NCERT SOLUTIONS FOR CLASS 12 BUSINESS STUDIES

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Last modified:2019-10-23

Chapter 1: Nature and significance of Management

Chapter 2: Principles of Management

Chapter 3: Business Environment

Chapter 4: Planning

Chapter 5: Organising

Chapter 6: Staffing

Chapter 7: Directing

Chapter 8: Controlling

Chapter 9: Financial Management

Chapter 10: Financial Market

Chapter 11: Marketing

Chapter  12: Consumer Reaction

Chapter 13: Entrepreneurship Development


 

Question : Define Management. 

Solution : Management can be defined as a process of getting the work or the task done that is required for achieving the goals of an organisation in an efficient and effective manner. Process implies the functions of the management. That is, planning, organising, staffing, directing and controlling. On the other hand, effective implies completing the given task and work, while efficient means successfully completing the task with minimum possible cost. The various functions of a management suggests that a manager first plans, then organises, puts staff in position, then directs, and finally controls. Management is important because it helps in achieving group goals, increases efficiency, creates a dynamic organisation, helps achieve personal objectives and contributes to the development of society. Management is a combination of an organised body of knowledge (science) and its skillful application (art). Although it does not satisfy all the requirements of a profession, it is to a large extent professional in character. Management is considered a three-tier activity. The top management focuses on determination of objectives and policies, middle management attempts to achieve these objectives through the effort of other managers and supervisory or operational management directly oversees the efforts of the workforce.

 

Question  : Name any two important characteristics of management.

Solution : The following are the two characteristics of management. i. Pervasive- Management is pervasive to all organizations across size, characteristics and region. That is, all organizations whether large or small, working whether for economic, social or political interest and in any region needs management. For example, a corporate firm requires management and even a non-profit organisation. Similarly, a hotel needs as much management as a hospital. In addition, management is practiced by organizations in all the countries and regions. The only difference lies in how it is practiced by different organizations in different regions based on their culture and traditions.

 

Question  : Is Management a Continuous Process ?

Solution : Management is a continuous process. That is, the various functions of management (planning, organising, directing, staffing and controlling) are performed simultaneously by the managers. However, the focus or the priority of the manager may differ from day to day. While on one day, the manger may devote more time towards planning, while on the other day more time may be spent on controlling.

 

Question : Ritu is the manager of the northern division of a large corporate house. At what level does she work in the organisation? What are the basic functions?

Solution : Ritu being the manager of the northern division of the organisation is in the middle-level management. She and other managers like her act as a link between the top management and the operational management. Her main task is to oversee the implementation of the plans and policies formulated by the top management by directing and supervising the functions of the lower

Management.

The following are her basic functions. 1. Interpreting the policies formulated by the top management. 2. To make sure that each department under her division has the required personnel and staff for carrying out the assigned work. 3. To assign the necessary duties and responsibilities to the persons working in various departments. 4. To encourage and motivate the personnel towards achieving the goals. 5. Cooperate with other departments for smooth functioning of the organisation. 

 

Question : Why is management considered a multifaceted concept? 

Solution : Management is said to be multi-faceted concept as it is a complex process involving not just one but various dimensions. There are three main dimensions of management. 

i. Managing the Work- The performance of a definite work forms the basis of an organisation. With management this work is interpreted in terms of the objectives and goals and how they are to be achieved. The task of management is to make people work towards achieving the organization’s goals, by making their strengths effective and their weaknesses irrelevant. ii. Managing the People- As the work is to be done by the people, managing people is another important dimension of management. It involves dealing with the employees both as an individual and as groups or teams. With management, their strengths are utilised and weaknesses are worked upon so as to achieve the desired objectives. 

Managing the Operations- Every organisation involves a production process where the inputs are transformed into a product or a service. This production process requires continuous management. Thus, we can say that management is a multi-dimensional process .

 

Question  : Discuss the basic features of management as a profession. Solution : The following are the basic features according to which management can be viewed as a profession. 

Systemised Knowledge- Management is based on a systemised and well-defined body of knowledge comprising of principles and theories. This knowledge can be obtained through various colleges, institutes and books.  Professional Association- As every profession, management is also affiliated with a professional association that regulates the functions of the members. For example, in India the AIMA (All India Management Association) regulates the functioning of its member managers. However, there is no compulsion for every manager to be a member of the association. 

Restriction to Entry- Although no specific qualifications or degrees are required to be a manger, however, professional knowledge in terms of management degrees and diplomas are preferred. To some extent, this restricts the entry of people in management as a profession. 

Code of Conduct- Every profession follows a particular code of conduct that acts as a guiding principle for the ethical behavior of its members. Through good management, the production takes place in an effective and efficient manner and quality goods and services are provided to the society at a fair price.

 

Long type Questions 

Question  : Management is considered to be both an art and a science. Explain. 

Solution : Management fulfills the criteria of both an art as well as a science. The following points explain the features of management as an art and as a science. 

Management as an Art Art is the skillful and personal application of existing knowledge to achieve desired results. It can be acquired through study, observation and experience. Since art is concerned with personal application of knowledge some kind of ingenuity and creativity is required to practice the basic principles learnt. Management satisfies the following criteria for it to be called an art. 

Existence of Theoretical Knowledge: Art presupposes the existence of certain theoretical knowledge. Experts in their respective areas have derived certain basic principles which are applicable to a particular form of art. Various theories and principles have been developed in management. Such as Henry Fayol's Principles of Management, Taylor's Scientific Management Theory. 

Personalised Application: Art is the personalised concept. That is, each individual uses the basic knowledge in his own creative way. For example, every dance form has some basic steps. These steps are used by each dancer using his own creative manner. In a similar manner, managers use available theories and principles as per the situation in their own unique manner. That is, the managers use their own creativity and imagination for the application of the knowledge of management. 

iii. Based on Practice and Creativity: Art involves practice and innovation. The artists use the existing literature as per his own creativity and innovation. For example, two writers can describe a given situation based on their unique interpretations. Similarly, in management, a manager applies the theories and principles of management to different situations as per his own creativity and imagination and sometimes even formulates new ways to address a situation. Management as a Science is a systematized body of knowledge that explains certain general truths or the operation of general laws. As a science, management fulfills the following criteria. 

 

i. Systematic Body of Knowledge: Science has a specified body of knowledge which is based on cause and effect relationship. Similarly, management has its own body of theories and principles that are developed over the years. For example, all of us discuss sports like cricket and soccer using a common vocabulary. The players also use these terms to communicate with each other. Similarly managers need to communicate with one another with the help of a common vocabulary for a better understanding of their work situation. 

Principles Based on Experimentation: In science the principles and theories are based on continuous observation and experimentation. In the same manner, the principles of management have also been developed over several years based on repeated observations and experiments. However, as against science, in management no exact cause and effect relationship can be established. This is because management primarily deals with humans and human behavior. As human behavior is subject to change, so, the outcome of these theories would also vary from one situation to another. Despite this, management fulfils this criterion of science to some extent as the scholars have been able to identify certain theories and principles that act as guidelines in management. 

Universal Validity: In science, the principles have universal validity. In management also the theories and principles are valid to some extent if not universal. Although the application of the theories and their outcomes vary from situation to situation, however they act as standards for actions in different situations. That is, these principles can be used for the basic training of the managers.

 

Question  : The following is not an objective of management:

a. earning profits

b. growth of the organisation

c. providing employment

d. policy making

Solution : Policy making is not an objective of management. It is in fact a process that involves the setting up of goals and objectives for the organisation and determining the ways to achieve the desired goals. That is, it can be said that policy making is the path through which the objectives of a management i.e. organisational objectives (such as earning profits and growth of the organisation), social objectives (such as providing employment) and personal objectives can be achieved.

 

Question  : Policy formulation is the function of a. top level managers b. middle level managers c. operational management d. all of the above

Solution : Policy formulation is the function of the top level managers. They are the ones responsible for developing the policies and goals for the organization. On the other hand, middle level managers interpret these policies in terms of plans and objectives and works towards implementing them with the help of the operational management. The operational management as per the instructions of the middle management directly oversees the actual work process.

 

Question  : Coordination is a. function of management b. the essence of management c. an objective of management d. none of the above 

Solution : Coordination is the essence of management. It is neither a function nor an objective of an organisation. Rather, it is intrinsic in all the operations and functions of the management. It is a process through which the activities of various departments and units are synchronized towards the achievement of the common goals of the organisation. It is only through coordination among the different functions of management that the desired goals can be achieved.

 

Chapter 2 : Principle of Management

Question  : Principles of management are NOT (a) Universal (b) Flexible (c) Absolute (d) Behavioural 

Solution: Management principles are relative rather than absolute. Therefore, these should be applied according to the needs of the organisation and demands of the situation. According to Fayol, "principles of management are flexible, not absolute but must be utilized in the light of changing and special conditions. There is nothing rigid or absolute in management affairs, it is all a question of proportion therefore, principles are flexible and capable of adaption to every need. It is a matter of knowing how to make use of them, which is a difficult art requiring intelligence, experience and proportion". Seldom does one have to apply the same principles twice in identical situations; allowance must be made for different changing conditions. Management principles should not be applied blindly in the same way to all problems.

 

Question  : How are principles of management formed? (a) In a laboratory (b) By experiences of managers (c) By experiences of customers (d) By propagation of social scientists

Solution: The principles of management are formed by experience and collective wisdom of managers as well as experimentation. For example, it is a matter of common experience that discipline is indispensable for accomplishing any purpose. This principle finds mention in management theory. On the other hand, in order to remedy the problem of fatigue of workers in the factory, an experiment may be conducted to see the effect of improvement of physical conditions to reduce stress.

 

Question  : The principles of management are significant because of (a) Increase in efficiency (b) Initiative (c) Optimum utilisation of resources (d) Adaptation to changing technology 

Solution : Resources both human and material available with the company are limited. They have to be put to optimum use. By optimum use we mean that the resources should be put to use in such a manner that they should give maximum benefit with minimum cost. Principles equip the managers to foresee the cause and effect relationships of their decisions and actions. As such the wastages associated with a trial-and-error approach can be overcomed. Effective administration necessitates impersonalisation of managerial conduct so that managerial power is used with due discretion. Principles of management limit the boundary of managerial discretion so that their decisions may be free from personal prejudices and biases. Thus, principles of management are significant because of optimum utilisation of resources. Increase in efficiency, initiative and adaptation to changing technology arrives at later stages, ones the resources are fully utilised.

 

Question  : Henry Fayol was a (a) Social Scientist (b) Mining Engineer (c) Accountant (d) Production engineer 

Solution : Henry Fayol : 1. Lifetime: 1841 TO 1925 2. Profession: Mining Engineer and Management Theorist (French national) 3. Education: Graduated from Mining Academy at St. Etienne. in 1880. 4. Positions Held: Founded the mining company 'Compagnie de Commentry Fourchambault-Decazeville’ and became its Managing Director in 1888 and remained until 1918. 5. Writings: Administration industrielle et générale. It was published in English as General and Industrial Management in 1949 and is widely considered a foundational work.

 

Question  : Which of the following statement best describes the principle of 'Division of Work' (a) Work should be divided into small tasks (b) Labour should be divided (c) Resources should be divided among jobs (d) It leads to specialisation 

Solution : According to the principle of 'Division of Work', the work should be divided into small jobs. According to Fayol, “The intent of division of work is to produce more and better work for the same effort. Specialisation is the most efficient way to use human effort.” In business, work can be performed more efficiently if it is divided into specialised tasks; each performed by a specialist or trained employees. This results in efficient and effective output. Thus, in a company we have separate departments for finance, marketing, production and human resource development, etc.. Fayol applies this principle of division of work to all kinds of work – technical as well as managerial. 

 

Question  : 'She/he keeps machines, materials, tools, etc., ready for operations by concerned workers'. Whose work is described by this sentence under functional foremanship (a) Instruction Card Clerk (b) Repair Boss (c) Gang Boss (d) Route Clerk 

Solution : The work of Gang Boss is being described in the given sentence. Gang boss is assigned the task of keeping the machines and tools ready for operations. That is, he has to take care of the materials which are to be used by the working people. On the other hand, repair boss ensures that these machines are in proper working condition. Route clerk is there to watch over the route of production and instruction card clerk assigns the duties of the workers.

 

Question  : Which of the following is NOT a Principle of management given by Taylor? (a) Science, not rule of Thumb (b) Functional Foremanship (c) Maximum not restricted output (d) Harmony not discord

Answer: Among the options given above, Functional Foremanship is not a principle of management rather it is a technique of scientific management as given by Taylor. It comprises of the methods or steps to be taken to achieve a desired goal. On the other hand, the other three are principles of management that acts as guidelines for decision making in the actual practice of the techniques.

 

Question : Management should find 'One best way' to perform a task. Which technique of Scientific management is defined in this sentence? (a) Time Study (b) Motion Study (c) Fatigue Study (d) Method Study

Solution : The technique that is being described in the given sentence is 'Method Study'. According to the Factory Manager Planning incharge Instruction card clerk Route Clerk Time and Cost clerk Production Incharge Speed Boss Gang Boss Repair Boss and Inspector . 'Method Study' is always a 'one best way' to complete any task. Every task can be performed via best method to gain efficiency. The basic purpose of this study is to reduce the costs to its minimal and increase the productivity to its maximum. Time study, Motion study and Fatigue study aims at standardising the time limits, eliminating the unwanted actions and deciding the break limits, respectively.

 

Question  : Which of the following statements best describes 'Mental Revolution'? (a) It implies change of attitude (b) The management and workers should not play the game of one upmanship. (c) Both management and workers require each other. (d) Workers should be paid more wages.

Solution : 'Mental Revolution', a term given by Taylor implied that the management and workers should change their attitude and thinking towards harmony. Management should take care of the needs and suggestions given by the workers and workers on the other hand, should work to their best capability. This will build a harmonious working environment in the organisation.

 

Question  : Which of the following statements is FALSE about Taylor and Fayol? (a) Fayol was a mining engineer whereas Taylor was a mechanical engineer (b) Fayol's principles are applicable in specialised situations whereas Taylor's principles have universal application. (c) Fayol's principles were formed through personal experience whereas Taylor's principles were formed through experimentation. (d) Fayol's principles are applicable at the top level of management whereas Taylor's principles are applicable at the shop floor.

Solution : The false statement is 'Fayol's principles are applicable in specialised situations whereas Taylor's principles have universal application'. The correct statement in place of this is, ' Fayol's principles are universally applicable whereas Taylor's principles are applicable only in specialised situation.' 

 

Question  : How is the principle of 'Unity of Command' useful to management? Explain briefly. 

Solution : According to Fayol there should be one and only boss for every individual employee. If an employee gets orders from two superiors at the same time the principle of unity of command is violated. The principle of unity of command states that each participant in a formal organisation should receive orders from and be responsible to only one superior. Fayol gave a lot of importance to this principle. He felt that if this principle is violated “authority is undermined, discipline is in jeopardy, order disturbed and stability threatened”. The principle resembles military organisation. Dual subordination should be avoided. This is to prevent confusion regarding tasks to be done. Suppose a salesperson is asked to clinch a deal with a buyer and is allowed to give 10% discount by the marketing manager. But finance department tells her/him not to offer more than 5% discount. Now there is no unity of command. This can be avoided if there is coordination between various departments.

 

Question  : Define Scientific Management. State any three of its principles.
Solution : The term 'Scientific management' was developed by Frederick Taylor (1856-1915) in 1911. It refers to the classical outlook of management which focussed on devising the best ways of doing the work and thereby increasing the effectiveness and efficiency of work. Scientific management implies working according to standardised techniques and tools and with the help of specialised personnel so as to improve the quantity as well as the quality of the product and at the same time reducing the costs. Scientific management is also known as Taylorism.

The Following are three principles of scientific management. i. Harmony, Not Discord: According to this principle, the managers and the workers should maintain a harmonious work environment. They should realise that they are dependent on each other. Only if they work in amity, will they be able to perform better. Taylor emphasised on complete mental revolution. That is, the workers should change their attitude and each one should realise other’s importance. Management should take care of the needs of the workers and workers on the other hand should work to their best efficiency. Both should work in harmony towards the common goals of the organisation. ii. Science, Not Rule of Thumb: According to Taylor, instead of rule of thumb scientific management practices should be followed. Under the rule of thumb, each manager handles a situation as and when they arise. They used the trial and error method to find solutions to a problem. Taylor proposed that instead of this, management practice should be scientific. He suggested that a study of various traditional methods should be done and the best method/solution among them should be adopted and followed by all the managers in the organisation. Such a scientific management greatly reduces the costs and improves efficiency. iii. Personnel Development: Overall efficiency of the organisation depends on the individual competencies of the employees. Scientific management aimed at improving the working capabilities of the employees to their maximum level. It focused on the training and development of the labourers to raise their productivity.

 

Question  : If an organisation does not provide the right place for physical and human resources in an organisation, which principle is violated? What are the consequences of it? 

Solution : In the stated situation, the Principle of Order is violated. As per the Principle of Order, there should be right arrangement of things. The principle of order states that ‘A place for everything (everyone) and everything (everyone) in its (her/his) place’. Essentially it means orderliness. If there is a fixed place for everything and it is present there, then there will be no hindrance in the activities of business/ factory. This will lead to increased productivity and efficiency. If this principle is violated, then it leads to chaos and delay in work. For instance, if the files are not kept in a certain order, then it will lead to difficulty in locating a file when required. 

 

Question : Explain any four points regarding significance of Principles of Management.

Solution: Principles of management play an important role in managerial practices. They guide the managers in taking actions and decisions. The following points highlight the significance of Principles of Management 1. Providing Managers with useful insights into Reality: Principles of Management are based on years of experimentation and experience. Thus, these principles guide the managers, when they face the real-world problems. Managers can use them in different situations to solve the recurring problems. 2. Scientific Decisions: Decisions regarding management should be taken carefully. They should be based on reasons and proofs rather than beliefs and ignorance. As principles of management were developed from real life problems so, they stand the test of logic and reasoning. Thus, principles of management help the managers in taking logical decisions that are free from personal bias. 3. Management Training, Education and Research: These principles form the basic roots of management education. Without them management as a discipline could not have been developed. That is, they form an important part of management curriculum. In addition, they also form the basis of further research on management techniques and methods. 4. Optimal use of Resources: Principles of management help in the optimum utilisation of the available resources. With principles of management the exact cause and effect relationship of the decisions of the managers can be predicted. Thereby, the wastages of resources that may be associated with the hit and trial method can be avoided. Thus, by following the principles of management, best possible usage of resources becomes possible such that maximum benefit can be derived with minimum possible cost.

 

Question  : Explain the principle of 'Scalar Chain' and gang plank. Solution : An organisation consists of superiors and subordinates. The formal lines of authority from highest to lowest ranks are known as scalar chain. According to Fayol, “Organisations should have a chain of authority and communication that runs from top to bottom and should be followed by managers and subordinates.” Scalar Chain refers to a pre-defined, formal path of authority and communication in the order of highest to the lowest. 

For example- if A is the CEO of an organisation and he has two paths of authorities under him. One, A-B-C and the other A-D-E. Everybody in the organisation follows this chain of authority for communication. For example, If C wants to contact with E then he will have to follow this formal path, as C → B → A → D → E. That is, C has to first contact the higher authorities (C → B → A) over him who then transverse the communication to E (A → D → E). However, in case of emergency C may directly contact E through 'Gang Plank'. Gangplank is a shorter emergency route through which the workers lower in the authority chain can directly contact the persons of higher authority or those working in other scalar chains. In practice, you find that a worker cannot directly contact the CEO of the company, if at all she/he has to. 

 

Chapter 3: Business Environment

Question : Which of the following does not characterise the business environment?

(a) Uncertainty

(b) Employees

(c) Relativity

(d) Complexity

 

Among the options given above, employees do not characterize business environment. Business environment refers to the external forces such as individuals, enterprises, situations, and other such forces that affect the performance of the organisation. For example, changes in government’s economic policies, rapid technological developments, political uncertainty, changes in fashions and tastes of consumers and increased competition in the market — all influence the working of a business enterprise in important ways. Employees are integral to an organisation and does not characterise its environment. 

 

Question  : Which of the following best indicates the importance of the business environment? (a) Identification (b) Improvement in performance (c) Coping with rapid changes (d) All of them

Solution : All the options given above indicate the importance of business environment. A good understanding of the environment by business managers enables them not only to identify and evaluate, but also to react to the forces external to their firms. The importance of business environment and its understanding by managers can be appreciated if we consider the following facts: • It enables the firm to identify opportunities and getting the first mover advantage • It helps the firm to identify threats and early warning signals • It helps in tapping useful resources. It helps in coping with rapid changes • It helps in assisting in planning and policy formulation • It helps in improving performance Study of business environment helps in identifying the positive changes as well as threats or hindrances that affects the performance of an organisation. Thereby, it helps them in taking appropriate measures for improving the performance. In addition, a careful study of the continuously changing environment helps the organisation in coping with it in a better manner.

 

Question  : Which of the following is an example of social environment? (a) Money supply in the economy (b) Consumer Protection Act (c) The constitution of the country (d) Composition of family

Elements of Business Environment:

 

Social environment refers to the social forces such as customs, traditions, social values, social trend etc. that affect the business opportunities and performance. Among the options given in the question, composition of family represents an example of social environment. For example, the health-and fitness trend has become popular among large number of urban dwellers. This has created a demand for products like organic food, diet soft drinks, gyms, bottled (mineral) water and food supplements. This trend has, however, harmed business in other industries like dairy processing, tobacco and liquor.

 

Question  : Liberalisation means

(a) Integration among the economies

(b) Reduced government controls and restrictions

(c) Policy of planned disinvestment

(d) None of them

Solution : Liberalisation means reduced government controls and restrictions such as licenses and quotas. Liberalisation of the Indian industry has taken place with respect to: (i) abolishing licensing requirement in most industries except a short list, (ii) freedom in deciding the scale of business activities i.e., no restrictions on expansion or contraction of business activities, (iii) removal of restrictions on the movement of goods and services, (iv) freedom in fixing the prices of goods and services, (v) reduction in tax rates and lifting of unnecessary controls over the economy, (vi) simplifying procedures for imports and exports, and (vii) making it easier to attract foreign capital and technology to India.

 

Question : Which of the following does not explain the impact of Government policy changes on business and industry?

(a) More demanding customers

(b) Increasing competition

(c) Change in agricultural prices

(d) Market orientation

Solution : Among the options given above, change in agriculture prices does not explain the impact of government policy changes on business and industry. Government policy changes such as liberalisation, privatisation and globalisation affect the working of business organisations. More demanding customers, increasing competition and market orientation all explain the impact of such policy changes. On the other hand, change in agricultural prices is independent of the government policy changes and takes place due to change in the demand and supply of agricultural products.

 

Short answers questions

Question : What do you understand by business environment?

Answer: Business environment refers to all the external forces that affect the performance of a business organisation. Such forces can be economic, social, political, technological or legal. Thus, individuals, consumers, government, legal matters all compose business environment. For example, change in taste and preferences of the consumers, change in government policies, change in political scenario, change in legal policies, all make up business environment. An organisation cannot control such forces but they affect its performance either positively or adversely. For example, a change in consumer's tastes in favour of a firm’s product, increases demand for its product. Similarly, the introduction of a new technology leaves the technology used by the firm obsolete and its products comparatively inferior. Thus, it can be said that everything that is outside the purview of an organisation but affects its performance composes business environment. Business environment, has the following features: • Business Environment is sum total of external forces • Business Environment includes Specific and general forces which directly or indirectly impact the firm • Different elements or parts of business environment are closely interrelated. • Business environment is dynamic in that it keeps on changing. • Business environment is largely uncertain as it is very difficult to predict future happenings. • Business environment is a complex phenomenon that is relatively easier to understand in parts but difficult to grasp in its totality. • Business environment is a relative concept since it differs from country to country and even region to region.

