Chapter no 1 Managerial economics

1.1 Introduction to Managerial Economics Nature Of Managerial Economics Managerial Economics and Business economics are the two terms, which, at times have been used interchangeably. Of late, however, the term Managerial Economics has become more popular and seems to displace progressively the term Business Economics. Decision-making and Forward Planning The prime function of a management executive in a business organization is decision-making and forward planning. Decision-making means the process of selecting one action from two or more alternative courses of action whereas forward planning means establishing plans for the future. The question of choice arises because resources such as capital, land, labour and management are limited and can be employed in alternative uses. The decisionmaking function thus becomes one of making choices or decisions that will provide the most efficient means of attaining a desired end, say, profit maximization. Once decision is made about the particular goal to be achieved, plans as to production, pricing, capital, raw materials, labour, etc., are prepared. Forward planning thus goes hand in hand with decision-making. A significant characteristic of the conditions, in which business organizations work and take decisions, is uncertainty. And this fact of uncertainty not only makes the function of decision-making and forward planning complicated but adds a different dimension to it. If knowledge of the future were perfect, plans could be formulated without error and hence without any need for subsequent revision. In the real world, however, the business manager rarely has complete information and the estimates about future predicted as best as possible. As plans are implemented over time, more facts become known so that in their light, plans may have to be revised, and a different course of action adopted. Managers are thus engaged in a continuous process of decision-making through an uncertain future and the overall problem confronting them is one of adjusting to uncertainty. In fulfilling the function of decision-making in an uncertainty framework, economic theory can be pressed into service with considerable advantage. Economic theory deals with a number of concepts and principles relating, for example, to profit, demand, cost, pricing production, competition, business cycles, national income, etc., which aided by allied disciplines like Accounting. Statistics and Mathematics can be used to solve or at least throw some light upon the problems of business management. The way economic analysis can be used towards solving business problems. Constitutes the subject-matte of Managerial Economics. Definition:According to McNair and Meriam, Managerial Economics consists of the use of economic modes of thought to analyse business situation Spencer and Siegelman have defined Managerial Economics as the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management. We may, therefore define Managerial Economics as the discipline which deals with the application of economic theory to business management. Managerial Economics thus lies on the borderline between economics and business management and serves as abridge between economics and business management and serves as a bridge between the two disciplines. (See Chart 1)

Chart 1 Economics, Business Management and Managerial Economics. Economics -Theory and Methodology Business Management -Decision Problems

Managerial Economics -Application of Economics to solving business problems

Optimal solutions

To business problems

Aspects of Application The application of economics to business management or the integration of economic theory with business practice, as Spencer and Siegel man have put it, has the following aspects: 1. Reconciling traditional theoretical concepts of economics in relation to the actual business behavior and conditions. In economic theory, the technique of analysis is one of model building whereby certain assumptions are made and on that basis, conclusions as to the behavior of the firms are drown. The assumptions, however, make the theory of the firm unrealistic since it fails to provide a satisfactory explanation of that what the firms actually do. Hence the need to reconcile the theoretical principles based on simplified assumptions with actual business practice and develops appropriate extensions and reformulation of economic theory, if necessary. Estimating economic relationships, viz., measurement of various types of elasticities of demand such as price elasticity, income elasticity, cross-elasticity, promotional elasticity, cost-output relationships, etc. the estimates of these economic relation-ships are to be used for purposes of forecasting. Predicting relevant economic quantities, eg., profit, demand, production, costs, pricing, capital, etc., in numerical terms together with their probabilities. As the business manager has to work in an environment of uncertainty, future is to be predicted so that in the light of the predicted estimates, decision-making and forward planning may be possible. Using economic quantities in decision-making and forward planning, that is, formulating business policies and, on that basis, establishing business plans for the future pertaining to profit, prices, costs, capital, etc. The nature of economic forecasting is such that it indicates the degree of probability of various possible outcomes, i.e. losses or gains as a result of following each one of the strategies available. Hence, before a business manager there exists a quantified picture indicating the number o courses open, their possible outcomes and the quantified probability of each outcome. Keeping this picture in view, he decides about the strategy to be chosen. Understanding significant external forces constituting the environment in which the business is operating and to which it must adjust, e.g., business cycles, fluctuations in national income and government policies pertaining to public finance, fiscal policy and taxation, international

2.

3.

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economics and foreign trade, monetary economics, labour relations, anti-monopoly measures, industrial licensing, price controls, etc. The business manager has to appraise the relevance and impact of these external forces in relation to the particular business unit and its business policies. Chief Characteristics It would be useful to point out certain chief characteristics of Managerial Economics, inasmuch its they throw further light on the nature of the subject matter and help in a clearer understanding thereof. 1 Managerial Economics micro-economic in character. 2 Managerial Economics largely uses that body of economic concepts and principles, which is known as Theory of the firm or Economics of the firm. In addition, it also seeks to apply Profit Theory, which forms part of Distribution Theories in Economics. 3 Managerial Economics is pragmatic. It avoids difficult abstract issues of economic theory but involves complications ignored in economic theory to face the overall situation in which decisions are made. Economic theory appropriately ignores the variety of backgrounds and training found in individual firms but Managerial Economics considers the particular environment of decision-making. 4 Managerial Economics belongs to normative economics rather than positive economics (also sometimes known as descriptive economics). In other words, it is prescriptive rather than descriptive. The main body of economic theory confines itself to descriptive hypothesis, attempting to generalize about the relations among different variables without judgment about what is desirable or undesirable. For instance, the law of demand states that as price increases. Demand goes down or vice-versa but this statement does not tell whether the outcome is good or bad. Managerial Economics, however, is concerned with what decisions ought to be made and hence involves value judgments. Production and Supply Analysis Production analysis is narrower in scope than cost analysis. Production analysis frequently proceeds in physical terms while cost analysis proceeds in monetary terms. Production analysis mainly deals with different production functions and their managerial uses. Supply analysis deals with various aspects of supply of a commodity. Certain important aspects of supply analysis are supply schedule, curves and function, law of supply and its limitations. Elasticity of supply and Factors influencing supply. Pricing Decisions, Policies and Practices Pricing is a very important area of Managerial Economics. In fact, price is the ness of the revenue of a firm and as such the success of a business firm largely depends on the correctness of the pries decisions taken by it. The important aspects alt with under this area is: Price Determination in various Market Forms, Pricing methods, Differential Pricing, Product-line Pricing and Price Forecasting. Profit Management Business firms are generally organized for the purpose of making profits and, in long run, profits provide the chief measure of success. In this connection, an important point worth considering is the element of uncertainty exiting about profits because of variations in costs and revenues which, in turn, are caused by torso both internal and external to the firm. If knowledge about the future were fact, profit analysis would have been a very easy task. However, in a world of certainty, expectations are not always realized so that profit planning and measurement constitute the difficult are of Managerial Economics. The important acts covered under this area are: Nature and Measurement of Profit. Profit iciest and Techniques of Profit Planning like Break-Even Analysis.

Capital Management Of the various types and classes of business problems, the most complex and able some for the business manager are likely to be those relating to the firms investments. Relatively large sums are involved, and the problems are so complex that their disposal not only requires considerable time and labour but is a term for top-level decision. Briefly, capital management implies planning and trolls of capital expenditure. The main topics dealt with are: Cost of Capital. Rate return and Selection of Project. The various aspects outlined above represent the major uncertainties which a ness firm has to reckon with, viz., demand uncertainty, cost uncertainty, price certainty, profit uncertainty, and capital uncertainty. We can, therefore, conclude the subject-matter of Managerial Economic consists of applying economic cripples and concepts towards adjusting with various uncertainties faced by a ness firm. 1.2 Managerial Economics and Other Subjects Yet another useful method of throwing light upon the nature and scope of managerial Economics is to examine is relationship with other subjects. In this connection, Economics, statistics, Mathematics and Accounting deserve special mention. (a) Managerial Economics and Economics Managerial Economics has been described as economics applied to decision-making. It may be viewed as a special branch of economics bridging the gulf between pure economic theory and managerial practice. Economics has two main divisions: microeconomics and macroeconomics. Microeconomics has been defined as that branch where the unit of study is an individual or a firm. Macroeconomics, on the other hand, is aggregate in character and has the entire economy as a unit of study. Microeconomics, also known as price theory (or Marshallian economics.) Is the main source of concepts and analytical tools for managerial economics? To illustrate various micro-economic concepts such as elasticity of demand, marginal cost, the short and the long runs, various market forms, etc. are all of great significance to managerial economics. The chief contribution of macro-economics is in the area of forecasting. The modern theory of income and employment has direct implications for forecasting general business conditions. As the prospects of an individual firm often depend greatly on general business conditions, individual firm forecasts depend on general business forecasts. A survey in the U.K. has shown that business economists have found the following economic concepts quite useful and of frequent application: 1.Price elasticity of demand 6 Marginal revenue product 8 Production function
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2 Income elasticity of demand 7 Speculative motive

3 Opportunity cost 4 the multiplier 5 Propensity to consume 9 Balanced growth 10 Liquidity preference.

Business economics have also found the following main areas of economi9cs as useful in their work Demand theory 2 Theory of the firm-price, output and investment decisions Business financing 4 Public finance and fiscal policy 3

5 Money and banking 6 National income and social accounting 7 Theory of international trade Economics of developing countries.

(b) Managerial Economics and Accounting Managerial Economics is also closely related to accounting, which is concerned with recording the financial operations of a business firm. Indeed, accounting information is one of the principal sources of data required by a managerial economist for his decision-making purpose. For instance, the profit and loss statement of a firm tells how well the firm has done and the information it contains can be used by managerial economist to throw significant light on the future course of action-whether it should improve or close down. Of course, accounting data call for careful interpretation. Recasting and adjustment before they can be used safely and effectively. It is in this context that the growing link between management accounting and managerial economics deserves special mention. The main task of management accounting is now seen as being to provide the sort of data which managers need if they are to apply the ideas of managerial economics to solve business problems correctly; the accounting data are also to be provided in a form so as to fit easily into the concepts and analysis of managerial economics. 1.3 Uses Of Managerial Economics Managerial economics accomplishes several objectives. First, it presents those aspects of traditional economics, which are relevant for business decision making it real life. For the purpose, it culls from economic theory the concepts, principles and techniques of analysis which have a bearing on the decision making process. These are, if necessary, adapted or modified with a view to enable the manager take better decisions. Thus, managerial economics accomplishes the objective of building suitable tool kit from traditional economics. Secondly, it also incorporates useful ideas from other disciplines such a psychology, sociology, etc., if they are found relevant for decision making. In face managerial economics takes the aid of other academic disciplines having a bearing upon the business decisions of a manager in view of the carious explicit and implicit constraints subject to which resource allocation is to be optimized. Thirdly, managerial economics helps in reaching a variety of business decisions. (i) (ii) (iii) (iv) (v) What products and services should be produced? What inputs and production techniques should be used? How much output should be produced and at what prices it should be sold? What are the best sizes and locations of new plants? How should the available capital be allocated?

Fourthly, managerial economics makes a manager a more competent model guilder. Thus he can capture the essential relationships which characterize a situation while leaving out the cluttering details and peripheral relationships. Fifthly, at the level of the firm, where for various functional areas functional specialists or functional departments exist, e.g., finance, marketing, personal production, etc., managerial economics serves as an integrating agent by co-coordinating the different areas and bringing to bear on the decisions of each department or specialist the implications pertaining to other functional areas. It thus enables business decision-making not in watertight compartments but in an integrated perspective, the significance of which lies in the fact that the functional departments or specialists often enjoy considerable autonomy and achieve conflicting coals. Finally, managerial economics takes cognizance of the interaction between the firm and society and accomplishes the key role of business as an agent in the attainment of social and economic welfare. It has come to be realized that business part from its obligations to shareholders has certain social obligations.

Managerial economics focuses attention on these social obligations as constraints subject to which business decisions are to be taken. In so doing, it serves as an instrument in rehiring the economic welfare of the society through socially oriented business decisions. 1.4 Managerial Economist Role And Responsibilities A managerial economist can play a very important role by assisting the Management in using the increasingly specialized skills and sophisticated techniques which are required to solve the difficult problems of successful decision-making and forward planning. That is why, in business concerns, his importance is being growingly recognized. In advanced countries like the U.S.A., large companies employ one or more economists. In our country too, big industrial houses have come to recognize the need for managerial economists, and there are frequent advertisements for such positions. Tatas, DCM and Hindustan Lever employ economists. Indian Petrochemicals Corporation Ltd., a Government of India undertaking, also keeps an economist. Let us examine in specific terms how a managerial economist can contribute to decision-making in business. In this connection, two important questions need be considered: 1. 2. What role does he play in business, that is, what particular management problems lend themselves to solution through economic analysis? How can the managerial economist best serve management, that is, what are the responsibilities of a successful managerial economist?

Role Of A Managerial Economist One of the principal objectives of any management in its decisionmaking process is to determine the key factors which will influence the business over the period ahead. In general, these factors can be divided into two-category (i) external and (ii) internal. The external factors lie outside the control management because they are external to the firm and are said to constitute business environment. The internal factors he within the scope and operations of a firm and hence within the control of management, and they are known as business operations. To illustrate, a business firm is free to take decisions about what to invest, where to invest, how much labour to employ and what to pay for it, how to price its products and so on but all these decisions are taken within the framework of a particular business environment and the firms degree of freedom depends on such factors as the governments economic policy, the actions of its competitors and the like. Environmental Studies An analysis and forecast of external factors constituting general business conditions, e.g., prices, national income and output, volume of trade, etc., are of great significance since every business from is affected by them. Certain important relevant questions in this connection are as follows: 1. 2. 3. What is the outlook for the national economy? What are the most important local, regional or worldwide economic trends? What phase of the business cycle lies immediately ahead? What about population shifts and the resultant ups and downs in regional purchasing power? What are the demands prospects in new as well as established markets? Will changes in social behavior and fashions tend to expand or limit the sales of a companys products, or possibly make the products obsolete? Where are the market and customer opportunities likely to expand or contract most rapidly? Will overseas markets expand or contract, and how will new foreign government legislations affect operation of the overseas plants?

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Will the availability and cost of credit tend to increase or decrease buying? Are money or credit conditions ahead likely to be easy or tight? What the prices of raw materials and finished products are likely to be? Is competition likely to increase or decrease? What are the main components of the five-year plan? What are the areas where outlays have been increased? What are the segments, which have suffered a cut in their outlay? What is the outlook regarding governments economic policies and regulations? What about changes in defense expenditure, tax rates, tariffs and import restrictions? Will Reserve Banks decisions stimulate or depress industrial production and consumer spending? How will these decisions affect the companys cost, credit, sales and profits?

Reasonably accurate answers to these and similar questions can Enable managements to chalk out more wisely the scope and direction of their own business plans and to determine the timing of their specific actions. And it is these questions which present some of the areas where a managerial economist can make effective contribution. The managerial economist has not only to study the economic trends at the macro-level but must also interpret their relevance to the particular industry/firm where he works. He has to digest the ever-growing economic literature and advise top management by means of short, business-like practical notes. In a mixed economy like India, the managerial economist pragmatically interprets the intentions of controls and evaluates their impact. He acts as a bridge between the government and the industry, translating the governments intentions and transmitting the reactions of the industry. In fact, government policies charge out of the performance of industry, the expectations of the people and political expediency. Business Operations A managerial economist can also be helpful to the management in making decisions relating to the internal operations of a firm in respect of such problems as price, rate of operations, investment, expansion or contraction. Certain relevant questions in this context would be as follows: 1. 2. 3. 4. What will be a reasonable sales and profit budget for the next year? What will be the most appropriate production Schedules and inventory policies for the next six months? What changes in wage and price policies should be made now? How much cash will be available next month and how should it be invested?

Specific Functions A further idea of the role managerial economists can play, can be had from the following specific functions performed by them as revealed by a survey pertaining to Britain conducted by K.J.W. Alexander and Alexander G. Kemp:
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Sales forecasting

2. Industrial market research. 3. Economic analysis of competing companies. 4. Pricing problems of industry. 5. Capital projects.

6. Production programs. 7. Security/investment analysis and forecasts. 8. Advice on trade and public relations. 9. Advice on primary commodities. 10. Advice on foreign exchange. 11. Economic analysis of agriculture. 12. Analysis of underdeveloped economics. 13. Environmental forecasting. The managerial economist has to gather economic data, analyze all pertinent information about the business environment and prepare position papers on issues facing the firm and the industry. In the case of industries prone to rapid technological advances, he may have to make a continuous assessment of the impact of changing technology. He may have to evaluate the capital budget in the light of short and longrange financial, profit and market potentialities. Very often, he may have to prepare speeches for the corporate executives. It is thus clear that in practice managerial economists perform many and varied functions. However, of these, marketing functions, i.e., sales forecasting and industrial market research, has been the most important. For this purpose, they may compile statistical records of the sales performance of their own business and those relating to their rivals, carry our analysis of these records and report on trends in demand, their market shares, and the relative efficiency of their retail outlets. Thus while carrying out their functions; they may have to undertake detailed statistical analysis. There are, of course, differences in the relative importance of the various functions performed from firm to firm and in the degree of sophistication of the methods used in carrying them out. But there is no doubt that the job of a managerial economist requires alertness and the ability to work under pressure. Economic Intelligence Besides these functions involving sophisticated analysis, managerial economist may also provide general intelligence service supplying management with economic information of general interest such as competitors prices and products, tax rates, tariff rates, etc. In fact, a good deal of published material is already available and it would be useful for a firm to have someone who understands it. The managerial economist can do the job with competence. Participating in Public Debates May well-known business economists participate in public debates. Their advice and views are being sought by the government and society alike. Their practical experience in business and industry ads stature to their views. Their public recognition enhances their stature in the organization itself. Indian Context In the Indian context, a managerial economist is expected to perform the following functions: 1. 2. 3. 4. 5. Macro-forecasting for demand and supply. Production planning at macro and micro levels. Capacity planning and product-mix determination. Economics of various productions lines. Economic feasibility of new production lines/processes and projects.

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Assistance in preparation of overall development plans. Preparation of periodical economic reports bearing on various matters such as the companys product-lines, future growth opportunities, market pricing situation, general business, and various national/international factors affecting industry and business. Preparing briefs, speeches, articles and papers for top management for various Chambers, Committees, Seminars, Conferences, etc. Keeping management informed o various national and international developments on economic/industrial matters. With the adoption of the New Economic Policy, the macro-economic \

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Environment is changing fast at a pace that has been rarely witnessed before. And these changes have tremendous implications for business. The managerial economist has to play a much more significant role. He has to constantly gauge the possibilities of translating the rapidly changing economic scenario into viable business opportunities. As India marches towards globalization, he will have to interpret the global economic events and find out how his firm can avail itself of the carious export opportunities or of establishing plants abroad either wholly owned or in association with local partners. 1.5 Responsibilities Of A Managerial Economist Having examined the significant opportunities before a managerial economist to contribute to managerial decision-making, let us next examine how he can best serve the management. For this, he must thoroughly recognize his responsibilities and obligations. A managerial economist can serve management best only if he always keeps in mind the main objective of his business, viz., to make a profit on its invested capital. His academic training and the critical comments from people outside the business may lead a managerial economist to adopt an apologetic or defensive attitude towards profits. Once management notices this, his effectiveness is almost sure to be lost. In fact, he cannot expect to succeed in serving management unless he has a strong personal conviction that profits are essential and that his chief obligation is to help enhance the ability of the firm to make profits. Most management decisions necessarily concern the future, which is rather uncertain. It is, therefore, absolutely essential that a managerial economist recognizes his responsibility to make successful forecasts. By making best possible forecasts and through constant efforts to improve upon them, he should aim at minimizing, if not completely eliminating, the risks involved in uncertainties, so that the management can follow a more orderly course of business planning. At times, he will have to reassure the management that an important trend will continue; in other cases, he may have to point out the probabilities of a turning point in some activity of importance to management. In any case, he must be willing to make considered but fairly positive statements about impending economic developments, based upon the best possible information and analysis and stake his reputation upon his judgment. Nothing will build management confidence in a managerial economist more quickly and thoroughly than a record of successful forecasts, well documented in advance and modestly evaluated when the actual results become available. A few corollaries to the above proposition need also be emphasized here. First, he has a major responsibility to alert management at the earliest possible moment in case he discovers an error in his forecast. By promptly drawing attention to changes in forecasting conditions, he will not only assist management in making appropriate adjustment in policies and programs but will also

be able to strengthen his own position as a member of the management team by keeping his fingers on the economic pulse of the business. Secondly, he must establish and maintain many contacts with individuals and data sources, which would not be immediately available to the other members of the management. Extensive familiarity with reference sources and material is essential, but it is still more important that he knows individuals who are specialists in particular fields having a bearing on his work. For this purpose, he should join professional associations and take active part in them. In fact, one of the best means of determining the caliber of a managerial economist is to evaluate his ability to obtain information quickly by personal contacts rather than by lengthy research from either readily available or obscure reference sources. Within any business, there may be a wealth of knowledge and experience but the managerial economist would be really useful if he can supplement the existing know-how with additional information and in the quickest possible manner. Again, if a managerial economist is to be really helpful to the management in successful decision-making and forward planning, he must be able to earn full status on the business team. He should be ready and even offer himself to take up special assignments, be that in study teams, committees or special projects. For, a managerial economist can only function effectively in an atmosphere where his success or failure can be traced not only to his basic ability, training and experience, but also to his personality and capacity to win continuing support for himself and his professional ideas. Of course, he should be able to express himself clearly and simply and must always try to minimize the use of technical terminology in communicating with his management executives. For, it is well known that hat management does not understand, it will almost automatically reject. Further, while intellectually he must be in tune with industrys thinking the wider national perspective should not be absents from his advice to top management. Question Bank 1 Define managerial economics with definition 2 How does managerial economics differ from economics? 3 Write a short note on managerial economist 4 Explain the scope of managerial economics

Chapter no 2 Demand and Supply

2.1 Demand In economic terminology the term demand conveys a wider and definite meaning than in the ordinary usage. Ordinarily demand means a desire, whereas in economic sense it is something more than a mere desire. It is interpreted as a want backed up by the-purchasing power. Further demand is per unit of time such as per day, per week etc. moreover it is meaningless to mention demand without reference to price. Considering all these aspects the term demand can be defined in the following words, Demand for anything means the quantity of that commodity, which is bought, at a given price, per unit of time. 2.2 Law of Demand This law explains the functional relationship between price of a commodity and the quantity demanded of the same. It is observed that the price and the demand are inversely related which means that the two move in the opposite direction. An increase in the price leads to a fall in the demand and vice versa. This relationship can be stated as Other things being equal, the demand for a commodity varies inversely as the price OR The demand for a commodity at a given price is more than what it would be at a higher price and less than what it would be at a lower price 2.3 Demand Schedule and Demand Curve : These are the two devices to present the law. The demand schedule is a schedule or a table which contains various possible prices of a commodity and different quantities demanded at them. It can be an individual demand schedule representing the demand of an individual consumer or can be the market demand schedule showing the total demand of all the consumers taken together, this is indicated in the following table. Price Individual Demand Schedule (Quantity in Market per liter Demand Liter in Demand by Different Individuals) (Daily Schedule Rs. Demand) (Daily Demand 24 1.00 0.75 0.50 0.00 75 22 1.25 1.00 0.75 0.50 100 20 1.5 1.25 1.00 0.75 125 18 1.75 1.5 1.25 1.00 150 It can be observed that with a fall in price every individual consumer buys a larger quantity than before as a result of which the total market demand also rises. In case of an increase in price the situation will be reserved. Thus the demand schedule reveals the inverse price-demand relationship, i.e. the law of demand. Demand Curve It is a geometrical device to express the inverse price-demand relationship, i.e. the law of demand. A demand curve can be obtained by plotting a demand schedule on a graph and joining the points so obtained, like the demand schedule we can derive an individual demand curve as well as a market demand curve. The former shows the demand curve of an individual buyer while the latter shows the sum total of all the individual curves i.e. a market or a total demand curve. The following diagram shows the two types of demand curves.

In the above diagram, figure A shows an individual demand curve-of the consumer A in the above schedule-while figure B indicates the total market demand. It can be noticed that both the curves are negatively sloping or downwards sloping from left to right. Such a curve shows the inverse relationship between the two variables. In this case the two variable are price on Y axis and the quantity demanded on X axis. It may be noted that at a higher price OP the quantity demanded is OM while at a lower price say OP, the quantity demanded rises to OM thus a demand curve diagrammatically explains the law of demand. Assumptions of Law The law of demand in order to establish the price-demand relationship makes a number of assumptions as follows: Income of the consumer is given and constant. No change in tastes, preference, habits etc. Constancy of the price of other goods. No change in the size and composition of population. These Assumptions are expressed in the phrase other things remaining equal. Exceptions of the Law In case of major bulk of the commodities the validity of the law is experienced. However there are certain situations and commodities which do not follow the law. These are termed as the exceptions to the law; these can be expressed as follows. (1) Continuous changes in the price lead to the exceptional behavior. If the price shows a rising trend a buyer is likely to buy more at a high price for protecting himself against a further rise. As against it when the price starts falling continuously, a consumer buys less at a low price and awaits a further in price. (2) Giffenss Paradox describes a peculiar experience in case of inferior goods. When the price of an inferior commodity declines, the consumer, instead of purchasing more, buys less of that commodity and switches on to a superior commodity. Hence the exception. (3) Conspicuous Consumption refers to the consumption of those commodities which are bought as a matter of prestige. Naturally with a fall in the price of such goods, there is no distinction in buying the same. As a result the demand declines with a fall in the price of such prestige goods. (4) Ignorance Effect implies a situation in which a consumer buys more of a commodity at a higher price only due to ignorance.

In the exceptional situations quoted above, the demand curve becomes an upwards rising one as shown in the alongside diagram. In the alongside figure, the demand curve is positively sloping one due to which more is demanded at a high price and less at a low price. 2.4 Determinants of Demand The law of demand, while explaining the price-demand relationship assumes other factors to be constant. In reality however, these factors such as income, population, tastes, habits, preferences etc., do not remain constant and keep on affecting the demand. As a result the demand changes i.e. rises or falls, without any change in price. (1) Income: The relationship between income and the demand is a direct one. It means the demand changes in the same direction as the income. An increase in income leads to rise in demand and vice versa. (2) Population: The size of population also affects the demand. The relationship is a direct one. The higher the size of population, the higher is the demand and vice versa. (3) Tastes and Habits: The tastes, habits, likes, dislikes, prejudices and preference etc. of the consumer have a profound effect on the demand for a commodity. If a consumers dislikes a commodity, he will not buy it despite a fall in price. On the other hand a very high price also may not stop him from buying a good if he likes it very much. (4) Other Prices: This is another important determinant of demand for a commodity. The effects depends upon the relationship between the commodities in question. If the price of a complimentary commodity rises, the demand for the commodity in reference falls. E.g. the demand for petrol will decline due to rise in the price of cars and the consequent decline in their demand. Opposite effect will be experienced incase of substitutes. (5) Advertisement: This factor has gained tremendous importance in the modern days. When a product is aggressively advertised through all the possible media, the consumers buy the advertised commodity even at a high price and many times even if they dont need it. (6) Fashions: Hardly anyone has the courage and the desire to go against the prevailing fashions as well as social customs and the traditions. This factor has a great impact on the demand. (7) Imitation: This tendency is commonly experienced everywhere. This is known as the demonstration effects, due to which the low income groups imitate the consumption patterns of the rich ones. This operates even at international levels when the poor countries try to copy the consumption patterns of rich countries. 2.5 Changes in Demand The law of demand explains the effect of only-one factor viz., price, on the demand for a commodity, under the assumption of constancy of other determinants. In practice, other factors such as, income, population etc. cause the rise or fall in demand without any change in the price. These effects are different from the law of demand. They are termed as changes in demand in contrast to variations in demand which occur due to changes in the price of a commodity. In economic theory a distinction is made between (a) variations i.e. extension and contraction in demand due to price and (b) Changes i.e. increase and decrease in demand due to other factors. (a) Variations in demand refer to those which occur due to changes in the price of a commodity. These are two types. (1) Extension of Demand: This refers to rise in demand due to a fall in price of the commodity. It is shown by a downwards movement on a given demand curve. (2) Contraction of Demand: This means fall in demand due to increase in price and can be shown by an upwards movement on a given demand curve.

(b) Changes in demand imply the rise and fall due to factors other than price. It means they occur without any change in price. They are of two types. (1) Increase in Demand: This refers to higher demand at the same price and results from rise in income, population etc., this is shown on a new demand curve lying above the original one. (2) Decrease in demand: It means less quantity demanded at the same price. This is the result of factors like fall in income, population etc. this is shown on a new demand lying below the original one.

Fig (A) Extension/Contraction of Demand

Fig (B) Increase/Decrease in Demand

In figure A, the original price is OP and the Quantity demanded is OQ. With a rise in price from OP to Op1 the demand contracts from OQ to Oq1 and as a result of fall in price from OP to OP2, the demand extends from OQ to OQ2. In figure, B an increase in demand is shown by a new demand curve, D1 while the decrease in demand is expressed by the new demand curve D2, lying above and below the original demand curve D respectively. On D1 more is demand (OQ1) at the same price while on D2 less is demanded (OQ2) at the same price OP. 2.6 Elasticity of Demand The law of demand explains the functional relationship between price and demand. In fact, the demand for a commodity depends not only on the price of a commodity but also on other factors such as income, population, tastes and preferences of the consumer. The law of demand assumes these factors to be constant and states the inverse price-demand relationship. Barring certain exceptions, the inverse price-demand relationship holds good in case of the goods that are bought and sold in the market. The law of demand explains the direction of a change as it states that with a rise in price the demand contracts and with a fall in price it expands. However, it fails to explain the extent or magnitude of a change in demand with a given change in price. In other words, the law of demand merely shows the direction in which the demand changes as a result of a change in price, but does not throw any light on the amount by which the demand will change in response to a given change in price. Thus, the law of demand explains the qualitative but not the quantitative aspect of price-demand relationship. Although it is true that demand responds to change in price of a commodity, such response varies from commodity to commodity. Some commodities are more responsive or sensitive to change in price while some others are less. The concept of the elasticity of demand has great significance as it explains the

degree of responsiveness of demand to a change in price. It thus elaborates the price-demand relationship. The elasticity of demand thus means the sensitiveness or responsiveness of demand to a change in price. According to Marshall, the elasticity (or responsiveness) of demand in a market is great or small accordingly as the demand changes (rises or falls) much or little for a given change (rise or fall) in price. From the above discussion, it will be clear that thought different commodities react to a change in price in the same direction; the degree of their response differs. Demand for some commodities is more sensitive or responsive to a change in price, while it is less responsive for some others. Elasticity of demand is a measure of relative changes in the amount demanded in response to a small change in price. Certain goods are said to have an elastic demand while others have an inelastic demand. The demand is said to be elastic when a small change in price brings about considerable change in demand. On the other hand, the demand for a good is said to be inelastic when a change in price fails to bring about significant change in demand. The concept of elasticity can be expressed in the form of an equation as: Ep = Percentage change in quantity demanded/Percentage change in the price Types of Price Elasticity The concept of price elasticity reveals that the degree of responsiveness of demand to the change in price differs from commodity to commodity. Demand for some commodities is more elastic while that for certain others is less elastic. Using the formula of elasticity, it possible to mention following different types of price elasticity: (1) Perfectly inelastic demand (ep = o). (2) Inelastic (less elastic) demand (e< 1) (3) Unitary elasticity (e = 1). (4) Elastic (more elastic) demand (e> 1). (5) Perfectly elastic demand (e = x) (1) Perfectly Inelastic Demand (ep = o). This describes a situation in which demand shows no response to a change in price. In other words, whatever be the price the quantity demanded remains the same. It can be depicted by means of the alongside diagram. The vertical straight line demand curve as shown alongside reveals that with a change in price (from OP to OP1) the demand remains same at OQ. Thus, demand does not at all respond to a change in price. Thus ep = O. Hence, perfectly inelastic demand. Fig a (2) Inelastic (less elastic) Demand (e < 1): In this case the proportionate change in demand is smaller than in price. The alongside figure shows this type.In the alongside figure percentage change in demand is smaller than that in price. It means the demand is relatively c less responsive to the change in price. This is referred to as an inelastic demand. Fig e (3) Unitary Elasticity (e = 1): When the percentage change in price produces equivalent percentage change in demand, we have a case of unit elasticity. The rectangular hyperbola as shown in the figure demonstrates this type of elasticity. In this case percentage change in demand is equal to percentage change in price, hence e = 1. Fig c (4) Elastic Demand (e> 1): In case of certain commodities the demand is relatively more responsive to the change in price. It means a small change in price induces a significant change in, demand. This can be understood by means of the alongside figure. It can be noticed that in the above example the percentage change in demand is greater than that in price. Hence, the elastic demand (e>1) Fig d (5) Perfectly Elastic Demand (e = x):

This is experienced when the demand is extremely sensitive to the changes in price. In this case an insignificant change in price produces tremendous change in demand. The demand curve showing perfectly elastic demand is a horizontal straight line. Fig b It can be noticed that at a given price an infinite quantity is demanded. A small change in price produces infinite change in demand. A perfectly competitive firm faces this type of demand. From the above analysis it can be concluded that theoretically five different types of price elasticity can be mentioned. In practice, however two extreme cases i.e. perfectly elastic and perfectly inelastic demand, are rarely experienced. What we really have is more elastic (e 1) or less elastic (e 1 ) demand. The unitary elasticity is a dividing line between these two cases.

2.7 Determinants of Elasticity The nature of demand for a commodity, i.e. whether the demand is elastic or inelastic depends upon many factors. Though it is difficult to state precisely the nature of demand for a particular commodity, it is possible to classify the commodities under broad categories and make certain generalizations regarding whether the demand for commodities belonging to a certain group is elastic or inelastic. (1) Nature of the Commodity: Humans wants, i.e. the commodities satisfying them can be classified broadly into necessaries on the one hand and comforts and luxuries on the other hand. The nature of demand for a commodity depends upon this classification. The demand for necessities is inelastic and for comforts and luxuries it is elastic. (2) Number of Substitutes Available: The availability of substitutes is a major determinant of the elasticity of demand.

The large the number of substitutes, the higher is the elastic. It means if a commodity has many substitutes, the demand will be elastic. As against this in the absence of substitutes, the demand becomes relatively inelastic because the consumers have no other alternative but to buy the same product irrespective of whether the price rises or falls. (3) Number Of Uses: If a commodity can be put to a variety of uses, the demand will be more elastic. When the price of such commodity rises, its consumption will be restricted only to more important uses and when the price falls the consumption may be extended to less urgent uses, e.g. coal electricity, water etc. (4) Possibility of Postponement of Consumption: This factor also greatly influences the nature of demand for a commodity. If the consumption of a commodity can be postponed, the demand will be elastic. (5) Range of prices: The demand for very low-priced as well as very high-price commodity is generally inelastic. When the price is very high, the commodity is consumed only by the rich people. A rise or fall in the price will not have significant effect in the demand. Similarly, when the price is so low that the commodity can be brought by all those who wish to buy, a change, i.e., a rise or fall in the price, will hardly have any effect on the demand. (6) Proportion of Income Spent: Income of the consumer significantly influences the nature of demand. If only a small fraction of income is being spent on a particular commodity, say newspaper, the demand will tend to be inelastic. (7) According to Taussig, unequal distribution of income and wealth makes the demand in general, elastic. (8) In addition, it is observed that demand for durable goods, is usually elastic. (9) The nature of demand for a commodity is also influenced by the complementarities of goods. From the above analysis of the determinants of elasticity of demand, it is clear that no precise conclusion about the nature of demand for any specific commodity can be drawn. It depends upon the range of price, and the psychology of the consumers. The conclusion regarding the nature of demand should, therefore be restricted to small changes in prices during short period. By doing so, the influence of changes in habits, tastes, likes customs etc., can be ignored. 2.8 Measurement of Elasticity For practical purposes, it is essential to measure the exact elasticity of demand. By measuring the elasticity we can know the extent to which the demand is elastic or inelastic. Different methods are used for measuring the elasticity of demand. (1) Percentage Method: In this method, the percentage change in demand and percentage change in price are compared. ep = Percentage change in demand / Percentage change in price In this method, three values of ep can be obtained. Viz., ep = 1, ep >1, ep <1. (a) If 5% change in price leads to exactly 5% change in demand, i.e. percentage change in demand is equal to percentage change in price , e = 1, it is a case of unit elasticity . (b) If percentage change in demand is greater than percentage change in price, e> 1, it means the demand is elastic. (c) If percentage change in demand is less than that in price, e 1, meaning thereby the demand is inelastic. (2) Total Outlay Method: The elasticity of demand can be measured by considering the changes in price and the consequent changes in demand causing changes in the total amount spent on the goods. The change in price changes the demand for a commodity which in turn changes the total expenditure of the consumer or total revenue of the seller.

(a) If a given change in price fails to bring about any change in the total outlay, it is the case of unit elasticity. It means if the total revenue (price x Quantity bought) remains the same in spite of a change in price, ep is said to be equal to 1. (b) If price and total revenue are inversely related, i.e., if total revenue falls with rise in price or rises with fall in price, demand is said to be elastic or e 1. (c) When price and total revenue are directly related, i.e. if total revenue rises with a rise in price and falls with a fall in price, the demand is said to be inelastic pr e <1. (3) Point Method: Another suggested by Marshall is to measure elasticity at a point on a straight line. This method can be better understood with the help of a diagram as given below: In the Fig. DD1 is a straight line demand curve meeting the two axes at D and D1. A is any point on the demand curve at which the elasticity is to be measured. The formula for measuring the same at a point say A isep = Lower segment of the demand curve AD1/ Upper segment of the demand curve =AD It will be observed from Fig. that at different points on the demand curve the elasticity will be different. Thus, at mid-point e=1, above the mid-point e I and below the I-point e<1. at a point where the curve intersects X axis, e = o and point at which it meets Y axis, e =

2.9 Income Elasticity of Demand The discussion of price elasticity of demand reveals that extent of change in demand as a result of change in price. However, as already explained, price is not the only determinant of demand. Demand for a commodity changes in response to a change in income of the consumer. In fact, income effect is a constituent of the price effect. The income effect suggests the effect of change in income on demand. The income elasticity of demand explains the extent of change in demand as a result of change in income. In other words, income elasticity of demand means the responsiveness of demand to changes in income. Thus, income elasticity of demand can be expressed as: EY =Percentage change in demand /Percentage change in income The following types of income elasticity can be observed: (1) Income Elasticity of Demand Greater than One: When the percentage change in demand is greater than the percentage change in income, a greater portion of income is being spent on a commodity with an increase in income- income elasticity is said to be greater than one.

(2) Income Elasticity is unitary: When the proportion of income spent on a commodity remains the same or when the percentage change in income is equal to the percentage change in demand, EY = 1 or the income elasticity is unitary. (3) Income Elasticity Less Than One (EY< 1): This occurs when the percentage change in demand is less than the percentage change in income. (4) Zero Income Elasticity of Demand (EY=o): This is the case when change in income of the consumer does not bring about any change in the demand for a commodity. (5) Negative Income Elasticity of Demand (EY< o): It is well known that income effect for most of the commodities is positive. But in case of inferior goods, the income effect beyond a certain level of income becomes negative. This implies that as the income increases the consumer, instead of buying more of a commodity, buys less and switches on to a superior commodity. The income elasticity of demand in such cases will be negative. Cross Elasticity of Demand While discussing the determinants of demand for a commodity, we have observed that demand for a commodity depends not only on the price of that commodity but also on the prices of other related goods. Thus, the demand for a commodity X depends not only on the price of X but also on the prices of other commodities Y, Z.N etc. The concept of cross elasticity explains the degree of change in demand for X as, a result of change in price of Y. this can be expressed asEC =Percentage Change in demand for X / Percentage change in price of Y The relationship between any two goods is of two types. The goods X and Y can be complementary goods (such as pen and ink) or substitutes (such as pen and ball pen). In case of complementary commodities, the cross elasticity will be negative. This means that fall in price of X (pen) leads to rise in its demand so also rise in t) demand for Y (ink) On the other hand, the cross elasticity for substitutes is positive which means a fall in price of X (pen) results in rise in demand for X and fall in demand for Y (ball pen). If two commodities, say X and Y, are unrelated there will be no change i. Demand for X as a result of change in price of Y. Cross elasticity in cad of such unrelated goods will then be zero. In short, cross elasticity will be of three types: (1) Negative cross elasticity Complementary commodities. (2) Positive cross elasticity Substitutes. (3) Zero cross elasticity Unrelated goods. Importance of elasticity The concept of elasticity is of great importance both in economic theory and in practice. (1) Theoretically, its importance lies in the fact that it deeply analyses the price-demand relationship. The law of demand merely explains the qualitative relationship while the concept of elasticity of demand analyses the quantitative price-demand relationship. (2) The Pricing policy of the producer is greatly influenced by the nature of demand for his product. If the demand is inelastic, he will be benefited by charging a high price. If on the other hand, the demand is elastic, low price will be advantageous to the producer. The concept of elasticity helps the monopolist while practicing the price discrimination. (3) The price of joint products can be fixed on the basis of elasticity of demand. In case of such joint products, such as wool and mutton, cotton and cotton seeds, separate costs of production are not known. High price is charged for a product having inelastic demand (say cotton) and low price for its joint product having elastic demand (say cotton seeds.)

(4) The concept of elasticity of demand is helpful to the Government in fixing the prices of public utilities. (5) The Elasticity of demand is important not only in pricing the commodities but also in fixing the price of labour viz., wages. (6) The concept of elasticity of demand is useful to Government in formulation of economic policy in various fields such as taxation, international trade etc. (a) The concept of elasticity of demand guides the finance minister in imposing the commodity taxes. He should tax such commodities which have inelastic demand so that the Government can raise handsome revenue. (b) The concept of elasticity of demand helps the Government in formulating commercial policy. Protection and subsidy is granted to the industries which face an elastic demand. (7) The concept of elasticity of demand is very important in the field international trade. It helps in solving some of the problems of international trade such as gains from trade, balance of payments etc. policy of tariff also depends upon the nature of demand for a commodity. In nutshell, it can be concluded that the concept of elasticity of demand has great significance in economic analysis. Its usefulness in branches of economic such as production, distribution, public finance, international trade etc., has been widely accepted. 2.10 Supply The term Supply is one of the important terms in economic. It implies various amounts or quantities of a good offered for sale at various prices. Mayers has defined this term in the following words: We may define supply as a schedule of the amount of a good that would be offered for sale at all possible prices at any one instant of time, or during any one period of time, for example, a day, a week and so on, in which the conditions of supply remain the same. Analysis of the above definition implies that: (i) It is a schedule of the amount of a good which is offered for sale at all possible prices. (ii) The amount of a good is offered for sale at a given time, which may be a day, a week, a month and so on. (iii) During the given period of time, the conditions of supply remain unchanged. (iv) The supplier is able and willing to supply the good at a given price. Thus, supply implies the willingness and ability on the part of a person (supplier) to sell a good in different quantities at a certain price and time.

Distinction between Stock and Supply In ordinary languages the two terms viz., stock and supply are used interchangeably. However, strictly in economic sense the two terms convey different meaning. The distinction between the two can be explained as follows: (1) Stock is a reservoir while supply is a flow. (2) At any time Stock is bigger than supply because supply represents only a part of total stock. (3) Supply refers to the actual Quantity offered for sale at the prevailing price while stock means the potential supply. (4) Supply is more elastic than stock.

2.11 Law of Supply Supply, like demand, is a function of price. It means a change in price brings about a change in supply. The law of supply explains the functional relationship between price and supply. The law is stated in the following words: In a given market at any given time, the quantity of any goods which people are ready to offer for sale generally varies directly with the price. If this statement of law of supply is analyzed, it will show that: (i) Price and supply vary or change in the same direction. This means that if price of a good rises, its supply will increase and if its price falls, supply thereof will contact. (ii) The supply position holds good at a particular time. This means that a particular quantity of a good will be offered at a certain price at a particular point of time. This law may also be stated in the following words: Other things remaining the same, as the price of a commodity rises, its supply is extended and as the price falls its supply is contracted. 2.12 Supply Schedule and Supply Curve: The law of supply can be explained by means of a supply schedule and a supply curve. Supply Schedule: It is a table or schedule that shows different quantities of a commodity that are offered for sale at a particular time. Supply schedule can be (i) individual supply schedule, (ii) Market supply schedule. The former relates to the quantity that an individual firm or producer or supplier is willing and able to offer for sale at different prices. The market supply refers to the sum total of the quantities of a commodity offered for sale by different individual suppliers at different prices per unit of time. The following schedule makes the point clear: Price per kg 2.00 3.00 4.00 5.00 6.00 S1 20 30 40 45 50 S2 35 45 50 55 60 S3 40 50 55 60 65 S4 Total market supply 500 700 1000 1200 1500

In the above schedule supply of different individual firms is shown as S1, S2, S3, etc. likewise there can be many other supplier in the market. The last column shows the market supply which is obtained by summing up the individual supplies of different firms at different prices. It can be noticed that the reaction of an individual supplier to the change in price is similar. It implies that as the price rises every individual seller offers a larger quantity for sale. Since the market supply is nothing but the sum total of the individual supplies, it is obvious that it changes in the same direction. Hence as the price rises the supply increases. Thus, the supply schedules explain the direct relationship between price and quantity supplied. Supply Curve: Supply curve is a geometrical device to express the price-supply relationship. Such curves can be obtained for every firm separately as well as for the entire market. Accordingly, we get individual supply curve as also the market supply curve. Supply curve is thus, a graphical presentation of the law of supply. If the points in the above schedule are plotted and the positions so obtained are joined we get a supply curve as shown in the following diagrams:

In the above diagrams price is measured along the vertical Y axis while the quantity supplied is measured along the horizontal X axis. Different positions showing price and the corresponding quantity supplied are joined to get the supply curve. S1, S2, S3 are the three individual supply curves while the last figure shows the market supply (SM). It can be observed that as the price rises more is supplied. Hence the supply curve is rising upwards to the right or positively sloping. Such curve indicates price supply relationship. The law of supply, which states that price and supply are directly related, can thus be expressed by means of supply schedule and supply curve. Explanation of the law Individual Supply: An individual firm is interested in securing maximum profits from its supply. Obviously, at a certain price it will supply the quantity at which the profits are maximum. In order to derive the profits an individual seller has to take into account the cost of production and compare the same with price to calculate his profits. Generally, it is observed that as the production and supply increase the per unit cost goes on increasing. Naturally, a firm will not be able and willing to supply more quantity unless the price is higher. In other

words, higher price offers an inducement to firm for offering larger quantity. thus, more will be supplied at a high price and less at a low price. Hence, the direct relationship. Moreover, every commodity has a reservation price which means the minimum price expected by the producer. If the actual price is less than the reservation price no supply will be forthcoming. As the price rises more will be supplied. Market Supply: As mentioned earlier market supply is the sum total of individual supply. Naturally, it will behave in the same way as the individual supply in response to change in price. Expansion of Market Supply occurs at a high price, because (i) The Existing suppliers supply larger quantity. (ii) New suppliers enter the market. Contraction of market supply occurs due to (i) Reduction in supply by some firms, (ii) Exit from the market of certain other firms who cannot supply any quantity at the new low price. Thus, both the individual as well as the market supply change in the same direction as the price. 2.13 Determinants of Supply The law of supply explains the functional relationship between price and supply. Price, though important, is not the only determinant of supply. There are many factors along with price which cause changes in supply. (i) Price: A change in price of a given good may bring about a change in the supply position. If price rises, generally, supply will increase and vice versa. (ii) Production cost: If production-cost changes, the supply; position may also change. If cost of production rises, production may be curtailed and hence, the supply may be reduced and if the cost of production declines, the situation will be just opposite. (iii) Factors of production: If the price of factors of production changes, there would be change in the volume of production and with that there would be a change in the supply position. (iv) Transport facilities etc. It means if communications and transport are improved, supply can be increased. If these means are not adequate, efficient or economical, the supply may decrease. (v) Future trends in prices: if future trends in prices indicate the possibility of rise in the price, the present supply will decrease and vice versa. (vi) Nature factors: If weather conditions are favorable, supply will increase and in case of unfavorable weather conditions, the same will decrease, similarly, if natural calamities occur, the supply will be reduced. (vii) Abnormal circumstances: It may be pointed out that if some abnormal circumstances, like war etc. develop, the supply position may change. During the war time supply may be reduced. But if hostilities are over, there can be increase in the supply. (viii) Monetary policy of the Government: Lastly, it may be pointed out that the monetary policy of the Government may also change the supply position. If liberal monetary policy is adopted by the Government, it is possible that production may increase and as such, the supply may also increase. If however, the Government adopts tight monetary policy, opposite may happen. 2.14 Increase/Decrease and Extension/Contraction of Supply (a) Extension and Contraction of Supply: The law of supply expresses the functional relationship between price and supply and states that the two are directly related. The variations in supply i.e. rise or fall in it, brought about due to changes in the price are called extension and contraction of supply respectively. Thus, Extension of supply means higher quantity supplied at a high price while

Contraction of supply refers to fall in supply due to a fall in the price of a commodity. Such changes can be shown by means of the following In the alongside diagram price of good is measured along Y axis while quantity supplied along X axis. Originally, at price OP the quantity supplied is OQ.(1) As the price rises to OP 1 the. Supply rises to OQ1 thus QQ1 is the extension of supply.(2) As the price falls to OP2 the supply falls to OQ2. QQ2

therefore, shows contraction of supply. (b) Increase/Decrease in Supply: The law of supply expresses the changes in supply due to changes in the price of a commodity. It assumes other factors to be constant. In reality the supply changes without any change in the price. This happens due to various factors other than price. These factors are: (1) Rise or fall in the cost. (2) Change in the prices of factors of production. (3) Change in the techniques of production etc. All these factors bring about rise or fall in the supply of a commodity. Such change, i.e. rise or fall in supply due to effect of other factors, are termed as increase and decrease in supply respectively. 1 Increase in supply means more quantity supplied at the same price. 2 Decrease in supply means less quantity supplied at the same price. Increase and decrease in supply can be shown by means of the following diagram:Alongside diagram shows three supply curves S1 S1 and S2. Let us assume that S is the original supply curve. On this supply curve OQ quantity is supplied at price OP. (1) S1 shows increase in the supply. On this curve, the price remains same i.e. OP but quantity supplied rises to OQ1. QQ1 is thus increase in supply. (2) S2 shows decrease in supply. On this curve, at the same price OP the quantity supplied is OQ2. QQ2 is thus, decrease in supply. It can, thus, be seen that new supply curves have to be drawn to show increase and decrease in supply. An increase in supply can be shown by means of a new supply curve (S1) which lies to the right of the original one, while the new supply curve (S2) which lies to the left of original curve (S) shows decrease in supply.

2.15 Elasticity of Supply The supply, like the demand, is a function of price. The law of supply expresses the price supply relationship. It is usually observed that the price and supply are directly related, which means that more is supplied at a high price and less at a low price.The elasticity of supply means, the responsiveness of the supply of a commodity to the changes in price. It may be noticed that though most of the commodities follow the law of supply, the degree of response varies from commodity to commodity. Some commodities are more responsive to a change in price, while certain others are less responsive. Accordingly, we come across commodities having more elastic supply and those having less elastic supply. The elasticity of supply can be expressed in the form of a formula as follows: Es= Percentage change in supply / percentage change in price = Change in S / Original S / Change in P / Original P Various types of elasticity of supply can be mentioned: (a) If the supply does not at all change, i.e. remains constant, whatever be the change in price, we have a case of perfectly inelastic supply. This means, the elasticity of supply is zero. This can be shown by means of a vertical straight line supply curve as in figure a. (b) Certain commodities may have perfectly or infinitely elastic supply, which means that the supply is fully sensitive to even a smallest possible change in price. This can be represented with the help of a horizontal straight line supply curve as in figure b. (c) When the percentage change in supply is the same, as the percentage change in demand a case of unit elasticity is experienced. In this case, e = 1. The case of unitary elasticity is shown in figure c. (d) When the percentage change in supply is greater than that of the price, the elasticity of supply is greater than one. This is the case of elastic supply. This is shown in figure d. (e) The supply is said to be inelastic or less elastic when the proportionate change in supply is lesser than that in the price. In this case, e is less than 1. This is represented in diagram e.

2.16 Measurement of Elasticity of Supply The elasticity of supply, at a point on a supply curve, can be measured by drawing a tangent to the curve at the point. This can be better understood with help of a diagram. In the alongside diagram, SS is the supply curve and the elasticity of supply is to be measured at any point, say A on this curve. A tangent to supply curve is drawn at point A to meet the X axis at point the perpendicular drawn from point A meets X axis at M. the elasticity at point A is measured as: Es = NM / OM (1) If the tangent drawn to supply curve passes through the origin. (o) the elasticity is equal to one, i.e. a case of unit elasticity. (2) If the tangent cuts Y axis, e is greater than 1. (3) If the tangent meets the X axis to the right of origin, i.e. elasticity is less than 1.

2.17 Determinants of Elasticity The elasticity of supply depends upon a variety of factors. (i) The time element: The most important factor, influencing the elasticity of supply, is the time at the disposal of a firm to adjust the supply to the changes in prices. During the short period, the supply is more or less inelastic. In case of the perishable goods, the supply during very short period or market period is perfectly inelastic. During the short period, the supply can be slightly adjusted to the changes in price and hence, it becomes fairly elastic. During long period, the full adjustments in the supply can be made and hence, the supply becomes much more elastic. In short, the longer the period, the more elastic is the supply. (ii) The elasticity of supply also depends on the possibilities of changes in the production techniques. If the techniques of production are improved, the supply will be fairly elastic. If the techniques are rigid and cannot be changed, the supply will become inelastic or less elastic. (iii) The degree of elasticity of supply also depends on the extent to which the fixed factors are being utilized. If the fixed factors are intensively utilized. There is very little scope for expanding the supply, in response to the changes in price and hence, the supply is elastic. If , however, the fixed factor is not much utilized, more can be produced and supplied, which makes the supply fairly elastic. (iv) The elasticity of supply also depends on the Availability of the variable inputs. If such factors are abundantly available, the production and supply can be easily adjusted to the changes in price, as a result of which, the supply will be fairly elastic. However, if the factors are not available, there will be much rigidity in the supply, making the supply inelastic. (v) The elasticity of supply is, to a great extent, influenced by the cost of attracting the productive resources. The higher the cost of attracting the resources lower will be the elasticity. The lower the cost of attracting the resources, the higher will be the degree of elasticity (vi) In addition to the above factors, the behavior of the cost also determines the nature of supply. If the rise in the cost is sharp and rapid, it will be difficult to expand the supply, which means the supply will be less elastic. On the other hand, if the cost rises gradually, the supply can be easily increased, which means it will be elastic. (vii) The availability of markets also determines the degree of elasticity.Thus, it can be concluded that the elasticity of supply is the result of a variety of factors, such as time element, utilization of fixed factors, availability of variable inputs, nature of production technique, behavior of cost, etc. Question bank 1.Write a short note on (i) Law of demand (ii) Law of supply 2.Explain briefly how the demand for a commodity is affected by changes in price. In come, price of substitute, advertisement ad population. 3.Define price elasticity of demand ad distinguish between its various types. Discuss the role of price elasticity of demand in business decision 4.Define elasticity of demand .explain with diagrams the cases where the absolutely value of elasticity is (i) zero (ii) infinity (iii) one (iv) less than one (v) more than one 5.Explain the concept of (i) elasticity of supply (ii) cross elasticity of supply 6.Explain the determinants of supply 7.Distinction between Stock and Supply

Chapter no 3 Demand Forecasting

3.1 Introduction Accurate demand forecasting is essential for a firm to enable it to produce the required quantities at the right time and arrange well in advance for the various factors of production, viz., raw materials, equipment, machine accessories, labour; buildings, etc. some firms may as a policy produce to order but generally, firms produce in anticipation of future demand. Forecasting helps a firm to assess the probable demand for its products and plan its production accordingly. In fact, forecasting is an important aid in effective and efficient planning. It can also help management in reducing its dependence on chance. Demand forecasting is also helpful in better planning and allocation of national resources. Because of unrealistic estimate of projected demand and production. India had to spend in 1978 Rs. 1,000 cores on imports of even essential goods. Demand forecasting is very popular in industrially advanced countries where demand conditions are always more uncertain than the supply conditions. In developing countries, however instead of the demand, supply is often the limiting factor. High prices and black markets point to supply bottlenecks.

