Chapter No. Contents Page No.

1.1 Demand 2-4

I
1.2 Utility 5

1.3 Indifference Curve 6-8

1.4 Elasticity of Demand 9-11
1.5 Factors of production 11-14
1.6 Advertising elasticity 14
1.7 Market 14
1.8 Market structure 14-16
1.9 Price and output determination under perfect 17
competition
1.10 Price and output determination under 17-19
monopolistic competition
1.11 Price and output determination under monopoly 19-20
1.12 References 20
II 2.1 Functions of Central Banks 21-23
2.2 Functions of Commercial Banks 23-26
2.3 Inflation 26
2.4 Deflation 26
2.5 Stagflation 27
2.6 Direct and Indirect Taxes 27-28
2.7 New Economic Policy 28-30
2.8 Monetary and Fiscal Policies of the government 30-31
2.9 Business Cycle 32-33
2.10 References 33
3.1 Meaning and Definition of Management 34-35
3.2 Functions of Management 36-38
3.3 Principles of Management 39-40
III 3.4 References 40
4.1 Marketing Management 41
IV 4.2 Marketing Mix 42-46
4.3 Service Marketing 46-49
4.4 Product Life Cycle 49-51
4.5 New product development 51-55
4.6 Pricing Strategies 55-57
4.7 Channels of Distribution 57-59
4.8 Promotion Mix 60-61
4.9 References 62
5.1 Financial Management 63-65
V 5.2 Sources of Finance 65-70
5.3 Ratio Analysis 70-71
5.4 Time Value of Money 71-72
5.5 References 72

1
 UNIT I
1.1 Demand

Demand is an economic concept that relates to a consumer's desire to purchase goods and
services and willingness to pay a specific price for them. An increase in the price of a good or
service tends to decrease the quantity demanded. Likewise, a decrease in the price of a good or
service will increase the quantity demanded.

Demand is a concept that consumers and businesses are very familiar with because it makes
sense and occurs naturally in the course of practically any day. For example, shoppers with an
eye on products that they want will buy more when the products' prices are low. When
something happens to raise the prices, such as a change of season, shoppers buy fewer or perhaps
none at all.

Generally speaking, there is market demand and aggregate demand. Market demand is the total
quantity demanded by all consumers in a market for a given good. Aggregate demand is the total
demand for all goods and services in an economy.

Determinants of Demand
There are five main factors that drive demand:

 Product/service price
 Buyer's income
 Prices of substitute goods
 Consumer preferences
 Consumer expectations for a change in price
 As these factors change, so can the demand for a product or service. In fact, they change
all the time, so demand can be constantly in flux.

2
The Law of Demand
The law of demand states that when prices rise, demand will fall. When prices fall, demand will
rise.

The law of demand is simply an expression of the inverse relationship between price and
demand. It involves price only. None of the other drivers of demand mentioned above are
involved. If they do come into play, the functioning of the law can be affected. Demand can be
seen to change for reasons other than price.

Demand Curve
A demand curve is a graph that displays the change in demand resulting from a change in price.
It's a visual representation of the law of demand.

The demand curve can be a useful tool for businesses because it can show them the prices at
which consumers start buying less or more. It can point out prices at which a company can
maintain consumer demand and support reasonable profits.

On the demand curve graph, the vertical axis denotes the price, while the horizontal axis denotes
the quantity demanded. A demand schedule, or table created by a business that lists the quantity
of a product that consumers will buy at particular price points, can provide the figures for the
demand curve chart.

Once plotted, the demand curve slopes downward, from left to right. As prices increase,
consumers demand less of a good or service.

A supply curve slopes upward. As prices increase, suppliers provide more of a good or service.

3
Market Equilibrium
The point where supply and demand curves intersect represents the market clearing or market
equilibrium price. An increase in demand shifts the demand curve to the right. The two curves
then intersect at a higher price, which means consumers are willing to pay more for the product.

Equilibrium prices typically change for most goods and services because factors affecting supply
and demand are always changing. Free, competitive markets tend to push prices toward market
equilibrium.

Market Demand vs. Aggregate Demand (1)

The market for each good in an economy faces a different set of circumstances, which vary in
type and degree. In macroeconomics, we also look at aggregate demand in an economy.

Aggregate demand refers to the total demand by all consumers for all goods and services in an
economy across all the markets for individual goods. Since aggregate demand includes all goods
in an economy, it is not sensitive to competition or the substitution of goods. Nor is it to changes
in consumer preferences between various goods. Demand in individual goods markets can be
affected by these factors.

4
1.2 Utility
A customer is the one who usually determines his demand for goods on the basis of the
satisfaction (utility) that he procures from them. So, what is a utility?

Utility of goods is their want-satisfying capability. More is the aspiration to have the goods, the
more is the utility procured from them. Utility is instinctive. Distinct people can get different
degrees of utility from the same goods. For instance, someone who likes sweets will get much
higher utility from a sweet than someone who doesn’t like sweets.

The utility that an individual obtains from the goods can differ with the change in location and
time. For instance, utility from the use of an air conditioner certainly relies upon whether the
person is in Srinagar or Jaipur (location) or whether it is winter or summer (season).

Approaches that elucidate consumer behaviour

Cardinal utility analysis: Cardinal utility is defined as the perspective that is put forward by the
economists who presume that utility is quantifiable and the consumer can convey his or her
contentment in fundamental or measurable numbers, such as 2, 3, 4, and so on.

Measures of utility (2)

Total utility: Total utility of a determined quantity of goods or commodities (TU) is the total
contentment procured from utilising the given amount of some goods ‘p’.

Marginal utility: MU is the difference in total utility due to the utilisation of one extra unit of
goods or commodities.

Ordinal utility analysis: The customer does not quantify utility in numerals. The theory of
customer decision-making under constraints of certitude can be, and mostly is, conveyed in
terms of ordinal utility.

5
1.3 Indifference Curve (3)
An indifference curve is a graphical representation of a combined products that gives similar
kind of satisfaction to a consumer thereby making them indifferent.Every point on the
indifference curve shows that an individual or a consumer is indifferent between the two
products as it gives him the same kind of utility.

Indifference Curve Analysis

The indifference curve analysis work on a simple graph having two-dimensional. Each
individual axis indicates a single type of economic goods. If the graph is on the curve or line,
then it means that the consumer has no preference for any goods, because all the good has the
same level of satisfaction or utility to the consumer. For instance, a child might be indifferent
while having a toy, two comic book, four toy trucks and a single comic book.

Indifference Map
The Indifference Map refers to a set of Indifference Curves that reflects an understanding and
gives an entire view of a consumer’s choices. The below diagram shows an indifference map
with three indifference curves.

Here, we understand that all three products resting in the indifferent curve give him the same
satisfaction. However, his preference for those combined products can be arranged in the order
of preference.

6
Following are the features of indifference curve

(a) INDIFFERENCE CURVE  An indifference curve has a negative slope, i.e. it

ALWAYS SLOPES slopes downward from left to right.
DOWNWARDS FROM
 Reason: If a consumer decides to have one more
LEFT TO RIGHT
unit of a commodity (say apples), quantity of
another good (say oranges) must fall so that the total
satisfaction (utility) remains same.

(b) INDIFFERENCE CURVE  IC is strictly Convex to origin i.e. MRSxy is always

IS ALWAYS CONVEX TO diminishing
THE ORIGIN
 Reason: Due to the law of diminishing marginal
utility a consumer is always willing to sacrifice
lesser units of a commodity for every additional unit
of another good.

(c) HIGHER  Higher indifference curve represents larger bundles

INDIFFERENCE CURVE of goods i.e. bundles which contain more of both or
REPRESENTS more of at least one.
HIGHER LEVEL OF  It is assumed that consumer’s preferences are
SATISFACTION monotonic i.e. he always prefers larger bundle as it
gives him higher satisfaction.

7
 In the diagram, IC1 and IC2 are the two indifference
curves. IC2 is the higher indifference curve than
IC1.
 Combination ‘L’ contains more of both goods ‘X’
and Y than combination ‘M’ on IC1. Hence IC2
curve gives more satisfaction

8
1.4 Elasticity of Demand (4)
Elasticity of Demand, or Demand Elasticity, is the measure of change in quantity demanded of a
product in response to a change in any of the market variables, like price, income etc. It measures
the shift in demand when other economic factors change.

In other words, the elasticity of demand is the percentage change in quantity demanded divided
by the percentage change in another economic variable.

The demand for a commodity is affected by different economic variables:

1. Price of the commodity

2. Price of related commodities
3. Income level of consumers

Types of Elasticity of Demand

On the basis of different factors affecting the quantity demanded for a product, elasticity of
demand is categorized into mainly three categories: Price Elasticity of Demand (PED), Cross
Elasticity of Demand (XED), and Income Elasticity of Demand (YED).

1. Price Elasticity of Demand (PED)

Any change in the price of a commodity, whether it’s a decrease or increase, affects the quantity
demanded for a product. For example, when there is a rise in the prices of ceiling fans, the
quantity demanded goes down.

9
This measure of responsiveness of quantity demanded when there is a change in price is termed
as the Price Elasticity of Demand (PED).

The mathematical formula given to calculate the Price Elasticity of Demand is:

PED = % Change in Quantity Demanded % / Change in Price

The result obtained from this formula determines the intensity of the effect of price change on
the quantity demanded for a commodity.

2. Income Elasticity of Demand (YED)

The income levels of consumers play an important role in the quantity demanded for a product.
This can be understood by looking at the difference in goods sold in the rural markets versus the
goods sold in metro cities.

The Income Elasticity of Demand, also represented by YED, refers to the sensitivity of quantity
demanded for a certain good to a change in real income (the income earned by an individual after
accounting for inflation) of the consumers who buy this good, keeping all other things constant.

The formula given to calculate the Income Elasticity of Demand is given as:

YED = % Change in Quantity Demanded% / Change in Income

The result obtained from this formula helps to determine whether a good is a necessity good or a
luxury good.

3. Cross Elasticity of Demand (XED)

10
In a market where there is an oligopoly, multiple players compete. Thus, the quantity demanded
for a product does not only depend on itself but rather, there is an effect even when prices of
other goods change.

Cross Elasticity of Demand, also represented as XED, is an economic concept that measures the
sensitiveness of quantity demanded of one good (X) when there is a change in the price of
another good (Y), and that’s why it is also referred to as Cross-Price Elasticity of Demand.

The formula given to calculate the Cross Elasticity of Demand is given as:

XED = (% Change in Quantity demanded for one good (X) %) / (Change in Price of another Good
(Y))

The result obtained for a substitute good would always come out to be positive as whenever there
is a rise in the price of a good, the demand for its substitute rises. Whereas, the result will be
negative for a complementary good.

These three types of Elasticity of Demand measure the sensitivity of quantity demanded to a
change in the price of the good, income of consumers buying the good, and the price of another
good.

1.5 Factors of production (5)

There are four factors of production—land, labor, capital, and entrepreneurship.

11
Land
Land has a broad definition as a factor of production and can take on various forms, from
agricultural land to commercial real estate to the resources available from a particular piece of
land. Natural resources, such as oil and gold, can be extracted and refined for human
consumption from the land.

Cultivation of crops on land by farmers increases its value and utility. For a group of early
French economists called “the physiocrats,” who predated the classical political economists, land
was responsible for generating economic value.

