understand how the employees behave in a particular situation/ why do they
behave as they do? What else is to be done so that they produce desirable working
motivation? Motivation refers to the set of those wishes, desire, needs and drive that
stimulate or activate individuals to behave or to do the work. The term motivation refers
to a force that drives a person to action. It is something that motivates a person into action
and continues him in the course of action enthusiastically. It is the complex of force
inspiring a person at work to intensify his willingness to use his capacities to achieve the
establish objectives of the organisation. In this unit the learners will learn the meaning,
definitions, theories of motivation.

12.2 OBJECTIVES OF THE UNIT

The learners after going through this unit will be able to;
➢ Explain the concept of motivation
➢ Define the term motivation
➢ State the importance of motivation
➢ Discuss the various theories of motivation

174
 Motivation

12.3 MEANING OF MOTIVATION

The term motivation has been derived from the Latin word ‘movere’, which means to
move. Motivation may be explained as the process of stimulating people to action to
accomplish sired goals. It involves arousing needs and desires in people to initiate and
direct their behavior in a purposive manner. Motivation includes creation and sustenance
of the desire to work for certain goals among the employees in an organization. In other
words, motivation is related to need satisfaction. It is a complex task because the factors
that motivate employee to work are complex and complicated. Financial incentive may
be important for some workers and non-financial incentives may be important for others.
The managers must determine what motivates the personnel behaviour at work.

12.4 DEFINITIONS OF MOTIVATION

Some of the important definitions of motivation given by authors are;

1. According to Brech, “Motivation is an inspirational process, which gets members

of the team to pull their weight effectively; to give their loyalty to the group to
carry out properly the task they accepted and generally to play an effective part in
the job that group has undertaken.”
2. According to - Dalton E. Me Farland, “Motivation refers to the ways in which
urges, drives, desires, aspirations, strivings needs direct, control or explain the
behavior of human beings.”
3. According to W. G. Scott, "Motivation means a process of stimulating people to
action to accomplish de- red goals.”
4. According to Michael J. Juclus, “The act of stimulating someone or oneself to get
a desired course of action, to push the right button to get a desired reaction.”
5. According to Fred Lathan’s, “A goal in the motivational cycle can be defined as
anything which will alleviate a need and reduce a drive.”

12.5 IMPORTANCE OF MOTIVATION

Motivation causes goal directed behavior. The needs of individuals serve as driving force
in human behaviour. The management tries to govern the behaviour of employees by
satisfying their needs. Any act or promise which induces an individual to respond in a
desired manner is called an incentive. Incentives are necessary to motivate to employees
by satisfying their needs. Effectiveness of motivation contributes a real deal to the
success of an organization. The importance of motivation are;

1. Motivation creates willingness to work. The utilization of physical and

financial resources depends on the ability and willingness of the human
resources. Motivation puts human resources into action. Motivation creates the
will to work among employees. It enables the management to secure the
cooperation of the workers and the best possible utilization of all resources.
175
Principles of Business Management

2. Improves the efficiency. The level of performance of employees depends not

only on individual's abilities but also on his willingness to achieve a high level of
performance. Motivation induces employees to work better and to use their full
potential. Thus, it helps in increasing productivity and overall efficiency.

3. Ensures achievement of organizational goals. Management can achieve the

goals effectively by motivating subordinates. The motivated employees
contribute to the fulfillment of the assigned tasks with their best efforts. If a
satisfactory system of motivation exists in the organization, the workers
cooperate voluntarily with the management towards the accomplishment of the
goals of enterprise.

4. Creates cordial relationships. Motivation brings about employee satisfaction

through monetary and non-monetary incentives. It leads to cordial and friendly
relationship between the employer and the employees. Industrial disputes are
reduced and morale is improved. Effective motivation helps management to
overcome resistance to change. Motivated employees support all changes that arc
in the organizational interest as they identify their own advancement with the
prosperity of the enterprise.

5. Leads to stability in the work force. Motivated employees are sincere and loyal
to the organisation. The rate of absenteeism and labour turnover is reduced. This
results in maintaining a stable work force. Existence of a satisfactory motivation
system builds the better image of the organisation. It helps in attracting qualified
and competent people.

6. Increase in work efficiency: when workers are motivated for satisfaction of

their need, they work to satisfy the organizational needs also. This increase the
efficiency of organizational activities.

7. Communication: motivation promotes communication between managers and

workers. Both try to understand each other’s needs and satisfy them to the extent
possible.

8. Reduction in rate of labour absenteeism and turnover: workers who are

satisfied with their work and work environment contribute positively towards
organizational goals and objectives. The rate of absenteeism and turnover, thus,
gets reduced.

9. Development of leaders; motivation helps managers ascertain the need of

employees and lead their behaviour in the right direction. Efficient leaders, thus
develop as a result of effective motivation.

176
 Motivation

12.6 NATURE OF MOTIVATION

1. It is an internal force: the degree of motivation cannot be measured in quantitative

terms. It can only be observed through action and performance of employees.
Motivation is an internal force or felling of a person.

2. Effect of environmental factors: internal organizational factors play important role

in motivating the employees. Poor working condition, labour management conflict,
autocratic style of management may affect individual’s initiative to work, however,
able or willing h is to perform the task. Conversely, a clean and a quiet environment,
healthy and cordial relationships encourage workers to contribute to organizational
output.

3. It is an ongoing process: the process of motivation, observing human needs,

behaviour and action is continuously followed by managers. Since human needs are
multiple and importance of needs keeps changing, managers constantly watch their
needs-behaviour-action.

4. It is a pervasive function: motivation is required at all levels of management. Both

managers and non-managers need to be motivated to accomplish the organizational
goals and through them their personal goals.

5. It is a complicated process: since understanding human needs is a difficult task,

motivation is a complicated or complex task.

6. Skilled managers: managers have to be skilled in motivating their employees.

Unless they understand human needs, right motivators cannot be adopted. Of all the
skills that managers must have, the skill of motivating employees was greatly
emphasized upon in a study conducted on motivation.

12.7 APPROACHES OF MOTIVATION

The following are the approaches of Motivation

1. Traditional Approach to motivation: it advocates that workers are lethargic by

nature and non-innovative and they work only for wage and salary. Extra efforts are
put by them only for financial rewards. Money is the main motivator that makes
people work. If managers want workers to put extra efforts, they should provide the
monetary incentives only. To maximize their income, workers would also be ready
for extra working hours. The proponents of this approach like F. W. Taylor, Henry
Fayol etc. give emphasis on the monetary incentive rather non-monetary.

2. Human Relation Approach to Motivation: refers that by virtue workers become part
of the informal groups and get bonded by the norms and values of the same group.
177
Principles of Business Management

The employees of the organisation after strengthening their financial situation they
want that their social and esteem needs should be recognized and satisfied by the
management. It is advocated in this approach that the worker should make their own
decision and enjoy doing their jobs by creating an effective working environment. It
makes the employees feel important and allows them to self-directed and control
their activities. Elton Mayo’s the propagator of this approach advocated that the
employees should have participation in the decision making process which will
motivate them.

3. Human Resources Approach to Motivation: refers that money and job satisfaction
are not the prime motivators that initiate employees to perform organizational
objectives. McGregor, Maslow, Likert and Argyris advocated that the human
resources should be utilized up to optimum level and they should have contribution
in the planning as well as the decision making process. Further, they advocate that
the managers and worker should sit together and discuss both the individual as well
as the organizational goal of the organisation.

4. System approach to Motivation: Layman Porter and Raymond Miles advocated that
the entire set or system operating on the employee must be considered before the
employee’s motivation and behaviour can adequately understood. The
characteristics of the employees should be understood before motivation because
some join for the sake of money while other join for the sake or recognition and
status. Thus accordingly they should be provided the suitable system of motivation.
Further, they advocated that the nature and situation of work motivate employees to
a great extent. For example some employees like challenging work while others like
routine works. They should be assigned accordingly and the management should try
to provide healthy, harmonious and conducive working environment to motivate
them.

12.8 MOTIVATIONAL TECHNIQUES

Following are some important motivational techniques used by the managers;

1. Financial Techniques: incentives in terms of cash emoluments, fringe benefits,

security of job tenure, and conditions of services are some of the financial
techniques which may be adopted by management to motivate the employees. Since
money is not an end but a means of purchasing ends, it can fulfill both physical
(food, shelter, clothes etc.) as well as safety needs.

2. Job based Technique: to satisfy the social and psychological requirements of

employees some job based techniques like job simplification, job enrichment, job
enlargement and working relation may be pursued as a motivator. It helps in making
the environment vibrant and conducive and employees develop the sense of
belongingness and responsible.
178
 Motivation

3. MBO Technique: both superior and subordinates take part and jointly determine
each individuals’ major as a guides for operating the unit and assessing the
contribution of each of its members.

4. Leadership Technique: Autocratic, democratic and participative styles of leadership

have their own implications for employee motivation, morale and productivity in the
short term and in the long term.

5. Sensitivity Training: the technique of training is given to groups of managers

themselves, so that they may behave with and motivate their subordinates better.
The sensitivity training helps in developing the better understanding, become open
minded, to know the motives, needs of employees, to develop insight about group
process, situations, develop scientific process of thinking, and acquiring behavioural
skill for dealing with subordinates.

I. Check Your Progress

1. What is motivation?
...............................................................................................................................................
...............................................................................................................................................
...............................................................................................................................................
...............................................................................................................................................
…………………....................................................................................................................
2. What are the techniques of motivation ?
...............................................................................................................................................
...............................................................................................................................................
...............................................................................................................................................
...............................................................................................................................................
………………........................................................................................................................

12.9 THEORIES OF MOTIVATION

By keeping in view the importance of motivation on the working behaviours of

employees as well as the productivity lot of research work has been done and as a result a
number of theories have been developed. Some of them are discussed below;

12.9.1 Need Theories of Motivation: human behaviour is a need based phenomena and
greatly influenced by it. The need based theory of motivation based on the assumption
that an individual behaves in a particular manner to satisfy his needs. These theories are
also known as content theories and focus on inner needs that motivate behaviours of the
employees. Therefore, provisions to reduce or satisfy their need would force them to
behave in a particular way. Some of the important need theories are as follow;

179
Principles of Business Management

12.9.1.1 Maslow’s Need Hierarchy Theory

Influencing human behavior requires knowledge of various types of needs and wants of
human beings working in the organization. To motivate the employees, a manager has to
identify their needs and satisfy them. After satisfaction, employees will feel happy and do
their jobs with their best efforts. This theory of motivation has received more attention
from the managers than any other theory of motivation. Abraham H. Maslow, a famous
US psychologist, developed a theory of motivation, called the ’Need Hierarchy Theory-.
According to him,

1) Man’s needs depend completely on what he already has. For this reason, satisfied
needs do not motivate behavior. A manager has to look out for the unsatisfied needs
of the individuals in the organization so that he can take proper steps to motivate
them by providing opportunities for the satisfaction of such needs.
2) Needs are arranged in a hierarchy of importance. That is, they follow a definite
sequence. As soon as needs of a lower level are satisfied, those of a higher level
emerge and demand satisfaction. Maslow classified human needs into following five
categories in order of priority:

Self-Actualization
Needs- Growth,
Advancement etc.

Esteem Needs-
Recognition, Status,
Achievement

Social Needs- Affection,

Love, Acceptance,
Belongingness, etc.

Security Needs- job

security, fixed sources
of income etc

Physiological Needs-
Food, Air, Water
Shelter, Clothes etc

Figure 12.1 Maslow’s Need Hierarchy

(1) Physiological needs. These needs are related to the survival and maintenance of
human life. They include such things as food, clothing, shelter, air, water and
other necessaries of life. The need for these things is felt not for oneself, but also
for the members dependent on the employee. These are also called economic
needs asthese cannot be fulfilled without money.
(2) Security needs or safety needs. These needs are related to the safety andsecurity
of life and future. Human beings want physical security, economic security as
180
 Motivation

well as social security. Physical security means protection from fire, accident,
and crime, etc. it may require satisfied working conditions. Economic security
means assured regular income to fulfill basic needs.It may include security of
job, i.e., protection against arbitrary dismissal from service. Social security
means assured income in case of illness, partial or full incapacity or old age.
When physiological needs are satisfied, people want to satisfy their security
needs.
(3) Social needs. The employees, being human are social persons and have social
needs. These needs include need for love, affection, exchange of feelings and
grievances, companionship, belongingness, etc. Such needs can be satisfied
through friendship on the job. Family and community relationship outside of
work. Organizations should encourage team spirit and provide opportunities to
interact socially.
(4) Esteem needs. Esteem needs arise when social needs are fulfilled. These needs
arc concerned with prestige and status of the individual. They include needs for
self-respect, competence, knowledge, recognition and respect from others.
Techniques of proper promotion and delegating authority help the individuals in
satisfying self-development and self-esteem needs.
(5) Self-actualization needs. Such needs arise when esteem needs are satisfied,
these needs relate to the desire for personal achievement and to become what one
is capable of becoming. Such needs refer to need to grow and self-fulfillment. It
is very difficult to identify and satisfy such needs.

Managers use various monetary and non-monetary incentives to satisfy the above
mentioned needs of their subordinates and to motivate them. Maslow's need hierarchy
theory of motivation is concise, informative and widely accepted by the managers. The
theory has few limitations. The above mentioned hierarchy of needs may not be
followed strictly in all cases. Some of the persons may like to satisfy the higher level
needs first. A person may seek to satisfy several needs at the same time. Thus, the
motivation function is dynamic. A constant review of incentives is required to have an
effective system of motivation.

12.9.2 Herzberg’s Two Factor Theory: Herzberg was a US behavioural scientist who
developed this theory after surveying hundreds of accountants, engineers and other
managerial personnel. He advocated that the employee’s motivation is the outcomes of
their job satisfaction. It is advocated that the satisfied employees is motivated from
within to work harder and dissatisfied employee is not self-motivated. Since Herzberg
has discovered two sets of factors associated with satisfaction and dissatisfaction of the
employee. Therefore, it is known as the Herzberg two factor theory. The first set
hygiene factors (dissatisfier) and the other is motivators (satisfier). The elements of
hygiene and motivators can be better understood from the following table;

181
Principles of Business Management

Table No.12.1: Herzberg’s hygiene and motivator factors

Hygiene Factors Motivational Factors.

Money and compensation Challenging work
Personal life Added responsibility
Working condition Advancement
Working relation Recognition of good work
Status Personal growth
Job security
Company policy and administration
Quality of supervision

12.9.2.1 Hygiene Factors: the hygiene factors are dissatisfir because if all of them are
adequately met with in a work situation, people will not be dissatisfied. Their adequacy
hence does not really motivate people. However, if any of the hygiene factors is not
attended to properly in a job, dissatisfaction can occur. For example, lower pay, bad
supervision, or a hazardous or uncomfortable workplace can create substantial
dissatisfaction among employees.

12.9.2.2: Motivating Factors: these factors are aspects of the task or work itself. They
included challenge, chance for personal growth and performance feedback. In other
words, as viewed by the employee, a job with these characteristics means it bears the
motivational factors. These factors contribute heavily to the satisfaction of the employee
and have a positive effect on their performance.

12.9.2.3 A comparison between Maslow's Need Hierarchy Theory and Herzberg's

Two Factor Theory

Though Maslow and Herzberg have different approaches to explaining motivational

philosophy and process; yet there seems to be a great similarity between the two theories
of motivation. In fact, basic needs, safety needs, social needs and a part of ego needs as
stated by Maslow correspond with what Herzberg calls hygiene factors (or maintenance
factors or dissatisfiers); while the latter part of ego needs and self-realisation needs much
correspond with the motivational factors (or satisfiers) of Herzberg's Two-Factor Theory.
This similarity between two theories is depicted below:

Table 12.2 Compression between Need and Two Factor Theory

(5) Self-realisation needs

Motivatyors
(4) Ego needs
(3) Social needs Maintenance
(2) Safety needs Factors or
(1) Basic needs dissatisfies
Maslow's Need Hierarchy Herzberg's Two Factor Theory
182
 Motivation

However, there is a sharp contrast between Maslow's theory and Herzberg's theory;
in that according to Maslow any type of need (which is unsatisfied) can be a motivator;
whereas according to Herzberg only higher level ego needs and self-realisation needs
could only be motivators. In fact, Maslow's account of motivation is of a universal
nature; while Herzberg's theory is valid only in the context of developed countries, where
lower level needs are always found to be fulfilled and hence cease to be motivators at all.

12.9. 3 McGregor’s Theory X and Theory Y

Douglas McGregor, a US behavioural scientist, has developed approach to manage and

motivate on the basis of various assumptions relating to human behaviours. It has been
formulated as theory X and theory Y. Both these theories are based on certain assumption
regarding human behaviour. Though, he was a great critic of classical approach of
management. But his theory X is related to philosophy of traditional management,
assumptions about employees and the way to manage them. Theory Y is based on
humanistic assumptions about employees and it describes the approaches to manage and
motivate them. The assumptions of the theories are as;

Theory X refers that:

1. Average employee in the organisation is lazy, dull, self-centered, resists change and
does not want to share responsibility.
2. He has limited number of needs mostly physical needs and to some extent security
needs.
3. Average employee lacks responsibility and has little ambitions.
4. Thus, the responsibility of getting things done by others for achieving organizational
goals lies on the managers and the managers must use coercive measures to control
the workers and they must be threatened and punished as to get them to work.
5. To get the things done by the employees, McGregor suggested rigid, bureaucratic
and rule based organisation.
6. Narrow span of management, one way communication, close supervision, more
concentration on monetary incentives and centralization of managerial authority
should be followed.
7. It was also thought necessary to guide, direct and control the employees in a strict
manner and the approach of carrot and stick should be used for motivating them.

Theory Y refers that

1. Work is a natural as play or rest for the workers.

2. Average employee or workers likes work they are cable of assuming responsibilities
and accepting challenges.
3. They are ambitious, achievement oriented, and capable of exercising self-control.
4. They have wide range of needs, both economic and non-economic

183
Principles of Business Management

5. They have potential to learn, to accept and seek responsibility. They have
imagination, and creativity that can be applied to work.
6. In view of these assumptions, the role of management is to develop potential and
help the employees to use it for achieving common objectives.
7. Organizational structure should be marked by open communication, flexibility,
informal relation, and decentralization of authority.
8. The approach of management should include, participative management, supportive
supervisory style, self-direction and control, opportunity for developing and using
creativity and innovativeness and package of both monetary and non-monetary
incentives.

12.9.4 Vroom’s Valence – Expectancy Theory

According to this theory a person’s motivation towards an action at any time would be
determined by his perception that a certain type of action would lead to attainment of a
specific goal. Vroom’s model is built around the concepts of value, expectancy and force.
The basic assumption is that the choice made by a person among alternative courses of
action is lawfully related to psychological events occurring contemporaneously with the
behaviour. Vroom’s concept of force is basically equivalent to motivation and may be
shown to be the algebraic sum of products of valences multiplied by expectation e.g.

Motivation (force) = €Valence x Expectancy

There are three variables and they have high positive values to imply motivated
performance choices. If any one of the variables approaches zero, the probability of
motivated performance approaches will be zero. Valence is the strength of an individual’s
preference for a reward and instrumentality denotes and individuals estimate that
performance will result in achieving the reward. Valence may be used as an incentive,
attitude, and expected utility. In order for the valence to be positive for individual, they
must prefer attending the outcome to not attending it, otherwise the valance will be zero
which will refer to non-attainment of the goal.

Another factor which influence motivation is expectancy that is the probability that a
particular action will lead to the outcome. Expectancy is different from instrumentality
input into valence. It differs from instrumentality in that it relates to first level outcomes
whereas instrumentality relates first and second level outcomes to each other. Thus,
expectancy is the probability that a particular action will lead to a particular first-level
outcome. The strength of motivation to perform a certain act will depend on the sum of
the products of the values for the outcomes times of expectancies. Therefore, overall it
can be said that the combination that produced the strongest motivation comprises high
positive valence, high expectancy and high instrumentality. If all three are low, the
resulting motivation will be weak. In brief, Vroom’s model attempts to explain how
individual’s goal influences his efforts.

184
 Motivation

12.9. 5 Alderfer ERG Theory

This theory of motivation has been developed by Claynton Alderfer as an extension of

Maslow’s Need Hierarchy Theory. It was considered as reformulation or refinement of
Maslow’s need theory. This theory states that employees attempt to meet a hierarchy of
existence, relatedness and growth needs. If the efforts to seek one level of needs are
defeated, individual would regress to lower level of needs. Alderfer classified needs into
three categories as characterized by its name as ERG where E stands for Existence
Needs, R stands for Relatedness Needs and G stands for Growth needs.

Existence Needs: refers to all physiological and safety needs of an employee. Thus,
existence needs group physiological and safety needs of Maslow into one category as
these have similar impact on the behaviour of the individual.

Relatedness Needs: refers to all those needs that involve relationship with other people
whom the individual cares. Relatedness needs cover Maslow’s social needs and that part
of esteem needs which is derived from the relationship with other people.

Growth Needs: refers to involve employees making creative efforts to achieve full
potential in the existing environment. These include Maslow’s self-actualization need as
well as that part of the esteem need which is internal to the individual like feeling of
being unique, valuable for the growth of the organisation.

The relationship between the Maslow’s need theory and Alderfer ERG theory

Table 12.3 Compression between Need and ERG Theory

Maslow Need Hierarchy Theory Alderfer ERG Theory

Self-Actualization and Self Esteem Needs Growth Needs
Social and Belongings Relatedness Needs
Physiological and Safety Needs Existence Needs

This theory has conceived that needs along a continuum which avoids the implication
that the higher up an individual is in the need hierarchy, better it is. According to this
theory different types of needs operate simultaneously in chronically way.