Naturally, in a country like India supply forecasting seems to be more important than demand forecasting. However, with the relaxation of industrial licensing regulations and economic liberalization in general in recent years increasing competition has already begun to change the situation in India as well. Competition has spread to most areas except those where massive investment is required. In such areas, supply as far in excess of demand and the producers have begun to battle for the market place. Thus, demand forecasting is bound to become important in India also. The national Council of applied Economic Research has made demand forecasts for a number of products (consumer as well as industrial) on a macro-level. These forecasts can be helpful in determining industry demand. 3.2 FACTORS INVOLVED IN DEMAND FORECASTING There are at least six factors involved in demand forecasting: 1.How far ahead? The problem is solved by having both short-run forecasting, usually defined as covering any period up to one year, and long-run forecasting covering a period of 5, 10 or even 20 years. How far ahead can the long-term forecast go, depends upon the nature of the industry but, beyond ten years, the becomes so uncertain that the projection becomes rather dubious. However, because of the close link with capital expenditure forecasting. It may be necessary to look 20 years ahead in case of certain industries. For example, petroleum companies, shipping companies and paper mills, in view of the long life of the fixed assets, the very high capital costs involved and the possibility of profit only in the distant future, do have to forecast well deep into the future. Short-term forecasting may cover a period of three months six months or one year, the last being the most usual. Which period is chosen depends upon the nature of business; when demand fluctuates from one month to another, a very short period should be taken. However, here too, depending upon the nature of the business. If stocks can be built up in the slack sales period, this may be preferable to a fluctuating level of production. The latter may cause problems of labour and machine utilization, which could be avoided if production is continued during the slack period. Instead of defining short-term and long-term forecasting in terms of different periods of time1 an alternative method is to associate them with certain types of decisions or objectives to be met. Accordingly, short-term forecast is one which provided information for tactical decisions. It is, therefore, concerned with day-to-day operations within the limits of resources currently available. A long-term forecast is one, which provides information for major decisions; it is concerned with extending or reducing the limits of resources. 2 For example, if it is intended to establish a factory, and it is thought that the time required to build, equip and bring it into operation will be five years, then the forecast of the demand for the products to be made in the factory must start five years ahead, and may be projected for a further five-year period in order to establish the viability of the project. Thus the time period involved will be ten years. When it is intended to replace plant or to buy new or improved machines, the period chosen will depend upon the expected life of the plant or machinery, the time required to purchase and to bring it into use, and the time required for the capital outlay to be recovered. 1 Demand forecasting may be undertaken at three different levels (a) Macro-level concerned with business conditions over the whole economy measured by an appropriate index of industrial production, national income or expenditure. Such external data constitute the basic assumptions on which the business must base its forecasts. (b) Industry-level prepared by different trade associations. Firm-level, which is the most important from managerial viewpoint 2 Should the forecast be general or specific? The firm may find a general forecast useful, but it usually needs to be broken down into commodity product-wise forecasts and forecasts by areas of sale.

3 Problems and methods of forecasting are usually different for new products from those for products already well established in the market, for which sales trends are known and the competitive characteristics of the product well understood. 4 It is important to classify products as producer goods, consumer durables or consumer goods and services. Economic analysis indicates distinctive patterns of demand for each of these different categories. 5 Finally in every forecast special factor peculiar to the product and the market must be taken into account. The nature of the competition in the market how far the situation is complicated by uncertainty or non-measurable risk and the possibility of error of inaccuracy in the forecast must be seriously considered. Political developments such as general elections are also important. Sociological factors are of great importance in some markets e.g., in the case of womens dresses likewise the role of psychology in demand can hardly be understated. What people think about the future, their own personal prospects and about products and brands are vital factors for firms and industries. 3.3 Purposes Of Forecasting The purposes of forecasting differ according to types of forecasting: short-term forecasting and long-term forecasting. Purposes of Short-term ForecastingAppropriate Production scheduling so as to avoid the problem of over production and the problem of short supply. For this purpose production schedules have to be geared to expected sales. 1. Helping the firm in reducing costs of purchasing raw materials and controlling inventory by determining its future resource requirements. 2. Determining appropriate price policy so as to avoid an increase when the market conditions are expected to be weak and a reduction when the market is going to be strong. 3. Setting sales targets and establishing controls and incentives. If targets are set too high, they will be discouraging salesmen who fall to achieve them: if set too low, the targets will be achieved easily and hence incentives will prove meaningless. 4. Forecasting short-term financial requirements. Cash requirements depend on sales level and production operations. Moreover, it takes time to arrange for funds on reasonable terms. Sales forecasts will, therefore, enable arrangement of sufficient funds on reasonable terms well in advance. Purposes of Long-term Forecasting 1. Planning of a new unit or expansion of an existing unit. It requires an analysis of the long-term demand potential of the products in question. A multi-product firm must ascertain not only the total demand situation, but also the demand of different items separately. If a company has better knowledge than its rivals of the growth trends of the aggregate demand and of the distribution of the demand over various products, its competitive position would be much better. 2. Planning long-term financial requirements. As planning for raising funds requires considerable advance notice, long-term sales forecasts are quite essential to assess long-term financial requirements. 3. Planning man-power requirements. Training and personnel development are long-term propositions, taking considerable time to complete. They can be started well in advance only on the basis of estimates of manpower requirements assessed according to long-term sales forecasts. 4. The demand forecasts of particular products may also provide a guideline for demand forecasts for related industries. For example, the demand forecast for cotton textiles may provide an idea of the likely demand for the textile machinery industry, dyestuff industry as also for ready made

garments industry. At the macro level demand forecasts may also help the government in determining whether imports are necessary to meet any possible deficit in the domestic supply, or in devising appropriate export promotion policies if there is a surplus. Thus, demand forecasts are useful to the industry as also to the government. 3.4 Determinants of Demand 1. Non-durable consumer goods. There are three basic factors influencing the demand for these goods: (A) Purchasing power. This is determined by disposable personal income (personal income direct taxes and other deductions). Data on aggregate personal income and personal disposable income are published by the Central Statistical Organization (C.S.O.). Some people suggest the use of discretionary income in place of disposable income. Discretionary income can be estimated by subtracting three items from disposable income vtz. imputed income and income in kind, major fixed outlay payments such as mortgage debt payment. Insurance premium payments and rent and essential expenditures such as food and clothing and transport expenses based upon consumption in a normal year. Discretionary income can be quite an important determinant in case of consumer non-durables, which are luxuries. (B) Price. The price factor is another important variable to be included in demand analysis. Here, one has to consider the prices of the product and also its substitutes and complements. One may also consider the price differences between products concerned and its substitutes and complements. Price as a determinant of the volume of sales of consumer non-durables is sometimes more important through cross-elasticity (involving substitute products) than it is directly in terms of rice elasticity. Direct price elasticity can be expected to be more important with respect to those consumer non-durables. Which are capable of storage and are free from risks of changes in styles. ( C ) Demography. This involves the characteristics of the population, human as well as non-human, using the product concerned. For example, it may pertain to the number and characteristics of children in a study of the demand for toys or the number and characteristics of automobiles in a study of the demand for tyres or petrol. In fact, it involves distinguishing between the total market demand and market segments. Such segments may be derived in terms of income, social status, sex, age, male female ratios, urban-rural ratios, educational level, geographic location, etc. the segment, when quantified, can be used as an independent variable affecting the demand for the product in question. Demand can be forecast by employing the following formula: D = J (Y, D, P) Where d is demand. Y is disposable income. D is demography and P is price. The various determinate of the demand for cotton textiles can provide a good illustration. The demand for cotton cloth is a function of the price of cotton cloth, prices of substitute commodities and the income of consumers. It bears a negative relationship with the price of cotton cloth and with the prices of complementary commodities; on the other hand a positive relationship exists with the prices of substitute commodities and with income. However, over a period of time a change may take place in some or all of these factors. For example, population may increase and fashions and consumer preferences may undergo

a change. But in a developing country like India, prices of food grains constitute an important determinant of the demand for cloth. Since the demand for food is inelastic any increase in the food prices leads to a corresponding increase in the expenditure on food reducing the part of income available for purchasing other goods including cotton cloth. This icads to a cut in the demand for cloth. Thus food prices exert a negative influence on the demand for cloth. 2. Durable consumer goods. The important considerations in the forecasting of demand for durable consumer goods are as under: (A) The consumer has to make a choice between: (a) using the goods longer by repairing it. If necessary or (b) disposing it of and replacing it with a new one. For example, a person may replace his black and white TV by selling it or just exchanging it for a colour TV after paying the difference in prices. The choice may depend upon non-economic factors like social status, prestige etc., or on economic factors like income and obsolescence. In periods of shortage, there is no alternative but to continue using the old product. (B) These goods require special facilities for their use, e.g., roads for automobiles, and electricity for refrigerators and TVs. The existence and growth of such facilities is an important variable for determining their demand. (C) To the extent that the consumer durable is used by household rather than on an individual basis, the total household figures are more important than total population figures (and changes therein). The few consumer durables (for example, electric shavers) that are used individually could be expected to depend more on population than on households. Disintegration of joint Hindu family has led to an increase in the number of households. (D) As consumer durables are used by more than one person, the decision to purchase may be influenced by family characteristics. Such as the size of families and the age distribution of adults and children as well as price, income and other considerations. (E) The total demand consists of (a) a new owner demand, and (b) a replacement demand. The replacement demand tends to grow with the growth in the total stock with the consumers. Once a person gets used to a thing he is unlikely to give it up at some future date. This makes replacement demand regular and predictable. For certain well-established products, life expectancy tables have been prepared in advanced countries in order to estimate the average replacement rates. When purchasing power increases, the scrap page rate tends to be high and vice versa again, when demand exceeds production, scrap page rate is lower. But as production catches up, the scrap page tends to increase. The total demand is symbolically stated as d = N + R. where N is New owner Demand and R is the Replacement Demand. Each of these independent variables may be forecast separately. The purchasing power, the number of families and some other factors depending on the product concerned, set an upper limit to the maximum or the optimum level. It is the level towards which the actual volume of consumer stock tends to gravitate. The difference between optimum and the actual stock shows the growth potential of the demand for durable goods. (F) Price and credit conditions. The ratio of price to the average like of the product should be considered. If the average life is high, the principal effect would be dampen the influence of price. Again, changes in credit terms can offset a price increase: lowering the cash down payment or extending the credit period or reducing the rate of interest.

The availability of hire purchase facility tends to push up the demand for consumer durables. Western countries have had this facility as a matter of routine. In fact, extension of credit is used as a sales promotion measure. This facility has now been extended in India as well. Many firms specialize in selling goods on hire purchase. The names of Zarapkars of Bombay and V G Pancreas of Madras need a special mention in this respect. Among the manufacturers, the Indian Sewing Machine Company, the manufactures of Singer, claim to have pioneered hire purchase in India. Hawkins Pressure Cookers are also available on hire-purchase basis. The intensified competition between car and two-wheeler manufacturers has led to many firms extending credit for their purchase. The relative importance of these various factors will vary from country to country. For example, the demand for refrigerators in India is mainly a function of income while in the U.S.A. it is a function of new houses built. Forecasting demand for consumer durables presents some difficult problems. Purchases of consumer durables are rather discretionary. They are not made on the spur of the moment but after considerable deliberations among members of the family. These deliberations very often involve choice among many competing consumer durables. Again, usually several months elapse between the formation of the idea and the culmination of the purchase decision. Thus durables are bought sporadically. Moreover, there is no compelling need to make these discretionary purchases at any given time. They are very often made at unevenly spaced intervals of time. If there are expectations of prices going up, these purchases may be speeded up or else they may be postponed. So also, the discretionary purchases may be postponed if there are reports of impending product improvements. Which is particularly the case in automobiles in foreign countries. 3. Capital Goods. Capital goods are used for further production. (A particular commodity may be a producer good for one but consumer good for the other). As the demand for capital goods is a derived one, it will depend upon the profitability of industries using the capital goods (called user industries), the ratio of production to capacity in the user industries, and the level of wage rates. When wage rates rise in relation to other costs, the management will seriously consider further investment in labour-saving equipment. In the case of particular capital goods, demand will depend upon the specific markets they serve and the end uses of which they are bought. The demand for textile machinery will for example, be determined by the expansion of textile industry in terms of new units and replacement of existing machinery. New demand as well as replacement demand will have to be considered. The demand for commercial vehicles depends upon (i) The scrap page rate. (ii) The availability of vehicles, (iii) economics of movement by road vis--vis rall, (iv) availability of bank finance to the prospective customers and (v) growth pattern of the economy. The demand for cable extruders would depend primarily on the demand for cables which in turn would be linked to electrification programmes. Government spending etc., For estimating the demand for aero planes, the points to be considered are expected passenger demand and traffic growth, airport congestion and landing fees, air and noise pollution, operating costs per seat mile and the nature and extent of competition (for an individual firm). The data required for estimating the demand for capital goods are: (a) The growth prospects of the user industries (demand estimates for the end-use products in the case of intermediate goods)

(b) The norm of consumption of capital goods per unit of installed capacity (per unit of each end use product in the case of intermediate products). It is assumed that norms of consumption would remain stable. However, in some cases the present norms may reflect shortages (for instance, in the case of imported spares subject to import controls). For construction of bridges, for example, mild steel may be in use in place of construction steels which are more suitable, because of the latters nonavailability of high costs. In such cases, as the pattern of availability changes, norms of consumption would also change. (c) The velocity of their use. 3.5 Methods Of Forecasting It should first of all the emphasized that there is no easy method or simple formula, which enables an individual or a business to predict the future with certainty or to escape the hard process of thinking. Moreover, two dangers must be guarded against. First, too much emphasis should not be placed on mathematical or statistical techniques of forecasting. Though statistical techniques are essential in clarifying relationships and providing techniques of analysis, they are not substitutes for judgment. The other danger is that we may go to the opposite extreme and regard forecasting as something to be left to the judgment of the so-called experts. What is needed is some commonsense mean between pure guessing and too much mathematics. The more commonly used methods of demand forecasting are discussed below. i. Survey of Buyers Intentions

The most direct method of estimating demand in the short run is to ask customers what they are planning to buy for the forthcoming time period-usually a year. This method, also known as Opinion Surveys, is most useful when bulk of the sales is made to industrial producers. Here the burden of forecasting is shifted to the customer. Yet it would be wise to depend wholly on the buyers estimates and they should be used cautiously in the light of the sellers own judgment. A number of biases may creep into the surveys. If shortages are expected, customers may tend to exaggerate their requirements. The customers may know what their total requirements are but they may misjudge or mislead or may be uncertain about the quantity they intend to purchase from a particular firm. This method is not very useful in the case of household customers for several reasons viz irregularity in customers buying intentions, their inability to foresee their choice when faced with multiple alternatives, and the possibility that the buyers plans may not be real but only wishful thinking. Again, household customers numerous making this method rather impracticable and costly. A basic limitation of this method is that it is passive and does not expose and measure the variables under managements control. ii. Delphi Method. A variant of the opinion poll and survey method is Delphi method. It consists of an attempt to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until the responses appear to converge along a single line or the issues causing disagreement are clearly defined. The participants are supplied the responses to previous questions from others in the group by a coordinator or leader of some sort. The leader provides each expert with the responses of the others including their reasons. Each expert is given the opportunity to react to the information or consideration advanced others but interchange is anonymous so as to avoid or reduce the halo effect, bandwagon effects and ego involvements

associated with publicity expressed opinions. Delphi method was originally developed at Rand Corporation of the U.S.A. in the late 1940s by Olaf Helmer. Dalkey and Gordon and has been successfully used in the area of technological forecasting. I.e. predicting technical changes. It has proved more popular in forecasting non-economic rather than economic variables. The Delphi method has some exclusive advantages. First it facilitates the maintenance of anonymity of the respondents identity throughout the course. This enables the respondent to be candid and forthright in his/her view. Secondly, Delphi renders it possible to pose the problem to the experts at one time and have their response. This is nearly as good as the panelists physically pooled together for the exercise. Thus, this technique saves time and other resources in approaching a large number of experts for their views. In one case for example, about 620 experts with different backgrounds such as policy-makers, technologists, scientists, economists, administrators and advisers were solicited. However, the Delphi method presumes the following two conditions. First the panelists must be rich in their expertise, possess wide knowledge and experience of the subject and have an aptitude and earnest disposition towards the participants. Secondly, the Delphi presupposes that its conductors are objective in their job, possess ample abilities to conceptualise the problems for discussion, genera tic considerable thinking, stimulate dialogue among panelists and make inferential analysis of the multitudinal views of the participants. Most often, the complexity of the subject under debate determines the degree of these qualities on the part of the conductors. iii. Collective Opinion Under this method also called sales force polling salesmen are required to estimate expected sales in their respective territories and sections. The rationale of this method is that salesmen, being the closest to the customers, are likely to have the most intimate feel of the market. I.e. customer reaction to the products of the firm and their sales trends. The estimates of individual salesmen are consolidated to find out the total estimated sales. They are then reviewed to eliminate the bias of optimism on the part of some salesmen and pessimism on the part of others. These revised estimates are further examined in the light of factors like proposed changes in selling prices, product designs and advertisement programmes, expected changes in competition, changes in secular forces like purchasing power, income distribution, employment, population, etc. the sales forecast would emerge after these factors have been taken into account. This method is known as the collective opinion method as it takes advantage of the collective wisdom of salesmen departmental heads like production manager, sales manager, marketing manager, managerial economist, etc. and the top executives. Advantages (1) The method is simple and does not involve the use of statistical techniques. (2) The forecasts are based on first-hand knowledge of salesmen and others directly connected with sales. (3) The method may prove quite useful in forecasting sales of new products. Of course, here salesmen will have to depend more on their judgment than in the case of existing products. Disadvantages (1) it is almost completely subjective as personal opinions can possibly influence the forecast. Salesmen may even understate the forecast of their sales quotas are to be based on it. (2) The usefulness of this method is restricted to short-term forecasting. i.e. for a period of about one year. These forecasts may not be useful for long-term production planning. (3) Salesmen may be unaware of the

broader economic changes likely to have an impact on the future demand. Their jobs usually require fulltime attention to the present so that they do not get time to think about the future. In many cases, they may lack the necessary breadth of vision for looking into the future, say five years ahead or more. iv Analysis of Time Series and Trend Projections A firm, which has been in existence for some time, will have accumulated considerable data on sales pertaining to different time periods. Such data when arranged chronologically yield time series. The time series relating to sales represent the past pattern of effective demand for a particular product. Such data can be presented either in a tabular form or graphically for further analysis. The most popular method of analysis of time series is to project the trend of the time series. A trend line can be fitted through a series either visually or by means of statistical techniques such as the method of least squares. The analyst chooses a plausible algebraic relation (linear, quadratic, logarithmic etc) between sales and the independent variable time. The trend line is then projected into the future by extrapolation. This method is popular because it is simple and inexpensive and partly because time series data often exhibit a persistent growth trend. The basic assumption of the trend method is that the past rate of change of the variable under study will continue in the future. This technique yields acceptable results so long as the time series shows a persistent tendency to move in the same direction. Whenever a turning point occurs, however, the trend projection breaks down. Nevertheless, a forecaster could normally expect to be right in most forecasts especially if the turning points are few and spaced at long intervals from each other. The real challenge of forecasting is in the prediction of turning points rather than in the projection of trends. It is when turning points occur that management will have to alter and revise its sales and production strategies most drastically. Many analyses have, therefore, given much thought to the turning points. There are primarily four sets of factors which are responsible for the characterization of time series by fluctuations and turning points in a time series: trend seasonal variations, cyclical fluctuations and irregular or random forces. The problem in forecasting is to separate and measure each of these four factors. The basic approach is to treat the original time series data (O or observed data) as composed of four parts a secular trend (T) a seasonal factor (S) a cyclical element and an irregular movement (I) It is generally assumed that these elements are bound together in a multiplicative relationship expressed by the equation O = TSCI The usual practice is to first compute the trend from the original data. The trend values are then eliminated from observed data (TSCI/T). The next step is to calculate the seasonal index, which is used to remove the seasonal effect (SCI/S). A cycle is then fitted to the remainder, which also contains the irregular effect. The foregoing approach to the decomposition of time series data is a useful analytical device for understanding that nature of business fluctuations. However, it is of limited value in actual business forecasting. The trend and the seasonal factor can be forecast, but the prediction of cycles is hazardous for the simple reason that there is no regularity in the cyclical behavior.

However, there are two assumptions underlying this approach: (1) The analysis of movements would be in the order of trend, seasonal variations and cyclical changes: and (2) The effects of each component are independent of each other. v. Use of Economic Indicators The use of this approach bases demand forecasting on certain economic indicators, e.g., Construction contracts sanctioned for the demand of building materials, say, cement; Personal income for the demand of consumer goods; Agricultural income for the demand of agricultural inputs, implements, fertilizers etc; d Automobile registration for the demand of accessories, petrol etc. These economic indicators are published by specialized organization like the C.S.O., which publishes national income estimates. For the use of economic indicators, the following steps have to be taken See whether a relationship exists between the demand for a product and certain economic indicators. 1. Establish the relationship through the method of least squares and derive the regression equation. Assuming the relationship to be linear, the equation will be of the form Y = a + ax. There can be curvilinear relationships as well. 2. Once regression equation is derived, the value of Y,i.e. demand can be estimated for any given value of x. 3. Past relationships may not recur. Hence the need for value judgment as well. New factors may also have to be taken into consideration. Limitations 1. Finding an appropriate economic indicator may be difficult. 2. For new products. It is inappropriate, as no past data exist. 3. This method of forecasting works best where the relationship of demand with a particular indicator is characterized by a time lag. For example construction contracts will result in a demand for building materials but with a certain amount of time lag. However, where the demand does not lag behind the particular economic index, the utility is limited because may have to be based on projected economic index itself which may not come true. vi. Controlled Experiments Under this method, an effort is made vary separately certain determinates of demand which can be manipulated, e.g. price advertising, etc., and conduct the experiments assuming that the other factors

remain constant. Thus, the effect of demand determinates like price, advertisement; packaging etc. on sales can be assessed by either varying them over different markets or by varying them over different time periods in the same markets. For example, different prices would be associated with different sales and on that basis the price quantity relationship is estimated in the form of regression equation and used for forecasting purposes. It must be noted that the market divisions here must be homogeneous with regard to income tastes, etc. Controlled experiments have often been conducted in the U.S.A. to gauge the effect of a change in some demand determinates like price, advertising, product design, etc. for example the Parker Pen Co. used this method to find out the effect of a price rise on the demand for Quink Ink. The method of controlled experiments is still relatively new and less tried. This is due to several reasons. First such experiments are expensive as well as time-consuming. Secondly they are risky too because they may lead to unfavorable reactions on dealers, consumers and competitors. Thirdly, there is a great difficulty in planning the study inasmuch as it is not always easy to determine what conditions should be taken as constant and what factors should be regarded as variable so as to segregate and measure their influence on demand. Fourthly, it is difficult to satisfy the condition of homogeneity of markets. Despite these limitations, controlled experiments have sufficient potentialities to become a major method for business research and analysis in future. vii. Judge mental Approach Management may have to use its own judgment when: (i) analysis of time series and trend projections is not feasible because of wide fluctuations in sales or because of anticipated changes in trends; and (ii) use of regression method is not possible because of lack of historical data or because of managements is inability to predict or even identify causal factors. Even when statistical methods are used. It might be desirable to supplement them by use of judgment for the following reasons (a) Even the most sophisticated statistical methods cannot incorporate all the potential factors affecting demand as, for example, a major technological breakthrough in product or process design. (b) For industrial products demand may be concentrated in a small number of buyers if the management anticipates loss or addition of a few such large buyers. It would be taken into account only through the judgmental approach. (c) Statistical forecasts are more reliable for larger levels of aggregations. Thus while it may be possible to forecast the total national demand more or less accurately. It may be more difficult to accurately forecast demand by sales territory, sizes and models. In such cases, there is no alternative but to depend upon judgment for developing more detailed forecasts. 3.6 Approach to Forecasting 1. Identify and clearly state the objectives of forecasting-short-term or long-term; market share or industry as a whole. 2. Select appropriate method of forecasting. 3. Identify the variables affecting the demand for the product and express them in appropriate forms. 4. Gather relevant data for approximations to relevant data to represent the variables.

5. Through the use of statistical techniques, determine the most probable relationship between the dependent and the independent variables. 6. Prepare the forecast and interpret the results. Interpretation is more important to the management. 7. For forecasting the companys share in the demand, two different assumptions may be made: (a) The ratio of the company sales to the total industry sales will continue as in the past. (b) On the basis of an analysis of likely competition and industry trends, the company may assume a market share different from that of the past. If would; however, be useful to prepare alternative forecasts. They are more meaningful than a single forecast. As forecasts are based on certain assumptions, forecasts must be revised when improved information is available. In long-term forecasts, the projections may be revised every year. These are sometimes known as rolling forecasts. 8. Forecast may be made either in terms of physical units or in terms of rupees of sales volume. The latter may be converted into physical units by dividing it by the expected selling price. 9. Forecasts may be made in terms of product groups and then broken for individual products on the basis of past percentages. Product group may be divided into individual products in terms of sizes, brands, labels, colours, etc. (See illustration below.) 10. Forecasts may be made on annual basis and then divided month-wise or week-wise on the basis of past records. 11. For determining the month-wise break-up of the forecast sales of a new product, either; (i) use may be made of other firms data, if available, or (ii) some survey may be necessary. Similar will be the situation when the forecast sales of a product line have to be divided product wise. LENGTH OF FORECASTS 1. Short-term forecasts, involving a period up to twelve months, are useful for determining sales quotas. Inventory control, production schedules, judge ting and planning cash flows. 2. Medium term forecasts, involving a period from on to two years, are useful for determining the rate of maintenance, schedule of operations and budgetary control over expenses. 3. Long-term demand forecasts, involving a period of three to ten years, are useful for determining capital expenditures, personnel requirements, financial requirements, raw material requirements and the size and scope of R & D programs.

However, the longer the forecast period, the more uncertain is the future. In the absence of any other evidence, the long-term trend will tend towards the horizontal. This is so for two reasons: (1) in the longterm market forces such as competition, market situation, etc., will provide a barrier to continuous growth. (2) No company will allow a product to decline indefinitely without taking some action, either by increased promotion activity, new product development or by discontinuing the brand. 3.7 Forecasting Demand For New Products Joel Dean has suggested a number of possible approaches to the problem of forecasting demand for new products: Project the demand for the new product as an outgrowth of an existing old product. Analyze the raw product as a substitute for some existing product or service. Estimate the rate of growth and the ultimate level of demand for the new product on the basis of the pattern of growth of established products. 4. Estimate the demand by making direct enquiries from the ultimate purchasers, either by the used of samples or on a full scale. 5. Offer the new product for sale in a sample market, e.g. by direct mall or through one multiple shop organization 6. Survey consumers reactions to a new product indirectly through the eyes of specialized dealers who are supposed to be informed about consumers need and alternative opportunities. These methods are not mutually exclusive and it would be desirable to try to combine several of them so that crosschecking is possible. To some extent, the methods of forecasting demand for an established product may also be applied or adapted for new products. Criteria Of A Good Forecasting Method 1. Accuracy. It is necessary to check the accuracy of past forecasts against present performance and of present forecasts against future of performance. Some comparisons of the model with what actually happens and of the assumptions with what is borne out in practice are more desirable. The accuracy of the forecast is measured by: (a) the degree of deviations between forecasts and actual, and (b) the extent of success in forecasting directional changes. 2. Simplicity and Ease of Comprehension. Management must be able to understand and have confidence in the techniques used. Understanding is also needed for a proper interpretation of the results. Elaborate mathematical and econometric procedures may be judged less desirable if management does not really understand what the forecaster is doing and falls to understand the procedure. 3. Economy. Costs must be weighed against the importance of the forecast to the operations of the business. A question may arise; how much money and managerial effort should be allocated to obtain a high level of forecasting accuracy? The criterion here is the economic

consideration of balancing the benefits from increased accuracy against the extra cost of providing the improved forecasting. 4. Availability. The techniques employed should be able to produce meaningful results quickly; techniques which take a long time to work out may produce useful information too late for effective management decisions. 5. Maintenance of Timeliness. The forecast should be capable of being maintained on an up-todate basis. This has three aspects. (a) The relationships underlying the procedure should be stable so that they will carry into the future for a significant amount of time (b) Current data required to use these underlying relationships should be available on timely basis. (c) The forecasting procedure should permit changes to be made in the relationships as they occur. 3.8 Recent Trends In Demand Forecasting 1. More firms are giving importance of demand forecasting than a decade ago. 2. Since forecasting requires closer co-operation and consultation with many specialists, a team spirit has developed. 3. Better kind of data and improved forecasting techniques have been developed. 4. There is a greater emphasis on sophisticated techniques such as using computers. 5. New products forecasting is still in infancy. 6. Forecasts are usually broken down in monthly forecasts. 7. However, in spite of the application of newer and modern techniques, demand forecasts are still not too accurate. 8. The usefulness of personal feel or subjective touch has been accepted. 9. Top down approach is more popular than bottom up approach. Top down approach starts by analyzing national economy, then the industry and finally the individual firm.

Bottom up approach is preferred by small firms because (i) they are closer to the customers. (ii) They cannot afford more sophisticated techniques, and (iii) very often; the small firms manufacture a single product. 3.9 Economies of Scale Economies of scale refer to the advantage enjoyed by affirm due to expansion of its size i.e. the scale of production. During short period, since some factors of production are fixed, a firm cannot alter the scale of production. Here economies of scale are associated with long run production function i.e. returns to scale. In the long run, since all factors are variable, it is possible a form to expand or contract its size as per the requirement. With the expansion of the scale of production a firm derives certain benefits i.e. economics of scale due to which the increasing returns to scale are experienced. Beyond certain limit, however, the expansion of size causes disadvantages or diseconomies, which lead to diminishing returns to scale. Thus Initially expansion of the firm renders advantages and the firms enjoys increasing returns. Beyond desirable limit, the expansion leads to occurrence of diseconomies of scale and the firm suffers the diminishing returns to scale. In between the balances between economies and diseconomies brings about constant returns to scale. The economies of scale are classified into two broad categories viz., (a) Internal economies: this refers to those advantages which are enjoyed by an individual firm which expands its scale. (b) External economies: These are associated with the entire industry. Such benefits are shared by all the firms in the expanding industry. (a)Internal Economies The term refers to those advantages which are enjoyed by an individual firm in an industry. Such benefits are not shared by all but accrue only to that firm which grows in size. Take for example hotel industry. Different individual restaurants are the firms that constitute that industry. Now if an individual restaurant grows in size i.e. expands the sale it alone will enjoy certain advantages. These benefits can be termed as internal economies. Internal economies enjoyed by an individual firm can be discussed under different categories as follows: (1) Technical Economies: (a) Technical economies are those advantages enjoyed by the firm which emerge due to greater efficiency of capital equipments. A small firm is unable to install specialized and advanced machinery. A larger firm is able to employ such machinery and equipments. The firm enjoys a reduction in cost per unit or increase in output as a result of such specialized capital equipments. Thus, the technical economies occur due to application of superior technique. (b) Another type of technical economies enjoyed by the large firm are the advantages of division of labour. Experts can be appointed by a large firm to perform specialized functions. These are the economies of specialization. (c) A large firm can make a proper use of wastes for producing by-products. Such an advantage cannot be enjoyed by a small firm. These are known as the economies of by-products. (d) Similarly, a large firm may be able to avail of the economies of linked processes. When the different processes are linked together under one control the dependence and inconvenience is avoided. (e) Dimensional economies are also enjoyed by the use of large sized capital equipment. Thus, large firm may be able to enjoy certain advantages which are absent in the case of a small firm. These economies are essentially associated with the large firm. (2) Managerial Economies (Administrative Economies):

These economies result from the managerial division of labour. Experts and qualified persons can be appointed only by a large firm. In a small firm, the owner has to look after different processes. These economies or advantage are called the advantage of functional specialization. (3) Marketing Economies: These economies emerge from the bulk buying. The large firm buys the raw materials in big quantities because of which it is assured of regular supply at a cheap rate. Thus, a large firm can reduce the expenses in the purchase of raw materials. Similarly, a large firm can enjoy many advantages in the marketing of their product through advertising. A large firm also enjoys concession in transport charges. Marketing economies may also arise from specialization. A large firm can afford to have its own marketing department through which the services of experts can be obtained. (4) Financial Economies: A large and reputed firm enjoys certain gain in the matter of raising funds. A small firm finds it difficult to sell shares and debentures. A large firm can do as very smoothly as the public in general is willing to subscribe to their capital needs. An expanding firm is also in comfortable position in respect of obtaining credit from banks and other financial institutions. It can raise the loans easily and at cheaper rates. Thus, various financial economies accrue to an expanding firm. (5) Risk-Bearing Economies (survival Economies): Lastly, certain risk-bearing economies are enjoyed by a large firm. A small firm finds it difficult to face the general and particular risks arising out of economic depression, fall in demand etc. on the other hand; a large firm with sizable resources can effectively face such risks and can survive. Business fluctuations and the risks associated with them bring the every the very existence of such small firm into danger, whereas large firms are in a position to bear such risks and overcome the same. Thus, risk-bearing or survival economies are enjoyed by an expanding firm. Such firm spreads the risk by diversification of products, diversification of markets and minimizes the risks. Thus, it can be concluded at a large firm enjoys various internal economies because of which a firm is in a position to enjoy increasing returns. It means as the size of the firm expands, it gets more than proportionate returns. Increasing returns imply diminishing costs. However, this phase of increasing returns or diminishing costs can not occur indefinitely. A limit to the expansion of the firm is reached at a point where average returns are maximum and average costs are minimum. Beyond this point, any further expansion will lead to diseconomies of scale and the firm will face the diminishing returns. (b) External Economies There are certain advantages which are enjoyed by all the firms in an industry. They are termed as external economies. As a result of growth of a particular industry many benefits are shared by all the constituent firms.If we consider again the hotel industry. It is possible to visualize such external economies e.g. a particular place becomes a favorite tourist attraction. Restaurants and hotels in that area can naturally get number of advantages. The external economies emerge particularly from the localization of industry. Various such economies can be discussed as follows: (1) Economies of Concentration: Certain benefits occur as a result of concentration of localization of industry. When an industry gets concentrated in a particular area, it receives the following advantages: (a) Provision of efficient transport system. (b) Availability of skilled and trained labour.

(c) Better and cheap credit facilities through the development of banks and other financial institutions. (d) Supply of adequate sources of power. These advantages can not be secured by the firms if they are not localized. Such economies help in reducing the cost of production i.e. raising the average and marginal returns. (2) Economies of Disintegration: With the growth of the industry, various other firms come up in the area and these firms supply raw materials to the main industry and also make use of the wastes of the industry for producing the byproducts. Development of such firms helps in reducing the cost of the main industry. These gains thus accrue to all the firms in the industry. (3) Economies of information: The industry may publish certain trade journals which are useful to the firms. Technical information may also be made available. Surveys can be undertaken which help the firm in obtaining the statistical and market information. Similarly, the industry can establish its own research center which will benefit the different firms. The expenditure on advertisement and such other sales promotion drive may be borne by the industry as a whole and to that extent the expenditure of an individual firm can be reduced. Thus, when the industry grows, it gains certain benefits or advantage known as external economies which help the firm in increasing the production or reducing the cost. It means the increasing returns can be attributed to the external economies along with the internal economies. Thus increasing returns occur due to internal as well as external economies. 3.10 Diseconomies of Scale (1) Internal diseconomies: As the firm expands in size, it experiences certain economies or advantages as mentioned above. But as already stated, these advantages can be enjoyed only up to a certain limit upto which the average returns go on increasing or average costs go on diminishing. Any expansion of the firm beyond this optimum limit will lead to diseconomies of scale. The various economies such as technical, managerial, etc. which bring about increasing returns initially, develop into internal diseconomies. Thus, the advantages turn into disadvantages and result in diminishing returns or increasing costs. Some economists are of the opinion that since entrepreneur is always a fixed factor, diminishing return to scale is nothing but a special case of the law of variable proportions. In the long run, all other inputs except the entrepreneur are variable. It means what really happens is that the proportion between fixed (entrepreneur) and variable (other inputs) factors go on varying and the diminishing returns to scale occur. Those who do not admit diminishing returns to scale to be special case of the law of variable proportions attribute the occurrence of diminishing returns to the various managerial and technical diseconomies which result from expansion of the firm beyond the optimum size Managerial Diseconomies: Beyond certain limit the growth of the firm creates many managerial problems and difficulties. The problems faced are mainly of co-ordination and supervision. When the firm expands, it becomes unwieldy and uncontrollable; the decision-makers are not directly concerned with productive. Hence, they have to depend upon second hand information. There is a separation between those who take decisions and those who execute the same. This result in delay and red-tapism reducing the efficiency which causes the diminishing returns.

Moreover, with the growth of the firm many important and responsible functions have to be delegated to lower level officials who are inexperienced and lack the necessary knowledge to perform such decisionmaking functions. In addition to this, when decision-making is done by different groups there can be disharmony. The large size of the firm reduces the initiative. The personal contact between management and workers is lost in a large firm. This results in growing labour problems. Thus, with the growth of the firm beyond the optimum limit, diminishing returns creep in due to problems and complexities of the management. Technical Diseconomies: As the size of the firm expands beyond the optimum limit, the economies arising from specialization and indivisibilities change in diseconomies Division of labour and specialization beyond certain limits prove to be in efficient. Similarly the indivisible equipments have a maximum capacity up to which such equipment work more and more sufficiently but once these limit is crossed , these equipments become over- burdened & hence inefficient. External Diseconomies: the external economics which benefit the firms initially change into diseconomies and result in raising the cost of production the diseconomies are of different types Transport bottlenecks causing delay in obtaining raw materials and marketing finished products High rent which is inevitable result of localization Wage rates increase as a result of increasing demand from number of firms The firms have to use less and less efficient units of input 3.11 Cost-Control : Cost accounting provides the element wise cost for each product, process, department, Job, contract etc. thus the profitable and unprofitable areas are identified in the organization. This information serves as a good guide to the management for either shutting down the unprofitable activities or enhancing their profitability through changes in the technology, methods, machines, reducing scrap and such other measures. The scarce resources are utilized efficiently with the minimum cost and wastages. For fixing selling price: It provides information for fixing selling price of the product. The cost, volume, profit analysis serves as a basis for determining the selling price of the product. For preparing quotations: Historical cost data serves as a good guide for estimating the cost of future production. Such data after adjustment to the expected changes help in preparing quotations and submitting tenders. Data for planning and control: Cost accounting provides the valuable data for planning, budgeting and thus controlling the cost. The pre-determined budgeted cost serves as the standard for judging whether the actual costs are what they are supposed to be. For specific managerial decisions: The cost data provide invaluable information for taking following managerial decisions: (1) Make or Buy. (2) To own or hire fixed asset. (3) To replace the existing plant before its useful life. (4) To continue or shut down the whole or any part of the business. (5) Determining the expansion or contraction policy. To suggest changes in design : If the cost of production in higher as compared to the competing product, cost accounting helps to suggest the changes in the design of the products (Such as eliminating some of the parts, which may not affect the functioning of the product, use of alternative material etc).

3.12 Methods of costing : The method of cost accounting adopted differs according to the nature of the business and types of products manufactured. Generally the following methods of costing are more commonly used : (a) Job costing or order costing. (b) Process costing. (c) Operating cost method. (d) Departmental costing. (e) Unit cost. (f) Multiple cost. (g) Batch costing. Job Costing or Order Costing. Job costing is concerned with finding the cost of each individual job or contract. This method is adopted in job order industries, ship building, machine manufacturing, fabrication, building contracts etc. in this method each job has to be planned and its cost determined separately on the basis of actual costs incurred or on predetermined costs. Daily record of direct material, direct labour and estimated overhead cost for each order is recorded in production order or a cost sheet. The total cost is then obtained from the cost sheet. It is applicable to industries where costs are usually charged to individual jobs. Process Costing. This method is employed when a standard product is made which involves a number of distinct processes performed in a definite sequence. This method is used in industries such as oil refining, chemical, paper making, paint and cement manufacturing etc. by-products should be taken into account while calculating the cost of each process of manufacture in this method of costing. This method indicates the cost of a product at different stages as it passes through various operations or process or departments. For instance in the manufacture of Portland cement, the operations of mixing, grinding the raw material, burning, cooling and grinding the clinker are readily separable and cost of each of these stages can be fairly accurately calculated. The total time spent mad material used on each process, as well as services such as power, light & heating, are all charged. For this purpose a process cost sheet may be employed. The process cost sheet is a summary of all operations for the month. The current operating charges are entered on the sheet showing : (a) The transfer cost from the previous operation. (b) The cost incurred by each operation showing material, labour and overhead in separate columns. Departmental costing. In big industries like steel industry or automobile industry each department is producing independently one or more components. Departmental costing method is used in such industries and the actual expenditures of each department on various products is entered on a separate cost sheet and the costing for each department is separately undertaken. Operating Costs. This method is used in firms providing utility services. For example, in transport services, water works, electricity boards, railways etc. cost is determined on the basis of operating expenses and charges are made as tonne-km or passage per km, per 1000 liters or kilowatt-hour etc. Unit cost. This method is adopted by the firms, which supply a uniform product rather than variety of products such as mines, quarries etc. Multiple Cost. This method is used in firms which manufacture variety of standardized products, having no relation to one another in cost, quality and the type of process etc. such as typewriter, gramophones and cycle etc. use this method.

Batch Costing. Batch costing in a form of job costing. Instead of costing each component separately, each batch of components is taken together and treated as a job. Thus, for example, if two units of a component, say a reflector, are to be manufactured, then costing would be for 100 units together. The unit cost would be ascertained by dividing the cost by 100 (No. of units produced per batch). 3.13 Elements Of Cost The total cost of manufactured product consists of : 1. Cost of material. 2. Cost of labour. 3. Expenses. It is the cost of material required for the manufacturing of the product. It consists of : (a) Cost of direct materials. (b) Cost of indirect materials. Cost of direct materials: It is the cost of material which are processed through various stages to form the main product or a component part of the product. The cost of direct material includes the purchase price as well as incidental charges (expenses) such as freight, insurance, loading and unloading expenses, octroi, import dutiesetc. Example: m.s. bar used to manufacture spindles. High speed steel used to manufacture cutter, C. I. Used to manufacture pulleys etc. Cost of indirect materials: It is the cost of material which are essentially needed in various shops for helping the direct materials to be converted into finished product. The example of indirect material are grease, lubricating oil used to equipments, coolants used to cool the job and the cool, cotton waste and kerosene used for cleaning equipments, screws, nails etc. Cost of labour : (a) Cost of direct labour. (b) Cost of indirect labour. Cost of direct labour : Direct labour cost consists of wages paid to the workers directly engaged in the manufacturing of the product. It also includes the wages paid to the workers engaged in handling the product inside the department. Example: Wages paid to the machinist, turner, and black smith welder, moulder etc. Cost of indirect labour: The wages paid to the labour that helps the productive labour in performing their duties is known as indirect labour cost. It cannot be charged directly to a particular job, but are charged on the number of products produced in the plant during a particular period. Examples . Wages paid to the supervisor, inspector, time keeper, sweeper, watchman, helper etc. Expenses : A part from the direct material cost and direct labour cost in each factory there are several other expenditures, which are known as expenses. The cost of indirect materials and indirect labour is also included in the expenses. Expenses can be classified as : 1. Direct expenses. 2. Indirect expenses (overhead costs.)

Direct Expenses: Direct expenses are those which can be charged directly to a particular job and are done for that specific job only. Example: 1. Cost of preparing designs, drawings for the manufacture of a particular product. 2. Cost of experimental work done specifically or a particular product. 3. Cost of procuring or manufacturing special types of jigs and fixtures for the manufacture of a particular product. 4. Cost of special type of patterns, moulding flasks, dies etc. 5. Cost of hiring special tools or equipments for particular product. 6. Cost of consultancy charges for design and manufacture of a specific product. Indirect expenses: Indirect expenses are those which cannot be charged directly to a particular product manufactured. All expenses other than the direct material cost, direct labour cost and direct expenses are indirect expenses. These expenses are also called as overhead costs or on costs. Indirect expenses or overheads are classified into four groups: 1. Factory expenses. 2. Administrative expenses. 3. Selling expenses. 4. Distribution expenses. Factory Expenses: It includes all indirect expenses which are incurred in connection with manufacture of the products, right from the receipt of the work order till it is completed and ready for dispatch. Example : 1. Expenses incurred on indirect material like lubricating oils, grease, coolants, cotton waste, polishing material etc. 2. Expenses incurred on indirect labour, i.e. salaries of supervisors, inspectors, sweepers, watchman, time-keeper, helper etc. 3. Expenses incurred on labour welfare activities. 4. Cost of fuel and power, internal transport etc. 5. Expenses incurred on repairs and maintenance of plant and machinery etc. 6. Rent of factory buildings, expenses incurred on depreciation of plant and machinery etc. Administrative Expenses: Administrative expenses include the expenses which are incurred for general administration and management for efficient and proper functioning of the enterprise. Examples: 1. Salaries of general manager, or managing director, office superintendents, clerks, typists, labour welafare officer, personnel officer, medical officer, canteen employees, security staff etc. 2. Expenses incurred on depreciation of office building and its equipment. 3. Expenses incurred on legal charges, audit fees. 4. Expenses incurred on telegrams, telephone calls, lighting expenses, postages, stationery items etc.

Selling Expenses: Selling expenses pertain to the marketing of the product. They include all such expenses which are incurred for creating and enhancing the demand for the products. Example: 1. Expenses incurred on salaries of sales manager, clerks and attendants in the sales department. 2. Salaries, commissions and traveling expenses of sales representatives or agents. 3. Cost of advertisement and publicity. 4. Expenses incurred for the preparation of tenders and estimates. Distribution Expenses: These overheads include all the expenses made on holding the finished goods stock and dispatching them to the customers. Examples: 1. Expenses incurred on packing material required to pack the products either for holding or dispatching. 2. Salaries of workers employed for packing the products. 3. Expenses incurred on forwarding the packed product to the customers. 4. Salaries of stores officer, storekeepers and their assistants etc.

3.14 BREAK EVEN ANALYSIS

The fundamental objective of any business is to earn more and more profit. Profit mainly depends on three factors namely cost of production, amount of output and revenue. The value of these components depends on the level of various activities performed in the organization. There is need to analyze fixed costs, variable costs and costs and revenues at different levels of output to determine optimum profit. Cost of production is composed of two components viz. fixed costs and Variable costs. Fixed costs are assumed to constant at all levels of output e.g. expenditure on permanent labour and overheads, But with the increase in output fixed cost per unit of output decreases ,variable costs tend to vary with output e.g. material costs etc. Cost of production can be minimized by (i) increase in output (ii) using alternative cheaper material without affecting the quality (iii) Maintaining optimum inventory levels (iv) standardization and mass production (v) Developing human resources by training and incentive schemes and .One of the techniques to study the total cost, total revenue and output relationship is break even analysis.. It is also termed as cost volume pro/it analysis. The break-even analysis is the study of Cost-volume-profit (CVP) relationship. Break-even analysis can be carried out in two ways:(a) Algebraic method(b} Graphical method usually, a break-even Analysis is presented graphically, as this method of visual presentation well-suited to the need of managers to appraise the situation at a glance. ASSUMPTIONS IN BREAK-EVEN ANALYSIS: The following assumptions arc made while plotting a break-even chart: 1The total cost of production can be divided into two categories- (a) Fixed cost, (b) Variable cost 2. Fixed cost remains constant i.e. it is independent of the quantity produced and include executive salaries, rent of building, depreciation of plant and equipment etc 3 The variable cost varies directly and proportionately with the volume of production If V =variable cost per unit and Q is the quantity produced, variable cost = V X Q. 4 The selling price does not change with change in the volume of sales. If P is the selling price total sales income = P X Q 5 The firm deals with only one product, or the sales mix remains unchanged 6 There is a perfect synchronization between production and sales. This assumes that everything produced is sold and there is no change in the inventory of finished goods 7 The productivity per worker and efficiency of plant. etc., remains mostly unchanged.

PLOTTING BREAK-EVEN CHART 1 The cost and the sales income (revenue) in rupees are plotted along the vertical axis 2 the quantity (volume of production) is plotted along the horizontal axis 3 the fixed cost are represented by a straight line parallel to the horizontal axis 4 variable costs are superimposed upon the horizontal line representing the fixed cost. This top line represents the total cost line 5 the sales income line passes through the origin

6 the point of intersection of the sales income line and the total cost line represents the break even point 7 the shaded area between the total cost line and the sales income line on the left hand side of B.E.P .indicates loss whereas the shaded area on the right hand side of B.E.P. shows profit.

Margin of safety it is a distance between the break even point and the out put being produced margin of safety is generally expressed as 1 Ratio of budgeted sales to sales at BEP 2 Ratio of actual sales to sales at BEP 3 Percentage of budget to BEP 4 Percentage of budget to actual sales at BEP In case of unsatisfactory Margin of safety the following measures can be taken Increase in sales price Reduction in fixed cost Reduction in variable costs Increase in output

Margin of safety

= =

sales sales at BEP x100 Sales

profit x sales Sales variable cost Angle of Incidence: The angle between the sales income line and the total cost line is called as angle of Angle of Incidence .A large angle of Incidence indicates large profit and extremely favorable business position .A narrow angle shows that even though overheads are recovered, the profit accrued shows a low rate of return. This indicates a large part of variable costs in total costs

Profit Volume (P/V Ratio): Profit volume ratio measures the profitability in relation to sales. The contribution at given output is defined as difference between total sales and total variable costs. The P/V ratio is the ratio of contribution to sales. It represents the relationship between contribution and turn-over. So, it is a measure to compare profitability of different products. Higher the P/V ratio the high yielding is the product P/V ratio = Contribution ----------------Sales = = Increase in profit --------------------Increase In sales

Total sales Total variable costs --------------------------------------Total sales Price unit- Cost per unit ---------------------Price per unit

= Uses of P/V ratio

The P/V ratio can be used to study a variety of problems viz 1. Determination of B.E.P. 2. To know profit for given sales volume. 3. To now sales volume for achieving some desired profit. P/V ratio can be increased by 1. Increasing the selling price. 2. Changing the mix of sales. 3. Reduction In variable costs. 3.15 COST Cost is the amount of resources sacrificed or given up to achieve a specific objective which may be the acquisition of goods or services. Costs are always expressed in money terms. Types of cost include Direct material cost direct material refers to the cost of materials which become a major part of finished product. e.g. raw cotton in textiles, steel for automobile parts Direct labour. Direct labour is defined as the labour associated with workers who are engaged in the production process. It is the labour costs for specific work performed on products that is traceable to end products.e.g. Labour of machine operators, assembly operators. Factory overheads these are also called as manufacturing costs. These include the cost of indirect materials, indirect labour and indirect expenses. e.g. foreman, shop clerks, material handlers, cutting oils

Fixed cost The cost which dont change for a given period in spite of change in volume of production. This cost is independent of volume of production. E.g. fixed costs are rent, taxes, insurance etc. Variable costs These vary directly and proportionality with output. There is constant ratio between the change in the cost and change in level of output. Direct material cost and direct labour cost are generally variable cost. Opportunity cost opportunity cost is defined as the benefits lost by rejecting the best competing alternative to the one chosen. The benefit lost is usually the net earnings or profits that might have been earned from rejecting alternative Sunk cost. It as expenditure for equipment or productive resources which has no economic relevance to the present decision making process. It is the cost that has either already been incurred or is yet be incurred but will be same no matter which alternative course of action is selected. It is also known as unavoidable cost. Controllable and non controllable cost a controllable cost is the cost over which a manager has direct and complete decision authority. A cost which cannot be influenced by the action of the specified member of na organisationis referred as uncontrollable cost. 3.16 Numerical 1 A manufacturing firm incurs a fixed cost of Rs 18000. The variable cost accounts Rs 8 per unit and selling price is Rs 13. Find the number of pieces to be produced to brake even Solution Fixed cost = 18000 Variable cost =8 Selling price = 13 BEP = Fixed cost / contribution = 18000 / ( 13-8) = 3600 2 Total fixed cost for the year is Rs 1200000. This includes depreciation of Rs 200000, write off of goodwill 100000. Selling price of good is Rs 80 per unit and variable cost is Rs 60 find BEP and p/v ratio. BEP= Fixed cost / contribution = (1200000-200000-100000) / (80-60) = 45000 Units P/Vratio = (s-v)/s = (80-60) / 80 = 0.25 25 % 3 For the particular product following information is given. Selling price Rs 10 Variable cost per unit Rs 6 Fixed cost 100000 Due to inflation variable cost increases by 10% while fixed cost increases by 5%. if the break even quantity is remain constant by what percentage should the sales price to be raised

Solution BEP= Fixed cost / contribution = 100000/( 10-6) = 25000 New variable cost = Rs 6.6 New fixed cost = Rs 105000 At BEP sales = total cost Total cost = 25000* 6.6 + 105000 = 2, 70000 so Sales = 2, 70000 Revised sales price = 270000/ 25000 = 10.80 Increase in sales price to maintain same BEP = 10.8/10 - 10 =8 % Question Bank 1 What is demand forecasting? Explain in brief the various methods of forecasting demand 2 Explain Delphi method .what the advantages ad disadvantages of this method 3 Write a short note on survey method of demand forecasting 4 Write short note statistical methods of demand forecasting 5 Write short note sample survey of consumers intention demand forecasting 6 What is demand forecasting? How do you estimate demand for a new product 7 Explain the methods of costing. 8 Difference between Cost estimating and costing 9 explain economics and diseconomics of scale 10 Write a short note on Break even analysis 11 What is BEP? What is its significance? 12 Explain fixed cost, Variable costs, Sunk cost, Opportunity cost , actual cost, incremental cost. 13 From the following calculate P/V, BEP, and Margin of safety Sales 100000 Fixed cost 20000 Variable cost 60000 14 A company estimates that next year it will earn a profit of Rs 50000. The budgeted fixed cost and sales are 250000 and 993000 resp. Find out the break even point for the company