While land is an essential component of most ventures, its importance can diminish or increase
based on industry. For example, a technology company can easily begin operations with zero
investment in land. On the other hand, land is the most significant investment for a real estate
venture.

Labor
Labor refers to the effort expended by an individual to bring a product or service to the market.
Again, it can take on various forms. For example, the construction worker at a hotel site is part of
labor, as is the waiter who serves guests or the receptionist who enrolls them into the hotel.

12
Within the software industry, labor refers to the work done by project managers and developers
in building the final product. Even an artist involved in making art, whether it is a painting or a
symphony, is considered labor. For the early political economists, labor was the primary driver
of economic value. Production workers are paid for their time and effort in wages that depend on
their skill and training. Labor by an uneducated and untrained worker is typically paid at low
prices. Skilled and trained workers are called “human capital” and are paid higher wages because
they bring more than their physical capacity to the task.

Capital
In economics, capital typically refers to money. However, money is not a factor of production
because it is not directly involved in producing a good or service. Instead, it facilitates the
processes used in production by enabling entrepreneurs and company owners to purchase capital
goods or land or to pay wages. For modern mainstream (neoclassical) economists, capital is the
primary driver of value.

It is important to distinguish personal and private capital in factors of production. A personal

vehicle used to transport family is not considered a capital good, but a commercial vehicle used
expressly for official purposes is. During an economic contraction or when they suffer losses,
companies cut back on capital expenditure to ensure profits. However, during periods of
economic expansion, they invest in new machinery and equipment to bring new products to
market.

An illustration of the above is the difference in markets for robots in China compared to the
United States after the 2008 financial crisis. After the crisis, China experienced a multi-year
growth cycle, and its manufacturers invested in robots to improve productivity at their facilities
and meet growing market demands. As a result, the country became the biggest market for
robots. Manufacturers within the United States, which had been in the throes of an economic
recession after the financial crisis, cut back on their investments related to production due to
tepid demand.

Entrepreneurship

13
Entrepreneurship is the secret sauce that combines all the other factors of production into a
product or service for the consumer market. An example of entrepreneurship is the evolution of
the social media behemoth Meta (META), formerly Facebook.

Mark Zuckerberg assumed the risk for the success or failure of his social media network when he
began allocating time from his daily schedule toward that activity. When he coded the minimum
viable product himself, Zuckerberg’s labor was the only factor of production. After Facebook,
the social media site, became popular and spread across campuses, it realized it needed to recruit
additional employees. He hired two people, an engineer (Dustin Muscovite) and a spokesperson
(Chris Hughes), who both allocated hours to the project, meaning that their invested time became
a factor of production.

The continued popularity of the product meant that Zuckerberg also had to scale technology and
operations. He raised venture capital money to rent office space, hire more employees, and
purchase additional server space for development. At first, there was no need for land. However,
as business continued to grow, Meta built its own office space and data centers. Each of these
requires significant real estate and capital investments.

1.6 Advertising elasticity (6)

Advertising Elasticity of Demand (AED) is a measure of effectiveness of increase in expenditure
of advertising in increasing demand of a product. AED is always positive, meaning that the
demand always increases with increase in advertising expenditure. Whereas values of this ratio
below 1 mean that the increase in demand is less than the increase in advertising expenditure,
while values greater than 1 indicate that the rise in demand is more than the rise in expenditure.

While this is a good way to estimate expected rise in advertising costs for growth in demand or
the expected growth with rise in expense toward advertising, this is not the most accurate way.
This ratio assumes that several other factors that may affect demand are constant, which cannot
be the case in real life.
The formula is:-

14
This ratio can lie between 0 and ∞ (infinity).

1.7 Market (7)

A market is a place where parties can gather to facilitate the exchange of goods and services. The
parties involved are usually buyers and sellers. The market may be physical like a retail outlet,
where people meet face-to-face, or virtual like an online market, where there is no direct physical
contact between buyers and sellers. There are some key characteristics that help define a market,
including the availability of an arena, buyers and sellers, and a commodity that can be purchased
and sold.

1.8 Market structure (8)

Market structure, in economics, refers to how different industries are classified and differentiated
based on their degree and nature of competition for goods and services. It is based on the
characteristics that influence the behavior and outcomes of companies working in a specific
market.

Some of the factors that determine a market structure include the number of buyers and sellers,
ability to negotiate, degree of concentration, degree of differentiation of products, and the ease or
difficulty of entering and exiting the market.

Perfect Competition

15
Perfect competition occurs when there is a large number of small companies competing against
each other. They sell similar products (homogeneous), lack price influence over the
commodities, and are free to enter or exit the market.

Consumers in this type of market have full knowledge of the goods being sold. They are aware
of the prices charged on them and the product branding. In the real world, the pure form of this
type of market structure rarely exists. However, it is useful when comparing companies with
similar features.

Monopolistic Competition
Monopolistic competition refers to an imperfectly competitive market with the traits of both the
monopoly and competitive market. Sellers compete among themselves and can differentiate their
goods in terms of quality and branding to look different. In this type of competition, sellers
consider the price charged by their competitors and ignore the impact of their own prices on their
competition.

When comparing monopolistic competition in the short term and long term, there are two distinct
aspects that are observed. In the short term, the monopolistic company maximizes its profits and
enjoys all the benefits as a monopoly.

The company initially produces many products as the demand is high. Therefore, its Marginal
Revenue (MR) corresponds to its Marginal Cost (MC). However, MR diminishes over time as
new companies enter the market with differentiated products affecting demand, leading to less
profit.

Oligopoly
An oligopoly market consists of a small number of large companies that sell differentiated or
identical products. Since there are few players in the market, their competitive strategies are
dependent on each other.

16
For example, if one of the actors decides to reduce the price of its products, the action will
trigger other actors to lower their prices, too. On the other hand, a price increase may influence
others not to take any action in the anticipation consumers will opt for their products. Therefore,
strategic planning by these types of players is a must.

In a situation where companies mutually compete, they may create agreements to share the
market by restricting production, leading to supernormal profits. This holds if either party honors
the Nash equilibrium state or neither is tempted to engage in the prisoner’s dilemma. In such an
agreement, they work like monopolies. The collusion is referred to as cartels.

Monopoly
In a monopoly market, a single company represents the whole industry. It has no competitor, and
it is the sole seller of products in the entire market. This type of market is characterized by
factors such as the sole claim to ownership of resources, patent and copyright, licenses issued by
the government, or high initial setup costs.
All the above characteristics associated with monopoly restrict other companies from entering
the market. The company, therefore, remains a single seller because it has the power to control
the market and set prices for its goods.
1.9 Price and output determination under perfect competition (9)
The market price and output is determined on the basis of consumer demand and market supply
under perfect competition. In other words, the firms and industry should be in equilibrium at a
price level in which quantity demand is equal to the quantity supplied. They make maximum
profit if the firm and industry are in equilibrium.

Price determination has to be shown in the following diagram:

Price of Curd Quantity Demand Quantity Supplied

(Rs.) (Liter) (Liter)
2 90 30
3 80 40
4 70 50

17
 5 60 60
6 50 70
7 40 80
8 30 90

In this above table, we can say that when a price is low, demand is increased. Talking about the
part of supply, as price increase, supply is increased. When the price is low, the competition
between the consumers can raise the price and when the price is high, the competition among the
sellers reduces the price. So, the price finally comes to be determined at such a place when the
demand and supply of a commodity are equal to each other. At Rs. 5, the demand of curd is 60
liter and supply is also 60 liters.

1.10 Price and output determination under monopolistic competition (10)

Under monopolistic competition, the firm will be in equilibrium position when marginal revenue
is equal to marginal cost. So long the marginal revenue is greater than marginal cost, the seller
will find it profitable to expand his output, and if the MR is less than MC, it is obvious he will
reduce his output where the MR is equal to MC. In short run, therefore, the firm will be in
equilibrium when it is maximising profits, i.e., when MR = MC.

(a) Short Run Equilibrium: Short run equilibrium is illustrated in the following diagram:

Monopolistic Competition Short Run Equilibrium

18
In the above diagram, the short run average cost is MT and short run average revenue is
MP. Since the AR curve is above the AC curve, therefore, the profit is shown as PT. PT is the
supernormal profit per unit of output. Total supernormal profit will be measured by multiplying
the supernormal profit to the total output, i.e. PT × OM or PTT’P’ as shown in figure (a). The
firm may also incur losses in the short run if it is facing AR curve below the AC curve. In figure
(b) MP is less than MT and TP is the loss per unit of output. Total loss will be measured by
multiplying loss per unit of output to the total output, i.e., TP × OM or TPP’T’.

(b) Long Run Equilibrium: Under monopolistic competition, the supernormal profit in the long
run is disappeared as new firms are entered into the industry. As the new firms are entered into
the industry, the demand curve or AR curve will shift to the left, and therefore, the supernormal
profit will be competed away and the firms will be earning normal profits. If in the short run
firms are suffering from losses, then in the long run some firms will leave the industry so that
remaining firms are earning normal profits.

The AR curve in the long run will be more elastic, since a large number of substitutes will be
available in the long run. Therefore, in the long run, equilibrium is established when firms are
earning only normal profits. Now profits are normal only when AR = AC. It is further illustrated
in the following diagram:

1.11 Price and output determination under monopoly (11)

19
A firm under monopoly faces a downward sloping demand curve or average revenue cum.
Further, in monopoly, since average revenue falls as more units of output are sold, the marginal
revenue is less than the average revenue. In other words, under monopoly the MR curve lies
below the AR curve.

The equilibrium level in monopoly is that level of output in which marginal revenue equals
marginal cost. The producer will continue producer as long as marginal revenue exceeds the
marginal cost. At the point where MR is equal to MC the profit will be maximum and beyond
this point the producer will stop producing.

It can be seen from the diagram that up till OM output, marginal revenue is greater than marginal
cost, but beyond OM the marginal revenue is less than marginal cost. Therefore, the monopolist
will be in equilibrium at output OM where marginal revenue is equal to marginal cost and the
profits are the greatest.

The corresponding price in the diagram is MP or OP. It can be seen from the diagram at output
OM, while MP’ is the average revenue, ML is the average cost, therefore, P’L is the profit per
unit. Now the total profit is equal to P’L (profit per unit) multiply by OM (total output). In the
short run, the monopolist has to keep an eye on the variable cost, otherwise he will stop
producing.

20
In the long run, the monopolist can change the size of plant in response to a change in demand.
In the long run, he will make adjustment in the amount of the factors, fixed and variable, so that
MR equals not only to short run MC but also long run MC.

1.12 Reference:
1. https://www.investopedia.com/terms/d/demand.asp
2. https://byjus.com/commerce/utility/
3. https://byjus.com/commerce/features-of-indifference-curve/
4. https://www.analyticssteps.com/blogs/elasticity-demand-and-its-types
5. https://www.investopedia.com/terms/f/factors-production.asp
6. https://www.mbaskool.com/business-concepts/marketing-and-strategy-terms/11823-
advertising-elasticity-of-demand.html
7. https://www.investopedia.com/terms/m/market.asp
8. https://corporatefinanceinstitute.com/resources/knowledge/economics/market-
structure/#:~:text=Market%20structure%20refers%20to%20how,monopoly%20market%2C
%20and%20monopolistic%20competition.
9. https://kullabs.com/class-12/economics-1/theory-of-price-and-output-
determination/price-and-output-determination-under-perfect-competion
10. https://sites.google.com/site/maeconomicsku/home/monopolistic-competition
11. https://www.microeconomicsnotes.com/monopoly/price-and-output-determination/price-
and-output-determination-under-monopoly-6-answers/15832

21
 UNIT II

2.1 Functions of Central Banks (1)

The functions of the central bank are given below in details:-
1. Monopoly of Note-Issue
In early banking, every bank has the practice of issuing currency notes, which lacking similarity,
losing public confidence, causing inflation and ultimately failure of the banks. Hence due to such
reasons, this right of issuing currency notes was given only to the central bank of the country,
everywhere in the world.

