DBA 1601 Management Concepts Guide

DBA 1601 MANAGEMENT CONCEPTS
MANAGEMENT CONCEPTS
Preface
This course consists of five units. The first unit introduces the concept of
management, its features and functions. This unit will familiarize us with
the evolution of the management thoughts. The second unit discusses the
concept of planning. It also makes an attempt to highlight the nature and
scope of the planning, process and steps involved in planning, the same
unit provides information to enrich our knowledge on objectives, policies,
procedures, and throw light on strategic formulations. It also helps us to
read about the decision-making process types, and to enhance ideas on
Management By Objectives. Unit three aims to make us learn the
principles of organizations with the support of types and structures of
organization. The same unit is planned to discuss about the methods of
delegation, the ways and means of span of control and the significance
of staff and committees. Fourth unit of the subject highlights the style and
sources of recruitment. Here, in the same unit, objective and scope of
the training are also discussed. Along with the same, communication
process and practices in the organization are also discussed .The fifth
unit of the subject promotes us to take up the discussion on basic
requisites for coordination and control in any organization. This unit will
enable us to realize the importance and functions of control in an
organization. This unit shall progress to discuss on the control practices
and control techniques used by the organization.
Anna Universtiy Chennai 1

UNIT - I
INTRODUCTION TO
MANAGEMENT
LEARNING OBJECTIVES
After reading this unit you should be able to understand
 the nature and purpose of management
 that management is both an art and science
 the managerial functions such as planning, organizing, staffing, leading
and controlling.
 the evolution of management thoughts
 the contribution of selected management thinkers
 various approaches to management
 contemporary management practices
 managing global environment
1.1 NATURE AND SCOPE OF MANAGEMENT
1.1.1 DEFINITION OF MANAGEMENT

There are different thoughts on the definition of management. Some are
as follows:
 Management as an art of getting things done by others
 Management as a process
 Management as a group of Managers
 Management as a discipline
2 Anna Universtiy Chennai
The above said views are taken closely for consideration to define
management. Mary Parker Follet defined management as “the art of
getting things done by others”. This definition was criticized for the smack
of a manipulative character about the practice of a manager and also for
treating the employees for mere means to certain ends. Management
was redefined by a strong understanding that it is not only getting things
done by others but there should be something more than that. This can
be achieved by providing them good opportunities for growth and
advancement.
Harold Koontz defined management as the art of getting things done

through formally organised groups. It is “the art of creating an environment
in which people can perform as individuals and yet cooperate towards
attainment of group goals”.
G.R.Terry has viewed management as a process. Management is a distinct

process consisting of planning, organizing, actuating and controlling,
performed to determine and accomplish stated objectives by the use of
human beings and other resources.
According to McFarland, “Management is defined as the process by

which managers create, direct, maintain and operate purposive
organizations through a systematic, coordinated and cooperative way”.
Though F.W. Taylor developed principles of management, credit goes

to Henri Fayol, a French management theorist for advocating and
publicizing certain principles (or laws) for the soundness and good
working of the management. Henri Fayol warned that the principles of
management should be :
(i) Flexible and not absolute - must be usable regardless of changing

conditions.
(ii) Used with intelligence and with a sense of proportion, etc.
Henri Fayol listed 14 principles that grew out of his experience.
Kreitner defines management as “A problem solving process of effectively

achieving organizational objectives through the efficient use of scarce
resources in changing environment”.
1.1.2 CHARACTERISTICS OF MANAGEMENT

Management is a distinct activity having the following salient features or
characteristics :
1. Economic Resource : Management is one of the factors of
production together with land, labor and capital. As industrialization
increases, the need for managers also increases. Efficient management
is the most critical input in the success of any organized group activity
as it is the force, which assembles and integrates other factors of
production, namely, labor, capital and materials. Inputs of labor,
capital and materials do not by themselves ensure production; they
require the catalyst of management to produce goods and services
required by the society. Thus, management is an essential ingredient
of an organization.
2. Goal Oriented : Management is a purposeful activity. It coordinates
the efforts of workers to achieve the goals of the organization. The
success of management is measured by the extent to which the
organizational goals are achieved. It is imperative that the
organizational goals must be well-defined and properly understood
by the managers at various levels.
3. Distinct Process : Management is a distinct process consisting of
such functions as planning, organizing, staffing, directing and
controlling. These functions are so interwoven that it is not possible
to lay down exactly the sequence of various functions or their relative
significance. In essence, the process of management involves
decision-making and putting of decisions into practice.
4. Integrative Force : The essence of management is integration of
human and other resources to achieve the desired objectives. All
these resources are made available to those who manage. Managers
apply knowledge, experience and management principles for getting
the results from the workers by the use of non-human resources.
Managers also seek to harmonize the individuals’ goals with the
organizational goals.
5. System of Authority : Management as a team of managers represent
a system of authority, a hierarchy of command and control. Managers
at different levels process varying degrees of authority. Generally, as
we move down in the managerial hierarchy, the degree of authority
gets gradually reduced. Authority enables the managers to perform

their functions effectively.
6. Dynamic function : Management is a dynamic function of business
organization. Its functions change from time to time depending upon
the circumstance of the business, i.e., changes in economic, social,
political, technological and human conditions. Management adjusts
itself to the changing atmosphere making suitable forecasts and
changes in the policies.
7. Social process : Management is a social process as it primarily
deals with emotional, dynamic and sensitive human beings. The major
achievement is to win their confidence and cooperation. Thus, it is
difficult to precisely define the principles of management.
Management principles are constantly influenced by social traditions,
customs and regulations.
8. Management make things happen : Managerial ability is distinctly
different from technical ability. Management is the art of getting things
done through people. It implies that under a given set of constraints
or problem boundaries, positive results can emerge, by taking well-
defined actions.
9. Management is a multi-faceted discipline : Management has to
deal with heterogeneous resources. Their performance depends upon
the proper knowledge and skill of various disciplines. Management
has grown as a body of discipline taking the help of so many social
sciences like-Anthropology, Sociology, Psychology etc. Due to this,
management is also known as a “Behavioral Science.”
10. Intangible force: Managerial ability is an intangible force; it is a
social skill, which cannot be seen with the eyes but evidenced by the
quality and level of an organization.
1.1.3 MANAGEMENT – SCIENCE OR ART ?

Science : An organized or systematized body of knowledge pertaining
to a specific field of enquiry.
Art : It is the application of knowledge and personal skills to achieve results.
Profession : It is an
 occupation for which specialized knowledge, skills and training are

required
 these skills are used for larger interests of the society and
 the success of these skills is not measured in monetary terms always.
The question whether management is a science, art or profession is put
to debate quite frequently. There are arguments on all sides. Let us
examine these in detail.
Properties of Science
Science is a systematized body of knowledge based on certain principles,
capable of general application. This knowledge is obtained through the
process of observation, experimentation and testing. Science has four
elements :
Systematic body of knowledge: Science is systematized in the sense
that it is based on the cause and effect relationship between different
variables. Such a knowledge helps in explaining past events and predicts
the outcome of specific actions.
Scientific inquiry and observation: Scientific inquiry is unaffected by
the personal likes and dislikes of a scientist. When we say that the rotation
of earth causes days and nights, we do not express the opinion of just
one person. This can be scientifically proved at any time.
Experimentation: The principles of science are derived after repeated
observations and experiments. The results of each experiment can be
verified and outcomes predicted in a definite way. When results get
confirmed after repeated experimentation, they become principles.
Universal truths: Scientific principles represent basic truths. They are
developed after a series of experiments. They can be applied in all
situations and at all times.
Management as a Science
Management is a science because it has all the characteristics of science,
namely, Systematized body of knowledge. Management is a distinct
discipline. It has a number of principles, which can be studied and put to
application. Management offers principles that could be put to good use
while solving problems.
Management is a social science : Management is a social science as it

deals with human behavior about which little is known at present. As we
all know, it is not possible to study human behavior under controlled
laboratory conditions. Human behavior is unpredictable and therefore,
defies experimentation. As a result, the principles of management cannot
be accepted as absolute truths. They are still at a developing stage and
evolutionary in nature. Management, at best, can be called as a soft
science.
Management is an inexact science : Management is not an exact science
like physics, chemistry or biology. It does not offer absolute principles.
It can offer only flexible guidelines that would be of use in solving
problems. Management can never be an exact science because business
is highly dynamic and business conditions change continually.
Manager vs. scientist : A scientist can afford to wait until all the
information (about a thing) is available. He can indulge in a series of
experiments till the truth emerges clearly. However, a manager cannot
afford to do that. He must take decisions based on inadequate information,
insufficient knowledge and resources. He must make decisions today in
order to survive in the future.
Scientific management : When Taylor used the term ‘scientific
management’, he was aware of the fact that experimentation and
verification of facts is not possible in managing human resources. He had
used the term ‘scientific’, as an organized body of knowledge as opposed
to traditional rules and empirical dexterity. Over the years, the traditional
hit-or-miss methods have yielded place to several systematic methods
based on principles. No wonder, management is known as a
‘sophisticated behavioral science’ these days. Thus, art and science
are complementary and mutually supportive.
Properties of Art
Art is the application of knowledge and personal skills to achieve results.
It is a way of living. Art is based on the knowledge of principles offered
by science. A surgeon or a physician without the knowledge of medical
science becomes a witch doctor, with the knowledge of science an artful
doctor. Art is basically concerned with application of knowledge, how
to do things creatively and skillfully. It can be improved through constant
practice only. Terry has drawn the distinctions between science and art.
Therefore :
Management is basically an art as it involves the use of know-how and

skills like any other art such as painting, sculpture, etc. The practical
knowledge acquired in the areas of planning, decision making and
motivating certainly help managers to tackle problems in a better way.
The arguments in favour of management as an art run as follows:
Use of knowledge : Just as a doctor uses the science of medicine while
diagnosing and treating the patients, a manager uses the knowledge of
management theory while performing the managerial functions. Thus he
uses sound knowledge in place of hit-or-miss methods with a view to
achieve results effectively.
Creative art : Management is creative like any other art. It combines
human and non-human resources in a useful way so as to achieve results.
It tries to produce sweet music by combining the chords in an effective
manner. It makes things happen by changing the behavior of human beings.
Personalized : Like any other art, management is a personalized activity.
Every manager has his own way of managing things and people, based
on his knowledge and experience. As years roll by, managers learn the
art of managing through a process of trial and error.
Constant practice : Managers learn from mistakes. The application of
managerial principle over a period of time enables them to tackle difficult
problems with confidence. In other words, they develop their skills through
constant practice just as artistic skills can be developed through training.
Management is Science as well as Art

Management is thus an art as well as a science. The art of management is
as old as civilization. The science of management is young and developing.
Both are complementary and mutually supporting. Managers need to
acquire the knowledge of management principles and practice in order
to be successful. They need to sharpen this knowledge through constant
practice. The theoretical knowledge in management must be put to good
use in a skilful way, while achieving results. As Drucker has pointed out,
every organization has the same resources to work with. It is the quality
of management that spells the difference between success and failure.
Managers need to acquire knowledge systematically and put the same
to good use, using intuition, judgement and experience. A successful
manager is one who is able to visualize problems before they turn into
emergencies. The ability to meet the problems head-on does not come
by chance. It requires sound knowledge and constant practice. Managers
therefore, have to fruitfully combine their scientific knowledge with artistic
skills in order to emerge as winners, in a competitive environment.
1.2 EVOLUTION OF MANAGEMENT THOUGHTS

More than 200 years ago, Adam Smith described the advantages of
division and specialization. However, the study of management as a
science began recently, especially after the Industrial Revolution. There
has been a deluge of research during the last few decades on management.
It has attracted the attention of psychologists, sociologists,
anthropologists, mathematicians, political scientists, economists and so
on. Unfortunately, the approaches by these scholars have created chaos
and resulted in a ‘confused and destructive warfare’.
Harold Koontz described the present state of management theory as a
‘jungle’. According to Koontz, Donnell and Weihrich there are eleven
approaches for studying management. Stogdill has identified not less than
eighteen approaches for studying management. Hutchinson has identified
five approaches. Thus, different writers have provided different
categorization schemes for studying management. In order to facilitate
easy understanding, we can identify four broad approaches namely, the
classical, neo-classical, behavioral and modern theory.
(i) Classical School: It is the oldest school of management thought.
The classical theorists concentrated on organization structure for the
achievement of organizational goals and also developed certain
principles of management. Many of the classical concepts and
principles hold good even today. Classical thought can be studied
und er t wo st reams namely (a) Scient ific Management
(b) Bureaucracy
(ii) Neo-Classical School : The neo-classical writers tried to remove
the deficiencies of the classical school and suggested improvements
for good human relations in the organization. Their propositions are
based on ‘human relations studies’ conducted at the Hawthorne Plant
of General Electricals, U.S.A. That is why, they are also known as
‘human relationists.’
(iii) Behavioral Sciences School : This approach emerged as a result
of the contributions of psychologists, sociologists and anthropologists
to the field of management. The behavioral science perspective

believes that it is difficult to understand the sociology of a group,
separate from the psychology of the individuals comprising it and
the anthropology of the culture within which it exists. Thus, the
behavioral sciences are transactional; they are concerned with all
relevant aspects of human behavior including the interactions among
all important factors.
(iv) Modern School : The modern management thinkers define
organization as a system and also consider the impact of environment
on the effectiveness of the organization. As a result, two approaches
have gained prominence after 1960s which are as follows: (a)
Systems approach, and (b) Contingency approach.
1.2.1 SCIENTIFIC MANAGEMENT APPROACH