12.10 SUMMARY

Motivation is the soul of the managerial process. Just as, when the soul is taken away
from the body of a living being, the living being is rendered dead likewise, if motivation
is removed from the managerial process, the managerial process becomes meaningless
and futile - incapable of providing any fruitful results whatsoever.In fact, there is a sort of
positive correlation between motivation and performance of individuals. The higher is the
motivation, the higher would be the performance level; the lower is the motivation, the
185
Principles of Business Management

lesser would be the performance level; and finally when there is no motivation,
therewould reasonably be no performance, on the part of individuals.

Men as we know is the only active factor of production which is solely responsible for
the best or the worst utilization of rest of the resources (money, materials, machine,
methods etc) of the organisation. Motivated employees make the best utilization of all
resources - materials, machines, technology and other physical work facilities; leading to
cost minimisation and profit maximization.Thus,Motivation, directly and indirectly,
results in the stability of work force; necessitating only the minimum inevitable labour-
turnover. In a way, it is only frustrated employees who are dissatisfied with management;
and who think in terms of leaving the organisation - seeking better employment avenues
outside.

12.11 TERM-END-QUESTIONS

1. "Motivation is the basis of management process discuss. Define motivation and

explaint its significance for management with examples.
2. What do you mean by Maslow's Needs Hierarchy Theory of motivation. How does
this theory compare with Herzberg's model of motivation?
3. Explain Herzberg's Two Factor Theory of motivation. Are hygiene factors stated in
Herzberg's theory really maintenance factors, discuss in Indian business scenario?
4. State in detail the McGregor's Theory X and Theory Y. Which theor of McGregor’s
is best suted for an Indian Production unit comment in your own words?
5. What do you mean by Alderfer ERG Theory? Explain ERG theory in your own
language and also compare it with Maslow Need Hierarchy Theory?

186
UNIT-13 LEADERSHIP

STRUCTURE

13.1 Introduction
13.2 Objectives of the Unit
13.3 Meaning of Leadership
13.4 Definitions of Leadership
13.5 Future of Leadership
13.6 Difference between Leadership and Managership]
13.7 Importance of Leadership
13.8 Functions of Leadership
13.9 Leadership Style
13.9.1 Autocratic Leadership
13.9.2 Democratic Leadership
13.9.3 Laissez Fair or Free Rein Leadership
13.10 Leadership Theories
13.10.1 Personality Theory
13.10.2 Behavioural Theory
13.10.3 Situational Theory
13.11 Qualities a of good Leader
13.12 Summary
13.13 Term-End-Questions

13.1 INTRODUCTION

Management as we know is the process of getting work done through the others in order
to achieve the goal of the organisation. For this the managers has to lead the subordinates
in a particular direction by issuing instruction and guidelines as well as they have to
ensure that they are performing as per the standard. In order to lead the managers have to
influence the overall working behaviours and maintain conducive working environment
through adopting the different style of leadership. Therefore, it can be said that leadership
is a process of influencing working behaviours of the subordinates to ensure the timely
achievement of the organizational goals. It is a managerial process of converting the
useless as well as the unproductive individual efforts or activities into productive one.
Leadership is a process of providing purpose, direction, and goals for the groups as per
the objectives of the business organisation. In the present unit the learners will learn the
meaning, style, theories and functions of leadership as part of management.

13.2 OBJECTIVES OF THE UNIT

After completing this unit the learners will be able to;

1. Explain the concept of leadership
2. Discuss the importance of leadership
3. State the different style of leadership
187
Principles of Business Management

4. List the functions of leadership

5. Outline the quality of a good leaders

13.3 MEANING OF LEADERSHIP

In simple words, leadership may be defined as the process of influencing the behaviours
of employees to work willingly for the achievement of organizational goals. Leadership is
an art of inducing subordinates to accomplish their assignment with enthusiasm and
confidence. It is a position of power occupied by the individual in a group whereby he
exercises interpersonal influence on the members of the group for directing their
activities towards the realization of goals. His position in a informal group of power is
backed by the acceptance of the members, and his personality traits and qualities. In a
business organisation it is backed by authority which is vested in his position. Leader
keeps members of the group together, infuses life into it and activates it to seek goals.
Though, the leader is a part of group, he maintains his own identity to lead, to guide,
conduct, direct and proceed others. Thus, it can be said a managerial leader influences the
attitude and behavior of his subordinates without using coercion in such a way that they
strive towards the achievement of specified goals.

13.4 DEFINITIONS OF LEADERSHIP

Some of the important definitions of leadership are as follow;

1. According to C. I. Bernard, "Leadership refers to the quality of the behavior of the

individual whereby they guide people on their activities in organized work."
2. According to Theo Heiman, “Leadership is the process by which an executive
imaginatively directs guides and influences the work of others in choosing and
attaining specified goal mediating between the individuals and the organization in
such a manner that both will obtain maximum satisfaction.”
3. According to Terry, “Leadership is the ability of influencing people to strive
willingly for mutual objectives.”
4. According to Robert Tannenbaum, “Leadership is interpersonal influence exercised
in a situation and directed through communication process, towards the attainment
of a specified goals or goals.”
5. According to Barnard Keys and Thomas Case, “Leadership is the process of
influencing and supporting others to work enthusiastically towards achieving
objectives.”

13.5 FEATURES OF LEADERSHIP

On the basis of aforesaid definitions, following are the important features of leadership
process;

1. Influencing the behaviour. Leadership is a process whose important aspect is

188
 Leadership

influencing the human behaviour. The influence is exerciser by the leadership

followers/group members towards the realization of specified goal in a given
situation. A person is said to have an influence over others when they are willing to
carry out his wishes and accept his advice, guidance and direction. Only successful
leaders are able to influence the behaviour, attitude and beliefs of their followers.
Thus, we can say, "Leadership is the process of influencing others.” Managerial
leadership is the process of influencing a group of subordinates to attain
organizational objectives,
2. Continuous interaction. In the process of leadership, there is a continuous
interaction between the leader and followers. The leader influences and guides the
followers. Followers also exercise their influence on their leader.
3. Common goals. Leadership implies achievement of common goals in the interest of
individuals as well as the group as a whole.
4. Willingness and cooperation. It is the process of securing willing cooperation of
others by influencing their behaviour.
5. Situational. Leadership is related to a particular situation. There is no style of
leadership, which can be applied successfully in all situations. The style of
leadership is determined by various factors, like circumstances, nature of followers,
etc.

14.6 DIFFERENCE BETWEEN LEADERSHIP AND MANAGERSHIP

Leadership may be defined as the process of influencing other people to work willingly
for achieving group objectives. Leadership helps in guiding and inspiring employees to
perform well and accomplish the goals. It helps in persuading employees to work
cooperatively and enthusiastically towards common goals. The terms leader and manager
are not synonymous. A manager is more than a leader. It can be explained on the basis of
following points:

Basis of Leadership Manager ship

Difference
1. Organisation Leadership is possible in Managership is found only in
both formal and informal formal organizations.
organizations.
2. Authority Leadership applies Every manager has formal
informal authority to authority or right to issue orders
influence the behavior of and enforce the obedience on his
his followers. subordinates.
3. Scope A leadership is an aspect Managership is a wider term than
of the directing function of leadership. A manager is more
management. than a leader.

4. Stability Leadership is generally Managership is generally stable.

unstable.
189
Principles of Business Management

5. Importance Leadership is important Professional management is the

but not more than need of every business
Managership. organization.

On the basis of above discussion, we can say, “All managers are leaders but all leaders
are not managers.”

13.7 IMPORTANCE OF LEADERSHIP

Leadership is the most important element of the directing function of management

importance of good leadership can be discussed as follows:

(1) A source of motivation. Leadership is an important factor which governs success of

an organization. A managerial leader directs the potential abilities of employees
towards the accomplishment of goals. A leader by exercising his leadership creates
an urge in the employees for better performance and helps in the attainment of
organizational goals.
(2) Willing cooperation. A manager is successful only when he secures willing
operation of his subordinates. The leader manager initiates action, brings about
changes when necessary, convinces the subordinates about the specified goals. He
persuades the employees to work diligently and achieve the specified goals.
(3) Creates confidence. When individuals fail to recognize their qualities and
capabilities, the leader creates confidence among them by his superior knowledge.
He guides them and provides psychological support.
(4) Improves efficiency. Effectiveness and efficiency of performance depends on the
work environment. Leadership aims at creating and maintaining a satisfactory
environment for employees to contribute their maximum effort towards achieving
the goals. The leader manager encourages subordinates to take initiative and helps
them in their personal advancement.
(5) Teamwork. A leader creates team spirit among the employees. He coordinates the
efforts of his subordinates. He resolves the conflict among the employees and
harmonies the individual goals with the organizational goals. He encourages them to
a common vision and work collectively towards the accomplishment of group goal.
(6) Implementation of change. People tend to resist changes due to uncertainty and
inconvenience caused by them. A good leader can easily implement the change in
the organization, by persuading people to accept the desired changes.

13.8 FUNCTIONS OF LEADERSHIP

Some of the major functions of leadership are;

i) Achieving co-operation through team work

A leader, by virtue of his leadership talents emphasizes on follower the utility of
team work in successfully achieving common objectives. He, thus, induces
190
 Leadership

followers to work with whole-hearted co-operation; and achieve results which

could not otherwise, be obtained. History of the Indian freedom-fighting struggle
would bear out this fact as to how the Indians, under the inspiring leadership of
Gandhiji, drove the English out of the country, just working with a sense of co-
operation.

ii) Emphasizing unity of objectives

A leader would help followers appreciate unity of objectives i.e. how the
individual objectives are united with the common objectives. Once people
understand the significance of unity of objectives; it is much likely that they start
working for common objectives, with a sense of zeal and devotion.

iii) Arousing self-confidence through direction of followers' talents

Self-confidence, is perhaps, the most significant mental asset possessed by an
individual; on which he/she can capitalize. A leader can help people develop this
asset - through imparting excellent direction (or guidance) to them for the best
utilization of their talents - patent and latent.

iv) Encouraging initiative

A progressive, forward and democratic-minded leader, always encourage
initiative, on the part of followers. Through encouraging initiative, the leader can
help the organisation, avail of the hidden merits of people.

v) Best utilization of manpower - through motivation

A leader primarily operates on the basis of motivation. Motivation is, in fact, an
instrument, in the hands of the leader; which is used by him in shaping and
moulding human behaviour. Through motivation, the leader causes a best
utilization of man-power resources.

vi) Developing good human relations

Partly through his magnetic personality and partly through ensuring a free-flow
of communication, a leader helps in the development of good human relations in
his work group.

vii) Building and raising morale

Good leadership helps in building morale of subordinates; and raising it further to
the highest extent with repeated doses of 'leadership tonic'. As Napolean has very
aptly commented that in war morale is three-fourths of victory; likewise, in the
managerial context, this morale is expected to play a similar role.

13.9 LEADERSHIP STYLES

Depending on the attitude of a leader towards his followers and their work, the
following are the major styles of leadership;
191
Principles of Business Management

13.9.1 Autocratic leadership style

13.9.2 Democratic leadership style
13.9.3 Laissez-faire or free-rein leadership style
13.9.4 Paternalistic leadership style.

13.9.1 Autocratic leadership style

This style of leaderships is also known as authoritarian or dictatorial. Under this style
of leadership, a leader believes in centralization of powers. He takes all decisions
himself without inviting any consultations from his followers; and expects them to
accept his decisions, unquestioningly. Autocratic leader dictates terms to his
subordinates, behaving as a dictator. Autocratic leadership style seems to have
originated in military organisation; where, there is no provision for advice or request
and where the only 'rule of order' prevails, asking personnel to ‘do or die'. In business
context it is generally found in the sole trade, private companies as well as in the small
scale industry. Sometimes, an autocratic leader might not be a strict authoritarian. He
might be a bit lenient towards followers. Such a 'bit lenient' autocratic leader is termed
as a 'benevolent autocratic leader'; as against the exploitative autocrat, who behaves as
an absolute dictator.

Merits

i) This style leads to quick-decision making; as decision-making power is

centralized in the hands of the leader.
ii) Autocratic leadership style is suitable at lower levels in an organisation; where
employees are less educated and may not work, in the absence of fear of authority.
iii) It is suitable in emergency situations; when urgent decisions on strategic issues are
required.
iv) An authoritarian leader may provide strong leadership to the groups, by virtue, of,
his vast powers over subordinates.

Limitations

i) Autocratic leadership style leads to development of frustration in subordinates. It

invites hostile attitude of subordinates towards the leader, which is often
manifested in actions of labour unions.
ii) Subordinates shirk work and avoid responsibility, whenever they can afford to do
so.
iii) As subordinates are not allowed participation in decision-making; their potential
cannot be exploited. This phenomenon retards human development.
iv) Autocratic leadership style may yield fruit; but only in the short-run. In the long-
run, people might design 'secret plans' to overthrow the dictator-leader.

192
 Leadership

13.9.2 Democratic leadership style

This style of leadership is also known as participative or consultative. Under this style
of leadership, a leader believes in decentralization of powers as well as in group
activities. He invites followers to participate in the decision-making process -
especially on matters, which concern their work-field or otherwise affect their interests
substantially. This style of leadership is usually adopted by the chief executive of a
business enterprise, while discussing major organizational objectives, strategies and
policies with departmental managers. The democratic style of leadership is generally
found in public companies, large scale business where each and every stakeholder has
right to give their opinions in the decision making process. In this style of leadership all
reward, punishments, profit and loss are shared among the followers and leaders. The
credit for success is goes to all not only to leader.

Merits

i) Democratic style of leadership invites commitment to decisions, on the part of

subordinates; because subordinates will be more inclined to implement decisions,
which have been made in consultation with them.
ii) Potential of subordinates is utilized, under this style; as they are supposed to
make suggestions towards decision-making.
iii) This style of leadership helps to increase-motivation, morale and job-satisfaction
for subordinates - because of the satisfaction of their social and ego needs, during
the process of decision-making.
iv) Because of a democratic system of managing, this style of leadership leads to the
emergence of good human relations, in the enterprise.

Limitations

i) There is usually delayed-decision-making, under this style of leadership; because

of the involvement of a number of subordinates, in the decision-making process.
ii) Under this style of leadership, the feature of having consultations with
subordinates by the leader might be taken as a sign of managerial incompetence.
iii) Democratic style of leadership may, in the long-run, lead to loss of leader's
control, over subordinates.
iv) There is usually witnessed, the phenomenon of passing the buck, under this style
of leadership. For wrong decisions taken, leader and the led have a tendency to
pass the buck (shifting the responsibility) to each other.
v) This style of leadership is not suitable; when decisions on complex and strategic
issues are required.

13.9.3 Laissez-Faire or Free-Rein Leadership Style

Free rein or laissez faire technique means giving complete freedom to subordinates. In
this style, leader once determines policy, programmes and limitations for action and the
193
Principles of Business Management

entire process is left to subordinates, the leader plays only a supervisory role over their
functioning. Group members perform everything and the managers usually maintain
contacts with outside persons to bring the information and materials which the group
needs.

This type of style is suitable to certain situations where the manager can leave a choice
to his group. This helps subordinates to develop independent personality. However, the
contribution of leader is almost zero. It tends to permit different units of an
organisation to proceed at cross purposes and can degenerate into chaos. Hence, this
style of leadership is used very rarely in business organizations. Generally this style of
leadership is adopted in the educational institutions or voluntary/cooperative
organisation where followers are free to take their initiatives as per the situations. For
example in a school or college, where teachers teach to students in their own styles; the
leader i.e. the Principal of the institution, would not impart any instructions to them
while they are actually explaining 'academic matters' to their pupils.

Merits

i) This style of leadership, possibly leads to a highest sense of job-satisfaction for

subordinates; because subordinates can make best and uninterrupted use of their
capabilities.
ii) This style of leadership encourages the fullest exploitation of potential of
subordinates. In fact, situations leading to the introduction of this style of
leadership are such, that subordinates are in a mood to exhibit the masterpieces of
their performance.
iii) This style of leadership, is a way or technique of training and developing
subordinates for higher managerial positions.

Limitations

i) This style of leadership minimizes the role of the leader. As such, his value
among the group members is substantially reduced.
ii) Performance of subordinates is rather poor under this style of leadership;
because of-
- Loss of control of leader
- Unavailability of leader's expert guidance.
iii) Under this style of leadership, subordinates may work at cross-purposes -
because of the laissez-faire approach followed by the leader.

I. Check Your Progress

1. What is leadership?
...............................................................................................................................................
...............................................................................................................................................

194
 Leadership

...............................................................................................................................................
...............................................................................................................................................
…………………....................................................................................................................

2. What are the styles of leadership?

...............................................................................................................................................
...............................................................................................................................................
...............................................................................................................................................
...............................................................................................................................................
………………........................................................................................................................

13.10 LEADERSHIP THEORIES

Leadership theories could be classified into the following three categories:

13.9.1 Personality theories

13.9.2 Behavioural theories
13.9.3 Situational theories

13.10.1 PERSONALITY THEORIES

Personality theory of leadership has been divided into the follow two categories;

(a) Great man theory

(b) Trait theory

(a) Great Man Theory

Some people believe that leaders are born and not made. They cite examples of great
leaders like Churchill, Mahatma Gandhi, Mao T'se Tung, Nelson Mandela, Abraham
Lincoln and many others, who created history 'by virtue of, their God-gifted leadership
qualities'. According to supporters of great man theory, leadership qualities could not
be much imparted through education and training; most of such qualities are a gift of
God. The historical base of great man theory is found in ancient days; when after the
death of a king his son or other descendant would succeed to the throne; as it was
presumed that the latter had inherited the qualities of his father i.e. leadership qualities
were carried in the genes.

Merits

Great man theory is true to some extent. In fact, qualities like - boldness, courage,
wisdom, foresight, initiative - are, by and large, God-gifted. Taking e.g. the case of
195
Principles of Business Management

industrial heroes of any country who laid foundations of industrial and economic
growth; we may say that most of such personalities had God-gifted talents.

Limitations

Some of the limitations of Great Man Theory are:

i) Except for physical features, other features are not usually inborn.
ii) Success associated with 'so-called inborn leaders' may be due to the chance
factor.
iii) There is need to supplement inborn qualities through formal education and
training - without which such qualities may die out.
iv) In the present-day-times, much professional skills and knowledge are required to
become a successful business leader, which are not inborn.

(b) Trait Theory

Trait Theory advocates that leadership qualities and trait are not inborn but can be
acquired by an individual through education, training and other forms of learning.
According to Tead a leader should have physical, nervous, energy, a sense of purpose
and direction, enthusiasm, friendliness and affection, integrity, technical mastery,
decisiveness, intelligence, communication skills and confidence. It was thought that a
successful leader is one who has specific leadership traits which can be acquired. At the
time of developing trait theory it was accepted that leadership traits are not completely
inborn but can also be acquired through learning and experience.

According to Ralph Stogdil a leader should have the following trait qualities;

i) General qualities: Physical fitness, character (honesty, loyalty and devotion), a

sense of fair play and justice, self-confidence, optimistic outlook.
ii) Technical qualities: Expertise in work-matters; ability to convince, educate and
guide subordinates.
iii) Managerial qualities: A balanced state of mind (to arrive at rational decisions),
organizing ability, sense of responsibility (feeling morally responsible for own
actions), motivating skills, effective communicator's qualities, receptiveness (i.e.
quality of listening to others), human relations expertise, being a man of foresight
and imagination (ability to convert challenges into opportunities), having wider
perspective (or broad outlook).
iv) Psychological qualities: Empathy (ability to place oneself in the position of
another; and simulating that person's feelings, prejudices and values) sociability
(quality of mixing-up with others), knowledge of the self (so as to capitalize on
one's strong traits and overcome one's weaknesses), knowledge of followers
(knowledge of their needs and psychology to decide about most appropriate
leadership style).

196
 Leadership

Merits

i) Leadership success depends on a leader's traits. More are the qualities possessed
by a leader; more successful he is likely to be.
ii) Trait qualities of leaders are transmitted, at least, in part, to his followers. For
example, followers of Gandhiji acquired many traits like truthfulness, character,
sympathy for the poor etc. from that grand personality.
iii) Trait theory is useful in developing training programmes for managers.

Limitations

Major limitations of trait theory are:

i) There is no universally accepted list of leadership traits.

ii) It is difficult to measure traits. Further, this theory does not state how high a
score on a particular leadership trait is required for leaders' success.
iii) Trait theory fails to consider the whole environment of leadership i.e. it ignores
an account of followers and situational variables.
iv) History shows that many leaders’ failed-despite possessing traits; and many
leaders were a great success - without possessing many traits, due to their power,
environment and chance factors.

13.10.2 Behavioural Theories

Since, the personality theories of leadership mainly focused on the traits and qualities
of leadership which are related to personality of an individual. It could not discover and
identify what set of traits and qualities are required to become effective leader. Thus,
the researchers further tried to isolate behavioural characteristics of effective leaders. In
other words, instead of finding out what effective leaders were, researchers attempt to
determine what effective leaders did; how they assigned a task, how they
communicated; how they motivate subordinates and how they carried out their job, etc.
unlike the traits and qualities of leadership, the behaviour can be learned. So it followed
that individuals trained in appropriate leadership behaviour would be able to lead more
effectively. This approach shifted the focus from trait to behaviour quality of a leader.
Further, the behaviour theory of leadership emphasizes that strong leadership is the
result of effective role behaviour. Leadership is shown by a person’s acts more than by
his traits. Researchers exploring leadership role have come to the conclusion that to
operate effectively groups need someone to perform two major functions; task-related
functions and group maintenance functions. Task-related functions or problem solving
functions, related to providing solutions to the problems faced by the groups, in
performing jobs and activities. Group maintenance functions or social functions related
to actions of mediating disputes and ensuring that individuals feel valued by the group.
An individual who is able to perform both roles successfully would be and effective

197
Principles of Business Management

leader. These two roles may require two different sets of behaviour from the leader,
known as leadership styles.

