Industrial Organization & Management - Prof. Ibrahim Shaikh · 2015-01-30 · INDUSTRIAL ORGANIZATION & MANAGEMENT By Shaikh Ibrahim Ismail [email protected] ... Introduction

[INDUSTRIAL ORGANIZATION & MANAGEMENT] By Shaikh Ibrahim Ismail

[email protected] |+91-9892128099 5

Industrial Organization & Management By Shaikh Ibrahim Ismail Sr.Lecturer, Automobile Engg.Dept. M.H.Saboo Siddik College of Engineering, Mumbai.

2011

For Diploma Courses in Engineering

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By Shaikh Ibrahim Ismail INDUSTRIAL ORGANIZATION & MANAGEMENT

2 +91-9892128099| [email protected]


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INDUSTRIAL ORGANIZATION & MANAGEMENT By Shaikh Ibrahim Ismail


Table of Content

Ch-1 Overview of Business…………………………………………………………......…………………………….….5 1.1. Introduction………………………………………………………………………………………………..……….5 1.2. Industry sectors and classification………………………………………………………………………………5 1.3. Classifications…………………………………………………………………………………………………..…5

1.4. Types of Trade... .……………………………………………………………………………………………….…7 1.5. Globalization………………………………………………………………………………..…………………...…7

1.5.1 Benefits of Globalization……………………………………………………………………………..…8 1.5.2 Advantages and Disadvantages of Globalization………………………………………………….…9

1.6 Intellectual Property Rights……………………………………………………………………………………..…9

1.6.1 Types of Intellectual Property Rights……………………………………………………………….…9 1.6.2 Advantages of Intellectual Property………………………………………………………………….12

Ch-2 Management……………………………………………………………………………………...........…………14 2.1 Introduction……………………………………………………………………………………………….………14 2.2 Feature of Management…………………………………………………………………………………………17 2.3 Levels of Management…………………………………………………………………………………………..18 2.4 Objectives of management………………………………………………………………………………………19 2.5 Importance of management…………………………………………………………………..…………………19 2.6 Management and Administration…………………………………………………………………………….…20 2.7 Functions of Management……………………………………………………………………………………….21 2.8 Coordination…………………………………………………………………………………………………….…23 2.9 Principles of Management………………………………………………………………………………….……24 2.10 Features of Principles of Management…………………………………………………………………………28 2.11 Study of Taylor & Fayol………………………………………………………………………………………..…31

Ch-3 Entrepreneurship……………………………………………………………………………………….…33 3.1 Introduction of Entrepreneurship…………………………………………………………………………..……33 3.1.1 Entrepreneurship vs. Small Business………………………………………………………………..33 3.1.2 Need For Entrepreneurship………………………………………………………………………...…33 3.1.3 Steps In The Process of Entrepreneurship…………………………………………………….……34 3.1.4 Factors Influencing Entrepreneurship…………………………………………………………….…34 3.1.5 Factors Affecting Entrepreneurial Growth………………………………………………………...…34 3.1.6 Importance of Entrepreneurship…………………………………………………………………..…35 3.1.7 Importance of Entrepreneurship in Developed Economy…………………………………………35

3.2 Forms of Ownership (Business) ……………………………………………………………………………..…36 3.2.1 Sole Proprietorship………………………………………………………………………………….…36 3.2.2 Partnership…………………………………………………………………………………………...…38 3.2.3 Corporation…………………………………………………………………………………………..…40 3.2.4 Private Limited Company ………………………………………………………………………….…41 3.2.5 Public Ltd.Company………………………………………………………………………………..…42 3.2.6 Limited Liability Partnership (LLP) ………………………………………………………………..43 3.2.7 Co-Operatives…………………………………………………………………………………………44 3.2.8 Public Sector Enterprise………………………………………………………………………….……47

Ch-4 Functions of Management...………………….………………………………………………….……48

4.1 Planning function of management……………………………………………………………………………….…48

4.1.1 Characteristics of Planning Functions…………………………………………………………….…49 4.1.2 Advantages of Planning Functions………………………………………………………………..…50 4.1.3 Disadvantages of Planning Functions………………………………………………………………51

4.2. Organizing function of management ……………………………………………………………………………..…52

4.2.1 Importance of organization……………………………………………………………………………52 4.2.2 Principles of organization……………………………………………………………………….…53 4.2.3 Principles of Span of Control/Supervision…………………………………………………….…53


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http://en.wikipedia.org/wiki/Sole_proprietorship



4.2.4 Classification of Organization…………………………………………………………………..…55 4.2.5 Line organization……………………………………………………………………………………55 4.2.6 Line and staff organization………………………………………………………………………………56 4.2.7 Functional organization………………………………………………………………………….…58 4.2.8 Delegation of Authority………………………………………………………………………..……58 4.2.9 Importance of delegation………………………………………………………………………..…60 4.2.10 Principles of delegation…………………………………………………………………………..…60 4.2.11 Centralization and decentralization……………………………………………………………..…61 4.2.12 Implications of Decentralization……………………………………………………………………61

4.3 Staffing Function of management……………………………………………………………………………63

4.3.1 Staffing process-steps involved in staffing process………………………………………….……63 4.3.2 Manpower Planning……………………………………………………………………………………64 4.3.3 Need of Manpower Planning…………………………………………………………………………65 4.3.4 Types of Recruitment …………………………………………………………………………………66 4.3.5 Orientation and placement……………………………………………………………………………67 4.3.6 Training of employees-need and importance of training…………………………………………68 4.3.7 Employee Remuneration…………………………………………………………………………..…69

4.4 Directing Function of Management………………………………………………………………………….…69

4.4.1 Importance of Direction function……………………………………………………………………70 4.4.2 Functions of a Supervisor………………………………………………………………………….…71

4.5 Controlling functions of management…………………………………………………………………………..72

4.5.1 Process of Controlling…………………………………………………………………………………73

Ch-5 Organizational Behaviour...………………….…..……………………………………………………75 5.1 Motivation………………………………………………………………………………………………………….75

5.1.1 Maslow’s Need Hierarchy Model……………………………………………………………………75 5.1.2 Motivation incentives …………………………………………………………………………………75 5.1.3 Importance of motivation………………………………………………………………………..……76 5.1.4 Motivation and morale –relationship and difference………………………………………….……77 5.1.5 Staff motivation-motivation tips for employee…………………………………………………..…78 5.1.6 Motivation at workplace…………………………………………………………………………….…80 5.1.7 Self-motivation…..…………………………………………………………………………………….80 5.1.8 Team motivation………………………………………………………………………………………81 5.1.9 Classical Theories Of Motivation……………………………………………………………………82 5.1.10 Maslow’s Hierarchy of Needs Theory…………………………………………………………….…82 5.1.11 Frederick Herzberg two-factor theory………………………………………………………………83 5.1.12 Theory X and Theory Y…………………………………………………………………………….…85 5.1.13 Modern theories of motivation………………………………………………………………………86

5.2 Leadership……………………………………………………………………………………………………..…88

5.2.1 Importance of leadership…………………………………………………………………………..…88 5.2.2 Qualities of A leader ………………………………………………………………………………..…89 5.2.3 Leadership and Management……………………………………………………………………..…90 5.2.4 Leadership and motivation……………………………………………………………………………92 5.2.5 Organizational leadership………………………………………………………………………….…92 5.2.6 Leadership strategy / style………………………………………………………………………….…94

Ch-6 Industrial Safety Management………………………………………………….………………...…96 6.1 Industrial Accidents………………………………………………………………………………………………96

6.1.1 Causes of Industrial Accidents…………………………………………………………………….…96 6.1.2 Industrial Accident Prevention………………………………………………………………………..97

6.2 The Industrial Acts…………………………………………………………………………………………..……98

6.2.1 Factories Act, 1948…………………………………………………………………………...………98 6.2.2 Industrial Disputes Act-1947………………………………………………………………………100 6.2.3 Authorities under the Industrial Disputes Act, 1947…………………………………………..…101


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http://business.gov.in/outerwin.php?id=http://indiacode.nic.in/rspaging.asp?tfnm=194714



6.2.4 Employees' State Insurance Act, 1948……………………………………………………………103 6.2.5 Workmen's Compensation…………………………………………………………………………104

Ch-7 Materials Management……………………………………………………….………………………106 7.1 Inventory management……………………………………………………………………………………...…106 7.2 The reasons for keeping stock……………………………………………………………………………...…106 7.3 Principle of inventory proportionality…………………………………………………………………………107 7.4 Economic order quantity(EOQ) …………………………………………………………………………….…108 7.5 ABC Analysis……………………………………………………………………………………………………110 7.6 Modern Techniques of Materials Management…………………………………………………………...…111

7.6.1 Just In Time (JIT) ……………………………………………………………………………….……111 7.6.2 Material requirements planning (MRP)………………………………………..……………………112 7.6.3 ERP………………………………………………………………………………………….…………113 7.6.4 SAP……………………………………………………………………………………………….……114

Ch-8 Financial Management………………………………………………………………....................…116 8.1 Financial management…………………………………………………………………………………….…...116 8.2 Objectives of Financial Management…………………………………………………………….……………116 8.3 Functions of Financial Management……………………………………………………………………..……116 8.4 Types of Financial Needs………………………………………………………………………………………116 8.4.1 Methods of Raising Capital…………………………………………………….……………………………..118 8.5 Sources of Finance………………………………………………………………………………………..……119 8.6 Budgets and Accounts…………………………………………………………………………………….……121 8.7 Introduction to Tax………………………………………………………………………………………...……126

8.7.1 Excise Tax…………………………………………………………………………………………..…126 8.7.2 Service Tax……………………………………………………………………………………………127 8.7.3 Income Tax……………………………………………………………………………………………128 8.7.4 VAT………………………………………………………………………………………….…………129 8.7.5 Custom Duty……………………………………………………………………….…………………130 8.7.6 Direct Tax and Indirect tax …………………………………………………………………………131 8.7.7 India GDP…………………………………………………………………………………….………132

Ch-9 Project Management………………………………………………………………………….………134 9.1 Meaning of project management………………………………………………………………………….…134 9.2 Introduction to CPM & PERT technique…………………………………………………………………..…136

9.2.1 Critical path method …………………………………………………………………………..…..…136 9.2.2 Program evaluation and review technique (PERT) ………………………………………………137 9.2.3 Break-even analysis…………………………………………………………………………….……138

9.3 Quality management……………………………………………………………………………………………141

9.3.1 Quality control…………………………………………………………………………………………142 9.3.2 Objectives of quality control…………………………………………………………………………142 9.3.3 The concept of total quality management (TQM) ……………………………………………...…144 9.3.4 Advantages of TQM………………………………………………………………………………..…146 9.3.5 Quality circle (QC) ……………………………………………………………………………………146 9.3.6 Quality assurance……………………………………………………………………….……………147 9.3.7 Six Sigma……………………………………………………………………………………..………148 9.3.8 5s Methodology…………………………………………………………………………………….…148 9.3.9 Kaizen…………………………………………………………………………………………………149


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[INDUSTRIAL ORGANIZATION & MANAGEMENT] By Shaikh Ibrahim Ismail


Chapter1 Overview of Business 1.1 Introduction A business enterprise is an economic institution engaged in the production and/or distribution of goods and services in order to earn profits and acquire wealth. The scope of a business is very wide. It includes a large number of activities which may be classified into two broad categories i.e. Industry and Commerce. Production of goods is the domain of 'Industry' and distribution comes under 'Commerce'. Every entrepreneur aims at starting a business and building it into a successful enterprise. The term 'entrepreneur' means to undertake and pursue opportunities and to fulfill needs and wants of people through innovation. He/she innovates and combines resources in the form of men, materials and money and brings them together to make the business venture profitable. He/she is prepared to take risk and face challenges. Thus, innovation and risks are the two basic elements of a good entrepreneurship. The whole process of starting a business begins with writing a business plan. A good business plan is the key to setting up a successful business. Once a plan is prepared, the entrepreneur faces various challenges while implementing the plan. 1.2 Industry sectors and classification There are many other different kinds of industries, and often organized into different classes or sectors by a variety of industrial classifications. Industry classification systems used by the government commonly divide industry into three sectors: agriculture, manufacturing, and services. The primary sector of industry is agriculture, mining and raw material extraction. The secondary sector of industry is manufacturing. The tertiary sector of industry is service production. Sometimes, one talks about a quaternary sector of industry, consisting of intellectual services such as research and development (R&D). Market-based classification systems such as the Global Industry Classification Standard and the Industry Classification Benchmark are used in finance and market research. These classification systems commonly divide industries according to similar functions and markets and identify businesses producing related products. Industries can also be identified by product: chemical industry, petroleum industry, automotive industry, electronic industry, meatpacking industry, hospitality industry, food industry, fish industry, software industry, paper industry, entertainment industry, semiconductor industry, cultural industry, poverty industry labor-intensive industry - capital-intensive industry light industry - heavy industry

1.3 Classifications Business activities may be classified into two broad categories: (a) Industry, and (b) Commerce. Industry involves the production of goods and materials, while commerce is concerned mainly with their distribution. Accordingly, then a business concern, the agency through which business regularly conducted, may be an industrial enterprise or a commercial one. Industry The term 'industry' refers to that part of business activity which concerns itself with the raising. Production, processing or fabrication of products. The products of an industry may be used either by the final consumers or by another industrial undertaking for further production. Accordingly, these will be called consumers goods if used by final consumers, and producers' goods or capital goods if used in the production of other goods. When a concern engages in the production of cloth or toothpaste, or when it processes cheese, it maybe said to be producing consumers' goods. On the other hand, an engineering concern manufacturing machine tools an machinery is said to be producing producers' goods for th simple reason that these products will be used by factories for the production of certain other products. In some cases, an industrial concern may produce materials which will be further processed by yet other concerns for conversion into finished consumers; goods. Such materials are generally placed in the category of intermediate goods. An example of this kind is provided by plastics an aluminum which are further used by industry for manufacturing other products. Types of Industry The broad sphere of industry may be divided into four distinct types: (1) Extractive Industries. These industries include activities whereby various forms of wealth are drawn out, extracted, or raised from the soil air or water or obtained from beneath the surface of the earth. The commodities raised by such industries are produced with comparatively little assistance from man. The products of extractive industries are generally meant to be used by the manufacturing and construction industries for producing finished goods through these may be used directly in some cases. These include hunting, fishing, mining, fruit-gathering, agriculture, afforestation etc.


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http://en.wikipedia.org/wiki/Category:Industrial_classifications

http://en.wikipedia.org/wiki/Primary_sector_of_industry

http://en.wikipedia.org/wiki/Agriculture

http://en.wikipedia.org/wiki/Mining

http://en.wikipedia.org/wiki/Raw_material_extraction

http://en.wikipedia.org/wiki/Secondary_sector_of_industry

http://en.wikipedia.org/wiki/Manufacturing

http://en.wikipedia.org/wiki/Tertiary_sector_of_industry

http://en.wikipedia.org/wiki/Service_(economics)

http://en.wikipedia.org/wiki/Quaternary_sector_of_industry

http://en.wikipedia.org/wiki/Research_and_development

http://en.wikipedia.org/wiki/Market

http://en.wikipedia.org/wiki/Global_Industry_Classification_Standard

http://en.wikipedia.org/wiki/Industry_Classification_Benchmark

http://en.wikipedia.org/wiki/Industry_Classification_Benchmark

http://en.wikipedia.org/wiki/Finance

http://en.wikipedia.org/wiki/Market_research

http://en.wikipedia.org/wiki/Chemical_industry

http://en.wikipedia.org/wiki/Petroleum_industry

http://en.wikipedia.org/wiki/Automotive_industry

http://en.wikipedia.org/wiki/Consumer_electronics

http://en.wikipedia.org/wiki/Consumer_electronics

http://en.wikipedia.org/wiki/Meatpacking_industry

http://en.wikipedia.org/wiki/Hospitality_industry

http://en.wikipedia.org/wiki/Food_industry

http://en.wikipedia.org/wiki/Fish_industry

http://en.wikipedia.org/wiki/Software_industry

http://en.wikipedia.org/wiki/Paper_industry

http://en.wikipedia.org/wiki/Entertainment_industry

http://en.wikipedia.org/wiki/Semiconductor_industry

http://en.wikipedia.org/wiki/Cultural_industry

http://en.wikipedia.org/wiki/Poverty_industry

http://en.wikipedia.org/wiki/Light_industry

http://en.wikipedia.org/wiki/Heavy_industry



(2). Genetic Industry. These industries engage in reproducing and multiplying certain species of plants an animals with the object of earning profit from their sale. Examples of this type are nurseries multiplying an selling plants, cattle breeding farms, poultry farms and commercial kennels. (3) Construction industries. These industries involve construction of buildings, roads, dams, bridges, canals. The distinctive characteristic of these industries is that their products are not marketed in the ordinary sense of being taken to the markets to be sold; they are erected, built, or fabricated at a fixed site. These industries use the products of manufacturing industries, especially cement and iron and steel, as also those of extractive industries like quarries, etc. (4) Manufacturing industries. Ordinarily, the term industry is used to refer to manufacturing industries. Thought that is not correct, it cannot be denied that the bulk of our requirements is fulfilled by such industries. Manufacturing industries are engaged in the conversion or transformation of raw materials or semi-finished products into finished products. In this process, these industries create 'form utility.' The products of extractive industries generally become the raw materials of manufacturing industries. The cotton textile industry is an example of a manufacturing industry that make use of the cotton produced by farms which are engaged in an extractive industry. Likewise, the iron and steel industry is concerned with the conversion of iron ore produced by mines (extractive industry) into pig iron, steel and various other products. Manufacturing industries maybe divided further into the following categories: (a) Analytical. In this type of industry, many types of products may be manufactured by analyzing and separating different elements from the same material. For example, in the oil refinery industry, the crude oil is analysed and separated into petrol, diesel, gasoline, kerosene and lubricating oil. (b) Synthetic. In synthetic industries various ingredients are put together and combined in the manufactured by analyzing and separating different elements from the same material. For instance, cement is produced by combining an mixing concrete, gypsum, coal, etc. (c) Processing. In this category are included those industries wherein the raw material is processed through different stages of production resulting in the final product. Textiles, paper and sugar are examples of this type. (d) Assembly line. 'Assembly line' type of industries include the industries where different instruments or component parts already manufactured are assembled to turn out new useful products, e.g,. car, scooter, bicycle, television, etc. Industries are also classified on the basis of size and investment as follows: (i) Heavy industries. The term heavy industries is generally used to refer to those industries which call for big capital investment and have a longer production cycle. Such investment goes mostly into machinery and equipment of sophisticated and expensive type Industries like iron and steel, aeronautics, ship-building and aluminum are included in this category. (ii) Light industries. Light industries are those which involve a comparatively smaller capital investment and have a short duration production cycle. This may be because of the less costly machinery required for the manufacture of certain types of products or because of the us of less sophisticated process of production. Industries are also classified as large-scale and small-scale according to th capital employed, number of workers employed, materials and tools used and volume or value of output produced over certain periods. For purposes of governmental assistance, a small industry is defined as an industry involving a capital outlay of not more than Rs. 10 lakhs in plant and machinery. Commerce While industry is concerned with the production of goods for the satisfaction of human wants, commerce is an activity whereby goods are transferred to those who and them. It is ―an organised system for the exchange of goods between the members of the industrial world. ― It established the necessary link between producers and consumers and , therefore, embraces all those functions which are essential for maintaining a free an uninterrupted flow of goods and services between them. Commerce may be defined a that part of business activity which seeks to facilitate exchange of goods by removing hindrances of person (though trade), hindrances of exchange (through banking), hindrances of place (through transportation, insurance and packing), hindrances of time (through warehousing) and hindrances of knowledge (through advertising, etc.,). It could well be described as the sum-total of all such activities and processes as make trade possible. The important commercial activities revolving around trade are: (i) banking, (ii) transport, (iii) insurance (iv) warehousing (v) packing, and (iv) advertising. Trade From the above description of commerce, it is clear that trade is not only an important part of commerce but is its nucleus. Trade refers to to be sale, transfer or exchange of goods. It does not include the ancillary functions like transportation, insurance, baking, etc. which along with it, form part of commerce.


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1.4. Types of Trade Trade may be classified broadly into two categories: (j) Internal trade. Also called home trade, this consists in the sale and exchange of goods within the bounds of a nation. Payments for such sale are made in national currency directly or through the national banking system and the internal transportation system is utilized for the movement of goods. Internal or home trade maybe conducted on either of the following bases: (a) Wholesale trade. This involves sale of goods in comparatively large quantities to those traders who are in direct contact with the consumers. It serves as a link between the producers or manufacturers and the retail traders who sell dire t to the consumers. (b) Retail trade. This type of trade consists in the supply of the requirements of the consumers in the small quantities needed by them. It provides the link between the wholesalers and the consumers. (ii) International or foreign trade. This refers to the supply of the goods to buyers located in foreign countries. When goods are moved from one country to another , payments have to be converted into the currency of ht other country and means of international transportation have to be used. Such trade is conducted mostly on wholesale basis Foreign trade maybe further divided into: (a) Import trade which consists in th procuring of foreign goods for home use. (b) Export trade, which consists in the supply of home goods for foreign use. (c) Entrepot trade, which effects the exchange of goods between foreign producers and foreign consumers. 1.5 Globalization Globalization is a term that includes a wide range of social and economic variations. It can encompass topics like the cultural changes, economics, finance trends, and global market expansion. There ought to be positive and negative effects of globalization - it all comes as a package. Globalization helps in creating new markets and wealth, at the same time it is responsible for extensive suffering, disorder, and unrest. The great financial crisis that just happened is the biggest example of how negative globalization can turn. It clearly reveals the dangers of an unstable, deregulated, global economy. At the same time, this gave rise to important global initiatives, striving towards betterment. Globalization is a factor responsible for both repression and the social boom. What happens when there is a growing integration of economies across the globe? Majorly there have been positive impacts of this global phenomenon - through liberalization, privatization and globalization (LPG). Due to globalization, there has been significant flow of inward foreign direct investment. MNCs are getting a chance to explore various different markets across economies and explore the untapped potential Globalization and India India's economy opened up during the early nineties. The policy measures on the domestic front demanded that there was a requirement of multinational organizations to set up their offices here. The market became more open and the economy started responding to the external (global) market. Due to globalization, contacts have been developed all across the globe, with the pace of integration dramatically increasing.

Impact of Globalization It was in July 1991, when foreign currency reserves had tumbled down to almost $1 billion; inflation was at a soaring high of 17%, highest level of fiscal deficit, and foreign investors loosing confidence in Indian Economy. With all these coupling factors, capital was on the verge of flying out of the country and we were on the brink of become loan defaulters. It was at this time that with so many bottlenecks at bay, a complete overhauling of the economic system was required. Policies and programs changed accordingly. This was the best time for us to realize the importance of globalization.

Measures of Globalization

1. Devaluation: The first initiative towards globalization had been taken the moment there was an announcement of devaluating the Indian currency by a hoping 18-19% against all the major global currencies. This was a major initiative in the international foreign exchange arena. The Balance of payment crisis could also be resolved by this measure.

2. Disinvestment: The core elements of globalization are privatization and liberalization. Under the privatization scheme, bulk of the public sector undertakings have been/ and are still being sold to the private sector. Thus the concept of PPP (public private partnership) came up.


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3. Allowing Foreign Direct Investment (FDI): Allowing FDI inflows is a major step of globalization. The foreign investment regime has been quite transparent and thus the economy is getting boosted up. Various sectors were opened up for liberalizing the FDI regime.

Is globalization delivering all the desired results to the masses? Or only a few can feel the benefits of globalization? Figures have out rightly proved that the global average per capita income showed a strong surge throughout the 20th century but the income gap between rich and poor countries have not been bridged for many decades now. The ultimate inference being that globalization hasn't shown positive results.

Benefits of Globalization

The continuing global tendency towards the free flow of business and monetary infusions across nations describes globalization which helps in the formation of international financial system. It provides economic independence and triggers competition stimulating globalization to elevate the living standard of people in the nations that offer themselves to the world trade.

Benefits of globalization

"We have moved from a world where the big eat the small to a world where the fast eat the slow", as observed by Klaus Schwab of the Davos World Economic Forum. All economic analysts must agree that the living standards of people have considerably improved through the market growth. With the development in technology and their introduction in the global markets, there is not only a steady increase in the demand for commodities but has also led to greater utilization. Investment sector is witnessing high infusions by more and more people connected to the world's trade happenings with the help of computers. As per statistics, everyday more than $1.5 trillion is now swapped in the world's currency markets and around one-fifth of products and services are generated per year are bought and sold. Buyers of products and services in all nations comprise one huge group who gain from world trade for reasons encompassing opportunity charge, comparative benefit, economical to purchase than to produce, trade's guidelines, stable business and alterations in consumption and production. Compared to others, consumers are likely to profit less from globalization. Another factor which is often considered as a positive outcome of globalization is the lower inflation. This is because the market rivalry stops the businesses from increasing prices unless guaranteed by steady productivity. Technological advancement and productivity expansion are the other benefits of globalization because since 1970s growing international rivalry has triggered the industries to improvise increasingly.

Some other benefits of globalization as per statistics: Commerce as a percentage of gross world product has increased in 1986 from 15% to nearly 27% in

recent years. The stock of foreign direct investment resources has increased rapidly as a percentage of gross world

products in the past twenty years. For the purpose of commerce and pleasure, more and more people are crossing national borders. Globally,

on average nations in 1950 witnessed just one overseas visitor for every 100 citizens. By the mid-1980s it increased to six and ever since the number has doubled to 12.

Worldwide telephone traffic has tripled since 1991. The number of mobile subscribers has elevated from almost zero to 1.8 billion indicating around 30% of the world population. Internet users will quickly touch 1 billion.

Globalization leading to social anxieties: Listed below are the three sources of anxiety between worldwide markets and social steadiness: Across the nations, globalization triggers the services of large sections of working people more effortlessly

substitutable, Commerce can set free factors that weaken guidelines in national practices, for example workers in South

Carolina are replaced by child laborers in Honduras, Globalization and its cutthroat rivalry makes it hard for administration to perform important tasks of offering

the social programs


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Key areas which demand immediate attention: Public education, which will demand proper evaluation and outcomes of globalization incorporating its

benefits. Amending practices to review the international fiscal institutions to assist in averting crises, facilitating

helpful early warning systems, better synchronization of exchange rates among the world markets and arranging the private sector in order in performing rescue functions, and reorganizing the bilateral liberalization of the global financial system, which should tackle the major areas related to food trade, labour pacts and the environment

Advantages and Disadvantages of Globalization

Advantages

1. Increased free trade between nations 2. Increased liquidity of capital allowing investors in developed nations to invest in developing nations 3. Corporations have greater flexibility to operate across borders 4. Global mass media ties the world together 5. Increased flow of communications allows vital information to be shared between individuals and

corporations around the world 6. Greater ease and speed of transportation for goods and people 7. Reduction of cultural barriers increases the global village effect 8. Spread of democratic ideals to developed nations 9. Greater interdependence of nation-states 10. Reduction of likelihood of war between developed nations 11. Increases in environmental protection in developed nations

Disadvantages

1. Increased flow of skilled and non-skilled jobs from developed to developing nations as corporations seek out the cheapest labor

2. Increased likelihood of economic disruptions in one nation effecting all nations 3. Corporate influence of nation-states far exceeds that of civil society organizations and average individuals 4. Threat that control of world media by a handful of corporations will limit cultural expression 5. Greater chance of reactions for globalization being violent in an attempt to preserve cultural heritage 6. Greater risk of diseases being transported unintentionally between nations 7. Spread of a materialistic lifestyle and attitude that sees consumption as the path to prosperity 8. International bodies like the World Trade Organization infringe on national and individual sovereignty 9. Increase in the chances of civil war within developing countries and open war between developing

countries as they vie for resources 10. Decreases in environmental integrity as polluting corporations take advantage of weak regulatory rules in

developing countries 1.6 Intellectual Property Rights Intellectual property rights is a legal concept that confers rights to owners and creators of the work, for their intellectual creativity. Such rights can be granted for areas related to literature, music, invention etc, which are used in the business practices. In general, the intellectual property law offers exclusionary rights to the creator or inventor against any misappropriation or use of work without his/her prior knowledge. Intellectual property law establishes equilibrium by granting rights for limited duration of time. Every nation has framed their own intellectual property laws. But on international level it is governed by the World Intellectual Property Organization (WIPO). The Paris Convention for the Protection of Industrial Property in 1883 and the 'Berne Convention for the Protection of Literary and Artistic Works' in 1886 were first conventions which have recognized the importance of safeguarding intellectual property. Both the treaties are under the direct administration of the WIPO. The WIPO convention lays down following list of the activities or work which are covered by the intellectual property rights -

Industrial designs Scientific discoveries Protection against unfair competition Literary, artistic and scientific works Inventions in all fields of human endeavor Performances of performing artists, phonograms and broadcasts Trademarks, service marks and commercial names and designations All other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields.


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Types of Intellectual Property Rights Intellectual Property Rights signifies to the bundle of exclusionary rights which can be further categorized into the following heads- Copyright Copyright, one of the form of intellectual property law, offers exclusive rights for protecting the authorship of original & creative work like dramatic, musical and literary in nature. Symbolized as "©", here the term 'exclusive rights' mean that the holder has the right to determine who will be credited with the work, who will perform the work and who will be benefited financially from it. However, copyright does not extend any protection to the facts, methods of operation, system, ideas except to the ways in which they can be expressed. Being a copyrighted item does not mean that other person can't use or write on subject matter of particular item. For e.g, if a person has written on a new motor cycle and he has copyrighted his article then it means that other person can't use that article but he is free to write his thoughts on the similar motor cycle. Copyright holder does not hold the rights by themselves. Instead of it they relinquish it to publishers or big companies by entering into the contractual agreement. Generally copyright is enforceable as a civil cases but in some jurisdiction, there are criminal infringement statutes. Criminal Sanctions are made for targeting the counterfeiting work. There are innumerable factors which determine the length of the duration term. Like the nature of work, the status of work i.e, whether it is published or unpublished and finally whether the work has been created by single person or group. Generally in various part of the world, the copyright has been granted for whole life of the author plus for 50 or 70 years. Advantages of Copyright Copyright helps in protecting the original published/unpublished work, that can be fall under the different heads of literature, musical, dramatic, artistic and intellectual. If we say the economic and social development of the nation relies upon the creativity skills of its people, then there would be no exaggeration. Copyright helps in making a protective shield, which is conducive for the growth rate of writers, artists, producers, musicians, cinematographic artists and induce them towards indulging into more creative work. By copyrighted their creation, copyright holder can enjoys following rights - One can use, re use, reproduce the copies and can sell the copies. One can import or export whole or part of work. One is free to create any derivative work. One can publicly demonstrate its work. One can sell or pass its rights to other person. One can indulge in transmitting or displaying work by radio or video. Patent A patent is termed as the exclusionary rights given by the government or the authorized authority to its inventor for a particular duration of time, in respect of his invention. It is the part of the intellectual property right, which connotes with all those rights which are granted to any person for protecting its invention, process, discovery, composition or new useful development etc. from its further usage without any authentication. If more than two persons have jointly applied for patent license, both will own the patent separately. The original word 'patent' has come up from the latin term 'patere', which means 'to lay open' or 'available for public usage'. Sometimes it is also related to the term 'letters patent', which marks to the royal decree granting exclusive rights to patentee. Unlike copyright, patent is not granted on giving mere suggestion or idea. An idea of mere manufacturing machine does not comes under the purview of obtaining patent. Advantages of Patent Patents assist in powering the research and development. Many corporations have huge budget set aside for extensive research and developments. Without the covering shell of patent, extensive spending of R&D would be less or go insignificant, which will limit the chances of technological growth. Such companies would hesitate in spending bulk amount on research activities, as any other third person can easily exploit their new developments. With an accordance to the meaning of 'patent', it allows and encourages the holder to publicly disclose the innovations in public domain for societal needs. If patent holder will not get any legal protection, then they would tend to keep their invention as a secret, as any disclosure would amount to the loss of license holder rights. Such companies which involve high fixed cost and low marginal cost, like computer processors software, pharmaceuticals, face high commercialization cost of testing , setting up of factory etc. Unless such companies do not have any protective shield for competing with marginal cost, they will hesitate in moving ahead. Patent allows them to purely concentrate on manufacturing process. It allows inventor to maintain monopoly on the invention for a specified period of time. Generally a patent application must possessed of one or two claims, which are new, innovative and commercially viable. Trademark The trademark or trade mark, symbolized as the â„¢ and Â®, is the distinctive sign or indication which is used for signifying some kind of goods or/and services and is distinctively used across the business organization or by an individual for identifying and uniquely classifying the source or their products and/or services among consumers and


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making a distinction of its products or services from the other entities. One of the part of the intellectual property law, trademark signifies to the name, word, phrase, logo, image, design, symbol or combination of any or all of these elements. The trademark grants rights to the owner which in turns may take or can commence legal proceedings in case of infringement of trademark. However registration is not compulsory in trademark. The owner of common law trademark can also file the suit but in case of the unregistered mark, the protection granted will only be confined only to that geographical area within which it has been used or in that area into which it is expected to be expand. Informally the term 'trademark' is used for distinguishing those characteristics or attributes which helps in identifying any individual. When the word 'trademark' is used in context of services rather than products, it may called service mark. When the trademark is used for describing the product or service, instead of making a distinction from the third parties then it is popularly called generalized trademark. As any sign which is attributed of doing the essential required functions of the trademark may be headed under the term 'trademark'. It may include various non-conventional signs like shapes(three dimensional trademarks), smells, sounds, moving images, taste, color and even texture. The extent to which these non conventional trade marks are recognized or even protected varies from one jurisdiction to another. Advantages of Trademarks

The trademark owner is conferred upon the 'exclusionary rights' which says that the owner enjoys the right of using the registered trademark and can indicate it by using the symbols- â„¢ and Â® in relation of those goods and services for which the owner has registered the trademark. At the time of any infringement, the owner can take upon the case in the court. Trademark provides the guarantee for the unchanged quality and helps in creating and advertising the products and services in public. Trade Secrets Trade secret points towards a formula, pattern, any instrument, design which is kept confidential and through which any business or trade can edge over its rival and can enjoy economic gain. Trade secrets can be anything from a chemical compound, manufacturing process, design or preserving materials or even a list of consumers or clients. It is also known as "confidential information" or "classified information". To be safeguarded under trade secrets, the matter should be 'secret'. Though the definition of trade secret is variable as per the jurisdiction but there are following elements that are found to be same - is not known by the public. provides some financial sort of gain to its holder. involves reasonable efforts from the holder side for maintaining secrecy. importance of data or information to him or for his rivals. the ease by which information could be learned or duplicated by others. Any enterprise or an organization can safeguard its confidential data or information by entering into non disclosure agreement with its employees. Such law of protecting confidential matters offers monopoly in respect of any secret data and information. Trade secrets offer protection for an indefinite time period. Unlike patent it does not expire. Every company invests its time and resources into discovering information regarding refinement of its various activities and operations. If other company will be allowed to use the same knowledge then the chance of first company survival and dominance into the industrial arena would be vitiated. When trade secrets are recognized then the inventor of such knowledge is entitled to consider that as part of the intellectual property. Utility Model The utility model is the intellectual property right for protecting the inventions. It is somehow described as the statutory monopoly which is bestow upon for the fixed duration of time in exchange to the inventor for the offering of the sufficient teaching of the invention and permitting the other person, possessing the ordinary skills of the relevant art, of performing the invention. The rights granted under the utility model are somewhat identical to those conferred upon by the patent but are more considerable for using the term 'incremental inventions'. Sometimes words like 'petty patent', 'innovation patent', 'minor patent' and 'small patent' are used in reference of the utility model. Such models are considered to be more suitable particularly for the small scale enterprises, which in turns make the 'minor' improvements with the adaption of the existing products. Utility models are more commonly used for the mechanical innovations. The utility model rights are recognized as the registered rights which provide the owner 'exclusivity' protection in terms of the invention. In general context the invention must be new and should encompasses the inventive step and able for lending itself to the industrial usage, which would be protected through the utility model. It is possible to grant utility model without following the lengthy process of examination. Unlike patents, utility model rights are granted for shorter time span, say 6 or 10 years, without the renewal or extension possibility and it follows less stringent requirements. These models are comparatively cheaper in obtaining and maintaining. The utility model of German and Austrian is known as the "Gebrauchsmuster", which in turns have influenced the model of other nations like Japan. The utility model working in Indonesia and Finland is termed as 'Petty Patent'. Such models are deemed to be more suitable for small and medium size enterprises which make few improvements. These are primarily found to be used for mechanical innovations also. Geographical Indication


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Geographical Indication (GI) signifies to the name or sign, used in reference to the products which are corresponding to the particular geographical area or somewhat related to the origin like town, region or nation. Thus GI grants the rights to its holder which acts as the certification mark and shows that the specified product consists of the some qualities and is enjoying good reputation due to its origin from the specified geographical location. The Trade Related Aspects of Intellectual Property Rights (TRIPs) Agreement has defined the 'geographical indications rights' as the exclusionary rights for the indicator which identify the goods originated within the member nations territories, or area or region of that territory, where the reputation or other attributes of the goods is essentially related to the geographic origin of the place. Geographical indications are the part of the intellectual property law therefore like any other law the regulation and govern conditions of GI also varies from one country to another as high differences have been found out in the use of generic terms across the world. Such case is prominent for food and beverage which more commonly use the geographic terms. Geographical Indications are aimed towards identifying the source of the product and is considered as the valuable business tool. The global trade has made it crucial of harmonizing the various approaches and methods which the governments use for registering the GIs in their respective territories. The first initiative was taken in the year 1883 as the Paris Convention on trademarks which was followed by the more elaborative provisions of the Lisbon Agreement in the year 1958 for the Protection of Appellations of Origin and their Registration. In the year 1994 during the conclusion of the negotiations on the WTO Agreement on Trade Related Aspects of Intellectual Property Rights all WTO members were decided to lay down certain standards for the GIs protection in their respective countries. The Article 22 of the TRIPS Agreement emphasis on the obligations of the government for providing legal opportunities within their territories for safeguarding the GI use and curbing its misappropriate use. Industrial Design Rights Industrial design rights are defined as the part of the intellectual property rights which confers the rights of exclusivity to the visual designs of objects which are generally not popular utilitarian. It safeguards the appearance, style, design of the industrial object such as spare parts, textiles, furniture. According to the Industrial Design Society of America (IDSA), "Industrial Design (ID) is the professional service of creating and developing concepts and specifications that optimize the function, value and appearance of products and systems for the mutual benefit of both user and manufacturer." As these designs consist of the aesthetic features therefore they do not provide any protection to the technical features of the article. The origin of design rights can be traced back in the United Kingdom as 'Designing and Printing of Linen Act' (1787). Designs are used in different products and across the various industries like medical, handicrafts, jewelry, electrical appliances etc. It precludes of any trademark or artistic type of work. In India the ever first design related legislation was enacted by the British Government and was popularly named as the Designs Act, 1911. The Hague Agreement in concern to the international deposit of industrial designs, the WIPO administered treaty, the procedure of the international registration has been laid down. The applicant intended to enjoy the industrial design rights can file the application with the WIPO or in the national office of the nations which are member of the treaty. Due to the application filing with the WIPO, the designs will be protected in various member nations of the treaty. If the right holder wants to protect its rights in multiple jurisdictions then it is required to seek protection separately from each nation. India has still not accepted the Hague System for the International Registration of Industrial Designs, which offers the industrial design owner the right of protecting its design product in various countries on mere filling of the application with the international bureau of the WIPO. Advantages of Industrial Design Rights

Industrial designs help in making any product or item more beautiful and appealing ,henceforth they help in increasing commercial viability of product and increases its market potentiality. The industrial design registration helps in safeguarding the ornamental or aesthetic elements of the article. Whenever an industrial design is being registered it gives an exclusionary rights to owner against unauthorized use like copying or imitation by third party without his consent. This in turns facilitate fair flow of investment. An effectual system also helps in benefiting public by encouraging fair and effective competition and trading practices which at large bolster the creativity and the final result comes in the form of attractive and beautiful products. Safeguarding of industrial designs help in the overall economic development which promote creativity in the industrial arena. Advantages of Intellectual Property Rights Intellectual property rights help in providing exclusive rights to creator or inventor, thereby induces them to distribute and share information and data instead of keeping it confidential. It provides legal protection and offers them incentive of their work. Rights granted under the intellectual property act helps in socio and economic development. Intellectual Property Rights in India

India has defined the establishment of statutory, administrative and judicial framework for protecting the intellectual property rights in the Indian territory, whether they connotes with the copyright, patent, trademark, industrial designs or with other parts.


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Tuning with the changing industrial world, the intellectual property rights have continued to strengthen its position in the India. In 1999, the government has passed the important legislation in relation to the protection of intellectual property rights on the terms of the worldwide practices and in accordance to the India's obligations under the Trade Related Aspects of Intellectual Property Rights. It consists of -

The Patents(Amendment) Act, 1999 which was passed on 10th March, 1999 in the Indian Parliament for amending the Patents Act of 1970 which in turns facilitate to establish the mail box system for filing patents and accords with the exclusive marketing rights for the time period of 5 years.

The Trade Marks Bill, 1999 was passed in the India parliament during the winter session for replacing the

Trade and Merchandise Marks Act, 1958. It was passed on 23rd December, 1999.

The Copyright(Amendment) Act, 1999 was passed by both upper house and lower house of the Indian parliament and was later on signed by the Indian president on 30th December, 1999.

The sui generis legislation was approved by both houses of the Indian parliament on 23rd December, 1999

and was named as the Geographical Indications of Goods (Registration & Protection) Bill, 1999.

The Industrial Designs Bill, 1999 was passed in the Upper House of the Indian parliament for replacing the Designs Act, 1911.

The Patents (Second Amendment) Bill, 1999 was introduced in the upper house of the parliament for

further amending the Patents Act 1970 and making it compliance with the TRIPS. Along with the above legislative measures, the Indian government has introduced several changes for streamlining and bolstering the intellectual property administration system in the nation. Several projects concerning to the modernizing of the patent information services and trademark registry have been undergone with the help of the World Intellectual Property Organization/ United Nations Development Programme.


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Chapter2 Management

2.1Introduction Management is a universal phenomenon. It is a very popular and widely used term. All organizations - business, political, cultural or social are involved in management because it is the management which helps and directs the various efforts towards a definite purpose. According to Harold Koontz, ―Management is an art of getting things done through and with the people in formally organized groups. It is an art of creating an environment in which people can perform and individuals and can co-operate towards attainment of group goals‖. According to F.W. Taylor, ―Management is an art of knowing what to do, when to do and see that it is done in the best and cheapest way‖. Management is a purposive activity. It is something that directs group efforts towards the attainment of certain pre – determined goals. It is the process of working with and through others to effectively achieve the goals of the organization, by efficiently using limited resources in the changing world. Of course, these goals may vary from one enterprise to another. E.g.: For one enterprise it may be launching of new products by conducting market surveys and for other it may be profit maximization by minimizing cost. Management involves creating an internal environment: - It is the management which puts into use the various factors of production. Therefore, it is the responsibility of management to create such conditions which are conducive to maximum efforts so that people are able to perform their task efficiently and effectively. It includes ensuring availability of raw materials, determination of wages and salaries, formulation of rules & regulations etc. Therefore, we can say that good management includes both being effective and efficient. Being effective means doing the appropriate task i.e., fitting the square pegs in square holes and round pegs in round holes. Being efficient means doing the task correctly, at least possible cost with minimum wastage of resources. Management can be defined in detail in following categories:

Management as a Process Management as an Activity Management as a Discipline Management as a Group Management as a Science Management as an Art Management as a Profession Management as a Process

2.1.1 Management as a Process As a process, management refers to a series of inter – related functions. It is the process by which management creates, operates and directs purposive organization through systematic, coordinated and co-operated human efforts, according to George R. Terry, ―Management is a distinct process consisting of planning, organizing, actuating and controlling, performed to determine and accomplish stated objective by the use of human beings and other resources‖. As a process, management consists of three aspects:

Management is a social process – Since human factor is most important among the other factors, therefore management is concerned with developing relationship among people. It is the duty of management to make interaction between people – productive and useful for obtaining organizational goals.

Management is an integrating process – Management undertakes the job of bringing together human physical and financial resources so as to achieve organizational purpose. Therefore, is an important function to bring harmony between various factors.

Management is a continuous process – It is a never ending process. It is concerned with constantly identifying the problem and solving them by taking adequate steps. It is an on-going process.

2.1.2 Management as an Activity Like various other activities performed by human beings such as writing, playing, eating, cooking etc, management is also an activity because a manager is one who accomplishes the objectives by directing the efforts of others. According to Koontz, ―Management is what a manager does‖. Management as an activity includes –

Informational activities – In the functioning of business enterprise, the manager constantly has to receive and give information orally or in written. A communication link has to be maintained with subordinates as well as superiors for effective functioning of an enterprise.

Decisional activities – Practically all types of managerial activities are based on one or the other types of decisions. Therefore, managers are continuously involved in decisions of different kinds since the decision made by one manager becomes the basis of action to be taken by other managers. (E.g. Sales Manager is deciding the media & content of advertising).


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Inter-personal activities – Management involves achieving goals through people. Therefore, managers have to interact with superiors as well as the sub-ordinates. They must maintain good relations with them. The inter-personal activities include with the sub-ordinates and taking care of the problem. (E.g. Bonuses to be given to the sub-ordinates).

2.1.3 Management as a Discipline Management as a discipline refers to that branch of knowledge which is connected to study of principles & practices of basic administration. It specifies certain code of conduct to be followed by the manager & also various methods for managing resources efficiently. Management as a discipline specifies certain code of conduct for managers & indicates various methods of managing an enterprise. Management is a course of study which is now formally being taught in the institutes and universities after completing a prescribed course or by obtaining degree or diploma in management, a person can get employment as a manager. Any branch of knowledge that fulfils following two requirements is known as discipline: 1. There must be scholars & thinkers who communicate relevant knowledge through research and publications. 2. The knowledge should be formally imparted by education and training programmes. Since management satisfies both these problems, therefore it qualifies to be a discipline. Though it is comparatively a new discipline but it is growing at a faster pace. 2.1.4 Management as a Group

Management as a group refers to all those persons who perform the task of managing an enterprise. When we say that management of ABC & Co. is good, we are referring to a group of people those who are managing. Thus as a group technically speaking, management will include all managers from chief executive to the first – line managers (lower-level managers). But in common practice management includes only top management i.e. Chief Executive, Chairman, General Manager, Board of Directors etc. In other words, those who are concerned with making important decisions, these persons enjoy the authorities to use resources to accomplish organizational objectives & also responsibility to for their efficient utilization.

Management as a group may be looked upon in 2 different ways: 1. All managers taken together. 2. Only the top management

The interpretation depends upon the context in which these terms are used. Broadly speaking, there are 3 types of managers -

1. Patrimonial / Family Manager: Those who have become managers by virtue of their being owners or relatives of the owners of company.

2. Professional Managers: Those who have been appointed on account of their specialized knowledge and degree.

3. Political Managers / Civil Servants: Those who manage public sector undertakings. Managers have become a part of elite group of society as they enjoy higher standard of living in the society. 2.1.5 Management as a Science Science is a systematic body of knowledge pertaining to a specific field of study that contains general facts which explains a phenomenon. It establishes cause and effect relationship between two or more variables and underlines the principles governing their relationship. These principles are developed through scientific method of observation and verification through testing. Science is characterized by following main features:

1. Universally acceptance principles – Scientific principles represents basic truth about a particular field of enquiry. These principles may be applied in all situations, at all time & at all places. E.g. – law of gravitation which can be applied in all countries irrespective of the time. Management also contains some fundamental principles which can be applied universally like the Principle of Unity of Command i.e. one man, one boss. This principle is applicable to all type of organization – business or non business.

2. Experimentation & Observation – Scientific principles are derived through scientific investigation &

researching i.e. they are based on logic. E.g. the principle that earth goes round the sun has been scientifically proved. Management principles are also based on scientific enquiry & observation and not only on the opinion of Henry Fayol. They have been developed through experiments & practical experiences of large no. of managers. E.g. it is observed that fair remuneration to personal helps in creating a satisfied work force.


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3. Cause & Effect Relationship – Principles of science lay down cause and effect relationship between various variables. E.g. when metals are heated, they are expanded. The cause is heating & result is expansion. The same is true for management, therefore it also establishes cause and effect relationship. E.g. lack of parity (balance) between authority & responsibility will lead to ineffectiveness. If you know the cause i.e. lack of balance, the effect can be ascertained easily i.e. in effectiveness. Similarly if workers are given bonuses, fair wages they will work hard but when not treated in fair and just manner, reduces productivity of organization.

4. Test of Validity & Predictability – Validity of scientific principles can be tested at any time or any number

of times i.e. they stand the test of time. Each time these tests will give same result. Moreover future events can be predicted with reasonable accuracy by using scientific principles. E.g. H2 & O2 will always give H2O. Principles of management can also be tested for validity. E.g. principle of unity of command can be tested by comparing two persons – one having single boss and one having 2 bosses. The performance of 1st person will be better than 2nd.

It cannot be denied that management has a systematic body of knowledge but it is not as exact as that of other physical sciences like biology, physics, and chemistry etc. The main reason for the inexactness of science of management is that it deals with human beings and it is very difficult to predict their behavior accurately. Since it is a social process, therefore it falls in the area of social sciences. It is a flexible science & that is why its theories and principles may produce different results at different times and therefore it is a behavior science. Ernest Dale has called it as a Soft Science. 2.1.6 Management as an Art Art implies application of knowledge & skill to trying about desired results. An art may be defined as personalized application of general theoretical principles for achieving best possible results. Art has the following characters –

1. Practical Knowledge: Every art requires practical knowledge therefore learning of theory is not sufficient. It is very important to know practical application of theoretical principles. E.g. to become a good painter, the person may not only be knowing different colour and brushes but different designs, dimensions, situations etc to use them appropriately. A manager can never be successful just by obtaining degree or diploma in management; he must have also know how to apply various principles in real situations by functioning in capacity of manager.

2. Personal Skill: Although theoretical base may be same for every artist, but each one has his own style

and approach towards his job. That is why the level of success and quality of performance differs from one person to another. E.g. there are several qualified painters but M.F. Hussain is recognized for his style. Similarly management as an art is also personalized. Every manager has his own way of managing things based on his knowledge, experience and personality, that is why some managers are known as good managers (like Aditya Birla, Rahul Bajaj) whereas others as bad.

3. Creativity: Every artist has an element of creativity in line. That is why he aims at producing something

that has never existed before which requires combination of intelligence & imagination. Management is also creative in nature like any other art. It combines human and non-human resources in useful way so as to achieve desired results. It tries to produce sweet music by combining chords in an efficient manner.

4. Perfection through practice: Practice makes a man perfect. Every artist becomes more and more

proficient through constant practice. Similarly managers learn through an art of trial and error initially but application of management principles over the years makes them perfect in the job of managing.

5. Goal-Oriented: Every art is result oriented as it seeks to achieve concrete results. In the same manner,

management is also directed towards accomplishment of pre-determined goals. Managers use various resources like men, money, material, machinery & methods to promote growth of an organization.

Thus, we can say that management is an art therefore it requires application of certain principles rather it is an art of highest order because it deals with moulding the attitude and behavior of people at work towards desired goals. 2.1.7 Management as both Science and Art Management is both an art and a science. The above mentioned points clearly reveals that management combines features of both science as well as art. It is considered as a science because it has an organized body of knowledge which contains certain universal truth. It is called an art because managing requires certain skills which are personal possessions of managers. Science provides the knowledge & art deals with the application of knowledge and skills. A manager to be successful in his profession must acquire the knowledge of science & the art of applying it. Therefore management is a judicious blend of science as well as an art because it proves the principles and the way these principles are applied is a matter of art. Science teaches to ’know’ and art teaches to ’do’. E.g. a person cannot become a good singer unless he has knowledge about various ragas & he also applies his personal skill in the art of singing. Same way it is not sufficient for manager to first know the principles but he must also apply them


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in solving various managerial problems that is why, science and art are not mutually exclusive but they are complementary to each other (like tea and biscuit, bread and butter etc.). The old saying that ―Manager are Born‖ has been rejected in favor of ―Managers are Made‖. It has been aptly remarked that management is the oldest of art and youngest of science. To conclude, we can say that science is the root and art is the fruit. 2.1.8 Management as a Profession Over a large few decades, factors such as growing size of business unit, separation of ownership from management, growing competition etc have led to an increased demand for professionally qualified managers. The task of manager has been quite specialized. As a result of these developments the management has reached a stage where everything is to be managed professionally. A profession may be defined as an occupation that requires specialized knowledge and intensive academic preparations to which entry is regulated by a representative body. The essentials of a profession are:

1. Specialized Knowledge – A profession must have a systematic body of knowledge that can be used for development of professionals. Every professional must make deliberate efforts to acquire expertise in the principles and techniques. Similarly a manager must have devotion and involvement to acquire expertise in the science of management.