Now the central bank issues currency notes and maintains their value in the country also
regulates them according to the requirements of the country. So, one of the main functions of the
central bank is to issue currency notes.

2. Bankers to the State

Another most important function of a central bank is that it acts as a banker to the state or
government. It accepts cash deposits and cheques of the government and other incomes of the
government like taxes etc and provides cash requirements for payment of salaries, wages and for
their expenditure. It maintains the account of government. No interest is paid on the cash balance
of the government maintained by the central bank.

3. Banker’s Banks
The central bank also performs the duties of bankers for other banks of the country. It also acts
as a banker’s bank. All the member banks are required to keep a prescribed percentage of the
reserve with the central bank to provide financial protection to the member banks.

The ratio of cash reserve can be changed by the state bank if required according to the situation.
Maintenance of cash reserve also helps in the process of credit control in the country. Against
this reserve, the central bank helps the member bank in discounting their bill of exchange and
supply of cash in financial hardships and other requirements.

22
4. Lender of the Last Resort
The central bank also acts as the lender of the last resort. In a difficult time, a person can get help
from a commercial bank. But in the case of a bank, his financial requirements are fulfilled only
by the central bank. The central bank provides financial, accommodation to commercial banks;
cooperative banks and other financial institutions in case of financial crises.

The central bank helps them either by advancing loans or by discounting bill of exchange held by
the commercial banks. This is also one of the important functions of the central bank.

5. Act as a Guardian
Another function of the central bank is that it is the custodian of all resources of the country. It
controls and regulates the money market of the country. The central bank is vested with the
power to control foreign exchange, hence it exercises full control on both the visible and
invisible payments from and to the country.

Similarly, credit performs the important functions of supplying money in the modern economy.
The value of money is influenced by the volume of credit. The volume of credit in the country is
regulated for economic stability. This regulation of credit by the central bank is known as
monetary policy or credit control. Controlling credit is also one of the important functions of the
central bank.

6. Clearing House
The central bank of the country also acts as a clearinghouse for the remember banks. A
clearinghouse is a place where the representatives of commercial banks meet to exchange
cheques drawn on each other and then settle the difference owed to the other.

It may also be defined as an association of banks to facilitate the exchange, off-set and settlement
of credit claims among them and to serves their mutual interest. As every commercial bank keeps
a certain percentage of the cash deposits with the central bank, the settlement of inter-bank
obligations becomes easy by the simple process of book entries.

23
With the help of a clearinghouse, the payments and receipts of large amounts become convenient
and secure without involving any cash. The advantage of this system is not only to secure a large
amount of payments without risk, loss of time and use of precious metal, but this facility also
enables the central bank to carry on the monetary policy of the country more effectively.
Clearinghouse is no doubt is also from one of the important functions of the central bank.

2.2 Functions of Commercial Banks (2)

The major functions performed by the commercial banks are:
1. Accepting Deposits
This is one of the primary functions of commercial banks. The commercial banks accept
different types of deposits, the deposits may be broadly classified as demand deposits and time
deposits. The former refer to the deposits which are repayable by the banks on demand by the
depositors, while the time deposits are accepted by the banks for a fixed period of time before the
expiry of which they don’t return the deposit. The demand deposits include the current account
deposits and savings bank account deposits. These two types of deposits earn very low rate of
interest as they can be withdrawn any time. In the case of savings deposit, the depositor is not
allowed to withdraw more than a fixed number of times or amount over a period of time. The
time or term deposits include the fixed deposit and recurring deposits. In the former a sum is
deposited for a fixed period of time determined at the time of deposit and is never allowed to be
withdrawn before the expiry of period of deposit. Any such foreclosures will invite penalty apart
from forfeiting the interest. Recurring deposits are the type of deposits in which a depositor
agrees to deposit a fixed sum of amount every month for a number of months as determined in
advance, and at the end of which the depositor will be repaid his deposit amount along with
interest. Every bank will be interested in mobilizing as much deposit as possible as it would
improve its liquidity with which the bank can meet is liabilities and expand its business.

2. Advancing of Loans
Commercial banks accept deposits and use them for expansion of their business. The banks
never keep the deposits mobilized idle. After keeping some cash reserve, they invest the funds
and earn. Commercial banks also lend loans and advances to the common men after satisfying

24
themselves about the credit worthiness of the borrowers. They grant different types of loans like
ordinary loans in which the banks lend money against collateral security. Cash credit is another
type of loan in which the entire amount sanctioned is credited into the borrower’s account and he
is permitted to withdraw only a specified sum at a time. Overdraft is yet another facility under
which the customer is allowed to withdraw an amount subject to the ceiling fixed, from his
account and he pays interest on the amount of overdrawn. Discounting bills of exchange is
another type of advance granted by the commercial banks in which a genuine trade bill is
discounted by the banks and the holder of the bill is given the amount and the banks arrange to
collect the due from the drawer of the bill on the date of maturity.

3. Investment of Funds
One of the main functions of the commercial banks is to invest their funds so as learn interest
and returns apart from utilizing their funds in a productive manner. In India as per the statutes,
commercial banks must invest a part of their total investments in government securities and other
approved securities so as to impart liquidity. Banks apart from enabling them to earn out of their
investments, now a days have set up mutual funds through which they mobilize funds from the
people invest them in very attractive projects which is a help rendered to the investors who
otherwise will not have the benefit of participating in the project. Banks administer these mutual
funds through specialists and experts whose services are not available to the common men.

4. Agency Functions of Commercial Banks

Commercial banks function as he agent of their customers and help them several ways. For these
agency services, the banks charge a nominal amount. The agency services include, transfer of
customer’s funds, collection of funds on behalf of the customers, transactions in the shares and
securities for their customers, collection of dividends on shares and interest on debentures for
their customers, payments of subscriptions, dues, bills, premia on behalf of the customers, acting
as the Trustees and Executor of the customers, offering financial and other consultancy services,
acting as correspondents of the customers, etc.

25
5. Purchase and Sale of Foreign Exchange
The commercial banks account for by far the largest proportion of all trading of both a
commercial and speculative nature and operate within what is known as the interbank market.
This is essentially a market composed solely of commercial and investments which buy and sell
currencies from each other. Strict trading relationships exist between the member banks and lines
of credit are established between these banks before they are permitted to trade. Commercial
banks are a fundamental part of the foreign exchange market as they not only trade on their own
behalf and for their customers, but also provide the channel through which all other participants
must trade. They are in essence the principal sellers within the Forex market. One important
thing to remember is that commercial and investment banks do not only trade on behalf of their
customers, but also trade on their own behalf through proprietary desks, whose sole purpose is to
make a profit for the bank. It should always be remembered that commercial banks have
exceptional knowledge of the marketplace and the ability to monitor the activities of other
participants such as the central banks, investment funds and hedge funds.

6. Financing Domestic and International Trade

This is a major function of the commercial banks. The international trade depends to a large
extent on the financial and other support given by the banks. Apart from encouraging bills
transactions, the banks also issue letter of credit facilitating the importers to conduct their trade
smoothly. The banks also process all the documents through consultancy services and reduce the
botheration of the traders. They also lend on the basis of commercial bills, warehouse receipts,
etc., which help the traders to expand their business.

7. Creation of Credit
It is worth noting the credit created by the commercial banks. In the process of their lending
operations, they create credit. The process involves the following mechanism; whenever the
banks lend loans, they do not pay cash to the borrowers; instead they credit the accounts of the
borrowers and allow them to withdraw from their accounts. This means every loan given will
create a deposit for the banks. Since every deposit is equal to money, banks are said to be
creating money in the form of credit. As a result the volume of funds required by the trade,
government and the country is met by the banks without any necessity to use actual cash.

26
8. Other Functions
Other functions of commercial banks include providing safety vault facility for the customers,
issuing traveller’s cheques acting as referees of their customers in times of need, compiling
statistics and other valuable information, underwriting the issue of shares and debentures,
honoring the bills drawn on them by their customers, providing consultancy services on
financial and investment matters to customers, etc.

In the process of performing all the above mentioned services, the banks do play key role in the
economic development and nation building. They help the country in achieving its socio-
economic objectives. With the nationalization of banks, the priority sector and the needy people
are provided with sufficient funds which helm them in establishing themselves. In this way the
commercial banks provide a firm and durable foundation for the economic development of every
country.

2.3 Inflation (3)

Inflation is commonly understood as a situation of substantial and rapid general increase in the
price level and consequent fall the value of money over a period of time. Inflation means
persistent rise in the general level of prices. Inflation is a long term operating dynamic process.
By and large, inflation is also a monetary phenomenon. It is usually characterized by an overflow
of money and credit. In fact, the root cause of inflation is the expansion of money supply beyond
the normal absorbing capacity of the economy. The behavior of general prices is measured
through price indices. The trend of price indices reveals the course of inflation or deflation in the
economy.

2.4 Deflation (4)

Deflation is generally the decline in the prices for goods and services that occur when the rate of
inflation falls below 0%. Deflation will take place naturally, if and when the money supply of an
economy is limited. Deflation in an economy indicates deteriorating conditions.

Deflation is normally linked with significant unemployment and low productivity levels of goods
and services. The term “Deflation” is often mistaken with “disinflation.” While deflation refers

27
to a decrease in the prices of goods and services in an economy, disinflation is when inflation
increases at a slower rate.
2.5 Stagflation (5)
The present day inflation is the best explanation for stagflation in the whole world. It is inflation
accompanied by stagnation on the development front in an economy. Instead of leading to full
employment, inflation has resulted in un-employment in most of the countries of the world. It is
a global phenomenon today. Both developed and developing countries are not free from its
clutches. Stagflation is a portmanteau term in macroeconomics used to describe a period with a
high rate of inflation combined with unemployment and economic recession. Inflationary gap
occurs when aggregate demand exceeds the available supply and deflationary gap occurs when
aggregate demand is less than the aggregate supply. These are two opposite situations. For
instance, when inflation goes unchecked for some time, and prices reach very high level,
aggregate demand contracts and a slump follows. Private investment is discouraged. Inflationary
and deflationary pressures exist simultaneously. The existence of an economic recession at the
height of inflation is called ’stagflation’.

2.6 Direct and Indirect Taxes (6)

2.6.1 Direct Tax
It is a tax levied directly on a taxpayer who pays it to the Government and cannot pass it on to
someone else. Some of the important direct taxes imposed in India are mentioned below:
 Income Tax- It is imposed on an individual who falls under the different tax brackets
based on their earnings or revenue and they have to file an income tax return every year
after which they will either need to pay the tax or be eligible for a tax refund.
 Corporate tax- Companies incorporated or having operations in India have to pay tax to
the government. They need to pay tax on the profits earned from the business. Unlike,
income tax slab rates of individuals, the companies have to pay tax at flat rates prescribed
by the government.
 Securities Transaction Tax (STT)- STT is a tax levied while dealing with securities
listed on a recognised stock exchange. It is an amount that is levied over and above the
trade value, and hence, it increases the transaction value.
 Estate and Wealth taxes are now abolished.