Leadership behaviour may be viewed in two ways: functional and dysfunctional.

Functional behaviour influences followers positively and includes such functions as
setting clear goals, motivating employees for achieving goals, raising the level of
morale, building team spirit, effective two way communication, etc. Dysfunctional
behaviour is unfavorable to the followers and denotes ineffective leadership. Such a
behaviour may be inability to accept employees ideas, display of emotional immaturity,
poor human relations. Some important behavioural theories of leadership are:

13.10.3 Situational Theories

Both personality and behavioural theorists of leadership have completely ignored the
effect of situational variables in the process of leadership. Personality theorists believed
that one can become successful leader if he possesses some trait qualities. Similarly,
behaviorists assumed that leader becomes effective and successful if he behaves in a
particular manner. But with the course of time many researchers conducted on
leadership revealed that apart from leadership traits and behaviour, the effectiveness of
it to the large extent depends on situational variables. Although a number of situational
theories of leadership have been developed so far, they all share one fundamental
assumption that successful leadership occurs when the leader’s style matches the
situation. They emphasize need for greater degree of flexibility in leadership and reject
the notion of universally applicable style of leadership. The situational factors or
variables which dominate effectiveness of leadership may be described as under;

1. Leadership Factors: it mainly includes all those which are related to the
personality of leader his orientation and skills which he uses for influencing
others.
2. Group Factors: it includes all those factors and forces which operate in a group
and effect leadership process. For example, interaction and relation among group
members, attitude of members towards leader, task and organizational goals, size
of group, group norms, values and goals, group structure and processes, etc.
3. Other Factors: in addition, there are a number of other factors which also place
significant effect on leadership from outside such as authority structure of
organisation, organizational plans, values and goals, motivation, communication
and control system of organisation and other economic, political, socio-cultural,
legal and technological factors.

Merits:

(i) Practical approach

Situational approach to leadership is one of a practical nature. It suggests that there is
no one best leadership style which could be effective in all situations; and that the

198
 Leadership

manager i.e. the leader must devise trail-made style of leadership, in view of situational
factors - to prove to be the most effective leader, in a particular situation.

(ii) Technique of managerial development

This approach facilitates managerial development. It sharpens diagnostic skills of
managers and makes them innovative; as managers are forced to think in terms of best
practical style of leadership, to ensure best performance out of follows - towards the
most effective and efficient attainment of organizational goals.

(iii) Freedom to managers

Situational approach provides ample freedom to managers to devise most appropriate
motivational techniques for inducing followers to give their best performance under the
circumstances.

Limitations

(i) Nothing new in approach

There is nothing new in the situational approach. This approach is just a matter of
common sense. Managers themselves understand the reality that the best style of
leadership must be based on the realities of the situation.

(ii) Over-emphasis on situational factors

This approach lays over-emphasis on situational factors. If the leader-

ship style is to be entirely devised on the spot, in view of situational variables; at times,
the manager may stand handicapped, in emergency situations-unable to find any
leadership style to cope with the situation.

(iii) An element of superfluity

Situational approach contains an element of superfluity. This is so because leader's

capabilities and followers' needs and attitudes do not entirely depend on the situation.

13.11 QUALITIES OF A GOOD LEADER

Leadership may be defined as the process of influencing other people to work willingly
for group objectives. The leadership process has four main elements. It is a process of
influence. Its purpose is to influence the behaviour of the followers. It involves
interaction between two or more people. It implies pursuit of common goals. The person
who influences the behaviour of the followers is called leader. A good leader should
possess the following qualities:

(1) Physical qualities. Physical characteristics is an important part of personality of

199
Principles of Business Management

an individual which is an important factor in determining success of leadership,

tight, weight, physique, health and appearance of an individual are important for
leadership to some extent.

(2) Intelligence. Leaders should possess higher level of intelligence than the average
of their followers. Good leaders possess the ability to think scientifically, analyze
accurately and interpret clearly and precisely the problems before them.

(3) Motivation drive. Leaders have relatively intense achievement type motivational
drives. They have inner urge to keep accomplishing something. To initiate suitable
activities at proper time is the habit of a leader. He works hard more for the
satisfaction of inner drives than for extrinsic material rewards.

(4) Maturity. Leaders generally have broad interests and activities. They are
emotionally mature and have balance temperaments avoiding enacting extremes so
that they not become thoroughness victims of the circumstances. They also have
high frustration tolerance.

(5) Human behavior approach. A good leader is considerate of the followers as his
success as a leader largely depends on the cooperation of the people. Thus, a
successful leader applies human behavioral approach. He approaches various
problems in terms of people involved more than in terms of technical aspects
involved. He is constantly busy in achieving the voluntary cooperation of the
followers.

(6) Foresightedness. A leader can’t maintain his influence unless he exhibits his trait
of looking forward well in advance and imagination for handling his followers. So
he should imaginatively visualize trends and devise his policies and programmes
with foresight based on logical programmes.

(7) Responsibility feeling. A reliable leader is one who is prepared to shoulder the
responsibility for the consequence of any steps he takes. He is always aware of his
duties and obligations associated with the position he holds.

(8) Adaptability. A leader is ready to absorb and adapt new ideas and views of other
as may be demanded by the situation. He is not critical of others. He is prepared to
accommodate other’s viewpoints and modify his decision, if required. Flexibility is
another name for open-mindedness which makes the leader more identified with
the group.

(9) Self-confidence. A good leader has conceptual clarity about the things he is going
to do. He has confidence in himself whenever he initiates any course of action.
Self-confidence is essential to motivate the followers and boost up their morale.

200
 Leadership

13.12 SUMMARY

Leadership plays a very significant role in business management for the achievement of
organizational established goals. The success of a business organisation is completely
depending upon the quality of its leadership. Good leadership gives a conducive
working environment and successful operation. Leadership is a human characteristic
that lifts a man’s vision to higher sights raises a man’s performance to higher standards
and builds a man’s personality beyond its normal limitation. Thus, Leadership may be
defined as the art of influencing the behaviour and performance of followers towards
the most enthusiastic attainment of common goals. The Major styles of leadership is
Autocratic; democratic and free-rein which are strictly govern influenced by the various
leadership theories like personality, behaviours as well as the situational theories.

13.13 TERM END QUESTIONS

1. "Leadership is the art of influencing the behaviour of followers, Comment. Explain

the meaning, natures and importance of leadership.
2. What is situational leadership? What are its merits? Why has it been criticized?"
3. What do you mean by style of leadership? Discuss in detail the autocratic style of
leadership and its relevance in today’s business scenario.
4. What do you mean by democratic style of leadership comment? How it is different
from the autocratic style of leadership?
5. Write short notes on the followings;
a. Free Rein Leadership
b. Situational Theory of Leadership
c. Qualities of good leaders
d. Functions of leadership

201
 UNIT-14 COMMUNICATION

STRUCTURE

14.1 Introduction
14.2 Objectives of the Unit
14.3 Meaning of Communication
14.4 Definitions of Communication
14.5 Natures of Communication
14.6 Process of Communication
14.7 Importance of Communication
14.8 Types of Communication
14.8.1 Formal Communication
14.8.2 Informal Communication
14.9 Barriers to Effective Communication
14.10 Guidelines for Effective Communication
14.11 Summary
14.12 Term-End-Questions

14.1 INTRODUCTION

Communication is a very common term in our day to day personal and professional life.
When we say or ask any thing to or from any one that is called communication.
Therefore, communication is the essential not only for fulfillment of needs but also for
survival of human as well as the organisation as a whole. Without, proper communication
not even a single work can be done. Similarly in the case of business organisation the
managerial function is not possible without a sound network of communication. It is not
only compulsory for directing but equally important for other managerial function like
planning, organizing, supervision, motivation as well as controlling. Therefore,
communication is the process of transmitting of business message, information etc. and
creation of understanding between superiors or subordinates, organisation to organisation
and organisation to consumers. It involves sending a message to another, who receives
the message and responds to it. In this unit the learners will learn about the concept,
meaning, definitions, process, channels, types as well as the barriers and guidelines for
effective communication.

14.2 OBJECTIVES OF THE UNIT

The learners after going through this unit will be able to;
1. Define communication
2. State the natures of Communication
3. Discuss the process of Communication
4. Explain the types of communication
5. Enumerate the barriers to effective communication

202
 Communication

14.3 MEANING OF COMMUNICATION

The term communication has been derived from the Latin word ‘communis’ which means
common. Therefore, communication is a process of transferring the business information
in such a way or language that should be commonly understandable to all concerned. It is
known to all that the success and failure of any plan completely depend on the
communication process adopted by the boss of that projects. However, there is a wide
disagreement among the management experts as well as the practitioners regarding
meaning and definitions of communication. Communication besides process it includes a
number of elements of communication through which two or more persons/ groups/
organizations share meaningful business information’s among themselves. It is the only
management tool through which the decisions, instruction and plans are transmitted from
top level of management to the lower levels as well as the feedback, grievances and the
opinions of lower level employees are taken. Otherwise it is very difficult to supervise
and guide the subordinates regarding the performance and problems being faced by the
subordination while implementing the plan.

14.4 DEFINITIONS OF COMMUNICATION

The followings are some important definitions of communication;

1. According to Louis A. Allen, “Communication is the sum total of all things one
person Joes when he wants to create understanding in the mind of another. It is a
bridge of meaning. It involves a systematic and continuing process of telling,
listening and understanding.”
2. According to Theo Heimann, “"Communication is the process of passing
information and understanding from one person to another. Communication,
fundamental and vital to all managerial functions, is the process imparting ideas
and making oneself understood by others. ”
3. According to Terry and Franklin, “Communication is the art of developing and
attaining understanding between people. It is the process of exchanging
information and a feeling between two or more people and it is essential to
effective management.”
4. According to Koontz and Weihrich, “Communication is the transfer of
information from a sender to a receiver, with the information being understood
by the receiver.”
5. According to Newmen and Summer, “Communication is an exchange of facts,
ideas, opinion or emotion by two or more persons.”

14.5 NATURE OF COMMUNICATION

Effective communication takes place when the received message is understood in the
same sense by the receiver as the sender intends. Following are the important features of
communication:
203
Principles of Business Management

1. Communication is a process: Communication is a process of sequential order of

steps that makes it complete and effective.
2. Two parties: Communication is a process which involves participation of two
parties - a sender and a receiver.
3. Two-way process: It is a two-way process. It includes sending of a message and
responding to the message.
4. Pervasive function: Communication is a pervasive function as it is required at all
levels and in all departments.
5. A continuous process: It is a continuous and on-going process as managers have
to be in regular touch with their subordinates and superiors.
6. A circular process: The process of communication is a circular process. A
message sent is followed by a reaction or response from the receiver, which require
another message.
7. It is a means of unification of business activities: it unifies internal
organizational environment with its external environment. It also integrates the
human and physical resources and converts them into organizational output.
8. It is basis for efficient management: it is very significant for every managerial
functions without which management of business activities is not possible.
Designing plans and organisation structures, motivating employees to accomplish
goals and controlling organizational activities; all require communication amongst
managers at various levels.
9. It is means not an end: effective communication is a means towards achieving the
end that is goal accomplishment. It smoothens managerial operations by facilitating
planning, organizing, staffing, directing and controlling functions.
10. It is a human activity: since communication makes accomplishment of
organizational goals possible, it is essential that employees understand and like
each other. If people do not understand each other’s view point, they cannot engage
in effective communication.

14.6 PROCESS OF COMMUNICATION

Communication is a process which involves participation of a sender with a message and

a receiver, who must understand it and respond to it. Following are the steps or elements
in the process of communication:

i) Sender. Sender or communicator is the person who wants to convey the message
to others. He initiates the communication process.
ii) Message. It is the subject-matter of communication. It is an idea to be conveyed. It
must be very clear and brief.
iii) Encoding. The idea is to be expressed into words, symbols, pictures or any other
form which will make the receiver understand the message. It is called encoding.
iv) Communication Channel. Channel is the media through which the message is
sent by sender to the receiver. It may be formal or informal and written or oral.

204
 Communication

v) Receiver. He is the person who receives the message. He may be a listener, reader
or viewer. The communication is not complete till the receiver understands the
message.
vi) Decoding. The message is decoded by the receiver to understand it. After decoding
the message, the receiver interprets it. Without understanding the message, no
appropriate action can be taken.
vii) Feedback. A message sent is followed by a reaction or response from the receiver,
which requires another message to be communicated by the sender, and so on. The
reaction or response is of the receiver is known as feedback. Thus, the process of
transmission and communication are not complete without feedback.

Thus, communication is a circular process. Following diagram explains that

Communication is a circular process:

Sender Message Encoding

Channel

Feedback Decoding Receiver

Fig. 7.2 Process of Communication

14.7 IMPORTANCE OF COMMUNICATION

The importance of communication in management can be hardly over-emphasized.

Managerial functions cannot be carried out without an efficient system of
communication. It is vital to the very existence and smooth operation of an enterprise.
The importance of communication in management may be explained as follows:

(1) Necessary for planning: Communication facilitates planning in a number of ways.

Participation of executives in planning is a precondition for getting the task done.
This can be secured only through interaction and communication. Further, to be
realistic planning should be based on accurate information. Such information can
be available only when there is systematic communication in the enterprise. For
example, the entire plan may fail if the information regarding latest market
developments are not available to the planners.

(2) Helps in decision-making: Communication helps management in arriving at vital

decisions. If the right type of information is not available at the proper time due to
lack of communication, it may not be possible for management to consider ail the
pros and cons before taking a decision. Moreover, it is through communication that
205
Principles of Business Management

management comes closer to the subordinates and is able to identify real problems
and take appropriate decisions. Communication is essential for decision making.

(3) Helps in coordination: In each enterprise the work to be done is always

subdivided into several interrelated departments or sections. In each department or
section there are many employees whose work is to be coordinated. Coordination
between these groups or sections is a must for the efficient functioning of the
enterprise. Communication is an aid to coordination. It is necessary for upward,
down ward and horizontal interaction between members at all levels of authority it
is necessary for creating unity of purpose and action.

(4) Basis of effective leadership: A good communication system bring* the manager
and subordinates in close contact with each other and removes misunderstandings,
by developing the skill of communication, a manager can be a real leader of his
subordinates. Thus, communication is the basis of leadership.

(5) Improves superior-subordinate relationship: Communication improves the

relationship between the superior and the subordinate as a result of flow of
information and discussion between them. Superiors and subordinates are clear
about what is to be achieved under what limitations. Communication is the
essential ‘flux' that binds individuals together in group activities. It works as a
lubricant in the process of management. It serves as the mechanism through which
human relations can be developed. Greater participation, proper exchange of ideas,
clear understanding of initiations helps in creating better understanding and this
ultimately improve superior- ordinate relationships.

(6) Helps the process of motivation and morale: Motivation and morale of
employees largely depend upon the effectiveness of communication. Sharing of
information with employees helps management to secure their willing cooperation.
Discussion on matters of common concerns between managers and employees is
source recognition of their importance. Information sharing and consultation act as
a strong motivating factor. A favorable impact on morale is also produced thereby.

I. Check Your Progress

1. What do you mean by Communication?

................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
…………………....................................................................................................................

2. What is the process of Communication?

................................................................................................................................................

206
 Communication

................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................

14.8 TYPES OF COMMUNICATION

The communication can be divided broadly into following two categories;

14.8.1 Formal Communication

14.8.2 Informal Communication

14.8.1 Formal Communication

Communication is said to be formal when it is transmitted through the officially
established chain of command in the organization structure. The organization structure
reflecting superior-subordinate relationship determines the flow of formal
communication. Formal communication normally takes the form of written
communication, such as note, memos, letters, reports and statements. According to the
direction flow, formal communication may be of four types (i) Downward (ii)
Upward,(iii) Horizontal, and (iv) Diagonal Communication. Formal communication is
usually written at top level, written and oral at middle level and usually oral at lower
level.

14.8. 1.1 Direction of Communication

On the basis of direction, communication may be classified into four type: (1) Downward
communication (2) Upward communication, (3) Horizontal communication and (4)
Diagonal communication. These are discussed below:

A A A A

B C B C B C B C

E E E
D (1) DownwardD (2) Upward (3) Horizontal (4) Diagonal
D E
D
Fig. 73. Direction of Communication

(1) Downward communication. Downward communication refers to the flow

communication from the top management downwards to the operating level. Thus,
207
Principles of Business Management

communications from superiors to subordinates at different levels of the

organization known as downward communication. Downward communication
from top management relates to organizational plans and policies. At the middle
and lower levels, such communications include order and instructions, rules and
procedures, etc. These communications may be oral or written.

(2) Upward Communication. Upward communication flows from a subordinate to

his superior in the hierarchy. It may consist of information relating to (i)
subordinate’s work performance, (ii) problems relating to work, (iii) opinions,
grievances/suggestion, etc. It may also relate to clarification needed with regard to
instructions, procedure and methods of work or statement of personal and family
problems. Upward communication not only keeps management informed about the
progress o ' work and the performance of subordinates but also helps managers to
take necessary steps to overcome problems relating to work, to settle grievances,
clarify instructions, rules, etc., and to advise employees regarding their personal
problems. Free flow of upward communication helps in maintaining cordial human
relations in the organization.

(3) Horizontal communication. Flow of communication between persons holding

positions at the same level of the organization is known as horizontal
communication. Exchange of information between managers of equal rank is
examples of horizontal communication. This type of communication usually
becomes necessary to coordinate different activities or to resolve interrelated
problems of two or more departments. For example, the Marketing Manager and
the Production Manager of an enterprise may discuss matters from time to time, so
that activities of the two departments are coordinated.

(4) Diagonal Communication. It refers to the transmission of information between

persons of the different departments and of the different levels. For example, the
production manager communicates a message to a clerk in the department of
accounts. Such communication is speedy but violates the principle of scalar chain.
Such practices are not encouraged.

Advantages of formal communication:

(i) Systematic. Formal communication is systematic and ensures orderly flow of

information as it passes through well- defined channels.
(ii) Identifying source. The source of communication can be easily located, which
helps in fixing responsibility.
(iii) Support. It provides support to managerial authority over subordinates.
(iv) No distortion. Chances of distortion of information are very few as formal
communications normally goes through written channel.
(v) Helps in controlling. Formal communication is helpful in the process of
controlling. It provides feedback, without which controlling is not possible.

208
 Communication

Disadvantages of formal communication:

(i) Slow. Formal communication is a slow-moving process as the formal

communication follows the scalar chain of authority.
(ii) Impersonal. It is conveyed mostly in an impersonal manner and thus lacks
personal warmth and involvement.
(iii) Inaccurate information. Sometimes, employees don’t transmit accurate
Information in view of the likelihood of unfavorable effects of the message or
report on their image.

14.8.2 Informal Communication

Communication that takes place independently of the formal line of authority is known as
informal communication. The necessity of such communication arises among people to
satisfy their social needs. The network of informal communication is known as ‘grape-
vine’. It often leads to rumors and spread very' fast through informal channel.

14.8.2.1 Grapevine: The network of informal communication is known as ‘grapevine’.

This is because the origin and direction of the flow of informally communicated
messages cannot be easily traced as in case of a vineyard. The ‘grapevine’ often leads to
rumors being spread very fast through informal channel.

14.8.2.2 Rumor: A rumor is the information without any adequate evidence. It is an

untrue part of the grapevine. Sometimes it may be correct but just by chance. Rumor,
when pass from one person to another, tends to change. In the process these are distorted
and twisted depending upon the interest and perception of the sender and receiver.
Rumors are undesirable and, therefore, should not be allowed to spread.

a. Advantages of informal communication. Advantages of informal communication

may be explained from the point of view of members of the organisation and
209
Principles of Business Management

management. Informal communication is helpful to the members of an organisation in the

following ways:

(i) Satisfaction of social needs. Exchange of ideas and information through informal
channels, helps the employees in developing friendly relations and derive social
satisfaction.
(ii) A substitute channel. It serves as a substitute channel where formal
communication is not possible. The matters, which cannot be communicated
through official channel, can be transmitted through informal channel.
(iii) Communication between persons having no official link. It is a means of
communication between persons, who are not linked through the official chain of
command.

14.8.2.3 Informal communication may be useful to management in the following

ways:

(i) Speedy transmission. It can be used for speedy transmission of message in

emergency and under exceptional circumstances.
(ii) Fills the gap in formal communication. For management, it serves to fill the gaps
in formal communication. It helps in communicatingtho.se messages, which cannot
be communicated through formal channel.
(iii) Understanding employee's attitudes and reactions: Through informal contacts
and interactions, managers can understand the attitude of employees and their
reactions on certain policies and programme.
(iv) Cordial human relations: It provides a sense of emotional relief and reduces
tension in labour-management relations as it has a personal touch.

b. Disadvantages or limitations of informal communication.

Following are the limitations of informal communication:

(i) Distortion of messages. There is a greater possibility of distortion of messages as

informal communication as different persons pass on the same message with
different interpretations. Informal communication is usually oral and has a greater
possibility of distortion.

(ii) Unsystematic and unreliable. It is unsystematic and cannot be relied upon for
regularity and timeliness. It often carries rumours and distorted facts.

(iii) Lack of secrecy. Informal communication is not good for management as

confidential information often leaks out through informal channels. Management
should take care and precautions, while using these channels.