 

Question : Why it is important for business enterprises to understand their environment? Explain briefly. 

Solution: Understanding of business environment is of vital importance for successful functioning of an organisation. Any organisation cannot function independently. It's functioning and performance depends on several external forces as well. A continuous evaluation and understanding of the business environment helps a firm to take account of these forces in a better manner and thereby, improve its functioning. The following points highlight the importance of understanding of environment for business enterprises.

i) Identification of Opportunities and getting the first mover advantage: Opportunities refer to the positive external trends or changes that will help a firm to improve its performance. Environment provides numerous opportunities for business success. Early identification of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors.

Identification of Threats and early warning signals: Threats refer to the external environment trends and changes that will hinder a firm’s performance. Besides positive opportunities, a study of business environment helps an enterprise in the identification of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors threats or negative signals that may adversely affect its functioning. Thereby, it enables it to take appropriate preventive measures. 

Accumulating Useful Resources: Environment provides a business various resources or inputs for its functioning such as raw material, machinery, labour, etc. On the other hand, enterprises provide the environment with output in the form of goods and services. That is, environment acts both as a source of resources as well as a source of demand for the products of the enterprises. Thus, it becomes logical for the enterprises to take up those resources from the environment that can be converted into the desired output. This is possible only if the enterprises have an understanding of what the environment desires and what it can offer. iv. Adjusting to Changes: Business environment is dynamic in nature. Changes in technology, consumers taste and preferences, government policies take place continuously. A careful analysis and understanding of the environment helps an enterprise in dealing with these changes in a better manner and thereby, take appropriate actions.

iv. Adjusting to Changes: Business environment is dynamic in nature. Changes in technology, consumers taste and preferences, government policies take place continuously. A careful analysis and understanding of the environment helps an enterprise in dealing with these changes in a better manner and thereby, take appropriate actions. 

v. Formulating Plans and Policies: A continuous study of environment helps an organisation in the identification of the opportunities and threats. Thereby, it guides the organisation in framing suitable plans and policies in view of the current scenario. 

vi. Improving Performance: A continuous analysis of the environment helps the enterprises in framing suitable policies and plans and thereby, improves their performance.

 

Question : Mention the various dimensions of business environment.

Solution : The following are the dimensions of business environment.

Economic Environment: It comprises of the economic variables such as interest rates, income, stock market indices that affect the functioning of the enterprises. For example, an increase in income affects the demand for goods and services of the enterprises. 

Social Environment: Social environment refers to the social forces such as customs, traditions, social values, social trends etc. For example, religious celebrations provide business opportunities to many enterprises such as those producing sweets, decoration items, etc. 

Technological Environment: Technological environment includes technological changes and improvements. For example, the introduction of computers, internet, new telecommunication.

Legal Environment: It refers to the legislation and rules passed by the government such as the Companies Act, Trade Union Act, etc. Knowledge of these legislation is essential for enterprises as their non-compliance can lead to legal trouble for them. For example, an export import company in India has to follow the rules and regulations as stated under the EXIM policy and the Foreign Trade (Development and Regulation) Act, 1992. Similarly, the refining, processing, distribution, sale of petroleum, petroleum products is governed by the Petroleum and Natural Gas Regulatory Board Act, 2006. Political Environment: Political environment comprises of political conditions such as peace and stability, law and order, etc. For example, a situation of political unrest such as frequent change in the ruling government implies a change in the rules and policies of the government regarding production and manufacturing. Such a frequent change in the regulations regarding production discourages investment. Similarly, the opening up of our economy under the New Economic Policy in 1991, provided business opportunity to many foreign companies.

 

Question : What economic changes were initiated by the government under the Industrial Policy, 1991? What impact have these changes made on the business and industry?

Solution: Government of India introduced the Industrial Policy, in July1991. Major highlights of the policy are as follows. (i) Abolition of Licensing- Under the new industrial policy 1991, compulsory licensing system was abolished. In other words, with the industrial reforms the private players were free to start a new venture without the need to obtain a license. However, the system of licensing was retained in six industries namely, liquor, cigarette, defence equipment, dangerous chemicals, industrial explosives, and drugs and pharmaceuticals. (ii) Dereservation- The number of industries exclusively reserved for the public sector was considerably reduced. The private sector was allowed operation in majority of the industries with only 3 industries under the exclusive purview of the government namely, railways, atomic mineral and atomic energy.

Augmentation of Production Capacity-Prior to the policy, industries had to obtain permission from the government in order to expand the scale of production. With liberalisation policy the MRTP companies (companies having assets worth more than Rs 100 crore) were free to expand the scale of their business according to the market conditions. (iv)Freedom in Importing Capital Goods- Under the policy, industrialists were permitted to import capital goods from the foreign countries.100 percent FDI was allowed in the foreign capital (v) Reforms in the Small Scale Industries - In India, small scale industries are defined on the basis of maximum investment that is allowed in the unit. With the commencement of reforms the maximum limit has been increased from Rs 5 lakh to Rs 1 crore. This encouraged development and modernisation of the industries. Further, the number of products reserved for the small scale industries was reduced. (vi) Disinvestment- The process of disinvestment was carried out for many public sector enterprises. That is, an increasing share of the assets of the public industrial enterprises was sold to the private sector. (vii) Foreign Investment Promotion Board - This board was set up to encourage and channelise foreign investment in India. The impact of these changes on the business and industry is highlighted in the following points. (a) Increased Competition: As a result of the policies such as abolition of the licensing policy, dereservation the competition faced by the domestic companies has increased. India companies experienced competition in service industry such as telecommunication, banking, insurance, etc. (b) Increased Demand: With increased competition the choice of goods and services for consumers has also increased. Thus, consumers also gain from quality products and greater variety. (c) Change in Business Policies: The government policies under new industrial policy directly affected the functioning of the business enterprises. As a result, they altered their policies and operations appropriately. (d) Technological Changes: With the increase in competition, firms tend to find new and innovative ways to survive in the market. They increasingly adopt new technology and engage in further research and development. (e) Need for Trained Personnel: Due to innovations and improvement in product, application of improved technologies, the demand for skilled, trained and competent personnel has increased. Thus, there arises a need for the development of human resources. (f) Greater Market Orientation: With increased competition, it has become imperative for enterprises to change the production as per the market demand. That is, the production has become market oriented. (g) Less Reliance on Budgetary Support by Public Sector Enterprises: To survive the increased competition, the public-sector enterprises have realised the need for improving the efficiency and productivity. They have reduced their reliance on budgetary support to cover their losses.

 

Question : What are the essential features of i. Liberalisation ii. Privatisation

iii. Globalisation 

Solution: Liberalisation: Liberalisation refers to the removal of unnecessary controls and restrictions of the government in the form of licenses, permits and quotas. India initiated liberalisation of industries in 1991. Liberalisation of industries in India took the following form. (i) Abolition of licenses: License required for the establishment of industries were abolished. The system of licensing was retained only for six industries namely, liquor, cigarette, defence equipment, dangerous chemicals, industrial explosives, and drugs and pharmaceuticals (ii) Augmentation of Production: Enterprises became free in deciding the scale and size of production and the price of the products. The MRTP companies (companies having assets worth more than Rs 100 crore) were free to expand the scale of their business according to the market conditions (iii) Removal of Trade Restrictions: Various restrictions regarding trade such as quantitative restrictions, customs, duties, tariff, etc. were removed to ease the movement of goods and services (iv) Encouragement to Foreign Direct Investment (FDI): Emphasis was laid to encourage competition in the market and to attract Foreign Direct Investment (FDI) from other countries. Privatisation: Privatisation refers to the gradual transfer of ownership or management of state owned enterprises from the public sector to the private sector enterprises. It implies assigning a greater role to the private sector undertakings. In India, privatisation was followed in the following manner. (i) Disinvestment: For disinvestment, the government adopted two methods. First, selling off a part of the equity of the PSU's and second, strategic sale of PSUs. Under privatisation, a large portion of the equity of the PSU's was sold to the private sector. Also, strategic sale of a number of companies such as Modern Foods India, Bharat Aluminum Company (BALCO), Maruti Udyog Ltd., etc. was undertaken. (ii) Establishing Board of Industrial and Financial Reconstruction: This board was established for the revival of the sick and loss-making enterprises. (iii) Reducing the Role of Public Sector: Under privatisation, the number of industries that were exclusively reserved for the public sector was reduced considerably from 17 to 8. At present, only 3 industries are exclusively reserved for the public sector namely, railways, atomic mineral and atomic energy. (iv) Navratna Policy: To improve efficiency, infuse professionalism and to enable PSUs to compete effectively in the market, government awarded the status of 'Navaratnas' to nine high performing PSUs.

Globalisation: Globalisation refers to the process of integration of various economies of the world. It is the process associated with increasing openness, growing economic independence and promoting economic integration in the world economy. In India, the following policies were followed with regard to globalisation. (i) Removal on Trade Restriction: Various barriers on trade such as tariffs, customs, quotas, etc.,were reduced considerably. (ii) Reducing the Export Duty and Import Duty: Various duties and taxes on imports and exports were removed to promote free trade. (iii) Encouragement to Foreign Capital Investment: With the aim of encouraging foreign capital investment various steps were taken such as increasing the equity limit of foreign capital, setting up of special economic zones, introduction of Foreign Exchange Management Act (FEMA).

 

Chapter 4: Planning 

Question : What are the main points in the definition of planning? 

Solution: Planning is a psychological process of 'thinking and deciding in advance' about 'what is to be done' and 'how it is to be done'. Thus, planning is closely connected with creativity and innovation. It is a mental activity, in which the manager decides about the goals to be achieved, and actions through which they are to be accomplished. It is futuristic in nature as it involves looking ahead, along with analysing and predicting the future. Planning can be defined as a process of setting up of goals and objectives for a given period of time, formulating alternatives for the course of action to be taken, and finally deciding an appropriate action from the various alternatives. The following are the main points in the definition of planning.

 

Question : How does planning provide direction?

 Solution: By stating in advance how work is to be done planning provides direction for action. Planning ensures that the goals or objectives are clearly stated so that they act as a guide for deciding what action should be taken and in which direction. If goals are well defined, employees are aware of what the organisation has to do and what they must do to achieve those goals. Departments and individuals in the organisation are able to work in coordination. 

 

Question : Do you think planning can work in a changing environment?

Solution: No, planning may not work right in a changing environment. Business environment is dynamic in nature and changes continuously. For example, political conditions, social conditions, consumer tastes and preferences, government rules and regulations change continuously. Planning cannot foresee such changes and thus, there may be obstacles to effective planning. For example, suppose a garment manufacturing company plans to increase the production of silk shirts. But over a period of time, the market demand shifts towards cotton shirts. Thus, in this case the previous plans of the company fail and it must modify its plans to cater to the change in demand. Similarly, if the government announces a reduction in the interest rates for consumer durables, the demand for such products increases. The plans of an organisation may not foresee such changes and may prove ineffective. The production and sales plan of the organisation must change as per the changing market demand. Likewise, with an entry of a competitor in the market a company needs to alter the previous plans so as to face the competition in a better manner.

 

Question : If planning involves working out details for the future, why does it not ensure success?

 Solution: It is true that planning is a forward-looking function and is based on analysing and predicting the future elements. However, future involves uncertainty and cannot be predicted. There are various external forces that affect the functioning of an organisation. These forces are complex and ever changing in nature. For example, social trends, political conditions, technology, government rules and regulations change continuously. Due to such uncertainties, one cannot be sure of the success rate of the plans rather, the plans need to be modified to adapt to the changing environment. For example, suppose due to entry of a competitor, the demand for the products of a company reduces. While planning out production the company could not foresee such a change. Thus, the previous plans of the company fail and it must formulate new plans keeping in view the change in demand. Similarly, suppose the government announces a relaxation in the rules for foreign investment, as a result of which competition in the market increases. The sales and manufacturing plans of the domestic companies might fail in the face of the increased competition. Thus, it can be said that despite the fact that planning involves working out details for the future, it does not ensure success.

 

Question : Why are rules considered to be plans? 

Solution : Rules refer to standard or specific statements that inform about what is to be done. 'Rules' are considered to be 'Plans' because both are very similar in nature. Rules are considered to be the simplest of plans. Planning aims at thinking and deciding about the futuristic course of action. Similarly, rules are statements that help in deciding if an action is to be taken or not. However, rules are rigid in nature and are to be followed as it is unless a change is stated. Non-compliance of the rules leads to disciplinary actions by the organisation. It reflects a managerial decision.

 

Question : What kind of strategic decisions are taken by business organisations?

Solution : Strategy refers to a broad outline for the business of an organisation. It has three broad objectives- to determine the objectives, to decide the course of action, and appropriate allocation of objectives for the achievement of the objectives. Whenever a strategy is formulated, the business environment needs to be taken into consideration. The changes in the economic, political, social, legal and technological environment will affect an organisation’s strategy. Strategies usually take the course of forming the organisation’s identity in the business environment. Following are a few strategic decisions which a business organisation may take: i. Deciding about which line of business should be taken. ii. Whether a new line of production should be adopted or not. iii.What position should the company aim for in the existing market. iv.What kind of pricing policy should be used. v. Decisions regarding the advertising policy and costs.

 

Long Type questions :

Question : Why is it that organisations are not always able to accomplish all their objectives? 

Solution : For the attainment of the desired objectives, organisations make plans. Planning is an essential activity for any organisation and sets the basis for its functioning. However, sometimes, things do not go as per the plan. Unforeseen changes in the business environment often dampen the plans of the organisation. Moreover, the process of planning has its own limitations that hinder the accomplishment of all the objectives of an organisation. Following are some of the limitations of planning which may result in the abandoning of the organisational objectives.

  1. Rigidness: In an organisation, a well-defined plan is drawn up with specific goals to be achieved within a specific time frame. These plans then decide the future course of action and managers may not be in a position to change it. This kind of rigidity in plans may create difficulty. Managers need to be given some flexibility to be able to cope with the changed circumstances. Following a pre-decided plan, when circumstances have changed, may not turn out to be in the organisation's interest.

2. Cannot Deal With Dynamic Environment: Business environment is dynamic and thereby, very uncertain. The environment consists of a number of dimensions, economic, political, physical, legal and social dimensions. The organisation has to constantly adapt itself to changes. However, planning cannot foresee such changes and fails at times of changes and uncertainties. This may lead to failure in the accomplishment of objectives. An organisation must adapt its functioning to the changing environment.

3.Huge Costs: Formulation of plans involves huge costs in terms of time and money. As planning is based on future predictions, it requires a lot of thinking and analysing. It involves scientific calculations along with the figures and the facts, which are to be used in formulating the course of action. This involves high costs. Moreover, sometimes it might also happen that the benefits derived from planning fall short of the costs incurred.

 4. Does not Guarantee success: Good planning does not mean a guarantee to success. Often the managers tend to rely on pretested plans that have worked well in the past. However, it is not always true that if a plan had worked well in the past, it will also be successful in the future. Many unforeseen changes may crop up that may fail the plan. Sometimes managers think that planning can prevent the problems from occurring, however, they neglect the fact that planning just provides a base for predicting the future. It does not give straight away solutions to the problems. 

5. Time Consuming: Formulating plans is a very time-consuming task, as it involves looking forward in unforeseen situations. It involves a lot of research and evaluation. This increases the time consumed by the managers and the actual actions may get delayed. 

6. Reduces Creativity: Planning is an activity which is done by the top management. Usually the rest of the members just implements these plans. As a consequence, middle management and other decision makers are neither allowed to deviate from plans nor are they permitted to act on their own. Thus, much of the initiative or creativity inherent in them also gets lost or reduced. Most of the time, employees do not even attempt to formulate plans. They only carry out orders. Thus, planning in a way reduces creativity since people tend to think along the same lines as others. There is nothing new or innovative.
 

Question : What are the main features to be considered by the management while planning?

 Solution : Planning states in advance where to go and in which direction to move ahead. It is a continuous process that helps in reducing the risk of uncertainty. Planning is an essential activity that provides the rationale for undertaking policies in the direction of achieving goals. Following are the highlighted features which a manager needs to consider while planning. 1.Focus on Objectives: Planning serves the basis for guidelines for what goals are to be achieved and how they are to be achieved. Any management should formulate plans keeping in view the specific goals in mind. These plans must ensure that the desired objective is attained. The managers must make sure that the plans made are purposeful. For example, if sales target is to be achieved then the plans must be made in sync with this objective. 

2. Planning is a primary function of management: Planning lays down the base for other functions of management. All other managerial functions are performed within the framework of the plans drawn. Thus, planning precedes other functions. This is also referred to as the primacy of planning. The various functions of management are interrelated and equally important. However, planning provides the basis of all other functions. 

3.Pervasiveness: Planning must be done at all levels of the organisation. It is not a function of just the top-level managers but, is a function to be performed at every level of management. However, its scope differs along the various dimensions of business. For example, the top-level

managers have to chalk out the policies regarding the overall management whereas, the middle level managers plan out the authority to be assigned to the subordinates. On the other hand, the lower level managers make out small targets for day-to-day working. 

4.Continuity: Planning should be done continuously. This is because after the completion of one plan period, need arises for formulation of another plan, keeping in views the new objectives and circumstances. Moreover, within a plan period need arises to modify the plans as per the changing needs and requirements. Thus, planning does not have an end. It is a continuous process all along the life of a business enterprise. 

5.Decision Making: Planning is a process of making choices amongst the different alternatives for the attainment of the desired objectives. These alternatives are based on the path to be taken, strategies or policies to achieve the goals, etc. Managers need to evaluate these choices thoroughly and then select the most rational scheme to achieve the set objectives. 

6. Futuristic: Planning must be futuristic in nature. That is, it must be able to foresee and analyse the future. Planning should be done so as to prepare the organisation to deal with the future events. Managers must be able to anticipate the probable situations and plan so as to cope with them in a better manner.

 7. Planning is a mental exercise: Planning requires application of the mind involving foresight, intelligent imagination and sound judgement. It is basically an intellectual activity of thinking rather than doing, because planning determines the action to be taken. However, planning requires logical and systematic thinking rather than guesswork or wishful thinking. In other words, thinking for planning must be orderly and based on the analysis of facts and forecasts.

 

Question : Is planning actually worth the huge costs involved? Explain.

Solution : Planning involves huge costs in terms of time and money. It involves analysis, research and scientific calculations that involve huge cost. However, despite being an expensive function it is a very basic and essential function of an organisation. Following are some of the highlighted factors due to which we can say that planning is a very significant action despite of the gigantic costs. (i) Renders Direction: Planning clearly states the goals and objectives to be achieved. Thus, it acts as a guide for the actions to be taken. It provides a direction to the actions of different departments of the organisation. They guide the managers about things to be done, what route to take and how the objectives are to be achieved. It ensures that the path taken for accomplishment of goals is righteously chosen. Planning also ensures that various departments of the organisation work in a coordinated manner towards the achievement of the desired objectives. (ii) Subdued Risk: By guiding an organisation in the right direction, it accredits its managers to analyse and anticipate changes. This leads to a reduction in uncertainty of the foreseen events. Planning shows how to deal with situations which may arise in the due course of management, though it does not fully eliminate the problems. (iii) Minimised Overlapping: As the managers are well comprehended with the policies and plans of the organisation, they coordinate the activities together to reach the objectives. Thus, overlapping of the work is reduced. Also any wastage of resources that takes place due to repeatedness is reduced. Proper planning ensures that there is no confusion and misunderstanding and the work proceeds smoothly. (iv) Encourages Creativity: Planning serves as the stepping stone of any organisation's success. It includes formulating policies and plans which requires innovation. It is a crucial activity which demands the best of managers thinking capabilities and creativity. It calls out for new ideas by the management to attain the goals. (v) Helps in Decision Making: Planning serves as a basis for decision making. Planning involves analysing the future, evaluating the various courses of action and choosing best alternative as per the objective. Thus, following a proper planning process helps the managers in making rational decisions. (vi) Essential for Controlling: Planning states the objectives that are to be achieved. Thus, it sets the standards against which the performance is evaluated. 

Authority: It refers to the power given to an individual to command and direct subordinates. It implies the right to make decisions regarding what is to be done and by whom. Scalar chain in a formal organisation gives rise to authority as it entails the link between various jobs and determines the relation of who is to report to whom. It is a downward flowing channel,i.e. superior commands authority over subordinates. The extent of authority at the top level management is the highest and it becomes lesser at the middle level and the lowest at the lower level management. However, the scope of authority delegated, depends on the rules and regulations of the organisation. Assigning authority helps in maintaining obedience and compliance.

 2. Responsibility: Responsibility refers to the adherence and answerability of the subordinate to complete the given task. That is, once a duty has been assigned to a subordinate, it is his responsibility to perform the task properly. A subordinate should be obedient and loyal towards the duty assigned to him. The superior-subordinate relationship gives rise to a sense of responsibility. As against authority, responsibility flows upward i.e. the subordinate is responsible to his superior. However, care should be taken that while assigning responsibility to a subordinate, he must also be given a certain degree of authority. On the other hand, an individual who is given authority must also have some responsibility. This is because authority without responsibility may lead to misapplication of power. On the other hand, responsibility without authority may lead to inefficiency. 

3. Accountability: Accountability implies the answerability of the superior for the final outcome of the work he assigned. Though the superior delegates the work to his subordinate but he still will be responsible for the final outcome. For this the superior, through regular feedbacks and supervision ensures that the subordinate performs the tasks properly and satisfactorily. The concept of being accountable arises out of responsibility itself. We may say that while responsibility is assumed, accountability is imposed.

 

Question : What does the term 'span of management' refer to? 

Solution : Span of management refers to the number of subordinates that a manager can efficiently handle. It is the determining factor for the nature and structure of an organisation. Span of management can be classified into the following two categories. i. Narrow Span of Management: If the number of subordinates reporting to a particular manager is small, the span of management is said to be narrow. Narrow span of management leads to tall organisational structures that have multiple levels of management. ii. Wide Span of Management: Span of management is said to be wide if, there are a large number of subordinates reporting to a manager. Wide span of management leads to flatter organisation.

 

Question : Under what circumstances would functional structure prove to be an appropriate choice?

 Solution : A Functional structure entails organising and grouping together activities of similar nature. That is, under functional organisation activities or work of similar nature are grouped together. Each group functions as a separate department and specialises in its work. For example an organisation can have departments such as production, human resource, finance, marketing, etc. Each department in turn report to one coordinating head. Functional structure is usually suitable for large organisations who deal with number of varying functions requiring a high degree of specialisation. The following points highlight the suitability of functional structure.

 i. Large Size: A large size organisation can function smoothly, if the work is divided into various departments. Departmentalisation in large organisation improves managerial efficiency and the degree of control. Thereby, the work proceeds smoothly. 

ii. Varying Functions: Dealing with diverse varying functions simultaneously requires a high degree of coordination so as to improve efficiency. By a clear division of activities in various departments, a functional structure promotes coordination among the various functions and thereby, ensures smooth functioning. 

iii. Requirement of Specialisation: Varying functions in an organisation can be performed better if dealt with specialisation. With departmentalisation, each department can function independently and specialise in their respective functions.