The impetus for the scientific management approach came from the first
industrial revolution. Because it brought about such an extraordinary
mechanization of industry, this revolution necessitated the development
of new management principles and practices. The main contributors to
scientific management include Frederick Taylor, Henry L. Gantt, Frank
Gilbreth, Lillian Gilbreth and Harrington Emerson and others.
1.2.1.1 Fredrick W. Taylor’s views on Scientific Management

Taylor was the first person who insisted on the introduction of methods
in management and it was he who, along with his associates, made the
first systematic study of management. He launched a new management
approach in 1910 which is known as ‘Scientific Management.’ That is
why Taylor is regarded as the father of scientific management.
Taylor was born in 1856 in Philadelphia, U.S.A. He started his career as
an apprentice in a small machine making shop in 1870 and rose to the position
of a Chief Engineer of Midvale Steel Works in 1884 at the age of 28.
Meaning of Scientific Management

According to Taylor, “Scientific Management is the substitution of
exact scientific investigations and knowledge for the old individual
judgment or opinion in all matters relating to the work done in the
shop”. It implies the application of science to the management of a
business concern. It aims at replacement of traditional techniques by
scientific techniques.
Principles of Scientific Management

Taylor’s contribution has two dimensions: (i) mechanical and (ii)
philosophical. On the mechanical side, Taylor introduced time and motion
studies. Standardization of tools, methods and working conditions,
differential piece rate were considered for the payment of wages, etc.
On the philosophical side, he tried to develop the science of management
based on scientific investigation and experiment. Before studying the
techniques or elements of scientific management, a proper understanding
of Taylor’s philosophy is a must. Scientific management is based on the
following five principles:
1. Science, not rule of thumb.
2. Harmony in group action, rather than discord.
3. Maximum output in the place of restricted output.
4. Scientific selection, training and placement of the workers.
5. Development of all workers to the fullest extent possible for their
own and organization’s highest prosperity.
The above principles are discussed below :
1. Replacement of old rules of thumb method : Scientific
investigation should be used for taking managerial decisions instead
of basing decisions on opinion, intuition or rule of thumb. Under
scientific management, decisions are made on the basis of facts as
developed by the application of scientific method to the problem
concerned. This is in contrast with the approach followed under
traditional management according to which decisions are based on
opinions, prejudices, or rule of thumb.
2. Scientific selection and training of workers: The procedure for
selection of workers should be designed scientifically. The errors
committed at the time of selection may prove to be very costly later
on. If we do not have the right worker on the right job, the efficiency
of the organization will be reduced. Therefore, every organization
should follow a scientific system of selection. The selected workers
are to be trained to avoid wrong methods of work. Management is
responsible for their scientific education and training.
3. Co-operation between labour and management: There should
be co-operation between the management and the workers. This
requires change of mental attitudes of the workers and the

management towards each other. Taylor called it a mental revolution.
When this mental revolution takes place, workers and management
turn their attention towards increasing profits. They do not quarrel
about the distribution of profits.
4. Maximum output: The management and the workers should try to
achieve maximum output, in place of restricted output. This will be
beneficial to both the parties. Maximum output will also be in the
interest of the society.
5. Equal division of responsibility: There must be equal division of
responsibility between the managers and the workers. The
management should assume responsibility for the work for which it
is better suited. For instance, management should decide the method
of work, working conditions, time for completion of work, etc.
instead of leaving these to the discretion of workers. The management
should be responsible for planning and organizing the work, whereas
workers should be responsible for the execution of work as per
instruction of the management.
Techniques of Scientific Management

To put the philosophy of scientific management into practice, Taylor and
his associates have suggested the following techniques:
1. Scientific Task Setting : It is essential to set the standard task
which an average worker should do during a working day. Taylor
called it a fair day’s work. He emphasized the need for fixing a fair
day’s work because it will prevent the workers from doing work
much below their capacity.
2. Work Study: Work-study implies an organized, objective,
systematic, analytical and critical assessment of the efficiency of
various operations in an enterprise. It is a generic term used for
those techniques which are used in the analysis of human work in its
entire context and which lead systematically to the investigation of
all factors, which affect the efficiency, and economy of operations.
Work-study includes the following techniques:
(i) Method study: This study is conducted to know the best method of
doing a particular job. It helps in reducing the distance traveled by
materials, and brings improvement in handling, transporting, inspection

and storage of raw materials and goods.
(ii) Motion study: It is the study of the movement of an operator or a
machine. Its purpose is to eliminate useless motions and find out the
best method of doing a particular job. By undertaking motion study,
an attempt is made to know whether some elements of a job can be
eliminated, combined or their sequence changed to achieve the
necessary rhythm.
(iii) Time study: Time study is the technique of observing and recording
the time required to do each element of an industrial operation.
Through time study, the precise time required for each element of a
man’s work is determined. It helps in fixing the standard time required
to do a particular job.
(iv) Fatigue study: Fatigue, (physical or mental) has an adverse effect
on worker’s health and efficiency. Fatigue study helps in reducing
fatigue among the workers. Fatigue is generally caused by long
working hours without rest pauses, repetitive operations, excessive
specialization and poor working conditions. The purpose of fatigue
study is to maintain the operational efficiency of the workers.
3. Planning the Task: Taylor emphasized the need for planning work.
He advocated that planning function should be separated. Workers
should not be asked to choose their own methods and decide what
they have to do. The planning department should do the detailed
planning. The planning department should prepare detailed
instructions for the workers as to the type, quality and quantity of
the products to be used.
4. Standardization: Taylor advocated the standardization of tools, and
equipments, cost system and several other items. Efforts should be
made to provide standardized working environment and methods of
production to the workers. Standardization would help to reduce
spoilage and wastage of materials, improve quality of work, reduce
cost of production and reduce fatigue among the workers.
5. Scientific Selection and Training: The management should design
scientific selection procedure so that the right men are selected for
the right jobs. The first step in scientific selection is determining the
jobs for which workers are required. After that, the most appropriate
qualification, training, experience and the level of efficiency for the
requisite post are determined. Employees are selected according to
predetermined standards in an impartial way. Workers should be
specifically trained for the jobs they are appointed to, so that they
can perform their jobs effectively.
6. Differential Piece-Wage Plan: Taylor suggested this plan to attract
highly efficient workers. Under this plan, there are two-piece work
rates, one is lower and another is higher. The standard of efficiency
is determined either in terms of time or output based on time and
motion study. If a worker finishes work within the standard time or
produces more than standard output within the standard time, he
will be given higher piece rate. On the other hand, if a worker is
below the standard, he shall be given lower piece rate.
7. Specialization: Taylor advocated that specialization must be
introduced in a factory. He advocated functional foremanship for
this purpose. In his scheme, planning was separated from executing.
He recommended eight foremen in all, to control the various aspects
of production. He suggested four foremen in the planning department,
namely, route clerk, instruction card clerk, time and cost clerk and
shop disciplinarian. The four foremen recommended for getting the
required performance from the workers include gang boss, speed
boss, repair boss and inspector.
Evaluation of Scientific Management

Taylor’s scientific management was associated with many benefits to the
industry. According to Gilberts, the main benefits of scientific management
are “conservation and savings, making an adequate use of every
one’s energy of any type that is expended.” Scientific management
leads to the following benefits:
1. Replacement of traditional rule of thumb method by scientific
techniques for each element of a man at work.
2. Proper selection and training of the workers.
3. Establishment of harmonious relationship between the workers and
the management.
4. Achievement of equal division of responsibilities between the workers
and the management.
5. Standardization of tools, equipment, materials and work methods.

6. Detailed instructions and constant guidance to the workers.
7. Incentive wages to the workers for higher production.
8. Elimination of wastes and rationalization of system of control.
9. Better utilization of various resources.
10. Satisfaction of the needs of the customers by providing higher quality
products at lower prices.
Criticism of Scientific Management:

Taylor’s scientific management was criticized not only by the workers
and managers but also by the psychologists, the general public, etc. The
main grounds of criticism are given below:
1. The use of the word ‘Scientific’ before ‘Management’ was objected
because what is actually meant by scientific management is nothing
but a scientific approach to management.
2. It was argued that the principles of scientific management as
advocated by Taylor were confined mostly to production
management. He ignored certain other essential aspects of
management like finance, marketing, accounting and personnel.
3. Taylor advocated the concept of functional foremanship to bring
about specialization in the organization. But this is not feasible in
practice as it violates the principle of unity of command.
4. Trade unionists regarded the principles of scientific management as
the means to exploit labour because the wages of the workers were
not increased in direct proportion to productivity.
The other contributors to scientific management like Henri L. Gantt, Frank
Gilbreth, Lillian Gilbreth and Harrington Emerson later remedied many
of the above objections. Taylor’s theory is still being applied by the
modern business undertakings. In short, it can be said that Taylor was
the pioneer in introducing scientific reasoning to the discipline of
management.
Management process school is also called the ‘traditional’ or
‘universality’ school, as it believes that management principles are
applicable to all kinds of group activities. Henri Fayol is regarded as the
father of this school. Henri Fayol defined management in terms of certain

functions and then laid down fourteen principles of management which
according to him have universal applicability.
1.2.1.2 Henri Fayol-Theory of Management

Fayol was born in 1841 and was appointed as an engineer of a French
mining company in 1860. In 1880, he became the managing director of
the same company. When he took charge, the company was on the verge
of bankruptcy. When he retired in 1918, its financial position was very
strong. Fayol attributed his success to his system of management which
he emphasized could be both taught and learnt. Unlike Taylor, Fayol
studied management from the board of directors down. Taylor’s approach
to management dealt with specifics of job analysis, employees’ motion
and time standards while Fayol viewed management as a teachable theory
dealing with planning, organizing, commanding, coordinating and
controlling.
Fayol’s long practical experience is simply reflected in his written work.
He tried to develop a theory of management. He discussed the principles
of general management and argued that managerial ability can be acquired
as any other technical ability. He not only recommended formal teaching
in management but also practiced it by founding the Center for
Administrative Studies in Paris. Thus, he was a pioneer in the field of
management education. In brief, Fayol’s views on management is
acceptable even today because they are much in tune with the requirements
of the management in the present day world. He has been rightly called
the father of general management.
Fayol’s Theory of Management

Fayol began by classifying all operations in business organizations under
the following six categories:
(i) Technical (production);
(ii) Commercial (purchases and sales);
(iii) Financial (funding and controlling capital);
(iv) Security (protection);
(v) Accounting (balance sheet, costing records); and
(vi) Administrative or Managerial (planning, organizing, commanding,
coordinating and controlling).
Fayol pointed out that managerial activity deserved more attention. In

his view, management is the process composed of five elements or
functions: planning, organizing, commanding, coordination and control.
Fayol observed :
(i) To plan means to study the future and arrange the plan of operations;
(ii) To organize means to build up the material and human organization
of the business;
(iii) To command means to make the staff do their work;
(iv) To coordinate means to unite all activities; and
(v) To control means to see that everything is done in accordance with
the standards that have been laid down.
Principles of Management
Principles of Management implies a list of current management practices.
Though F.W. Taylor developed principles of management, credit goes
to Henri Fayol, a French management theorist for advocating and
publishing certain principles (or laws) for the soundness and good working
of the management. Henri Fayol warned that the principles of management
should be, (i) Flexible and not absolute; must be usable regardless of
changing conditions, (ii) Used with intelligence and with a sense of
proportion, etc. Henri Fayol listed 14 principles which are briefed below:
1. Division of Work (or Labour)
- Division of work means dividing the work on the principle that different
workers (and different places) are best fitted for different jobs (or things)
depending upon influences arising from geography, natural conditions,
personal aptitude and skills.
- Division of work leads to specialization.
- Concept of division of labour can be applied to all kinds of work,
managerial as well as technical.
Advantages of Division of Labour :

Since the same worker does the same work repeatedly,
(i) He gains proficiency and skill on the jobs,
(ii) Rate of production increases,
(iii) Product quality improves,

(iv) He is in a position to suggest changes in product, processing or
methods of doing that work.
Disadvantages of Division of Labour:

(i) Division of labour gives rise to loss of craftsmanship; workers become
machine-minders and no more,
(ii) With the passage of time, the same job becomes dull and monotonous,
(iii) Workers can not remain all-around and one cannot work in place of
another if he is absent.
2. Authority and Responsibility
- Authority and Responsibility should go together, hand-in-hand and
must be related.
- An executive can do justice with his responsibility only when he has
the proper authority.
- Responsibility without Authority or vice versa is meaningless.
3. Discipline
- Discipline is absolutely necessary for efficient functioning of all
enterprises.
- Discipline may be described as a respect for agreements that are
directed at achieving obedience, application, and the outward marks
of respect.
4. Unity of Command
- Unity of command means, employees should receive orders and
instructions from one boss (or supervisor) only. In other words a
worker should not be under the control of more than one supervisor.
- Unity of command avoids confusion, mistakes and delays in getting
the work done.
5. Unity of Direction
- It is a broader concept than the unity of command.
- Unlike unity of command which concerns itself with the personnel,
unity of direction deals with the functioning of the body corporate.
- Unity of direction implies that there should be one plan and one
head for each group of activities having the same objective.
In other words, there should be one common plan for an enterprise as a
whole.
6. Subordination of Individual to General Interest
- The interests of an individual person should be permitted to supersede
or prevail upon the general interests of the enterprise.
- This is necessary to maintain unity and to avoid friction among the
employees.
7. Remuneration
Remuneration is the price paid to the employees for the services rendered
by them for the enterprise. Remuneration should (i) be fair, and (ii) bring
maximum satisfaction to both employees and the employer.
8. Centralization of Authority
- Centralization of authority means that the authority is in the hands of
the center, i.e., the authority is not dispersed among different sections.
- In a business organization, authority should be centralized only to
that degree or extent which is essential for the best overall
performance.
- Degree of centralization is decided by keeping in view the nature,
size and complexity of the (business) enterprise.
9. Scalar Chain
- Managers may be regarded as a chain of superiors. There should be
an unbroken line of authority and command through all levels from
the highest (i.e., general manager) to the lowest ranks (employee).
- The chain of superiors should be short circuited, when following it
strictly will be detrimental to performance.
10. Order
- This promotes the idea that everything (e.g., materials) and everyone
(human being) has his place in the organization.
- Materials and human beings should be arranged such that right
material (things)/person are in the right place.
11. Equity of Treatment