Chapter no 4

Market strictures

4.1 Introduction The term Market is so familiar and commonly used one that it is difficult to offer a precise definition of the same. It conveys a variety of meanings when viewed from different angles. It is rightly pointed out that the infinite variety of meanings involving anywhere from two people to thousands, one dollar to a millions, is what makes a market hard to define. The original of the term can be tracked back to a Latin word Marcatus or marcart which means to trade. Thus the term basically implies trading i.e. buying and selling. As mentioned above, the term market means different things to different people. It means shopping to a housewife, while for a businessman it suggest advertising and sales promotion for an industrialist it may mean discovery of foreign outlets for his products, and for a farmer it stands for the sale of his products. Whatever the interpretation, it is certain that the term is related to buying and selling activities. In ordinary languages, the term market refers to a place i.e. a geographical location where the buying and selling of the commodities takes place e.g. Bombay market, Calcutta market etc. in economic sense there is relevance to a place but to a commodity. From this angle one speaks of textile market, food grains market etc. truly what the economic meaning of the term implies is the contact between the buyers and the sellers. Such a contact may be direct or an indirect one. It means a market can exist even without the buyers and sellers meeting each other. The best way to know the meaning of the term in economic sense is to refer to the following features. Existence of buyers and sellers. Contact between buyers and sellers. Identical commodity. Existence of price. Thus from the economic point a market implies a contact, direct or indirect, between the buyers and sellers of an identical product for which there exists a price. Classification of market Markets can be viewed from different criteria such as extent or coverage, time element, and the structure i.e. extent of competition etc. this can be explained by the following points. (A) Classification according to size: One simple way of classifying the markets is to take into account their size or the area covered by a product. From this angle the markets can be classified as Local, National, and International etc. A local market is said to exist when the buyers and the sellers are confined to a small area like a village. A town etc. usually the perishable commodities such as vegetables. Flowers, fish, milk etc. enjoy only local market. Non-perishable consumption goods like wheat, sugar, cotton etc. have a national market. Finally certain commodities are such that their buyers and sellers are spread over the entire world. Hence they enjoy an international or a global market. Electronic goods, vehicles, chemicals, medicines etc. can be included in this category. This classification is neither scientific nor rigid. With the development of the means of communications and transport, even the perishable commodities can conquer international market. (B) Classification according to time: it was Alfred Marshall who introduced this important approach. The time element the determination of price, particularly from the supply side. The adjustability of supply depends on the availability of time. The longer the period, the greater is the elasticity of supply. Hence in the very short period the supply is rigid or inelastic and cannot exert any influence on the price which is dominated by the demand. In the short period some marginal adjustments on the supply side are possible through the changes in the employment of the variable inputs. Long period refers to that period during which full adjustments in supply are possible. As a result, supply, along with demand, begins to play an active role in the price determination. In the very long period there may occur structural changes on demand as well as supply sides. The factors affecting demand such as size and the composition of population, habits, fashions etc. undergo fundamental changes. Similarly, there may be basic changes in

the techniques of production, quality and the quantity of inputs etc. hence during the very period everything becomes flexible and both the sides can have full impact on the price. (C) Structural Classification: In the context of the process of price determination and the equilibrium of the firm this classification is of great significance. The extent of competition is the basic of his classification. As shown in the chart above, the markets, on the basic degree of competition, can be broadly divided into two categories viz. the perfect market and the imperfect markets, with latter having different varieties. Perfect competition is the most ideal, but the least practicable form of market. The imperfect markets such as monopoly, oligopoly, monopolistic competition etc. indicate deviations from the perfectly competitive market in different ways such as, the number of firms, nature of product, etc. In comparison with perfect competition, the imperfect markets, particularly oligopoly, monopolistic competition etc. have a greater empirical validity. It is useful to get acquainted with the characteristic features of different markets forms. 4.2 Perfect Competition: (1) Large Number Of buyer and sellers: This feature implies that an individual producer or an individual consumer cannot have any influence on the price. This is because the contribution of an individual either as a consumer or a producer is negligible, just like a drop of water in the ocean. As a result of this an individual becomes only a price taker but not a price maker. (2) Homogenous product: under perfectly competitive market the products of all the firms are identical or homogenous which means there is no difference whatsoever among them. This makes the demand for the product of an individual firm perfectly elastic and hence the demand curve is a horizontal straight line this feature further loosens the control of an individual firm on the price of the product. Firm cannot charge a higher price and a firm does not charge a lower price than one that rules the market. (3) Freedom of Entry and Exit: Perfect competition allows the existing firms to leave the industry if they so desire. Generally the firms which suffer the losses even in the long period are anxious to leave the industry and only the efficient ones can survive. Similarly there are no obstacles to the entry of new firms as a result of which the abnormal profits are eliminated from the competitive market. This feature of perfect competition. Maximizes the welfare of the consumers. (4) Perfect Knowledge: Another important condition of perfect competition is that both, the consumers as well as the firms have perfect knowledge about the market conditions, particularly about the prevailing price of the product. As a result a uniform price rules the perfectly competitive market. No consumer pays a higher price and no firm charges a lower one than that prevailing in the market. (5) Absence of Transport Cost: This feature implies that the price of the competitive product differs in different places only by the amount of transport cost. (6) Perfect Mobility: The factors of production are assumed to be fully mobile under the conditions of perfect competition. This ensures a uniform factor reward. 4.2 Monopoly:This form of market is diagonally opposite to perfect competition. In fact it represents another theoretical extreme which like perfect competition, is rarely experienced in its pure form. The chief features can be mentioned as follows: (1) A single Firm: In contrast to infinite number of firms under perfect competition. A monopoly market is characterized by the existence of a single producer who rules the entire market for the said product. Naturally. The demand for the product of a monopolist is perfectly inelastic. This enables the monopolist to charge an exorbitant price and enjoy super normal profits permanently. (2) Absence of Close Substitute: Another important feature of monopoly market is that there is no close substitute available for the product of the monopolist. No doubt there may exist remote substitute. Such an absence of close substitutes helps the monopolist to control prices. Even if he charges a high price

there is no fear of losing the customer because there is no substitute available. In other words, the cross elasticity of demand between the monopoly product and any other product is zero or very small. (3) Barriers to Entry of New Firms: Unlike under perfect competition, monopoly is characterized by restrictions which prevent other firms from entering the monopoly market. These barriers are artificial, economic, legal or institutional. The barriers are strong enough to block completely all the potential competitors. The above features reveal the fact that monopolist has a complete control over the price and the output of a commodity. That he produces and sells. His price output policy is not affected by that of the other firms. In the words of Stonier and Hague Pure monopoly occurs when a producer is so strong that he is able to take the whole of the consumers incomes whatever the level of his output. 4.3 Oligopoly: The term oligopoly is derived from two Greek words, Oligos which means a few, and Pollen meaning, to sell. This market form which consists of a few firms selling either identical or a differentiated product is known by many names such as, Limited competition, incomplete monopoly, multiple monopoly, etc. In real world a large number of products, such as automobiles, cement, steel, electronics goods, etc. is supplied by the oligopolistic firms. Oligopoly is that situation in which, a firm bases its market policy, in a part, on the expected behavior of a few close rivals. Stigler, (1) Few Sellers: In contrast to perfect competition with infinite number of firms and the monopoly with a single firm, oligopoly is characterized by the existences of a limited number of firms. Naturally every individual firm in this type of market makes a sizeable contribution to the total supply. As a result the price-output policy of a firm influences and is influenced by that of other rivals. It is rightly described as A competition among a few. (2) Interdependence: A distinct feature of oligopoly is the existence of extreme interdependence among the firms. There is hardly any interdependence under perfect or monopolistic competition as a number of firms is very large. With the close substitutes offered by the small number of rivals, the cross elasticity of demand of different products is very high. Obviously every move of the rival firms has to be closely watched by every other firm. The decisions to raise or lower the price or the output receives a sharp reaction from other firms, the interdependence is so strong that every firm has to properly predict and analyze the possible reaction of the rivals before taking any important decision. (3) Indeterminate Demand Curve: Under oligopoly, it is almost impossible to precisely derive the demand curve i.e. the AR curve of a firm. The extreme interdependence among the firms creates uncertainty about the possible response of the rivals and of the consumers to a change in the price output policy. Nobody can derive a precise demand schedule and a demand curve because of the unpredictable reaction of the market. Suppose an individual firm decides to lower the price to command a larger market share. In this case whether the firm will succeed or not depends upon the reaction of the rivals. In case they also follow the price reduction policy, the firm in question will hardly be in a position to expand its market share, which means no effect on the demand. Thus the entire picture is uncertain to all the firms. An oligopolist is thus caught in a strange situation of an indeterminate demand curve for through he knows that his decision is bound to cause a reaction, he does not know what and how strong that reaction will be. (4) Price Rigidity: This is a unique feature of oligopoly. This implies that the price is fixed rigid or stuck-up at certain level. Thus there is no departure from the existing price. In other words, the price neither rises nor falls from a given level but remains rigid at that point. This is the result of quick reaction of the rivals. An individual firm will not raise the price because of fear of losing the customers to rivals neither can it lower the price as this decision will be immediately followed by the other firms and the

firms in question cannot reap the benefits of wider market. Thus no oligopolistic firm will either lower or raise the price. Hence the price-rigidity. This leads to a kinky demand curve. (5) Conflicting Behavior: An element of uncertainty is witnessed even in respect of attitude of the firms. Sometimes they adopt the attitude of co-operation so as to prevent the fall in sales and profits. Thus there can be collusion among the firms. In contrast, on certain occasions they pick up the fight among them especially in respect of distribution of profits or sharing of markets. Thus there can be a situation of war or peace among the oligopolistic firms depending upon their attitude or the behavior. (6) A Monopoly Element: As a result of the existence of only a few firms under the oligopoly market form, it is but natural that there prevails a strong monopoly element. With a differentiated product, every firm enjoys a monopoly power, at least among a small group of buyers. To a certain extent it is possible for an oligopolist to follow it own independent price-output policy. The monopoly power is further strengthened because of an attachment of some buyers to a particular product. (7) Lack Of Uniformity: Finally an oligopoly market is characterized by an absence of uniformity. The firms widely differ in respect of size. An oligopoly situation exhibits a composition of small, medium and large sized firms. Thus it is clear that oligopoly exhibits some unique features which distinguish it from other market forms. 4.4 Monopolistic Competition: It was Prof. Chamberlin who introduced the concept of monopolistic competition. He disagreed with the traditional view which regarded monopoly and perfect competition to be mutually exclusive market forms. It means if one is present the other cannot exist. He emphasized the fact that real market situation exhibits a simultaneous existence of both the pure forms which are mixed up. He argues, Monopolistic Competition is a challenge to the traditional viewpoint of economists that competition and monopoly are alternatives and that individual prices are to be explained in terms or either one or the other. By contrast it is held that most economic situations are composites of both monopoly and perfect competition. In practice we come across a number of small firms which produce and sell a commodity which has its own identity and stands distinguished from other similar products. A variety of tooth pastes, hair oils, soaps, detergents etc. are available in the market with different brand names, though these products belong to a similar category of the commodity. As a result each individual brand enjoys certain amount of monopoly among a small group of buyers who are attached to that particular brand. In the wider circle however, these products are exposed to competition to similar but not identical brands. Thus there exists a competition among the monopolists. Hence the term Monopolistic Competition. Features of Monopolistic Competition: (1) Large Number of Seller: Like under perfect competition, there exists a sizeable number of firms under monopolistic competitions also, due to which an individual firm has no significant control over the market situation. However the firm under this form of market is not as passive as that under the perfect competition. This is because the number of firms under monopolistic competition is not as large as that under perfect competition. Moreover, the firms produce a differentiated product which is similar but not identical. It means the products are not perfect substitutes as under perfect competition. They are only remote or the distant substitutes. as a result the small firms have some control or monopoly over a part of the market which is attached to that particular product. Thus the market undet the monopolistic competition is constituted of Too Many Too Small firms. (2) Product Differentiation: This is most vital feature of monopolistic competition. The individual firms trade in a product which belongs to the broad category of the commodity being produced by the rival firms. However each individual product has its own identity and dissimilarity in comparison with the

products of other firms. This is achieved through the practice of product differentiation. Every firm tries to impress upon the minds of the buyers that its product is distinct from that of the others, may be in respect of colour, quality, packing, workmanship etc. thus the individual product is similar but not identical to that of the rival firms. In other words, The products of different firms under monopolistic competition are only remote but not the perfect substitutes. (3) Selling Cost: This is yet another unique feature of monopolistic competition. Selling cost refers to those expenses which are incurred in order to create the market or the demand for the differentiated product of the individual firm. Such expenditure is not necessary either under perfect competition or monopoly because under the former the products are homogenous while under the latter i.e. monopoly there exists no close substitutes. It is only under monopolistic competition with differentiated product that a firm is required to create demand for the same. Selling costs can take a variety of forms such as free sampling lucky draws, free sale, discount and above all advertisement. Propaganda and sales promotion drives through various media such as radio, TV, newspaper, Magazines etc. is the key to capture the new markets and to strengthen the existing one. Popular personalities from politics, firms. Television serial. Sports etc. are made to advertise the product to catch the attention and the demand of the consumers. Repeated advertising has a profound impact on the psychology of the buyers which tremendously benefits the concerned product. Selling costs have become so inevitable in the modern highly competitive market that usually the expenditure of selling costs far exceeds that on production cost. Selling costs have become so persuasive and aggressive that on any occasions the buyers are made to purchase a commodity which is of hardly any use to them. (4) Freedom of Entry: In this respect monopolistic competition is similar to perfect competition and opposite to monopoly. As under perfect competition, there is freedom of entry to the new firms in the monopolistically competitive market. In other words, there are no restrictions of any type on the entry of new firms. The only peculiarity is that under perfect competition the new firms have to produce the existing product, while under monopolistic competition the new entrant has to introduce a different variety of the concerned product. (5) Independence: In contrast to oligopoly, there is high independence among the firms operating under monopolistic competition. The differentiated product and the reliance on selling costs render the firms under monopolistic to plan and execute their own independence policy in respect of price and output. In this context the monopoly element due to the product differentiation as also the selling costs, it is obvious that an individual firm can have its independent price output policy without relying on other rivals. Thus this market claims many distinct and realistic features
.

4.5 Price Determination under perfect Competition In economic analysis there has always
been a controversy as to what determines the price of a commodity. One thing is certain that a market is dependent upon two forces viz. demand and supply which are represented by the buyers and sellers respectively. Some economists like Adam Smith and Ricardo attached great importance to supply and argued that price is determined by the cost of production. Certain others though that demand is the real determinant of price. Alfred Marshall rightly emphasized the role of both the forces of demand and supply in the determination of price. In his words, We might as reasonably dispute whether it is the upper or the lower blade of a pair of scissors that cuts a piece of paper as whether value is governed by utility or cost of production. Neither is more or less important than the other in determining price.

Above statement rightly emphasizes that price is the result of both demand as well as supply. It may happen that at any particular time demand may be active and the supply passive. But both are essential. Stonier and Hague rightly remark, The only really accurate answer to the question whether it is supply or demand which determines the price, is that it is both. From the above analysis it is clear that price is determined by demand and supply. Another important aspect to be noticed is that under perfect competition, no individual buyer or seller can determine the price. This is due to large number of buyers and sellers with a homogeneous product. Since the contribution of our individual seller in the total supply and of individual buyer in the total demand, is insignificant, none is able to influence the price. It is determined by the combined action of the entire seller and the entire buyer taken together. It means the price under competitive conditions is the result of total demand for the total supply of the industry. The actual formation of price for the industry as a whole can be determined by the equality between demand and supply, finally that price rules the market at which a quantity demanded is equal to quantity supplied. This can be explained with the help of following schedule and diagram. Equilibrium Price of Footwear Demand 1000 800 600 300 100 Price 100 200 300 400 500 Supply 100 300 600 800 1000

The total demand for the product (Footwear) of the industry is equal to the total supply when the price is Rs. 300. Hence it is the price that uniformly exists in the market. At any other price either the demand will exceed the supply or vice versa. It is shown in the following diagram: In the above figure, the supply curve of the industry intersects its total demand curve at point E. hence OP (Rs. 300) is the price which will rule the market. An important point that needs to be mentioned here is that every individual firm has to adjust its output at the given price. An individual firm cannot fix the price but only adjust its supply to the given price. The demand for individual firm is perfectly elastic. This is because it has a large number of perfect substitutes. Hence the demand curve facing an individual firm is a horizontal straight line. It means it can sell any quantity at the ruling price. However it has no power to charge a higher price. How much it will produce will be governed by its cost conditions. If its cost cannot be covered by the given price it will suffer losses and will be forced to leave the industry. The firm at a given price produces that output at which its marginal cost (MC) is equal to marginal revenue (MR) and average revenue (AR) i.e. in the above figure an individual firm produces QQ output and sells it at the given price OP.

4.6 Price Determination under Monopoly Like any other producer the monopolist also has to
consider the demand for his product as well as the supply conditions i.e. cost conditions while determining the price. The monopoly firm however has an advantage because there is no close substitute for its product. Naturally the demand becomes fairly inelastic. as a result the monopolist can charge a high price.It must be remembered that a monopolist faces a down ward sloping demand curve. It means if he produces and sells a small quantity he can charge a high price. But if he is interested in selling a large quantity he can do so only at alower proce. He thus has to make a choice between large quantity (Low price) and small quantity (high price). His motive obviously is the maximization of total profits. A monopolist will fix up that price at which his profits are maximum. Once he decides upon the price he ahs to produce that amount of output which is demanded at that price. a point to be noted is that though monopoly producer has a firm grip over the market he cannot dictate both the price and the output. He has to fix one and accept the other. While fixing the price output. the monopolist has to take into account various factors such as Nature of demand (elasticity) for his product. Substitutes available. Cost conditions. Generally any product considers two things what is the cost of producing one more unit, which is known as marginal cost (MC) and what revenue or income he gets by selling that unit which is called marginal revenue (MR). A monopolist also follows the same rule that he produces that quantity at which MR=MC. Once this is decided he ahs to compare the revenue per unit i.e. average revenue (AR) and the cost per unit i.e. average cost (AC). A monopolist follows a trial and error method for determining the price and output. finally he sells that quantity which fetches with maximum profit. This is shown in the following diagram: The equilibrium point is E at which MR curve intersects MR the output produced is OQ which is sold at price OA or PQ. The are APRS shows the total profit enjoyed by the monopolist Lastly one point has to be cleared. Generally it is believed that a monopolist charges extremely high price. This is course is possible but not practicable. A monopolist has to be careful about the following: Reaction of the customers Boycotting the product. Reaction of factor owner demand for higher rewards. Reaction for the Gov. Control over price, nationalization etc. Reaction for rival Introduction of a substitute. Within these limits the monopolist charges such a price which enables him to get maximum profit.

4.7 Equilibrium under Perfect Competition Perfect competition is a form of market in which various firms, which produce a homogeneous commodity, constitute an industry. The existence of large number of firms selling and identical product implies that the product of an individual firm faces a large number of perfect substitutes in the market. As a result of two characteristics an individual firm does not have any grip over the price of the product. It is in this sense that a remark is passed that the firm under perfect competition is only a price taker and not a price market. This implies that a competitive firm has only to accept the price which is determined by the industry as a whole. It has no capacity to alter this price in any direction. If it thinks of raising the price, the consumers will switch on to various alternatives available in the market and hence there will be no demand for the product of the firm which raises the price. On the other hand, a firm will not lower the price because it knows that any quantity it produces can be sold at the prevailing price. Hence, the price remains fixed and given for a competitive firm. The only decision left to an individual firm is whether to produce or not and how much to produce. For this purpose, a firm will compare the given price i.e. AR with its cost situations. Under the profit maximization principle, a firm will produce and sell that output which offers it is maximum profits. Thus, equilibrium of a firm implies the fixation of profit maximizing output. the short run considerations widely differ from the long run ones. It may be noticed that in the short run, the firm may operate in spite of losses but in the long run, it will never operate will losses.
Short run equilibrium:

Short run is a period during which certain factors and costs remain fixed or constant while certain others can be varied. The fixed cost has to be incurred even if no production is undertaken. It means, in the short run, it is only the variable cost which is relevant from the point of view of equilibrium output. Since the price is given and constant, the demand curve faced by an individual firm is horizontal straight line and the MR curve coincides with it is all levels of output. it means for all the output that the firm produces, AR is equal to MR. In order to maximize the profits, the firms intends to equal MR with MC. Since MR is always equal to AR i.e. price, it follows that at equilibrium, price i.e. AR is equal to marginal cost. But this price may be equal to, greater than or less than the average cost. Under any of these conditions, the firm will continue to produce.

If AR>AC there are abnormal profits. If it is less than AC, there are losses to the firm and when AR is equal to AC there are only normal profits. The equilibrium with profits i.e. AR>AC and that with losses i.e. AR<AC is shown in the following diagrams: In the above diagram, figure (a) shows profits while (b) losses. In figure (a) at equilibrium output AR is greater than AC while in Figure (b) at equilibrium output OQ AR is less than AC There NEPL shows the total profits in figure (a) and total losses in figure (b). Thus in short run, firm is equilibrium at the level of output where MC is equal to MR. At this level, there may be abnormal profits ((AR>AC) or losses (AR<AC). The abnormal profits enjoyed by the firm during the short period attached the other firms to enter the industry. On the other hand, the firm incurring losses during short period, will try to leave the industry. However, neither entry nor exit is possible in the short run. The industry, therefore, is not in equilibrium. The quality between the total demand and total supply suggests that the industry is only in temporary or indeterminate equilibrium. The decision of the firm to produce if the existing price renders abnormal profits can be easily understood. However, why should a firm continue to produce when it faces losses i.e. when AR is less than AC. No doubt, during short period, a firm cannot leave the industry, but can certainly stop the operation. It is observed that in spite of losses, the firms continue to produce. Such a decision can be explained with reference to the distinction between fixed costs and the variable costs. Fixed costs are those costs which have no relation with the output produced. It means such costs have to be incurred even if the firm does not produce any output. Thus, losses to the extent of fixed costs have to be borne by the firm. A firm, therefore, in the short run concentrates upon the variable costs. So long as price is greater than average variable costs i.e. AVC, a firm continues to produce. This decision by the firm reduces losses. It is an attempt to minimize the losses. Thus. A firm under perfect competition will operate if (1) there are abnormal profits (AR>AC), and (2) there are losses (AR<AC), but AR>AVC. However, if the price is less than AVC, the firm will stop the production. This is known as the close down position of a firm. In short, the short run equilibrium of a firm indicates three possibilities namely (i) Profit maximization, (ii) Losses minimization and (iii) close down position. All these positions are explained in the following diagram:

In the alongside diagram along with the SMC and SAC, i.e. short run marginal cost and short run average cost respectively, AVC (average variable cost) is also shown. Now, if the price i.e. (AR = MR) is OP, the MC intersects the MR curve at point E and the equilibrium output is OQ at this level of output, the

total cost (OLNQ) exceeds the total revenue (OPEQ) by LPEN which means the firm faces losses. It will, even then, continue to produce because the price OP covers not only AVC (QA) but a part of fixed cost (AE). If the firm stops the production, it will have to bear the losses worth the entire amount of fixed cost. Since the prevailing price is covering at least a part of fixed cost, the losses by producing some are less than by not producing at all. Thus, the firm will continue to operate. If the prevailing price is OP1, the equilibrium will be reached at point E1 at which the level of output is OQ. At this point of output, the prevailing price OP1 just covers the AVC since the AR MR curve is tangent to the AVC curve at E1 price OP1 does not therefore, cover any portion of the fixed cost. At this point, weather the firm produces or not does not make any difference because the loss in both the cases will be equal to the fixed cost. Hence, the decision regarding production or otherwise is a matter of indifference. Lastly, if the price falls below OP1 say to OP2, no rational producer will operate because this price does not even cover the AVC. Losses by closing down can be restricted only to the fixed cost in this case. Hence, if any price falls below OP1 the firm will not operate.

Thus the short run equilibrium of a competition firm exhibits all of the possibilities. It may be earning supernormal profits (if AR>AC) only normal profits (if AR=AC) or losses (if AR<AC). In this diagram, at price OP there are supernormal profits, at OP1 there normal profits and at price OP2 losses. To conclude the discussion regarding the short run equilibrium of a competitive firm, it may be stated at the given price a firm may be in (1) Profit maximization Position (if AR > AC0, (2) Loss minimization position when (AR < AC > AVC), (3) Shut down position (AR < AVC). Long run equilibrium: long run is defined as the period during which all factors are variable because of which the firms have sufficient time at their disposal to bring about full adjustment on the supply side. The supply in the long run can be adjusted through a change not only in variable factors but also in fixed factors. In other words, the changes in output can be brought about through the changes in the scale of production i.e. size of the firm. The existing firms can expand output, by expanding the plant size. Similarly, the new firms can also enter the market or the old firms can leave the industry, if they face losses. Thus, full adjustments are possible in the long run. The distinction between fixed and variable costs no more exists because all costs are variable costs.

In the long run, the equilibrium of a firm will be reached at the quality between MC and MR i.e. MC and price. In the long run, however, the price equates not only marginal cost but also the average cost, because if price is greater than AC, the abnormal profits will attract new firms into the market. The entry of new firms will wipe out such supernormal profits. On the other hand, a firm may operate in spite of losses in the short run but it can not do so in the long run. Such firms, incase of which AR is less than AC will leave the industry, it means in the long run, price can neither exceed the average cost nor can be less than it. In other words, the long run price must necessarily be equal to the average cost. The entry of new firms in the context of supernormal profits will produce a twofold effect. (i) Increase in supply and therefore a fall in price. (ii) Increase in demand for productive resources and hence increase in the cost. Similarly, the exit of the existing firms will also affect the cost and revenue positions in two ways. (i) Decrease in supply and rise in price. (ii) Fall in demand for productive resources and consequent rise in cost. Thus, the long run equilibrium exhibits the following: (1) MR = MC. (2) AR = AC. (3) AR = MR = MC. (4) AR = AC = MC=MR. Thus in the long run under perfect competition, a grand equilibrium is obtained. This is shown in the diagram below:

It may be noticed in the alongside diagram that corresponding to the output OQ2 the grand equilibrium between AR, MR, AC and MC is obtained at price OP. no other price can prevail in the market because at a price higher than OP there will be supernormal profits inviting new firms while at any price below OP the losses will force the firms to leave the industry. Moreover, in the long run, not only an individual firms but the entire industry reaches a determine equilibrium because of the quality between AR and AC. Thus, the long run equilibrium of a firm and industry exhibits the following remarkable features: (i) Firms are in equilibrium because MR = MC. (ii) Industry is in equilibrium because of quality between AR and AC.

(iii) All firms tend to be optimum since they operate at lowest AC. (iv) Abnormal profits are absent due to equality between AR and AC. From this, it is concluded that perfect competition is an ideal market situation which produces most efficiently and sells at the lowest price. Hence it maximizes welfare. 4.8 Equilibrium under Monopoly

Short run Equilibrium: like any other producer, a monopolist aims at maximizing the profits. He produces that output at which MR = MC. Since a monopoly firm itself means the entire industry, a demand curve i.e. AR curve facing a monopolist is downwards sloping which implies that a monopolist can sell more only at a lower price. Since the AR curve is downwards sloping, the MR curve is always below the former. In other words, under monopoly, AR>MR, i.e. price is always greater than marginal cost. Thus, under monopoly, AR>MR but MR = MC AR> MC. Now, this price in the short run can be greater than or less than AC. If the price is greater than AC, it means the firm earns abnormal profits. Such profits can continue even in the long run because there is no fear of new firm entering and competing away the profits. In the short period if AR<AC, there will be losses. But a monopolist will continue to produce so long as the price covers the average variable cost. In short, in short run monopolist will be in equilibrium when MR=MC. The price i.e. AR, though higher than MC, can be higher or lower than AC, implying profits or losses respectively. This can be observed in the following diagram: In both (a) and (b) above, a firm is in equilibrium at point E at which MR=MC. The output is OQ. In figure (a) at equilibrium output AR (i.e. QM). Is greater than Ac 9i.e. QL) Hence there are abnormal profits. In figure (b) since the price i.e. at equilibrium is less than AC, firm suffers losses. But it will continue to produce. Thus, in the short run there can be profits or losses under monopoly. Long run Equilibrium: In the long run, a firm cannot afford to face the losses. It can make full adjustments in supply according to the change in demand. The price in the long run is necessarily higher than cost implying abnormal profits. This can seen from the alongside diagram. Firm is in equilibrium at point E producing OQ output. Since the AR>AC, there are abnormal profits worth the area PNLM.

Certain important features of monopoly equilibrium should be noted. (1) Monopoly equilibrium can occur in any phase i.e. increasing, constant, or diminishing cost conditions. Under any case a monopolist can permanently enjoy abnormal profits. This is seen in the following diagram: in the above diagrams, figure (a) shows equilibrium under diminishing cost, (b) shows equilibrium under constant cost and (c) the equilibrium under increasing cost. (2) Monopoly price is a function of marginal cost and elasticity of demand. It is known that, A=M (e / (e-1)) where A = A.R. i.e. price M=M.R. e = elasticity of demand Price = M.R (e / (e-1)) but in equilibrium M.C. = M.R Price = MC (e / (e-1)) Thus, monopoly price is a function of MC and elasticity of demand. On a straight line demand i.e. AR curve at midpoint e=1 and below midpoint e<1. when e<1, MR is negative. Producer equates MR with MC can never be negative no producer will produce when MR is negative i.e. e<1. it means producers will not be in equilibrium if the elasticity of demand is less than one. If MC is zero, the equilibrium may occur at midpoint at which MR is zero. Since MC is positive, the equilibrium must occur at that level of output at which MR is positive i.e. e>1. Thus, equilibrium of the monopolist will necessarily occur at the level of output at which on the corresponding AR curve the elasticity is greater than one. Thus, equilibrium under monopoly can be summed up as follows: (1) A monopoly firm like any other firm is in equilibrium when MR=MC. (2) Price under monopoly is always greater than MC.

(3) In the short run the price may be greater than AC implying abnormal profits or less than AC indicating losses.The long run price under monopoly will always be greater than AC. It means monopolist can permanently enjoy the abnormal profits. (4) Monopoly equilibrium may occur under any cost conditions i.e. diminishing increasing or constant. (5) Monopoly equilibrium will necessarily be at that level of output which corresponds to elastic demand, i.e. e>1. (6) A monopolist may produce output corresponding to unit elasticity if MC is zero.

4.9 Price Discrimination Meaning of price discrimination: So far we have discussed the price output determination under simple monopoly, i.e. under a situation in which the monopolist charges uniform price for the same product to different consumers. In practice, there are many cases in which a monopolist charges different price for the same product such a practice of charging different prices from different prices from different groups of consumers is known as price discrimination. Price discrimination, therefore, refers to the act of selling the same commodity at different prices in different markets whenever it is possible and profitable. Under perfect competition with large number of producers, the individual firm has no control over the market-supply. Hence it is not possible to practice price discrimination in a competitive market. As the monopolist is a single producer in the market, he has control over the supply of the product. He can sell the commodity at different prices to different consumer. However, it is rather difficult to offer the identical commodity at different prices. Therefore, to widen the scope of price discrimination, commodities or services are slightly differentiated. For example, in railways and airways, price discrimination is practiced. It should be noted that generally price discrimination in confined to simple price discrimination, i.e. charging different prices for the same product from different consumers. In the words of Mrs. Joan Robinson, the act of selling the same article produced under single control, at different price to different buyers is known as price discrimination. Thus, a monopoly can be a simple monopoly when a uniform price is charged by the monopoly firm, or it can be a discriminating monopoly when he discriminates between users or persons and charges different prices for the same product. Forms of price discrimination: price discrimination by a monopolist may take many forms. The important forms of price discrimination are discussed as under:

(1) Personal discrimination: Personal discrimination occurs when different prices are charged from different consumers depending upon their incomes. For example, a doctor may charge higher fees to the rich and lower fees to the poor. Similarly, other professionals like lawyers, consultants, teachers, etc. may also discriminate between rich and poor. (2) Local Discrimination: in local discrimination, the monopolist charges a lower price at one place and a higher price at other places. For example, in dumping, the monopolist charges higher price at home and lower price in a foreign market. (3) Trade discrimination: this form of price discrimination is based on the use of the product. For example, there are different tariffs in the supply of electricity for home consumption, industrial and agricultural uses. Similarly, there are different rates for trunk calls. (4) Quality discrimination: Price discrimination may also take place on the basis of qualitative differences of the same product. For example, a deluxe edition of a book is sold at a higher price than its paper-back edition. (5) Special service discrimination: In this situation price discrimination takes place on the basis of special services provided to the consumers. For instance, railways charge different rates for different classes of travel. Similarly, cinema houses charge different admission rates. (6) Time Discrimination: Different prices for the same commodity or services are charged at different times. For instance, trunk call charges are higher during day time and lower during night time. Age discrimination and sex discrimination is also practiced. When is price discrimination possible? Broadly speaking, two important conditions are essential for the price discrimination to become possible. First, it should be impossible to transfer the commodity from the cheaper market to the dearer market. Second, there should be no possibility for the consumers to transfer themselves to the cheaper market. From the above, it follow that price discrimination will be possible when the monopolist is able to keep his two markets separate. Other important conditions of price discrimination are as follows: (1) Price discrimination often occurs due to consumers peculiarities. In this case there are three possibilities. (i) The consumers are very often unaware that prices have changed. (Ignorance of consumers) (ii) The consumer has irrational feeling that he is paying a higher price for a better quality. (consumers illusion) (iii) Price difference are marginal and the consumers simply do not bother about the changes in price. (Let go attitude) (2) Price difference also occurs due to legal sanction where customers are divided into different groups. it is largely prohibited to transfer the use of commodity from a particular purpose. For example, the electricity company has different tariffs for domestic and industrial consumers. Likewise in railways it is an offence for one to travel in other class without a proper ticket. (3) Price discrimination will be possible due to the nature of the commodity. In this case price discrimination refers mostly to direct services which can not be resold. These services are directly given to the consumers and therefore, the resales are impossible. (4) Discrimination often occurs when the market are situated at large distance and makes it very expensive to transfer goods from a cheaper market to the dearer market. Similarly, the monopolist may serve two different markets. Namely a home market with tariff and a world market without tariff. He can

take advantages of tariff barrier to sell the commodity at a higher price in the home market and at a lower price in the world market. Above are the circumstances under which price discrimination is possible. Price discrimination does not necessarily imply that different prices are charged for the same product. Sometimes different services are rendered or different goods are offered at different prices, but the differences in the quality are not so high as to justify the price difference. Hence this also is a way of price discrimination. Most common example is provided by railways where the first and second class fares widely differ. However, the facilities provided in the first class hardly are in proportion to the high fare charged. price discrimination as the sales of technically similar products at prices no which are or proportional to marginal costs. Thus, it is clear that all these forms of price discrimination depend on his ability to retain his customers. Further, it also depends on his power to ensure that no one else sells his products at a lower price. When is Price Discrimination Profitable? We have so far analyzed the conditions in which price discrimination is possible. It will be possible when the monopolist is serving separate markets. But it may not be always profitable for him to practice price discrimination. It should be noted that the monopolist seeks maximum profits when he fixes his output so as to equal marginal revenue with marginal cost. Since he is serving two markets the marginal revenue (Combined MR) obtained in both the markets must be equal to MC. He will sell at different prices till the MR obtained in one market is equal to the MR obtained in another market. This enables the monopolist to earn maximum profit However, the most fundamental factor of profitability is the nature of elasticity of demand at the single monopoly price in these markets. In this case the basic condition is that the elasticity of demand should be different in different market. If the elasticity of demand in each market is the same at each price the monopolist will not resort to price discrimination because marginal revenues are equal. It follows from the formula M That MR in two markets is the same and therefore, if different prices are charged by transferring the output discrimination will not be profitable: If elasticties of demand in two markets at a single, monopoly price are different, price discrimination will be profitable. It is evident from the above formula that MR in the two markets will be different and the monopolist, by transferring the commodity, can charge different prices at which the gain in MR will be greater than the loss in MR> he will continue transferring units of the good until marginal revenue in two markets are equal. If follows from the above analysis that price discrimination will be profitable only when the elasticity of demand is different in each market. Technique of price discrimination

Price-output determination under discriminating monopoly. The monopolist practices price discrimination for maximizing his total profits. We are acquainted with the basic principle of profit maximization viz., the equality between MR and MC. The same principle is equally applicable to discriminating monopoly. The principle of profit maximization is extended to different markets. Under discriminating monopoly, there are different AR and MR curves corresponding to different markets. The monopolist will equate his MC with each MR. Thus, condition of equilibrium of discriminating monopoly can be stated as MC=MR1 MR2=MR3.MR This condition means that given the different demand schedules corresponding to different markets, the monopolist will sell that much output in each market at which MR in each market is equal to the MC. The monopolist will, thus, equalize the marginal revenue in the different markets. If the MR in one market is higher than that in the other market, the seller will be benefited by transferring some quantity from the latter to the former market. When more is supplied in the market with higher MR, the price i.e. AR, and therefore, MR in that market will decline. On the other hand, as he withdraws some quantity from other market, the price, and hence, MR in that market will rise. The process of shifting will continue till the MRs in the different markets become equal. Once such equality is achieved any further shifting will be unprofitable. The discriminating monopolist is required to take two decisions. (a) How much to produce? (b) How to distribute the total output among the different markets? The answers to the two questions above are found by equating MC of the total output to the aggregate marginal revenue (AMR) which is obtained by adding up the marginal revenues in the different markets. Thus, he will produce at the level of output at which MC=AMR=MR1+MR2+MRn. The following figure clarifies the point. In the above diagrams Fig. (a) And Fig. (b) Show two different markets with different degrees of elasticity. It may be observed that fig. (a) depicts a higher market with less degree of elasticity while Fig. (b) portrays a lower market with higher elastic demand. AR1 and AR2 are the demand curves and MR1 and MR2 are their corresponding marginal revenue curves in higher and lower markets respectively. The aggregate marginal revenue curve (AMR) obtained by lateral summation of MR1 and MR2 drawn in Fig. (c) above. The discriminating monopolist will be in equilibrium at point E in fig. at which the MC curve intersects the AMR curve. The total output produced by the monopolist is, therefore, OQ. Thus, equality between MC and AMR provides answer to the first question faced by the discriminating monopolist viz., how much to produce.

After the equilibrium i.e. profit maximizing output has been fixed, next problem facing the firm is the distribution of this output among different markets so as to acquire maximum profits. In solving this problem, again he is helped by the marginal principle. as explained above, the monopolist will sell that much output in each market at which MR in each market equates the MC. In the above diagrams, a parallel line drawn from the point of equilibrium E intersects MR1 and MR2 at E1 and E2 respectively. Thus, E1 and E2 are the equilibrium positions in the two markets. The monopolist will, therefore, sell OQ1 quantity at price OP1 in the first market, and Oq1 at price OP2 in the second market. It can be easily noticed that he charges higher price in less elastic market and lower in more elastic market (OP1 >OP2). Thus, the technique of price discrimination lies in equating the marginal cost of total output with the aggregate marginal revenue to determine the total output produced and to marginal revenue in each market to distribute the total output in different markets.

4.10 Monopoly and Perfect Competition A Comparison

We have so far analysed the market situations under perfect competition and monopoly. One of the common features of these market situations is that the firms aim at maximizing profits at the equilibrium output where: marginal cost equal marginal revenue. However, there are significant dissimilarities between the two market situations. Hence, we may attempt a comparison between monopoly and perfect competition with reference to their characteristics, price and output determination, the size of profit etc.
(a)

Market structure: Perfect competition is a market situation is which there is a large number of buyers nad sellers, each one selling a small proportion of the total output. The price in the market of the entire industry is determined by the forces of demand and supply. All competing firms have to accept this price. As them are large numbers of firms, selling homogeneous products, as individual firms can sell any amount depending upon its size, at ruling price. Since it can sell as much as it likes at the prevailing price, it has no incentive to lower it. Thus, once the price in the market is established, the firm accepts the price as given and adjusts its output at the level which ensures maximum profit it is clear, therefore, that under perfect competition there can be only one price in the market at a point of time because the products are homogeneous. Every firm is, thus, a price taker and output adjuster in the market. On the other hand, under monopoly, there is only one firm selling a particular commodity or service. Hence there is no distinction between the firm and industry under this type of market situation. The monopoly firm itself fixes the price for its product unlike perfect competition. He may charge either a single uniform price or different prices to the consumers, for the same product. Thus, the monopoly firm is a price maker. (b) Nature of demand curve-and industry: Under perfect competition. There is a clear distinction between the firm and industry. Accordingly, the demand curve or the average revenue curve (AR) faced by the firm and industry will be different. The demand curve (AR) of a firm is perfectly elastic and the marginal revenue coincides with it. But the demand curve faced by the industry consisting of a large number of firms slopes downward from left to right. Since, the total output produced by an industry is quite large, industry cannot sell more at the same price. When the price is reduced, the total demand for the commodity rises. Thus, the demand curve (AR) of an industry will have a negative slope. (c) Price-marginal cost relationship: As pointed out, already there is similarity between the equilibrium conditions of the firms under perfect competition and monopoly. But there are differences between the prices marginal cost relationship. Sources of Monopoly Power

There are many factors or circumstances responsible for the emergence of monopoly. In fact, the absence of competition is the essence of monopoly. A monopoly firm may emerge when there are restrictions to the entry of new firms into the organization. In this context, there are two important points: (a) the firm emerging as a monopoly power, and (b) to retain that power in the long run. It implies that if the product has close substitutes, and the entry of new firms is restricted, the monopoly firm will continue to enjoy the privileged position even in the long run. According to Prof. Robinson a monopoly firm can exist only so long as it is able to bar the entry of its potential competitors or rivals. (1) Control over raw materials: It may be possible for single firm to acquire ownership or control of essential raw materials required for production. It would be an effective barrier to the entry of other firms into the monopoly industry. A monopoly firm may also acquire raw materials in big quantities at lower prices. Thus, monopoly may emerge when a single firm has control over the supply of strategic raw materials. (2) Nature monopolies: Monopoly may emerge due to one single firms control of raw materials, especially those the supply of which depends on natural forces. This is characterized as natural monopoly, for instance, the geographical distribution of natural and mineral resources is very uneven. In such a situation a firm may acquire control over natural resources. Monopoly power can also be acquired if a firm has control over professional services, capital equipment, labour etc. for instance, some surgeons, lawyers, singers, etc. can charge higher fees than others in the same profession. Similarly in public utility services like water supply, transport, telephone services etc. monopoly is preferred. These tend to become natural monopolies and competition in such services is avoided. But the Government subjects such services to certain regulations in the interest of the consumers. (3) Legal barriers: This is most important factor to confer the monopoly right and prevent the entry of the potential competitors. In other words, monopoly may emerge as a result of certain legal provisions of the government. law may confer patent, trade marks, copy right etc. On the privileged firms. In this case, a firm gets an absolute monopoly power in the production of a particular commodity. It is a protected from the threat of competition from new firms making identical products. Further, the firm is protected by law against imitation by rival producers. Similarly, tariffs on imports of certain goods will restrict foreign competition in the domestic market. This will tend to create a monopolistic position for the domestic producers. Again the Government may reserve certain products and services for itself in order to provide better services to the community. E.g. posts and telegraph, railway etc. (4) Business combinations: It is possible for a number of big business companies to acquire a degree of monopoly power through voluntary agreement. This will help them to eliminate competition among the groups in terms of price; output and sharing of the market it will also prevent the entry of new potential competitors. These business combinations are variously called as pools, cartels, trusts, syndicates, trade associations etc. such combinations exploit the consumers and therefore, socially least desirable. In order to eliminate monopoly power, anti-trust and anticartel legislation have been passed in the USA. (5) Existence of goodwill or reputation: A well established firm possesses a degree of monopoly power. Such a firm will have considerable goodwill and it is virtually impossible for potential competitor to enter the industry. It is prohibitively risky for the new firms to compete with the existing firms. (6) Technical economies of scale: There are a number of industries which are dominated by a few giant firms with great technical economies of scale. For instance, the firms manufacturing types, chemicals, motor cars etc. operate on a large scale and enjoy economies of large scale production. These economies of scale reduce the cost of production and thus enable the firms to supply goods at low prices. As a result, it is impossible for the new firms to enter the industry.

From the above discussion of the sources of monopoly power, it should be noted that different sources are more or less temporary in nature. They do not confer permanent monopoly power. Natural monopolies, the existence of giant firms enjoying economies of large scale production etc. may not be permanent. It is possible for new firms to enter the industry at one stage or the other because of discovery of a new source of raw materials. Similarly, existence of economies of large scale production may not always mean the possibility of only a few giant firms. The liberalization of licensing policy, innovations, liberal bank credit may result in the emergence of new competitors. However, in the case of social monopoly or public utility, there is a tendency to continue as a monopoly. Such monopolies are socially more desirable. Question bank 1. Explain the term price discrimination. How is price determined in a discriminating monopoly? 2. Distinguish between the perfect and monopolistic competition .explain ad illustrate the condition for the establishment of firms equilibrium under perfect competition 3. In short run cost analysis, explain with diagram giving reasons the following statement the MC curve intersects both the AVC curve ad ATC curve at their minimum points 4. Explain the main features of oligopoly market. 5. Writes a short note on causes ad disadvantages of monopoly 6. Explain the main features of monopolistic competition .How does it differs from perfect competition 7. Describe the short and long run equilibrium under monopoly 8. Writes a short note on imperfect competition 9. Name & explain the different types of market

Chapter 5 Management function 5.1 What is Management? The concept of management has acquired special significance in the present competitive and complex business world. Efficient and purposeful management is absolutely essential for

the survival of a business unit. Management concept is comprehensive and covers all aspects of business. In simple words, management means utilising available resources in the best possible manner and also for achieving well defined objectives. It is a distinct and dynamic process involving use of different resources for achieving well defined objectives. The resources are: men, money, materials, machines, methods and markets. These are the six basic inputs in management process (six M's of management) and the output is in the form of achievement of objectives. It is the end result of inputs and is available through efficient management process. The term 'management' is used extensively in business. It is the core or life giving element in business. We expect that a business unit should be managed efficiently. This is precisely what is done in management. Management is essential for the conduct of business activity in an orderly manner. It is a vital function concerned with all aspects of working of an enterprise. Definitions (1) According to George R. Terry, "Management is a distinct process consisting of planning, organising, actuating and controlling, performed to determine and accomplish stated objectives by the use of human beings and other resources'.' (2) According to Henry Fayol, "To manage is to forecast and to plan, to organise, to command, to coordinate and to control'.2 (3) According to Peter Drucker, "Management is a multi-purpose organ that manages business and manages managers and manages workers and work". (4) According to Harold Koontz, "Management is the art of getting things done through and with people in formally organized groups. (5) According to Mary Parker Fallett, "Management is the art of getting things done through people". Characteristicsof Management (1) Management is a managerial process: Management is a process and not merely a body of individuals. Those who perform this process are called managers. The managers exercise leadership by assuming authority and direct others to act within the organisation. Management process involves planning, organising, directing and unifying human efforts for the accomplishment of given tasks. (2) Management is a social process- Management takes place through people. The importance of human factor in management cannot be ignored. A manager's job is to get the things done with the support and cooperation of subordinates. It is this human element which gives management its special character. (3) Management is action-based: Management is always for achieving certain objectives in terms of sales, profit, etc. It is a result-oriented concept and not merely an abstract philosophy. It gives importance to concrete performance through suitable actions. It is an action based activity. (4) Management involves achieving results through the efforts of others: Management is the art of getting the things done through others. Managers are expected to guide and motivate subordinates and get the expected performance from them. Management acts as an activating factor. (5) Management is a group activity- Management is not an isolated individual activity but it is a collective activity or an activity of a group. It aims at using group efforts for achieving objectives. Managers manage the groups and coordinate the activities of groups functioning in an organisation. (6) Management is intangible: Management is not directly visible but its presence is noticed in the form of concrete results. Management is intangible. It is like invisible spirit, which guides and motivates people working in a business unit. Management is like government, which functions but is not visible in physical form. (7) Management is aided, not replaced by computers: The computer is an extremely powerful tool of management. It helps a manager to widen his vision. The computer supplies ocean of information

for important decision-making. The computer has unbelievable data processing and feedback facilities. This has enabled the manager to conduct quick analysis towards making correct decisions. A computer supports manager in his managerial work. However, it cannot replace managers in business. They were' required in the past, at present and also in future. Their existence is absolutely essential in the management process. (8) Management is all pervasive: Management is comprehensive and covers all departments, activities and employees. Managers operate at different levels but their functions are identical. This indicates that management is a universal and all pervasive process. (9) Management is an art, science as well as a profession: Management is an art because certain skills, essential for good management, are unique to individuals. Management is a science because it has an organised body of knowledge. Management is also a profession because it is based on advanced and cultivated knowledge. ' (10)Management aims at coordination of activities: Coordination is the essence of management. It gives one clear direction to the whole organisation and brings unity and harmony in the whole business unit. For such coordination, effective communication at all levels is essential. (11) Management is innovative- Management techniques are dynamic and innovative. They need to be adjusted as per the requirements of the situations. Another manager need not repeat the decisions of one manager. Similarly, a manager has to change his decisions under different situations. (12) Management has different operational levels- Every Organisation needs managers for managing business activities. The manager's job is basically the same at all levels. The managers at the higher levels have more important duties while managers at the lower levels have to perform routine functions/duties. (13) Management is different from ownership: Management is concerned with the management of business activities. Managers are not the owners but they manage the business on behalf of the owners. Separation of ownership and management is a special feature of modem business organisation. (14) Management has vast scope: The scope of management is quite comprehensive. It covers all aspects of business. The principles of management guide managers while managing various business activities. (15) Management is dynamic: Business is influenced by changes in economic, social, political technological and human resource. Management adjusts itself to the changing atmosphere making suitable forecasts and changes in the policies. Hence, management is treated as a dynamic activity. (16) Management aims at achieving predetermined objectives, Management is a meaningful activity. All organisations are essentially groups of individuals formed for achieving common objectives. An Organisation exists for the attainment of specific objectives. Need of Management (1) Direction, coordination and control of group efforts: In business, many persons work together. They need proper direction and guidance for raising their efficiency. In the absence of guidance, people will work as per their desire and the, orderly working of enterprise will not be possible. Management is needed for planning business activities, for guiding employees in the right direction and finally for coordinating their efforts for achieving best/most favorable results. (2) Orderly achievement of business objectives: Efficient management is needed in order to achieve the objectives of business activity in an orderly and quick manner.

(3) Performance of basic managerial functions: Planning, organising, coordinating and controlling are the basic functions of management. Management is needed as these functions are performed through the management process. (4) Effective communication at all levels: Management is needed for effective communication within and outside the Organisation. (S) Motivation of employees: Management is needed for motivating employees and also for coordinating their efforts so as to achieve business objectives quickly. (6) Success and stability of business enterprise: Efficient management is needed for success, stability and prosperity of a business enterprise. Modem business is highly competitive and needs efficient and capable management for survival and growth. Management is needed as it occupies a unique position in the smooth functioning of a business unit. This suggests the need of efficient management of business enterprises. Profitable/successful business may not he possible without efficient management. In this sense, "'No management, no business is true. Survival of a business unit in the present competitive world is possible only through efficient and competent management. 5.2 Meaning of Management Process The term management is explained in different ways. For example, it is said that management is what management does. Here, management is explained with reference to its basic functions which include planning, organising, coordinating and controlling. Similarly, management is described as a process which involves various elements. Management process is a continuous one and is run by the managers functioning at different levels. Management is now recognised as a distinct process in which managers plan, organise, lead, motivate and control human efforts in order to achieve well defined goals. In fact, process means a series of activities/operations undertaken/conducted for achieving a specific objective. Process is a systematic way of doing things. For example, in a factory there is a production process. Similarly, in the management process, resources and human efforts are used in an orderly manner for achieving specific objectives. The management process suggests functions to be performed by the managers. Definitions (1)According- to D. E. McFarland, "Management is the distinct process by which the managers create, direct, maintain and operate purposive organisation through systematic, co-coordinated and cooperative human efforts.' (2) According to Gemp R. Terry, "management is a distinct process consisting of planning, organisisng, actuating, and controlling, performed to determine and accomplish objectives by the use of people and other resources.' 5.3 Functions of Management the essential elements/components of management process are four. These are: (a) Planning, (b) organising (c) Directing and (d) controlling. We may add some more elements in the management process. Such elements are. - (i) Motivating (ii) Co-coordinating (iii) Staffing and (iv) Communicating. The elements in the management process are actually the basic functions of management these functions constitute the management process in practice. Management process is in fact, management in practice. This process suggests what a manager is supposed to, do or the basic functions that he has to perform while managing the job assigned to him. Luther Gullic gave a new formula to suggest the elements of management process i.e. basic functions of management. According to him, management process may be indicated by the word

"PODSCORB. Here, P' states for 'planning'. "O" for 'organising', "D" for 'directing', "S" for Staffing CO- for 'Coordinating, R for 'Reporting' and -B" for 'Budgeting'- Gullic coined the word "PODSCORB" to suggest seven functions of management. The following figures show the management process and the elements involved: (A) Management Process:

Functions of Management (1) Planning: Planning is the primary function of management. It involves determination of a course of action to achieve desired results/objectives. Planning is the starting point of management process and all other functions of management are related to and dependent on planning function. Planning is the key to success, stability and prosperity in business. It acts as a tool for solving the problems of a business unit. Planning plays a pivotal role in business management It helps to visualize the future problems and keeps management ready with possible solutions. [Details of planning function are explained in the next chapter.] (2) Organising: Organising is next to planning. It means to bring the resources (men, materials, machines, etc.) together and use them properly for achieving the objectives. Organisation is a process as well as it is a structure. Organising means arranging ways and means for the execution of a business plan. It provides suitable administrative structure and facilitates execution of proposed plan. Organising involves different aspects such as departmentation, span of control delegation of authority, establishment of superior-subordinate relationship and provision of mechanism for coordination of various business activities. (3) Staffing: Staffing refers to manpower required for the execution of a business plan. Staffing, as managerial function, involves recruitment, selection, appraisal, remuneration and development of managerial personnel. The need of staffing arises in the initial period and also from time to time for replacement and also along with the expansion and diversification of business activities. Every

business unit needs efficient, stable and cooperative staff for the management of business activities. Manpower is the most important asset of a business unit. In many organisations, manpower planning and development activities are entrusted to personnel manager or HRD manager. 'Right man for the right job' is the basic principle in staffing. (4) Directing (Leading): Directing as a managerial function, deals with guiding and instructing people to do the work in the right manner. Directing/leading is the responsibility of managers at all levels. They have to work as leaders of their subordinates. Clear plans and sound organisation set the stage but it requires a manager to direct and lead his men for achieving the objectives. Directing function is quite comprehensive. It involves Directing as well as raising the morale of subordinates. It also involves communicating, leading and motivating. Leadership is essential on the part of managers for achieving organisational objectives. (5) Coordinating: Effective coordination and also integration of activities of different departments are essential for orderly working of an Organisation. This suggests the importance of coordinating as management function. A manager must coordinate the work for which he is accountable. Coordination is rightly treated as the essence of management. It may be treated as an independent function or as a part of organisms function. Coordination is essential at all levels of management. It gives one clear-cut direction to the activities of individuals and departments. It also avoids misdirection and wastages and brings unity of action in the Organisation. Co-ordination will not come automatically or on its own Special efforts are necessary on the part of managers for achieving such coordination. (6) Controlling: Controlling is an important function of management. It is necessary in the case of individuals and departments so as to avoid wrong actions and activities. Controlling involves three broad aspects: (a) establishing standards of performance, (b) measuring work in progress and interpreting results achieved, and (c) taking corrective actions, if required. Business plans do not give positive results automatically. Managers have to exercise effective control in order to bring success to a business plan. Control is closely linked with other managerial functions. It is rightly treated as the soul of management process. It is true that without planning there will be nothing to control It is equally true that without control planning will be only an academic exercise Controlling is a continuous activity of a supervisory nature. (7) Motivating: Motivating is one managerial function in which a manager motivates his men to give their best to the Organisation. It means to encourage people to take more interest and initiative in the work assigned. Organisations prosper when the employees are motivated through special efforts including provision of facilities and incentives. Motivation is actually inspiring and encouraging people to work more and contribute more to achieve organisational objectives. It is a psychological process of great significance. (8) Communicating: Communication (written or oral) is necessary for the exchange of facts, opinions, ideas and information between individuals and departments. In an organisation, communication is useful for giving information, guidance and instructions. Managers should be good communicators. They have to use major portion of their time on communication in order to direct, motivate and coordinate activities of their subordinates. People think and act collectively through communication. According to Louis Allen, 'Communication involves a systematic and continuing process of telling, listening and understanding. Importance of Management (1) Optimum utilisation of resources: Management facilitates optimum utilisation of available human and physical resources, which leads to progress and prosperity of a business enterprise. Even wastages of all types are eliminated or minimized.

(2) Competitive strength: Management develops competitive strength in an enterprise. This enables an enterprise to develop and expand its assets and profits. (3) Cordial industrial relation: Management develops cordial industrial relations, ensures better life and welfare to employees and raises their morale through suitable incentives. (4) Motivation of employees: It motivates employees to take more interest and initiatives in the work assigned and contribute for raising productivity and profitability of the enterprise. (5) Introduction of new techniques: Management facilitates the introduction of new machines and new methods in the conduct of business activities. It also brings useful technological developments and innovations in the management of business activities. (6) Effective management: Society gets the benefits of efficient management in terms of industrial development, justice to different social groups, consumer satisfaction and welfare and proper discharge of social responsibilities. (7) Expansion of business: Expansion, growth and diversification of a business unit are possible through efficient management. (8) Brings stability and prosperity: Efficient management brings success, stability and prosperity to a business enterprise through cooperation among employees. t (9) Develops team spirit: Management develops team spirit and raises overall efficiency of a business enterprise. (10) Ensures effective use of managers: Management ensures effective use of managers so that the benefits of their experience, skills and maturity are available to the enterprise. (11) Ensures smooth functioning: Management ensures smooth, orderly and continues functioning of an enterprise over a long period. It also raises the efficiency, productivity and profitability of an enterprise. ( 12) Reduces turnover and absenteeism: Efficient management reduces labour turnover and absenteeism and ensures continuity in the business activities and operations. (13) Creates sound organisation: A dynamic and progressive management guarantees development of sound Organisation, which can face any situation - favorable or unfavorable with ease and confidence. The very survival of an enterprise depends on its management. Ineffective management leads to disastrous consequences. According to George Terry, "Ineffective management cuts at the very roots of economy of an enterprises. This suggests the importance of efficient management. In brief, management occupies a unique position in the functioning of business enterprises. Its importance and positive role is accepted in all sector-private, public, joint and co-operative. Management is like a human brain. It is an integral aspect of business itself. The importance of management is not fully realised in many developing countries. The economic progress of western countries is not merely due to abundant material resources but because they are efficiently managed and utilised. In other countries, resources are not utilised fully and properly due to lack of managerial skills. This suggests that management is a key factor in the working of business enterprises. There is no substitute to efficient management. An inefficiently managed business enterprise has no place in the present complex and competitive business world groups. 5.4 Management in the Future In the next couple of decades, management theory and practice is bound to change in order to meet the complex and ever changing environmental variables. The phenomenal growth in multinational and transnational operations, fast changing technology, increasing complexity of decision making, dynamic social and economic environment, globalisation of business and elastic project organisations and task

groups will significantly influence the future managerial world and managerial tasks. There are successful business and management leaders publishing their memories and offering their experience to the world. There is great increase in the number of business schools. Management education is bank ably providing expertise to nonage the business and this trend is likely to continue. Career paths are likely to be based on expertise alone. Managers will be under pressure to develop this expertise and apply it in an everwidening range of situations rather than their ability to survive the bureaucratic jungle. They will have to combine their personal, professional and operational qualities and capacities to the satisfaction of employers and the society. The future must be considered as an opportunity and not a problem. The future business environment will he dominated by information technology (IT), globalisation, material and energy shortages, problems of pollution and ecological balance, consumerism, inflation and R & D. The costs of employing expert managers are regarded as an investment for effective business performance. Management is a designated expertise, increasingly professionalized and is likely to progress to a highly organised status. It is assumed that young people will choose management as an occupation and will progress from lower to middle and from middle to top management positions. An ever-greater range of knowledge is available to all aspects of business and management. Some forces/factors that are likely to have an impact upon management in future are as mentioned below-. (1) Emergence of knowledge society. (2) Development of socially - concerned Humanistic society. (3) Widespread application of information technology (IT) (4) Transition from industrial to service economy. (5) Growing use of innovations and R & D. (6) Social accountability of business. (7) Satisfaction of human and social values in man-machine system. (8) Liberalization and Globalisation of the business 5.5 Development of Management Thought Management thought has a long history. It is as old as human civilization itself. Management in one form or the other has been a significant feature of economic life of mankind throughout ages. Management thought is an evolutionary concept It has develop along with and in line with the growth of social, political, economic and scientific institutions. Management thought has its origin in the ancient times. It developed gradually along with other socioeconomic developments. The contributors to management though are many. They include Management philosophers, management practitioners and scholars. Modem management is based on the solid foundations laid down by management thinkers from the early historical period. Evolution of Management Thought Historical Background: The recorded use of organised management dates back to 5000 B.C. when the agricultural revolution had taken place. These agricultural civilizations existed in India, China and Egypt According to Peter Drucker these irrigation civilizations "were not only one of the great ages of technology, but it represented also mankinds most productive age of social and political innovation". As the villages grew and civilizations evolved, the managers too grew and evolved. They became the priests, the kings, the ministers holding power and wealth in the society. Written documents found in the Sumerian civilization which flourished some 5000 years ago, contains evidence of management control practices.