28
2.6.2 Indirect Tax
It is a tax levied by the Government on goods and services and not on the income, profit or
revenue of an individual and it can be shifted from one taxpayer to another.

Earlier, an indirect tax meant paying more than the actual price of a product bought or a service
acquired. And there was a myriad of indirect taxes imposed on taxpayers.

Goods and Service Tax (GST) is one of the existing indirect tax levied in India. It has subsumed
many indirect tax laws.

A few indirect taxes that were earlier imposed in India:

 Customs Duty- It is an Import duty levied on goods coming from outside the country,
ultimately paid for by consumers and retailers in India.
 Central Excise Duty– This tax was payable by the manufacturers who would then shift
the tax burden to retailers and wholesalers.
 Service Tax– It was imposed on the gross or aggregate amount charged by the service
provider on the recipient.
 Sales Tax– This tax was paid by the retailer, who would then shifts the tax burden to
customers by charging sales tax on goods and service.
 Value Added Tax (VAT) – It was collected on the value of goods or services that were
added at each stage of their manufacture or distribution and then finally passed on to the
customer.

2.7 New Economic Policy (7)

2.7.1 Liberalization
The basic aim of liberalization was to put an end to those restrictions which became hindrances
in the development and growth of the nation. The loosening of government control in a country
and when private sector companies’ start working without or with fewer restrictions and

29
government allow private players to expand for the growth of the country depicts liberalization
in a country.

Objectives of Liberalization Policy

 To increase competition amongst domestic industries.
 To encourage foreign trade with other countries with regulated imports and exports.
 Enhancement of foreign capital and technology.
 To expand global market frontiers of the country.
 To diminish the debt burden of the country.

2.7.2 Privatization
This is the second of the three policies of LPG. It is the increment of the dominating role of
private sector companies and the reduced role of public sector companies. In other words, it is
the reduction of ownership of the management of a government-owned enterprise. Government
companies can be converted into private companies in two ways:
 By disinvestment
 By withdrawal of governmental ownership and management of public sector companies.

Objectives of Privatization

 Improve the financial situation of the government.

 Reduce the workload of public sector companies.

 Raise funds from disinvestment.

 Increase the efficiency of government organizations.

 Provide better and improved goods and services to the consumer.

 Create healthy competition in the society.

 Encouraging foreign direct investments (FDI) in India.

2.7.3 Globalization

30
It means to integrate the economy of one country with the global economy. During Globalization
the main focus is on foreign trade & private and institutional foreign investment. It is the last
policy of LPG to be implemented.

Globalization as a term has a very complex phenomenon. The main aim is to transform the world
towards independence and integration of the world as a whole by setting various strategic
policies. Globalization is attempting to create a borderless world, wherein the need of one
country can be driven from across the globe and turning into one large economy.

2.8 Monetary and Fiscal Policies of the government

2.8.1 Monetary Policy (8)

Monetary policy is an economic policy that manages the size and growth rate of the money
supply in an economy. It is a powerful tool to regulate macroeconomic variables such
as inflation and unemployment.

These policies are implemented through different tools, including the adjustment of the interest
rates, purchase or sale of government securities, and changing the amount of cash circulating in
the economy. The central bank or a similar regulatory organization is responsible for formulating
these policies.

Objectives of Monetary Policy

The primary objectives of monetary policies are the management of inflation or unemployment
and maintenance of currency exchange rates.
1. Inflation
Monetary policies can target inflation levels. A low level of inflation is considered to be healthy
for the economy. If inflation is high, a contractionary policy can address this issue.
2. Unemployment
Monetary policies can influence the level of unemployment in the economy. For example, an
expansionary monetary policy generally decreases unemployment because the higher money
supply stimulates business activities that lead to the expansion of the job market.

31
3. Currency exchange rates
Using its fiscal authority, a central bank can regulate the exchange rates between domestic and
foreign currencies. For example, the central bank may increase the money supply by issuing
more currency. In such a case, the domestic currency becomes cheaper relative to its foreign
counterparts.

2.8.2 Fiscal Policy (9)

Fiscal policy is a part of general economic policy of the government which is primarily
concerned with the budget receipts and expenditures of the government. All welfare projects are
completed under this policy .It also suggests measures to control economic fluctuations which
may become violent and create great upheavals in the socio-economic structure of the economy.
It also outlines the influence of resource utilization on the level of aggregate demand through
affecting the level of aggregate consumption and investment expenditure.

Objectives of Fiscal Policy

There are following objectives of fiscal policy:
 Development of Country: Every country has to make fiscal policy for development of
Country. With this policy, all work like govt. planning and proper use of funds for
development functions is done. If govt. does not make fiscal policy, then it can happen
that revenues are misused without targeted expenditure of Government.
 Employment: Getting the full employment is also the objective of fiscal policy. Govt.
can take many actions for increasing employment. Government can fix certain amount
which can be utilized for creation of new employment opportunities for unemployed
people.
 Inequality: In developing country like India, we can see the difference one basis of
earning. 10% of people are earning more than Rs. 100000 per day and other are earning
less than Rs. 100 per day. By making a good fiscal policy, govt. can reduce this
difference if govt makes it as its target.
 Fixation of Govt. Responsibility: It is the duty of Govt. to effective use of resources and
by making of fiscal policy different minister’s accountability can be checked.

32
2.9 Business Cycle (10)

2.9.1 Meaning
Business Cycle is a series of stages of rise and fall of the GDP (Gross Domestic Product) over a
long-term period of economic growth. Where it shows expansions and contractions in economic
activity that a nation experiences over a long period.

Business Cycle is also known as Economic Cycle or Trade Cycle. Based in the economic
activities such as countries’ decision in the new policy, unemployment rate, supply, and demand,
which will affect the upwards and downwards of the economic growth.

2.9.2 Phases in Business Cycle:

There are 6 stages in the business cycle as we can see it in the above image, Here are the detailed
view of these stages:-
1) Expansion
Where economy of a country will be in the growing stage until it reaches a peak. All new
economies will face expansion or any new government is formed will see the expansion.

2) Peak
Peak as its name says the peak of the economic growth in the period. The next stage after the
expansion is the peak. Once the economy is reached the highest point after that started falling,
that point is called Peak.

3) Recession

33
This is the stage where the economy will fall after reaching Peak. It can happen due to sudden
change policy of the economy or the international market’s effects on the economy and many
more.

5) Depression
This is the stage where GDP continues to fall below the growth line. In this stage where you
increase the unemployment rate and inflation etc.
4) Trough
This lowest point of the economy can fall, the Growth rate will be negative. Where you can see a
fall in national income and there will be layoffs, declining business sales and earnings, and lower
credit availability. This will be the end of the decline of the growth rate.

6) Recovery
After Trough the economy started recovering from the lowest point. At this stage, there will be
increasing in the employment rate, slowly increase in sales and earnings of the business. Where
the economy will come to normal. And after this stage, again expansion will come.

2.10 References:
1. https://www.businessstudynotes.com/others/banking-finance/what-are-the-main-
functions-of-central-bank/
2. https://www.mbaknol.com/business-finance/functions-of-commercial-banks/
3. https://www.mbaknol.com/managerial-economics/definition-of-inflation-and-its-
types/#:~:text=Inflation%20is%20commonly%20understood%20as,long%20term%20operati
ng%20dynamic%20process.
4. https://cleartax.in/s/inflation-deflation
5. https://www.mbaknol.com/global-business-environment/stagflation-and-phillips-
curve/#:~:text=Stagflation%20is%20a%20portmanteau%20term,less%20than%20the%20agg
regate%20supply.
6. https://cleartax.in/s/direct-indirect-taxation-india-explained
7. https://www.toppr.com/guides/economics/liberalization-privatisation-and-
globalisation/introduction-to-lpg/

34
 8. https://corporatefinanceinstitute.com/resources/knowledge/economics/monetary-policy/
9. https://www.mbaknol.com/managerial-economics/fiscal-policy/
10. https://www.mbacheats.com/what-is-the-definition-of-the-business-cycle-and-its-phases/

UNIT III

3.1 Meaning and Definition of Management (1)

Management is a process of planning, organizing and directing the activities of human beings
and physical resources with the intention of accomplishing a predefined objectives.

According to Lousis Allenm, “Management is what a manager does”.

According to Koontz and O’Donnel, “Management is the creation and maintenance of an internal
environment in an enterprise where individuals, working in groups, can perform efficiently and
effectively toward the attainment of group goals. It is the art of getting the work done through
and with people in formally organized groups”.

3.1.1 Nature of Management

1. It is a Continuous Process: It is never ending process. It continuously follows a series of
steps like planning, organizing, staffing, directing and controlling for effective utilization
of financial and personnel organizational resources. All these functions are
interdependent and one function cannot operate without the presence of the other.
2. It as Discipline: In recent times the status of management as a discipline is increasing as
it provides certified information and knowledge to management practitioners and also
aims at discovering new aspects of the business world.
3. Management is an Art as well as a Science: It is a good combination of arts as well as
science. As it is an organised body of knowledge and states various facts and truths,

35
 hence it can be considered as a science. It is also an art, as it involves managing various
process which requires different set of skills by managers.
4. Goal Oriented: Every organization has to attain a set of predetermined goals. The success
or failure of the management depends on the extent to which these objectives have been
achieved.
5. Guidance: It provides guidance and explains the way in which human and material
resources can be utilised in the most efficient manner. It suggests techniques for effective
and economic utilisation of scarce resources to achieve the objectives of a business
enterprise. It is an art of getting things done by achieving coordination among employees
who carry-out specific and diverse business operations.
6. It is Universal: Application of management is universal; it can be applied anywhere and
everywhere. Every business activity, club, government offices, charitable and religious
institutions, army, etc., comes under the scope of management.
7. It is Dynamic: It is difficult for any business environment to remain constant for a long
period of time. Hence, It also change with every change in the environment to the
business. Management tools and techniques help in converting the threats associated with
environment into opportunities.
8. It is Decision-Making: Decision-making is an important activity for any business
manager Decisions are based on the available facts and figures and depend on the
understanding and analysis of the managers. Various technical methods are used to
determine the best decision for the overall betterment of the organization.
9. It is Profession: It is not an inherent ability, it is a profession. Managers are not born; they
are made by proper training and acquiring managerial skills.
3.1.2 Scope of Management
Activity Point of View:-
1. Planning
2. Organizing
3. Staffing
4. Directing
5. Controlling
Functional Areas of Management:-

36
 1. Financial
2. Personnel
3. Purchasing
4. Production
5. Maintenance
6. Logistics
7. Marketing
8. Office
3.2 Functions of Management (2)
The functions of management given by KOONTZ and O’DONNEL are as follows:-
1. Planning
It is the basic function of management. It deals with chalking out a future course of action &
deciding in advance the most appropriate course of actions for achievement of pre-determined
goals.

According to KOONTZ, “Planning is deciding in advance - what to do, when to do & how to do.
It bridges the gap from where we are & where we want to be”. A plan is a future course of
actions. It is an exercise in problem solving & decision making.