2. Formal Education & Training – There are no. of institutes and universities to impart education & training

for a profession. No one can practice a profession without going through a prescribed course. Many institutes of management have been set up for imparting education and training. For example, a CA cannot audit the A/C’s unless he has acquired a degree or diploma for the same but no minimum qualifications and a course of study has been prescribed for managers by law. For example, MBA may be preferred but not necessary.

3. Social Obligations – Profession is a source of livelihood but professionals are primarily motivated by the

desire to serve the society. Their actions are influenced by social norms and values. Similarly a manager is responsible not only to its owners but also to the society and therefore he is expected to provide quality goods at reasonable prices to the society.

4. Code of Conduct – Members of a profession have to abide by a code of conduct which contains certain

rules and regulations, norms of honesty, integrity and special ethics. A code of conduct is enforced by a representative association to ensure self discipline among its members. Any member violating the code of conduct can be punished and his membership can be withdrawn. The AIMA has prescribed a code of conduct for managers but it has no right to take legal action against any manager who violates it.

5. Representative Association – For the regulation of profession, existance of a representative body is a

must. For example, an institute of Charted Accountants of India establishes and administers standards of competence for the auditors but the AIMA however does not have any statuary powers to regulate the activities of managers.

From above discussion, it is quite clear that management fulfills several essentials of a profession, even then it is not a full fledged profession because: -

a) It does not restrict the entry in managerial jobs for account of one standard or other. b) No minimum qualifications have been prescribed for managers. c) No management association has the authority to grant a certificate of practice to various managers. d) All managers are supposed to abide by the code formulated by AIMA, e) Competent education and training facilities do not exist. . f) Managers are responsible to many groups such as shareholders, employees and society. A regulatory

code may curtail their freedom. g) Managers are known by their performance and not mere degrees. h) The ultimate goal of business is to maximize profit and not social welfare. That is why Haymes has rightly

remarked, ―The slogan for management is becoming – ’He who serves best, also profits most’.‖

2.2 Feature of Management Management is an activity concerned with guiding human and physical resources such that organizational goals can be achieved. Nature of management can be highlighted as: -

1. Management is Goal-Oriented: The success of any management activity is accessed by its achievement of the predetermined goals or objective. Management is a purposeful activity. It is a tool which helps use of human & physical resources to fulfill the pre-determined goals. For example, the goal of an enterprise is maximum consumer satisfaction by producing quality goods and at reasonable prices. This can be achieved by employing efficient persons and making better use of scarce resources.


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2. Management integrates Human, Physical and Financial Resources: In an organization, human beings work with non-human resources like machines. Materials, financial assets, buildings etc. Management integrates human efforts to those resources. It brings harmony among the human, physical and financial resources.

3. Management is Continuous: Management is an ongoing process. It involves continuous handling of

problems and issues. It is concerned with identifying the problem and taking appropriate steps to solve it. E.g. the target of a company is maximum production. For achieving this target various policies have to be framed but this is not the end. Marketing and Advertising is also to be done. For this policies have to be again framed. Hence this is an ongoing process.

4. Management is all Pervasive: Management is required in all types of organizations whether it is political,

social, cultural or business because it helps and directs various efforts towards a definite purpose. Thus clubs, hospitals, political parties, colleges, hospitals, business firms all require management. When ever more than one person is engaged in working for a common goal, management is necessary. Whether it is a small business firm which may be engaged in trading or a large firm like Tata Iron & Steel, management is required everywhere irrespective of size or type of activity.

5. Management is a Group Activity: Management is very much less concerned with individual’s efforts. It is

more concerned with groups. It involves the use of group effort to achieve predetermined goal of management of ABC & Co. is good refers to a group of persons managing the enterprise.

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

1. Top level / Administrative level 2. Middle level / Executory 3. Low level / Supervisory / Operative / First-line managers

Managers at all these levels perform different functions. The role of managers at all the three levels is discussed below:

1. Top Level of Management It consists of board of directors, chief executive or managing director. The top management is the ultimate source of authority and it manages goals and policies for an enterprise. It devotes more time on planning and coordinating functions. The role of the top management can be summarized as follows –

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


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

a) They execute the plans of the organization in accordance with the policies and directives of the top management.

b) They make plans for the sub-units of the organization. c) They participate in employment & training of lower level management. d) They interpret and explain policies from top level management to lower level. e) They are responsible for coordinating the activities within the division or department. f) It also sends important reports and other important data to top level management. g) They evaluate performance of junior managers. h) They are also responsible for inspiring lower level managers towards better performance.

3. Lower Level of Management

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

a) Assigning of jobs and tasks to various workers. b) They guide and instruct workers for day to day activities. c) They are responsible for the quality as well as quantity of production. d) They are also entrusted with the responsibility of maintaining good relation in the organization. e) They communicate workers problems, suggestions, and recommendatory appeals etc to the higher level

and higher level goals and objectives to the workers. f) They help to solve the grievances of the workers. g) They supervise & guide the sub-ordinates. h) They are responsible for providing training to the workers. i) They arrange necessary materials, machines, tools etc for getting the things done. j) They prepare periodical reports about the performance of the workers. k) They ensure discipline in the enterprise. l) They motivate workers. m) They are the image builders of the enterprise because they are in direct contact with the workers.

2.4 Objectives of management The main objectives of management are:

1. Getting Maximum Results with Minimum Efforts – The main objective of management is to secure maximum outputs with minimum efforts & resources. Management is basically concerned with thinking & utilizing human, material & financial resources in such a manner that would result in best combination. This combination results in reduction of various costs.

2. Increasing the Efficiency of factors of Production – Through proper utilization of various factors of

production, their efficiency can be increased to a great extent which can be obtained by reducing spoilage, wastages and breakage of all kinds, this in turn leads to saving of time, effort and money which is essential for the growth & prosperity of the enterprise.

3. Maximum Prosperity for Employer & Employees – Management ensures smooth and coordinated

functioning of the enterprise. This in turn helps in providing maximum benefits to the employee in the shape of good working condition, suitable wage system, incentive plans on the one hand and higher profits to the employer on the other hand.

4. Human betterment & Social Justice – Management serves as a tool for the upliftment as well as

betterment of the society. Through increased productivity & employment, management ensures better standards of living for the society. It provides justice through its uniform policies.

2. 5 Importance of management

1. It helps in Achieving Group Goals – It arranges the factors of production, assembles and organizes the resources, integrates the resources in effective manner to achieve goals. It directs group efforts towards achievement of pre-determined goals. By defining objective of organization clearly there would be no wastage of time, money and effort. Management converts disorganized resources of men, machines, money etc. into useful enterprise. These resources are coordinated, directed and controlled in such a manner that enterprise work towards attainment of goals.


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2. Optimum Utilization of Resources – Management utilizes all the physical & human resources productively. This leads to efficacy in management. Management provides maximum utilization of scarce resources by selecting its best possible alternate use in industry from out of various uses. It makes use of experts, professional and these services leads to use of their skills, knowledge, and proper utilization and avoids wastage. If employees and machines are producing its maximum there is no under employment of any resources.

3. Reduces Costs – It gets maximum results through minimum input by proper planning and by using

minimum input & getting maximum output. Management uses physical, human and financial resources in such a manner which results in best combination. This helps in cost reduction.

4. Establishes Sound Organization – No overlapping of efforts (smooth and coordinated functions). To

establish sound organizational structure is one of the objective of management which is in tune with objective of organization and for fulfillment of this, it establishes effective authority & responsibility relationship i.e. who is accountable to whom, who can give instructions to whom, who are superiors & who are subordinates. Management fills up various positions with right persons, having right skills, training and qualification. All jobs should be cleared to everyone.

5. Establishes Equilibrium – It enables the organization to survive in changing environment. It keeps in

touch with the changing environment. With the change is external environment, the initial co-ordination of organization must be changed. So it adapts organization to changing demand of market / changing needs of societies. It is responsible for growth and survival of organization.

6. Essentials for Prosperity of Society – Efficient management leads to better economical production which

helps in turn to increase the welfare of people. Good management makes a difficult task easier by avoiding wastage of scarce resource. It improves standard of living. It increases the profit which is beneficial to business and society will get maximum output at minimum cost by creating employment opportunities which generate income in hands. Organization comes with new products and researches beneficial for society.

2.6 Management and Administration According to Theo Haimann, ―Administration means overall determination of policies, setting of major objectives, the identification of general purposes and laying down of broad programmes and projects‖. It refers to the activities of higher level. It lays down basic principles of the enterprise. According to Newman, ―Administration means guidance, leadership & control of the efforts of the groups towards some common goals‖. Whereas, management involves conceiving, initiating and bringing together the various elements; coordinating, actuating, integrating the diverse organizational components while sustaining the viability of the organization towards some pre-determined goals. In other words, it is an art of getting things done through & with the people in formally organized groups. The difference between Management and Administration can be summarized under 2 categories: -

1. Functions 2. Usage / Applicability

On the Basis of Functions: -

Management Administration

Meaning Management is an art of getting things done through others by directing their efforts towards achievement of pre-determined goals.

It is concerned with formulation of broad objectives, plans & policies.

Nature Management is an executing function. Administration is a decision-making function.

Process Management decides who should as it & how should he dot it.

Administration decides what is to be done & when it is to be done.

Function Management is a doing function because managers get work done under their supervision.

Administration is a thinking function because plans & policies are determined under it.


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Skills Technical and Human skills Conceptual and Human skills

Level Middle & lower level function Top level function

On the Basis of Usage: -

Basis Management Administration

Applicability It is applicable to business concerns i.e. profit-making organization.

It is applicable to non-business concerns i.e. clubs, schools, hospitals etc.

Influence The management decisions are influenced by the values, opinions, beliefs & decisions of the managers.

The administration is influenced by public opinion, govt. policies, religious organizations, customs etc.

Status Management constitutes the employees of the organization who are paid remuneration (in the form of salaries & wages).

Administration represents owners of the enterprise who earn return on their capital invested & profits in the form of dividend.

Practically, there is no difference between management & administration. Every manager is concerned with both – administrative management function and operative management function as shown in the figure. However, the managers who are higher up in the hierarchy denote more time on administrative function & the lower level denote more time on directing and controlling worker’s performance i.e. management

The Figure above clearly shows the degree of administration and management performed by the different levels of management. 2.7 Functions of Management Management has been described as a social process involving responsibility for economical and effective planning & regulation of operation of an enterprise in the fulfillment of given purposes. It is a dynamic process consisting of various elements and activities. These activities are different from operative functions like marketing, finance, purchase etc. Rather these activities are common to each and every manger irrespective of his level or status. Different experts have classified functions of management. According to George & Jerry, ―There are four fundamental functions of management i.e. planning, organizing, actuating and controlling‖. According to Henry Fayol, ―To manage is to forecast and plan, to organize, to command, & to control‖. Whereas Luther Gullick has given a keyword ’POSDCORB’ where P stands for Planning, O for Organizing, S for Staffing, D for Directing, Co for Co-ordination, R for reporting & B for Budgeting. But the most widely accepted are functions of management given by KOONTZ and O’DONNEL i.e. Planning, Organizing, Staffing, Directing and Controlling.


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

1. Planning

It is the basic function of management. It deals with chalking out a future course of action & deciding in advance the most appropriate course of actions for achievement of pre-determined goals. According to KOONTZ, ―Planning is deciding in advance – what to do, when to do & how to do. It bridges the gap from where we are & where we want to be‖. A plan is a future course of actions. It is an exercise in problem solving & decision making. Planning is determination of courses of action to achieve desired goals. Thus, planning is a systematic thinking about ways & means for accomplishment of pre-determined goals. Planning is necessary to ensure proper utilization of human & non-human resources. It is all pervasive, it is an intellectual activity and it also helps in avoiding confusion, uncertainties, risks, wastages etc.

2. Organizing It is the process of bringing together physical, financial and human resources and developing productive relationship amongst them for achievement of organizational goals. According to Henry Fayol, ―To organize a business is to provide it with everything useful or its functioning i.e. raw material, tools, capital and personnel’s‖. To organize a business involves determining & providing human and non-human resources to the organizational structure. Organizing as a process involves:

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

3. Staffing

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

Manpower Planning (estimating man power in terms of searching, choose the person and giving the right place).

Recruitment, selection & placement. Training & development. Remuneration. Performance appraisal. Promotions & transfer.

4. Directing

It is that part of managerial function which actuates the organizational methods to work efficiently for achievement of organizational purposes. It is considered life-spark of the enterprise which sets it in motion the action of people because planning, organizing and staffing are the mere preparations for doing the work. Direction is that inert-personnel aspect of management which deals directly with influencing, guiding, supervising, motivating sub-ordinate for the achievement of organizational goals. Direction has following elements:

Supervision Motivation Leadership Communication

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


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

1. Establishment of standard performance. 2. Measurement of actual performance. 3. Comparison of actual performance with the standards and finding out deviation if any. 4. Corrective action. 5. Definition of Co-ordination

2.8 Definition of coordination

Co-ordination is the unification, integration, synchronization of the efforts of group members so as to provide unity of action in the pursuit of common goals. It is a hidden force which binds all the other functions of management. According to Mooney and Reelay, ―Co-ordination is orderly arrangement of group efforts to provide unity of action in the pursuit of common goals‖. According to Charles Worth, ―Co-ordination is the integration of several parts into an orderly hole to achieve the purpose of understanding‖. Management seeks to achieve co-ordination through its basic functions of planning, organizing, staffing, directing and controlling. That is why, co-ordination is not a separate function of management because achieving of harmony between individuals efforts towards achievement of group goals is a key to success of management. Co-ordination is the essence of management and is implicit and inherent in all functions of management. A manager can be compared to an orchestra conductor since both of them have to create rhythm and unity in the activities of group members. Co-ordination is an integral element or ingredient of all the managerial functions as discussed below: -

a) Co-ordination through Planning – Planning facilitates co-ordination by integrating the various plans through mutual discussion, exchange of ideas. e.g. - co-ordination between finance budget and purchases budget.

b) Co-ordination through Organizing – Mooney considers co-ordination as the very essence of organizing.

In fact when a manager groups and assigns various activities to subordinates, and when he creates department’s co-ordination uppermost in his mind.

c) Co-ordination through Staffing – A manager should bear in mind that the right no. of personnel in

various positions with right type of education and skills are taken which will ensure right men on the right job.

d) Co-ordination through Directing – The purpose of giving orders, instructions & guidance to the

subordinates is served only when there is a harmony between superiors & subordinates.

e) Co-ordination through Controlling – Manager ensures that there should be co-ordination between actual performance & standard performance to achieve organizational goals.

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

2.8.1 Differences between Co-ordination and Co-operation Co-ordination is an orderly arrangement of efforts to provide unity of action in the fulfillment of common objective whereas co-operation denotes collective efforts of persons working in an enterprise voluntarily for the achievement of a particular purpose. It is the willingness of individuals to help each other.


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Co-ordination is an effort to integrate effectively energies of different groups whereas co-operation is sort to achieve general objectives of business. Though these two are synonymous but they are different as below: Differences between Co-ordination and Co-operation

Basis Co-ordination Co-operation

Meaning It is an orderly arrangement of group efforts in pursuit of common goals.

It means mutual help willingly.

Scope It is broader than co-operation which includes as well because it harmonizes the group efforts.

It is termed as a part of co-ordination.

Process The function of co-ordination is performed by top management.

The functions of co-operation are prepared by persons at any level.

Requirements Co-ordination is required by employees and departments at work irrespective of their work.

Co-operation is emotional in nature because it depends on the willingness of people working together.

Relationship It establishes formal and informal relationships.

It establishes informal relationship.

Freedom It is planned and entrusted by the central authority & it is essential.

It depends upon the sweet will of the individuals and therefore it is not necessary.

Support It seeks wholehearted support from various people working at various levels.

Co-operation without co-ordination is fruitless & therefore it may lead to unbalanced developments.

Therefore, existence of co-operation may prove to be effective condition or requisite for co-ordination. But it does not mean that co-ordination originates automatically from the voluntary efforts of the group of members. It has to be achieved through conscious & deliberate efforts of managers, therefore to conclude we can say that co-operation without co-ordination has no fruit and co-ordination without co-operation has no root.

2.9 Principles of Management A principle refers to a fundamental truth. It establishes cause and effect relationship between two or more variables under given situation. They serve as a guide to thought & actions. Therefore, management principles are the statements of fundamental truth based on logic which provides guidelines for managerial decision making and actions. These principles are derived: -

a) On the basis of observation and analysis i.e. practical experience of managers.

b) By conducting experimental studies. There are 14 Principles of Management described by Henri Fayol.

1. Division of Labor

a) Henry Fayol has stressed on the specialization of jobs. b) He recommended that work of all kinds must be divided & subdivided and allotted to various persons

according to their expertise in a particular area. c) Subdivision of work makes it simpler and results in efficiency. d) It also helps the individual in acquiring speed, accuracy in his performance. e) Specialization leads to efficiency & economy in spheres of business.

2. Parity of Authority & Responsibility a) Authority & responsibility are co-existing.


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b) If authority is given to a person, he should also be made responsible. c) In a same way, if anyone is made responsible for any job, he should also have concerned authority. d) Authority refers to the right of superiors to get exactness from their sub-ordinates whereas responsibility

means obligation for the performance of the job assigned. e) There should be a balance between the two i.e. they must go hand in hand. f) Authority without responsibility leads to irresponsible behavior whereas responsibility without authority

makes the person ineffective.

3. Principle of One Boss

a. A sub-ordinate should receive orders and be accountable to one and only one boss at a time. b. In other words, a sub-ordinate should not receive instructions from more than one person because –

-It undermines authority - Weakens discipline - Divides loyalty - Creates confusion - Delays and chaos - Escaping responsibilities - Duplication of work - Overlapping of efforts

c. Therefore, dual sub-ordination should be avoided unless and until it is absolutely essential. d. Unity of command provides the enterprise a disciplined, stable & orderly existence. e. It creates harmonious relationship between superiors and sub-ordinates.

4. Unity of Direction

a) Fayol advocates one head one plan which means that there should be one plan for a group of activities

having similar objectives. b) Related activities should be grouped together. There should be one plan of action for them and they should

be under the charge of a particular manager. c) According to this principle, efforts of all the members of the organization should be directed towards

common goal. d) Without unity of direction, unity of action cannot be achieved. e) In fact, unity of command is not possible without unity of direction.

Basis Unity of command Unity of direction

Meaning It implies that a sub-ordinate should receive orders & instructions from only one boss.

It means one head, one plan for a group of activities having similar objectives.

Nature It is related to the functioning of personnel’s.

It is related to the functioning of departments, or organization as a whole.

Necessity It is necessary for fixing responsibility of each subordinates.

It is necessary for sound organization.

Advantage It avoids conflicts, confusion & chaos. It avoids duplication of efforts and wastage of resources.

Result It leads to better superior sub-ordinate relationship.

It leads to smooth running of the enterprise.

Therefore it is obvious that they are different from each other but they are dependent on each other i.e. unity of direction is a pre-requisite for unity of command. But it does not automatically comes from the unity of direction.

5. Equity

a) Equity means combination of fairness, kindness & justice. b) The employees should be treated with kindness & equity if devotion is expected of them. c) It implies that managers should be fair and impartial while dealing with the subordinates. d) They should give similar treatment to people of similar position. e) They should not discriminate with respect to age, caste, sex, religion, relation etc.


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f) Equity is essential to create and maintain cordial relations between the managers and sub-ordinate. g) But equity does not mean total absence of harshness. h) Fayol was of opinion that, ―at times force and harshness might become necessary for the sake of equity‖.

6. Order

a) This principle is concerned with proper & systematic arrangement of things and people. b) Arrangement of things is called material order and placement of people is called social order. c) Material order- There should be safe, appropriate and specific place for every article and every place to be

effectively used for specific activity and commodity. d) Social order- Selection and appointment of most suitable person on the suitable job. There should be a

specific place for every one and everyone should have a specific place so that they can easily be contacted whenever need arises.

7. Discipline

a) According to Fayol, ―Discipline means sincerity, obedience, respect of authority & observance of rules and

regulations of the enterprise‖. b) This principle applies that subordinate should respect their superiors and obey their order. c) It is an important requisite for smooth running of the enterprise. d) Discipline is not only required on path of subordinates but also on the part of management. e) Discipline can be enforced if –

-There are good superiors at all levels. - There are clear & fair agreements with workers. - Sanctions (punishments) are judiciously applied.

8. Initiative

a) Workers should be encouraged to take initiative in the work assigned to them. b) It means eagerness to initiate actions without being asked to do so. c) Fayol advised that management should provide opportunity to its employees to suggest ideas,

experiences& new method of work. d) It helps in developing an atmosphere of trust and understanding. e) People then enjoy working in the organization because it adds to their zeal and energy. f) To suggest improvement in formulation & implementation of place. g) They can be encouraged with the help of monetary & non-monetary incentives.

9. Fair Remuneration

a) The quantum and method of remuneration to be paid to the workers should be fair, reasonable, satisfactory

& rewarding of the efforts. b) As far as possible it should accord satisfaction to both employer and the employees. c) Wages should be determined on the basis of cost of living, work assigned, financial position of the

business, wage rate prevailing etc. d) Logical & appropriate wage rates and methods of their payment reduce tension & differences between

workers & management creates harmonious relationship and pleasing atmosphere of work. e) Fayol also recommended provision of other benefits such as free education, medical & residential facilities

to workers.

10. Stability of Tenure

a) Fayol emphasized that employees should not be moved frequently from one job position to another i.e. the period of service in a job should be fixed.

b) Therefore employees should be appointed after keeping in view principles of recruitment & selection but once they are appointed their services should be served.

c) According to Fayol. ―Time is required for an employee to get used to a new work & succeed to doing it well but if he is removed before that he will not be able to render worthwhile services‖.

d) As a result, the time, effort and money spent on training the worker will go waste. e) Stability of job creates team spirit and a sense of belongingness among workers which ultimately increase

the quality as well as quantity of work.

11. Scalar Chain

a) Fayol defines scalar chain as ’The chain of superiors ranging from the ultimate authority to the lowest‖. b) Every orders, instructions, messages, requests, explanation etc. has to pass through Scalar chain. c) But, for the sake of convenience & urgency, this path can be cut shirt and this short cut is known as Gang

Plank.


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d) A Gang Plank is a temporary arrangement between two different points to facilitate quick & easy communication as explained below:

In the figure given, if D has to communicate with G he will first send the communication upwards with the help of C, B to A and then downwards with the help of E and F to G which will take quite some time and by that time, it may not be worth therefore a gang plank has been developed between the two. Gang Plank clarifies that management principles are not rigid rather they are very flexible. They can be moulded and modified as per the requirements of situations

12. Sub-Ordination of Individual Interest to General Interest

a) An organization is much bigger than the individual it constitutes therefore interest of the undertaking should prevail in all circumstances.

b) As far as possible, reconciliation should be achieved between individual and group interests. c) But in case of conflict, individual must sacrifice for bigger interests. d) In order to achieve this attitude, it is essential that –

-Employees should be honest & sincere. - Proper & regular supervision of work. - Reconciliation of mutual differences and clashes by mutual agreement. For example, for change of location of plant, for change of profit sharing ratio, etc.

13. Espirit De’ Corps (can be achieved through unity of command)

a) It refers to team spirit i.e. harmony in the work groups and mutual understanding among the members. b) Spirit De’ Corps inspires workers to work harder. c) Fayol cautioned the managers against dividing the employees into competing groups because it might

damage the d) moral of the workers and interest of the undertaking in the long run. e) To inculcate Espirit De’ Corps following steps should be undertaken –

There should be proper co-ordination of work at all levels Subordinates should be encouraged to develop informal relations among themselves. Efforts should be made to create enthusiasm and keenness among subordinates so that they can

work to the maximum ability. Efficient employees should be rewarded and those who are not up to the mark should be given a

chance to improve their performance. Subordinates should be made conscious of that whatever they are doing is of great importance to

the business & society. f) He also cautioned against the more use of Britain communication to the subordinates i.e. face to face

communication should be developed. The managers should infuse team spirit & belongingness. There should be no place for misunderstanding. People then enjoy working in the organization & offer their best towards the organization.

14. Centralization & De-Centralization

a) Centralization means concentration of authority at the top level. In other words, centralization is a situation in which top management retains most of the decision making authority.

b) Decentralization means disposal of decision making authority to all the levels of the organization. In other words, sharing authority downwards is decentralization.

c) According to Fayol, ―Degree of centralization or decentralization depends on no. of factors like size of business, experience of superiors, dependability & ability of subordinates etc.


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d) Anything which increases the role of subordinate is decentralization & anything which decreases it is centralization.

e) Fayol suggested that absolute centralization or decentralization is not feasible. An organization should strike to achieve a lot between the two.

2.10 Features of Principles of Management

1. Principles of Management are Universal

a) Management principles are applicable to all kinds of organizations – business & non business. b) They are applicable to all levels of management. c) Every organization must make best possible use by the use of management principles. d) Therefore, they are universal or all pervasive.

2. Principles of Management are Flexible

a) Management principles are dynamic guidelines and not static rules. b) There is sufficient room for managerial discretion i.e. they can be modified as per the requirements of

the situation. c) Modification & improvement is a continuous phenomenon in case of principles of management.

3. Principles of Management have a Cause & Effect Relationship

a) Principles of management indicate cause and effect relationship between related variables. b) They indicate what will be the consequence or result of certain actions. Therefore, if one is known, the

other can be traced.

4. Principles of Management - Aims at Influencing Human Behavior

a) Human behavior is complex and unpredictable. b) Management principles are directed towards regulating human behavior so that people can give their

best to the organization. c) Management is concerned with integrating efforts and harmonizing them towards a goal. d) But in certain situations even these principles fail to understand human behavior.

5. Principles of Management are of Equal Importance

a) All management principles are equally important. b) No particular principle has greater importance than the other. c) They are all required together for the achievement of organizational goals.

2.10.1 Importance of Principles of Management Following are the main importance of the Principles of Management.

a) Improves Understanding. b) Direction for Training of Managers. c) Role of Management. d) Guide to Research in Management.

1. Improves Understanding – From the knowledge of principles managers get indication on how to manage

an organization. The principles enable managers to decide what should be done to accomplish given tasks and to handle situations which may arise in management. These principles make managers more efficient.

2. Direction for Training of Managers – Principles of management provide understanding of management

process what managers would do to accomplish what. Thus, these are helpful in identifying the areas of management in which existing & future managers should be trained.

3. Role of Management – Management principles makes the role of managers concrete. Therefore these

principles act as ready reference to the managers to check whether their decisions are appropriate. Besides these principles define managerial activities in practical terms. They tell what a manager is expected to do in specific situation.

4. Guide to Research in Management – The body of management principles indicate lines along which

research should be undertaken to make management practical and more effective. The principles guide managers in decision making and action. The researchers can examine whether the guidelines are useful or not. Anything which makes management research more exact & pointed will help improve management practice.


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2.10.2 Scientific Management’ by Taylor Winslow Taylor ( March 20, 1856 - March 21, 1915) commonly known as ’Father of Scientific Management’ started his career as an operator and rose to the position of chief engineer. He conducted various experiments during this process which forms the basis of scientific management. It implies application of scientific principles for studying & identifying management problems. According to Taylor, ―Scientific Management is an art of knowing exactly what you want your men to do and seeing that they do it in the best and cheapest way‖. In Taylors view, if a work is analysed scientifically it will be possible to find one best way to do it. Hence scientific management is a thoughtful, organized, dual approach towards the job of management against hit or miss or Rule of Thumb. According to Drucker, ―The cost of scientific management is the organized study of work, the analysis of work into simplest element & systematic management of worker’s performance of each element‖.

Principle of Scientific Management 1. Development of Science for each part of men’s job (replacement of rule of thumb)

This principle suggests that work assigned to any employee should be observed, analyzed with respect to each and every element and part and time involved in it. This means replacement of odd rule of thumb by the use of method of enquiry, investigation, data collection, analysis and framing of rules. Under scientific management, decisions are made on the basis of facts and by the application of scientific decisions.

2. Selection, Training & Development of Workers

a) There should be scientifically designed procedure for the selection of workers. b) Physical, mental & other requirement should be specified for each and every job. c) Workers should be selected & trained to make them fit for the job. d) The management has to provide opportunities for development of workers having better capabilities. e) According to Taylor efforts should be made to develop each employee to his greatest level and

efficiency & prosperity.

3. Co-operation between Management & workers or Harmony not discord

a) Taylor believed in co-operation and not individualism. b) It is only through co-operation that the goals of the enterprise can be achieved efficiently. c) There should be no conflict between managers & workers. d) Taylor believed that interest of employer & employees should be fully harmonized so as to secure

mutually understanding relations between them.

4. Division of Responsibility

a) This principle determines the concrete nature of roles to be played by different level of managers & workers.

b) The management should assume the responsibility of planning the work whereas workers should be concerned with execution of task.

c) Thus planning is to be separated from execution.

5. Mental Revolution

a) The workers and managers should have a complete change of outlook towards their mutual relation and work effort.

b) It requires that management should create suitable working condition and solve all problems scientifically.

c) Similarly workers should attend their jobs with utmost attention, devotion and carefulness. They should not waste the resources of enterprise.

d) Handsome remuneration should be provided to workers to boost up their moral. e) It will create a sense of belongingness among worker. f) They will be disciplined, loyal and sincere in fulfilling the task assigned to them. g) There will be more production and economical growth at a faster rate.

6. Maximum Prosperity for Employer & Employees

a) The aim of scientific management is to see maximum prosperity for employer and employees. b) It is important only when there is opportunity for each worker to attain his highest efficiency.


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c) Maximum output & optimum utilization of resources will bring higher profits for the employer & better wages for the workers.

d) There should be maximum output in place of restricted output. e) Both managers & workers should be paid handsomely.

2.10.3 Techniques of Scientific Management 1. Time Study

a) It is a technique which enables the manager to ascertain standard time taken for performing a specified job.

b) Every job or every part of it is studied in detail. c) This technique is based on the study of an average worker having reasonable skill and ability. d) Average worker is selected and assigned the job and then with the help of a stop watch, time is

ascertained for performing that particular job. e) Taylor maintained that Fair day’s work should be determined through observations, experiment and

analysis by keeping in view an average worker. f) Standard Time × Working Hours = Fair Day’s Work

2. Motion Study

a) In this study, movement of body and limbs required to perform a job are closely observed. b) In other words, it refers to the study of movement of an operator on machine involved in a particular task. c) The purposse of motion study is to eliminate useless motions and determine the bet way of doing the job. d) By undertaking motion study an attempt is made to know whether some elements of a job can be

eliminated combined or their sequence can be changed to achieve necessary rhythm. e) Motion study increases the efficiency and productivity of workers by cutting down all wasteful motions.

3. Functional Foremanship

a) Taylor advocated functional foremanship for achieving ultimate specification. b) This technique was developed to improve the quality of work as single supervisor may not be an expert in

all the aspects of the work. c) Therefore workers are to be supervised by specialist foreman. d) The scheme of functional foremanship is an extension of principle pf specialization at the supervisory level. e) Taylor advocated appointment of 8 foramen, 4 at the planning level & other 4 at implementation level. f) The names & function of these specialist foremen are: -

Instruction card clerk concerned with tagging down of instructions according to which workers are required to perform their job

Time & cost clerk is concerned with setting a time table for doing a job & specifying the material and labor cost involved in it.

Route clerk determines the route through which raw materials has to be passed. Shop Disciplinarians are concerned with making rules and regulations to ensure discipline in

the organization. Gang boss makes the arrangement of workers, machines, tools, workers etc. Speed boss concerned with maintaining the speed and to remove delays in the production

process. Repair boss concerned with maintenance of machine, tools and equipments. Inspector is concerned with maintaining the quality of product.


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4. Standardization

a) It implies the physical attitude of products should be such that it meets the requirements & needs of customers.

b) Taylor advocated that tools & equipments as well as working conditions should be standardized to achieve standard output from workers.

c) Standardization is a means of achieving economics of production. d) It seems to ensure –

The line of product is restricted to predetermined type, form, design, size, weight, quality. Etc There is manufacture of identical parts and components. Quality & standards have been maintained. Standard of performance are established for workers at all levels.

5. Differential Piece Wage Plan

a) This tech of wage payment is based on efficiency of worker. b) The efficient workers are paid more wages than inefficient one. c) On the other hand, those workers who produce less than standard no. of pieces are paid wages at lower

rate than prevailing rate i.e. worker is penalized for his inefficiency. d) This system is a source of incentive to workers who improving their efficiency in order to get more wages. e) It also encourages inefficient workers to improve their performance and achieve their standards. f) It leads to mass production which minimizes cost and maximizes profits.

6. Other Techniques

a) Various other techniques have been developed to create ordeal relationship between management and workers and also to create better understanding on part of works.

b) Those includes use of instruction cards, strict rules & regulations, graphs, slides, charts etc, so as to increase efficiency of workers.

2.11 Study of Taylor & Fayol Both the persons have contributed to development of science of management. The contribution of these two pioneers in the field of science of management has been reviewed as ―The work of Taylor & Fayol was, of course, especially complementary. They both realized that problem of personnel & its management at all levels is the key to individual success. Both applied scientific method to this problem that Taylor worked primarily from operative level, from bottom to upward, while Fayol concentrated on managing director and work downwards, was merely a reflection of their very different careers‖. They both differ from each other in following aspects: -

1. Taylor looked at management from supervisory viewpoint & tried to improve efficiency at operating level. He moved upwards while formulating theory. On the other hand, Fayol analyzed management from level of top management downward. Thus, Fayol could afford a broader vision than Taylor.

2. Taylor called his philosophy ―Scientific Management‖ while Fayol described his approach as ―A general theory of administration‖.

3. Main aim of Taylor – to improve labor productivity & to eliminate all type of waste through standardization of work & tools. Fayol attempted to develop a universal theory of management and stressed upon need for teaching the theory of management.

4. Taylor focused his attention on fact by management and his principles are applicable on shop floor. But Fayol concentrated on function of managers and on general principles of management wheel could be equally applied in all.

Similarity - Both emphasized mutual co-operation between employment and employees. Spheres of Human Activity Fayol’s theory is more widely applicable than that of Taylor, although Taylor’s philosophy has undergone a big change Under influence of modern development, but Fayol’s principles of management have stood the test of time and are still being accepted as the core of management theory. Psychologists View Point According to Psychologists, Taylor's study had following drawbacks: -

1. Ignores human factors - Considers them as machines. Ignores human requirements, want and aspirations. 2. Separation of Planning and Doing. 3. Dissatisfaction - Comparing performance with others. 4. No best way - Scientific management does not give one best way for solving problems.


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Basis Taylor Fayol

Human aspect Taylor disregards human elements and there is more stress on improving men, materials and methods

Fayol pays due regards on human element. E.g. Principle of initiative, Espirit De’ Corps and Equity recognizes a need for human relations

Status Father of scientific management Father of management principles

Efficiency & administration

Stressed on efficiency Stressed on general administration

Approach It has micro-approach because it is restricted to factory only

It has macro-approach and discuses general principles of management which are applicable in every field of management.

Scope of principles

These principles are restricted to production activities

These are applicable in all kinds of organization regarding their management affairs

Achievement Scientific management Administrative management


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Chapter 3 Entrepreneurship

3.1 Introduction

Entrepreneurship is the act of being an entrepreneur, which can be defined as "one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods". This may result in new organizations or may be part of revitalizing mature organizations in response to a perceived opportunity. The most obvious form of entrepreneurship is that of starting new businesses (referred as Startup Company); however, in recent years, the term has been extended to include social and political forms of entrepreneurial activity. When entrepreneurship is describing activities within a firm or large organization it is referred to as intra-preneurship and may include corporate venturing, when large entities spin-off organizations.[1]

Entrepreneurial activities are substantially different depending on the type of organization that is being started. Entrepreneurship ranges in scale from solo projects (even involving the entrepreneur only part-time) to major undertakings creating many job opportunities. Many "high value" entrepreneurial ventures seek venture capital or angel funding (seed money) in order to raise capital to build the business. Angel investors generally seek annualized returns of 20-30% and more, as well as extensive involvement in the business.[3] Many kinds of organizations now exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs. In more recent times, the term entrepreneurship has been extended to include elements not related necessarily to business formation activity such as conceptualizations of entrepreneurship as a specific mindset (see also entrepreneurial mindset) resulting in entrepreneurial initiatives e.g. in the form of social entrepreneurship, political entrepreneurship, or knowledge entrepreneurship have emerged.

3.1.1 Entrepreneurship vs. Small Business Many people use the terms "entrepreneur" and "small business owner" synonymously. While they may have much in common, there are significant differences between the entrepreneurial venture and the small business. Entrepreneurial ventures differ from small businesses in these ways: 1. Amount of wealth creation - rather than simply generating an income stream that replaces traditional employment, a successful entrepreneurial venture creates substantial wealth, typically in excess of several million dollars of profit. 2. Speed of wealth creation -while a successful small business can generate several million dollars of profit over a lifetime, entrepreneurial wealth creation often is rapid; for example, within 5 years. 3. Risk - the risk of an entrepreneurial venture must be high; otherwise, with the incentive of sure profits many entrepreneurs would be pursuing the idea and the opportunity no longer would exist. 4. Innovation - entrepreneurship often involves substantial innovation beyond what a small business might exhibit. This innovation gives the venture the competitive advantage that results in wealth creation. The innovation may be in the product or service itself, or in the business processes used to deliver it. 3.1.2 NEED FOR ENTREPRENEURSHIP Entrepreneurship promotes small business in the society. Government has accepted the fact that small firms have a crucial role to play in the economic development of the country. Small businesses are an essential part of our future economic prosperity because of the following reasons- EMPLOYMENT GENERATION: Entrepreneurial development is looked at as a vehicle for employment generation through promotion of small business. India, being far more developed and forward looking country than some of the third world countries, can provide lead to entrepreneurial development activities. However, India can benefit from the well- documented success experiences of developed countries like USA, Japan and UK in the field of employment generation and small business promotion. Steady growth in consumer spending, expanding retail sales, a strong housing market, continued expansion of the service sector, low rates of inflation and of labour cost increases and failing interest rates contributed to a healthy environment for small business. In India, the government policies, political and economic environment greatly encourage the establishment of new and small enterprises. Self- employment and small scale industry schemes have been further liberalized during the last decade. The employment in the small-sector increased from 9.00 million people in 1984-85 to 13.9 million people in 1994-95. This indicates an increase of 5.4% p.a in employment in this sector. SMALL BUSINESS DYNAMISM: Great dynamism is one of the qualities of the small and medium enterprises. This quality of dynamism originates in the inherent nature of the small business. The structure of small and medium enterprises is less complex than that of large enterprises and therefore facilitates quicker and smoother communication and decision- making. This allows for the greater flexibility and mobility of small business management. Also, small enterprises,more often make it possible for owners, who have a stronger entrepreneurial spirit than employed mangers, to undertake risk and challenges.


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http://en.wikipedia.org/wiki/Innovations

http://en.wikipedia.org/wiki/Organization

http://en.wikipedia.org/wiki/Organization

http://en.wikipedia.org/wiki/Business

http://en.wikipedia.org/wiki/Startup_Company

http://en.wikipedia.org/wiki/Entrepreneurship#cite_note-0

http://en.wikipedia.org/wiki/Venture_capital

http://en.wikipedia.org/wiki/Angel_investors

http://en.wikipedia.org/wiki/Seed_money

http://en.wikipedia.org/wiki/Capital_(economics)

http://en.wikipedia.org/wiki/Entrepreneurship#cite_note-2

http://en.wikipedia.org/wiki/Business_incubator

http://en.wikipedia.org/wiki/Business_incubator

http://en.wikipedia.org/wiki/Science_park

http://en.wikipedia.org/wiki/Non-governmental_organization

http://en.wikipedia.org/wiki/Mindset

http://en.wikipedia.org/wiki/Entrepreneurial_mindset

http://en.wikipedia.org/wiki/Social_entrepreneurship

http://en.wikipedia.org/wiki/Political_entrepreneur

http://en.wikipedia.org/wiki/Knowledge_entrepreneurship


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BALANCED ECONOMIC DEVELOPMENT: Small business promotion needs relatively low investment and therefore can be easily undertaken in rural and semiurban areas. This in turn creates additional employment in these areas and prevents migration of people from rural to urban areas. Since majority of the people are living in the rural areas, therefore, more of our development efforts should be directed towards this sector. Small enterprises use local resources and are best suited to rural and underdeveloped sector. This in turn will also lead to dispersal of industries, reduction in concentration of economic power and balanced regional development. INNOVATIONS IN ENTERPRISES: Business enterprises need to be innovative for survival and better performance. It is believed that smaller firms have a relatively higher necessity and capability to innovate. The smaller firms do not face the constraints imposed by large investment in existing technology. Thus they are both free and compelled to innovate. Entrepreneurship development is accelerating the pace of small firm’s growth in India. An increased number of small firms are expected to result in more innovations and make the Indian industry compete in the international market. 3.1.3 STEPS IN THE PROCESS OF ENTREPRENEURSHIP 1. Identifying opportunities 2. Establish vision 3. Persuade others 4. Gather resources (Capital, land and manpower) 5. Organize these resources to develop new product 6. Create the product 7. Adapt according to market changes. 3.1.4FACTORS INFLUENCING ENTERPRENURESHIP The emergence of entrepreneurs in a society depends upon closely interlinked social, religious, cultural, psychological, and political and economic factors. FAMILY TRADITION: Individuals who for some reason, initiate, establish maintain and expand new enterprises generate entrepreneurship in society. It is observed that entrepreneurs grow in the tradition of their families and society and accept certain values and norms from these sources. RELIGIOUS, SOCIAL AND CULTURAL FACTORS: Religious, social and cultural factors also influence the individual taking up an entrepreneurial career, in some countries there is religious and cultural belief that high profit is unethical. This type of belief inhibits growth of entrepreneurship. PSYCHOLOGICAL FACTORS: The psychological factors like high need for achievement, determination of unique accomplishment, self confidence, creativity, vision, leadership etc, promote entrepreneurship among individuals. On the other hand psychological factors like security, conformity and compliance, need for affiliation etc restrict promotion of entrepreneurship. POLITICAL FACTORS: The political and also the political stability of country influence the growth of entrepreneurship. The political system, which promotes free market, individual freedom and private enterprise, will promote entrepreneurship. ECONOMIC POLICIES: The economic policies of the government and other financial institutions and the opportunities available in a society as a result of such policies play a crucial role in exerting direct influence on entrepreneurship. In view of the haphazard development of economic zones, Government is encouraging the entrepreneurs to establish their business in backward and tribal areas. This is primarily to arrest the migration of people from the villages to cities and to create employment opportunities locally. Government is promoting such development by giving incentives like tax holidays (both sales and income), subsidized power tariff, raw materials, transportation cost etc. 3.1.5 FACTORS AFFECTING ENTREPRENEURIAL GROWTH 1. ECONOMIC FACTORS a) Lack of adequate overhead facilities: Profitable innovations require basic facilities like transportation, communication power supply etc. They reduce cost of production and increase profit. b) Non availability of capital: Inventions are capital oriented. In less developed countries most capital equipment have to be imported which involves foreign exchange which acts as a difficult problem. c) Great risk: Risk is high in case of less developed countries as there is lack of reliable information, markets for good and services is small etc. d) Non availability of labor and skills: Though there is abundant labor supply there is generally scarcity of skills at all levels.’


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2. SOCIAL FACTORS A society that is rational in decision making would be favourable for decision making. Education, research and training is given less importance in less developed countries therefore there is very little vertical mobility of labor. 3. CULTURAL FACTORS Religious, social and cultural factors also influence the individual taking up an entrepreneurial career, in some countries there is religious and cultural belief that high profit is unethical. This type of belief inhibits growth of entrepreneurship. 4. PERSONALITY FACTORS In less developed countries the entrepreneur is looked upon with suspicion. Public opinion in the less developed nations sees in the entrepreneur only a profit maker and exploited. 5. MOTIVATION Motivation is the act of stimulating someone or oneself to get a desired course of action, to push the right button to get the desired results. MOTIVATING FACTORS 1. Education background 2. Occupational experience 3. Family background 4. Desire to work independently in manufacturing line 5. Assistance from financial institution 6. Availability of technology 7. Other factors 3.1.6 IMPORTANCE OF ENTREPRENEURSHIP The importance of entrepreneurship to any economy is like that of entrepreneurship in any community. Entrepreneurial activity and the resultant financial gain are always of benefit to a country. If you have entrepreneurial skills then you will recognize a genuine opportunity when you come across one. Now the reasons why entrepreneurship holds a dominant position in the society? The following reasons are responsible for the same:- 1) Provides employment to huge mass of people:- people often hold a view that all those who do not get employed anywhere jump into entrepreneurship, a real contrast to this is that 76% of establishments of new business in the year 2003 were due to an aspiration to chase openings. This emphasizes the fact that entrepreneurship is not at all an encumbrance to an economy. What’s more is that approximately 34 million of fresh employment opportunities were created by entrepreneurs from the period of 1980. This data makes it clear that entrepreneurship heads nation towards better opportunities, which is a significant input to an economy. 2) Contributed towards research and development system:- almost 2/3% of all innovations are due to the entrepreneurs. Without the boom of inventions the world would have been a much dry place to live in. Inventions provide an easier way of getting things done through better and standardized technology. 3) Creates wealth for nation and for individuals as well:- all individuals who search business opportunities usually, create wealth by entering into entrepreneurship. The wealth created by the same play a considerable role in the development of nation. The business as well as the entrepreneur contributes in some or other way to the economy, may be in the form of products or services or boosting the GDP rates or tax contributions. Their ideas, thoughts, and inventions are also a great help to the nation. 4) Sky‐ scraping heights of apparent prospects:- the individual gets maximum scope for growth and opportunity if he enters into entrepreneurship. He not only earns, the right term would be he learns while he earns. This is a real motivating factor for any entrepreneur as the knowledge and skills he develops while owning his enterprise are his assets for life time which usually, lacks when a person is under employment. The individual goes through a grooming process when he becomes an entrepreneur. In this way it not only benefits him but also the economy as a whole. 5) It is a challenging opportunity for the people:- although entrepreneurship is a challenging task but in most of the cases the rewards it gives are much more than what one anticipates. It does not only reward an entrepreneur at financial levels but also on individual level. It provides self satisfaction to the entrepreneur. 6) Entrepreneurship provides self sufficiency:- the entrepreneur not only become self sufficient but also provide great standards of living to its employees. It provides opportunity to a number of people working in the organization. The basic factors which become a cause of happiness may be liberty, monetary rewards, and the feeling of contentment that one gets after doing the job. Therefore the contribution of entrepreneurs makes the economy an improved place to live in. 3.1.7 IMPORTANCE OF ENTREPRENEURSHIP IN DEVELOPED ECONOMY

The nature of a developing economy is quite different from a developed economy. www.ibrahimshaikh.com

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The developing economy can be an agricultural country moving towards the Industrialization or it may be the one where in the industry may be in its infancy lacking advance

technology. The modern era is an era of changes. The whole world is becoming a village due to the industrial revolution

and fast developing communication technology. The globalization of industry and commerce is bringing a vast

change in various aspects of life

Economic development of a country is the outcome of purposeful human activity.

The modern era is an era of changes. The whole world is becoming a village due to the industrial revolution and fast developing communication technology. The globalization of industry and commerce is bringing a vast

change in various aspects of life.

Economic development of a country is the outcome of purposeful human activity.

Economic development is a highly dynamic process characterized by the pattern of demand shifts, new products are needed, appear for the production of goods within a country.

A developing country needs entrepreneurs who are competent to perceive new opportunities and are

willing to incur the necessary risk in exploiting them.

A developing economy is required to be brought out of the vicious circle of low income and poverty.

Entrepreneur can break this vicious circle.

Entrepreneurs and helping government can change a developing economy in developed economy.

3.2 Forms of Ownership (Business) A business enterprise can be owned and organized in several forms. Each form of organization has its own merits and demerits. The ultimate choice of the form of business depends upon the balancing of the advantages and disadvantages of the various forms of business. The right choice of the form of the business is very crucial because it determines the power, control, risk and responsibility of the entrepreneur as well as the division of profits and losses. Being a long term commitment, the choice of the form of business should be made after considerable thought and deliberation. The choice of the form of business is governed by several interrelated and interdependent factors :-

1. The nature of business is the most important factor. Businesses providing direct services like tailors, restaurants and professional services like doctors, lawyers are generally organised as proprietary concerns. While, businesses requiring pooling of skills and funds like accounting firms are better organised as partnerships. Manufacturing organisations of large size are more commonly set up as private and public companies.

2. Scale of operations i.e. volume of business ( large, medium, small) and size of the market area (local,

national, international) served are the key factors. Large scale enterprises catering to national and international markets can be organised more successfully as private or public companies. Small and medium scale firms are generally set up as partnerships and proprietorship. Similarly, where the area of operations is wide spread (national or international), company ownership is appropriate. But if the area of operations is confined to a particular locality, partnership or proprietorship will be a more suitable choice.

3. The degree of control desired by the owner(s). A person who desires direct control of business, prefers

proprietorship, because a company involves separation of ownership and management.

4. Amount of capital required for the establishment and operation of a business. A partnership may be converted into a company when it grows beyond the capacity and resources of a few persons.

5. The volume of risks and liabilities as well as the willingness of the owners to bear it, is also an important

consideration.

6. Comparative tax liability.

3.2.1 Sole proprietorship Sole proprietorship is a form of business organisation in which an individual introduces his own capital, uses his own skill and intelligence in the management of its affairs and is solely responsible for the results of its operations.A sole proprietorship is the oldest and the most common form of business.


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The individual may run the business alone or may obtain the assistance of employees. It is the first stage in the evolution of the forms of organisation and is, thus, the oldest among them. Also known as individual entrepreneurship, it is the easiest form and is also the simplest in organisation. All that is required is that the individual concerned should decide to carry on some particular business and find the necessary capital. For purpose he may depend mostly on his own savings, or else he borrows part or whole form his friends or relatives. The business may be started either in a portion of the proprietor's own house or in rented premises. There are no legal formalities to be gone through except those required for a particular type of business. For example, if one wants to start a restaurant one has to obtain a license from the Health department of the Municipal Corporation, but for setting up the firm as such no legal formalities are necessary. Its main features are :-

The sole proprietorship has only one owner who does all the business activities. It is managed either by the owner or by a manager appointed and remunerated by the owner. There are little or no legislative acts governing the formation of the sole proprietorship. It needs only a trading licence, with no legal formalities. The owner's liability for the debts of the business is unlimited. (The owner's personal assets may be sold

to pay off debts.) The owner may choose any name for his business. There is no legal prescription, so there may be

numerous businesses trading under the same name. The sole proprietorship has no legal personality. The owner contributes all capital, which may, however, be borrowed. The owner may sell the enterprise whenever he/she wants, to whomever he/she wants. The owner takes all profits. The business has no continuity: if the owner dies, the enterprise dissolves. Auditing financial statements is unnecessary. A balance sheet, however, may be required by a loan-granting bank. The owner is the legal entity; he, therefore, is the one responsible for income tax, paid in his personal

capacity.

Advantages

The sole proprietorship is easily established, there being no legal formalities. Owner takes all profits. There are no overhead expenses required in the establishment. It allows for quick and free decision-making. The owner may gain experience of all aspects of the business world. If the owner puts all of his/her abilities into the enterprise, all of them may be utilised to his/her benefit. Ownership easily transferred. Close ties can develop between the owner and his/her customers and employees, and this generally leads

to faithfulness. A large number of sole traders in one area leads to good competition, which will benefit both owners and

consumers. Such a business can adapt comparatively easily to changing conditions.

Disadvantages

The owner has unlimited liability because his/her personal assets may be sold in order to pay for the debts of the business.

There is no continuity. Because there are a limited number of assets to give as security, it is difficult to obtain a loan. It is not easy to acquire good, qualified staff, as there is little to offer them in the way of promotion. Salaries paid to workers are normally lower than the salaries that bigger companies can offer. The owner is usually responsible for all managerial functions, often without the necessary expertise and

experience. Competition is usually strong. Prices offered to consumers by sole traders are usually far higher than those of the other forms of

ownership, and consumers generally buy where it is cheapest to do so. There is usually a limited amount of capital with which to expand the business. The owner is the only person with direct interest in the business. His/her decisions depend solely on his/her

judgement. Wrong decisions are often made. If the owner is not wholly dedicated to business, he/she will suffer the effects directly.