 

Question : Can a large sized organisation be totally centralised or decentralised? Give your opinion. 

Solution: No, any organisation cannot work smoothly if it is either completely centralised or completely decentralised. Rather a balance is required between the two. Centralisation refers to a situation where the decision-making power is concentrated only in the hands of the top-level management. Herein, only the top-level managers are authorised to take the needed decisions. All the functions related to policy making, planning and controlling are curtailed to the top-level management. In contrast to this, decentralisation refers to a situation where the decision-making power is delegated to the lower level managers. Herein, the power of taking actions and deciding the policies is distributed at different levels. An organisation cannot function either with extreme centralisation or with extreme decentralisation. As an organisation grows in size, it cannot maintain complete centralization. Rather, a need arises to move towards decentralisation. For a smooth functioning, the individuals involved in the actual work must have certain degree of authority and responsibility. With decentralisation, the overall management of the work becomes more efficient. It allows for better control of the work at each level of hierarchy. Moreover, as the organisation grows in size, decentralisation would facilitate quick decision making. This is because in a decentralised system the decision-making power is near the point of actual work. Thereby, the delay in work is avoided. However, an organisation cannot also follow extreme decentralisation. If all the decision-making power is delegated to the lower level managers, then it may harm the harmony of the organisation. It is possible that lower level managers at each department mold the rules and policies according to their own convenience and thereby, diverge from the organisational goals. Thus, a certain degree of authority and control must be retained at the top-level management so as to maintain the integrity of the organisation. Hence, we can say that a large sized organisation cannot be totally centralised or totally decentralised, rather it must maintain a balance between the two.

 

Question : Decentralisation is extending delegation to the lowest level. Comment. 

Solution: Both decentralisation and delegation relate to downward delegation of authority and responsibility. Under delegation, the authority is shared by the superior to the immediate subordinate. On the other hand, under decentralisation this concept is extended and the authority is distributed at not just one but multiple levels. That is, while delegation involves just two persons, i.e. the superior and subordinate, decentralisation is a wider concept of the same (delegation) where the power gets transferred to numerous levels. For example, suppose the director of an organisation delegates the responsibility of completing a task, hiring the required workers and supervising them to a project head. The project head in turn shares his responsibility of hiring and supervising the workers with the project lead. The project lead further delegates the responsibility of supervising the workers to the team lead. Thus, delegation at each level from the director, to project head, project lead and further to the team lead results in decentralisation. Hence, it can be said that delegation at each level leads to decentralisation and decentralisation is extending delegation to the lowest level.

 

Long Type Questions

Question : Why is delegation considered essential for effective organising?

Solution : Delegation implies transfer of authority, from a superior to his subordinate. It is an essential concept for effective organisation as it lowers the burden on the manager and thereby, facilitates the manager to focus on activities that command high priority. Also, the managers can extend his area of operations once he delegates the work to subordinates. In addition to this, it provides the subordinates with more opportunities for growth. It helps in efficient completion of tasks as the subordinates can now show their skills and exercise initiative. The following points highlight the importance of delegation in effective organising. (i) Efficient Management: By empowering the employees, the managers are able to function more efficiently as they get more time to concentrate on important matters. Freedom from doing routine work provides them with opportunities to excel in new areas (ii) Employee Development: By delegating the work, managers empower his subordinates by providing them opportunities to apply their skills. Herein, the subordinates get a chance to prove his abilities, gain experience and develop his career. Thus, delegation in a way helps in preparing future managers. (iii) Motivation: Along with improving the managerial and employee efficiency, delegation provides the employees with the psychological benefits. It acts as a motivational guide for the workers. It imparts a feeling of mutual trust and commitment between the superior and subordinate. With responsibility the employee gains confidence and he get encouraged to give their best to the organisation. (iv) Facilitation of Growth: Delegation helps in the expansion of an organisation by providing a ready workforce to take up leading positions in new ventures. Trained and experienced employees are able to play significant roles in the launch of new projects by replicating the work ethos they have absorbed from existing units, in the newly set up branches.

 

Question : What is divisional structure? Discuss its advantages and limitations. 

Solution: Divisional structure refers to an arrangement where activities are separated on the basis of products. There are different units and divisions which deal with varied products. Each division has its own divisional manager who supervises the whole unit and has the authority for it. Organisations that are large in size and deals in a diversified range of products or categories opt for this type of structure. Under each head of divisional structure, a functional structure develops itself, i.e. each divisional unit is further divided on the basis of its functions. For example, a company dealing with varied products have divisional heads such as clothing, shoes and electronics. Now these units will have further functional departments such as, under shoes, there will be resource inputs, advertising, production, sales, etc. Similarly, under clothing also there will be departments of resources, advertising, production and sales. The same will be under the electronics division. Here, each division has to take care about its profit and loss and is responsible for its own work. Following are a few prominent advantages of a divisional structure. 

1.Product specialisation helps in the development of varied skills in a divisional head and this prepares him for higher positions. This is because he gains experience in all functions related to a particular product. 

2.Divisional heads are accountable for profits, as revenues and costs related to different departments can be easily identified and assigned to them. This provides a proper basis for performance measurement. It also helps in fixation of responsibility in cases of poor performance of the division and appropriate remedial action can be taken. 

3. It promotes flexibility and initiative because each division functions as an autonomous unit which leads to faster decision making. 

4. It facilitates expansion and growth as new divisions can be added without interrupting the existing operations by merely adding another divisional head and staff for the new product line. A divisional structure has certain disadvantages as well. The following are some of the disadvantages of a divisional structure.

 1.Conflict may arise among different divisions with reference to allocation of funds and further a particular division may seek to maximise its profits at the cost of other divisions.

 2.It may lead to increase in costs since there may be a duplication of activities across products. Providing each division with separate set of similar functions increases expenditure.

 3.It provides managers with the authority to supervise all activities related to a particular division. In course of time, such a manager may gain power and, in a bid to assert his independence may ignore organisational interests.

 

Question : How does informal organisation support the formal organisation?

Solution: Informal organisation refers to a complex network of relations that arises out of the social interactions outside the office. They originate from within the formal organisation and are not deliberately created by the management. These relations are based on the friendship which develops between the working personnel on the basis of like nature. Following are the factors of informal organisation that support the working of formal organisation. 

(i) Free Flow of Communication: Informal organisation helps in establishing a free flow of communication. It allows the workers to form informal relations outside the organisation. This facilitates faster spread of information, thereby assisting the formal organisation. For example, if A needs to talk about a problem to E. In a formal structure he'll have to follow a scalar chain which may lead to delay in finding a solution for it. Thus, he can discuss it over lunch, thereby, shortening the length of communication. 

(ii) Coordination: Through informal relations, working people develops a sense of belongingness towards each other and towards the organisation. This helps them over the working place as well. It promotes coordination among them by developing mutual trust and understanding. Thereby, it results in lowering down the rate of conflicts between the people. For example, if A and B are friends outside the office, then, they will work in coordination with each other at the workplace as well. 

(iii) Organisational Objectives: Along with the personal goals, informal relations help in fulfilling the organisational objectives as well. The managers can interact with the workers informally and assess their reactions on various matters. They can ask the workers for their suggestions and ideas regarding the inadequacies in the formal structure. Thereby, contributing to the overall organisational objectives in a better way. 

(iv) Harmonious Environment: By developing healthy relationships, informal structure helps in building a harmonious working environment. It encourages cooperation between the people and maintain a peaceful environment at work. For example, if C and D have a dispute over some matter, they can discuss it outside the office and solve it without harming the formal working environment. Thus, conserving the amiable working environment. 

(v) Efficiency and Productivity: Informal organisation fosters efficiency among the working personnel. By contributing to their well being, it helps in increasing their productivity. Such relations help in fulfilling the social and psychological needs of the employees and thereby, increase their efficiency.

 

Question : Can a large sized organisation be totally centralised or decentralised? Give your opinion. 

Solution: No, any organisation cannot work smoothly if it is either completely centralised or completely decentralised. Rather a balance is required between the two. Centralisation refers to a situation where the decision-making power is concentrated only in the hands of the top-level management. Herein, only the top-level managers are authorised to take the needed decisions. All the functions related to policy making, planning and controlling are curtailed to the top-level management. In contrast to this, decentralisation refers to a situation where the decision-making power is delegated to the lower level managers. Herein, the power of taking actions and deciding the policies is distributed at different levels. An organisation cannot function either with extreme centralisation or with extreme decentralisation. As an organisation grows in size, it cannot maintain complete centralization. Rather, a need arises to move towards decentralisation. For a smooth functioning, the individuals involved in the actual work must have certain degree of authority and responsibility. With decentralisation, the overall management of the work becomes more efficient. It allows for better control of the work at each level of hierarchy. Moreover, as the organisation grows in size, decentralisation would facilitate quick decision making. This is because in a decentralised system the decision-making power is near the point of actual work. Thereby, the delay in work is avoided. However, an organisation cannot also follow extreme decentralisation. If all the decision-making power is delegated to the lower level managers, then it may harm the harmony of the organisation. It is possible that lower level managers at each department mold the rules and policies according to their own convenience and thereby, diverge from the organisational goals. Thus, a certain degree of authority and control must be retained at the top-level management so as to maintain the integrity of the organisation. Hence, we can say that a large sized organisation cannot be totally centralised or totally decentralised, rather it must maintain a balance between the two

 

Question : Decentralisation is extending delegation to the lowest level. Comment. 

Solution : Both decentralisation and delegation relate to downward delegation of authority and responsibility. Under delegation, the authority is shared by the superior to the immediate subordinate. On the other hand, under decentralisation this concept is extended and the authority is distributed at not just one but multiple levels. That is, while delegation involves just two persons, i.e. the superior and subordinate, decentralisation is a wider concept of the same (delegation) where the power gets transferred to numerous levels. For example, suppose the director of an organisation delegates the responsibility of completing a task, hiring the required workers and supervising them to a project head. The project head in turn shares his responsibility of hiring and supervising the workers with the project lead. The project lead further delegates the responsibility of supervising the workers to the team lead. Thus, delegation at each level from the director, to project head, project lead and further to the team lead results in decentralisation. Hence, it can be said that delegation at each level leads to decentralisation and decentralisation is extending delegation to the lowest level.

 

Question : What is divisional structure? Discuss its advantages and limitations. 

Solution: Divisional structure refers to an arrangement where activities are separated on the basis of products. There are different units and divisions which deal with varied products. Each division has its own divisional manager who supervises the whole unit and has the authority for it. Organisations that are large in size and deals in a diversified range of products or categories opt for this type of structure. Under each head of divisional structure, a functional structure develops itself, i.e. each divisional unit is further divided on the basis of its functions. For example, a company dealing with varied products have divisional heads such as clothing, shoes and electronics. Now these units will have further functional departments such as, under shoes, there will be resource inputs, advertising, production, sales, etc. Similarly, under clothing also there will be departments of resources, advertising, production and sales. The same will be under the electronics division. Here, each division has to take care about its profit and loss and is responsible for its own work. Following are a few prominent advantages of a divisional structure.

 1.Product specialisation helps in the development of varied skills in a divisional head and this prepares him for higher positions. This is because he gains experience in all functions related to a particular product. 

2.Divisional heads are accountable for profits, as revenues and costs related to different departments can be easily identified and assigned to them. This provides a proper basis for performance measurement. It also helps in fixation of responsibility in cases of poor performance of the division and appropriate remedial action can be taken. 

3.It promotes flexibility and initiative because each division functions as an autonomous unit which leads to faster decision making.

 4.It facilitates expansion and growth as new divisions can be added without interrupting the existing operations by merely adding another divisional head and staff for the new product line. A divisional structure has certain disadvantages as well. The following are some of the disadvantages of a divisional structure. 

1.Conflict may arise among different divisions with reference to allocation of funds and further a particular division may seek to maximise its profits at the cost of other divisions. 

2.It may lead to increase in costs since there may be a duplication of activities across products. Providing each division with separate set of similar functions increases expenditure. 

3.It provides managers with the authority to supervise all activities related to a particular division. In course of time, such a manager may gain power and, in a bid to assert his independence may ignore organisational interests.

 

Question : Decentralisation is an optional policy. Explain why an organisation would choose to be decentralised. 

Solution : Decentralisation refers to the dispersal of the decision making power among the middle and lower level managers. It is an optional policy as it depends on the organisation how much power the top level management wants to delegate to the lower levels. An organisation may choose to be centralised or decentralised depending on the objectives and the decisions of the top level managers. Following are a few factors that explain why an organisation would choose to be decentralised. (i) Initiative: Decentralisation allows a sense of freedom to the lower managerial levels as it lets them take their own decisions. It gives them a higher degree of autonomy to take initiative. Moreover, it promotes a feeling of self-confidence and self-reliance among them. When the power is delegated to lower level managers, they learn to face new challenges and find solutions for the problems themselves. This helps in spotting those potential managers who can take the needed initiative. (ii) Managerial Competence: Once the authority is delegated to the managers at lower levels, it provides them the needed opportunity to develop themselves. It provides them with the opportunity to gain experience and thereby, develop the skills and knowledge to face new challenges. Decentralisation gives them a chance to prove their talent and get ready for higher positions. It also helps in pre-identification of the future managers who are well-equipped with the necessary talent required to deal with managerial problems. (iii) Control: Decentralisation helps in evaluating the performance of the organisation in a better manner. Decentralisation helps in analysing and evaluating the performances of each department separately. Thus, the extent of achievement of each department and their contribution to the overall objectives of the organisation can be easily evaluated. (iv) Active Decision Making: Since through decentralisation, the authority of making decisions is passed on to lower levels of management, decisions are taken quickly and timely. This is because the decision can be taken at the nearest points of action which thereby, helps in easy adjudication of the problems. (v) Growth: Managerial efficiency is developed to a large extent with the help of decentralisation. Decentralisation results in greater authority to the lower level managers. It promotes competition among the managers of various departments. In a race to outperform each other, they give their best shot and thereby, increase the overall productivity and efficiency. The organisation gains from the increased overall performance and thereby, grows. (vi) Reduced Workload of Top Managers: Delegation of authority provides freedom to top level managers. It helps them in shifting the workload to their subordinates and gives them time to concentrate on more important and higher priority work such as policy decisions. Moreover, direct supervision by the top level management is decreased, as the subordinates are given the rights to take the decisions by their own.

 

Question : How does informal organisation support the formal organisation? 

Solution : Informal organisation refers to a complex network of relations that arises out of the social interactions outside the office. They originate from within the formal organisation and are not deliberately created by the management. These relations are based on the friendship which develops between the working personnel on the basis of like nature. Following are the factors of informal organisation that support the working of formal organisation. (i) Free Flow of Communication: Informal organisation helps in establishing a free flow of communication. It allows the workers to form informal relations outside the organisation. This facilitates faster spread of information, thereby assisting the formal organisation. For example, if A needs to talk about a problem to E. In a formal structure he'll have to follow a scalar chain which may lead to delay in finding a solution for it. Thus, he can discuss it over lunch, thereby, shortening the length of communication. (ii) Coordination: Through informal relations, working people develops a sense of belongingness towards each other and towards the organisation. It promotes coordination among them by developing mutual trust and understanding. Thereby, it results in lowering down the rate of conflicts between the people. For example, if A and B are friends outside the office, then, they will work in coordination with each other at the workplace as well. (iii) Organisational Objectives: Along with the personal goals, informal relations help in fulfilling the organisational objectives as well. The managers can interact with the workers informally and assess their reactions on various matters. They can ask the workers for their suggestions and ideas regarding the inadequacies in the formal structure. Thereby, contributing to the overall organisational objectives in a better way. (iv) Harmonious Environment: By developing healthy relationships, informal structure helps in building a harmonious working environment. It encourages cooperation between the people and maintain a peaceful environment at work. For example, if C and D have a dispute over some matter. They can discuss it outside the office and solve it without harming the formal working environment. Thus, conserving the amiable working environment. (v) Efficiency and Productivity: Informal organisation fosters efficiency among the working personnel. By contributing to their well being, it helps in increasing their productivity. Such relations help in fulfilling the social and psychological needs of the employees and thereby, increase their efficiency.

 

Chapter 5 : Organising

Question  : Which of the following is not an element of delegation? (a) Accountability (b) Authority (c) Responsibility (d) Informal Organisation

Solution : Informal Organisation is not an element of delegation. Delegation refers to the transfer of authority to subordinates. Accountability, responsibility and authority are the major elements of delegation. On the other hand, informal organisation refers to the relationship which arises out of informal communication among the employees in an organisation. Such communication is purely informal in nature and does not involve any formal communication such as that in delegation.

 

Question  : A network of social relationships that arise spontaneously due to interaction at work is called: (a) Formal Organisation (b) Informal Organisation (c) Decentralisation (d) Delegation 

Solution : A network of social relationships that arise spontaneously due to interaction at work is called informal organisation. It emerges from social interaction and free flow of communication among the employees of an organisation. On the other hand, formal organisation refers to a formal system based on superior-subordinate relationship. Whereas, delegation and decentralisation are concerned with the transfer of authority and responsibility to the subordinates.

 

Question  : Which of the following does not follow the scalar chain? (a) Functional structure (b) Divisional Structure (c) Formal organisation (d) Informal organisation 

Solution: Scalar Chain refers to a pre-defined, formal path of authority and communication in the order of highest to the lowest. Informal organisation do not follow a scalar chain as they arise out of informal relationships among the workers and managers. For example, it may arise from interaction which happens over lunch or an office party. Other structures such as formal organisation, divisional structure and functional structure follow a proper defined scalar chain.

 

Question  : A tall structure has a (a) Narrow span of management (b) Wide span of management (c) No span of management (d) Less levels of management 

Solution : A tall structure of organisation is the one that has multiple levels of hierarchy. A tall structure of organisation has narrow span of management. That is, under such a structure a manager has charge of only a few subordinates.

 

Question  : Centralisation refers to (a) Retention of decision making authority (b) Dispersal of decision making authority (c) Creating divisions as profit centers (d) Opening new centers or branches 

Solution : Centralisation refers to the retention of decision making authority. Centralisation implies a situation where the decision-making power is retained by the top level management. Under such a system, other levels of management do not have a right to intervene in policy making. The power and authority, in such a system, remains concentrated in a few hands.

 

Question  : For delegation to be effective it is necessary that responsibility be accompanied with necessary (a) Authority (b) Manpower (c) Incentives (d) Promotions

Solution : For delegation to be effective it is necessary that responsibility is accompanied with authority. Responsibility refers to the obligation to complete a task which has been assigned by the superior. Complementary to this, authority refers to the power to give commands and directions to subordinates. For successful delegation both authority and responsibility must go together. That is, if an individual is given the responsibility to carry out a task, he must also be given the necessary authority to carry it out. 

 

Question  : Span of management refers to (a) Number of managers (b) Length of term for which a manager is appointed (c) Number of subordinates under a superior (d) Number of members in top management 

Solution : The span of management, to a large extent gives shape to the organisational structure. Span of management refers to the number of subordinates that can be effectively managed by a superior. This determines the levels of management in the structure. 

 

Question : The form of organisation known for giving rise to rumours is called (a) Centralised organisation (b) Decentralised organisation (c) Informal organisation (d) Formal organisation 

Solution : Rumours are a result of informal organisation. They can have an adverse effect on the working environment. It may result in arguments or conflicts among the people of the organisation. For example, a rumour about the boss may pop up during a communication among a group of employees, which may affect the superior-subordinate relationship.

 

Question : Grouping of activities on the basis of product lines is a part of (a) Delegated organisation (b) Divisional organisation (c) Functional organisation (d) Autonomous organisation 

Solution : Sometimes an organisation has more than one product line. Under such a scenario the organisation groups the activities on the basis of the product line. Such a grouping of activities on the basis of product line is known as divisional organisation. Each division further has its own sub-departments such as production, finance, etc.

 

Question : Grouping of activities on the basis of functions is a part of (a) Decentralised organisation (b) Divisional organisation (c) Functional organisation (d) Centralised organisation 

Solution : Functional Organisation involves grouping of the functions of similar nature. Each group forms a separate department that report to one head. For example, departments may be divided on the basis of functions such as production, human resources, etc. that report to the managing director of the organisation.

 

Short Question and Answers

Question  : Define 'Organising'? 

Solution : Organising refers to the procedure of aligning the activities in a certain order. It contains designing the roles and directing the people towards accomplishment of goals. Human efforts along with the resources are brought together and coordinated under this function. The focus of the function lies in enabling people to work together and implementing the plans for successful attainment of objectives. Through organising the working relationships of an organisation gets clearly defined, thereby ensuring its smooth functioning. The process of organising involves 

i. Identifying the work and dividing them according to the plans 

ii. Grouping the work of similar nature and making departments for the same. iii. Assigning authorities to the right personnel 

iv. Designating the reporting relations 

 

Question : What are the steps in the process of organising? 

Solution : The following are the steps involved in a successful process of organising.

 

Authority: It refers to the power given to an individual to command and direct subordinates. It implies the right to make decisions regarding what is to be done and by whom. Scalar chain in a formal organisation gives rise to authority as it entails the link between various jobs and determines the relation of who is to report to whom. It is a downward flowing channel,i.e. superior commands authority over subordinates. The extent of authority at the top level management is the highest and it becomes lesser at the middle level and the lowest at the lower level management. However, the scope of authority delegated, depends on the rules and regulations of the organisation. Assigning authority helps in maintaining obedience and compliance. 

2. Responsibility: Responsibility refers to the adherence and answerability of the subordinate to complete the given task. That is, once a duty has been assigned to a subordinate, it is his responsibility to perform the task properly. A subordinate should be obedient and loyal towards the duty assigned to him. The superior-subordinate relationship gives rise to a sense of responsibility. As against authority, responsibility flows upward i.e. the subordinate is responsible to his superior. However, care should be taken that while assigning responsibility to a subordinate, he must also be given a certain degree of authority. On the other hand, an individual who is given authority must also have some responsibility. This is because authority without responsibility may lead to misapplication of power. On the other hand, responsibility without authority may lead to inefficiency.

 3. Accountability: Accountability implies the answerability of the superior for the final outcome of the work he assigned. Though the superior delegates the work to his subordinate but he still will be responsible for the final outcome. For this the superior, through regular feedbacks and supervision ensures that the subordinate performs the tasks properly and satisfactorily. The concept of being accountable arises out of responsibility itself. We may say that while responsibility is assumed, accountability is imposed.

 

Question  : What does the term 'span of management' refer to? 

Solution : Span of management refers to the number of subordinates that a manager can efficiently handle. It is the determining factor for the nature and structure of an organisation. Span of management can be classified into the following two categories. 

i. Narrow Span of Management: If the number of subordinates reporting to a particular manager is small, the span of management is said to be narrow. Narrow span of management leads to tall organisational structures that have multiple levels of management. 

ii. Wide Span of Management: Span of management is said to be wide if, there are a large number of subordinates reporting to a manager. Wide span of management leads to flatter organisational structures with only a few levels of management. Span of management depends on various factors such as the ability of the manager in terms of leadership, control, etc., extent of decentralisation followed in the organisation, working ability of the subordinates, nature of work, etc.

 

Question : Under what circumstances would functional structure prove to be an appropriate choice?