14.8.1.4 Distinction between Formal and Informal Communication

210
 Communication

Basis of Difference Formal Communication Informal Communication

1. Channel of Formal communication is Informal communication

communication usually a written is usually a verbal
communication. communication.

2. Scalar chain The formal communication Informal communication

follows the scalar chain. does not follow it.

3. Proof A proof of sending formal There is no proof for

communication is kept sending informal
communications

4. Relations Formal communication is Informal communication

the result of authorities is the result of mutual
granted and duty assigned relationship among
by the organisation. employee.

5. Rumours and Messages are clear in Informal nature of

misunderstanding writing and as such, there is communication spreads
no cause for rumor or rumours and creates
misunderstanding in formal misunderstanding.
communication.

6. Authority Messages sent through Message sent through

formal communication are informal communication
formal, official and may not be authentic.
authentic.

7. Speed Formal communication is Informal communication

passed through formal passes without following
channels and, therefore, any formal channel and.
delay is unavoidable. therefore, is faster in
speed.

14.9 BARRIERS TO EFFECTIVE COMMUNICATION

Communication plays tin important role in all managerial functions, particularly in

decision making, coordinating and controlling. There are some factors, which are likely

211
Principles of Business Management

to disrupt effective communication. Disruption may be delay or distortion in

communication. Following are the important barriers in effective communication:

1. Organizational barrier: Organizational structure may also act as a barrier to

effective communication. In case of long chain of command, information may get
filtered, modified or lost at different levels in upward or downward
communication. In a complex organization structure, there is no smooth flow of
information.
2. Status differences: Status differences, between communicators may affect
communication adversely. It has been observed that a person with higher status
does give proper attention to the feedback and suggestions given by a person with
lower status. Persons at the lower level usually hesitate to express their frank
opinion and suggestions to their superior as their opinion or suggestions may not be
liked.
3. Perceptual barrier: Communication is not perfect, when the receiver of the
information evaluates the message before getting the complete information. A
manager may not listen to one of his subordinate, perceiving in his mind that he
always complains about something. There are many persons having closed minds.
They do listen the information, which conflicts with their perceptions. They block a
part of information, if it disagrees with their belief. People tend to listen what they
want.
4. Poor listening skill: Some people have poor listening skill. They do not pay per
attention to listening and understanding messages. The listener may believe die
information is not important.
5. Semantic problems. Semantic is science of meaning. Symbols and words: a
variety of meanings for different persons. If a word or symbol is not understood he
receiver in die same sense, which the sender wants, the communication will not be
perfect. For example, meaning of profit is not the same for management, equity
shareholder and taxation authorities.
6. Filtering of information: Sometimes, information is screened or filtered by
lender. Unpleasant Information may be held back or postponed from being trans-
ed. Sender of information may pass unpleasant information about his subordinate
in he dislikes.
7. Lack of ability to communicate: Some persons may not have ability and to
communicate effectively. Now a day, training programmes are available to improve
communication skill.
8. Situational barriers or noise: Communication may be disturbed by or distorted
due to situational barriers. It is called ‘noise’. Noise is the disruption interference
communication process at any point of time before its completion. Ii may be a id
affecting the listening such as coughing, vehicular noise, mechanical noise, a talk,
disturbance in telephone communication, etc. A letter lost or destroyed in nail
(traditional or electronic), a memo or notice hard to read are also considered as
noise in the communication process.
9. Barriers due to resistance to change: resistance to change for preserving status
quo may cause another communication barrier. Although resistance to change is
212
 Communication

not considered healthy but it is a natural inclination on the part of the person who
does not want to leave the existing environment in which he feels comfortable and
well adjusted. Thus, when the communication message is to convey new ideas, it
may not be properly received by the receiver because new ideas may result in
conflict with what he already believes in.
10. Distrust: receiver’s trust or distrust or a communication message also affects its
effectiveness. It is based on the credibility of sender in the mid of receiver, which is
a function of integrity, honesty and reliability of the sender of the message.

14.10 GUIDELINES FOR EFFECTIVE COMMUNICATION

Effective Communication, as we know is vital for managing the employee at work

efficiently. Without having effective communication plans and policy will not be
materialized, even not implemented and that will lead to the wastage as well as stagnation
organizational resources. It is equally important for securing smooth and coordinated
functioning of organisation for seeking objectives. Thus, the managers ought to be
familiar with several methods, techniques and guidelines which are helpful in
maximizing his communication abilities and efficiency. In order to make communication
process more effective and responsive, the barriers to effective communication can be
handled by the adaptation of following guidelines;

1. To reduce and remove perception barrier the sender of message should attempt to
know background level of knowledge of those with whom he is communicating.
When the subject is not clear, asking questions becomes critical for effective
communication.
2. Language difference can be handled by explaining meaning of unconventional or
technical terms in the simple language. As far as possible use of ambiguous words
or the words having dual meaning or multiple interpretations should be avoided.
3. Emotional reactions can be tackled by accepting them as a part of communicating
process. These should be analysed properly when they create problems. If the
subordinates are talking aggressively, it is necessary for the manager to understand
their reaction only then he may be able to improve the situation. And the manager
should also think about his own moods and must know how they influence others.
4. Organisational structure, its rigidity and line of command also create a problem
which can be solved by de-emphasizing authority relation and making more use of
informal relations for communicating messages.
5. In modern organisation the manager to become good communicator has to learn
three important skills, namely, skills of listening, talking, writing and conducting a
meeting.
6. An atmosphere of mutual trust and goodwill is to be created in organisation to
make communication process more effective.
7. The channels of communication should be direct, short and straight forward to
reduce delay and distortion in communication.

213
Principles of Business Management

8. Communication system of organisation should consist of both formal as well as

informal network.
9. There should be at least two way communication channels as to provide necessary
feedback which is essential for its effectiveness.
10. In modern organisation it is also found that physical layout of work place also
influence communication pattern. Thus, layout should be designed in such a way so
as to facilitate frequent interaction, and to maintain privacy that both contribute to
effective communication.

14.11 SUMMARY

Communication is the life blood of management without which the goal of a business
organisation cannot be achieved. The entire management process for planning to control
is completely dependent on the communication. It is the only bridge by which the entire
gap between management and employees can be parted. It is a only tool by which the
facts, information, ideas, suggestions, orders, requests, grievances etc. can be transferred
from one person to another - so as to impart a complete understanding of the subject-mat-
ter of communication to the recipient thereof. Therefore, every organisation should have
sound communication process with full of understanding, attention, timeliness,
rationality, feedback as well as constructive so that the information and suggestions can
be send easily from top to bottom. The managers should have the sound knowledge of
communication process to discuss the objectives, plan, policy of the organisation with the
superiors and subordinates. They should be aware about the organizational, languages,
channels and personal barriers which create hurdles in effective communication.

14.12 TERM-END-QUESTIONS

1. What do you mean by communication? Discuss the meaning, process and channels of
communication in details.
2. Explain Formal communication and state how it is different from the informal
communication?
3. What are the barriers of effective communication, explain in details with suitable
example?
4. Explain the significance of informal communication in management. Describe the
various networks of informal communication.
5. Explain the process of communication. Discuss the different types of communication.

214
 BLOCK – 4

Coordination and Control

The present block refers to the fundamentals of Co-ordination, Process and

Techniques of Controlling. In the present unit the meaning, types and process of
management of change has been discuss in details. The learners will have the
opportunities to learn the meaning, types, process of Coordination and Control.
They will learn about the techniques of control as well as the process of
management of change. In the present unit the need for coordination and control
is highlighted too. The present block includes the following units;

Unit 15: Co-ordination

Unit 16: Process of Controlling

Unit 17: Techniques of Controlling

Unit 18: Management of Change

215
 UNIT-15 COORDINATON

STRUCTURE

15.1 Introduction
15.2 Objectives of the Unit
15.3 Meaning of Coordination
15.4 Definitions of Coordination
15.5 Features of Coordination
15.6 Elements of Coordination
15.7 Importance of Coordination
15.8 Barriers in achieving Coordination
15.8.1 Check your Progress
15.9 Types of Coordination
15.10 Techniques of Coordination
15.11 Principles of Coordination
15.12 Coordination and Coordination
15.13 Coordination is the essence of Management
15.14 Summary
15.15 Term-End-Questions

15.1 INTRODUCTION

Coordination as a function of management refers to the task of integrating the activities

of separate units of an organisation to accomplish the organisational goals efficiently.
According to Mooney and Reelay, “Coordination is the orderly arrangement of group
efforts to provide unity of action for the pursuit of a common purpose.” Coordination is
required in group efforts, not in individual efforts. The objective of coordination is to
ensure that the goals of units and sub-units are pursued in harmony with each other
keeping in view the goals of the organisation as a whole. It is needed at all level because
it is the essence of management. The basic objectives of coordination are to unify,
integrate and harmonise the different activities which are being undertaken towards
common objectives of the organisation. It is a continuous as well as the dynamic process
which depend on the situation. It is the result of conscious side of management without
which the management will not be efficient. The learners in the present unit will learn
about the meaning, process, nature and qualities of a good coordinators etc. Coordination
is an important function of Management which helps in ensuring the organization good
will be achieved efficiently and harmoniously.

15.2 OBJECTIVES OF THE UNIT

The learners after completing this unit will be able to:

1. Explain the term coordination
2. Define the term coordination
3. Discuss the nature and importance of coordination
216
 Co-ordination

4. State the type of coordination

5. Enumerate the techniques of Coordination

15.3 MEANING OF COORDINATION

Business organisation comprises varied types of units and subunits, along with different
professional individual who has to come together to fulfill the organizational goal
efficiently on time. Coordination bring different group together to achieve one goal.

Business organisation is the system which consists of many sub-systems. These sub
system contribute to the functioning of organisation. Through these sub system various
activities, operation and function are performed. In order to seek smooth and effective
functioning of organisation it is necessary to integrate and coordinate them. The term
coordination may be defined as the process of bringing about unity and harmony in the
functioning of pulling together various components of organised activity and weaving
them into a unified and integrated whole for achieving predetermined goals.

Therefore, coordination may be considered as a process of integrating objectives and

activities of separate work units of functional departments for realizing organizational
goals. Without coordination the people and departments will lose sight of their role in
organisation. They may be tempted to pursue their own interest and goals at the cost of
organizational goals. The main function of coordination is to forge unity of purpose and
implementing plans in a harmonious manner for seeking common goals. The process of
implementing plans in a harmonious manner for seeking common goals. The process
coordination is inevitable and imperative in group efforts because common goals can be
achieved only by integrating, unifying and coordinating efforts made by the members.
Co-ordination maintains unity of action amongst individuals and departments. Absence
of co-ordination will result in sub-optimal attainment of goals. In extreme situations, it
may result in losses and liquidation of companies. Co-ordination integrates, harmonises
and balances the conflicting opinions of individuals and departments and facilitates their
movement in a unified direction the organizational goal. If, for example, the production
department does not coordinate its activities with the sales department, production may
be more or less than the required sales. Production more than sales will result in piling of
stock and blocking up funds in inventory and production less than sales will result in loss
of sales revenue and goodwill of the firm. Coordination, thus, facilitates smooth running
of a business.

15.4 DEFINITIONS OF COORDINATION

1. According to Luther Gulik, “if subdivision of work is inescapable, coordination

becomes mandatory.”
2. According to Ordway Tead, “Coordination is the efforts to ensure the smooth
interplay of the functions and forces of all the different components and parts of

217
Principles of Business Management

organisation to the end that its purpose will be realized with a minimum of
function and maximum of collaborative effectiveness.”
3. According to J.D. Mooney, “Coordination is the orderly arrangement of group
effort to provide unity of action in the pursuit of a common purpose.”

15.5 FEATURES OF COORDINATION

The following are some important features of coordination;

1. Group effort: Coordination integrates the efforts of individuals and departments

to makethem work as a group. The group works for maximizing the group goals
as well as organizational goals. Coordination unites the effort as a group of
individual and the departments to execute the work together.
2. Unity of action: Every individual and department has his own perspective or
way of achieving the organisational goals. Coordination ensures unity of action
amongst individual and departmental activities.
3. Common goal: Each individual and department has a goal, which it strives to
maximize. Maximization of departmental goals at the cost of organisational goals
can be harmful forthe organisation. Sales department, for example, may want to
increase expenditure onadvertisement to maximize sales. Finance department,
however, may not release funds for advertisement to control financial costs. An
organisation consists of many departments and each department has a target or
goal to achieve which they strive for.
4. Continuous process: Coordination is not a onetime attempt by managers to
integrate and harmonies individual goals. It is a continuous process that keeps
going as long as theorganisation survives.
5. Managerial responsibility: Co-ordination is the responsibility of every manager
at every level for every operative function (production, finance, personnel and
sales). All managerscontinuously coordinate the efforts of people working in
their respective departments.
6. Essence of management: Coordination is not a separate function of
management. It is required for every managerial function. Managers coordinate
the human and non-humanresources while carrying out all the managerial
functions of planning, organising, staffing, directing and controlling.
Coordination is, thus, called the 'essence of management'.
7. Process of synthesis of efforts: Coordination integrates and synthesizes the
efforts of peopleof all departments at all levels towards achievement of common
organisational goals. It alsosynthesizes the organisational resources (physical,
human and financial) to collectivelycontribute to organisational goals.
8. Necessary obligation: Coordination is not something that managers may or may
not strivefor. All managers (also non-managers) must direct their efforts towards
a common goal, considering this as their necessary obligation.

218
 Co-ordination

9. Deliberate effort: Coordination is not a spontaneous effort of managers.

Managers make deliberate efforts to coordinate their inter-departmental
activities.

15.6 ELEMENTS OF COORDINATION

Following are the elements of coordination:

1. Group effort: Coordination integrates individual effort of each unit so that the
unit works as a group. It ensures that individuals work as group for promoting
their individual and organizational goals.
2. Unity of action: Coordination ensures that activities of each individual, group
anddepartment are headed towards the common goal. They must be carried out
within the framework of policies, procedures etc.
3. Common purpose: Coordination strives to maintain balance amongst individual,
departmental and organisational goals. It ensures that resources and tasks are
assigned toindividuals and departments in a manner that working of one
department promotes theworking of other departments. All individuals, groups
and departments should have a commonpurpose, that is, achieve organisational
goals.

15.7 IMPORTANCE FOR COORDINATION

The need for coordination arises because individuals and departments have different
goals. They depend on each other for resources and information. To ensure that all
individuals and departments use organisational resources and information for successful
attainment of organisational goals, managers continuously coordinate their activities. The
following benefits are offered by coordination:

1. Non-routine jobs: Jobs which are non-routine in nature need constant flow of
information, both vertical and horizontal. Unless there is proper coordination
amongst these jobs, theycannot be performed efficiently. Coordination, thus, helps
in effectively carrying out non-routine jobs.
2. Dynamic activities: Coordination helps in integrating activities which constantly
change according to changes in the environment.
3. Standards of performance: When standards of performance against which actual
performance is to be measured are too high, managers need to coordinate various
businessactivities to ensure that high performance standards are achieved.
4. Interdependence of activities: When different units of organisation are dependent
on each other for resources or information, there is greater need for coordination
amongst them.Greater the interdependence, greater is the need for coordination.
According to Thompson, there are three types of interdependence. In pooled
interdependence, organisationalperformance depends upon pooled or combined
performance of all the departments. Thishappens when different divisions make
219
Principles of Business Management

different products not dependent on each other. Theneed for coordination is,
therefore, minimum. In sequential interdependence, performanceof one unit
depends upon that of another (marketing department depends upon
productiondepartment to increase its sales). This requires coordination between
production and salesdepartments. In reciprocal interdependence, there is give and
take relationship amongst units. With increase in degree of interdependence from
pooled to reciprocal, the need forcoordination also increases.
5. Specialisation: Specialisation leads to concentration on very narrow areas of job
activity. Individuals tend to overlook overall perspective of the job. This requires
coordination to directall the activities towards a common goal.
6. Growing organization: In growing organisations, number of people and divisions
becomesso large that it becomes difficult for top managers to coordinate the
activities performed by all of them. Various techniques of coordination (rules,
procedures, plans, goals, slack resourcesetc.) help managers in unifying diverse and
multiple o organisational/departmental activitiestowards the common goal.
7. Promoting group effort: In the absence of coordination, each individual and
department will carry out their objectives in a manner that they perceive as the best.
People tend tomaximize their individual goals. This may, however, not be the best
for the organisation as awhole. Coordination helps in promoting group effort rather
than individual effort for achievingorganisational goals optimally. It harmonises
individual goals with organisational goals andsatisfies individual goals through
satisfaction of organisational goals.
8. Unity of action: Organisations have diverse work force, thoughts, resources, goals,
activities and skills. Coordination helps to unify these diverse set of actions
towards a single goal and, thus, maximize their use.
9. Synergy: Coordination facilitates the sum total of output of group to increase by
more than the sum total of their individual output. It integrates work of different
units and producessynergistic effects by increasing the overall organisational
output.

15.8 BARRIERS IN ACHIEVING COORDINATION

There are some barriers also in achieving effective coordination. Some of these are
discussed below:

1. Increased specialisation: Though specialisation helps to increase organisational

productivity, it also creates the problem of coordination. According to Paul R.
Lawrence and Jay W. Lorsch,, "People in specialized units tend to develop their
own sense of the organization's goals andhow to pursue them." Higher the degree
of specialisation, therefore, more difficult it is tocoordinate the activities.

2. High interdependence amongst various units: Higher the degree of dependence

of one unit on the other, greater the need for coordination and more difficult it is to

220
 Co-ordination

coordinate.Achieving coordination of units/activities with reciprocal

interdependence is more complexthan for activities with pooled interdependence.

3. Pooled interdependence: Performance of one unit does not depend on the other,
but overall performance of each unit affects the performance of the organisation as
a whole. Thus, organisational performance depends upon pooled or combined
performance of each unit or department of the organisation.

For example, an organization is structured on the basis of products. Each product

division has functional heads to look after activities related to its product. Success
of one product division does not depend upon the other, but the overall
performance of the organisation depends upon how successfully each product
division operates its activities.

4. Reciprocal interdependence: Where there is give and take relationship between

different units, it is known as reciprocal interdependence. If a business firm loads
its trucks with finished goods and sends them to different locations for unloading;
unless the unloaded trucks come back to them, they cannot be reloaded for further
shipment. This two-way flow of activities between different units is a form of
reciprocal interdependence.

5. Different approach towards the same problem: If different departments look at

the same problem in different ways, there will be problem of coordinating their
activities.If a company wants to increase its profits; production department may
want to improve the quality of goods, while sales department may want to improve
advertisement to increase the sale. Finance department may aim at cost control as
the means of increasing company's profits. Since each department has different
perception about the way organisational profits can be increased, top managers may
find it difficult to coordinate conflicting opinions of different functional heads.

6. Uncertainty about future: Howsoever skilled and competent may the managers
be incoordinating the activities of different units, changes in environmental factors
can makecoordination difficult. Internal uncertainties like strikes and lockouts also
make coordinationdifficult.

7. Lack of skill: Even in certain situations, where work flows smoothly, coordination
becomesa problem if managers do not have the knowledge, skill and competence to
coordinate.

8. Informal groups: Informal groups which are strongly bonded by forces of culture,
social values and ethics can affect the ability of highly skilled managers to
coordinate organizational activities.

221
Principles of Business Management

15.8.1 Check your Progress

1. What are the features of Co-ordination?

................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
…………………....................................................................................................................
2. What are the elements of Co-ordination?
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
………………........................................................................................................................

15. 9 TYPES OF COORDINATION

Coordination can be of the following types:

15.9.1 Internal and External Coordination

15.9.2 Vertical and Horizontal Coordination.

15.9.1 Internal and External Coordination: Coordination between the activities of

departments and people working within the organisation is known as internal
coordination. Coordination between activities of the organisation with units
outside the organization (Government, customers, suppliers, competitors etc.) is
known as external coordination.

15.9.2 Vertical and Horizontal Coordination: Both these types of coordination are
the forms of internal coordination. Vertical coordination is achieved amongst
activities of people working at different levels. It coordinates the activities of
top managers with those of middle andlower level managers. It is "the linking of
activities at the top of the organisation with those atthe middle and lower levels
in order to achieve organisational goals." Vertical coordinationcan be achieved
through span of management, centralization, decentralization and delegation.

Horizontal coordination is coordination amongst the activities of people of different

departments working at the same level. It is "the linking of activities across department’s
atsimilar levels. It links the activities of four primary departments — production, finance,
personnel and sales.

The need for horizontal coordination arises when departments depend upon each other for
information or products. When information is transacted across departments,
222
 Co-ordination

departmental managers share their views on the same problem and arrive at innovative
ideas and thoughts to deal with the situation According to Jay R. Galbraith, "the more
organisations need to process information in the course of producing their product or
service, the more methods of horizontal coordination they will need to use".

15.9.2.1 Different methods of achieving horizontal coordination are slack

resources, information systems and lateral relations.

1. Slack resources: mean maintaining a cushion of resources like extra time, money,
material, inventory, people etc. by each department. This provides flexibility to the
organisation to adapt to various internal and external pressures without waiting
forresources. It also provides a leeway to different units to meet each others'
requirement and reduces the need for constant and continuous coordination.
2. Information systems: are the systems which facilitate exchange of information
among units of the organisation. Computers have eased the work of managers in
transmittinginformation to different departments. Information systems facilitate
effectivecoordination amongst departments.
3. Lateral relations: refers to relations between peer groups of different departments
whoseinteraction with each other (through direct contact or appointment of liaison
officer orwork groups/teams) helps in arriving at solution to the problem.