Planning is determination of courses of action to achieve desired goals. Thus, planning is a

systematic thinking about ways & means for accomplishment of pre-determined goals. Planning
is necessary to ensure proper utilization of human & non-human resources. It is all pervasive, it
is an intellectual activity and it also helps in avoiding confusion, uncertainties, risks, wastages
etc.
2. Organizing
It is the process of bringing together physical, financial and human resources and developing
productive relationship amongst them for achievement of organizational goals.
According to Henry Fayol, “To organize a business is to provide it with everything useful or its
functioning i.e. raw material, tools, capital and personnel’s”. To organize a business involves
determining & providing human and non-human resources to the organizational structure.
Organizing as a process involves:

37
  Identification of activities.
 Classification of grouping of activities.
 Assignment of duties.
 Delegation of authority and creation of responsibility.
 Coordinating authority and responsibility relationships.

3. Staffing
It is the function of manning the organization structure and keeping it manned. Staffing has
assumed greater importance in the recent years due to advancement of technology, increase in
size of business, complexity of human behavior etc.

The main purpose o staffing is to put right man on right job i.e. square pegs in square holes and
round pegs in round holes. According to Kootz & O’Donell, “Managerial function of staffing
involves manning the organization structure through proper and effective selection, appraisal &
development of personnel to fill the roles designed un the structure”. Staffing involves:
 Manpower Planning (estimating man power in terms of searching, choose the person and
giving the right place).
 Recruitment, Selection & Placement.
 Training & Development.
 Remuneration.
 Performance Appraisal.
 Promotions & Transfer.
4. Directing
It is that part of managerial function which actuates the organizational methods to work
efficiently for achievement of organizational purposes. It is considered life-spark of the
enterprise which sets it in motion the action of people because planning, organizing and staffing
are the mere preparations for doing the work.
Direction is that inert-personnel aspect of management which deals directly with influencing,
guiding, supervising, motivating sub-ordinate for the achievement of organizational goals.
Direction has following elements:

38
Supervision
Motivation
Leadership
Communication
Supervision- implies overseeing the work of subordinates by their superiors. It is the act of
watching & directing work & workers.
Motivation- means inspiring, stimulating or encouraging the sub-ordinates with zeal to work.
Positive, negative, monetary, non-monetary incentives may be used for this purpose.
Leadership- may be defined as a process by which manager guides and influences the work of
subordinates in desired direction.
Communications- is the process of passing information, experience, opinion etc from one
person to another. It is a bridge of understanding.
5. Controlling
It implies measurement of accomplishment against the standards and correction of deviation if
any to ensure achievement of organizational goals. The purpose of controlling is to ensure that
everything occurs in conformities with the standards. An efficient system of control helps to
predict deviations before they actually occur.
According to Theo Haimann, “Controlling is the process of checking whether or not proper
progress is being made towards the objectives and goals and acting if necessary, to correct any
deviation”.
According to Koontz & O’Donell “Controlling is the measurement & correction of performance
activities of subordinates in order to make sure that the enterprise objectives and plans desired to
obtain them as being accomplished”. Therefore controlling has following steps:
 Establishment of standard performance.
 Measurement of actual performance.
 Comparison of actual performance with the standards and finding out deviation if any.
 Corrective action.

3.3 Principles of Management (3)

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

39
1. Division of Work-
Henri believed that segregating work in the workforce amongst the worker will enhance the
quality of the product. Similarly, he also concluded that the division of work improves the
productivity, efficiency, accuracy and speed of the workers. This principle is appropriate for both
the managerial as well as a technical work level.
2. Authority and Responsibility-
These are the two key aspects of management. Authority facilitates the management to work
efficiently, and responsibility makes them responsible for the work done under their guidance or
leadership.
3. Discipline-
Without discipline, nothing can be accomplished. It is the core value for any project or any
management. Good performance and sensible interrelation make the management job easy and
comprehensive. Employees good behaviour also helps them smoothly build and progress in their
professional careers.
4. Unity of Command-
This means an employee should have only one boss and follow his command. If an employee has
to follow more than one boss, there begins a conflict of interest and can create confusion.
5. Unity of Direction-
Whoever is engaged in the same activity should have a unified goal. This means all the person
working in a company should have one goal and motive which will make the work easier and
achieve the set goal easily.
6. Subordination of Individual Interest-
This indicates a company should work unitedly towards the interest of a company rather than
personal interest. Be subordinate to the purposes of an organization. This refers to the whole
chain of command in a company.
7. Remuneration-
This plays an important role in motivating the workers of a company. Remuneration can be
monetary or non-monetary. However, it should be according to an individual’s efforts they have
made.
8. Centralization-
In any company, the management or any authority responsible for the decision-making process
should be neutral. However, this depends on the size of an organization. Henri Fayol stressed on
the point that there should be a balance between the hierarchy and division of power.
9. Scalar Chain-

40
Fayol on this principle highlights that the hierarchy steps should be from the top to the lowest.
This is necessary so that every employee knows their immediate senior also they should be able
to contact any, if needed.
10. Order-
A company should maintain a well-defined work order to have a favourable work culture. The
positive atmosphere in the workplace will boost more positive productivity.
11. Equity-
All employees should be treated equally and respectfully. It’s the responsibility of a manager that
no employees face discrimination.
12. Stability-
An employee delivers the best if they feel secure in their job. It is the duty of the management to
offer job security to their employees.
13. Initiative-
The management should support and encourage the employees to take initiatives in an
organization. It will help them to increase their interest and make then worth.
14. Esprit de Corps-
It is the responsibility of the management to motivate their employees and be supportive of each
other regularly. Developing trust and mutual understanding will lead to a positive outcome and
work environment.

References:-
1. https://scoopskiller.com/management-materials/human-resource-
management/management-nature/
2. https://www.managementstudyguide.com/management_functions.htm
3. https://byjus.com/commerce/henri-fayol-14-principles-of-management/

41
 UNIT IV

4.1 Marketing Management (1)

Marketing management is centered on creating, planning, and implementing strategies that will
help achieve wider business objectives. These business objectives can involve increasing brand
awareness, boosting profits, or entering previously untapped markets. When we begin to
consider the field of marketing management, it’s important to look to marketing experts Philip
Kotler and Kevin Lane Keller, who, in their book “Marketing Management," offer a standard
marketing management definition as “the development, design, and implementation of marketing
programs, processes, and activities that recognize the breadth and interdependencies of the
business environment.”
These professionals need to study their customers, have a deep understanding of the methods and
strategies that retain and delight them, and be active in measuring achievements and optimizing
internal processes.
Think of it this way: A high school teacher does not just teach. They have to understand their
students, create methods and strategies for passing on information, and track student progress
through metrics and achievements.
In essence, the right marketing management processes should elevate a brand, establish a
strategic marketing vision for an organization, and coordinate resources to get it all done.
International marketing management
International marketing management encompasses marketing activities that take place across
national borders.

42
International marketing management requires the marketing manager to achieve a deep
understanding of the customer base in any country where the product is marketed, including
cultural nuances and demographics particular to that nation.
When you are marketing products in various other countries, you might need to engage with
marketers in those localities, which will further expand your marketing management remit. This
could involve hiring employees in that country or a third-party marketing agency to better reach
customers there.

4.2 Marketing Mix (2)

The 4Ps marketing mix concept (also known as the 4ps of marketing) was introduced by Jerome
McCarthy in his book: "Basic Marketing: A Managerial Approach". It refers to the thoughtfully
designed blend of strategies and practices a company uses to drive business and successful
product promotion. Initially 4, these elements were product, price, place and promotion, which
were later expanded by including people, packaging and process. These are now considered to be
the “7 Ps” mix elements.

7 Ps of Marketing
It can be difficult for a small business owner or marketing manager to know how to establish a
unique selling proposition or to reach the right customers, especially on new platforms like the
internet, with digital marketing.
Fortunately, the 7 Ps of marketing give you a framework to use in your marketing planning and
essential strategy to effectively promote to your target market.
You can also take into consideration elements of the mix in your day to day marketing decision
making process with the goal to attract the right audience to successfully market to through your
marketing campaigns.
The 7 elements of the marketing mix include the following:
1. Product (or Service)
Your customer only cares about one thing: what your product or service can do for them.
Because of this, prioritize making your product the best it can be and optimize your product lines

43
accordingly. This approach is called “product-led marketing.” In a marketing mix, product
considerations involve every aspect of what you're trying to sell. This includes:
 Design
 Quality
 Features
 Options
 Packaging
 Market positioning
There are five components to successful product-led marketing that are important for product
marketers to take into consideration::
 Get out of the way. Let your product or service sell itself. Focus your marketing efforts
on getting consumers to try what you have to offer so they can learn its value for
themselves.
 Be an expert (on your customers). Know your customer's needs and use that knowledge
to help communicate your product's value.
 Always be helping. Position yourself as an ally by creating informative content that meets
your target customers’ needs, and they'll be more likely to buy from you. (This is also
called content marketing.)
 Share authentic stories. Encourage happy customers to share their experiences and tell
others why they appreciate your brand.
 Grow a product mindset. Focus on your product before you consider how to sell it. Invest
in development, and the product quality will take care of the rest.
2. Price
Many factors go into a pricing model. Brands may:
 Price a product higher than competitors to create the impression of a higher-quality
offering.
 Price a product similar to competitors, then draw attention to features or benefits other
brands lack.
 Price a product lower than competitors to break into a crowded market or attract value-
conscious consumers.

44
  Plan to raise the price after the brand is established or lower it to highlight the value of an
updated model.
 Set the base price higher to make bundling or promotions more appealing.
Consider what you're trying to achieve with your pricing strategy and how price will work with
the rest of your marketing strategy. Some questions to ask yourself when selling products:
 Will you be offering higher-end versions at an additional cost?
 Do you need to cover costs right away, or can you set a lower price and consider it an
investment in growth?
 Will you offer sales promotions?
 How low can you go without people questioning your quality?
 How high can you go before customers think you’re overpriced?
 Are you perceived as a value brand or a premium brand?
3. Promotion
Promotion is the part of the marketing mix that the public notices most. It includes television and
print advertising, content marketing, coupons or scheduled discounts, social media
strategies, email marketing, display ads, digital strategies, marketing communication, search
engine marketing, public relations and more.
All these promotional channels tie the whole marketing mix together into an omnichannel
strategy that creates a unified experience for the customer base. For example:
 A customer sees an in-store promotion and uses their phone to check prices and read
reviews.
 They view the brand's website, which focuses on a unique feature of the product.
 The brand has solicited reviews addressing that feature. Those reviews appear on high-
ranking review sites.
 The customer buys the product and you’ve sent a thank you email using marketing
automation.
Here are the ways you can use these channels together:
 Make sure you know all the channels available and make the most of them to reach your
target audience.
 Embrace the move toward personalized marketing.
 Segment your promotional efforts based on your customers' behavior.

45
  Test responses to different promotions and adjust your marketing spend accordingly.
 Remember that promotion isn't a one-way street. Customers expect you to pay attention
to their interests and offer them solutions when they need them.
4. Place
Where will you sell your product? The same market research that informed your product and
price decisions will inform your placement as well, which goes beyond physical locations. Here
are some considerations when it comes to place:
 Where will people be looking for your product?
 Will they need to hold it in their hands?
 Will you get more sales by marketing directly to customers from your own e-
commerce website, or will buyers be looking for you on third-party marketplaces?
 Do you want to converse directly with your customers as they purchase, or do you want a
third party to solve customer service issues?
5. People
People refers to anyone who comes in contact with your customer, even indirectly, so make sure
you're recruiting the best talent at all levels—not just in customer service and sales force.
Here’s what you can do to ensure your people are making the right impact on your customers:
 Develop your marketers’ skills so they can carry out your marketing mix strategy
 Think about company culture and brand personality.
 Hire professionals to design and develop your products or services.
 Focus on customer relationship management, or CRM, which creates genuine
connections and inspires loyalty on a personal level.
6. Packaging
A company's packaging catches the attention of new buyers in a crowded marketplace and
reinforces value to returning customers. Here are some ways to make your packaging work
harder for you:
 Design for differentiation. A good design helps people recognize your brand at a glance,
and can also highlight particular features of your product. For example, if you’re a
shampoo company, you can use different colors on the packaging to label different hair
types.