- Manager should have equality of treatment for all his subordinates.
- Manager should deal with his subordinates with kindness and justice.
-This will make employees more loyal and devoted towards the
management/enterprise.
12. Stability
- Stable and secure work force is an asset to the enterprise, because
unnecessary labour turnover is costly.
- An average employee who stays with the concern is much better than
outstanding employees who merely come and go.
- Instability is the result of bad management.
13. Initiative
- Initiative is one of the keenest satisfactions for an intelligent employee
to experience.
- Managers should sacrifice their personal vanity in order to permit their
subordinates to exercise their own initiative.
- A manger should encourage his subordinates to take initiative.
14. Esprit de Corps
- This principle of management emphasizes the need for teamwork
(harmony and proper understanding) among the employees and shows
the importance of communications in obtaining such team work.
FOLLOWERS OF TAYLOR
Among the immediate disciples of Taylor were such outstanding pioneers
as Henry L. Gantt and Frank and Lillian Gilbreth, to mention only a few.
1.2.1.3 Henry L. Gantt’s Contribution of Management

Gantt like Taylor , a mechanical engineer joined Taylor at the Midvale
Steel Company in 1887. He stayed with Taylor in his various assignments
until 1901, when he formed his own consulting engineering firm. Although
he strongly espoused Taylor’s ideas and did much consulting work on
the scientific selection of workers and the development of incentive bonus
systems, he was far more cautious than Taylor in selling and implementing
his scientific management methods. Like Taylor, he emphasized the need

for developing a mutuality of interests between management and labour,
a harmonious cooperation. In doing this, he stressed the importance of
teaching, developing an understanding of systems on both labour and
management, and appreciating that “in all problems of management the
human element is the most important one.”
Gantt is perhaps best known for his development of graphic methods of
describing plans and making possible better managerial control. He
emphasized the importance of time, as well as cost, in planning and
controlling work. This led eventually to the famous Gantt chart, which is
in wide use today and was the forerunner of such modern techniques as
the Program Evaluation and Review Technique (PERT). Some social
historians regard the Gantt chart as the most important social invention
of the twentieth century.
1.2.1.4 Frank and Lillian Gilbreth

The ideas of Taylor were also strongly supported and developed by the
famous husband and wife team of Frank and Lillian Gilbreth. Frank
Gilbreth gave up going to the university to become a bricklayer at the
age of 17 in 1885; he rose to the position of chief superintendent of a
building contracting firm 10 years later and became a building contractor
on his own shortly thereafter. During this period, and quite independently
of Taylor’s work, he became interested in wasted motions in work. By
reducing the number of bricklaying motions from 18 to 5, he made
possible the doubling of a bricklayer’s productivity with no greater
expenditure of effort. His contracting firm soon gave way largely to
consulting on the improvement of human productivity. After meeting Taylor
in 1907, he combined his ideas with Taylor’s to put scientific management
into effect.
Lillian Gilbreth’s interest in the human aspects of work and her husband’s
interest in efficiency search for the one best way of doing a given task,
led to a rare combination of talents. It is therefore not surprising that
Frank Gilberth long emphasized in applying scientific management
principles; we must look at workers first and understand their personalities
and needs. It is interesting too that the Gilbreths came to the conclusion
that it is not the monotony of work that causes so much worker
dissatisfaction but, rather, management’s lack of interest in workers.
Bureaucracy-Definition
A Structure with highly routine operating tasks achieved through
specialization, much formalized rules and regulations, tasks that are
grouped into functional departments, centralized authority, narrow spans
of control and decision making that follows the chain of command.
Elements of Bureaucracy are:
1. Hierarchy
2. Division of work
3. Rules, regulations and procedures
4. Records
5. Impersonal Relationships
6. Administrative class
Advantages of Bureaucracy: It is having the following qualities of
distinction like
 Specialization
 Rationality
 Predictability
 Democracy
Disadvantages of Bureaucracy are as follows :
 Rigidity
 Impersonality
 Displacement of objectives
 Compartmentalization of activities
 Empire building
 Red tape
1.2.2 NEO-CLASSICAL APPROACH

Theories resulted in work behavior and the researches tried to investigate
the reasons for human behavior at work. They discovered that the real
cause of human behavior is somewhat more than the physiological variable.
These findings generated a new phenomenon about the organizational
functioning and focused attention, on human beings in the organizations.

These exercises were given new names such as ‘behavioral theory of
an organization’, ‘human view of an organization’ or ‘human
relations approach in an organization.’
The neoclassical approach was developed as a reaction to the classical
approach, which attracted so many behaviorists to make further
researches into the human behavior at work. ‘Mayo’ and his associates
at Hawthorne Plant of the Eastern Electric Company, Chicago started
this movement in the late twenties, gained momentum and continued to
dominate till the sixties. Douglas M. McGregor has given an impressive
account of thinking of human relations in his book entitled ‘The Human
Side of Enterprise.’
The classical theory was the product of the time and the following reasons
were responsible for its development:
(i) The management thinking was showing signs of change because of
the improved standards of living and education level. The
technological changes were forcing the management to expand the
size of the organization and complexities were increasing. This also
led to the fact that the management be somewhat more sympathetic
and considerate towards their workers.
(ii) The trade union movement got momentum and made the workers
conscious of their rights. It was no longer possible for the management
to treat the human beings at work as ‘givens’.
These were the two main reasons, which were responsible for the change
of management behavior from autocratic to the custodial approach, which
was based on offer of fringe benefits apart from wages to meet their
security needs.
Though neoclassical approach was developed as a reaction to the classical
principles, it did not abandon the classical approach altogether, rather it
pointed to the limitations of the classical approach and attempted to fill
in the deficiencies through highlighting certain points which were not given
due place in the classical approach. In this regard, there were two schools
of thought. One school of thought with writers as Simon, Smith burg,
and Thompson, pointed out the limitations of the classical approach to
structural aspect only and the analysts called this group as ‘neoclassicists’.
This school of thought suggested modifications to the classical principles

but did not abandon the basic principles. The other school of thought
which consisted of large number of writers focused on the human aspect
neglected by the classicists. This group was called as human relationists
or ‘behaviorists’. Both these schools were reactions to the classical theory
but failed to suggest or develop any new theory except providing some
points of criticism on varying counts. Both of them could be referred as
neoclassicists.
Neoclassicists endeavored to identify the weaknesses of classicists

through empirical research and most of the criticisms of classical theory
have emerged through researches. Hawthorne studies were the beginning
of the series. The other contributors are Roethlisberger, Dickson,
Whitehead, Lippitt and White, Coach and French Jr., etc.
1.2.3 HUMAN RELATIONS APPROACH

The classical writers including Weber, Taylor and Fayol neglected the
human relations aspect. The human relationists, (also known as
neo-classicists) focused on the human aspect of industry. They modified
the classical theory by emphasizing the fact that organization is a social
system and the human factor is the most important element within it.
They conducted some experiments (known as Hawthorne Experiments)
and investigated informal groupings, informal relationships, patterns of
communication, patterns of informal leadership, etc. Elton Mayo is
generally recognized as the father of the Human Relations School. Other
prominent contributors to this school include Roethlisberger, Dickson,
Dewey, Lewin, etc.
Hawthorne Studies
In 1927, a group of researchers led by George Elton Mayo and Fritz
J. Roethlisberger at the Harvard Business School were invited to join in
the studies at the Hawthorne Works of Western Electric Company,
Chicago. The experiment lasted up to 1932. Earlier, from 1924 to 1927,
the National Research Council made a study in collaboration with the
Western Electric Company to determine the effect of illumination and
other conditions upon workers and their productivity.
Illumination Experiment. This experiment was conducted to establish

relationship between output and illumination. The output tended to
increase every time as the intensity of light was improved. But the output
again showed an upward trend when the illumination was brought down
gradually from the normal level. Thus, it was found that there is no
consistent relationship between output of workers and illumination in the
factory. There were some other factors, which influenced the productivity
of workers when the intensity of light was increased or decreased.
Relay Assembly Room Experiment. In this experiment, a small
homogeneous work-group of girls was constituted. Several new elements
were introduced in the work atmosphere of this group. These included
shorter working hours, rest pauses, improved physical conditions, friendly
and informal supervision, free social interaction among group members,
etc. Productivity and morale increased considerably during the period of
the experiment.Morale and productivity were maintained even if
improvements in working conditions were withdrawn. The researchers
concluded that socio-psychological factors such as feeling of being
important, recognition, attention, participation, cohesive work-group, and
non-directive supervision held the key for higher productivity.
Bank Wiring Observation Room Experiment. This experiment was
conducted to study a group of workers under conditions, which were as
close as possible to normal. This group comprised of 14 workers. After
the experiment, the production records of this group were compared
with their earlier production records. There were no significant changes
in the two because of ‘the maintenance of ‘normal conditions’. However,
the researchers observed existence of informal cliques in the group and
informal production norms.
The findings of Bank Wiring Experiment included the following
observations:
1. Each individual was restricting output.
2. The group had its own “unofficial” standards of performance.
3. Individual output remained fairly constant over a period of time.
4. Departmental records were distorted due to differences between
actual and reported output or between standard and reported
working time.
Mass Interview Programme. The researchers interviewed a large

number of workers with regard to their opinions on work, working
conditions and supervision. Initially, managers and researchers used a
direct approach whereby interviewers asked questions which are
considered important. Later, this approach was replaced by an indirect
technique where the interviewer simply listened to what the employees
had to say. The findings confirmed the importance of social factors at
work in the total work environment.
Contributions of Human Relations Approach or Hawthorne

Studies
The human relationists proposed the following points as a result of their
findings of the Hawthorne experiments:
1. The organization in general, is a social system composed of numerous
interacting parts. The social system defines individual roles and
establishes norms that may differ from those of the formal
organization. The workers follow a social norm determined by their
co-workers, which defines the proper amount of work, rather than
try to achieve the targets, management thinks they can achieve, even
though this would have helped them to earn as much as they physically
can.
2. The social environment on the job affects the workers and is also
affected by them. Management is not the only variable.
3. The informal organization does also exist within the framework of
formal organization and it affects the formal organization.
4. At the workplace, the workers often do not act or react as individuals
but as members of groups. A person who resists pressure to change
his behavior as an individual often changes it quite readily if the group
of which he is a member changes its behavior. The group plays an
important role in determining the attitudes and performance of
individual workers.
5. There is an emergence of informal leadership as against formal
leadership and the informal leader sets and enforces group norms.
He helps the workers to function as a social group and the formal
leader is rendered ineffective unless he conforms to the norms of the
group of which he is supposed to be in charge.
6. Both way communication is necessary because it carries necessary

information downward for the proper functioning of the organization
and transmits upward the feelings and sentiments of people who
work in the organization.
7. Money is only one of the motivators, but not the sole motivator of
human behavior. Man is diversely motivated and socio-psychological
factors act as important motivators.
8. Man’s approach is not always rational. He may behave irrationally
as far as rewards from the job are concerned.
Appraisal of Neoclassical Theory Contribution

The neoclassical theory provides various modifications and improvements
over the earlier theory and offers a more humanistic view towards people
at work. Neoclassicists have also introduced behavioral science in the
study of organizational functioning which has helped managers quite a
lot. This approach emphasized the micro-analysis of the human behavior.
The theory has brought into light certain important factors which were
altogether ignored by the classicists such as informal group, group norms,
informal leader, non-economic rewards, etc. Thus, the approach gives
evidence of accepting the classical doctrine though superimposing its
modifications, resulting from individual behavior and the influence of the
informal group.
Criticism of Human Relations Approach

The human relations approach has been criticized on the following grounds:
(i) Lack of Scientific Validity : The human relationists drew conclusions
from Hawthorne studies. These conclusions are based on clinical
insight rather than on scientific evidence. The groups chosen for study
were not representative in character. The findings based upon
temporary groups do not apply to groups that have continuing
relationship with one another. Moreover, the experiments focused
on operative employees only.
(ii) Limited Focus on Work : The human relations approach lacks
adequate focus on work. It puts all the emphasis on interpersonal
relations and on the informal group. It tends to overemphasize the
psychological aspects at the cost of the structural and technical
aspects.
(iii) Over-emphasis on Group : The human relations approach

over-emphasizes the group and group decision-making. But in
practice, groups may create problems and collective decision-making
may not be possible.
(iv) Over-stretching of Human Relations : It is assumed that all
organizational problems are amenable to solutions through human
relations. This assumption does not hold good in practice.
(v) Conflict between Organizational and Individual goals : It views
conflict between the goals of the organization and those of individuals
as destructive. The positive aspects of conflicts such as overcoming
weaknesses and generation of innovative ideas are ignored.
1.2.4 BEHAVIOURAL SCIENCE APPROACH