 Solution : A Functional structure entails organising and grouping together activities of similar nature. That is, under functional organisation activities or work of similar nature are grouped together. Each group functions as a separate department and specialises in its work. For example an organisation can have departments such as production, human resource, finance, marketing, etc. Each department in turn report to one coordinating head. Functional structure is usually suitable for large organisations who deal with number of varying functions requiring a high degree of specialisation. The following points highlight the suitability of functional structure.

 i. Large Size: A large size organisation can function smoothly, if the work is divided into various departments. Departmentalisation in large organisation improves managerial efficiency and the degree of control. Thereby, the work proceeds smoothly. 

ii. Varying Functions: Dealing with diverse varying functions simultaneously requires a high degree of coordination so as to improve efficiency. By a clear division of activities in various departments, a functional structure promotes coordination among the various functions and thereby, ensures smooth functioning. 

iii. Requirement of Specialisation: Varying functions in an organisation can be performed better if dealt with specialisation. With departmentalisation, each department can function independently and specialise in their respective functions.

 

Question : Draw a diagram depicting a divisional structure.

Solution : Sometimes when an organisation has more than one product line, it groups its activities on the basis of the product line. Such grouping of activities on the basis of product line is known as divisional structure. Each division in the organisation specialise in their respective product lines. Further, each division has multiple functions under it such as production, sales, marketing, etc. That is, within each division there is a functional structure. Suppose an organisation deals in four product lines namely, footwear, garments, jewelry and leather accessories. Based on these product lines, the organisation has four divisions that report to the managing director. Each division further has four departments namely, production, sales, marketing and advertising. The divisional structure for such an organisation is depicted by the following diagram.

 

 

Question : Can a large sized organisation be totally centralised or decentralised? Give your opinion.

Solution: No, any organisation cannot work smoothly if it is either completely centralised or completely decentralised. Rather a balance is required between the two. Centralisation refers to a situation where the decision-making power is concentrated only in the hands of the top-level management. Herein, only the top-level managers are authorised to take the needed decisions. All the functions related to policy making, planning and controlling are curtailed to the top-level management. In contrast to this, decentralisation refers to a situation where the decision-making power is delegated to the lower level managers. Herein, the power of taking actions and deciding the policies is distributed at different levels. An organisation cannot function either with extreme centralisation or with extreme decentralisation. As an organisation grows in size, it cannot maintain complete centralization. Rather, a need arises to move towards decentralisation. For a smooth functioning, the individuals involved in the actual work must have certain degree of authority and responsibility. With decentralisation, the overall management of the work becomes more efficient. It allows for better control of the work at each level of hierarchy. Moreover, as the organisation grows in size, decentralisation would facilitate quick decision making. This is because in a decentralised system the decision-making power is near the point of actual work. Thereby, the delay in work is avoided. However, an organisation cannot also follow extreme decentralisation. If all the decision-making power is delegated to the lower level managers, then it may harm the harmony of the organisation. It is possible that lower level managers at each department mold the rules and policies according to their own convenience and thereby, diverge from the organisational goals. Thus, a certain degree of authority and control must be retained at the top-level management so as to maintain the integrity of the organisation. Hence, we can say that a large sized organisation cannot be totally centralised or totally decentralised, rather it must maintain a balance between the two.

However, an organisation cannot also follow extreme decentralisation. If all the decision-making power is delegated to the lower level managers, then it may harm the harmony of the organisation. It is possible that lower level managers at each department mold the rules and policies according to their own convenience and thereby, diverge from the organisational goals. Thus, a certain degree of authority and control must be retained at the top-level management so as to maintain the integrity of the organisation. Hence, we can say that a large sized organisation cannot be totally centralised or totally decentralised, rather it must maintain a balance between the two.

 

Question : Decentralisation is extending delegation to the lowest level. Comment.

Solution : Both decentralisation and delegation relate to downward delegation of authority and responsibility. Under delegation, the authority is shared by the superior to the immediate subordinate. On the other hand, under decentralisation this concept is extended and the authority is distributed at not just one but multiple levels. That is, while delegation involves just two persons, i.e. the superior and subordinate, decentralisation is a wider concept of the same (delegation) where the power gets transferred to numerous levels. For example, suppose the director of an organisation delegates the responsibility of completing a task, hiring the required workers and supervising them to a project head. The project head in turn shares his responsibility of hiring and supervising the workers with the project lead. The project lead further delegates the responsibility of supervising the workers to the team lead. Thus, delegation at each level from the director, to project head, project lead and further to the team lead results in decentralisation. Hence, it can be said that delegation at each level leads to decentralisation and decentralisation is extending delegation to the lowest level.

 

Long answers Questions  

Question : Why is delegation considered essential for effective organising?

Solution : Delegation implies transfer of authority, from a superior to his subordinate. It is an essential concept for effective organisation as it lowers the burden on the manager and thereby, facilitates the manager to focus on activities that command high priority. Also, the managers can extend his area of operations once he delegates the work to subordinates. In addition to this, it provides the subordinates with more opportunities for growth. It helps in efficient completion of tasks as the subordinates can now show their skills and exercise initiative. The following points highlight the importance of delegation in effective organising. 

(i) Efficient Management: By empowering the employees, the managers are able to function more efficiently as they get more time to concentrate on important matters. Freedom from doing routine work provides them with opportunities to excel in new areas 

(ii) Employee Development: By delegating the work, managers empower his subordinates by providing them opportunities to apply their skills. Herein, the subordinates get a chance to prove his abilities, gain experience and develop his career. Thus, delegation in a way helps in preparing future managers. 

(iii) Motivation: Along with improving the managerial and employee efficiency, delegation provides the employees with the psychological benefits. It acts as a motivational guide for the workers. It imparts a feeling of mutual trust and commitment between the superior and subordinate. With responsibility the employee gains confidence and he get encouraged to give their best to the organisation. 

(iv) Facilitation of Growth: Delegation helps in the expansion of an organisation by providing a ready workforce to take up leading positions in new ventures. Trained and experienced employees are able to play significant roles in the launch of new projects by replicating the work ethos they have absorbed from existing units, in the newly set up branches. 

(v) Hierarchical Structure: Delegation forms the basis of the hierarchical structure of an organisation. It decides the superior-subordinate chain and determines who has to report to whom. It clearly states down the reporting relationships which helps in smooth working of the organisation. 

(vi) Coordination: Delegation promotes coordination of work. It reduces overlapping of work by defining the reporting relationships. All the elements of delegation such as authority, responsibility and accountability helps in providing a clear working relationship, thereby, increasing efficiency.

 

Question : What is divisional structure? Discuss its advantages and limitations. 

Solution: Divisional structure refers to an arrangement where activities are separated on the basis of products. There are different units and divisions which deal with varied products. Each division has its own divisional manager who supervises the whole unit and has the authority for it. Organisations that are large in size and deals in a diversified range of products or categories opt for this type of structure. Under each head of divisional structure, a functional structure develops itself, i.e. each divisional unit is further divided on the basis of its functions. For example, a company dealing with varied products have divisional heads such as clothing, shoes and electronics. Now these units will have further functional departments such as, under shoes, there will be resource inputs, advertising, production, sales, etc. Similarly, under clothing also there will be departments of resources, advertising, production and sales. The same will be under the electronics division. Here, each division has to take care about its profit and loss and is responsible for its own work. Following are a few prominent advantages of a divisional structure. 

  1. Product specialisation helps in the development of varied skills in a divisional head and this prepares him for higher positions. This is because he gains experience in all functions related to a particular product.

  2. Divisional heads are accountable for profits, as revenues and costs related to different departments can be easily identified and assigned to them. This provides a proper basis for performance measurement. It also helps in fixation of responsibility in cases of poor performance of the division and appropriate remedial action can be taken. 

  3. It promotes flexibility and initiative because each division functions as an autonomous unit which leads to faster decision making. 

  4. It facilitates expansion and growth as new divisions can be added without interrupting the existing operations by merely adding another divisional head and staff for the new product line. A divisional structure has certain disadvantages as well. 

The following are some of the disadvantages of a divisional structure.

  1. Conflict may arise among different divisions with reference to allocation of funds and further a particular division may seek to maximise its profits at the cost of other divisions. 

  2. It may lead to increase in costs since there may be a duplication of activities across products. Providing each division with separate set of similar functions increases expenditure. 

  3. It provides managers with the authority to supervise all activities related to a particular division. In course of time, such a manager may gain power and, in a bid to assert his independence may ignore organisational interests.

 

Question : Decentralisation is an optional policy. Explain why an organisation would choose to be decentralised. 

Solution : Decentralisation refers to the dispersal of the decision making power among the middle and lower level managers. It is an optional policy as it depends on the organisation how much power the top level management wants to delegate to the lower levels. An organisation may choose to be centralised or decentralised depending on the objectives and the decisions of the top level managers. Following are a few factors that explain why an organisation would choose to be decentralised. 

(i) Initiative: Decentralisation allows a sense of freedom to the lower managerial levels as it lets them take their own decisions. It gives them a higher degree of autonomy to take initiative. Moreover, it promotes a feeling of self-confidence and self-reliance among them. When the power is delegated to lower level managers, they learn to face new challenges and find solutions for the problems themselves. This helps in spotting those potential managers who can take the needed initiative. 

(ii) Managerial Competence: Once the authority is delegated to the managers at lower levels, it provides them the needed opportunity to develop themselves. It provides them with the opportunity to gain experience and thereby, develop the skills and knowledge to face new challenges. Decentralisation gives them a chance to prove their talent and get ready for higher positions. It also helps in pre-identification of the future managers who are well-equipped with the necessary talent required to deal with managerial problems. 

(iii) Control: Decentralisation helps in evaluating the performance of the organisation in a better manner. Decentralisation helps in analysing and evaluating the performances of each department separately. Thus, the extent of achievement of each department and their contribution to the overall objectives of the organisation can be easily evaluated. 

(iv) Active Decision Making: Since through decentralisation, the authority of making decisions is passed on to lower levels of management, decisions are taken quickly and timely. This is because the decision can be taken at the nearest points of action which thereby, helps in easy adjudication of the problems. 

(v) Growth: Managerial efficiency is developed to a large extent with the help of decentralisation. Decentralisation results in greater authority to the lower level managers. It promotes competition among the managers of various departments. In a race to outperform each other, they give their best shot and thereby, increase the overall productivity and efficiency. The organisation gains from the increased overall performance and thereby, grows. 

(vi) Reduced Workload of Top Managers: Delegation of authority provides freedom to top level managers. It helps them in shifting the workload to their subordinates and gives them time to concentrate on more important and higher priority work such as policy decisions. Moreover, direct supervision by the top level management is decreased, as the subordinates are given the rights to take the decisions by their own.

 

Question : How does informal organisation support the formal organisation? 

Solution: Informal organisation refers to a complex network of relations that arises out of the social interactions outside the office. They originate from within the formal organisation and are not deliberately created by the management. These relations are based on the friendship which develops between the working personnel on the basis of like nature. Following are the factors of informal organisation that support the working of formal organisation. 

(i) Free Flow of Communication: Informal organisation helps in establishing a free flow of communication. It allows the workers to form informal relations outside the organisation. This facilitates faster spread of information, thereby assisting the formal organisation. For example, if A needs to talk about a problem to E. In a formal structure he'll have to follow a scalar chain which may lead to delay in finding a solution for it. Thus, he can discuss it over lunch, thereby, shortening the length of communication. 

(ii) Coordination: Through informal relations, working people develops a sense of belongingness towards each other and towards the organisation. This helps them over the working place as well. It promotes coordination among them by developing mutual trust and understanding. Thereby, it results in lowering down the rate of conflicts between the people. For example, if A and B are friends outside the office, then, they will work in coordination with each other at the workplace as well. 

(iii) Organisational Objectives: Along with the personal goals, informal relations help in fulfilling the organisational objectives as well. The managers can interact with the workers informally and assess their reactions on various matters. They can ask the workers for their suggestions and ideas regarding the inadequacies in the formal structure. Thereby, contributing to the overall organisational objectives in a better way. 

(iv) Harmonious Environment: By developing healthy relationships, informal structure helps in building a harmonious working environment. It encourages cooperation between the people and maintain a peaceful environment at work. For example, if C and D have a dispute over some matter. They can discuss it outside the office and solve it without harming the formal working environment. Thus, conserving the amiable working environment. 

(v) Efficiency and Productivity: Informal organisation fosters efficiency among the working personnel. By contributing to their well being, it helps in increasing their productivity. Such relations help in fulfilling the social and psychological needs of the employees and thereby, increase their efficiency.

 

Chapter 6 : Staffing Exercise Solutions

 

Question  : Briefly enumerate the important sources of recruitment.

Solution : Recruitment refers to the process of searching and attracting the required personnel for a job. In other words, it is the process of finding the potential candidates and instigating them to apply for the job. The following are the two important sources of recruitment.

i. Internal sources: Internal sources of recruitment refer to the sources that are within the organisation. That is, through internal sources the jobs are filled up from inside the organisation. It can take the form of transfers and promotions. Through transfers, the job of a specific profile is filled by shifting a suitable person working in another department of the organisation to the concerned department. Similarly, through promotions, higher position job vacancies in the organisation are filled by promoting the lower level employees. ii.External Sources: External sources of recruitment refer to the sources of recruitment that are outside the organisation. Through external sources the jobs in an organisation are filled by bringing in new people. For fresh talent and wider choice, external sources are used. For example, one of the external sources of recruitment is 'direct recruitment' which involves putting up a notice board outside office and then following the recruitment process on a specified date. Similarly, placement agencies work as an external source as they act as a matchmaker for the job seekers and job providers.

 

 

Question : What is meant by recruitment? How is it different from selection? 

Solution : Recruitment refers to the procedure of finding and stimulating the required candidates to apply for a particular job. As against this, selection is the procedure of screening and choosing the required candidates out of the gathered pool. The following points highlight the difference between recruitment and selection.

 

Basic Difference 

Recruitment

Selection 

Meaning

Recruitment refers to the process of finding and instigating the required personnel for a job.

Selection refers to the process of choosing the right candidate out of the gathered pool developed at the time of recruitment.

Sequence

In the staffing process, recruitment is at the second stage.

In the staffing process, selection is at the third stage and succeeds recruitment.

Employment Contract

The candidates gathered under recruitment are not offered any employment contract from the organisation.

The candidates who successfully complete the selection process are offered an employment contract by the organisation containing such information as date of joining, terms and conditions, etc.

Characteristic

Recruitment process involves attracting as many people as possible for the job.

Selection process involves choosing only the appropriate candidate and rejecting the non-suitable ones

 

Question : Define training. How is it different from education?

Solution: Training refers to the enhancement of skills, abilities and competence required for a specific job profile. On the other hand, education refers to the process of improving the overall knowledge and understanding of the employees. The following points highlight the difference between training and education.

Basis of Difference

Training

Education

Meaning

Training implies increasing the skills and abilities required to perform a

specific job

Education implies increasing the

overall  knowledge and understanding

of the employees.

Scope

Training is a narrow concept and relates to development of understanding relating to only a specific job.

Education is a wider concept and relates to the overall development of understanding. 

Focus

It focuses on the goals of the

organisation

It focuses on the individual goals.

 

Question : Distinguish between training and development. 

Solution : Training and development are related yet distinct concepts. Though both the concepts focus on improvement of an individual but the perspectives are different. Training on one hand refers to providing the skills and abilities for a particular job. Development on the other hand, refers to the concept of growth of an individual as a whole. The following points highlight the difference between training and development.

Basis of Difference

Training

Development

Meaning 

Training refers to the process of

enhancing the skills and competence of

an employee that are required to perform

a specific job.

Development refers to the process of

overall growth of an employee.

 

The focus of training is the specific job

requirement and is thereby, job-oriented

The focus of development is overall

growth and is thereby, career oriented.

 

Training is narrow in scope and focuses on how one can become more efficient in the intended job.

Development is wider in scope and focuses on the overall personality development of the employee. Training is a part of development.


 

Question : Why are internal sources of recruitment considered to be more economical? 

Solution: Internal sources of recruitment refer to the sources that are endogenous to the organisation, that is, within the organisation. There are two ways of filling the jobs internally, namely transfers and promotions. It has the advantage of being more economical than other sources of recruitment. Filling the jobs through internal sources is cheaper in terms of time as well as money is listed below: 

1. Internal recruitment also simplifies the process of selection and placement. The candidates that are already working in the enterprise can be evaluated more accurately and economically. This is a more reliable way of recruitment since the candidates are already known to the organisation. 

2. Transfer is a tool of training the employees to prepare them for higher jobs. Also people recruited from within the organisation do not need induction training. 

3. Transfer has the benefit of shifting workforce from the surplus departments to those where there is a shortage of staff. Thus, in contrast to other sources, the internal sources of recruitment are more economical in nature.

 

Question : What is the importance of staffing function in today's environment? 

Solution : Staffing is an important function of management as it takes care of the manpower requirement of any organisation. In today's environment with rapid changes taking place in technology, the size of the organisations, etc. finding the right people for the job becomes critical. In such a scenario, proper staffing process plays an important role in the organisations. Following are the highlighted benefits of staffing in the current world scenario.

 (i) Finding Competent Personnel: Staffing helps in finding and choosing the right personnel required for a job. 

(ii) Improves Efficiency: By ensuring that the right people are placed for right jobs, the overall efficiency and performance increases. 

(iii) Growth of the Organisation: It ensures survival and growth of the organisation by appointing efficient and competent employees for various jobs. 

(iv) Optimum Utilisation of Human Resources: Through proper manpower planning, staffing prevents overutilization or underutilization of manpower. In addition, it avoids interruption in working efficiency by suggesting, in advance if there is any unfilled job. 

(v) Job Satisfaction: Compensation and fair rewards given to the employees provide them self confidence and job-satisfaction. It encourages them to work diligently and give their best to the organisation.

 

Long answers : 

Question : Define the staffing process and the various steps involved in it?

Solution : Staffing process refers to the procedure of filling the vacancies and keeping them filled. It focuses on timely fulfillment of the human resource required within the organisation. According to 'Theo Haimann', 'staffing pertains to recruitment, selection, development, training and compensation of subordinate managers. This definition includes the steps involved in the staffing process. Following is a brief description of various steps involved in staffing.

(i) Estimation of the Required Manpower: The process of estimating manpower requirements is the basic step in the process of staffing. It refers to knowing the number and the kind of persons that are required in the organisation. Estimation process involves two steps-workload analysis and workforce analysis. Work load analysis implies an estimation of the number and the kind of persons required for various jobs. On the other hand, workforce analysis implies an estimation of the existing persons. The two-step analysis reveals whether there is any overstaffing or understaffing in the organisation and thereby, forms the basis of the staffing process. For example, a situation of understaffing would imply that more personnel are required to be appointed and a situation of overstaffing would imply that some of the existing personnel need to be removed. 

(ii) Recruitment: It refers to enlisting and searching the suitable candidates for the job. It is the process of searching the appropriate people for the job and influencing them to apply for the job. Recruitment creates a pool of prospective candidates for a job. It involves searching through the various sources that includes internal sources (transfers and promotions) and external sources (advertising and placement agencies). It forms the basis for the selection process by attracting the aspirants towards the organisation. 

(iii) Selection: Selection involves choosing the right candidate out of the gathered pool of aspirants which is created after recruitment process. It is a rigorous procedure and comprises of a series of tests, interviews, etc. The candidates who are not able to negotiate the selection process are rejected. It ensures that only the competent and the best ones are selected for the job. It is a highly important process as it forms the basis for working efficiency of the organisation. Those who are able to successfully negotiate the test and the interviews are offered an employment contract, a written document containing the offer of employment, the terms and conditions and the date of joining. 

(iv) Placement and Orientation: Once the selection is done it becomes important to make the selected employees familiar with the working environment of the organisation. Induction involves giving a brief overview about the workplace, introducing them to other employees and the managers and making them comfortable with the work environment. Orientation is, thus, introducing the selected employee to other employees and familiarising him with the rules and policies of the organisation. Placement refers to occupying the position by the employee for which he has been selected.

(v) Training and Development: Next step in the staffing process is training and development of the employee. Both the process emphasis on improving the employee competence. Training is a process of increasing the employee's capabilities and skills required for performing the job. Development, on the other hand, focuses on the overall growth of the employee by enhancing his thinking and understanding capabilities. They help the workers to upgrade their knowledge and increase their efficiency. Moreover, training and development motivates the workers and provides them opportunities for growth and career development. 

(vi) Performance Appraisal: Performance appraisal is an important aspect of any organisation as it helps in evaluating the work of the individuals. Appraisal implies assessing the performance of the employee against certain predetermined standards. In addition, under performance appraisal the superior provides proper feedback to the employee so that right measures can be taken for increasing the working efficiency. 

(vii) Promotion and Career Planning: Every employee needs encouragement and motivation for continuing the work with right efficiency. Promotion of the employee in terms of position, pay, etc. helps in providing job satisfaction to the employees and encourages them to realise their potential. Promotions serve the long term interests of the employees. 

(viii) Compensation: Worth of the job is an important aspect to determine. All organisations need to establish the right pay or salary for each job. Compensation entails the price of a job along with the rewards that the employee deserves. Compensation provided to the employee can be in direct terms (that is, wages and salaries) as well as in indirect terms (such as insurance, bonus, etc.).

 

Question : Explain the procedure for selection of employees. 

Solution : Selection is a procedure to choose the appropriate candidates out of the numerous aspirants. It is a rigorous process as it involves various stages of tests and interviews. Selection process aims at getting the best out of the recruited pool so that work efficiency can be maximised. Following are the steps involved in the selection process.

 

 

Question  : What are the advantages of training to the individual and to the organisation? 

Solution : Training is an important aspect of any organisation. It aims at building the skills and abilities of the individuals to perform a job. Training is an essential part of the job which attempts at improving the aptitude and knowledge of a person as per the job requirement. With the ever changing business environment, the complexity of the jobs has increased. Thereby, training has become all the more essential. The following are the highlighted benefits of training to the employee and the organisation. Benefits to the Employee 

(i) Better Career Opportunities: Training enhances the skill and knowledge of the employees and thereby, helps in improving their career prospects.

 (ii) Earn More: By helping the individual to learn more it assist them to earn more. Training enhances the individuals understanding and knowledge. Thereby, it improves their efficiency and performance. As a result, it gives them a chance to earn more. 

(iii) Less Accident Prone: Training attempts to make the employees more adept and efficient in handling the machines. Jobs that require the employees to work with complex machines and in more accident-prone areas need to emphasise strongly on training and development, as it helps them in taking precautionary actions. Thus, it makes the employee less prone to accidents. (iv) Self-Confidence: Development and training direct the individuals to work more efficiently that in turn builds up required morale within the individuals. It increases their self-confidence and self-reliance thereby, contributing to higher job-satisfaction.


 

 

Question  : The staffing function is performed by every manager and not necessarily by a separate department. Explain. 

Solution: Staffing refers to the function of finding the right people for the right job. It is an important aspect of management as it ensures that the right people with the needed qualifications are chosen for the work. It ensures that the vacancies are filled and always remain occupied. Staffing involves various stages including recruitment through various sources, right selection out of the applicants, placement and orientation, training of the employees, etc. Managing the human element is a requisite function of any organisation as it serves the basis of the level of efficiency of the organisation. Thus, the success of any organisation depends on how effectively this function can be performed and to what extent the productivity can be increased with efficient staffing. Nowadays, it is seen that organisations that are large in size, maintain a separate department for dealing with this function. This department is generally known as 'Human Resource Department'. Under this department, the various tasks of staffing are performed by specialised managers. Along with staffing they also take care of the labour grievances. Human resource management thus act as a link between the workers and the managers.