46
  Provide valuable information. Your packaging is the perfect place for product education
or brand reinforcement. Include clear instructions, or an unexpected element to surprise
and delight your customers.
 Add more value. Exceed expectations for your customers and give them well-designed,
branded extras they can use, like a free toothbrush from their dentist, a free estimate from
a roofer, or a free styling guide from their hairdresser.
7. Process
Prioritize processes that overlap with the customer experience. The more specific and seamless
your processes are, the more smoothly your staff can carry them out. If your staff isn't focused on
navigating procedures, they have more attention available for customers—translating directly to
personal and exceptional customer experiences.
Some processes to consider:
 Are the logistics in your main distribution channel cost-efficient?
 How are your scheduling and delivery logistics?
 Will your third-party retailers run out of product at critical times?
 Do you have enough staff to cover busy times?
 Do items ship reliably from your website?
If you get more than one customer complaint about any process, pinpoint what's going wrong
and figure out how to fix it.
4.3 Service Marketing (3)

Service Marketing is simply defined as a phenomenon wherein a service or an intangible

commodity is promoted and marketed among the target audience. A novel kind of marketing,
service marketing has become quite prominent in helping companies promote services around
the world.
Service Marketing reflects on the way a type of service is promoted in the market. Though
service marketing is a unique concept, it calls out for an intangible representation of
commodities (services).
As opposed to Product Marketing that involves a physically visible product being promoted over
various media, service marketing calls for the promotion of a service that is not physically
available but is still sold out to the customers.

47
Activities, benefits, or facilities, services are simply extended as a commodity to customers who
choose from a varied nature of services. An example of service marketing can be- when a family
arrives at a restaurant, they avail of the services (dining) while they are the restaurant.
Features of Service Marketing

Service Marketing is a comparatively newer concept than the concept of marketing itself. While
you have been through a short introduction in the previous segment, here are some
characteristics of service marketing to help you have a better understanding of the topic.

1. Intangible Performance

Service Marketing focuses on an intangible performance more than anything else. A service is a
performance rather than a product that can be consumed.

Moreover, it is an intangible commodity that the masses avail themselves of. Invisible and
intangible, services are simply different than a product. This calls out for a different kind of
marketing strategies that promote an unseen service yet through the lens of performance,
marketers do that well.
Thus, service marketing is nothing more than a representation of an intangible performance that
the common masses avail themselves of in their day-to-day lives.
For instance, the hotel industry has no products to sell but services. So, the industry promotes
and performs an intangible service through various advertising means to reach out to the masses.

2. No Ownership Involved

Unlike product marketing wherein the audience is subjected to product ownership, service
marketing does not reflect on such promises. This is because a service can be consumed and not
owned.
One can, for example, consume the dining experience at a restaurant as compared to a pencil that
one can own in the case of product marketing. This characteristic in particular highlights the

48
amount of hard work that service marketing officials have to put in order to attract the
customers.

3. Perishable Products

Unlike products that last long, a service is prone to perish within a very short period of time that
makes it to be termed as a perishable product. This is because as long as a customer is present at
the venue, a service lasts for that amount of time.

After that, it simply becomes a memory that one can only think of! Since a service is an easily
perishable product, many people from the audience are not convinced easily. Still, the service
marketing features perishable products and promotes them in some way to call out for the target
audience.

4. Cost of Consumption

Unlike the cost of products that is broadly standardized, the cost of consumption of a service is
not standardized at all. We can understand this with the help of an example.
A 1-star restaurant is likely to provide its services at a low price with cheap quality. However, at
the same time a 5-star restaurant will provide the same services with a refined quality and better
experience. The difference between the services can be varied and vast.
Perhaps there is no standardized cost of consumption in service marketing. This is why services
are not standardized in terms of cost. The cost of consumption in service marketing becomes a
major highlight in order to promote a service.

5. Inseparably Interesting

49
A way to promote a service is a way to promote your brand. This means that a service is
inseparably interesting that cannot be severed from the producer. Yet it calls for the target
audience to avail themselves of a specific service and enjoy to their fullest.
As compared to a product that can be physically owned by the customer, a service is an
inseparable entity that should seem interesting enough for the audience to consume. For instance,
a service at a beauty salon is inseparable from its producers.
Since you visit the venue and avail of the services at the salon itself, there is nothing you take
away from the salon in physical terms. Thus, the service is inseparable. Yet the service seems to
interest you because it is a commodity that leads you to a better lifestyle. Therefore, service
marketing features a service as an inseparably interesting commodity.

4.4 Product Life Cycle (4)

The product life cycle involves the stages through which a product goes from the time it is
introduced in the market till it leaves the market. A product life cycle consists of four stages:
introduction, growth, maturity, and decline. A lot of products continue to remain in a prolonged
maturity state. However, eventually, in every product life cycle, the product eventually phases
out from the market. This may be due to several factors such as saturation, competition, decrease
in demand, and even reduction in sales. A product life cycle analysis can help companies in
creating strategies that enable them to sustain the longevity of a product and even adapt to
market conditions.

50
4 Stages of the Product Life Cycle
To recap, we are now well-versed with what product life cycle is, why product life cycle
management is important, and how product development life cycle helps businesses. We will
now skim through the four stages of the product life cycle and their importance.
1. Introduction
This is the first stage of the product life cycle. Once a product is developed, the first step is its
introduction into the market. During this stage, the product is released into the market for the
very first time. This product development life cycle’s stage is on high stake but does not decide
whether the product will be successful or not. Additionally, a lot of marketing and promotional
activities are undertaken, and capital is pooled in so that the product reaches the consumers. At
this stage of the product life cycle management, companies are able to understand how users will
respond to the product. Precisely, the idea is to create a huge demand.
2. Growth
In the growth stage, consumers start to take action. They buy the product; the product becomes
popular and results in increasing sales. There are other companies also that notice the product as
it starts getting more attention and revenue.

51
When the competition is heavy, a higher amount of money may be pooled in to market it. The
market for the product expands and it may also be tweaked at this stage to ensure some features,
etc., are improved. Competition may also force you to cut down the prices. Nonetheless, sales
increase and therefore the product and market grow.
3. Maturity
In the maturity stage, sales slowdown, indicating that the market has begun to reach saturation.
This is also one of the stages of the product life cycle when pricing becomes competitive. This
makes the profit margins thinner. In this stage, the purpose of marketing is to fend off
competition and sometimes, altered products are introduced.
4. Decline
While companies make all efforts throughout the different stages of the product life cycle to
ensure that it stays alive in the market, an eventual decline cannot be ruled out. This is why it
becomes important to know what product life cycle is at first. When a product is in the decline
stage, the sales drop due to a change in consumer behavior and demand. The product loses its
market share and competition also deteriorates. Eventually, the product retires from the market.

4.5 New product development (NPD) (5)

New product development (NPD) is the process of bringing a new product to the marketplace.
Your business may need to engage in this process due to changes in consumer preferences,
increasing competition and advances in technology or to capitalise on a new opportunity.
Innovative businesses thrive by understanding what their market wants, making smart product
improvements, and developing new products that meet and exceed their customers' expectations.
'New products' can be:
 products that your business has never made or sold before but have been taken to market
by others
 product innovations created and brought to the market for the first time. They may be
completely original products, or existing products that you have modified and improved.
NPD is not limited to existing businesses. New businesses, sole traders or even freelancers can
forge a place in the market by researching, developing and introducing new or even one-off
products. Similarly, you don't need to be an inventor to master NPD. You can also consider
purchasing new products through licensing or copyright acquisition.

52
8 Steps of the New Product Development Process

1. Idea Generation
The new product development process starts with idea generation. Idea generation refers to the
systematic search for new-product ideas. Typically, a company generates hundreds of ideas,
maybe even thousands, to find a handful of good ones in the end.
2. Idea Screening
The next step in the new product development process is idea screening. Idea screening means
nothing else than filtering the ideas to pick out good ones. In other words, all ideas generated are
screened to spot good ones and drop poor ones as soon as possible.
While the purpose of idea generation was to create a large number of ideas, the purpose of the
succeeding stages is to reduce that number of ideas. The reason is that product development costs
rise greatly in later stages. Companies cannot afford to take every single idea to the next stages.
Therefore, it is necessary to filter and go ahead only with those product ideas that are likely to
turn into profitable products. Dropping the poor ideas as soon as possible is, consequently, of
crucial importance.

53
At this early stage, filtering for the potentially profitable ideas can be tricky. A key to success is
to initiate the conversation with customers early and look for feedback. For instance, by surveys
and focus group interviews, companies can get early insights whether their ideas might meet
customer demands in a better way than existing products.
3. Concept Development and Testing
To go on in the new product development process, attractive ideas must be developed into a
product concept. A product concept is a detailed version of the new-product idea stated in
meaningful consumer terms. You should distinguish the following sub-stages:
 A product idea – this is really just an idea for a possible product.
 A product concept – this is a detailed version of the idea stated in meaningful consumer
terms.
 A product image – this is the way consumers perceive an actual or potential product
4. Marketing Strategy Development
The next step in the new product development process is the marketing strategy development.
When a promising concept has been developed and tested, it is time to design an initial
marketing strategy for the new product based on the product concept for introducing this new
product to the market.

The marketing strategy statement consists of three parts and should be formulated carefully:
A description of the target market, the planned value proposition, and the sales, market share and
profit goals for the first few years.
An outline of the product’s planned price, distribution and marketing budget for the first year.
The planned long-term sales, profit goals and the marketing mix strategy.
5. Business analysis
Once the company has decided upon a product concept and marketing strategy, management can
evaluate the business attractiveness of the proposed new product. The fifth step in the new
product development process involves a review of the sales, costs and profit projections for the
new product to find out whether these factors satisfy the company’s objectives. If they do, the
product can be moved on to the product development stage.