As early as 4000 B.C., the Egyptians were aware of the importance of planning, organising and controlling. The huge pyramids of Egypt stand a mute testimony to the managerial and organizational abilities of the ancient Egyptian civilization. One pyramid required 1,00,000 men working for 20 years, covering 13 acres, using 2.3 million blocks, each weighing an average of 2.5 tons. To produce such a monument required proper planning, work allocation, organising, directing, controlling and decision making. In the Grecian civilization we find the origin of the Scientific Method in the famous Socratic discourses. The Romans who built a vast empire extending from Britain in the west to Syria in the east ruled it for many years only because of their superior and advanced managerial abilities. In ancient India Kautilya wrote his Arthashastra in about 321 B.C. the major theme of which was political, social and economic management of the State The study of administration of the cities of Mohenjodaro and Harappa of the ancient Aryans in 2000 B. C., Buddha's order and the Sangha in 530 B. C., provide evidence about the use of the principles of management. During the 13th and 14th centuries AD the large trading houses of Italy needed a means of keeping records of their business transactions. To satisfy their needs Luca Pacioli published a treatise in 1494 describing the Double Entry System of Book-keeping for the first time. Management thought is an evolutionary concept. New theories and principles were suggested along with new developments in the business field. The new thoughts supplemented the existing thoughts and theories. This is how developments are taking place continuously in regard to management thoughts/theories. Management thinkers and thinkers from other fields such as economics, psychology, sociology and mathematics have also made their contribution in the evolution of management thought. This evolution of management thought can be studied in the following flum broad stages: (A)The Classical Theory of Management (Classical Approach): It includes the following three streams of thought: (i) Bureaucracy, (ii) Scientific Management; and (iii) Administrative Management (B)The Neo-classical theory of Management: It includes the following two streams: (i) Human Relations Approach and (ii) Behavioral Sciences Approach (C) The Modern Theory of Management: It includes the following three streams of thought: ( i)Quantitative Approach to Management (Operations Research); (ii) Systems Approach to Management and (iii) Contingency Approach to Management It is rather difficult to state the exact period of each stage in the evolution of management thoughtExperts, in general, agree with the following period for each thought/school (a) Classical School/thought: 1900 to 1930. (b) Neo-classical School/thought: 1930 to 1960. (c) Modern School/thought: 1960 onwards. Contributors to Management Thought The development of management thought is the result of contributions made by pioneering management thinkers and experts from other social sciences such as economics and psychology. (1) Contribution of F. W. Taylor to Management Thought F.W. Taylor is one of the founders (the other two are Max Weber and Henry Fayol) of classical thought/classical theory of management. He suggested scientific approach to management also called scientific management theory. F. W. Taylor (1856-1915) is rightly treated as the father of scientific management. He suggested the principles of scientific management. His concept of scientific management developed into a movement and dominated the industrial management for several decades after him. His concepts and principles were refined and popularized by several of his followers, notable among them being Henry Gantt, The Gilberths and Emerson. Principles of Scientific Management of Taylor

According to Taylor, scientific management in its essence consists of a philosophy which results in a combination of four important underlying principles of management. First, the development of a true science, second, the scientific selection of the workers, third, their scientific education and development, Froth, intimate co-operation between management and their men. The basic principles of Taylor philosophy of scientific management are as noted below. These principles of scientific management are most crucial aspects of scientific management. (1) The development of 'One best way" of doing a job. This suggests the task of finding out the best method for achieving the objectives of a given job. The standards are decided scientifically for Jobs and incentive wages were paid for all production above this standard. Here, job analysis and standardization of tools, equipment, machinery, etc. are required. (2) Scientific selection of workers and their development through proper training (3) Scientific approach by management. The management has to develop a true science in all fields of work activity through scientific investigation and experiments. (4) Close co-operation of managers and workers (labour management relations) for better results and understandings. (5) Elimination of conflict between methods and men. The workers are likely to resist to new methods. This can be avoided by providing them an opportunity to earn more wages Features of Scientific Management of F. W. Taylor (1) Scientific task setting: F. W. Taylor suggested the introduction of standard task which every worker is expected to complete within one day (working hours) the task is to be calculated through careful scientific investigation. For this, work study (i.e. method study and work measurement study) is essential. Taylor suggested time study, motion study, fatigue study and rate-setting for the introduction of scientific task. Time study is the art of observing and recording the time required to do each detailed element in an industrial operation. Motion study refers to the study and analysis of the movements of an operator while performing a job so that attempts can be made to remove useless/unwanted movements from the process. Both the studies together help in determining the best method of performing a job and the standard time allowed for it. This replaces the old rule--ofthumb knowledge of the workers. The workload, the best method of performing the same and the time within which it must be performed are suggested in this feature of scientific management by Taylor (2) Planning the task:- For performing the task by every worker, Taylor suggested the need of planning the production activity accurately. This idea of planning is Taylor's gift to the science of management. Planning of task gives answers to the following questions. What has to be done, how it is to be done, where the work shall be done and when the work shall be done. (3) Scientific selection and training of workers: Taylor suggested the need of scientific selection of workers for the plant/production activities. The procedure of selection must be systematic so as to select the best and the most suitable persons for different types of jobs. Correct placement of workers is equally important He also suggested the need of training of workers so as to raise their ability or efficiency. Training is to be integrated with the promotion policy. He also suggested differential piece wage plan for compensation payment to workers. He also suggested the importance of cordial relations between management and workers. (4) Standardization: Taylor suggested the importance of standardization of tools and equipment, materials, conditions of work and speed of machines. This brings co-ordination in different activities and all workers will be able to perform the task assigned easily. The workers will have satisfactory working conditions for work due to such standardization.

(5) Specialization: Taylor suggested specialization in the administrative and organizational setup of the plant He suggested functional foremanship. Taylor recommended eight functional foremen for different activities and functions. The foremen suggested by him are like route clerk, instruction card clerk, speed boss etc. Such specialization is useful for raising efficiency of the whole organisation. (6) Mental revolution: The techniques suggested by F. W. Taylor in his scientific management are different as compared to traditional techniques and methods. Naturally, these techniques can be used only when workers supervisors and managers accept them in theory and also in practice For this, Mental revolution on their part is essential The success of scientific management rests basically on the attitude of management and workers. They must give up their old ideas and methods and must accept new scientific methods. For this, mental revolution on the part of both is essential. Cooperation from workers and management for the introduction of scientific management depends on this mental revolution. Benefits/Advantages of Scientific Management: (1) Application and use of scientific methods. (2) Wide scope for specialization and accurate planning (3) Minimum wastages of materials, time and money. (4) Cordial relations between workers and management. (5) Benefits to workers (higher wages and less burden of work), management (cost reduction, better quality productions) and consumers (superior goods at lower prices) Scientific management not only developed a rational approach to solving organisational problems but also contributed a great deal to the professionalisation of management. Time and motion studies, scientific selection of workers, work design and one best way to doing a job are some new ideals suggested by Taylor and are responsible for the introduction of Many positive changes in the field of industrial/ production management. F. W. Taylors Contribution to the Development of Management Thought/Science The contribution of F. W. Taylor to management thought is as explained below: (1) Emphasis on rational thinking: Taylor suggested rational thinking on the part of management for raising efficiency and productivity. He wanted managements to replace old methods and techniques by Modern methods which will raise productivity and offer benefits to all concerned parties. He was in favour of progressive, scientific and rational thinking on the part of management on all managerial problems. Such progressive outlook is essential for the introduction of new techniques and methods in the Management (2) Introduction of better methods and techniques of production: F. W. Taylor suggested the importance of improved methods and techniques of production. Work-study techniques are his contribution to management thought. He suggested new methods after systematic study and research. Taylor recommended the use of new methods for raising overall efficiency and productivity. (3) Emphasis on planning and control of production: Taylor suggested the importance of production planning and control for high production, superior quality production and also for low cost production. He introduced the concept of production management in a systematic way. (4) Importance of personnel and personnel department: Taylor suggested the importance of manpower in management. He was in favour of progressive personnel policies for the creation of efficient and satisfied labour force. He suggested the need of personnel department and its importance. He favored incentive wage payment to workers.

(5) Industrial fatigue and rest pauses: Taylor noted the nature of industrial fatigue and suggested the introduction of suitable rest pauses for removing such fatigue of workers. He wanted to reduce the burden of work on workers through the use of scientific methods. (6) Time and motion study: Taylor introduced new concepts like time study, motion study and work study in the field of industrial management such concepts are for the introduction of new methods which will be more quick, scientific and less troublesome to workers. The positive view of scientific management was described by Taylor as 'Science, not rule of thumb; Harmony, not discord; Co-operation, not individualism; maximum output in place of restricted output. The development of each man to his greatest efficiency and prosperity F.W. Taylor a rightly treated as father of scientific management. In fact, through his concept of scientific management, Taylor actually developed a new science of management which is applicable not only to management of industrial units but also to the management of all other business units. He suggested certain techniques which can be applied purposefully to all aspects of management of business activities. This is treated as Taylors unique contribution to management thought. The fundamental principles suggested by F. W. Taylor in his scientific management can be treated as his contribution to management thought. In fact, Taylor suggested scientific attitude and a new philosophy for discarding old and outdated ideas and techniques. He was instrumental for the introduction of new ideas and techniques in the science of management. These ideas aid techniques are now accepted in theory as well as in practice. Criticism of Scientific Management / Opposition to Scientific Management: Scientific management has wider economic and social significance. It has succeeded in revolutionalising the very concept of management by offering a novel approach to the managers in managing men, materials and methods. In spite of several benefits, Taylor's scientific management concept has widely been criticized by employers, workers, trade unions and also by theorists. They oppose Taylor's scientific management on different grounds. The points of criticism we as explained below: (A) Criticism from Employers (1) Huge investment required: Heavy investment is necessary for reorganization of preliminary standardization of tools, machines and equipment and conduct of time and motion studies and other research activities for the introduction of scientific management. Such investment may not be possible in small and medium size enterprises. (2) Sudden change may disturb existing working arrangements: Sudden change due to the introduction of scientific management may paralyze the existing arrangement of work and will bring the entire Organisation in difficulties. There will be loss due to reorganization, if scientific management is to be introduced. (3) Unsuitable to small units: Small manufacturers argue that the concept of scientific management is not suitable to their units due to financial and other difficulties. (4) Benefits after a long period: The benefit of scientific management will be available only after a long period and the business unit may come in financial and other difficulties during the process of introduction of new changes as suggested in the scientific management. (5) Huge overhead expenses required: Introduction of scientific management involves huge overhead expenses which may erode profitability. (B) Criticism from Workers and Trade Unions/Why did Trade Unions Oppose Scientific Management? (1) Heavy burden on workers: Workers feel that they will have to share more burden of work as a result of introduction of scientific management They also fear that the benefits will he shared by the

employer alone and that they will be at a loss from all sides. Workers and their unions feel that it will lead to their exploitation and they oppose scientific management on this ground. (2) Reduces initiative among workers: Workers and trade unions argue that scientific management will destroy their initiative and they will be converted into machines in the production process with no freedom, initiative and choice. Similarity, over-specialization (excessive specialization) will lead to monotony and mental fatigue. Hence, they oppose Taylor's scientific management. (3) Possibility of unemployment: Workers and their unions also feel that scientific management will lead to unemployment and that workers will be removed due to the use of labour-saving devices. This will lead to loss of employment and income to workers. This is likely to make trade unions weak and hence they oppose scientific management. (4) Exploitation of workers: Workers argue that they will be exploited under scientific management as they will have to share more burden of work without corresponding increase in the wage rate. Trade unions also oppose to scientific management as it is likely to put more burden of work on the workers without corresponding monetary benefit. (5) Possible adverse effects on workers unity: Trade unions also oppose scientific management as they fear that the unity among workers will be adversely affected. Workers will be divided into efficient and inefficient categories. In addition, different piece rate plans will be introduced in place of uniform wage rate. As a result, workers will be divided. Workers getting high salary will not be interested in the union activities and this will make their union week and ineffective. Even more unions and rival unions will be formed. In brief, trade unions strongly criticize scientific management as it breaks solidarity of workers The criticism of scientific management by employers and workers/trade unions is not based on sound reasoning. Their arguments are not based on realities. It is possible to give counter-arguments to every point of criticism noted by them. For example, employers object scientific management on the ground of huge investment for its introduction. It is true that huge investment will be necessary but it is likely to give greater return in due course. In addition, scientific management will bring down the cost and thereby enhance the profits. (2) Contribution of Henry Fayol to Management Thought Henry Fayol (1841-1925) is rightly treated as the father of modern theory of general and industrial management. The credit of suggesting the basic principles of management in an orderly manner goes to Henry Fayol. After obtaining an engineering degree, Henry Fayol, joined as chief executive in a coal mining company. He developed his management principles and general management theory and published them in the form of a book (in French) "General and Industrial Administration" in 1916. It was translated into English in 1930. In due course of time, Henry Fayol came to be recognised as the founder of modern management theory. His analysis of management process acts as the foundation of the whole management theory and the present super-structure of management has been built on it. Henry Fayol suggested important qualities of managers and stressed the need for raising such qualities. He developed fourteen principles of management out of his practical experience. These principles are universal in character and are applicable to all types of organisations. Each principle suggested by him has specific meaning and significance. According to him, managers in all organisations need to follow these principles/guidelines while managing the affairs of their business units. The management principles suggested by him in 1916 are universally accepted by modern authorities on management and are treated as valid even to this day. This is because these principles are practical in nature and also result-oriented. In fact, these principles are the outcome of his long experience as a practicing manager. These basic principals are useful for effective management of business activities. They are related to the basic components of management process such as planning, organizing, staffing, leading, coordinating and

controlling. He incorporated these principles in the management theory suggested by him.The principles of management suggested by him are useful not only in business/industrial enterprises but also in other organisations such as colleges, hospitals, charitable institutions and government departments. Due to his contribution to management theory and principles, Henry Fayol is rightly treated as the Father of Modern Management Thought. Fayol is the first management thinker who provided the conceptual framework of the functions of management in his book General and Industrial Management. The functions of management according to Fayol are, (1) Planning (2) Organising (3) Staffing (4) Commanding (5) Coordinating (6) Controlling The fourteen principles of management suggested by him are related these basic functions of management process and are universally accepted. Fayol has given adequate details of every principle suggested by him. He also made them easily acceptable by others. According to Henry Fayol, managers should be flexible in the application of these principles. Fayol divided general and industrial management into six groups these are: (a) Technical activities (production, manufacture, adaptation). (b) Commercial activities (buying, selling and exchange). (c) Financial activities (search for and optimum use of capital). (d) Security activities (protection of property" and persons). (e) Accounting activities (stock taking, balance sheet, cost, and statistics). (f) Managerial activities (planning, organising, command, coordination and control). Henry Fayol also suggested 14 principles of management these principles are (1) Division of work, (8)Centralization (2) Authority and responsibility, (9) Scalar chain, (3) Discipline, (10) Order, (4) Unity of command, (11) Equity, (5) Unity of direction, (12) Stability oft tenure, (6)Subordination of personal interest to organizational interests (13) Span of co-operation and (7) Remuneration (14) Initiative Henry Fayols contribution to management theory is certainly remarkable. He gave overall concepts of general management and suggested the basic functions of management. He recommended the selection and training of workers and managers. He also advocated the use of organisation charts. He suggested certain qualities of managers winch include physical, mental, moral, educational technical and experience. Fayols theory of management was the first complete theory of management as we understand today. It incorporated proven principles, elements, procedures and techniques based on his practical experience. (3) Contribution of Elton Mayo to the Development of Management Thought Elton Mayo (18801949) is recommended as the Father of Human Relations School. He introduced human relations approach to management thought. His contribution to the development of management thought is unique and is also treated as human relations approach to management. It was Mayo who led the team for conducting the study at Western Electric's Hawthorne Plant (1927-1932) to evaluate the attributes and psychological reactions of workers in on-the-job situations. His associates included John Dewery, Kurt Lewin and others. Mayo and his associates came to the following conclusions from their famous Hawthorne experiments: (1)The amount of work to be done by a worker is not determined by his physical capacity but by the social norms. (2) Non-economic rewards play a significant role in influencing the behavior of the workers. (3) Generally the workers de not reacts as individuals, but as members of group. (4) Informal leaders play an important part in setting and enforcing the group norms

Mayo discussed the factors that cause a change in human behavior. He concluded that the cause of increase in the productivity of the workers is not a single factor like rest pauses or changing working hours but a combination thease and several other factors such as less restrictive supervision, giving autonomy to workers,, allowing the formation of small cohesive groups of workers and so on. Today, as a result of the efforts of Mayo and his associates, the managers in different organisations recognize that workers' performance is related to psychological, sociological and physical factors. Thus, Hawthorne Study was an important landmark to study the behavior of worker and his relationship to the job, his fellow workers and the organisation. It proved that informal work groups and the opportunity to be heard and participate in decision-making have an important impact on the productivity of the workers. Mayo is one leading management thinker and also a leading advocate of neo-classical theory. The concept of participative management style was suggested in the neo-classical theory. The human relations approach suggested by Mayo has special importance in the present period. He rightly suggested the importance of democratic leadership and participative management style for running business activities efficiently. The role of people (workers) is clearly suggested by Mayo. He rightly suggested that management is not a mechanical process but a study of people involved in the production activities. Management will get positive response from its employees when their actions, sentiments and expectations are given due attention. Mayo is best known for his work on the project commonly referred to as the Hawthorne Studies. They were conducted in the Hawthorne plant of Western Electric Company in the USA between 1927 and 1932. It is said that Mayo applied psychological approach to management for the first time. He used clinical and diagnostic methods. Mayo has drawn various conclusions from these studies. The Hawthorne Studies have had a shattering impact on management thinking. Mayo is regarded as revolutionary thinker because of his contribution to the management thought in the recent period. The credit of humanization of management with a view to achieve common interest of management and workers goes to Elton Mayo. Some of the major findings of Hawthorne Studies we as noted below: (1)Employee's behavior is influenced by mental attitudes and emotions including prejudices. (2)The workers in a group develop a common psychological bond uniting them as a group in the form of informal organisation. (3) In managing and motivating employee groups, human and social motivation plays greater role then financial incentives. (4) Management must understand that a typical group behavior can dominate or even supersede individual propensities and preferences. (5) When workers are given special attention by management, the productivity is likely to increase irrespective of actual changes in the working conditions. Hawthorne Studies are primarily responsible for consideration of non financial incentives in improving productivity. Mayo pointed out that the organization is a social system and informal organisation is a reality. The knowledge of human nature can solve many problems of management. He emphasized that successful human relations approach can easily create harmony in an organisation, higher employee satisfaction and great operational efficiency. Central to this approach was an increased understanding of the individual worker with emphasis on motivation, needs, interpersonal relationships and group dynamics Mayo believed that a factory is not only a workplace but also a social environment in which the employees interact with each other. This gave rise to the concept of the 'social man' whose interaction with others would determine the quality and quantity of the work produced.

Mayo developed his Human Relations Theory of Management on his Hawthorne experiments. He introduced human relations approach to management and is rightly considered as one of the pioneers of the Human Relations Theory of Management. Features of Human Relations Approach: (1) A business organisation is not merely a techno-economic system but also a social system and involves human element. (2) An individual employee is motivated not merely by economic incentives but also by non economic incentives, psychological and social interests, needs and aspirations. (3) The informal groups in the organisation are more important than individuals and play an important role in raising productivity. (4) In place of task-centered leadership, the employee-centered, humanistic, democratic and participative style of leadership should be introduced as it is more effective / productive (5) Employees are not necessarily inefficient or negative in their approach. They are capable of selfdirection and control (6) Employees performance can be raised by meeting their social and psychological needs. Cordial atmosphere at work place is also useful for raising productivity. (7) Management needs social skills along with technical skills in order to create a feeling (among the employees) that they are a part and parcel of the organisation and not outsiders. (8) Employees need respect and positive feeling from the management. For this, employees should be encouraged to participate and communicate freely their views and suggestions in the concerned areas of decision-making. (9) The management has to secure willing cooperation of employees. The objective before the management should be to secure cooperative effort of its employees. For this, employees should be made happy and satisfied. The features of human relations school (noted above) are important as they were introduced in the management theory for the first time. At present, these features are well recognised but were unique when suggested by 1930. Human relations approach is a progressive development as compared to classical approach. Here, productivity is not treated merely as an engineering problem. Cooperation of employees, team spirit and their satisfaction are treated as factors useful for raising productivity. The human relations approach has put special stress on social needs and the role of management in meeting such needs. Limitations of Human Relations Approach: There are certain limitations of human relations approach. These are as noted below: (1) Too much importance to employees, and social needs. Human relations approach to management has given too much importance to employees, their needs and satisfaction. It has given undue stress on the social side of management as compared to technical side. It is another extreme as compared - to classical theory where employees were neglected considerably. Human relations approach has also neglected many other aspects such as organizational issues, environment at the work place, labour unions, structure of the organisation and so on. (2) Employee-oriented approach to a limited extent: It is argued that human relations approach is apparently employee-oriented but in reality it is organisation-oriented. Many measures are suggested for the happiness and satisfaction of employees. Measures are suggested to satisfy employees in order to achieve organizational objectives and not for meeting the real needs of workers. Their participation in management or upward communication with the management, etc. is outwardly employee-oriented and gives them a false sense of happiness. In brief, the human relations approach is employee-oriented but only to a limited extent.

(3) Faulty assumption in the theory: The human relations approach is based on a wrong assumption that satisfied workers are more productive. After 1950s, it was proved that productivity improvement, as a result of better working conditions and the human relations skills of managers did not result in productivity improvement as expected. Thus, workers satisfaction is one but not the only factor which raises industrial productivity. (4) Limited importance to economic incentives: The human relations approach has given limited importance to economic incentives in motivating employees. They prefer informal groups and cordial relations among them. However, their interest and loyalty to the organisation largely depends on monetary incentives. Low wages lead to Labour turnover even when the good treatment is given to employees, The human relations movement is based on the experiments conducted in the Hawthorne Plant in Cicero (USA). The major conclusion (of Hawthorne Experiments) was that the workers respond to their work situation as a whole and their attitudes and social relations constitute an important part of the total situation. In addition, the attitudes of workers and their relations with each other and with the management would play a role in forming their attitudes towards the total work situation. Elton Mayo conducted a series of pioneering studies at the Hawthorne plant they proved to be of much use in associating employees with the management for achieving organizational objectives. It is rightly pointed out that F. W. Taylor in his contribution to management thought suggested rationalizing work for greater labour productivity while Elton Mayo recommended/ advocated humanism work for enhanced efficiency and personal satisfaction. The basic purposes of both the approaches are identical. However; the approaches of Taylor and Mayo are different. Taylor's approach was purely engineering while may referred to social needs of employees and their satisfaction. Taylor's approach to scientific management lacks human elements in the production process. He treated employee as a cog in the wheel emphasizing on efficiency at all costs as if there is no difference between workers and machines. Mayo applied psychological approach to management. He recommended humanization of management for better results in terms of production and productivity. He rightly suggested that workers are human beings and not machines. They should be treated with dignity and honour while on job. Both the approaches (of Taylor and Mayo) are supplementary in the present management thought. At present, stress is on scientific management principles as well as on human approach to management. Efforts are being made to create favorable organisation climate for achieving organizational goals. Taylor's approach is comparatively old and was popular in the early decades of 19th century the human relations approach (suggested by Elton Mayo) is comparatively new and got popularity by 1930s. 5.6 Systems Approach to Management Thought Contributions to management thought/theory after 1960s are covered by modem management theories. Modem theories are based on classical and neo-classical theories but consider the management problems as they developed in the recent years. There are three streams under modern management theory. These are :( a) Quantitative/Mathematical Approach to Management, (b) Systems Approach to Management, and (c) Contingency Approach to Management. (a) Systems Management School (Systems Approach to Management Thought): A system is an organised entity i.e. a company or a business enterprise made up of parts connected and directed to some purpose. Each system has an input, a process and an output. It acts as a self sufficient unit. Every system is interlinked with its subsystems. Any organisation is looked upon as an artificial system, the internal parts of which work together to achieve established goals and the external parts to achieve interplay with the environment including customers, the general public, suppliers and government. The manager integrates available facilities to achieve a goal by means of systems that relate activities

required for the end result. The system serves as the media through which the manager operates. An integrated system can be used purposefully for the conduct of production, marketing, distribution and other activities relating to business in an orderly manner. A manager can conduct various activities in an orderly manner with the help of the systems established. A system is a set of interrelated and interdependent parts arranged in a manner that produces a unified whole. Almost anything can be viewed as a system. As per systems management school, an organisation is looked upon as an artificial system. Its internal parts work together to achieve established goals and the external parts to achieve interplay with the environment including customers, the general public, suppliers and government. The manager integrates available facilities to achieve a goal by means of systems that relate activities required for the end result. In this way, the systems management school helps in achieving the established goals of the organisation. It is possible to establish such systems management organisation in a business enterprise. For this authorities, departments, etc. will be created. The work will be properly distributed and various departments (sub-systems) will operate as per the work assigned under the project. The computer can be used extensively for the execution of systems management Data processing work will become easy and quick. Systems management enables a manager to work more efficiently because of easy availability of information in different aspects of business. Features of Systems Approach to Management: (1) Open or Closed Systems: Systems may be either open or dosed. An open system is one that is dependent on the outside environment for survival e.g., human body as a system is composed of many subsystems. This is an open system and it must depend on outside input and energy for survival. A system is considered closed if it does not interact with the environment. Physical and mechanical Systems are closed system because they are insulted from their external environment. Traditional organisation theorists regarded organisations as closed systems while according to the modern view organizations are open systems, always interacting with the environment. (2) Interdependent parts: A system is a set of interdependent parts which together form a unitary whole that perform some function. An organisation is also a system which consists of four interdependent parts viz., task, structure, people and technology. (3)Consideration of whole system: No part of the system can be precisely analyzed and under-stood apart from the whole system. Conversely, the whole system cannot be exactly evaluated without understanding all its parts. Each part is related to every other part. It means rather than dealing separately with the various parts of one organisation, the systems approach attempts to give the manager a way of looking at the organisation as a whole. For example, in order to understand the operations of the finance or production or marketing departments, he must understand the company as a whole. It is because activity of any one part of the company affects the activity of every other part. (4) Information, energy and material: Generally, there are three basic inputs that enter the processor of the system viz., information (technology), energy (motive power) and materials to be transformed into goods. If the output is service, materials are not included in the inputs. If we have manufacturing company, output is goods or materials. If we have a consultancy firm, output is information or advice. if we have a power generating company, output is energy. (5) Defined boundaries: Each system including an organisation has its own boundaries which separate it from other system in the environment. For open systems the boundaries are penetrable whereas for closed systems, they are not. The boundaries for closed systems are rigid. In a business organisation, it has many boundary contacts or 'interfaces' with many external system like creditors, suppliers,

customers, government agencies etc. The system is inside the boundary, the environment is outside the boundary'. (6) Synergy: Output of a system is always more than the combined output of its parts. This is called 'synergy. In organizational terms, synergy means when separate departments within an organisation cooperate and interact, they become more productive than if they had acted in isolation e.g., it is certainly more efficient for each department to deal with one secretarial department than for each department to have a separate secretarial department of its own. (7) Feedback mechanism: A system can adopt and adjust itself to the changing environment through the feedback mechanism. As operations of the system proceed information in feedback to the appropriate people. This helps to assess the work and if need be, to get it corrected. (8) Multidisciplinary approach: Systems approach integrates and uses with profit ideas emerging from different schools of thought. Management freely draws concepts and techniques from many fields of study such as psychology, sociology, ecology, economics, mathematics, statistics, operations research, systems analysis etc. Important contributors to systems school of management include Chester Barnard, Ludwig Von Bertalanffy, Russell Ackoff, Kenneth Boulding and William Scott. From 1960s onwards, the management theorists and practitioners are referring management concepts in a systems phraseology. A system means to bring together or to combine. When viewed from the systems angle, the organisation is seen as operating in an open system constantly interacting with its environment. It receives external inputs in a continuous manner and transforms them into outputs. Suitable adjustments and rectifications are also made as per the feedback available. An organisation which is not adaptive and responsive to its environment will not survive or grow. An organisation will have individuals, groups, formal structures, goals and resources. A manager has to see that all these parts work in co-ordination in order to achieve organizational goals. Absence of co-ordination will hamper the performance of the organisation. The systems approach suggests that the total performance of the organisation will be effective only when the different systems/units/activities are coordinated and integrated in an efficient manner. For example, efficient manufacturing division needs the support of efficient marketing division for achieving organizational objectives. If not, the total performance of the organisation will be jeopardized. The managers, as decision-making entities, have to regulate the sub-systems of the Organisation. They should not work in isolation but operate in co-ordination with others. This will avoid shortfalls in different components and bring success to the organisation. The emphasis of systems approach is on interrelatedness of the parts of an organisation. The introduction of integrated approach is treated as major contribution of systems theory. The systems approach developed only after 1950 and is the recent contribution to management thought. It stresses the interrelatedness and interdependence of all activities within an organization. The systems theory considers organisation as an open, adaptive system which has to adjust changes in its environment. It defines organisation as a structured process in which individuals interact for attaining objectives. Merits of Systems Approach: Systems approach to management is comparatively new to the management thought. This approach represents a refreshingly new thinking on organisation and management. It stresses that managers should avoid analyzing problems in isolation but should develop the skills for integrated thinking on management problems. The systems approach provides a unified focus to organizational efforts. It provides a strong conceptual framework for meaningful analysis and understanding of organisations. Systems approach provides clues to the complex behavior of organisation.

The systems theory suggests to practicing manager to study/analyze a particular element by taking into consideration its interacting consequences with other elements. A variety of systems concepts and perspectives have been developed for managers. The systems approach rightly points out the role of 'synergy' in management. Each subsystem derives strength by its association and interaction with other sub-systems. As a result, the overall outcome is more than the sum total of individual contributions. The other contribution of systems theory is its treatment of organisation as an open system. The Organisation exhibits a 'holistic' character. Limitations of Systems Approach: (1) The systems approach is criticized on the ground that it is too abstract and vague. It is difficult to apply it to practical problems directly and easily. (2) The systems theory/approach fails to provide specific tools and techniques for the practicing executives/managers. (3) The systems approach does not recognize differences in systems. It fails to clearly identify the nature of interactions and interdependencies between an Organisation and its external environment it also fails to offer a unified body of knowledge. Contingency Management School/Contingency Approach to Management/Situational Approach A common deficiency of the classical, behavioral and quantitative schools is that they have stress one aspect of the organisation at the cost of others. The classical approach emphasizes on 'task' while behavioral approach emphasizes on 'people. The stress of quantitative approach is on 'mathematical decision-making. However, it is difficult to understand precisely which aspect is most useful and appropriate in a given practical situation.This brings the need to develop me broad conceptual framework that can help a manager diagnose a problem and decide which tool or tools will best do the job. The systems approach as well as contingency approach provide one integrated approach to management problems. The contingency/situational approach is the second approach (the first being the systems approach) whichattempts to integrate the various schools of management thought in an orderly manner. The contingency management approach is similar to known leadership theory called situational leadership theory. The contingency approach is applicable to leadership as well as to business management. This situational management approach is relatively a new approach to management and is an extension of systems approach. The basic theme of contingency approach is that organisations have to deal with different situations in different ways. There is no single best way of managing applicable to all situations. In order to be effective, the internal functioning of the organisation must be consistent with the needs and demands of the external environment. In other words internal organisation should have the capacity to face any type of external situation with confidence. The main features of the contingency/ situational approach are: (1) Management is entirely situational. The management has to use the measures/techniques as per the situation from time to time. (2) Management should match its approach as per the requirements of the situation. The policies and practices used should be suitable to environmental changes. (3) The success of management depends on its ability to cope up with its environment. Naturally, it has to make special efforts to anticipate and comprehend the possible environmental changes. Managers should realize that there is no one best way to manage. They have to use management techniques as per the situation which they face. According to contingency approach, management principles and concepts of different schools have no universal/general applicability under all situations. This means these schools have not suggested one best

method of doing things under all situations and at all times. The contingency approach has provided a solution to this situation. As per the contingency approach, the task of managers is to try to identify which technique or method will be most suitable for achieving the management objectives under the available situation. Managers have to develop a sort of situational sensitivity and practical selectivity in order to deal with their managerial problems as they develop from time to time. Contingency approach views are applicable in designing organizational structure and in deciding the degree of decentralization in establishing communication and control systems and also in deciding motivational and leadership approaches. In brief, the contingency approach is applicable to different areas of organisation and management it is an attempt to integrate various viewpoints and to synthesize various fragmented approaches to management. The contingency approach is the outcome of the research studies conducted by Tom Burns and G. W. Stalker, James Thompson and others. Merits of Contingency Approach (1) Contingency approach is pragmatic and open minded It discounts preconceived notions, and universal validity of principles. (2) The theory relieves managers from dogmas and set principles. It provides freedom/choice to manage to judge the external environment and use the most suitable management techniques. Here, importance is given to the judgment of the situation and not the use of specific principles. (3) The contingency approach has a wide-ranging applicability and practical utility in, organisation and management. It advocates comparative analysis of organisations to bring suitable adjustment between organisation structure and situational peculiarities. (4) The contingency approach focuses attention on situational factors that affect the management strategy. The theory combines the mechanistic and humanistic approaches to fit particular/specific situation. It is superior to systems theory as it not only examines the relationships between subsystems of an organisation but also the relationship between the organisation and its external environment Limitations of Contingency Approach (1) It is argued that the contingency approach lacks a theoretical base. (2)Under contingency approach, a manager is supposed to think through all possible alternatives as he has no dried principles to act upon. This brings the need of more qualities and skills on the part of managers. The responsibility of a manager increases as he has to analyze the situation, examine the validity of different principles and techniques to the situation at hand, make right choice by matching the technique to the situation and finally execute his choice. The areas of operation of a manager are quite extensive under this theory. Contingency approach/theory is the latest addition to existing management theories. It was observed that different theories developed earlier are not applicable to all real world situations developed since 1970. An open and adaptable systems approach (also called contingency approach) is more convenient to deal with complex management problems. Contingency/ situational approach appears to be better suited to lead management out of the present management theory jungle. Contingency theories do not give special importance to any specific theory. It suggests that there is no one best way to management. In the Contingency approach, what is best for a particular business unit or organisation or under the available situation is given special attention. Each situation (before the management) is different and calls for a Contingency / situational approach. A manager has to study the complexity under each situation. He has to adjust his policies/decisions as per his awareness. He has to decide what is best under the available total situation and act accordingly. He (manager) has to identify

the technique which will be most effective for achieving organisation objectives under particular situation/ circumstances and act accordingly. This is the practical aspect of contingency approach. What constitutes best/effective management varies with the organisations internal and external environment and the makeup of the organizational sub-systems. The best management pattern depends on a number of interrelated internal and external variable factors around the specific organisation/business unit. The contingency approach falls somewhere in between the classical theory and systems theory. It provides a synthesis that brings together the best of aft segments of what Koontz has termed "management theory jungle". Contingency approach is practical progressive and action oriented. It considers each organisation as unique and gives special attention to situation around it. Finally, it integrates theory with practice in a systems framework. The other theories (classical or systems) are not rejected in the, contingency approach. However, they are viewed as incomplete, vague and unsuitable to all organisations and situations. QUESTION BANK 1. Discuss the functions and nature of management 2. Explain the nature of management process. Why management process is called social and consequential process? 3. What are the principles and features of scientific management of Taylor? Why did trade unions oppose scientific management? 4. Discuss contributions of Elton Mayo to the development of management thought? 5. Discuss features of systems approach to management 6. What is management? Explain the characteristics of management 7. Explain the importance of management in the present day business world.

Chapter 6 Planning 6.1 Introduction A plan is a determined course of action for achieving a specific objective. An individual may prepare a plan for his journey or tour or for a family function. Similarly, a business unit may prepare a plan to achieve a particular objective. It is called a business plan which includes production plan, sales plan, and so on. A business unit prepares a master plan for the whole unit. Such master plan is again divided into departmental plans for actual execution. Planning is a process of thanking to action. It is a means to achieve well defined objectives. Business plan and business planning move together. Planning is the primary function of management and occupies the first position in the management process. It is the starting point of the whole management process as other management functions are related to planning function. Planning, in simple words, means to decide the objectives clearly and to prepare a plan. Thereafter to take suitable steps for the execution of the plan. Planning function is

performed by managers at all levels. It is deciding the objective to be achieved and taking suitable follow-up steps for achieving the same.

Planning is, now, universally accepted as a key/passport to success, progress and prosperity in business as well as in all other aspects of life. It acts as a base of all purposeful human activities. The concept of planning is old enough. planning was advocated by Confucius almost 2500 years ago. He said "A man who does not think and plan long ahead will find trouble right at his door'. Thus, planning is the centre around which all business activities move. In planning, various business problems are studied, decisions are taken regarding the future course of action and business activities are adjusted accordingly. Thus, planning means deciding in advance the objectives to be achieved and preparing plans/programmes for achieving them. In other words, planning is the process of foreseeing desired objectives - anticipating problems and developing solutions. It serves as a core of the whole management process. Planning bridges the gap from where we are to where we want to go. In the absence of planning, events are left to chance. A plan is to-day's projection for tomorrow's activity. (1) According to Koontz and O'Donnell, "Planning is deciding in advance what to do, how to do it, when to do it, and who is to do it. Planning bridges the gap between where we are and where we want to go. It makes it possible for things to occur which would not otherwise happen. (2) According to George R Terry, 'Planning is the selecting and relating of facts and the making and using of assumptions regarding the future in the visualization and formulation of purposed activities believed necessary to achieve desired results. (3) According to Philip Kotler, 'Planning is deciding in the present what to do in the future. It is the
process whereby companies reconcile their resources with their objectives and opportunities". Need of Planning The need of planning is universally accepted in the business as well as in other aspects of life. The following points justify the need of business planning/planning in business: (1) Planning is needed for survival and growth of a business unit in an orderly manner. (2) Planning is needed in order to face new problems/difficulties developed due to growth of markets, market competition, changes in consumer expectations and so on. (3) Planning is needed in order to face challenges created by changing environmental factors/forces. (4) Planning is needed as it acts as a pre-requisite to good management. It is needed as it is the core of the whole management process. (5) Planning is needed in order to achieve the objectives decided by the management. It is also needed as it ensures accuracy, economy and operational efficiency in busin6s management. Importance of Planning Function in Business Management The importance of planning as an element in the management process is universally accepted. It plays a positive role in the management of a business unit. Planning brings stability and prosperity to a business unit. It brings unity of purpose and diverts all efforts in one direction for the achievement of certain well defined objectives. Planning also improves the performance of a business unit. In fact, in the absence of planning there will be disorder, confusion, inefficiency, wastage of human efforts and material resources. Planning is rightly treated as the pre-requisite to efficient management. The fact that large majority of business units use planning as a tool of management indicates its utility and importance. Planning brings safety to business operations. It is the only way for survival in the competitive business world. Planning is important as it is more than a mere theoretical exercise or paperwork. It has practical utility and creative value. Planning is also a rational and intelligent activity. It is, now, rightly treated as a highly professionalized aspect of business management Planning is important but planning alone is not adequate. It should be supplemented by suitable follow-up actions on the part of managers. Planning may not be able to solve all managerial problems,

but it certainly helps the thoughtful managers in overcoming various managerial problems. A plan will remain on paper if suitable follow-up steps are not taken at different levels for its execution. Thus, planning is a means and not the end in itself Advantages of Planning (1) Facilitates quick achievement of objectives: Planning facilitates quick achievement of business objectives. In the planning process, the objectives to be achieved are clearly decided / finalised and plans are prepared and executed for achieving such well defined objectives. Planning ensures achievement of objectives in an orderly and quick manner. (2) Brings unity of purpose and direction: Planning brings unity of purpose and direction before the entire organisation as it is for achieving certain well defined goals. Planning diverts all resources in one direction for achieving well defined objectives. (3) Ensures full utilisation of resources: Planning ensures effective/maximum utilisation of available human and material resources. It eliminates wastages of all kinds (of material resources and human efforts) and this ensures fuller utilisation of available resources. (4) Avoids inconsistency in efforts: Planning avoids inconsistency in efforts and also avoids possible frictions and duplications. It ensures economy in business operations. (5) Raises competitive capacity/strength: Planning raises competitive potentialities of a business unit. It enables a business unit to stand with confidence in a competitive market. It keeps ready solutions for possible problems and enables a business unit to function with confidence. (6) Promotes managerial efficiency: Planning promotes managerial efficiency. It covers all managerial functions and helps management to execute future programmes in a systematic manner. It makes managerial direction and control effective. (7) Avoids hasty decisions and actions: Due to planning, hasty decisions and haphazard actions by managers are avoided. It also encourages systematic thinking by the managers. Planning facilitates effective delegation of authority, removes communication gaps and thereby raises overall efficiency. It even encourages innovative thinking among managers. (8) Ensures effective control on the Organisation: Planning ensures effective control on the whole organisation. It fixes targets in clear terms and draws plans and programmes for achieving them. This facilitates effective control on the functioning of the business unit. (9) Acts as an insurance against future uncertainties: Planning acts as an insurance against future uncertainties. It takes care of all business uncertainties. In fact, in planning, future problems and situations are studied in advance and alternative solutions are kept ready. This enables management to face any type of critical situation with ease and confidence. (10) Facilitates other managerial functions: Planning facilitates other managerial functions. It is the basic managerial function and other managerial functions such as organising, etc. move as per the plans prepared. It acts as a motivating force behind other managerial functions. (11) Improves motivation: Planning facilitates participation of managers and workers in the normal functioning of an enterprise. It develops team spirit and raises morale and motivation of employees. Workers know what is expected from them. This ensures high degree of efficiency from them. Planning also provides training to managers. It serves as a tool for manpower development in an Organisation. (12) Miscellaneous Advantages: (a) Planning ensures survival, stability and progress of a business unit. (b) Ensures uniform decision-making. (c) Acts as a key to solve problems and challenges faced by a business unit. (d) Sets performance standards for functional departments. (e) Planning enables a business unit to adjust itself with ever changing business environment. Limitations of Planning (1)Time-consuming and costly- It is argued that planning is a lengthy process as it involves collection of data, forecast, research and analysis. Similarly, planning is essentially the job of

(2)

(3)

(4)

(5) (6)

(7)

(8)

highly paid experts. As a result, planning is a time-consuming and costly activity. Only large firms can undertake planning due to heavy cost and lengthy procedure involved in it. Ineffective due to environmental changes: Business environment changes frequently and plans are required to be adjusted as per the changes in the situation through suitable modifications. However, such revision/modification creates a number of problems. Such adjustments in the operational plan are always costly, time-consuming. Dangers of unreliable data: Planning needs accurate data from internal and external sources. The quality of planning depends on such accurate feedback. If the information supplied by various departments is unreliable, the planning process will be adversely affected. Planning based on incomplete information may prove to be even dangerous. In brief, plans based on unreliable data are not useful /effective. Securing reliable information is always difficult and this brings deficiencies in the entire planning process. Encroachment on individual freedom and initiative: Planning is a centralized process. At the lower levels, plans are to be executed as per the directives issued. This affects individual freedom and initiative at the lower levels. Employees at the lower levels act as instruments for the execution of plan prepared by the top level managers. People are asked to become cogs in the machine with little scope for initiative or independent thinking. Delays actions: Planning is a lengthy process. As a result, the actions to be taken for execution are delayed. Planning is not useful when quick decisions and actions are required. Unsuitable to small firms: Small firms prefer to function without long term comprehensive planning as they find planning rather costly and time-consuming. They prefer to face the situations as they come. Similarly, quick decisions and prompt actions are necessary in the case of certain business activities. Here, long term planning is not suitable. Limited practical value: It is argued that planning is too theoretical and has limited practical utility. Planning takes long time for preparation and the situation changes when such plans are ready for execution. Planning for example, is not suitable in the case of speculative business. It is also not useful for taking quick benefits of business opportunities. In brief, planning has limited practical value. No guarantee of expected results: Planning is for achieving certain well defined objectives. However, there is no guarantee that the objectives will be achieved within the specific time limit by using planning as a tool. Actual performance may not be as per the expectation due to various reasons. Thus planning has an element of uncertainty. Planning leads to probable results and not the expected results. It gives benefits but may not be exactly as per the expectation. Thus, there is no guarantee that planning will give 100 per cent positive/expected results.

(9)

Generates frustration: At the lower levels, plans are imposed on the employees. No consideration is given to their difficulties, views and opinions. The targets may be too ambitious and the employees may not be able to achieve them in spite of best efforts. This leads to frustration among employees at lower levels. (10) Involves huge paper work: Planning involves huge paper work in the preparation of master plan and departmental plans. (11) Danger of overdoing: Sometimes, planners overload the work. Elaborate reports are prepared without practical utility. The advantages of planning are more important/significant while its limitations are few and also not of serious nature. Moreover, these limitations can be minimized. The practical utility of planning is universally accepted. It is not fair to give up the concept of planning due to certain limitations. The better alternative is to make it more effective, purposeful and result oriented.

6.2 Steps in Planning Process Planning is a lengthy process which moves gradually and step by step approach is usually adopted. These steps are like stations in the journey of planning process. Usual steps in the planning process are as briefly explained below: (1) Classifying the problems: The planning process starts with clear understanding and classifying business problems faced by a business unit. Identification of problems or opportunities by managers justifies the need for action. It is like the diagnosis of the health problem of a patient by his doctor. Planners have to understand the problems of the Organisation first and, then, prepare a plan to deal with the problems in the light of the prevailing business environment. (2) Determining the objectives: In this second stage in the planning process, the planners decide the overall objectives to be achieved. Planning is always for achieving certain well defined objectives and naturally objectives must be spelt out precisely. Objectives act as pillars of the entire planning process. Business objectives may be decided in terms of profit, sales, production or market reputation. Objectives may be defined in quantitative or qualitative terms. (3) Collecting complete information and data: The planners have to collect information relating to problems facing the business unit. Such information is necessary and useful for analyzing the problems in depth and also for accuracy in planning. Information can be collected from internal and external sources. Reliable, updated and adequate data make planning process resultoriented. (4) Analyzing and classifying the information: At this stage, the information collected is analyzed and interpreted systematically for drawing specific conclusions. This facilitates purposeful use of information, while preparing alternative plans. Irrelevant information can be discarded through such analysis. (5) Establishing planning premises: Planning premises are various assumptions and predictions about the future business situation. Such premises act as background for planning activities. The planning premises are expected to supply relevant facts, information and data on the basis of which forecasts are prepared and future trends are indicated. Planning premises reduce uncertainties in the planning process. Planning premises are three in number viz., (a) Controllable permises, (b) Semi-controllable permises, and (c) Uncontrollable premises. (6) Determining alternative plans: Here, the planners prepare and keep ready alternative plans suitable for use under different situations. The best among the available alternative plans is used for actual execution. The preparation of alternative plans is essential as one plan is normally not adequate under all types of situations. It is a type of stand-by arrangement useful for meeting any emergency situation. (7) Selecting operating plan and preparing derivative plans: After study of the business environment and the alternative plans available, the planners select the best plan for actual execution. This decision is a delicate one and must be made with proper care. After the selection of operating plan, the planners have to prepare derivative plans. Such plans are related to different departments/activities and constitute sub-sections of the operating plan. The division of overall plan into derivative plans is necessary for effective execution. (8) Arranging timing and sequence of operations: Timing involves fixation of starting and finishing time for each job or piece of work. Sequence of operations ensures proper flow of work. This step in planning process is important as it brings coordination in the activities of different departments. The timings and sequence of operations must be communicated to concerned departments, managers and staff for implementation of the plan. (9) Securing participation of employees: Planning needs willing participation of all employees and departments. For this, information regarding the operative plan should be given to employees well in advance. Here, the internal communication system should be used extensively. For such participation, employees should be associated with the planning process.

(10) Follow-up of the proposed plan: The purpose of follow-up is to make periodical review of the execution process. It is useful for understanding actual progress and deficiencies in the process of execution of the plan. This also facilitates adoption of suitable remedial measures as and when required. 6.3 DECISION-MAKING Decision-making is an essential aspect of modern management. It is a primary function of management. A manager's major job is sound/rational decision-making. He takes hundreds of decisions consciously and subconsciously. Decision-making is the key part of manager's activities. Decisions are important as they determine both managerial and organizational actions. A decision may be defined as "a course of action which is consciously chosen from among a set of alternatives to achieve a desired result." It represents a wellbalanced judgment and a commitment to action. It is rightly said that the first important function of management is to take decisions on problems and situations. Decision-making pervades all managerial actions. It is a continuous process. Decisionmaking is an indispensable component of the management process itself. Means and ends are linked together through decision-making. To decide means to come to some definite conclusion for follow-up action. Decision is a choice from among a set of alternatives. The word 'decision' is derived from the Latin words de ciso which means 'a cutting away or a cutting off or in a practical sense' to come to a conclusion. Decisions are made to achieve goals through suitable follow-up actions. Decision-making is a process by which a decision (course of action) is taken. Decision-making lies embedded in the process of management. According to Peter Drucker, 'Whatever a manager does, he does through decision-making". A manager has to take a decision before acting or before preparing a plan for execution. Moreover, his ability is very often judged by the quality of decisions he takes. Thus, management is always a decision-making process. It is a part of every managerial function. This is because action is not possible unless a firm decision is taken about a business problem or situation. This clearly suggests that decision-making is necessary in planning, organising, directing, controlling and staffing. For example, in planning alternative plans are prepared to meet different possible situations. Out of such alternative plans, the best one (i.e., plan which most appropriate under the available business environment) is to be selected. Here, the planner has to take correct decision. This suggests that decision-making is the core of planning function. In the same way, decisions are required to be taken while performing other functions of management such as organising, directing, staffing, etc. This suggests the importance of decision-making in the whole process of management. The effectiveness of management depends on the quality of decision-making. In this sense, management is rightly described as decision-making process. According to R. C. Davis, management is a decision-making process." Decision-making is an intellectual process which involves selection of one course of action out of many alternatives. Decision-making will be followed by second function of management called planning. The other elements which follow planning are many such as organising, directing, coordinating, controlling and motivating. Decision-making has priority over planning function. According to Peter Drucker, it is the top management which is responsible for all strategic decisions such as the objectives of the business, capital expenditure decisions as well as such operating decisions as training of manpower and so on. Without such decisions, no action can take place and naturally the resources would remain idle and unproductive. The managerial decisions should be correct to the maximum extent possible. For this, scientific decision-making is essential. (1) (2) The Oxford Dictionary defines the term decision-making as 'the action of carrying out or carrying into effect". According to Trewatha & Newport, Decision-making involves the selection of a course of action from among two or more possible alternatives in order to arrive at a solution for a given problem."

Characteristics of Decision-making (1) Decision making implies choice: Decision making is choosing from among two or more alternative courses of action. Thus, it is the process of selection of one solution out of many available. For any business problem, alternative solutions are available. Managers have to consider these alternatives and select the best one for actual execution. Here, planners/ decisionmakers have to consider the business environment available and select the promising alternative plan to deal with the business problem effectively. It is rightly said that "Decision-making is fundamentally choosing between the alternatives.' In decision-making, various alternatives are to be considered critically and the best one is to be selected. Here, the available business environment also needs careful consideration. The alternative selected may be correct or may not be correct. This will be decided in the future, as per the results available from the decision already taken. In short, decision-making is fundamentally a process of choosing between the alternatives (two or more) available. Moreover, in the decisionmaking process, information is collected; alternative solutions are decided and considered critically in order to find out the best solution among the available. Every problem can be solved by different methods. These are the alternatives and a decision-maker has to select one alternative which he considers as most appropriate. This clearly suggests that decision-making is basically/fundamentally choosing between the alternatives. The alternatives may be two or more. Out of such alternatives, the most suitable is to be selected for actual use. The manager needs capacity to select the best alternative. The benefits of correct decision-making will be available only when the best alternative is selected for actual use. (2) Continuous activity/process: Decision-making is a continuous and dynamic process. It pervades all organizational activity. Managers have to take decisions on various policy and administrative matters. It is a never ending activity in business management. (3) Mental/intellectual activity- Decision-making is a mental as well as intellectual activity/process and requires knowledge, skills, experience and maturity on the part of decision-maker. It is essentially a human activity. (4) Based on reliable information/feedback: Good decisions are always based on reliable information. The quality of decision-making at all levels of the Organisation can be improved with the support of an effective and efficient management information system (MIS). (5) Goal oriented process: Decision-making aims at providing a solution to a given problem/ difficulty before a business enterprise. It is a goal-oriented process and provides solutions to problems faced by a business unit. (6) Means and not the end: Decision-making is a means for solving a problem or for achieving a target/objective and not the end in itself. (7) Relates to specific problem: Decision-making is not identical with problem solving but it has its roots in a problem itself. (8) Time-consuming activity- Decision-making is a time-consuming activity as various aspects need careful consideration before taking final decision. For decision makers, various steps are required to be completed. This makes decision-making a time consuming activity. (9) Needs effective communication: Decision-taken needs to be communicated to all concerned parties for suitable follow-up actions. Decisions taken will remain on paper if they are not communicated to concerned persons. Following actions will not be possible in the absence of effective communication. (10) Pervasive process: Decision-making process is all pervasive. This means managers working at all levels have to take decisions on matters within their jurisdiction. (11) Responsible job: Decision-making is a responsible job as wrong decisions prove to be too costly to the Organisation. Decision-makers should be matured, experienced, knowledgeable and rational in their approach. Decision-making need not be treated as routing and casual activity. It is a delicate and responsible job. Advantages of Decision-making

(1) Decision making is the primary function of management: The functions of management starts only when the top-level management takes strategic decisions. Without decisions, actions will not be possible and the resources will not be put to use. Thus decision-making is the primary function of management. (2) Decision-making facilitates the entire management process: Decision-making creates proper background for the first management activity called planning. Planning gives concrete shape to broad decisions about business objectives taken by the top-level management. In addition, decision-making is necessary while conducting other management functions such as organising, staffing, coordinating and communicating. (3) Decision-making is a continuous managerial function: Managers working at all levels will have to take decisions as regards the functions assigned to them. Continuous decision making is a must in the case of all managers/executives. Follow-up actions are not possible unless decisions are taken. (4) Decision-making is essential to face new problems and challenges: Decisions are required to be taken regularly as new problems, difficulties and challenges develop before a business enterprise. This may be due to changes in the external environment. New products may come in the market, new competitors may enter the market and government policies may change. All this leads to change in the environment around the business unit. Such change leads to new problems and new decisions are needed. (5) Decision-making is a delicate and responsible job: Managers have to take quick and correct decisions while discharging their duties. In fact, they are paid for their skill, maturity and capacity of decision-making. Management activities are possible only when suitable decisions are taken. Correct decisions provide opportunities of growth while wrong decisions lead to loss and instability to a business unit. 6.4 Decision-making Process and Steps Involved Decision-making involves a number of steps which need to be taken in a logical manner. This is treated as a rational or scientific 'decision-making process' which is lengthy and time consuming. Such lengthy process needs to be followed in order to take rational/scientific/result oriented decisions. Decision-making process prescribes some rules and guidelines as to how a decision should be taken / made. This involves many steps logically arranged. It was Peter Drucker who first strongly advocated the scientific method of decision-making in his world famous book 'The Practice of Management' published in 1955. Drucker recommended the scientific method of decision-making which, according to him, involves the following six steps: (1)Defining/Identifying the managerial problem, (2)Analyzing the problem, (3)Developing alternative solutions, (4) Selecting the best solution out of the available alternatives, (5) Converting the decision into action, and (6) Ensuring feedback for follow-up. The figure given below suggests the steps in the decision-making process:

(1) Identifying the Problem: Identification of the real problem before a business enterprise is the first step in the process of decision-making. It is rightly said that a problem well-defined is a problem half-solved. Information relevant to the problem should be gathered so that critical analysis of the problem is possible. This is how the problem can be diagnosed. Clear distinction should be made between the problem and the symptoms which may cloud the real issue. In brief, the manager should search the 'critical factor' at work. It is the point at which the choice applies. Similarly, while diagnosing the real problem the manager should consider causes and find out whether they are controllable or uncontrollable. (2) Analyzing the Problem: After defining the problem, the next step in the decision-making process is to analyze the problem in depth. This is necessary to classify the problem in order to know who must take the decision and who must be informed about the decision taken. Here, the following four factors should be kept in mind: (a) Futurity of the decision, (b) The scope of its impact, (c) Number of qualitative considerations involved, and (d) Uniqueness of the decision. (3) Collecting Relevant Data: After defining the problem and analyzing its nature, the next step is to obtain the relevant information/ data about it. There is information flood in the business world due to new developments in the field of information technology. All available information should be utilised fully for analysis of the problem. This brings clarity to all aspects of the problem. (4) Developing Alternative Solutions: After the problem has been defined, diagnosed on the basis of relevant information, the manager has to determine available alternative courses of action that could be used to solve the problem at hand. Only realistic alternatives should be considered. It is equally important to take into account time and cost constraints and psychological barriers that will restrict that number of alternatives. If necessary, group participation techniques may be used while developing alternative solutions as depending on one solution is undesirable. (5) Selecting the Best Solution: After preparing alternative solutions, the next step in the decisionmaking process is to select an alternative that seems to be most rational for solving the problem. The alternative thus selected must be communicated to those who are likely to be affected by it.