Under behavioural science approach, the knowledge drawn from
behavioural sciences, namely, psychology, sociology and anthropology,
is applied to explain and predict human behavior. It focuses on human
behavior in organizations and seeks to promote verifiable propositions
for scientific understanding of human behavior in organizations. It lays
emphasis on the study of motivation, leadership, communication, group
dynamics, participative management, etc.
The essential characteristics of behavioural science approach are as under:
(1) Data must be objectively collected and analyzed.
(2) Findings must be presented so that the distinction between cause
and effect, as opposed to chance occurrences, is clear.
(3) Facts must be systematically related to one another within a systematic
framework. Data collection alone does not constitute a science.
(4) The findings of a study must always be open to further examination
and question.
The proponents of behavioural science approach made the following
propositions :
(i) An organization is a socio-technical system.
(ii) Individuals differ with regard to attitudes, perceptions and value
systems. As a result, they behave differently to different stimuli under
different conditions.
(iii) People working in the organization have their needs and goals, which
may differ, from the organizational goals. Attempts should be made
to achieve fusion between organizational goals and human needs.
(iv) A wide range of factors influence inter-personal and group behavior
of people in organizations.
1.2.5 SOCIAL SYSTEM APPROACH

It was Chester I. Barnard who developed the concept of social system.
He viewed organization as a social system that is composed of people
who work in, cooperation. An organization comes into existence when
(a) there are a number of persons in communication with each other, and
(b) they are willing to cooperate for a common purpose. Barnard also
recognized informal organization representing social interactions, which
generally do not have a consciously coordinated joint purpose. The
executives should encourage informal organizations to serve as a means
of communication and group cohesiveness.
Chester I. Barnard –Contribution to Management

Barnard’s treatment of management differed considerably from that of
Taylor and Fayol. Taylor concentrated on improving the task efficiency
of the individual. Fayol, on the other hand, moving to the totality concept
of management directed his analysis to the operational side, i.e., principles
and functions of management. But Barnard started with the individual,
moved to cooperative organised endeavor and ended with executive
functions. His publication ‘The Functions of the Executive’ (1938) is a
highly significant work. He wrote this book with two objectives: to set
forth a theory of cooperation and organization, and to present a
description of the executive process.
The broad features of the Social System approach are as follows:
(i) Organization is treated as a social system. That is why, this approach
resembles the human relations approach.
(ii) Relationships exist among the external and internal environment of
the organization.
(iii) Cooperation among group members is necessary for the achievement
of organizational goals.
(iv) For effective management, efforts should be made for establishing

harmony between the goals of the organization and those of the
various groups therein.
Barnard identified the following functions of an executive: (a) the
maintenance of organizational communication, (b) securing essential
services from individuals in the organization, and (c) formulating and
defining the purpose. By performing these functions, the executives can
achieve good human relations in the organization.
Barnard also developed a new concept of authority-known as acceptance
authority. He suggested that a person will accept the communication as
authoritative only when-four conditions are satisfied: (a) he can understand
the communication, (b) he believes that it is consistent with organizational
purpose, (c) he believes it to be compatible with his own personal
interests, and (d) he is mentally and physically able to comply with it.
Barnard is often remembered for his views on social responsibility of
management. The philosophy of social responsibility of management
emphasizes that management should consider itself as a provider of fair
wages and security, and a creator of an atmosphere conducive to the
growth and development of the worker as an employee and as a citizen.
1.2.6 SYSTEMS APPROACH TO AN ORGANIZATION

We may look at the organization from two different angles:
1. We may consider the overall picture of the organization as a unit; or
2. We may consider the relationship between its various internal
components.
When we consider the overall picture of the organization, we consider
all the elements-internal and external-and their effects on each offer
simultaneously. This approach may be called the ‘goalistic view’ because
it tries to reach the goal of an organization by unifying the efforts of all
the elements. For example, when we consider finance, workers and their
attitude, technological developments, etc. we are following goalistic view.
It serves as a mean-ends analysis, which in turn facilitates division of
work and helps in judging the extent of success of comparing actual and
targeted performance. But it does not answer many problems such as
interdependence of elements, organizations environment, interface, etc.
It gives a systematic view when we consider the second approach,
i.e., we examine the relationship between each element of the organization

and their interdependence. If we examine employer-employee, customer
and organization, debtors-organization relationships, we follow systematic
view.
The systems approach focused attention on the following aspects:
(i) It integrates all elements for the proper and smooth functioning of
the organization.
(ii) The organization overall goals can be achieved successfully because
it considers all the aspects of the problems deeply and maintains a
harmonious relationship between various elements so that they work
untidily to achieve the goals.
(iii) The approach helps in acquisition and maintenance of various
resources, i.e., man, material, money, and machinery, etc. for
pertaining the smooth functioning of the organization.
(iv) It allows adaptation to internal - requirements and environmental
changes in order to survive and grow.
Definition and Characteristics of System

1. Definition of System: Kast and Rosenzweig define the system as an
organised unitary whole composed of two or more interdependent parts,
components or sub-systems defined by identifiable boundaries that form
its environmental suprasystem. More simply, a system may be referred
as units composed of several interdependent parts. System may be
denoted as a grouping of parts and not simply an agglomeration of
individual parts. Though each part performs its own functions, yet they
work towards a common goal. The behavior of the entity is a joint function
of the behaviors of the individual parts and their interactions. An
organization is composed of a number of sub-systems such as internal
organization, technological, psychological, structural, managerial and
environmental etc., that are constantly changing and evolving. A change
in one may affect the other.
2. Characteristics of System: From the analysis of foregoing definition
and discussion following characteristics of a system emerge:
1. Interdependence of parts: A system has several parts. Each part is
dynamic and affects all other parts. They are interrelated and
interdependent. Interdependence of different parts is a must in an

organization as a system, because of division of labour, specialization,
sharing of limited resources, scheduling of activities, etc. The work
of the organization is divided into various departments,
sub-departments and so on, assigning each unit an independent
specialized task, which on integration culminates into the
accomplishment of overall organizational goals. These parts are
interconnected in such a way that a change in one part may affect
the other part and in this way, the whole organization.
2. Composition of several sub-systems: A system is composed of
several sub-systems. For example, in a manufacturing organization,
total manufacturing is one system, within which may exist a complete
production system, which again may contain an inventory control
system. Conversely, a system or sub-system may form part or
container of other system. For example, an individual who may be a
part of one system may also be a part or container for another
physiological system.
3. Every system has its own norms: Every syst em may be
distinguished from other systems in terms of objectives, processes,
roles, structures, and norms of conduct. So, every system is unique.
If anything happens in the organization, we regard it as an outcome
of a particular system and we locate the fault in the system.
4. Systems influence and are influenced by other systems: As
systems are open, they influence other systems in the environment
depending upon its strengths and capacities in relation to other
systems. Obviously, the influence of environment, in most cases is
greater than the systems over all impact on the environment.
Concept of Sub-system in an Organization

In the previous section, we have suggested that a system is an integrated
whole of various sub-systems. An organization, as a system can better
be understood by identifying the various sub-systems within it. The levels
of systems within a sub-system are called sub-systems and certain
objectives, processes, role, structures and norms of conduct identify
levels of systems within. A system is composed of various lower order
sub-systems and is also a part of a super-system.
The various sub-systems of the system constitute the mutually dependent

parts of the large system, called organization. These sub-systems interact,
and through interaction create new patterns of behavior that are separate
from, but related to, the patterns specified by original system. The
interdependence of different parts as characterized by Thompson, may
be pooled, sequential, or reciprocal. When dependence is not direct, it
is pooled interdependence. For example, an organization, having sales
divisions in different cities making their own buying and selling, but
drawing upon its common funds is an example of pooled interdependence.
When one sub-system is directly dependent upon another, it is sequential
interdependence. Such type of interdependence may be seen in
production job or assembly line when output of one sub-system is the
input for the other department or sub-system. Reciprocal interdependence
refers to the situation where outputs of each unit become inputs for another
such as in production and maintenance divisions. Thus, system behavior
emerged as one, and since different variables are mutually interdependent,
the true influence of alerting one aspect of the system cannot be determined
by changing it alone.
Classification of Sub-systems
There are various ways of classifying sub-systems and one may support
any of them. Each of the organization unit may be treated as a sub-system.
In other words, each functional unit of an organization may be regarded
as different sub-systems such as production sub-system, personnel or
finance or sales sub-systems, etc. Seiler has classified four components
in an organization, i.e., human inputs, technological inputs, organizational
inputs and social structure and norms. From these inputs, he has derived
the concept of socio-technical system, Kast and Rosenzweig have
identified five subsystems, i.e., goal and values sub-system, technical
sub-system, psychological sub-system, structural sub-system, and
managerial sub-system. Katz and Kahn have, identified five sub-systems.
These are: technical sub-system concerned with the work that gets done;
supportive sub-system concerning with the procurement, disposal and
institutional relations; maintenance sub-system for uniting people into their
functional roles; adaptive sub-system concerned with organizational
change; and managerial sub-system for direction, adjudication and control
of many sub-systems and activities of the whole structure. Carzo and
Yunouzas give three kinds of sub-systems in an organization as a system,
i.e., technical, social and power sub-systems. We shall here discuss these
three sub-systems.
1. Technical Sub-system: The technical sub-system may be referred
to as the formal organization. It refers to the knowledge required for
the performance of tasks including the techniques used in the
transformation of inputs into outputs. Being a formal organization, it
decides to make use of a particular technology; there is a given layout;
policies, rules and regulations are framed; different hierarchical levels
are developed; authority is given and responsibilities are fixed; and
necessary technical engineering and efficiency consideration are laid
down. The behavior in the organization cannot be explained fully by
technical sub-system, also because there is a fundamental conflict
between the individual , a part of the system and the system itself
resulting from the expectancies of the organization and that of the
people regarding the work he has to perform. It requires certain
modifications in the behavior of the man through the social and power
sub-systems (explained later).
The objective of the technical sub-system is to make necessary
imports from the environment, transform them into products or
services and expert them back to the environment. For this purpose,
it involves decisions, communications, action and balance processes.
Through the decision process, three main problems of what to
produce, for whom to produce and how to produce are resolved.
Decisions are based on information gathered from various sources.
Such informations are communicated through the communication
process to action centres to implement them. Through balance
process, an administrative balance is obtained so that all parts may
be co-ordinated and no one part can dominate all other parts in the
organization. These processes take place on the basis of roles
assigned to people according to the requirements of the job. In order
to handle the job properly, one is given authority from the superiors
and is assigned a status matching with the importance of the job and
the individual’s ability to do the job. Norms of conduct are defined
in the well-designed policies, norms, rules, procedures and
description of the job. Thus, the arrangement of job in relation to
each other, process and authority relations, etc. provide a structure
to the technical sub-system.
2. Social Sub-system: As we have explained earlier, there exists a

conflict between an individual and the system itself because people
differ very widely in abilities, capacities, attitudes and beliefs, likes
and dislikes, etc. People find the formal set-up quite inadequate to
satisfy all their needs especially social ones. Gradually they are seen
interacting with each other and at times by cutting across the
hierarchical and departmental lines, etc., on non-formal matters, and
display their positive and negative sentiments towards each other.
Another group of elements in social sub-system consists of status,
role, norms and values. Status is a position determined as being
important in the interpersonal relationship of the group. Thus, it is a
social rank, prestige, sentiments and feelings of a person in
comparison with a social system. Some members come to be more
highly respected than others while some others born to be followers.
Role is a pattern of action, expected of a person in his position
involving others. Thus, it describes specific form of behavior and
develops originally from the task-requirements. Different members
have to play different roles assigned to them by the group. Norm is
that the general expectation demands character for all role incumbents
of a system or subsystem. The members of the group follow unwritten
norms. Anybody not adhering to norms are reprimanded or punished.
Value is the more generalized ideological justification and aspiration.
Value guides the behavior of the members.
3. Power Sub-system: Power behavior of the people in an organization
plays a very important role. As the organization starts functioning,
people realize the importance of their job in relation to others in the
organization; the benefits of their experience to the organization; the
crucial location of their jobs and their personality characteristics;
the fact of their access to the superior authority holder. In this way,
they have acquired power to some degree or the others based on
the source of their power that influences the decision-making and
regulate others behavior.
Individual’s abilities to regulate the behavior of others vary. Some persons
are more powerful and some others have powerful influence areas than
others have. Consequently, a power differentiation based on the amount
of power enjoyed (which is again a function of success achieved and
attempts made to influence the behavior of others) develops in a power
structure. It gives birth to politicking and people play opportunistic roles.