54
In order to estimate sales, the company could for instance look at the sales history of similar
products and conduct market surveys. Having a precise view of the likely demand for the
eventual product is absolutely crucial. There are countless cases where this stage was
underestimated. For example, think of cars that turned out to be flops when introduced to the
market. Often, companies tend to skip this stage or spend too little time on it. The reason is in
many cases a bias to focus too much on the company perspective, rather than listening to
customers. When you come up with a new idea, think it through, design the product, include all
those features you like and so on, you may have developed a great product for yourself.
However, this does not mean that it will be a great product for the market. Customer feedback is
therefore a critical element along all stages of the new product development process.
6. Product development
The new product development process goes on with the actual product development. Up to this
point, for many new product concepts, there may exist only a word description, a drawing or
perhaps a rough prototype. But if the product concept passes the business test, it must be
developed into a physical product to ensure that the product idea can be turned into a workable
market offering. The problem is, though, that at this stage, R&D and engineering costs cause a
huge jump in investment.
The R&D department will develop and test one or more physical versions of the product concept.
Developing a successful prototype, however, can take days, weeks, months or even years,
depending on the product and prototyping methods.
Also, products often undergo tests to make sure they perform safely and effectively. This can be
done by the firm itself or outsourced.
In many cases, marketers involve actual customers in product testing. Consumers can evaluate
prototypes and work with pre-release products. Their experiences may be very useful in the
product development stage.
7. Test marketing
The last stage before commercialization is test marketing. In this stage of the new product
development process, the product and its proposed marketing program are tested in realistic
market settings. Therefore, test marketing gives the marketer experience with marketing the
product before going to the great expense of full introduction. In fact, it allows the company to

55
test the product and its entire marketing program, including targeting and positioning strategy,
advertising, distributions, packaging etc. before the full investment is made.
The amount of test marketing necessary varies with each new product. Especially when
introducing a new product that requires a large investment, when the risks are high, or when the
firm is not sure of the product or its marketing program, a significant amount of time may be
spend on test marketing.
8. Commercialization
Test marketing has given management the information needed to make the final decision:
Launch or do not launch the new product. The final stage in the new product development
process is commercialization. Commercialization means nothing else than introducing a new
product into the market. At this point, the highest costs are incurred: the company may need to
build or rent a manufacturing facility. Large amounts may be spent on advertising, sales
promotion and other marketing efforts in the first year.
Some factors should be considered before the product is commercialized:
 Introduction timing – For instance, if the economy is down, it might be wise to wait until
the following year to launch the product. However, if competitors are ready to introduce
their own products, the company should push to introduce the new product sooner.
 Introduction place – Where to launch the new product? Should it be launched in a single
location, a region, the national market, or the international market? In many cases,
companies may lack the confidence, capital and capacity to launch new products into full
international distribution from the start. Instead, they usually develop a planned market
rollout over time.
4.6 Pricing Strategies (6)
Good pricing strategies help in determining the price point at which one can maximize profits on
the sale of its goods or services. While setting prices, one needs to consider various factors like
demand and supply of goods or services in the market, selling and distribution cost, offerings of
competitors in the market, target customers, etc.

Types of Pricing Strategies

Following are the types of pricing strategies
1. Cost-plus Pricing

56
It is the simplest pricing method. The firm calculates the cost of producing the good and adds on
a percentage (profit) to that price to give the selling price.
2. Limit Pricing
A limit price is a price set by a monopolist to discourage economic entry into a market. The limit
price is often lower than the average cost of production.
3. Penetration Pricing
Setting the price lower than what it is offered by other competitors in order to attract customers
and gain market share. The price can be raised later once this market share is gained.
4. Price Discrimination
Price discrimination is setting a different price for the same product in different segments to
the market. For example, this can be for different classes of buyers, such as ages, or for different
opening times.
5. Psychological Pricing
In this pricing designed to have a positive psychological impact on the customers. For
example, selling goods on profit at ₹ 4.95 or ₹ 4.99, rather than ₹ 5.00.
6. Dynamic Pricing
A flexible pricing mechanism made possible by advances in information technology and this
strategy is mostly employed by internet-based companies.
7. Price Leadership
In oligopolistic business market usually, the dominant competitor among several leads the way in
determining prices, and the others soon follow.
8. Target Pricing
Target pricing is a pricing method whereby the selling price of a product is calculated to produce
a particular rate of return on investment for a specific volume of production.
Companies with high capital investment and public utilities like gas and electrical companies use
this strategy.
9. Absorption Pricing
It is a method of pricing which recovers all costs. The price of the goods or services includes the
variable cost of each item plus a proportionate amount of the fixed costs and is a form of cost-
plus pricing.
10. High-low Pricing

57
High-Low pricing is a method of pricing where the goods or services offered by the organization
are regularly priced higher than competitors, but through promotions, advertisements, and
coupons, lower prices are offered on key items.
11. Marginal Cost Pricing
This pricing method is a practice of setting the price of products and goods to be equal to the
additional cost of producing an extra unit of output.
Examples of Pricing Strategies
Give an example each of psychological pricing, penetration pricing, cost-plus pricing, and
limit pricing.
Ans.
1. Selling goods for ₹ 999, rather than ₹ 1000 is psychological pricing.
2. Selling goods at price ₹ 45 than what its competitors are offering ₹ 50 or ₹ 55 in the
market. This pricing strategy is penetration pricing which increases market share.
3. A produces a good and cost of producing such good is ₹ 100. It then adds 20% to the cost
of goods (100 + 20% = 120) and sells the good in the market at ₹ 120. This is cost-plus
pricing.
4. Suppose, the average cost of producing a good is ₹ 80, but the price of good offered in
the market is ₹ 75 which is lower than the average cost of the good. This type of pricing
is limit pricing and it discourages competitors entry into the market.
4.7 Channels of Distribution (7)
The word ‘distribution’ means the allocation of something to its recipients. Hence, the term,
‘channels of distribution refers to the various mediums used for the purpose of distribution.
Channels of Distribution or Distribution Channel can be defined as the path taken by the good
or service when they move from manufacturer to the end consumers. The movement of the
goods implies the physical distribution of the goods or the transfer of ownership.
It is the network of intermediaries such as wholesalers, retailers, distributors, agents, etc., who
carry out a number of interrelated and coordinated functions in the flow of goods from its source
to its destination. Additionally, it creates utility of time, place, form, and possession to the
product by the quick and efficient performance of the function of physical distribution.
Have you ever wondered that product manufacturing units of various companies are set up at a
particular location only, but the consumers of that product are everywhere across the globe, so

58
how these goods are available to the people residing in a place distant from the place where the
manufacturing unit is located? Well, it is the channels of distribution that act as an intermediary
to make the goods available to the intended consumer.
Types of Channels of Distribution
Channels of Distribution implies the means through which the good or service need to pass to
reach the intended consumer. Based on the number of intermediaries involved, the channel of
distribution can be short or long. Further, it has a great impact on the company’s sales, as the
higher the availability of the goods, the more will be its sales.
Depending on the type of the product, i.e. good or service, different marketing channels are
employed by the companies.
Direct Channel
Prior to reaching the hands of the consumers, goods and services pass through various hands.
However, there are certain instances when the producer sells goods directly to their customer,
then such a channel is known as a direct channel.
Hence, no middlemen exist in the case of the direct channels. And to do so, the company can
supply the product to the customer via their own online or retail store, or salesman at the
customer’s doorstep and arranging their own delivery system. It is also called a Zero Level
Channel. Example: Consultancy firms, Passenger and freight transport services, banks, etc.

Indirect Channel
When the producer produces goods on a large scale, it is difficult to make direct selling of the
goods to the customers. In this way, middlemen come into the picture to ensure the availability
of the goods to its customers. It may include wholesalers and retailers. So, we can say that when
there are a host of intermediaries involved in the distribution process, it amounts to the indirect
channel of distribution.

59
  One Level Channel: Where only one middleman (either wholesaler or retailer) is
involved.

 Two Level Channel: Where two middlemen (both wholesaler and retailer) are involved.

 Three Level Channel: Where along with wholesalers and retailers, the mercantile agent
is also involved. Hence, the producer deals with a mercantile agent, then the wholesaler
buys goods from that agent, and sells them to retailers, who further sell them to its
ultimate consumer.

Hybrid Channels
The combination of the direct channel and indirect channel is called the hybrid channel of
distribution. When the manufacturer uses more than one channel to reach the final
consumer, it is said to be using the hybrid channel. This attracts more consumers and
facilitates more sales. Suppose a manufacturer owning their own retail outlet and
simultaneously, offering goods to customers via e-commerce platforms or other retailers.

60
4.8 Promotion Mix (8)
Promotion mix refers to the combination of all marketing efforts employed by company for
doing mass scale promotion of its products. It is a mix of various tools and techniques which
aims at enhancing sales of company’s products by advertising and reaching among the target
market. It creates awareness about products in market and explains its feature to peoples for
persuading them to purchase it. Promotion mix comprises of all types of communication with
customers that is of both personal or impersonal type and also include all distribution
middlemen. It is very crucial element of marketing mix. Promotion mix need to be properly
designed by managers and require proper understanding of market field. It must include effective
tools of promotion that provide optimum results to organization as all promotional tools are not
equally effective.
Concept Of Promotion Mix
Promotion mix is a part of marketing mix which determines the success of all marketing efforts
of company. All promotional programmers and advertising campaigns carried out by
organization are included and performed in accordance with its promotion mix. It includes
various marketing approaches designed by marketers with better experience and aims at
optimizing the overall promotional efforts of business organizations. Promotion mix of a
company is created after a lots of research and collecting data about a particular company, its
target audience to involve effective tools of marketing in it. It is all the efforts of promotion mix
that enables a brand to develop its better image in market and differentiates itself from other
competitors. Promotion carried out by business enables in informing public about its products
and impart them all required information. It is served as a communication channel in between
company and its customers which helps in building trust.
Elements of Promotion Mix
Advertising
Advertising is a paid form of promotion of company goods and services that is of non-personal
nature. It is carried out by identified sponsor who charges fees in return for his promotional
services. Advertising is a one-way communication done for creating awareness among public
and bring their attention towards the company’s products. It is a vital tool for reaching out to
mass group of people for informing them about the brand existence in the market. Here,

61
company representatives do not interact directly with customers but carries out promotion using
distinct sources such as television, newspaper, radio, magazines, social media and direct mail.
Personal Selling
Personal selling is a tool of promotion mix where representatives of company interacts directly
with people. It is a traditional form of promotion where face to face interaction is done in
between the customer and company agents. It is a type of promotion where salesman directly
visits customers in a door to door campaign and define all details about product for motivating
them to buy it. Personal selling is most expensive method of promotion which leads to enhance
the buyer and seller relationship.
Sales Promotion
Sales promotion comprises of all promotional activities which aims to stimulate sales and
purchase by providing incentives to customers. These incentives are provided by company for a
short-term basis. Sales promotion activities enable companies in attracting both existing and new
customers which leads to increase the short-term profits. The incentives are offered during
festive periods or end seasons in the form of discounts, coupons, product samples and payback
offers. Sales promotional activities are carried out by business for a limited time-period for
bringing a large amount of audience.
Public Relations
Public relation is one that aims at developing a favorable image of company among public. It is
sharing of information by organization about itself in market for attracting its target audience.
Public relation is a promotional method which determines how people treat a particular brand.
Many public relation campaigns are carried out by organization to get support of all peoples that
are connected with it either directly or indirectly. Public for an organization includes employees,
customers, shareholders, suppliers, distributor, government and society as a whole. Publicity is
one of the widely used type of public relation for sharing newsworthy information in market.
Direct Marketing
Direct marketing is a promotional tool where company interacts directly with target audience
without any intermediary. It is unpaid form of promotion intended to reach prospect customers in
place of mass audience. Direct marketing is a one-way communication in between company and
customer that is done for product announcements, bulletins, order confirmations and special

62
promotions. It is of various forms such as text messages, fax, e-mail, online alerts, websites and
promotional letters.