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http://en.wikipedia.org/wiki/Legal_personality

http://en.wikipedia.org/wiki/Balance_sheet

http://en.wikipedia.org/wiki/Legal_entity


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Hence, this form of organisation is suitable for the businesses which involve moderate risk, small financial resources, capital requirement is small and risk involvement is not heavy like automobile repair shops, small bakery shops, tailoring, etc. It accounts for the largest number of business concerns in India.

3.2.2 Partnership Partnership is defined as a relation between two or more persons who have agreed to share the profits of a business carried on by all of them or any of them acting for all. The owners of a partnership business are individually known as the "partners" and collectively as a "firm". Its main features are :-

A partnership is easy to form as no cumbersome legal formalities are involved. Its registration is also not essential. However, if the firm is not registered, it will be deprived of certain legal benefits. The Registrar of Firms is responsible for registering partnership firms.

The minimum number of partners must be two, while the maximum number can be 10 in case of banking business and 20 in all other types of business.

The firm has no separate legal existence of its own i.e., the firm and the partners are one and the same in the eyes of law.

In the absence of any agreement to the contrary, all partners have a right to participate in the activities of the business.

Ownership of property usually carries with it the right of management. Every partner, therefore, has a right to share in the management of the business firm.

Liability of the partners is unlimited. Legally, the partners are said to be jointly and severally liable for the liabilities of the firm. This means that if the assets and property of the firm is insufficient to meet the debts of the firm, the creditors can recover their loans from the personal property of the individual partners.

Restrictions are there on the transfer of interest i.e. none of the partners can transfer his interest in the firm to any person(except to the existing partners) without the unanimous consent of all other partners.

The firm has a limited span of life i.e. legally, the firm must be dissolved on the retirement, lunacy, bankruptcy, or death of any partner.

Reasons for the formation of a partnership

In the case of a sole proprietorship or close corporation, the owner/s may want to increase the business's capital for the purposes of expansion.

Two or more people may want to combine their skills, personal qualities and administrational abilities with a view to greater efficiency.

The owner/s may want to retain the services of a competent employee by giving him/her a stake in the business.

The amalgamation of competing firms helps to eliminate harmful competition. Family interest in a business can be ensured by employing a younger relative or child. Sharing the burdens and responsibilities amongst partners helps to ease the stress on the individual.

TYPES OF PARTNERSHIPS

Basically, there are two distinguishable types of partnerships:

General partners Special partners

The general partnership is the most common type, and members are known simply as partners. They all take an active part in the management of the partnership and are jointly and severally liable for the debts of the enterprise.

In the case of special partners, three more sub-categories can be distinguished:

1. The Anonymous Partner This type of partner contributes only to the capital of the business and is not known strictly as a business partner. Uninvolved in the management of the partnership, they are known also as sleeping partners.


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2. Partner en Commandite

This is a commandite partner, whose liability to the debts of the business is limited. They are not really known as partners either, for they do not play an active role in the management of the business.

3. Limited Partner The liability of this type of partner is limited: it does not play any role in the management of the partnership. Rights and Duties of Partners

Each partner becomes an agent of the partnership. It follows, therefore, that each partner has the authority to execute all sorts of acts incidental to the proper conduct of the business and, as such, bind their fellow partners to their actions.

A partnership is a contract of utmost good faith. Partners should be sincere and honest in their dealings with clients and co-partners.

The partners are both jointly liable, as well as liable severally for the debts of the business settled by themselves individually.

The relationship between partners is one of mutual trust and confidence. Consequently, a partner may acquire and retain for him/herself any benefit or advantage which falls within the scope of the partnership. If a partner commits a criminal act in furtherance of the interest of the partnership, each member of the partnership is deemed to be guilty of the offence unless it is proven that they did not take part in and could not have prevented the offence.

Each partner is entitled to full information regarding the affairs of the partnership. He/she and his/her adviser must have free access to the books and accounts.

Formation Except in the case of a limited partnership, any partnership may be formed by an oral or written agreement. It is, nevertheless, advisable to get the help of an attorney in drawing up a written contract, known as the partnership articles. Each partner should sign the partnership articles, thereby binding themselves to its stipulations. If a written contract does not exist, disputes are settled in terms of the principles of the common law.

Contents of the Partnership Agreement (Deed) A partnership is formed by an agreement, which may be either written or oral. When the written agreement is duly stamped and registered, it is known as "Partnership Deed". Ordinarily, the rights, duties and liabilities of partners are laid down in the deed. But in the case where the deed does not specify the rights and obligations, the provisions of the THE INDIAN PARTNERSHIP ACT, 1932 will apply. The deed, generally contains the following particulars:-

Nature and aim of the business. Address of the partnership. Duration of the partnership. Rights, powers and duties of partners. Chosen name. Decisions about financial year end and books. Partners' names. Contribution of each partner. Proportion in which profits and losses are to be divided. Name of the person who will manage the partnership and sign the cheques. Division of tasks between partners. Rules for taking leave. Life insurance requirements of partners. Arbitration clause. Interest payable on capital and drawings. Salaries payable to partners. Dissolution procedure.

Characteristics

There is a minimum of two and a maximum of twenty partners (while, in professional enterprises, this number is unlimited).

The partnership is managed by one or more partners or an employed manager, as agreed upon by the partners.

The partners are jointly, severally and unlimitedly liable for the debts of the undertaking. The partnership enterprise may be given any name, but it is generally in plural form or includes the word

"and".


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It has no legal personality. Each partner contributes capital, not necessarily in the form of money, to the business. There are no legal acts governing formation. A partner cannot sell his/her share in the business to anyone else without the consent of the other

partners. This is fittingly bracketed with "complications". Profits are divided between partners according to stipulations in the partnership agreement, the only legal

document that the partnership requires. The partnership has no continuity. If one partner dies, retires or is declared insolvent, the entire enterprise

must dissolve. The remaining partners may then, of course, come to a new agreement and establish a new partnership.

It is not necessary to audit a partnership's financial statements; however, if a partner smells a rat, he/she is more than welcome to do a spot of auditing at his/her own expense.

By the same token, it is unnecessary to compile a balance sheet, although it would be wise to do so. The partnership is not a legal entity. It stays with the partners and doesn't pay income tax; the partners do

so in their respective personal capacities. A partner is an agent of the partnership and signs contracts on its behalf.

Reasons why a partnership may be dissolved

The partners themselves decide to do so. A new partner is admitted. A partner dies, retires or is declared insolvent. The objectives of the partnership have been completed. The court makes an order to this effect.

Advantages

A partnership is relatively easy to start. There are no prescribed legal formalities. There are low additional expenses for establishment, although it is preferable to acquire a written

agreement, compiled by an attorney, which can be very costly. Joint decision-making may lead to better results. Capital can be increased easily, without legal procedures. It enables better personal contact with clients. It is financially stronger, more stable and easier to expand than a sole proprietorship. There is usually a strong personal interest in the partnership, especially with family orientated ones. Workload and responsibility is divided between the partners. A partner can specialize in the aspect of the business world to which he/she is best suited. The partnership is not subject to different legal regulations, as is the case with companies. The joint and several liability of the partners helps to increase the partnership's creditworthiness.

Disadvantages

Ordinary partners are jointly, severally and unlimitedly liable for the debts of the partnership. It has no continuity -- vis-à-vis it must dissolve when a partner dies, retires or is declared insolvent, or when

a new partner enters the business. Capital cannot be contributed by more than twenty members. A difference of opinions may delay the decision-making process, for all partners must be included in

decision-making. Urgent decisions, therefore, are not easily taken. Because financial statements are not audited, fraud can occur.

Partnership is an appropriate form of ownership for medium sized business involving limited capital. This may include small scale industries, wholesale and retail trade; small service concerns

like transport agencies, real estate brokers; professional firms like charted accountants, doctors' clinic, attorney or law firms etc.

3.2.3 Corporation

Characteristics

One to ten members. www.ibrahimshaikh.com

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Has legal personality. Limited liability. Unlimited continuity. Managed by the members. Taxed on profits. Governed by the Act on Close Corporations, No. 69 of 1984. Requires a Founding Statement and Certificate of Incorporation for formation.

Advantages

A CC obtains funds more easily than a sole trader. Limited liability. Easy and inexpensive to establish. Annual meetings not required. Easy to change the Founding Statement (making it an Amended Founding Statement). Members' interest does not have to be in proportion to contributions. Financial statements do not have to be audited. A CC may acquire the interest of a member. Unlimited continuity.

Disadvantages

Relies on mutual trust between members. A member acts as an agent for his CC and binds all other members to his actions. Members can lose limited liability. Restriction to only ten members can hamper growth. Disposal of a member's interest requires consent of all other members. A Close Corporation cannot be sold to a company.

Contents of the Founding Statement

Name must end in letters "CC". Principal business activity. Postal and physical address. Details of each member's contribution. Size (expressed as a percentage) of each member's contribution. Name and address of accounting officer. Date of financial year-end.

3.2.4 Private Limited Company

A private limited company is a voluntary association of not less than two and not more than fifty members, whose liability is limited, the transfer of whose shares is limited to its members and who is not allowed to invite the general public to subscribe to its shares or debentures. Its main features are :-

It has an independent legal existence. The Indian Companies Act,1956 contains the provisions regarding the legal formalities for setting up of a private limited company. Registrars of Companies (ROC) appointed under the Companies Act covering the various States and Union Territories are vested with the primary duty of registering companies floated in the respective states and the Union Territories.

It is relatively less cumbersome to organise and operate it as it has been exempted from many regulations and restrictions to which a public limited company is subjected to. Some of them are :-

it need not file a prospectus with the Registrar. it need not obtain the Certificate for Commencement of business. it need not hold the statutory general meeting nor need it file the statutory report.

Characteristics

One to fifty shareholders. Name must end "(Pvt) Ltd" Has legal personality. Limited liability.


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Unlimited continuity. Managed by a board of directors, comprising a minimum of one person. Taxation charged on company's profits. Governed by Companies Act 61 of 1973. Requires the Memorandum of Association, Articles of Association and Certificate of Incorporation to

commence with business.

Advantages

Limited liability. Not subject to legal requirements of a public company. No minimum subscription required. Ideal for a business requiring privacy. Relatively easy to raise sufficient capital (via shares). Suitable for entrepreneurs with limited capital but inventive ideas.

Disadvantages

Shares cannot be sold to the public. Shares not freely transferable; cannot be listed on a stock exchange. Management problems often arise. Not suitable for very large businesses.

Contents of the Memorandum of Association

Name Clause. Objectives Clause. Limited Liability Clause. Share Capital Clause.

Contents of the Articles of Association

Shares, certificates and variations of rights. Meetings. Accounting records. Directors. Dividends and reserves. Postal and physical address. Registration-fee receipts. Payment of annual duty. List of directors. Written undertaking of directors to take shares.

3.2.5 Public Ltd.Company A public limited company is a voluntary association of members which is incorporated and, therefore has a separate legal existence and the liability of whose members is limited. Its main features are :-

The company has a separate legal existence apart from its members who compose it.

Its formation, working and its winding up, in fact, all its activities are strictly governed by laws, rules and regulations. The Indian Companies Act, 1956 contains the provisions regarding the legal formalities for setting up of a public limited company. Registrars of Companies (ROC) appointed under the Companies Act covering the various States and Union Territories are vested with the primary duty of registering companies floated in the respective states and the Union Territories.

A company must have a minimum of seven members but there is no limit as regards the maximum number.

The company collects its capital by the sale of its shares and those who buy the shares are called the embers. The amount so collected is called the share capital.

The shares of a company are freely transferable and that too without the prior consent of other shareholders or without subsequent notice to the company.


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The liability of a member of a company is limited to the face value of the shares he owns. Once he has paid the whole of the face value, he has no obligation to contribute anything to pay off the creditors of the company.

The shareholders of a company do not have the right to participate in the day-to-day management of the business of a company. This ensures separation of ownership from management. The power of decision making in a company is vested in the Board of Directors, and all policy decisions are taken at the Board level by the majority rule. This ensures a unity of direction in management.

As a company is an independent legal person, its existence is not affected by the death, retirement or insolvency of any of its shareholders.

Advantages

Can raise large amounts of capital—through both shares and debentures. Unlimited lifespan; shares are freely transferable. Has legal personality; may trade under its own name. Shareholders' liability is limited. Generally managed by competent directors, elected by the many shareholders. People with small amounts of money may still invest. Strict requirements of the Companies Act protect shareholders. Losses spread over all shareholders. Risk can be spread by investing in multiple public companies.

Disadvantages

Directors not always able to manage companies as effectively as sole traders and partners. Formation expenses are high. Tax burden is greater than in other forms of ownership. Administrative costs are high. Management separate from ownership. Financial statements are available to competitors. Procedure of establishment is complicated. The failure of a public company affects thousands. Memorandum not easily altered. Numerous legal formalities. Often conducive to monopolies.

Contents of the prospectus

Date of incorporation and company address. Main objectives of the company. Name and address of the managing director. Details of shares and debentures available. Details of share capitals. Statement that the prospectus has been registered. Names and details of directors. Preferential rights in respect of shares. Amounts payable to promoters. History of the company and its state of affairs. Contents of the Memorandum of Association. Details of preliminary expenses. Minimum subscription to be raised by issuance of shares. Details of any contracts into prior to the issuance of the prospectus.

3.2.6 Limited Liability Partnership (LLP)

Limited Liability Partnership (LLP) is a new corporate structure that combines the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost. In other words, it is an alternative corporate business vehicle that provides the benefits of limited liability of a company, but allows its members the flexibility of organising their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm.


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Owing to flexibility in its structure and operation, it would be useful for small and medium enterprises, in general, and for the enterprises in services sector, in particular. Internationally, LLPs are the preferred vehicle of business, particularly for service industry or for activities involving professionals.

LLP is governed by the provisions of the Limited Liability Partnership Act 2008, the salient features of which are as follows: -

The LLP shall be a body corporate and a legal entity separate from its partners. Any two or more persons, associated for carrying on a lawful business with a view to profit, may by subscribing their names to an incorporation document and filing the same with the Registrar, form a Limited Liability Partnership. The LLP will have perpetual succession.

The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between partners or between the LLP and the partners subject to the provisions of the LLP Act 2008 . The act provides flexibility to devise the agreement as per their choice.

The LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP which may be of tangible or intangible nature or both tangible and intangible in nature. No partner would be liable on account of the independent or un-authorized actions of other partners or their misconduct. The liabilities of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP.

Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, of whom at least one shall be resident in India. The duties and obligations of Designated Partners shall be as provided in the law.

The LLP shall be under an obligation to maintain annual accounts reflecting true and fair view of its state of affairs. A statement of accounts and solvency shall be filed by every LLP with the Registrar every year. The accounts of LLPs shall also be audited, subject to any class of LLPs being exempted from this requirement by the Central Government.

The Central Government has powers to investigate the affairs of an LLP, if required, by appointment of competent Inspector for the purpose.

The compromise or arrangement including merger and amalgamation of LLPs shall be in accordance with the provisions of the LLP Act 2008.

A firm, private company or an unlisted public company is allowed to be converted into LLP in accordance with the provisions of the Act. Upon such conversion, on and from the date of certificate of registration issued by the Registrar in this regard, the effects of the conversion shall be such as are specified in the LLP Act. On and from the date of registration specified in the certificate of registration, all tangible (moveable or immoveable) and intangible property vested in the firm or the company, all assets, interests, rights, privileges, liabilities, obligations relating to the firm or the company, and the whole of the undertaking of the firm or the company, shall be transferred to and shall vest in the LLP without further assurance, act or deed and the firm or the company, shall be deemed to be dissolved and removed from the records of the Registrar of Firms or Registrar of Companies, as the case may be.

The winding up of the LLP may be either voluntary or by the Tribunal to be established under the Companies Act, 1956. Till the Tribunal is established, the power in this regard has been given to the High Court.

The LLP Act 2008 confers powers on the Central Government to apply provisions of the Companies Act, 1956 as appropriate, by notification with such changes or modifications as deemed necessary. However, such notifications shall be laid in draft before each House of Parliament for a total period of 30 days and shall be subject to any modification as may be approved by both Houses.

The Indian Partnership Act, 1932 shall not be applicable to Limited Liability Partnerships.

3.2.7 Co-operatives

Co-operative organization is a society which has as its objectives the promotion of the interests of its members in accordance with the principles of cooperation. It is a voluntary association of ten or more members residing or working in the same locality, who join together on the basis of equality for the fulfillment of their economic or business interest. The basic feature which differentiates the co-operatives from other forms of business ownership is that its primary motive is service to the members rather than making profits.


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There are different types of cooperatives like consumer co-operatives, producer's co-operatives, marketing co-operatives, housing co-operatives, credit co-operatives, farming co-operatives etc. The aim of all such co-operatives is to promote the welfare of their members. Its main features are :-

It is a voluntary organization as a member is free to leave the society and withdraw his capital at any time, after giving a notice.

The minimum number of members is 10, but there is no limit to the maximum number of members.

However, the members must be residing or working in the same locality.

Registration of a co-operative enterprise is compulsory. A co-operative society may be registered with the Registrar of Co-operatives Societies.

After registration a co-operative enterprise becomes a body corporate independent of its members i.e. a

separate legal entity.

It is subject to the provisions of the Co-operative Societies Act, 1912 or State Co-operative Societies Acts. It has to submit annual reports and accounts to the Registrar of Societies.

The liability of every member is limited to the extent of his capital contribution.

The shares of co-operative society cannot be transferred but can be returned to the society in case a

member wants to withdraw his membership.

Being a separate legal entity a co-operative enjoys continuity of existence which is not affected by death, insolvency, retirement, etc. of the members.

Types of Co-operatives

Credit Co-operatives

The co-operative credit societies are voluntary associations of people with moderate means formed with the object of extending short-term financial accommodation to them and developing the habit of thrift among them.

The funds of these societies consist of share capital contributed by the members. The liability of the members generally unlimited. This helps the society in raising funds from outsiders and ensures that every member shows keen interest in the working of the society. In granting loans, the society may show consideration for the proper people who apply for smaller loans,. Besides, loans may generally be granted only for productive purposes. The society may, ask for security of immovable property while making loans. The rate of interest charged from the borrowing members is kept as low as possible. According to their coverage, credit societies may be be divided into two types: (i) agricultural credit societies, and (ii) non-agricultural credit societies. An agricultural credit society generally confines its activities to a particular village. In India, the minimum number of members necessary for the formation of such a society is fixed at 10 while the maximum is limited to 100. The non-agricultural credit societies are formed by people of moderate or limited means in towns and cities. These societies are meant to provide bank accommodation to the members, and may be formed by small artisans in towns or by office clerks, mill workers, etc., in cities.

Housing Co-operatives

Housing co-operatives are associations of persons who are interested either in securing the ownership of a house or obtaining accommodation at fair and reasonable rent. Such societies are formed mostly in urban areas.

Mostly, intending builders of houses join together to form co-operatives of this kind . Through these societies, they can secure not merely financial assistance but also the economies of purchase of building materials in bulk. The membership of such a society may be thrown open to all those who are interested in securing housing accommodation as well as to those who are ready to deposit money with the society for interest. Each member has to buy at least on share and his liability is generally limited to his capital contribution.

Marketing Co-operatives

The marketing co-operatives or the co-operative sales societies are voluntary associations of independent producers organised for the purpose of arranging for the sale of their output.

As the central sales agency for a number of producers, a marketing co-operative quite often performs such important functions of marketing as processing and grading of the produce delivered by the individual producers.


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The sale proceeds of the produce or products are distributed among the contributing producers according to their contribution to the pool. Societies of this kind are particularly useful for agriculturists, small producers and artisans.

Consumer's Co-operative Societies

These societies are formed by ordinary people for obtaining their day-to-day-requirements of goods at cheaper prices.

For this purpose, consumers' co-operative stores are organised by such societies. These societies make their purchases in bulk from wholesalers at wholesale rates an sell the goods to members sometimes also to non-members) at market prices. The difference is represented by the surplus which is distributed among the purchasing members in the form of a bonus on purchases. This is the oldest form of co-operative organisation. In India, consumers' co-operatives have received impetus from the Government attempts to check rise in prices of consumer goods and essential commodities.

Advantages of Co-operative Society As a form of organization, the co-operative society offers the following advantages: (i) Facility of formation. A co-operative is a voluntary association that maybe formed by any ten adults. Its registration is a simple affair and it does not have to spend much on legal dreliminaries. (ii) Democratic management. The management of a co-operative is based on the basic democratic principle of 'one-man-one-vote'. A small group of members cannot dominate its affairs even if it happens to command more capital than the other members. (iii) Limited liability. The liability of the members of a co-operative is limited to a certain proportion of their capital contribution mentioned in the bye-laws. (iv) Scope for internal financing. Since the law lays down that the dividend on a share in any co-operative exceed 6 ¼ %, the balance of the surplus earned in any year can well be utilised for its growth, development and expansion. (v) Continuity. The law gives a preferential treatment to co-operatives in the form of concessions and exemptions below a specified amount of income. (vi) Tax concessions. The law gives a preferential treatment to co-operatives in the form of concessions and exemptions below a specified amount of income. (vii) Co-ordination. Since co-operation is an instrument of he economic policy of the Government, the State offers may types of assistance including cheap loan assistance to co-operative. (viii) State assistance. Since cooperation is an instrument of he economic policy of the Government, the State offers many types of assistance including cheap loan assistance to co-operative. Limitations of Co-operative Society As a form of organization, the co-operative society offers the following limitations: (i) Limitation of capital. Co-operatives can usually muster a limited amount of capital because the members usually come from a limited area or class an usually have limited means. The principle of one-man-vote and the limit on dividends also dampen the enthusiasm of investing members. (ii) Excessive State regulation. Co-operatives are exposed to a considerable degree of regulation by the co-operative department an are almost over-administered. This interferes with the flexibility of its operation and the efficiency of its management. (iii) Inefficiency of management. The management of a co-operative vest in the managing committee which generally lacks technically knowledgeable and experienced people. Proper managerial personnel may not be attracted toward a co-operative on account of its limited capacity to pay proper rates of remuneration. Even otherwise, employee loyalty may be adversely affected due to indifference and on the part of the management. (iv) Lock of secrecy. The affairs of co-operatives are generally so much exposed to the members that it becomes difficult for them to maintain proper business secrecy. (v) Intrigue and bickering among members. Once the first wave of entheiasm about the co-operative ideals is exhausted, intrigue and factionalism arise among members. This affect the autonomy of the management and the general attitude of the employees too.


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(vi) Insufficient motivation. Since the rate of the return to the members is limited by law, the members of the managing committee do not feel motivated enough to make success of the enterprise. 3.2.8 Public Sector Enterprises The Indian public sector enterprises have been playing the legendary role in the country's industrialization and development of the national economy for over a period of 50 years, since independence. The first public sector undertaking was the railways. Following independence the sovereign government undertook setting up of a strong national economic infrastructure. The iron & steel industries, power generation, mining and oil refining activities, were focused at this stage. Initially they focused on post and telegraph, the port trusts, salt factories, ordnance and aircraft factories, quinine factories, etc. later the government undertook development of the major infrastructure activities. A government-owned corporation, state-owned enterprise, state enterprise, government business enterprise, or parastatal is a legal entity created by a government to undertake commercial activities on behalf of an owner government. Their legal status varies from being a part of government into stock companies with a state as a regular stockholder. There is no standard definition of a government-owned corporation (GOC) or state-owned enterprise (SOE), although the two terms can be used interchangeably. The defining characteristics are that they have a distinct legal form and they are established to operate in commercial affairs. While they may also have public policy objectives, GOCs should be differentiated from other forms of government agencies or state entities established to pursue purely non-financial objectives that have no need or goal of satisfying the shareholders with return on their investment through price increase or dividends. In India, public sector undertaking (PSU) is a term used for a government-owned corporation (company in the public sector). The term is used to refer to companies in which the government (either the Union Government or state or territorial governments, or both) owned a majority (51 percent or more) of the company equity. They are mainly in the sectors of Oil & Gas, Defence and power. These include:

Indian Oil Corporation Limited Oil and Natural Gas Corporation Balmer Lawrie Mazagon Dock Limited National Thermal Power Corporation Hindustan Aeronautics Limited Bharat Electronics Limited Hindustan Machine Tools


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http://en.wikipedia.org/wiki/Government

http://en.wikipedia.org/wiki/Commerce

http://en.wikipedia.org/wiki/Dividends

http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/Government-owned_corporation

http://en.wikipedia.org/wiki/Company

http://en.wikipedia.org/wiki/Public_sector

http://en.wikipedia.org/wiki/Government

http://en.wikipedia.org/wiki/Government_of_India

http://en.wikipedia.org/wiki/States_and_territories_of_India

http://en.wikipedia.org/wiki/Stock

http://en.wikipedia.org/wiki/Indian_Oil_Corporation_Limited

http://en.wikipedia.org/wiki/Oil_and_Natural_Gas_Corporation

http://en.wikipedia.org/wiki/Balmer_Lawrie

http://en.wikipedia.org/wiki/Mazagon_Dock_Limited

http://en.wikipedia.org/wiki/National_Thermal_Power_Corporation

http://en.wikipedia.org/wiki/Hindustan_Aeronautics_Limited

http://en.wikipedia.org/wiki/Bharat_Electronics_Limited

http://en.wikipedia.org/wiki/Hindustan_Machine_Tools


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Chapter 4 Function of Management

4.1 Planning function of management Planning means looking ahead and chalking out future courses of action to be followed. It is a preparatory step. It is a systematic activity which determines when, how and who is going to perform a specific job. Planning is a detailed programme regarding future courses of action. It is rightly said ―Well plan is half done‖. Therefore planning takes into consideration available & prospective human and physical resources of the organization so as to get effective co-ordination, contribution & perfect adjustment. It is the basic management function which includes formulation of one or more detailed plans to achieve optimum balance of needs or demands with the available resources. According to Urwick, ―Planning is a mental predisposition to do things in orderly way, to think before acting and to act in the light of facts rather than guesses‖. Planning is deciding best alternative among others to perform different managerial functions in order to achieve predetermined goals. According to Koontz & O’Donell, ―Planning is deciding in advance what to do, how to do and who is to do it. Planning bridges the gap between where we are to, where we want to go. It makes possible things to occur which would not otherwise occur‖. Steps in Planning Function Planning function of management involves following steps:- Establishment of objectives

Planning requires a systematic approach. Planning starts with the setting of goals and objectives to be achieved. Objectives provide a rationale for undertaking various activities as well as indicate direction of efforts. Moreover objectives focus the attention of managers on the end results to be achieved. As a matter of fact, objectives provide nucleus to the planning process. Therefore, objectives should be

stated in a clear, precise and unambiguous language. Otherwise the activities undertaken are bound to be ineffective.

As far as possible, objectives should be stated in quantitative terms. For example, Number of men working, wages given, units produced, etc. But such an objective cannot be stated in quantitative terms like performance of quality control manager, effectiveness of personnel manager.

Such goals should be specified in qualitative terms. Hence objectives should be practical, acceptable, workable and achievable.

Establishment of Planning Premises

Planning premises are the assumptions about the lively shape of events in future. They serve as a basis of planning. Establishment of planning premises is concerned with determining where one tends to deviate from the

actual plans and causes of such deviations. It is to find out what obstacles are there in the way of business during the course of operations. Establishment of planning premises is concerned to take such steps that avoids these obstacles to a great

extent. Planning premises may be internal or external. Internal includes capital investment policy, management

labour relations, philosophy of management, etc. Whereas external includes socio- economic, political and economical changes.

Internal premises are controllable whereas external are non- controllable. Choice of alternative course of action

When forecast are available and premises are established, a number of alternative course of actions have to be considered.

For this purpose, each and every alternative will be evaluated by weighing its pros and cons in the light of resources available and requirements of the organization.

The merits, demerits as well as the consequences of each alternative must be examined before the choice is being made.

After objective and scientific evaluation, the best alternative is chosen. The planners should take help of various quantitative techniques to judge the stability of an alternative.

Formulation of derivative plans Derivative plans are the sub plans or secondary plans which help in the achievement of main plan.


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Secondary plans will flow from the basic plan. These are meant to support and expediate the achievement of basic plans. These detail plans include policies, procedures, rules, programmes, budgets, schedules, etc. For example, if profit maximization is the main aim of the enterprise, derivative plans will include sales maximization, production maximization, and cost minimization. Derivative plans indicate time schedule and sequence of accomplishing various tasks. Securing Co-operation After the plans have been determined, it is necessary rather advisable to take subordinates or those who have to implement these plans into confidence. The purposes behind taking them into confidence are :- Subordinates may feel motivated since they are involved in decision making process. The organization may be able to get valuable suggestions and improvement in formulation as well as implementation of plans. Also the employees will be more interested in the execution of these plans. Follow up/Appraisal of plans After choosing a particular course of action, it is put into action. After the selected plan is implemented, it is important to appraise its effectiveness. This is done on the basis of feedback or information received from departments or persons concerned. This enables the management to correct deviations or modify the plan. This step establishes a link between planning and controlling function. The follow up must go side by side the implementation of plans so that in the light of observations made, future plans can be made more realistic. 4.1.1 Characteristics of Planning Functions Planning is goal-oriented. Planning is made to achieve desired objective of business. The goals established should general acceptance otherwise individual efforts & energies will go misguided and misdirected. Planning identifies the action that would lead to desired goals quickly & economically. It provides sense of direction to various activities. E.g. Maruti Udhyog is trying to capture once again Indian Car Market by launching diesel models. Planning is looking ahead. Planning is done for future. It requires peeping in future, analyzing it and predicting it. Thus planning is based on forecasting. A plan is a synthesis of forecast. It is a mental predisposition for things to happen in future. Planning is an intellectual process. Planning is a mental exercise involving creative thinking, sound judgement and imagination. It is not a mere guesswork but a rotational thinking. A manager can prepare sound plans only if he has sound judgement, foresight and imagination. Planning is always based on goals, facts and considered estimates. Planning involves choice & decision making. Planning essentially involves choice among various alternatives. Therefore, if there is only one possible course of action, there is no need planning because there is no choice. Thus, decision making is an integral part of planning. A manager is surrounded by no. of alternatives. He has to pick the best depending upon requirements & resources of the enterprises. Planning is the primary function of management / Primacy of Planning. Planning lays foundation for other functions of management. It serves as a guide for organizing, staffing, directing and controlling. All the functions of management are performed within the framework of plans laid out. Therefore planning is the basic or fundamental function of management.


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Planning is a Continuous Process. Planning is a never ending function due to the dynamic business environment. Plans are also prepared for specific period f time and at the end of that period, plans are subjected to revaluation and review in the light of new requirements and changing conditions. Planning never comes into end till the enterprise exists issues, problems may keep cropping up and they have to be tackled by planning effectively. Planning is all Pervasive. It is required at all levels of management and in all departments of enterprise. Of course, the scope of planning may differ from one level to another. The top level may be more concerned about planning the organization as a whole whereas the middle level may be more specific in departmental plans and the lower level plans implementation of the same. Planning is designed for efficiency. Planning leads to accomplishment of objectives at the minimum possible cost. It avoids wastage of resources and ensures adequate and optimum utilization of resources. A plan is worthless or useless if it does not value the cost incurred on it. Therefore planning must lead to saving of time, effort and money. Planning leads to proper utilization of men, money, materials, methods and machines. Planning is Flexible. Planning is done for the future. Since future is unpredictable, planning must provide enough room to cope with the changes in customer’s demand, competition, govt. policies etc. Under changed circumstances, the original plan of action must be revised and updated to male it more practical.

4.1.2 Advantages of Planning Functions

a) Planning facilitates management by objectives. Planning begins with determination of objectives. It highlights the purposes for which various activities are to be undertaken. In fact, it makes objectives more clear and specific. Planning helps in focusing the attention of employees on the objectives or goals of enterprise. Without planning an organization has no guide. Planning compels manager to prepare a Blue-print of the courses of action to be followed for accomplishment of objectives. Therefore, planning brings order and rationality into the organization.

b) Planning minimizes uncertainties. Business is full of uncertainties. There are risks of various types due to uncertainties. Planning helps in reducing uncertainties of future as it involves anticipation of future events. Although future cannot be predicted with cent percent accuracy but planning helps management to anticipate future and prepare for risks by necessary provisions to meet unexpected turn of events. Therefore with the help of planning, uncertainties can be forecasted which helps in preparing standbys as a result, uncertainties are minimized to a great extent.

c) Planning facilitates co-ordination. Planning revolves around organizational goals. All activities are directed towards common goals. There is an integrated effort throughout the enterprise in various departments and groups. It avoids duplication of efforts. In other words, it leads to better co-ordination. It helps in finding out problems of work performance and aims at rectifying the same. d) Planning improves employee’s moral. Planning creates an atmosphere of order and discipline in organization. Employees know in advance what is expected of them and therefore conformity can be achieved easily. This encourages employees to show their best and also earn reward for the same. Planning creates a healthy attitude towards work environment which helps in boosting employees moral and efficiency.


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e) Planning helps in achieving economies. Effective planning secures economy since it leads to orderly allocation ofresources to various operations. It also facilitates optimum utilization of resources which brings economy in operations. It also avoids wastage of resources by selecting most appropriate use that will contribute to the objective of enterprise. For example, raw materials can be purchased in bulk and transportation cost can be minimized. At the same time it ensures regular supply for the production department, that is, overall efficiency.

f) Planning facilitates controlling. Planning facilitates existence of certain planned goals and standard of performance. It provides basis of controlling. We cannot think of an effective system of controlling without existence of well thought out plans. Planning provides pre-determined goals against which actual performance is compared. In fact, planning and controlling are the two sides of a same coin. If planning is root, controlling is the fruit.

g) Planning provides competitive edge. Planning provides competitive edge to the enterprise over the others which do not have effective planning. This is because of the fact that planning may involve changing in work methods, quality, quantity designs, extension of work, redefining of goals, etc.

With the help of forecasting not only the enterprise secures its future but at the same time it is able to estimate the future motives of it’s competitor which helps in facing future challenges. Therefore, planning leads to best utilization of possible resources, improves quality of production and thus the competitive strength of the enterprise is improved.

h) Planning encourages innovations.

In the process of planning, managers have the opportunities of suggesting ways and means of improving performance. Planning is basically a decision making function which involves creative thinking and imagination that ultimately leads to innovation of methods and operations for growth and prosperity of the enterprise.

4.1.3 Disadvantages of Planning Functions

a) Internal Limitations There are several limitations of planning. Some of them are inherit in the process of planning like rigidity and other arise due to shortcoming of the techniques of planning and in the planners themselves.

b) Rigidity

Planning has tendency to make administration inflexible. Planning implies prior determination of policies, procedures and programmes and a strict adherence to them in all circumstances. There is no scope for individual freedom. The development of employees is highly doubted because of which management might have faced lot of difficulties in future. Planning therefore introduces inelasticity and discourages individual initiative and experimentation.

c) Misdirected Planning

Planning may be used to serve individual interests rather than the interest of the enterprise. Attempts can be made to influence setting of objectives, formulation of plans and programmes to suit ones own requirement rather than that of whole organization. Machinery of planning can never be freed of bias. Every planner has his own likes, dislikes, preferences, attitudes and interests which is reflected in planning.

d) Time consuming

Planning is a time consuming process because it involves collection of information, it’s analysis and interpretation thereof. This entire process takes a lot of time specially where there are a number of alternatives available. Therefore planning is not suitable during emergency or crisis when quick decisions are required.

e) Probability in planning

Planning is based on forecasts which are mere estimates about future. These estimates may prove to be inexact due to the uncertainty of future. Any change in the anticipated situation may render plans ineffective.


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Plans do not always reflect real situations inspite of the sophisticated techniques of forecasting because future is unpredictable. Thus, excessive reliance on plans may prove to be fatal.

f) False sense of security

Elaborate planning may create a false sense of security to the effect that everything is taken for granted. Managers assume that as long as they work as per plans, it is satisfactory. Therefore they fail to take up timely actions and an opportunity is lost. Employees are more concerned about fulfillment of plan performance rather than any kind of change.

g) Expensive

Collection, analysis and evaluation of different information, facts and alternatives involves a lot of expense in terms of time, effort and money According to Koontz and O’Donnell, ’ Expenses on planning should never exceed the estimated benefits from planning. ’

External Limitations of Planning

Political Climate- Change of government from Congress to some other political party, etc. Labour Union- Strikes, lockouts, agitations. Technological changes- Modern techniques and equipments, computerization. Policies of competitors- Eg. Policies of Coca Cola and Pepsi. Natural Calamities- Earthquakes and floods. Changes in demand and prices- Change in fashion, change in tastes, change in income level, demand

falls, price falls, etc. 4.2 Organizing function of management Organizing is the function of management which follows planning. It is a function in which the synchronization and combination of human, physical and financial resources takes place. All the three resources are important to get results. Therefore, organizational function helps in achievement of results which in fact is important for the functioning of a concern. According to Chester Barnard, ―Organizing is a function by which the concern is able to define the role positions, the jobs related and the co- ordination between authority and responsibility. Hence, a manager always has to organize in order to get results. A manager performs organizing function with the help of following steps:-

1. Identification of activities - All the activities which have to be performed in a concern have to be identified first. For example, preparation of accounts, making sales, record keeping, quality control, inventory control, etc. All these activities have to be grouped and classified into units.

2. Departmentally organizing the activities - In this step, the manager tries to combine and group similar

and related activities into units or departments. This organization of dividing the whole concern into independent units and departments is called departmentation.

3. Classifying the authority - Once the departments are made, the manager likes to classify the powers and

its extent to the managers. This activity of giving a rank in order to the managerial positions is called hierarchy. The top management is into formulation of policies, the middle level management into departmental supervision and lower level management into supervision of foremen. The clarification of authority help in bringing efficiency in the running of a concern. This helps in achieving efficiency in the running of a concern. This helps in avoiding wastage of time, money, effort, in avoidance of duplication or overlapping of efforts and this helps in bringing smoothness in a concern’s working.

4. Co-ordination between authority and responsibility - Relationships are established among various

groups to enable smooth interaction toward the achievment of the organizational goal. Each individual is made aware of his authority and he/she knows whom they have to take orders from and to whom they are accountable and to whom they have to report. A clear organizational structure is drawn and all the employees are made aware of it.

4.2.1 Importance of organization

a) Specialization - Organizational structure is a network of relationships in which the work is divided into units and departments. This division of work is helping in bringing specialization in various activities of concern.

b) Well defined jobs - Organizational structure helps in putting right men on right job which can be done by

selecting people for various departments according to their qualifications, skill and experience. This is helping in defining the jobs properly which clarifies the role of every person.


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c) Clarifies authority - Organizational structure helps in clarifying the role positions to every manager (status quo). This can be done by clarifying the powers to every manager and the way he has to exercise those powers should be clarified so that misuse of powers do not take place. Well defined jobs and responsibilities attached helps in bringing efficiency into managers working. This helps in increasing productivity.

d) Co-ordination - Organization is a means of creating co- ordination among different departments of the

enterprise. It creates clear cut relationships among positions and ensure mutual co- operation among individuals. Harmony of work is brought by higher level managers exercising their authority over interconnected activities of lower level manager. Authority responsibility relationships can be fruitful only when there is a formal relationship between the two. For smooth running of an organization, the co- ordination between authority- responsibility is very important. There should be co- ordination between different relationships. Clarity should be made for having an ultimate responsibility attached to every authority. There is a saying, ―Authority without responsibility leads to ineffective behaviour and responsibility without authority makes person ineffective.‖ Therefore, co- ordination of authority- responsibility is very important.

e) Effective administration – The organization structure is helpful in defining the jobs positions. The roles to

be performed by different managers are clarified. Specialization is achieved through division of work. This all leads to efficient and effective administration.

f) Growth and diversification - A company’s growth is totally dependant on how efficiently and smoothly a

concern works. Efficiency can be brought about by clarifying the role positions to the managers, co-ordination between authority and responsibility and concentrating on specialization. In addition to this, a company can diversify if its potential grow. This is possible only when the organization structure is well- defined. This is possible through a set of formal structure.

g) Sense of security - Organizational structure clarifies the job positions. The roles assigned to every

manager is clear. Co- ordination is possible. Therefore, clarity of powers helps automatically in increasing mental satisfaction and thereby a sense of security in a concern. This is very important for job- satisfaction.

h) Scope for new changes - Where the roles and activities to be performed are clear and every person gets

independence in his working, this provides enough space to a manager to develop his talents and flourish his knowledge. A manager gets ready for taking independent decisions which can be a road or path to adoption of new techniques of production. This scope for bringing new changes into the running of an enterprise is possible only through a set of organizational structure.

4.2.2 Principles of organization The organizing process can be done efficiently if the managers have certain guidelines so that they can take decisions and can act. To organize in an effective manner, the following principles of organization can be used by a manager. Principle of Specialization According to the principle, the whole work of a concern should be divided amongst the subordinates on the basis of qualifications, abilities and skills. It is through division of work specialization can be achieved which results in effective organization. Principle of Functional Definition According to this principle, all the functions in a concern should be completely and clearly defined to the managers and subordinates. This can be done by clearly defining the duties, responsibilities, authority and relationships of people towards each other. Clarifications in authority- responsibility relationships helps in achieving co- ordination and thereby organization can take place effectively. For example, the primary functions of production, marketing and finance and the authority responsibility relationships in these departments shouldbe clearly defined to every person attached to that department. Clarification in the authority-responsibility relationship helps in efficient organization. 4.2.3 Principles of Span of Control/Supervision According to this principle, span of control is a span of supervision which depicts the number of employees that can be handled and controlled effectively by a single manager. According to this principle, a manager should be able to handle what number of employees under him should be decided. This decision can be taken by choosing either froma wide or narrow span. There are two types of span of control:-

a) Wide span of control- It is one in which a manager can supervise and control effectively a large group of persons at one time. The features of this span are:-


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Less overhead cost of supervision Prompt response from the employees Better communication Better supervision Better co-ordination Suitable for repetitive jobs

According to this span, one manager can effectively and efficiently handle a large number of subordinates at one time.

b) Narrow span of control- According to this span, the work and authority is divided amongst many

subordinates and a manager doesn't supervises and control a very big group of people under him. The manager according to a narrow span supervises a selected number of employees at one time. The features are:-

Work which requires tight control and supervision, for example, handicrafts, ivory work, etc. which

requires craftsmanship, there narrow span is more helpful. Co-ordination is difficult to be achieved. Communication gaps can come. Messages can be distorted. Specialization work can be achieved.

Factors influencing Span of Control

a) Managerial abilities- In the concerns where managers are capable, qualified and experienced, wide span of control is always helpful.

b) Competence of subordinates- Where the subordinates are capable and competent and their

understanding levels are proper, the subordinates tend to very frequently visit the superiors for solving their problems. In such cases, the manager can handle large number of employees. Hence wide span is suitable.

c) Nature of work- If the work is of repetitive nature, wide span of supervision is more helpful. On the other

hand, if work requires mental skill or craftsmanship, tight control and supervision is required in which narrow span is more helpful.

d) Delegation of authority- When the work is delegated to lower levels in an efficient and proper way,

confusions are less and congeniality of the environment can be maintained. In such cases, wide span of control is suitable and the supervisors can manage and control large number of subordinates at one time.

e) Degree of decentralization- Decentralization is done in order to achieve specialization in which authority

is shared by many people and managers at different levels. In such cases, a tall structure is helpful. There are certain concerns where decentralization is done in very effective way which results in direct and personal communication between superiors and subordinates and there the superiors can manage large number of subordinates very easily. In such cases, wide span again helps.

Principle of Scalar Chain Scalar chain is a chain of command or authority which flows from top to bottom. With a chain of authority available, wastages of resources are minimized, communication is affected, overlapping of work is avoided and easy organization takes place. A scalar chain of command facilitates work flow in an organization which helps in achievement of effective results. As the authority flows from top to bottom, it clarifies the authority positions to managers at all level and that facilitates effective organization. Principle of Unity of Command It implies one subordinate-one superior relationship. Every subordinate is answerable and accountable to one boss at one time. This helps in avoiding communication gaps and feedback and response is prompt. Unity of command also helps in effective combination of resources, that is, physical, financial resources which helps in easy co- ordination and, therefore, effective organization. According to the above diagram, the Managing Director has got the highest level of authority. This authority is shared by the Marketing Manager who shares his authority with the Sales Manager. From this chain of hierarchy, the official chain of communication becomes clear which is helpful in achievement of results and which provides stability to a concern. This scalar chain of command always flow from top to bottom and it defines the authority positions of different managers at different levels.


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4.2.4 Classification of Organization Organizations are basically classified on the basis of relationships. There are two types of organizations formed on the basis of relationships in an organization

1. Formal Organization - This is one which refers to a structure of well defined jobs each bearing a measure of authority and responsibility. It is a conscious determination by which people accomplish goals by adhering to the norms laid down by the structure. This kind of organization is an arbitrary set up in which each person is responsible for his performance. Formal organization has a formal set up to achieve pre- determined goals.

2. Informal Organization - It refers to a network of personal and social relationships which spontaneously

originates within the formal set up. Informal organizations develop relationships which are built on likes, dislikes, feelings and emotions. Therefore, the network of social groups based on friendships can be called as informal organizations. There is no conscious effort made to have informal organization. It emerges from the formal organization and it is not based on any rules and regulations as in case of formal organization.

Relationship between formal and informal organizations For a concerns working both formal and informal organization are important. Formal organization originates from the set organizational structure and informal organization originates from formal organization. For an efficient organization, both formal and informal organizations are required. They are the two phase of a same concern. Formal organization can work independently. But informal organization depends totally upon the formal organization. Formal and informal organization helps in bringing efficient working organization and smoothness in a concern. Within the formal organization, the members undertake the assigned duties in co- operation with each other. They interact and communicate amongst themselves. Therefore, both formal and informal organizations are important. When several people work together for achievement of organizational goals, social tie ups tends to built and therefore informal organization helps to secure co-operation by which goals can be achieved smooth. Therefore, we can say that informal organization emerges from formal organization

4.2.5 Line organization Line organization is the most oldest and simplest method of administrative organization. According to this type of organization, the authority flows from top to bottom in a concern. The line of command is carried out from top to bottom. This is the reason for calling this organization as scalar organization which means scalar chain of command is a part and parcel of this type of administrative organization. In this type of organization, the line of command flows on an even basis without any gaps in communication and co- ordination taking place. Features of Line Organization

a) It is the simplest form of organization. b) Line of authority flows from top to bottom. c) Specialized and supportive services do not take place in these organization. d) Unified control by the line officers can be maintained since they can independently take decisions in their

Managing Director

Marketing Manager

Sales/Media Manager

Salesman


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areas and spheres. This kind of organization always helps in bringing efficiency in communication and bringing stability to a concern. Merits of Line Organization

a) Simplest- It is the most simple and oldest method of administration.

b) Unity of Command- In these organizations, superior-subordinate relationship is maintained and scalar chain of command flows from top to bottom.

c) Better discipline- The control is unified and concentrates on one person and therefore, he can

independently make decisions of his own. Unified control ensures better discipline.

d) Fixed responsibility- In this type of organization, every line executive has got fixed authority, power and fixed responsibility attached to every authority.

e) Flexibility- There is a co-ordination between the top most authority and bottom line authority. Since the

authority relationships are clear, line officials are independent and can flexibly take the decision. This flexibility gives satisfaction of line executives.

f) Prompt decision- Due to the factors of fixed responsibility and unity of command, the officials can take

prompt decision. Demerits of Line Organization

a) Over reliance- The line executive’s decisions are implemented to the bottom. This results in over-relying on the line officials.

b) Lack of specialization- A line organization flows in a scalar chain from top to bottom and there is no

scope for specialized functions. For example, expert advices whatever decisions are taken by line managers are implemented in the same way.

c) Inadequate communication- The policies and strategies which are framed by the top authority are carried

out in the same way. This leaves no scope for communication from the other end. The complaints and suggestions of lower authority are not communicated back to the top authority. So there is one way communication.

d) Lack of Co-ordination- Whatever decisions are taken by the line officials, in certain situations wrong

decisions, are carried down and implemented in the same way. Therefore, the degree of effective co- ordination is less.

e) Authority leadership- The line officials have tendency to misuse their authority positions. This leads to

autocratic leadership and monopoly in the concern.

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

↓ ↓ ↓

Production Manager Marketing Manager Finance Manager

↓ ↓ ↓

Plant Supervisor Market Supervisor Chief Assisstant

↓ ↓ ↓

Foreman Salesman Accountant Features of Line and Staff Organization There are two types of staff : Staff Assistants- P.A. to Managing Director, Secretary to Marketing Manager.


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Staff Supervisor- Operation Control Manager, Quality Controller, PRO Line and Staff Organization is a compromise of line organization. It is more complex than line concern. Division of work and specialization takes place in line and staff organization. The whole organization is divided into different functional areas to which staff specialists are attached. Efficiency can be achieved through the features of specialization. There are two lines of authority which flow at one time in a concern : Line Authority Staff Authority Power of command remains with the line executive and staff serves only as counselors. Merits of Line and Staff Organization

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

b) Expert advice- The line and staff organization facilitates expert advice to the line executive at the time of

need. The planning and investigation which is related to different matters can be done by the staff specialist and line officers can concentrate on execution of plans.

c) Benefit of Specialization- Line and staff through division of whole concern into two types of authority

divides the enterprise into parts and functional areas. This way every officer or official can concentrate in its own area.

d) Better co-ordination- Line and staff organization through specialization is able to provide better decision

making and concentration remains in few hands. This feature helps in bringing co- ordination in work as every official is concentrating in their own area.

e) Benefits of Research and Development- Through the advice of specialized staff, the line executives, the

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

f) Training- Due to the presence of staff specialists and their expert advice serves as ground for training to

line officials. Line executives can give due concentration to their decision making. This in itself is a training ground for them.

g) Balanced decisions- The factor of specialization which is achieved by line staff helps in bringing co-

ordination. This relationship automatically ends up the line official to take better and balanced decision.

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

Demerits of Line and Staff Organization

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

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

c) Line and staff conflicts- Line and staff are two authorities which are flowing at the same time. The factors

of designations, status influence sentiments which are related to their relation, can pose a distress on the minds of the employees. This leads to minimizing of co- ordination which hampers a concern’s working.

d) Costly- In line and staff concern, the concerns have to maintain the high remuneration of staff specialist.

This proves to be costly for a concern with limited finance. e) Assumption of authority- The power of concern is with the line official but the staff dislikes it as they are

the one more in mental work.

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


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4.2.7 Functional organization Functional organization has been divided to put the specialists in the top position throughout the enterprise. This is an organization in which we can define as a system in which functional department are created to deal with the problems of business at various levels. Functional authority remains confined to functional guidance to different departments. This helps in maintaining quality and uniformity of performance of different functions throughout the enterprise. The concept of Functional organization was suggested by F.W. Taylor who recommended the appointment of specialists at important positions. For example, the functional head and Marketing Director directs the subordinates throughout the organization in his particular area. This means that subordinates receives orders from several specialists, managers working above them Features of Functional Organization The entire organizational activities are divided into specific functions such as operations, finance, marketing and personal relations. Complex form of administrative organization compared to the other two. Three authorities exist- Line, staff and function. Each functional area is put under the charge of functional specialists and he has got the authority to give all decisions regarding the function whenever the function is performed throughout the enterprise. Principle of unity of command does not apply to such organization as it is present in line organization. Merits of Functional Organization

a) Specialization- Better division of labour takes place which results in specialization of function and it’s consequent benefit.

b) Effective Control- Management control is simplified as the mental functions are separated from manual

functions. Checks and balances keep the authority within certain limits. Specialists may be asked to judge the performance of various sections.

c) Efficiency- Greater efficiency is achieved because of every function performing a limited number of

functions.

d) Economy- Specialization compiled with standardization facilitates maximum production and economical costs.

e) Expansion- Expert knowledge of functional manager facilitates better control and supervision.

Demerits of Functional Organization

a) Confusion- The functional system is quite complicated to put into operation, especially when it is carried out at low levels. Therefore, co- ordination becomes difficult.

b) Lack of Co- ordination- Disciplinary control becomes weak as a worker is commanded not by one person

but a large number of people. Thus, there is no unity of command.

c) Difficulty in fixing responsibility- Because of multiple authority, it is difficult to fix responsibility.

d) Conflicts- There may be conflicts among the supervisory staff of equal ranks. They may not agree on certain issues.

e) Costly- Maintainance of specialist’s staff of the highest order is expensive for a concern.

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


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1. Authority - in context of a business organization, authority can be defined as the power and right of a person to use and allocate the resources efficiently, to take decisions and to give orders so as to achieve the organizational objectives. Authority must be well- defined. All people who have the authority should know what is the scope of their authority is and they shouldn’t misutilize it. Authority is the right to give commands, orders and get the things done. The top level management has greatest authority. Authority always flows from top to bottom. It explains how a superior gets work done from his subordinate by clearly explaining what is expected of him and how he should go about it. Authority should be accompanied with an equal amount of responsibility. Delegating the authority to someone else doesn’t imply escaping from accountability. Accountability still rest with the person having the utmost authority.