Lateral relations allow the information to be exchanged across the scalar chain rather than
people placed at higher levels in the organisational hierarchy. These relations are
"coordination of efforts through communicating and problem solving with peers in other
departments or units, rather than referring most issues up the hierarchy for resolution."
Lateral relations can be maintained in the following ways:

1. Direct contact: Mostly prevalent at middle and lower levels, people of different
departments directly communicate with each other to solve their organisational problems
without involving the top managers. Coordination is, thus, achieved laterally without
following the chain of command.

2. Liaison roles: Rather than people of different departments solving their problems on
their own, through direct contact, the problems are solved by an individual who maintains
direct contact with people of different departments. The individual, known as the liaison
officer, is a common link between the units or departments. Though he does not have
formal authority over the groups, he facilitates the flow of information and
communication between them. He coordinates the efforts of diverse groups by dealing
directly with departments where problems are occurring.

3. Task forces: Where the liaison officer cannot coordinate the activities of departments
because the inter-departmental dependence is complex or because coordination has to be
achieved amongst many departments, task forces are created to facilitate coordination. A
task force is a team where members from different departments (where the problem has
arisen) form a group and share information with respect to the problems of their
223
Principles of Business Management

respective departments. When solution to the problem is achieved, the task force is
dissolved and members go back to their respective positions. Coordination amongst
different departments is, thus, facilitated through task forces.

4. Committees: "Committees are usually formally organised groups with a

designatedmembership and chairperson and regularly scheduled meetings." Committees
are generallyformed to look into specific organisational problems which may be recurring
in nature. Acommittee that looks into the cases of absenteeism, promotion and transfer of
workers achievescoordination with respect to keeping the labour force satisfied in the
organization.

5. Managerial integrators: The role of integrating or coordinating the activities of

various departments is assigned to a specifically appointed manager whose work is to
coordinate theproducts, projects or brands that involve inter-departmental dependence or
interaction. Thesemanagers are usually product managers, project managers or brand
managers.

They ensure efficient use of scarce organisational resources over products or projects that
require integration of functional activities. They also enable the organisation to adapt to
the fast changing environment.

15.10 TECHNIQUES OF COORDINATION

The following techniques help to achieve coordination:

1. Scalar chain: Scalar chain clearly identifies every person's position in the
organization structure. It also identifies the authority and responsibility attached to
each position in thescalar chain. When one knows clearly his position, the position
of his boss and subordinates,it facilitates coordination.

2. Rules and procedures: In organisations where simple and routine activities are
performed, rules and procedures provide established standards of performance.
Organisational membersperform according to rules without going to top managers
everytime they face a problem.Rules and procedures, thus, provide an effective
way of achieving coordination.

3. Plans and goals: Well defined plans and goals help to achieve coordination by
ensuring that efforts of all individuals and departments are directed towards
organisational goals.

4. Information system: People of different departments at all levels need information

for making various decisions. Effective information systems like computers and
networkingfacilitate free flow of information and, thus, facilitate coordination
throughout the organisation.
224
 Co-ordination

5. Lateral relationships: Lateral relations refer to relations between peer groups of

different departments. People of different departments constantly interact with each
other throughformal and informal communication systems. These relations refer to
"coordination of effortsthrough communicating and problem solving with peers in
other departments or units, ratherthan referring most issues up the hierarchy for
resolution." An effective system ofcommunication, thus, facilitates coordination by
developing strong relationships amongstpeople of different departments.

6. Slack resources: It means keeping a backup of resources. If an organisation

expects demand for its product to be 10,000 units every month, it should produce
11,000 units to meet sudden, unexpected increase in demand. In case it does not do
so, it will have to wait to produce to meet the increased demand. Competitors can
take advantage of this and divert the firm's customers to increase their clientele.
Maintaining stack resources, thus, facilitates coordination amongst different
departments and units.

7. Cooperation: Cooperation is a way of achieving coordination. Cooperation refers to

voluntary actions of members to work collectively as a group. If all the members
cooperatewith each other, it will result in coordination amongst their activities.

8. Independent units: If organisation is structured in a manner that different units

carry outall functional activities (production, finance, marketing and personnel)
with respect to theirunits independently, the need for coordination gets reduced.
Though this will be financiallycostly, it will reduce top manager's burden to
coordinate the activities of these units.

9. Committees: "Committees are usually formal organised groups with a designated

membership and chairperson and regularly scheduled meetings." Committees are
formed tosolve specific organisational problems like leave committee. This looks
into cases ofabsenteeism and transfer of workers and achieves coordination by
keeping the organisationalwork force satisfied at their jobs.

10. Managerial integrators: Managerial integrators are specially appointed managers

who continuously coordinate the products, project or brand managers who
coordinate the activitiesof work groups carrying out different projects or producing
different products.

15.11 PRINCIPLES OF COORDINATION

Principles refer to fundamental truths on which an action is based. In order to achieve

coordination, managers follow the following principles of coordination:

225
Principles of Business Management

1. Unity of command: Unity of command means one boss for one subordinate. It
will be difficult to achieve coordination if one individual has to report to more than
one boss. Unity of command, thus, helps in coordinating the activities of
individuals and departments.

2. Early beginning: It follows the principle of earlier the better. Managers should
initiate efforts to coordinate organisational activities right from the planning stage.
If plans are implemented without coordination in mind, it will become difficult to
coordinate the working of people at later stages.

3. Scalar chain: It refers to chain or link between top managers and lower managers.
It is the hierarchy of levels where information and instructions flow from top to
bottom and suggestions and complaints flow from bottom to top. This chain
facilitates coordination as top managers pass only those orders and instructions
down the chain which are necessary for subordinatesto work efficiently.
Subordinates also pass upwards only those suggestions and complaints, which they
feel should be brought to the notice of top managers through middle level
managers. Passing of only necessary information facilitates coordination amongst
various levels. Scalar chain, thus, facilitates coordination.

4. Continuity: Managers appreciate the fact that coordination is a continuous process.

It must be continuously carried out at all levels in every department.

5. Span of management: It refers to the number of subordinates that a manager can

manage effectively. It is important to place only as many subordinates under the
direction of one manager as can be effectively managed by him. It affects the
manager's ability coordinate the activities of subordinates working under him.

6. Direct contact: Direct or personal contact between managers and subordinates can
achieve better coordination than indirect or impersonal contact. Face-to-face
interaction amongst people of different levels or same level in different
departments promotes understanding ofinformation and thoughts. This facilitates
effective communication and through it, effectivecoordination.

7. Reciprocity: It refers to interdependence of activities. Production and sales

department, for example, are inter-dependent. The more one sells, the more one
needs to produce. Themore one produces, the more one attempts to sell what is
produced. The nature and extent towhich organisational activities are dependent on
each other are considered by managerswhen they initiate to coordinate the
organisational activities.
8. Dynamism: There are no fixed and rigid rules for coordination. Changes in
organizational environment necessitate changes in the techniques of coordination
also. It is, thus, a dynamicand not static concept.

226
 Co-ordination

15.12 COORDINATION AND COOPERATION

Though the terms 'coordination' and 'cooperation' are used interchangeably, they are
conceptually different. While cooperation is a voluntary action of members to work
collectively as a group, coordination is a deliberate attempt of managers to unify the
actions of organisational members. Coordination can be achieved if all the members
cooperate with each other and with top managers. Even when members cooperate with
each other, there is need for managers to coordinate their efforts to achieve the
organisational goals. For example, the departmental manager wants to organize a
seminar. All the members of his department cooperate with him in organising it. Despite
their cooperation, the departmental manager has 1 to coordinate their activities by
dividing work amongst them and giving them the authority I and responsibility to
effectively discharge duties related to that work.

The terms 'coordination' and 'cooperation' are supplementary to each other.

Achieving one without the other is almost impossible. The term 'coordination' ishowever,
wider in scope and includes 'cooperation'. Differences between the two terms are
highlighted in the following table:

Table No. 15.1 Coordination and Cooperation

S. No Nature of Cooperation Coordination

difference
1 Attempt It is a voluntary attempt of It is deliberate attempt of
members. managers.
2 Scope It is narrow in scope It is wider in scope
3 Relationship Relationship amongst Relationship amongst
members is in formal members is formal
4 Nature It is an important technique of It is not technique toachieve
coordination. cooperation.
5 Concept It is a collective effort of It is an attempted effort of
group members that arises out managers to unify the action
of their need to work together of all the organisational
to attain a common goal. members.

15.13 COORDINATION - THE ESSENCE OF MANAGEMENT

When the organisational structure is created and departments are made, managers
coordinate the activities of these departments to achieve organisational goals. Top
managers communicate the organisational goals to departmental managers and help them
carry out the functions of planning, organising, staffing, directing and controlling for
their respective departments. They integrate objectives of the organisation with the
objectives and activities of departments through coordination, in order to harmonise
227
Principles of Business Management

departmental goals with organisational goals. Coordination, thus, helps to coordinate the
work of different departments and within each department; it integrates the functions of
management. Coordination is, therefore, rightly called the essence of management. It
helps each managerial function and each departmental activity contribute to overall
organisational goals.

1. Coordination while planning: When plans are made by managers, they ensure
that differenttypes of plans (long-term and short-term, strategic and routine),
policies, rules and procedureoperate in harmony and coordination with each other
so that various departments effectivelyfollow these plans.
2. Coordination while organising: Division of work into departments on the basis of
similarityof activities, appointing people to manage these departments, defining
their authority andresponsibility and creating the organisational structure are done
to coordinate departmentalactivities with the overall organisational goals. If the
activities are divided haphazardly withoutcoordination, some activities may not be
assigned to individuals and some may be assignedto more than one individual.
3. Coordination while staffing: The jobs having been created, managers ensure that
individualare placed on different jobs according to their skills and capabilities. This
ensures placing the right person at the right job in order to achieve coordination
amongst their work activities.
4. Coordination while directing: When a manager directs his subordinates through
motivation, leadership and communication, he coordinates the various
organisational activities. It is also an attempt to harmonise individual goals with
organisational goals. Directing maintains unityand integrity amongst activities of
members in the organisation.
5. Coordination while controlling: Controlling ensures that actual performance is in
conformity with planned performance. The purpose of controlling through budgets
or information systemsis to coordinate the various organisational activities.

Every managerial activity is, thus, coordinated to contribute towards organizational goals;
Coordination is required throughout the organization.

"Coordination is achieved by structuring the organisation in such a way as to ensure

vertical coordination between hierarchical levels of management and horizontal
coordination across individuals and work units at similar levels." The principles of
management like unity of command and scalar chain ease the task of managers in
effectively coordinating various managerial functions.

15.14 SUMMARY

The purpose of organizing; division of work, departmentation, span of management,

centralization and decentralization, delegation of authority and organisation structure is
to optimally achieve the organizational goals. This is possible if units or departments of
the organisation are integrated, united and co-ordinate in a unified direction. Once the
228
 Co-ordination

activities of the organisation are broken into smaller units which are re-grouped into
departments (on the basis of similarity of features), it becomes necessary for managers to
coordinate the activities of these departments by communicating the organizational goals
to each department, setting departmental goals and linking the performance of each
department with that of others so that all the departments collectively contribute towards
the organizational goals. Coordination is, thus, "the process of linking the activities of
various departments of the organisation."

Coordination is "the process of integrating the objectives and activities of the separate
units (departments or functional areas) of an organisation in order to achieve
organizational goals efficiently."

15.15 TERM-END-QUESTIONS

1. What do you mean by Coordination? Explain the concept, features of coordination?

2. Discuss the importance of coordination. What are the barriers in achieving
Coordination?
3. What are the types of Coordination? Discuss the techniques of Coordination in detail
with suitable examples.
4. State the principles of Coordination. Differentiate coordination and cooperation.
5. What do you mean by elements of Coordination, discuss in details the various
elements of coordination?

229
 UNIT-16 PROCESS OF CONTROLLING

STRUCTURE

16.1 Introduction
16.2 Objectives of the units
16.3 Meaning of Controlling
16.4 Definitions of Controlling
16.5 Natures of Controlling
16.6 Objectives of Controlling
16.7 Process of Controlling
16.8 Importance of Controlling
16.8.1 Check your Progress
16.9 Limitation of Controlling
16.10 A Good Control System
16.11 Relationship between Planning and Controlling
16.12 Summary
16.13 Term-End-Questions

16.1 INTRODUCTION

Controlling is one of the last but important functions in the entire process of management
in order to achieve the organizational objectives; it becomes necessity to ensure that the
adopted plans are being implemented properly or not. For this purpose performance of
the subordinates is measured and then compared with the planned activities. If there is
any deviation, its causes that diagnosed and remedial steps are taken. The whole process
is called ‘Controlling.’ Without effective controlling there is no use of good plans. In this
the learners will learn the various aspects of controlling as a function of management.

16.2 OBJECTIVES OF THE UNIT

The learners after reading this unit will be able to;

1. Explain the concept of Controlling
2. Define the term controlling
3. State the natures, objectives of Controlling
4. Discuss the process of Controlling
5. Enlist the importance and limitation of Controlling

16.3 MEANING OF CONTROLLING

Controlling is the process through which managers assure that the actual activities match
to the planned activities. It involves verifying whether activities undertaken are in
conformity with the plans adopted, instructions issued and results expected. The
managerial function of controlling relates to the measurement and correction of
performance in order to make sure that enterprise objectives and the plan devised to attain
230
 Process of Controlling

them are accomplished. Management control is a systematic effort through which, the
managers assure that the actual activities conform to the planned activities. Although, the
scope of control varies among managers, those at all levels have responsibility for
execution of plans. Thus, control is an essential managerial function at every level.
Controlling, in order to be effective, has to be regular and continuous to ensure smooth
running of the organisation in conformity with established standards. In other words, it is
through control that managers ensure the execution of plans and achievement of goals. In
the absence of control the planned activities may not be carried out according to the
prescribed methods and procedures. Controlling also involves taking corrective actions,
whenever the performance is not according to predetermined standards.

16.4 DEFINITIONS OF CONTROLLING

These are some important definitions of controlling given by management experts;

1. According to George R. Terry, “Controlling is determining what is being

accomplished, that is evaluating the performance and, if necessary, applying
corrected measures so that the performance takes place according to plan.”

2. According to Henry Fayol, “Control consists in verifying whether everything

occurs in conformity with the plans adopted, the instructions issued and the
principles established. It has for its object to point out weaknesses and errors in
order to rectify them and prevent recurrence. "

3. According to E.L. Brech, "Control is checking current performance against

predetermined standards contained in the plans, with a view to ensure adequate
progress and satisfactory performance, and also recording the experience gained
from the working of these plans as guide to possible future needs."

4. According to Koontz and O’Donnell, “The managerial function of control is the

measurement and correction of the performance of subordinates in order to make
sure that enterprise objectives and the plans devised to attain them are
accomplished.”

16.5 NATURE OF CONTROLLING

Controlling is the process through which managers assure that the actual activities
conform to the planned activities. Following are the important features of controlling:

(1) Controlling is forward looking. The effective control system should be forward
looking. Future-oriented controls are also known as feed forward controls. They are
designed to measure current performance and providing early information to
achieve results in conformity with planned performance and standards. Checking
on operation should enable prompt detection of faults and of the causes before it is
231
Principles of Business Management

too late for remedy. Deviations, if any, should lead to investigation of the factors
responsible and noting the effect on future operations. Remedial action should
follow so as to prevent the occurrence of defects thereafter. In other words, controls
must ensure timely detection of deviations and prevention of their repetition in
future. Thus, controlling is forward looking.

(2) Controlling is looking back. The control process is made of three phases (a)
Determination of the planned performance; (b) Comparison of actual performance
with planned performance; and (c) Corrective action to be taken on the basis of
analysis of the deviations. Past-oriented controls measure results after the process.
They examine what has happened in a particular period in the past.

Thus, control is in fact looking back to planned performance. In control it is seen

that actual performance is in conformity with plans. We have to look back what
was actually planned to be achieved and what is actually achieved.

(3) Controlling is a continuous process. Controlling involves constant analysis of

validity of standards, policies, procedures, etc. It also suggests corrective and
remedial measures in various processes and then it starts again comparing the
performance of work. Thus, a manager has to perform this function continuously as
expressed in the following diagram;

Measurement of
Performance

Establishing Comparison of Action

Standards With Standards

Corrective Actions

Figure 16.1 Contrilling –A Continuous Process

(4) Controlling is a pervasive function. Controlling is a function which is performed

at all levels of management and in every type of organization. Controlling has to
see that other functions of management are effectively performed. Controlling
compares actual performance with planned targets. It is helpful in finding faults in
planning and other functions. Analysis of deviations is also helpful in that
direction. Thus, controlling is related to all the functions of management process
and is a pervasive function.

232
 Process of Controlling

(5) Controlling implies taking action. The purpose of control is not only to detect
errors and defects in performance of work but also to adopt remedial measures.
Without taking corrective actions, controlling has no meaning. Corrective actions
are. Therefore, initiated on the basis of factors causing deviations between
standards and actual results. For example, actual performance may fall short of
standards due to outdated machines or absence of adequate incentive to workmen.
This can be rectified by installing up- to-date machinery or offering suitable
incentives to workers for better performance. Thus, a corrective action may involve
a change in methods, machinery, rules or procedure. Improving physical conditions
of work, or changing the nature of supervision may also be necessary at times.
Where the deviations cannot be rectified through managerial action, the standards
may have to be revised.

16.6 OBJECTIVES OF CONTROLLING

The main objectives of controlling are to check and ensure that performance of work is in
accordance with the plans and programmes of the organization and its various units.
More specifically, controlling serves two purposes.

(1) To find out errors and defects and take corrective action: Controlling enables
managers to find out defects and errors in the course of work and take appropriate
corrective action so that the defects can be removed and errors are not repeated.
Suppose, a worker is expected to produce 40 units per week, this is the standard
against which his actual performance would be measured at the end of the week. If
his actual performance at the end of the week falls short of the standard, reasons for
the short production would be looked into by managers. Corrective actions would
be taken to help the employee achieve the standard in future. Thus, controlling
serves the purpose of detecting deficiencies in performance so as to rectify the
same and prevent their recurrence.

(2) To provide proper direction to works efforts: Controlling provides proper

direction to work efforts in accordance to the plan of action. Take another example,
suppose a worker is paid Rs.10 for producing an article. The worker may work very
fast to increase his income and turn out goods of poor quality in that process. , he
foreman (manager) in-charge having noted that quality standard; are not maintained
will instruct the worker to work slowly and carefully and maintain the quality.
Controlling, thus, provides proper direction to work being performer according to the
predetermined standards. It seeks to compel events to conform to plans.

16.7 PROCESS OF CONTROL

Controlling is the process through which managers assure that the actual activities
conform to the planned activities. The process of control includes the following steps:

233
Principles of Business Management

(1) Establishment of standards: The first step in control process is the setting
standards of performance. Standards are the criteria for judging results. They are
the yardsticks of performance and specify what should be accomplished. It is,
therefore, necessary that standards should be set and stated in measurable terms,
such as in ms of physical units, costs, time, etc. A company for example, may
decide to achieve production target of 10,000 units per month at a cost of Rs. 10
per unit or to achieve sales target of 10,000 units at Rs. 12 per unit. It facilitates
control if standards are generally fixed by managers in the light of objectives set by
top management.

(2) Measurement of performance: The second major step in the control process is the
measurement of performance. It means evaluation of the work actually done and
result achieved. Measurement is most useful if actual performance is excused in the
same units as the planned targets or standards. Comparison of actual id planned
performance then becomes easier. Thus, performance in the case of production and
sales activities can be measured in terms of number of units produced or sold, costs
incurred, etc. However, it may be difficult to express performance in quantitative
terms in the case of service departments, or managerial activities at higher levels.
The measurement of performance is relatively more difficult at the higher levels.

(3) Feedback in controlling: To ensure that controlling function is effectively

performed there must be prompt flow of information to the manager about the
actual performance. The necessary corrective actions must also promptly follow.
Such a system of communication is called feedback in controlling. Thus, on the one
hand it communicates the actual performance and on the other hand, it
communicates the corrective actions. Feedback plays a very important role in the
process of controlling.

Without feedback actual performance cannot be compared and no corrective action

may be taken.

(4) Comparison of actual performance with standards: Comparison of actual

performance with the planned target or standard involves two steps: (a) finding the
extent of deviations, and (b) identifying the causes of such deviations. If
performance matches the standards, managers may assume that ‘everything is
under control. If performance falls short of standards, managers must find out the
extent of edition. Generally, minor deviations do not require managerial attention.
To save me, managers concentrate on major dev nations only. For example, if
actual production on a particular day is short target by a few units, it may be
ignored. But if it continues and monthly production is short of the target by a large
quantity, it must be regarded as a serious matter.

(5) Deviation in controlling. Deviation may be defined as the difference between

actual performance and standard performance. Deviations may be positive or
negative. Positive deviation shows better performance, while negative deviation
234
 Process of Controlling

tells that actual performance is short of standard.

(6) Taking corrective action: The purpose of control is not only to detect errors and
defects in the performance of work but also to adopt remedial measures. Corrective
actions are, therefore, initiated on die basis of factors causing deviations between
standards and actual results. For example, if sales of a product A is less than the
budgeted sales. It may be due to poor quality of the product, poor packing, late
deliveries, etc. It can be rectified accordingly by improving quality of product and
packing and prompt deliveries. Thus, a corrective action may involve a change in
methods, machinery, rules or procedure. Improving physical condition of work or
changing the nature of supervision may also be necessary at times. Where the
deviations cannot be rectified through managerial action, the standards may have to
be revised.

16.8 IMPORTANCE OF CONTROLLING

The Controlling function has vital importance in the management of organization.