Power minded people have no norms. Generally, the individual’s interests
and the opportunity of serving those interests decide norms and therefore,
sheer expediency is the norm. The power holder enjoys the status in
accordance with his abilities to influence the behavior of others in order
to carry out his wishes. This part of the system is known as power sub-
system
Appraisal of Social System School

Chester I. Barnard is regarded as the founding father of social system
school. He studied the inter-relationships within the organization. His
definition of formal organization is regarded to be a major contribution in
the field of management. The main focus of the official system is to study
different aspects of social systems. For the adherents of this school,
organization is essentially a socio-cultural system composed of groups
of people who work in cooperation. For achieving the goals of the
organization, a cooperative system of management can be developed
only by understanding the social behavior of groups and individuals. In
other words, the socio-cultural environment and different types of
pressures affect an organization as a social system.
The concept of informal organization is also a contribution of the social
system school. The analysis of social and group behavior in the context
of social system has added to the knowledge of management. The
supporters of this school advocate that efforts should be directed towards
establishing harmony between the goals of the organization and the goals
of the groups and individual members.
1.2.7 CONTINGENCY APPROACH

Environmental change and uncertainty, work technology, and the size of
a company are all identified as environmental factors impacting the
effectiveness of different organizational forms. According to the
contingency perspective, stable environments suggest mechanistic
structures that emphasize centralization, formalization, standardization,
and specialization to achieve efficiency and consistency. Certainty and
predictability permit the use of policies, rules, and procedures to guide
decision making for routine tasks and problems. Unstable environments
suggest organic structures which emphasize decentralization to achieve
flexibility and adaptability. Uncertainty and unpredictability require general
problem solving methods for nonroutine tasks and problems. Paul

Lawrence and Jay Lorsch suggest that organizational units operating in
differing environments develop different internal unit characteristics, and
that the greater the internal differences, the greater the need for
coordination between units.
Joan Woodward found that financially successful manufacturing
organizations with different types of work technologies (such as unit or
small batch; large-batch or mass-production; or continuous-process)
differed in the number of management levels, span of management, and
the degree of worker specialization. She linked differences in organization
to firm performance and suggested that certain organizational forms were
appropriate for certain types of work technologies.
Organizational size is another contingency variable thought to impact the
effectiveness of different organizational forms. Small organizations can
behave informally while larger organizations tend to become more
formalized. The owner of a small organization may directly control most
things, but large organizations require more complex and indirect control
mechanisms. Large organizations can have more specialized staff, units,
and jobs. Hence, a divisional structure is not appropriate for a small
organization but may be for a large organization.
In addition to the contingencies identified above, customer diversity and
the globalization of business may require product or service diversity,
employee diversity, and even the creation of special units or divisions.
Organizations operating within the United States may have to adapt to
variations in local, state, and federal laws and regulations. Organizations
operating internationally may have to adapt their organizational structures,
managerial practices, and products or services to differing cultural values,
expectations, and preferences. The availability of support institutions and
the availability and cost of financial resources may influence an
organization’s decision to produce or purchase new products. Economic
conditions can affect an organization’s hiring and layoff practices as well
as wage, salary, and incentive structures. Technological change can
significantly affect an organization. The use of robotics affects the level
and types of skills needed in employees. Modern information technology
both permits and requires changes in communication and interaction
patterns within and between organizations.
1.3 THE OTHER MAJOR CONTRIBUTIONS BY LEADING

MANAGEMENT THINKERS
1.3.1 MARRY FOLLETT (1868 - 1933)

M.P.Follet is a social philosopher. Important contributions of Follett to
management thought are:
 Constructive conflict
 Law of the situation
 Group ethic important
 Leadership
 Authority and responsibility
 Coordination principles
1.3.2 RENSIS LIKERT (1903 - 1972)

According to Rensis Likert, Director of the Institute of Social Research,
University of Michigan, the traditional job-centered supervision is mainly
responsible for low productivity and poor morale of employees. He,
therefore, advocated the employee-centered approach where maximum
participation would be given to operatives while setting goals and making
decisions. Likert is best known for his classifications of management
styles into four categories:
System 1 (exploitative autocratic): Leaders have no confidence or
trust in subordinates. Subordinates are deprived of participation in
decision-making.
System 2 (benevolent autocratic): Management has condescending
confidence in subordinates just as a master has towards a servant.
System 3 (participative): Leaders have substantial but not total
confidence in subordinates. Participation is meaningful and employees
are permitted to participate in decision making.
System 4 (democratic): Participation is meaningful, as leaders have
complete confidence and trust in subordinates.
According to Likert, system 4 is an ideal management style and is
associated with high production, low costs and good labour relations. In
an attempt to integrate individual and organizational Likert developed
the concept of ‘linking pin’. In this approach, each work group is

integrated to the rest of the organization by means of persons who are
members of more than one group. Such overlapping membership is known
as ‘linking pin’.
1.3.3 PETER F. DRUCKER

Peter F. Drucker had revolutionalised management thinking in early 50’s
with his path breaking books, presentations. He came into prominence
with the publication of “The New Society”. Drucker is often hailed as a
genius who had pioneered several modern management concepts in the
fields of innovation, creativity,problem solving, organization design, MBO
etc. His major contributions include:
 Nature of Management
 Management is a dynamic, life-giving element in an organization.
 Management is a distinct, discipline and a social function.
 Managers should be creative and innovative in order to produce
results. He opined that management is a great profession full of
challenges.
 Mangers job
 Managers are known by their performance. They must set meaningful
goals for the entire organization.
Business is inextricably interwoven with society. It has certain social
obligations. Managers impact society through their actions. It is their
duty to meet social expectations regarding quality, service, etc
Drucker wanted business community to stand on their own. Profit is not
the only goal always. He knew that ‘a healthy business cannot exist in a
sick society’. Managers should realize that businesses survive and flourish
only through the blessing, while meeting social expectations and enterprise
objectives managers need to strike fine balance. He stressed the
importance of setting goals, defining problems correctly motivating people.
He wanted businesses to deliver want satisfying goods and services. The
purpose of an enterprise is to create a customer.
He wanted managers to set meaningful objectives in eight key areas of
business. Market standing, innovation, productivity, physical and financial

resources, profitability, manager performance and development, worker

performance and social responsibility.
The Highlight of the Drucker’s elements
1. MBO: Drucker stressed the importance of joint goal setting through
a novel concept called Management By Objectives (MBO). He
emphasized the importance of participative goals that are tangible,
verifiable and measurable. He wanted managers to focus on what
be accomplished (goals) rather than how it was to be accomplished
(methods).
2. Decentralization: Drucker vehemently criticized the functional focus
of managers, confirming their work to their own narrow specialized
fields of study (such as marketing manager, finance manager,
production manager, etc.). He wanted managers to create
autonomous, self contained independent product divisions within a
large undertaking, giving adequate and proportionate emphasis to
various products. In place of task specialization, he advocated for
decentralization. The federal structure, he felt, would make managers
accountable for and allow them to grow steadily.
3. Structure: Drucker wanted managers to reduce the number of layers
within the organization; the organization structure should be dynamic
in nature. To realize this, he suggested concrete steps: activity
analysis, decision analysis and relations analysis.
Activity analysis: What is to be done, how it should be put together,
how much emphasis to be put on each activity.
4. Decision analysis: The degree of futurity in the decision, the impact
of a decision on activities, the various qualitative elements that enter
the decision-making process, whether the decision is a recurring
phenomenon or a rare one, etc.
5. Relation’s analysis: Helps in providing a concrete shape to the
structure and manning structure properly.
6. Decision-making: According to Drucker, the life of a manager is a
perpetual choice-making activity. Management is nothing but
decision-making only. He wanted managers to understand the
problems correctly before trying to find solutions. He wanted
managers to look into the following questions carefully:
What is the problem?

Which problem to solve?
What is the real, cause of the problem? (According to Drucker, critical
factor analysis helps in identifying the causes properly)
1.4 MANAGERIAL FUNCTIONS

Many authorities and scholars on management have discussed the
functions of management. But there is no unanimity among them about
the nomenclatures of the functions of management.
Ralph Davis classified managerial functions into three categories, viz.,
organization, coordination and control. He was of the view that command
and coordination facilitate control and, therefore, should be considered
as parts of it. However some authors argue that co-ordination is not a
separate function, the essence of management.
Joseph Massie prescribed a list of seven functions of management,
namely, making, organizing, staffing, planning, controlling, communicating
and directing. G.R. Terry described managerial functions under four
heads, which are: planning, organizing, actuating and controlling. Koontz
and O’Donnell have adopted the following classification: planning,
organizing, directing and controlling. They have further said, “In practice
it is not always possible to place all managerial activities neatly into these
categories since the functions tend to coalesce.”
Luther Gulick coined the word ‘PODSCORB’ to describe the functions
of management. This word is made up of the initials of the following
functions, (i) planning, (ii) organizing, (iii) directing, (iv) staffing,
(v) co-ordinating, (vi) reporting, and (vii) budgeting. Thus, we can say
that there is no universally accepted classification of managerial functions.
But at the same time it is significant to note that though there is disagreement
over the grouping and classification of management functions, there is
general agreement that certain functions exist.
Henri Fayol gave for the first time a clear functional definition of
management. According to him, “To manage is to forecast and plan, to
organize, to command, to coordinate and to control.” Thus, Fayol has
given following five functions of management: Forecasting and planning,
Organizing, Commanding, Coordination and Control.
The basic reason for so many classifications of functions of management

is that different authors discussed them by studying different organizations.
If we accept one of these classifications, it should be kept in mind that
functions are not independent and they frequently overlap each other.
According to C.S. George, the management process is not a series of
separate functions, which can be performed independently; it is a
composite process made up of these ingredients. He further said that no
one function could be performed without involving the others.
For the purpose of analysis of management process, we can divide the
management functions into
(1) Planning, (2) organizing, (3) staffing, (4) directing and (5) controlling.
1.4.1 Planning
Planning is a mental process requiring the use of intellectual faculties,
foresight and sound judgment. It is the determination of a course of action
to achieve the desired result. “It is the selecting and relating of facts and
the making and using of assumptions regarding the future in the visualization
and formation of proposed activities believed necessary to achieve desired
results.” It involves deciding in advance what to do, when to do it, where
to do it, how to do it and who is to do it and how the results are to be
evaluated. Thus, planning is the systematic thinking about the ways and
means for the accomplishment of pre-determined objectives. Goals or
objectives have to be clarified first before taking any other decision.
Goals provide the basis for looking into the future and for evaluating the
performance with the predetermined standards.
Planning bridges the gap between where we are , to where we want to
go. It is a prerequisite to doing anything. Systematic planning is necessary
for any business activity; otherwise it will be done in a haphazard manner.
Proper planning is a must to ensure effective utilization of human and
non-human resources to achieve the desired goals. It has to be done at
all levels of management. The process of planning involves the following
steps:
(i) Determination of goals or objectives of the enterprise, (ii) forecasting,
(iii) search of alternative courses of action, (iv) evaluation of various
alternatives and formulation of a plan. (v) Formulation of policies and
procedures, (vi) preparation of schedules, programmes and budgets.
1.4.2 Organizing
Organizing is an important managerial activity by which management brings
together the manpower and material resources for the achievement of
pre-determined objectives. Organization is the process of establishing
relationships among the members of the enterprise. The relationships are
created in terms of authority and responsibility. Each member in the
organization is assigned a specific responsibility or duty to perform and
is granted the corresponding authority to perform his duty.
In the words of Louis A. Allen, “Organization involves identification and
grouping the activities to be performed and dividing them among the
individuals and creating authority and responsibility relationships among
them for the accomplishment of organizational objectives”. Thus,
organizing involves the determination of activities to be performed,
grouping them and assigning them to various individuals and creating a
structure of authority and responsibility among the individuals to achieve
the organizational goals. Organization involves the following steps:
(1) Identification of activities required for the achievement of objectives
and Implementation of plans.
(2) Grouping of activities so as to create well-defined jobs
(3) Assignment of jobs to employees
(4) Delegation of authority to subordinates
(5) Establishment of authority-responsibility relationships throughout the
organization
1.4.3 Staffing
The staffing function of management pertains to recruitment, selection,
training, development and appraisal of personnel. There is a controversy
whether staffing is a function of every manager in the organization as
there is personnel department in every organization. Since every manager
is concerned with management of human resources, he must perform the
function. In fact, every manager is associated with the employment,
training and appraisal of human resources.
1.4.4 Directing
The term ‘directing’ or ‘direction’ is generally used in every walk of life.
It has got a wide interpretation these days. It is no more restricted to
‘commanding’ as viewed by Henri Fayol. In the words of Marshall,

“Directing , determining the course, giving orders and instructions and
providing dynamic leadership.”” It relates to those activities, which deal
directly with influencing, guiding, supervising and motivating subordinates
in their jobs. This function does not cease with mere issuance of directives.
According to A.Terry, “Directing means moving to action and supplying
stimulative power to group of persons”. Thus, directing involves issuing
instructions (or communication) to the subordinates, guiding, motivating
and supervising
These sub-functions of directing are discussed below:
(a) Communication. Communication is the process of passing
information and understanding from one person to another. This process
is necessary making the subordinates understand what the management
expects from him. A manager has always to tell the subordinates what to
do, how to do it and when to do it. He has to create an understanding in
their minds in regard to these things. Communication is a two way process.
A manager to be successful must develop an effective system of
communication so that he may issue instructions, receive the reactions of
the subordinates and guide and motivate them.
(b) Leadership. A manager must perform the function of leadership if
he is to guide the people effectively for the achievement of organizational
objectives. Leadership may be defined as the process by which a manager
guides and influences the behavior of his subordinates. A manager must
possess the leadership qualities if he has to get others to follow him and
accept his directions. He should also build up confidence and zeal to
work among the subordinates.
(c) Motivation. A manager can get the desired results from the people
working in the organization by providing them with proper stimulation or
motivation. Motivation means inspiring the subordinates with zeal to do
work for the accomplishment of organizational objectives. Motivation is
the process of indoctrinating personnel with unity of purpose and the
need to maintain continuous harmonious relationship.
A successful manager makes appropriate use of motivation to actuate
the subordinates to work harmoniously towards the achievement of
organizational goals. Effective motivation is necessary for getting voluntary
co-operation of the subordinates. Different types of rewards motivate
different people. The manager should study the behavior of individuals

working under him to provide them proper inducements. To some
,financial incentives are important while others are motivated by non
pecuniary incentives like job security, job enlargement, freedom to work
and recognition by peers and management.
1.4.5 Controlling
The function of controlling deals with the measurement and correction of
the performance of persons against the pre-determined standards. E.F.L.
Brech defined control as the process of checking actual performance
against standards to ensure satisfactory performance. Fayol viewed
control as verifying whether everything occurs in conformity with the
plan adopted, the instructions issued and principles established.
Controlling leads to taking corrective action if the results do not conform
to plans.
The process of control involves the following steps:
(i) Establishment of Standards. The management must establish
Standards with which the actual performance of the subordinates
will be compared. The standards of performance should be laid down
in unambiguous terms and should be understood by everyone in the
establishment.
(ii) Measurement of Performance. After the performance is over, the
actual performance has to be measured in terms of quantity, quality,
cost and time.
(iii) Appraisal of performance. The establishment of standards has no
meaning unless they are used in actual practice. The management
must compare the actual performance with the pre-established
standards. The deviations from the standards should be recorded
and brought to knowledge of the management.
(iv) Taking Corrective Action. When the deviations from the standards
are reported to the management, it must take corrective action so
that such things do not occur again. While taking corrective steps,
management should consider the improvement of plans and
standards.
1.5. Managerial Skills