2. Responsibility - is the duty of the person to complete the task assigned to him. A person who is given the

responsibility should ensure that he accomplishes the tasks assigned to him. If the tasks for which he was held responsible are not completed, then he should not give explanations or excuses. Responsibility without adequate authority leads to discontent and dissatisfaction among the person. Responsibility flows from bottom to top. The middle level and lower level management holds more responsibility. The person held responsible for a job is answerable for it. If he performs the tasks assigned as expected, he is bound for praises. While if he doesn’t accomplish tasks assigned as expected, then also he is answerable for that.

3. Accountability - means giving explanations for any variance in the actual performance from the

expectations set. Accountability can not be delegated. For example, if ’A’ is given a task with sufficient authority, and ’A’ delegates this task to B and asks him to ensure that task is done well, responsibility rest with ’B’, but accountability still rest with ’A’. The top level management is most accountable. Being accountable means being innovative as the person will think beyond his scope of job. Accountability, in short, means being answerable for the end result. Accountability can’t be escaped. It arises from responsibility. For achieving delegation, a manager has to work in a system and has to perform following steps : - Assignment of tasks and duties Granting of authority Creating responsibility and accountability

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

1. Assignment of Duties – The delegator first tries to define the task and duties to the subordinate. He also has to define the result expected from the subordinates. Clarity of duty as well as result expected has to be the first step in delegation.

2. Granting of authority – Subdivision of authority takes place when a superior divides and shares his

authority with the subordinate. It is for this reason, every subordinate should be given enough independence to carry the task given to him by his superiors. The managers at all levels delegate authority and power which is attached to their job positions. The subdivision of powers is very important to get effective results.

3. Creating Responsibility and Accountability – The delegation process does not end once powers are

granted to the subordinates. They at the same time have to be obligatory towards the duties assigned to them. Responsibility is said to be the factor or obligation of an individual to carry out his duties in best of his ability as per the directions of superior. Responsibility is very important. Therefore, it is that which gives effectiveness to authority. At the same time, responsibility is absolute and cannot be shifted. Accountability, on the others hand, is the obligation of the individual to carry out his duties as per the standards of performance. Therefore, it is said that authority is delegated, responsibility is created and accountability is imposed. Accountability arises out of responsibility and responsibility arises out of authority. Therefore, it becomes important that with every authority position an equal and opposite responsibility should be attached.

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

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


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Authority Responsibility

It is the legal right of a person or a superior to command his subordinates.

It is the obligation of subordinate to perform the work assigned to him.

Authority is attached to the position of a superior in concern.

Responsibility arises out of superior–subordinate relationship in which subordinate agrees to carry out duty given to him.

Authority can be delegated by a superior to a subordinate

Responsibility cannot be shifted and is absolute

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

4.2.9 Importance of delegation Delegation of authority is a process in which the authority and powers are divided and shared amongst the subordinates. When the work of a manager gets beyond his capacity, there should be some system of sharing the work. This is how delegation of authority becomes an important tool in organization function. Through delegation, a manager, in fact, is multiplying himself by dividing/multiplying his work with the subordinates. The importance of delegation can be justified by – Through delegation, a manager is able to divide the work and allocate it to the subordinates. This helps in reducing his work load so that he can work on important areas such as - planning, business analysis etc. With the reduction of load on superior, he can concentrate his energy on important and critical issues of concern. This way he is able to bring effectiveness in his work as well in the work unit. This effectivity helps a manager to prove his ability and skills in the best manner. Delegation of authority is the ground on which the superior-subordinate relationship stands. An organization functions as the authority flows from top level to bottom. This in fact shows that through delegation, the superior-subordinate relationship become meaningful. The flow of authority is from top to bottom which is a way of achieving results. Delegation of authority in a way gives enough room and space to the subordinates to flourish their abilities and skill. Through delegating powers, the subordinates get a feeling of importance. They get motivated to work and this motivation provides appropriate results to a concern. Job satisfaction is an important criterion to bring stability and soundness in the relationship between superior and subordinates. Delegation also helps in breaking the monotony of the subordinates so that they can be more creative and efficient. Delegation of authority is not only helpful to the subordinates but it also helps the managers to develop their talents and skills. Since the manager get enough time through delegation to concentrate on important issues, their decision-making gets strong and in a way they can flourish the talents which are required in a manager. Through granting powers and getting the work done, helps the manager to attain communication skills, supervision and guidance, effective motivation and the leadership traits are flourished. Therefore it is only through delegation, a manager can be tested on his traits. Delegation of authority is help to both superior and subordinates. This, in a way, gives stability to a concern’s working. With effective results, a concern can think of creating more departments and divisions flow working. This will require creation of more managers which can be fulfilled by shifting the experienced, skilled managers to these positions. This helps in both virtual as well as horizontal growth which is very important for a concern’s stability. Therefore, from the above points, we can justify that delegation is not just a process but it is a way by which manager multiples himself and is able to bring stability, ability and soundness to a concern.

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

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


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

c) Principle of absolute responsibility- This says that the authority can be delegated but responsibility

cannot be delegated by managers to his subordinates which means responsibility is fixed. The manager at every level, no matter what is his authority, is always responsible to his superior for carrying out his task by delegating the powers. It does not means that he can escape from his responsibility. He will always remain responsible till the completion of task. Every superior is responsible for the acts of their subordinates and are accountable to their superior therefore the superiors cannot pass the blame to the subordinates even if he has delegated certain powers to subordinates example if the production manager has been given a work and the machine breaks down. If repairmen is not able to get repair work done, production manager will be responsible to CEO if their production is not completed.

d) Principle of Authority level- This principle suggests that a manager should exercise his authority within

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

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

Reservation of decision making power at top level. Reservation of operating authority with the middle level managers. Reservation of operation at lower level at the directions of the top level.

Under centralization, the important and key decisions are taken by the top management and the other levels are into implementations as per the directions of top level. For example, in a business concern, the father & son being the owners decide about the important matters and all the rest of functions like product, finance, marketing, personnel, are carried out by the department heads and they have to act as per instruction and orders of the two people. Therefore in this case, decision making power remain in the hands of father & son. On the other hand, Decentralization is a systematic delegation of authority at all levels of management and in all of the organization. In a decentralization concern, authority in retained by the top management for taking major decisions and framing policies concerning the whole concern. Rest of the authority may be delegated to the middle level and lower level of management. The degree of centralization and decentralization will depend upon the amount of authority delegated to the lowest level. According to Allen, ―Decentralization refers to the systematic effort to delegate to the lowest level of authority except that which can be controlled and exercised at central points. Decentralization is not the same as delegation. In fact, decentralization is all extension of delegation. Decentralization pattern is wider is scope and the authorities are diffused to the lowest most level of management. Delegation of authority is a complete process and takes place from one person to another. While decentralization is complete only when fullest possible delegation has taken place. For example, the general manager of a company is responsible for receiving the leave application for the whole of the concern. The general manager delegates this work to the personnel manager who is now responsible for receiving the leave applicants. In this situation delegation of authority has taken place. On the other hand, on the request of the personnel manager, if the general manager delegates this power to all the departmental heads at all level, in this situation decentralization has taken place. There is a saying that ―Everything that increasing the role of subordinates is decentralization and that decreases the role is centralization‖. Decentralization is wider in scope and the subordinate’s responsibility increase in this case. On the other hand, in delegation the managers remain answerable even for the acts of subordinates to their superiors. 4.2.12 Implications of Decentralization There is less burden on the Chief Executive as in the case of centralization.


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

Delegation and Decentralization

Basis Delegation Decentralization

Meaning Managers delegate some of their function and authority to their subordinates.

Right to take decisions is shared by top management and other level of management.

Scope Scope of delegation is limited as superior delegates the powers to the subordinates on individual bases.

Scope is wide as the decision making is shared by the subordinates also.

Responsibility Responsibility remains of the managers and cannot be delegated

Responsibility is also delegated to subordinates.

Freedom of Work Freedom is not given to the subordinates as they have to work as per the instructions of their superiors.

Freedom to work can be maintained by subordinates as they are free to take decision and to implement it.

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

Need on purpose Delegation is important in all concerns whether big or small. No enterprises can work without delegation.

Decentralization becomes more important in large concerns and it depends upon the decision made by the enterprise, it is not compulsory.

Grant of Authority

The authority is granted by one individual to another.

It is a systematic act which takes place at all levels and at all functions in a concern.

Grant of Responsibility Responsibility cannot be delegated Authority with responsibility is delegated to

subordinates.

Degree Degree of delegation varies from concern to concern and department to department.

Decentralization is total by nature. It spreads throughout the organization i.e. at all levels and all functions

Process Delegation is a process which explains superior subordinates relationship

It is an outcome which explains relationship between top management and all other departments.

Essentiality Delegation is essential of all kinds of concerns

Decentralization is a decisions function by nature.


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Significance Delegation is essential for creating the organization

Decentralization is an optional policy at the discretion of top management.

Withdrawal Delegated authority can be taken back. It is considered as a general policy of top management and is applicable to all departments.

Freedom of Action Very little freedom to the subordinates Considerable freedom

Decentralization can be called as extension of delegation. When delegation of authority is done to the fullest possible extent, it gives use to decentralization. 4.3 Staffing Function of management The managerial function of staffing involves manning the organization structure through proper and effective selection, appraisal and development of the personnels to fill the roles assigned to the employers/workforce. According to Theo Haimann, ―Staffing pertains to recruitment, selection, development and compensation of subordinates.‖ Nature of Staffing Function

a) Staffing is an important managerial function- Staffing function is the most important mangerial act along with planning, organizing, directing and controlling. The operations of these four functions depend upon the manpower which is available through staffing function.

b) Staffing is a pervasive activity- As staffing function is carried out by all mangers and in all types of

concerns where business activities are carried out.

c) Staffing is a continuous activity- This is because staffing function continues throughout the life of an organization due to the transfers and promotions that take place.

d) The basis of staffing function is efficient management of personnels- Human resources can be

efficiently managed by a system or proper procedure, that is, recruitment, selection, placement, training and development, providing remuneration, etc.

e) Staffing helps in placing right men at the right job. It can be done effectively through proper recruitment

procedures and then finally selecting the most suitable candidate as per the job requirements.

f) Staffing is performed by all managers depending upon the nature of business, size of the company, qualifications and skills of managers,etc. In small companies, the top management generally performs this function.In medium and small scale enterprise, it is performed especially by the personnel department of that concern.

4.3.1 Staffing process-steps involved in staffing process

a) Manpower requirements- The very first step in staffing is to plan the manpower inventory required by a concern in order to match them with the job requirements and demands. Therefore, it involves forecasting and determining the future manpower needs of the concern.

b) Recruitment- Once the requirements are notified, the concern invites and solicits applications according to

the invitations made to the desirable candidates.

c) Selection- This is the screening step of staffing in which the solicited applications are screened out and suitable candidates are appointed as per the requirements.

d) Orientation and Placement- Once screening takes place, the appointed candidates are made familiar to

the work units and work environment through the orientation programmes. placement takes place by putting right man on the right job.

e) Training and Development- Training is a part of incentives given to the workers in order to develop and

grow them within the concern. Training is generally given according to the nature of activities and scope of expansion in it. Along with it, the workers are developed by providing them extra benefits of indepth knowledge of their functional areas. Development also includes giving them key and important jobsas a test or examination in order to analyse their performances.


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f) Remuneration- It is a kind of compensation provided monetarily to the employees for their work performances. This is given according to the nature of job- skilled or unskilled, physical or mental, etc. Remuneration forms an important monetary incentive for the employees.

g) Performance Evaluation- In order to keep a track or record of the behaviour, attitudes as well as opinions

of the workers towards their jobs. For this regular assessment is done to evaluate and supervise different work units in a concern. It is basically concerning to know the development cycle and growth patterns of the employees in a concern.

h) Promotion and transfer- Promotion is said to be a non- monetary incentive in which the worker is shifted

from a higher job demanding bigger responsibilities as well as shifting the workers and transferring them to different work units and branches of the same organization.

4.3.2 Manpower Planning Manpower Planning which is also called as Human Resource Planning consists of putting right number of people, right kind of people at the right place, right time, doing the right things for which they are suited for the achievement of goals of the organization. Human Resource Planning has got an important place in the arena of industrialization. Human Resource Planning has to be a systems approach and is carried out in a set procedure. The procedure is as follows:

1. Analysing the current manpower inventory 2. Making future manpower forecasts 3. Developing employment programmes 4. Design training programmes

Steps in Manpower Planning Analysing the current manpower inventory- Before a manager makes forecast of future manpower, the current manpower status has to be analysed. For this the following things have to be noted- Type of organization Number of departments Number and quantity of such departments Employees in these work units Once these factors are registered by a manager, he goes for the future forecasting. Making future manpower forecasts- Once the factors affecting the future manpower forecasts are known, planning can be done for the future manpower requirements in several work units. The Manpower forecasting techniques commonly employed by the organizations are as follows: Expert Forecasts: This includes informal decisions, formal expert surveys and Delphi technique. Trend Analysis: Manpower needs can be projected through extrapolation (projecting past trends), indexation (using base year as basis), and statistical analysis (central tendency measure). Work Load Analysis: It is dependent upon the nature of work load in a department, in a branch or in a division. Work Force Analysis: Whenever production and time period has to be analysed, due allowances have to be made for getting net manpower requirements. Other methods: Several Mathematical models, with the aid of computers are used to forecast manpower needs, like budget and planning analysis, regression, new venture analysis. Developing employment programmes- Once the current inventory is compared with future forecasts, the employment programmes can be framed and developed accordingly, which will include recruitment, selection procedures and placement plans. Design training programmes- These will be based upon extent of diversification, expansion plans, development programmes,etc. Training programmes depend upon the extent of improvement in technology and advancement to take place. It is also done to improve upon the skills, capabilities, knowledge of the workers. Importance of Manpower Planning

a) Key to managerial functions- The four managerial functions, i.e., planning, organizing, directing and controlling are based upon the manpower. Human resources help in the implementation of all these managerial activities. Therefore, staffing becomes a key to all managerial functions.


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b) Efficient utilization- Efficient management of personnels becomes an important function in the industrialization world of today. Seting of large scale enterprises require management of large scale manpower. It can be effectively done through staffing function.

c) Motivation- Staffing function not only includes putting right men on right job, but it also comprises of

motivational programmes, i.e., incentive plans to be framed for further participation and employment of employees in a concern. Therefore, all types of incentive plans becomes an integral part of staffing function.

d) Better human relations- A concern can stabilize itself if human relations develop and are strong. Human

relations become strong trough effective control, clear communication, effective supervision and leadership in a concern. Staffing function also looks after training and development of the work force which leads to co-operation and better human relations.

e) Higher productivity- Productivity level increases when resources are utilized in best possible manner.

higher productivity is a result of minimum wastage of time, money, efforts and energies.This is possible through the staffing and it's related activities ( Performance appraisal, training and development, remuneration)

4.3.3 Need of Manpower Planning Manpower Planning is a two-phased process because manpower planning not only analyses the current human resources but also makes manpower forecasts and thereby draw employment programmes. Manpower Planning is advantageous to firm in following manner:

a) Shortages and surpluses can be identified so that quick action can be taken wherever required. b) All the recruitment and selection programmes are based on manpower planning. c) It also helps to reduce the labour cost as excess staff can be identified and thereby overstaffing can be

avoided. d) It also helps to identify the available talents in a concern and accordingly training programmes can be

chalked out to develop those talents. e) It helps in growth and diversification of business. Through manpower planning, human resources can be

readily available and they can be utilized in best manner. f) It helps the organization to realize the importance of manpower management which ultimately helps in the

stability of a concern. Obstacles in the process of manpower planning Following are the main obstacles that organizations face in the process of manpower planning: Under Utilization of Manpower: The biggest obstacle in case of manpower planning is the fact that the industries in general are not making optimum use of their manpower and once manpower planning begins, it encounters heavy odds in stepping up the utilization. Degree of Absenteeism: Absenteeism is quite high and has been increasing since last few years. Lack of Education and Skilled Labour: The extent of illetracy and the slow pace of development of the skilled categories account for low productivity in employees. Low productivity has implications for manpower planning.

Manpower Control and Review: Any increase in manpower is considered at the top level of management On the basis of manpower plans, personnel budgets are prepared. These act as control mechanisms to keep the manpower under certain broadly defined limits. The productivity of any organization is usually calculated using the formula:

Productivity = Output / Input But a rough index of employee productivity is calculated as follows:

Employee Productivity = Total Production / Total no. of employees

Exit Interviews, the rate of turnover and rate of absenteesim are source of vital information on the satisfaction level of manpower. For conservation of Human Resources and better utilization of men studying these condition, manpower control would have to take into account the data to make meaningful analysis. Extent of Overtime: The amount of overtime paid may be due to real shortage of men, ineffective management or improper utilization of manpower. Manpower control would require a careful study of overtime statistics. Few Organizations do not have sufficient records and information on manpower. Several of those who have them do not have a proper retrieval system. There are complications in resolving the issues in design, definition and creation of computerized personnel information system for effective manpower planning and utilization. Even the existing technologies in this respect is not optimally used. This is a strategic disadvantage.


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4.3.4 Types of Recruitment Recruitment is of two types 1. Internal Recruitment – is a recruitment which takes place within the concern or organization. Internal sources of recruitment are readily available to an organization. Internal sources are primarily three – Transfers, promotions and Re-employment of ex-employees. Re-employment of ex-employees is one of the internal sources of recruitment in which employees can be invited and appointed to fill vacancies in the concern. There are situations when ex-employees provide unsolicited applications also. Internal recruitment may lead to increase in employee’s productivity as their motivation level increases. It also saves time, money and efforts. But a drawback of internal recruitment is that it refrains the organization from new blood. Also, not all the manpower requirements can be met through internal recruitment. Hiring from outside has to be done. Internal sources are primarily three

1. Transfers 2. Promotions (through Internal Job Postings) and 3. Re-employment of ex-employees - Re-employment of ex-employees is one of the internal sources of

recruitment in which employees can be invited and appointed to fill vacancies in the concern. There are situations when ex-employees provide unsolicited applications also.

2. External Recruitment – External sources of recruitment have to be solicited from outside the organization. External sources are external to a concern. But it involves lot of time and money. The external sources of recruitment include – Employment at factory gate, advertisements, employment exchanges, employment agencies, educational institutes, labour contractors, recommendations etc.

a) Employment at Factory Level – This a source of external recruitment in which the applications for vacancies are presented on bulletin boards outside the Factory or at the Gate. This kind of recruitment is applicable generally where factory workers are to be appointed. There are people who keep on soliciting jobs from one place to another. These applicants are called as unsolicited applicants. These types of workers apply on their own for their job. For this kind of recruitment workers have a tendency to shift from one factory to another and therefore they are called as ―badli‖ workers.

b) Advertisement – It is an external source which has got an important place in recruitment procedure. The

biggest advantage of advertisement is that it covers a wide area of market and scattered applicants can get information from advertisements. Medium used is Newspapers and Television.

c) Employment Exchanges – There are certain Employment exchanges which are run by government. Most

of the government undertakings and concerns employ people through such exchanges. Now-a-days recruitment in government agencies has become compulsory through employment exchange.

d) Employment Agencies – There are certain professional organizations which look towards recruitment and

employment of people, i.e. these private agencies run by private individuals supply required manpower to needy concerns.

e) Educational Institutions – There are certain professional Institutions which serves as an external source

for recruiting fresh graduates from these institutes. This kind of recruitment done through such educational institutions is called as Campus Recruitment. They have special recruitment cells which helps in providing jobs to fresh candidates.

f) Recommendations – There are certain people who have experience in a particular area. They enjoy goodwill and a stand in the company. There are certain vacancies which are filled by recommendations of such people. The biggest drawback of this source is that the company has to rely totally on such people which can later on prove to be inefficient.

g) Labour Contractors – These are the specialist people who supply manpower to the Factory or

Manufacturing plants. Through these contractors, workers are appointed on contract basis, i.e. for a particular time period. Under conditions when these contractors leave the organization, such people who are appointed have to also leave the concern.

Employee Selection process Employee Selection is the process of putting right men on right job. It is a procedure of matching organizational requirements with the skills and qualifications of people. Effective selection can be done only when there is effective matching. By selecting best candidate for the required job, the organization will get quality performance of employees. Moreover, organization will face less of absenteeism and employee turnover problems. By selecting right candidate for the required job, organization will also save time and money. Proper screening of candidates takes place during selection procedure. All the potential candidates who apply for the given job are tested. But selection must be differentiated from recruitment, though these are two phases of employment process. Recruitment is considered to be a positive process as it motivates more of candidates to apply for the job. It creates a pool of applicants. It is just sourcing of data. While selection is a negative process as the inappropriate candidates


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are rejected here. Recruitment precedes selection in staffing process. Selection involves choosing the best candidate with best abilities, skills and knowledge for the required job. The Employee selection Process takes place in following order- Preliminary Interviews- It is used to eliminate those candidates who do not meet the minimum eligiblity criteria laid down by the organization. The skills, academic and family background, competencies and interests of the candidate are examined during preliminary interview. Preliminary interviews are less formalized and planned than the final interviews. The candidates are given a brief up about the company and the job profile; and it is also examined how much the candidate knows about the company. Preliminary interviews are also called screening interviews. Application blanks- The candidates who clear the preliminary interview are required to fill application blank. It contains data record of the candidates such as details about age, qualifications, reason for leaving previous job, experience, etc. Written Tests- Various written tests conducted during selection procedure are aptitude test, intelligence test, reasoning test, personality test, etc. These tests are used to objectively assess the potential candidate. They should not be biased. Employment Interviews- It is a one to one interaction between the interviewer and the potential candidate. It is used to find whether the candidate is best suited for the required job or not. But such interviews consume time and money both. Moreover the competencies of the candidate cannot be judged. Such interviews may be biased at times. Such interviews should be conducted properly. No distractions should be there in room. There should be an honest communication between candidate and interviewer. Medical examination- Medical tests are conducted to ensure physical fitness of the potential employee. It will decrease chances of employee absenteeism. Appointment Letter- A reference check is made about the candidate selected and then finally he is appointed by giving a formal appointment letter. Difference between recruitment and selection

Basis Recruitment Selection

Meaning It is an activity of establishing contact between employers and applicants.

It is a process of picking up more competent and suitable employees.

Objective It encourages large number of Candidates for a job.

It attempts at rejecting unsuitable candidates.

Process It is a simple process. It is a complicated process.

Hurdles The candidates have not to cross over many hurdles.

Many hurdles have to be crossed.

Approach It is a positive approach. It is a negative approach.

Sequence It proceeds selection. It follows recruitment.

Economy It is an economical method. It is an expensive method.

Time Consuming

Less time is required. More time is required.

4.3.5 Orientation and placement Once the candidates are selected for the required job, they have to be fitted as per the qualifications. Placement is said to be the process of fitting the selected person at the right job or place, i.e. fitting square pegs in square holes


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and round pegs in round holes. Once he is fitted into the job, he is given the activities he has to perform and also told about his duties. The freshly appointed candidates are then given orientation in order to familiarize and introduce the company to him. Generally the information given during the orientation programme includes-

1. Employee’s layout 2. Type of organizational structure 3. Departmental goals 4. Organizational layout 5. General rules and regulations 6. Standing Orders 7. Grievance system or procedure

In short, during Orientation employees are made aware about the mission and vision of the organization, the nature of operation of the organization, policies and programmes of the organization. The main aim of conducting Orientation is to build up confidence, morale and trust of the employee in the new organization, so that he becomes a productive and an efficient employee of the organization and contributes to the organizational success. The nature of Orientation program varies with the organizational size, i.e., smaller the organization the more informal is the Orientation and larger the organization more formalized is the Orientation programme. Proper Placement of employees will lower the chances of employee’s absenteeism. The employees will be more satisfied and contended with their work. 4.3.6 Training of employees-need and importance of training Training of employees takes place after orientation takes place. Training is the process of enhancing the skills, capabilities and knowledge of employees for doing a particular job. Training process moulds the thinking of employees and leads to quality performance of employees. It is continuous and never ending in nature. Importance of Training Training is crucial for organizational development and success. It is fruitful to both employers and employees of an organization. An employee will become more efficient and productive if he is trained well. Training is given on four basic grounds: New candidates who join an organization are given training. This training familiarize them with the organizational mission, vision, rules and regulations and the working conditions. The existing employees are trained to refresh and enhance their knowledge. If any updations and amendments take place in technology, training is given to cope up with those changes. For instance, purchasing a new equipment, changes in technique of production, computer implantment. The employees are trained about use of new equipments and work methods. When promotion and career growth becomes important. Training is given so that employees are prepared to share the responsibilities of the higher level job. The benefits of training can be summed up as:

1. Improves morale of employees- Training helps the employee to get job security and job satisfaction. The more satisfied the employee is and the greater is his morale, the more he will contribute to organizational success and the lesser will be employee absenteeism and turnover.

2. Less supervision- A well trained employee will be well acquainted with the job and will need less of

supervision. Thus, there will be less wastage of time and efforts. 3. Fewer accidents- Errors are likely to occur if the employees lack knowledge and skills required for doing a

particular job. The more trained an employee is, the less are the chances of committing accidents in job and the more proficient the employee becomes.

4. Chances of promotion- Employees acquire skills and efficiency during training. They become more

eligible for promotion. They become an asset for the organization.

5. Increased productivity- Training improves efficiency and productivity of employees. Well trained employees show both quantity and quality performance. There is less wastage of time, money and resources if employees are properly trained.

Ways/Methods of Training Training is generally imparted in two ways: On the job training- On the job training methods are those which are given to the employees within the everyday working of a concern. It is a simple and cost-effective training method. The inproficient as well as semi- proficient


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employees can be well trained by using such training method. The employees are trained in actual working scenario. The motto of such training is ―learning by doing.‖ Instances of such on-job training methods are job-rotation, coaching, temporary promotions, etc. Off the job training- Off the job training methods are those in which training is provided away from the actual working condition. It is generally used in case of new employees. Instances of off the job training methods are workshops, seminars, conferences, etc. Such method is costly and is effective if and only if large number of employees have to be trained within a short time period. Off the job training is also called as vestibule training,i.e., the employees are trained in a separate area( may be a hall, entrance, reception area,etc. known as a vestibule) where the actual working conditions are duplicated.

4.3.7 Employee Remuneration Employee Remuneration refers to the reward or compensation given to the employees for their work performances. Remuneration provides basic attraction to a employee to perform job efficiently and effectively. Remuneration leads to employee motivation. Salaries constitutes an important source of income for employees and determine their standard of living. Salaries effect the employees productivity and work performance. Thus the amount and method of remuneration are very important for both management and employees. There are mainly two types of Employee Remuneration Time Rate Method Piece Rate Method These methods of employee remuneration are explained below in detail Methods of Employee Remuneration Time Rate Method: Under time rate system, remuneration is directly linked with the time spent or devoted by an employee on the job. The employees are paid a fixed pre-decided amount hourly, daily, weekly or monthly irrespective of their output. It is a very simple method of remuneration. It leads to minimum wastage of resources and lesser chances of accidents. Time Rate method leads to quality output and this method is very beneficial to new employees as they can learn their work without any reduction in their salaries. This method encourages employees unity as employees of a particular group/cadre get equal salaries. There are some drawbacks of Time Rate Method, such as, it leads to tight supervision, indefinite employee cost, lesser efficiency of employees as there is no distinction made between efficient and inefficient employees, and lesser morale of employees. Time rate system is more suitable where the work is non-repetitive in nature and emphasis is more on quality output rather than quantity output. Piece Rate Method: It is a method of compensation in which remuneration is paid on the basis of units or pieces produced by an employee. In this system emphasis is more on quantity output rather than quality output. Under this system the determination of employee cost per unit is not difficult because salaries differ with output. There is less supervision required under this method and hence the per unit cost of production is low. This system improves the morale of the employees as the salaries are directly related with their work efforts. There is greater work-efficiency in this method. There are some drawbacks of this method, such as, it is not easily computable, leads to deterioration in work quality, wastage of resources, lesser unity of employees, higher cost of production and insecurity among the employees. Piece rate system is more suitable where the nature of work is repetitive and quantity is emphasized more than quality.

4.4 Directing Function of Management DIRECTING is said to be a process in which the managers instruct, guide and oversee the performance of the workers to achieve predetermined goals. Directing is said to be the heart of management process. Planning, organizing, staffing have got no importance if direction function does not take place. Directing initiates action and it is from here actual work starts. Direction is said to be consisting of human factors. In simple words, it can be described as providing guidance to workers is doing work. In field of management, direction is said to be all those activities which are designed to encourage the subordinates to work effectively and efficiently. According to Human, ―Directing consists of process or technique by which instruction can be issued and operations can be carried out as originally planned‖ Therefore, Directing is the function of guiding, inspiring, overseeing and instructing people towards accomplishment of organizational goals. Direction has got following characteristics:


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Pervasive Function - Directing is required at all levels of organization. Every manager provides guidance and inspiration to his subordinates. Continuous Activity - Direction is a continuous activity as it continuous throughout the life of organization. Human Factor - Directing function is related to subordinates and therefore it is related to human factor. Since human factor is complex and behaviour is unpredictable, direction function becomes important. Creative Activity - Direction function helps in converting plans into performance. Without this function, people become inactive and physical resources are meaningless. Executive Function - Direction function is carried out by all managers and executives at all levels throughout the working of an enterprise, a subordinate receives instructions from his superior only. Delegate Function - Direction is supposed to be a function dealing with human beings. Human behaviour is unpredictable by nature and conditioning the people’s behaviour towards the goals of the enterprise is what the executive does in this function. Therefore, it is termed as having delicacy in it to tackle human behaviour.

4.4.1Importance of Direction function Directing or Direction function is said to be the heart of management of process and therefore, is the central point around which accomplishment of goals take place. A few philosophers call Direction as ―Life spark of an enterprise‖. It is also called as on actuating function of management because it is through direction that the operation of an enterprise actually starts. Being the central character of enterprise, it provides many benefits to a concern which are as follows:- It Initiates Actions – Directions is the function which is the starting point of the work performance of subordinates. It is from this function the action takes place, subordinates understand their jobs and do according to the instructions laid. Whatever are plans laid, can be implemented only once the actual work starts. It is there that direction becomes beneficial. It Ingrates Efforts – Through direction, the superiors are able to guide, inspire and instruct the subordinates to work. For this, efforts of every individual towards accomplishment of goals are required. It is through direction the efforts of every department can be related and integrated with others. This can be done through persuasive leadership and effective communication. Integration of efforts bring effectiveness and stability in a concern. Means of Motivation – Direction function helps in achievement of goals. A manager makes use of the element of motivation here to improve the performances of subordinates. This can be done by providing incentives or compensation, whether monetary or non – monetary, which serves as a ―Morale booster‖ to the subordinates Motivation is also helpful for the subordinates to give the best of their abilities which ultimately helps in growth. It Provides Stability – Stability and balance in concern becomes very important for long term sun survival in the market. This can be brought upon by the managers with the help of four tools or elements of direction function – judicious blend of persuasive leadership, effective communication, strict supervision and efficient motivation. Stability is very important since that is an index of growth of an enterprise. Therefore a manager can use of all the four traits in him so that performance standards can be maintained. Coping up with the changes – It is a human behaviour that human beings show resistance to change. Adaptability with changing environment helps in sustaining planned growth and becoming a market leader. It is directing function which is of use to meet with changes in environment, both internal as external. Effective communication helps in coping up with the changes. It is the role of manager here to communicate the nature and contents of changes very clearly to the subordinates. This helps in clarifications, easy adaptions and smooth running of an enterprise. For example, if a concern shifts from handlooms to powerlooms, an important change in technique of production takes place. The resulting factors are less of manpower and more of machinery. This can be resisted by the subordinates. The manager here can explain that the change was in the benefit of the subordinates. Through more mechanization, production increases and thereby the profits. Indirectly, the subordinates are benefited out of that in form of higher remuneration. Efficient Utilization of Resources – Direction finance helps in clarifying the role of every subordinate towards his work. The resources can be utilized properly only when less of wastages, duplication of efforts, overlapping of performances, etc. doesn’t take place. Through direction, the role of subordinates become clear as manager makes use of his supervisory, the guidance, the instructions and motivation skill to inspire the subordinates. This helps in maximum possible utilization of resources of men, machine, materials and money which helps in reducing costs and increasing profits. From the above discussion, one can justify that direction, surely, is the heart of management process. Heart plays an important role in a human body as it serves the function pumping blood to all parts of body which makes the parts function. In the similar manner, direction helps the subordinates to perform in best of their abilities and that too in a healthy environment. The manager makes use of the four elements of direction here so that work can be accomplished in a proper and right manner. According to Earnest Dale, ―Directing is what has to be done and in


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what manner through dictating the procedures and policies for accomplishing performance standards‖. Therefore, it is rightly said that direction is essence of management process.

Role of a Supervisor Supervisor has got an important role to play in factory management. Supervision means overseeing the subordinates at work at the factory level. The supervisor is a part of the management team and he holds the designation of first line managers. He is a person who has to perform many functions which helps in achieving productivity. Therefore, supervisor can be called as the only manager who has an important role at execution level. There are certain philosophers who call supervisors as workers. There are yet some more philosophers who call them as managers. But actually he should be called as a manager or operative manager. His primary job is to manage the workers at operative level of management. A supervisor plays multiplinary role at one time like – As a Planner - A supervisor has to plan the daily work schedules in the factory. At the same time he has to divide the work to various workers according to their abilities. As a Manager - It is righty said that a supervisor is a part of the management team of an enterprise. He is, in fact, an operative manager. As a Guide and Leader - A factory supervisor leads the workers by guiding them the way of perform their daily tasks. In fact, he plays a role of an inspirer by telling them. As a Mediator - A Supervisor is called a linking pin between management and workers. He is the spokesperson of management as well as worker. As an Inspector - An important role of supervisor is to enforce discipline in the factory. For this, the work includes checking progress of work against the time schedule, recording the work performances at regular intervals and reporting the deviations if any from those. He can also frame rules and regulations which have to be followed by workers during their work. As a Counselor - A supervisor plays the role of a counselor to the worker’s problem. He has to perform this role in order to build good relations and co-operation from workers. This can be done not only by listening to the grievances but also handling the grievances and satisfying the workers. Therefore, we can say that effective and efficient supervision helps in serving better work performance, building good human relations, creating a congenial and co-operative environment. This all helps in increasing productivity.

4.4.2 Functions of a Supervisor Supervisor, being the manager in a direct contact with the operatives, has got multifarious function to perform. The objective behind performance of these functions is to bring stability and soundness in the organization which can be secured through increase in profits which is an end result of higher productivity. Therefore, a supervisor should be concerned with performing the following functions – Planning and Organizing - Supervisor’s basic role is to plan the daily work schedule of the workers by guiding them the nature of their work and also dividing the work amongst the workers according to their interests, aptitudes, skills and interests. Provision of working conditions - A supervisor plays an important role in the physical setting of the factory and in arranging the physical resources at right place. This involves providing proper sitting place, ventilation, lighting, water facilities etc. to workers. His main responsibility is here to provide healthy and hygienic condition to the workers. Leadership and Guidance - A supervisor is the leader of workers under him. He leads the workers and influences them to work their best. He also guides the workers by fixing production targets and by providing them instruction and guidelines to achieve those targets. Motivation - A supervisor plays an important role by providing different incentives to workers to perform better. There are different monetary and non-monetary incentives which can inspire the workers to work better. Controlling - Controlling is an important function performed by supervisor. This will involve

Recording the actual performance against the time schedule. Checking of progress of work. Finding out deviations if any and making solutions If not independently solved, reporting it to top management.

Linking Pin - A supervisor proves to be a linking pin between management and workers. He communicates the policies of management to workers also passes instructions to them on behalf of management. On the other hand,


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he has a close contact with the workers and therefore can interact the problems, complaints, suggestions, etc to the management. In this way, he communicates workers problems and brings it to the notice of management. Grievance Handling - The supervisor can handle the grievances of the workers effectively for this he has to do the following things :-

He can be in direct touch with workers. By winning the confidence of the workers by solving their problems. By taking worker problems on humanitarian grounds. If he cannot tackle it independently, he can take the help and advice of management to solve it.

Reporting - A supervisor has got an important role to report about the cost, quality and any such output which can be responsible for increasing productivity. Factors like cost, output, performance, quality, etc can be reported continually to the management. Introducing new work methods - The supervisor here has to be conscious about the environment of market and competition present. Therefore he can innovate the techniques of production. He can shift the workers into fresh schedules whenever possible. He can also try this best to keep on changing and improving to the physical environment around the workers. This will result in

Higher productivity, High Morale of Workers, Satisfying working condition, Improving human relations, Higher Profits, and High Stability

Enforcing Discipline - A supervisor can undertake many steps to maintain discipline in the concern by regulating checks and measures, strictness in orders and instructions, keeping an account of general discipline of factory, implementing penalties and punishments for the indiscipline workers. All these above steps help in improving the overall discipline of the factory. 4.5 Controlling functions of management Controlling consists of verifying whether everything occurs in confirmities with the plans adopted, instructions issued and principles established. Controlling ensures that there is effective and efficient utilization of organizational resources so as to achieve the planned goals. Controlling measures the deviation of actual performance from the standard performance, discovers the causes of such deviations and helps in taking corrective actions According to Brech, ―Controlling is a systematic exercise which is called as a process of checking actual performance against the standards or plans with a view to ensure adequate progress and also recording such experience as is gained as a contribution to possible future needs.‖ According to Donnell, ―Just as a navigator continually takes reading to ensure whether he is relative to a planned action, so should a business manager continually take reading to assure himself that his enterprise is on right course.‖

Controlling has got two basic purposes It facilitates co-ordination It helps in planning

Features of Controlling Function Following are the characteristics of controlling function of management-

1. Controlling is an end function- A function which comes once the performances are made in confirmities with plans.

2. Controlling is a pervasive function- which means it is performed by managers at all levels and in all type

of concerns.

3. Controlling is forward looking- because effective control is not possible without past being controlled. Controlling always look to future so that follow-up can be made whenever required.

4. Controlling is a dynamic process- since controlling requires taking reviewal methods, changes have to

be made wherever possible. 5. Controlling is related with planning- Planning and Controlling are two inseperable functions of

management. Without planning, controlling is a meaningless exercise and without controlling, planning is useless. Planning presupposes controlling and controlling succeeds planning.


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4.5.1 Process of Controlling Controlling as a management function involves following steps: Establishment of standards- Standards are the plans or the targets which have to be achieved in the course of business function. They can also be called as the criterions for judging the performance. Standards generally are classified into two- Measurable or tangible- Those standards which can be measured and expressed are called as measurable standards. They can be in form of cost, output, expenditure, time, profit, etc. Non-measurable or intangible- There are standards which cannot be measured monetarily. For example- performance of a manager, deviation of workers, their attitudes towards a concern. These are called as intangible standards. Controlling becomes easy through establishment of these standards because controlling is exercised on the basis of these standards. Measurement of performance- The second major step in controlling is to measure the performance. Finding out deviations becomes easy through measuring the actual performance. Performance levels are sometimes easy to measure and sometimes difficult. Measurement of tangible standards is easy as it can be expressed in units, cost, money terms, etc. Quantitative measurement becomes difficult when performance of manager has to be measured. Performance of a manager cannot be measured in quantities. It can be measured only by-

Attitude of the workers, Their morale to work, The development in the attitudes regarding the physical environment, and Their communication with the superiors. It is also sometimes done through various reports like weekly, monthly, quarterly, yearly reports.

Comparison of actual and standard performance- Comparison of actual performance with the planned targets is very important. Deviation can be defined as the gap between actual performance and the planned targets. The manager has to find out two things here- extent of deviation and cause of deviation. Extent of deviation means that the manager has to find out whether the deviation is positive or negative or whether the actual performance is in conformity with the planned performance. The managers have to exercise control by exception. He has to find out those deviations which are critical and important for business. Minor deviations have to be ignored. Major deviations like replacement of machinery, appointment of workers, quality of raw material, rate of profits, etc. should be looked upon consciously. Therefore it is said, ― If a manager controls everything, he ends up controlling nothing.‖ For example, if stationery charges increase by a minor 5 to 10%, it can be called as a minor deviation. On the other hand, if monthly production decreases continuously, it is called as major deviation. Once the deviation is identified, a manager has to think about various cause which has led to deviation. The causes can be-

Erroneous planning, Co-ordination loosens, Implementation of plans is defective, and Supervision and communication is ineffective, etc.

Taking remedial actions- Once the causes and extent of deviations are known, the manager has to detect those errors and take remedial measures for it. There are two alternatives here- Taking corrective measures for deviations which have occurred; and After taking the corrective measures, if the actual performance is not in conformity with plans, the manager can revise the targets. It is here the controlling process comes to an end. Follow up is an important step because it is only through taking corrective measures, a manager can exercise controlling. Relationship between planning and controlling Planning and controlling are two separate functions of management, yet they are closely related. The scope of activities if both are overlapping to each other. Without the basis of planning, controlling activities becomes baseless and without controlling, planning becomes a meaningless exercise. In absense of controlling, no purpose can be served by. Therefore, planning and controlling reinforce each other. According to Billy Goetz, " Relationship between the two can be summarized in the following points

Planning preceeds controlling and controlling succeeds planning. Planning and controlling are inseperable functions of management. Activities are put on rails by planning and they are kept at right place through controlling.

The process of planning and controlling works on Systems Approach which is as follows :

Planning → Results → Corrective Action


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Planning and controlling are integral parts of an organization as both are important for smooth running of an enterprise. Planning and controlling reinforce each other. Each drives the other function of management. In the present dynamic environment which affects the organization, the strong relationship between the two is very critical and important. In the present day environment, it is quite likely that planning fails due to some unforeseen events. There controlling comes to the rescue. Once controlling is done effectively, it give us stimulus to make better plans. Therefore, planning and controlling are inseperate functions of a business enterprise.


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Chapter 5 Organizational Behaviour 5.1 Motivation Motivation is the word derived from the word ’motive’ which means needs, desires, wants or drives within the individuals. It is the process of stimulating people to actions to accomplish the goals. In the work goal context the psychological factors stimulating the people’s behaviour can be -

desire for money success recognition job-satisfaction team work, etc

One of the most important functions of management is to create willingness amongst the employees to perform in the best of their abilities. Therefore the role of a leader is to arouse interest in performance of employees in their jobs. The process of motivation consists of three stages:-

A felt need or drive A stimulus in which needs have to be aroused When needs are satisfied, the satisfaction or accomplishment of goals.

Therefore, we can say that motivation is a psychological phenomenon which means needs and wants of the individuals have to be tackled by framing an incentive plan

5.1.1 Maslow’s Need Hierarchy Model Human behavior is goal-directed. Motivation cause goal-directed behaviour. It is through motivation that needs can be handled and tackled purposely. This can be understood by understanding the hierarchy of needs by manager. The needs of individual serves as a driving force in human behaviour. Therefore, a manager must understand the ―hierarchy of needs‖. Maslow has proposed ―The Need Hierarchy Model‖.

Self-actualization Needs

Esteem Needs

Social Needs

Security Needs

Physiological Needs

The needs have been classified into the following in order:

1. Physiological needs- These are the basic needs of an individual which includes food, clothing, shelter, air, water, etc. These needs relate to the survival and maintenance of human life.

2. Safety needs- These needs are also important for human beings. Everybody wants job security, protection against danger, safety of property, etc.

3. Social needs- These needs emerge from society. Man is a social animal. These needs become important. For example- love, affection, belongingness, friendship, conversation, etc.

4. Esteem needs- These needs relate to desire for self-respect, recognition and respect from others.

5. Self-actualization needs- These are the needs of the highest order and these needs are found in those 6. person whose previous four needs are satisfied. This will include need for social service, meditation.

5.1.2 Motivation incentives Incentive is an act or promise for greater action. It is also called as a stimulus to greater action. Incentives are something which are given in addition to wagers. It means additional remuneration or benefit to an employee in recognition of achievement or better work. Incentives provide a spur or zeal in the employees for better performance. It is a natural thing that nobody acts without a purpose behind. Therefore, a hope for a reward is a powerful incentive to motivate employees. Besides monetary incentive, there are some other stimuli which can drive a person to better. This will include job satisfaction, job security, job promotion, and pride for accomplishment. Therefore, incentives really can sometimes work to accomplish the goals of a concern. The need of incentives can be many:-


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To increase productivity, To drive or arouse a stimulus work, To enhance commitment in work performance, To psychologically satisfy a person which leads to job satisfaction, To shape the behavior or outlook of subordinate towards work, To inculcate zeal and enthusiasm towards work, To get the maximum of their capabilities so that they are exploited and utilized maximally.

Therefore, management has to offer the following two categories of incentives to motivate employees:-

1. Monetary incentives- Those incentives which satisfy the subordinates by providing them rewards in terms of rupees. Money has been recognized as a chief source of satisfying the needs of people. Money is also helpful to satisfy the social needs by possessing various material items. Therefore, money not only satisfies psychological needs but also the security and social needs. Therefore, in many factories, various wage plans and bonus schemes are introduced to motivate and stimulate the people to work.

2. Non-monetary incentives- Besides the monetary incentives, there are certain non-financial incentives which can satisfy the ego and self- actualization needs of employees. The incentives which cannot be measured in terms of money are under the category of ―Non- monetary incentives‖. Whenever a manager has to satisfy the psychological needs of the subordinates, he makes use of non-financial incentives. Non- financial incentives can be of the following types:-

a. Security of service- Job security is an incentive which provides great motivation to employees. If his job is

secured, he will put maximum efforts to achieve the objectives of the enterprise. This also helps since he is very far off from mental tension and he can give his best to the enterprise.

b. Praise or recognition- The praise or recognition is another non- financial incentive which satisfies the ego

needs of the employees. Sometimes praise becomes more effective than any other incentive. The employees will respond more to praise and try to give the best of their abilities to a concern.

c. Suggestion scheme- The organization should look forward to taking suggestions and inviting suggestion

schemes from the subordinates. This inculcates a spirit of participation in the employees. This can be done by publishing various articles written by employees to improve the work environment which can be published in various magazines of the company. This also is helpful to motivate the employees to feel important and they can also be in search for innovative methods which can be applied for better work methods. This ultimately helps in growing a concern and adapting new methods of operations.

d. Job enrichment- Job enrichment is another non- monetary incentive in which the job of a worker can be

enriched. This can be done by increasing his responsibilities, giving him an important designation, increasing the content and nature of the work. This way efficient worker can get challenging jobs in which they can prove their worth. This also helps in the greatest motivation of the efficient employees.

e. Promotion opportunities- Promotion is an effective tool to increase the spirit to work in a concern. If the

employees are provided opportunities for the advancement and growth, they feel satisfied and contented and they become more committed to the organization.

The above non- financial tools can be framed effectively by giving due concentration to the role of employees. A combination of financial and non- financial incentives help together in bringing motivation and zeal to work in a concern. Positive Incentives Positive incentives are those incentives which provide a positive assurance for fulfilling the needs and wants. Positive incentives generally have an optimistic attitude behind and they are generally given to satisfy the psychological requirements of employees. For example-promotion, praise, recognition, perks and allowances, etc. It is positive by nature. Negative Incentives Negative incentives are those whose purpose is to correct the mistakes or defaults of employees. The purpose is to rectify mistakes in order to get effective results. Negative incentive is generally resorted to when positive incentive does not works and a psychological set back has to be given to employees. It is negative by nature. For example- demotion, transfer, fines, penalties. 5.1.3 Importance of motivation Motivation is a very important for an organization because of the following benefits it provides:- Puts human resources into action Every concern requires physical, financial and human resources to accomplish the goals. It is through motivation that the human resources can be utilized by making full use of it. This can be done by building willingness in employees to work. This will help the enterprise in securing best possible utilization of resources.


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Improves level of efficiency of employees The level of a subordinate or a employee does not only depend upon his qualifications and abilities. For getting best of his work performance, the gap between ability and willingness has to be filled which helps in improving the level of performance of subordinates. This will result into- Increase in productivity, Reducing cost of operations, and Improving overall efficiency. Leads to achievement of organizational goals The goals of an enterprise can be achieved only when the following factors take place :- There is best possible utilization of resources, There is a co-operative work environment, The employees are goal-directed and they act in a purposive manner, Goals can be achieved if co-ordination and co-operation takes place simultaneously which can be effectively done through motivation. Builds friendly relationship Motivation is an important factor which brings employees satisfaction. This can be done by keeping into mind and framing an incentive plan for the benefit of the employees. This could initiate the following things:

a. Monetary and non-monetary incentives, b. Promotion opportunities for employees, c. Disincentives for inefficient employees.

In order to build a cordial, friendly atmosphere in a concern, the above steps should be taken by a manager. This would help in:

a. Effective co-operation which brings stability, b. Industrial dispute and unrest in employees will reduce, c. The employees will be adaptable to the changes and there will be no resistance to the change, d. This will help in providing a smooth and sound concern in which individual interests will coincide with the

organizational interests, e. This will result in profit maximization through increased productivity.

Leads to stability of work force Stability of workforce is very important from the point of view of reputation and goodwill of a concern. The employees can remain loyal to the enterprise only when they have a feeling of participation in the management. The skills and efficiency of employees will always be of advantage to employees as well as employees. This will lead to a good public image in the market which will attract competent and qualified people into a concern. As it is said, ―Old is gold‖ which suffices with the role of motivation here, the older the people, more the experience and their adjustment into a concern which can be of benefit to the enterprise. From the above discussion, we can say that motivation is an internal feeling which can be understood only by manager since he is in close contact with the employees. Needs, wants and desires are inter-related and they are the driving force to act. These needs can be understood by the manager and he can frame motivation plans accordingly. We can say that motivation therefore is a continuous process since motivation process is based on needs which are unlimited. The process has to be continued throughout. We can summarize by saying that motivation is important both to an individual and a business. Motivation is important to an individual as:

1. Motivation will help him achieve his personal goals. 2. If an individual is motivated, he will have job satisfaction. 3. Motivation will help in self-development of individual. 4. An individual would always gain by working with a dynamic team.

Similarly, motivation is important to a business as:

1. The more motivated the employees are, the more empowered the team is. 2. The more is the team work and individual employee contribution, more profitable and successful is the

business. 3. During period of amendments, there will be more adaptability and creativity. 4. Motivation will lead to an optimistic and challenging attitude at work place.

5.1.4 Motivation and morale –relationship and difference Morale can be defined as the total satisfaction derived by an individual from his job, his work-group, his superior, the organization he works for and the environment. It generally relates to the feeling of individual’s comfort, happiness and satisfaction. According to Davis, ―Morale is a mental condition of groups and individuals which determines their attitude.‖ In short, morale is a fusion of employees’ attitudes, behaviours, manifestation of views and opinions - all taken together in their work scenarios, exhibiting the employees’ feelings towards work, working terms and relation with their employers. Morale includes employees’ attitudes on and specific reaction to their job.


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There are two states of morale: High morale - High morale implies determination at work- an essential in achievement of management objectives. High morale results in:

A keen teamwork on part of the employees. Organizational Commitment and a sense of belongingness in the employees mind. Immediate conflict identification and resolution. Healthy and safe work environment. Effective communication in the organization. Increase in productivity. Greater motivation.

Low morale - Low morale has following features:

Greater grievances and conflicts in organization. High rate of employee absenteeism and turnover. Dissatisfaction with the superiors and employers. Poor working conditions. Employees frustration. Decrease in productivity. Lack of motivation.

Though motivation and morale are closely related concepts, they are different in following ways:

While motivation is an internal-psychological drive of an individual which urges him to behave in a specific manner, morale is more of a group scenario.

Higher motivation often leads to higher morale of employees, but high morale does not essentially result in greatly motivated employees as to have a positive attitude towards all factors of work situation may not essentially force the employees to work more efficiently.

While motivation is an individual concept, morale is a group concept. Thus, motivation takes into consideration the individual differences among the employees, and morale of the employees can be increased by taking those factors into consideration which influence group scenario or total work settings.

Motivation acquires primary concern in every organization, while morale is a secondary phenomenon because high motivation essentially leads to higher productivity while high morale may not necessarily lead to higher productivity.

Things tied to morale are usually things that are just part of the work environment, and things tied to motivation are tied to the performance of the individual.