1.The workers of a factory are unable to work on new machines and always demand for help of supervisor. The Supervisor is overburdened with their frequent calls. Suggest the remedy. 

Solution: Workers of factory must be trained through Vestibule Training. Employees learn their jobs on the equipment they will be using, but the training is conducted away from the actual work floor. Actual work environments are created in a class room and employees use the same materials, files and equipment. This is usually done when employees are required to handle sophisticated machinery and equipment.

 

2. The workers of a factory remain idle because of lack of knowledge of hi-tech machines. Frequent visit of engineer is made which causes high overhead charges. How can this problem be removed?

Solution: Workers must be trained while they are working. On-the-Job methods refer to the methods that are applied to the workplace, while the employee is actually working. 1. Train them under the guidance of a master worker. Apprentice training are designed to acquire a higher level of skill. 2. The trainee should work directly with a senior manager and the manager takes full responsibility for the trainee’s coaching. Classically the trainee is being groomed to replace the senior manager and relieve him from some of his duties. 3. Shifting the trainee from one department to another or from one job to another. This enables the trainee to gain a broader understanding of all parts of the business and how the organisation as a whole functions. The trainee gets fully involved in the departments operations and also gets a chance to test her own aptitude and ability.

 

3. The quality of Production is not as per standards. On investigation it was observed that most of the workers were not fully aware of the proper operation of the machinery. What could be a way to improve the accuracy?

Solution: Workers should be provided off the job training methods where they can be taught how to maintain accuracy related to the proper operation of the machinery. Training makes the employee more efficient and result in high productivity. 

 

4. An organisation provides security services. It requires such candidates who are reliable and don’t leak out the secrets of their clients. What steps should be incorporated in the selection process? 

Solution: • Check whether the candidate is properly educated • The candidate should be sincere and honest. • The candidate should have good health. So, have a medical checkup. • Do a reference check. • The candidate must be a good observer. 

 

5. A company is manufacturing paper plates and bowls. It produces 100000 plates and bowls each day. Due to a local festival, it got an urgent order of extra 50,000 plates bowls. Advise how the company will fulfill its order and which method of recruitment would you suggest. 

Solution: 1. Internal Recruitment method: The existing workers may be asked to do overtime by paying additional wages. 2. External Recruitment Method: New workers may be employed and another shift can be worked parallelly. New workers can be hired by giving a newspaper advertisement.

 

6. Which methods of training and development should be company initiate? Explain giving reasons. 

Solution: The company can use ‘on the job’ and ‘off the job’ training methods. On the Job Methods: (i) Apprenticeship Programs (ii) Coaching (iii) Internship Training (iv) Job Rotation Off the Job Methods: (i) Classroom Lectures/Conferences (ii) Films (iii) Case Study (iv) Computer Modelling (v) Vestibule Training (vi) Programmed Instruction.

 

7.  What problems do you foresee in her job? 

Solution: • Qualified candidate may not be available • Demand for a higher pay. • After training, employees may leave the organisation.

 

8. What steps is she going to take to perform her job efficiently?

 Solution: • She can use all possible sources of recruitment. • Consult an expert to observe and form good policy to recruit and retain candidates. 

• Maintain cordial relationships with workforce. 

 

9. How significant is her role in the organisation? 

Solution: Her role is significant concerned with timely appointment of competent manpower and ensuring effective and efficient utilisation towards main objectives, organisational, individual and social.

 

Chapter 7:  Directing Exercise Solutions

Question  : Which of the following is not an element of direction? (a) Motivation (b) Communication (c) Delegation (d) Supervision 

Solution : The process of directing involves guiding, coaching, instructing, motivating, leading the people in an organisation to achieve organisational objectives. The elements of directing. These are: (i) Supervision (ii) Motivation (iii) Leadership (iv) Communication Delegation is not an element of directing, rather, it precedes directing.

 

Question  : The motivation theory which classifies the needs in hierarchical order is developed by (a) Fred Luthans (b) Scott (c) Abraham Maslow (d) Peter F. Drucker 

Solution : Abraham Maslow gave the need hierarchy theory of motivation. His theory was based on the argument that within each individual there lies five basic needs that can be put in hierarchical order. Starting from the most primary ones, the order of hierarchy was stated as physiological needs, security needs, belongingness needs, esteem needs and actualisation needs.

 

 

Question  : Which of the following is a financial incentive a) Promotion b) Stock Incentive c) Job Security d) Employee Participation 

Solution : Stock incentive is a kind of financial incentive. Financial incentives refer to incentives which are in direct monetary form or measurable in monetary term and serve to motivate people for better performance. Stock Incentive is a direct monetary incentive wherein the employee is offered the shares of the company at a price lower than the market price. The other three options as given in the question, that is, promotion, job security and employee participation are non-financial incentives that focus on psychological and social needs of the employees.

 

Question  : Which of the following is not an element of communication process? (a)Decoding (b)Communication (c)Channel

Solution : Communication is a process wherein ideas, feelings, facts, etc. are exchanged among people. Decoding, channel and receiver are elements of communications. Channel refers to the path through which the message in the form of encoded symbols from the sender is transferred to the receiver. Before the message is received by the receiver, the encoded symbols must be converted. This process of converting the encoded symbols is known as decoding. On the other hand, the receiver refers to the person who actually receives the message.

 

Question  : Status comes under the following types of barriers (a)Semantic barrier (b)Organisational barrier (c)Non semantic barrier (d)Psychological barrier

Solution : Status comes under organisational barriers. Organisational barriers refer to those barriers in the communication that are related to the structure of the organisation, hierarchical relationships in the organisation, rules and policies. Sometimes status of an individual in the company in terms of profile, authority, etc. instills a feeling of superiority (or inferiority) in him. Such a psychology acts a barrier in free flow of communication in the organisation.

 

Question  : The software company promoted by Narayana Murthy is (a)Wipro (b)Infosys (c)Satyam (d)HCL 

Solution : Narayana Murthy was the founder of the software company 'Infosys'. He started Infosys in the year 1981and in 2002 it was a global IT company. Narayana Murthy was the CEO of Infosys for two decades before he retired from the post in 2002. Under the leadership of Murthy, Infosys reached unimaginable heights and is today among the biggest exporters of software from India.

 

Question : The highest-level need in the need Hierarchy of Abraham Maslow (a)Safety Need (b)Belongingness Need (c)Self Actualisation Need (d)Prestige Need 

Solution : The highest-level need in the need Hierarchy of Abraham Maslow is self actualisation need. This need of an individual refers to achieving what one aims or aspires. For an employee in an organisation, such needs relate to growth, work satisfaction, etc.

 

Question : The process of converting the message into communication symbols is known as: (a) Media (b) Encoding (c) Feedback (d) Decoding

Solution : The process of converting the message into communication symbols is known as encoding. The communication symbols in the process of encoding can be in the form of pictures, gestures, etc.

 

Question  : The communication network in which all subordinates under a supervisor communicate through supervisor only is: (a)Single chain (b)Inverted V (c)Wheel (d)Free flow 

Solution : The communication network in which all subordinates under a supervisor communicate through supervisor only is wheel communication network. In a wheel network, the supervisor is at the centre of the communication network (wheel). The subordinates cannot communicate among themselves, rather they need to communicate through the supervisor.

 

Question  : Distinguish between leaders and managers. 

Solution : The following points highlight the difference between a manager and a leader.

 

 

Question : Define Motivation. 

Solution : Motivation refers to a process of inducing and stimulating an individual to act in a certain manner. An unsatisfied need of an individual creates tension which stimulates his or her drives. These drives generate a search behaviour to satisfy such need. If such need is satisfied, the individual is relieved of tension. Motivation is considered important because it helps to identify and satisfy the needs of human resources in the organisation and thereby helps in improving their performance. 

 

 

In the context of an organisation, motivation implies encouraging and urging the employees to  perform to the best of their capabilities so as to achieve the desired goals of the organisation. In other words, it refers to driving the individual psychologically so as to induce his willingness to work and perform better. In an organisation motivation can take various forms such as promotion, appraisal, recognition, etc. depending on the expectations and desires of the employee. For example, an appraisal may act as a motivating factor for an employee to improve performance. Similarly, for another employee praise from the senior may motivate him to further improve the performance.

 

Question : What is informal communication? 

Solution : Informal communication refers to the communication that flows without following the formal defined path. An informal communication system is also known as grapevine. Under informal communication, a piece of information flows in all directions without paying any heed to the level or authority. The informal communication arises out of needs of employees to exchange their views, which cannot be done through formal channels. Workers chit chatting in a canteen about the behaviour of the superior, discussing about rumors that some employees are likely to be transferred are some examples of informal communications. The grapevine/ informal communication spreads rapidly and sometimes get distorted. It is very difficult to detect the source of such communication. It also leads to generate rumors which are not authentic. People’s behaviour is affected by rumors and informal discussions and sometimes may hamper work environment. Sometimes, grapevine channels may be helpful as they carry information rapidly and, therefore, may be useful to the manager at times. Informal channels are used by the managers to transmit information so as to know the reactions of his/her subordinates. An intelligent manager should make use of positive aspects of informal channels and minimise negative aspects of this channel of communication. In single strand network, each person communicates to the other in sequence. In gossip network, each person communicates with all on nonselective basis. In probability network, the individual communicates randomly with other individual. In cluster, the individual communicates with only those people whom he trusts. Of these four types of networks, cluster is the most popular in organisations.

 

Question  : What are semantic barriers of communication?
Solution : Semantics is the branch of linguistics dealing with the meaning of words and sentences. Semantic barriers are concerned with problems and obstructions in the process of encoding and decoding of message into words or impressions. Normally, such barriers result on account of the use of wrong words, faulty translations, different interpretations. 

The following are some of the causes of semantic barriers. 

i. Badly expressed message: Sometimes due to poor vocabulary or wrong use of words, the information may not be clearly expressed. 

ii.Symbols with different meanings: At times a word may have more than one meaning or two or more words may have the same pronunciation (such as idle and idol). In such cases, the correct interpretation of the word remains ambiguous. 

iii. Faulty translations: In certain cases the proficiency of a language differs among the workers and the managers. In such cases, a translation of the information is required in the language which is understandable to the workers. However, in the process of translation some of the words or sentences may get misinterpreted. For example, in a translation of an instruction from English to Hindi, the meaning of certain words might change. 

iv. Technical jargon: At times while giving out instructions the senior or specialist uses technical vocabulary that might be difficult to understand for the subordinates. 

V. Body language and gesture decoding: Every movement of body communicates some meaning. The body movement and gestures of communicator matters so much in conveying the message. If there is no match between what is said and what is expressed in body movements, communications may be wrongly perceived. 

vi. Unclarified assumptions: Some communications may have certain assumptions which are subject to different interpretations.

 

Question : Who is a supervisor? 

Solution : A supervisor refers to a person who directly oversees the activities of the workers. In the organisational hierarchy he lies immediately above the worker. A supervisor performs the following functions.

 i. He is in direct contact with the workers and thereby guides and supports the workers. He also helps in maintaining harmony and unity among the workers.

 ii. He acts as a link between the manager and the workers. Through supervisor, on the one hand, the management communicates the ideas and policies to the workers and on the other hand, the workers are able to communicate their problems and grievances to the management. 

iii. Supervisor ensures that the workers work efficiently and as per the set targets. 

iv. He provides the required knowledge and skills to the workers.

 

Question : What are the elements of directing?

Solution : Directing refers to the process of instructing, motivating, guiding and leading the people to achieve certain goals and objectives. Directing involves the following four elements. 

i.Supervision: Supervision implies the process of guiding and instructing the subordinates towards achieving the desired goals. In other words, it implies overseeing the work of subordinates. Supervision ensures that work takes place as per the desired objectives. A good supervision helps in improving the efficiency of the workers. Besides this, it also plays a key role in maintaining harmony and unity among the workers. 

ii.Motivation: Motivation implies encouraging and inducing the employees to perform to the best of their capabilities so as to achieve the desired goals of the organisation. Motivation can take various forms such as promotion, appraisal, recognition, etc. By satisfying the needs of the employees, motivation helps in improving their performance. It provides a psychological boost to the workers and drives their willingness to work. Moreover, it also helps in reducing turnover and absenteeism in the organisation. iii.Leadership: Leadership implies influencing the behaviour of the employees in such a manner that they willingly work towards achieving the objectives of the organisation. Leadership plays a key role in the success of an organisation. Good leadership brings out the capabilities and talents of the workers and thereby, boosts their confidence. They act as a guide to the workers and induces a feeling of initiative in them. 

iv.Communication: Communication refers to the process of exchange of ideas, feelings, facts, etc. among people. A smooth functioning of an organisation requires good communication. It fosters coordination among various departments and individuals in the organisation. Communication forms the basis of management. Without good communication network efficient management becomes difficult.

 

Question : Explain the process of motivation?

 Solution : Motivation implies inducing and stimulating an individual to act in a certain manner. The following points explain the process of motivation. i.Unsatisfied Want: The motivation process begins with an unsatisfied need of an individual.

 ii.Tension: As the want remains unsatisfied frustration builds up in the mind of the individual.

 iii.Drives: The frustration drives the individual to look out for alternatives to satisfy his need. 

iv.Search Behaviour: Among the various alternatives he chooses one and starts behaving according to it. 

v.Satisfied Needs: After following a particular alternative for some time, he assesses if his need is satisfied. 

vi.Reduced of Tension: Once the need is satisfied, the frustration and tension of the individual finally gets reduced.

 

Question : Explain the different networks of grapevine communication? Solution : Grapevine communication or informal communication refers to the communication that arises out of social interaction among employees and spreads without following the formal communication path. The following are the types of grapevine communication network.

i. Single Strand Network: In this network, the information spreads from one person to another in a sequence. That is, one person communicates to another person who turn communicates to some other person.

 ii. Gossip Network: In gossip network, one person shares the information with many other people. 

iii. Probability Network: Under a probability network, an individual share the information randomly with other people. That is, the person is indifferent about who he shares the information with. 

iv. Cluster Network: In this network, information is first shared between two people who trust each other. One of them then passes the information to some other person who in turn shares it with another and so the information spreads.

 

Long Type Questions

Directing as a function of management is quite complex. To help in the directing process, certain principles have been developed. The following are the principles of directing. 

1. Maximum Individual Contribution: According to this principle, a manager should use such directing techniques that induce the workers to perform to the best of their capabilities. It should encourage the workers to work towards the goals of the organisation. That is, each individual should contribute the maximum towards the organisational goals. For example, suitable incentive and motivation techniques can be used by the managers to urge the employees to perform better. 

2. Harmony of Objectives: Often the objectives of an individual diverge from the overall organisational objectives. For example, an individual's focus may be on earning greater income while the organisation aims at increasing the production. In such a case, directing should work towards converging the individual goals with the goals of the organisation. 

3. Unity of Command: As per this principle, an individual should receive commands and instructions from only one superior. If a worker receives orders from more than one superior, it creates confusion and clashes that leads to delay in the work. For example, the worker might get confused whose order to follow. Moreover, it might also happen that a conflict is created between the two superiors. 

4. Appropriateness of Direction Technique: According to this principle, the direction technique to be used should be appropriately selected. It should suit the need and attitude of the employees. For example, one employee might get motivated by a praise while other requires monetary incentive. Thus, the manager should use suitable directing techniques on requirement basis. 

5. Managerial Communication: Effective communication plays a key role in directing. The instructions and commands given by the superior must be clear and easily understandable by the subordinates. In addition, the subordinates must also be able to communicate with superiors in an unhesitant manner. They must be able to express freely their feedbacks and suggestions. Thus, an effective two-way communication must take place between the superior and the subordinates. 

6. Use of Informal Organisation: The manger should realise the existence and importance of informal organisation. He must strategically use them. For example, informal communication can be used to divulge true and real feedback on policy matters. 

7. Leadership: Leadership is an important element of directing. A manager must be able to bring out the capabilities of the employees. He must be able to influence the behaviour of the employees such as to boost the willingness of the employees to work towards the organisational goals. In addition, he must also be able to work effectively towards the satisfaction of the individual goals of the employees. 

8. Follow Through: According to this principle, a manager's role is not just limited to giving instructions to the subordinates rather, he should continuously review the implementation of the instructions. Through a proper follow up he must ensure that the commands are properly followed and implemented. If required suitable corrective actions must also be taken.

1. Physical Attributes: People with good physical features such as height, appearance, health etc. are attractive. A healthy and active person can himself work hard and efficiently and thereby, has the capability of being looked up to. Thus, he can induce his subordinates as well to work and perform better.

2. Honesty: A good leader should maintain a high degree of honesty. He should be sincere and should follow ethics and values. He should be an idol for others in terms of honesty, integrity and values. 

3. Intelligence: A leader must have a good presence of mind and knowledge. He should be competent enough to effectively examine and solve the problems encountered in the course of work. He must have the required intelligence to take proper decisions based on logic and facts. 

4. Inspiration: A leader should be a source of inspiration and motivation to others. That is, he must be exemplary in terms of work, performance and values. He must be able to develop willingness among the subordinates to work to the best of their capabilities. 

5. Confidence: A leader should be high in confidence. He must also be able to maintain his confidence in difficult situations as well. Only when a leader is confident himself, he can boost the confidence of his subordinates. 

6. Responsibility: A leader should command responsibility for the work and tasks of his group. He should hold the responsibility of being answerable for the mistakes of his subordinates. However, as a mark of encouragement he must share the credit of the success with his subordinates. 

7. Effective Communication Skill: A leader should be able to clearly express his ideas and instructions clearly to the subordinates. On the other hand, a leader also forms the link between the higher authorities and the subordinates. He should be able to effectively pass the problems and suggestions of the subordinates to the seniors. Besides, he should also be a patient listener and counsellor. 

8. Ability to take Decisions: A leader should be able to take appropriate decisions based on logic, facts and figures. Moreover, he should be confident enough to hold on to his decisions and not get confused. 

9. Social Behaviour: He should maintain a friendly and supportive behaviour with his subordinates. He must be able to understand people and maintain good social relations with them. 

10. Dynamic: A leader must be dynamic and outgoing. He must be able to take up new initiatives and break the old paradigms for the benefit of the organisation. Though the above mentioned qualities are necessary for being a good leader, however, the mere presence of these qualities does not ensure leadership success. In fact, no single individual can possess all the qualities. However, a conscious effort must be made by the managers to acquire them. 

 

Question : Discuss Maslow's Need Hierarchy theory of motivation.

Solution : Maslow's Need Hierarchy theory provides an understanding of the complex phenomenon of motivation. According to Maslow, within each individual there exists a set of five needs that can be arranged in a hierarchy. Knowledge of these needs helps the manager in understanding the motivation can be provided to them. Assumptions Maslow's theory is based on the following assumptions. (i) People’s behaviour is based on their needs. Satisfaction of such needs influences their behaviour. (ii) People’s needs are in hierarchical order, starting from basic needs to other higher-level needs. (iii) A satisfied need can no longer motivate a person; only next higher-level need can motivate him. (iv) A person moves to the next higher level of the hierarchy only when the lower need is satisfied. Theory The following is the hierarchy of needs as given by Maslow. 

1. Physiological Needs: Such needs comprise of essential requirements for sustenance of life. They are at the top of the hierarchy. The fulfilment of these needs is necessary for survival. For example, food, clothing, shelter are physiological needs. An employee requires a certain basic salary for the satisfaction of these needs. 

2. Security Needs: These needs relate to physical and economic security and well being. For example, an employee desires job security, income stability, etc. 

3. Belongingness Needs: Such needs comprise of the social needs of an individual such as affection, acceptance, companionship, etc. as every individual yearns for social acceptance and belongingness. 

4. Esteem Needs: These needs include such elements as respect, dignity, recognition, etc. as every individual wants to command respect and acknowledgement in the peer group. 

5. Self-Actualisation Needs: This need refers to achieving what one aims or aspires. It is the highest level need in hierarchy. For an employee such needs relate to growth, work satisfaction, etc.

Maslow's theory is widely appreciated and is used as basis for motivation by the managers. However, sometimes it can happen that needs of an individual does not follow the exact order of hierarchy. Nevertheless, an understanding of the needs as given by Maslow helps the managers in practicing efficient motivation.

 

Question : What are the common barriers to effective communication? Suggest measures to overcome them. 

Solution : Barriers in Communication Sometimes the information that reaches the receiver is not in the manner that the sender had intended. That is, at times there arises misunderstanding or misinterpretation of the information as it is passed from the sender to the receiver. This creates barriers in the effective flow of communication. Barriers to communication can be classified as follows. 

1. Semantic Barriers: Semantic barriers of communication relate to the use or understanding of language. Sometimes it happens that certain words, sentences or phrases remain ambiguous or difficult to understand. Thereby, they are likely to get misinterpreted. Such barriers in communication that arise out of ambiguity or difficulty in understanding of words and sentences are known as semantic barriers. For example, sometimes while giving out instructions, the senior or specialist uses technical vocabulary that might be difficult to understand for the subordinates. Similarly, at times two or more words have the same pronunciation (such as access and excess), that results in confusion regarding the correct interpretation of the word. 

2. Psychological Barriers: Sometimes psychological factors such as frustration, anger, fright may also obstruct effective communication. For example, out of frustration over a certain matter, an individual's mind may be preoccupied and he may not be able to attentively grasp the information given to him. Similarly, due to preconceived notions regarding a conversation, an individual might derive conclusions even before the information is completed. 

3. Personal Barriers: Sometimes personal factors related to the sender or the receiver act as a hurdle in communication. For example, often in formal organisations, superiors do not share such information that they fear will harm their authority. Similarly, due to lack of trust in their subordinates, they may not be willing to pay attention to the information provided by them. In a similar manner, subordinates may lack the incentive to communicate freely with the superiors. Thus, in such cases, effective communication is hindered due to personal factors pertaining to the sender and the receiver. 

4. Organisational Barriers: In formal organisational structures, barriers to communication arise due to such factors as authority, rules, regulations, relationships, etc. For example, if an organisation follows long vertical chains of communication, it might result in delay in the flow of information. Similarly, a highly centralised organisational structure obstructs free communication.

Measures to overcome Barriers in Communication: The following are some of the measures that can be adopted to overcome various barriers of communication. 

(i) Clarify the ideas before communication: The communication should take place as per the understanding level and capabilities of the receiver. That is, it must be ensured that the receiver is clearly able to understand the information.

ii)Be aware of languages, tone and content of message: The language, tone and content of the information should be appropriately chosen. It should be easily understandable and should not harm anybody's sentiments.

 (iii) Ensure proper feedback: For the communication to be effective, proper feedback must be taken from the receiver. That is, he must be encouraged to respond during the conversation. 

(iv) Communicate for present as well as future: It must be ensured that the information is complete in all respect and nothing is left ambiguous. (v)Communicate according to the needs of receiver: The core idea of the communication must be clear between the sender and the receiver. That is, it must be conveyed properly what the communication is about. 

(vi) Be a good listener: The sender of the information should also be a patient listener. He should be open to communication from the other end as well.

 

Question : Explain different financial and non-financial incentives used to motivate employees of a company? 