Acceptance of the decision by group members is always desirable and useful for its effective implementation. (6) Converting Decision into Action: After the selection of the best decision, the next step is to convert the selected decision into an effective action. Without such action, the decision will remain merely a declaration of good intentions. Here, the manager has to convert 'his decision into 'their decision' through his leadership. For this, the subordinates should be taken in confidence and they should be convinced about the correctness of the decision. Thereafter, the manager has to take follow-up steps for the execution of decision taken. (7) Ensuring Feedback: Feedback is the last step in the decision-making process. Here, the manager has to make built-in arrangements to ensure feedback for continuously testing actual developments against the expectations. It is like checking the effectiveness of follow-up measures. Feedback is possible in the form of organised information, reports and personal observations. Feed back is necessary to decide whether the decision already taken should be continued or be modified in the light of changed conditions. Every step in the decision-making process is important and needs proper consideration by managers. This facilitates accurate decision-making. Even quantitative techniques such as CPM, PERT/OR, linear programming, etc. are useful for accurate decision-making. Decision-making is important as it facilitates entire management process. Management activities are just not possible without decisionmaking as it is an integral aspect of management process itself. However, the quality of decisionmaking should be always superior as faulty/irrational decisions are always dangerous. Various advantages of decision-making (already explained) are easily 'available when the entire decision-making process is followed properly. Decisions are frequently needed in the management process. However, such decisions should be appropriate, timely and rational. Faulty and hasty decisions are wrong and even dangerous. This clearly suggests that various advantages of decisionmaking are available only when scientific decisions are taken by following the procedure of decisionmaking in an appropriate manner. For accurate/rational decision-making attention should be given to the following points: (1) Identification of a wide range of alternative courses of action i.e., decisions. This provides wide choice for the selection of suitable decision for follow-up actions. (2) A careful consideration of the costs and risks of both positive and negative consequences that could follow from each alternation. (3) Efforts should be made to search for new information relevant to further evaluation of the alternatives. This is necessary as the quality of decision depends on the quality of information used in the decision-making process. (4) Re-examination of the positive and negative effects of all known alternatives before making a final selection. (5) Arrangements should be made for implementing the chosen course of action including contingency plans in the event that various known risks were actually to occur. (6) Efforts should be made to introduce creativity and rationality in the final decision taken. Why Rational and Right Decisions Are Not Possible? Rational decisions are the best decisions under the available circumstances. All decisions should be rational as such decisions facilitate expansion of business and give more profit, goodwill and prosperity to a business unit. Rationality and decision-making are closely related concepts. Rationality principle is applicable to all types of decisions. All decisions (business, economic, social etc.) should be fair and rational. They should serve as examples over a long period. For such decisions, rational/scientific/balanced approach is essential while making decisions. In the absence of such approach, decisions are likely to be faulty and dangerous to the Organisation and also to all concerned parties.

Rationality in decision-making is possible through human brain which has the ability to learn, think, analyze and relate complex facts and variables while arriving at a decision. A manager has to introduce rationality in his decision-making by using his skills, experience, knowledge and mental abilities. On some occasions, such rational and right decisions are not taken due to variety of possible reasons. It is also possible that the decision taken may be rational when taken but is treated as wrong/irrational/faulty because' the results available from the decision taken are not as expected/positive/encouraging. Rational decisions may not be possible when the approach of the decision-maker is casual and superficial. He may not be alert, careful and cautious while taking the decisions or he might not have followed the decision-making process in a scientific manner. In brief, all business decisions should be rational as far as possible as such rational decisions offer many benefits/advantages. However, rational decisions may not be taken on certain occasions. According to Herbert A. Simon, human beings are not always rational in the decisional process. Rational and right decisions may not be possible because of the following possible reasons: (1) Inadequate information, data and knowledge: For rational decision-making accurate, reliable and complete information about various aspects of the problem under investigation is necessary. The possible future trends can be estimated with the help of such information. This facilitates rational decision-making. However, adequate and reliable information may not be available at the time of decision-making. As a result, the decisions become defective or irrational. Such decision may prove to be faulty in the course of time. This is how the decisions become irrational to certain extent. (2) Uncertain environment: Decisions are taken on the basis of information available about various environmental variables. However, the variables are many and complex in nature. They may be related to political, economic, social and other aspects. It is not possible to study all such variables in depth due to inadequate information/data. This leads to inaccuracy in decision making and the decisions taken are not fully rational. (3) Limited capacity of decision-maker. A decision-maker should be expert, knowledgeable, intelligent and matured. He needs vision and capacity to imagine possible future situation. In the absence of such qualities, the decision-maker may not be able to take rational decisions. Similarly, the decision taken may not be rational if the decision-maker fails to follow all necessary steps required for scientific decision-making. A hasty decision or decision taken without full use of all mental faculties may not be fully rational. Thus, decisions are likely to be less rational if the decision maker lacks capacity to take rational decisions. (4) Personal element in decision-making: Decision-making should be always impartial and also favorable to the Organisation. Decision against Organisation but favorable to decision maker or other employees will be unfair. Such decision will not be rational. Similarly, every decision-maker has his own personal background in the form of personal beliefs, attributes, preferences, likes and dislikes and so on. A decision-maker is expected to keep these elements away while taking management decisions. This may not be possible in the case of all decision-makers and on all occasions. However, decisions are not fully rational when such personal element comes in the picture. (5) A decision cannot be fully independent: Managerial decisions are interlinked and interdependent. A manager has to make adjustments or compromises while making decisions. For example, for reducing price, some compromise with the quality may be necessary. A manager gives more importance to one and less to the other. He takes one decision which is rational at the same time makes some compromise in the other decision. As a result, other decision is not likely to be fully rational. In short, business decisions are interlinked. This brings an element of irrationality in some decisions. The points noted above suggest why it is not possible to take rational and right decisions on all occasions.

6.5 Relationship between Planning and Decision-making There is close relationship between planning and decision-making. Decision-making has priority over planning function. It is the starting point of the whole management process. In fact, decision-making is a particular type of planning. A decision is a type of plan involving commitment to resources for achieving specific objective. According to Peter Drucker, it is the top management which is responsible for all strategic decisions such as the objectives of the business, capital expenditure decisions as well as operating decisions such as training of manpower and so on. Without management decisions, no action can take place and naturally the resources would remain idle and unproductive. The managerial decisions should be correct to the maximum extent possible. For this, scientific decision-making is essential. 6.6 MANAGEMENT BY OBJECTIVES (MBO) The concept of MBO is closely connected with the concept of planning. The process of planning implies the existence of objectives and is used as a tool/technique for achieving the objectives. Modern managements are rightly described as 'Management by Objectives' (MBO). This MBO concept was popularized by Peter Drucker. It suggests that objectives should not be imposed on subordinates but should be decided collectively by a concerned with the management. This gives popular support to them and the achievement of such objectives becomes easy and quick. Management by Objectives (MBO) is the most widely accepted philosophy of management today. It is a demanding and rewarding style of management. It concentrates attention on the accomplishment of objectives through participation of all concerned persons, i.e., through team spirit. MBO is based on the assumption that people perform better when they know what is expected of them and can relate their personal goals to organizational objectives. Superior subordinate participation, joint goal setting and support and encouragement from superior to subordinates are the basic features of MBO. It is a result-oriented philosophy and offers many advantages such as employee motivation, high morale, effective and purposeful leadership and clear objectives before all concerned per-sons. MBO is a participative and democratic style of management. Here, ample a scope is given to subordinates and is given higher status and positive/participative role. In short, MBO is both a philosophy and approach to management. MBO concept is different from MBC (Management by Control) and is also superior in many respects. According to the classical theory of management, top management is concerned with objectives setting, directing and coordinating the efforts of middle level managers and lower level staff. However, achievement of organizational objectives is possible not by giving orders and instructions but by securing cooperation and participation of all persons. For this, they should be associated with the management process. This is possible in the case of MBO and hence MBO is different from MBC and also superior to MBC. MBO is an approach (to planning) that helps to overcome these barriers. MBO involves the establishment of goals by managers and their subordinates acting together, specifying responsibilities and assigning authority for achieving the goals and finally constant monitoring of performance. The genesis of MBO is attributed to Peter Drucker who has explained it in his book 'The Practice of Management'. Definitions of MBO (1) According to George Odiome, MBO is "a process whereby superior and subordinate managers of an Organisation jointly define its common goals, define each individual's major areas of responsibility in terms Of results expected of him and use these measures as guides for operating the unit and assessing the contribution of each of its members. (2) According to John Humble, MBO is "a dynamic system which seeks to integrate the company's needs to clarify and achieve its profits and growth goals with the manager's need to contribute and develop himself. It is a demanding and rewarding style of managing a business."

Essential Features of MBO (1) Superior-subordinate participation: MBO requires the superior and the subordinate to recognize that the development of objectives is a joint project/activity. They must be jointly agree and write out their duties and areas of responsibility in their respective jobs. (2) Joint goal-setting: MBO emphasizes joint goal-setting that are tangible, verifiable and measurable. The subordinate in consultation with his superior sets his own short-term goals. However, it is examined both by the superior and the subordinate that goals are realistic and attainable. In brief, the goals are to be decided jointly through the participation of all. (3) Joint decision on methodology- MBO focuses special attention on what must be accomplished (goals) rather than how it is to be accomplished (methods). The superior and the subordinate mutually devise methodology to be followed in the attainment of objectives. They also mutually set standards and establish norms for evaluating performance. (4) Makes way to attain maximum result- MBO is a systematic and rational technique that allows management to attain maximum results from available resources by focussing on attainable goals. It permits lot of freedom to subordinate to make creative decisions on his own. This motivates subordinates and ensures good performance from them. (5) Support from superior: When the subordinate makes efforts to achieve his goals, superior's helping hand is always available. The superior acts as a coach and provides his valuable advice and guidance to the subordinate. This is how MBO facilitates effective communication between superior and subordinates for achieving the objectives/targets set. 6.7 Steps in MBO Planning (1) Goal setting- The first phase in the MBO process is to define the organizational objectives.. These are determined by the top management and usually in consultation with other managers. Once these goals are established, they should be made known to all the members. In setting objectives, it is necessary to identify "Key-Result Areas' (KRA). (2) Manager-Subordinate involvement: After the organizational goals are defined, the subordinates work with the managers to determine their individual goals. In this way, everyone gets involved in the goal setting. (3) Matching goals and resources: Management must ensure that the subordinates are provided with necessary tools and materials to achieve these goals. Allocation of resources should also be done in consultation with the subordinates. (4) Implementation of plan: After objectives are established and resources are allocated, the subordinates can implement the plan. If any guidance or clarification is required, they can contact their superiors. (5) Review and appraisal of performance: This step involves periodic review of progress between manager and the subordinates. Such reviews would determine if the progress is satisfactory or the subordinate is facing some problems. Performance appraisal at these reviews should be conducted, based on fair and measurable standards. Advantages of MBO (1) Develops result-oriented philosophy- MBO is a result-oriented philosophy. It does not favor management by crisis. Managers are expected to develop specific individual and group goals, develop appropriate action plans, properly allocate resources and establish control standards. It provides opportunities and motivation to staff to develop and make positive contribution in achieving the goals of an Organisation. (2) Formulation of dearer goals: Goal-setting is typically an annual feature. MBO produces goals that identify desired/expected results. Goals are made verifiable and measurable which encourage high level of performance. They highlight problem areas and are limited in number. The meeting is of minds between the superior and the subordinates. Participation encourages

commitment. This facilitates rapid progress of an Organisation. In brief, formulation of realistic objectives is me benefit of M[BO. (3) Facilitates objective appraisal: NIBO provides a basis for evaluating a person's performance since goals are jointly set by superior and subordinates. The individual is given adequate freedom to appraise his own activities. Individuals are trained to exercise discipline and self control. Management by self-control replaces management by domination in the MBO process. Appraisal becomes more objective and impartial. (4) Raises employee morale: Participative decision-making and two-way communication encourage the subordinate to communicate freely and honestly. Participation, clearer goals and improved communication will go a long way in improving morale of employees. (5) Facilitates effective planning: MBO programmes sharpen the planning process in an Organisation. It compels managers to think of planning by results. Developing action plans, providing resources for goal attainment and discussing and removing obstacles demand careful planning. In brief, MBO provides better management and better results. (6) Acts as motivational force: MBO gives an individual or group, opportunity to use imagination and creativity to accomplish the mission. Managers devote time for planning results. Both appraiser and appraise are committed to the same objective. Since MBO aims at providing clear targets and their order of priority, employees are motivated. (7) Facilitates effective control: Continuous monitoring is an essential feature of MBO. This is useful for achieving better results. Actual performance can be measured against the standards laid down for measurement of performance and deviations are corrected in time. A clear set of verifiable goals provides an outstanding guarantee for exercising better control. (8) Facilitates personal leadership: MBO helps individual manager to develop personal leadership and skills useful for efficient management of activities of a business unit. Such a manager enjoys better chances to climb promotional ladder than a non-MBO type. Limitations of MBO (1) Time-consuming: MBO is time-consuming process. Objectives, at all levels of the Organisation, are set carefully after considering pros and cons which consumes lot of time. The superiors are required to hold frequent meetings in order to acquaint subordinates with the new system. The formal, periodic progress and final review sessions also consume time. (2) Reward-punishment approach: MBO is pressure-oriented programme. It is based on rewardpunishment psychology. It tries to indiscriminately force improvement on all employees. At times, it may penalize the people whose performance remains below the goal. This puts mental pressure on staff. Reward is provided only for superior performance. (3) Increases paper-work: MBO programmes introduce ocean of paper-work such as training manuals, newsletters, instruction booklets, questionnaires, performance data and report into the Organisation. Managers need information feedback, in order to know what is exactly going on in the Organisation. The employees are expected to fill in a number of forms thus increasing paperwork. In the words of Howell, "MBO effectiveness is inversely related to the number of MBO forms. (4) Creates organizational problems: MBO is far from a panacea for all organizational problems. Often MBO creates more problems than it can solve. An incident of tug-of-war is not uncommon. The subordinates try to set the lowest possible targets and superior the highest. When objectives cannot be restricted in number, it leads to obscure priorities and creates a sense of fear among subordinates. Added to this, the programme is used as a 'whip' to control employee performance. (5) Develops conflicting objectives: Sometimes, an individual's goal may come in conflict with those of another e.g., marketing manager's goal for high sales turnover may find no support from the production manager's goal for production with least cost. Under such circumstances,

individuals follow paths that are best in their own interest but which are detrimental to the company. (6) Problem of co-ordination: Considerable difficulties may be encountered while coordinating objectives of the Organisation with those of the individual and the department. Managers may face problems of measuring objectives when the objectives are not clear and realistic. (7) Lacks durability: The first few go-around of MBO are motivating. Later it tends to become old hat. The marginal benefits often decrease with each cycle. Moreover, the programme is deceptively simple. New opportunities are lost because individuals adhere too rigidly to established goals. (8)Problems related to goal-setting: MBO can function successfully provided measurable objectives are jointly set and it is agreed upon by all. Problems arise when: (a) verifiable goals are difficult to set (b) goals are inflexible and rigid (c) goals tend to take precedence over the people who use it (d) greater emphasis on quantifiable and easily measurable results instead of important results and (e) over-emphasis on short-term goals at the cost of long-term goals. (9) Lack of appreciation: Lack of appreciation of MBO is observed at different levels of the Organisation. This may be due to the failure of the top management to communicate the philosophy of MBO to entire staff and all departments. Similarly, managers may not delegate adequately to their subordinates or managers may not motivate their subordinates properly. This creates new difficulties in the execution of MBO programme. 6.8 Essential Conditions for Successful Execution/Implementation of MBO (1) Support from all: In order that MBO succeeds, it should get support and co-operation from the management. MBO must be tailored to the executive's style of managing. No MBO programme can succeed unless it is fully accepted by the managers. The subordinates should also clearly understand that MBO is the policy of the Organisation and they have to offer cooperation to make it successful. It should be a programme of all and not a programme imposed on them. (2) Acceptance of MBO programme by managers: In order to make MBO programme successful, it is fundamentally important that the managers themselves must mentally accept it as a good or promising programme. Such acceptances will bring about deep involvement of managers. If manages are forced to accept NIBO programme, their involvement will remain superfluous at every stage. The employees will be at the receiving-end. They would mostly accept the lines of action initiated by the managers. (3) Training of managers: Before the introduction of MBO programme, the managers should be given adequate training in MBO philosophy. They must be in a position to integrate the technique with the basic philosophy of the company. It is but important to arrange practice sessions where performance objectives are evaluated and deviations are checked. The managers and subordinates are taught to set realistic goals, because they are going to be held responsible for the results. (4) Organizational commitment: MBO should not be used as a decorative piece. It should be based on active support, involvement and commitment of managers. MBO presents a challenging task to managers. They must shift their capabilities from planning for work to planning for accomplishment of specific goals. Koontz rightly observes, "An effective programme of managing by objective must be woven into an entire pattern and style of managing. It cannot zwrk as a separate technique standing alone." "7 (5) Allocation of adequate time and resources: A well-conceived MBO programme requires three to five years of operation before it provides fruitful results. Managers and subordinates should be so oriented that they do not look forward to MBO for instant solutions. Proper time and resources should be allocated and persons are properly trained in the philosophy of MBO. (6) Provision of uninterrupted information feedback: Superiors and subordinates should have regular information available to them as to how well subordinate's goal performance is progressing. Over and above, regular performance appraisal sessions, counseling and

encouragement to subordinates should be given. Superiors who compliment and encourage subordinates with pay rise and promotions provide enough motivation for peak performance.

QUESTION BANK 1. 2. 3. 4. 5. 6. 7. 8. 9. What is planning? Explain its features and importance. Explain briefly the steps involved in the planning process. What is a business plan? What are the features of a good business plan? What is decision-making? Explain why management is called a decision making process. Explain the significance of decision-making in management. State and explain briefly the steps involved in the process of decision making. What is MBO? Explain its features. Explain the steps involved in MBO process. Write short notes on o Advantages and limitations of business planning. o Features of a good business plan. o MBO o Importance of decision-making in business o Steps in decision-making. o Advantages and limitations of MBO

CHAPTER 7

ORGANISATION STRUCTURE7.1 Introduction organisation is one important element of the management process. It is next to planning. In management, organisation is both the process as well as the end-product of that process which is referred to as organisation structure. Such structure acts as the foundation on which the whole super-structure of management is built. Sound organisation structure is essential for the conduct of business activities in an efficient manner. It is within the framework of the organisation that the whole management process takes place. The success of the management process will be determined by the soundness of the organisation structure. Organising involves integration of resources in order to accomplish the objectives. The term "organisation' is derived from the word 'organism' which means a structure of body divided into parts that are held together by a fabric of relationship as one organic whole. In an enterprise, many managers and employees work together for achieving common objectives. It is the organisation structure which binds them together and brings proper adjustment and coordination in their work. The division of work and authority and the establishment of relationship among individuals or groups are possible due to the organisation structure. In simple words, organizing means arranging the ways and means for the execution of business plan. It is the creation of administrative set-up for the execution of the plan. It suggests the framework within which the management functions. The term organisation suggests a functional group working together for achieving common purposes/objectives. Organisation provides mechanism for integrated and cooperative action by two or more persons with a view to implementing any plan. Organisation facilitates efficient administration, direction and control. It avoids wastage of raw materials and human efforts. Every management has to establish its own organisation structure for efficient conduct of business activities. There are different structures which can be given to an organisation. They include line, functional and so on. An organisation deals with a number of elements which defines the relationships between the members of a group. It is concerned with the channels of communication and lines of authority. It also defines the degree of authority and responsibility of each person in the organisation. In short, organisation clarifies relationships and provides a framework within which all managerial actions take place. Organisation involves the following aspects: (a) Identifying the activities required to achieve organizational objectives. (b) Grouping up of these activities into workable units (Departmentation). (c) Assigning duties and responsibilities to subordinates in order to achieve the tasks assigned. (d) Delegating authority necessary and useful for the accomplishment of tasks assigned. (e) Establishing superior-subordinate relationship. (f) Providing a system of co-ordination for integrating the activities of individuals and departments. Definitions 1) An Organisation has been defined by E. F. L. Breach as"a system of structural interpersonal relationships. In it, individuals are differentiated in terms of authority, status and roles with the result that personal interaction is prescribed, and anticipated reactions between individuals tend to occur while ambiguity and spontaneity are decreased". (2) According to Louis A. Allen, Organisation is 'the process of identification and grouping the work to be performed, defining and delegating responsibility and authority and establishing relationships for the purpose of enabling people to work most effectively together in accomplishing objectives". (3) James Mooney defines organisation as "the form of every human association for attainment of a common purpose." Importance

(1) Ensures optimum utilisation of human resources: Every enterprise appoints employees for the conduct of various business activities and operations. They are given the work according to their qualifications and experience. Organisation ensures that every individual. Is placed on the job for which he is best suited. (2) Facilitates coordination: It acts as a means of bringing coordination and integration among the activities of individuals and departments of the enterprise. It establishes clear-cut relationships between operating departments and brings proper balance in their activities. (3) Facilitates division of work: Different departments are created for division of work, specialization and orderly working of the enterprise. Similarly, delegation relieves top level managers from routine duties. (4) Ensures growth, expansion and diversification: Sound Organisation structure facilitates expansion/diversification of an enterprise. Organisation structure has in-built capacity to absorb additional activities and also effective control on them. A business enterprise brings diversification in its activities within the framework of its Organisation. (5) Stimulates creativity: Organisation provides training and self-development facilities to managers and subordinates through delegation and departmentation. It also encourages initiative and creative thinking on the part of managers and others. (6) Facilitates administration: Effective administration of business will not be possible without the support of sound organisation structure. Delegation, departmentation and decentralisation are the tools for effective administration. (7) Determines optimum use of technology: Sound Organisation structure provides opportunities to make optimum use of technology. It facilitates proper maintenance of equipment and also meets high cost of installation. (8) Determines individual responsibility: Responsibility is an obligation to perform an assigned work. In a sound Organisation, the manager finds it easy to pinpoint individual responsibility when the work is spoilt. Organisation as a Structure The term organisation can be studied as a structure and also as a process. In a static sense, organisation is a structure. A group of people functions within this structure and try to accomplish certain objectives. Organisation is a structure for the conduct of business activities efficiently. In the words of Kast and Rosenzweig, "structure is the established pattern of relationships among the component parts of the organisation". In this sense, Organisation structure refers to the network of relationships among individuals and positions in an Organisation. Organisation structure suggests its framework. Just as human beings have skeletons that define their parameters likewise organisations have structures that define their parameters. While preparing an architectural plan, an architect considers different factors such as space, cost, time, special features and resources. In the same way, a manager is expected to take into account factors such as channels of communication, before designing Organisation structure. Organisation structure specifies which individuals will work as subordinates to which superiors. It defines the interpersonal relationships that should exist between individuals and work. Such invisible framework is intended to promote co-ordination in the functions and activities of members of the group. Because of specific assignments of authority and responsibility, each person will look after his part of pre-established plans in proper relation to the parts of others in the group. Organisation suggests the structure within which people associate for the attainment of an objective. Organisation as a structure implies the following four elements: (a) Intentionally created: In order to attain specific goals, Organisation structure is deliberately created which converts resources (of management) into a productive enterprise.

(b) Provides framework: Organisation structure usually takes the shape of a pyramid. Once established, it acts as a framework that can either constrain or facilitate managerial actions. (c) Use of Chart: In an Organisation, the structural relationships are normally shown through Organisation charts. These charts indicate the intended final relationships at a given time. (d) Provides formal picture: Organisation structure may be horizontal or vertical. The horizontal aspects display basic departmentalization and vertical aspects display creation of hierarchy of superiors and subordinates. 7.2 Principles of organising There are some principles which are common to all organisations that are established in a classical form i.e. the form where there is hierarchy of authority and responsibility and it flows downwards. The principles of Organisation offer guidance for the creation of a sound, efficient and effective Organisation structure. In other words, these principles are the sound criteria for efficient organising. They ensure smooth and orderly working of a business enterprise. Principles of organising are not given in a serial order by any authority on management. Management thinkers (Henry Fayol, F. W. Taylor, U. L Urwick and others) have laid down certain statements regarding organising function of management. Such statements are treated as principles of organisation.Well accepted principles of organisation/organising are as explained below (1)Unity of Objectives: Objectives of the enterprise influence the Organisation structure and hence the objectives of the enterprise should first be decided clearly and firmly. In addition, there should be unity among the objectives decided. This gives clear direction to the whole Organisation and it will be geared for the achievement of such objectives. The Organisation acts as a tool for achieving the objectives. The objectives may be divided into departmental objectives and organizational objectives. There should be unity of objectives as such unity gives one clear direction to the whole Organisation. In addition, objectives should be made clear to all concerned persons so as to enable them to do their best to achieve the objectives. (2) Division of Work and Specialization: Division of work leads to specialization. Every department of an Organisation should be given specialized functions. This will raise the overall efficiency and quality of work of an Organisation. At the same time, specialization and departmentation should not have any adverse effect on the total integrated system. Coordination must be established among the departments and activities. Specialization is necessary for raising the efficiency of the whole Organisation structure. The functions given to each department should be preferably only of one category. Employees should be assigned duties to different departments as per their qualifications, qualities and so on. (3) Delegation of Authority: There should be proper delegation of authored in every Organisation, particularly in large organisations. The basic idea behind delegation is to see that decision-making power is placed at a proper place. Delegation should go to the lower levels of management. Every one should be given authority which is adequate to accomplish the task assigned to him. Delegation is useful for getting the things done through others. A successful manager normally does not perform the jobs by himself. He delegates the authority and responsibility to his subordinates. He also motivates his subordinates and see that they take initiative, work efficiently and contribute for achieving organizational objectives. (4) Coordination: Organisation involves division of work and departmentation. This naturally suggests the need of proper coordination among the departments and efforts of people working in an Organisation. Due to coordination one clear-cut direction is given to people/ departments and efforts will not be wasted or misdirected. Coordination also brings integration in the basic functions of

management. The principle of coordination is important as it facilitates achievement of overall objectives of a business Organisation. It also brings unity of action in the Organisation. Coordination will not be available automatically. For this, working relationships need to be established within the Organisation. (5) Unity of Command: Unity of command principle suggests that each subordinate should have only one superior whose command he has to obey. Dual subordination is undesirable as it leads to confusion, disorder, uneasiness and indiscipline. An employee should not have more than one boss to whom he has to report and also function as per his orders and instructions. Reportiing to more than one boss leads to confusion. (6) Flexibility: According to the principle of flexibility, the Organisation structure should be flexible and not rigid. Such structure is adaptable to changing situations and permits expansion or replacement without any serious dislocation and disruption. There should be an in-built arrangement to facilitate growth and expansion of an enterprise. (7) Simplicity: The Organisation structure should be simple for clear understanding of employees. The structure should be easy to manage. Internal communication will be easy due to simplicity of Organisation. The Organisation structure should be simple as far as possible. The levels of management should also be limited. (8) Span of Control: The span of control, as far as possible, should be small and fair. This means a manager should not be asked to keep supervision on large number of subordinates. The span of control should be narrow and manageable. It should be properly balanced. (9) Scalar Principle (Chain of Command): The principle of chain of command suggests that the line of authority from the chief executive to the first line of superior should be clearly defined. The line of authority should be properly defined so as to avoid any confusion as regards the line of authority. This principle suggests that as far as possible, the chain of authority should be short and should not be broken. (10) Exception Principle: The executives at the higher level are busy in important matters and have limited time for the study of routine administrative matters. It is not desirable to take routine matters to the top level managers frequently. Very crucial and exceptionally complex problems should be referred to the top executives and routine matters should be dealt with by the junior executives at the lower levels. Moreover, time of top executives is saved. They can use their time for dealing with more important and complex problems. (11) Authority and Responsibility- Authority acts as a powerful tool by which a manager can achieve a desired objective. Authority of every manager should be clearly defined. Moreover, it should be adequate to discharge the responsibilities assigned. The superior should be held responsible for the acts of his subordinates. He cannot run away from the responsibility simply by delegating authority to his subordinates. In fact, the responsibility of the superior for the acts of his subordinates is absolute. (12) Efficiency: The Organisation structure should enable the enterprise to function efficiently. This will enable the enterprise to accomplish its objectives quickly and also at the lowest cost. For this, the structure introduced should be suitable to the nature, size, activities etc. of the Organisation. A suitable Organisation structure ensures full and purposeful utilisation of available human and material resources and ensures efficiency. (13) Proper Balance: Proper balance is necessary in different aspects of the Organisation. This means there should be reasonable balance in the size and functions of departments, centralisation and decentralisation of the Organisation, span of control, chain of command and finally in between

human and material resources. This principle of balance suggests that the top management should see that the vertical and horizontal dimensions of the Organisation are fairly balanced. (14) Separation of line and staff functions: Line functions should be separated from the staff functions even when they are supplementary in character. Line functions are directly connected with operations while staff functions are auxiliary to the line functions. These functions should be coordinated when necessary but normally they should be kept separate. 7.3 Types Of Organisation Structure Organisation structure is defined as "The logical arrangement of task and the network of relationships and roles among the various positions established to carry out the activities necessary to achieve the predetermined objectives of business." Internal Organisation structure constitutes the arteries and veins through which the blood of work flows in the body of Organisation. Internal Organisation structures can be broadly classified into the following types/forms: (1) Line Organisation structure. (2) Functional Organisation structure. (3) Line and staff Organisation structure. (4) Product Organisation structure. (5) Committee and Matrix Organisation structure. (1) Line Organisation Structure: Line Organisation (also called Military/Scalar Organisation) is the oldest and the simplest form of internal Organisation structure. It was first developed by the Roman army and later adopted by armies all over the world. Factory owners also used line Organisation structure in its purest form in the nineteenth century in England. In the line Organisation, the line of authority moves directly from the top level to the lowest level in a step-by-step manner. It is straight and vertical. The top-level management takes all major decisions and issues directions for actual execution. The general manager, for example, issues order to various departmental managers. Thereafter, the departmental manager issues instructions to works manager. The works manager will issue instructions to foreman. In this manner, the orders and instructions will be issued to the workers working at the lowest level. Thus authority moves downward and also step-by-step. The responsibility, on the other hand, moves in the upward direction. Line Organisation structure is given in the following chart:

Advantages (1) Simplicity: Line Organisation structure is easy to understand and follow by superiors and subordinates. It is simple and clear as regards authority and accountability. (2) Prompt decisions: Line Organisation facilitates prompt decision-making at all levels as the authority given is clear and complete. (3) Discipline: It brings discipline in the Organisation due to unity of command, delegation of authority and direct accountability. (4) Economical: Line Organisation is economical as experts are not appointed. (5) Attraction to talented persons: Line Organisation brings out talented workers and develops in them quality of leadership. It offers opportunities of self-development to employees. (6) Quick communication, high efficiency, flexibility and high employee morale are some more advantages of line Organisation structure. Limitations: (1) Heavy burden on line executives: The line executives are given too many duties and responsibilities. Even the quality of the decisions of executives may suffer due to heavy burden of duties and responsibilities. (2) Non-availability of services of experts: There is absence of skilled experts in line organisation. Expert assistance is not available promptly when needed by line executives.

(3) Favoritism: There is wide scope for favoritism and nepotism in the line organisation. Leadership of departmental executive is autocratic due to heavy concentration of powers. He may favour some employees at the cost of others. (4) Too much dependence on limited executives: In the line organisation, all powers are concentrated in the hands of a few executives. Naturally, the success and stability of the entire organisation depends on their personal skill, initiative and interest. Special difficulties arise when one executive is to be transferred/replaced/promoted. (5) Rigidity: There is rigidity in the working of line organisation. (6) Delays in communication, limited freedom to employees and unsuitability to modern large business units are some more demerits of line Organisation. (2) Functional Organisation Structure F.W.Taylor, founder of scientific management, conceived the functional Organisation structure. According to him, it is unscientific to overload a foramen with the entire responsibility of running a department. He introduced a system of functional foremanship in his Organisation. In his functional foremanship, there will be eight specialists foremen who will be required to guide, direct and control the work. Workers at the plant level will have to follow the instructions of all these eight specialists called bosses. In the functional Organisation suggested by F.W.Taylor, the job of management is divided according to specialization. As a result, functional departments are created. For example, the personnel department will look after the recruitment, selection, training, wage payment, etc. of all persons of the Organisation. Similar will be the position of other departments like production, sales, etc. The scope of work of the department is limited but the area of authority is unlimited. In the functional Organisation structure, there will be separation of planning of work and execution of the plan prepared. The basis of division is the function and naturally the Organisation structure created will be called "Functional Organisation". In the functional foremanship, there will be eight specialists/functional heads called bosses. Out of eight bosses, four bosses will be at the planning level and the remaining four will be at the slop floor level. (A) The Foremen at the Planning Level (Planning Department): (i) Time and Cost Clerk: He is concerned with preparing standard time for the completion of certain piece of work and compiling the cost of that work. (ii) Instruction Card Clerk: He lays down the exact method of doing the work. He specifies the tools to be used for conducting the production and also gives other instructions on the instruction cards prepared by him. (iii) Route Clerk: The route clerk lays down the exact route through which each and ever Piece of work should move through various stages till completion. He decides the production schedule and the sequence of steps by which the production process is to move. (iv) Shop Disciplinarian: I-le is concerned with the discipline, insubordination, violation of rules of discipline and absenteeism. All cases relating to these matters will be managed by the shop disciplinarian. (B) The Foremen at the Shop Floor Level (Shop Floor): (i) Gang Boss: He assembles and sets up various machines; and tools for a particular piece of work. He is in-charge of assembling line of production. (ii) Speed Boss: He is concerned with the speeding of machines used for production. He keeps proper speed of the machines and see that workers complete the production work as per the schedule time.

(iii) Repair Boss: The repair boss looks after the proper maintenance of machines, tools and equipments required during the production process. (iv) Inspector- The inspector controls quality of the products by keeping adequate check/control when the production work is in progress. The functional Organisation structure is given in the following chart:

Advantages (1) Facilitates specialization: Functional Organisation structure facilitates division of work and specialization. Each boss has specialized knowledge of his functional area. He is in a better position to guide and help the workers. (2) Benefits of large-scale operations: Functional Organisation offers the benefit of economy of largescale operation. In this Organisation, one administrative unit manufactures all products. The available machinery, equipment and facilities are used fully for large-scale production. (3) Facilitates effective coordination: Functional Organisation facilitates effective coordination within the function. This is possible as one boss is in-charge of a particular function and he looks after all activities, which come within that function. (4) Operational flexibility: Functional Organisation possesses operational flexibility. Necessary changes can be introduced easily to suit the needs of the situation without any adverse effect .on the efficiency. (5) Ensures effective supervision: Functional Organisation facilitates effective supervision by the functional heads and foremen. Due to specialization, they concentrate on the specific functional area and also keep effective supervision on their subordinates. Disadvantages:

(1) Absence of unity of command: Unity of command is absent ' in the functional Organisation as each worker gets orders and instructions from several bosses. (2) Fixing responsibility is difficult: In functional Organisation, responsibility is difficult to fix on a specific person. This is because the responsibility itself is divided among many. (3) Unsuitable to non-manufacturing activities: Functional Organisation can be introduced in the case of manufacturing activities. However, its application to non-manufacturing activities such as marketing, etc. has not been successful. (4) Costly: Functional Organisation is costly, as more specialists are required to be appointed. (5) Creates confusion among workers: Functional Organisation is based on specialization as function is taken as a base for dividing the work. The authority is overlapping the responsibility is divided. This confuses workers. (6) Conflicts among foremen, delays in decision-making and limited discipline within the departments are some more demerits of functional Organisation. (3)Line and Staff Organisation Structure In the line and staff Organisation, line executives and staff (specialists) are combined together. The line executives are 'doers' whereas staff refers to experts and act as 'thinkers'. The following chart shows line and staff Organisation structure:

The line executives are concerned with the execution of plans and Policies. They do their best to achieve the organizational objectives. The staff concentrates their attention on research and planning activities. They are experts and conduct advisory functions. Staff specialists are regarded as 'thinkers" while execution function is given to line executives who are "doers". The staff is supportive to line. The staff specialists offer guidance and cooperation to line executives for achieving organizational objectives. This reduces the burden of functions on the line executives and raises overall efficiency of the Organisation. For avoiding the conflicts between line and staff, there should be clear demarcation between the line and staff functions. This avoids overlapping of functions and possible conflicts. In short, the line and staff functions are different but are supportive and can give positive results if adjusted properly i.e. by avoiding the conflicts. They suggest/recommend but

have no power to command the line executive. However, their advice is normally accepted because of their status in the Organisation. According to Louis Allen, "Line refers to those positions and elements of the Organisation, which have the responsibility and authority and are accountable for accomplishment of primary objectives. Staff elements are those which have responsibility and authority for providing advice and service to the line in attainment of objectives. " Characteristics of Line and Staff Organisation: (1) Planning and execution: There are two aspects of administration in this Organisation, viz., planning and execution. (2) Combining line and staff- Planning function is entrusted to staff specialists who are 'thinkers' while execution function is given to line executives who are 'doers'. The staff is supportive to line. (3) Role of authority- The line managers have authority to take decisions as they are concerned with actual production. The staff officers lack such authority. (4) Guidance from staff- The staff provides guidance and advice to line executives when asked for. Moreover, line executives may or may not act as per the guidance offered. (5) Exercising control: The staff manager has authority over subordinates working in his department. (6) Scope for specialization: There is wide scope for specialization in this Organisation as planning work is given to staff and execution work is given to line executives. (7) Possibility of conflicts: Conflicts between line and staff executives are quite common in this Organisation but can be minimized through special measures. (8) Suitability: Line and staff Organisation structure is suitable to large-scale business activities. Advantages 1) Less burden on executives: Line executives get the assistance of staff specialists.This reduces the burden of tine executives. This raises overall efficiency and facilitates the growth and expansion of an enterprise. (2) Services of experts available: The benefits of services of experts are provided to line managers. Highly qualified experts are appointed and they offer guidance to line executives. (3) Sound decision-making: Line and staff Organisation facilitates sound management decisions because of the services of experts and specialists. The decisions are also taken in a democratic method i.e. in consultation with the experts. (4) Limited tension on line managers: The pressure of work of line bosses is brought down as they are concerned only with production management. (5) Benefits of specialization: There is division of work and specialization in this Organisation. Naturally, the benefits of division of work and specialization are easily available. (6) Training opportunities to employees: Better opportunities of advancement are provided to workers. The scope for learning and training for promotions are available.

Limitations: (1) Delay in decision-making: The process of decision-making is delayed, as line executives have to consult staff experts before finalizing the decisions. The decisions of line managers are likely to be delayed due to this lengthy procedure.

(2) Buck passing among executives: The line bosses are concerned with actual execution of work. However, they depend on staff experts for guidance. If something goes wrong, the attempt is made to pass on the blame by one party to the other. Thus, there is shifting of responsibility or buck-passing. (3) Conflicts between line and staff executives: In this Organisation, quarrels and conflicts between line managers and staff specialists are quite common. The line managers are generally not interested in the advice offered by experts. Secondly, specialists feel that the line bosses lack knowledge of new ideas. Such conflicts lead to bitterness. (4) Costly Organisation: Line and staff Organisation is a costly Organisation as the line executives are supported by highly paid staff executives who are experts. All this adds to the overhead expenses and the cost of production increases. (5) Complicated operation: This Organisation is too complicated in actual operation because of dual authority, division of functions and too much dependence on staff. The unity of command principle is violated. (6) Internal discipline is affected adversely: The internal discipline is likely to be affected adversely due to decentralisation and division of loyalty of subordinates. Reasons/Causes for Conflict between Line and Staff Managers: One serious problem in the line and staff Organisation is the possible conflict between the line executives and staff specialists. Line executives have complaints against staff officers and staff officers have complaints against line executives. Reasons/Causes for conflict between line and staff executives are as noted below: Reasons/Causes for Conflict A B I I Arguments of Line Executives against Staff (1) (2) (3) (4) (5) (6) (7) Dilution of Authority. Stealing show. Lacks practical knowledge. Lacks human skills. Domination of staff managers. Easy access to top management. Stress on paperwork. (1) (2) (3) (4) (5) (6) (7) Arguments of Staff Executives against Line Resistance to new plans and ideas. Inadequate support from line executives. Inadequate scope for the use of authority. Lack of support from top management. Limited cooperation from line executives. Supply of inadequate information. Absence of authority.

(A) Arguments of Line Executives against Staff Managers/Officers: (1) Dilution of authority: Line executives argue that the introduction of staff managers dilutes their authority and also leads to interference in their work. They feel that their jobs become less important. (2) Stealing show: Line managers feel that the staff executives tend to steal show for the work that turns out to be successful. On the other hand, when things go wrong, they alone have to face the blame and criticism. (3) Lacks practical knowledge: Line executives argue that staff executives are not familiar with the situation where actual work is carried out. The services offered by the staff executives are rather theoretical and not practical.

(4) Lacks human skills: Line executives argue that staff managers with human relations skills are rarely available. Staff presents matters mechanically. (5) Domination of staff managers: Line executives argue that staff managers always feel that they are superior as regards education and skills. They dominate line executives. This is treated as unwanted interference. (6) Easy access to top management. The staff managers work at the head office and have easy access to top level management. They try to show their superiority to top level management by making new plans and suggestions which may not be acceptable to line executives. The top management feels that the line executives are incompetent due to which the services of staff officers are required. This is a source of agony for line managers. (7) Stress on paper work: The staff executives are engaged in the paper work. In addition, they need information and various details from the line executives. As a result, there is increase in the paper work of line executives, which they resent. (B) Arguments of Staff Managers against Line Executives: (1) Resistance to new plans and ideas: According to staff managers, the line managers usually oppose/resist new plans/ideas. They treat this as interference in their routine work. A staff manager is a professional critic. He suggests modifications, which are useful, but the suggestions are opposed as unnecessary interference. This leads to conflicts. (2) Inadequate support from line executives: Staff managers argue that line Managers do not take benefit of their services. Their services are used only as a measure of last resort. (3) Inadequate scope for the use of authority: Staff managers argue that line managers do not give importance to suggestions given by them. This reduces the scope of activities of staff managers. Moreover, the suggestions of staff managers are not binding on line executives and this affects their importance and contribution. (4) Lack of support from top management: Staff managers also feel that they do not get full support from the top management. The top management is more concerned with regular production. As a result, it gives better treatment to line bosses. (5) Limited cooperation from line executives: Staff managers argue that line executives adopt negative approach towards them even when both are working in the same Organisation with identical objectives. Line executives do not take the advice/suggestions of staff managers in the right spirit. They reject suggestions on the ground that they are not practicable even without giving fair trail. This indicates limited co-operation from line executives. (6) Supply of inadequate information: Staff managers argue that line executives do not approach them well in advance with all necessary details of the problems faced by them. They do not supply relevant information but want the solution quickly. If solution is suggested within the time limit, it is again rejected on the ground that it is not workable. This leads to dissatisfaction and conflicts. (7) Absence of authority: Staff managers feel frustrated as they offer suggestions for solving the problem through hard work and also by using their skills and experience. However, they do not have commanding authority to execute their suggestions. 7.4 Organisation Chart: Organisation structure of a company can be shown in a chart. Such chart indicates how different departments are interlinked on the basis of authority and responsibility. It is a simple diagrammatic method of describing an Organisation structure. It indicates how the departments are linked together on the basis of authority and responsibility. Such Organisation chart provides information of the Organisation structure at a glance. Organisation chart is like a blue print of

a building. It indicates the number and types of departments, superior-subordinate relationship, chain of command and communication. Definition : According to George Terry, Organisation chart is "a diagrammatical form which shows important aspects of an Organisation, including the major functions and their respective relationships, the channels of supervision and the relative authority of each employee who is in-charge of each respective function. Features of Organisation Chart: The definition noted above indicates the following features of Organisation charts: (1) Organisation chart is a diagrammatical presentation, (2) It represents the formal Organisation structure. (3) It shows the lines of authority in the Organisation. (4) It indicates the channel of communication. (5) It indicates who supervises whom and how various units are inter-related. Advantages: (1) Brings clarity to the Organisation: The very process of preparing a chart makes the executive think more clearly about the Organisation relationships. (2) Provides dear picture of the Organisation: Once the charts are prepared, they provide lot of information about the Organisation, both to the members of the Organisation as well as to the outsiders. This information relates to number and types of departments, superior subordinate relationships, chain of command and communication and job titles of each employee. (3) Facilitates training of employees: Organisation charts are useful in familiarizing and training new employees. (4) Ensures organizational changes: Organisation charts provide a starting point for planning organizational changes after having discovered the weaknesses of the existing structure. (5) Provides quick understanding: A chart serves as a better method of visualizing an Organisation than a lengthy written description of it. Limitations (1) Details are not provided: The Organisation chart does not provide all the details of Organisation structure created. For example, the chart will show the line of authority but not the extent of authority. (2) Informal relationship is not shown: The chart fails to give details of informal relationship available in a firm. In fact, human relationships cannot be shown on a chart. (3) Updated position is not available: The chart shows the position of Organisation structure when it was formed. It gives a static picture of the Organisation. Changes made thereafter may not be available in such charts. (4) Fosters buck-passing: The charts tend to foster 'buck-passing' and emphasize only formal channels of communication. (5) Lacks flexibility: Organisation chart lacks an element of flexibility. Such chart also brings an element of rigidity in the working of an Organisation. (6) Creates rank consciousness: An Organisation chart leads to rank consciousness among the staff. It destroys team spirit and collective approach on the part of the staff. Type of Organisation Chart: (1) Vertical chart. - One of the most popular methods is the vertical chart in which the highest job is shown at the top with other jobs shown in a descending order, connected by lines to show the authority and the line of communication. (2) Horizontal chart: This chart shows the Organisation structure in the form of a pyramid.

(3) Circular chart: The top management is shown at the centre of the circle and other management levels are shown in concentric circles. (4) Departmental chart: This chart is devoted exclusively to particular department and gives details of relationships, authority, responsibility, etc. within the department. Uses: (1) An Organisation chart facilitates ready reference. It enables the management to find out different positions of authority and their relationships in the Organisation structure. (2) It provides proper guidance to managers in executing, their assignments and helps them to avoid overlapping and duplication of work. (3) It provides complete information to understand the character of an Organisation. (4) An Organisation chart indicates ways to better utilisation of available manpower. (5) An organisation chart points out the consistencies and deficiencies of an Organisation and enables the management to correct them. 7.5 Authority, Responsibility and Accountability It is necessary to have brief understanding of three terms intimately connected with the concept and process of delegation. These terms are: (a) Responsibility, (b) Authority, and (c)Accountability. (1)Responsibility- Responsibility indicates the duty assigned to a position. The person holding the position has to perform the duty assigned. It is his responsibility. The term "responsibility' is often referred to as an obligation to perform a particular task assigned to a subordinate. In an organisation, responsibility is the duty as per the guidelines issued. According to Davis, "Responsibility is an obligation of individual to perform assigned duties to the best of his ability under the direction of his executive leader." In the words of Theo Haimann, "Responsibility is the obligation of a subordinate to perform the duty as required by his superior". McFarland defines responsibility as "the duties and activities assigned to a position or an executive" Characteristics of Responsibility: (i)The essence of responsibility is the obligation of a subordinate to perform the duty assigned. (ii)It always originates from the superior-subordinate relationship. (iii)Normally, responsibility moves upwards, whereas authority flows downwards. (iv)Responsibility is in the form of a continuing obligation. (v)Responsibility cannot be delegated. (vi) The person accepting responsibility is accountable for the performance of assigned duties. (vii)It is hard to conceive responsibility without authority. (2) Authority: Authority is the right or power assigned to an executive or a manager in order to achieve certain organizational objectives. A manager will not be able to function efficiently without proper authority. Authority is the genesis of organizational framework. It is an essential accompaniment of the job of management. Without authority, a manager ceases to be a manager, because he cannot get his policies carried out through others. Authority is one of the founding stones of formal and informal organisations. An Organisation cannot survive without authority. It indicates the right and power of making decisions, giving orders and instructions to subordinates. Authority is delegated from above but must be accepted from below i.e. by the subordinates. In other words, authority flows downwards.

According to Henri Fayol, "Authority is the right to give orders and the power to exact obedience." According to Mooney and Reily, "Authority is the principle at the root of Organisation and so important that it is impossible to conceive of an Organisation at all unless some person or persons are in a position to require action of others". (3)Accountability: Every employee/manager is accountable for the job assigned to him. He is supposed to complete the job as per the expectations and inform his superior accordingly. Accountability is the liability created for the use of authority. It is the answerability for performance of the assigned duties. According, to McFarland, accountability 'is the obligation of an individual to report formally to his superior about the work he has done to discharge the responsibility." When authority is delegated to a subordinate, the person is accountable to the superior for performance in relation to assigned duties. If the subordinate does a poor job, the superior cannot evade the responsibility by stating that poor performance is the fault of the subordinate. A superior is normally responsible for all actions of groups under his supervision even if there are several layers down in the hierarchy. Simply stated, accountability means that the subordinate should explain the factors responsible for non-performance or lack of performance. Authority, Responsibility and Accountability are inter-related. They need proper consideration while introducing delegation of authority within an Organisation. In the process of delegation, the superior transfers his duties/responsibilities to his subordinate and also give necessary authority for performing the responsibilities assigned. At the same time, the superior is accountable for the performance of his subordinate. 7.6 Delegation of Authority Delegation of authority is one vital organizational process. It is inevitable along with the expansion and growth of a business enterprise. Delegation means assigning of certain responsibilities along with the necessary authority by a superior to his subordinate managers. Delegation does not mean surrender of authority by the higher level manager. It only means transfer of certain responsibilities to subordinates and giving them the necessary authority, which is necessary to discharge the responsibility properly. Delegation is quite common in all aspects of life including business. Even in the college, the principal delegates some of his authority to the vice-principal. In delegation, an attempt is being made to have meaningful participation and cooperation from the subordinates for achieving certain well-defined results. Due to delegation, the routine responsibilities of the superior are reduced. As a result, he concentrates on more urgent and important matters. Secondly, due to delegation, subordinate becomes responsible for certain functions transferred to him. Delegation is a tool, which a superior manager uses for sharing his work with the subordinates and thereby raising his efficiency. Delegation is not a process of abdication. The person who delegates does not divorce himself from the responsibility and authority with which he is entrusted. He remains accountable for the overall performance and also for the performance of his subordinates. Delegation is needed when the volume of work to be done is in excess of an individual's physical and mental capacity. Delegation involves the following three basic elements: (a) Assignment of duties to subordinates, (b) Granting of authority to enable the subordinates to perform the duties assigned, and (c) Creation of obligation on the part of subordinate to perform duties in an orderly manner.

Definitions of Delegation of Authority (1) According to F.C. Moore, "Delegation means assigning work to the others and giving them authority to do so. (2) According to O. S. Miner, 'Delegation takes place when one person gives another the right to perform work on his behalf and in his name and the second person accepts a corresponding duty or obligation to do that is required of him." (3) According to Louis Allen, "Delegation is the dynamics of management, it is the process a manager follows in dividing the work assigned to him so that he performs that part which only he, because of his unique organizational placement, can perform effectively, and so that he can get others to help him with what remains.," Objectives of Delegation of Authority (1) To reduce the excessive burden on the superiors i.e., executives and managers functioning at different levels. (2) To provide opportunities of growth and self development to junior executives. (3) To create a team of experienced and matured managers for the Organisation. It acts as a technique of management and human resource development. (4) To improve individual as well as overall efficiency of the Organisation. Process of Delegation of Authority Delegation process involves four distinct stages. The process of delegation moves through these stages. The following figure shows the stages in the process of delegation of authority.

Stages in the delegation of authority : (A) Assignment of duties to subordinates: Before delegating, the delegator has to decide precisely the duties which are to be delegated to the subordinate or a group of subordinates. The authority is delegated accordingly and the subordinate is told what is expected from him. The usual practice is to list the functions to be performed by the subordinate. If necessary, targets to be achieved by the subordinate are also spelt out. Subordinates may be assigned tasks either in terms of activities or results. The manager (delegator) must communicate clearly his expectations. Competent and responsible employees may be given general guidelines about what needs to be accomplished. Their less competent and responsible counter-parts need more specific guidelines. In brief, in the first stage of delegation process, duties are assigned to the subordinate.