Controlling assure that the actual activities conform to the planned activities. The
following are some of the benefits:

(1) Controlling helps in achieving the objectives: Controlling ensures that results of
operations conform as closely as possible to the predetermined objectives. Every
organization draws up a plan of action at periodical intervals. When the activities
are actually in progress there is possibility of actions being going off the track? By
keeping a close watch over performance at various levels, controlling tries to
correct the deviation between actual results and desired results. Mistakes are
located promptly and appropriate remedial actions are initiated. Thus, it helps in
achieving the objectives laid in the plan of action.

(2) Facilitates decision-making: A manager should have the ability to identify and
solve problems before they become unmanageable. Controlling facilitates decision-
making, enabling managers to identify the gap between thinking and doing
functions of management. It helps in finding out the problems of work performance
and takes appropriate decisions aimed at rectifying the deficiencies. Controlling
involves taking corrective action whenever needed. If the management is kept
informed of the activities then only will they be able to identify and solve problems
before they become unmanageable. This will enable them to take decisions for
future course of action also. For example, if there are frequent production delays,
then the manager should find out the reasons for it immediately. One possible
reason is outdated machines. Then only he will be able to take decision for
installing latest machines.

(3) Controlling improves employees’ morale: Controlling creates an atmosphere of

order and discipline in the organization. Employees know well in advance what
235
Principles of Business Management

they are expected to do and the standards against which their performance will be
judged. Evaluation of performance against predetermined standards induces
employees to do things in a proper manner. It prompts them to perform well and
also earn the rewards. Such a healthy attitude to work helps in keeping the
employees morale at a high level. In an organisation where the control process is
not effective, employees tend to be negligent and careless. Controlling prevents
these tendencies.

(4) Helps In achieving better coordination: Controlling facilitates the work of

coordination. This is possible by keeping all activities and efforts directed towards
the achievement of goals in conformity with plans and programmes. Overlapping
and duplication of work arc avoided and deviations, if any, are promptly corrected.

(5) Helps in better planning: Planning and controlling are important managerial
functions. The two are closely interrelated. Planning provides purpose and
direction to enterprise activities. Controlling provides useful information which
makes the plans more realistic. Controlling is the process of checking the current
performance against predetermined standards contained in the plans, with a view to
ensuring satisfactory performance.

(6) Controlling simplifies the task of a supervisor: Controlling involves verifying

whether activities undertaken are in conformity’ with the plans adopted,
instructions issued and results expected. Controlling simplifies the ‘ask of a
supervisor by comparing the actual performance with the standards continuously,
and finding out the deviations so that the root cause can be identified and not
repeated in future.

(7) Controlling helps in minimizing errors: An effective control system helps in

minimizing errors by detecting them in time. After defecting errors, remedial action
is taken. It is also ensured that such errors are not repeated in future. If any error
becomes a routine matter, it will affect the performance and increase the cost like
the traffic signal, the control system guides and directs various departments of an
organization'. The traffic signals at a busy road crossing may be taken as an
example of how important control is. Without the traffic signals, it is not possible
to ensure smooth flow of traffic. Like the traffic signal, the control system guides
and directs various departments of an organization in the Draper direction. It
ensures the best possible utilization of resources. We can say, “Controlling Is a
fundamental management function that ensures work accomplishment according to
plans.”

236
 Process of Controlling

16.8.1 Check your Progress

1. What is controlling?
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
…………………....................................................................................................................
2. What is the process of controlling?
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
………………........................................................................................................................

16.9 LIMITATIONS OF CONTROLLING

A control system may be faced with the following limitations:

(1) External factors. An enterprise cannot control the external factors such as
government policies, technological changes, fashion changes, social changes, etc.
(2) Expensive. Control is an expensive process because sufficient attention has to be
paid to determine the standards of work performance and then observe and measure
the performance of the subordinates. This requires expenditure, a lot of time and
effort.
(3) Difficulty in determining quantitative standards. Control system loses its
effectiveness when standards of performance cannot be defined in quantitative
terms. For instance, it is very difficult to measure human behavior and employee
morale.
(4) Resistance by subordinates. The effectiveness of controls mainly depends on their
acceptance by the subordinates. They may resist controls if they feel that these will
reduce or curtail their freedom. Control also loses its significance when it is not
possible to fix the accountability of the subordinates.

16.10 A GOOD CONTROL SYSTEM

Good and effective control system is the need of every organization. The control system
must be simple and easily understandable to all managers and employees. Stands and
targets should be clearly specified. All managers should be well informed.

(1) Appropriate: The control system must be appropriate to suit the requirement of an
organization. For example, the control system used in manufacturing organization
will be different from that of a purely trading concern. Likewise, controls d in the
237
Principles of Business Management

production, marketing and service departments of an organization would different.

Large scale organizations generally have elaborate control systems. Small le units,
on the other hand, works on simple control procedures.

(2) Clear objectives: An effective control system requires clear and specific objectives
and accurate standards, based on facts. These should be expressed in quantitative
terms as far as possible, leaving no scope for subjective interpretations.

(3) Flexible: The control system must continue to be workable even where there
environmental changes which lead to changes in the objectives, plans and activities
of the organization. It should have the flexibility to adjust itself to changing
Tenements of the organization.

(4) Forward looking: An effective control system must ensure time detection
deviations and prevent their repetition in future. Remedial action should follow so
to prevent occurrence of defects thereafter.

(5) Concentration on exceptions: If managers try to control everything, they may end
up by controlling nothing. To be effective and economical the control system must
focus attention only on factors critical to performance. Only significant deviations
from standards, whether positive or negative, require management’s attention as
they constitute exceptions. An attempt to go through all deviations tends to increase
necessary work and decrease attention on important problems. In practice, it is not
possible for a manager to check each and every item being produced because of
limited time available with him. An attempt to control everything may prove to be
a futile exercise. Therefore, the control system should be designed in such a
manner that only significant deviations from the standard performance are reported
to the higher level tanagers. This will ensure effective action by the manager. Thus,
we can say, “I f you try to control everything, you may end up by controlling
nothing.” For instance, if postal expenses increase by 10 per cent, the deviation is
too insignificant to require managerial attention On the other hand, if labour costs
rise by even 1 percent it should receive immediate managerial attention. Generally
speaking, the more a manager concentrates his energies on important deviations,
the more effective will be the process if control.

“An ideal control technique is the one that checks every bit of performance.” t is
not true that an ideal control technique is the one that checks every bit of
performance. A good control system should concentrate on key performance
aspects. There are hundreds and thousands of activities to be controlled. In real life
it is difficult to control each and every activity. This is the reason why attention
should be focused on key points only. Extending the control system beyond the key
variable issues may mean doing what is not really essential. Controlling each and
every items result in delay, increased cost and neglect to key control points. Paying
attention to each and every minor aspect of performance is time consuming and
uneconomic.
238
 Process of Controlling

(6) Simple: The system of control must be simple and easily understandable to all
managers and employees. Standards and targets should be clearly specified.
Reports on performance must be simple and straight forward so that there is no
difficulty of interpretation of control data by the managers concerned. All managers
should be well-informed about the control system.

16.11 RELATIONSHIP BETWEEN PLANNING AND CONTROLLING

Planning is the first step in the process of management. It is the primary or basic function
of management. Planning not only helps in determining the objectives, but also in
achieving them. Effective planning is always must for success. Controlling is the process
through which managers assure that the actual activities conform to the planned
activities. Planning and controlling are closely related. The relationship between planning
and controlling is discussed below:

(1) Planning and controlling are interdependent and interrelated activities:

Planning provides basis for controlling. Without planning, there is no basis to
controlling activities and without effective controlling; planned activities cannot be
properly implemented. In the absence of plans, it is not possible to measure and
assess performance. Whether performance is good, bad or reasonable it cannot be
determined without specified standards. Likewise, in the absence of controlling, no
purpose can be served by planning. Predetermined goals can be achieved only
through the process of control which involves noting deviations from standards and
taking corrective decisions. Plans may also be revised, if necessary. Controlling
also ensures realizing planned goals efficiently.

(2) Planning and controlling are forward looking: Planning and controlling are thus
closely interrelated and in fact reinforce each other. Planning based on facts makes
controlling easier and effective controlling improves future planning. Controlling
seeks to compel events conform to plans. It tries to compare actual performance
with the standards set in advance. As actual performance relates to the past, it may
be said that controlling is looking back. However, this is not true. Like planning,
control is also forward looking. Controlling helps in the adoption of new plans and
revision of existing plans on the basis of actual performance against standards.
Controlling provides valuable information derived from past experience for future
planning. It ensues better utilization of resources in future by rectifying past
features.

16.12 SUMMARY

Controlling is the process through which managers assure that the actual activities
conform to the planned activities. It involves verifying whether activities undertaken are
in conformity with the plans adopted, instructions issued and results expected. The first
step in the control process is to establish standard against which results can be measured.
239
Principles of Business Management

Standards can be defined as, “The criteria of performance or yardsticks which serve as
the criteria for judging results.” Standards should be defined as far as possible in
quantitative terms to make controlling more specific and accurate. For example,
standards should be measurable in terms of physical units, costs, time, profits etc.
Standards also need to be flexible in order to adapt to changing conditions. For example,
a new salesman who poses to be an above average performer should have his sales
standard adjusted accordingly. There are many kinds of standards like physical standards,
cost standards, revenue standards, capital standards etc. Appraisal of performance can be
done by personal observation as in case of subordinates being observed while engaged in
work and by a study of various summaries or figures, reports and statements. Accurate
and timely measurement reporting of performance may take place at periodic intervals
like weekly, monthly, yearly etc. The management should be in a position to distinguish
between unimportant deviations and important deviations. Focusing on important
deviations is known as control by exception. Whereas it is wastage of time and effort to
concentrate on minor deviations.

16.13 TERM-END-QUESTIONS

1. What do you mean by controlling? Discuss the concept and objectives of controlling
in your own words?
2. What are the natures and significance of controlling explain with examples?
3. What is the process of controlling? Discuss any three in details.
4. What do you mean by a good control system? How is controlling different from
planning?
5. Write a short notes on the followings
a. Limitation of controlling
b. Significance of Controlling

240
UNIT-17 TECHNIQUES OF CONTROLLING

STRUCTURE

17.1 Introduction
17.2 Objectives of the Unit
17.3 Classical Techniques of Control
17.3.1 Budgetary Control
17.3.2 Elements of Budgeting
17.3.3 Advantages of Budgeting Control
17.3.4 The Budgeting Process
17.3.5 Types of Budget
17.4 Financial Statements
17.4.1 Check your Progress
17.5 Modern Techniques of Controlling
17.5.1 Balanced Score Card
17.5.2 Break Even Analysis
17.5.3 Return on Investment
17.5.4 Controlling through Accounting Ratio
17.5.5 PERT and CPM
17.5.6 Management Audit
17.6 Summary
17.7 Term-End-Questions

17.1 INTRODUCTION

There are many techniques which can be used by the managers for controlling activities
of the subordinates working under their command. These techniques have been
developed over the years. In order to get benefit of relative advantages of various
techniques, an optimal combination of these is used. It is because no single techniques are
complete in itself. In the previous unit the meaning, nature, significance, process as well
as the limitations of controlling has been discussed. To control the business activities a
number of techniques are used. Among of these techniques some of them are traditional
and some of them are modern. In the present unit the learners will learn both traditional
as well as the modern techniques of Controlling

17.2 OBJECTIVES OF THE UNIT

After reading this unit the learners will be able to:

1. Explain the various classical Techniques of Controlling
2. Discuss the modern Techniques of Controlling
3. Enlists the merits of Budgetary control
4. State the meaning and nature of Break Even Analysis

241
Principles of Business Management

17.3 CLASSICAL TECHNIQUES OF CONTROLLING

The classical/traditional techniques of Controlling has been developed and used over the
years by the classical thinkers, management experts. It was found very useful for a longer
period of time in the past and some of them are still used by the modern management
experts due to its reliability and validity. Some of them are budgetary control and
standard costing.

17.3.1 Budgetary Control: as we know budgetary device has been divided into two
segments, the first is preparation of budget which is a part of planning and second aspect
i.e. implementing that budget seems to be more related to control. Budgets are a useful
tools of control. It is because they facilitate measurement, comparison, monitoring and
evaluation of organisational activities which have been expressed in monetary terms as
against budgetary estimates. Budgetary control is considered as one of the most important
traditional control devices. To exercise control over day to day operations of organisation
by way of preparing various budgets and getting them executed is known as budgetary
control.

The Institute of Cost and Management Accountants of England has defined budgetary
control as, “ the establishment of objective relating to the responsibility of execution to
the requirement of a policy and the continuous comparison of actual and budgetary
results either to secure by individual action, the objective of the policy provide a basis for
its revision.”

The basic elements or essentials which are involved in controlling process remain almost
similar in a budgetary control. In a big organisation the entire budgetary system may be
more complex as per the requirements of organisation. But in some other organisations,
only important activities are planned and controlled by preparing and executing budgets.
In brief, budgets are formal quantitative statements of the resources set aside for r
carrying out planned activities over given period of time. As such, they are commonly
used as a means for planning and controlling activities at every level of organisation.

17.3.2 Elements of Budgetary Control

The process of budgetary control involves the following essential elements;

1. As usual in other controlling devices, at the first stage of budgetary control, the
overall corporate objectives of organisation are got to be broken down into
departmental goals and these goals are further narrowed down into specific targets
which can easily be translated into standard of performance. In other words, long
term objectives are converted into short term objectives such as sales volume,
market share, production level and profit, certain standards are determined with
regard to these which are known as budgeted standards.

242
 Techniques of
Controlling

2. At the second stage of budgetary control, to achieve standard of performance or

short-term or operational goals proper estimation of required physical and human
resources is prepared.
3. Allocation of budget is sought for various activities which are to be performed to
achieve these budgetary goals.
4. Responsibility centres are designed at various levels of organisation and
accountability is fixed on the concerned executive who has authority for
performing that operation. For example, in sales budget, the sales manager who has
authority over physical and human resources to be used in sales department may be
made accountable for generating specific volume of sales of a particular product
over a period of time.
5. Constant monitoring, measuring and evaluation of actual results to be done through
budgets is made as to facilitate comparison of actual results with budgeted results
and to discover gap between them.
6. At the final stage, deviations which are alternatively known as budgetary variations
are studied and analysed as to find out possible causes. And a set of suitable
remedial measures is developed and implemented to bring actual results closer to
budgeted standard.

17.3.3 Advantages of Budgetary Control

1. Since budgets are prepared in monetary units, they can directly convey information
on key organisational goals such as profit and market share etc. therefore, they are
considered more useful for profit organisations in which goals can be quantified.

2. Budgets established clear and unambiguous standards of performance for a given

period of time, usually for a year. At a periodic interval within that period actual
performance may be compared with budgeted time figure, deviations are quickly
detected and acted upon for improvements.

3. It also establishes clear relationship and balance between inputs such as material,
labour, capital and time and the output such as production, profit and performance.

4. Budgeting is also used for coordinating activities of various departments of

organisation. It is done by preparing budgets for various departments within a
master budget of the organisation. Not only has the act of preparing budget but to
integrate them into master budget facilitated coordination.

5. Like other controlling techniques, budgetary control is also a source of motivation

for the personnel who are involved in the execution of it. It is because to execute
budget, adequate authority is given to them, necessary resources are allocated and
budgetary sections are made within which they act with higher degree of freedom.

243
Principles of Business Management

17.3.4 The Budgeting Process

These are the following four essential process of budgetary control;

1. Budget Estimation Guidelines: while estimating the budget the managers has to
keep in mind the following guidelines like the state economy, political trends,
government policies, competitors actions, strengths of the organisation etc. The
budget should be prepared on the basis of the financial status, sources of income,
assets as well as the liability of the organisation. The past trends as well as the
budget performance should be kept in mind.
2. Preparation of budgets: it refers to the desired financial planning to which
manager’s commit themselves. To secure commitment from managers, it is
advisable to involve the managers in preparing their budgets based on the activities
of their own budget centres. While preparing the organisational budget the
managers should ensure harmony among the budgets of all the departments as per
the guidelines of the organisation. It should be the part of the overall budget of the
organisation prepared by the top level management.
3. Reporting of variances: the managers should check how the budget is performing
as per the performance budget of the organisation. If there is any difference than
the corrective steps should be taken in time to make the budget balance and under
the control of the organisational financial situation.
4. Review and follow up: on a regular interval the managers of the budget centre
should review the performance of the budget. Otherwise any variance will cause a
large wastes of resources. Thus, the review and follow up should be done by taking
into account the financial position of the organisation which is compulsory for
controlling.

17.3.5 Types of Budgets

Budget is the financial planning on the basis of source of finance that how much will be
expand on which head of the production. Budgets are of many types;

1. Expense Budget: refers to the estimation of operating expenses of the business as

per the actual requirement of process of production. It prepared on the basis of the
last year actual production expenditures of the organisation.
2. Revenue Budget: this budget refers to the income or revenue expected in the
financial years from the sale of the services and goods. It will include all sources of
income like additional capital, interest on capital, dividend etc.
3. Cash Budget: to cash receipt as well as the payment in the financial years. It also
includes the recurring expenses and petty cash.
4. Capital Budget: it is prepared by taking into account the expenditures required for
the development and up keeping of plant, machinery, equipment, buildings and
other fixed assets required for the operation of the business. When and how much
additional capital will be required for the growth and survival of the business.

244
 Techniques of
Controlling

5. Sales Budget: refers to the financial requirements for the sale process like
advertisements, samples distributions, storage, carriage, insurance etc. further, it
include that how much revenue will be received in a financial year from the sales
process.
6. Production Budget: it estimates the volume of production to be produced for a
financial year and how much material, labour, machinery and methods will be
required for it as the demand of the market for the product of the organisation.
7. Purchase Budget: it is prepared by manufacturing organisation who purchase raw
materials and labour for the purpose of productions.
8. Master Budget: it refers to the overall budget of the organisation which represents
all the budget presented by different departments. Which is final and followed by
all the departments?

17.4 FINANCIAL STATEMENTS

The annual financial statements prepared by organisation at the end of each financial year
may be used as an important tool of control. These statements including trading, profit
and loss account, and balance sheet provided a means for monitoring the following major
financial conditions of organisation.

1. Liquidity of organisation which is an ability of organisation to convert assets into

cash to meet current financial needs and obligation.
2. Profitability which is an ability of the organisation to earn profit regularly over an
extended period of time.
3. Financial position includes long term balance between debt and equity capital.

Financial statements are usually prepared at the end of each financial year on the basis of
the transactions and events which have occurred during the period. Thus, these statements
cannot be used to influence the transactions and events which have occurred in the past.
But by analysing the statements of the previous years, dynamics of revenue generation
and incidence of expenditure and trend of change in the assets and liabilities may be
uncovered. On the basis of such information projected, financial statement can be
prepared for the next financial year. The information contained in these statements can be
prepared for the next financial years. The information contained in these statements can
be used by management, creditors, investors and prospective investors and others to form
a judgement regarding operating performance and financial position of organisation. The
various parties use information given in these statements to get better insight about
financial strengths and weaknesses of the organisation. Further, the information given in
financial statements also facilitates ratio analysis to be conducted by the managers. These
financial rations, in fact have predictive power as to whether business will survive or not.
The financial ratios are generally categorised as under;

1. Liquidity: how well can organisation meet its short term obligation?
2. Assets management; how effectively organisation has been managing its assets?
245
Principles of Business Management

3. Debt management: to what extent debt capital has been used by the organisation?
4. Profitability: what are the combined effects of assets management, debt
management and liquidity on the profitability of organisation?
5. Market value; how do investors consider past performance of organisation and
what are its future prospectus?

By calculating various ratios in each area of operation and then comparing them with
standard ratios the managers can exercise feed forward and feedback financial control.
In short, analysis of financial statement represents the process of identifying financial
strengths and weakness of organisation by establishing relationship between the items of
balance sheet and the profit and loss account. It can be undertaken either by the
management itself or outside consultant may be hired for this purpose. It is important to
mention that to add to the value of financial statement as a tool to be used for financial
control; various accounting software packages have been developed.

17.4.1 Check your Progress

1. What do you mean by controlling?

................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
…………………....................................................................................................................
2. What are the techniques of controlling?
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
………………........................................................................................................................

17.5 MODERN TECHNIQUES OF CONTROLLING

We propose to have an overview of the following modern techniques of con-trolling:

17.5.1 Balanced Score Card

17.5.2 Break-Even Analysis
17.5.3 Return on Investment (ROI)
17.5.4 Controlling through Accounting Ration
17.5.5 PERT and CPM
17.5.6 Management Audit

246
 Techniques of
Controlling

17.5.1 Balanced Score Card

The concept of Balanced Score Card (BSC) was introduced by Robert S. Kaplan and
David P. Norton in 1992 through an article published in the Haward Business Review in
1992. This concept consists in identifying the vision and mission of an organisation;
identifying the strategies to achieve that mission and analyzing the performance of the
organization from certain perspectives to have an idea of how for the organization is
successful or otherwise. Balances Score Card is an approach which seeks to provide a
balanced and comprehensive framework for judging an organization's performance from
perspective like financial perspective, customer perspective, business and production
process perspective and learning and growth perspective; so as to assist management in
controlling the organization in a modern and unique way.

Following is a brief account of the four perspectives of analysis which are the core
aspects of BSC:

(i) Financial perspective

The financial perspective indicates whether a company's strategy and operations
add value for shareholders.
(ii) Customer perspective
The customer perspective considers the business through the eyes of customers. It
indicates whether and to what extent the company is meeting the expectations of
customers.
(iii) Business and production process perspective
This perspective focuses attention on the performance of key internal processes
which drive the organization.
(iv) Learning and growth perspective
Learning and growth perspective considers organization's potential future
performance; directing attention on the bases of all future success the organization's
people and infrastructure.