5.1.5 Staff motivation-motivation tips for employee Employees are the building blocks of an organization. Organizational success depends on the collective efforts of the employees. The employees will collectively contribute to organizational growth when they are motivated. Below mentioned are some tips for motivating the staff / employees in an organization: Evaluate yourself- In order to motivate, encourage and control your staff’s behaviour, it is essential to understand, encourage and control your own behaviour as a manager. Work upon utilizing your strengths and opportunities to neutralize and lower the negative impact of your weaknesses and organizational threats. The manager should adopt the approach ―You’re OK - I’m OK‖. Be familiar with your staff- The manager should be well acquainted with his staff. The more and the better he knows his staff, the simpler it is to get them involved in the job as well as in achieving the team and organizational goals. This will also invite staff’s commitment and loyalty. A cordial superior-subordinate relationship is a key factor in job-satisfaction. Provide the employees certain benefits- Give your staff some financial and other benefits. Give them bonuses, pay them for overtime, and give them health and family insurance benefits. Make sure they get breaks from work. Let them enjoy vacations and holidays. Participate in new employees induction programme- Induction proceeds with recruitment advertising. At this point of time, the potential entrants start creating their own impressions and desires about the job and the organization. The manner in which the selection is conducted and the consequent recruitment process will either build or damage the impression about the job and organization. Thus, the manager must have a say in framing the advertisement and also in the selection and recruitment process. After the decision about the candidate is made, the manager must take personal interest in the selected joinee’s joining date, the family relocation issues, cost of removal, etc. Being observed by the new recruit and your entire team / staff to be involved completely, will ensure a persuasive entry in the organization.


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Provide feedback to the staff constantly- The staff members are keen to know how they are performing. Try giving a regular and constructive feedback to your staff. This will be more acceptable by the staff. Do not base the feedback on assumptions, but on facts and personal observations. Do not indulge in favouritism or comparing the employee with some one else. Sit with your staff on daily or weekly basis and make sure that feedback happens. This will help in boosting employee’s morale and will thus motivate the staff. Acknowledge your staff on their achievements- A pat on the back, some words of praise, and giving a note of credit to the employee / staff member at personal level with some form of broad publicity can motivate the staff a lot. Make it a point to mention the staff’s outstanding achievements in official newsletters or organization’s journal. Not only acknowledge the employee with highest contribution, but also acknowledge the employee who meets and over exceeds the targets. Ensure effective time management- Having control over time ensures that things are done in right manner. Motivate your staff to have ―closed‖ times, i.e., few hours when there are no interruptions for the staff in performing their job role so that they can concentrate on the job, and ―open‖ times when the staff freely communicate and interact. Plan one to one sessions of interaction with your staff where they can ask their queries and also can get your attention and, thereby, they will not feel neglected. This all will work in long run to motivate the staff. Have stress management techniques in your organization- Create an environment in which you and your staff can work within optimum pressure levels. Ensure an optimistic attitude towards stress in the workplace. Have training sessions on stress management, and ensure a follow-up with group meetings on the manner stress can be lowered at work. Give your staff autonomy in work. Identify the stress symptoms in employees and try to deal with them. Use counselling technique- The employees’ / staff feelings towards the work, their peer, their superiors and towards the future can be effectively dealt through the staff counseling. Counselling provides an environment, incentive and support which enable the employee to achieve his identity. Give the employees learning opportunities- Employees should consistently learn new skills on the job. It has been well said by someone that with people hopping jobs more often than required and organizations no longer giving job security to employees, the young blood employees specifically realize that continuing learning is the best way to remain employable. Opportunities should be given to the employees to develop their skills and competencies and to make best use of their skills. Link the staff goals with the organizational goals. Set an example for your staff / subordinates- Be a role model for your staff. The staff would learn from what you do and not from what you say / claim. The way you interact with your clients / customers and how do you react later after the interaction is over have an impact upon the staff. The staff more closely observes your non-verbal communication (gestures, body language). Being unpunctual, wasting the organization’s capital, mismanaging organization’s physical equipments, asking the staff to do your personal work, etc. all have a negative impact on the staff. Try setting an example for your staff to follow. Smile often- Smiling can have a tremendous effect on boosting the morale of the staff. A smiling superior creates an optimistic and motivating work environment. Smiling is an essential component of the body language of confidence, acceptance and boldness. Smile consistently, naturally and often, to demonstrate that you feel good and positive about the staff who works for you. It encourages new ideas and feedback from the staff. The staff does not feel hesitant and threatened to discuss their views this way Listen effectively- Listening attentively is a form of recognizing and appreciating the person who is talking. Reciprocal / Mutual listening develops cordial and healthy personal relationships on which the employee / staff development rests. If the managers do not listen attentively to the subordinates, the morale of the subordinates lowers down and they do not feel like sharing their ideas or giving their views. Effective listening by the manager boosts up the employees’ morale and thus motivates them. Ensure effective communication- In order to motivate your staff, indulge in effective communication such as avoid using anger expressions, utilize questioning techniques to know staff’s mindset and analysis rather than ordering the staff what to do, base your judgements on facts and not on assumptions, use relaxed and steady tone of voice, listen effectively and be positive and helpful in your responses. Share your views with the staff. Develop and encourage creativity- The staff should be encouraged to develop the creativity skills so as to solve organizational problems. Give them time and resources for developing creativity. Let them hold constant brainstorming sessions. Invite ideas and suggestions from the staff. They may turn out to be very productive. Don’t be rigid. Be flexible- Introduce flexibility in work. Allow for flexible working hours if possible. Let the employees work at home occasionally if need arises. Do not be rigid in accepting ideas from your staff. Stimulate flexible attitudes in the employees who are accountable to you by asking what changes they would like to bring about if given a chance. Adopt job enrichment- Job enrichment implies giving room for a better quality of working life. It means facilitating people to achieve self-development, fame and success through a more challenging and interesting job which provides more promotional and advancement opportunities. Give employees more freedom in job, involve them in decision-making process, show them loyalty and celebrate their achievements.


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Respect your team- Respect not only the employees’ rights to share and express their views, and to be themselves, but their time too. This will ensure that the employees respect you and your time. Make the staff feel that they are respected not just as employees / workers but as individuals too. 5.1.6 Motivation at workplace ―I am in this job because I have no other option.‖ If this is what an employee of your company feels, read on to know how this statement can be changed to something more positive - ―I love what I do.‖ First things first - whose responsibility is it to ensure that an employee loves his job? While an employee would say - the employer, the human resource experts have a different point of view which sounds fair. It’s both the employer and the employee who should work together to make work fun for each other. It is interesting to know here, that employees do not rank ’salary’ as the top factor in determining whether they like their jobs or not. What is important to them then - the opportunity to do what is ’important’. Almost all the employees would like to feel part of the big picture and would want to contribute to the organizational goals in some way or the other. Doing the mundane, routine work will never excite them - what excites them is - work that challenges them to use their talent. Right Management Consultants conducted a survey sometime back and found that 83% of about 500 workers surveyed were motivated by ―challenges at work‖. Also, as per an executive editor of the Harvard Business Review, while salary and promotions could do a great job of demotivating people if handled ineffectively, they aren’t so much effective in motivating people. So then what needs to be done for effective motivation at workplace?

Link Rewards directly to Performance- An organization should adopt a fair reward structure which provides incentive to the most deserving employee. Have an incentive structure in place doesn’t solve the problem... what makes it workable is the employees trust in the system and believe that they will be rewarded if they perform well.

Compliment employees- Even though an employee’s name has not appeared in the list of people getting incentives, go ahead and compliment that employee for a job well done - no matter how small. There is nothing more satisfying to an employee than a pat on his back.

Be transparent- While there may be some strategic decisions which you might want to share with the employees at a later stage, make sure employees do not give in to the rumours. Stay in touch with the employees.

Work on your PDP- Every employee is responsible for his / her own career. He / she should work towards his ’Personal Development Plan’ [PDP] as discussed and agreed by his manager. Find out what are the training company offers and which is best suited to his development needs. How this will motivate you - remember training always increase your marketability and enhance your career.

Participate and Network- Employees - Remember you work for a company where a one-on-one attention might not be possible. Do not wait for an invitation to participate in a discussion. If you are a part of a forum, then you have full right to express your opinion and be a part of the process. Expressing yourself is a good way of motivating yourself.

5.1.7 Self-motivation Self-motivation is a power that drives us to keep moving ahead. It encourages continuous learning and success, whatever be the scenario. Self-motivation is a primary means of realizing our goals and progressing. It is basically related to our inventiveness in setting dynamic goals for ourselves, and our faith that we possess the required skills and competencies for achieving those challenging goals. We often feel the need for self-motivation. Following are the ways/techniques for self-motivation:

Communicate and talk to get motivated: Communicating with someone can boost up your energy and make you go on track. Talk with optimistic and motivated individuals. They can be your colleagues, friends, wife, or any one with whom you can share your ideas.

Remain optimistic: When facing hurdles; we always make efforts to find how to overcome them. Also, one should understand the good in bad.

Discover your interest area: If you lack interest in current task, you should not proceed and continue with it. If an individual has no interest in the task, but if it is essential to perform, he should correlate it with a bigger ultimate goal.

Self-acknowledgement: One should know when his motivation level is saturated and he feels like on top of the world. There will be a blueprint that once an individual acknowledge, he can proceed with his job and can grow.

Monitor and record your success: Maintain a success bar for the assignments you are currently working on. When you observe any progress, you will obviously want to foster it.


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Uplift energy level: Energy is very essential for self-motivation. Do regular exercises. Have proper sleep. Have tea/coffee during breaks to refresh you.

Assist, support and motivate others: Discuss and share your views and ideas with your friends and peers and assist them in getting motivated. When we observe others performing good, it will keep us motivated too. Invite feedback from others on your achievements.

Encourage learning: Always encourage learning. Read and grasp the logic and jist of the reading. Learning makes an individual more confident in commencing new assignments.

Break your bigger goals into smaller goals: Set a short time deadline for each smaller goal so as to achieve bigger goal on time.

5.1.8 Team motivation A group heading towards a common objective will perform best when it is motivated as a team. Team motivation is determined by how well the team members’ needs and requirements are met by the team. Some tips for effective team motivation are as follows:

The team’s objective should well align and synchronize with the team members needs and requirements.

Give in written the team’s mission and ensure that all understand it (as mission is a foundation based on which the team performs).

For maintaining motivation, the team should be given challenges (which must be difficult but achievable) consistently.

Giving a team responsibility accompanied by authority can also be a good motivator for the team to perform.

The team should be provided with growth opportunities. The team’s motivation level is high when the team members feel that they are being promoted, their skills and competencies are being enhanced, and they are learning new things consistently.

Effective and true leaders can develop environment for the team to motivate itself. They provide spur for self- actualization behaviours of team members.

Devote quality/productive time to your team. Have an optimistic and good relation with your team members. This will make you more acquainted with them and you can get knowledge of how well they are performing their job. Welcome their views and ideas as they may be fruitful and it will also boost their morale.

Motivation is all about empowerment. The skills and competencies of the team members should be fully utilized. Empowering the team members makes them accountable for their own actions.

Provide feedback to the team consistently. Become their mentor. Give the team recognition for good and outstanding performance. Give the team a constructive and not negative feedback.

Discover and offset the factors which discourage team spirit such as too many conflicts, lethargy, team members’ escape from responsibilities, lack of job satisfaction, etc.

Motivational challenge Motivation seems to be a simple function of management in books, but in practice it is more challenging. The reasons for motivation being challenging job are as follows:

One of the main reasons of motivation being a challenging job is due to the changing workforce. The employees become a part of their organization with various needs and expectations. Different employees have different beliefs, attitudes, values, backgrounds and thinking. But all the organizations are not aware of the diversity in their workforce and thus are not aware and clear about different ways of motivating their diverse workforce.

Employees motives cannot be seen, they can only be presumed. Suppose, there are two employees in a

team showing varying performance despite being of same age group, having same educational qualifications and same work experience. The reason being what motivates one employee may not seem motivating to other.

Motivation of employees becomes challenging especially when the organizations have considerably

changed the job role of the employees, or have lessened the hierarchy levels of hierarchy, or have chucked out a significant number of employees in the name of down-sizing or right-sizing. Certain firms have chosen to hire and fire and paying for performance strategies nearly giving up motivational efforts. These strategies are unsuccessful in making an individual overreach himself.


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The vigorous nature of needs also pose challenge to a manager in motivating his subordinates. This is because an employee at a certain point of time has diverse needs and expectations. Also, these needs and expectations keep on changing and might also clash with each other. For instance-the employees who spend extra time at work for meeting their needs for accomplishment might discover that the extra time spent by them clash with their social neds and with the need for affiliation.

Good motivation system Motivation is a state of mind. High motivation leads to high morale and greater production. A motivated employee gives his best to the organization. He stays loyal and committed to the organization. A sound motivation system in an organization should have the following features:

Superior performance should be reasonably rewarded and should be duely acknowledged.

If the performance is not consistently up to the mark, then the system must make provisions for penalties.

The employees must be dealt in a fair and just manner. The grievances and obstacles faced by them must be dealt instantly and fairly.

Carrot and stick approach should be implemented to motivate both efficient and inefficient employees. The employees should treat negative consequences (such as fear of punishment) as stick, an outside push and move away from it. They should take positive consequences (such as reward) as carrot, an inner pull and move towards it.

Performance appraisal system should be very effective.

Ensure flexibility in working arrangements.

A sound motivation system must be correlated to organizational goals. Thus, the individual/employee goals must be harmonized with the organizational goals.

The management approach should be participative. All the subordinates and employees should be involved in decision- making process.

The motivation system should involve monetary as well as non- monetary rewards. The monetary rewards should be correlated to performance. Performance should be based on the employees’ action towards the goals, and not on the fame of employees.

―Motivate yourself to motivate your employees‖ should be the managerial approach.

The managers must understand and identify the motivators for each employee.

Sound motivation system should encourage supportive supervision whereby the supervisors share their views and experiences with their subordinates, listen to the subordinates views, and assist the subordinates in performing the designated job.

5.1.9 Classical Theories Of Motivation The motivation concepts were mainly developed around 1950’s. Three main theories were made during this period. These three classical theories are-

Maslow’s hierarchy of needs theory Herzberg’s Two factor theory Theory X and Theory Y

These theories are building blocks of the contemporary theories developed later. The working mangers and learned professionals till date use these classical theories to explain the concept of employee motivation. 5.1.10Maslow’s Hierarchy of Needs Theory Abraham Maslow is well renowned for proposing the Hierarchy of Needs Theory in 1943. This theory is a classical depiction of human motivation. This theory is based on the assumption that there is a hierarchy of five needs within each individual. The urgency of these needs varies. These five needs are as follows- Physiological needs- These are the basic needs of air, water, food, clothing and shelter. In other words, physiological needs are the needs for basic amenities of life. Safety needs- Safety needs include physical, environmental and emotional safety and protection. For instance- Job security, financial security, protection from animals, family security, health security, etc. Social needs- Social needs include the need for love, affection, care, belongingness, and friendship. Esteem needs- Esteem needs are of two types: internal esteem needs (self- respect, confidence, competence, achievement and freedom) and external esteem needs (recognition, power, status, attention and admiration).


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Self-actualization need- This include the urge to become what you are capable of becoming / what you have the potential to become. It includes the need for growth and self-contentment. It also includes desire for gaining more knowledge, social- service, creativity and being aesthetic. The self- actualization needs are never fully satiable. As an individual grows psychologically, opportunities keep cropping up to continue growing. According to Maslow, individuals are motivated by unsatisfied needs. As each of these needs is significantly satisfied, it drives and forces the next need to emerge. Maslow grouped the five needs into two categories - Higher-order needs and Lower-order needs. The physiological and the safety needs constituted the lower-order needs. These lower-order needs are mainly satisfied externally. The social, esteem, and self-actualization needs constituted the higher-order needs. These higher-order needs are generally satisfied internally, i.e., within an individual. Thus, we can conclude that during boom period, the employees lower-order needs are significantly met.

FIGURE: Maslow’s Need Hierarchy Model

Implications of Maslow’s Hierarchy of Needs Theory for Managers

As far as the physiological needs are concerned, the managers should give employees appropriate salaries to purchase the basic necessities of life. Breaks and eating opportunities should be given to employees.

As far as the safety needs are concerned, the managers should provide the employees job security, safe

and hygienic work environment, and retirement benefits so as to retain them.

As far as social needs are concerned, the management should encourage teamwork and organize social events.

As far as esteem needs are concerned, the managers can appreciate and reward employees on

accomplishing and exceeding their targets. The management can give the deserved employee higher job rank / position in the organization.

As far as self-actualization needs are concerned, the managers can give the employees challenging jobs in

which the employees’ skills and competencies are fully utilized. Moreover, growth opportunities can be given to them so that they can reach the peak.

The managers must identify the need level at which the employee is existing and then those needs can be utilized as push for motivation. Limitations of Maslow’s Theory

It is essential to note that not all employees are governed by same set of needs. Different individuals may be driven by different needs at same point of time. It is always the most powerful unsatisfied need that motivates an individual.

The theory is not empirically supported.

The theory is not applicable in case of starving artist as even if the artist’s basic needs are not satisfied, he

will still strive for recognition and achievement.

5.1.11 Frederick Herzberg two-factor theory In 1959, Frederick Herzberg, a behavioural scientist proposed a two-factor theory or the motivator-hygiene theory. According to Herzberg, there are some job factors that result in satisfaction while there are other job factors that prevent dissatisfaction. According to Herzberg, the opposite of ―Satisfaction‖ is ―No satisfaction‖ and the opposite of ―Dissatisfaction‖ is ―No Dissatisfaction‖.


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FIGURE: Herzberg’s view of satisfaction and dissatisfaction Herzberg classified these job factors into two categories

a) Hygiene factors- Hygiene factors are those job factors which are essential for existence of motivation at workplace. These do not lead to positive satisfaction for long-term. But if these factors are absent / if these factors are non-existant at workplace, then they lead to dissatisfaction. In other words, hygiene factors are those factors which when adequate / reasonable in a job, pacify the employees and do not make them dissatisfied. These factors are extrinsic to work. Hygiene factors are also called as dissatisfiers or maintenance factors as they are required to avoid dissatisfaction. These factors describe the job environment / scenario. The hygiene factors symbolized the physiological needs which the individuals wanted and expected to be fulfilled. Hygiene factors include:

Pay- The pay or salary structure should be appropriate and reasonable. It must be equal and competitive to those in the same industry in the same domain.

Company Policies and administrative policies- The company policies should not be too rigid. They should be fair and clear. It should include flexible working hours, dress code, breaks, vacation, etc.

Fringe benefits- The employees should be offered health care plans (medi-claim), benefits for the family members, employee help programmes, etc.

Physical Working conditions- The working conditions should be safe, clean and hygienic. The work equipments should be updated and well-maintained.

Status- The employees’ status within the organization should be familiar and retained. Interpersonal relations-The relationship of the employees with his peers, superiors and subordinates

should be appropriate and acceptable. There should be no conflict or humiliation element present. Job Security- The organization must provide job security to the employees.

b. Motivational factors- According to Herzberg, the hygiene factors cannot be regarded as motivators. The motivational factors yield positive satisfaction. These factors are inherent to work. These factors motivate the employees for a superior performance. These factors are called satisfiers. These are factors involved in performing the job. Employees find these factors intrinsically rewarding. The motivators symbolized the psychological needs that were perceived as an additional benefit. Motivational factors include: Recognition- The employees should be praised and recognized for their accomplishments by the

managers. Sense of achievement- The employees must have a sense of achievement. This depends on the job.

There must be a fruit of some sort in the job. Growth and promotional opportunities- There must be growth and advancement opportunities in an

organization to motivate the employees to perform well. Responsibility- The employees must hold themselves responsible for the work. The managers should give

them ownership of the work. They should minimize control but retain accountability. Meaningfulness of the work- The work itself should be meaningful, interesting and challenging for the employee to perform and to get motivated. Limitations of Two-Factor Theory The two factor theory is not free from limitations:

1. The two-factor theory overlooks situational variables.

2. Herzberg assumed a correlation between satisfaction and productivity. But the research conducted by Herzberg stressed upon satisfaction and ignored productivity.

3. The theory’s reliability is uncertain. Analysis has to be made by the raters. The raters may spoil the findings

by analyzing same response in different manner. 4. No comprehensive measure of satisfaction was used. An employee may find his job acceptable despite the

fact that he may hate/object part of his job. www.ibrahimshaikh.com

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5. The two factor theory is not free from bias as it is based on the natural reaction of employees when they are enquired the sources of satisfaction and dissatisfaction at work. They will blame dissatisfaction on the external factors such as salary structure, company policies and peer relationship. Also, the employees will give credit to themselves for the satisfaction factor at work.

6. The theory ignores blue-collar workers. Despite these limitations, Herzberg’s Two-Factor theory is

acceptable broadly. Implications of Two-Factor Theory

The Two-Factor theory implies that the managers must stress upon guaranteeing the adequacy of the hygiene factors to avoid employee dissatisfaction. Also, the managers must make sure that the work is stimulating and rewarding so that the employees are motivated to work and perform harder and better. This theory emphasize upon job-enrichment so as to motivate the employees. The job must utilize the employee’s skills and competencies to the maximum. Focusing on the motivational factors can improve work-quality.

5.1.12 Theory X and Theory Y In 1960, Douglas McGregor formulated Theory X and Theory Y suggesting two aspects of human behaviour at work, or in other words, two different views of individuals (employees): one of which is negative, called as Theory X and the other is positive, so called as Theory Y. According to McGregor, the perception of managers on the nature of individuals is based on various assumptions. Assumptions of Theory X

An average employee intrinsically does not like work and tries to escape it whenever possible. Since the employee does not want to work, he must be persuaded, compelled, or warned with punishment

so as to achieve organizational goals. A close supervision is required on part of managers. The managers adopt a more dictatorial style.

Many employees rank job security on top, and they have little or no aspiration/ ambition. Employees generally dislike responsibilities. Employees resist change. An average employee needs formal direction.

Assumptions of Theory Y

Employees can perceive their job as relaxing and normal. They exercise their physical and mental efforts in an inherent manner in their jobs.

Employees may not require only threat, external control and coercion to work, but they can use self-direction and self-control if they are dedicated and sincere to achieve the organizational objectives.

If the job is rewarding and satisfying, then it will result in employees’ loyalty and commitment to organization.

An average employee can learn to admit and recognize the responsibility. In fact, he can even learn to obtain responsibility.

The employees have skills and capabilities. Their logical capabilities should be fully utilized. In other words, the creativity, resourcefulness and innovative potentiality of the employees can be utilized to solve organizational problems.

Thus, we can say that Theory X presents a pessimistic view of employees’ nature and behaviour at work, while Theory Y presents an optimistic view of the employees’ nature and behaviour at work. If correlate it with Maslow’s theory, we can say that Theory X is based on the assumption that the employees emphasize on the physiological needs and the safety needs; while Theory X is based on the assumption that the social needs, esteem needs and the self-actualization needs dominate the employees. McGregor views Theory Y to be more valid and reasonable than Theory X. Thus, he encouraged cordial team relations, responsible and stimulating jobs, and participation of all in decision-making process. Implications of Theory X and Theory Y

Quite a few organizations use Theory X today. Theory X encourages use of tight control and supervision. It implies that employees are reluctant to organizational changes. Thus, it does not encourage innovation.

Many organizations are using Theory Y techniques. Theory Y implies that the managers should create and encourage a work environment which provides opportunities to employees to take initiative and self-direction. Employees should be given opportunities to contribute to organizational well-being. Theory Y encourages decentralization of authority, teamwork and participative decision making in an organization. Theory Y searches and discovers the ways in which an employee can make significant contributions in an organization. It harmonizes and matches employees’ needs and aspirations with organizational needs and aspirations.


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5.1.13 Modern theories of motivation We all are familiar with the classical theories of motivation, but they all are not empirically supported. As far as contemporary theories of motivation are concerned, all are well supported with evidences. Some of the contemporary / modern theories of motivation are explained below:

ERG Theory McClelland’s Theory of Needs Goal Setting Theory Reinforcement Theory Equity Theory of Motivation Expectancy Theory of Motivation

ERG theory of motivation To bring Maslow’s need hierarchy theory of motivation in synchronization with empirical research, Clayton Alderfer redefined it in his own terms. His rework is called as ERG theory of motivation. He recategorized Maslow’s hierarchy of needs into three simpler and broader classes of needs:

Existence needs- These include need for basic material necessities. In short, it includes an individual’s physiological and physical safety needs.

Relatedness needs- These include the aspiration individual’s have for maintaining significant interpersonal relationships (be it with family, peers or superiors), getting public fame and recognition. Maslow’s social needs and external component of esteem needs fall under this class of need.

Growth needs- These include need for self-development and personal growth and advancement. Maslow’s self-actualization needs and intrinsic component of esteem needs fall under this category of need.

The significance of the three classes of needs may vary for each individual. Difference between Maslow Need Hierarchy Theory and Alderfer’s ERG Theory

ERG Theory states that at a given point of time, more than one need may be operational.

ERG Theory also shows that if the fulfillment of a higher-level need is subdued, there is an increase in desire for satisfying a lower-level need.

According to Maslow, an individual remains at a particular need level until that need is satisfied. While according to ERG theory, if a higher- level need aggravates, an individual may revert to increase the satisfaction of a lower- level need. This is called frustration- regression aspect of ERG theory. For instance- when growth need aggravates, then an individual might be motivated to accomplish the relatedness need and if there are issues in accomplishing relatedness needs, then he might be motivated by the existence needs. Thus, frustration/aggravation can result in regression to a lower-level need.

While Maslow’s need hierarchy theory is rigid as it assumes that the needs follow a specific and orderly hierarchy and unless a lower-level need is satisfied, an individual cannot proceed to the higher-level need; ERG Theory of motivation is very flexible as he perceived the needs as a range/variety rather than perceiving them as a hierarchy. According to Alderfer, an individual can work on growth needs even if his existence or relatedness needs remain unsatisfied. Thus, he gives explanation to the issue of ―starving artist‖ who can struggle for growth even if he is hungry.

Implications of the ERG Theory Managers must understand that an employee has various needs that must be satisfied at the same time. According to the ERG theory, if the manager concentrates solely on one need at a time, this will not effectively motivate the employee. Also, the frustration- regression aspect of ERG Theory has an added effect on workplace motivation. For instance- if an employee is not provided with growth and advancement opportunities in an organization, he might revert to the relatedness need such as socializing needs and to meet those socializing needs, if the environment or circumstances do not permit, he might revert to the need for money to fulfill those socializing needs. The sooner the manager realizes and discovers this, the more immediate steps they will take to fulfill those needs which are frustrated until such time that the employee can again pursue growth.

Existence Relatedeness Growth


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McClelland’s theory of Needs David McClelland and his associates proposed McClelland’s theory of Needs / Achievement Motivation Theory. This theory states that human behaviour is affected by three needs - Need for Power, Achievement and Affiliation. Need for achievement is the urge to excel, to accomplish in relation to a set of standards, to struggle to achieve success. Need for power is the desire to influence other individual’s behaviour as per your wish. In other words, it is the desire to have control over others and to be influential. Need for affiliation is a need for open and sociable interpersonal relationships. In other words, it is a desire for relationship based on co-operation and mutual understanding. The individuals with high achievement needs are highly motivated by competing and challenging work. They look for promotional opportunities in job. They have a strong urge for feedback on their achievement. Such individuals try to get satisfaction in performing things better. High achievement is directly related to high performance. Individuals who are better and above average performers are highly motivated. They assume responsibility for solving the problems at work. McClelland called such individuals as gamblers as they set challenging targets for themselves and they take deliberate risk to achieve those set targets. Such individuals look for innovative ways of performing job. They perceive achievement of goals as a reward, and value it more than a financial reward. The individuals who are motivated by power have a strong urge to be influential and controlling. They want that their views and ideas should dominate and thus, they want to lead. Such individuals are motivated by the need for reputation and self-esteem. Individuals with greater power and authority will perform better than those possessing less power. Generally, managers with high need for power turn out to be more efficient and successful managers. They are more determined and loyal to the organization they work for. Need for power should not always be taken negatively. It can be viewed as the need to have a positive effect on the organization and to support the organization in achieving it’s goals. The individuals who are motivated by affiliation have an urge for a friendly and supportive environment. Such individuals are effective performers in a team. These people want to be liked by others. The manager’s ability to make decisions is hampered if they have a high affiliation need as they prefer to be accepted and liked by others, and this weakens their objectivity. Individuals having high affiliation needs prefer working in an environment providing greater personal interaction. Such people have a need to be on the good books of all. They generally cannot be good leaders

Goal-setting theory of motivation In 1960’s, Edwin Locke put forward the Goal-setting theory of motivation. This theory states that goal setting is essentially linked to task performance. It states that specific and challenging goals along with appropriate feedback contribute to higher and better task performance. In simple words, goals indicate and give direction to an employee about what needs to be done and how much efforts are required to be put in. The important features of goal-setting theory are as follows:

The willingness to work towards attainment of goal is main source of job motivation. Clear, particular and difficult goals are greater motivating factors than easy, general and vague goals.

Specific and clear goals lead to greater output and better performance. Unambiguous, measurable and

clear goals accompanied by a deadline for completion avoids misunderstanding.

Goals should be realistic and challenging. This gives an individual a feeling of pride and triumph when he attains them, and sets him up for attainment of next goal. The more challenging the goal, the greater is the reward generally and the more is the passion for achieving it.

Better and appropriate feedback of results directs the employee behaviour and contributes to higher

performance than absence of feedback. Feedback is a means of gaining reputation, making clarifications and regulating goal difficulties. It helps employees to work with more involvement and leads to greater job satisfaction.

Employees’ participation in goal is not always desirable.

Participation of setting goal, however, makes goal more acceptable and leads to more involvement.

Goal setting theory has certain eventualities such as:

a. Self-efficiency- Self-efficiency is the individual’s self-confidence and faith that he has potential of

performing the task. Higher the level of self-efficiency, greater will be the efforts put in by the individual when they face challenging tasks. While, lower the level of self-efficiency, less will be the efforts put in by the individual or he might even quit while meeting challenges.

b. Goal commitment- Goal setting theory assumes that the individual is committed to the goal and will not leave the goal. The goal commitment is dependent on the following factors:

i. Goals are made open, known and broadcasted.


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ii. Goals should be set-self by individual rather than designated.

iii. Individual’s set goals should be consistent with the organizational goals and vision

Advantages of Goal Setting Theory

Goal setting theory is a technique used to raise incentives for employees to complete work quickly and effectively.

Goal setting leads to better performance by increasing motivation and efforts, but also through increasing

and improving the feedback quality. Limitations of Goal Setting Theory

At times, the organizational goals are in conflict with the managerial goals. Goal conflict has a detrimental effect on the performance if it motivates incompatible action drift.

Very difficult and complex goals stimulate riskier behaviour.

If the employee lacks skills and competencies to perform actions essential for goal, then the goal-setting

can fail and lead to undermining of performance.

There is no evidence to prove that goal-setting improves job satisfaction.

5.2 Leadership Leadership is a process by which an executive can direct, guide and influence the behavior and work of others towards accomplishment of specific goals in a given situation. Leadership is the ability of a manager to induce the subordinates to work with confidence and zeal. Leadership is the potential to influence behaviour of others. It is also defined as the capacity to influence a group towards the realization of a goal. Leaders are required to develop future visions, and to motivate the organizational members to want to achieve the visions. According to Keith Davis, ―Leadership is the ability to persuade others to seek defined objectives enthusiastically. It is the human factor which binds a group together and motivates it towards goals.‖ Characteristics of Leadership

1. It is a inter-personal process in which a manager is into influencing and guiding workers towards attainment of goals.

2. It denotes a few qualities to be present in a person which includes intelligence, maturity and personality. 3. It is a group process. It involves two or more people interacting with each other. 4. A leader is involved in shaping and moulding the behaviour of the group towards accomplishment of

organizational goals. 5. Leadership is situation bound. There is no best style of leadership. It all depends upon tackling with the

situations. 5.2.1 Importance of leadership Leadership is an important function of management which helps to maximize efficiency and to achieve organizational goals. The following points justify the importance of leadership in a concern.

1. Initiates action- Leader is a person who starts the work by communicating the policies and plans to the subordinates from where the work actually starts.

2. Motivation- A leader proves to be playing an incentive role in the concern’s working. He motivates the

employees with economic and non-economic rewards and thereby gets the work from the subordinates.

3. Providing guidance- A leader has to not only supervise but also play a guiding role for the subordinates. Guidance here means instructing the subordinates the way they have to perform their work effectively and efficiently.

4. Creating confidence- Confidence is an important factor which can be achieved through expressing the


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work efforts to the subordinates, explaining them clearly their role and giving them guidelines to achieve the goals effectively. It is also important to hear the employees with regards to their complaints and problems.

5. Building morale- Morale denotes willing co-operation of the employees towards their work and getting

them into confidence and winning their trust. A leader can be a morale booster by achieving full co-operation so that they perform with best of their abilities as they work to achieve goals.

6. Builds work environment- Management is getting things done from people. An efficient work environment

helps in sound and stable growth. Therefore, human relations should be kept into mind by a leader. He should have personal contacts with employees and should listen to their problems and solve them. He should treat employees on humanitarian terms.

7. Co-ordination- Co-ordination can be achieved through reconciling personal interests with organizational

goals. This synchronization can be achieved through proper and effective co-ordination which should be primary motive of a leader.

Roles of a leader in an organization Following are the main roles of a leader in an organization :

1. Required at all levels- Leadership is a function which is important at all levels of management. In the top level, it is important for getting co-operation in formulation of plans and policies. In the middle and lower level, it is required for interpretation and execution of plans and programmes framed by the top management. Leadership can be exercised through guidance and counseling of the subordinates at the time of execution of plans.

2. Representative of the organization- A leader, i.e., a manager is said to be the representative of the

enterprise. He has to represent the concern at seminars, conferences, general meetings, etc. His role is to communicate the rationale of the enterprise to outside public. He is also representative of the own department which he leads.

3. Integrates and reconciles the personal goals with organizational goals- A leader through leadership

traits helps in reconciling/ integrating the personal goals of the employees with the organizational goals. He is trying to co-ordinate the efforts of people towards a common purpose and thereby achieves objectives. This can be done only if he can influence and get willing co-operation and urge to accomplish the objectives.

4. He solicits support- A leader is a manager and besides that he is a person who entertains and invites

support and co- operation of subordinates. This he can do by his personality, intelligence, maturity and experience which can provide him positive result. In this regard, a leader has to invite suggestions and if possible implement them into plans and programmes of enterprise. This way, he can solicit full support of employees which results in willingness to work and thereby effectiveness in running of a concern.

5. As a friend, philosopher and guide- A leader must possess the three dimensional traits in him. He can

be a friend by sharing the feelings, opinions and desires with the employees. He can be a philosopher by utilizing his intelligence and experience and thereby guiding the employees as and when time requires. He can be a guide by supervising and communicating the employees the plans and policies of top management and secure their co-operation to achieve the goals of a concern. At times he can also play the role of a counselor by counseling and a problem-solving approach. He can listen to the problems of the employees and try to solve them.

5.2.2 Qualities of A leader A leader has got multidimensional traits in him which makes him appealing and effective in behavior. The following are the requisites to be present in a good leader: Physical appearance- A leader must have a pleasing appearance. Physique and health are very important for a good leader. Vision and foresight- A leader cannot maintain influence unless he exhibits that he is forward looking. He has to visualize situations and thereby has to frame logical programmes. Intelligence- A leader should be intelligent enough to examine problems and difficult situations. He should be analytical who weighs pros and cons and then summarizes the situation. Therefore, a positive bent of mind and mature outlook is very important. Communicative skills- A leader must be able to communicate the policies and procedures clearly, precisely and effectively. This can be helpful in persuasion and stimulation.


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Objective- A leader has to be having a fair outlook which is free from bias and which does not reflects his willingness towards a particular individual. He should develop his own opinion and should base his judgement on facts and logic. Knowledge of work- A leader should be very precisely knowing the nature of work of his subordinates because it is then he can win the trust and confidence of his subordinates. Sense of responsibility- Responsibility and accountability towards an individual’s work is very important to bring a sense of influence. A leader must have a sense of responsibility towards organizational goals because only then he can get maximum of capabilities exploited in a real sense. For this, he has to motivate himself and arouse and urge to give best of his abilities. Only then he can motivate the subordinates to the best. Self-confidence and will-power- Confidence in himself is important to earn the confidence of the subordinates. He should be trustworthy and should handle the situations with full will power. (You can read more about Self-Confidence at : Self Confidence - Tips to be Confident and Eliminate Your Apprehensions). Humanist-This trait to be present in a leader is essential because he deals with human beings and is in personal contact with them. He has to handle the personal problems of his subordinates with great care and attention. Therefore, treating the human beings on humanitarian grounds is essential for building a congenial environment. Empathy- It is an old adage ―Stepping into the shoes of others‖. This is very important because fair judgement and objectivity comes only then. A leader should understand the problems and complaints of employees and should also have a complete view of the needs and aspirations of the employees. This helps in improving human relations and personal contacts with the employees. From the above qualities present in a leader, one can understand the scope of leadership and it’s importance for scope of business. A leader cannot have all traits at one time. But a few of them helps in achieving effective results.

5.2.3 Leadership and Management

Leadership and management are the terms that are often considered synonymous. It is essential to understand that leadership is an essential part of effective management. As a crucial component of management, remarkable leadership behaviour stresses upon building an environment in which each and every employee develops and excels. Leadership is defined as the potential to influence and drive the group efforts towards the accomplishment of goals. This influence may originate from formal sources, such as that provided by acquisition of managerial position in an organization. A manager must have traits of a leader, i.e., he must possess leadership qualities. Leaders develop and begin strategies that build and sustain competitive advantage. Organizations require robust leadership and robust management for optimal organizational efficiency.

Differences between Leadership and Management Leadership differs from management in a sense that:

1. While managers lay down the structure and delegates authority and responsibility, leaders provides direction by developing the organizational vision and communicating it to the employees and inspiring them to achieve it.

2. While management includes focus on planning, organizing, staffing, directing and controlling; leadership is

mainly a part of directing function of management. Leaders focus on listening, building relationships, teamwork, inspiring, motivating and persuading the followers.

3. While a leader gets his authority from his followers, a manager gets his authority by virtue of his position in

the organization.

4. While managers follow the organization’s policies and procedure, the leaders follow their own instinct.

5. Management is more of science as the managers are exact, planned, standard, logical and more of mind. Leadership, on the other hand, is an art. In an organization, if the managers are required, then leaders are a must/essential.

6. While management deals with the technical dimension in an organization or the job content; leadership

deals with the people aspect in an organization.

7. While management measures/evaluates people by their name, past records, present performance; leadership sees and evaluates individuals as having potential for things that can’t be measured, i.e., it deals with future and the performance of people if their potential is fully extracted.

8. If management is reactive, leadership is proactive.


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9. Management is based more on written communication, while leadership is based more on verbal communication.

The organizations which are over managed and under-led do not perform upto the benchmark. Leadership accompanied by management sets a new direction and makes efficient use of resources to achieve it. Both leadership and management are essential for individual as well as organizational success.

Leaders versus Managers ―Leadership and managership are two synonymous terms‖ is an incorrect statement. Leadership doesn’t require any managerial position to act as a leader. On the other hand, a manager can be a true manager only if he has got the traits of leader in him. By virtue of his position, manager has to provide leadership to his group. A manager has to perform all five functions to achieve goals, i.e., Planning, Organizing, Staffing, Directing, and Controlling. Leadership is a part of these functions. Leadership as a general term is not related to managership. A person can be a leader by virtue of qualities in him. For example: leader of a club, class, welfare association, social organization, etc. Therefore, it is true to say that, ―All managers are leaders, but all leaders are not managers.‖ A leader is one who influences the behavior and work of others in group efforts towards achievement of specified goals in a given situation. On the other hand, manager can be a true manager only if he has got traits of leader in him. Manager at all levels are expected to be the leaders of work groups so that subordinates willingly carry instructions and accept their guidance. A person can be a leader by virtue of all qualities in him. Leaders and Managers can be compared on the following basis:

Basis Manager Leader

Origin A person becomes a manager by virtue of his position.

A person becomes a leader on basis of his personal qualities.

Formal Rights Manager has got formal rights in an organization because of his status. Rights are not available to a leader.

Followers The subordinates are the followers of managers.

The group of employees whom the leaders leads are his followers.

Functions A manager performs all five functions of management.

Leader influences people to work willingly for group objectives.

Necessity A manager is very essential to a concern. A leader is required to create cordial relation between person working in and for organization.

Stability It is more stable. Leadership is temporary.

Mutual Relationship All managers are leaders. All leaders are not managers.

Accountability Manager is accountable for self and subordinates behaviour and performance.

Leaders have no well defined accountability.

Concern A manager’s concern is organizational goals.

A leader’s concern is group goals and member’s satisfaction.

Followers People follow manager by virtue of job description. People follow them on voluntary basis.


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Role continuation

A manager can continue in office till he performs his duties satisfactorily in congruence with organizational goals.

A leader can maintain his position only through day to day wishes of followers.

Sanctions Manager has command over allocation and distribution of sanctions.

A leader has command over different sanctions and related task records. These sanctions are essentially of informal nature.

5.2.4 Leadership and motivation Motivation is a goal-oriented characteristic that helps a person achieve his objectives. It pushes an individual to work hard at achieving his or her goals. An executive must have the right leadership traits to influence motivation. However, there is no specific blueprint for motivation. As a leader, one should keep an open perspective on human nature. Knowing different needs of subordinates will certainly make the decision-making process easier. Both an employee as well as manager must possess leadership and motivational traits. An effective leader must have a thorough knowledge of motivational factors for others. He must understand the basic needs of employees, peers and his superiors. Leadership is used as a means of motivating others. Given below are important guidelines that outline the basic view of motivation:

Harmonize and match the subordinate needs with the organizational needs. As a leader, the executive must ensure that the business has the same morals and ethics that he seeks in his employees. He should make sure that his subordinates are encouraged and trained in a manner that meets the needs of the business.

Appreciation and rewards are key motivators that influence a person to achieve a desired goal. Rewarding

good/ exceptional behavior with a small token of appreciation, certificate or letter can be a great motivator. If a certificate is awarded to a person, it should mention the particular act or the quality for which the individual is being rewarded.

Being a role model is also a key motivator that influences people in reaching their goals. A leader should

set a good example to ensure his people to grow and achieve their goals effectively.

Encouraging individuals to get involved in planning and important issues resolution procedure not only motivates them, but also teaches the intricacies of these key decision-making factors. Moreover, it will help everyone to get better understanding of their role in the organization. The communication will be unambiguous and will certainly attract acknowledgement and appreciation from the leader.

Developing moral and team spirit certainly has a key impact on the well-being of an organization. The

metal or emotional state of a person constitutes his or her moral fabric. A leader’s actions and decisions affect the morale of his subordinates. Hence, he should always be aware of his decisions and activities. Team spirit is the soul of the organization. The leader should always make sure his subordinates enjoy performing their duties as a team and make themselves a part of the organization’s plans.

A leader should step into the shoes of the subordinates and view things from subordinate’s angle. He

should empathize with them during difficult times. Empathizing with their personal problems makes them stronger-mentally and emotionally.

A meaningful and challenging job accomplished inculcates a sense of achievement among employees.

The executive must make their employees feel they are performing an important work that is necessary for the organization’s well-being and success. This motivational aspect drives them to fulfill goals.

Remember, ―To become an efficient leader, you must be self-motivated‖. You must know your identity, your needs and you must have a strong urge to do anything to achieve your goals. Once you are self-motivated, only then you can motivate others to achieve their goals and to harmonize their personal goals with the common goals of the organization.

5.2.5 Organizational leadership

Organizations need strong leadership for optimum effectiveness. Leadership, as we know, is a trait which is both inbuilt and can be acquired also. Organizational leadership deals with both human psychology as well as expert


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tactics. Organizational leadership emphasizes on developing leadership skills and abilities that are relevant across the organizations. It means the potential of the individuals to face the hard times in the industry and still grow during those times. It clearly identifies and distinguishes the leaders from the managers. The leader should have potential to control the group of individuals. An ideal organizational leader should not dominate over others. He should guide the individuals under him, give them a sense of direction to achieve organizational goals successfully and should act responsibly. He should be optimistic for sure. He should be empathetic and should understand the need of the group members. An organizational leader should not only lead others individually but also manage the actions of the group.

Individuals who are highly ambitious, have high energy level, an urge to lead, self-confidence, intelligence, have thorough knowledge of job, are honest and flexible are more likely to succeed as organizational leaders. Individuals who learn the organizational leadership develop abilities and skills of teamwork, effective communication, conflict resolution, and group problem solving techniques. Organizational leaders clearly communicate organizational mission, vision and policies; build employees morale, ensure efficient business operations; help employees grow professionally and contribute positively towards organizations mission. Tips for Effective Organizational Leadership

1. A leader must lead himself, only then he can lead others. He must be committed on personal and professional front, and must be responsible. He must be a role model for others and set an example for them.

2. A leader must boost up the morale of the employees. He should motivate them well so that they are

committed to the organization. He should be well acquainted with them, have concern for them and encourage them to take initiatives. This will result in more efficient and effective employees and ensure organizational success.

3. A leader must work as a team. He should always support his team and respect them. He should not hurt

any employee. A true leader should not be too bossy and should not consider him as the supreme authority. He should realize that he is part of the organization as a whole.

Organizational leadership involves all the processes and possible results that lead to development and achievement of organizational goals. It includes employees’ involvement, genuineness, effective listening and strategic communication.

Leadership Ethics-Traits of an Ethical leader

Ethics refer to the desirable and appropriate values and morals according to an individual or the society at large. Ethics deal with the purity of individuals and their intentions. Ethics serve as guidelines for analyzing ―what is good or bad‖ in a specific scenario. Correlating ethics with leadership, we find that ethics is all about the leader’s identity and the leader’s role. Ethical theories on leadership talk about two main things: (a) The actions and behaviour of leaders; and (b) the personality and character of leaders. It is essential to note that ―Ethics are an essential to leadership‖. A leader drives and influences the subordinates / followers to achieve a common goal, be it in case of team work, organizational quest, or any project. It is an ethical job of the leader to treat his subordinates with respect as each of them has unique personality. The ethical environment in an organization is built and developed by a leader as they have an influential role in the organization and due to the fact that leaders have an influence in developing the organizational values. An effective and ethical leader has the following traits / characteristics: Dignity and respectfulness: He respects others. An ethical leader should not use his followers as a medium to achieve his personal goals. He should respect their feelings, decision and values. Respecting the followers implies listening effectively to them, being compassionate to them, as well as being liberal in hearing opposing viewpoints. In short, it implies treating the followers in a manner that authenticate their values and beliefs. Serving others: He serves others. An ethical leader should place his follower’s interests ahead of his interests. He should be humane. He must act in a manner that is always fruitful for his followers. Justice: He is fair and just. An ethical leader must treat all his followers equally. There should be no personal bias. Wherever some followers are treated differently, the ground for differential treatment should be fair, clear, and built on morality. Community building: He develops community. An ethical leader considers his own purpose as well as his followers’ purpose, while making efforts to achieve the goals suitable to both of them. He is considerate to the community interests. He does not overlook the followers’ intentions. He works harder for the community goals. Honesty: He is loyal and honest. Honesty is essential to be an ethical and effective leader. Honest leaders can be


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always relied upon and depended upon. They always earn respect of their followers. An honest leader presents the fact and circumstances truly and completely, no matter how critical and harmful the fact may be. He does not misrepresent any fact. It is essential to note that leadership is all about values, and it is impossible to be a leader if you lack the awareness and concern for your own personal values. Leadership has a moral and ethical aspect. These ethics define leadership. Leaders can use the above mentioned traits as yardsticks for influencing their own behaviour. 5.2.6 Leadership strategy / style Without an effective leadership strategy, it is believed, that the organizational strategies do not work. Best players in a team do not guarantee success without a great coach, similarly, work teams may not function effectively if leaders do not follow an appropriate leadership strategy. To understand leadership styles here are three scenarios - Scenario 1 - A Teacher gives a question to the class full of students, however, solves it for them; Scenario 2 - A Teacher gives the question to the students and observes how students solve them; Scenario 3 - A Teacher gives a question to the students and moves around the class, observes the students, and helps wherever required. Scenario 1 was ―Leading from the Front‖, Scenario 2 was ―Supportive Leadership Style‖, and Scenario 3 was ―Interactive Leadership Style‖. Besides this the leadership styles / strategies could be based on personality traits like Directive Leadership, Structured Leadership, Intuitive Leadership, or Process Driven leadership. Here are some tips while selecting leadership strategy / style:

1. A leader must be aware of his / her personality traits and those of his team members / followers to understand which leadership style will be most effective.

2. A leader may not adopt a consistent leadership all through his / her career. Situational Leadership helps

addressing varied needs / expectations of the followers as he the leader adopts a strategy based on a situation he / she is in. In case a leader has a self-reliant team, he needs to be using a directive leadership style or lead form the front. He could instead delegate and provide inputs where necessary.

3. A common mistake especially a lot of new leaders make is to copy established / well know leaders.

Remember, each situation is unique and so are the followers. A leadership style which may be suited to a well known leader may not be appropriate for your team. Make no mistake here - do not try and imitate other leaders.

4. A leader will never be afraid of trying new approach to solve a work problem or address a conflicting

situation. It is quite a possibility that a leader adopts a style that is not by the book.

5. A leader must keep enhancing his / her leadership skills. While on the job experience matters a lot, getting enrolled into leadership courses after detailed evaluation of the program and feedback of the participants will help implementing a leadership style more effectively.

It is often said that good leaders are born and not made; however, good leaders are those who are aware of their personality traits and also of their followers. They know which leadership style is to be adopted in a particular situation. Once this is done, there is a little challenge left for a leader to become a ―good / great‖ leader. All leaders do not possess same attitude or same perspective. As discussed earlier, few leaders adopt the carrot approach and a few adopt the stick approach. Thus, all of the leaders do not get the things done in the same manner. Their style varies. The leadership style varies with the kind of people the leader interacts and deals with. A perfect/standard leadership style is one which assists a leader in getting the best out of the people who follow him. Some of the important leadership styles are as follows:

Autocratic leadership style: In this style of leadership, a leader has complete command and hold over their employees/team. The team cannot put forward their views even if they are best for the team’s or organizational interests. They cannot criticize or question the leader’s way of getting things done. The leader himself gets the things done. The advantage of this style is that it leads to speedy decision-making and greater productivity under leader’s supervision. Drawbacks of this leadership style are that it leads to greater employee absenteeism and turnover. This leadership style works only when the leader is the best in performing or when the job is monotonous, unskilled and routine in nature or where the project is short-term and risky.

The Laissez Faire Leadership Style: Here, the leader totally trusts their employees/team to perform the job themselves. He just concentrates on the intellectual/rational aspect of his work and does not focus on the management aspect of his work. The team/employees are welcomed to share their views and provide suggestions which are best for organizational interests. This leadership style works only when the employees are skilled, loyal, experienced and intellectual. Democrative/Participative leadership style: The leaders invite and encourage the team members to play an


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important role in decision-making process, though the ultimate decision-making power rests with the leader. The leader guides the employees on what to perform and how to perform, while the employees communicate to the leader their experience and the suggestions if any. The advantages of this leadership style are that it leads to satisfied, motivated and more skilled employees. It leads to an optimistic work environment and also encourages creativity. This leadership style has the only drawback that it is time-consuming. Bureaucratic leadership: Here the leaders strictly adhere to the organizational rules and policies. Also, they make sure that the employees/team also strictly follows the rules and procedures. Promotions take place on the basis of employees’ ability to adhere to organizational rules. This leadership style gradually develops over time. This leadership style is more suitable when safe work conditions and quality are required. But this leadership style discourages creativity and does not make employees self-contented.


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Chapter 6 Industrial Safety Management

6.1 Industrial Accidents Industrial accidents are usually pursued under worker’s compensation laws. However, in the case that industrial accidents result from defectively designed or manufactured equipment, or negligence of someone besides the employer, industrial accidents can be sometimes cause a personal injury action. There are a number of factors in industrial accidents that influence what legal recourse the victims of an industrial accident may take. Individuals who have been involved in an industrial accident must prove that their injury was caused by negligence or illegal action. Additionally, because industrial accidents are considered actionable under worker’s compensation, they cannot be the fault of the employer if the industrial accident is being pursued through a personal injury lawsuit. (The specific laws and regulations governing industrial accidents can vary widely from state to state.) Injuries resulting from industrial accidents can range in severity from slight to lethal. The cause of an industrial accident can include malfunctioning equipment, explosions, electrocution, falls, etc. Contributing factors to industrial accidents include workers’ negligence, poor safety standards, and fatigue. Depending upon the cause and severity of the industrial accident, recovery can be swift, or a long process. Those persons who have been injured in an industrial accident may never return to their full capacity, affecting their physical and psychological health. Victims of industrial accidents may also suffer long-term financial losses due to their inability to work. If you were in an industrial accident and suspect that the fault lies with someone other than your employer, the industrial accident may qualify for a personal injury lawsuit. Personal injury suits concerning industrial accidents can recover financial losses, pay for medical care, and compensate victims for other resulting damages. Industrial accident law can be complicated, and regulations may vary by state. An attorney familiar with industrial accident law in your state may be able to help you make key decisions regarding your case.