The job of a manager demands a mixture of many types of skills, whether
he belongs to business organization, an educational institution, a hospital
or a club. A Manager is successful when he is able to make a smooth

functioning team of people working under him. He is to reconcile,
coordinate and appraise us viewpoints and talents of people working
under him towards, the organization goals. He has also to plan and
organize the operations of the enterprise so that the subordinates are
able to use the material resources in the best possible manner. For this,
he must use the various skills in appropriate degrees.
We can broadly classify the skills required by managers into the following
three categories: (i) Conceptual skills (ii) Human skills, and (iii) Technical
skills. Technical skills deal with jobs, human skills with persons and
conceptual skills with ideas. The three types of skills are interrelated and
all managers require them. But the proportion or relative significance of
these skills varies with the level of management.
(i) Conceptual Skills

Conceptual skill is the ability to see the organization as a whole, to
recognize inter-relationships among different functions of the business
and external forces and to guide effectively the organizational efforts.
Conceptual skills are used for abstract thinking, and for the concept
development involved in planning and strategy formulation. Conceptual
skills involve the ability to understand how the parts of an organization
depend on each other. A manager needs conceptual skills to recognize
the interrelationships of various situational factors and, therefore, make
decisions that will be in the best interests of the organization.
(ii) Human Skills

Human skills are the abilities needed to resolve conflicts, motivate, lead
and communicate effectively with others. Because all work is done when
people work together, human relations skills are equally important at all
levels of management.
(iii) Technical Skills

Technical skills refer to specialized knowledge and proficiency in handling
methods, processes and techniques of specific jobs. These skills are
most important at lower levels of management and much less important
at upper levels. A production supervisor in a manufacturing plant, for
example, must know the processes used and be able to physically perform
the tasks he supervises. A word processing supervisor must have
specialized knowledge about computer software used in, the process.

In most cases, technical skills are important at this level because
supervisory managers must train their subordinates in the proper use of
work-related tools, machines and equipment.
1.6 Levels of Management

Management/Industrial Management has got the following activity levels.
1. Top Management.
2. Upper Middle Management.
3. Middle Management.
4. Lower Management
1.6.1 Top Management :

It is the function of top management to watch, interpret, exploit of where
necessary, and counter external influences with appropriate decisions
and plans and to initiate the appropriate adjustment in the functional
authority and status structures of the organization. It is the top
management’s duty to protect the integrity of the organization, so that it
can survive for its own employee’s , the shareholder’s, supplier’s and
customer’s interests and for the general good of the social and economic
system within which it operates. Top Management Functions are setting
basic goals and objectives, Expanding or contracting activities,
Establishing policies, Monitoring performance, Designing/Redesigning
organization and system, and shouldering financial responsibilities, etc.
Top Management includes
(a) Board of Directors,
(b) Managing Directors,
(c) Chief Executives,
(d) General Managers,
(e) Owners, and
(f) Shareholders and financiers.
1.6.2 Middle Management :

The middle management level generally consists of divisional and
departmental heads such as plant manager, production manager,
marketing manager, personal directors etc. Their job is to interpret policies

and directions set by the top level management into specific plans and
guidelines for action. Their responsibility is to coordinate the working of
their departments so that the set objectives can be achieved. They are
concerned with short term goals and specific results. They spend more
time on operational planning, information processing and day-to–day
monitoring of their divisional activities. Middle Management Functions
are running the details of the organization, cooperating to run organization
smoothly, understanding interlocking of departments in major policies,
achieving coordination between different parts of the organization,
conducting training for employee development and building an efficient
company team spirit.
1.6.3 Lower Management :

This level of management consists of supervisors, superintendents, unit
heads, foremen, chief clerks etc, their primary concern is with the
mechanics of the job and they are responsible for coordinating the work
of their employees. They must possess technical skills so that they can
assist their subordinates when necessary. They plan day to day operations,
assign personnel to specific job, oversee their activities, evaluate their
performances, and become a link between the workers and the middle
level management.
Importance of Skills at Different Levels

There are various levels of management; and the managers at various
levels perform all the functions of management though in varying degrees.
Thus, the level of skills required at different managerial levels will be
different. Conceptual skills are critical in top executive positions whereas
technical skills are very essential for lower level management. Technical
skills can be learnt easily, but other skills cannot be learnt unless an
individual has the potential and capacity and an inner urge to learn them.
Conceptual skills are highly important for top management, which is
responsible for formulating long-range plans and policies for the whole
business. Human skills are important at all levels of management.
1.7 Roles of managers

In1973, Henry Mintzberg conducted one of the first comprehensive
studies of the nature of managerial work and gives us a complete picture
of what a manager actually does. Based on his study of the activities of

five practicing chief executives, Mintzberg generalized his description of
the nature of managerial work in actual practice. He identified ten basic
roles performed by managers and classified them under three heads.
(i) Interpersonal, (ii) informational, and (iii) decisional. These
roles-organized sets of behaviors belonging to a position-describe what
managers actually do, whereas functions of managers had historically
described what managers should do?
The interpersonal roles are as follows:
1. A manager is a symbol, or a figurehead. This role is necessary
because of the position occupied. It consists of such duties as signing
certain documents required by law and officially receiving visitors.
2. A manager serves as a leader that is, hires, trains, encourages,
remunerates, judges the subordinates.
3. A manager serves as a liaison between outside contacts such as the
community, suppliers, and others and the organization.
The informational roles found by Mintzberg are:
1. As monitors, managers gather information in order to be well
informed.
2. Managers are disseminators of information flowing from both external
and internal sources.
3. Managers are spokes-persons or representatives of the organization.
They speak for subordinates to superiors and represent upper
management to subordinates.
Mintz berg’s decisional roles are:
1. Managers as entrepreneurs are initiators, innovators, problem
discoverers and designers of improvement projects that direct and
control change in the organization.
2. As disturbance handlers, managers react to situations that are
unexpected, such as mass absenteeism, resignation of subordinates,
or losing of customers.
3. A third decisional role is that of resource allocator.
4. Finally, managers are negotiators. At times, this role can be partially
delegated; however, managers assume it when conflicts arise.
1.8 Managing in global environment

Management fundamentals may be applicable in different countries. How
ever the practice of carrying out the managerial function of planning,
organizing, staffing, leading and controlling differs considerably in domestic
and international enterprises.
Planning
Planning requires setting objectives and then selecting strategies, policies,
programs and procedures for achieving them. A critically important
activity for the MNC is the assessment of opportunities and threats in
the external environment. This is a complex task even for a domestic
enterprise, but it becomes much more intricate when many different, ever-
changing world markets must be scanned.
External threats and opportunities must be matched with the internal
strengths and weaknesses of the firm. For example, a poor educational
system makes it difficult to find qualified personnel. Similarly, cultural
orientation towards time will affect planning. Finally, political and
economic instability in a country makes it difficult to forecast and will
discourage long term commitment of resources. Each big MNC finds it
difficult to face the competency in the world wide market. So they are
grouping in to a form global strategic partnerships. American telephone
corp. and telegraph comp. shares technology with Olivetti and Philips,
both large MNC’s in Europe.
Organizing
Objective of the organization is to achieve the corporate goals. One can
choose the best among the variety of structures for them to suit. For
example vice president at corporate head quarters may be responsible
for the international division. Another alternative may be to organize
according to geographic areas. For example managers may be put in
charge of regions such as North America, Latin America, Europe, Africa
and the Far East. Still another way of grouping organizational activities is
according to product lines. For instance at corporate headquarters,
managers may be put in charge of product line which is marketed
worldwide. The truly MNC may integrate domestic and international
business into a global structure which gives similar importance to domestic
and foreign business activities. Each structure has advantages and
limitations, as we have in the domestic management structure international

organization structure may be of any one type or may be of mixed type
depending on the environmental and task demand
Staffing
Staffing involves identifying the vacancy positions and filling up by the
qualified persons.
Managers of the MNC can be classified in three ways. First managers
may be nationals selected from the country in which the headquarters is
located .These expatriates are chosen to represent and manage the
enterprise abroad. These managers because of their experience are usually
familiar with the parent company’s policies and operations.
Second managers are those who are nationals of the host country. These
managers are familiar with the country’s environment, its education system
its culture its legal and political processes and its economic environment.
They usually also know local customers, suppliers, government officials,
behavioural characteristics of employees and the public in general.
Third source of managerial personnel consists of third county nationals.
These managers who have a nationality that is different from the parent
company or the host country. Such managers may have gained experience
by working at the company head quarters as well as in different countries.
Thus, they would have developed behavioural flexibility that eases their
adaptation to different cultures. These managers may by truly transcultural.
Each of the three sources for managers has advantages and disadvantages
and a firm may use a variety of combinations. A few factors that influence
the trend in staffing MNCs are worth noting. First, the cost of sending
U.S. dollar in the 1970s and in 1986. Second, people in the host countries
are now better prepared to assume responsible managerial positions.
Motivating and leading demand an understanding of employees and their
cultural environment. For instance, participative management may work
in one country but may cause confusion among employees in another
country with tradition of autocratic rule.
Communication is often a problem in multinational firms with subsidiaries
and affiliates in countries where different languages are spoken. Even a
firm with operations in a country where English is the primary language
may encounter communication problems because of the distance between
headquarters and subsidiary. But new communications technology has

greatly improved the transmission of information. Still, a telephone call is
not quite the same as a visit and a person to person discussion.
Controlling in the Multinational Corporation– The measurement and
correction of performance to ensure that events conform to plans – is an
essential managerial function that is influenced by several environment
factors unique to international enterprises. First, revenues, costs and
profits are measured in different currencies. Second, the ratios between
currencies are subject to considerable fluctuations. Third, accounting
practices and financial reporting often differ from country to country.
For example, accounting procedures may have to satisfy the demands of
tax authorities of the host country as well as the government of the parent
firm. The procedures must also satisfy stockholders in various countries,
agencies in charge of regulating securities and banks. Procedures must
also be suitable to meet the internal requirements of the firm. Developing
a procedure that meets all these demands at the same time is extremely
difficult. The complex nature of measurement of performance may delay
detecting deviations from standard and initiating corrective action.
Computers, however, have done much to speed up the process. In all,
then, these few examples indicate that controlling the international
corporation is considerably more difficult than monitoring a domestic
operation.
Summary
Management is the process of planning, organizing, staffing, directing
and controlling to accomplish objectives through the coordinated use of
human and material resources. Management thinkers have tried to interpret
the term in multifarious ways: as a noun, as a process, as a team, as a
discipline, as an activity, as an economic resource, as a system of
authority or as a distinct class in society having its own value system.
Management is the life-blood of a business. It ensures optimum use of
scarce resources, offers competent leadership, ensures peaceful industrial
relations, achieves goals, improves standard of living and enables a
company to manage change effectively.
Management is being increasingly accepted as a soft science and also as
a difficult and complex art, as it deals with human behavior, which is
highly unpredictable. Management, from another standpoint, is also
interpreted as a profession having a well-defined set of principles and
practices capable of universal application. Professionalisation, no doubt,

helps the discipline to acquire a distinct character and recognition of its
own but trying to link and measure managerial success in terms of degrees
may come in the way of developing creative entrepreneurs having brilliant
ideas but not professional qualifications.
Over the years, the subject of management has been written and re-written
in terms of certain well-accepted principles and time-tested practices.
These principles are the products of years of experience, research and
analysis. They are not to be interpreted as absolute truths. When applied
carefully, using discretion and judgement, they have proved to be quite
successful in delivering results at various points of time all over the world.
Management can be studied from various angles. The classical theory
has three important branches. Bureaucracy prescribed that an organization
be built around the work to be done. The work must be logically divided
and assigned to subordinates, who are expected to report the progress
to superiors at various levels. The whole system should have some well
defined rules so that results can be obtained without friction. Scientific
management emphasized the importance of work design and encouraged
managers to find ‘one best way’ to do things with minimum effort and
cost. The classical school of thought, thus, focused attention on the
technical and administrative aspect and ignored the contributions of human
beings completely.
The neo-classical theory tried to correct this deficiency by drawing rich
inputs from various behavioural sciences and practical experiments carried
out by Elton Mayo. The theory attempted creation of workforce with
high morale through democratic means. The focus was on people,
incentives, democratization of workplace, and social interactions. The
human resources theory went a step ahead by suggesting that human
beings are the most valuable assets in every organization. Every attempt
must, therefore, be made to exploit the latent potential of human resources
by emphasizing things such as self-direction, self-control and creativity.
To improve the quality of decision-making, the quantitative approach
has advocated the use of mathematics, statistics and computers
extensively. The variables affecting each problem must be identified and
measured in a definite way. This would help in solving issues in an objective
manner, eliminating the subjective element in decision-making completely.
The systems approach views the organization as a unified, purposeful

entity, consisting of interrelated parts. While deciding things, executives
must look at the totality of the situation and the resultant consequences
carefully. They must strike a fine balance between the needs of various
parts of the enterprise and the goals of the firm as a whole.
According to the contingency approach there are no plans, organization
structures, leadership styles, or controls that will fit all situations. There
are few if any, universal truths, concepts and principles that can be applied
under all conditions. Managers must find different ways that fit different
situations. Their actions, in the final analysis, must be consistent with the
requirements of internal as trial factors.
Have you understood Questions :