Solution : Financial Incentives refer to direct monetary incentives offered to the employees to motivate or reward people for better performance. The following are some of the financial incentives used in the organisations. 

i. Salary and Allowances: In every organisation salary and allowances given to the employees forms the basic form of financial incentive. Regular raise in salaries and grant of allowances acts as a motivation for the employees 

ii. Performance Based Incentives: Often organisation offer monetary rewards for good performance. This induces the workers to improve their efficiency and performance. 

iii. Bonus: Bonus refers to the extra reward over and above the basic salary. It can take the form as cash, gifts, paid vacations, etc. For example, some organisations grant bonus during festival times such as Diwali bonus. 

iv. Stock Option: Under this incentive scheme, the employee is offered the shares of the company at a price lower than the market price. This instils a feeling of ownership and belongingness in the employee and urges him to contribute towards the goals of the organisation. 

v. Sharing of Profit: Here in, the organisation shares a portion of the profit with its employees. This encourages the workers to contribute actively towards the growth of the organisation. 

vi. Retirements Benefits: Many organisations offer certain retirement benefits to its employees such as pensions, gratuity, provident fund, etc. This provides a sense of security and stability to the employees. 

vii. Fringe Benefits: Besides the basic salary an organisation may offer certain additional advantages also to its employees such as housing allowance, medical allowance, etc. Non-financial incentives refer to those incentives that focus on non-monetary needs.

 

Chapter 8: Controlling Exercise Solutions

Question  : An efficient control system helps in (a) Accomplishes organisational objectives (b) Boosts employee morale (c) Judges accuracy of standards (d) All of the above 

Solution : An efficient controlling system helps in achieving all the aforementioned objectives. Controlling refers to the process of assessing the progress of the current tasks and activities, and setting the work standards to achieve the goals of the organisation. An efficient control system helps in keeping a close watch on the progress of the work towards the accomplishment of organisational goals and takes the required corrective actions. It helps in tracking the changes taking place in the organisation and the business environment and thereby, helps in judging the accuracy of the standards set. Along with this, controlling boosts employee morale by telling them in advance about what is expected from them and motivating them to work according to the set policies.

 

Question  : Controlling function of an organisation is (a) Forward looking (b) Backward looking (c) Forward as well as backward looking (d) None of the above 

Solution : Controlling as an essential part of management is forward as well as backward looking. It is a backward looking function in the sense that it assesses the work done and analyses deviations from the set standards. Based on these deviations it attempts to take the required corrective measures. Thus, it guides the future course of action and aims at improving the future performance. In this sense, it is also a forward looking function. Hence, we can say that controlling is forward as well as backward looking function.

 

Question  : Management audit is a technique to keep a check on the performance of (a) Company (b) Management of the company (c) Shareholders (d) Customers 

Solution : Management audit implies a systematic assessment of the overall actions of the management of a company. It aims at evaluating the efficiency and effectiveness of the management and helps in identifying the areas where it lags behind. It reveals the deficiencies in performance and helps in taking corrective measures. Hence, management audit keeps a check on the overall performance of the management of the company.

 

Question  : Budgetary control requires the preparation of (a) Training schedule (b) Budgets (c) Network diagram (d) Responsibility centres

Solution : Budgetary control technique of managerial control involves the preparation of budgets for each operation of the organisation and then comparing the realised results with the budgetary standards. A budget is a quantitative statement defining the objectives to be achieved in a specified time period and the policies to be followed. 

 

Question : Which of the following is not applicable to responsibility accounting? (a) Investment centre (b) Accounting centre (c) Profit centre (d) Cost centre

Solution : Accounting centre is not a part of responsibility accounting. Responsibility accounting basically refers to a system in which different divisions of the organisation are established as responsibility centres. Herein, each department is given a set target and the head of the department (manager) is made responsible for achieving it. They are of different types of responsibility centres such as cost centre, investment centre, profit centre and revenue centre.

 

Short answers Questions: 

Question  : Explain the meaning of controlling. 

Solution : Controlling refers to the function of evaluating and assessing the progress of the work done. It involves setting a specific criteria or standards for the work and then comparing the actual work with the set standards. It helps in finding the deviations from the set targets and thereby, take the required corrective actions. It ensures that everything goes as per the plans adopted. It also ensures full and efficient utilisation of resources. Controlling is an imperative managerial function as it keeps a close check on the progress of work and thereby, forms the basis for future actions and planning.

 

Question : 'Planning is looking ahead and controlling is looking back'. Comment. 

Solution : Planning is looking ahead and controlling is looking back. This statement is partially true. Planning is a psychological process of 'thinking and deciding in advance' about 'what is to be done' and 'how it is to be done'. It is a mental activity that includes deciding the goals and also the actions through which they are to be accomplished. Thus, it is said that planning is looking ahead as it involves predicting the future. Controlling on the other hand, involves an assessment of the past performance and evaluating them against the set standards. In this sense, controlling is said to be a backward-looking function. However, both these statements are only partially true. Though planning is a futuristic concept but it is based on past actions and experiences. Planning for future cannot take place without peeping into the past. Similarly, though controlling involves assessment of past performance, it also aims at improving the future performance by taking the required corrective actions. Hence, we can say that planning and controlling are backward looking as well as forward looking functions.

 

Question  : 'An effort to control everything may end up in controlling nothing'. Explain. 

Solution : The statement, 'an effort to control everything may end up in controlling nothing' is in regard with the principle of 'Management by Exception'. It stresses on the fact that everything cannot be effectively controlled. According to this principle, rather than controlling each and every deviation in performance, an acceptable limit of deviations in various activities should be set and only those deviations that go beyond the acceptable range should be brought to the notice of the managers for control. In other words, only the major deviations which are beyond permissible limit should be acknowledged. For instance, suppose the acceptable range of increase in the input  cost is set at 3 percent. In this case, only a more than 3% increase in the input cost (say 7%) should be brought to the notice of the managers. On the other hand, a less than 3% increase (say 1%) should be neglected. Hence, an effort should be there to control only the major things instead of trying to control everything. 

 

Question  : Write a short note on budgetary control as a technique of managerial control. 

Solution : Budgetary control is a technique of controlling that involves preparing plans in the form of budgets. Budget refers to a financial or a quantitative statement that defines the targets to be achieved and the policies to be followed in a specific period of time. The actual performance is then compared with the budgetary standards. This comparison helps in identifying the deviations and thereby, guides in taking appropriate corrective measures. Budget can be prepared for different divisions of the organisation such as sales budget, production budget, purchase budget, etc. However, for budgeting to be effective, future estimates must be made carefully. Budgeting also acts as a source of motivation for the employees by setting the standards against which their performance will be assessed. Thus, it encourages them to achieve the set objectives. In addition, it is also used to facilitate coordination among different divisions/departments of the organisation. Moreover, proper budgeting ensures that resources are allocated to different divisions as per their requirements. Thereby, it helps in optimum utilisation of the resources.

 

Question  : Explain how management audit serves as an effective technique of controlling. 

Solution : Management audit refers to the extensive and constructive appraisal of the overall performance of the management of an organisation. It aims at improving the overall effectiveness and efficiency of the management. It evaluates all the functions performed by the managers and helps in identifying deficiencies in the work performance. The effectiveness of management audit for controlling can be judged from the following points. i. Identification of Deficiencies: Management audit helps in recognising the current as well as probable deficiencies in the performances. Thereby, it helps in taking the necessary corrective measures. 

ii. Improves Efficiency: Through management audit, various activities of the management can be continuously monitored. Thereby, it helps in improving the overall efficiency of the management. 

iii.Enhances Coordination: It improves coordination between employees as well as within the different functions of the organisation as it continuously oversees the work. 

iv.Adapting to Environmental Changes: It helps the organisation to adapt to the environmental changes appropriately. This is done by ensuring that the managerial policies and strategies are up-to-date.

 

Long Type Questions

Question : Explain the techniques of managerial control. 

Solution : The techniques used for managerial control can be divided into two broad categories namely, Traditional Techniques and Modern Techniques. Traditional Techniques which are being used by the managers since long back, are known as traditional techniques. The following are traditional techniques of managerial control. 

i. Personal Observation: This technique includes personal observation by the managers to oversee the work being done. It enables the manager to gather the right information and also creates a pressure on the workers to perform well as they are being continuously observed by their supervisor. However, it is a time-consuming process and cannot be used where there are a variety of functions to be overseen. 

ii. Statistical Reports: Information in the form various statistical analysis such as averages, ratios, percentages, etc. can be easily presented in the form of graphs, charts and tables. Such presentation facilitates easy comparison of the performance with the standards. 

iii. Break-Even Analysis: It involves a study of the relationship between costs, volume and profits. Break-Even point refers to that quantity of sales where there is neither profit nor loss. It is determined at the point where total cost incurred is equals the total revenue earned. Through this technique, the manager can estimate the costs and profits to the organisation at various levels of quantity and thereby, find the level where profit can be maximised. 

iv. Budgetary Control: Budgetary control is a technique of planning the future operations in the form of budgets. Here, 'budget' refers to a quantitative or qualitative statement which presents the objectives to be achieved in a specified period of time. These budgets are then used as standards for measuring the actual performance. It also presents the time-bounded policies to be used for the attainment of the objectives. It also facilitates management by exception by focusing on the activities which deviate significantly from the set budgets. However, to ensure the effectiveness of the technique, estimates about the future should be as accurate as possible. In addition, the budgets should be flexible so as to adapt to the changes in business environment. 

 

Question : Explain the techniques of managerial control. 

Solution : The techniques used for managerial control can be divided into two broad categories namely, Traditional Techniques and Modern Techniques. Traditional Techniques Techniques which are being used by the managers since long back, are known as traditional techniques. The following are traditional techniques of managerial control.

 i. Personal Observation: This technique includes personal observation by the managers to oversee the work being done. It enables the manager to gather the right information and also creates a pressure on the workers to perform well as they are being continuously observed by their supervisor. However, it is a time-consuming process and cannot be used where there are a variety of functions to be overseen. 

ii. Statistical Reports: Information in the form various statistical analysis such as averages, ratios, percentages, etc. can be easily presented in the form of graphs, charts and tables. Such presentation facilitates easy comparison of the performance with the standards. 

iii. Break-Even Analysis: It involves a study of the relationship between costs, volume and profits. Break-Even point refers to that quantity of sales where there is neither profit nor loss. It is determined at the point where total cost incurred is equals the total revenue earned. Through this technique, the manager can estimate the costs and profits to the organisation at various levels of quantity and thereby, find the level where profit can be maximised. 

iv. Budgetary Control: Budgetary control is a technique of planning the future operations in the form of budgets. Here, 'budget' refers to a quantitative or qualitative statement which presents the objectives to be achieved in a specified period of time. These budgets are then used as standards for measuring the actual performance. It also presents the time-bounded policies to be used for the attainment of the objectives. It also facilitates management by exception by focusing on the activities which deviate significantly from the set budgets. However, to ensure the effectiveness of the technique, estimates about the future should be as accurate as possible. In addition, the budgets should be flexible so as to adapt to the changes in business environment.

 

Question  : Explain the importance of controlling in an organisation. What are the problems faced by the organisation in implementing an effective control system? 

Solution : Controlling is an important and an indispensable function of management. It aims at managing the managerial actions by setting the standards and identifying the deviations of actual performance as against the set standards. It also ensures optimum utilisation of resources while taking corrective measures for the deviations. The following are the factors that highlight the importance of controlling. 

(i) Achieving Organisational Goals: Controlling aims at the accomplishment of organisational goals by indicating the deficiencies and the corrective actions which are to be taken. It helps in moving in the right direction for attaining the set organisational objectives. 

(ii) Evaluating the Standards: Controlling helps in judging the accuracy of the standards adopted by the management. A good controlling system enables the manager to check whether the set standards are accurate and feasible. It also helps the organisation to review and revise the standards according to the changing business environment. 

(iii) Optimum Utilisation of Resources: A continuous control and monitoring helps in the efficient and optimum utilisation of resources. As each work is done according to the set standard, there is less wastage and spoilage of resources. 

(iv) Employee Motivation: By exercising effective control, employees get to know well in advance about what is expected from them and the standards against which their performance will be assessed. This motivates them to achieve the assigned targets in a better way. 

(v) Order and Discipline: Efficient controlling helps in creating an atmosphere of order and discipline in the organisation. As the employees are aware of the fact that they are being continuously observed, dishonesty and inefficiency in behaviour is minimised. 

(vi) Promoting Coordination: Predetermined standards provide a basis for better coordination within various activities. As the departments are made aware of their duties and tasks, controlling promotes coordination among them. Controlling provides unity of direction while ensuring that the organisational objectives are met. Hence, Controlling is an important function that is performed by all the managers. However, controlling has some limitations. The following points highlight the problems faced by the organisation when implementing an effective controlling system. 

(i) Complication While Setting Standards: It is important to set the standards in quantitative terms as well as qualitative terms for better controlling. However, controlling becomes less effective when the standards are defined in qualitative terms. Qualitative standards make the evaluation of the performance and the comparison of actual work with the standards, a complicated task. Thus, it might pose a problem in the process of controlling. 

(ii) External Factors: Business environment keeps on changing and the organisation have very little control over such external factors. These factors might create hurdles in effective controlling. Such factors can be in the form of change in government policies, environmental changes, competition, etc.


 

Chapter 8: Controlling Exercise Solutions

Question  : An efficient control system helps in (a) Accomplishes organisational objectives (b) Boosts employee morale (c) Judges accuracy of standards (d) All of the above 

Solution : An efficient controlling system helps in achieving all the aforementioned objectives. Controlling refers to the process of assessing the progress of the current tasks and activities and setting work standards to achieve the goals of the organisation. An efficient control system helps in keeping a close watch on the progress of the work towards the accomplishment of organisational goals and takes the required corrective actions. It helps in tracking the changes taking place in the organisation and the business environment and thereby, helps in judging the accuracy of the standards set. Along with this, controlling boosts employee morale by telling them in advance about what is expected from them and motivating them to work according to the set policies.

 

Question  : Controlling function of an organisation is

(a) Forward looking

(b) Backward looking

(c) Forward as well as backward looking

(d) None of the above 

 

Question  : Management audit is a technique to keep a check on the performance of (a) Company (b) Management of the company (c) Shareholders (d) Customers

Solution : Management audit implies a systematic assessment of the overall actions of the management of a company. It aims at evaluating the efficiency and effectiveness of the management and helps in identifying the areas where it lags behind. It reveals the deficiencies in performance and helps in taking corrective measures. Hence, management audit keeps a check on the overall performance of the management of the company.

 

Question  : Budgetary control requires the preparation of (a) Training schedule (b) Budgets (c) Network diagram (d) Responsibility centres 

Solution : Budgetary control technique of managerial control involves the preparation of budgets for each operation of the organisation and then comparing the realised results with the budgetary standards. A budget is a quantitative statement defining the objectives to be achieved in a specified time period and the policies to be followed.

 

Question  : Which of the following is not applicable to responsibility accounting? (a) Investment centre (b) Accounting centre (c) Profit centre (d) Cost centre

Solution : Accounting centre is not a part of responsibility accounting. Responsibility accounting basically refers to a system in which different divisions of the organisation are established as responsibility centres. Herein, each department is given a set target and the head of the department (manager) is made responsible for achieving it. They are of different types of responsibility centres such as cost centre, investment centre, profit centre and revenue centre.

 

Long type Questions

Question : Explain the meaning of controlling. 

Solution : Controlling refers to the function of evaluating and assessing the progress of the work done. It involves setting a specific criteria or standards for the work and then comparing the actual work with the set standards. It helps in finding the deviations from the set targets and thereby, take the required corrective actions. It ensures that everything goes as per the plans adopted. It also ensures full and efficient utilisation of resources. Controlling is an imperative managerial function as it keeps a close check on the progress of work and thereby, forms the basis for future actions and planning.

 

Question : 'Planning is looking ahead and controlling is looking back'. Comment.

Solution : Planning is looking ahead and controlling is looking back. This statement is partially true. Planning is a psychological process of 'thinking and deciding in advance' about 'what is to be done' and 'how it is to be done'. It is a mental activity that includes deciding the goals and also the actions through which they are to be accomplished. Thus, it is said that planning is looking ahead as it involves predicting the future. Controlling on the other hand, involves an assessment of the past performance and evaluating them against the set standards. In this sense, controlling is said to be a backward-looking function. However, both these statements are only partially true. Though planning is a futuristic concept but it is based on past actions and experiences. Planning for future cannot take place without peeping into the past. Similarly, though controlling involves assessment of past performance, it also aims at improving the future performance by taking the required corrective actions. Hence, we can say that planning and controlling are backward looking as well as forward looking functions.

 

Question : Identify the benefits the company will derive from a good control system.

Solution:

1. Achieving desired goals

2. Accuracy of operations.

3. Efficient and effective use of resources.

4. Improving employee morale.

5. Ensuring proper flow of orders and the whole system is in discipline.

6. Improves the performance of the individual through coordination.

 

Question : How can the company relate its planning with control in this line of business to ensure that its plans are actually implemented and targets attained.

Solution :

(i) Setting Standards Setting up of standards involves developing the benchmarks against which the actual performance is to be measured. The standards can be set in qualitative as well as quantitative terms. Qualitative benchmarks can be in the form of improving coordination in work, higher goodwill or increased motivation level of employees, etc. 

(ii) Measuring Actual Performance once the standards are set, the next step is to measure the actual performance of the activities. This may be done through various techniques such as personal observation, checking the sample, performance reports, etc. The checking should be done in an exact and reliable manner so that correct measurement is taken for comparison. Measurement can be done after the completion of an activity as well as while it is in progress. 

(iii) Comparing the Performances once measured are then compared with the set standards. Such a comparison helps in assessing the deviations in the work. Thereby, it guides the managers in taking the necessary steps so as to improve the performances. These comparisons are easier when they are in quantitative terms. (iv) Analysing Deviation Every organisation faces deviations when comparing the actual performance with the predeveloped standards. Thus, it is important to find the deviations that are in the permissible range. It is said that deviations in key areas should be attended first. For analysing the deviations the managers generally use 'Critical Point Control' and 'Management by Exception'. Once the deviations are recognised, it is necessary to acknowledge the cause for it. There can be a number of elements causing deviations in work such as infeasible standards, deficiencies in process, under utilisation of resources, changes in business environment, etc. Thus, it becomes important for the management to take into regard the causes for the concerned deviations.

 (v) Corrective Measures: When deviations go beyond the admissible limits, there arises a need for the management to take corrective actions. This is the last step of controlling which aims at correcting the deficiencies of the organisation so that the errors do not occur again. For example, if the production target was not met duly, appropriate corrective actions such as training the workers or updating the machinery for working, etc. can be taken.

 

Question : Give the steps in the control process that the company should follow to remove the problems it is facing. 

Solution: 

1. Setting performance standards 

2. Measurement of actual performance.

3.Comparison of actual performance with standards.

 

Question  : What techniques of control can the company use? In all the answers keep in mind the sector of business the company is in. 

Solution: 

i. Return on Investment: Return on investment refers to the gains or benefits earned in relation to the investments done. It is a useful technique in measuring whether the invested capital is being used effectively and if a reasonable amount of returns are being generated from these investments. Managers can opt for this technique when comparing the performances of different departments or divisions or when comparing the present actions in relation to the previous year's performance. 

ii. Responsibility Accounting: Under this system, different divisions of an organisation are established as responsibility centers. The head of each centre is responsible for the targets and duties regarding his centre. The following are some of the responsibility centers that can be formed. 

  •  Cost Centre, is responsible for the costs incurred by the organisation. 

  • Revenue Centre, responsible for the revenue generated from the sales or marketing activities. 

  • Profit Centre, responsible for the profits generated considering the costs and revenues. 

  • Investment Centre, it takes into account the investment made in the form of assets.

 iii. Management Information System: MIS is a computer based controlling technique that provides timely data and information to the managers while aiming at effective decision making. It processes the massive data of the organisation and generates useful information to the managers. MIS also ensures cost effectiveness in managing information as it facilitates collection and dissemination of information at different levels.

 

Chapter 9 : Financial Management

Question : The cheapest source of finance is (a) debenture (b) equity share capital (c) preference share (d) retained earning 

Solution: (d) The cheapest source of finance is retained earnings. Retained income refers to that portion of net income or profits of an organisation that it retains after paying off dividends. An organisation can reinvest its retained earnings or profits for the purpose of expansion, modernisation, etc. It neither involves any fund raising cost nor any risk. Also, unlike other sources of finance it does not involve any obligation in terms of repayment. 

 

Question  : A decision to acquire a new and modern plant to upgrade an old one is a (a) financing decision (b) working capital decision (c) investment decision (d) None of the above 

Solution : (c) The decision to acquire a new and modern plant to upgrade an old one is an Investment decision. Investment decision refers to the decision regarding where the funds are to be invested so as to earn the highest possible return. The decision to acquire a new plant is a long term investment decision and affects long run working and earning capacity  of the business. On the other hand, working capital decisions refer to those investment decisions that influence the day to day working of the business. While, financing decision refers to the decisions regarding the sources from where the funds can be raised.

 

Question : Other things remaining the same, an increase in the tax rate on corporate profit will (a) make the debt relatively cheaper (b) make the debt relatively the dearer (c) have no impact on the cost of debt (d) we can't say 

Solution : (a) When there is an increase in the tax on corporate profit, the debt becomes relatively cheaper. This is because interest that is to be paid to the debtors is deducted from the total income before calculating the value of tax. Thus, as the value of tax increases, the debt becomes relatively cheaper.

 

Question : Companies with a higher growth potential are likely to (a) pay lower dividends (b) pay higher dividends (c) dividends are not affected (d) none of the above

Solution: (a) Companies which have higher growth potential are likely to pay lower dividends. This is because the companies having higher growth potential have greater investment plans and require larger funds for investment. Thus, they retain a greater portion of their earnings to finance the required investment and thereby, pay lower dividends. 

 

Question : Financial leverage is called favourable if

(a) Return on investment is lower than the cost of debt

(b) ROI is higher than the cost of debt

(c) Debt is easily available

(d) If the degree of existing financial leverage is low

 

Solution : (b) Financial Leverage refers to the proportion of debt in the overall capital. It is said to be a favourable situation when the return on investment becomes higher than the cost of debt. In other words, as the Return on investment becomes greater, the earning per share also increases and the financial leverage is said to be favourable. 

 

Question  : Higher debt-equity ratio results in (a) lower financial risk (b) higher degree of operating risk (c) higher degree of financial risk (d) higher EPS 

Solution : (c) Higher debt- equity ratio refers to a situation where the proportion of debt in total capital is higher. This implies higher degree of financial risk. This is because in case of debt, it is obligatory for a business to make interest payments and the return of principal to the debtors. Thus, higher debt increases the financial risk for the business. 

 

Question : Higher working capital usually results in (a) higher current ratio, higher risk and higher profits (b) lower current ratio, higher risk and profits (c) higher equity, lower risk and lower profits (d) lower equity, lower risk and higher profits 

Solution : (a) Working capital of a firm refers to the amount of current assets which are in excess 

over current liabilities. If a company has a higher working capital then there will be a higher current ratio (i.e. current assets over current liabilities), higher risk and higher profits.

 

Question  : Current assets are those assets which get converted into cash (a) within six months (b) within one year (c) between one year and three years (d) between three and five years 

Solution : (b) Current assets are those assets which can be converted into cash or can be used to pay off liabilities within a time span of 12 months, i.e. one year. Some of the examples of current assets are cash, cash equivalents, inventories, debtors, bills receivables, etc. 