6.1.1 Causes of Industrial Accidents

There are a just as many causes of industrial accidents as there are types of industrial accidents. The broad category of industrial accidents covers anything from small cuts and bruises to huge disasters that affect a large population of people. Approximately 120 million industrial accidents occur in the work place worldwide each year. Approximately 210,000 of these accidents result in fatality. The industries which have the highest rate of accidents are the mining, construction, transportation, and agricultural industries. Construction accidents account for fifteen percent of all accidents and thirty percent of all fatalities in industrial work environments. Causes of industrial accidents can be broken down into two broad categories: unsafe conditions and unsafe acts. The causes of industrial accidents that pertain to unsafe conditions can include insufficient workspace lighting, excessive noise, slippery or unsafe flooring, extreme temperature exposure, inadequate protection when working with machinery or hazardous materials, unstable structures, electrical problems, machine malfunction or failure, and more. The causes of industrial accidents that involve unsafe acts can include actions or failures to act which result in injury. This can be a result of employee negligence but employers, organizations, and product manufacturers can also be liable for the causes of industrial accidents. The causes of industrial accidents can occur in the environment around the workplace or within the work environment. External causes of industrial accidents may include fires, chemical spills, toxic gas emission or radiation. The causes of industrial accidents in these cases might include organizational errors, human factors, abnormal operational conditions, natural forces, software or component failures, and outside interference. Internal causes of industrial accidents can involve equipment or other work related tangibles, harmful materials, toxic chemicals, and human error. There are several ways that a worker can be injured in the work environment. Injuries that result from the causes of industrial accidents can include any one or combination of the following occurrences:

falls, being struck by objects in motion, slides and cave ins, structure collapse, being trapped in or by an object, overexertion or strenuous physical actions, exposure to temperature extremes, electrical accidents, radiation exposure, and the inhalation, Ingestion or absorption of harmful substances.


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These industrial accidents can result in a number of injuries including superficial injury, fractures, sprains and strains, amputation, concussion, internal injury, poisoning, infection, and death. The causes of industrial accidents are numerous. There are several cases where employee negligence is a factor in industrial accidents. As a general rule, worker’s compensation laws protect employers from lawsuits brought by injured employees. There are cases where an employer can be held liable for worker injuries if they had knowledge of unsafe conditions and failed to act in order to prevent injury. Injured workers may also be able to seek compensation for their injuries from the makers of faulty or dangerous industrial products. Victims of industrial accidents greatly benefit from consulting a personal injury lawyer who can advise them of their rights and options in a case.

6.1.2 Industrial Accident Prevention

Industrial accidents refer to any accident that occurs on an industrial site. Causes can range from workers'' negligence or fatigue to faulty machinery, improper supervision of the work site, inadequate safety precautions and unknown safety hazards. When industrial accidents are the result of workers'' negligence or fatigue, the injured party can seek workers'' compensation - a portion of pay to compensate for disability and medical expenses due to the accident. When a third party - such as a site supervisor or equipment manufacturer - is responsible for inadequate safety training, enforcement of safety regulations or design and production of faulty products, the injured party may be entitled to additional damages gained through an industrial accident lawsuit. In most cases, industrial accident prevention revolves around the safety of the industrial site. On construction sites, for example, contractors are required to inspect the site with safety engineers and to warn employees of possible danger zones. Workers, in turn, must comply with the safety requirements set forth by their supervisors in order to maximize industrial accident prevention. If contractors or subcontractors fail to enforce safety rules or take safety precautions on their industrial site, they can be held liable in a third party suit. If workers'' negligence is to blame, the injured party is only entitled to workers'' compensation. Industrial accident prevention also lies on the shoulders of the manufacturing companies of equipment frequently used on industrial sites. Such equipment consists of, but is not limited to: scaffolding (many industrial accidents are caused by falls from heights or faulty scaffolds), motorized vehicles (tractors, forklifts), gas pressure machinery, electricity conductors and heavy machinery. Industrial accident prevention obligates equipment and machinery manufacturers to design, produce and maintain properly functioning products. When industrial accident prevention fails and an incident occurs, it is imperative to determine the negligent party in order to reach a fair settlement. A personal injury lawyer can help ascertain responsibility in an industrial accident case. Industrial accidents refer to a broad range of accidents that occur on any type of industrial site. Examples of industrial accidents include machinery failure, crane accidents, pressurized vessel failure, pipe explosions and equipment malfunctions. Victims of industrial accidents usually seek workers'' compensation through their industrial accident reports. By law, workers'' compensation entitles an injured worker to receive a portion of his salary to compensate for medical expenses and disability based on the claims set forth in the industrial accident report. In industrial accidents, third party negligence may be just cause for additional damages to be sought by the injured party. In such cases, personal injury lawyers investigate industrial accident reports to ascertain the responsible party, whether it''s a manufacturer of industrial equipment, a land or property owner, architect, contractor or subcontractor. While workers'' compensation laws prohibit employees from suing their employers over an on-the-job accident, they can seek damages from a third party. Immediate filing of an industrial accident report is crucial to the case and the settlement of any damages caused by the accident. Employers want to file industrial accident reports as soon as possible to cut the costs of lost time. Workers'' compensation agencies will pay close attention to industrial accident reports filed in a delinquent manner because they can result in larger than necessary settlements due to greater periods of disability than normal for an injury; higher medical costs; disputes over causation, treatment and return to work; and higher rates of attorney involvement and litigation. In fact, the International Association of Industrial Accident Boards and Commissions reports that prompt filing of industrial accident reports reduces the frequency of litigations in industrial accident cases. The organization reports that 22 percent of claims reported within 10 days of the injury resulted in lawsuits; this number jumped to 47 percent when industrial accident reports were filed more than 31 days from the injury.


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6.2 The Industrial Acts 6.2.1 Factories Act, 1948 According to the Factories Act,1948, a 'factory' means "any premises including the precincts thereof - (i) whereon ten or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on with the aid of power, or is ordinarily so carried on, or (ii) whereon twenty or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power, or is ordinarily so carried on; but this does not include a mine subject to the operation of the Mines Act, 1952 , or a mobile unit belonging to the armed forces of the union, a railway running shed or a hotel, restaurant or eating place." The Act is administered by the Ministry of Labour and Employment through its Directorate General Factory Advice Service & Labour Institutes (DGFASLI) and by the State Governments through their factory inspectorates. DGFASLI was set up with the objective of advising the Central and State Governments on administration of the Factories Act and coordinating the factory inspection services in the States. It serves as a technical arm to assist the Ministry in formulating national policies on occupational safety and health in factories and docks. It also advises factories on various problems concerning safety, health, efficiency and well-being of the persons at work places. The organisational set up of DGFASLI is:- * Its headquarters in Mumbai - maintains overall liaison with its Central and Regional Labour Institutes, frames policy, plans and executes the programs concerning the organization on matters pertaining to safety, health and welfare of workers in industries and docks. The headquarters consists of the following divisions:-

1. Factory Advice Service

2. Docks Safety

3. Construction Safety

4. Awards

5. MIS Division * Central Labour Institute (CLI) in Mumbai - is a centre for research, training and consultancy on the various aspects of industrial work related to the human factor. The activities of the institute are geared to improve work methods and working conditions so as to enhance the safety, health and productivity of the industrial workers and in general, his/ her quality of work life. The divisions/ cells of the Institute consists of the following:-

1. Industrial Safety

2. Industrial Hygiene

3. Industrial Medicine

4. Industrial Physiology

5. Staff Training

6. Industrial Psychology

7. Productivity

8. Major Accident Hazards Control

9. Communication * The four Regional Labour Institutes (RLIs) are:-

1. Regional Labour Institute, Chennai

2. Regional Labour Institute, Kanpur

3. Regional Labour Institute, Kolkata

4. Regional Labour Institute, Faridabad The important provisions of the Act are as follows:-

No adult worker shall be required or allowed to work in a factory:- (i) for more than forty-eight hours in any week; and/ or (ii) for more than nine hours in any day.


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Where a worker works in a factory for more than nine hours in any day or for more than forty-eight hours in any week, he shall, in respect of overtime work, be entitled to wages at the rate of twice his ordinary rate of wages. The 'ordinary rate of wages' means the basic wages plus such allowances, including the cash equivalent of the advantage accruing through the concessional sale to workers of foodgrains and other articles, as the worker is for the time being entitled to, but does not include a bonus and wages for overtime work.

Where a worker is deprived of any of the weekly holidays, he shall be allowed, within the month in which

the holidays were due to him or within the two months immediately following that month, compensatory holidays of equal number to the holidays so lost.

The periods of work of adult workers in a factory each day shall be so fixed that no period shall exceed five

hours and that no worker shall work for more than five hours before he has had an interval for rest of at least half an hour.

Every worker who has worked for a period of 240 days or more in a factory during a calendar year shall be

allowed during the subsequent calendar year, leave with wages for a number of days calculated at the rate of - (i) if an adult, one day for every twenty days of work performed by him during the previous calendar year; (ii) if a child, one day for every fifteen days of work formed by him during the previous calendar year. In the case of a female worker, maternity leave for any number of days not exceeding twelve weeks.

* In order to safeguard the health of the workers:-

Every factory shall be kept clean and free from effluvia arising from any drain, privy or other nuisance and in particular accumulations of dirt.

Effective arrangements shall be made in every factory for the treatment of wastes and effluents due to the

manufacturing process carried on therein, so as to render them innocuous and for their disposal.

Effective and suitable provision shall be made in every factory for securing and maintaining in every workroom adequate ventilation by the circulation of fresh air; and such a temperature that will secure to workers reasonable conditions of comfort and prevent injury to health.

No room in any factory shall be overcrowded to an extent injurious to the health of the workers employed

therein.

Every part of a factory, where workers are working or passing, shall be provided with sufficient and suitable lighting, natural or artificial, or both.

In every factory effective arrangements shall be made to provide, at suitable points conveniently situated

for all workers employed therein, a sufficient supply of wholesome drinking water. * In order to ensure safety of the workers:-

Every dangerous part of any machinery shall be securely fenced and constantly maintained to keep it in position.

No young person shall be required or allowed to work at any dangerous machine unless he has been fully

instructed as to the dangers arising from it and the precautions to be observed as well as has received sufficient training in work at the machine.

No woman or child shall be employed in any part of a factory for pressing cotton in which a cotton-opener

is at work (subject to the given conditions).

In every factory every hoist and lift shall be - (i) of good mechanical construction, sound material and adequate strength; (ii) properly maintained, and thoroughly examined by a competent person at least once in every period of six months.

No person shall be required or allowed to enter any chamber, tank, vat, pit, pipe, flue or other confined

space in any factory in which any gas, fume, vapour or dust is likely to be present to such an extent as to involve risk to the workers, unless it is provided with a manhole of adequate size or other effective means of egress.

* Certain facilities to be provided to the workers:-

Every factory shall provide and maintain readily accessible first-aid boxes or cupboards equipped with the prescribed contents, and the number of such boxes or cupboards shall not be less than one for every one hundred and fifty workers ordinarily employed at any one time in the factory.

In any factory wherein more than two hundred and fifty workers are ordinarily employed, a canteen or

canteens shall be provided and maintained by the occupier for the use of the workers.


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In every factory wherein more than one hundred and fifty workers are ordinarily employed, adequate and suitable shelters, rest rooms and lunch room, with provision for drinking water, where workers can eat meals brought by them, shall be provided and maintained for the use of the workers.

In every factory wherein more than thirty women workers are ordinarily employed, there shall be a suitable

room or rooms for the use of children under the age of six years of such women. Such rooms shall provide adequate accommodation, lighting and ventilation with clean and sanitary condition.

6.2.2 Industrial Disputes Act-1947 Industrial disputes are the disputes which arise due to any disagreement in an industrial relation. The term 'industrial relation' involves various aspects of interactions between the employer and the employees; among the employees as well as between the employers. In such relations whenever there is a clash of interest, it may result in dissatisfaction for either of the parties involved and hence lead to industrial disputes or conflicts. These disputes may take various forms such as protests, strikes, demonstrations, lock-outs, retrenchment, dismissal of workers, etc.

Some of the important causes of an industrial dispute are:- Demand for higher wages and allowances. Demand for payment of bonus and determination of its rate thereof. Demand for higher social security benefits. Demand for good and safer working conditions, including length of a working day, the interval and

frequency of leisure and physical work environment. Demand for improved labour welfare and other benefits. For example, adequate canteen, rest, recreation

and accommodation facility, arrangements for travel to and from distant places, etc. Besides, poor personnel management; conflicting legislative measure or government policies; and

psychological factors such as denial of opportunity to the worker for satisfying his/ her basic urge for self-expression, personal achievement and betterment may also result in labour problems.

In India, the Industrial Disputes Act, 1947 is the main legislation for investigation and settlement of all industrial disputes. The Act enumerates the contingencies when a strike or lock-out can be lawfully resorted to, when they can be declared illegal or unlawful, conditions for laying off, retrenching, discharging or dismissing a workman, circumstances under which an industrial unit can be closed down and several other matters related to industrial employees and employers. The Act is administered by the Ministry of Labour through its Industrial Relations Division. The Division is concerned with improving the institutional framework for dispute settlement and amending labour laws relating to industrial relations. It works in close co-ordination with the Central Industrial Relations Machinery (CIRM) in an effort to ensure that the country gets a stable, dignified and efficient workforce, free from exploitation and capable of generating higher levels of output. The CIRM, which is an attached office of the Ministry of Labour, is also known as the Chief Labour Commissioner (Central) [CLC(C)] Organisation. The CIRM is headed by the Chief Labour Commissioner (Central). It has been entrusted with the task of maintaining industrial relations, enforcement of labour laws and verification of trade union membership in central sphere. It ensures harmonious industrial relations through:-

Monitoring of industrial relations in Central Sphere; Intervention, mediation and conciliation in industrial disputes in order to bring about settlement of disputes; Intervention in situations of threatened strikes and lockouts with a view to avert the strikes and lockouts; Implementation of settlements and awards.

According to the Act, the term 'industrial dispute' means "any dispute or difference between employers and employers, or between employers and workmen, or between workmen and workmen, which is connected with the employment or non-employment, or the terms of employment or with the conditions of labour, of any person". The basic objectives of the Act are:-

To provide a suitable machinery for the just, equitable and peaceful settlement of industrial disputes. To promote measures for securing and preserving amity and good relations between employers and

employees. To prevent illegal strikes and lockouts. To provide relief to workers against layoffs, retrenchment, wrongful dismissal and victimisation. To promote collective bargaining. To ameliorate the conditions of workers. To avoid unfair labour practices.

Under the Act, statutory machinery has been constituted for conciliation and adjudication of industrial disputes. It includes:-

The Act provides for appointment of 'Conciliation Officers', by appropriate Government, charged with the duty of mediating in and promoting the settlement of industrial disputes. He/ she may be appointed for a specified area, or for specified industries in a specified area, or for one or more specified industries, either permanently or for a limited period. It is the duty of these officers to bring both the employees and


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employers together and help them to resolve their differences. If the dispute is settled, he/ she shall send a report, to that effect, to the appropriate Government.

The appropriate Government may, as occasion arises, constitute a 'Board of Conciliation', which shall

consist of a chairman and two or four other members, as the appropriate Government thinks fit. The Chairman shall be an independent person and the other members shall be persons appointed in equal numbers to represent the parties to the dispute. Where a dispute has been referred to a Board, it shall, without delay, investigate the dispute and do all such things as it thinks fit for the purpose of inducing the parties to come to a fair and amicable settlement of the dispute.

The appropriate Government may, as occasion arises, also constitute a 'Court of Inquiry' to inquire into any

matter appearing to be connected with or relevant to an industrial dispute. It shall, thereafter, report about it to the Government ordinarily within a period of six months from the commencement of its inquiry. Such a court may consist of one independent person or of such number of independent persons as the appropriate Government may think fit and where it consists of two or more members, one of them shall be appointed as the chairman.

The appropriate Government may constitute one or more 'Labour Courts' to adjudicate industrial disputes

relating to any matter specified in the second schedule like issues related to standing orders, discharge or dismissal of workers, illegality or otherwise of strikes and lockouts, withdrawal of any customary benefit, etc. and to perform such other functions as may be assigned to them under the Act. A labour court shall consist of one person only to be appointed by the appropriate Government.

The appropriate Government may constitute one or more 'Industrial Tribunals' to adjudicate industrial

disputes relating to any matter, whether specified in the second schedule or third schedule, and to perform such other functions as may be assigned to them under the Act. A tribunal shall consist of one person only to be appointed by the appropriate Government. The third schedule covers the matters such as wages, bonus, allowances and certain other benefits, certain working conditions, discipline, rationalisation, retrenchment and closure of establishment.

The Central Government may, by notification in the Official Gazette, constitute one or more 'National

Industrial Tribunals' to adjudicate an industrial dispute which, in the opinion of the Central Government, involve questions of national importance or are of such a nature that industrial establishments situated in more than one State are likely to be interested in, or affected by, such disputes. Such a tribunal shall consist of one person only to be appointed by the Central Government.

The Act also makes it obligatory for an employer to set up a 'Grievance Settlement Authority (GSA)' in an

industrial establishment in which fifty or more workers have been employed in the preceding twelve months. This authority shall have the responsibility to settle industrial disputes concerning an individual worker employed in that establishment.

No reference can be made under the Act to Conciliation Boards, Labour Courts or Industrial Tribunals, unless the dispute has first been the subject of a decision of a Grievance Settlement Authority. Under the Industrial Disputes Act, 1947, the Central Government is the appropriate Government for investigation and settlement of industrial disputes in regard to the departmental undertakings of the Central Government, major ports, mines, oil fields, cantonment boards, banking and Insurance Companies, Life Insurance Corporation of India (LIC), Industrial Finance Corporation of India Limited, the Oil and Natural Gas Corporation Limited, the Indian Airlines, Air India, the Airport Authority of India and all air transport services. While in relation to other industrial establishments, the State Government is the appropriate Government.

6.2.3 AUTHORITIES UNDER THE INDUSTRIAL DISPUTES ACT, 1947 A. Works Committee. (1) in the case of any industrial establishment in which one hundred or more workmen are employed or have been employed on any day in the preceding twelve months, the appropriate Government may by general or special order require the employer to constitute in the prescribed manner a Work Committee consisting of representative of employer and workmen engaged in the establishment, so however that the number of representatives of workmen on the Committee shall not be less than the number of representatives of the employer. The representatives of the workmen engaged in the establishment and in consultation with their trade union if any, registered under the Indian Trade Unions Act, 1927 (16 of 1927). (2) It Shall be the duty of the Works Committee to promote measure, for securing and preserving amenity and good relations between the employer and workmen and, to that end, to comment upon matters of their common interest or concern and, endeavour to compose any material difference of opinion in respect of such matters.


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B. Conciliation Officers. (1) The appropriate Government may, by notification in the Official Gazette, appoint such number of persons as it think fit, to be Conciliation Officers, charged with the duty of mediating in and promoting the settlement of industrial disputes. (2) A Conciliation Officer may be appointed for a specified area or for specified industries in a specified area or for one or more specified industries and either permanently or for a limited period. C. Board o Conciliations (1) The appropriate Government may as occasion arises, by notification in the Official Gazette, constitute a Board of Conciliation for promoting the settlement of any industrial dispute. (2) A Board shall consist of a Chairman and two or four other members, as the appropriate Government thinks fit. (3) The Chairman shall be an independent person and the other members shall be persons appointed in equal numbers to represent the parties to the dispute and any person appointed to represent a party shall be appointed on the recommendation of the party: Provided that if the appropriate Government notifies the Board that the services of the Chairman or of any other member have ceased to be available, the Board shall not act until a new Chairman or member, as the case may be, has been appointed. D. Court of inquiry (1) The appropriate Government may as occasion arises by notification in the Official Gazette, constitute a Court of inquiry for inquiring into any matter appearing to be connected with or relevant to an industrial dispute. (2) A Court may consist of one independent person or of such number of independent persons as the appropriate Government may think fit and where a Court consist of two or more members, one of them shall be appointed as the Chairman. (3) A Court, having the prescribed quorum, may act, notwithstanding the absence of the chairman or any of its members of any vacancy in its number: Provided that, if the appropriate Government notifies the Court that the service of the Chairman has ceased to be available, the Court shall not act until a new Chairman has been appointed. E. Labour Courts (1) The appropriate Government may, by notification in the Official Gazette, constitute one or more Labour Courts for the adjudication of industrial disputes relating to any matters specified in the Second Schedule and for performing such other functions as the case may be assigned to them under this Act. (2) A labour Court shall consist of one person only to be appointed by the appropriate Government. (3) A person shall not be qualified for appointment as the Presiding Officer of a Labour Court, unless -

(a) he is, or has been, a Judge of a High Court : or (b) he has, for a period of not less than three years, been a District Judge or an Additional District Judge ; or (c) [omitted by Act 46 of 1982 S. 3] (d) he has held any judicial office in India for not less than seven years; or (e) he has been the Presiding Officer of a labour Court constituted under any Provincial Act or State Act for

not less than five years. F-A. Tribunals (1) The appropriate Government may, by notification in the Official Gazette, constitute one or more Industrial Tribunals for the adjudication of industrial disputes relating to any matter, whether specified in the Second Schedule or the Third Schedule 1[and for performing such other functions as may be specified to them under this Act.] (2) A Tribunal shall consist of one person only to be appointed by the appropriate Government. (3) A person shall not be less qualified for appointment as the presiding Officer of a Tribunal unless - (a) he is, or has been, Judge of a High Court ; or (aa) he has, for a period of not less than three years, been a District Judge or an Additional District Judge; 2[* *]. (b) [omitted by Act 46 of 1982 S. 4]. (4) The appropriate Government may, if it so thinks fit, appoint two persons at assessors, to advise the Tribunal in proceeding before it. F-B National Tribunals (1) The Central Government may, by notification in the Official Gazette, constitute one or more National Industrial Tribunals for the adjudication of industrial disputes which, in the opinion of the Central Government, involve


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questions of national importance or are of such a nature that industrial establishments situated in more than one State are likely to be interested in, or affected by such disputes. (2) A National Tribunal shall consist of one person only to be appointed by the Central Government. (3) A person shall not be qualified for appointment as the presiding Officer of a National Tribunals unless 3[he is or has been a Judge of a High Court.]. 7(4) The Central Government may, if it so thinks fit, appoint two persons as assessors to advise the National Tribunals in the proceeding before it. F-C Disqualifications for the Presiding Officer of Labour Courts, Tribunals and National Tribunals. - No person shall be appointed to, or continue in, the office of the presiding officer of a Labour Court, Tribunal or National Tribunal, if- (a) he is not an independent person; or (b) he has attained the age of sixty five years. G. Filling of vacancies - if, for any reason a vacancy (other than a temporary absence) occurs in the office of the Presiding officer of a Labour Court, Tribunal or National Tribunal or in the office of the Chairman or any other member of a Board or Court, then in the case of a National Tribunal, the Central Government, and in any other case, the appropriate Government, shall appoint another person in accordance with the provisions of this Act to fill the vacancy, and the preceding may be continued before the Labour Court, Tribunal, National Tribunal, Board or Court, as the case may be, from the stage at which the vacancy is filled. H. Finality of orders constituting Boards, etc. (1) No order of the appropriate Government or the Central Government appointing any person as the Chairman or any other member of a Board or Court or as the presiding officer of a Labour Court Tribunal or National Tribunal shall be called in question in any manner ; and no act or proceeding before any Board or Court shall be called in question in any manner on the ground merely of the existence of any vacancy in, or defect in the constitution of, such Board or Court. (2) No settlement arrived at in the course of conciliation proceeding shall be invalid by reason only of the fact that such settlement was arrived at after the expiry of the period referred to in sub-section (6) of section 12 or sub-section (5) of section 13, as the case may be. (3) Where the report of any settlement arrived in the course of conciliation before a Board is signed by the Chairman and all the other members of the Board, on such settlement shall be invalid by reason only the causal or unforeseen absence of any of the members (including the Chairman) of the Board, during any stage the proceeding.

6.2.4 Employees' State Insurance Act, 1948

The Employees' State Insurance Act, 1948 (ESI Act) provides for health care and cash benefit payments in the case of sickness, maternity and employment injury. The Act applies to all non-seasonal factories run with power and employing 10 or more persons and to those factories which run without power and employing 20 or more persons. The appropriate Government may after notification in the Official Gazette, extend the provision of the Act to any other establishment or class of establishments, industrial, commercial, agriculture or otherwise. Under the Act, cash benefits are administered by the Central Government through the Employees State Insurance Corporation (ESIC), whereas the State Governments and Union Territory Administrations are administering medical care. The Employees' State Insurance Corporation (ESIC) is the premier social security organization in the country. It is the highest policy making and decision taking authority under the ESI Act and oversees the functioning of the ESI Scheme under the Act. The corporation comprises members representing Central and State Governments, employers, employees, Parliament and the medical profession. Union Minister of Labour functions as the Chairman of the Corporation. A Standing Committee constituted from among the members of the Corporation acts as the Executive Body for the administration of the Scheme.

The basic provisions of the Act are :-

Every factory or establishment to which this Act applies shall be registered within such time and in such manner as may be specified in the regulations made in this behalf.

It provided for an integrated need based social insurance scheme that would protect the interest of workers

in contingencies such as sickness, maternity, temporary or permanent physical disablement, death due to employment injury resulting in loss of wages or earning capacity.

It also provided for six social security benefits:-


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http://business.gov.in/outerwin.php?id=http://esic.nic.in/esi_schemes.htm

http://business.gov.in/outerwin.php?id=http://esic.nic.in/esi_schemes.htm

http://business.gov.in/outerwin.php?id=http://esic.nic.in/administration_scommittee.htm

http://business.gov.in/outerwin.php?id=http://esic.nic.in/registration.htm

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1. Medical Benefit

2. Sickness Benefit (SB)

3. Maternity Benefit (MB)

4. Disablement Benefit

5. Dependants' Benefit(DB)

6. Funeral Expenses

The Central Government may, by notification in the Official Gazette, establish a Corporation to be known as the 'Employees' State Insurance Corporation' for the administration of the scheme of Employees' State Insurance in accordance with the provisions of the Act.

The Corporation may, in addition to the scheme of benefits specified in this Act, promote measures for the

improvement of the health and welfare of insured persons and for the rehabilitation and re-employment of insured persons who have been disabled or injured and may incur in respect of such measures expenditure from the funds of the Corporation within such limits as may be prescribed by the Central Government.

The contribution payable under this Act in respect of an employee shall comprise contribution payable by

the employer and contribution payable by the employee and shall be paid to the Corporation. The contributions shall be paid at such rates as may be prescribed by the Central Government.

All contributions paid under this act and all other moneys received on behalf of the Corporation shall be

paid into a fund called the 'Employees' State Insurance Fund' which shall be held and administered by the Corporation for the purposes of this Act.

Whoever, for the purpose of causing any increase in payment or benefit under this Act, or for the purpose

of causing any payment or benefit to be made where no payment or benefit is authorised by or under this Act, or for the purpose of avoiding any payment to be made by himself under this Act or enabling any other person to avoid any such payment, knowingly makes or causes to be made any false statement or false representation, shall be punishable with imprisonment or with fine or with both.

If the person committing an offence under this Act is a company, every person, who at the time the offence

was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

6.2.5 Workmen's Compensation The Workmen’s Compensation Act, 1923 provides for payment of compensation to workmen and their dependants in case of injury and accident (including certain occupational disease) arising out of and in the course of employment and resulting in disablement or death. The Act applies to railway servants and persons employed in any such capacity as is specified in Schedule II of the Act. The schedule II includes persons employed in factories, mines, plantations, mechanically propelled vehicles, construction works and certain other hazardous occupations. The amount of compensation to be paid depends on the nature of the injury and the average monthly wages and age of workmen.The minimum and maximum rates of compensation payable for death (in such cases it is paid to the dependents of workmen) and for disability have been fixed and is subject to revision from time to time. A Social Security Division has been set up under the Ministry of Labour and Employment , which deals with framing of social security policy for the workers and implementation of the various social security schemes. It is also responsible for enforcing this Act. The Act is administered by the State Governments through Commissioners for Workmen's Compensation. The main provisions of the Act are:- An employer is liable to pay compensation:- (i) if personal injury is caused to a workman by accident arising out of and in the course of his employment; (ii) if a workman employed in any employment contracts any disease, specified in the Act as an occupational disease peculiar to that employment. However, the employer is not liable to pay compensation in the following cases:- If the injury does not result in the total or partial disablement of the workman for a period exceeding three days. If the injury, not resulting in death or permanent total disablement, is caused by an accident which is directly attributable to:- (i) the workman having been at the time of the accident under the influence of drink or drugs; or (ii) the willful disobedience of the workman to an order expressly given, or to a rule expressly framed, for the purpose of securing the safety of workmen; or (iii) the willful removal or disregard by the workman of any safety guard or other device which has been provided for the purpose of securing safety of workmen.


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The State Government may, by notification in the Official Gazette, appoint any person to be a Commissioner for Workmen's Compensation for such area as may be specified in the notification. Any Commissioner may, for the purpose of deciding any matter referred to him for decision under this Act, choose one or more persons possessing special knowledge of any matter relevant to the matter under inquiry to assist him in holding the inquiry. Compensation shall be paid as soon as it falls due. In cases where the employer does not accept the liability for compensation to the extent claimed, he shall be bound to make provisional payment based on the extent of liability which he accepts, and, such payment shall be deposited with the Commissioner or made to the workman, as the case may be. If any question arises in any proceedings under this Act as to the liability of any person to pay compensation (including any question as to whether a person injured is or is not a workman) or as to the amount or duration of compensation (including any question as to the nature or extent of disablement), the question shall, in default of agreement, be settled by a Commissioner. No Civil Court shall have jurisdiction to settle, decide or deal with any question which is by or under this Act required to be settled, decided or dealt with by a Commissioner or to enforce any liability incurred under this Act. The State Government may, by notification in the Official Gazette, direct that every person employing workmen, or that any specified class of such persons, shall send at such time and in such form and to such authority, as may be specified in the notification, a correct return specifying the number of injuries in respect of which compensation has been paid by the employer during the previous year and the amount of such compensation together with such other particulars as to the compensation as the State Government may direct. Whoever, fails to maintain a notice-book which he is required to maintain; or fails to send to the Commissioner a statement which he is required to send; or fails to send a report which he is required to send; or fails to make a return which he is required to make, shall be punishable with fine.


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Chapter 7 Materials Management

Materials Management 7.1 Inventory management Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment. Inventory management involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle counting support etc. Management of the inventories, with the primary objective of determining/controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling costs 7.2 The reasons for keeping stock There are three basic reasons for keeping an inventory: Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this "lead time." Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods. Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.

All these stock reasons can apply to any owner or product stage.

Buffer stock is held in individual workstations against the possibility that the upstream workstation may be a little delayed in long setup or change over time. This stock is then used while that changeover is happening. This stock can be eliminated by tools like SMED. These classifications apply along the whole Supply chain, not just within a facility or plant. Where these stocks contain the same or similar items, it is often the work practice to hold all these stocks mixed together before or after the sub-process to which they relate. This 'reduces' costs. Because they are mixed up together there is no visual reminder to operators of the adjacent sub-processes or line management of the stock, which is due to a particular cause and should be a particular individual's responsibility with inevitable consequences. Some plants have centralized stock holding across sub-processes, which makes the situation even more acute. Special terms used in dealing with inventory Stock Keeping Unit (SKU) is a unique combination of all the components that are assembled into the purchasable item. Therefore, any change in the packaging or product is a new SKU. This level of detailed specification assists in managing inventory. Stockout means running out of the inventory of an SKU "New old stock" (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale that was manufactured long ago but that has never been used. Such merchandise may not be produced anymore, and the new old stock may represent the only market source of a particular item at the present time. Typology Buffer/safety stock Cycle stock (Used in batch processes, it is the available inventory, excluding buffer stock) De-coupling (Buffer stock that is held by both the supplier and the user)


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http://en.wikipedia.org/wiki/SMED

http://en.wikipedia.org/wiki/Supply_chain

http://en.wikipedia.org/wiki/Line_management

http://en.wikipedia.org/wiki/Stock_Keeping_Unit

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Anticipation stock (Building up extra stock for periods of increased demand - e.g. ice cream for summer) Pipeline stock (Goods still in transit or in the process of distribution - have left the factory but not arrived at the customer yet) Inventory examples While accountants often discuss inventory in terms of goods for sale, organizations - manufacturers, service-providers and not-for-profits - also have inventories (fixtures, furniture, supplies, ...) that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore impossible to control them. While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into: Raw materials - materials and components scheduled for use in making a product. Work in process, WIP - materials and components that have begun their transformation to finished goods. Finished goods - goods ready for sale to customers. Goods for resale - returned goods that are salable. Manufacturing A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned, empty cans and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (solder, glue, ...) that will form part of a finished can. The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers. This may be vats of prepared food, filled cans not yet labeled or sub-assemblies of food components. It may also include finished cans that are not yet packaged into cartons or pallets. Its finished good inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers. Examples of case studies are very revealing, and consistently show that the improvement of inventory management has two parts: the capability of the organisation to manage inventory, and the way in which it chooses to do so. For example, a company may wish to install a complex inventory system, but unless there is a good understanding of the role of inventory and its perameters, and an effective business process to support that, the system cannot bring the necessary benefits to the organisation in isolation. Typical Inventory Management techniques include Pareto Curve ABC Classification and Economic Order Quantity Management. A more sophisticated method takes these two techniques further, combining certain aspects of each to create The K Curve Methodology. A case study of k-curve benefits to one company shows a successful implementation. Unnecessary inventory adds enormously to the working capital tied up in the business, as well as the complexity of the supply chain. Reduction and elimination of these inventory 'wait' states is a key concept in Lean. Too big an inventory reduction too quickly can cause a business to be anorexic. There are well-proven processes and techniques to assist in inventory planning and strategy, both at the business overview and part number level. Many of the big MRP/and ERP systems do not offer the necessary inventory planning tools within their integrated planning applications 7.3 Principle of inventory proportionality Purpose Inventory proportionality is the goal of demand-driven inventory management. The primary optimal outcome is to have the same number of days' (or hours', etc.) worth of inventory on hand across all products so that the time of runout of all products would be simultaneous. In such a case, there is no "excess inventory," that is, inventory that would be left over of another product when the first product runs out. Excess inventory is sub-optimal because the money spent to obtain it could have been utilized better elsewhere, i.e. to the product that just ran out. The secondary goal of inventory proportionality is inventory minimization. By integrating accurate demand forecasting with inventory management, replenishment inventories can be scheduled to arrive just in time to replenish the product destined to run out first, while at the same time balancing out the inventory supply of all products to make their inventories more proportional, and thereby closer to achieving the primary goal. Accurate demand forecasting also allows the desired inventory proportions to be dynamic by determining expected sales out into the future; this allows for inventory to be in proportion to expected short-term sales or consumption rather than to past averages, a much more accurate and optimal outcome. Integrating demand forecasting into inventory management in this way also allows for the prediction of the "can fit" point when inventory storage is limited on a per-product basis. Applications


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http://en.wikipedia.org/wiki/Manufacturer

http://en.wikipedia.org/wiki/Service_provider

http://en.wikipedia.org/wiki/Service_provider

http://en.wikipedia.org/wiki/Not-for-profit

http://en.wikipedia.org/wiki/Distribution_(business)

http://en.wikipedia.org/wiki/Warehouse

http://en.wikipedia.org/wiki/Retailer

http://en.wikipedia.org/wiki/Retailing#Shops_and_stores

http://en.wikipedia.org/wiki/Customers

http://en.wikipedia.org/wiki/Consumer

http://en.wikipedia.org/wiki/Raw_materials

http://en.wikipedia.org/wiki/Work_in_process

http://en.wikipedia.org/wiki/Finished_goods

http://en.wikipedia.org/wiki/Factory_outlet

http://en.wikipedia.org/wiki/Factory_outlet

http://en.wikipedia.org/wiki/Demand_forecasting

http://en.wikipedia.org/wiki/Demand_forecasting


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The technique of inventory proportionality is most appropriate for inventories that remain unseen by the consumer. As opposed to "keep full" systems where a retail consumer would like to see full shelves of the product they are buying so as not to think they are buying something old, unwanted or stale; and differentiated from the "trigger point" systems where product is reordered when it hits a certain level; inventory proportionality is used effectively by just-in-time manufacturing processes and retail applications where the product is hidden from view. One early example of inventory proportionality used in a retail application in the United States is for motor fuel. Motor fuel (e.g. gasoline) is generally stored in underground storage tanks. The motorists do not know whether they are buying gasoline off the top or bottom of the tank, nor need they care. Additionally, these storage tanks have a maximum capacity and cannot be overfilled. Finally, the product is expensive. Inventory proportionality is used to balance the inventories of the different grades of motor fuel, each stored in dedicated tanks, in proportion to the sales of each grade. Excess inventory is not seen or valued by the consumer, so it is simply cash sunk (literally) into the ground. Inventory proportionality minimizes the amount of excess inventory carried in underground storage tanks. This application for motor fuel was first developed and implemented by Petrolsoft Corporation in 1990 for Chevron Products Company. Most major oil companies use such systems today Roots The use of inventory proportionality in the United States is thought to have been inspired by Japanese just-in-time parts inventory management made famous by Toyota Motors in the 1980s

7.4 Economic order quantity(EOQ) Economic order quantity is the level of inventory that minimizes the total inventory holding costs and ordering costs. It is one of the oldest classical production scheduling models. The framework used to determine this order quantity is also known as Wilson EOQ Model or Wilson Formula. The model was developed by F. W. Harris in 1913, but R. H. Wilson, a consultant who applied it extensively, is given credit for his early in-depth analysis of it. EOQ only applies where the demand for a product is constant over the year and that each new order is delivered in full when the inventory reaches zero. There is a fixed cost charged for each order placed, regardless of the number of units ordered. There is also a holding or storage cost for each unit held in storage (sometimes expressed as a percentage of the purchase cost of the item). We want to determine the optimal number of units of the product to order so that we minimize the total cost associated with the purchase, delivery and storage of the product The required parameters to the solution are the total demand for the year, the purchase cost for each item, the fixed cost to place the order and the storage cost for each item per year. Note that the number of times an order is placed will also affect the total cost, however, this number can be determined from the other parameters Underlying assumptions The ordering cost is constant. The rate of demand is constant The lead time is fixed The purchase price of the item is constant i.e no discount is available The replenishment is made instantaneously, the whole batch is delivered at once. EOQ is the quantity to order, so that ordering cost + carrying cost finds its minimum. (A common misunderstanding is that the formula tries to find when these are equal.) Variables

Q = order quantity

Q * = optimal order quantity

D = annual demand quantity of the product

P = purchase cost per unit

S = fixed cost per order (not per unit, in addition to unit cost)

H = annual holding cost per unit (also known as carrying cost or storage cost) (warehouse space, refrigeration, insurance, etc. usually not related to the unit cost)


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http://en.wikipedia.org/wiki/Chevron_Corporation

http://en.wikipedia.org/wiki/Just-in-time_(business)

http://en.wikipedia.org/wiki/Toyota

http://en.wikipedia.org/wiki/Lead_time

http://en.wikipedia.org/wiki/Carrying_cost


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The Total Cost function

The single-item EOQ formula finds the minimum point of the following cost function:

Total Cost = purchase cost + ordering cost + holding cost

- Purchase cost: This is the variable cost of goods: purchase unit price × annual demand

quantity. This is P×D

- Ordering cost: This is the cost of placing orders: each order has a fixed cost S, and we need to

order D/Q times per year. This is S × D/Q

- Holding cost: the average quantity in stock (between fully replenished and empty) is Q/2, so

this cost is H × Q/2

.

To determine the minimum point of the total cost curve, set the ordering cost equal to the

holding cost:

Solving for Q gives Q* (the optimal order quantity):

Therefore: .

Note that interestingly, Q* is independent of P; it is a function of only S, D, H.

Example

Suppose annual requirement (AR) = 10000 units

Cost per order (CO) = Rs 2

Cost per unit (CU)= Rs 8

Carrying cost %age (%age of CU) = 0.02

Carrying cost Per unit = Rs 0.16

Economic order quantity =

Economic order quantity = 500 units

Number of order per year (based on EOQ) www.ibrahimshaikh.com

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Number of order per year (based on EOQ) = 20

Total cost = CU * AR + CO(AR / EOQ) + CC(EOQ / 2)

Total cost = 8 * 10000 + 2(10000 / 500) + 0.16(500 / 2)

Total cost = Rs. 80080

If we check the total cost for any order quantity other than 500(=EOQ), we will see that the cost

is higher. For instance, supposing 600 units per order, then

Total cost = 8 * 10000 + 2(10000 / 600) + 0.16(600 / 2)

Total cost = Rs 80081

Similarly, if we choose 300 for the order quantity then

Total cost = 8 * 10000 + 2(10000 / 300) + 0.16(300 / 2)

Total cost = Rs 80091

This illustrates that the Economic Order Quantity is always in the best interests of the entity.

7.5 ABC Analysis

ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control. ABC analysis provides a mechanism for identifying items which will have a significant impact on overall inventory cost whilst also providing a mechanism for identifying different categories of stock that will require different management and controls. Firms that carry hundreds or even thousands of different part numbers can be faced with the impossible task of monitoring the inventory levels of each part number. In order to facilitate this, many firm's use an ABC approach. ABC analysis is based on Pareto Analysis, also known as the "80/20" rule. The 80/20 comes from Pareto's finding that 20 percent of the populace possessed 80 percent of the wealth. From an inventory perspective it can restated thusly: approximately 20 percent of all inventory items represent 80 percent of inventory costs. Therefore, a firm can control 80 percent of its inventory costs by monitoring and controlling 20 percent of its inventory. But, it has to be the correct 20 percent. The top 20 percent of the firm's most costly items are termed "A" items (this should approximately represent 80 percent of total inventory costs). Items that are extremely inexpensive or have low demand are termed "C" items, with "B" items falling in between A and C items. The percentages may vary with each firm, but B items usually represent about 30 percent of the total inventory items and 15 percent of the costs. C items generally constitute 50 percent of all inventory items but only around 5 percent of the costs. By classifying each inventory item as an A, B or C the firm can determine the resources (time, effort and money) to dedicate to each item. Usually this means that the firm monitors A items very closely but can check on B and C items on a periodic basis (for example, monthly for B items and quarterly for C items). Another control method related to the ABC concept is cycle counting. Cycle counting is used instead of the traditional "once-a-year" inventory count where firms shut down for a short period of time and physically count all inventory assets in an attempt to reconcile any possible discrepancies in their inventory records. When cycle counting is used the firm is continually taking a physical count but not of total inventory. A firm may physically count a certain section of the plant or warehouse, moving on to other sections upon completion, until the entire facility is counted. Then the process starts all over again. The firm may also choose to count all the A items, then the B items, and finally the C items. Certainly, the counting frequency will vary with the classification of each item. In other words, A item may be counted monthly, B items quarterly, and C items yearly. In addition the required accuracy of inventory records may vary according to classification, with A items requiring the most accurate record keeping.


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ABC codes "A class" inventory will typically contain items that account for 80% of total value, or 20% of total items. "B class" inventory will have around 15% of total value, or 30% of total items. "C class" inventory will account for the remaining 5%, or 50% of total items. Advantages of ABC analysis

This kind of categorization of inventory helps one manage the entire volume and assign relative priority to the right category. For Example A Class items are the high value items. Hence one is able to monitor the inventory of this category closely to ensure the inventory level is maintained at optimum levels for any excess inventory can have huge adverse impact in terms of overall value.

A Category Items: Helps one identify these stocks as high value items and ensure tight control in terms of process control, physical security as well as audit frequency.

It helps the managers and inventory planners to maintain accurate records and draw management’s attention to the issue on hand to facilitate instant decision-making.

B Category Items: These can be given second priority with lesser frequency of review and less tightly controls with adequate documentation, audit controls in place.

C Category Items: Can be managed with basic and simple records. Inventory quantities can be larger with very few periodic reviews.

Disadvantages

Inventory Classification does not reflect the frequency of movement of SKU and hence can mislead controllers.

B & C Categories can often get neglected and pile in huge stocks or susceptible to loss, pilferage, slackness in record control etc.

7.6 Modern Techniques of Materials Management 7.6.1 Just In Time(JIT) Just-in-Time originally encapsulated the logistics aspects of the Toyota Production System. Our current view of what it should encapsulate incorporates some of the principles of "leanness" because by itself and specifically detached from Kanban and continuous improvement it begins to loose its meaning. Also to implement these techniques without flexible, reliable processes and appropriate organisation is impossible. However at this point it begins to blur with agile manufacturing principles. This section should therefore be read in conjunction with these others and as a minimum JIT should include: Strategic Capacity Management for example the use of multiple small machines (rather than "efficient" expensive machines that have to be kept busy). Group Technology (Also commonly called "Cellular" manufacturing). This is based on the principle that segmented (possibly product focused) manufacture is much simpler, with less interference of material flows, than factories where similar processes are grouped together, such as heat treatment. This principle has also been applied to other processes where natural groups are formed to perform a complete process aligned to customer needs in manufacturing and other industries, and "category management" in procurement. However we have shown in some circumstances that the benefits of cellular manufacturing can be gained by creating "virtual cells" (without moving the plant). (See Business Process Reengineering / Organisational Redesign). This thinking was based on our early experience of forming cells, which demonstrated, at least to our satisfaction, that cell stability can be poor if volume and / or mix change, with the need to review cell integrity at regular intervals. Production smoothing, avoids the problems associated with poor demand tracking (See Demand Management) and unnecessary interference of the production schedule. In a recent consultancy assignment we established that whilst customer orders were highly volatile, the underlying demand was extremely stable. The volatility downstream in the supply chain was in fact being artificially induced by poor customer planning, resulting in late changes to the order schedule, to bring the orders back in line with the very stable underlying demand! However many companies experience cyclic or seasonal demand, where it is beneficial, and in some cases vital, to flex or move resources to respond to fluctuating demand, the alternative being to pre-build stock to a forecast to afford some production smoothness, at some risk and tying up of capital. A refinement of this process is, in addition, to use "Takt" times (See Previous Technique of the Week T021: "Takt Time, Measuring Throughput Time") to set rates of production. I.e. the hourly rate of demand from customers (as opposed to coarser units of time and uncorrupted by planning parameters). Levelled schedules, bring more stability and regular patterns of production (See Previous Best Practice of the Week 005: Level Scheduling). Labour balancing when used in conjunction with Takt time (Previous Best Practice of the Week 046: "Using Takt Time to Manage Your Business") highlights process / line imbalance from the cycle time of one operation to the next


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and indicates the need to balance the manning for each operation (and the opportunity to improve the slowest to achieve balance). There are some dangers here in achieving balance. (See the "lean question" at the end of this article.) This is the guiding principle of lean manufacturing where the problem would be permanently solved as opposed to the traditional approach of buffering the uncertainty with stock. Set-up reduction, which is based on the principle that small is beautiful as far as batch sizes are concerned and that what is required, is made that day without inflating batch sizes. (In the article Previous Technique of the Week T019: Avoiding Set Ups and Reducing Changeover Times (SMED) (and thereby reducing batch sizes)) we show that there is in fact much more to this than the set-up reduction techniques proposed by Shingo. But there are a number of techniques available to do this stated by Shingo. His SMED techniques give rise to the opportunity to reduce batch sizes by up to a factor of 50. It should be remembered however that this should be applied to the bottleneck first and maybe even stop there. Standard working. Defined by the operator, not the industrial engineer, it is a prescribed sequence of production steps done by one operator and balanced to the required rate of demand. It becomes the basis of understanding the job and therefore what can be improved. (Will be covered by a future article) Visual controls. Characteristic of JIT factories are simple visible controls, held locally where they are used to monitor key performance indicators and used as a spur to improvement. This is a deliberate attempt to give eyeball control rather than the over-sophistication provided by remote computer systems. Examples include: Standard container sizes replacing irregular sizes such that stockholding is a simple question of counting containers rather than the parts within them. The reorder point in this case is a chalk mark on the wall rather than it being hidden in a computer system and appearing on a reorder report the following morning. The graphs of quality, productivity, safety and delivery performance updated daily and discussed at the daily stand-up meeting. A small segregation area for quality defects kept deliberately small to ensure that problems are solved quickly and rejects are not allowed to accumulate. The flip chart to write down today’s problems while they are still fresh.

7.6.2 Material requirements planning (MRP) Material requirements planning (MRP) is a computer-based inventory management system designed to assist production managers in scheduling and placing orders for dependent demand items. Dependent demand items are components of finished goods—such as raw materials, component parts, and subassemblies—for which the amount of inventory needed depends on the level of production of the final product. For example, in a plant that manufactured bicycles, dependent demand inventory items might include aluminum, tires, seats, and derailleurs. The first MRP systems of inventory management evolved in the 1940s and 1950s. They used mainframe computers to explode information from a bill of materials for a certain finished product into a production and purchasing plan for components. Before long, MRP was expanded to include information feedback loops so that production personnel could change and update the inputs into the system as needed. The next generation of MRP, known as manufacturing resources planning or MRP II, also incorporated marketing, finance, accounting, engineering, and human resources aspects into the planning process. A related concept that expands on MRP is enterprise resources planning (ERP), which uses computer technology to link the various functional areas across an entire business enterprise. MRP works backward from a production plan for finished goods to develop requirements for components and raw materials. "MRP begins with a schedule for finished goods that is converted into a schedule of requirements for the subassemblies, component parts, and raw materials needed to produce the finished items in the specified time frame," William J. Stevenson wrote in his book Production/Operations Management. "Thus, MRP is designed to answer three questions: what is needed? how much is needed? and when is it needed?" MRP breaks down inventory requirements into planning periods so that production can be completed in a timely manner while inventory levels—and related carrying costs—are kept to a minimum. Implemented and used properly, it can help production managers plan for capacity needs and allocate production time. But MRP systems can be time consuming and costly to implement, which may put them out of range for some small businesses. In addition, the information that comes out of an MRP system is only as good as the information that goes into it. Companies must maintain current and accurate bills of materials, part numbers, and inventory records if they are to realize the potential benefits of MRP.

Enterprise Resource Planning Introduction to ERP Enterprise Resource Planning (ERP) is a computerized inventory control and production planning system that was born from Material Requirements Planning (MRP) systems. ERP is a system that organizes functions of an institution; supporting, for example, accounting, finance, human resources and e- commerce applications through


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the creation of relational databases and graphical user interfaces that unify the tasks of institutions like corporations, government agencies, non-profit organizations, powerful institutions and industries and businesses establishments. ERP stands for Enterprise Resource Planning. ERP is a way to integrate the data and processes of an organization into one single system. Usually ERP systems will have many components including hardware and software, in order to achieve integration, most ERP systems use a unified database to store data for various functions found throughout the organization. Enterprise resource planning (ERP) is a company-wide computer software system used to manage and coordinate all the resources, information, and functions of a business from shared data stores. An ERP system has a service-oriented architecture with modular hardware and software units or "services" that communicate on a local area network. The modular design allows a business to add or reconfigure modules (perhaps from different vendors) while preserving data integrity in one shared database that may be centralized or distributed. The term ERP originally referred to how a large organization planned to use organizational wide resources. In the past, ERP systems were used in larger more industrial types of companies. However, the use of ERP has changed and is extremely comprehensive, today the term can refer to any type of company, no matter what industry it falls in. In fact, ERP systems are used in almost any type of organization - large or small. In order for a software system to be considered ERP, it must provide an organization with functionality for two or more systems. While some ERP packages exist that only cover two functions for an organization (QuickBooks: Payroll & Accounting), most ERP systems cover several functions. Today's ERP systems can cover a wide range of functions and integrate them into one unified database. For instance, functions such as Human Resources, Supply Chain Management, Customer Relations Management, Financials, Manufacturing functions and Warehouse Management functions were all once stand alone software applications, usually housed with their own database and network, today, they can all fit under one umbrella - the ERP system. ERP Benefits: Myth or Reality Many industry leaders have believed on the evasive nature of ERP benefits. But how real is the issue of ERP benefits realization? To find out, it helps to look into some key statistics from our ongoing ERP benchmark study. The study, which focuses on companies across the globe that have implemented or are in the process of implementing various ERP packages, reveals some interesting points:

30% of those surveyed did not realize any sort of staff reductions after go-live 18% did not measure benefits after go-live 28% had some type of problem or operational stoppage after go-live

Surprisingly, only 18% of companies did not measure post-go-live benefits (in other words, 82% did indeed measure). Besides almost 100% of the companies that have implemented ERP, does not measure post-implementation benefits. Second, the fact that 28% experienced stoppages seems somewhat alarming. It does highlight that at least 1 in 4 companies have operational problems and/or stoppages because of the disruptions caused by ERP. So what does this all mean? First, the results show that ERP benefits are by no means guaranteed. Second, the risk of ERP disrupting an organization's core operations is a significant business risk. These factors are clearly areas that will affect the ROI of the investment in ERP and should be carefully managed as part of an overall ERP Benefits Realization plan. The Advantages and Disadvantages of ERP There are a number of powerful advantages to Enterprise Resource Planning. It has been used to solve a number of problems that have plagued large organizations in the past. At the same time, it is not without a number of disadvantages. Being able to weigh the two will allow a company to decide if this solution will properly meet their needs. Advantages of ERP: In the absence of an ERP system, a large manufacturer may find itself with many software applications that do not talk to each other and do not effectively interface. Tasks that need to interface with one another may involve:

design engineering (how to best make the product) order tracking from acceptance through fulfillment the revenue cycle from invoice through cash receipt managing interdependencies of complex Bill of Materials tracking the 3-way match between Purchase orders (what was ordered), Inventory receipts (what arrived),

and costing(what the vendor invoiced) the Accounting for all of these tasks, tracking the Revenue, Cost and Profit on a granular level.