Advantages of BSC

(i) BSC adopts a balanced and comprehensive approach for judging and controlling an
organization's performance; by setting objectives and performance measures in four
key perspectives viz. financial, customer, business and internal processes and
learning and growth.
(ii) BSC facilitates communication and understanding of business goals and strategies,
at all levels of an organization.
(iii) BSC brings organization's strategy and vision, to the centre of management focus;
so that management may never deviate from these.
(iv) BSC integrates financial and non-financial goals and performance measures into a
single system - a thing which traditional controlling techniques never consider.

247
Principles of Business Management

Limitations of BSC

(i) BSC bases its approach to analysis around four perspectives (viz. financial,
customer, business and production processes and learning and growth) only. In
fact, there may be many more perspectives more important than these, e.g.
managerial development perspectives, social responsibility perspective and so on.
As such, the so called Balanced Score Card really turns into an imbalanced and
imperfect score card.
(ii) BSC is a vague concept and approach, to controlling an organization's success; as
there are neither any set of standard goals nor any set of standard performance
measures, for each of the four perspectives, which from the core of BSC.
(iii) BSC just considers organizational performance from four perspectives. It suggests
nothing about what should be done to better performance in each of these
perspectives. Its job, it seems, is just counting casualties, after the battle is over.

17.5.2 Break Even Analysis:

In order to ascertain and control behaviour of cost, revenue and profit at various levels of
activities, break even technique is commonly used. It is because in well managed
business the concept of profit is forethought rather than an afterthought. Break even
analysis is often considered as cost, volume, profit analysis. By using algebraic or graphic
method, the manager can calculate break-even point that is the level of sales or
production at which the organisation neither earns a profit not suffers a loss. In fact
break-even point is a profit making threshold because every additional unit sold or
produced on the above point will fetch margin of profit for the organisation.

The organisation generally incurs two types of costs to the effect of product or sales.
These are fixed cost and variable cost. Fixed cost includes those which are incurred by
the organisation irrespective of level of production or sale. It remains fixed whether the
organisation produces single unit or maximum as per capacity available. Such cost
includes all contractual costs like rent, utilities, insurance premium, managerial and
professional staff salary, property taxes and licence fees etc.

Variable costs are those costs which vary with the volume of production or sales such as
labour cost, material overheads, sales commission, transport expenses etc. The following
algebraic method is commonly used for calculating break-even point

Fixed Cost
BEP = ---------------------------------
P-variable Cost
(P=is price per unit)
The difference between price per unit and variable cost per unit is technically referred as
a contribution margin. Above the break-even point margin of contribution contributes to
profit for the firm.

248
 Techniques of
Controlling

The technique of BE analysis may profitably use for planning price and profit of the
organisation. On the one hand, it also seeks to determine required level of output for
earning specific amount of profit. But the major problem associate with this technique is
that in practice, it is very difficult to make clear distinction between fixed cost and
variable costs. Due to a set of complex factors which are involved in the demand and
supply of a product the relationship between level of operation and amount of profit
cannot be determined. Thus, the technique remains more important only for general
planning and decision making thereby having less scope being used as control device.

17.5.3 Return on Investment (ROI)

ROI is one of the most successfully used overall control techniques; which measure the
success of a company by the ratio of earnings to investment of capital. This approach has
been an important part of the control system of the Du Pont Company, USA, since 1919.
ROI is computed according to the following formula:

𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡, 𝑡𝑎𝑥 𝑎𝑛𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠

ROI = X 100
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

Where, capital employed refers to the total long-term investment in a company. (We may
also take average capital employed i.e. capital employed in the beginning + capital
employed at the end ÷ 2)

Capital employed is calculated as the summation of fixed assets + net working capital
(i.e. current assets - current liabilities)

Advantages of ROI

(i) ROI gives an overall assessment of business functioning. It guides management

in increasing profits through a better utilization of capital invested. It, in fact,
focuses managerial attention on the central objective of the business i.e. making
best profits possible on capital available.
(ii) ROI is effective; where authority is decentralized. When departmental managers
are furnished with a guide to efficiency that applies to the company as a whole;
they develop a keener sense of responsibility for their departments and top
management can easily hold subordinate managers responsible.

Limitations of ROI

(i) There is a problem of valuations of assets. If assets are jointly used or costs are
common, what method of allocation between departments should be used?
Should a manager be charged with assets at their original costs or their
replacement costs or their depreciated values? Setting up of a ROI system as a
control device is not an easy task.
249
Principles of Business Management

(ii) ROI preoccupies with financial factors; and overlooks environmental factors
such as social and technological. Qualitative factors which are scarce (like
competent managers, good employee morale, good public relations) and equally
significant or rather more significant than capital employed are totally neglected
in ROI calculation.
(iii) There is no standard ROI available for inter-firm and intra-firm comparison
purposes.

17.5.4 Controlling through computing accounting ratios:

A popular, useful and comprehensive way to study ratios is by classifying these from the
following perspectives:

(i) Liquidity
(ii) Solvency
(iii) Profitability
(iv) Activity or performance

(i) LIQUIDITY RATIOS :

Important liquidity ratios are:

(i) Current ratio (or Working Capital ratio) :

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Current ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
(The ideal current ratio is 2:1)

(ii) Liquid ratio (Acid Test ratio / Quick ratio) :

𝐿𝑖𝑞𝑢𝑖𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 (𝑜𝑟 𝑞𝑢𝑖𝑐𝑘 𝑎𝑠𝑠𝑒𝑡𝑠)
Liquid ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Liquid Assets = Current Assets – Stock – prepaid expenses
(Ideal liquid ratio is 1:1)

(ii) SOLVENCY RATIOS :

Important solvency ratios are:

(i) Debt – Equity Ratio (D.E. ratio) :
𝐷𝑒𝑏𝑡
D. E. ratio =
𝐸𝑞𝑢𝑖𝑡𝑦
Where, Debt = long-term loans
Equity = Shareholders’ Funds.
Or
𝐷𝑒𝑏𝑡
D. E. ratio =
𝐷𝑒𝑏𝑡 + 𝐸𝑞𝑢𝑖𝑡𝑦

250
 Techniques of
Controlling

(ii) Proprietary Ratio :

𝑃𝑟𝑜𝑝𝑟𝑖𝑒𝑡𝑎𝑟𝑦 𝑓𝑢𝑛𝑑𝑠 𝑖. 𝑒. 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐹𝑢𝑛𝑑𝑠
Proprietary ratio =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

(iii) Interest coverage ratio (or fixed charges cover) :

𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥
Interest coverage ratio =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑙𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡

(iii) Profitability ratios

Important profitability ratios are:

(i) Gross profit ratio :
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡𝑠
Gross profit ratio = X 100
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

(ii) Net profit ratio :

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡𝑠
Net profit ratio = X 100
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

Note: Net profits may be considered from two perspectives: net profits
before tax and net profit after tax. Hence net profit ratio has these two
variations: net profit ratio (before tax) and not profit ratio (after tax).

(iii) Operating Profit ratio :

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡𝑠
Operating Profit ratio = X 100
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

(Operating Profits = Net Profit-non—operating incomes + non-operating

expenses).

(iv) Operating ratio :

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 + 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Operating ratio = X 100
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

(v) Return on Investment (ROI) :

This ratio has been explained earlier.

(iv) ACTIVITY RATIOS (or performance ratios) :

Some of the important activity ratios are:

(i) Stock Turnover ratio :
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
Stock Turnover ratio =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘

251
Principles of Business Management

(𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘)

Average stock =
2

(ii) Fixed Assets turnover ratio :

𝑆𝑎𝑙𝑒𝑠 𝑜𝑟 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
Fixed Assets turnover ratio =
𝑁𝑒𝑡 𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
(Net fixed assets = fixed assets – depreciation).

(iii) Working capital turnover ratio :

Sales or cost of sales
Working capital turnvoer ratio =
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
(Working capital = current assets – Current liabilities)

(iv) Debtors turnover ratio :

𝑁𝑒𝑡 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
Debtors turnover ratio =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑡𝑛𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
Where, Accounts receivable = Debtors + bills receivable
Average accounts receivable = Opening accounts receivables + Closing
accounts receivables / 2.

(v) Debt collection period (or Average age of debtors)

362 𝑑𝑎𝑦𝑠 𝑜𝑟 12 𝑚𝑜𝑛𝑡ℎ𝑠
Debt collection period =
𝐷𝑒𝑏𝑡𝑜𝑟𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒 𝑟𝑎𝑡𝑖𝑜

Advantages of ratio analysis

(i) Accounting ratios make data speak i.e. data which otherwise are a dumb mass of
information become meaningful and understandable through conversion into
accounting ratios.
(ii) Ratios facilitate intra-firm and inter-firm comparisons i.e. financial
performance of a company can be compared over a number of years; and
performance of the company can be compared with other companies, similarly
situated, in the industry.
(iii) Accounting ratios facilitate undertaking corrective action. Management may
lay down targets (or standards) of various ratios against which actual ratios may be
compared. This ex3rcise enables management to locate weak points in
organisational functioning and come out with suitable remedial actions to correct
deviations from standards.
(iv) Ratio analysis facilitates decision making. It provides information which
facilities management to make decision vis-a-vis various aspects of company
function. Banks, financial institutions, investors etc. are also facilitated in their
decisions about whether to advance money to company or invest in it, by virtue of
information provided (or revealed) through ratio-analysis.

252
 Techniques of
Controlling

(v) Ratios are useful for forecasting purposes. With the help of the indication of
trends revealed by ratio-analysis; management can do forecasting of events,
through appropriate statistical devices like correlation, regression etc.

Limitations of Ratio – Analysis

(i) Ratios may mislead management; when these are based on inaccurate accounting
data. In fact, ratios are as accurate as the data on which these are based. Many-a-
times, accounting data are neither complete nor accurate, because of bias involved
in preparation of financial statements.
(ii) Ratios analysis may not permit inter-firm comparisons; which may be necessary for
controlling purposes. This is so because, to many ratios, different interpretations
may be assigned by experts; and different computational formulas recommended.
Moreover, there are no standard ratios (expert for a few ratios) agreed on by
experts against which actual ratios may be compared.
(iii) Accounting ratios are affected by price-level changes; which make intra-firm and
inter-firm comparisons meaningless and misleading. For example comparison of
ratios of today with ratios based on data of a decade back of the same company and
comparison of ratios of an old company with a presently established new company
may be wholly fu-tile and misleading, because of price-level changes.
(iv) Ratios analysis ignores qualitative aspects of organisational functioning e.g
employee morale, managerial efficiency, human relations etc. As such ratio
analysis is dull and abstract and is unsuitable for judging qualitative performance
of the organisation.
(v) Ratios give many clues but very few conclusions. It is a lop-sided con-trolling
technique; unable to provide guidance to management for effecting improvements
in organisational functioning.

17.5.5 PERT and CPM as a Tools of Control

For a wide range of planning and control problems PERT and CPM are used as
techniques of project management. PERT stands for Programme Evaluation and
Review Technique while CPM stands for Critical Path Method. These are needed in
basic management functions of planning, scheduling and control. Now a day,
business projects are big and complicated. These techniques complete the work
within the specified period. Production delays and conflicts are minimised. The
coordinate the various jobs of the total project and thus complete the entire job to
scheduled period.

17.5.5.1 Steps in using PERT

1. All the independent jobs of project should be separately listed.

253
Principles of Business Management

2. The order of precedence for doing the jobs should be determined. To link the whole
certain jobs are to be done before. All such relationships between the different jobs
or activities should be pre-planned and clearly laid down.
3. In this step, graph or picture is drawn to show the performance of the different
activities and their relationship. It will deal with priority of the jobs and the
required time for its completion. It can be called project graph or arrow diagram.
4. In the project graph, the different activities are shown by way of arrows leading
from one circle to another. Arrow connecting the two circles represent a job.
5. It is essential to locate the longest path of sequence connecting the different
activities through the net-work. This is known as critical path of the project.

Advantage of PERT

1. It forces planning and consideration of alternatives. It has, therefore, all the

advantages of planning. A well planned programme always has more chances of
success. In case it goes wrong, there are alternatives provided which is an
advantages of this technique.
2. Another advantage of PERT is that it provides a basis for assignment of
responsibilities and assessment of performance.
3. The PERT provides a clear understanding of the inter-relationships among various
activities involved in the accomplishment of a project or task. This enables the
manager to focus on the critical sub-systems and identify where there is under-
utilization of resources. This helps them in setting things right where necessary.
4. The PERT provides data which becomes the basis for decision making. The
probability of meeting schedules is enhanced.

Disadvantages of PERT

1. It does not provide information about the cost that is very much required
sometimes. In the absence of the cost information, it becomes difficult for the
managers to assess alternatives and select any one of them.
2. Another disadvantage of PERT is that its time estimates are, quite often, not
reliable.
3. The third shortcoming of this technique is that analysis exercise too much control
and unnecessarily complicates the system. The managers often feel as if the system
has been forced on them, a fact which makes them not to utilize it fully.

17.5.6 Management Audit

It is conducted by the cost manager to check the viability of financial position of the
firms. Whether the firm is doing well or not, for this the managers do the internal
checking of the financial statements or data. The management audit provides a device for
surveying and evaluating how effectively and efficiently organisational operations and
activities have been managed by the managers. The management audit may also be

254
 Techniques of
Controlling

defined as systematic evaluation of the functioning, performance, and effectiveness of

management of an organisation. Management audit is generally conducted at the instance
of top management to ascertain and review the quality of management. It may also be
known as internal audit because it is conducted by the team of experts drawn from
relevant areas of organisation. It is, however, to be noted that it starts from where the
balance sheet audit leaves off. Management audit helps in determining whether policies
and procedures and other plans are followed, standards are met, resources are used
efficiently and economically, planned objectives are accomplished effectively and finally
organisational goals are achieved.

Advantages of Management Audit

1. It helps in pointing out inadequacies and deficiencies lying in the process of

management. On the basis of it, necessary attempts may be for improving overall
efficiency of management process.
2. It seeks to improve working of communication and control systems which are
installed in organisation. Consequently, operational efficiency of organisation is
raised.
3. It promotes and protects organisations from outside threats and challenges by
designing and implementing timely and appropriate strategies to deal with
changing environment.
4. By improving coordination in the functioning of various subsystems it helps in
securing smooth functioning of organisation.
5. It ensures updating of existing set of managerial policies, strategies and other
important plans as to make them responsive to existing situation.
6. Management audit encourages the use of creativity and innovativeness among the
managerial personnel working in the organisation.

17.6 SUMMARY

Controlling might be defined as that managerial function which seeks to ensure an

absolute conformity of actual performance of organisational personnel with the planned
standards – to facilitate the most effect and efficient attainment of the enterprise
objectives. In management controlling as a function of management is always a process
involving determination of standards of performance, for all phases of organisational
activity. Measurement of actual performance as well as comparing it with actual
performance against standards performance. It is a process of locating deviations,
analysing the causes of deviations and rectifying it. The Controlling techniques
undertaking suitable remedial/corrective/feedback action - to bring performance on the
right track. The process of controlling is consisting various techniques like budgetary
control, break-even analysis, ROI, management audit and many others.

On the whole, it can be concluded that the principles, procedures and practices adopted in
controlling techniques are the achievement of organisational goals. It provides the
255
Principles of Business Management

financial information to the stakeholders to decide in advance whether the organisation is

running well or not. Afresh capital can be invested or not. One should be the members or
partners of the organisation or not. They should purchase share or not. The financial
intuition like banks and government should provide financial assistance or not these all
problem are solved by the controlling techniques. The management of the organisation
can take in time corrective measure to strengthen the financial position of the
organisation in time.

17.6 TERM-END-QUESTIONS

1. What is budgetary control? What are its advantages and limitations?

2. Define financial statements. How does it help in keeping the costs within control?
3. What is meant by break even analysis? Explain its uses in decision making?
4. Discuss the concept and importance of PERT and CPM as a tool for control?
5. What do you mean by management audit? Discuss its advantages.

256
Ca UNIT-18 MANAGEMENT OF CHANGE

STRUCTURE

18.1 Introduction
18.2 Objectives of the Unit
18.3 Meaning
18.4 Features of Changes
18.5 Forces of Changes
18.6 Factor affecting Changes
18.7 Process of Changes
18.8 Resistance to Change
18.8.1 Check your Process
18.9 Overcoming Resistance to Change
18.10 Types of Change
18.11 Approaches to Planned Changes
18.12 Management of Changes
18.13 Issues for Management of Changes
18.14 Challenges for Management of Changes
18.15 Summary
18.16 Term-End-Questions

18.1 INTRODUCTION

Change is an experienced compulsory as well as universal phenomenon in our day to day

personal and professional life. We experience It is in the form of change in taste,
preferences, choices, size, colour etc. In fact change is all around us like in the season, in
social environment and in biological process. In the modern dynamic globalised business
world organisations have to adopt change for their survival. They have to change the
shape, size, composition of their product and the location of business as per the demand
of the market otherwise they will be out of the market. It is a major challenged for
management to cope with the barriers to change that confronts them in attempting to keep
their organisation viable and up to date. In the present unit the attempt has been made to
make the learners learn the meaning, nature, scope, characteristics and management of
change. Further, the learners will learn how management of change is important as well
as a challenge for managers.

18.2 OBJECTIVES OF THE UNIT

The learners after going through this unit will be able to;

➢ Explain the concept of Change

➢ Discuss the type of Change
➢ List the characteristics of Change
➢ State the types of Change
257
Principles of Business Management

➢ Explain the management of Change

➢ Describe the issues and challenges of management of change

18.3 MEANING

The increasing competition in the modern globalised technological driven fast changing
markets, it is required that the business organisations either at the local or international
level should change their structures, process as well as working environment to be in the
race. As we know business organisation is open system which not only influence with the
changed but also adopt the economical, political, social, climate and cultural change for
their survival and growth.“Organisation change is any substantive modification to some
part of the organisation”. Change may be required for the organisation as a whole or for
any part of the organisation; work force, basis of depart mentation, span and control,
machinery, technology etc.

18.4 FEATURE OF CHANGE

Change is characterised by the following features:

1. Movement of balance: Change involves moving from the existing state of balance
to a new level of equilibrium.
2. Partially or Fully: It may involve change in some parts of the organisation
(technology, structure or personnel) or the organisation as a whole.
3. Universal: The process of change is not restricted to any specific organisation or
one country. It is a worldwide phenomenon. The whole world, all countries, every
organisation along with its members and all individuals change their pattern of
working with the courses of time. However, the nature and magnitude of change
differs from organisation to organisation.
4. Continuous process: Change is an ongoing process. Organisations continue to
change their policies, plan, objectives and target to survive and grow in the
competitive markets.
5. Essential activity: Change is not a force that organisations may or may not
respond to. It is compulsory for the survival of the organisation.
6. Change agents: Change is a deliberate attempt initiated by the internal or external
change agents. Internal change agents can be top executives of the organisation.
External agents are outside experts or advisors appointed by executives to initiate
the change process.

18.5 FORCES OF CHANGE

There are two forces that act on existing state of equilibrium of the organisation:

258
 Management of
Change

1. Driving forces: These forces drive the organisation to change its structure in all
respect of working environment. These forces encourage the organisation to
accept environmental changes.
Organisation’s needs for higher productivity, employees’ commitment to work,
desire for promotions and career development are the driving forces that
encourage people to accept change.

2. Restraining forces: These forces restrain organisations to accept change.

Organisations continue with their current working standards as people resist
change. Laziness, habits, precedents, domestic problems and routine nature of
work are the restraining forces that discourage people to accept change.
To survive, grow and develop in the industry, firms should spurt the driving
forces and reduce the restraining forces. This will help them reach a new level of
equilibrium which will be favourably accepted by the organisational members.

18.6 FACTORS AFFECTING CHANGE/NEED FOR CHANGE

Change is the essence of life. Organisation that does not anticipate or respond to change
will not be successful in the long-run. The factors that necessitate change fall into the
following categories;

1. Internal Factors :

(a) Efficiency: Organisations want to perform better than competitors, earn more
profits for themselves (in the form of retained earnings), employees (increase in
salary and bonus) and shareholders (increase in dividends). This is possible if they
consistently review their policies and reorganise their present structure. Change is,
therefore, desirable to achieve higher level of efficiency.
(b) Control: People at high managerial posts want to retain control over organisational
activities. They have their own philosophies and ways of working. They introduce
new organisation designs and control systems which are followed by everyone in
the organisation.
(c) Leadership: Dynamic managers introduce change because they want to lead the
market. Change in one business forces others to adopt the changes.
(d) Internal pressures: Attitudes of employees also enforce change. Workers’
dissatisfaction with the working conditions, pay structures and inter-personal
relationships reflect negative behaviour towards managers which may force them to
change their policies, procedures and strategies. Change is, therefore, enforced to
develop cordial relationships in the organisation.
(e) Change in work force: Changes in managerial personnel (when new managers join
in place of retiring managers) also require the organisation to change its values and
philosophies. Changes in operative personnel (new workers who are more
educated, skilled and competent)also require the organisation of change its values

259
Principles of Business Management

and beliefs to match those who join the organisation. There may be changes in
leadership styles and motivation systems.
(f) Internal inefficiencies: Organisations may change their structures because of
internal inefficiencies like imbalance between narrow and wide span of
management, centralisation and decentralisation, line and staff relationships,
internal and external environment etc. Improvement in these areas requires changes
in organisation structure.