(B) Transfer of authority to perform the duty: In the second stage of delegation process, the authority is granted by the delegator to his subordinate (delegate). Authority must be delegated strictly to perform the assigned duty. The performance of duties suffers serious setback when required authority is not delegated along with the duty. In brief, the transfer of authority should be adequate considering the duties assigned to the subordinate. (C) Acceptance of the assignment: In this third stage of delegation process, the subordinate/delegate has to accept or reject the task assigned to him in the first stage along with the authority given in the second stage. If the delegates refuse, the delegator has to make fresh plan of delegation or may consider some other subordinate who is capable and is willing to accept the assignment. On the other hand, the process of delegation will move to the fourth and the last stage, if the first delegates accept the assignment of work accompanying the authority. (D) Creation of obligation/accountability/responsibility: The fourth stage in the, delegation of authority is the creation of obligation on the part of the subordinate to perform duties assigned to him in a satisfactory manner by using the authority given. When subordinate accepts a task and the authority is given, an obligation is created. He has to perform the assigned task by using the authority granted to him. A subordinate is also responsible /accountable for completing the assigned work. He is held answerable to a superior for the satisfactory performance of that work assigned. The delegator has to help his subordinate as and when necessary as he is responsible to his superior/organisation. Advantages of Delegation of Authority: (1) Relieves manager for more challenging jobs: Delegation makes it possible for the managers to distribute their workload to others. Thus, managers are relieved of routine work and they can concentrate on higher functions of management like planning, organising, controlling, etc. (2) Leads to motivation of subordinates: Subordinates are encouraged to give their best at work when they have authority with responsibility. They take more initiative and interest in the work and are also careful and cautious in their work. Delegation leads to motivation of employees and manpower development. (3) Facilitates efficiency and quick actions: Delegation saves time enabling tile subordinates to deal with the problems promptly. They can take the decisions quickly within their authority. It is not necessary to go to the superiors for routine matters. This raises the overall efficiency in an Organisation and offers better results in terms of production, turnover and profit. (4) Improves employee morale: Delegation raises the morale of subordinates as they are given duties and supporting authority. They feel that they are responsible employees. The attitude and outlook of subordinates towards work assigned becomes more constructive. (5) Develops team spirit: Due to delegation, effective communication develops between the superiors and subordinates. The subordinates are answerable to superiors and the superiors are responsible for the performance of subordinates. This brings better relations and team spirit among the superiors and subordinates. (6) Maintains cordial relationships: The superiors trust subordinates and give them necessary authority. The subordinates accept their accountability and this develops cordial superior-subordinate relationships. (7) Facilitates management development: Delegation acts as a training ground for management development. It gives opportunity to subordinates to learn, to grow and to develop new qualities and

skills. It builds up a reservoir of executives, which can be used as and when required. Delegation creates managers and not mere messengers. The advantages of delegation will not be available easily and automatically. They will be available only when the process of delegation moves smoothly. Problems may develop, if the delegation is not introduced with proper planning and in proper spirit. For example, the authority given to subordinate is inadequate or the subordinate is not competent to discharge the responsibilities assigned or the superior fails to monitor' the whole process of delegation effectively. In all such cases, the delegation will be ineffective and the expected advantages will not be available to the Organisation and also to concerned parties. Obstacles/Barriers to Effective Delegation of Authority (A)Obstacles/Barriers on the Part of Manager/Superior/Delegator: (1) Unwillingness of the manager to delegate authority: Some superiors/managers tend to think that they can do the job better when they themselves handle the job. The attitude that 'I can do it better myself' on the part of superior acts as an obstacle to delegation. Some managers (superiors) who are autocratic and power worshippers feel that delegation will lead to reduction of their influence in the Organisation. A manager may feel that if he has a competent subordinate and if he delegates authority to the subordinate, quite likely he will outshine him (manager) and may be promoted. (2) Fear of competition: A manager may feel that if he has a competent subordinate and if he delegates authority to the subordinate, quite likely he will outshine him. Fear of subordinate's excellence may come in the way of delegation. (3) Lack of confidence in subordinates: A manager may hesitate to delegate authority, if he feels that his subordinate is not competent to deal with the problem and take decisions. Even fear of losing control over the subordinates acts as an obstacle to delegation. In addition, fear of being exposed due to personal shortcomings may act as an obstacle in the process of delegation. (4) Lack of ability to direct: Sometimes, a manager may experience difficulty in directing the efforts of his subordinates because of his inability to identify and communicate the essential features of his long-range plans and programmes. (5) Absence of controls that warn of coming troubles: An Organisation might not have developed the controlling techniques to know in advance the serious problems lying ahead. It may happen due to concentration of power in the hands of few people. As a result, manager may resist delegation. (6) Conservative and cautious temperament of the manager. If a manager has a conservative and over-cautious approach, there will be psychological barrier in the way of delegation. A manager avoids delegation as he feels that something may go wrong even when the instructions given are clear and the subordinates are reliable. (7) Desire to dominate subordinates: -Managers (superiors) normally, have a desire to dominate the subordinates functioning under their control. They feel that their domination will reduce if the powers are delegated to subordinates. They also feel that due to delegation, the subordinates will know their managerial deficiencies. In order to maintain their superior status and in order to dominate the subordinates, they avoid

delegation itself. (B) Obstacles/Barriers on the Part of Subordinates (Why Subordinates Resist Delegation?):

(1) Too much dependence on the manager for decisions: Some subordinates avoid responsibility even when the superior/manager is prepared to delegate authority. They want the manager to tackle problems and take decisions. A subordinate who is not confident about his performance/ability will certainly try to shirk responsibility even though his superior is prepared to delegate functions and authority. (2) Fear of criticism: Subordinates express unwillingness to accept delegated authority because of the fear of criticism in the case of mistakes. They fear that they may be criticized by others if they commit mistakes. Such subordinates have the following feeling in their mind, "Why should I stick my neck out for my boss?" (3) Lack of information: A subordinate may hesitate to accept a new assignment, when he knows that necessary information to perform the job is not likely to be made available to him. He is reluctant to accept delegated functions and authority as he feels that he will not be able to perform well due to inadequate information available. . (4) Absence of positive incentives: Positive incentives like recognition of work and rewards go a long way in building up the morale of subordinates. In the absence of such incentives in the form of recognition, appreciation or monetary benefit, a subordinate may not be prepared to accept delegation of authority. (5) Absence of self-confidence: A subordinate may lack self-confidence about his ability to take quick and correct decisions. He may not like to accept new challenging functions as he lacks selfconfidence. Thus, lack of self-confidence on the part of subordinates is one obstacle which comes in the way of delegation of authority. (6) Difficulty in decision-making: A subordinate may not have the skill and the expertise to take quick and correct decisions. He prefers to go to his superior (boss) and ask for his guidance or opinion. Such psychology acts as a cause for non-acceptance of delegation. A subordinate avoids delegation due to such mental tension or inferiority complex. (7) Poor superior-subordinate relations: Absence of cordial relations in between the superior and the subordinates hampers the process of delegation of authority. The attitude of the superior towards subordinate may not be friendly but hostile. There may be undue interference in the work assigned to the subordinate. Even the good work of subordinate may not be appreciated by the superior. Such situation creates unfavorable attitude of subordinate towards delegation. He avoids delegation as and when offered. (8) Undue interference by superior.- A superior should not interfere in the duties delegated to the subordinate. He may offer guidance as and when asked for. Some superiors interfere in the work of his subordinate and try to control him often and again. In the absence of legitimate freedom, the subordinate becomes uneasy and prefers to remain away from the process of delegation. (9) Fear of being exposed: Some subordinates may have inferiority complex. They feel that they have limited capacity to accept the challenges which are bound to come out to delegation. They feel that their inability to deal with new problems will be exposed due to delegation. This fear acts as an obstacle to delegation. Principles of Effective Delegation of Authority

(1) Knowledge of Objectives: Before delegating authority, the subordinates should be made to understand their duties and responsibilities. In addition, knowledge of objectives and policies of the enterprise should be provided to them. This will enable them to discharge their roles purposefully in the process of delegation. (2) Parity of Authority and Responsibility: This principle of delegation suggests that when authority is delegated, it should be commensurate with the responsibility of the subordinate. In fact, the authority and responsibility should be made clear to the subordinate so that he will know what he is expected to do within the powers assigned to them. There should be proper balance/parity or co-existence between the authority and responsibility. A subordinate will not function efficiently, if authority given to him is inadequate. On the other hand, if the excess authority is given, he may misuse the same. For avoiding this, the subordinates who are assigned duties should be given necessary/ adequate authority enables them to carry out their duties. (3) Unity of Command: This principle of delegation suggests that everyone should have only one boss. A subordinate should get orders and instructions from one superior and should be made accountable to one superior only. This means 'no subordinate should be held accountable to more than one superior. When a subordinate is asked to report to more than one boss, it leads to confusion and conflict. Unity of command also removes overlapping and duplication of work. In the absence of unity of command, there will be confusion and difficulty in fixing accountability. (4) The Scalar Principle: The scalar principle of delegation maintains that there should be clear and direct lines of authority in the Organisation, running from the top to the bottom. The subordinate should know who delegates authority to him and to whom he should contact for matters beyond his authority. They (subordinates) should also know what is expected from them. This principle justifies establishment of the hierarchical structure within the Organisation. (5) Clarity of Delegation: The principle of clarity of delegation suggests that while delegating authority to subordinates, they should be made to understand the limits of authority so that they know the area of their operation and the extent of freedom of action available to them. Such clarity guides subordinates while performing their jobs. (6) Absoluteness of Responsibility: This principle of delegation suggests that it is only the authority which is delegated and not the responsibility. The responsibility is absolute and remains with the superior. He cannot run away from the same even after delegation. Even when the manager delegates authority to his subordinate, he remains fully accountable to his superiors because responsibility cannot be divided between a superior and his subordinate. No superior can delegate responsibilities for the acts of his subordinates. He is responsible for the acts and omissions of his subordinates. (7) Use of Exception Principle: This principle of delegation indicates that when authority is delegated, it is expected that the subordinate will exercise his own judgment and take decisions within the purview of his authority. He is to be given adequate freedom to operate within his authority even at the cost of mistakes. He should refer the problems to the top level management only when he is unable to take decisions. Unnecessary interference in the work of delegates should be avoided. This normal rule can be given up under exceptional circumstances. Here, the superior can interfere in the work of his subordinate and even withdraw the delegated duties and authority. The superior takes this decision under exceptional circumstances. (8) Completeness of Delegation: This principle of delegation suggests that there should be completeness in the process of delegation. The process of delegation should be taken to its logical end. Otherwise, there will be confusion of authority and accountability.

(9)

Effective Communication Support System: This principle suggests that there should be continuous flow of information between the superior and the subordinates with a view to furnishing relevant information to subordinate for decision-making. This helps him to take proper decisions and also to interpret properly the authority delegated to him. Delegation system may not work smoothly in the absence of effective communication between the superior and subordinates. (10) Reward for Effective Delegation: This principle suggests that effective delegation and successful assumption of authority should be rewarded. This will facilitate fuller delegation and effective assumption of authority within the Organisation. Reward for effective delegation will provide favorable environmental climate for its fair introduction. 7.7 Decentralisation Meaning Decentralisation of authority is another concept closely related to centralisation. The delegation of authority by an individual manager is closely related to organizations Decentralisation of authority. Decentralisation of authority means conscious/systematic effort to bring dispersal (spreading) of decision making power to the lower levels of the Organisation. In decentralisation, only broad powers will be reserved at the top level. Such powers include power to plan, organise, direct and control and maximum powers will delegated to the authority at the lower level. Decentralisation is just opposite to centralisation. Under centralisation, authority is mostly concentrated at the top level management. Centralisation and decentralisation are mutually dependent. In a large Organisation, the process of centralisation and decentralisation co-exist and reinforce each other. Decentralisation is a natural development when the Organisation grows large and complex. Here, centralisation of management is neither possible nor desirable. The only practical solution is to divide the Organisation into decision-making units and giving the powers to take routine types of decisions in regard to the functioning of those units. This is decentralisation in practice. In decentralisation, systematic efforts are being made to delegate to the lowest levels all authority except that which can only be exercised at the central points. Decentralisation is delegation not from one individual to another but delegation to all units in an Organisation. A company is said to be highly decentralized, when the delegation is company-wide in all functions and divisions of the company and also for a wide range of authorities and responsibilities. Decentralisation is different from centralisation as in centralisation, the decision making power is in the hands of one person only. We observe such centralisation in sole trading concerns. It is also noted that centralisation is one feature of traditional management in India while decentralisation is a normal practice under professional management. Definitions (1) According to Henry Fayol, "Everything that goes to increase the importance of the subordinates role is decentralisation, everything that goes to reduce it is centralisation." (2) According to Louis Allen, "decentralisation refers to the systematic effort to delegate to the lowest levels all authority except that which can only be exercised at central point. This definition makes it clear that even in decentralisation, delegation to the lowest levels is not complete as the basic functions in the management process are centralized. Advantages : (1) Decentralisation helps to improve the quality of decisions/decision-making at the top level management: Decentralisation of authority among other executives at all levels in the Organisation relieves the top executive of the excessive burden saving his valuable time, which he can devote to

more important and long-term problems. This is bound to improve the quality of his decisions regarding such problems. (2) Decentralisation facilitates diversification of activities: It is a matter of common experience that an Organisation with departmentation on the basis of products facilitates diversification of products or market even when the authority is centralized. Decentralisation takes this process a step further. Managers of semi-autonomous product divisions are able to utilise their skills and experienced judgment. This has a bearing on their products and the market. The enterprise also attains maximum possible growth. Decentralisation is beneficial when new product lines or new activities are introduced in an Organisation. Such policy creates self sufficient units under overall coordination of top level management. (3) Decentralisation encourages development of managerial personnel: Most companies find lack of managerial talent as a limiting factor in their growth. A company cannot expand effectively beyond the scope and abilities of its managerial personnel. Capable managers, however, can be developed only by giving managerial jobs to suitable persons and delegating them the authority to make important decisions. Such wide exposure gives them opportunity to grow and to have self development for higher positions. The more talented and capable persons will learn and improve and qualify themselves for higher managerial positions. Only a decentralized Organisation can offer such opportunities to future managers without involving additional expenditure. A decentralized Organisation also allows its managers adequate freedom to try new ideas, methods or techniques. In brief, decentralisation creates a team of competent managers at the disposal of the company. (4) Decentralisation improves motivation: Research conducted by social scientists has proved that the Organisation structure itself exercises some influence on the motivation of the people working within it. An Organisation structure which facilitates delegation, communication and participation also provides greater motivation to its managers for higher productivity. Decentralized Organisation structure is most favorable for raising the morale and motivation of subordinates which is visible through better work performance. (5) Decentralisation makes decision-making quicker and better. Since decisions do not have to be referred up through the hierarchy, quicker and better decisions at lower levels can be taken. Divisional heads are motivated to make such decisions that will create the maximum profit because they are held responsible for the effect of their decisions on profits. Thus decentralisation facilitates quick and result-oriented decisions by concerned persons. (6) Decentralisation provides opportunity to learn by doing: Decentralisation provides a positive climate where there is freedom to make decisions, freedom to use judgment and freedom to act. It gives practical training to middle level managers and facilitates management development at the enterprise level. Limitations (1) Decentralisation may lead to the problem of co-ordination at the level of an enterprise as the decision-making authority is not concentrated. (2) Decentralisation may lead to inconsistencies (i.e. absence of uniformity) at the Organisation level. For example, uniform policies or procedures may not be followed for the same type of work in different divisions. (3) Decentralisation is costly as it raises administrative expenses on account of requirement of trained personnel to accept authority at lower levels. Even the services of such highly paid manpower may not be utilised fully, particularly in small organisations. (4) Introduction of decentralisation may be difficult or may not be practicable in small concerns where product lines are not broad enough for the creation of autonomous units for administrative purposes.

(5) Decentralisation creates special problems particularly when the enterprise is facing number of uncertainties or emergency situations. The decision-making process gets delayed and even correct decisions as per the changing situations may not be possible. Decentralisation is not an unmixed blessing. The advantages of decentralisation are more significant as compared to its limitations. The limitations suggest possible problems relating to decentralisation. Efforts should be made to solve these problems. It is certainly not desirable to have centralisation (in place of decentralisation) only because of certain limitations. However, to what extent the organisation should be decentralized is a delicate issue. Here, certain factors such as size of the organisation and the abilities of lower level managers need careful consideration. QUESTION BANK 1. What is organization structure? Explain briefly the process of organizing 2. What is line and staff organization? Explain its merits and demerits 3. Explain line and staff organization with the help of a chart 4. Explain the principles of organization given below: o Division of work o Unity of command o Scalar chain 5. What are the causes of line and staff conflict? How can it be resolved? 6. Explain Line, Staff and Functional authority relationships 7. What is delegation of authority? Explain the process of delegation of authority 8. What are the difficulties of managers and subordinates in delegation of authority? 9. Suggest guidelines of effective delegation of authority 10. What is decentralization? Explain its merits and demerits. 11. Write short notes on: o Flat organization o Authority, responsibility and accountability o Delegation v/s decentralization o Bases of decentralization

Chapter 8 Motivation and leadership Motivation 8.1 Introduction Motivation is next to directing/leading. Managers can motivate their subordinates while guiding them. Motivating means encouraging people to take more initiative and interest in the work assigned. It is an art of getting things done willingly from others. Motivation avoids clashes and non-cooperation and brings harmony, unity and co-operative outlook among employees. Managers have to work as motivators of their subordinates. For this, effective communication, proper appreciation of work done and positive encouragement are necessary and useful. Motivation is inspiring and encouraging people to work more and contribute for achieving the objectives

of the company The creation of the desire and willingness to perform the job efficiently is known as motivation. Motivation is a psychological and sociological concept as it relates to human behavior and human relations. It is the most fundamental and all pervasive concept of psychology. For motivation, sweet words are useful but are certainly not adequate. Motivation basically relates to human needs, desires and expectations. In other words, these factors suggest the measures which can be used for the motivation of employees. In motivation, efforts should be made to satisfy the different needs of employees so that they will be satisfied, happy and away from tensions. This creates favorable environment because of which employees take more interest and initiative in the work and perform their jobs efficiently. Motivation is a technique of creating attraction for the job. It is encouraging employees for better performance in order to achieve the goals of an Organization. The process of motivation is a continuous one (circular one) and is beneficial to both - employer and employees. It is a key to improve work performance of employees. The term 'motive' is derived from the Latin word "emovere" which means to move or to activate. Motivation is the act of making someone to act in the desired manner through positive encouragement. It is through motivation that employees can be induced to work more, to earn more and to give better results to the Organization. (1) According to W. G. Scot, "Motivation means a process of stimulating people to action to accomplish the desired goals." (2) According to Michael J. jucius, "Motivation is the act of stimulating someone or oneself to get a desired course of action, to push the right button to get a desired results'. Features/Characteristics of Motivation (1) Psychological process: Motivation is a psychological process useful for encouraging employees to take more interest in the work assigned. It relates to human relations. (2) Initiative by manager- The initiative for motivation is by the manager by offering guidance and also by other methods like appreciation of good work or offering incentives. Management has to adopt special measures for motivating employees. They include monetary as well as non-monetary. (3) Continuous activity: It is a continuous and circular process. Subordinates need motivation in a continuous manner as their needs and expectations change from time to time. A manager has to study the needs of workers and use the technique of motivation accordingly. The process of motivation must be made a regular and continuous one. (4) Goal-oriented and action-oriented: Motivation diverts human behavior towards certain goals. Attainment of organizational and individual goals depends on the motivational plans. (5) Broad concept-. Motivation covers needs, human relations and satisfaction of employees. For employee motivation, monetary and other incentives need to be offered. Job satisfaction is one such need and is useful for their motivation. (6) Essence of management process: Motivation is an essential function of a manager. He has to motivate his subordinates for achieving organizational objectives. Motivated labour force is an asset of a business unit. Motivated employees bring prosperity to a business unit. (7) Beneficial to employees and management- Motivation offers benefits to employees and Organisation. It avoids crashes and encourages cooperative outlook among employees. Motivation leads to cordial labour-management relations. It provides more profit to management and better welfare to employees. (8) Varied measures available for motivation: For motivation, various monetary and non monetary incentives can be offered to employees by the management. Attractive wages, welfare facilities, job

satisfaction, appreciation of good work, encouragement to self-development, job security and fair treatment are some measures of motivating employees. (9) Motivation is different from satisfaction: Motivation implies a drive towards a result while satisfaction involves result already experienced and achieved. 'When desire is satisfied, employee is motivated. (10) Related to a person in totality-. An employee is motivated in totality and not in part. Employee's basic needs are interrelated. Management must fulfill all the needs through monetary and nonmonetary incentives. Importance of Motivation Motivation occupies an important place and position in the whole management process. This technique can be used fruitfully for encouraging workers to make positive contribution for achieving organizational objectives. Motivation is necessary as human nature needs some sort of inducement, encouragement or incentive in order to get better performance. Motivation of employees offers may benefits to the Organisation and also to the employees. This suggests the importance of motivating employees. Motivation acts as a technique for improving the performance of employees working at different levels. Motivation of employees is one function which every manager has to perform along with other managerial functions. A manager has to function as a friend and motivator of his subordinates. Motivation is useful in all aspects of life and even our family life. The same is the case with business. This dearly suggests that motivation is extremely important. It is an integral part of management process itself. Advantages of Motivation (A) Advantages to Management/Organization: (1) Increase in the efficiency and productivity of employees. Motivation ensures a high level performance of employees. (2) Better co-operation from employees and cordial labour-management relations. (3) Reduction in the rate of labour absenteeism and turnover. (4) Reduction in the wastages and industrial accidents. (5) Improvement in the morale of employees. (6) Quick achievement of business/corporate objectives and favorable corporate image. (B) Advantages to Employees/Workers: (1) Employees get various monetary and non-monetary facilities/ benefits N4ich provide better life and welfare to them. (2) Security of employment and other benefits due to cordial relations with the management. (3) Job attraction and job satisfaction. (4) Higher status and opportunities of participation in management. (5) Positive approach and outlook of employees towards company, management and superiors. (6) Reduction in the rate of labour turnover which is harmful to employees and management. (7) Better scope for improvement in knowledge and skills of employees. Motivational Factors (a) Monetary Factors/Incentives (1) Attractive salary/wages and allowances (2)High rate of bonus. (3)Liberal monetary incentives (4)Allowances such as over time allowance, (b) Non-monetary Factors/Incentives (1)Job security and job enrichment. (2)Fair treatment to employees. (3)Recognition of good work. (4)Encouragement for self-development and

medical allowance, leave travel allowance, career development. house rent, educational and re-creation (5)Delegation of authority to subordinates. allowances and so on. (6)Congenial working conditions. (5)Special incentives. (7)Helpful attitude of management. (8)Fair opportunity of promotion. (9)Labour participation in management. (10)Designation and status. Monetary/Financial Incentives: Monetary incentives are offered in terms of money. Such incentives provide more cash or purchasing power to employees. Monetary incentives are extremely attractive to employees (particularly those working at lower levels) as they get the benefit quickly and in concrete terms. At the higher levels of management, non-monetary incentives are more important than monetary incentives. Workers prefer monetary incentives as compared to non-monetary incentives. Managements also offer liberal monetary incentives to all categories of workers. Individual and Group Monetary Incentives: Monetary incentives may be further classified as: (i) Individual Monetary Incentives: The benefit of individual monetary incentive is available to concerned worker only. For example, F. W. Taylor suggested differential piece rate system which offers different wage rates to different workers as per their production efficiency. Different incentive wage plans are the examples of individual monetary incentives as the benefit is offered individually to every worker. Here, a worker is paid as per his efficiency, productivity or as per the production given by him. Efficient/sincere workers give more production and get higher reward in terms of wage payment. (ii) Group Monetary Incentives: In the group monetary incentives, the monetary benefit is not given individually but to a group of workers or to all workers in the Organisation. Workers have to work jointly/collectively as a team in order to secure the benefits of group monetary incentives. Bonus payment, pension, P.F, production/ productivity bonus, profit sharing& etc. are the examples of group monetary incentives. For the employer/management, group incentives are more important as they offer many benefits to the management. Monetary Incentives for Employee Motivation: (1) Attractive Salaries/Wages: Money is the most important motivating factor. While determining salaries, management must give to employees security of income along with ability to lead respectable life. Salary should be revised periodically to meet the cost of living. (2) Attractive Bonus Payment: Under the Bonus Payment Act, 1965 a company has to declare bonus whenever it earns profit. Bonus adds to annual income of the employees and it becomes monetary incentive. (3) Liberal Monetary Incentives: When employees are paid over and above their salary, an additional payment in recognition of better work, it is called incentive. When incentive payment is offered, employees work hard to earn more and they remain motivated. (4) Package of allowances: Management provides to employees both statutory and non statutory types of allowances such as medical allowance, leave travel allowance, house rent allowance, recreation allowance, educational allowance and so on. These allowances act as motivators. (5) Special Incentives: There are certain monetary incentives offered only to deserving employees e.g. performance bonus, attendance bonus etc. It has a positive impact on others because they also work hard to earn these special incentives.

Non-monetary Incentives for Employee Motivation are as explained below (1) Job security and job enrichment: Job security is useful for the motivation of employees. Such security keeps the employee away from the tension of becoming unemployed. Job enrichment provides an opportunity for greater recognition and advancement. Job enrichment refers to redesign of jobs. (2) Fair treatment to employees: Employer should give attention to the needs, difficulties and grievances of employees. Small work groups and effective communication are useful for solving the problems of workers. Employees must be given decent treatment. They will be co-operative only when they are treated with sympathy and love, affection and dignity. Employees should also be given help in personal matters. (3) Recognition of good work: Recognition of good work at an appropriate time gives encouragement to employees to show better performance in future. As an appreciation of good work, prizes, rewards, promotions, etc. should be given. (4) Encouragement to self-development and career development: Employees should be given varied training facilities. Training facilitates self-development and also provides opportunities for career development. Every employee has a desire to grow, develop and rise higher. This desire should be exploited fully for motivating employees. For this, training as well as management development programmes should be introduced. (5) Delegation of authority: Due to delegation of authority, a subordinate employee feels that superior has faith in him and also in his ability to use authority in a proper manner. Employees get mental satisfaction when authority is given to them. They take interest and initiative in the work and try to prove that they are competent to work at the higher levels. Thus, delegation of authority becomes a motivating factor. (6) Congenial working conditions: It is a non financial incentive for motivation. Employees should be given various facilities and conveniences at the work place. The work environment should be pleasant and safe. This creates desire to work efficiently. (7) Helpful attitude of management: The helpful attitude of management towards its employees creates a sense of affinity for the Organisation. Fair treatment to workers creates better understanding among workers. Cordial industrial relations also motivate employees. Thus, enlightened and pro-employee attitude of management acts as a motivating factor. (8) Fair opportunity of promotion: Fair opportunity of promotion to all eligible workers is one more method useful for motivating employees. They take interest in the work as they feet that they will be rewarded in the form of promotions. Training facility should be provided to employees in order to make them eligible for promotion. (9) Labour participation in management: Labour participation in management is useful for the motivation of employees. Workers get higher status and better scope for expressing their views through such participation. Even the formation of quality circles or joint management councils is useful for motivating employees. (10) Designation and status: When an employee is provided with a better designation, it adds to his status. Employees are proud to reveal their attractive and high-sounding designations. 8.2 Theories of Motivation: (1) A. H. Maslow's Need Hierarchy Theory. (2) Hertzbergs Motivation Hygiene Theory (Two Factor Theory). (3) Douglas McGregor's Theory 'X" and Theory 'Y".

(4) McClelland's Achievement Motivation. (1)MASLOW'S THEORY OF MOTIVATION ( HIERARCHY THEORY) It was in 1943 that Psychologist Mr. Abraham H. Maslow suggested his theory of human motivation. His theory is one popular and extensively cited theory of motivation. Maslow's theory is based on the hierarchy of human needs. According to him human behavior is related to his needs. It is adjusted as per the nature of needs to be satisfied. In his theory, Maslow identified five types/sets of human need arranged in a hierarchy of their importance and priority. He concluded that when one set of needs is satisfied, it ceases to be a motivating factor. Thereafter, the next set of needs in the hierarchy order takes its place. These needs in hierarchy can be compared to a pyramid. At the lowest level, there will be first set of needs which can be described as basic needs and are universal in character. This will be followed by other sets of needs. Maslow has noted the following assumptions about the hierarchy of needs: (1) Man is a wanting being, i.e. his wants are growing continuously even when some wants are satisfied. Human needs are of varied and diversified nature. They can be arranged in a hierarchy of importance progressing from a lower to a higher order of needs. (2) Needs have a definite hierarchy of importance. As soon as needs on a lower level are fulfilled, those on the next level will emerge and demand satisfaction. This suggests that bread (food) is essential and is a primary need of every individual. According to Maslow "man lives by bread alone when there is no bread." However, he feels the other needs when his physiological needs are fulfilled. In brief, bread is important but man does not live by bread alone. There are other needs (security/safety, social, esteem and self actualisation which influence behavior of people (employees) to work. This is the basic feature of Maslow's need hierarchy. Attention to all human needs is essential for motivation of employees. Attention to the provision of bread alone is not adequate for motivating employees. Bread can act as motivating factor when there is no bread but when it is available, its use as motivator comes to an end. Here, other motivators (e.g. security of job, social status, etc.) will have to be introduced for motivating employees. Attention to other needs such as security needs, social needs, esteem needs and self actualisation needs is equally important and essential for the motivation of different categories of employees. Maslow, in his theory, has referred to different needs and suggested that attention needs to be given to all such needs as attention to physiological needs alone is not adequate for motivating employees. According to Maslow, 'Man does not live by bread alone'. This conclusion of Maslow is a practical reality and needs to be given adequate attention while motivating employees. (3) A satisfied need does not act as a motivator. (4) As one need is satisfied, another replaces it The basic human needs (as identified by Maslow) are as explained below: (1) Physiological Needs: Physiological needs are the basic needs for sustaining human life. These needs include food, shelter, clothing, rest, air, water, sleep and sexual satisfaction. These basic human needs (also called biological needs) lie at the lowest level in the hierarchy of needs as they have priority over all other needs. These needs cannot be postponed for long. Unless and until these basic physiological needs are satisfied to the required extent, other needs do not motivate an employee. A hungry person, for example, is just not in a position to think of anything else except his hunger or food. According to Maslow, 'man lives by bread alone,' when there is no bread. The management attempts to meet such physiological needs through fair wages. (2) Security/Safety Needs:

These are the needs connected with the psychological fear of loss of job, property, natural calamities or hazards, etc. An employee wants protection from such types of fear. He prefers adequate safety or security in this regard i.e. protection from physical danger, security of job, pension for old age, insurance cover for life, etc. The safety needs come after meeting the physiological needs. Such physiological needs lose their motivational potential when they are satisfied. As a result, safety needs replace them. They begin to manifest themselves and dominate human behavior. Safety needs act as motivational forces only if they are unsatisfied. (3) Social Needs: An employee is a human being is rightly treated as a social animal. He desires to stay in group. He feels that he should belong to one or the other group and the member of the group should accept him with love and affection. Every person desires to be affiliated to such groups. This is treated as basic social need of an individual. He also feels that he should be loved by the other members. He needs friends and interaction with his friends and superiors of the group such as fellow employees or superiors. Social needs occupy third position in the hierarchy of needs. (4) Esteem Needs: This category of needs include the need to be respected by others, need to be appreciated by others, need to have power and finally prestigious position. Once the previous needs are satisfied, a person feels to be held in esteem both by himself and also by others. Thus, esteem needs are two fold in nature. Self esteem needs include those for self confidence, self-respect, competence, etc. The second groups of esteem needs are those related to one's status, reputation, recognition and appreciation by others. This is a type of personal ego which needs to be satisfied. The Organisation can satisfy this need (ego) by giving recognition to the good work of employees. Esteem needs do not assume the motivational properties unless the previous needs are satisfied. (5) Self-actualisation Needs: This is the highest among the needs in the hierarchy of needs advocated by Maslow. Self actualisation is the desire to become what one is capable of becoming. It is a 'growth' need. A worker must work efficiently if he is to be ultimately happy. Here, a person feels that he should accomplish something in his fife. He want5 to utilise his potentials to the maximum extent and desires to become what one is capable of becoming. A person desires to have challenges and achieves something special in his life or in the area of his specialization. Though every one is capable of self-actualization, many do not reach this stage. This need is fully satisfied rarely. Limitations of Maslow's Motivation Theory: Maslow's theory of motivation is very popular all over the world and provides guidelines to managers/managements for motivating employees. However, Maslow's theory has many limitations as noted below: (1) Maslow's theory is over simplified and is based on human needs only. There is lack of direct cause and effect relationship between need and behavior. (2) The theory has to refer to other motivating factors like expectations, experience and perception. (3) Needs of all employees are not uniform. Many are satisfied only with physiological needs and security of employment. (4) The pattern of hierarchy of needs as suggested by Maslow may not be applicable uniformly to all categories of employees. (5) Maslow's assumption of 'need hierarchy' does not hold good in the present age as each person has plenty of needs to be satisfied, which may not necessarily follow Maslow's need hierarchy. (6) Maslow's theory is widely accepted but there is little empirical evidence to support it. It is largely tentative and untested. Maslow's writings are more philosophical than scientific.

Maslow hierarchy can be represented as shown in figure

(2) HERZBERG'S TWO (DUAL) FACTOR THEORY OF MOTIVATION Fredrick Herzberg's theory of motivation (also called Two (Dual) Factor Theory or Hygiene/ Maintenance Theory of Motivation) is based on the information collected by him and his associates (in the USA in 1959) by interviewing two hundred engineers and accountants. The information collected relates to the attitude of people towards work. This attitude towards work depends on two sets of factors namely hygiene or maintenance factors and the motivating factors. (a) Hygiene/maintenance factors: According to Herzberg, the hygiene factors do little contribution to provide job satisfaction. He called them "dissatisfiers' as their absence cause dissatisfaction but their presence is not motivating but only prevent dissatisfaction. The hygiene factors meet man's needs to avoid unpleasantness but do not motivate them to take more interest in the work. Hygiene factors (when provided) create a favorable environment for motivation and prevents job dissatisfaction. They are not an intrinsic part of a job, but they are related to the conditions under which a job is performed. When employer is unable to provide enough of these factors to his employees, there will be job dissatisfaction. However, ff they are provided, they will not necessarily act as motivators. They will just lead employees to experience no job dissatisfaction. Such hygiene factors are as noted below. (1) Company's policies and administration. (2) Supervision. (3) Working conditions. (4) Interpersonal relations with superiors and other subordinates. (5) Salary, job security and status. (6) Personal fife. (7) Employee benefits. (b) Motivating factors: Motivating factors act as forces of job satisfaction. They create positive and a longer lasting effect on employees performance and are related to work itself. Adequate provision of such factors (called satisfiers) make people happy with their jobs because they serve man's basic needs for psychological growth. In addition, they also motivate employees in their work. Such factors are five and are called motivators by Herzberg. The motivating factors are: Achievement, recognition for accomplishment, increased responsibility, opportunity for growth and development and creative and challenging work. These factors motivate subordinates to take more interest in the work. They raise efficiency and productivity of employees. According to Herzberg, motivating factors are essential in order to provide job satisfaction and in order to maintain a high level of job performance. Employees will not have job satisfaction if the motivating factors are not provided in sufficient quality by the employer. Motivators and Hygiene Factors are as shown below: Hygienes Motivators (1) Company Policies and Administration (1) Achievement

(2) Supervision (2) Recognition for Accomplishment (3) Working Conditions (3) Increased Responsibility (4) Interpersonal Relations (4) Opportunity for Growth (5) Salary (5) Challenging Work (6) Job Security (7) Status (8) Personal Life According to Herzberg, these two sets of factors are quite independent of each other. It may be noted that hygiene factors, when satisfied, tend to eliminate dissatisfaction but do not motivate an individual employee for better performance. The motivating factors will permit an individual to grow and develop in a natural way. In brief, hygiene factors affect an individual's willingness to work while motivating factors affect his ability and efficiency to work. This theory can be compared to Maslow's theory of human needs as both the theories refer to needs and their role in motivation. In addition, the assumptions in both the theories are identical. Herzberg's theory has many limitations. They are related to research methodology used, empirical validity and assumptions in the theory. His theory is criticized on many grounds. Many have found the theory to be an oversimplification. Despite such criticism, Herzberg's two factor theory has made a significant contribution towards improving manager's basic understanding of human behavior. His theory is simple to grasp, based on some empirical data and guides managers to improve employee motivation. Herzberg provided stimulus to other researchers to develop alternative theories of motivation.

(3) MCGREGOR'S THEORY "X" AND THEORY "Y" The eminent psychologist Douglas McGregor has given his theory of motivation called Theory X and. Theory Y. He first presented his theory in a classic article 'The Human Side of Enterprise'. He treated traditional approach to management as 'Theory X' and the professional approach to management as "Theory Y'. His theory refers to two sets of employees based on the perception of human nature. Here, theory X and theory Y are two sets of assumptions about the nature of employees. His theory is based on human behavior. Theory X: Theory X is based on traditional assumptions about people (employees). Here, the conventional approach of management is used as a base. It suggests the following features of an average human being/employee (assumptions about human nature): Assumptions of Theory X: (1) The average human being is inherently lazy by nature and desires to work as little as possible. He dislikes the work and will like to avoid it, if he can. (2) He avoids accepting responsibility and prefers to be led or directed by some other. (3) He is self-centered and indifferent to organizational needs. (4) He has little ambition, dislikes responsibility, prefers to be led but wants security. (5) He is not very intelligent and lacks creativity in solving organizational problems. (6) He by nature resists to change of any type. In the case of such employees, self-motivation is just not possible. They will work only when there is constant supervision on them. A manager has to persuade, punish or reward such workers in order to achieve organizational goals. Theory Y Theory Y is based on modem/progressive approach. Here, the assumptions about people i.e. employees are quite different. They are as follows: (1) Work is as natural as play, provided the work environment is favorable. Work may act as a source of satisfaction or punishment. An average man is not really against doing work. (2) People can be self-directed and creative at work if they are motivated properly. (3) Self-control on the part of people is useful for achieving organizational goal. External control and threats of punishment alone do not bring out efforts towards organizational objectives. (4) People have capacity to exercise imagination and creativity. (5) People are not by nature passive or resistant to organizational needs. They have become so as a result of experience in organisations. (6) An average human being learns under proper conditions. He is also willing to accept responsibility. (7) The intellectual capacity of an average human being is utilised partially under the conditions of modem industrial life. Such types of people (employees) are self-motivated and McGregor recommends that they be motivated by encouraging participation so as to get team work. Theory Y assumes that people are not by nature, lazy and unreliable. They can be self-directed and creative at work, if properly motivated. It is for the management to unleash this potential in individuals (employees). Theory Y emphasizes creating opportunities, removing obstacles, providing guidance and encouraging growth. By using these tools, the management can integrate individual goals of employees with those of the Organisation.

The assumptions in Theory X and Theory Y are fundamentally distinct. Theory X is static, rigid, conservative and pessimistic. Theory Y is optimistic, dynamic, flexible and progressive. It suggests self direction and the integration of individual needs with organizational needs. On the other hand, more importance is given to external control imposed by the superior on the subordinate in the Theory X. (4) McClelland's Achievement Motivauon Theory Some people have an intense desire to achieve while others are not so keen about achievement. David C. McClelland had studied this phenomenon for over twenty years at Harvard University and proposed his Achievement Motivation Theory (Also called manifest need theory). According to him, there are certain needs that are learned and socially acquired as the individual interacts with the environment. McClelland classified such needs into three broad categories. These are (a) need for power, (b) need for affiliation, and (c) need for achievement. (a) Need for power. This need is indicated by a person's desire to control and influence the behavior of others. A person with desire for power likes to compete with others when the situation is favorable for such domination. Such persons prefer jobs that provide them an opportunity to acquire leadership with power. There are two aspects of power accordingly to McClelland. These are: positive and negative. Positive use of a power is necessary when a manager desires to achieve results through the efforts of others. The negative use of power is possible when a person uses power for personal aggrandizement. Such use of power may prove to be harmful to the Organisation. (b)Need for affiliation: Here, the person has a need/desire for affection and wants to establish friendly relationships. A person with high need for affiliation seeks to establish and maintain friendships and dose emotional relationships with others. He wants to be liked by others and develops a sense of belonging by joining informal groups in the Organisation. Such persons (managers) prefer tasks that require frequent interaction with subordinates/co-workers. (c)Need for achievement- Here, the person desires to succeed in competitive situations. He desires to prove his superiority over others. Such person sets reasonably difficult but potentially achievable goals for himself. He accepts moderate degree of risk. He is more concerned with personal achievement than with the rewards of success. Moreover, he feels that he can achieve the goal with his efforts and abilities. He also desires to have concrete feedback (social or attitudinal) on his performance. Such person has high level of energy and capacity to work hard. He naturally prefers jobs which tax his abilities and skills fully. This again is for achieving the objectives set. According to McClelland, the need for achievement is the most important need which can be used effectively for the economic progress of a nation. Persons with achievement needs tend to be motivated by difficult, challenging and competitive work situations and not by routine and non-competitive situations. They habitually spend their time thinking about doing things better. They are not motivated by money but in their future achievements. Such employees are better achievers and naturally get promotions faster. An Organisation also grows faster and move towards prosperity with the support of such achievement seekers employees. Importance of McCelland's Achievement Motivation: McClelland's theory is important as he argues that the achievement motive can be taught. It can be achieved by learning. A manager can raise achievement need level of his subordinates by creating a healthy work atmosphere, provision of reasonable freedom to subordinates, provision of more responsibilities and by making tasks more interesting and challenging. Even reward and appreciation of high performance of subordinates is useful for raising their achievement need level. This is how motivation of employees is possible by developing the desire for higher achievement in their mind. Such achievement motivation is necessary and useful for the success of an enterprise.

McClelland's theory of motivation is quite extensive. He developed achievement motive for motivation. His assertion that achievement motive can be developed among the employees is important. This is possible through well-conceived and deliberate learning process. This he (McClelland) proved in an experiment carried out in a large U.S. Corporation. According to McClelland, every person has an achievement motive to some extent. However, some are constantly more achievement-oriented than others. Most people will put more efforts into their work if they are challenged to do better. However, the achievement-motivated person is likely to outstrip all others in his zeal to improve performance when he is challenged. He makes more efforts and accomplishes more. This background can be used for motivation of employees. In fact, McClelland's achievement motivation theory is based on this experience which he gained while working with Harvard University. Achievement motivation is very essential for the success of an entrepreneur/enterprise. Every employee should have some objective which he desires to achieve. Such desire for achievement acts as a motivating factor. According to McClelland, the need for achievement is the most important need. It can be used as motivating factor for economic progress of a nation and even for the success of an enterprise or entrepreneur. An entrepreneur or a manager has to put forward some objective before every employee and encourage the employee to achieve the same. To create the desire for achievement of objective is a way to motivate employee. In this way, achievement motivation is useful for the success of an enterprise/entrepreneur. The most famous of all human relations movement and research were Hawthorne expt. So named because they were carried on in Hawthorne plant of western Electric Company of Chicago {USA} 8.3 The Hawthorne Experiment: Dr. Elton may led a team from Harward University which cooperated with western electric co. in the period 1927-1936 to carry out Hawthorne expt. 1) Recognized the importance of employee attitudes such as understanding voluntary co-operations and willing dedication in accomplishment of organizational goals. 2) Found that employee performance is very much influenced by his attitude towards his job, associates and management 3) Proved that organizational firm can gain only when its employees are satisfied contented in their jobs. 4) Pointed out that any change to be should be made should be explained and its meaning should be clear to employees. The fact that change is logical is not enough because employees may not appreciate the logic. 5) Explored much of information on group behavior. 6) Thus have provided the basis for much of what we know about getting along with all, problem employees in particular LEADERSHIP: 8.4 Meaning of Leadership Leading is one important function of management only next to planning and organizing. It is the liveliest element in the management process. It initiates actions to translate the decisions into concrete actions. Managers have to lead their subordinates through guiding and motivating. Leading involves directing, influencing and motivating employees to perform essential tasks. Every manager has to act as a leader in his area of operation. This means he has to guide, instruct, lead and motivate his subordinates so as to use their skills, efficiency, capacity etc. for the benefit of his

Organisation. He has to influence the behavior of his subordinates and get the work done through their collective efforts. Leadership qualities are required in order to conduct various managerial functions effectively. Each and every group of people engaged in a particular activity needs a leader in order to guide, co-ordinate and control their efforts. In this sense, leadership is required for the conduct of economic, social, political or cultural activities. A college principal, secretary of a co-operative society or of a sports club or cultural association act as leaders in their respective fields George Washington, Lincoln, Churchill, Mahatma Gandhi, Nelson Mandella, John Kennedy are world known political leaders while Ford, J. R. D. Tata and S. L. Kirloskar are known leaders in the business world. Here, we are concerned only with the managerial leadership. Managerial leadership is that part of a manager's activities by which he influences the behavior of his subordinates towards a desired objectives or results. Leadership is followership. A good leader leads but does not push. Effective leadership can guide a group towards certain ideals without exerting much force. Managers who possess the quality of guiding and directing the subordinates under inspired impulses can be called business leaders. Leadership is concerned with getting results through people and implies the Organisation of staff into productive teams, groups and departments. Leadership entrails the creation of human structures, their motivation and direction; the resolution of conflicts at the workplace, creating vision for the entire business and providing resources in support of this. Manager can perform various managerial functions more effectively by providing proper leadership to his subordinates. This makes leadership an inevitable aspect of management process itself. Leadership is essential for the success and stability of a business enterprise. Managers possessing leadership qualities are called business leaders. (1) According to Koontz and O'Donnell, 'Leadership is the ability of a manager to induce subordinates (followers) to work with confidence and zeal. "@ (2) According to George Terry, "Leadership is the activity of influencing people to strive for mutual objectives." (3) According to Peter Drucker, "Leadership is the shifting of own's vision to higher sights, the raising of man's performance to higher standards, the building of man's personality beyond its normal limitations." 8.5 Characteristics of Leadership (1) Involves guiding and motivating: Leadership is a managerial process of guiding and motivating the subordinates for achieving organizational goals/objectives. For motivating, communicating is necessary. L4eadership is described as an art of influencing and inspiring subordinates to perform their duties efficiently. (2) Needs subordinates and common interests: It pre-supposes the existence of subordinates. There must be common interest for the leader and his followers due to which they cooperate and participate for achieving common objectives. (3) Promotes interest in the work: The purpose of leadership is to influence, motivate and encourage subordinates to take active interest in the work assigned and give the best results. (4) Needs support from all: The leader must recognize the presence of all employees irrespective of their position. The leader cannot become successful unless he obtains support from all. (5) Influences subordinates through personal qualities: A leader understands the problems of his subordinates and influences them by his personal qualities. (6) Dynamic and continuous process: Leadership is a dynamic and continuous process. It is a regular activity of guiding and motivating subordinates for improving their performance and contribution towards organizational objectives.

(7) Leadership is situational: An ideal leadership is always situational. A leader has to study the prevailing situation and provide appropriate leadership to his subordinates. (8) Assumes obligation: A leader always inspires followers. In the event of failure, he does not shift the responsibility to his subordinates but accepts his personal weaknesses in performance. A leader leads by setting good example. (9) Needs interaction with followers: The objective of the leader and his subordinates should be the same. If the leader attempts for one purpose and his subordinates for some other purpose, it is no leadership. Their interest must be identical. (10) Achievement of objectives: The success of a leader largely depends on his ability to achieve organizational objectives. When a leader fails to attain the objectives, he is of no utility to the management. Qualities of a Good Leader /Leadership Qualities A leader needs sound health and physical capacity to perform his functions or duties assigned in an efficient manner. In addition to physical qualities, an ideal leader needs certain qualities of head and heart. The main qualities include personal traits and managerial traits which are shown in the following chart:

8.6 Styles of Leadership There are different styles of leadership. This classification is based on the methods used by the leaders. Edwin Flippo has defined leadership style as "a pattern of behavior designed to integrate organizational and personal interest in pursuit of some objectives." Basically, the styles of leadership can be divided into two broad groups. These are: (a) Task-oriented styles, and (b) People-oriented styles. (a) In the task oriented styles of leadership, more importance is given to getting the work done by subordinates. Task-oriented leaders are interested in the completion of work and do not give importance/attention to subordinates or their desires, interests and so on. Dictatorial leader and autocratic leader are the examples of this category.

(b) People-oriented style of leadership is basically democratic. Here, the leader gives importance to the interests, thoughts, problems, etc. of subordinates. He tries to achieve objectives with their support and co-operation. Participative or democratic leader comes under this category. 8.7 Theories of Leadership (1) Trait Approach Theory (The Traits Approach), (2) Behavioral Approach Theory, and (3) Contingency/Situational Approach Theory. (1) Trait Approach Theory The traits approach theory was one of the first attempts to explain the leadership based on personal traits. Traits are inborn or acquired personal qualities of an individual. They include physical qualities and the qualities of head and heart. Traits theory refers to certain traits/characteristics which separate leaders from non-leaders. Such traits enable some to rise above their followers. The basic traits useful for leadership include height, energy, looks, knowledge and intelligence, imagination, self-confidence, integrity, fluency of speech, mental balance, enthusiasm, courage, sociability, and friendliness and so on. According to the traits theory, an individual possessing such traits is usually able to influence others and gets the status of a leader. This suggests that a leader is quite different from an average person in regard to personal qualities such as intelligence, perseverance and overall personality including physical features. The traits theory suggests that leaders are above the followers in regard to personal traits. A fair combination of such traits makes them influential and impressive as compared to others. Traits theory indirectly supports the view that leaders are born and not made. Researchers have suggested different traits of leaders. Such traits are similar to physical, psychological, mental, intellectual and other qualities which are normally treated as essential in the case of an ideal leader. It may be noted that some traits are innate while some others can be acquired through special efforts. The traits theory is based on the personal qualities (inborn/acquired) of an individual. Such qualities play a positive role in building leadership. A person becomes leader due to such traits. The theory is based entirely on personal traits and their contribution in developing leadership. Limitations of Traits Approach Theory/Criticism of Traits Theory. (1) Examples of leaders without certain traits are common: According to this theory, leadership is based on certain traits such as personality, intelligence, self-confidence, courage and so on. However, it is very difficult to find out a particular leadership trait in the greatest leaders of the world. Some known world leaders have had quite different traits. People with limited education, limited training and without well developed personality have proved to be great leaders. History is full of such examples of leaders. (2) Traits are not absolutely essential for leadership: As per the theory, many traits are desirable in the case of leaders. However, none seems to be absolutely essential. Many leaders are extremely popular even without certain useful traits. (3) Situational aspect is ignored: The theory fails to take into consideration the situation within which the leaders have to function. There are instances in which a leader is successful in one situation but may not be in another even when traits are same on both the occasions. For example, Winston Churchill was Prime Minister of England and was also war hero during the Second World War but was defeated in the general elections under new situation i.e., after the end of World War 11. (4) No reference to essential qualities: The theory fails to give the list of essential qualities (innate and acquired) required for leadership purpose.

(5) Superiority is not clearly stated: The theory states that a leader has superior personal traits as compared to his followers. However, the nature or extent of superiority is not given in a clear manner. (2) Behavioural Approach Theory The behavioral approach theory is an extension of the traits theory and is superior in certain respects. The traits theory failed to explain what caused effective leadership. The behavioral approach is based on the study of behavior of a leader. Leadership grows/develops not by traits but by the acts or experience of a person. The behavioral theory is based on the assumption that leaders are not born but they develop gradually by experience and maturity. The attention is given to what leaders do (i.e., their behavior) rather than to what they are. A leader learns new traits through his experience (behavior or acts). The focus point, here, is on what the leader does while leading. This behavioral theory suggests that a leader do not behave in the same manner under all situations. Similarly, his actions are not identical under all situations which he faces. He adjusts his behavior as per the need of the situation. There is an element of flexibility in his approach and behavior. He studies the situation and adjust his leadership style accordingly. He adopts different leadership styles to meet the need of different situations. The most popular behavioral theories are: (a)McGregor's Theory X and Theory Y, and (b) Linkert's Four Management Systems. The behavioral approach theory is practical in nature. It gives more attention to acts and behavior of a person and not to the personal traits. Leadership develops by experience and not by inborn traits. A leader has to acquire certain qualities by experience only. Like the traits theory, the behavioral approach oversimplifies the complexities of the leadership process. However, the behavioral approach is responsible for the development of a classification of leadership styles which has provided managers suitable opportunities to secure greater insight into their own behavior. (3)Contingency / Situational Approach Theory or Blanchard's Situational Leadership Theory Situational/Contingency Theory is a new addition to the existing theories of leadership. It is a combination of different leadership styles such as autocratic, democratic and so on. An ideal leader studies the overall prevailing situation, draws conclusions about the whole situation and adopts the leadership style which is most appropriate to the prevailing situation. He is not concerned with one specific leadership style but will use any style as per the available situation. He is interested in achieving his objectives and is willing to use suitable means for this purpose. Sometimes he may be democratic but may be autocratic on some other occasions. "Different strokes for different folks" is his leadership approach. He will consider the group of employees (skilled, unskilled, supervisory, etc.) to be handled and adjust his leadership style accordingly. He will not use one leadership style for controlling/motivating all categories of employees. On the other hand, he will be democratic with some categories of employees and autocratic with the employees working at the other level. In other words, adjusting the leadership style as per the need of the situation or as per the group of employees/subordinates to be handled is the essence of situational leadership style. In brief, he studies the situation and adjust his leadership style accordingly. He adopts a practical approach in order to get his work done i.e. achievement of organizational objectives. In brief, in the situational leadership style, the leader adopts practical and flexible approach in decision-making. This is the essence of situational/contingency theory or approach. Contingency approach concludes that there is no "one best style' of leadership under all conditions. Efficient leadership style varies with situations and an efficient leader is one who studies the prevailing

situation and finds out the leadership style which would be most suitable for the given situation. This is natural as a simple cookbook approach for selecting the best leadership style does not exist. A good leader has to study the situation and adjust his leadership style accordingly. Here, the focus is on the situation and not on the personal qualities and behavior of a leader. Situational leadership style is flexible/adjustable and is normally more effective as compared to other types of leadership. The situational theory of leadership was developed by Hersey and Blanchrd at the Centre for Leadership Studies in Ohio State University. Important Features of Situational Leadership: (1) Situational leadership is new addition to the existing styles of leadership. (2) An ideal leader (according to this theory) studies the overall situation, draws conclusions and adopts the leadership style which is most appropriate to the prevailing situation. This is the essence of situational leadership theory. (3) The best leadership style according to this theory is situational. (4) An ideal leader is one who can adjust his style of functioning as per the situation within which he has to operate. This means the internal and external environment to the enterprise. (5) A leader may act as a dictator at one time and also as a democratic leader on some other occasion. A good leader is one who studies the situation around him and adopts the most suitable leadership style. (6) A situational leadership is a combination of all types of leadership. (7) A situational leader knows different leadership styles but selects one particular style, which is most, appropriate to a given situation/environment. (8) A situational leader adopts flexible approach in his style of functioning. This makes his leadership effective and result-oriented. A situational leader knows when to use autocratic style and when to use democratic style. He makes corresponding adjustment in his style. This makes him effective/successful as a leader. The situational theory suggests that a manager's leadership style should vary with the situation. This leadership model is simple and appealing. However, it ignores several other critical elements that determine leadership style and it does not have a wide accepted research base. Inspite of the limitations, this leadership model achieved considerable popularity and also awakened many managers to the idea of contingency approaches to leadership style. Merits of Situational Leadership: (1) The situational leadership theory is a practical one and is based on real facts of life. The best leadership style is situational. (2) The situational theory has universal acceptance. (3) It focuses attention not on the personality of the leader, but on the personality of the Organisation as a whole. (4) The situational leadership theory is flexible and adaptable. It can operate in any style (autocratic, democratic, etc.) as per the need of the situation. Limitations of Situational Leadership: (1) In situational leadership, more importance is given to the situation and less to personal traits. Leadership should involve both traits and situations. However, the theory gives importance to situation only(2) The theory offers an incomplete explanation of the leadership process. QUESTION BANK 1. What is leadership? Explain its functions. 2. Explain the importance of/role of leadership in business. 3. State and explain the qualities of a good leader.

4. Best type of leadership is situational Explain. 5. Write short notes on: Blanchards situational leadership theory Qualities of an ideal leader Leadership is situational 6. What is motivation? Explain motivation as a function of management. 7. Explain Maslows theory of motivation. 8. Explain clearly theory X and theory Y 9. Explain the need and importance of motivation of employees. 10. Explain The Hawthorne experiment. CHAPTER 9 QUALITY CONTROL 9.1 Quality Every manufacturing organisation is concerned with the quality of its product. While it is important that quantity requirements be satisfied and production schedules met, it is equally important that the finished product meet established specifications. Because, customer's satisfaction is derived from quality products and services. Stiff competition in me national and international level and consumer's awareness require production of quality goods and services for survival and growth of the company. Quality and productivity are more likely to bring prosperity into the country and improve quality of work life. However, the management looks to achieve customer satisfaction by running its business at the desired economic level. Both these can be attained by properly integrating quality development, quality maintenance and quality improvement of die product. The integration of these three aspects of a product can be achieved through a sound quality control system. 9.2 The Meaning of "Quality" Quality is a relative term and it is generally used with reference to die end use of the product. For example, a gear used in sugarcane juice extracting machine may not possess good surface finish, tolerance and accuracy as compared with the gear used in the head stock of a lathe, still it may be considered of good quality if it works satisfactorily in die juice extracting machine. The quality is thus defined as die fitness for use/purpose at die most economical level. The quality depends on die perception of a person in a given situation. The situation can be user-oriented, costoriented or supplier-oriented. Since, die item is manufactured for me use of die customer, die requirements of die customer dictates die quality of die product. Quality is to be planned, achieved, controlled and improved continuously. The word "Quality" has variety of meanings : 1. Fitness for purpose. The component is said to possess good quality, if it works well in the equipment for which it is meant. Quality is tiius defined as fitness for purpose. 2. Conformance to requirements. Quality is die ability of the material/component to perform satisfactorily in an application for which it is intended by die user. Quality of a product, thus, means conformance to requirements. Customer needs have to be assessed and translated into specifications depending upon die characteristics required for specific application. Just as every human has his own characteristics every application has its own characteristics. 3. Grade. Quality is a distinguishing feature or grade of the product in appearance, performance, life, reliability, taste, odor, maintainability etc. This is generally called as quality characteristics. 4Degree of preference. Quality is the degree to which a specified product is preferred over competing products

of equivalent grade, based on comparative test by customers, normally called as customer's preference. 5 Degree of excellence. Quality is a measure of degree of general excellence of the product. 6 Measure of fulfillment of promises. The quality of a product is a measure of fulfillment of the promises made to the customers. The abilities may be categorized into ten factors as under: 1. Suitability. For specific application. 2. Reliability. It should give efficient and consistent performance. 3. Durability. It should have desired life. 4. Safe and foolproof workability. 5. Affordability. It should be economical. 6. Maintainability. It should be easy to maintain. 7. Aesthetic look. It should look attractive. 8. Satisfaction to customers. It should satisfy the customers' requirements. 9. Economical. It should have reasonable price. 10. Versatility. It should serve number of purposes. A product can be said to possess good quality if all the above requirements are properly balanced while designing and manufacturing it. 9.3 Quality Control Control. Control can be defined as a process by means of which we observe the actual performance and compare it with some standard. If there is a deviation between the observed performance and the standard performance then it is necessary to take corrective action. Quality Control. The term quality control has variety of meanings : 1. Quality control is the process through which we measure the actual quality performance, compare it with the standards and take corrective action if there is a deviation. 2. It is a systematic control of various factors that affect the quality of the product. It depends on : Material, Tools, Machines, type of labour, working conditions, measuring instruments, etc. 3. Quality control can be defined as the entife collection of activities which ensures that the operation will produce the optimum quality products at minimum cost 4. It can also be defined as the tools, devices or skills through which quality activities are carried out. 5. It is the name of the department which devotes itself full time to quality functions. 6. The procedure for meeting the quality goals is termed as quality control. 7. It is a system, plan or method of approach to the solution of quality problems. 8. As per A.Y. Feigorbaum Total Quality control is : "An effective system for integrating the quality development, quality maintenance and quality improvement efforts of the various groups in anorganization, so as to enable production and services at the most economical levels which allow full customer satisfaction." Steps in quality control programme 1. Formulate quality policy. 2. Work out details of product requirements, set the standards (specifications) on the basis of customers preference, cost and profit 3. Select inspection plan and set up procedure for checking. 4. Detect deviations from set standards or specifications. 5. Take corrective action through proper authority and make necessary changes to achieve standards. 6. Decide on salvage method i.e. to decide how the defective parts are disposed of, entire scrap or rework. 7. Co-ordination of quality problems.