Change how a product is made, in the engineering details, and that is how it will now be made. Effective dates can be used to control when the switch over will occur from an old version to the next one, both the date that some


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ingredients go into effect, and date that some are discontinued. Part of the change can include labeling to identify version numbers. Computer security is included within an ERP to protect against both outsider crime, such as industrial espionage, and insider crime, such as embezzlement. A data tampering scenario might involve a terrorist altering a Bill of Materials so as to put poison in food products, or other sabotage. ERP security helps to prevent abuse as well. Disadvantages of ERP: Many problems organizations have with ERP systems are due to inadequate investment in ongoing training for involved personnel, including those implementing and testing changes, as well as a lack of corporate policy protecting the integrity of the data in the ERP systems and how it is used. Limitations of ERP include:

Personnel turnover; companies can employ new managers lacking education in the company's ERP system, proposing changes in business practices that are out of synchronization with the best utilization of the company's selected ERP.

Customization of the ERP software is limited. Some customization may involve changing of the ERP software structure which is usually not allowed.

Re-engineering of business processes to fit the "industry standard" prescribed by the ERP system may lead to a loss of competitive advantage.

ERP systems can be very expensive to install often ranging from 30,000 to 500,000,000 for multinational companies.

ERP vendors can charge sums of money for annual license renewal that is unrelated to the size of the company using the ERP or its profitability.

Technical support personnel often give replies to callers that are inappropriate for the caller's corporate structure. Computer security concerns arise, for example when telling a non-programmer how to change a database on the fly, at a company that requires an audit trail of changes so as to meet some regulatory standards.

ERPs are often seen as too rigid and too difficult to adapt to the specific workflow and business process of some companies—this is cited as one of the main causes of their failure.

Systems can be difficult to use. Systems are too restrictive and do not allow much flexibility in implementation and usage. The system can suffer from the "weakest link" problem—inefficiency in one department or at one of the

partners may affect other participants. Many of the integrated links need high accuracy in other applications to work effectively. A company can

achieve minimum standards, and then over time "dirty data" will reduce the reliability of some applications. Once a system is established, switching costs are very high for any one of the partners (reducing flexibility

and strategic control at the corporate level). The blurring of company boundaries can cause problems in accountability, lines of responsibility, and

employee morale. Resistance in sharing sensitive internal information between departments can reduce the effectiveness of

the software. There are frequent compatibility problems with the various legacy systems of the partners. The system may be over-engineered relative to the actual needs of the customer.

The success of the system is fully dependent on how the workers utilize it. This means they must be properly trained, and a number of companies have attempted to save money by reducing the cost of training. Even if a company has enough money to implement ERP, they may not be able to successfully use it if they do not have enough money to train their workers on the process of using it. One of the biggest problems with ERP is that it is hard to customize. Very few companies can effectively use ERP right out of the box. It must be modified to suit their needs, and this process can be both expensive and tedious. Even when a company does begin changing the system, they are limited in what they can do. SAP SAP (Systems, Applications, and Products in Data Processing) is the leading ERP (Enterprise Resource Planning) software package. SAP was the first to integrate a corporation's worldwide functions tightly into one application.

SAP is the leading Enterprise Information and Management Package worldwide. Use of this package makes it possible to track and manage, in real-time, sales, production, finance accounting and human resources in an enterprise.

Traditional Information technology systems used by many business today have been developed to accomplish some specific task and provide reports and analysis of events that have already taken place. Examples are accounting general ledger systems. Occasionally, some systems operate in a "real-time" mode that is, have up to date information in them and can be used to actually control events. A typical company has many separate systems to manage different processes like production, sales and accounting. Each of these systems has its own databases and seldom passes information to other systems in a timely manner.


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SAP takes a different approach. There is only one information system in an enterprise, SAP. All applications access common data. Real events in the business initiate transactions. Accounting is done automatically by events in sales and production. Sales can see when products can be delivered. Production schedules are driven by sales. The whole system is designed to be real-time and not historical.

SAP structure embodies what are considered the "best business practices". A company implementing SAP adapts it operations to it to achieve its efficiencies and power.

The process of adapting procedures to the SAP model involves "Business Process Re-engineering" which is a logical analysis of the events and relationships that exist in an enterprise's operations.

Multiple country implementation

Comprehensive multi-currency translation Multiple language support Customized reporting and document generation for individual countries Multi-company support Local support in most major industrialized countries Country specific functionality

Flexibility

Customers can customize business modules to realize best business practices System provides necessary interfaces to incorporate external software. Scalability, accommodates acquisitions and growth System can be configured the way you want to do business in the future Allows customized screens processing and reports System runs on multiple hardware platforms


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Chapter 8 Financial management 8.1 Financial Management One needs money to make money. Finance is the lifeline of business. A business firm requires finance to commence its operations, to continue its operations and for its expansion and growth. There must be continuous flow of funds in and out of business. Sound plans, efficient production and marketing are all dependent on smooth flow of finance. Hence, a financial plan needs to be prepared, which indicates the requirements of finance, sources for raising the finance and the application of funds. Financial planning for starting a business begins with estimating the total amount of capital required by the firm for the various need of the business. Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. The financial plans of an enterprise should be formulated by taking into consideration the following factors :- The financial objectives of the company Nature and size of the business The image and credit-worthiness of the enterprise Growth and expansion plans Capital market trends Government regulations 8.2 Objectives of Financial Management The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be-

To ensure regular and adequate supply of funds to the concern. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price

of the share, expectations of the shareholders. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum

possible way at least cost. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of

return can be achieved. 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.

8.3Functions of Financial Management Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise. Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties. Choice of sources of funds: For additional funds to be procured, a company has many choices like-

Issue of shares and debentures Loans to be taken from banks and financial institutions Public deposits to be drawn like in form of bonds. Choice of factor will depend on relative merits and demerits of each source and period of financing.

8.4 Types of Financial Needs Financial Needs of a Business may be Classified into two on the basis of the Extent of Permanence :-


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Fixed Capital The funds required to purchase fixed or durable assets are known as fixed capital or long term capital. The fixed or durable assets include land, buildings, machinery, equipment and furniture etc. The nature and size of the business generally determines the amount of fixed capital needed. For e.g. manufacturing activities require large investments in plant, machinery, warehouses and others. While, trading concerns need relatively lesser investment in such assets. These assets continue to generate income and profits over an extended period of time. Also, funds which are once invested in fixed assets cannot be withdrawn and put to some other use.

Working Capital

Money invested in short term assets or current assets is known as working capital. It includes purchase of raw materials, payment of wages and salaries, rent, fuel, electricity and water, repairs and maintenance of machinery, advertising, etc. Besides, sale of goods on credit leads to the holding of debtors balance and bills receivable, which may also be regarded as current assets. The requirement of finance for all these purposes arises at short intervals. Working capital is also known as Circulating capital or Revolving capital because funds invested in such assets are continuously recovered through realization of cash, and again reinvested in current assets. The amount of working capital required depends mainly on the nature of the business, the time required for completing the manufacturing process, and the terms on which materials are purchased and goods sold. For e.g. trading companies require more working capital than manufacturing companies.

On the Basis of Period of Use, the Financial Needs of the Business may be Classified into :- Long-Term Capital Long-term capital is required for a longer period i.e. five years or more. The fixed assets as well as the

permanent part of the working capital is financed by it. The important sources of long-term finance are :- Issue of shares Issue of debentures Loans from financial institutions Reinvestment of profits

Short-Term Capital Short-term capital is required for a shorter period i.e. less than a year. It involves financing the current assets and meeting day-to-day expenses. The important sources of short -term finance are :-

Banks Trade credit Installment credit Medium-Term Capital Medium-term capital is required for a period of 2 to 5 years. It involves financing certain activities like

renovation of buildings, modernization of machinery, heavy expenditure on advertising, etc. The important sources of short -term finance are :- Issue of shares Issue of debentures Borrowing from banks and other financial institutions Reinvestment of profits

The funds raised to meet both the long-term and short-term capital requirements may take the form of Ownership Capital It is the amount of capital invested in a business by its owners. It is on the basis of the amount invested that the owners become entitled to the profits of the business. Under sole proprietorship, the individual owner normally invests capital from his own savings. In partnership, each partner contributes capital as mutually agreed among partners. While companies raise capital by issuing shares. The investors who contribute towards the share capital of a company become its owners by virtue of their share holdings. The rate of return on owners investment depends on the level of profits earned and are entitled to receive dividend out of these profits. Ownership capital is generally used as permanent capital or long-term capital. Borrowed Capital The financial requirements of the business are often met by raising loans. Borrowed money involves a fixed obligation to pay interest and repay the principal amount as and when due. In a sole proprietary business the proprietor can borrow money on his personal security or on the security of his existing assets. A partnership firm can raise loans on the personal security of the individual partners. Companies can also borrow either by issuing debentures or bonds, or raise direct loans. Money may be borrowed for short-term and long-term i.e. to finance fixed assets as well as current assets. .


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8.4.1Methods of Raising Capital A company may raise funds for different purposes depending on the time periods ranging from very short to fairly long duration. The total amount of financial needs of a company depends on the nature and size of the business. The scope of raising funds depends on the sources from which funds may be available. The business forms of sole proprietor and partnership have limited opportunities for raising funds. They can finance their business by the following means :-

Investment of own savings

Raising loans from friends and relatives

Arranging advances from commercial banks

Borrowing from finance companies Companies can Raise Finance by a Number of Methods. To Raise Long-Term and Medium-Term Capital, they have the following options:- Issue of Shares It is the most important method. The liability of shareholders is limited to the face value of shares, and they are also easily transferable. A private company cannot invite the general public to subscribe for its share capital and its shares are also not freely transferable. But for public limited companies there are no such restrictions. There are two types of shares:-

Equity shares: - the rate of dividend on these shares depends on the profits available and the discretion of directors. Hence, there is no fixed burden on the company. Each share carries one vote.

Preference shares: - dividend is payable on these shares at a fixed rate and is payable only if there are

profits. Hence, there is no compulsory burden on the company's finances. Such shares do not give voting rights.

Issue of Debentures Companies generally have powers to borrow and raise loans by issuing debentures. The rate of interest payable on debentures is fixed at the time of issue and are recovered by a charge on the property or assets of the company, which provide the necessary security for payment. The company is liable to pay interest even if there are no profits. Debentures are mostly issued to finance the long-term requirements of business and do not carry any voting rights. Loans from Financial Institutions Long-term and medium-term loans can be secured by companies from financial institutions like the Industrial Finance Corporation of India, Industrial Credit and Investment Corporation of India (ICICI) , State level Industrial Development Corporations, etc. These financial institutions grant loans for a maximum period of 25 years against approved schemes or projects. Loans agreed to be sanctioned must be covered by securities by way of mortgage of the company's property or assignment of stocks, shares, gold, etc. Loans from Commercial Banks

Medium-term loans can be raised by companies from commercial banks against the security of properties and assets. Funds required for modernisation and renovation of assets can be borrowed from banks. This method of financing does not require any legal formality except that of creating a mortgage on the assets. Public Deposits

Companies often raise funds by inviting their shareholders, employees and the general public to deposit their savings with the company. The Companies Act permits such deposits to be received for a period up to 3 years at a time. Public deposits can be raised by companies to meet their medium-term as well as short-term financial needs. The increasing popularity of public deposits is due to :-

The rate of interest the companies have to pay on them is lower than the interest on bank loans.

These are easier methods of mobilising funds than banks, especially during periods of credit squeeze.

They are unsecured.

Unlike commercial banks, the company does not need to satisfy credit-worthiness for securing loans. Reinvestment of Profits

Profitable companies do not generally distribute the whole amount of profits as dividend but, transfer certain proportion to reserves. This may be regarded as reinvestment of profits or ploughing back of profits. As these retained profits actually belong to the shareholders of the company, these are treated as a part of ownership capital. Retention of profits is a sort of self financing of business. The reserves built up over the years by ploughing back of profits may be utilised by the company for the following purposes :-


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Expansion of the undertaking Replacement of obsolete assets and modernisation. Meeting permanent or special working capital requirement. Redemption of old debts.

The benefits of this source of finance to the company are :-

It reduces the dependence on external sources of finance. It increases the credit worthiness of the company. It enables the company to withstand difficult situations. It enables the company to adopt a stable dividend policy.

To Finance Short-Term Capital, Companies can use the following Methods :- Trade Credit Companies buy raw materials, components, stores and spare parts on credit from different suppliers. Generally suppliers grant credit for a period of 3 to 6 months, and thus provide short-term finance to the company. Availability of this type of finance is connected with the volume of business. When the production and sale of goods increase, there is automatic increase in the volume of purchases, and more of trade credit is available. Factoring The amounts due to a company from customers, on account of credit sale generally remains outstanding during the period of credit allowed i.e. till the dues are collected from the debtors. The book debts may be assigned to a bank and cash realised in advance from the bank. Thus, the responsibility of collecting the debtors' balance is taken over by the bank on payment of specified charges by the company. This method of raising short-term capital is known as factoring. The bank charges payable for the purpose is treated as the cost of raising funds. Discounting Bills of Exchange This method is widely used by companies for raising short-term finance. When the goods are sold on credit, bills of exchange are generally drawn for acceptance by the buyers of goods. Instead of holding the bills till the date of maturity, companies can discount them with commercial banks on payment of a charge known as bank discount. The rate of discount to be charged by banks is prescribed by the Reserve Bank of India from time to time. The amount of discount is deducted from the value of bills at the time of discounting. The cost of raising finance by this method is the discount charged by the bank.

Bank Overdraft and Cash Credit

It is a common method adopted by companies for meeting short-term financial requirements. Cash credit refers to an arrangement whereby the commercial bank allows money to be drawn as advances from time to time within a specified limit. This facility is granted against the security of goods in stock, or promissory notes bearing a second signature, or other marketable instruments like Government bonds. Overdraft is a temporary arrangement with the bank which permits the company to overdraw from its current deposit account with the bank up to a certain limit. The overdraft facility is also granted against securities. The rate of interest charged on cash credit and overdraft is relatively much higher than the rate of interest on bank deposits.

8.5 Sources of Finance The Long-Term Finance may be Raised by the Companies from the following Sources :- Capital Market Capital market denotes an arrangement whereby transactions involving the procurement and supply of long-term funds takes place among individuals and various organisations. In the capital market, the companies raise funds by issuing shares and debentures of different types. When long-term capital is initially raised by new companies or by existing companies by issuing additional shares or debentures, the transactions are said to take place in the market for new capital called, as 'New Issue Market'. But, buying and selling of shares and debentures already issued by companies takes place in another type of market called as 'the Stock market'. Individuals and institutions which contribute to the share capital of the company become its shareholders. They are also known as members of the company. Before shares are issued, the directors of the company have to decide on the following matters:-

The amount of capital which is to be raised by issue of shares.

The types of shares which will be issued.

The time of issuing shares. When a company decides to issue additional shares at any time after its formation or after one year of the first


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allotment of shares, it is required under law that such shares must be first offered to the existing shareholders of the company. If the offer is declined by the existing shareholders, only then shares can be issued to the public. Such an issue is called 'rights issue' and these shares are known as 'right shares'. The Government controls the issue of shares and debentures under the Capital Issues (Control) Act, 1947. Special Financial Institutions A large number of financial institutions have been established in India for providing long-term financial assistance to industrial enterprises. There are many all-India institutions like Industrial Finance Corporation of India (IFCI); Industrial Credit and Investment Corporation of India (ICICI); Industrial Development Bank of India(IDBI) , etc. At the State level, there are State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs). These national and state level institutions are known as 'Development Banks'. Besides the development banks, there are several other institutions called as 'Investment Companies' or 'Investment Trusts' which subscribe to the shares and debentures offered to the public by companies. These include the Life Insurance Corporation of India (LIC); General Insurance Corporation of India (GIC); Unit Trust of India (UTI) , etc. Leasing Companies Manufacturing companies can secure long-term funds from leasing companies. For this purpose a lease agreement is made whereby plant, machinery and fixed assets may be purchased by the leasing company and allowed to be used by the manufacturing concern for a specified period on payment of an annual rental. At the end of the period the manufacturing company may have the option of purchasing the asset at a reduced price. The lease rent includes an element of interest besides expenses and profits of the leasing company. Foreign Sources Funds can also be collected from foreign sources which usually consists of :-

Foreign Collaborators :- If approved by the Government of India, the Indian companies may secure capital from abroad through the subscription of foreign collaborator to their share capital or by way of supply of technical knowledge, patents, drawings and designs of plants or supply of machinery.

International Financial Institutions :- like World Bank and International Finance Corporation (IFC)

provide long-term funds for the industrial development all over the world. The World Bank grants loans only to the Governments of member countries or private enterprises with guarantee of the concerned Government. IFC was set up to assist the private undertakings without the guarantee of the member countries. It also provides them risk capital.

Non-Resident Indians :- persons of Indian origin and nationality living abroad are also permitted to

subscribe to the shares and debentures issued by the companies in India. Retained Profits or Reinvestment of Profits An important source of long-term finance for ongoing profitable companies is the amount of profit which is accumulated as general reserve from year to year. To the extent profits are not distributed as dividend to the shareholders, the retained amount can be reinvested for expansion or diversification of business activities. Retained profit is an internal source of finance. Hence it does not involve any cost of floatation which has to be incurred to raise finance from external sources. Short-Term Finance may be Raised by the Companies from the following Sources :- Trade Credit It is the credit which the firms get from its suppliers. It does not make available the funds in cash, but it facilitates the purchase of supplies without immediate payment. No interest is payable on the trade credits. The period of trade credit depends upon the nature of product, location of the customer, degree of competition in the market, financial resources of the suppliers and the eagerness of suppliers to sell his stocks. Installment Credit Firms may get credit from equipment suppliers. The supplier may allow the purchase of equipment with payments extended over a period of 12 months or more. Some portion of the cost price of the asset is paid at the time of delivery and the balance is paid in a number of installments. The supplier charges interest on the installment credit which is included in the amount of installment. The ownership of the equipment remains with the supplier until all the installments have been paid by the buyer. Accounts Receivable Financing Under it, the accounts receivable of a business concern are purchased by a financing company or money is advanced on security of accounts receivable. The finance companies usually make advances up to 60 per cent of the value of the accounts receivable pledged. The debtors of the business concern make payment to it which in turn forwards to the finance company. Customer Advance Manufacturers of goods may insist the customers to make a part of the payment in advance, particularly in cases of special order or big orders. The customer advance represents a part of the price of the products that have been ordered by the customer and which will be delivered at a later date.


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Bank Credit Commercial Banks play an important role in financing the short-term requirements of business concerns. They provide finance in the following ways :-

Loans :- When a bank makes an advance in lump sum, the whole of which is withdrawn to cash immediately by the borrower who undertakes to repay it in one single installment, it is called a loan. The borrower is required to pay the interest on the whole amount.

Cash credit :- It is the most popular method of financing by commercial banks. When a borrower is

allowed to borrow up to a certain limit against the security of tangible assets or guarantees, it is known as secured credit but if the cash credit is not backed by any security, it is known as clean cash credit. In case of clean cash credit the borrower gives a promissory note which is signed by two or more sureties. The borrower has to pay interest only on the amount actually utilised.

Overdrafts :- Under this, the commercial bank allows its customer to overdraw his current account so that

it shows the debit balance. The customer is charged interest on the account actually overdrawn and not on the limit sanctioned.

Discounting of bills :- Commercial banks finance the business concern by discounting their credit

instruments like bills of exchange, promissory notes and hundies. These documents are discounted by the bank at a price lower than their face value.

8.6 BUDGETS AND ACCOUNTS A budget is a list of all planned expenses and revenues. It is a plan for saving and spending. A budget can also defined as a detailed plan of operations that is predetermined for a particular period. Budgets are quantitative or financial statements prepared for the purpose of attaining a particular objective. In other terms, a budget is an organizational plan stated in monetary terms. In summary, the purpose of budgeting is to: Provide a forecast of revenues and expenditures i.e. construct a model of how our business might perform financially speaking if certain strategies, events and plans are carried out. Enable the actual financial operation of the business to be measured against the forecast.

Budgeting Process Budgeting is the formal procedure of preparing budgets. It involves the following basic steps: Identifying expenses Determining different sources of income Preparing the budget Establishing the budget period Laying down the budget procedure Allocating income for expenses Monitoring the efficiency of the budget

Types of budgets Budgets can be classified according to Time, Function, and Flexibility. ACCORDING TO TIME: 1. Long Term Budget 2. Short Term Budget 3. Current Budget 4. Rolling budget ACCORDING TO FUNCTION: 1. Sales Budget 2. Production Budget 3. Cost of Production Budget 4. Purchase Budget


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5. Personnel budget 6. R & D Budget 7. Capital Expenditure Budget 8. Cash Budget 9. Master Budget ACCORDING TO FLEXIBILITY: 1. Fixed Budget 2. Flexible Budget

Sales budget: The sales budget is an estimate of future sales, often broken down into both units and dollars. It is used to create company sales goals.

Production budget: Product oriented companies create a production budget which estimates the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material.

Cash Flow/Cash budget: The cash flow budget is a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.

Marketing budget: The marketing budget is an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.

Project budget: The project budget is a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each.

Revenue budget: The Revenue Budget consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies.

Expenditure budget: A budget type which include of spending data items.

Balance sheet In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition".[1] Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time. A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity.[2] Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.[3] Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing." Records of the values of each account or line in the balance sheet are usually maintained using a system of accounting known as the double-entry bookkeeping system. A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities


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The Three Main Sections of Balance sheet The hardest thing about the balance sheet is deciphering the vocabulary on it. Once you learn what a few things mean, the sheet is much easier to read. Before you can understand the individual accounts in each section, it is important to understand the three main sections on the balance sheet.

Assets: they are the things that you have that are of value to your business. These are the resources that you use to generate earnings. Examples are chairs, a barn, an instrument, land, a factory, and inventory.

Liabilities: can be thought of as obligations. Liabilities are not a bad thing, but if you have too many, you run the risk of going broke or having your resources tied up. Liabilities do not always mean that you can’t afford to pay for something; it can be that you have not been billed for something yet, or you are waiting until a certain time. Money that is owed to outsiders and lending institutions is categorized here.

Equity: a measurement of the resources that you borrow from outsiders, and resources you have generated and kept in the business. As a result of the borrowing, outsiders get ownership privileges in return. This is also where retained earnings are kept. Retained earnings are kept within the business. It is important to have and increase retained earnings. If you have losses in a particular year, this decreases retained earnings.

A balance sheet can be used as a comparison tool. A business can compare itself to others within an industry, see how it has done in comparison to past years, and set goals for future years. It can reveal important information to help you decide if you want to be more aggressive or risk aversive based on where you stand at the end of your operating year. Have your competitors been spending more in certain areas? Do you need to reduce your obligations in a certain spending area?

Balance sheets are presented in the order of assets, liabilities, and equity. The individual accounts are lined up on the left and the number amounts in the accounts are usually lined up on the right. This keeps everything in order and you can clearly see how all the individual items add up.

Types of Assets

There are two main kinds of assets. Assets can be classified as current or long-term. Liabilities are also broken down in a similar manner. Current assets are assets that you plan to use or could use in the next year. This means that the asset could be turned into emergency cash if needed by sale or use. Long-term assets are assets that are going to be around for more than one year and are hard to turn into cash quickly if you were to need money. The general rule of thumb is that you don’t expect to convert them into cash within one year. Current Assets • Cash and Cash Equivalents: various instruments that you pay your bills with. These are things such as physical currency, checks, treasury bills etc. • Marketable securities: short-term securities that you can invest in, but have the ability to get your money back right away if necessary. There are three kinds of marketable securities. A) Trading securities: bought and sold regularly in hopes of keeping your eye on the market and making a quick profit. These are written on the balance sheet at fair market value. This is the price that the market dictates for them currently, not what you or someone else paid for them in the past. B) Held-to-maturity: company plans to keep them until the date that they mature or are due, but they could be sold if necessary. Many of these securities were long-term, but will be reaching their maturity date within the year. However, if they do not meet that criteria, then they are classified as long-term assets. These are included on the balance sheet at amortized cost. Amortized cost = original cost - payments received and adjustments for premiums and discounts. C) Available-for-sale: a ―catch-all‖ category. Anything that can’t be defined as the above two securities fits here. These are recorded on the balance sheet at fair value with unrealized changes in their value and tax effects. Unrealized changes are when the market value of the security changes, but the change has no impact until the sell security is sold for the new market value amount. The investor would then get more or less than what they paid for the security. This can be either a gain or a loss. • Accounts Receivable: amounts that customers owe you and have not paid for yet. This account has another account that goes along with it to make adjustments. Sometimes customers never pay their bills. Companies have an allowance for doubtful accounts specifically for this purpose. This holds the estimate of what is usually not collected. It can be based on prior years. The allowance for doubtful accounts is subtracted from the accounts receivable category in order to see what your asset, accounts receivable, should really be valued as.

• Inventory: goods and parts of goods that you have for purposes of resale. These can be in the form of the materials used to make goods, works-in-process, or entirely finished goods. Inventory can be on the balance sheet broken down into the three types or it can be classified as one large category. Inventory is usually recorded at the lower of two prices. It can either be what you paid for to make the goods, or the market value of the goods.


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• Prepaid expenses: these are things that you have paid for that are not used up and completely considered an expense. Examples would be paying a year of rent and only being two months into the lease. You still have not used up ten months of rent. Accounting procedures consider this an asset because it is not used up until the time has passed. Insurance and paying for items and services before you receive them are also considered prepaid expenses. Long-term and Non-current Assets • Plant, property, and equipment: includes all of the things listed in the name and is broken down for explanation and adding purposes into respective categories. All of these classifications need to be reported at their purchased value minus accumulated depreciation. Depreciation is the normal wear of the goods. It is the accumulated amounts that can be subtracted from the value of an asset every year so that when the assets estimated useful life is over, the value is zero or at salvage value. The value at the end if the assets life may not be zero if you can get salvage money from scrapping costs or resale to another person who will use it. Useful lives and salvage values are based on best estimates, and are frequently adjusted. Depreciation charges each year may be different for financial statement purposes and tax purposes. The following are various accounts under the long-term assets section:

A) Land

B) Buildings

C) Machinery

D) Leasehold improvements: modifications and additions to leased assets.

E) Fixtures: furniture, display cases, and things permanently situated and used within your business.

• Deferred charges: similar to prepaid expenses except the benefit of the expense is over a year away.

• Intangible assets: They have no physical existence, but provide value to a business.

A) Goodwill: when you pay more for something than what it is worth because it has a certain name recognition, reputation, or workforce. When goodwill is suspected to be of reduced value, it is tested for impairment. If impaired, it is written-off and will no longer show at the same amount on the balance sheet.

B) Trademarks and logos: leads consumers to purchase simply because of brand name recognition.

• Investment securities: similar to the held-to-maturity securities except that the holder must have ability and positive intent to hang onto the security until the maturity date. These securities, such as bonds will not reach maturity within the next year. These are also tested for impairment if it is believed that they will not be paid back.

Types of Liabilities Just as assets are broken down into current and long-term, liabilities are also classified in the similar manner. Obligations that will be due in the next year are considered current. Obligations that will last longer than a year are long-term.

Current Liabilities • Accounts Payable: money owed to others for businesses or services.

• Notes Payable: Money that is owed to a bank, person, or business that is due within one year of the date on a balance sheet. Represented by a promissory note that is also referred to as a bond.

• Accrued Expenses: Bills and other items that are unpaid because they are due after the balance sheet is created.

A) Salary and wages: work time is added up but will not be paid until it is time for people to receive their paycheck.

B) Interest expense: interest has built up and will continue to build up, or accrue until the interest payment date occurs.

• Income Taxes Payable: Money that you suspect will be owed to the IRS, state, local, and foreign tax collectors within the next year.

• Other Liabilities: additional liabilities that will be owed in the next year. Some businesses choose to break down the above categories into smaller categories if they have lots of liabilities in one area.


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Long-Term Liabilities

• Deferred Income Taxes: tax liabilities that the company is going to pay later.

• Long-term Debenture Bonds: promissory notes that will be due in over a year. Usually backed up with company credit only.

• Mortgage Bonds: debt that is issued, but in the event of default, the lender can take property to make up for any money owed.

• Other Long-Term Debt: anything that matures in longer than one year and does not fit anywhere else cleanly.

More About Equity The main part of equity is the shareholder’s equity portion. However, please note that not all businesses have outside shareholders. Most small businesses do not have to worry about different kinds of stock, but I will discuss them for the purposes of this handout. A basic knowledge of stock is useful for your own investing endeavors. Equity consists of various types of stock and retained earnings. It is important to be able to value and distinguish the various kinds from one another. Stock consists of a par value amount and an additional paid-in capital amount. Par value is the value assigned to the stock when it was first sold. This number stays the same. The market determines the amount of additional paid-in capital. It is the amount above par value that is paid for the stock. For example, stock that has a $5 par value is selling for $25 a share. The additional $20 paid for it is additional paid-in capital. If the market value of the stock decreases and someone buys it, the par value will always be $5, but the additional paid-in capital will be reduced. Unrealized gains and losses as well as retained earnings fit under this section. The following categories are things that may show up on your balance sheet depending on the size, structure, and type of your business. • Preferred Stock: ownership that gives holders dividends before common stock holders. They have the ability to receive dividends and get assets of a company in the event that it goes out of business. The dividends are set amounts and no money above this amount is ever paid to these shareholders as dividends. Preferred stock can be cumulative or not. Cumulative has a set amount of dividends to receive on an annual or other set time of year. If the company does not pay them one year then they accumulate until they are eventually paid. Non-cumulative means that if the dividend is not paid when it is due, the shareholder will not ever get that dividend payment. • Common Stock: holders can get as large of dividends as the company feels like paying. However, if the company decides to pay out a small amount, the money is first allocated to preferred stockholders, and common holders could not get any dividends. These shareholders do have the benefit of having a voice in company matters through voting abilities, while preferred shareholders tend to have no voting rights. • Additional Paid-in Capital: value given for stock above the par value. • Treasury Stock: a company’s own stock that it buys. It is easier to understand if you realize that what it technically is doing is retaining common stock and the ownership rights of the company. Treasury stock shares are subtracted out of the value of stockholder’s equity while all other forms of stock are added. •Unrealized Gains and Losses: A subcategory under equity that records unrealizables on available-for-sale securities. The security itself is listed in the asset section, but the gains and losses are listed here separately. Unrealized gains and losses are ―unrealized‖ because you do not feel the real impact until a sale occurs, but you must keep tract of increases or decreases for accounting valuation purposes. Calculate this out by computing the difference between what you paid for the asset, or what it was worth as last year’s balance sheet creation, and what the market value of the asset is at the time the balance sheet is created for this year. • Retained earnings: Funds kept and reinvested in the business. In other words, it is the money that the business generated that will not be taken out to give to the owners. This is where profits are kept and accumulate. When there is a loss in a year, it is subtracted out of retained earnings. When dividends are paid the money goes to shareholders and the money is no longer ―retained‖ in the business. In smaller businesses, the owners may take money out of the retained earnings.


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8.7 Introduction to tax

8.7.1. Excise Tax Excise Tax is more commonly known as Excise Duty and is one of the most well-known forms of taxation in India. Any manufacturer of excisable products is liable to pay this tax and is levied on a wide variety of commodities manufactured in India. For the Indian central government this duty is an important source of revenue. The Excise Tax is required to be paid before the goods leave the factory, as a result of which the small-scale industries do not pay Excise Tax up to the specified value of goods cleared from the factory. The state governments are liable to levy excise duty on a few


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commodities including liquor, provided the central government fails to do so. At times when the manufactured goods are exported excise drawback is available.

Rates of Excise Tax: The rates of the Excise Tax vary depending on the nature of commodity. Sometimes, even for the similar commodity the tax rates are different depending on circumstances. Factors like end-use and taxability of inputs are responsible for this. The Excise Tax rates are notified in the Central Excise Tariff Act but can be revised accordingly by the annual Finance Acts. However, the former Acts should be considered to determine the applicable excise duty rate for any commodity. According to the Central Excise Tax provisions, such excise duty can be imposed on any goods either produced or manufactured, although the payment can be done during the time of removing the goods. Importance of Central Excise Tax in India

In India, the revenue from the Excise Tax is the biggest single financial source. The main objective of the central Government is to achieve different socio-economic policies by making suitable adjustments regarding the scope, nature, and quantum of levy of the Central Excise Tax. Such schemes of the Excise Tax taken by the central government modifies and serves various purposes of price control, adequate supply of essential commodities, promotion of small scale industries and industrial growth. Types of Excise Taxes

In India, the three types of Central Excise Taxes being collected include the Basic Excise Duty, Additional Duty of Excise, and Special Excise Duty. The Basic Excise Duty is charged under the Section 3 of the Central Excises and Salt Act, 1944. According to this all excisable goods other than salt produced or manufactured in India, has to pay the rates given in the schedule to the Central Excise Tariff Act, 1985. As per the Section 3 of the Additional duties of Excise Act, 1957 it is authorized that only the goods described in the Schedule to this Act are liable for Excise Tax payments. Generally these are imposed under different categories like medicinal and toilet preparations, sugar and other industries development. The Special Excise Duty following the Section 37 of the Finance Act, 1978 was imposed on all excisable goods that are also subjected to Basic excise Duty under the Central Excises and Salt Act, 1944. However, the Finance Act provisions regarding the said fiscal year specify the levy and collection of the Special Excise Duty.

8.7.2. Service tax

Service Tax is a form of indirect tax imposed on specified services called "taxable services". Service tax cannot be levied on any service which is not included in the list of taxable services. Over the past few years, service tax been expanded to cover new services. The objective behind levying service tax is to reduce the degree of intensity of taxation on manufacturing and trade without forcing the government to compromise on the revenue needs. The intention of the government is to gradually increase the list of taxable services until most services fall within the scope of service tax. For the purpose of levying service tax, the value of any taxable service should be the gross amount charged by the service provider for the service rendered by him. Service Tax was first brought into force with effect from 1 July 1994. All service providers in India, except those in the state of Jammu and Kashmir, are required to pay a Service Tax in India. Initially only three services were brought under the net of service tax and the tax rate was 5%. Gradually more services came under the ambit of Service Tax. The rate of tax was increased from 5% to 8% w.e.f 14 May 2003. From 10 September 2004 the rate of Service Tax was enhanced to 10% from 8%. Besides this 2% education cess on the amount of Service Tax was also introduced. In the Union Budget of India for the year 2006-2007, service tax was increased from 10% to 12%. On February 24, 2009 in order to give relief to the industry reeling under the impact of economic recession, The rate of Service Tax was reduced from 12 per cent to 10 per cent.

Service Tax in India As per the Finance Act of 1994, all service providers in India, except those in the state of Jammu and Kashmir, are required to pay a Service Tax in India. The provisions related to Service Tax came into effect on 1st July, 1994.

Administration and Intent Service Tax in India is regulated and administered by the Central Excise Commissionerates who work directly under the Department of Revenue, Ministry of Finance, Central Board of Excise and Customs, and the Government of India. The interesting thing about Service Tax in India, is that the government depends heavily on the voluntary


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compliance of the service providers for collecting Service Tax in India. This is expected to foster and sustain faith in Indian citizens regarding the government's tax initiatives. Taxed Services When the concept of Service Tax was introduced in India in 1994-95, only three services came under the purview of the tax. Since then, in several phases and installments, the government has brought nearly 100 categories under the ambit of Service Tax, including:

Telephone Stock broking General Insurance Advertising agencies Courier agencies Consulting engineers Air travel agents Tour operators Architects Market research agencies Management consultants Sound recording Broadcasting Event management Beauty parlors Fashion Designers Internet cafés Outdoor caterers Intellectual property services Packaging services

Tax Amount The government charges Service Tax in India on the gross amount which the service providers charge from their clients. By bringing more and more services within the scope of Service Tax, the government intends to enhance its revenue earnings manifold.

The Service Tax amount used to be 5% when the government first launched Service Tax in India. In 2003, this was hiked to 8%. Currently, the rate of Service Tax in India is 10.2%, including a 2% Education Cess.

Salient Features

Service Tax is essentially an indirect tax. Individuals are required to pay the Service Tax only once in a quarter. Companies can pay Service Tax for one month by the 25th of the following month. The Finance Act of 2001 launched self-assessment for Service Tax returns so that assessees can are

spared the inconvenience of regular scrutiny. Although legal penalties exist for failing to pay Service Tax, these penalties cannot be imposed if the

assessee can prove that there was due cause for failure.

8.7.3. Income Tax

Income Tax in India includes all income except the agricultural income that is levied and collected by the central government. This particular income is also shared with the states. The Income Tax was incorporated in India from the year1860. However, after many alterations, finally with the Indian Income Tax Act, 1922, there was a revolutionary change brought by the All India Income Tax Committee. This is significant as after this the administration of the Income Tax came under the direct control of the Central Government. This Act got amended


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again in the year 1961, and the present Income Tax regime in India is still following the provisions of the Act of 1961.

As per the Income Tax Act 1961, the assessee whose total income level is more than the maximum exemption limit, are under the domain of chargeable Income Tax. The assessee has to pay the Income Tax at the rates stated in the provisions of the Finance Act. The payment of the Income Tax is to be calculated on the total income of the last year in the relevant financial assessment year. For the determination of the total income of an individual the residential status in India is a necessary parameter. Every Income Tax payer should file Tax Return under the existing law. The taxable income of the assessee is sorted and computed under five categories known as the Heads of Income. The best citizen should not defer the payment of the Income Tax and must pay the tax in advance as such deferment would involve payment of an extra interest to the Income Tax Department of India. Generally, the person paying the Income Tax should clear their dues at the latest by 31 March. The Income Tax payments are paid in the sort of TDS or Tax deducted at source, TCS or Tax collected at source, and Advance Tax. The TDS is the Income Tax that is subtracted at the beginning of income by the employer or the taxpayer to pay to the government, following certain limitations and conditions. This encompasses various types of income like -

Salary Interest Commission and contract fees Rent Professional fees

The TCS is that type of Income Tax that is collected by certain goods-seller at the specified rates on the purchase of those goods. It is then remitted on the behalf of the buyer to the governmental treasury. The Income Tax paid by the income earner during the previous year of the assessment year is known as the Advance Tax. The total income for the year is estimated and then this tax is computed, after the surcharge is calculated and considering the available rebate on the tax. This Income Tax is paid in three installments. In case the payment of total amount of advance tax is not paid on or before the 15 March then 1% interest will be charged for one month. 8.7.4. VAT VAT or Value Added Tax is a consumption tax which is levied at each stage of production based on the value added to the product at that stage. VAT is intended to tax every stage of sale where some value is added to raw materials, but taxpayers will receive credit for tax already paid on procurement stages. Why Shift to VAT

In case of sales tax structure, there are problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, in the sales tax structure, before a commodity is produced, inputs are first taxed, and then after the commodity is produced with input tax load, output is taxed again. This causes an unfair double taxation with cascading effects. In the VAT, a set-off is given for input tax as well as tax paid on previous purchases. In the sales tax structure that existed in India and still exists in some states, there was multiplicity of taxes such as turnover tax, surcharge on sales tax, additional surcharge, etc. With introduction of VAT, these other taxes have abolished. In addition, Central sales tax is also going to be phased out. As a result, overall tax burden will be rationalised, and prices in general will also fall. Moreover, VAT will replace the existing system of inspection by a system of built-in self-assessment by the dealers and auditing. The tax structure will become simple and more transparent. That will improve tax compliance and also augment revenue growth. Criticisms of VAT

VAT relies on personal end-consumers of products and is therefore labelled as a regressive form of

taxation (the poor pay more, in comparison, than the rich). www.ibrahimshaikh.com

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Revenues from a value added tax are frequently lower than expected because they are difficult and costly to administer and collect.

8.7.5. Custom duty Custom duty is a tax which a state collects on goods imported or exported out of the boundaries of the country. It forms a significant source of revenue for all countries especially in developing countries like India. The Custom Duty in India is one of the most important tariffs. The custom duty in India is regulated by the Customs Act of 1962. The main purpose of the custom duty in India is the prevention of the illegal export and import of goods. The rates of the custom duty levied on the imported and exported goods are assigned in the Custom Act, 1962. Objectives of Custom Duties:

Restricting Imports for conserving foreign exchange Protecting Indian Industry from undue competition Prohibiting imports and exports of goods for achieving the policy objectives of the Government. Regulating exports Co-ordinating legal provisions with other laws dealing with foreign exchange such as Foreign Trade Act,

Foreign Exchange Regulation Act, Conservation of Foreign Exchange and Prevention of Smuggling Act, etc.

Custom duty is levied on Import of Goods : Import is bringing of goods to India from any other country of the world. Territorial water extend upto 12 nautical miles into the sea from the coast of India and so the liability to pay import duty commences as soon as goods enter the territorial waters of India. No duty is leviable on goods which are in transit in the same ship or if goods are in transit from one ship to another. Export of Goods : Export duty is levied on export of goods. The main objective of this duty is to simply restrict exports of certain goods. At present very few articles like skin and leather are subject to export duty. The liability to pay export duty commences as soon as goods leave the territorial waters of India. Rules To carry out the purpose of the act several rules are made by the Central Government. The few among these rules are:

Custom Valuation Rules, 1988 for valuation of imported goods that calculates the custom duty payable. Customs and Central Excise Duties Drawback Rule, 1971 for calculating rates of duties as drawbacks on

exports.

Regulations The Central Board of Excise and Customs has been empowered to make regulations to carry out the provisos of the act. In case of any conflict regarding the rules and regulations the provisions of the rules shall prevail. In order to maintain the rules of the Act several regulations like Customs House Agents Licensing Regulations, 1984 have been framed. The Acts under the custom duty in India:

Foreign Trade (Exemption from application of Rules in certain cases) Order, 1993 Customs Act, 1962

The Registrars of Companies in different states chiefly manage:

Customs Tariff Act, 1975 Foreign Trade (Development and Regulation) Act, 1992 Taxation Laws (Amendment) Act, 2006 Provisional Collection of Taxes Act, 1931 Central Excise Tariff Act, 1985 Foreign Trade (Regulation) Rules, 1993 Central Excise Act, 1944

The rules and regulations under the custom duty in India:

Foreign Privileged Persons (Regulation of Customs Privileges) Rules, 1957 Denaturing of Spirit Rules, 1972 Customs (Attachments of Property of Defaulters for Recovery of Government Dues) Rules, 1995 Accessories (Condition) Rules, 1963


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Specified Goods (Prevention of Illegal Export) Rules, 1969 Re-Export of Imported Goods (Drawback of Customs Duties) Rules, 1995 Notice of Short-Export Rules,1963 Customs Tariff (Identification, Assessment and Collection of Countervailing Duty on Subsidized Articles

and for Determination of Injury) Rules, 1995 Customs and Central Excise Duties Drawback Rules,1995 Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and

for Determination of Injury) Rules, 1995 Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 Customs Tariff (Determination of Origin of Goods under the Agreement on SAARC Preferential Trading

Arrangement) Rules,1995 Notified Goods (Prevention of Illegal Import) Rules, 1969 Customs Tariff (Determination of Origin of Goods under the Bangkok Agreement) Rules, 1976 Customs Tariff (Determination of Origin of the U.A.R. and Yugoslavia) Rules, 1976 Customs (Settlement of Cases) Rules, 1999 Customs( Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 Customs (Publication of Names) Rules,1975 Rules of Determination of Origin of goods under the Agreement on South Asian Free Trade Area (SAFTA) Customs Tariff (Identification and Assessment of Safeguard Duty) Rules, 1997 Baggage Rules, 1998 Customs Tariff (Determination of Origin of Other Preferential Areas) Rules,1977 Customs Tariff (Determination of Origin of Goods under the Free Trade Agreement Between the

Democratic Socialistic Republic of Sri Lanka and the Republic of India) Rules, 2000 The different duties under custom duty in India: Basic Duty: This is the general kind of duty levied under the Customs Act, 62 Additional Duty (Countervailing Duty): This duty is levied under the Custom Tariff Act, section 3 (1) Anti-dumping Duty: This duty prevents the dumping of foreign goods by the transnational companies Protective Duty: This duty protect the interests of the Indian industrial sector Export Duty: This duty is levied on the export of goods

8.7.6 Direct Tax Direct Tax is the tax paid to the government directly by the assessee like the Income Tax or the Capital Gains Tax. There has been a steady rise in the net Direct Tax collections in India over the years.

All the collections of the direct taxes in India like the Corporate Tax, Personal Income Tax, Securities Transaction Tax, Banking Cash Transaction Tax, and the Fringe Benefit Tax have been going through a healthy ascent. For instance, in the current year the personal income taxes collection have increased with the rate of TDS being higher than the previous years. Overall, as per the estimates of the Budget of the financial year 2006-07, the target of Direct Tax growth rate was estimated to be 27.5%, but so far it has exceeded this limit and reached 41.2%. At present, the net Direct Tax collection of India is at Rs.610.30 billion, which is estimated to rise to 42% over Rs.429.80 billion as it was in the last financial year. This growth in the rate of Direct Tax reflects a continued increase in the economy, high tax compliance, and better tax administration. One of the main forms of Direct Tax is the Taxes on Corporate Income, under which the companies residing in this country pays a tax on their global income arising from all sources. The payment of the tax follows the provisions of the Income Tax Act. On the other hand, the non-resident companies pay the Direct Tax on the income obtained from an India-based business connection. The resident companies pay a tax at the rate of 35% with a surcharge of 2.5% while for the non-resident companies the basic tax rate goes up to 40% along with the same 2.5% surcharge. Along with these the corporate companies also pay an education tax at the rate of 2% and a wealth tax at the rate of 1%. Moreover, a Minimum Alternative Tax at 7.5% also requires to be paid by the Domestic corporations. The Capital Gains Tax is another important form of Direct Tax in India which is payable on capital gains received upon the sale of assets. If the capital assets are in possession for more than three years and regarding the shares, stock exchange securities, mutual fund units the time frame for possessing the asset is one year. The basic tax rate of the long-term capital gains is fixed at 20% while for the short-term capital gains the rate is fixed at the normal corporate income tax rate. A rate of 10% is fixed on the transfer of equity shares from which the short-term capital gain emerges. Personal Income tax is another type of Direct Tax, which is under the Central Government controlled by the Central Board of Direct Taxes. The taxpayer is required to pay a tax if the income level reaches above Rs. 100,000. If the income reaches Rs. 850,000 there is a surcharge of 10% imposed on the total tax. Indirect Tax Indirect Tax or the tax that is levied on goods or services rather than on persons or organizations are of different types in India like Excise Duty, Customs Duty, Service Tax, and Securities Transaction Tax. In India, there are a series of Tax laws and regulations in order to control the indirect taxation, which can be either law, made by the central government or even can be state specific laws. As a result these taxes are an important part of the total cost. It is thus essential to make appropriate planning for such costs.


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Nearly all of the activities that are subjected to indirect taxation range from manufacturing to those required for final consumption. Activities related to trading, imports, and services are also included in this list. As a result Indirect Tax has an impact on all business lines. At present the Indirect Taxes in India are under a transformation due to the changing fiscal reforms of the Indian government. Many new acts and laws are being introduced replacing the old laws and all related issues, which have become redundant. However, it should be remembered that such new laws while on one hand would create new opportunities, but also at the same time would lead to a certain extent of uncertainty and judicial proceedings. In general, the Indirect Tax in India is a complex system of interconnecting laws and regulations, which includes specific laws of different states. For this there are many reliable organizations in India, which employs efficient Indirect Tax professionals to help their clients. These tax professionals with their in-depth knowledge and wide-ranging experience offers effective planning methods to their clients in order to help in their cost minimization. The Indirect Taxation regime encompasses various types of taxes like Sales Tax, Service Tax, Custom and Excise Duties, VAT and Anti-Dumping Duties, and the organizations provide services in all these related fields. In the recent year, the Indian government has undertaken significant reform of indirect taxation system. This includes the initiation of a region-based and state-level VAT on goods. However, it should be noted that as taxes still forms a barrier to inter-state trading in order to attain a secured market for the activities related to services and goods more reform is needed. Some of the reforms that can be introduced for a better indirect taxation system in India are –

The serialized set of Indirect Taxes so far activated at the central and state levels should be amalgamated and treated as a single tax.

The integrated Indirect Tax should be neutral at all levels such that chances of fraudulence would be minimized

The Central Sales Tax, which obstructs easy trading between different states, is being under the process of termination that would help to abolish the control measures on the inter-state trade

By the year 2010 the Indian government has planned to activate a goods and services tax neutral at all levels in order to fulfill these objectives. The government can undertake either an introduction of a national VAT or a system, which would permit both a state VAT, or a central VAT. Along with this if the government also can incorporate a central VAT that can be rebated, on the trade across the boundary lines, then there would be minimum chances of fraudulence. 8.7.7 India GDP The India GDP is a combination of all the differential factors, contributing to the welfare of the India economy. India GDP gives us a combined report of the performance of the Indian economy. 'Cost factor' or 'Actual price' method - these are the two methods to calculate Indian Gross Domestic Product. The main factor that contributed to the growth of India GDP post 1990s was the opening-up of the Indian economy. The balance-of-payments crisis of 80s of the Indian economy led to the paradigm shift of the Indian Economy. The markets were opened up, the Government leveraged the entry of private investments. As a result of this, more investments flowed into the markets. More so by the Foreign direct investments (FDIs) and foreign institutional investors (FIIs), the India GDP growth saw a phenomenal increase. Bulk of the Government undertakings were divested into lots of private business houses. Gauging the health of the India economy - India GDP is the best tool! Going by figures, India GDP has already crossed the trillion-dollar mark, other peers in this sphere being US, Japan, Germany, China, UK, France, Italy, Spain, Canada, Brazil and Russia. After the liberalization era of the India economy, the growth story of the India GDP was driven by the following sectors of Indian industry -

Information Technology Information Technology Enabled Services Telecommunications Electronics and hardware Automobiles Pharmaceuticals and biotechnology Consumer durables Retail Textiles Infrastructure Construction Airlines Hospitality Power Oil and natural gas


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Fertilizers and chemical The GDP of India, even after the opening up of the economy and other relaxed norms couldn't survive the aftermath of the global financial crisis. The GDP of India over the past two fiscals (2008-09 and 2009-10) experienced considerable slowdown. This moderate growth of the India economy has given rise to moderate expectations with respect of India GDP. Though various rating agencies, economists, business houses predict a healthy growth in India GDP in the next two years, yet skepticism is still the order of the day. Achieving a 9% GDP growth by 2012 is immensely impractical, looking at the rate at which things are improving. Reasons for fall in India's GDP growth - Interest rates are at its peak (experiencing a 6-year high), thus consumer spending has gone down considerably and in a way investments have also reduced. Else than exploring better export prospects, Indian economy doesn't have any other elements which can steer its growth path. Year-on-year GDP growth rate stood at around 8.8% for first three months of 2009 but then again experienced a fall. Is the Indian economy severely affected? Countering the inflationary pressures had been the main agenda of the Government for a long time during the initial months of the financial year. But, the Government must aim at achieving a high GDP growth rate, rather than aiming at countering other external pressures. A dramatic improvement might not be expected, but a slow and steady growth path is surely desirable.


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Chapter 9 Project management 9.1 MEANING OF PROJECT MANAGEMENT Project management is the discipline of planning, organizing, and managing resources to bring about the successful completion of specific project goals and objectives. It is often closely related to and sometimes conflated with program management. A project is a temporary endeavor, having a defined beginning and end (usually constrained by date, but can be by funding or deliverables) undertaken to meet particular goals and objectives usually to bring about beneficial change or added value. The temporary nature of projects stands in contrast to business as usual (or operations) which are repetitive, permanent or semi-permanent functional work to produce products or services. In practice, the management of these two systems is often found to be quite different, and as such requires the development of distinct technical skills and the adoption of separate management. The primary challenge of project management is to achieve all of the project goals and objectives while honoring the preconceived project constraints Typical constraints are scope, time, and budget. The secondary—and more ambitious—challenge is to optimize the allocation and integration of inputs necessary to meet pre-defined objectives.