 

Question :  Financial planning arrives at (a) minimising the external borrowing by resorting to equity issues (b) entering that the firm always have significantly more fund than required so that there is no paucity of funds (c) ensuring that the firm faces neither a shortage nor a glut of unusable funds (d) doing only what is possible with the funds that the firms has at its disposal 

Solution : (c) Financial Planning aims at ensuring that the firm faces neither a shortage nor a glut (excess) of unusable funds. If there is a shortage of funds then the firm will not be able to carry out its planned activities and commitments. On the other hand, if there are excess funds available then it adds to the cost of business and also encourages wastage of funds. Thus, financial planning focuses on ensuring the availability of just enough funds at the right time. 

 

Question :  Higher dividend per share is associated with 

(a) high earnings, high cash flows, unstable earnings and higher growth opportunities (b) high earnings, high cash flows, stable earnings and high growth opportunities (c) high earnings, high cash flows, stable earnings and lower growth opportunities (d) high earnings, low cash flows, stable earnings and lower growth opportunities 

Solution : (d) If a company gives higher dividend per share then it gets associated with high amount of earnings as only if they will earn higher, they will be able to give higher dividends; higher cash flow as the payment of dividend involves cash outflow; stable earnings as stable earnings means that the company is confident of its future earning potentials; and lower growth opportunities because it requires less requirement of retained earnings and their retained earnings while lowering the amount of dividends paid.

 

Question :  A fixed asset should be financed through (a) a long term liability  (b) short term liability (c)   a mix of long and short term liabilities 

Solution : (a) Fixed assets are those assets which are invested in a company for a longer time period, generally more than one year. As these assets have long term implication on the business in terms of growth and profitability, they should be financed through long term liabilities such as long term loans, preference shares, retained earnings, etc.

 

Question  : Current assets of a business firm should be financed through (a) current liability only (b) long-term liability only (c) both types (i.e. Long and short liabilities)

Solution : (c) Current assets are those assets which get converted in cash or cash equivalents within a short span of time and provide liquidity to a business. For financing the current assets of a business, both types of liabilities (short and long) can be used. 

 

Short type questions

Question  : What is meant by capital structure? 

Solution : Capital Structure means  the proportion of debt and equity used for financing the operations of business. In other words, capital structure represents the proportion of debt capital and equity capital in the capital structure. What kind of capital structure is best for a firm is very difficult to define. The capital structure should be such which increase the value of equity share or maximizes the wealth of equity shareholders.

 

Question  : Discuss the two objective of Financial Planning. 

Solution : Financial Planning involves designing the blueprint of the financial operations of a firm. It ensures that just the right amount of funds are available for the organisational operations at the right time. Thereby, it ensures smooth functioning. Taking into consideration the growth and performance, through financial planning, firms tend to forecast what amount of fund would be required at what time. The following are the two highlighted objectives of financial planning.

To ensure availability of funds whenever these are required: The main objective of financial planning is that sufficient fund should be available in the company for different purposes such as for purchase of long term assets, to meet day to day expenses etc. It ensures timely availability of finance. Along with availability financial planning also tries to specify the sources of finance. 

 

Question  : Current assets are those assets which get converted into cash (a) within six months (b) within one year (c) between one year and three years (d) between three and five years 

Solution : (b) Current assets are those assets which can be converted into cash or can be used to pay off liabilities within a time span of 12 months, i.e. one year. Some of the examples of current assets are cash, cash equivalents, inventories, debtors, bills receivables, etc.

 

Question :  Financial planning arrives  at (a) minimising the external borrowing by resorting to equity issues (b) entering that the firm always have significantly more fund than required so that there is no paucity of funds (c) ensuring that the firm faces neither a shortage nor a glut of unusable funds (d) doing only what is possible with the funds that the firms has at its disposal.

 

Question  : Higher dividend per share is associated with

Solution : (c) Financial Planning aims at ensuring that the firm faces neither a shortage nor a glut (excess) of unusable funds. If there is a shortage of funds then the firm will not be able to carry out its planned activities and commitments. On the other hand, if there are excess funds available then it adds to the cost of business and also encourages wastage of funds. Thus, financial planning focuses on ensuring the availability of just enough funds at the right time. 

 

Question :  A fixed asset should be financed through (a) a long term liability (b) a short term liability (c) a mix of long and short term liabilities

 Solution : (a) Fixed assets are those assets which are invested in a company for a longer time period, generally more than one year. As these assets have long term implication on the business in terms of growth and profitability, they should be financed through long term liabilities such as long term loans, preference shares, retained earnings, etc.

 

Question  : Current assets of a business firm should be financed through (a) current liability only (b) long-term liability only (c) both types (i.e. Long and short liabilities) 

Solution : (c) Current assets are those assets which get converted in cash or cash equivalents within a short span of time and provide liquidity to a business. For financing the current assets of a business, both types of liabilities (short and long) can be used. 

 

Short Answer Type: 

Question  : What is meant by capital structure? 

Solution : Capital Structure means the proportion of debt and equity used for financing the operations of business. In other words, capital structure represents the proportion of debt capital and equity capital in the capital structure. What kind of capital structure is best for a firm is very difficult to define. The capital structure should be such which increase the value of equity share or maximizes the wealth of equity shareholders. 

 

Question  : Discuss the two objective of Financial Planning.

Solution : Financial Planning involves designing the blueprint of the financial operations of a firm. It ensures that just the right amount of funds are available for the organisational operations at the right time. Thereby, it ensures smooth functioning. Taking into consideration the growth and performance, through financial planning, firms tend to forecast what amount of fund would be required at what time. The following are the two highlighted objectives of financial planning.

To ensure availability of funds whenever these are required: The main objective of financial planning is that sufficient fund should be available in the company for different purposes such as for purchase of long term assets, to meet day to day expenses etc. It ensures timely availability of finance. Along with availability financial planning also tries to specify the sources of finance.

To see that firm does not raise resources unnecessarily: Excess funding is as bad as inadequate or shortage of funds. If there is surplus money, financial planning must invest it in the best possible manner as keeping financial resources idle is a great loss for an organization.

 

Question : What is financial risk? Why does it arise? 

Solution : Financial risk refers to a situation when a company is not able to meet its fixed financial charges such as interest payment, preference dividend and repayment obligations. In other words, it refers to the probability that the company would not be able to meet its fixed financial obligations. It arises when the proportion of debt in the capital structure increases. This is because it is obligatory for the company to pay the interest charges on debt along with the principle amount. Thus, higher the debt, higher will be its payment obligations and thereby higher would be the chances of default on payment. Hence, higher use of debt leads to higher financial risk for the company.

 

Question :  Define a 'current asset'. Give four examples of such assets.
Solution : Current asset are those assets which are retained in the business with the purpose to convert them into cash within a short period say, one year. for example- goods are
purchased with a purpose to resell and earn profit, debtors exist convert them into cash, i.e., receive the amount from them, bills receivable exist again for receiving cash against it.
Some of the examples of current assets are short term investment, debtors, stocks and cash equivalents.

 

Question :  Financial management is based on three broad financial decisions. What are these? 

Solution : Financial management refers to the efficient acquisition, allocation and usage of funds of the company. It deals in three main dimensions of financial decisions namely, Investment decisions, Financial decisions and Dividend decisions. 

1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions. 

2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. 

3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution.

Net profits are generally divided into two: 

1. Dividend for shareholders- Dividend and the rate of it has to be decided.

 2. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise. 

 

Question : What are the main objectives of financial management? Briefly explain 

Solution : The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be

1. To ensure regular and adequate supply of funds to the concern. 

2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders.

 3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. 

4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved.

 5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital. 

 

Question :  How does working capital affect both the liquidity as well as profitability of a business? 

Solution : Working capital of a business refers to the excess of current assets (such as cash in hand, debtors, stock, etc.) over current liabilities. Working capital affects both the liquidity as well as profitability of a business. As the amount of working capital increases, the liquidity of the business increases. However, since current assets offer low return, with the increase in working capital the profitability of the business falls. For example, an increase in the inventory of the business increases its liquidity but since the stock is kept idle, the profitability falls. On the other hand, low working capital, hinders the day to day operations.

 

Long type Type:

Question : What is working capital? How is it calculated? Discuss five important determinants of working capital requirement. 

Solution : Every business needs to take the decision regarding the investment in current assets i.e. the working capital. Current assets refer to the assets that are converted into cash or cash equivalents in a short period of time (less than or equal to one year). There are two broad concepts of working capital namely, Gross working capital and Net working capital. Gross working capital (or, simply working capital) refers to the investment done in the current assets. Net working capital, on the other hand, refers to the amount of current assets that is in excess of current liabilities. Herein, current liabilities are those obligatory payments which are due for payment such as bills payable, outstanding expenses, creditors, etc. Net Working Capital is calculated as the difference of current assets over current liabilities.

 

Question :  ''Capital structure decision is essentially optimisation of risk-return relationship''. Comment. 

Solution : Capital Structure refers to the combination of different financial sources used by a company for raising funds. The sources of raising funds can be classified on the basis of ownership into two categories as borrowed funds and owners' fund. Borrowed funds are in the form of loans, debentures, borrowings from banks, public deposits, etc. On the other hand, owners' funds are in the form of reserves, preference share capital, equity share capital, retained earnings, etc. Thus, capital structure refers to the combination of borrowed funds and owners' fund. For simplicity, all borrowed funds are referred as debt and all owners' funds are referred as equity. Thus, capital structure refers to the combination of debt and equity to be used by the company. The capital structure used by the company depends on the risks and returns of the various alternative sources. 

One hand, debt is a cheaper source of finance but involves greater risk, on the other hand, although equity is comparatively expensive, they are relatively safe. The cost of debt is less because it involves low risk for lenders as they earn an assured amount of return. Thereby, they require a low rate of return which lowers the costs to the firm. In addition to this, the interest on debt is deductible from the taxable income (i.e. interest that is to be paid to the debt security holders is deducted from the total income before paying the tax). Thus, higher return can be achieved through debt at a lower cost. In contrast, raising funds through equity is expensive as it involves certain floatation cost as well. Also, the dividends are paid to the shareholders out of after tax profits. Though debt is cheaper, higher debt raises the financial risk. This is due to the fact that debt involves obligatory payments to the lenders. Any default in payment of the interest can lead to the liquidation of the firm. As against this, there is no such compulsion in case of dividend  payment to shareholders. Thus, high debt is related to high risk. 

Another factor that affects the choice  of capital structure is the return offered by various sources. The return offered by each source determines the value of earning per share. A high use of debt increases the earning per share of a company (this situation is called Trading on Equity). This is because as debt increases the difference between Return on Investment and the cost of debt increases and so does the EPS. Thus, there is a high return on debt. However, even though higher debt leads to higher returns but it also increases the risk to the company. Therefore, the decision regarding the capital structure should be taken very carefully, taking into consideration the return and risk involved.

 

Question  : ''A capital budgeting decision is capable of changing the financial fortunes of a business''. Do you agree? Why or why not?

 Solution : Yes, capital budgeting decision is a very essential decision which needs to be taken  carefully. It has the capability of changing the financial fortunes of a business. Capital budgeting decision refers to the decisions regarding the allocation of fixed capital to different projects. Such decisions involve investment decisions regarding attainment of new assets, expansion, modernisation and replacement. Such long term investments include purchasing plant and machinery, furniture, land, building, etc. and also expenditure as on launch of new product, modernisation and advertising, etc. They have long term implications on the business and are irrevocable except at a huge cost. They affect a business' long term growth, profitability and risk. The following are the factors that highlight the importance of capital budgeting decisions: (i)Long Term Implications: Investment on capital assets (long term assets) yield return in the future. Thereby, they affect the future prospects of a company. A company's long term growth prospects depend on the capital budgeting decisions taken by it. (ii)Huge Amount of Funds: Investing in fixed capital involves a large amount of funds. This makes the capital budgeting decisions all the more important as huge amount of funds remain blocked for a longer period of time. These decisions once made are difficult to change. Thus, capital budgeting decisions need to be taken carefully after a detailed study of the total requirement of funds and the sources from which they are to be raised. (iii)High Risk: Fixed assets involve huge amount of money and thereby, involve huge risk as well. Such decisions are risky as they have an impact on the long term existence of the company. For example, decision about the purchase of new machinery involves a risk in terms of whether the return from the machinery would be greater than the cost incurred on it. 

(iv) Irreversible Decisions: These decisions once made are irrevocable. Reversing a capital budgeting decision involves huge cost. This is because once huge investment is made on a project, withdrawing it would mean huge losses.

 

Question  : Explain the factors affecting the dividend decision. 

Solution : Dividend decision of a company deals with what portion of the profits is to be distributed as dividends between the shareholders and what portion is to be kept as retained earnings. The following are the factors that affect the dividend decision. 

1. Legal requirements : There is no legal compulsion on the part of a company to distribute dividend.

However, there  certain conditions imposed by law regarding the way dividend is distributed. Basically there 

are three rules relating to dividend payments. They are the net profit rule, the capital impairment rule and insolvency rule. 

2. Firm's liquidity position : Dividend payout is also affected by firm's liquidity position. In spite of sufficient retained earnings, the firm may not be able to pay cash dividend if the earnings are not held in cash. 

3. Repayment   need : A firm uses several forms of debt financing to meet its investment needs. These debt must be repaid at the maturity.

If the firm has to retain its profits for the purpose of repaying debt, the dividend payment capacity reduces. 

4. Expected rate of return : If a firm has relatively higher expected rate of return on the new investment, the firm prefers to retain the earnings for reinvestment rather than distributing cash dividend. 

5. Stability of earning : If a firm has relatively stable earnings, it is more likely to pay relatively larger dividend than a firm with relatively fluctuating earnings. 

6. Desire of control : When the needs for additional financing arise, the management of the firm may not prefer to issue additional common stock because of the fear of dilution in control on management. Therefore, a firm prefers to retain more earnings to satisfy additional financing need which reduces dividend payment capacity. 

7. Access to the capital market : If a firm has easy access to capital markets in raising additional financing, it does not require more retained earnings. So a firm's dividend payment capacity becomes high. 

8. Shareholder's individual tax situation : For a closely held company, stockholders prefer relatively lower cash dividend because of  higher tax to be paid on dividend income. The stockholders in higher personal tax bracket prefer capital gain rather than dividend gains.

 

Question : Explain the term ''Trading on Equity''. Why, when and how it can be used by a company? 

Solution : Trading on equity refers to a practice of raising the proportion of debt in the capital structure such that the earnings per share increases. A company resorts to Trading on Equity when the rate of return on investment is greater than the rate of interest on the borrowed fund. That is, the company resorts to Trading on Equity in situation of favourable financial leverage. As the difference between the return on investment and the rate of interest on debt  increases, the earnings per share increase. 

The use of Trading on Equity is explained in detail with the help of the following example. Suppose there are two situations for a company. In situation I it raises a fund of Rs 5,00,000 through equity capital and in situation II, it raises the same amount through two sources - Rs 2,00,000 through equity capital and the remaining Rs3,00,000 through borrowings.  Also suppose the tax rate is 30% and the interest on borrowings is 10%. The earnings per share (EPS) in the two situations is calculated as follows. 

 



 

Chapter 10 : Financial Markets Class

Question : Primary and secondary markets

(a) Compete with each other

(b) Complement each other

(c) Function independently

(d) Control each other

Solution : Primary and secondary markets complement each other. Primary market deals with the issue of  new securities. When a company issues securities for the first time (i.e. IPO which means the first time a company is offering securities to the general public for subscription) , they are traded in the Primary Market through the help of issuing houses , Dealing /Brokerage Firms,

Investment Bankers and or Underwriters. That is, through the primary market a company raises capital directly from the borrowers. On the other hand, secondary market deals in the purchase and sale of the existing securities. Stock Exchange does the work of a Secondary Market by facilitating a formal trading arrangement for financial securities. That is, once the securities are issued in the primary market, they are then traded in the secondary market. It is in this sense that both the markets complement each other.

 

Question : The settlement cycle in NSE is (a) T+5 (b) T+3 (c) T+2 (d) T+1 

Solution : Settlement cycle refers to the time period within which the actual settlement between the buyers and sellers of shares takes place. In other words, it refers to the time period within which the seller of the shares would receive the money and the buyers of the share would get the ownership of the share. NSE follows a T+2 settlement cycle. T+2 means the transactions done on the trade day, will be settled by the exchange of money and securities on the second business day (excluding Saturdays, Sundays, Bank and exchange trade holidays). Here, T refers to the transaction date. Thus, T+2 implies that transactions in NSE are settled within 2 days of the transaction date.

 

Question :The total number of Stock Exchange in India is (a) 20 (b) 21 (c) 22 (d) 23 

Solution : The total number of Stock Exchange in India is 23. However, as per the latest updates by SEBI, there are 25 Stock Exchanges in India. 

 

Question : The National Stock Exchange of India was recognized as a stock exchange in the year (a) 1992 (b) 1993 (c) 1994 (d) 1995 

Solution : National Stock Exchange of India was promoted by financial institutions and established as a public limited company in 1992. However, it was recognized as a stock exchange' in April,'1993' under the Securities Contracts (Regulation) Act,1956. It commenced its operations in capital markets in 1994 and operations in derivatives market were started in 2000.

 

Question : NSE commenced futures trading in the year (a) 1999 (b) 2000 (c) 2001 (d) 2002 

Solution : National Stock Exchange started its operations in the year 1994. It commenced 'trading in futures and options market on 12 June, '2000'.

 

Question : Clearing and settlement operations of NSE are carried out by

(a) NSDL

(b) NSCCL

(c) SBI

(d) CDSL

Solution : The clearing and settlement operations of NSE are carried out by NSCCL. NSCCL (National Securities Clearing Corporation Ltd.) was incorporated in august, 1995 and it commenced its clearing operations for NSE in April 1996.

 

Question : A Treasury Bill is basically:

a. An instrument to borrow short-term funds

b. An instrument to borrow long-term funds

c. An instrument of capital market

d. None of the above

Solution : 

Answer (a) Treasury Bills are an instrument to borrow short term funds. These are issued by RBI on  behalf of the Government of India. They are issued to fulfil the short-term fund requirements of the Government of India. Maturity period of Treasury Bills ranges from 14 days to 364 days. Generally, these bills are brought by commercial banks, LIC, UTI, non-banking financial companies, etc. They are also called Zero-Coupon Bonds. Treasury bills are highly liquid instruments because of the fact that the RBI is always ready to purchase these bills. Moreover, they are also considered to be the safest instrument as they are issued by the RBI. They are available for a minimum amount of Rs 25,000 and in multiples thereof. Treasury Bills are issued at a discount i.e. they are issued at a price which is lower than the face value and are redeemed at par. Herein, the discount (the difference between the price of issue and the redemption value) is the interest received at the time of redemption. Objective of issuing T-Bills is to fulfill the short-term money borrowing needs of the government. T-bills have an advantage over the other bills such as: 

1. Zero Risk weighting associated with them. They are issued by the government and sovereign papers have zero risk assigned to them. 

2. High liquidity because 91 days and 364 days are short term maturity. 

3. Transparency.

 4. The secondary market of T-Bills is very active so they have a higher degree of tradability.

 

Question : Distinguish between Capital Market and Money Market.

Solution : The following points highlight the difference between Capital Market and Money Market.

Basis of Difference 

Capital Market

Money Market

Time Span of Securities

Capital Market mainly deals in

the trading of medium and long term securities where in, the

maturity period is more than one

year.

Money Market deals in the trading of short-term securities wherein, the maturity period can vary from one day to a maximum of one year. 

Liquidity

Capital market securities are

liquid in nature as they are

tradable on stock exchanges, but

are less liquid in comparison to

the money market securities

The securities traded are highly liquid

in nature. DFHI discounts money

market securities and offers a ready

market for them

Returns Expected

Expected Returns are higher due to the possibility of capital gains in the long term and regular dividends on bonus.

Expected returns are lower due to shorter duration.

Instruments

Instruments traded in capital market comprises of equity shares, long term investments etc

Investments traded in money market comprises of treasury bills


 

Question : What are the functions of a Financial Market?

Solution : Financial market plays an important role in the allocation of scarce resources in an economy by performing the following four important functions

(i) Mobilisation of Savings and Channelising Them into the Most Productive Uses

A financial market facilitates the transfer of savings from savers to investors. It gives choice to the saver of different investments and thus, it helps to channelise surplus funds into the most productive use.

(ii) Facilitate Price Discovery

In a financial market, the households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.

(iii) Provide Liquidity to Financial Assets

Financial markets facilitate easy purchase and sale of financial assets. Folders of assets can readily sell their financial assets through the mechanism of financial market.

(iv) Reduce the Cost of Transactions

Financial markets provide valuable information about securities being traded in the market. It helps to save time, effort and money that both buyers and sellers of a financial asset would have to spend to try or otherwise find each other.

 

Question : “Money Market is essentially a Market for short term funds.” Discuss.

Solution : The money market is a market for short term funds which deals in monetary assets whose period of maturity is upto one year. These assets are close substitutes for money. It is a market where low risk, unsecured and short term debt instruments that are highly liquid are issued and actively traded everyday. It enables the raising of short term funds for earning returns. The major participants in the market are the Reserve Bank of India, Commercial Bank, Non-Banking Finance Companies, State Governments, Large Corporate Houses and Mutual Funds.

 

Question : What are the functions of a Stock Exchange?

Solution : The efficient functioning of a stock exchange creates a conducive climate for an active and growing primary market following are the important functions of a stock exchange

(i) Providing Liquidity and Marketability to Existing Securities

The basic function of a stock exchange is the creation of a continuous market where securities are bought and sold. It gives investors the chance to disinvest and reinvest. This provides both liquidity and easy marketability to the existing securities in the market.

(ii) Pricing of Securities

Share prices on the stock exchange are determined by the forces of demand and supply. A stock exchange is a mechanism of constant valuation through which the prices of securities are determined. Such a valuation provides important instant information to both buyers and sellers in the market.

(iii) Safety of Transactions

The membership of a stock exchange is well-regulated and its dealings are well defined according to the existing legal framework which ensures that the investing public gets a safe and fair deal on the market.

(iv) Contributes to Economic Growth

A stock exchange is a market in which existing securities are resold or traded. This process of disinvestment and reinvestment savings get channelised into productive investment avenues. This leads to capital formation and economic growth.

 

Question : What are the objectives of SEBI?

Solution : The overall objective of SEBI is to protect the interest of investors, promote the development and regulate the securities in the market. This may be elaborated as follows

(i) To regulate stock exchanges and the securities industry to promote their orderly functioning.

(ii) To protect the rights and interests of investors, particularly individual investors to guide and educate them.

(iii) To prevent trading malpractices and achieve a balance between self-regulation by the securities and its statutory regulation.

(iv) To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc with a view to making them competitive and professional.

 

Question : What is the OTCEI?

Solution : The OTCEI is a company incorporated under the Companies Act, 1956. It was set up to provide small and medium companies access to the capital market for raising finance in a cost effective manner. It is fully computerised, transparent, single window exchange which commenced trading in 1992. This exchange is established on the lines of NASDAQ the OTC exchange in USA. If has been promoted by UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI capital markets and can bank financial services.

It is a negotiated market place that exists anywhere as opposed to the auction market place, represented by the activity on securities exchange. Thus, in the OTC exchange, trading takes place when a buyer or seller walks up to an OTCEI counter, taps on the computer screen, finds quotes and effects a purchase or sale depending on whether the prices meet their target.


 

Question : Explain the various money Market Instruments.

Ans: Money Market Instruments

(i) Treasury Bill

A treasury bill is an instrument of short term borrowing by the Government of India maturing in less than one year. They are also known as Zero Coupon Bonds issued by Reserve Bank of India on behalf of the Central Government to meet its short term requirements of funds. They are issued in the form of a promissory note. They are highly liquid and issued at a price which is lower than their face value and repaid at par. Treasury bills are available for a minimum amount of Rs.25,000.