1. Frequently visit any one of the organization on your choice and
observe the management functions and skills which is characterized
by variety, fragmentation, and record how do managers perform basic
management functions such has planning, organizing, etc., keep
reflected and analyzed of your study.
2. Observe any organization that how a manager can use tools and
techniques from each of the major management perspectives in a
contemporary manner.
3. Try to enroll your self as a trainee in any one of the organizations to
find out whether the organization is practicing the management as in
the style of art or science.
4. Regularly read the business and management magazines to a
reasonable period to find out the professionalism practices and the
development over in this practice.
Review Questions :
1. Define management.
2. Is management – science or art? Discuss.
3. State the Managerial functions.
4. What are skills required to a manager?
5. Describe different levels of management.
6. List the roles of managers.
7. Discuss the evolution of management thoughts.
UNIT - II
PLANNING
LEARNING OBJECTIVES
 what is managerial planning and why it is important.
 the various types of plans and show how they relate to one another.
 the logical steps in planning and see how these steps are essentially
a rational approach to setting objectives and selecting the means of
reaching them.
 the basic principle underlying the determination of how far in the
future to plan and how to build desirable flexibility into plans to meet
future uncertainties at the lowest cost.
 the importance of reviewing plans periodically to make sure that
they are up to date in light of any new developments.
 decision making as a rational process, with special attention given to
evaluating alternatives in light of the goals sought.
 alternative courses of action with due consideration of the limiting
factor.
 select alternatives on the basis of experience and experimentation,
as well as research and analysis.
 differentiate between programmed and non-programmed decisions,
understand the differences between decisions made under conditions
of certainty, uncertainty and risks.
2.1 INTRODUCTION
Planning is the systematic thinking about the ways and means for the
accomplishment of predetermined objectives. Planning produces
fundamental decisions and actions that shape and guide what an
organization is, what it does, and why it does it. Planning bridges the gap
between where we are and where we want to go. It requires broad-
scale information gathering, an exploration of alternatives, and an emphasis
on the future implications of present decisions. Top level managers engage
chiefly in strategic planning or long range planning. They answer such
questions as “What is the purpose of this organization?” , “What does
this organization have to do in the future to remain competitive?” Top
level managers clarify the mission of the organization and set its goals.
The output needed by top management for long range planning is summary
reports about finances, operations, and the external environment.
Goals or objectives have to be clarified first before taking any other
decision. Goals provide the basis for looking into the future and for
evaluating the performance with the predetermined standards. It is a
prerequisite to doing anything. Systematic planning is necessary for any
business activity, otherwise it will be done in a haphazard manner. Proper
planning is a must to ensure effective utilization of human and non human
resources to achieve the desired goals. It has to be done at all levels of
management.
The necessity for planning arises because of the fact that business
organizations have to operate, survive and progress in a highly dynamic
economy where change is the rule, not the exception. The change may
be sudden and extensive, or it may be slow and almost imperceptible.
Some of the important forces of change may be: changes in technology,
changes in population and income distribution, changes in the tastes of
consumers, changes in competition, changes in government policies etc.
These changes often give rise to innumerable problems and throw
countless challenges. Most of these changes are thrust on managers;
thus, managers are forced to adjust their activities in order to take full
advantage of favourable developments or to minimize the adverse effects
of unfavourable ones. Successful managers try to visualize the problems
before they turn into emergencies. As pointed out by Terry, “successful
managers deal with foreseen problems, and unsuccessful managers
struggle with unforeseen problems. The difference lies in planning.”
Managers charged with the responsibility of achieving definite targets,

do not wait for future. They make the future. They introduce original
action by removing present difficulties, anticipating future problems,
changing the goals to suit the internal and external changes, experiment
with creative ideas and take the initiative, attempting to shape the future
and create a more desirable environment.
Top level managers engage chiefly in strategic planning or long range
planning. They answer such questions as “What is the purpose of this
organization?” “What does this organization have to do in the future to
remain competitive?” Top level managers clarify the mission of the
organization and set its goals. The output needed by top management for
long range planning is summary reports about finances, operations, and
the external environment.
MEANING
A plan is a forecast for accomplishment. It is a predetermined course of
action. It is today’s projection for tomorrow’s activity. In other words,
to plan is to produce a scheme for future action, to bring about specified
results at a specified cost, in a specified period of time. Management
thinkers have defined the term, basically, in two ways:
Based on futurity: “Planning is a trap laid down to capture the future”
(Allen). “Planning is deciding in advance what is to be done in future”
(Koontz). “Planning is informed anticipation of future” (Haimann).
“Planning is ‘anticipatory’ decision-making” (R.L. Ackoff).
As a thinking function: “Planning is a thinking process, an organised
foresight, a vision based on fact and experience that is required for
intelligent action” (Afford and Beatty)
“Planning is deciding in advance what to do, how to do it, when to do it
and who is to do it.” (Koontz and O’Donnel)
It is deciding in the present, what is to be done in future? It is the process
of thinking before doing. A plan is a specific, documented intention
consisting of an objective and an action statement. The objective portion
is the end, and the action statement represents the means to that end.
Stated another way, objectives give management targets to shoot at,
whereas action statements provide arrows for hitting the targets. Properly
conceived plans tell what, where and how something is to done.
Is Planning Really Necessary?

Planning is an activity of a highly ubiquitous character. Every function of
business is planned in most of the enterprises as is evident from the fact
that there are production plans, sales plans, financial plans, purchase
plans, research and development plans and so on. This is done because
of the necessity to ensure proper utilization of human and material
resources to achieve the objectives of the business. Without proper
planning, the affairs of any enterprise are most likely to be haphazard.
Less important task may be done ahead of more important one or different
individuals using different procedures or methods may do the same piece
of work. There may be unnecessary repetition of certain business
operations leading to wastage of efforts and resources. In short, without
plans, action must become merely random activity, producing nothing
but chaos. Therefore planning is a must to achieve a consistent and
coordinated structure of operations focused on desired objectives.
“Henri Fayol” explained the importance of planning as a management
function. According to him, “ Managing means looking ahead, gives some
idea of the importance attached to planning in the business world, and it
is true that if foresight is not the whole of management, at least it is an
essential part of it. The plan of action is, at one and the same time, the
result envisaged, the line of action to be followed, the stages to go through,
and the methods to use.” George Terry viewed planning as basic to the
other managerial functions. Without the activities determined by planning,
there would be nothing to organize, no -one to actuate and no need to
control.” This stresses the importance of planning in the management
process. Thus, planning is a prerequisite to good management.
Planning provides a rational approach to predetermined objectives, as it
requires a lot of systematic mental exercise on the part of planners.
Planning helps in selecting from among alternative future courses of action
for the enterprise as a whole and for its every department. It lays down
clearly what every segment of the enterprise should do to achieve the
organizational objectives. No organization can achieve its objectives
without proper planning because of certain obvious reasons. These
reasons are as follows:
(i) Growing complexities of modern business because of rapid
technological changes and keen competition in the market.
(ii) Rapid social, economic and political changes.

(iii) Recognition of social responsibilities.
(iv) Growth of trade unionism.
(v) Uncertainties caused by trade cycles.
(vi) Shortage of certain resources.
(vii) Increasing government control over business.
(viii) Need for research and development activities.
These are the challenges before the managers of modern era, which can
be dealt with effectively only through proper planning. Looking at the
significance of planning, management of every organization should give
due weightage to the planning function. Good planning is the foundation
of efficient management.
2.2 FEATURES OF PLANNING

Planning has a number of characteristics:
(i) Planning is goal-oriented: All plans arise from objectives. Objectives
provide the basic guide for planning activities. Planning has no meaning
unless it contributes some positive achievement of predetermined goals.
(ii) Planning is a primary function: Planning is the foundation of
management. It is a parent exercise in management process. It is a preface
to business activities. According to Koontz, “Planning provides the basic
foundation from which all future management functions arise”. Terry also
supported the view, that “without planning there is nothing to organize,
no one to motivate and no need to control”. The idea of primacy of
planning emphasizes the fact that planning takes precedence over other
managerial functions like organizing, directing and controlling because
none of these functions can come into being until there is a plan.
(iii) Planning is all-pervasive: Planning is a function of all managers. It
is needed and practiced at all managerial levels. Planning is inherent in
everything a manager does. Managers have to plan before launching a
new business. They have to plan whenever things change. Even when
they decide to close down a plant, they have to plan meticulously to
avoid problems from employees. The scope of planning, however, differs
at different levels and among different departments.

(iv) Planning is a mental exercise: Planning is a mental process

involving imagination, foresight and sound judgement. Planning compels
managers to abandon guesswork and wishful thinking. It makes them
think in a logical and systematic manner. Plans arc based on a careful
study of internal and external factors influencing business activities.
(v) Planning is a continuous process: Planning is continuous. It is a
never-ending activity. Once plans for a specific period are prepared,
they are translated into action. At the end of that period, there is a need
for a new plan to be drawn based on new situations and conditions.
Planning is thus, an ongoing process of adjustment to change. There is
always need for a new plan to be drawn on the basis of new demands
and changes in the circumstances.
(vi) Planning involves choice: Planning essentially involves choice
among various alternative courses of action. If there is one way of doing
something, there is no need for planning. The need for planning arises
only when alternatives are available. Planning presupposes the existence
of alternatives. From out of these alternatives, a manager would select
the best alternative, after careful analysis and evaluation.
(vii) Planning is forward looking: Planning means looking ahead and
preparing for the future. It means peeping into the future, analyzing it and
preparing for it. Managers plan today with a view to flourish tomorrow.
Without planning, business becomes random in nature and decisions
would become meaningless, adhoc choices.
(viii) Planning is flexible: Planning is based on a forecast of future
events. Since future is uncertain, plans should be reasonably flexible.
The onset of colour television sets forced many a manufacturer in the
West to abandon production of black and white television sets long back.
When market conditions change, planners have to make necessary
changes in the existing plans.
(ix) Planning is the most basic of all management functions: Since
managerial operations in organizing, staffing, leading, and controlling are
designed to support the accomplishment of enterprise objectives, planning
logically precedes the execution of all other managerial functions.
(x) Planning is a pervasive function of management. Planning is a
function of all managers, although the character and breadth of planning
will vary with their authority and with the nature of policies and plans
outlined by their superiors.
Planning is a managerial process requiring the use of intellectual faculties,

foresight and sound judgement. It is the determination of a course of
action to achieve the desired result. “It is selecting, relating of facts,
making use of assumptions regarding the future in the visualization and
formation of proposed activities believed necessary to achieve desired
results.” It involves deciding in advance what to do, when to do it, where
to do it, how to do it and who is to do it and how the results are to be
evaluated. Thus, planning is the systematic thinking about the ways and
means for the accomplishment of pre determined objectives. Goals or
objectives have to be clarified first before taking any other decision.
Goals provide the basis for looking into the future and for evaluating the
performance with the predetermined standards.
2.3 BENEFITS OF PLANNING

Good planning will have the results in the following advantages:
(i) Focuses Attention on Objectives. Since all planning is directed
towards achieving enterprise objectives, the very act of planning focuses
attention on these objectives. Laying down the objectives is the first step
in planning. If the objectives are clearly laid down, the execution of plans
will also be directed towards these objectives.
(ii) Ensures Economical Operation. Planning involves a lot of mental
exercise, which is directed towards achieving efficient operation in the
enterprise. It substitutes joint directed effort for uncoordinated piecemeal
activity, even flow of work for uneven flow, and deliberate decisions for
snap judgements. This helps in better utilization of resources and thus
minimizing costs.
(iii) Reduces Uncertainty. Planning helps in reducing uncertainties of
future because it involves anticipation of future events. Effective planning
is the result of deliberate thinking based on facts and figures. It involves
forecasting also. Planning gives an opportunity to a business manager to
foresee various uncertainties, which may be caused by changes in
technology, taste and fashion of the people, etc. Sufficient provision is
made in the plans to offset these uncertainties.
(iv) Facilitates Control. Planning helps the managers in performing their
function of control. Planning and control are inseparable in the sense that
unplanned action cannot be controlled because control involves keeping

activities on the predetermined course by rectifying deviations from plans.