8. Developing quality consciousness in the organization. Quality control is not a function of any single department or a person. It is the primary responsibility of any supervisor to turn out work of acceptable quality. Quality control is one aspect of production planning and control. It is basically concerned with the quality production through regular inspection technique. Quality is a combination of characteristics pertaining to the manufacture of the product and control is the correction in the quality of the product, when the deviations in the product are more than expected. A good quality item is one which conforms to some standard specifications. These specifications are determined by the expectations of consumers
and also by the availability and costs of processes and materials.

To most people, quality is variable. It is subjectively judged because it deals with the relative goodness of a product. When a buyer boasts that his house or car is the best, it implies high quality. Quality is thus subjective and vaguely measurable. In the words of Broom, "subjective quality refers to degree of goodness of a product and objectively it consists of a set of measurable characteristics for which standard dimensions together with small, allowable departures, up and down, may be prescribed. All manufacturing processes face a basic difficulty. It is physically impossible to make all items or units exactly alike. There is always variability in the product. With precision manufacturing, the variability may be difficult to see but nevertheless it is there. When variability becomes obvious it results in scraps, re-work and losses, thus adding to the costs.
Definitions (1)According to Alford and Beatty quality control is "that technique or group @ techniques of industrial management by means of which products of uniform acceptable quality are manufactured."10 (2) In the words of Broom quality control is "systematic control by management of the variables in the manufacturing process that affect goodness of the end products. "I' 9.4 Objectives of Quality Control (1) Establishment of quality standard: The main objective of quality control is the economical production of a high quality product at the quality level the customer wants. It is basically for eliminating variations in production and in order to have uniformity in production. (2) Locating quality deviations: It is necessary to analyze the trend and extent of quality deviations in a manufacturing process. Such deviations should be explained by statistical techniques when they cannot be attributed to the element of chance. (3) Evaluating methods and processes of production: By evaluating methods and processes of production, quality control helps to take corrective measures to maintain the quality of the product during the process of manufacture. (4) Quick sale of quality goods- Quality control accelerates the sale of the goods by supplying only the quality goods in the market. Consumers also support quality goods. (5) Production of standard quality goods: Quality control aims at manufacturing standard quality products and avoids the production of inferior quality goods. Such standard quality goods give satisfaction to consumers and also create goodwill in the market. (6) Improvement in quality: One objective of quality control is to find out high quality standards and to make constant efforts to reach those standards. Quality control aims at creating quality consciousness at all levels in the Organisation. 9.5 Steps in Quality Control

(1) Devising control over raw materials: The quality of the finished product is determined mostly by the quality of raw materials. It calls for close connection between the raw material purchase department of the company and the vendors. As and when necessary, a resident inspector may be deputed by the Quality Control Department in the vendor's place to see that only goods in accordance with specifications are supplied. It is advisable to reinspect the raw materials before putting them to actual use. (2) Fixing standards and specifications: In order to make any scheme of quality control successful, it is essential to predetermine standards and specifications. The practice should be to provide quality instructions in the form of drawings, showing shapes, dimensions and specifications describing color, strength, thickness, chemical composition, etc. (3) Exercising control over production operations: In order to execute efficient practices, the technical expert of the Quality Control Department must investigate, from time to time, the operating methods. Such investigation helps to eliminate all possible variables. (4) Locating inspection points: When the points at which defects occur are wrongly located or located with delay, it hinders quality control. Therefore there should first inspection of the raw materials at the vendor's places, then at the company's plant, then at the various points during the process of production and finally at the time of packing. The defects are likely to occur at these points. The finished goods can be cleared after obtaining 'O.K.' or 'All Correct' from the Quality Control Department. (5) Maintaining quality of equipments: The final quality of the products is conditioned by the quality of the equipments and other devices used. The Quality Control Department is responsible for testing the equipment used in inspection such as gauges, which measure dimensions, electronic devices, magnetic devices and industrial radiographical instruments. (6) Maintaining records: The Quality Control Department is responsible for maintaining all records relating to quality inspection and control and the number rejected. 9.6 Advantages of Quality Control

Quality control is important as it offers certain advantages to the manufacturer. Such advantages are: stability to sale, goodwill in the market, ability to face market competition effectively, reduction in production costs, and elimination of wastage due to rejections and uniformity in production. These benefits are important for sales promotion and profit maximization. Manufacturers now give special attention to quality control techniques for long term benefits. Attention is given to research and development activities for this purpose. Even foreign collaborations are made for raising the quality standards of products manufactured. In brief, quality control is a matter of great importance in production management. The benefits of quality control to consumes are: Availability of standard quality and reliable goods, proper reward for the price paid, safety to life and health, better standard of living& protection against substitution or adulteration and quick shopping of goods. Consumers always purchase standard quality goods even by paying a little higher price as they get full satisfaction over a long period from quality goods. Consumers, particularly educated consumers, support quality products as they know the benefits available from such standard quality products. This suggests the importance of quality control from the point of view of consumers.
The importance of quality control is, now, accepted even at the global level. Consumers now insist for superior quality goods. Expenditure on quality control is an investment for more sale and satisfaction to consumers. Quality control is a must for export promotion. Companies can capture foreign markets only by manufacturing superior quality goods at reasonable cost of production. Japan is a leading world exporter. This is mainly due to superior quality of goods manufactured in Japan. Governments in many countries support quality control measures. They provide all possible help for maintaining superior quality of goods. Restrictions are also imposed on the manufacturing of cheap

goods. Even associations of manufacturers and traders support quality control measures. This suggests the importance of quality control in business. In addition, the following advantages of quality control also suggest its importance: (1) Improvement in the quality of production and reduction in the production cost. (2) Uniformity in the production and supply of standard quality goods to consumers. (3) Offering full return of the price paid by consumers and giving convenience and satisfaction to consumers. This also develops cordial relations with consumers. (4) Reduction in spoiled production and rejection from consumers and dealers. (5) Promotion of exports due to superior and standard quality production. (6) Sales promotion in the internal market and facing market completion with confidence. (7) Reduction in the inspection cost. (8) Improvement in the productivity and motivation of employees. (9) Making the products popular in the market and thereby to develop market goodwill.

9.7 COST OF QUALITY The costs of carrying out company quality program are known as Cost of Quality. It includes 1) Market research cost of discovering quality needs of customer. 2) Product research and development cost of creating a product concept, which will meet quality needs. 3) The design cost of transmitting product concept into information which represents planning for manufacturer. 4) Cost of inspection and test. 5) Cost of defect prevention. 6) Cost of quality assurance. 7) Cost of scrap and quality failure. The quality cost can be defined in four categories a) Cost of prevention. b) Cost of appraisal. c) Cost of internal failures. d) Cost of external failures. (a) Cost of prevention: It consists of costs associated with person engaged in designing, implementing, maintaining the quality system. Cost of prevention includesi) Cost of Quality planning: It includes the cost associated with creating a overall quality plan, the cost of market research and product development, inspection plan, reliability plan etc. ii) Cost of Documenting: It includes cost of preparation of manuals and procedures to communicate these costs. iii) Process control cost: Used with quality plans procedure to achieve fitness for use. iv) Cost of training: Cost associated in preparing any programs for attaining, improving, maintaining quality programs. v) Cost associated with preventing recurring defects: Engineering, technical, supervisory, cost of preventing recurring defects. vi) Cost of investigation, analysis of correction of causes of defects by quality central department. vii) Cost of investigation, analysis of correction of causes of defects by engineering control department. viii) Cost of consciousness programs.

(b) Cost of appraisal: Costs associated with measuring, evaluating or auditing the products, component and purchase materials to assure conformance with quality standard and performance requirement are called as Cost of appraisal. In other words, the cost of evaluating, quality and of identifying and segregating non-conforming part and assemblies. This consist costs of i) Receiving or incoming tests and inspection. ii) Laboratory and acceptance test. iii) Inspection and test. iv) Checking labor. v) Set up for inspection and test. vi) Inspection of test material. vii) Quality Audits. viii) Review of test and inspection data. ix) Evaluation of field stocks, spare parts. (c) Cost of internal failures: The costs associated with defective products, components, materials that fail to meet quality requirements and results in manufacturing losses are called as Cost of internal failures. Costs associated with scrap.i.e. Cost of material, labor. Cost of rework, repair i.e. Cost of making defective parts and assembly rules. Cost of re-inspection and re-test after defective parts are repaired.Costs associated with material review activity. Cost of processes yield lower that might be attainable by improved controls. Trouble shooting. d) Cost of external failures: Cost because of defective products being shifted to the customer. 1. Cost of processing complaints from the customer. 2. Cost of service to customer to receive defective items. 3. Cost of inspecting, preparing defective items. 4. Cost of replacing defective products.
9.8 TOTAL QUALITY MANAGEMENT (TQM): Total quality management is a comprehensive concept and not related only to the quality of goods and services. It suggests that high quality standards (e.g., ISO 9000) should be maintained in other aspects of management such as production cost, marketing, sales promotion, etc. For such quality/efficiency in all aspects of business management, consciousness/awareness needs to be

developed at all levels and among employees working in all departments of the enterprise. Employees must be motivated for maintaining high quality standards. In addition, their cooperation/involvement is necessary for maintaining efficiency in all aspects of business management. In brief, quality management is not the responsibility of management alone. Participation/involvement of both parties (management and employees) is essential for achievement of quality and other benefits. The concept of TQM is closely related to the concept of quality circles which is very popular and also successful in Japan. Quality circles are work groups that meet frequently to study the ways and means to improve quality, reduce cost, eliminate wastages and solve other production problems. Here, employees are associated with quality, cost, efficiency, productivity, consumer service and satisfaction. This creates background for the concept of TQM.

TQM aims at improving the total performance at the work place. It covers all functions, activities and people who are responsible for competitiveness of an Organisation. The employees are expected to participate not only in maintaining quality but also in improving their total performance so that the wastages will be avoided, production cost will go down and the enterprise can earn more profit. TQM means strategic commitment to improving quality by combining statistical quality control methods with a cultural commitment to seeking incremental improvements that increase productivity and lower costs. Total quality management reflects the culture of an Organisation. It indicates consumer oriented, quality-oriented management philosophy. It is a commitment to quality by all managers and workers. TQM is a philosophy for achieving customer satisfaction which involves all - managers, employees and users. It is management by commitment and not management by control. This technique is to be introduced through quality circles. The route to TQM is through application of simple tools followed by Organisation change and culture change. Total quality management is based on the following four powerful elements: (1) Focus on customer expectations, (2) Employees' involvement, (3) Mastery of processes, (4) Team work. Definition According to John Gilbert, Total Quality Management is "A process designed to focus on customer expectations, preventing problems, building commitment to quality in the workforce and promoting open decision-making."12
Origin of TQM (1) TQM concept developed in Japan: Total Quality Management is a new technique developed first in Japan in the 1960s. Japanese were the first to enlarge these principles and use them to corporate strategy. The idea of involving all employees, not just quality control staff and management in quality control, was made popular first in Japan. Japanese organisations believe in total quality control. (2) Contribution of Deming and Juran to TQM: The credit of introducing quality revolution in Japan goes to two Americans, Dr. W. Edwards Deming and Dr. J.M. Juran, both 'gums' of Japanese in the field of quality management. It is interesting to note that they became heroes in Japan long before America realised their importance. (3) Commitment to quality-. Under the influence of Juran and Deming, commitment to quality became a part of every plant's culture. This comn7libnent was reinforced by the introduction of quality circle for improving quality and reducing costs. This deeply embedded commitment to quality is known as total quality management (TQM). The Deming Prize is the highest TQM award in Japan and is given to most respected and successful corporations. Toyota and Matsushita are the winners of highest TQM awards in Japan. Need (1) TQM is needed for consumer satisfaction and pleasure. (2) TQM is needed as it suggests progressive philosophy in business, in which the stress will be on consumer expectations, total commitment to quality and participative management. (3) TQM is needed to face market competition effectively, to create goodwill and to have support of consumers. (4) TQM is needed for lowering rejection rate in production process and also for reducing the complaints of consumers. (5) TQM is needed for motivation of employees and also for giving them better facilities, training and participation in decision-making. (6) TQM is needed to facilitate industrial growth, economic progress and prosperity to the nation.

Principles of TQM (1) Stress on quality management: In TQM, collective efforts are being made for improving quality of goods and services so as to give more satisfaction to consumers. Quality improvement is also useful for facing market competition and for creating market reputation. In brief, TQM involves steps for improving quality and productivity. There is total commitment to quality on the part of entire Organisation. TQM covers all functions, activities and people who are instrumental for raising the competitiveness. (2) Continuous process: TQM is a continuous process/activity as there is ample scope for using new methods and techniques for improvement in the quality standards and performance. 'Steal ideas constantly and shamelessly" is the rule in TQM. Implementation of innovative ideas or taking benefit of new opportunities is an integral aspect of TQM. In fact, TQM is a never ending quest for achieving new levels of performance. (3) Stress on quality assurance system. - The aim of TQM is to give maximum satisfaction to consumers by providing goods which are best in quality (zero defects). The present ISO9000 series is a set of well recognised standards for quality assurance system. The Japanese have been using quality assurance concepts and principles as a part of their TQM implementation programme even when specific name or number was not used. Thus, quality assurance system is an integral part of TQM. (4) Linkage of quality and productivity. The TQM technique is useful for improving quality as well as productivity. In a TQM programme, the focus is on quality improvement. However, such programme also raises productivity. The methods used in TQM programmes. E.g. stress on quality improvement, zero defects production, making all employees responsible for quality maintenance and improvement) are likely to bring quality improvement as well as yield improvement. Similarly, the TQM programme creates a feeling of participation among the employees. There is also positive improvement in the morale of employees. (5) TQM is a gradual process-. Introduction of TQM is a gradual process. It is self improvement and group improvement programme through team building for raising quality and productivity. TQM is about the gradual change of people's behavior towards the tasks they perform and their attitude towards other people. A mental revolution among the employees is required for the execution of TQM. However, such change in the mental make-up of managers and employees requires long period. This suggests that TQM is a gradual process. There are, in fact, four broad phases in the introduction of TQM. These are: (a) Awareness Phase, (b) Planning Phase, (c) Implementation Phase, and (d) Institutional Phase. (6) Focus on customers: Customers are the source of all the revenue that flows through the corporation. Their satisfaction keeps the money flowing especially in an open market where competitors are wooing them too. The focus of TQM is on customer satisfaction on quality, cost and delivery through improved orgarnisational quality of processes. According to British Quality Association (BQA), TQM is a corporate business management philosophy which recognised that customers' needs and business goals are inseparable. (7) Employee involvement: Employees involvement is the most important recognised feature of TQM. In fact, quality's a team work of all employees. Their participation and co-operation are required to be taken at all levels. TQM is possible only through participative management. Under TQM, employees will be motivated to participate actively in the process of quality improvement through incentives and recognition of contribution for achieving quality standards. (8) Formation of quality improvement teams: A cornerstone of TQM is the team building that leads to commitment to improvement. Such teams include quality steering teams, corrective actions teams and so on. Such teams motivate employees and facilitate quality improvement. (9) Management's involvement: TQM is a systems approach in managing business and improving overall performance. It needs total commtment from the top management to provide viable

leadership to the whole approach. Top level management has to take number of initiatives in order to start the process of TQM. In fact, TQM cannot have a good take off without total commitment of CEO and other senior executives. Advantagesof TQM (1) Customer satisfaction: TQM is basically for the satisfaction and welfare of customers. Needs and expectations of customers are given special attention in TQM. The attention is on customers and zero defect goods will be supplied to them. As a result, there will be reduction in the complaints of consumers/customers. TQM is not for profit-making at the cost of customers but it is for giving satisfaction and welfare to them. (2) Quality improvement: One major advantage of a TQM is quality improvement at all levels and in all activities. There is a systematic attempt to eliminate deficiencies such as production scrap or rework, customer complaints and material shortages. The cornerstone of any successful TQM system is the organised elimination of waste. The rejection rate in the production process will be low and this minimizes waste of materials and human efforts. Due to quality improvement, the sales and profits will also increase. The company will also develop goodwill and market recognition as supplier of quality goods. (3) Absence of additional investment: One advantage of TQM is that TQM does not require any additional investment. It improves operational quality as well as reduces cost. This technique is quite convenient to developing countries which are facing financial difficulties due to various reasons. TQM gives many benefits but without additional financial burden. (4) Raises competitiveness: TQM technique is useful for raising quality and reducing costs. This naturally raises competitiveness in the domestic as well as global markets. TQM technique is useful for exports by raising global competitiveness. (5) Facilitates expansion and diversification: TQM leads to large turnover and high profits along with market reputation and consumer support. The company can use this profit for the execution of its expansion and diversification programmes. In brief, TQM facilitates expansion and diversification of business. (6) Provides trained and motivated employees: TQM philosophy has its positive impact on employees. They are given proper training, monetary and non-monetary incentives, attractive working conditions and proper treatment. Workers take pride in manufacturing defect-free products. (7) Miscellaneous Advantages: TQM technique offers other advantages as noted below-. (a) Long-term consumer support, (b) Prestigious position in international marketing, (c) High standard of living to employees, and (d) Cost control.

9.9 Quality Circle Dewar, President of the International Association of QCs, defines QCs as "a way of capturing the creative and innovative power that lies within the work force". A quality circle is a small group of volunteers (usually 3 to 12 employees) doing similar work. They meet regularly under the leadership of their immediate supervisor, or some one chosen among the circle to identify problems, set priorities, discover causes and propose solutions. These may concern quality, productivity, safety, job structure, process flow, control mechanism, aesthetics of the work area etc. According to Maurice Alston : "Quality Circles are small groups of people doing similar work who, together with their supervisors volunteer to meet for an hour a week to study and solve work related problems which affect them. Circle

leaders and members are trained in simple problem solving techniques which identify causes and develop solutions. At an appropriate time, presentations are made by the quality circles to the management who decide whether to accept, modify or decline the proposals". Quality Circle is a participative management system in which workers make suggestions and improvements for the betterment of organisation. Concept of Quality Circle The Quality Circle concept has three major attributes ; these are : 1. QC is a form of participative management. 2. QC is a human resource development technique. 3. QC is a problem solving technique. Objectives of Quality Circles Objectives which contribute to the improvement and development of the enterprise and indirectly the interest of the employees are : 1. To improve the quality and productivity and thus contribute to the improvements and development of the enterprise. 2. To reduce the cost of products or services by waste reduction, safety, effective utilisation of resources, avoiding unnecessary errors and defects. 3. To identify and solve work related problems that interfere with production. 4. To tap the creative intelligence of the persons working in the organisation and to make full use of its human resources. 5. To permit employees to develop and use greater amount of knowledge and skill and motivate them to apply to a wide range of challenging tasks. 6. To improve communication within the organisation. 7. To increase employees' loyalty and commitment to the organisation and its goals. 8. To respect humanity and build a happy bright work place environment which is meaningful to work in. 9. To enrich human capability, confidence, moral, attitude and relationship. 10. To satisfy the human needs of recognition, achievement and selfdevelopment. Advantages and Limitations of Quality Circles The organization can accomplish one or more of the following advantages by establishing quality circles: 1. Promote high level of productivity and quality-mindedness. 2. Self and mutual development of employees. 3. Creating team spirit and unity of action. 4. Increased motivation, job satisfaction and pride in their work. 5. Reduced absenteeism and labour turnover. 6. Developing sense of belongingness towards a particular organization. 7. Waste Reduction. 8. Cost reduction. 9. Improved communication. 10. Safety improvement. 11. Increased utilization of human resource potential. 12. Enhancement in consciousness and moral of employees Uirough recognition of their activities.

13. Leadership development. 14. Trained staff. 9.10 Preventive Maintenance

Question Bank 1 Explain the concept of Quality 2 What do you mean by quality control 3 What are the different costs associated with Quality 4 Write a short note on TQM 5 Explain quality circle with respect to Indian companys 6 What do you mean by maintenance? What are different types of maintenance? 7 Write a short note on preventive maintenance

Chapter 10 Marketing
10.1 Meaning Marketing is an important socioeconomic activity with history of many centuries. It is an essential activity for the satisfaction of human wants and for also raising social welfare. Production is the base of marketing. It supplements production activities by distributing goods and services. Marketing links producers and consumers together for mutual benefits. It facilitates transfer of ownership of goods and services to consumers. Production will be meaningless if goods produced are not supplied to consumers through appropriate marketing mechanism. Marketing activities are conducted through the medium of money. They are conducted regularly throughout the world. Modern marketing is global in character. Everyone participates in marketing activities for the satisfaction of needs/wants. Customer is the most important person in the whole marketing process. He is the cause and purpose of all marketing activities. According to Prof. Drucker, the first function of marketing is to create a customer or market. All marketing activities are for meeting the needs of customers and for raising social welfare. Marketing itself is a "need-satisfying process". It facilitates physical distribution and creates four types of utilities viz., Form Place, Time and Possession. The term marketing can be given narrow or broad interpretation. In the narrow sense, marketing is concerned with the flow of goods and services from producers to consumers/ users. This interpretation is 'product-orientation' of marketing. In the broader sense, marketing essentially represents consumeroriented activity. It is for meeting the needs of consumers and naturally production and marketing activities are to be planned as per the needs and expectations of consumers. Marketing is for demand creation and demand satisfaction. This interpretation of marketing is now accepted. The broader interpretation views marketing as a "total concept". William Stanton gives a definition of marketing which states that "Marketing is a total system of business activities designed to plan, price, promote and distribute want-satisfying products to target markets to achieve organizational objectives." This definition treats marketing as one managerial function. It also suggests consumer orientation to marketing concept. Definitions (1) According to Philip Kotler, 'Marketing is human activity directed at satisfying needs and wants through exchange process".2 (2) According to J.F. Pyle, "Marketing is that phase of business activity through which human wants are satisfied by the exchange of goods and services." Features (1) Marketing is a regular and continuous activity: Marketing is a continuous activity in which goods and services are manufactured and distributed to consumers. Assembling, grading, packaging, transportation, warehousing, etc. are supplementary to marketing and are useful for smooth and orderly conduct of marketing operations.

(2) Facilitates satisfaction of human wants: Marketing activities are basically for satisfying the needs of consumers and also for raising social welfare. Identification of consumer needs should be the starting point of marketing activity. (3) Relates to goods and services: Marketing relates to goods and services. It is concerned with the exchange of goods and services with the medium of money. Trade transactions are between sellers and buyers of goods. Thus, goods and services constitute the basic and the most lively element in marketing. (4) Brings transfer of ownership: Marketing activity brings transfer of ownership of goods and services and facilitates physical distribution. Production acts as a base of marketing. (5) Creates utility-. Marketing activity creates utilities (time, place and possession) through which human wants are satisfied. (6) Wider socioeconomic significance: Marketing activity has wider socioeconomic significance as it facilitates large-scale production, creates massive employment opportunities, and promotes social welfare and cultural exchanges. (7) Importance of 4 Ps: Marketing is the sum total of 4Ps. These are: product, price, promotion and physical distribution. Large-scale marketing is possible through appropriate combination of 4Ps called marketing mix. (8) Integral part of business: Marketing is one aspect of business. It is within the scope of business and is also linked with other functional areas of business. (9) Evolutionary concept: The concept of marketing has undergone significant changes. It is not merely for profit maximization. It has wider social significance. (10) Precedes and follows production: Production and marketing are closely related activities. Goods are produced for marketing. Here, marketing follows production. In addition, marketing suggests what consumer wants and production is adjusted accordingly. Here, production follows marketing. (11) Wide in scope: The concept of marketing is wide/comprehensive. It is not concerned merely with selling of goods but with other functional areas of business such as production, finance and personnel. 10.2 Importance of Marketing (1) Satisfies human wants: Marketing plays an important role in the satisfaction of human wants by maintaining regular supply of goods to consumers. It provides better life and welfare to people by satisfying their wants and also by providing useful goods and services which can make their fife happy and enjoyable. (2) Provides profit and goodwill to marketing enterprises: Marketing is important to marketing firms as they earn profit by conducting marketing activities. Marketing enables a firm to expand business activities for market reputation and goodwill. The firm can achieve its objectives through successful conduct of marketing activities. Even new product can be introduced for consumer satisfaction and sales promotion. (3) Facilitates specialization and division of labour- Marketing function, if performed successfully, leads to specialization, division of labour and efficient performance of production function climaxing in economic stability. (4) Widens markets: Marketing facilitates widening of markets through large scale movement of goods throughout the country. Even advertising and sales promotion techniques are useful for widening markets. They provide convenience to consumers and profit to traders. (5) Improves the standard of living of the society: Continuous production improves the skill of the workers. In addition, marketing process provides new varieties of quality goods to customers. It facilitates production as per the needs of consumers and supplies such production to consumers. This raises the standard of living of the people. It is the marketing which has converted "Yesterday's luxuries into today's necessaries'.

(6) Facilitates economic growth: Marketing brings industrial/economic growth. It facilitates full utilisation of available natural resources. Marketing creates new demand for goods and thereby encourages production activities. This leads to the creation of massive employment opportunities. Thus, marketing is the kingpin that sets revolving of the whole economy. (7) Creates new norms of socioeconomic behavior. Marketing develops new ways of life in the society. It makes the society progressive and dynamic. National economic policy is successfully implemented through marketing. It not only expands the home market but tries to establish a sound base for exports. (8) Provides channels of communication to marketing firms: The marketing firms receive continuous feedback about demand for products and services through marketing. The three elements of marketing, namely, concentration, equalization and dispersion with their sub processes such as buying, assembling, transport, storage, standardization, grading, insurance, etc., facilitate quick communication between traders and consumers. Marketing is beneficial to producers and consumers. They get goods as per their needs and manufacturers get more profit and consumer support. (9) Facilitates price control: Marketing facilitates price control by the manufacturers. It brings proper balance between demand and supply and this ensures price stability. (10) Creates utility: Marketing is important as it creates form, time, place and possession utilities. Such utility creation gives satisfaction and pleasure to consumers and facilitates large-scale marketing. (11) Facilitates introduction of new items: A firm marketing one or more lines of products can add a new item easily. This is because successful marketing increases the prestige and reputation of the Organisation. Business planning and decision-making are also based on marketing considerations. Marketing acts as a line of communication between producers and consumers. It provides information about expectations of consumers. This facilitates innovation of existing products and introduction of new products. (12) Facilitates stability to marketing firm: Marketing is one major revenue generating source of a firm. It raises the turnover and profit of a business unit. A firm's survival, growth and stability are dependent on its ability to market the products efficiently. Marketing is thus one challenging function of management. (13) Brings success in business: Marketing is a major activity of every business enterprise. If the marketing is not efficient, there will be losses and the whole firm will come in danger. This suggests that marketing is a risky activity with equal chances of getting profit and incurring losses. It is the successful marketing which supports all other activities of a business unit. 10.3 Marketing Mix: Marketing Mix is one of the most fundamental concepts in marketing management. For attracting consumers and for sales promotion, every manufacturer has to concentrate on four basic elements/components. These are: product, pricing, distributive channels (place) and sales promotion techniques. A fair combination of these marketing elements is called Marketing Mix. It is the blending of four inputs (4 Ps) which form the core of marketing system. This marketing mix is marketing manager's tool for achieving marketing objectives/targets. He has to use the four elements of marketing mix in a rational manner to achieve his marketing objectives in terms of volume of sales and consumer support. Meaning of the term 'marketing mix' is made clear with reference to the following points: (1) Marketing mix is the combination of four basic elements/ingredients under one head. Product itself is the most important element of marketing mix. Price, place and promotion are the other supporting elements. Marketing mix indicates an appropriate combination of four Ps for achieving marketing objectives.

(2) James Culliton, the American marketing expert, coined the expression Marketing Mix and described the marketing manager as 'mixer of ingredients" as he has to establish fair balance among the four elements of marketing mix in order to achieve marketing targets. He is also a 'decider', 'artist' of marketing mix formula. (3) The four components of marketing mix are also called "marketing mix variables' or "controllable variables" as they emanate from within the enterprise and the marketing manager can use them freely as per his desire or need of the situation. (4) The elements of marketing mix constitute the core of marketing system of a firm. It is a profitable formula for successful marketing operations. A marketing manager executes his marketing strategies through these instruments. The diagram given suggests the nature of marketing mix.

Customer-oriented Marketing Mix Definitions of Marketing Mix: (1) According to W. J. Stanton, "Marketing mix is the term used to describe the combination of the four inputs which constitute the core of a company's marketing system: the product, the price structure, the promotional activities, and the distribution system".' (2) According to Philip Kotler, "A4arketing mix is the mixture of controllable marketing variables that the firm uses to pursue the sought level of sales in the target market. Features of Marketing Mix: (1) Combination of four marketing variables: Marketing mix is a combination/integration of four basic marketing variables namely, product, price, promotion and place. These variables are interdependent. (2) Useful for achieving marketing targets: Marketing mix aims at achieving marketing targets in terms of sales, profit and consumer satisfaction. It is rightly said that marketing mix is the marketing manager's instrument for attainment of marketing objectives/targets. (3) Flexible and dynamic concept: Marketing mix is not a rigid combination of four variables. It is in fact a flexible combination of variables. It is necessary to adjust the variables in the mix from time to time as per the changes in the marketing environment. It is the continuous monitoring of the marketing mix which facilitates appropriate changes in the mix. (4) Periodical adjacent of variables necessary: Marketing mix variables are interrelated and need suitable adjustments from time to time. Updating of marketing mix is essential for making it a powerful tool for achieving marketing targets. Updating is also essential due to environmental changes taking place within the firm. (5) Marketing manager acts as a mixer of ingredients: A marketing manager has to function as a mixer of marketing ingredients and has to achieve desired results through skillful combination of four Ps. He needs maturity, imagination and intelligence for appropriate blending of the variables.

(6) Customer is the focus point: The main focus of marketing mix is the customer. His satisfaction and support are important. Variables of marketing mix are for giving more satisfaction and pleasure to consumers. (7) Variables are interrelated: Marketing mix variables are interrelated. Decisions in one area affect action in the other areas. An integrated approach is needed while making changes in the marketing mix variables. (8) Consumer-oriented activity: Marketing mix is a consumer-oriented activity as its purpose is to give satisfaction and pleasure to consumers. Here, the needs and expectations of consumers are given special attention and 4 Ps are adjusted accordingly. (9) Four Ps of sellers correspond to four Cs of customers: Four Ps in the marketing mix represent the sellers' view of the marketing tools available for influencing buyers. Each tool is designed to deliver a customer benefit. The sellers' four Ps correspond to the customers' four Cs as shown below:

10.4 BASIC ELEMENTS/INGREDIENTS OF MARKETING MIX: (1) Product: Product is the article which a manufacturer desires to sell in the open market. It is the first element in the marketing mix. The product mix includes the following variables. (a) Product line and range, (b) Style, shape, design, colour, quality and other physical features of a product, (c) Packaging and labeling of a product, (d) Branding and trade mark given to the product, (e) Product innovation, and (f) Product servicing. Managing product component involves product planning and development. Here, the decisions are required to be taken regarding product range, branding, packaging, labeling and other features of the product. The product manufactured for market should be as per the needs and expectations of consumers. Product is the most powerful competing instrument in the hands of the marketing manager. It is the heart of whole marketing mix. If the product is not sound /attractive to the customers, no amount of sales promotion, appropriate channel selection or price reduction will help to achieve the marketing target. Hence, durability, quality, uses, etc. of the product are important from the marketing point of view. Various Aspects of Product Decisions in Marketing: In the marketing process, various decisions regarding the product are required to be taken. Marketing will be easy and quick if the decisions taken on various aspects of a product are appropriate. AU such decisions need to be taken by the marketing division of the Organisation. Such decisions should be based on current marketing environment, nature of market competition, consumer expectations, information available through marketing research and so on. Cooperation of other departments is also necessary in marketing decision-making. Production or product is rightly treated as the heart of the marketing mix. Customers purchase a product because of its attributes, features and benefits. These are the selling points of a product. They should be adjusted to the buying motives of consumers. A consumer/customer considers the total package of benefits available from the product and takes a decision to purchase the product. This suggests that various decisions regarding the product to be marketed need to be taken correctly. As a result, the product offered in the market will be a quality product. In addition, it will be utility oriented,

attractive, convenient, property designed and branded. Even attractive packaging decision facilitates sales promotion. The following aspects of a product need careful attention in marketing decision-making. (1) Product line and range, (2) Style, shape, design, colour, quality and other physical features of a product. (3) Packaging and labeling of a product. (4) Branding and trade mark given to a product. (5) Product servicing and channel of distribution. (6) Product pricing. (7) Guarantees and warranties of the product. (8) Product innovation. (9) Special features of the product from the marketing point of view. Decisions on these aspects of a product are important as marketing is directly related to these aspects. Sales promotion measures will be useful but their role will be supplementary/ supportive. Such measures may not be effective if the product to be marketed is not of standard quality or if the brand or package is not attractive or if the product is not as per the requirements/expectations of consumers. This suggests that decisions relating to product are important /crucial in the marketing of a product. (2)Distribution channel (Place) Physical distribution is the delivery of goods at the right time and at the right place to consumers. Physical distribution of product is possible through channels of distribution which are many and varied in character. Physical distribution (place mix) includes the following variables: (a) Types of intermediaries available for distribution, (b) Distribution marketing channels available for distribution, and (c) Transportation, warehousing and inventory control for making the product available to consumers easily and economically. For large-scale distribution, the services of wholesalers, retailers and other marketing intermediaries are required. A marketing manager has to select a channel which is convenient, economical and suitable for the distribution of a specific product. For instance, large numbers of outlets are required for the distribution of products of mass consumption such as soaps and oils. On the other hand, for the marketing of speciality products like refrigerators and TV sets, selective distribution through authorized dealers is quite convenient. (3) Promotion: Promotion is the persuasive communication about the product offered by the manufacturer to the prospect. Promotion mix includes the following variables: (a) Advertising and publicity of the product, (b) Personal selling techniques used, (c) Sales promotion measures introduced at different levels, (d) Public relations techniques used for keeping cordial relations with dealers and consumers, (e) Display of goods for sales promotion. Promotional activities are necessary for large scale marketing and also for facing market competition effectively. Such activities are varied in nature and are useful for establishing reasonably good rapport with the consumers. Advertising gives information and guidance to consumers. Brand names are made popular through advertising. Along with advertising, personal selling is also useful for motivating the customers to buy a specific product. In addition to advertising and personal selling, a manufacturer has to use other sales promotion techniques at the consumer level and at the dealer level. The techniques at consumer level include displays, exhibitions, discount coupons, small gifts and free samples, attractive container and consumer contests. Consumer psychology is favorable for extensive use of such sales promotion techniques. After-sales services are also useful for promoting sales of durable goods. (4) Price: Price is one more critical component of marketing mix. It is the valuation of the product mentioned by the seller on the product. Price mix includes the following variables:

(a) Pricing policies, (b) Discounts and other concessions offered for capturing market, (c) Terms of credit sale, (d) Terms of delivery, and (e) Pricing strategy selected and used. Pricing has an important bearing on the competitive position of a product. The marketing manager may use pricing as a tool for achieving the targeted market share or sales volume. Pricing can also be used for capturing market and also for facing market competition effectively. Pricing decisions and policies have direct influence on the sales volume and profits of the firm. Market price of a product also needs periodical review and adjustments. The price charged should be high enough to give adequate profit to the company but low enough to motivate consumers to purchase product. It should also be suitable to face market competition effectively. Basic elements of marketing mix are shown in the figure given on the next page:

10.5 Market Segmentation Meaning Market segmentation means dividing the total market for a product into different parts/segments on certain bases and using each segment fully for the purpose of marketing and sales promotion. Due to segmentation, each segment will have uniform features and suitable marketing mix can be introduced for promoting sales in each segment. Market refers to the aggregate of all demand for a particular product/service. It also refers to the aft customers (existing and potential) for the product/service. All are consumers but they differ as regards their: (i) basic features, (ii) needs and wants, (iii) financial position i. e. purchasing power (iv) willingness to buy (v) likes and dislikes and (vi) social and cultural background. For effective

marketing, the total market needs to be divided into suitable segments and exploited fully through suitable marketing mix. This is exactly what is done in segmentation. One marketing mix for all segments will not be effective and for introducing different marketing mixes, segmentation is a basic requirement. Philip Kotler has rightly pointed out that "Markets consist of buyers and buyers differ in one or more respects. They may differ in their wants, resources, geographical locations, buying attitudes and buying practices. Any of these variables can be used to segment a market. This can be made clear with the help of following figures. Let us assume that there are six buyers the market with different characteristics as shown below: Thus, market segmentation means dividing the total market into different sub-markets that have similar characteristics with reference to consumers. The individual buyers within each segment are similar in terms of their wants, expectations and buying power and marketing programme will be drawn for each group in order to enhance consumer satisfaction and sales promotion. This approach of market segmentation is better as compared to the approach of treating the entire market for a product as one entity and use only one marketing mix for the market (market aggregation/ mass marketing approach) Market segmentation is a new customer-oriented philosophy and is consistent with modern marketing concept. It studies needs and expectations of different consumer groups and provides something for everybody. This promotes sales and also offers more satisfaction to buyers of that group. Here, the producer employs a 'rifle' approach and not the "shotgun approach. This means he pinpoints the target (customers group) and draws specific plan to meet their needs rather than fixing broad target (all customers) and preparing one general plan to meet the needs of all customers. It is an accepted fact that markets are not homogeneous. Consumers differ in their needs and also the manner in which the needs are to be satisfied. For example, clothing is required by all consumers but all consumers do not wear the same type of clothing. The same is the case with shoes, shampoo, soap, cosmetics and so on. Naturally, manufacturers of each products have to produce different varieties as per the requirements of customers of different segments.

Definition : (1) According to Philip Kotler, market segmentation means "the act of dividing a market into distinct groups of buyers who might require separate products and/or marketing mixes'.4

(2) According to William J. Stanton, "Market segmentation in the process of dividing the total heterogeneous market for a good or service into several segments. Each of which tends to be homogeneous in all significant aspects". Advantages/Importance/Significance of Market Segmentation: (1) Facilitates consumer-oriented marketing: Market segmentation facilitates formation of marketing-mix which is more specific and useful for achieving marketing objectives. Segment-wise approach is better and effective as compared to integrated approach for the whole market. (2) Facilitates introduction of suitable marketing mix: Market segmentation enables a producer to understand the needs of consumers, their behavior and expectations as information is collected segment-wise in an accurate manner. Such information is purposefully usable. Decisions regarding Four Ps based on such information are always effective and beneficial to consumers and the producers. (3) Facilitates introduction of effective product strategy: Due to market segmentation, product development is compatible with consumer needs as there is effective crystallisation of the specific needs of the buyers in the target market. Market segmentation facilitates the matching of products with consumer needs. This gives satisfaction to consumers and higher sales and profit to the marketing firm. (4) Facilitates the selection of promising markets: Market segmentation facilitates the identification of those sub-markets which can be served best with limited resources by the firm. A firm can concentrate efforts on most productive/ profitable segments of the total market due to segmentation technique. Thus market segmentation facilitates the selection of the most suitable market. (5) Facilitates exploitation of better marketing opportunities: Market segmentation helps to identify promising market opportunities. It helps the marketing man to distinguish one customer group from another within a given market. This enables him to decide his target market. It also enables the marketer to utilise the available marketing resources effectively as the exact target group is identified at the initial stage only. (6) Facilitates selection of proper marketing programme- Market segmentation helps the marketing man to develop his marketing mix programme on a reliable base as adequate information about the needs of consumers in the target market is available. The buyers are introduced to marketing programme which is as per their needs and expectations. (7) Provides proper direction to marketing efforts: Market segmentation is rightly described as the strategy of "dividing the markets in order to conquer them'. Due to segmentation, a firm can avoid the markets which are unprofitable and irrelevant for its marketing purpose and concentrate on certain promising segments only. Thus due to market segmentation, marketing efforts are given one clear direction for achieving marketing objectives. (8) Facilitates effective advertising- Advertising media can be more effectively used because only the media that reach the segments can be employed. It makes advertising result oriented. (9) Provides special benefits to small firms: Market segmentation offers special benefits to small firms. The resources available with them are limited as they are comparatively new in the market. Such firms can select only suitable market segment and concentrate all efforts within that segment only for better marketing performance. Such firms can compete even with large firms by offering personal services to customers within the segment selected. (10) Facilitates optimum use of resources: Market segmentation facilitates efficient use of available resources. It enables a marketing firm to use its marketing resources in the most efficient manner in the selected target market. The marketing firm selects the most promising market segment and concentrates all attention on that segment only. This offers best results to the firm in terms of sale, profit and consumer support as compared to the results available from spending such resources on the total market.

In conclusion, it can be said that market segmentation offers benefits not only to marketing firms but also to customers. The marketing job will be conducted efficiently and the available resources will be utilised in a better mariner. These advantages also suggest the importance of market segmentation and make a case in its favor. In the present marketing system, market segmentation is a normal rule and not an exception. It enables companies to exploit marketing opportunities fully by using the available resources and also enables them to face market competition with confidence. It enhances marketing efficiency of the firm in each segment selected. No segmentation means absence of market penetration. In short, market segmentation is an important aspect of modem marketing management. It is a must for survival and growth in the present competitive marketing. It facilitates the preparation of separate marketing programmes for meeting the needs of different groups of buyers. Right markets for the right products can be provided through market segmentation. In brief, market segmentation is important not only for creating consumers but also for satisfying them. Market segmentation helps matching of market opportunities to the resources of the corporations and enables them to face market competition effectively. It raises marketing efficiency through proper adjustment of marketing mix for each market segment. Market segmentation is one important element of modem marketing management. Segmentation gives precise answer to the question, 'To whom should we sell out products and what should we sell to them?' 10.6 ADVERTISING: Advertising facilitates large scale marketing. It is a medium of mass communication. Manufacturers supply information about new products through advertising. The fact that companies spend crores of rupees on advertising through TV, radio and newspapers indicates its benefits in sales promotion. Advertising is within the scope of promotion which is one element in the marketing mix. It is getting popularity in the present highly competitive and consumer oriented marketing. All products old and new, consumer and durable, cheap and costly need extensive advertising for sales promotion and consumer support. New communication techniques are now used for making advertising attractive and agreeable. The basic purpose of advertising is to give information, to attract attention, to create awareness and finally to influence the buying behavior of consumers. Advertising is certainly needed in marketing but is equally important and essential in social, cultural and political aspects of our life. The term 'Advertising" originates from the Latin word "advertere" which means "to turn the mind towards". The dictionary meaning of the term advertising is "to give public notice or to announce publicity". This suggests that advertising acts as a marketing vehicle and is useful for drawing the attention of people (prospects) towards a specific product/service/manufacturer. Advertising is defined differently by different authorities and the institutions dealing with the subject of advertising. The American Marketing Association defines advertising as "any paid form of nonpersonal presentation and promotion of ideas, goods or services by an identified sponsor. This definition suggests the following features of advertising. Firstly, advertisement is paid for by the sponsor/advertiser. Naturally, he exercises control over the advertisement. Secondly, advertising is non-personal selling. It is a medium of mass communication for large scale selling. Thirdly, advertising acts as important marketing tool for presentation and promotion of ideas, goods and services. Finally, advertising needs the sponsor of the message known. Advertising will be meaningless if the advertiser is not clearly identified. Features of Advertising (1) Advertising provides information: The basic purpose of advertising is to provide information about products/services to prospective buyers. The details of products such as features, uses, prices, benefits, manufacturer's name, and instructions to be followed while using the product are given in the advertisements. The advertising message and brand name are also given. The

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information supplied gives education and guidance to consumers and facilitates correct selection of goods by them. Paid form of communication: The advertiser has to pay to the media for giving publicity to his advertising message. He pays for the advertisement and naturally he decides the size, slogan, etc. given in the advertisement. Advertising is a form of paid communication. Non-personal presentation: Advertising is non-personal in character as against salesmanship which is personal (face to face communication) in character. In advertising, the message is given to all and not to one specific individual. This rule is applicable to all advertising media including press. However even in advertising target consumers or target market can be selected for making an advertising appeal. Gives publicity to goods, services and ideas: Advertising is basically for giving information to consumers. This information is always related to the features and benefits of goods and services of different types. Advertising gives new ideas to consumers as its contents are meaningful. The aim is to make the ideas popular and thereby to promote sales. For example, advertising on family planning, family welfare, and life insurance is useful for placing new ideas before the people. Basically for persuasion: Advertising aims at persuasion of potential customers. Advertising attracts attention towards a product, creates desire to have the same and finally induces consumers to visit the market and purchase the same. Advertising has psychological impact on consumers. It influences the buying decisions of consumers. Target oriented: It is possible to make intensive advertising by selecting a specific market or specific segment of consumers (e.g. children, housewives, etc.) for the purpose of advertising. This selection of a specific market is called target market. Advertising becomes effective and result oriented when it is target oriented. The waste in advertising can be minimized through such target oriented advertising. An Art, Science and Profession: It is now universally accepted that advertising is an art, science and a profession. It is an art as it needs creativity for raising its effectiveness. Advertising is a science as it has its principles and rules. Advertising is now treated as a profession with its professional bodies and code of conduct for members. Advertising agencies and space brokers function as professionals in the field of advertising. Important element in marketing mix: Advertising is an important element in marketing mix. It supports the sales promotion efforts of the manufacturer and makes positive contribution in sales promotion provided other elements in the marketing mix are reasonably favorable. This is natural as advertising alone is not adequate for promoting sales. Many companies now spend huge funds on advertising and public relations. Creativity - the essence of advertising: Advertising is a method of presenting a product in an artistic, attractive and agreeable manner. This is possible through the element of creativity which is the essence of advertising. Creativity can be introduced by creative people (professionals) in the field of advertising. They introduce new techniques for introducing creativity. Without creativity, advertising will be like a body without a soul.

Advantages of Advertising (A) Benefits of Advertising to Manufacturers: (1) Large scale production and marketing: Advertising is useful as a sales promotion technique. It gives information to consumers and encourages them to purchase more. Manufacturers expand their production base due to higher market demand created through advertising. (2) Introduction of new products: Advertising facilitates the introduction of new products. Due to advertising, information about new products is given to the prospects. This creates demand and the manufacturer is able to sell new products along with the existing ones. (3) Creates new demand: Advertising spreads information and encourages consumers to purchase new products. Such advertising leads to the creation of new demand. Various concessions are

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offered to consumers in the initial period. This gives positive response from the consumers. Thus, advertising creates new demand from non-users. Facilitates effective personal selling: Advertising creates proper background for personal selling. It gives advance information to the prospects. They visit the shop in order to purchase a particular product which they know through advertising media. The job of a salesman becomes easy as consumers develop affinity to specific products. In brief, advertising supports and supplements personal selling. Builds brand image: Manufacturers introduce branding for making their products popular with distinct personality. The brands are made popular through advertising. As a result, consumers develop loyalty towards a specific brand. Advertising builds brand image and this develops consumer loyalty towards a specific brand. Reduces cost of production: Advertising creates demand and promotes sales. This enables a manufacturer to conduct production on a large scale. This leads to reduction in the cost of production and distribution. As a result, the profit margin of the manufacturer increases. Facing competition: A manufacturer can face market competition effectively and can make his products popular through advertising. He can remove misunderstanding among consumers about his products through appropriate advertising.

(8) Sales promotion: A manufacturer can make his sales promotion campaign successful by using the support of advertising. He can prepare proper background for the success of such campaign as advertising facilitates direct communication with consumers. (9) Goodwill builder: A manufacturer can build up goodwill and good image in the business world and also among the consumers through advertising. The social welfare programmes and community service activities can be given wide publicity through advertising. Even the progress of the Organisation can be brought to the notice of the public through advertising. (B) Benefits of Advertising to Consumers: (1) Information and guidance: Consumers get information and guidance from advertising. They can study the advertisements of competitors and select the products which are profitable to them. This avoids their cheating and exploitation at the hands of middlemen. (2) Acts as reminder. Advertising acts as a reminder to consumers. They remember what is urgently required to be purchased through advertising. (3) Special attraction to consumers: Advertising leads to competition among manufacturers and retailers. They have to offer something special in order to attract consumers. Such attraction offers benefits to consumers. For example, manufactures have to bring down the price in order to attract customers. They have to supply quality goods in order to attract more customers. All this is beneficial to consumers in terms of price and quality of goods. (4) Raises living standards: Advertising raises the standard of living of people by supplying information about goods and services which can offer convenience and pleasure to them. Advertising guides consumers in the selection of most suitable goods for their daily life. Thus advertising provides higher standard of living to consumers as a social group. (5) Effective product use: Consumers get information about uses/benefits of different products through advertising. They also get guidance as regards the right manner of using the product. This avoids possible damage of the product purchased. Even the product can be used for different purposes because of the information supplied through advertisements. (6) Removes misunderstanding- Advertising helps consumers in removing their misunderstanding about certain products. They change their attitudes towards certain products and services due to advertising.

10.7 Role of Advertising in Selling Consumer Durables The following points suggest the role of advertising in selling sales promotion of consumer durables. (1) Advertising is useful for giving information and guidance to prospective buyers of consumer durables. Here, advertising gives the details of special features, benefits, price discount, and other concessions offered, etc. to the purchasers of consumer durables and encourage interested customers to take initiative in purchasing the durable articles. (2) Effective advertising of consumer durables creates proper background for personal selling. An attraction is created in the minds of consumers and they are encouraged to visit retail shop in order to see the article or look at the demonstration of its working. Here, the salesman can use his skills and see that the article is purchased by his visitors. (3) Advertising of consumer products enables a manufacturer to face market competition effectively. He can give special features of his product and also suggest how his product is superior to that of his competitors. This is useful for sales promotion of consumer durables. Even consumers can make appropriate selection of a suitable product by studying the advertisements of competitors. (4) Advertising of consumer durables during the festival period acts as a reminder to consumers. They remember to purchase a useful product on the eve of the festival. This technique facilitates sales promotion during the festival period. (5) The seller of consumer products (manufacturing company) may like to offer attractive gift or price discount to interested consumers. Here, advertising can be made effectively. This encourages consumers to purchase a durable product. Such advertisements are common during festivals. Even local dealer may offer certain concession to his customers. He can make suitable advertisement of such concession for large scale selling at the local level. In short, effective advertising of consumer durables is necessary and useful for regular selling, for providing information and guidance to consumers and finally for sales promotion. Types of Advertising Media Advertising media are as noted in the chart given below:

It may be noted that advertising media have their special features, merits, limitations and suitability. An advertiser has to consider his advertising budget and select the most appropriate advertising media and use them for advertising purpose. 10.8 Decision-making in Advertising (Five Ms of Advertising )

while undertaking advertising campaign or while organising an advertising programme for products consumer products, (tooth paste, chocolate, soap, face powder, skin cream, etc.) or durable products, (car,

TV, etc.) or industrial products, (machine, etc.) concerned company has to take certain decisions and adjust the advertising activity accordingly. Such advertising decision-making is a five-step process (Five Ms of advertising) consisting of mission, money, message, media and measurement. In other words, evaluation and broad decisions need to be taken in regard to these five areas while organising an advertising programme/campaign. Five Ms of advertising are five basic considerations which need to be given proper attention so as to have positive/favorable effect of advertising efforts. These considerations are particularly applicable to consumer product marketing such as tooth paste, face powder, body creams, soaps, chocolates and so on. Advertising will be effective/result oriented when it is made with proper planning and appropriate decisions as regards the objectives, media used, funds provided and so on. In short, advertising activity
needs appropriate decision-making on various matters. Such decisions constitute the steps in the advertising. An advertiser has to take decisions on the following aspects: (a) Mission: This refers to the purpose/objective behind advertising. The objectives behind advertising are varied in character. They include sales promotion, information and guidance to consumers, developing brand loyalty, market goodwill, facing market competition effectively, making the products popular/successful and introduction of a new product. Decision in regard to mission is a basic one as other decisions are to be adjusted as per the mission or objective or purpose of advertising decided. For consumer products like chocolate, tooth paste, soap, the mission/objective include facing market competition, sales promotion and making the product popular in the market. (b) Money: This refers to the finance provided for advertising purpose (advertising budget). It means the budget allocation made by the company for advertising. Money provided is a limiting factor as effectiveness of advertising, media used, coverage of advertising, etc. are related to the funds provided for advertising purpose. Advertising is costly and companies have to spend crores of rupees for this purpose. Advertising should be always within the limits of funds provided. Naturally, decisions on advertising package should be adjusted as per the budget allocation for advertising. It may be noted that consumer products like tooth paste or chocolate are highly competitive with many substitutes easily available in the market. Naturally, extensive advertising on TV, newspapers, radio, etc. is required. These media are costly. Naturally, the manufacturing/marketing company will have to provide huge money for advertising purpose. (c) Message: Message is provided through the text of advertisement. The message is given through written words, pictures, slogans and so on. The message is for the information, guidance and motivation of prospective buyers. Attractive and meaningful messages give positive results and the advertising becomes result-oriented. The services of creative writers, artists, etc. are used for giving attractive message to the consumers. Here, the advertiser has to decide the message to be given, the media to be used for communicating the message, the extent of creativity, the specific customer group selected for giving the message and so on. The message is also related to the decisions taken as regards mission and money provided for advertising. For advertising consumer product like chocolate, the message is important. The buyers are mainly children and others of lower age groups or for the benefit (pleasure and satisfaction) of younger generation. The advertising message should be simple and easily understandable with the help of picture or slogan. It should be also attractive and agreeable to younger generation. The pictures or slogans used should be short and impressive. (d)Media: Media of advertising are already noted previously. The advertiser has to take decision about the media to be used for advertising purpose. Media differ as regards cost, coverage, effectiveness and so on. The selection of media depends on the budget provided, products to be advertised, and features of prospective buyers and so on. Wrong decision on media may make

advertising ineffective and money spent will be wasted. This suggests that media should be selected properly and decision in this regard is important and critical. For advertising popular and extensively used consumer items like chocolate, the media should be selected properly. TV advertising particularly a cartoon channel, advertising in children books or newspaper supplements for children, advertising on radio programmes for children, etc. (e)Measure: Measure relates to the effectiveness of advertising. An advertiser will like to make evaluation of advertisement in order to judge its effectiveness. If an advertisement is not effective /purposeful, it will be modified or withdrawn. This is necessary for avoiding expenditure on the advertisement which is not effective or is not likely to give positive results. An advertiser has to measure the effectiveness of his advertisement programme/ campaign and take suitable decisions. This decision-making as regards effectiveness of advertising is equally important and essential. Such testing facilitates introduction of suitable remedial measures, if required. For measuring effectiveness of chocolate advertising, the post advertising sale is one major consideration. Demand creation in new market segments or in new age groups is another consideration for the measurement of advertising effectiveness. Even success of sales promotion programme is useful for measuring advertising effectiveness. In brief, like other areas of marketing management, decision-making is necessary in advertising. This relates to Five Ms - mission, money, message, media and measurement. 10.9 MARKETING RESEARCH: The term marketing research is used extensively in modem marketing management. It acts as a tool for accurate decision making as regards marketing of goods and services. It is also useful for studying and solving different marketing problems in a systematic and rational manner. Research means detailed, systematic and comprehensive study of a problem. Here, the details of the marketing problems are collected and studied, conclusions are drawn and suggestions (recommendations) are made to solve the problems quickly, correctly and systematically. In marketing research, marketing problem is studied in depth and solutions are suggested to solve the problem relating to consumers, product, market competition, sales promotion and so on. MR is a special branch of marketing management. It is comparatively recent in origin. MR acts as an investigative arm of a marketing manager. It suggests possible solutions on marketing problems for the consideration and selection by a marketing manager. (1) "The systematic gathering, recording, and analyzing of data about problems relating to the marketing of goods and services. American Marketing Association (AMA) (2) 'The systematic, objective and exhaustive search for and study of the facts relevant to any problem in the field of marketing." Richard D. Crisp (3) "A4arketing research is systematic problem analysis, model building and fact-finding for the purpose of improved decision-king and control in the marketing of goods and services. "Philip Kotler Features (1) Systematic and continuous activity/process: MR is a continuous process. This is natural as new marketing problems are bound to come from time-to-time in the course of marketing of goods and services. One type of research is not adequate to resolve all marketing problems. Similarly, new research projects will have to be undertaken to solve new marketing problems and challenges. (2) Wide and comprehensive in scope: Marketing research is wide in scope as it deals with all aspects of marketing of goods and services. Introduction of new products, identification of potential markets, selection of appropriate selling techniques, study of market competition and

consumer preferences, introduction of suitable advertising strategy and sales promotion measures, are some areas covered by MR. (3) Emphasizes on accurate data collection and critical analysis: In marketing research, suitable data should be collected objectively and accurately. The data collected must be reliable. It should be analyzed in a systematic manner. This will provide comprehensive picture of the situation and possible solutions. (4) Offers benefits to the company and consumers: Marketing research is useful to the sponsoring company. It raises the turnover and profit of the company. It also raises the competitive capacity and creates goodwill in the market. It enables a company to introduce consumer-oriented marketing policies. Consumers also get agreeable goods and more satisfaction due to marketing research activities. (5) Commercial equivalent of military intelligence: MR is a type of commercial intelligence activity. It facilitates planned activities in the field of marketing. It is similar to military intelligence where systematic study of the situation is made before taking any military action. Marketing research acts as the intelligence tool of management. (6) Tool for managerial decisions: MR acts as a tool in the hands of management for identifying and analyzing marketing problems and finding out solutions to them. It is an aid to decision-making. It suggests possible solutions for the consideration and selection by managers. Marketing research, is an aid to judgment and never a substitute for it (7) An applied research: MR is applied knowledge. It is concerned with specific marketing problem and suggests alternative solutions and possible outcome of each alternative. (8) Reduces the gap between the producers and consumers: MR is an essential supplement of competitive marketing. It is useful for understanding the needs and expectations of consumers. It reduces the gap between producers and consumers and adjusts the marketing activities to suit the needs of consumers. (9) Marketing research has limitations: Marketing research is not an exact science. It only suggests possible solutions to marketing manager for consideration and selection. (10) Use of different methods: MR can be conducted by using different methods. Data can be collected through survey or by other methods. The researcher has to decide the method which is suitable for the conduct of research project. This selection is important as the quality of research work depends on the method used for the research purpose. 10.10 Steps in Marketing Research (Marketing Research Process) (1) Identifying and defining a marketing problem: The first step in the marketing research procedure is to identify the marketing problem which needs to be solved quickly. The problem may be related to product, price, market competition, sales promotion and so on. The research process will start only when the marketing problem is identified and defined clearly. The researcher has to identify and define the marketing problem in a clear manner. (2) Conducting a preliminary exploration (survey): The marketing team may suggest many marketing problems which they face. However, it is not possible to take up all such problems for research purpose. The researcher has to study such problems and select one major problem which is suitable for detailed investigation. For this, preliminary investigation is necessary. A sales manager may suggest a problem of declining sales. The researcher has to find out the possible reasons and which one is the most important and also suitable for detailed study. AR marketing problems are not researchable and hence. Such preliminary exploration is necessary and useful. (3) Determining research objectives: The researcher has to formulate hypothesis to fit the problem under investigation. It is a tentative explanation of a problem under study. For example, the sales are declining. According to the researcher, this may be due to poor quality and high price or due

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(7) (8)

(9)

to limited interest taken by middlemen or that the product has become outdated. If the first reason is accepted, the same will be investigated in full. If the first cause is rejected, he will move to the second for detailed study through data collection. Determining the data required and their sources: In this stage, the researcher has to decide the type of data required for his study purpose. The hypothesis guides the data collection process. The researcher can use primary and/or secondary data for his research project. The sources of primary and secondary data are different. Similarly, for the collection of primary data, any one method such as mail survey or telephone survey, or personal interview or observation or experimentation method can be used. The researcher has to decide the method which is convenient for data collection and collect the required data accordingly. Creating research design: Research design is the plan for the conduct of actual research investigation. Such design provides guideline for the researcher to keep a track on his actions and to know that he is moving in the right direction on data collection. The research design contains answers to the following questions: (i) What is the nature and purpose of study? (ii) What type of data is required? (iii) How to collect required data? What is the technique of data collection? (iv) How much funds will be required? (v) How much time/period will be required for completion of research project? Designing the Questionnaire: As per the objective of research project, information will be required. For collection of data, suitable questionnaire will have to be prepared. All necessary care should be taken in order to prepare ideal questionnaire, so as to collect required information easily, quickly and correctlyDesigning a sample of respondents: For data collection, a representative group will have to be selected out of the total i.e. universe. A sample designed should be adequately representative in character. It must represent the total population under study. Collecting data: Data are to be collected as per the method selected for data collection. If mail survey method is selected, questionnaires will be sent by post to respondents. If personal interview method is selected, interviewers will be given suitable guidance, information and training for the conduct of personal interview. Data collection should be quick and data collected should be reliable, adequate and complete in all respects. Organising/Processing the data collected: The completed questionnaires are not useful directly for tabulation and drawing conclusions. They need to be organised /processed properly for drawing conclusions. For this, scrutiny of data, editing, coding and classification of data are required. In addition, tabulation of data collected is also essential. Such processing make data integrated in a compact manner. In addition, the data are made reliable and suitably arranged for analysis and interpretation. Conclusions can be drawn only when the collected data are arranged in an orderly manner for detailed study. In short, processing of data means verification of data collected and the orderly arrangement of data for analysis and interpretation. The steps in data processing (editing, coding, etc.) are interrelated and need to be completed properly. The processing of data collected is a type of office work which can be attended by the office staff under the guidance of researcher. The processing of data is a lengthy and time-consuming activity and needs to be completed property. This is necessary for raising accuracy and reliability of the whole research project. The processing of data collected through marketing research involves the following steps: (a) Preliminary screening of the data collected, (b) Editing of the data collected, (c) Coding of the data collected, (d) Classification of data into meaningful categories, and (e) Tabulation of data for easy and quick analysis and interpretation.