2. External factors: Survival of organisation depends on its active interaction with

the environment. Some of the external factors which affect change are as follows:

(a) Market factors: change taken place in the demand and supply in the various
market, in consumer tastes and preferences, policies of government as well as the
other business organisation.
(b) Economic factors: Changes in economic conditions; exchange rate and interest rate
fluctuations, change in the fiscal and monetary policies, inflation force to change in
the organisational policies.
(c) Social factors: The norms for pollution, workers’ safety and working conditions,
health consciousness, geographical movement of works, changes in their age
composition are the social factors that necessitate changes in the organisational
policies.
(d) Technological factors: The modern world has constantly changing technology,
information systems, and computerisation and decision support systems. If
organisation fails to update its technology and management information system, it
will not be able to survive in the market.
(e) Political factors: Business enterprises and government actively interact with each
other. Changes in government policies with respect to taxation and corporate
governance, new laws and court decisions require the organisations to change their
policies according to these regulations.
(f) Natural factors: Natural factors like floods, earthquakes, famines, excess summer
and winter also require changes in the policies of the organisation.
(g) Educational factors: Educated employees, shareholders, labour unions, customers
and suppliers require organisations to change their structures to come upto their
expectations.
(h) Global factors: the fast changing modern globalised markets require changes in the
policies of organisations to compete with international organisation operating in
their home country and also enter the international markets.

18.7 PROCESS OF CHANGE

According to Kurt Lewin people generally do not accept change and if they accept it,
they tend to revert to the original behaviour after some time. To make change have
lasting impact on members, it must become part of their attitudes and values system.
Lewin suggested a three step model of the change process. This model helps to initiate
260
 Management of
Change

change in business organisations and behaviour of individuals and groups. The following
steps are involved in the change process:
1. Unfreezing: it arises the need for change so inevitable to employees that they
become ready to accept the change. It inculcates awareness in employees that
present system of working is undesirable and change is desirable. It motivates
people to move from the old and traditional ways to new and modern ways of
working. It is possible only by gaining employees trust, confidence, participation in
decision making and through motivation.

2. Changing or Moving: Once people are ready to accept the change, change is
initiated by instruction new ways of doing things. New information is collected,
new concepts are developed, and employees are trained to implement the new
process for work is called changes. New behaviour is promoted, new beliefs are
inculcated, new attitudes are developed and the existing value system is changed.
Members identity themselves with the changed value systems of the organisation
and internalise them by changing their behavioural norms. Thus, in this phase,
changes are introduced and people adjust their behaviour to the changed norms.
Driving people to change their behaviour and attitude.

3. Refreezing: though change is desirable, employees generally resist change.

Despite learning new ways of doing things, they tend to revert to old behaviour
after working in the changed environment for some time. Refreezing attempts to
make change permanent till there is need to reintroduce change “It means locking
the new behaviour pattern into place by means of supporting or reinforcing
mechanisms, so that it becomes the new norm.”

18.8 RESISTANCE TO CHANGE

These are the following resistance to change

1. Individual Resistance to Change: Individuals prefer to maintain status quo rather

than accept new ways of doing things. They resist change because of the following
reasons:

(a) Insecurity: There is a sense of insecurity amongst individuals as they move from
one post or location to the other. They are uncertain about new job requirements,
new environment and new work groups and, therefore, resist change.
(b) Social factors: it is a psychological set of mind of employees that do not wish to
leave their peer groups in the existing business environment. They find it difficult
to cope with new environment which is also a factor for resistance to change.
(c) Economic factors: Change from labour intensive to capital intensive techniques of
production creates fear of loss of jobs amongst employees. People, therefore, do
not welcome such jobs even if employers assure them of job security.

261
Principles of Business Management

(d) Poor knowledge about causes of change: If managers announce a change without
any reasons, how and to what extent such changes will affect employees’ lives and
behaviour is not known. Employees resist changes due to unawareness about the
changes.
(e) Lesser faith in management: due to lack of trust and faith in managers often
creates a feeling amongst subordinates that whatever change is being initiated, it is
done at the cost of their interest. This invites resistance on their part to accept
change.
(f) Law levels of tolerance: Change requires new ways of learning by employees.
New behaviours and skills have to be developed. If people do not want to learn
new procedures and techniques, it results in resistance to change.
(g) Difference opinion: Managers may introduce change because they perceive it
necessary for improving organisational efficiency. Others may resist change
because they perceive the situation differently. Because of different perceptions,
the existing state of equilibrium is not disturbed and change is not enforced in the
organisation.
(h) Peer pressure: People may resist change because their fellow workers oppose it.
They obey the group norms for the fear of social boycott.

2. Organisational Resistance: Change is resisted at the organisational level also.

Sometimes resist arises due to organisational structures, economic and
organisational commitments.

18.8.1 Check your Progress - I

1. What do you mean by change?

................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
……………………………………………………………………........................................

2. What is the process of change?

................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
……………………………………………………………………........................................

262
 Management of
Change

18.9 OVERCOMING RESISTANCE TO CHANGE

Change is always beneficial desirable for organisational development without the

required changes the business organisation cannot compete with the modern technology
based globalised business. Resistance to change should not be considered bad. Rather, it
gives managers an opportunity re-examines their proposals of change for their effective
implementation. The following six ways of overcoming resistance to change were
identified by Kotter and Schlesinger;

1. Education and communication: An effective way to reduce resistance to change

is to plan the change and communicate its benefits to organisational members.
Announcing the need for change, explaining the ways of implementing it and
training people to deal with new procedures reduces resistance to change.
2. Participation and involvement: the employees who are affected by
implementation of change should be involved in framing the change process, it’s
planning and implementation will be accepted by them without resistance. When
people are involved in designing the change, they can understand the need for
change, have less uncertainty about the impacts of change on their economic and
social values and, therefore, will be more committed to their implementation.
3. Facilitation and support: If employees lack confidence about performing
according to new procedures and methods, managers should provide them moral
support, advise them when necessary and create a cordial and friendly atmosphere
of understanding. This will promote the employees to accept and implement
change smoothly and efficiently.
4. Negotiation and agreement: When the above measures to reduce resistance to
change remain ineffective, managers make negotiations and agreements with the
employees. Such negotiations involve sharing of profits by management and
workers out of changed mode of operations. Sometimes, managers also obtain
written consent to change from the resisters.
5. Manipulation and co-optation: when people resist change, managers may adopt a
manipulative policy. They present selective information to resisters to gain their
confidence and acceptance to change.
6. Explicit and implicit coercion: As a measure of last resort, when no other method
of overcoming resistance to change works, managers use force to implement the
change. Methods like demotions, transfers and dismissals make people accept the
change. However, such change does to have a lasting impact. Future changes shall
be subject to more rigorous resistance by the employees.
Besides above measures of overcoming resistance to change as suggested by Kotter
and Schlesinger, the following additional measures can also be useful:
7. Initiate change only if it is necessary: Some managers announce change just for
the sake of bringing a change. Such practice should be avoided and changes should
be introduced only if they are required and beneficial for the organisation as a
whole.

263
Principles of Business Management

8. Building trust and confidence: When people resist change because they lack
confidence and trust in managers, managers should build trust by openly
communicating with the employees. They should give them timely and reliable
information and explain the benefits of proposed changes. Such measures
considerably help to reduce resistance to change.
9. Guarantee job security: Resistance to technological changes which creates fear of
loss of job can be overcome by guaranteeing job security to employees.
10. Force field analysis : Managers should conduct force field analysis, determine the
driving and restraining forces to change, increase the driving forces and reduce the
restraining force and reach a new stage of equilibrium; that is, the desired level of
change.
11. Change in organisation structure: Changing the organisation structure from
bureaucratic (which is not receptive to change) to socio-technical system, where
focus is not only on task but also on people and relationship between the technical
system and people also helps to overcome resistance to change.

I. Check Your Progress - II

3. What do you mean by change?

................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
…………………....................................................................................................................
4. What is the process of change?
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
................................................................................................................................................
………………........................................................................................................................

18.10 TYPES OF CHANGE

Effective management depends upon the way manager’s deal with different types of
changes. There are two types of changes:

1. Reactive change: It is change in reaction to event. This change is initiated due to

pressures of external forces. Changes are made in response to a situation and are
primarily unplanned in nature. Managers make quick changes to deal with the
problems since they do not have time to analyse the situation and prepare a well-
conceived plan. Changes are made in response to environmental events, threats and
opportunities.

264
 Management of
Change

2. Planned change: It is systematic change and wider in scope than reactive change.
It follows a proactive approach to change. Managers increase organisational
effectiveness by anticipating the forces causing change and plan ahead to deal with
them. They anticipate environmental threats and opportunities and carry out the
change process in phased manner. These changes are important for survival or
growth of the firm. They involve huge financial and non-financial resources and
are planned in a scientific and systematic manner. Planned change is “change that
involves actions based on a carefully worked out process for change that anticipates
future difficulties, threats and opportunities.”

18.11 APPROACHES TO PLANNED CHANGE

The following are the approaches to changes;

1. Structural changes: Organisation structure is the organisation design which

defines authority-responsibility relationships among organisational members,
communication system, centralisation and decentralisation, break up of job into
smaller units and integration of individual and group tasks to achieve the
organisational goals.
The organisation structure does not remain static. It is dynamic in nature and changes
according to changes in the internal and external environment. reorganisation
among various work groups may require the organisations to change from
functional to divisional structure or vice versa, centralisation to decentralisation
and vice versa, wide span of control to narrow span and vice versa. A change may
be required in the job design, work schedules, communication system or job
responsibilities.
The purpose of change is to improve organisational performance in terms of production,
employee morale and motivation and higher job satisfaction, both individual and
organisational.
2. Technological changes: Technology refers to tools, equipment’s, processes,
knowledge and techniques to produce goods and services. Technological change
refers to change in any aspect of technology. It aims to improve the goods and
services and add new products to the existing line of goods and services.
Technological changes are necessary to compete in the domestic and international
markets. Changes in competitors’ technology, for example, require change in the
firm’s technological requirement also.
3. People or human resource changes: Structural and technological changes focus
on task-related activities and relationships which are implemented by the human
force. Human resource changes focus on changing the human behaviour, skills,
knowledge’s, attitudes and beliefs to increase organisational performance. Change
in people’s attitude can be brought the following ways :
(a) Training and development can improve their behavioural skills and
knowledge.
265
Principles of Business Management

(b) Recruitment and selection procedures can be changed to appoint people with
desired skills and knowledge to manage the jobs efficiently.
(c) Organisational development techniques can be adopted to change people’s
behaviour and attitude towards the work environment.

18.12 MANAGEMENT OF CHANGE

Change is a very complex process and requires intensive planning and monitoring of the
change process. Managers should take the following steps in the management of changes:

1. Access the requirements for change: the manager should have the vision and
ability to access the requirement for the changes as per the organisational
objectives. In order to achieve these objectives, the managers must perform better
than competitors and to do so, they constantly need to scan the external
environment, find threats and opportunities, link them with the organisation’s
strengths and weaknesses review the policies and performance periodically
(monthly, quarterly or half-yearly) and, if required, modify the organisation
structure and policies.

2. Analysing the situation: The desire to reach a new state of equilibrium requires
analysis of the organisation’s existing goals, structure, technology and people. A
careful analysis of the organisation’s existing structure and its comparison with the
planned situation helps managers in identifying the type of change to be made.

3. Prepare a plan for change: When the existing situation is analysed and need for
change is felt, managers prepare a plan for initiating the change. The kind of
changes to be made in the organisation structure, development of new authority-
responsibility relationships, new policies, procedures, standards, market operations
and people help to make plans for change.

4. Try the plan: Resources committed in the change plan cannot be easily reversed.
A pilot run of the plan should be made by the organisation (on a functional area or
a product division) and if it is successful in one unit, it should be implemented in
the entire organisation. Problem in the pilot run or pretesting of the plan should be
corrected before the overall change plan is implemented.

5. Overcome resistance to change: Change may invite resistance from members as it

involves rearrangement of people and resources. There may be fear of insecurity,
discontentment, loss of social interactions, position or status amongst members.
Managers must, therefore, overcome the resistance. When resistance is overcome,
people will willingly accept the change. This will ease the process of transition or
change from present situation to the ideal situation.

266
 Management of
Change

6. Implement the change: After the above steps to the management of change are
accomplished, the change process is put into operation. Resources are committed to
various functional areas, new authority-responsibility relationships are established,
people are trained and placed at their respective jobs, a sound communication
system is designed and other operative and administrative arrangements are made
Managers pass information to people at different levels and clarify their doubts on
the proposed change. How effectively the change is planned determines how
effectively it is implemented.

7. Monitor or review the change: A successfully planned and implemented change

may not always bring the desired results. The change process should be regularly
monitored and reviewed to analyse the effects of change. Discrepancies or
deviations should be brought to the notice of managers and corrective action should
be taken to smoothen the process of change. Observing the level of production,
profits and behaviour of employees towards the changed structure at frequent and
regular intervals of time provides timely feedback to managers about successful
implementation and change.

18.13 ISSUES FOR MANAGEMENT OF CHANGE

Mangers of today strive for better understanding of the management theory to improve
organisational effectiveness and compete with firms in national and international
markets. As interest in management theory has increased in recent years, new issues have
emerged in the management of change in the following two categories;

1. Internal Issues at National Level:

(a) Globalisation: Almost all local business organisations are facing the challenge of
competition with their international counterparts. Small retailers, big
manufacturers, all are competing with the international products. It has resulted in
greater complexities, greater economic and political risk and uncertainty. The
problems of internationalisation are faced by mangers in the field of selling goods
and services, finance, arranging for the human resource and advertising. An
important question that managers have to answer, therefore, is “Should we focus on
globalisation or regionalism?”

(b) Quality and productivity: Managers of every country compete with international
competitors with respect to quality and productivity of goods and services.
Successful companies have been able to maintain and enhance the quality of goods
and services with fewer resources (productivity). Managers must, therefore, focus
on producing more and better with fewer resources. Quality is “the totality of
features and characteristics of a product or service that bear on its ability to satisfy
stated or implied needs”. Productivity is “an economic measures of efficiency that
summary the value of outputs relative to the value of the inputs used to create
267
Principles of Business Management

them”. Quality and productivity are important determinants of business that affect
its success.

(c) Ownership: Another controversial area that concerns managers today is ownership.
Large foreign investors are buying stocks of home companies and ownership can
be transferred in their hands. Profitability and productivity, thus, may suffer.

(d) Environment: Environment today is changing at a fast rate. Organisations have to

change with the competitive environment to maintain their customers. Otherwise,
they have to move out of the market. Managers should develop deep understanding
of the internal and external environmental factors and their application to business
operations.

(e) Strategy formulation: Just as everything around us is constantly changing,

business firms must watch the strategies and strategic management. Strategies
cannot continue forever. They keep changing according to environmental changes.
“Strategic management is a way of approaching business opportunities and
challenges – it is a comprehensive and ongoing management process aimed at
formulating and implementing effective strategies.” It keeps managers constantly
involved and promotes healthy interaction between the organisation and its
environment. Managers who frame effective strategies will remain in the market
and those who fail to do so will have to leave the market. The issue of strategy
formulation, therefore, requires constant attention of contemporary managers.

(f) Ethics and social responsibility: Traditionally, business firms did not conform to
the principles of ethics and social responsibility but today, firms which do not
adhere to ethical standards and social responsibilities are not accepted by the
society. It is, therefore, a challenge for managers to define relationships with the
social environment. An organisation that violates social expectations faces the risk
of legal interference, loss of goodwill and eve loss of business.

(g) Workforce diversity: Diversity in the workforce of organisation exists when its
members differ from each other along dimensions like race, colour, caste, creed,
nationality, gender etc. Traditionally, organisations were managed by workforce
with no or very little diversity, like all men, or all whites or all Indians but today
almost all organisations experience tremendous changes in the composition of their
workforce. Firms employ people from diverse sets of cultural, social, economic and
ethical backgrounds at almost every organisational level. Though diversity offers
competitive advantage to a firm in terms of cost, resource acquisition, marketing,
creativity, problem solving and systems flexibility, it also becomes a source of
conflict in many organisations.

(h) Change: Traditionally, change was periodically introduced in business operations

but today change is a continuous process. If firms want to compete in a complex,
dynamic and diverse environment as they are facing today, where expectations
268
 Management of
Change

from managers and their organisations, are on an every increase, they must face the
changes that confront their everyday life. Firms which do not change their
operations with the changing environment (internal and external) will have to close
their operations. Change is something, therefore, that managers have to
continuously respond to and look to future with hope and optimism.

(i) Environment: Though management is ‘the art of getting things done through
others,’ the others/subordinates will not do things if they have to merely carry out
the orders and instructions of managers. Workers today, want more information
about the organisation to perform and control their jobs efficiently and effectively.
Participative decision-making and formation of groups and work teams help in
fulfilment of individual, group and organisational goals. The basic requirement,
therefore, is to communicate with the external environment and their workforce.
Communication is a major task of managers today. They must convey organisation
goals to individuals and understand their individual goals, in turn. Failure to do so
will result in loss of empowerment and failure of organisations to achieve their
goals, both quantitative and qualitative.

(j) Information technology: Information technology “refers to the resources used by

an organisation to manage information that it needs to carry out its mission”.
Information is an important part of communication and managers have to be careful
in selecting the amount and type of information (out of the large quantity of
information available) for carrying out the business operations. Lack of control
over use of information can result in lack of control over business operations.
Manager have to carefully collect the right information, used it effectively and
ensure that right information is leaving the organisation to enter the environment.

2. External Issues at International Level:

1. Economic Environment: In the market economy of today, consumers are free to

buy what they want and producers are free to produce what they want. Keeping in
view the economic system of a country, demands and preferences of consumers
and system of ownership (private or public), managers decide whether or not they
should carry business operations in the host country.
Natural resources (oil, iron, coal, natural gas, uranium etc.) in a country also attract
foreign enterprises that need these resources to manufacture goods for domestic
and international markets.
Infrastructural facilities like roads, schools, hospitals, transport, communication system
etc. affect economic development of a country. An economically developed
country attracts and supports foreign enterprises.

2. Political/Legal environment: Political environment of a country also offers

challenges to international managers. A politically stable economy where rules and
regulations affecting the business operations do not change frequency; where
269
Principles of Business Management

incentives (reduce interest rates on loans, tax subsides, market protection etc.) are
offered to attract foreign business; where international economic communities
agree to reduce trade barriers on international trade (in the form of tariffs, quotas,
export restraint agreements and “buy national” laws) to protect domestic business
(more the trade barriers, less the international business), offer great advantage to
foreign enterprises.

3. Cultural environment: International business is also affected by cultural

environment of a country. The value systems, social and ethical beliefs,
understanding and interpretation of symbols and language of different cultures have
direct impact on business practices. The international manager must, therefore get
accustomed to the cultural environment of an economy before establishing his
business there.

18.14 CHALLENGES FOR MANAGEMENT OF CHANGES

As internal and external, domestic and international environment is changing radically,

the managerial functions are also undergoing a change. The challenges faced by
managers in carrying out these functions are discussed below:

1. Planning: Planning becomes complex in the changing business environment. At

the domestic level, local market conditions, technological factors, growth rate of
products and markets, strengths and weaknesses of domestic and foreign
competitors and a host of other factors become challenging for managers to
effectively plan the business operations. At the international level, economic,
political and legal stability of economy, availability of required technology and
finance, ease of formation of business enterprises or their strategic alliances,
understanding of the environmental circumstances and many other issues affect
planning. Managers who have the ability and competence to forecast various
environmental opportunities will be successful in making plans that can be
optimally achieved.
2. Organising: Managers have to reorient their organising abilities to face the
competitive challenges in domestic and international markets. Line organisations
cannot be suitable forms of organisations and managers have to adopt project,
matrix or network organisation structures. Managers should be competent to
manage organisation structures and designs, manage people and change, both at the
national and international levels.
Firms operating at the international level should give authority to managers in each
country to manage their businesses rather than exercising authority from the head
office.
3. Staffing: With increase in knowledge and competence of workers, managers have
to be skilled in making appointments so that right persons are selected for the right
jobs and expenditure on training and development of employees is worthwhile.

270
 Management of
Change

4. Directing: As management is moving towards excellence and managers deal with

people from different social and cultural backgrounds, they must understand how
cultural factors affect individuals, how motivational forces and communication
vary across cultures and accordingly interact with work groups of different
cultures.
Even while interacting with people of the same culture, managers adopt democratic
styles of leadership, non-financial motivators and two-way communication to get
better responses from the subordinates.
5. Controlling: The basic issues with respect to control are operations management,
productivity, quality, technology and information systems. Managers have to take
care of factors like distance, time zones and cultural differences (in international
management) while controlling the business operations. Controlling through
computers and management information systems is replacing direct controls
through close contacts and supervision.

18.15 SUMMARY

The term change refers to an alteration in a system whether physical, biological or social.
Thus, organisational Change is the alteration of work environment in organisation. It
implies a new equilibrium between different components of the organisation such as
technology, structural arrangement, job design, people and location. However, the change
in organisation does not occur purely on mechanical relationship. While managers as a
change agent wish to bring changes in the organisation, employees want to maintain a
status quo. Though these phenomena will be taken later, what is important at this point is
that a change in any part affects the entire organisation and subsequent changes are
required in other parts. Thus, management for changes have to play a vital role and be
vigilant while adopting change in accordance with the demand of the market as well as
the global business scenario.

18.16 TERM END QUESTIONS

1. What are the tasks to be performed by the management to deal with future
challenges?
2. What do you understand by ‘Planned change’? Explain the steps involved in the
process of planned change.
3. What do you understand by the term ‘change’? Why do people resist change in an
organisational setting?
4. Explain the nature and process of change.
5. Why do individuals resist change? How can resistance be overcome by managers?
6. What are the different types of changes? State the differences between reactive and
planned change.

271
Principles of Business Management

NOTE

272