Project management approaches

There are a number of approaches to managing project activities including agile, interactive, incremental, and phased approaches. Regardless of the methodology employed, careful consideration must be given to the overall project objectives, timeline, and cost, as well as the roles and responsibilities of all participants and stakeholders.

The traditional approach

A traditional phased approach identifies a sequence of steps to be completed. In the "traditional approach", we can distinguish 5 components of a project (4 stages plus control) in the development of a project. Typical development phases of a project

Project initiation stage; Project planning or design stage; Project execution or production stage; Project monitoring and controlling systems; Project completion stage.

Not all the projects will visit every stage as projects can be terminated before they reach completion. Some projects do not follow a structured planning and/or monitoring stages. Some projects will go through steps 2, 3 and 4 multiple times.

Many industries use variations on these project stages. For example, when working on a brick and mortar design and construction, projects will typically progress through stages like Pre-Planning, Conceptual Design, Schematic Design, Design Development, Construction Drawings (or Contract Documents), and Construction Administration. In software development, this approach is often known as the waterfall model, i.e., one series of tasks after another in linear sequence. In software development many organizations have adapted the Rational Unified Process (RUP) to fit this methodology, although RUP does not require or explicitly recommend this practice. Waterfall development works well for small, well defined projects, but often fails in larger projects of undefined and ambiguous nature. The Cone of Uncertainty explains some of this as the planning made on the initial phase of the project suffers from a high degree of uncertainty. This becomes especially true as software development is often the realization of a new or novel product. In projects where requirements have not been finalized and can change, requirements management is used to develop an accurate and complete definition of the behavior of software that can serve as the basis for software development. While the terms may differ from industry to industry, the actual stages typically follow common steps to problem solving — "defining the problem, weighing options, choosing a path, implementation and evaluation."

Project development stages Traditionally, project development includes a number of elements: four to five stages, and a control system. Regardless of the methodology used, the project development process will have the same major stages. Major stages generally include:

Initiation Planning or development Production or execution Monitoring and controlling Closing


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http://en.wikipedia.org/wiki/Managing

http://en.wikipedia.org/wiki/Resources

http://en.wikipedia.org/wiki/Program_management

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http://en.wikipedia.org/wiki/Time

http://en.wikipedia.org/wiki/Budget

http://en.wikipedia.org/wiki/Operations_research

http://en.wikipedia.org/wiki/Resource_allocation

http://en.wikipedia.org/wiki/Agile_Project_Management

http://en.wikipedia.org/wiki/Project_planning

http://en.wikipedia.org/wiki/Software_development

http://en.wikipedia.org/wiki/Waterfall_model

http://en.wikipedia.org/wiki/Rational_Unified_Process

http://en.wikipedia.org/wiki/Cone_of_Uncertainty

http://en.wikipedia.org/wiki/Requirements

http://en.wikipedia.org/wiki/Requirements_management

http://en.wikipedia.org/wiki/Requirements_management

http://en.wikipedia.org/wiki/Problem_solving


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In project environments with a significant exploratory element (e.g., Research and development), these stages may be supplemented with decision points (go/no go decisions) at which the project's continuation is debated and decided. An example is the Stage-Gate model.

Initiation

The initiation stage determines the nature and scope of the development. If this stage is not performed well, it is unlikely that the project will be successful in meeting the business’s needs. The key project controls needed here are an understanding of the business environment and making sure that all necessary controls are incorporated into the project. Any deficiencies should be reported and a recommendation should be made to fix them. The initiation stage should include a plan that encompasses the following areas:

Analyzing the business needs/requirements in measurable goals Reviewing of the current operations Conceptual design of the operation of the final product Equipment and contracting requirements including an assessment of long lead time items Financial analysis of the costs and benefits including a budget Stakeholder analysis, including users, and support personnel for the project Project charter including costs, tasks, deliverables, and schedule

Planning and design

After the initiation stage, the system is designed. Occasionally, a small prototype of the final product is built and tested. Testing is generally performed by a combination of testers and end users, and can occur after the prototype is built or concurrently. Controls should be in place that ensure that the final product will meet the specifications of the project charter. The results of the design stage should include a product design that:

Satisfies the project sponsor, end user, and business requirements Functions as it was intended Can be produced within acceptable quality standards Can be produced within time and budget constraints

Executing

Executing consists of the processes used to complete the work defined in the project management plan to accomplish the project's requirements. Execution process involves coordinating people and resources, as well as integrating and performing the activities of the project in accordance with the project management plan. The deliverables are produced as outputs from the processes performed as defined in the project management plan. type of design.

Monitoring and Controlling

Monitoring and Controlling consists of those processes performed to observe project execution so that potential problems can be identified in a timely manner and corrective action can be taken, when necessary, to control the execution of the project. The key benefit is that project performance is observed and measured regularly to identify variances from the project management plan. Monitoring and Controlling includes:

Measuring the ongoing project activities (where we are); Monitoring the project variables (cost, effort, scope, etc.) against the project management plan and the

project performance baseline (where we should be); Identify corrective actions to address issues and risks properly (How can we get on track again); Influencing the factors that could circumvent integrated change control so only approved changes are

implemented

In multi-phase projects, the Monitoring and Controlling process also provides feedback between project phases, in order to implement corrective or preventive actions to bring the project into compliance with the project management plan. Project Maintenance is an ongoing process, and it includes:

Continuing support of end users Correction of errors Updates of the software over time

In this stage, auditors should pay attention to how effectively and quickly user problems are resolved. Over the course of any construction project, the work scope may change. Change is a normal and expected part of the construction process. Changes can be the result of necessary design modifications, differing site conditions,


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http://en.wikipedia.org/wiki/Stage-Gate_model

http://en.wikipedia.org/wiki/Business

http://en.wikipedia.org/wiki/Requirement

http://en.wikipedia.org/wiki/Business_operations

http://en.wikipedia.org/wiki/New_product_development

http://en.wikipedia.org/wiki/Contract

http://en.wikipedia.org/wiki/Lead_time

http://en.wikipedia.org/wiki/Financial_analysis

http://en.wikipedia.org/wiki/Budget

http://en.wikipedia.org/wiki/Stakeholder_analysis

http://en.wikipedia.org/wiki/Project_charter

http://en.wikipedia.org/wiki/Deliverable

http://en.wikipedia.org/wiki/Software

http://en.wikipedia.org/wiki/Auditor


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material availability, contractor-requested changes, value engineering and impacts from third parties, to name a few. Beyond executing the change in the field, the change normally needs to be documented to show what was actually constructed. This is referred to as Change Management. Hence, the owner usually requires a final record to show all changes or, more specifically, any change that modifies the tangible portions of the finished work. The record is made on the contract documents – usually, but not necessarily limited to, the design drawings. The end product of this effort is what the industry terms as-built drawings, or more simply, ―as built.‖ The requirement for providing them is a norm in construction contracts. When changes are introduced to the project, the viability of the project has to be re-assessed. It is important not to lose sight of the initial goals and targets of the projects. When the changes accumulate, the forecasted result may not justify the original proposed investment in the project.

Closing

Closing includes the formal acceptance of the project and the ending thereof. Administrative activities include the archiving of the files and documenting lessons learned. This phase consists of:

Project close: Finalize all activities across all of the process groups to formally close the project or a project phase

Contract closure: Complete and settle each contract (including the resolution of any open items) and close each contract applicable to the project or project phase

PROJECT CONTROL SYSTEMS Project control is that element of a project that keeps it on-track, on-time and within budget. Project control begins early in the project with planning and ends late in the project with post-implementation review, having a thorough involvement of each step in the process. Each project should be assessed for the appropriate level of control needed: too much control is too time consuming, too little control is very risky. If project control is not implemented correctly, the cost to the business should be clarified in terms of errors, fixes, and additional audit fees. Control systems are needed for cost, risk, quality, communication, time, change, procurement, and human resources. In addition, auditors should consider how important the projects are to the financial statements, how reliant the stakeholders are on controls, and how many controls exist. Auditors should review the development process and procedures for how they are implemented. The process of development and the quality of the final product may also be assessed if needed or requested. A business may want the auditing firm to be involved throughout the process to catch problems earlier on so that they can be fixed more easily. An auditor can serve as a controls consultant as part of the development team or as an independent auditor as part of an audit. Businesses sometimes use formal systems development processes. These help assure that systems are developed successfully. A formal process is more effective in creating strong controls, and auditors should review this process to confirm that it is well designed and is followed in practice. A good formal systems development plan outlines:

A strategy to align development with the organization’s broader objectives Standards for new systems Project management policies for timing and budgeting Procedures describing the process Evaluation of quality of change

9.2 Introduction to CPM & PERT Technique 9.2.1 CRITICAL PATH METHOD

Also known as critical path analysis, the critical path method (CPM) is a widely used technique for analyzing and managing task sequences in large projects. Based on calculating how long it takes to complete essential steps of a process and analyzing how those steps interrelate, CPM is a visual and mathematical technique that gives managers the ability to effectively plan, schedule, and evaluate their projects. CPM-associated techniques are probably most often used in large manufacturing and construction projects, but they are also applied to tasks like new product development cycles, marketing campaigns, software process modeling, and research programs.

Any time a manager is trying to determine the date by which a project will be completed, he or she needs to have a basic understanding of the time required to complete each task that makes up the overall project. For small projects, managers are often able to memorize and to coordinate all of the various tasks necessary for their completion. For larger projects, however, with numerous activities occurring simultaneously, remembering and coordinating these activities can prove much more difficult. CPM and related tools allow managers to determine which particular tasks most affect the total time of the project and enable managers to better schedule each task so that deadlines are met at the least possible cost.

THE BASICS OF THE CRITICAL PATH METHOD


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http://en.wikipedia.org/wiki/Financial_statements

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For CPM to be used appropriately, a project should have three attributes. First, it must consist of tasks that are independent of each other, which managers can stop and start within the duration of the project. Second, the distinct tasks, upon completion, must result in the end of the project. Third, while some tasks can be performed simultaneously, others must be performed in a particular sequence.

If a project meets this criteria, CPM can be used. CPM consists of three core steps:

1. Planning 2. Analyzing and scheduling 3. Controlling project tasks

To plan a project using this method, a diagram of each of the tasks comprising a project must be devised. The diagram can be constructed by, first, assigning a symbol (such as X, Y, or Z) or identifying label to all of the tasks and listing them in the order that they are to be performed. The time estimated for each task to be completed should also be calculated, or at least estimated.

Take, for example, a delivery project involving the transportation of goods using three trucks. The project will start at place W, where all the trucks start out, and end at place X, where they all ultimately arrive. Trucks A and B go first to place Y; from there Truck A goes to place X, while Truck B goes to place Z and then eventually to place X. The third truck (Truck C) goes directly from place W to place X. These events are represented in Figure I (this sort of visual CPM representation is sometimes called a "network diagram"). The estimated times needed to complete the individual segments of the trips are shown in the illustration.

To analyze this scenario, the manager must figure out the shortest amount of time in which it is possible to complete the project, given that all of the individual tasks are necessary and take fixed amounts of time to complete. For the above example, the answer is 5 hours, the time needed for Truck A to leave place W, go to place Y, and reach place X. Trucks B and C take only four hours and two hours, respectively. Thus, Truck A traveling from W to Y to X is seen as the critical path. Anything delaying that truck will delay the project, while any delays experienced by the other two trucks would not be significant, unless they pushed the project beyond 5 hours.

Defining the critical path can allow the manager to concentrate his or her efforts appropriately and make optimal scheduling decisions. Thus, it follows that if the project manager can reduce the time it takes for Truck A to complete its path, the overall project will save time. He or she will not waste efforts on reducing the time spent by Trucks B and C. Furthermore, knowing that Trucks B and C have more time to complete their tasks, the manager can schedule them more conveniently. For instance, Truck C is unoccupied for three hours and could be used for other tasks during that time. Similarly, from this analysis the manager knows that the drivers for Trucks B and C will be idle during the course of this project and their labor can be used for something else, rather than paying all three drivers for the

project's full duration.

Finally, by using CPM, the manager can control the project as the tasks are being completed. Comparing the actual performance with the planned performance will let the manager know whether or not the project is on schedule. Thus, if Truck A is behind schedule going from place W to place Y, the truck's trip from point Y to point X will have to be expedited—that is, if the project is to be completed on time.

9.2.2 Program Evaluation and Review Technique (PERT)

Program Evaluation and Review Technique (PERT) is a scheduling method originally designed to plan a manufacturing project by employing a network of interrelated activities, coordinating optimum cost and time criteria. PERT emphasizes the relationship between the time each activity takes, the costs associated with each phase, and the resulting time and cost for the anticipated completion of the entire project.

PERT is an integrated project management system. These systems were designed to manage the complexities of major manufacturing projects, the extensive data necessary for such industrial efforts, and the time deadlines created by defense industry projects. Most of these management systems developed following World War II, and each has its advantages.

PERT was first developed in 1958 by the U.S. Navy Special Projects Office on the Polaris missile system. Existing integrated planning on such a large scale was deemed inadequate, so the Navy pulled in the Lockheed Aircraft


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Corporation and the management consulting firm of Booz, Allen, and Hamilton. Traditional techniques such as line of balance, Gantt charts, and other systems were eliminated, and PERT evolved as a means to deal with the varied time periods it takes to finish the critical activities of an overall project.

PERT centers on the concept of time and allows flexible scheduling due to variations in the amount of time it takes to complete one specific part of the project. A typical PERT network consists of activities and events. An event is the completion of one program component at a particular time. An activity is defined as the time and resources required to move from one event to another. Therefore, when events and activities are clearly defined, progress of a program is easily monitored, and the path of the project proceeds toward termination. PERT mandates that each preceding event be completed before succeeding events, and thus the final project, can be considered complete.

One key element to PERT's application is that three estimates are required because of the element of uncertainty and to provide time frames for the PERT network. These three estimates are classed as optimistic, most likely, and pessimistic, and are made for each activity of the overall project. Generally, the optimistic time estimate is the minimum time the activity will take—considering that all goes right the first time and luck holds for the project. The reverse is the pessimistic estimate, or maximum time estimate for completing the activity. This estimate takes into account Murphy's law—whatever can go wrong will—and all possible negative factors are considered when computing the estimate. The third is the most likely estimate, or the normal or realistic time an activity requires. Two other elements comprise the PERT network: the path, or critical path, and slack time. The critical path is a combination of events and activities that will necessitate the greatest expected completion time. Slack time is defined as the difference between the total expected activity time for the project and the actual time for the entire project. Slack time is the spare time experienced in the PERT network.

A vital aspect of PERT is the formula used for the calculation of expected project time. The project reads:

T = (O + 4M + P) ÷ 6

where T = expected completion time,

O = optimistic estimate,

M = most likely estimate,

P = pessimistic estimate.

Applying real numbers to the PERT formula, the result is as follows, where A (optimistic time) = 7 weeks; M (most likely time) = 11 weeks; B (pessimistic time) = 15 weeks: Once the expected time is computed, the critical path is established. The PERT network considers all potential variables, thus quantifying the scheduling and planning of the project. In a comprehensive view of PERT, it becomes clear that despite the fact that some steps of the process are independent, the next step will depend on the successful completion of prior steps.

Another key to PERT is to analyze and revise the data owing to a constant state of flux. Factors influencing project management take many forms, including personnel, materials, equipment and facilities, utilities, and environmental conditions. For example, absenteeism, sickness, vacations, and even strikes can affect personnel supply, or sudden changes in climatic conditions (snow, flooding from rains, etc.) may have an environmental impact. Various methods have been established to adjust the PERT network in order to allow for unpredictable situations. In recent years, computers have provided one major means of network analysis and revision, especially on larger projects. Computers are significantly useful for computations of the critical path and slack time. Smaller networks can generally be managed with manual computations and are usually developed, evaluated, and revised without great difficulty.

The basic difference in PERT and CPM is in how the diagrams are drawn. In PERT, events are placed in circles (or rectangles) to emphasize a point in time. Tasks are indicated by the lines connecting the network of events. In CPM the emphasis is on the tasks, which are placed in circles. The circles are then connected with lines to indicate the relationship between the tasks. CPM use has become more widespread than the use of PERT applications.

PERT has advantages as well as disadvantages, but time has seemingly not diminished its applicability. Planning a major network reveals potential problem areas and interdependent events that are not so obvious in conventional project development methods. One advantage is the three time estimate process, again useful in identifying difficulties as well as more effective interrelated processes. When utilizing the latest computer applications to PERT networks, managers have additional benefits with which to plan. A final advantage is the use of what is termed the management-by-exception principle, whereby data accumulated and analyzed by various means can be applied to the planning and execution of a major project. When managers have used PERT in integrated project management, experience gained is reapplied to future projects, especially in developing bids for project estimates. When appropriate costing techniques are implemented with PERT networking, the project sponsors realize significant financial benefits.


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9.2.3 Break-even analysis Break-even analysis is used in cost accounting and capital budgeting to determine at what point a product or business is profitable. This analysis employs mathematical models, which may be very simple or highly complex, in order to understand the relations between the costs of doing business and the associated revenues. The object of break-even analysis is to learn or predict the minimum pricing and production levels at which a company will recover its costs and begin to profit. In addition to analyzing actual production levels, it may also be applied to production-related variables such as the break-even point for a given production capacity. BASIC ANALYSIS At its simplest, this analysis is used as its name suggests: to determine the volume of production at which a company's costs equal its revenues. Perhaps more useful than this simple determination, however, is the understanding gained through such analysis of the variable and fixed nature of certain costs. Break-even studies force the analyst to research, quantify, and categorize an entity's costs into fixed and variable groups.

Definition of Break even point:

Break even point is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost. This concept is further explained by the the following equation:

[Break even sales = fixed cost + variable cost]

The break even point can be calculated using either the equation method or contribution margin method. These two methods are equivalent.

Equation Method:

The equation method centers on the contribution approach to the income statement. The format of this statement can be expressed in equation form as follows:

[Profit = (Sales − Variable expenses) − Fixed expenses]

Rearranging this equation slightly yields the following equation, which is widely used in cost volume profit (CVP) analysis:

[Sales = Variable expenses + Fixed expenses + Profit]

According to the definition of break even point, break even point is the level of sales where profits are zero. Therefore the break even point can be computed by finding that point where sales just equal the total of the variable expenses plus fixed expenses and profit is zero.

Example:

For example we can use the following data to calculate break even point.

Sales price per unit =Rs250 variable cost per unit = Rs 150 Total fixed expenses = Rs 35,000

Calculate break even point

Calculation:

Sales = Variable expenses + Fixed expenses + Profit

Rs 250Q* = Rs 150Q* + Rs 35,000 + Rs 0**

Rs 100Q = Rs 35000

Q = Rs 35,000 / Rs 100


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http://www.accountingformanagement.com/fixed_cost_definition.htm

http://www.accountingformanagement.com/variable_cost_definition.htm

http://www.accountingformanagement.com/contribution_margin_definition.htm

http://www.accountingformanagement.com/income_statement_definition.htm


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Q = 350 Units

Q* = Number (Quantity) of units sold. **The break even point can be computed by finding that point where profit is zero

The break even point in sales dollars can be computed by multiplying the break even level of unit sales by the selling price per unit.

350 Units × Rs 250 Per unit = Rs 87,500

Contribution Margin Method:

The contribution margin method is actually just a short cut conversion of the equation method already described. The approach centers on the idea discussed earlier that each unit sold provides a certain amount of contribution margin that goes toward covering fixed cost. To find out how many units must be sold to break even, divide the total fixed cost by the unit contribution margin.

Break even point in units = Fixed expenses / Unit contribution margin

=Rs 35,000 / Rs 100* per unit

=350 Units

* Rs 250 (Sales) − Rs 150 (Variable exp.)

A variation of this method uses the Contribution Margin ratio (CM ratio) instead of the unit contribution margin. The result is the break even in total sales dollars rather than in total units sold.

Break even point in total sales dollars = Fixed expenses / CM ratio

=Rs 35,000 / 0.40

= Rs 87,500

This approach is particularly suitable in situations where a company has multiple products lines and wishes to compute a single break even point for the company as a whole.

The following formula is also used to calculate break even point

Break Even Sales in Dollars = [Fixed Cost / 1 – (Variable Cost / Sales)]

This formula can produce the same answer:

Break Even Point = [$35,000 / 1 – (150 / 250)]

= Rs35,000 / 1 – 0.6

= Rs 35,000 / 0.4

= Rs 87,500

Benefits / Advantages of Break Even Analysis:

The main advantages of break even point analysis is that it explains the relationship between cost, production, volume and returns. It can be extended to show how changes in fixed cost, variable cost, commodity prices, revenues will effect profit levels and break even points. Break even analysis is most useful when used with partial budgeting, capital budgeting techniques. The major benefits to use break even analysis is that it indicates the lowest amount of business activity necessary to prevent losses.

Assumption of Break Even Point:


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The Break-even Analysis depends on three key assumptions:

1. Average per-unit sales price (per-unit revenue): This is the price that you receive per unit of sales. Take into account sales discounts and special offers. Get this number from your Sales Forecast. For non-unit based businesses, make the per-unit revenue $1 and enter your costs as a percent of a dollar. The most common questions about this input relate to averaging many different products into a single estimate. The analysis requires a single number, and if you build your Sales Forecast first, then you will have this number. You are not alone in this, the vast majority of businesses sell more than one item, and have to average for their Break-even Analysis.

2. Average per-unit cost: This is the incremental cost, or variable cost, of each unit of sales. If you buy goods for resale, this is what you paid, on average, for the goods you sell. If you sell a service, this is what it costs you, per dollar of revenue or unit of service delivered, to deliver that service. If you are using a Units-Based Sales Forecast table (for manufacturing and mixed business types), you can project unit costs from the Sales Forecast table. If you are using the basic Sales Forecast table for retail, service and distribution businesses, use a percentage estimate, e.g., a retail store running a 50% margin would have a per-unit cost of .5, and a per-unit revenue of 1.

3. Monthly fixed costs: Technically, a break-even analysis defines fixed costs as costs that would continue even if you went broke. Instead, we recommend that you use your regular running fixed costs, including payroll and normal expenses (total monthly Operating Expenses). This will give you a better insight on financial realities. If averaging and estimating is difficult, use your Profit and Loss table to calculate a working fixed cost estimate—it will be a rough estimate, but it will provide a useful input for a conservative Break-even Analysis.

Limitations of Break Even Analysis:

It is best suited to the analysis of one product at a time. It may be difficult to classify a cost as all variable or all fixed; and there may be a tendency to continue to use a break even analysis after the cost and income functions have changed. 9.3 Quality Management Introduction to Quality Every manufacturing organisation is concerned with the quality of its product. While it is important that quantity requirements be satisfied and production schedules met, it is equally important that the finished product meet established specifications. Because, customer's satisfaction is derived from quality products and services. Stiff competition at national and international level and consumer's awareness require production of quality goods and services for survival and growth of the company. Quality and productivity are more likely to bring prosperity into the country and improve quality of work life. However, the management looks to achieve customer satisfaction by running its business at the desired economic level. Both these can be attained by properly integrating quality development, quality maintenance and quality improvement of die product. The integration of these three aspects of a product can be achieved through a sound quality control system. The Meaning of Quality Quality is a relative term and it is generally used with reference to die end use of the product. For example, a gear used in sugarcane juice extracting machine may not possess good surface finish, tolerance and accuracy as compared with the gear used in the head stock of a lathe, still it may be considered of good quality if it works satisfactorily in die juice extracting machine. The quality is thus defined as die fitness for use/purpose at die most economical level.

The quality depends on die perception of a person in a given situation. The situation can be user-oriented, cost-oriented or supplier-oriented. Since, die item is manufactured for me use of die customer, die requirements of die customer dictates die quality of die product. Quality is to be planned, achieved, controlled and improved continuously. The word "Quality" has variety of meanings :-

1. Fitness for purpose : The component is said to possess good quality, if it works well in the equipment for which it is meant. Quality is tiius defined as fitness for purpose.


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2. Conformance to requirements : Quality is die ability of the material/component to perform satisfactorily in an application for which it is intended by die user. Quality of a product, thus, means conformance to requirements. Customer needs have to be assessed and translated into specifications depending upon die characteristics required for specific application. Just as every human has his own characteristics every application has its own characteristics.

3. Grade : Quality is a distinguishing feature or grade of the product in appearance, performance, life, reliability, taste, odor, maintainability etc. This is generally called as quality characteristics.

4. Degree of preference : Quality is the degree to which a specified product is preferred over competing products of equivalent grade, based on comparative test by customers, normally called as customer's preference.

5. Degree of excellence : Quality is a measure of degree of general excellence of the product. 6. Measure of fulfillment of promises : The quality of a product is a measure of fulfillment of the promises

made to the customers.

Suitability : For specific application. Reliability : It should give efficient and consistent performance. Durability : It should have desired life. Safety : Safe and foolproof workability. Affordability : It should be economical. Maintainability : It should be easy to maintain. Aesthetic look : It should look attractive. Satisfaction to customers : It should satisfy the customers' requirements. Economical : It should have reasonable price. Versatility : It should serve number of purposes. A product can be said to possess good quality if all the above requirements are properly balanced while designing and manufacturing it.

9.3.1 Quality Control

Control can be defined as "a process by means of which we observe the actual performance and compare it with some standard". If there is a deviation between the observed performance and the standard performance then it is necessary to take corrective action. The term "Quality Control" has variety of meanings :

1. Quality control is the process through which we measure the actual quality performance, compare it with the standards and take corrective action if there is a deviation.

2. It is a systematic control of various factors that affect the quality of the product. It depends on : Material, Tools, Machines, type of labour, working conditions, measuring instruments, etc.

3. Quality control can be defined as the entire collection of activities which ensures that the operation will produce the optimum quality products at minimum cost.

4. It can also be defined as the tools, devices or skills through which quality activities are carried out. 5. It is the name of the department which devotes itself full time to quality functions. 6. The procedure for meeting the quality goals is termed as quality control. 7. It is a system, plan or method of approach to the solution of quality problems.

Total Quality control is "An effective system for integrating the quality development, quality maintenance and quality

improvement efforts of the various groups in anorganization, so as to enable production and services at the most economical levels which allow full customer satisfaction."

Steps In Quality Control Programme Formulate quality policy. Work out details of product requirements, set the standards (specifications) on the basis of customers preference, cost and profit. Select inspection plan and set up procedure for checking. Detect deviations from set standards or specifications. Take corrective action through proper authority and make necessary changes to achieve standards. Decide on salvage method i.e. to decide how the defective parts are disposed of, entire scrap or rework. Co-ordination of quality problems. Developing quality consciousness in the organization. Quality control is not a function of any single department or a person. It is the primary responsibility of any supervisor to turn out work of acceptable quality. Quality control is one aspect of production planning and control. It is basically concerned with the quality production through regular inspection technique. Quality is a combination of characteristics pertaining to the manufacture of the product and control is the correction in the quality of the product, when the deviations in the product are more than expected. A good quality item is one which conforms to some standard specifications. These specifications are determined by the expectations of consumers and also by the availability and costs of processes and materials.


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To most people, quality is variable. It is subjectively judged because it deals with the relative goodness of a product. When a buyer boasts that his house or car is the best, it implies high quality. Quality is thus subjective and vaguely measurable. 9.3.2 Objectives of Quality Control

Establishment of quality standard : The main objective of quality control is the economical production of a high quality product at the quality level the customer wants. It is basically for eliminating variations in production and in order to have uniformity in production. Locating quality deviations : It is necessary to analyze the trend and extent of quality deviations in a manufacturing process. Such deviations should be explained by statistical techniques when they cannot be attributed to the element of chance. Evaluating methods and processes of production : By evaluating methods and processes of production, quality control helps to take corrective measures to maintain the quality of the product during the process of manufacture. Quick sale of quality goods : Quality control accelerates the sale of the goods by supplying only the quality goods in the market. Consumers also support quality goods. Production of standard quality goods : Quality control aims at manufacturing standard quality products and avoids the production of inferior quality goods. Such standard quality goods give satisfaction to consumers and also create goodwill in the market. Improvement in quality : One objective of quality control is to find out high quality standards and to make constant efforts to reach those standards. Quality control aims at creating quality consciousness at all levels in the Organisation. Steps In Quality Control Process Devising control over raw materials : The quality of the finished product is determined mostly by the quality of raw materials. It calls for close connection between the raw material purchase department of the company and the vendors. As and when necessary, a resident inspector may be deputed by the Quality Control Department in the vendor's place to see that only goods in accordance with specifications are supplied. It is advisable to reinspect the raw materials before putting them to actual use. Fixing standards and specifications : In order to make any scheme of quality control successful, it is essential to predetermine standards and specifications. The practice should be to provide quality instructions in the form of drawings, showing shapes, dimensions and specifications describing color, strength, thickness, chemical composition, etc. Exercising control over production operations : In order to execute efficient practices, the technical expert of the Quality Control Department must investigate, from time to time, the operating methods. Such investigation helps to eliminate all possible variables. Locating inspection points : When the points at which defects occur are wrongly located or located with delay, it hinders quality control. Therefore there should first inspection of the raw materials at the vendor's places, then at the company's plant, then at the various points during the process of production and finally at the time of packing. The defects are likely to occur at these points. The finished goods can be cleared after obtaining 'O.K.' or 'All Correct' from the Quality Control Department. Advantages of Quality Control Quality control is important as it offers certain advantages to the manufacturer. Such advantages are: stability to sale, goodwill in the market, ability to face market competition effectively, reduction in production costs, and elimination of wastage due to rejections and uniformity in production. These benefits are important for sales promotion and profit maximization. Manufacturers now give special attention to quality control techniques for long term benefits. Attention is given to research and development activities for this purpose. Even foreign collaborations are made for raising the quality standards of products manufactured. In brief, quality control is a matter of great importance in production management. The benefits of quality control to consumes are: Availability of standard quality and reliable goods, proper reward for the price paid, safety to life and health, better standard of living and protection against substitution or adulteration and quick shopping of goods. Consumers always purchase standard quality goods even by paying a little higher price as they get full satisfaction over a long period from quality goods. Consumers, particularly educated consumers, support quality products as they know the benefits available from such standard quality products. This suggests the importance of quality control from the point of view of consumers. The importance of quality control is, now, accepted even at the global level. Consumers now insist for superior quality goods. Expenditure on quality control is an investment for more sale and satisfaction to consumers. Quality control is a must for export promotion. Companies can capture foreign markets only by manufacturing superior quality goods at reasonable cost of production. Japan is a leading world exporter. This is mainly due to superior quality of goods manufactured in Japan. Governments in many countries support quality control measures. They provide all possible help for maintaining superior quality of goods. Restrictions are also imposed on the


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manufacturing of cheap goods. Even associations of manufacturers and traders support quality control measures. This suggests the importance of quality control in business. In addition, the following advantages of quality control also suggest its importance:

1. Improvement in the quality of production and reduction in the production cost. 2. Uniformity in the production and supply of standard quality goods to consumers. 3. Offering full return of the price paid by consumers and giving convenience and satisfaction to consumers.

This also develops cordial relations with consumers. 4. Reduction in spoiled production and rejection from consumers and dealers. 5. Promotion of exports due to superior and standard quality production. 6. Sales promotion in the internal market and facing market completion with confidence. 7. Reduction in the inspection cost. 8. Improvement in the productivity and motivation of employees. 9. Making the products popular in the market and thereby to develop market goodwill.

Cost of Quality The costs of carrying out company quality program are known as "Cost of Quality". It includes:-

1. Market research cost of discovering quality needs of customer. 2. Product research and development cost of creating a product concept, which will meet quality needs. 3. The design cost of transmitting product concept into information which represents planning for

manufacturer. 4. Cost of inspection and test. 5. Cost of defect prevention. 6. Cost of quality assurance. 7. Cost of scrap and quality failure. 8. The quality cost can be defined in four categories :- 9. Cost of prevention. 10. Cost of appraisal. 11. Cost of internal failures. 12. Cost of external failures.

9.3.3The Concept of Total Quality Management (TQM) Total quality management is a comprehensive concept and not related only to the quality of goods and services. It suggests that high quality standards (e.g., ISO 9000) should be maintained in other aspects of management such as production cost, marketing, sales promotion, etc. For such quality/efficiency in all aspects of business management, consciousness/awareness needs to be developed at all levels and among employees working in all departments of the enterprise. Employees must be motivated for maintaining high quality standards. In addition, their cooperation/involvement is necessary for maintaining efficiency in all aspects of business management. In brief, quality management is not the responsibility of management alone. Participation/involvement of both parties (management and employees) is essential for achievement of quality and other benefits. The concept of TQM is closely related to the concept of quality circles which is very popular and also successful in Japan. Quality circles are work groups that meet frequently to study the ways and means to improve quality, reduce cost, eliminate wastages and solve other production problems. Here, employees are associated with quality, cost, efficiency, productivity, consumer service and satisfaction. This creates background for the concept of TQM. TQM aims at improving the total performance at the work place. It covers all functions, activities and people who are responsible for competitiveness of an Organisation. The employees are expected to participate not only in maintaining quality but also in improving their total performance so that the wastages will be avoided, production cost will go down and the enterprise can earn more profit. TQM means strategic commitment to improving quality by combining statistical quality control methods with a cultural commitment to seeking incremental improvements that increase productivity and lower costs. Total quality management reflects the culture of an Organisation. It indicates consumer oriented, quality-oriented management philosophy. It is a commitment to quality by all managers and workers. TQM is a philosophy for achieving customer satisfaction which involves all - managers, employees and users. It is management by commitment and not management by control. This technique is to be introduced through quality circles. The route to TQM is through application of simple tools followed by Organisation change and culture change. Total quality management is based on the following four powerful elements:

1. Focus on customer expectations, 2. Employees' involvement, 3. Mastery of processes, 4. Team work


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Definition of TQM According to John Gilbert, Total Quality Management is "A process designed to focus on customer expectations, preventing problems, building commitment to quality in the workforce and promoting open decision-making."

Origin of TQM

Stress on quality management : In TQM, collective efforts are being made for improving quality of goods and services so as to give more satisfaction to consumers. Quality improvement is also useful for facing market competition and for creating market reputation. In brief, TQM involves steps for improving quality and productivity. There is total commitment to quality on the part of entire Organisation. TQM covers all functions, activities and people who are instrumental for raising the competitiveness. Continuous process : TQM is a continuous process/activity as there is ample scope for using new methods and techniques for improvement in the quality standards and performance. "Steal ideas constantly and shamelessly" is the rule in TQM. Implementation of innovative ideas or taking benefit of new opportunities is an integral aspect of TQM. In fact, TQM is a never ending quest for achieving new levels of performance. Stress on quality assurance system : The aim of TQM is to give maximum satisfaction to consumers by providing goods which are best in quality (zero defects). The present ISO9000 series is a set of well recognised standards for quality assurance system. The Japanese have been using quality assurance concepts and principles as a part of their TQM implementation programme even when specific name or number was not used. Thus, quality assurance system is an integral part of TQM. Linkage of quality and productivity : The TQM technique is useful for improving quality as well as productivity. In a TQM programme, the focus is on quality improvement. However, such programme also raises productivity. The methods used in TQM programmes. E.g. stress on quality improvement, zero defects production, making all employees responsible for quality maintenance and improvement) are likely to bring quality improvement as well as yield improvement. Similarly, the TQM programme creates a feeling of participation among the employees. There is also positive improvement in the morale of employees. TQM is a gradual process : Introduction of TQM is a gradual process. It is self improvement and group improvement programme through team building for raising quality and productivity. TQM is about the gradual change of people's behavior towards the tasks they perform and their attitude towards other people. A mental revolution among the employees is required for the execution of TQM. However, such change in the mental make-up of managers and employees requires long period. This suggests that TQM is a gradual process. There are, in fact, four broad phases in the introduction of TQM. These are:

Awareness Phase, Planning Phase, Implementation Phase, and Institutional Phase.

Focus on customers : Customers are the source of all the revenue that flows through the corporation. Their satisfaction keeps the money flowing especially in an open market where competitors are wooing them too. The focus of TQM is on customer satisfaction on quality, cost and delivery through improved orgarnisational quality of processes. According to British Quality Association (BQA), TQM is a corporate business management philosophy which recognised that customers' needs and business goals are inseparable. Employee involvement : Employees involvement is the most important recognised feature of TQM. In fact, quality's a team work of all employees. Their participation and co-operation are required to be taken at all levels. TQM is possible only through participative management. Under TQM, employees will be motivated to participate actively in the process of quality improvement through incentives and recognition of contribution for achieving quality standards. Formation of quality improvement teams : A cornerstone of TQM is the team building that leads to commitment to improvement. Such teams include quality steering teams, corrective actions teams and so on. Such teams motivate employees and facilitate quality improvement. Management's involvement : TQM is a systems approach in managing business and improving overall performance. It needs total commitment from the top management to provide viable leadership to the whole approach. Top level management has to take number of initiatives in order to start the process of TQM. In fact, TQM cannot have a good take off without total commitment of CEO and other senior executives.


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9.3.4 Advantages of TQM

Customer satisfaction : TQM is basically for the satisfaction and welfare of customers. Needs and expectations of customers are given special attention in TQM. The attention is on customers and zero defect goods will be supplied to them. As a result, there will be reduction in the complaints of consumers/customers. TQM is not for profit-making at the cost of customers but it is for giving satisfaction and welfare to them.

1. Quality improvement : One major advantage of a TQM is quality improvement at all levels and in all activities. There is a systematic attempt to eliminate deficiencies such as production scrap or rework, customer complaints and material shortages. The cornerstone of any successful TQM system is the organised elimination of waste. The rejection rate in the production process will be low and this minimizes waste of materials and human efforts. Due to quality improvement, the sales and profits will also increase. The company will also develop goodwill and market recognition as supplier of quality goods.

2. Absence of additional investment : One advantage of TQM is that TQM does not require any additional investment. It improves operational quality as well as reduces cost. This technique is quite convenient to developing countries which are facing financial difficulties due to various reasons. TQM gives many benefits but without additional financial burden.

3. Raises competitiveness : TQM technique is useful for raising quality and reducing costs. This naturally raises competitiveness in the domestic as well as global markets. TQM technique is useful for exports by raising global competitiveness.

4. Facilitates expansion and diversification : TQM leads to large turnover and high profits along with market reputation and consumer support. The company can use this profit for the execution of its expansion and diversification programmes. In brief, TQM facilitates expansion and diversification of business.

5. Provides trained and motivated employees : TQM philosophy has its positive impact on employees. They are given proper training, monetary and non-monetary incentives, attractive working conditions and proper treatment. Workers take pride in manufacturing defect-free products.

9.3.5 Quality Circle (QC)

1. Dewar, President of the International Association of QCs, defines QCs as "a way of capturing the creative and innovative power that lies within the work force".

2. A quality circle is a small group of volunteers (usually 3 to 12 employees) doing similar work. They meet

regularly under the leadership of their immediate supervisor, or some one chosen among the circle to identify problems, set priorities, discover causes and propose solutions. These may concern quality, productivity, safety, job structure, process flow, control mechanism, aesthetics of the work area etc.

3. According to Maurice Alston,

"Quality Circles are small groups of people doing similar work who, together with their supervisors volunteer to meet for an hour a week to study and solve work related problems which affect them. Circle leaders and members are trained in simple problem solving techniques which identify causes and develop solutions. At an appropriate time, presentations are made by the quality circles to the management who decide whether to accept, modify or decline the proposals".

4. Quality Circle is a participative management system in which workers make suggestions and improvements for the betterment of organisation

Objectives of Quality Circles Objectives which contribute to the improvement and development of the enterprise and indirectly the interest of the employees are :

1. To improve the quality and productivity and thus contribute to the improvements and development of the enterprise.

2. To reduce the cost of products or services by waste reduction, safety, effective utilisation of resources, avoiding unnecessary errors and defects.

3. To identify and solve work related problems that interfere with production. 4. To tap the creative intelligence of the persons working in the organisation and to make full use of its human

resources. 5. To permit employees to develop and use greater amount of knowledge and skill and motivate them to

apply to a wide range of challenging tasks. 6. To improve communication within the organisation. 7. To increase employees' loyalty and commitment to the organisation and its goals. 8. To respect humanity and build a happy bright work place environment which is meaningful to work in. 9. To enrich human capability, confidence, moral, attitude and relationship. 10. To satisfy the human needs of recognition, achievement and self-development.

Advantages of Quality Circles


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1. The organization can accomplish one or more of the following advantages by establishing quality circles: 2. Promote high level of productivity and quality-mindedness. 3. Self and mutual development of employees. 4. Creating team spirit and unity of action. 5. Increased motivation, job satisfaction and pride in their work. 6. Reduced absenteeism and labour turnover. 7. Developing sense of belongingness towards a particular organization. 8. Waste Reduction. 9. Cost reduction. 10. Improved communication. 11. Safety improvement. 12. Increased utilization of human resource potential. 13. Enhancement in consciousness and moral of employees through recognition of their activities. 14. Leadership development. 15. Trained staff.

9.3.6 Quality Assurance Quality Assurance is a formal methodology designed to assess the quality of products or services provided. Quality assurance includes formal review of care, problem identification, corrective actions to remedy any deficiencies and evaluation of actions taken. Quality assurance implies that necessary precautions have been taken so that the entire production of a product or service is within specifications under a wide conditions of operation. This usually requires that the production process is mastered and monitored using indicators. Quality assurance is built-in the new ISO9000:2000 standard. The terms ―quality assurance‖ and ―quality control‖ are often used interchangeably to refer to ways of ensuring the quality of a service or product. The terms, however, have different meanings.

Assurance: The act of giving confidence, the state of being certain or the act of making certain. Quality assurance: The planned and systematic activities implemented in a quality system so that quality requirements for a product or service will be fulfilled.

Control: An evaluation to indicate needed corrective responses; the act of guiding a process in which variability is attributable to a constant system of chance causes. Quality control: The observation techniques and activities used to fulfill requirements for quality.

The QA program provides an efficient method for gathering and maintaining information on the quality characteristics of products and on the source and nature of defects and their impact on the current operation. It permits decisions to be based on facts rather than on intuition or memory. It provides comparative data that will be useful long after the details of particular times or events have been forgotten. Quality assurance requires that certain individuals have both the authority and the responsibility for overseeing QA related actions. A properly functioning QA program points out problem areas to maintenance managers so they can take appropriate action to accomplish the following:

To Improve the quality, uniformity, and reliability of the total maintenance effort Improve the work environment, tools, and equipment used in the performance of maintenance Eliminate unnecessary man-hour and dollar expenses Improve the training, work habits, and procedures of maintenance personnel Increase the excellence and value of reports and correspondence originated by the maintenance

activity Distribute required technical information more effectively Establish realistic material and equipment requirements in support of the maintenance effort

To obtain full benefits from a QA program, teamwork must be achieved first. Blend QA functions with the interest of the total organization and you produce a more effective program. Allow each worker and supervisor to use an optimum degree of judgment in the course of assigned daily work; a person’s judgment plays an important part in the quality of his or her work Quality assurance techniques supply each person involved with a job with information concerning actual product quality. This information provides a challenge to the person to improve the quality of the work. The resulting knowledge encourages the best efforts of all your maintenance personnel. Quality assurance is designed to serve both management and production equally. Management is served when QA monitors the complete maintenance effort of the department, furnishes factual feedback of discrepancies and deficiencies, and provides the action necessary to improve the quality, reliability, and safety of maintenance. Production is served by having the benefit of collateral duty inspectors formally trained in inspection


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procedures; it is also served in receiving technical assistance in resolving production problems. Production personnel are not relieved of their basic responsibility y for quality work when you introduce QA to the maintenance function. Instead, you increase their responsibility by adding accountability.

9.3.7 Six Sigma Six Sigma stands for Six Standard Deviations (Sigma is the Greek letter used to represent standard deviation in statistics) from mean. Six Sigma methodology provides the techniques and tools to improve the capability and reduce the defects in any process.

It was started in Motorola, in its manufacturing division, where millions of parts are made using the same process repeatedly. Eventually Six Sigma evolved and applied to other non manufacturing processes. Today you can apply Six Sigma to many fields such as Services, Medical and Insurance Procedures, Call Centers.

Six Sigma methodology improves any existing business process by constantly reviewing and re-tuning the process. To achieve this, Six Sigma uses a methodology known as DMAIC (Define opportunities, Measure performance, Analyze opportunity, Improve performance, Control performance).

Six Sigma methodology can also be used to create a brand new business process from ground up using DFSS (DESIGN FOR SIX SIGMA) principles. Six Sigma Strives for perfection. It allows for only 3.4 defects per million opportunities for each product or service transaction. Six Sigma relies heavily on statistical techniques to reduce defects and measure quality.

Six Sigma experts (Green Belts and Black Belts) evaluate a business process and determine ways to improve upon the existing process. Six Sigma experts can also design a brand new business process using DFSS (DESIGN FOR SIX SIGMA) principles. Typically its easier to define a new process with DFSS principles than refining an existing process to reduce the defects.

Six Sigma incorporates the basic principles and techniques used in Business, Statistics, and Engineering. These three form the core elements of Six Sigma. Six Sigma improves the process performance, decreases variation and maintains consistent quality of the process output. This leads to defect reduction and improvement in profits, product quality and customer satisfaction.

Six Sigma methodology is also used in many Business Process Management initiatives these days. These Business Process Management initiatives are not necessarily related to manufacturing. Many of the BPM's that use Six Sigma in today's world include call centers, customer support, supply chain management and Project Management.

Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes. It uses a set of quality management methods, including statistical methods, and creates a special infrastructure of people within the organization ("Black Belts", "Green Belts", etc.) who are experts in these methods. Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified targets. These targets can be financial (cost reduction or profit increase) or whatever is critical to the customer of that process (cycle time, safety, delivery, etc.)

Six Sigma originated as a set of practices designed to improve manufacturing processes and eliminate defects, but its application was subsequently extended to other types of business processes as well in Six Sigma, a defect is defined as any process output that does not meet customer specifications, or that could lead to creating an output that does not meet customer specifications.

9.3.8 5S Methodology

5S is the name of a workplace organization methodology that uses a list of five Japanese words which, transliterated and translated into English, start with the letter S. This list is how it should be stored and most importantly how the new order will be maintained. This decision making process usually comes from a dialog about standardization which builds a clear understanding, between employees, of how work should be done. It also instills ownership of the process in each employee.

Another key distinction between 5S and "standardized cleanup" is Seiton. Seiton is often misunderstood, perhaps due to efforts to translate into an English word beginning with "S" (such as "sort" or "straighten"). The key concept here is to order items or activities in a manner to promote work flow. For example, tools should be kept at the point of use, workers should not have to repetitively bend to access materials, flow paths can be altered to improve efficiency, etc.

The 5S's are:

Phase 1 - Seiri (整理) Sorting: Going through all the tools, materials, etc., in the plant and work area and keeping only essential items. Everything else is stored or discarded.


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http://bpm.knowledgehills.com/BPM/BPM.aspx

http://pm.knowledgehills.com/PM/default.aspx

http://en.wikipedia.org/wiki/Statistical_dispersion

http://en.wikipedia.org/wiki/Manufacturing

http://en.wikipedia.org/wiki/Business_process

http://en.wikipedia.org/wiki/Quality_management

http://en.wikipedia.org/wiki/Statistics

http://en.wikipedia.org/wiki/Industrial_process

http://en.wikipedia.org/wiki/Transliteration


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Phase 2 - Seiton (整頓) Straighten or Set in Order: Focuses on efficiency. When we translate this to "Straighten or Set in Order", it sounds like more sorting or sweeping, but the intent is to arrange the tools, equipment and parts in a manner that promotes work flow. For example, tools and equipment should be kept where they will be used (i.e. straighten the flow path), and the process should be set in an order that maximizes efficiency. For everything there should be place and everything should be in its place. (Demarcation and labeling of place.)

Phase 3 - Seisō (清掃) Sweeping or Shining or Cleanliness: Systematic Cleaning or the need to keep the workplace clean as well as neat. At the end of each shift, the work area is cleaned up and everything is restored to its place. This makes it easy to know what goes where and have confidence that everything is where it should be. The key point is that maintaining cleanliness should be part of the daily work - not an occasional activity initiated when things get too messy.

Phase 4 - Seiketsu (清潔) Standardizing: Standardized work practices or operating in a consistent and standardized fashion. Everyone knows exactly what his or her responsibilities are to keep above 3S's.

Phase 5 - Shitsuke (躾) Sustaining the discipline: Refers to maintaining and reviewing standards. Once the previous 4S's have been established, they become the new way to operate. Maintain the focus on this new way of operating, and do not allow a gradual decline back to the old ways of operating. However, when an issue arises such as a suggested improvement, a new way of working, a new tool or a new output requirement, then a review of the first 4S's is appropriate.

A sixth phase, "Safety," (安全) is sometimes added. Purists, however, argue that adding it is unnecessary since following 5S correctly will result in a safe work environment. Often, however a poorly conceived and designed 5S process can result in increases in workplace hazard when employees attempt to maintain cleanliness at the expense of ensuring that safety standards are adequately followed.

There will have to be continuous education about maintaining standards. When there are changes that will affect the 5S program—such as new equipment, new products or new work rules—it is essential to make changes in the standards and provide training. Companies embracing 5S often use posters and signs as a way of educating employees and maintaining standards.

9.3.9 KAIZEN

The term kaizen (改善, Japanese for "improvement") is a Japanese word adopted into English referring to a philosophy or practices focusing on continuous improvement in manufacturing activities, business activities in general, and even life in general, depending on interpretation and usage. When used in the business sense and applied to the workplace, kaizen typically refers to activities that continually improve all functions of a business, from manufacturing to management and from the CEO to the assembly line workers by improving standardized activities and processes, kaizen aims to eliminate waste. Kaizen was first implemented in several Japanese businesses during the Japanese post-war economic miracle and has since spread to businesses throughout the world.

The Japanese word "kaizen" means simply "improvement," but in management it means, more broadly, continuous improvement in in small increments.

Kaizen is a daily activity, the purpose of which goes beyond simple productivity improvement. It is also a process that, when done correctly, humanizes the workplace, eliminates overly hard work ("muri"), and teaches people how to perform experiments on their work using the scientific method and how to learn to spot and eliminate waste in business processes. In all, the process suggests a humanized approach to workers and to increasing productivity: "The idea is to nurture the company's human resources as much as it is to praise and encourage participation in kaizen activities." Successful implementation requires "the participation of workers in the improvement."

People at all levels of an organization can participate in kaizen, from the CEO down, as well as external stakeholders when applicable. The format for kaizen can be individual, suggestion system, small group, or large group. At Toyota, it is usually a local improvement within a workstation or local area and involves a small group in improving their own work environment and productivity. This group is often guided through the kaizen process by a line supervisor; sometimes this is the line supervisor's key role. Kaizen on a broad, cross-departmental scale in companies, generates total quality management, and frees human efforts through improving productivity using machines and computing power.

While kaizen (at Toyota) usually delivers small improvements, the culture of continual aligned small improvements and standardization yields large results in the form of compound productivity improvement. This philosophy differs from the "command and control" improvement programs of the mid-twentieth century. Kaizen methodology includes making changes and monitoring results, then adjusting. Large-scale pre-planning and extensive project scheduling are replaced by smaller experiments, which can be rapidly adapted as new improvements are suggested. Recent events indicate that kaizen (as practiced at Toyota) may not be adequate for dealing with life threatening problems in design and manufacturing. In a filing with the National Highway Traffic Safety Administration, Toyota said it had not realized until October (2009) that the pedals in cars made in the United States used the same material as those


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http://en.wiktionary.org/wiki/æ

http://en.wikipedia.org/wiki/Japanese_language

http://en.wikipedia.org/wiki/CEO

http://en.wikipedia.org/wiki/Japanese_post-war_economic_miracle

http://en.wikipedia.org/wiki/Muri_(Japanese_term)

http://en.wikipedia.org/wiki/Scientific_method

http://en.wikipedia.org/wiki/Stakeholder_(general)

http://en.wikipedia.org/wiki/Total_quality_management

http://en.wikipedia.org/wiki/Command_and_control_(management)


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in Europe — even though both are supplied by the same parts maker, CTS of Elkhart, Ind. Although it made the change on European models last summer, Toyota initially told American authorities it was unaware of any problems with the CTS-made pedals. Instead, Toyota said it believed gas pedals were becoming trapped in floor mats, the subject of an advisory to consumers that was later followed by a recall.

In modern usage, a focused kaizen that is designed to address a particular issue over the course of a week is referred to as a "kaizen blitz" or "kaizen event". These are limited in scope, and issues that arise from them are typically used in later blitzes.

The five main elements of kaizen

Teamwork Personal discipline Improved morale Quality circles Suggestions for improvement.


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