(10) Analyzing and interpreting data: Tabulated data can be used for detailed and critical analysis. The purpose is to establish useful and logical relation between the information and problem.

Analysis of data should be made in a rational manner. This facilitates interpretation of data in an orderly manner. Conclusions can be drawn after the analysis and interpretation of data. Such conclusions are useful for suggesting remedial measures. Various statistical techniques are used for the analysis and interpretation of data. This is necessary so that the conclusions drawn will be accurate and remedial measures recommended will be appropriate or resultoriented. In brief, processing of data collected is one important and critical stage in the research process. The utility of the whole research process depends upon the manner in which the data are processed by the researchers. The services of experts should be used for such processing of data. Similarly, advanced statistical techniques should be used in the analysis and interpretation of data so that the conclusions drawn will be accurate and useful for the introduction of appropriate remedial measures. Processing of data is like examining patient by a doctor. Here, if the diagnosis is accurate, the follow-up treatment (remedial measures) will be appropriate and the patient will be all right within a short period. The same rule is applicable to processing of data in the marketing research activity/process. (11) Preparing research report: After drawing conclusions, the researcher can make concert suggestions/recommendations for solving the marketing problem in a satisfactory manner. A researcher also prepares a document giving details of research problem, data collected, conclusions drawn and the recommendations made. Such document is called research report which is the final outcome of lengthy research process. The report will be prepared in a suitable format for the convenience of readers. It acts as a self-explanatory document. (12) Presenting research report: The researcher will submit the report to the decision-makers in the field of marketing. The decision-makers will study the report minutely and find out the desirability of execution of the recommendations made. The final decision is to be taken by the decisionmakers (marketing managers and top level management) only. (13) Follow-up steps: If the recommendations made are accepted, the decision-makers have to take follow-up steps for the execution of the recommendations made. The follow-up steps should be controlled effectively so as to have positive results in the cause of time. The steps in the MR process (as noted above) are normally used in all MR projects. Certain modifications are also possible in a specific research project. The research process is lengthy and time consuming and needs to be completed in a rational and systematic manner. This gives promising results in the sense that appropriate solution to marketing problem is available. The researcher has to follow this lengthy MR procedure carefully. He has to take various decisions while conducting the research work. The research project may be conducted by an outside consultancy firm or an advertising agency. Sometimes, the research work is conducted internally i.e. through the marketing research department or sales department. Here, the research department takes up the major marketing problem (e.g. declining sales or profits of the company) and organise the research project in order to find out the causes (e.g. causes for declining sales or profit) and appropriate remedial measures. A sales manager may be asked to organise the research project for dealing with the problem of declining sales. Here, he has to organise the whole research project and finalize the details of different steps involved. Advantages of Marketing Research (1) Indicates current market trends: Marketing research keeps business unit in touch with the latest market trends and offers guidance for facing market situation with confidence. It facilitates production as per consumer demand and preferences. (2) Pinpoints deficiencies in marketing policies: MR pinpoints the deficiencies as regards products, pricing, promotion, etc. It gives proper guidance regarding different aspects of marketing. They include product development, branding, packaging and advertising.

(3) Explains customer resistance: MR is useful for finding out customer resistance to company's products. Suitable remedial measures are also suggested by the researcher to deal with the situation. This makes the products agreeable to the consumers. (4) Suggests sales promotion techniques: Marketing research enables a manufacturer to introduce appropriate sales promotion techniques, select most convenient channel of distribution, suitable pricing policy for the products and provision of discounts and concessions to dealers. It facilitates sales promotion. (5) Guidance to marketing executives: Marketing research offers information and guidance to marketing executives while framing marketing policies. Continuous research enables a company to face adverse marketing situation boldly. It acts as an insurance against possible changes in market environment. (6) Selection and training of sales force: Marketing research is useful for the selection and training of staff in the sales Organisation. It suggests the incentives which should be offered for motivation of employees concerned with marketing. (7) Facilitates business expansion: Marketing research enables a business unit to grow and expand its activities. It creates goodwill in the market and also enables a business unit to earn high profits through consumer-oriented marketing policies and programmes. (8) Facilitates appraisal of marketing policies: Research activities enable marketing executives to have an appraisal of the present marketing policies in the fight of research findings. Suitable adjustments in the policies are also possible as per the suggestions made. (9) Suggests marketing opportunities: Marketing research suggests new marketing opportunities and the manner in which they can be exploited fully. It identifies existing and emerging market opportunities. (10) Facilitates inventory study: Marketing research is useful for the evaluation of company's inventory policies and also for the introduction of more efficient ways of managing inventories including finished goods and raw materials. (11) Provides marketing information: MR provides information on various aspects of marketing. It suggests relative strengths and weaknesses of the company. On the basis of such information, marketing executives find it easy to frame policies for the future period. MR provides information, guidance and alternative solutions to marketing problems. (12) Suggests distribution channels: Marketing research can be used to study the effectiveness of existing channels of distribution and the need of making suitable changes in the distribution system. (13) Creates progressive outlook: Marketing research generates a progressive and dynamic outlook throughout the business Organisation. It promotes systematic thinking and a sense of professionalisation within the company. It also creates enthusiasm among executives concerned with marketing. This brings success and stability to the whole business unit. (14) Social significance: Marketing research is of paramount importance from the social angle. It acts as a means by which the ultimate consumer literally becomes king of the market place. Limitations of Marketing Research (1) Offers suggestions and not decisions: Marketing research is not a substitute for decisionmaking process. Ready-made decisions on marketing problems are not provided by the researcher. Marketing research does not solve any marketing problems directly. It only aids management in decision-making and problem solving process. (2) Fails to predict accurately: In marketing research, efforts are made to predict the possible future situation. For this, certain research studies are undertaken. However, the predictions arrived at may not be perfect. Future is always uncertain and exact prediction about the future is just not possible through marketing research.

(3) Cannot study all marketing problems: Marketing research cannot study all marketing problems particularly where it is difficult to collect relevant data. Similarly, research study is not possible where value judgments are involved. Thus, all marketing problems are not researchable and all research problems are not answerable. MR is not a 'panacea'. (4) Resistance to research by marketing executives: Researchers study marketing problems and offer guidance to marketing executives in their decision-making process. However, some executives are reluctant to use the solutions suggested by the researchers. They feel that such use will act as a threat to their personal status. Marketing executives also feel that researchers give solutions which are academic in character and lack practical utility. (5) Time-consuming activity: MR is a time-consuming activity. The research work takes longer period for completion and the findings when available may prove to be outdated. Even data collected very soon become old due to fast changing market environment. (6) Costly/expensive activity- MR activity is costly as research work requires the services of experts. Advanced training in economics, computer technology, sociology, etc. is also necessary on the part of research staff. Even giving responsibility of research work to an advertising agency or to a management consultant is costly. (7) Dearth of qualified staff- For scientific MR, professional marketing researchers with proper qualifications, experience and maturity are required. Research work is likely to be incomplete /unreliable in the absence of such expert staff. (8) Complexity of the subject: MR fails to give complete and correct guidance to the management on marketing issues. This is because MR is not an exact science. It is concerned with the study of human behavior which is always difficult to predict. As a result, the conclusions drawn and recommendations made are not cent per cent correct. (9) Uncertainty of conclusions: Consumer is the focal point in marketing research. However, consumer's buying motives are difficult to judge precisely and accurately. This brings some sort of uncertainty in the conclusions drawn from the MR. (10) Limitations of data used: MR process solely depends on the data collected and used for analyzing the marketing problem, for drawing conclusions and making recommendations. However, the whole process will come in danger if data collected are inadequate and unreliable. (11) Limited practical utility- MR is mainly an academic exercise. Researchers take more interest in research work rather than in supplying information and guidance to marketing managers in decision-making process. Many research reports are rather bulky and unintelligible. This brings down the practical utility of marketing research. (12) Miscellaneous Limitations: (1) Problems developed due to changing marketing environment cannot be solved quickly through MR. (2) Research report may be bulky, technically worded and difficult. Its execution is difficult at lower levels. The limitations of marketing research (noted above) do not suggest that it is a redundant activity. It only suggests that the marketing research activity should be conducted with proper care and caution. This will make research activity meaningful and result-oriented. Importance of Marketing Research Marketing research is fast growing in its importance due to increasing competition, fast moving technological developments and changing consumer needs, expectations and attitudes. The importance of marketing research is universally accepted. The status of marketing research in business management is identical to the position of brain in a human body. The following points suggest the importance of marketing research:

(1) Planning and execution of marketing plan: A business unit can plan and execute all activities right from manufacturing to marketing with reasonable accuracy and confidence due to the guidelines available through marketing research. (2) Quick and correct decision-making: MR facilitates quick and correct decision-making by marketing managers. It enables management to take quick and correct marketing decisions. (3) Effective solutions on marketing problems: MR provides effective solutions to marketing problems. MR is the radiology and pathology of marketing operations of business. It diagnoses the business ailments and suggests measures to remove them. Marketing researcher acts like business doctor and prescribes treatment for business elements. (4) Huge spending on MR: Large companies spend crores of rupees on marketing research activities. New techniques and methods are used in the conduct of research activities in an accurate manner. This suggests the growing importance of MR. 10.11 product life cycle 10.12 new product development

QUESTION BANK 1. Define marketing and explain its features and significance. 2. What do you mean by marketing functions? Give a broad classification of marketing function and indicate how they facilitate large scale marketing 3. What is marketing mix? Explain briefly the components of marketing mix 4. What is advertising? Explain its advantages and importance. 5. What is marketing research? Explain its advantages and importance. 6. Explain step-by-step process/procedure involved in marketing research project/activity. 7. Advertising is essential in the case of old and new, competitive as well as noncompetitive products explain the statement. 8. Write short notes on: o Importance of marketing. o Market research o Decision-making in advertising.

CHAPTER 11 Human Resource Management

11.1 Introduction Every business unit needs human resource (manpower) for the conduct of different business activities. In fact, no organisation can exist or operate efficiently without the support of human resource. Such human resource includes top level managers, executives, supervisors and other subordinate/lower level staff/employees. A business organisation has to estimate its future manpower needs and adjust its manpower planning and development programmes accordingly. This is called 'staffing' function of management Human resource management is also described as personnel management or manpower management. According to Edwin Flippo "Personnel management is the planning, organising, directing and controlling of the procurement, development, compensation, integration and maintenance of people for the purpose of contributing to organizational, individual and social goals'.' Various areas such as recruitment and selection, wage payment and industrial relations are covered under human resource management Meaning In an industrial unit, large number of persons are employed in order to conduct various operations and activities. This is treated as human resource or manpower employed. A business unit needs material resources as well as human resource for the conduct of various activities. Of all the "M"s in management (such as materials, machines, methods and money) the most important "M" stands for men i.e., manpower working in the organisation. It is through manpower/employees that all other ingredients of an enterprise-money, machines, materials, marketing, etc. are managed. In brief, human resource (HR) constitutes the most important and the most productive resource of an industrial/business unit. It is rightly said that machines are important in the production process but the man behind the machines is more important. He transforms the lifeless factors of production into useful products. Human resource is an important asset of a business unit Well-trained, loyal and efficient team of workers brings success and stability to a business unit. This suggests the importance of human resource in business. People and the organisation in which they work are inter-related and interdependent. organisation moves towards prosperity only by using its available human resource purposefully. Similarly, employees get various monetary and other benefits through the prosperity of their organisation. Human resource development (HRD) means to develop available manpower through suitable methods such as training, promotions, transfers and opportunities for career development. HRD

programmes create a team of well-trained, efficient and capable managers and subordinates. Such team constitutes an important asset of an enterprise. One organisation is different from another mainly because of the people (employees) working therein. According to Peter F. Druker, the prosperity, if not the survival of any business depends on the performance of its managers of tomorrow". The human resource should be nurtured and used for the benefit of the organisation. Importance of Human Resource in Management Human resource is most important resource in management and needs to be used efficiently. This is because success, stability and growth of an organisation depend on its ability in acquiring, utilizing and developing the human resources for the benefit of the organisation. In the final analysis, it is the people (employees) who produce promising results and genera a climate conductive to the growth and development of an organisation. HR is a highly productive corporate asset and the overall performance of companies and corporations depends upon the extent to which it is effectively developed and utilised. It is the most delicate factor of production and need not be treated merely as a commodity to be bought and used in factories. According to Peter Drucker, the)"Unction of management is to manage managers, workers and work. The importance of manpower in business management is now universally accepted. Employees have a capacity to grow and develop, if suitable opportunities are offered. They give positive response to monetary and non-monetary incentives, training opportunities, favorable work environment and motivation. According to Pigors and Myers, good management means getting effective results with people". This suggests the importance of human resource. Human resource is certainly important even in this age of extensive use of computer technology. This is because machine cannot be used as a substitute for human brain which has capacity to think, assess and react. It is correct to say that man is a power rather than man has a power. Progressive/professional managements invest huge funds on training and development of human resource and this suggests the importance of human resource and its contribution in industrial and economic development. Professionally managed companies such as Larsen and Toubro Ltd, TELCO, Reliance, etc., give special attention to HRD. The following remark of Shri Dhirubhai H. Ambani, Chairman of Reliance Industries Ltd. (made in the 21st AGM held on 3/8/95), is worth noting in this regard. 'Our People: People are assets you can never show on a balance sheet. Our company has a human resource asset of around 12,500 people; 3,000 of which constitute scientific and technical manpower. Every year we add over 450 young professionals. These motivated and well-trained people are the backbone of our business. The team is young in spirit, conscious of its responsibilities and committed to building world class assets for the country". Human Resource Planning (HRP) (1) Colemn has defined human resource planning as 'the process of determining manpower requirements and the means for meeting those requirements in o to carry an integrated plan at the organisation". (2) Stainer defines manpower planning as "strategy for the acquisition, utilisation, improvement and preservation of an enterprise's human resources. It relates to establishing job specifications or the quantitative requirements of jobs determining the number of personnel required and developing resources of manpower".3 Objectives of Manpower/Human Resource Planning (1) To ensure optimum utilisation of human resources currently employed in the Organisation. (2) To determine the future manpower requirements of the Organisation as per the need for renovations, modernisation, expansion and growth programmes. (3) To determine the recruitment level.

(4) To ensure that necessary human resources are available as and when required. (5) To assess future accommodation requirements. (6) To design the basis for management development programmes so as to develop the required talents among the employees selected. Advantages/importance of HRP (1) Meeting manpower needs: Every Organisation needs adequate and properly qualified staff for the conduct of regular business activities. Imaginative HRP is needed in order to meet the growing and changing human resource needs of an Organisation. (2) Replacement of manpower: The existing manpower in an Organisation is affected due to various reasons such as retirement and removal of employees and labour turnover. HRP is needed to estimate the shortfall in the manpower requirement and also for making suitable arrangements for the recruitment and appointment of new staff. (3) Meeting growing manpower needs: The expansion or modernisation programme may be undertaken by the enterprise. Manpower planning is needed in order to forecast and meet additional manpower requirement due to expansion and growth needs through recruitment and suitable training programmes. (4) Meeting challenges of technological environment: HRP is helpful in effective use of technological progress. To meet the challenge of new technology existing employees need to be retrained and new employees may be recruited.
(5) Coping with change: HRP enables an enterprise to cope with changes in competitive forces, markets, products, and technology and government regulations. Such changes generate changes in job content, skill, number and type of personals. (6) Increasing investment in HR: An employee who picks up skills and abilities becomes a valuable resource because an Organisation makes investments in its manpower either through direct training or job assignments. (7) Adjusting manpower requirements: A situation may develop in; an Organisation when there will be surplus staff in one department and shortage of staff in some other department. Transfers and promotions are made for meeting such situations. (8) Recruitment and selection of employees: HRP suggests the type of manpower required in an Organisation with necessary details. This facilitates recruitment and selection of suitable personnel for jobs in the Organisation. Introduction of appropriate selection tests and procedures is also possible as per the manpower requirements. (9) Placement of manpower. HRP is needed as it facilitates placement of newly selected persons in different departments as per the qualifications and also as per the need of different departments. Surplus or shortage of manpower is avoided and this ensures optimum utilisation of available manpower. (10) Training of manpower: HRP is helpful in selection and training activities. It ensures that adequate number of persons are trained to fill up the future vacancies in the Organisation. 11.2 Personnel Management/HRM: Meaning of Personnel/HR Management Personnel refer to the employees working in an Organisation. They represent the manpower which is an important asset of a business unit. Employees are the real supporters of a business unit and they contribute substantially for the stability and prosperity of a business unit. Employees have various problems relating to wage payment,

promotions, transfers, working conditions, welfare facilities, training and so on. All such problems are treated as personnel problems. These problems come within the scope of personnel management which is one important area of total business management. Naturally, a separate department called personnel

department is created in every Organisation. It looks after the personnel problems. The manager in charge of this department is called personnel manager. He has to perform various functions which are responsible in nature and also delicate. He needs tact and imagination while dealing with personnel problems. He also needs active support of the top management for dealing with personnel problems effectively. A personnel manager must be a specialist in Organisation theory. In addition, he should be expert in personnel administration with knowledge of relevant Labour laws, procedures and so on. A personnel manager needs sound academic qualifications, communication skill, broad social outlook, sympathy and consideration for employees. Knowledge of subjects like philosophy, logic, sociology and ethics is also useful while discharging his duties and responsibilities. He needs a keen sense of social justice and also rights and interest of men (employees) at work. A personnel manager also needs other qualities which are normally required by a successful manager. In short, personnel management deals with the people working in an Organisation. It studies and solves
their problems in order to create an efficient, loyal and cooperative labour force for the benefit of a business enterprise. Personnel management deals with "personnel" of the Organisation. It is concerned primarily with the manpower resource inputs. Definitions (1) According to Edwin Flippo, "Personnel management is the planning, organising, directing and controlling of the procurement, development, compensation, integration and maintenance of the people for the purpose of contributing to organizational, individual and social goals. 2 (2) According to George R. Terry, "Personnel management is concerned with the obtaining and maintaining of a satisfactory and a satisfied, workforce."3 (3) According to British Institute of Personnel Management, London, 'Personnel manage7nent is that part of management which is concerned with the people at work and with their relationship within an enterprise." Features of Personnel Management/HRM (1) Personnel management relates to managing people at work. It covers all levels of personnels and their needs, expectations and so on. In this sense, it is a comprehensive function and is basically concerned with managing people at work. (2) Personnel management is concerned with employees, both as individuals as well as a group. The aim of personnel management is to get better results (for the Organisation) through their involvement, motivation and co-operation. It is a people-oriented process of bringing people and organisations together so that the goals of each are met property. (3) Personnel management is concerned with helping the employees to learn and develop their potentialities to the highest level for their benefits as well as for the benefits of their Organisation. (4) Personnel management is inherent in all organisations as all organisations (including industrial and commercial) need manpower for the conduct of their activities. They are concerned with recruitment, selection, utilisation and development of manpower available. Personnel management is an integral aspect of total business management. (5) Personnel management is a continuous activity/function in an Organisation as personnel problems continue to exist as long as employees are working in an Organisation. They need constant attention as they may disturb normal working of an Organisation, if neglected. (6) Personnel management aims as securing willing co-operation of employees for achieving organizational objectives. This is natural as industrial and other activities can be conducted only with the support of human resources. Objectives/Purposes of Personnel Management (1) To attain maximum individual development (self development) of the members of an Organisation and also to utilise available human resources fully and effectively.

(2)

To mould effectively the human resources.

(3) To establish desirable working relationships between employer and employees and between groups of employees. (4) To ensure satisfaction to the workers so that they are freely ready to work. (5) To improve the service rendered by the enterprise to the society through better employee morale which leads to more efficient individual and group performance. (6) To establish and maintain a productive and self respecting relationship among the members of an Organisation. (7) To ensure the availability of a competent and willing workforce to the Organisation for its progress and prosperity. (8) To help Organisation to achieve its goals by providing well trained, efficient and property motivated employees. (9) To maintain high morale and good human relations within the Organisation for the benefit of employer and employees. (10) To secure the integration of all the individuals and groups with the Organisation by reconciling individual/group goals with those of an Organisation. Functions of Personnel/HR Management The functions of HRM are directly or indirectly related to the human resource available in the Organisation. HR manager has to perform the basic functions of management in the area of HRM. These managerial functions include planning, organising, directing and controlling the manpower of his department. The operative functions of the HRM include procurement of manpower, development of manpower, and payment compensation to manpower and so on. In short, HRM involves the following functions and these functions are to be performed by the HRM department of the Organisation: (1) Procurement of manpower. Procurement means acquiring or resourcing the human resources or the manpower required by an Organisation from time-to-time. Such procurement will be from the employment market. The basic principle in procurement is "right man for the right job". The procurement function includes manpower planning and forecasting, recruitment, selection, appointment, placement and induction of employees so as to have a team of efficient and capable employees for the benefits of the Organisation. Even promotions and transfers are covered by this broad personnel function. At present, scientific methods are used for recruitment and selection of most suitable manpower for the benefit of the Organisation. (2) Training and Development of manpower. Development of manpower (human resource development) means planning and execution of the training programmes for all categories of employees in order to develop new skills and qualities required for working at the higher level. Manpower development is possible through training programmes and not simply by offering attractive wages to workers. Such manpower development (possible through systematic training programmes) is required for meeting the growing and changing needs of manpower along with the expansion and diversification of business activities. Executive development programmes are introduced for the benefit of higher level managers. Promotions and transfers are possible when manpower development programmes are introduced regularly. Similarly, future manpower requirement will be met properly through such manpower development programmes. This suggests the importance/ significance of human resource development. It aims at educating and training employees for the improvement of overall performance of an Organisation. HRD programmes are for education, training and development of existing manpower in an Organisation. This is for facing new problems and challenges likely to develop in the near future. (3) Compensation payment and reward to manpower employed: One function of HRM department is to pay compensation (in monetary form) to employees for the services rendered. For this, a fair system of remuneration payment (wages and salaries) needs to be introduced. Remuneration to employees should be attractive so that the labour force will be satisfied and

disputes, etc. will be minimized. Fair wage payment acts as a motivating factor. Along with compensation payment, HRM also deals with reward system. It is a type of appreciation of exceptional good work and offer some monetary or non-monetary incentive to suitable employees. (4) Integration of interests of manpower and the Organisation: Manpower is interested in wage payment while Organisation is interested in higher profits, consumer loyalty market reputation and so on. Personnel management has to reconcile the interests of the individual members of the Organisation with those of the Organisation. This will ensure cordial industrial relations. Reconciliation of individual, social and organizational goals and interest is one challenge before HRM. (5) Maintenance of manpower. This HRM function relating to maintaining of satisfied manpower in the Organisation through the provision of welfare facilities. For this attention needs to be given to health and safety measures, maintenance of proper working conditions at the work place, provision of welfare facilities and other non-monetary benefits so as to create efficient and satisfied labour force with high morale. Even collective bargaining and workers participation come within this broad personnel function. Maintenance of stable manpower is difficult due to the availability of ample employment opportunities. (6) Provision of welfare facilities: Employees are offered various welfare facilities. They include medical, educational, recreation, housing, transport and so on. These facilities are given for raising their efficiency and also for making their life happy. Welfare facilities create efficient and satisfied Labour force. To introduce new labour welfare facilities and to maintain the existing facilities is one of the functions of HRM. (7) Misc. functions: Misc. functions under personnel management include the following: (a) Maintenance of service records of employees, (b) promotions and transfers of employees, (c) Maintaining cordial industrial relations, (d) introduction of rational grievance procedure, (e) Performance evaluation of employees, (f) career planning of employees, (g) maintenance of discipline, administering the policies with regard to disciplinary action and compliance of various labour laws, (h) restructuring of the Organisation, (I) formulating HRM strategy. These HRM functions need to be performed regularly for the benefit of employees and also for continuity in the production activities of the Organisation. W.R. Spriegel has divided the functions of personnel management/HRM department into the following six broad categories: (a) Employment (b) Promotion, Transfer and Termination. (c) Training. (d) Wages and other incentives. (e) Service activities (welfare activities). (f) Collective bargaining and workers' participation. As per Indian Institute of Personnel Management (IIMP now called NIPM), the personnel/ HRM functions are classified as noted below: (i) Improvement of industrial relations; (ii) Promotion of joint consultation; (iii) Helping management to formulate a labour policy and improving communication between management and employees; (iv) Advising management on the fulfillment of statutory obligations relating to safety, health and welfare of the employees; (v) Improving factory amenities and welfare provisions; and (vi) Advising the management on the training and future education of employees. In the HRM department, various sections are created in order to give attention to various functions which are basically HRM functions. The functions (noted above) are varied in character. These are

functions of HRM and also the functions of personnel management. They are important and needs constant attention. Efficient, satisfied and cooperative labour force can be created by giving proper attention to various personnel functions. 11.3 Recruitment And Selection Recruitment and selection constitute staffing function of management. Scientific selection ensures right man for the right job. For creating a team of efficient, capable and loyal employees, proper attention needs to be given to scientific selection of managers and other employees. The conventional approach of selecting managers in a casual manner is now treated as outdated and is being replaced by scientific and rational approach. The basic principle in selection is "right man for the right job' and can be achieved only through scientific recruitment and selection. JOB ANALYSIS: Meaning of Job Analysis: Job analysis is prior to recruitment. Job means a task or a specific activity to be performed in one or the other department of a production unit. Clear understanding of the job is called job analysis. It creates proper background for recruitment and selection. Job analysis is the process of collecting all relevant information relating to the job. This information relates to the nature and features of a job and the qualities and qualifications required for performing the job efficiently. Job analysis provides basic information which facilitates scientific recruitment and selection. According to Edwin Flippo, "Job analysis is the process of studying and collecting information relating to the operations and responsibility of a specific job. Benefits of Job Analysis (1) Facilitates proper publicity of jobs: Exact details of the job and the qualifications, qualities, etc. required can be notified in the advertisement because of job analysis. Scrutiny of applications and selection of suitable candidates is made manageable, easy and quick. (2) Facilitates appropriate selection of psychological tests: Psychological tests can be adjusted exactly as per the need of the job due to the availability of details from job analysis. (3) Facilitates purposeful interviews: Interviewers should be given the details of job analysis before interviewing the candidates. This makes the interviews relevant as the candidates are judged accurately in the light of details of job analysis. (4) Facilitates appropriate medical examination: Even the medical examination is adjusted as per the information available from job analysis. (5) Facilitates scientific selection and placement of candidates: job analysis makes the selection work accurate. The tragedy of misfit is avoided. In addition, proper placement (as per qualifications and qualities) of employees is possible due to job analysis. (6)Facilitates scientific promotions and transfers: Promotions and transfers become easy, quick and accurate on the basis of data of job analysis. (7)Facilitates impartial performance appraisal: A company can make scientific and impartial performance appraisal of its employees with the help of job analysis data. (8)Useful for providing training: job analysis suggests the qualities necessary for performing specific job. This information can be used in a purposeful manner while framing training programmes for jobs. (9) Useful for fixing wage structure: job analysis indicates relative worth of each job within the Organisation. This information is useful for fixing wage rates for different categories of workers. (10) Facilitates redesigning of jobs: Job analysis gives the details of different jobs and facilitates redesigning of jobs so as to improve operational performance or to enrich job content and employee improvement.

Meaning of Recruitment Recruitment means to estimate the avaIlable vacancies and to make suitable arrangements for their selection and appointment. In the recruitment process, the available vacancies are given wide publicity and suitable candidates are encouraged to submit applications so as to have a pool of eligible candidates for scientific selection. In recruitment, information is collected from interested candidates. For this different sources of recruitment such as newspaper advertisement, employment exchanges, internal promotions, etc. are used. In the recruitment, a pool of eligible and interested candidates is created for the selection of most suitable candidates. Recruitment represents the first contact that a company makes with potential employees. Recruitment is a positive function in which publicity is given to the jobs available in the Organisation and interested candidates (qualified job applicants) are encouraged to submit applications for the purpose of selection. According to Edwin Flippo, 'Recruitment is the process of searching for prospective employees and stimulating them to apply for jobs in the Organisation. Need for Recruitment The need for recruitment may be due to the following reasons/situations: (a) Vacancies due to promotions, transfers, retirement, termination, permanent disability, death and labour turnover. (b) Creation of new vacancies due to growth, expansion and diversification of business activities of an enterprise. In addition, new vacancies are possible due to job respecification. Meaning of Selection Selection is next to recruitment. It is the process of choosing the most suitable candidates (Properly qualified and competent) out of many interested candidates. It is a process of selecting the best and rejecting the rest. In this selection process, interested applicants are differentiated in order to identify those with a greater likelihood of success in a job. Such candidates are selected and appointed. Selection is a negative function as it relates to elimination of unsuitable candidates. 'Right man for the right job' is the basic principle in selection. Selection of suitable candidates is a responsible type of work as selection of unsuitable persons for jobs creates new problems before the business unit. For appropriate selection, scientific procedure needs to be followed. Recruitment and selection are supplementary activities. In recruitment prospective employees are encouraged to apply for the jobs and in the selection; the most suitable candidates are selected out of the pool of applicants. The purpose of both is to have the most suitable and most capable candidates for the Organisation out of a pool of available and interested candidates. The recruitment process widens the scope for selection and provides wide choice for the selection of best candidates out of many interested. Recruitment and selection need lengthy and scientific procedure particularly in the case of managerial posts. Such lengthy procedure must be followed for scientific selection of employees. Sources of Recruitment Sources of recruitment are the outlets through which suitable candidates are available. The Following chart shows the sources of recruitment at supervisory and managerial levels:

11.4 Selection Procedure (Steps in the Scientific Selection Process/procedure) In the selection procedure, out of the available/interested candidates, the best one is selected through written test, psychological tests, personal interview and medical examination. Such lengthy procedure is followed in order to select the most suitable candidate. Selection process is a screening process. It is a type of hurdle race to the candidates. Final selection is possible only when the candidate completes this hurdle race successfully. Lengthy selection procedure is needed for scientific selection of candidates. The steps involved in the selection procedure are as explained below: (1) Job Analysis: job analysis prepares proper background for recruitment and selection. It gives details of a job to be performed and the human qualities and qualifications required for performing that job efficiently. Scientific selection is possible only when it is made in the light of the details available from job analysis. Job means an activity performed in one or the other department of a business unit. A job includes various positions. Clear and detailed understanding of the job is called job analysis or job study. (2) Advertisement: This medium is widely used for recruitment of all categories of personnel. Though quite costly, it provides a wide choice as it attracts large number of candidates from all over the country. The qualities and qualifications expected from the candidates are usually mentioned in the advertisement. (3) Collection of Applications Blanks: In this step, applications with necessary details are collected from interested candidates. Some companies give advertisement in the press and ask interested candidates to submit applications on a prescribed form. (4) Scrutiny of Applications Received: After the last date fixed for the receipt of applications, officer from the personnel department starts the scrutiny of applications received. Incomplete applications are normally rejected. Applicants, who do not possess required qualifications, experience, etc., are also rejected. Along with this, the certificates, testimonials and references are checked.

(5) Written Tests: After the scrutiny of applications, a final list of candidates for written tests is prepared. The purpose of such tests is to judge the knowledge of the candidate and also to find out his (a) intelligence, (b) aptitude, (c) capacity, (d) interests and (e) suitability for a specific job. Trade test is particularly necessary in the case of technical jobs such as junior engineer, computer engineer and research assistant and so on. At present, such test is given in the case of all types of jobs. For example, written tests are used by Banks and public sector organisations for selection purpose. It is also possible to reject candidates whose performance in such written tests is not up to the mark. Testing of candidates is a lengthy process particularly when the number of applicants is large. In such testing, the process of elimination can be introduced. For example, all candidates may be invited for the first test and' the candidates with poor performance in the first test need not be called for the second test. (6) Psychological Tests: The psychological tests given to candidates include the following tests: (1)Intelligence test (2) Aptitude test (3) Interest test (4) Achievement test (5) Analytical test (6) Performance test (7) Synthetic test and (8) Personality test. Each test needs to be given separately and each test is useful for judging specific quality of a candidate to be selected for the executive post (7) Personal Interview: The candidates who have shown reasonably good performance in the written examination and psychological tests are called for personal interview. Interview technique is used extensively for the selection of managerial posts. This interview is conducted by one interviewer or by a group of interviewers including top officers of the company and other professional experts. The candidate is asked various questions about his qualifications, experience, family background and performance in the written test and psychological tests by the interviewers during the course of the interview. In this final interview, an attempt is made to judge overall personality of the candidate. The selection committee notes the plus and minus points of every candidate and selects the best candidates for appointment by applying certain uniform norms. Here, short-listing of candidates is done for final selection as per the need of the Organisation. The final selection depends partly

on the performance of the candidate in the tests and also on the performance in the personal interview. (8) Reference Check: The candidate is required to give at least two references which may be (a)Educational, (b) social and (c) employment. These references help to cross check the information provided by the candidate (9) Medical Examination: The purpose of medical examination is to judge the general health and physical fitness of the candidate. Candidates who are not physica4y fit for the specific job are rejected even when they show good performance in the tests and personal interview. Medical test is taken in the case of all candidates before appointment. In case of certain jobs, the test is of a general nature. However, medical examination has special importance in armed forces. (10) Final Selection for Appointment: The selection procedure comes to an end when the final appointment letter is sent to the candidate with a request to join the organisation on a particular date. This means the job is offered to the selected candidate and he is asked to join the Organisation within a specific time limit. Note on Psychological Tests/Selection Tests For scientific selection of candidates (particularly for higher level/executive level posts) different types of tests are given to candidates as per the requirements of the post for which selection is required to be made. Such tests include written test, trade test and psychological tests. The basic purpose is to judge the knowledge, skills, intelligence, aptitude, etc. of the candidate before his selection. It is also possible to reject the candidates who show poor performance in such tests. The possible performance of the candidate in the future can be judged with the help of such tests. Such tests need to be conducted in a systematic manner and not as a mere formality. The assistance of experts should be taken while conducting such tests. In addition, the results of such tests should be used while taking final decision regarding selection of the candidate. Such tests are particularly useful for the selection of supervisory staff in an Organisation. Important psychological tests are as explained below: (1) Intelligence test. - Intelligence test is useful for judging the intelligence of a candidate. According to the industrial psychologist, "General intelligence is the capacity of a person for comprehension and logical reasoning". Previously only the passing certificates of certain examinations were universally accepted as evidence of intelligence. After long experience, employees discovered that such certificates were not always very reliable as they indicate only paper qualifications. Fortunately for them, two French psychologists. Simon and Binet had developed in 1916 suitable Intelligence Tests to measure general intelligence. According to these tests, intelligence of a person or his intelligence quotient (I.Q.) can be measured by his performance in the test. (2) Vocational aptitude test: Vocational aptitude has been defined as 'the capacity or latent ability of an individual to learn a job, given the necessary training". It has been claimed that vocational aptitude is as important and perhaps more important than general intelligence for success on a job. It is, therefore necessary to ascertain the vocational aptitude of a candidate before final selection. (3) Analytical test: For the purpose of analytical tests, a job is first analyzed in terms of such qualities as speed, dexterity, observation, etc. Terms are then devised to measure the degree to which a candidate possesses these qualities. Dr. Munsterberg, an industrial psychologist in the US, had first devised such tests for the selection of telephone operators for the American Telephone and Telegraph Company. He had also devised similar tests for the selection of inspectors for inspection of ball bearings for an American bicycle manufacturer. These tests had produced satisfactory results. (4) Synthetic test: In case of jobs which are complex and so cannot be analyzed and for which analytical tests cannot be developed, synthetic tests have been evolved. The essence of these

tests is that the candidate is presented a complex situation, more or less similar to the one which he will have to face in his job but on a miniature scale and he is asked to handle the situation. His performance in such a test indicates his aptitude for the job. Dr. Munsterberg had devised such a test for the selection of tram drivers for a tram. Company in the United States. Today, a similar test is being used for the selection of motor and truck drivers. (5) Trade test: Trade test is necessary and useful in the case of jobs which involve technical work. For example, a stenographer or a typist should be given suitable test in order to judge his ability to take dictation or type. Similar trade tests can be given to welders, machine operators and so on. Workers can be given such tests in order to find out their capacities for the type of job for which they are being considered. (6) Personality test- Personnel managers have come across many individuals with the 4cessary intelligence and the vocational aptitude, and yet did not prove successful in the jobs for which they are selected. Industrial psychologists felt that they might not have a suitable personality or temperament and began to develop tests to measure personality traits. Protective test is one such test. Its essential feature is that it induces a candidate to reveal his inner or real personality. Advantages of Psychological Tests in the Selection Procedure (1) Objective comparison of candidates possible. (2) Incompetent candidates are eliminated. (3) Suitable candidates are given proper placement. (4) Right man to the right job is achieved. (5) Achievements of the candidates are verified. (6) Compatibility of the candidate can be found out. (7) Mental qualities of candidates are evaluated. (8) Overall ability of the candidates is measured. (9) Application of knowledge is found out. (10) Accuracy in selecting employees. Importance/Role of Personal Interview in the Selection Procedure Interviewing is the most popular element in the selection procedure. It plays a crucial role in the selection procedure. For majority of executive posts, it is supplemented by written and other tests. Personal interview offers many benefits to the company and also to the candidates. 11.5training and Methods of Management Development Meaning of Employee Training: Training is next to selection. A worker selected/appointed in an Organisation needs proper training. This enables him to perform the job correctly and also with efficiency. Similarly, a manager needs training for promotion and for his self improvement. Employees are now given training immediately after appointment and thereafter from time to time. Training is used as a tool/technique for management/executive development. It is used for the development of human resource working in an Organisation. In fact, training is the watchword of present dynamic business world. Training means giving information, knowledge and education in order to develop technical skills, social skills and administrative skills among the employees. According to Edwin Flippo, training is "the act of increasing the knowledge and skill of an employee for doing a particular job." Training is necessary due to technological changes rapidly taking place in the industrial field. It is also essential along with the introduction of new techniques, new methods and so on. It is necessary for developing overall personality of employees and also for developing positive attitude towards fellow employees, job and Organisation where he is working.

Training of employees is the responsibility of the management/employer. Expenditure on such training is an investment for manpower development and gives good dividend in the long run. Employees should take the benefit of training facilities provided for raising their efficiency and also for self-development. Training need not be treated as a punishment but an opportunity to learn, to grow and to develop for jobs at the higher levels. Types of Training: There are different types of training. These are: Induction training. (b) Job training. (c) Training for promotion. (d) Refresher training. (e) Training for managerial development. Induction training aims at introducing the Organisation to a newly appointed employee. It is a short and informative training given immediately after joining the Organisation. The purpose is to give "bird's eye-view" of the Organisation to an employee. Job training relates to specific job and the purpose is to give suitable information and guidance to a worker so as to enable him to perform the job systematically, correctly, efficiently and finally with confidence. Training for promotion is given after the promotion but before joining the post at the higher level. The purpose is to enable an employee to adjust with the work assignment at the higher level. The purpose of refresher training is to update the professional skills, information and experience of persons occupying important executive positions. Training for managerial development is given to managers so as to raise their efficiency and thereby to enable them to accept higher positions. A company has to make provision for providing all types of training. Objectives of Training (1) To raise efficiency and productivity of employees and the Organisation as a whole. (2) To create a pool of well trained, capable and loyal employees at all levels and thereby to make arrangement to meet the future needs of an Organisation. (3) To provide opportunities of growth and self-development to employees and thereby to motivate them for promotion and other monetary benefits. In addition, to give safety and security to the life and health of employees. (4) To avoid accidents and wastages of all kinds. In addition, to develop balanced, healthy and safety attitudes among the employees. (5) To meet the challenges posed by new developments in science and technology. (6) To improve the quality of production and thereby to create market demand and reputation in the business world. (7) To develop cordial labour-management relations and thereby to improve the organisational environment. (8) To develop positive attitude and behavior pattern required by an employee to perform a job efficiently. In other words, to improve the culture of the Organisation. (9) To prevent manpower obsolescence in an Organisation. (10) To develop certain personal qualities among employees which can serve as personal assets on long term basis. Importance of Training (A) Benefits of Training to Employer/Management: (1) Training raises the efficiency and productivity of managers. It also improves the performance of workers due to their motivation. (2) Training improves the quality of production. It also reduces the volume of spoiled work and wastages of all kinds. This reduces cost of production and improves quality.

(3) It reduces accidents as trained employees work systematically and avoid mistakes in the work assigned. (4) Training reduces expenditure on supervision as trained employees take interest in the work and need limited supervision and control. (5) Training brings stability to labour force by reducing turnover of managerial personnel. (6) It raises the morale of employees. (7) Training creates skilled and efficient manpower which is an asset of an industrial unit. (8) Training moulds attitudes of employees and develops cordial industrial relations. (9) Training reduces absenteeism as trained managers find their job interesting and prefer to remain present on all working days. (10) It facilitates the introduction of new management techniques and also new production techniques including automation and computer technology. (11) Training creates a pool of trained and capable personnel from which replacements can be drawn to fill up the loss of key personnel due to retirement, etc. (12) Training provides proper guidance and instructions to newly appointed executives and assists them to adjust properly with the job and the Organisation. (B) Benefits of Training to Managers/Employees: (1) Training creates a feeling of confidence among the employees. It gives personal safety and security to them at the work place. (2) It develops skills which act as valuable personal assets of employees. (3) Training provides opportunity for quick promotion and self-development to managers. (4) Training provides attractive remuneration and other monetary benefits to employees. (5) Training develops adaptability among employees. It up-dates their knowledge and skills and keeps them fresh. It actually refreshes the mental outlook of employees. (6) It develops positive attitude towards work assigned and thereby creates interest and attraction for the job and the work place. (7) Training creates an attitude of mutual co-operation and understanding among the managers. Such attitude is useful not only at the work place but also in the social life. Meaning of Management Development/Managerial Training In addition to training for operative staff, an Organisation has to take steps for training managers. Such training programmes are called managerial development/executive development programmes. Managerial talent is the most important asset that a company can possess. Management development ensures that as and when the demand for managers arise, suitably qualified persons are ready to fill the vacancies. Managerial development consists of all means by which executives learn to improve their performance. It is designed to improve the effectiveness of mangers in their present jobs and to prepare them for higher jobs in future. Managerial development aims at helping the mangers to realise their full potential Management development is a way to improving the culture of the Organisation so that it could be geared to excellence. 'People move organisations-not machines.' According to P. N. Singh, "Management development is an activity designed to improve the performance of existing managers, provide a supply of managers to meet the need of organisations in future and extend the understanding of the management activity by drawing from the following three resource areas: (a) Knowledge, (b) Experience, and (c) Trainee himself Need/Importance of Management Development

According to Edwin Flippo, "No Organisation has a choice of whether to develop employees or not; the only choice is that of method."2 The need for management development is well accepted in the present business, which is fast changing due to technological and social developments. (1) Shortage of trained managers: Talented and matured managers are not easily available. It is not possible to appoint managers from outside for the key managerial posts. The better alternative is to select talented persons as trainee managers and develop their qualities through special training and wider exposures. In this way, the Organisation can create its own team of talented managers to lead the whole Organisation. (2) Complexity of management jobs: The jobs of managers are now complicated and more challenging. They need varied skills for dealing with the complex organizational problems. For this, talented persons should be selected and proper training should be given to them. (3) Technological and social changes: Rapid technological and social changes are taking place in the business world. In India, such developments are fast taking place along with the liberalization and globalisation of business. Managers should be given proper training and exposure in computer applications and information technology. (4) Management obsolescence: Executive obsolescence occurs due to mental deterioration and aging process. This can be corrected by offering self-development opportunities to managers. In fact, self-development must continue throughout the career of an executive. (5) Complexity of business management. Business management is becoming very complicated due to government legislations, market competition, social pressures and consciousness among consumers. Well-trained and matured managers are therefore required. Such managers are not available easily. The best way is to train existing managers through management development programmes. 11.6 Methods of Management Development/Managerial Development For management development, several methods/techniques are used. These methods can be divided into two broad categories, namely, (i) Internal or on the job methods, and (ii) External or off the job methods. (A) Internal Training Methods/On-the-job Methods: (1) Coaching and Counseling: Coaching: On the job coaching is a method by which a superior teaches job knowledge and skills to a subordinate manager. He briefs the trainee executive about what is expected of him and how it can be done. The superior also checks the performance of his subordinate and guides him to improve his shortfalls and deficiencies. The superior acts as a friend and guide of his subordinate. Coaching method favours learning by doing. Its effectiveness depends on the capacity and the interest taken by the superior and also by the subordinate. The superior should adopt a positive approach in the coaching process and help the subordinate in achieving self development. Coaching has certain limitations. For example, a trainee manager cannot develop much beyond the limits of his own superior's abilities. Similarly, the success of coaching method depends on the interest and initiative taken by the trainee-manger. Counselling: Under this method, the subordinate wanting advice approaches his superior. Counselling is provided in matters relating to the job. However, on request from the subordinate, counselling may also be offered on matters not directly related to the job. There is two-way dialogue between the subordinate and the superior to find solution to his problem. Counselling provides emotional stability to trainee-subordinate. (2) Understudy assignment: An understudy is a trainee-manager who is to assume the full duties and responsibilities of the position currently held by his superior, when the later leaves his post due to retirement, transfer or promotion. Here, a departmental manager (head) selects one of his suitable subordinates to become his understudy. As an alternative, the personnel department may make the selection of understudy. The departmental manager will guide him (i.e. understudy) to learn his job and deal with the problems that confront the manager daily.

The understudy will learn the job of his superior through observation and participation in the decision-making. He may be given specific problems to study and to make recommendations for solving them. The understudy will be given wider exposure and an opportunity to develop capacity to deal with difficult problems and complex situations. (3) Job Rotation: It involves transfer of executives from one job to another. The aim of job rotation is to broaden the knowledge, skills and outlook of executives. This method can be used in the case of management trainee and also in the case of an existing manager due for promotion. Job rotation method is also useful for providing variety of job experience to managers. Advantages: (1) It brings all departments on the same footing as executives move from one department to other. (2) Job rotation facilitates inter-departmental cooperation. New procedures are introduced in departments along with the rotation of managers. (3) The benefit of wider exposure is available to trainee manager. (4) There is absence of monotony in the training process due to job rotation. Limitations: (1) The work of departments is affected due to frequent changes of executives for training purpose. (2) The trainee manager finds it difficult to adjust himself to his new bosses. (3) Even the executives are not in a position to have specialized knowledge and training in one particular branch of work. (4) Frequent changes of position of executives may also affect their morale. (4) Delegation: Delegation is one more internal method of management development. The performance of subordinates may not improve unless additional responsibility and authority are delegated to them. Making the subordinates to achieve a particular target through delegation is one way by which subordinates will learn to grow and develop independently. They will develop leadership qualities and decision-making skills, which are necessary for a good manager. (5) Appointment as 'Assistant to': A junior executive may be appointed as 'Assistant to' senior executive for the purpose of training and practical experience. Here, the junior executive is given exposure to the job of senior executive and he teams new techniques while providing assistance to his boss. This broadens his viewpoint and makes him ready for future promotions. The superior executive also gets the benefit as he can delegate some of his responsibilities to the assistant and also acts as guide of his assistant. (6) Membership of Committees: Inter-departmental committees are normally created for bringing coordination in the activities of different departments. Managers from different departments are taken on such committees. Junior managers are also given membership of such committees so as to give them a broader exposure to the viewpoints of other departmental heads. Ad hoc committee of executives is also constituted and is assigned a specific problem for study. Such commitee assignments offer opportunity of training to junior executives, as they have to study the problem in depth and make recommendations. (7) Project Assignment: In the project assignment method, a trainee manager is given a project that is closely related to the work of his department. The project relates to specific problem faced by the department. Here, the executive has to study the project on his own and make recommendations for the consideration of the departmental head. Such assignment provides valuable experience to the trainee and develops problem-solving attitude, which is one essential requirement of an executive. (8) Promotions and Transfers: Promotions and transfers are two more internal methods of management development. Promotion gives an opportunity to a manager to acquire new skills required for the job at the higher level. It motivates him for self-improvement. Transfer also facilitates the broadening of viewpoint required for higher positions. It gives an opportunity to work at different positions and develop.

(B)

External Methods of Management Development/Off-The-job Methods:

(1) Universities and Colleges: The universities and colleges, now, provide facilities of management education. Here, education is given through lectures, discussions, home assignments, tests and examinations. Mumbai University has its Bajaj Institute of Management for various management development courses. Colleges affiliated to the Universities also conduct DBM, MBA and other management development programmes for the executives from business sector. Candidates working at managerial levels in companies are normally selected for such training programmes. (2) Management Institutions: Along with the universities and colleges, there are management training institutions such as NITIE, Bombay Management Association, and Productivity Councils and so on. These institutes run special training courses for graduates interested in management education and also orientation programmes for existing managers from public and private sector enterprises. Companies can depute their managers for short orientation courses and update the knowledge and information of their managers in specific areas. Even seminars, workshops and conferences are arranged for the training of managers by various associations such as chambers of commerce and export promotion councils. (3) Role-playing: Role-playing has been defined as "A method of human interaction, which involves realistic behavior in the imaginary situations." It is particularly useful for learning human relations and leadership training. Its objective is to raise the ability of trainee manager while dealing with others. In the role playing, a conflict situation is artificially created and two or more trainees are assigned different roles to play. For example, a male employee may assume the role of a female supervisor and the female supervisor may assume the role of a male employee. Then, both may be given a typical work situation and asked to respond as they expect others to do. Such role playing results in better understanding among individuals. It helps to promote interpersonal relations and attitude change. (4) Case Study: Case study method was first developed by Christopher Lang dell and Harvard Law School. A case is a written account giving certain details of the situation is relation to a specific matter. Such case study may be related to any aspect of management such as production, marketing, personnel, finance and so on. The case presented is always incomplete. This means the solution to the problem is not provided. The participants are supposed to identify the best available solution. A small group of managers is asked to study the case in the fight of theoretical study already completed and is followed by open discussion in the presence of capable instructor, who can guide intelligent discussion and analysis. There is nothing like one correct answer to the case study. Case study method has certain advantages. These are: (a) in-depth thinking about the matter by managers, (b) more perception in situation and greater respect for the opinions of others. (5) Conferences and Seminars: Deputing officers for conferences and seminars is a method available for management development. Various matters are discussed systematically in such conferences and seminars. This provides new information and knowledge to the managers. The participants in such conferences and seminars are limited. As a result, more persons get an opportunity to participate in such conferences for self-development. Conferences may be directed or guided or may be for consultation and finally for problem solving. (6) Simulation: Here, an executive/trainee is given practical training by creating situation/ environment, which closely represents the real situation at the work place. For example, activities of an Organisation may be simulated and the trainee may be asked to make a decision in support of those activities. The results of those decisions are reported back to the trainee with an explanation. The report illustrates what would have happened if that decision was taken. The trainee teams from this feedback and improves his subsequent simulation.

(7) Management/Business Games: A variety of computer and non-computer management/ business games have been devised for training of managers. This training method is used in management development. It is a type of classroom method of training. The game is designed to represent real life situation. Employees for managerial positions are put in an exercise of actual decision-making. A problem is provided to them along with all the necessary information and constraints. The employee is asked to make a decision. The quality of this decision is judged by how well the applicant has processed the information provided to him. The processing of information is supposed to be guided by knowledge of the goals and policies of the Organisation. Even if mistake is made in the game, the trainee can learn a lot out of his mistake. This avoids possible mistakes while taking decisions for his company. This method develops capacity to take rational decisions by managers. (8) TV and Video Instructions: TV and Video instructions are used for training and management development programmes. At present, programmes on management problems are arranged on TV network regularly. Videotapes are also available on management training. Books and periodicals are published regularly on management. Audio-visual aids (film strips, Video, tape recorders, TV, overhead projectors, etc.) are now used for training of managers.

QUESTION BANK
1. 2. 3. 4. 5. 6. Explain the meaning, nature and features of human resource. Explain, in brief, the steps in the selection procedure. Explain the significance scientific selection of supervisory staff. State and explain the different methods of training of managerial personnel. What are the objectives and benefits of training of managers? Write short notes on: o Recruitment and selection o Sources of recruitment o Meaning and objectives of employee training o Advantages of training of employees