(ii) Commercial Paper

Commercial paper is a short term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise short term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days

to one year. The issuance of commercial paper is an alternative to bank borrowing for large companies that are generally considered to be finally strong. It is sold at a discount and redeemed at par.

(iii) Call Money

Call money is a short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. Commercial Banks have to maintain a minimum cash balance known as cash reserve ratio. Call money is a method by which banks borrow from each other.

(iv) Certificate of Deposit

Certificates of deposit are unsecured, negotiable, short term instruments in bearer form, issued by Commercial Banks and development financial institutions. They can be issued to individuals, corporations and companies during periods of tight liquidity when the deposit growth of banks is slow but the demand for credit is high. They help to mobilise a large amount of money for short periods.

(v) A Commercial Bill

A commercial bill is a bill of exchange used to finance the working capital requirements of business firms. It is a short term negotiable, self-liquidating instrument which is used to finance the credit sales of firms, when goods are sold on credit, the buyer becomes liable to make payment on a specific date in the future.

 

Question : What are the methods of floatation in Primary Market?

Solution : The primary market is also known as the new issues market. It deals with new securities being issued for the first time. There are various methods of floating new issues in the primary market

(i) Offer Through Prospectus

This involves inviting subscription from the public through issue of prospectus. A prospectus makes a direct appeal to investors to raise capital, through an advertisement in newspapers and magazines. The issues may be under written and also required to be listed on at least one stock exchange. The contents of the prospectus has to be in accordance with the provisions of the Companies Act and SEBI disclosure and investor protection guidelines.

(ii) Offer for Sale

Under this method securities are not issued directly to the public but offered for sale through intermediaries like issuing houses or stock brokers. In this case, company sells securities en bloc at an agreed price to brokers who, in turn, resell them to the investing public.

(iii) Private Placement

Private placement is the allotment of securities by a company to institutional investors and some selected individuals. It helps to raise capital more quickly than a public issue. Access to the primary market can be expensive on account of various mandatory and non-mandatory expenses.

(iv) Rights Issue

This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company. The shareholder are offered the ‘right’ to buy new shares in proportion to the number of shares they already possess.

(v) e-IPOs

A company proposing to issue capital to the public through the on-line system of the stock exchange has to enter into an agreement with the stock exchange. This is called an Initial Public Offer (IPO). SEBI registered brokers have to be appointed for the purpose of accepting applications and placing orders with the company the issuer company should appoint a registrar to the issue having electronic connectivity with the exchange. The issuer company can apply for listing of its securities on any exchange other than the exchange through which it has offered its securities. The lead manager coordinates all the activities amongst intermediaries connected with the issue.

 

Question : Explain the Capital Market reforms in India.

Solution : The National Stock Exchange is the latest, most modern and technology driven exchange. NSE has set up a nationwide fully automated screen based trading system. The NSE was setup by leading financial institutions, banks, insurance companies and other financial intermediaries. It is managed by professionals, who do not directly or indirectly trade on the exchange. The trading rights are with the trading members who offer their services to the investors. The Board of NSE comprises senior executives from promoter institutions and eminent professionals, without having any representation from trading members.

Objectives of NSE

(i) Establishing a nationwide trading facility for all types of securities.

(ii) Ensuring equal access to investors all over the country through an appropriate communication network.

(iii) Providing a fair, efficient and transparent securities market using electronic trading system.

(iv) Enabling shorter settlement cycles and book entry settlements.

(v) Meeting international benchmarks and standards..

Within a span of 10 year, NST was able to achieve its objectives for which it was set up. It has been playing a leading role as a change agent in transforming the Indian capital market.

 

Question : Explain the objectives and functions of SEBI.

Solution : Objectives of SEBI

Functions of SEBI

Keeping in mind the emerging nature of the securities market in India, SEBI was entrusted with the twin task of both regulation and development of the securities market. It has certain functions

Regulatory Functions

(i) Registration of brokers and sub-brokers and other players in the market.

(ii) Registration of collective investment schemes and mutual funds.

(iii) Regulation of stock brokers, portfolio exchanges, underwriters and merchant bankers and the business in stock exchanges and any other securities market.

(iv) Regulation of taken over bids by companies.

(v) Calling for information by undertaking inspection conducting enquiries and audits of stock exchanges and intermediaries.

(vi) Levying for or other charges for carrying out the purposes of the act.

(vii) Performing and exercising such power under Securities Contracts Act, 1956, as may be delegated by the Government of India.

Development Functions

(i) Training of intermediaries of the securities market.

(ii) Conducting research and publishing information useful to all market segments.

(iii) Undertaking measures to develop the capital markets by adopting a flexible approach.

Protective Functions

(i) Prohibition of fraudulent and unfair trade practice like making misleading statements, manipulations, price rigging etc.

(ii) Controlling insider trading and imposing penalties for such practices.

(iii) Undertaking steps for investor protection.

(iv) Promotion of fair practices and code of conduct in securities market

 

Question  : Explain the various segments of NSE.

Solution : NSE provides trading in the following two segments

(i) Wholesale Debt Market Segment This segment provides a trading platform for a wide range of fixed income securities that include central government securities, treasury bills, state development loans, bonds issued by public sector undertakings, floating rate bonds, zero coupon bonds, index bonds, commercial paper, certificate of deposit, corporate debentures and mutual funds.

(ii) Capital Market Segment The capital market segment of NSE provides efficient and transparent platform for trading in equity, preference, debentures, exchange traded funds as well as retail government securities.

 

Chapter 11 : Marketing

1. Market It refers to the ‘set of potential and actual buyers of a product or service’.

2. Customer It refers to the people or organisations that seek satisfaction of their needs and wants.

3. Marketer or Seller The marketer can be a person or organisation who make available the products or services and offer them to the customer with an intention of satisfying the customer with an intention of satisfying the customer needs and wants.

4. Marketing It is a social process by which individuals and groups obtain what they need and want through creating, offering and freely exchanging products and services of value with others.

According to JF Pyle, “Marketing is that phase of business activity through which human wants are satisfied by the exchange of goods and services.”

5. Features of Marketing

(i) Need and want (ii) Creating a market offering

(iii) Customer value (iv) Exchange Mechanism

6. Marketing Management It means management of all the activities related to marketing or in other words we can say, it refers to planning, organising, directing and controlling the activities which result in exchange of goods and services. Marketing management involves following activities

(i) Choosing a target market

(ii) Growing customers in target market

7. Difference between Selling and Marketing The marketing and selling can be differentiated on the basis of

(i) Scope (ii) Objective (iii) Focus

(iv) Start and end (v) Efforts (vi) Supremacy

(vi Approach (viii) Demand

8. Marketing Management Philosophies

(i) Production concept

(ii) Product concept

(iii) Selling concept

(iv) Marketing concept

(v) Societal concept

10. Functions of Marketing

(i) Gathering and analysing market information

(ii) Market planning

(iii) Product designing and development

(iv) Standardisation and grading

(v) Packaging and Labelling

(vi) Branding

(vii) Customer support services (viii) Pricing of products

(ix) Promotion and selling

(x) Physical distribution

(xi) Transportation

(xii) Storage and warehousing

11. Role of Marketing

(i) Role in firm (ii) Role in the economy

12. Marketing Mix The marketing mix refers to the ingredients or the tools or the variable which the marketeer mixes in order to interact with a particular market.

According to Philip Kotler, “Marketing mix are the set of – marketing tools that firm uses to pursue its marketing objectives in the target market.”

13. Elements of Marketing Mix

(i) Product (ii) Place

(iii) Price (iv) Promotion

14. Product The product element of the marketing mix signifies the tangible or intangible product offered to the customer which satisfies the need.

15. Classification of Product or Service Product or goods can be classified in two categories

(i) Consumer goods (ii) Industrial goods

16. Consumer Goods

(i) On the Basis of Durability

(a) Durable products

(b) Non-durable products

(c) Services

(ii) Classification Based on Consumers Buying Behaviour and Attitude

(a) Convenient goods

(b) Shopping goods

(c) Speciality goods

17. Industrial Product Industrial products are used as input or raw material to produce consumer goods, e.g., tools, machinery etc.

Features of industrial produced are

(i) Number of buyers

(ii) Channel of distribution

(iii) Geographical concentration

(iv) Derived demand

(v) Technical consideration

(vi) Reciprocal buying

(vii) Leasing

18. Types of Products Industrial goods are classified as

(i) Material and parts

(ii) Capital item

(iii) Supplies and business services

19. Product Mix It refers to important decisions related to the product such as quality of product, design of product packing of product etc.

(i) Branding A brand is the identification of a product. It can be in the form of a name, symbol or design etc.

(ii) Various Terms Related to Brand

(a) Brand (b) Brand name

(c) Brand mark (d) Trade mark

(iii) Advantages of Brand Name

(a) Helps in product differentiation

(b) Helps in advertising

(c) Differential pricing

(d) Easy introduction of new product

21. Packaging It can be defined as a set of tasks or activities which are concerned with designing, production of an appropriate wrapper, container or bag for the product.

(i) Level of Packaging There are three levels of packaging

(a) Primary packaging

(b) Secondary packaging

(c) Transportation packaging

(ii) Importance of Packaging

(a) Rising standard of health and sanitation

(b) Self service outlets

(c) Product differentiation

(d) Innovational opportunities

(iii) Functions of Packaging

(a) Protection (b) Identification (c) Convenience (d) Promotion

21. Labelling It means putting identification marks on the package

Functions of labels are as follows

(i) Describe the product and specify its contents

(ii) Identify the product

(iii) Helps in grading

(iv) Promotes sale

(v) Providing information required by law/legal requirement

22. Price Price is the value which a buyer passes on to the seller in lieu of the product or service provided.

23. Price Mix It refers to important decisions related to fixing the price of a commodity.

The factors kept in mind while fixing the price of a commodity or service

(i) Pricing objectives

(ii) Product cost

(iii) Extent of competition in the market

(iv) Customer’s demand and utility

(v) Government and legal regulation

(vi) Marketing methods used

24. Pricing Strategies There are two pricing strategies

(i) Price skimming

(ii) Penetration pricing

25. Place/Physical Distribution Place refers to the set of decisions that need to be taken in order to make the product available.

26. Place Mix It refers to important decisions related to physical distribution of goods and services. These decisions are deciding the channel of distribution, market for distribution.

27. Channels of Distribution

 

 

28. Functions of Distribution Channels

(i) Sorting/Granding (ii) Accumulation

(iii) Variety (iv) Packaging

(v) Promotion (vi) Negotiation

(vii) Risk taking

29. Promotion Mix It refers to all the decisions related to promotion of sales of products and services.

Following are the tools or elements of promotion. They are also called elements of promotion mix.’

(i) Advertising (ii) Sales promotion

(iii) Personal selling (iv) Publicity

30. Advertising It can be defined as the paid form of nonpersonal presentation and promotion of ideas, goods or services and by identified sponsor.

31. Advantages of Advertisement

(i) Reach

(ii) Choice

(iii) Legitimacy

(iv) Expressiveness

(v) Economy

(vi) Enhancing customer satisfaction

32. Disadvantages of Advertisement

(i) Less forceful

(ii) Less effective

(iii) Difficulty in media choice

(iv) Inflexibility

(v) Lack of feedback

33. Objections to Advertising

(i) Adds to cost

(ii) Undermines social values

(iii) Confuses the buyers

(iv) Encourages sale of inferior products

(v) Some advertisements are not appealing

34. Different Media Available for Advertising

(i) Newspapers (ii) Magazines

(iii) Television (iv) Radio

(v) Outdoor (vi) Internet

35. Sales Promotion It refers to short term use of incentives or other promotional activities that stimulate the customer to buy the product.

36. Sales Promotion Techniques for Customers

(i) Rebate (ii) Discount

(iii) Refunds (iv) Product combination

(v) Quantity gift (vi) Instant draws and assigned gift

(vii) Lucky draw (viii) Usable benefit

(ix) Full finance @ 0%

(x) Sampling (xi) Contents

37. Merits of Sales Promotion

(i) Attention attract

(ii) Useful in new product launch

38. Sales Promotion It refers to short term use of incentives or other promotional activities that stimulate the customer to buy the product.

39. Sales Promotion Techniques for Customers

(i) Rebate (ii) Discount

(iii) Refunds (iv) Product combination

(v) Quantity gift (vi) Instant draws and assigned gift

(vii) Lucky draw (viii) Usable benefit

(ix) Full finance @ 0%

(x) Sampling (xi) Contents

40. Merits of Sales Promotion

(i) Attention attract

(ii) Useful in new product launch

(iii) Synergy in total promotion efforts

(iv) Aid to other promotion tools

41. Demerits of Sales Promotion

(i) Reflect crisis (ii) Spoil product image

42. Personal Selling Personal selling means selling personally. This involves face-to-face interaction between seller and buyer for the purpose of sale.

 

Chapter 12 : Consumer Protection

Question 1: Explain the importance of consumer protection from the point of view of business.

Solution : A business can not survive without paying attention on protecting the consumers interest and adequately satisfying them. This is important because of the following reasons

(i) Long Term Interest of Business

Business firms should aim at long term profit maximisation through customer satisfaction. Satisfied customers not only lead to repeat sales but also provide good

feedback to prospective customers and thus help in increasing the customer base of business.

(ii) Business uses Society’s Resources

Business organisation uses resources which belong to the society, thus they have a responsibility to supply such products and render such services which are in the public interest.

(iii) Social Responsibility

A business has a social responsibility towards various interest groups. Business organisations make money by selling goods and providing services to consumers. Thus, consumers form an important group among the many stakeholders of business and like other stakeholders, their interest has to be well taken care of.

(iv) Moral Justification

The moral duty of any business is to take care of consumer’s interest and securing them from exploitation. Thus, a business must avoid insecure loss, exploitation and unfair trade practices like defective and unsafe products, adulteration, false and misleading advertising hoarding, black marketing etc.

(v) Government Intervention

A business engaging in any form of exploitation time trade practices would invite government intervention or action. Thus, it is advisable that business organisation voluntarily resort to such practices, where the customers needs and interests will be taken care of.

 

Question 2: Enumerate the various Acts passed by the Government of India which help in protecting the consumer’s interest?

Solution : The Indian legal framework consists of a number of regulations which provide protection to consumers. Some of these regulations are as under

(i) The Consumer Protection Act, 1986

The Act provides safeguards to consumers against defective goods, deficient services, unfair trade practices etc.

(ii) The Contract Act, 1982

The Act lays down the conditions in which the promises made by parties to a contract will be binding on each other.

(iii) The Sale of Goods Act, 1930

The Act provides some safeguards and reliefs to the buyers of the goods in case, the goods purchased do not comply with express or implied conditions or warranties.

(iv) The Essential Commodities Act, 1955

The Act aims at controlling, I (reduction, supply, distribution and price of essential commodities.

(v) The Agricultural Produce Act, 1937

The Act prescribes grade standards for agricultural commodities and livestock products.

(vi) The Prevention of Food Adulteration Act, 1954

The Act aims to check adulteration of food articles and ensure their purity, so as to maintain public health.

(vii)The Standards of Weights and Measures Act, 1976

It provides protection to consumers against the malpractice of under-weight or under-measure.

(viii) The Trade Marks Act, 1999

The Act prevents the use of fraudulent marks on products and thus provides protection to consumers against such products.

(ix) The Competition Act, 2002

The Act provides protection to the consumers in case of practices adopted by business firms which hamper competition in the market.

(x) The Bureau of Indian Standard Act, 1986

The bureau has two major activities : formulation of quality standards for goods and their certification through the BIS certification scheme. The bureau has also set up a grievance cell, where consumers can make a complaint about the quality of products carrying the ISI mark.

 

Question 3 : What are the responsibilities of a consumer?
Solution : A consumer should keep in mind the following responsibilities
while purchasing, using and consuming goods and services
(i) Be aware about various goods and services available in the market, so that an intelligent and wise choice can be made.
(ii) Buy only standardised goods as they provide quality assurance. Thus, look for ISI mark on electrical goods, FPO mark on food products and Hallmark on jewellery etc.
(iii) Learn about the risks associated with products and services.
(iv) Read labels carefully, so as to have information about prices, weight, manufacturing and expiry dates etc.
(v) Assert yourself to get a fair deal.
(vi) Be honest in your dealings. Choose only from legal goods and services.
(vii) Ask for a cash-memo on purchase of goods and services. This would serve as a proof of the purchase made.
(viii) File a complaint in an appropriate consumer forum in case of a shortcoming in the quality of goods purchased or services availed.
(ix) Form consumer societies which would play an active part in educating consumers and safeguarding their interests
(x) Respect the environment, avoid waste, littering and contributing to pollution.
 

Question 4 : Who can file a complaint in a consumer court?
Solution : A complaint can be made by
(i) Any consumer.
(ii) Any registered consumer’s association.
(iii) The Central Government or any State Government.
(iv) One or more consumers, on behalf of numerous consumers having the same interest.
(v) A legal heir or representative of a deceased consumer.


 

Question 5 : What kind of cases can be filed in a state commission?

Solution : A complaint can be made to the appropriate state commission when the value of the goods and services, along with compensation claim exceeds Rs.20 lakhs but does not exceed Rs 1 crore. The appeals against the orders of a District Forum can also be filed before the state commission.

 

Question 6 : Explain the role of consumer organisations and NGOs in

protecting and promoting consumers’ interest.

Solution : Consumer organisation and NGOs perform several functions for the protection and promotion of interest of consumers. In India, these associations are performing lots of functions, some of them are

(i) Educating the general public about consumer rights by organising training programmes, seminars and workshops.

(ii) Publishing periodicals and other publications to impart knowledge about consumer problems, legal reporting, reliefs available and other – matters of interest.

(iii) Carrying out comparative testing of consumer products in accredited laboratories to test relative qualities of competing brands and

publishing the test results for the benefit of consumers.

(iv) Encouraging consumers to strongly protest and take action L against unscrupulous, exploitation and unfair trade practices of sellers.

(v) Providing legal assistance to consumers by providing aid, legal advice etc in seeking legal remedy.

(vi) Filing complaints in appropriate consumer courts on behalf of the consumers.

(vii) Taking an initiative in filing cases in consumer court in the interest of the general public, not for any individual.

 

Long Type Questions

Question 1: Explain the rights and responsibilities of a consumer.

Solution : The Consumer Protection Act provides six rights to consumers. They are as follows

(i) Right to Safety

The consumer has a right to be protected against goods and services which are hazardous to life, e.g., sometimes we purchased the food items of low quality which causes severe problems. Thus, in this case, we should purchased good quality and FPO labelled products.

(ii) Right to be Informed

The consumer has a right to have complete information about the product, which he intends to buy including its ingredients, date of manufacture, price , quantity, directions for use etc. Under the legal framework of India manufactures have to provide such information on the package and label of the product.

(iii) Right to Choose

The consumer has the freedom to choose from a variety of products. The marketers should offer a wide variety of products and allow the consumer to make a choice and choose the product which is most suitable. ‘

(iv) Right to be Heard

The consumer has a right to file a complaint and to be heard in case of dissatisfaction with a good or a service. It is because of this reason that many enlightened business firms have set up their own consumer service and grievance cells.

(v) Right to Seek Redressal

The Consumer Protection Act provides a number of reliefs to the consumer including replacement of the product, removal of defect in the product, compensation paid for any loss or injury suffered by the consumer etc.

(vi) Right to Consumer Education

The consumer has a right to acquire knowledge about products. He should be aware about his rights and the reliefs available to him in case of a product/service falling short of his expectations. Many consumer organisations and some enlightened businesses are taking an active part in educating consumers in this respect.

Consumer Responsibilities

A consumer must be aware about these responsibilities while purchasing, using and consuming goods and services

(i) Consumer must be aware of all their rights.

(ii) Consumer must be careful while purchasing a product.

(iii) He should file complaint for the redressal of genuine grievances.

(iv) Consumer must buy a standardised good.

(v) He should ask for a cash-memo on purchase of goods and services

 

Question 2 : What are various ways in which the objective of consumer protection can be achieved? Explain the role of consumer organisations and NGOs in this regard?

Solution : There are various ways in which the objective of consumer protection can be achieved

(i) Self Regulation by Business Socially responsible firms follow ethical standards and practices in dealing with their customers. Many firms have set up their customer service and grievance cells to redress the problems and grievances of their consumers.

(ii) Business Associations

The associations of trade, commerce and business like Federation of Indian Chambers of Commerce of India (FICCI) and Conference of Indian Industries (ClI) have laid down their code of conduct which lays down for their members the guidelines in their dealings with the customers.

(iii) Consumer Awareness

A consumer, who is well informed about his rights and the reliefs, would be in a position to raise his voice against any unfair trade practices or exploitation.

(iv) Consumer Organisations

Consumer organisations plays an important role in educating consumers about their rights and protecting them. These organisations can force business firms to avoid malpractices and exploitation of consumers.

(v) Government

The Government can protect the interests of the consumers by enacting various legislations. The legal framework in India encompasses various legislations which provide protection to consumer, the most important of these regulations is the Consumer Protection Act, 1986. The Act provides for a three-tier machinery at the District, State and National levels for redressal of consumer grievances.

Role of Consumer Orgs and NGOs

Consumer organisation and NGOs perform several functions for the protection and promotion of interest of consumers. In India, these associations are performing lots of functions, some of them are

(i) Educating the general public about consumer rights by organising training programmes, seminars and workshops.

(ii) Publishing periodicals and other publications to impart knowledge about consumer problems, legal reporting, reliefs available and other – matters of interest.

(iii) Carrying out comparative testing of consumer products in accredited laboratories to test relative qualities of competing brands and publishing the test results for the benefit of consumers.

(iv) Encouraging consumers to strongly protest and take action L against unscrupulous, exploitation and unfair trade practices of sellers.

(v) Providing legal assistance to consumers by providing aid, legal advice etc in seeking legal remedy.

(vi) Filing complaints in appropriate consumer courts on behalf of the consumers.

(vii) Taking an initiative in filing cases in consumer court in the interest of the general public, not for any individual.

 

Question 3 : Explain the redressal mechanism available to consumers under the Consumer Protection Act, 1986?

Solution : For redressal of consumer grievances, the Consumer Protection Act provides for setting up of a three-tier enforcement machinery at the District, State and National levels.

(i) District Forum A complaint can be made to the appropriate District Forum when the value of goods or services, along with the compensation claimed, does not exceed ? 20 lakhs. In case the aggrieved party is not satisfied with the order of the District Forum, he can appeal before the State Commission within 30 days.

(ii) State Commission A complaint can be made to the appropriate State Commission when the value of the goods or services, along with the compensation claimed, exceeds ? 20 lakhs but does not exceed Rs 1 crore. The appeals against the orders of District Forum can also be filed before the State Commission. In case the party is not satisfied with the order of the State Commission, he can appeal before the National Commission within 30 days of the passing of the order by State Commission.

(iii) National Commission A complaint can be made to the National Commission when the value of the goods or services, along with the compensation claimed exceeds Rs 1 crore. The appeals against the orders of a State Commission can also be filed before the National Commission. An order passed by the National Commission in a matter of its original justification is appealable before the supreme court. This means that only those appeals, where the value of goods + services in question, along with the compensation claimed, exceeded Rs. 1 crore and where the aggrieved party was not satisfied with the order of the National Commission, can be taken to the Supreme Court of India.


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