References:
1. https://www.wrike.com/marketing-guide/marketing-management/
2. https://mailchimp.com/marketing-glossary/marketing-mix-7ps/
3. https://www.analyticssteps.com/blogs/what-service-marketing-features-and-types
4. https://emeritus.org/in/learn/different-stages-of-product-life-cycle/
5. https://marketing-insider.eu/new-product-development-process/
6. 11 Different Pricing Strategies for Your Business | Pricing Strategy (toppr.com)
7. What are Channels of Distribution? Definition, Types, Functions and Objectives -
Business Jargons
8. Promotion Mix : Meaning, Elements, Advantages and Disadvantages
(commercemates.com)

63
 UNIT V
5.1 Financial Management (1)
Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.
Scope/Elements of Financial Management
1. Investment decisions includes investment in fixed assets (called as capital budgeting).
Investment in current assets are also a part of investment decisions called as working
capital decisions.
2. Financial decisions- They relate to the raising of finance from various resources which
will depend upon decision on type of source, period of financing, cost of financing and
the returns thereby.
3. Dividend decision- The finance manager has to take decision with regards to the net
profit distribution. Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. Retained profits- Amount of retained profits has to be finalized which will depend
upon expansion and diversification plans of the enterprise.
Objectives of Financial Management
The financial management is generally concerned with procurement, allocation and control of
financial resources of a concern. The objectives can be-
1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
64
 4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that
adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of capital
so that a balance is maintained between debt and equity capital.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with
regards to capital requirements of the company. This will depend upon expected costs
and profits and future programmes and policies of a concern. Estimations have to be
made in an adequate manner which increases earning capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the capital
structure have to be decided. This involves short- term and long- term debt equity
analysis. This will depend upon the proportion of equity capital a company is possessing
and additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many
choices like-
1. Issue of shares and debentures
2. Loans to be taken from banks and financial institutions
3. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period of
financing.

4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the finance manager.
This can be done in two ways:
1. Dividend declaration - It includes identifying the rate of dividends and other
benefits like bonus.
2. Retained profits - The volume has to be decided which will depend upon
expansional, innovational, diversification plans of the company.

65
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current liabilities,
maintainance of enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the
funds but he also has to exercise control over finances. This can be done through many
techniques like ratio analysis, financial forecasting, cost and profit control, etc.

5.2 Sources of Finance (2)

Every business enterprise whether new or already established would need finance for its
various programmes like new project implementation, expansion, modernization etc.

At the same time, there are several sources of finance available to a business enterprise,
which source of finance should be resorted for raising funds shall be decided by the type of
requirements for which fund is needed by the business enterprise.

(i) Long-term financial requirements, which are for a period exceeding five to ten years. All
funds to be invested in various types of fixed assets plus in hard core working capital are to
be considered as long-term financial needs.

(ii) Medium-term financial requirements which are required for a period exceeding one year
but not exceeding five years. All funds needed for meeting the defined revenue expenditures
like expenses on heavy publicity and advertisement campaigns shall be considered as
medium-term financial needs.

(iii) Short-term financial requirements which arise for a short period of time often not
exceeding one year (i.e., accounting period). All funds needed for financing current assets/for
meeting working capital requirements shall be considered as short-term financial needs.

A. Long Term Sources of Finance

The long term sources of finance are shown below:

66
1. Equity Share Capital:

Equity shares, also known as ordinary shares or common shares represent the owners’ capital
in a company. The holders of these shares are the real owners of the company. They have
control over the working of the company. The rate of dividend on these shares depends upon
the profits of the company.

They may be paid a higher rate of dividend if the profit of the company is high or they may
not get anything if the profit of the company is not sufficient. Equity shareholders are paid
dividend after paying dividend to the preference shareholders.

2. Preference Shares:

According to Section 85(1) of the Companies Act, 1956, “A preference share is a share
which carries preferential rights as to the payment of dividend at a fixed rate either free or
subject to income tax and as to the payment of capital at the time of liquidation prior to
equity shareholders.”

In simple words we can say that preference shares have certain preferences as compared to
other types of shares.

These preferences are given below:

i) The first preference is for payment of dividend.

ii) The second preference for these shares is the repayment of capital at the time of
liquidation of the company.

A company can issue preference shares of varying dividend rates at a time viz. 10%
Preference Shares, 12% Preference Shares etc. these % are showing the fixed rate of dividend
which is payable to the preference shareholders

3. Debenture:

67
According to section 2(12) of Indian Companies Act, 1956, “debenture includes debenture
stock, bonds or any other securities of a company whether constituting a charge on the assets
of the company or not.”

A debenture holder is a creditor of the company. A fixed rate of interest is paid on

debentures. The interest due on debentures is a charge on the profit and loss account of the
company. The debentures are generally given a floating charge over the assets of the
company.

4. Loans from Financial Institutions:

This is also termed as ‘Term Loan’. Term loans refer to the borrowed capital of the
companies, repayable in not less than one year and normally not more than ten years.

Financial institutions such as Commercial Banks, Life Insurance Corporation, Industrial

Finance Corporation of India, State Financial Corporation, State Industrial Development
Corporations, Industrial Development Bank of India, etc. provide this type of loan.

This source of finance is more suitable to meet the medium-term demands of working
capital.

5. Ploughing Back of Profits/Retained Earnings:

A company generally doesn’t distribute all its earnings amongst the shareholders as dividend.
A portion of the net earnings may be retained in the business for use in the future. This is
known as retained earnings. It is a source of internal financing or self-financing or ploughing
back of profits.

The profit available for ploughing back in an organization depends on many factors like net
profit, dividend policy, and age of the organization etc. It means the reinvestments by
concern of its surplus earnings in its business.

B. Short Term Sources of Finance

68
Sources of finance are the most explored area for the businessmen, a boost to start a new
business. There are several sources of finance, i.e., Equity Share Capital, Preference Share
Capital and Debentures, etc. These are long-term sources of finance.

Purpose of this finance is to finance fixed assets, construction projects on large scale,
expansion of companies, etc. but business firms need to manage cash for operations, such as
activities involved in the day-to-day functions of the business conducted for the purpose of
generating profits.

For recurring activities, short-term finance also plays an important role. Time period of short-
term finance is not exceeding one year. Basically it is related to the working capital
requirement of the company.

The following are the short-term sources of finance:

(1) Trade Credit

(2) Accrued Expenses

(3) Advance from Customers

(4) Commercial Paper

(5) Factoring

(6) Leasing

The short-term sources of finance can be divided into two parts:

A. Bank Sources:

The bank sources of short term finance include:

(i) Line of Credit:

69
Under this source, the bank determines the maximum limit of credit for the customer.
Customers can withdraw money from the bank within this limit. The maximum amount of
credit is determined on the basis of goodwill of the customer, his size of business, financial
position and allied factors. Interest has to be paid on the amount actually withdrawn.

(ii) Overdraft:

In this facility, the bank allows the customer to withdraw more than his actual deposit in his
current account. The excess amount withdrawn is called overdraft. The amount of overdraft
is also determined on the basis of financial position of business.

The quantum of overdraft is generally less than the line of credit. Bank honours the cheques
of customers within a predetermined time frame. Interest is charged on the actual amount
withdrawn.

(iii) Secured Loan:

Banks generally grant credit on the basis of security of the current assets like inventory. The
assets held as security remain in control of the bank. As soon as a loan is paid by a customer,
he is allowed to remove goods from the godown.

Under this source, banks grant loans after reserving a fair margin. The amount of loan is
transferred to the account of the customer. Interest is charged on the whole amount of loan
rather than the actual amount withdrawn.

(iv) Discounting of Bills:

Customers can discount the bills due on the future date from the bank. The amount of the bill
after charging a discount is transferred to the account of the customer. On the date of
maturity, the branch collects money from the drawee of the bill.

(v) Letter of Credit:

70
It is another form of credit purchase. In the letter of credit, the bank takes the guarantee of
payment which is supposed to be paid by the buyers of the goods. In case of default, the bank
is responsible for making these payments.

B. Non-Banking Sources:

The non-bank sources of short term finance are:

(i) Public Deposits:

Public deposits for a period of one year are a short term source of finance. The public
deposits for more than one year are included in medium term sources of finance.

(ii) Short-Term Loans:

Short term loans, secured or unsecured can be taken from other parties accepting banks
including merchant bankers, finance companies, co-operative societies, relatives, etc.

(iii) Trade Credit:

Trade credit is the credit extended by one trader to another for purchasing goods and
services. Credit period starts on the receipt of goods and extends till the payment is made
therefore. When the goods are delivered, the minimum time for this exercise is 30 days, 60
days and 90 days, but in jewellery business it is extended to 180 days.

5.3 Ratio Analysis (3)

Ratio analysis is a quantitative procedure of obtaining a look into a firm’s functional

efficiency, liquidity, revenues, and profitability by analysing its financial records and
statements. Ratio analysis is a very important factor that will help in doing an analysis of
the fundamentals of equity.

Analysts and investors make use of the methods for ratio analysis to study and evaluate the
fiscal wellbeing of businesses by closely examining the historical performance and monetary
statements.

71
Comparative data and analysis can give an insight into the performance of the business over
a given period of time by comparing it with the industry standards. At the same time, it also
measures how well a business racks up against other businesses functioning in the same
sector.

Liquidity Ratios

These ratios evaluate a business’ efficiency to settle its debts as and when they become due,
with its revenues or assets in the disposal. Liquidity ratios cover quick ratio, current ratio,
and the working capital ratio.

Solvency Ratio

Solvency ratios are also referred to as the financial leverage ratios. These ratios will compare
an organisation’s level of debt with assets, earnings, and equity in order to determine the
possibility of an organisation to stay in operation over an extended period of time by settling
all its short and long-term debts and by paying coupon/interest regularly. Solvency ratios
include interest coverage ratios, debt-asset ratios, and debt-equity ratios.

Profitability ratios

Profitability ratios indicate how efficiently a business will be able to generate revenues and
profits through its operations. Profit margins, return on equity, return on assets,
gross margin ratios, and return on capital employed are good examples of profitability ratios.

Efficiency ratios

Efficiency ratios are also called as the activity ratios. These ratios determine the efficiency of
a business by using its liabilities and assets to boost sales and optimise profits. Inventory
turnover and turnover ratios are examples of efficiency ratios.

5.4 Time Value of Money (4)

72
 ‘Time value of money’ is central to the concept of finance. It recognizes that the value of
money is different at different points of time. Since money can be put to productive use, its
value is different depending upon when it is received or paid.

In simpler terms, the value of a certain amount of money today is more valuable than its
value tomorrow. It is not because of the uncertainty involved with time but purely on account
of timing. The difference in the value of money today and tomorrow is referred to as the time
value of money.

The time value of money is one of the basic theories of financial management, it states that
‘the value of money you have now is greater than a reliable promise to receive the same
amount of money at a future date’.

The time value of money (TVM) is the idea that money available at the present time is worth
more than the same amount in the future due to its potential earning capacity. This core
principle of finance holds that, provided money can earn interest, any amount of money is
worth more the sooner it is received.

The time value of money is the greater benefit of receiving money now rather than receiving
later. It is founded on time preference. The principle of the time value of money explains
why interest is paid or earned? Interest, whether it is on a bank deposit or debt, compensates
the depositor or lender for the time value of money.

References:
1. Financial Management - Meaning, Scope, Objectives & Functions (managementstudyguide.com)
2. Sources of Finance: Long, Medium and Short Term Sources of Finance (economicsdiscussion.net)
3. Ratio Analysis - Definition, What is Ratio Analysis, and How Ratio Analysis works? (cleartax.in)
4. Time Value of Money: Meaning, Concept, Importance and Techniques (economicsdiscussion.net)

73