Planning helps control by furnishing standards of control. It lays down
objectives and standards of performance, which are essential for the
performance of control function.
(v) Encourages Innovation and Creativity. Planning is basically the
deciding function of management. It helps innovative and creative thinking
among the managers because many new ideas come to the mind of a
manager when he is planning. It creates a forward-looking attitude among
the managers.
(vi) Improves Motivation. A good planning system ensures participation
of all managers, which improves their motivation. It improves the
motivation of workers also because they know clearly what is expected
of them. Moreover, planning serves as a good training device for future
managers.
(vii) Improves Competitive Strength. Effective planning gives a
competitive edge to the enterprise over other enterprises that do not
have planning or have ineffective planning. This is because planning may
involve expansion of capacity, changes in work methods, changes in
quality, anticipation tastes and fashion of people and technological changes,
etc.
(viii) Achieves Better Coordination. Planning secures unity of direction
towards the organizational objectives. All the activities are directed
towards the common goals. There is an integrated effort throughout the
organization.
2.4 LIMITATIONS OF PLANNING

Sometimes, planning fails to achieve the expected results. There are many
causes of failure of planning in practice. These are discussed below:
1. Lack of reliable data. There may be lack of reliable facts and figures
over which plans may be based. Planning loses its value if reliable
information is not available or if the planner fails to utilize the reliable
information. In order to make planning successful, the planner must
determine the reliability of facts and figures and must base his plans on
reliable information only.
2. Lack of initiative. Planning is a forward-looking process. If a

manager has a tendency to follow rather than lead, he will not be able to
make good plans. Therefore, the planner must take the required initiative.
He should be an active planner and should take adequate follow up
measures to see that plans are understood and implemented properly.
3. Costly process. Planning is time consuming and expensive process.
This may delay action in certain cases. But it is also true that if sufficient
time is not given to the planning process, the plans so produced may
prove to be unrealistic. Similarly, planning involves costs of gathering
and analyzing information and evaluation of various alternatives. If the
management is not willing to spend on planning, the results may not be
good.
4. Rigidity in organizational working. Internal inflexibility in the
organization may compel the planners to make rigid plans. This may
deter the managers from taking initiative and doing innovative thinking.
So the planners must have sufficient discretion and flexibility in the
enterprise. They should not always be required to follow the procedures
rigidly.
5. Non-acceptability of change. Resistance to change is another factor,
which puts limits on planning. It is a commonly experienced phenomenon
in the business world. Sometimes, planners themselves do not like change
and on other occasions they do not think it desirable to bring change as
it makes the planning process ineffective.
6. External limitations. The effectiveness of planning is sometimes
limited because of external factors, which are beyond the control of the
planners. External stringencies are very difficult to predict. Sudden
break-out of war, government control, natural havocs and many other
factors are beyond the control of management. This makes the execution
of plans very difficult.
7. Psychological barriers. Psychological factors also limit the scope of
planning. Some people consider present more important than future
because present is certain. Such persons are psychologically opposed
to planning. But it should not be forgotten that dynamic managers always
look ahead. Long-range well-being of the enterprise cannot be achieved
unless proper planning is done for future
Measures to Overcome Limitations of Planning

Some people say that planning is a mere ritual in the fast changing
environment. This is not a correct assessment of managerial planning.
Planning may be associated with certain difficulties such as non-availability
of data, lethargy on the part of planners, rigidity of procedures, resistance
to change and changes in external environment. But these problems can
be overcome by taking the following steps :
1. Setting Clear-cut Objectives. The existence of clear-cut objectives
is necessary for efficient planning. Objectives should not only be
understandable but rational also. The overall objectives of the enterprise
must be the guiding pillars for determining the objectives of various
departments. This would help in having coordinated planning in the
enterprise.
2. Management Information System. An efficient system of
management information should be installed so that all relevant facts and
figures are made available to the managers before they perform the
planning function. Availability of right type of information will help in
overcoming the problems of complete understanding of the objectives
and resistance to change on the part of the subordinates.
3. Careful Premising. The planning premises constitute a framework
within which planning is done. They are the assumptions of what is likely
to happen in future. Planning always requires some assumptions to be
made regarding future happenings. In other words, it is a pre-requisite to
determine future settings such as marketing, pricing, Government policy,
tax structure, business cycle, etc. before giving the final shape to the
overall business plan. The planning premises should be set up very
carefully. Due weightage should be given to the relevant factors at the
time of premising. It may be pointed out that the premises which may be
of strategic significance to one enterprise may not be of equal significance
to another because of size, nature of business, nature of market, etc.
4. Business Forecasting. Business is greatly influenced by economic,
social, political and international environment. The management must have
a mechanism of forecasting changes in such environment. Good forecasts
will contribute to the effectiveness of planning.
5. Dynamic Managers. The persons concerned with the task of
planning should be dynamic in outlook. They must take the required
initiative to make business forecasts and develop planning premises. A

manager should always keep in mind that planning is looking ahead and
he is making plans for future, which is highly uncertain.
6. Flexibility. Some element of flexibility must be introduced in the
planning process because modern business operates in an environment,
which keeps on changing. For achieving effective results, there should
always be a scope to make necessary addition, deletion, or alteration in
the plans as is demanded by the circumstances.
7. Availability of Resources. Determination and evaluation of
alternatives should be done in the light of resources available to the
management. Alternatives are always present in any, decision making
problem. But their relative plus and minus points are to be evaluated in
the light of the resources available. The alternative which is chosen should
not only be concerned with the objectives of the enterprise, but also
capable of being accomplished with the help of the given resources.
8. Cost-Benefit Analysis. The planners must undertake cost-benefit
analysis to ensure that the benefits of planning are more than the cost
involved in it. This necessarily calls, for establishing measurable goals,
clear insight to the alternative courses of action available, premising
reasonably and formulation of derivative plans keeping in view the fact
that environment is fast-changing.
2.5 PRINCIPLES OF PLANNING

The important principles of planning are discussed below :
1. Principle of contribution to objectives. The purpose of plans and
their components is to develop and facilitate the realization of
organizational aims. Long-range plans should be interwoven with
medium-range plans, which in turn, should be meshed with short-range
ones in order to accomplish organizational objectives effectively and
economically.
2. Principle of pervasiveness of planning. Planning is found at all
levels of management. Strategic planning or long-range planning is related
to top management, while intermediate and short-range planning are the
concern of middle and operating management respectively.
3. Principle of limiting factors. Planning must take the limiting factors
(manpower, money, machines, materials, and management) into account
by concentrating on them, when developing alternative plans, strategies,

policies, procedures, and standards.
4. Principle of flexibility. Flexibility should be built into organization
plans. Possibility of error in forecasting and decision making and future
uncertainties are the two common factors which call for flexibility in
managerial planning. The principle of flexibility states that management
should be able to change an existing plan because of change in
environment without undue cost or delay so that activities keep moving
towards established goals. Thus an unexpected slump in demand for a
product will require change in sales plan as well as production plan.
Changes in these plans can be introduced only when these possess the
characteristic of flexibility. Adapting plans to suit future uncertainties or
changing environment is easier if flexibility is an important consideration
while planning.
Both short-term and long-term plans need to have the element of flexibility.
However, flexibility is more important in long-range plans. The reason is
not difficult to trace. Possibility of error or uncertainty is much higher for
long-term plans than for short-term plans. However, the management
can have flexibility in planning only within limits. External and internal
rigidities and pressures greatly limit flexibility in managerial planning. Thus,
the existing pattern of human behavior, policy and procedure rigidities,
union pressures, government policy and legal requirements are important
inflexibilities greatly restricting adaptability of plans to changing
environment.
5. Principle of navigational change. This principle requires that
managers should periodically check on events and redraw plans to
maintain a course towards the desired goal. It is the duty of the navigator
to check constantly whether his ship is following the right direction in the
vast ocean to reach the destination as scheduled. The navigator changes
the path of the ship, in case it is not going on the right path. In the same
way, a manager should check his plans to ensure that these are
progressing as required. He should change the direction of his plans if he
faces unexpected events. It is useful if plans contain an element of
flexibility. But built-in flexibility in plans does not mean that plans get
revised automatically. It is the responsibility of the manager to adapt and
change direction of plans to meet the challenge of constantly changing
environment that could not be foreseen. In this regard, the role of a

manager is analogous to the role of the navigator of a ship to change its
course, if it is not going on the right path.
2.6 KINDS OF PLANNING

Planning can be classified on different bases, which are discussed below:
1.Strategic and Functional Planning
In strategic or corporate planning, the top management determines the
general objectives of the enterprise and the steps necessary to accomplish
them in the light of resources currently available and likely to be available
in the future. Functional planning, on the other hand, is planning that
covers functional areas like production, marketing, finance and purchasing.
2. Long-range and Short-range Planning
Long-range planning sets long-term goals for the enterprise and then
proceeds to formulate specific plans for attaining these goals. It involves
an attempt to anticipate, analyze and make decisions about basic problems
and issues which have significance reaching well beyond the present
operating horizon of the enterprise. Short-range planning, on the other
hand, is concerned with the determination of short-term activities to
accomplish long term objectives. Short-range planning relates to a
relatively short period and has to be consistent with the long-range plans.
Operational plans are generally related to short periods.
3. Ad hoc and Standing Planning
Ad hoc planning committees may be constituted for certain specific
matters, as for instance, project planning. But standing plans are designed
to be used over and over again. They include organizational structure,
standard procedures, standard methods, etc.
4. Administrative and Operational Planning
Administrative planning is done by the middle level management, which
provides the foundation for operative plans. The lower level managers
to put the administrative plans into action, on the other hand, do operative
planning.
5. Physical Planning
It is concerned with the physical location and arrangement of building
and equipment. City planning and regional planning are the illustrations
of physical planning.
6. Formal and Informal Planning

Various types of planning discussed above are of formal nature. The
management carries them on systematically. They specify in black and
white, the specific goals and the steps to achieve them. They also facilitate
the installation of internal control systems. Informal planning, on the other
hand, is mere thinking by some individuals, which may become the basis
of formal planning in future.
2.7 LEVELS OF PLANNING

In management theory, it is usual to consider that there are three basic
levels of planning, though in practice there may be more than three levels
of management and to an extent there will be some overlapping of planning
operations. The three levels of planning are discussed below :
Top Level Planning. Also known as overall or strategic planning, by
the top management, i.e., board of directors or governing body. It
encompasses the long-range objectives and policies of organization and
is concerned with corporate results rather than sectional objectives. Top
level planning is entirely long-range and is inextricably linked with
long-term objectives. It might be called the ‘what’of planning.
Second Level Panning. Also known as tactical planning, it is done by
middle level managers or departmental heads. It is concerned with ‘how’
of planning. It deals with deployment of resources to the best advantage.
It is concerned mainly, but not exclusively, with long-range planning, but
its nature is such that the time spans are usually shorter than those of
strategic planning. This is because its attentions are usually devoted to
the step-by-step attainment of the organization’s main objectives. It is,
in fact, oriented to functions and departments rather than to the
organization as a whole.
Third Level Planning. Also known as operational or activity planning,
it is the concern of departmental managers and supervisors. It is confined
to putting into effect the tactical or departmental plans. It is usually for a
short term and may be revised quite often to be in tune with the tactical
planning.
Corporate Planning. Corporate planning is a new concept, which has
gained popularity these days. It may be defined as a systematic and
comprehensive process of long range planning taking account of the
resources and capability of the organization and the environment within

which it has to operate, and viewing the organization as a total, corporate unit
Corporate planning is specifically strategic in nature as it takes the overall
view of the organization. Its time span is normally over a minimum period
of five years and frequently extends very much longer than this. A
corporate plan must be frequently updated. Most organizations review
performance at least once a year so that modifications may be made in
the light of experience.
2.8 STEPS IN PLANNING

It is difficult to specify the steps in the planning process for all organizations
because of their differences in size and complexity. Nevertheless, it is
possible to suggest some important steps for effective planning. The steps,
which are applicable to the most types of plans are discussed below.
(i) Establishing Objectives :
Planning is an intellectual process, which an executive carries out before
he does any job with the help of other people. But while planning, the
question, which must arise in the mind of the executive, is ‘what is the
objective of doing that job?’ So the first step in planning is the
determination of objectives.
Objectives provide direction to various activities in the enterprise. Planning
has no utility if it is not related to certain objectives.
The establishment of objectives can, at times, be more important than
the objectives themselves since their establishment emphasizes how
various people and units fit into the overall organization framework. The
formalization of this process can also be used to motivate individuals to
achieve objectives, which they have helped to establish. Objectives clarify
the tasks to be accomplished. Overall objectives define what is to be
accomplished in general terms.
The derivative objectives focus on more details; that is, what is to be
accomplished, where action is to take place, who is to perform it, how it
is to be undertaken, and when it is to be accomplished.
(ii) Collection and Forecasting of Information :
Sufficient information must be collected in order to make the plans and
sub-plans; Necessary information includes the critical assessment of the
current status of the organization together with a forward look at the

environment that is anticipated. The collection and forecasting of
information should be done in terms of external and internal environment.
The assessment of external environment should include consideration of
competition now and in the future. The assessment of internal environment
may consider the strong and weak points of the organization. Collection
of information and making forecasts serve as an important basis of
planning.
(iii) Development of Planning Premises :
This step involves making assumptions concerning the behavior of internal
and external factors mentioned in the second step. It is essential to identify
the assumptions on which the plans will be based. Assumptions denote
the expected environment in the future and are known as ‘planning
premises’. Again, forecasting is important in premising. It helps in making
realistic assumptions about sales, costs, prices, products, technological
developments, etc. in the future. The assumptions along with the future
forecasts provide a basis for the plans. Since future environment is so
complex and uncertain, it would not be realistic to make assumptions in
great details about every environment factor. It is advisable to limit
premising to those factors, which are critical or strategic to the planning
process.
(iv) Search of Alternatives :
Usually, there are several alternatives for any plan. The planner must try
to find out all the possible alternatives. Without resorting to such a search,
he is likely to be guided by his limited imagination. At the time of finding
or developing alternatives, the planner should try to screen out the most
unviable alternatives so that there are only a limited number of alternatives
for detailed analysis. It may be noted that determination of alternative
plans can be a time consuming task because objectives, which have been
established initially, may be found to be inflexible. It is also possible that
the assumptions need revision in the light of the changed circumstances.
(v) Evaluation of Alternatives :
Once alternative action plans have been determined, they must be
evaluated with reference to considerations like cost, long-range
objectives, limited resources, expected payback, risk, and many
intangible factors to select the satisfactory course of action. Many

quantitative techniques are available to evaluate alternatives. The manager
may take the help of these techniques to reach the most objective result.
The manager may choose the best possible alternative after detailed
analysis. Sometimes, evaluation of available alternatives may disclose
that two or more courses are advisable and so the concerned manager
may decide to choose two or more alternatives and combine them to suit
the requirements of the situation.
(vi) Selection of Plan and Development of Derivative Plans :
The final step in the planning process is to select the most feasible plan
and develop its derivative plans. The plans must also include the feedback
mechanism. The hierarchy of plans must be both integrated and flexible
to meet the changing internal and external environment.
Essential requirements of Planning
An effective plan is one, which helps, in the better management of the
enterprise. In order to be effective, a plan should possess the following
characteristics :
(1) The Plan should be Specific. The more specific it is, the less chance
there is for it to be misinterpreted. Objectives should be clearly defined.
The means for carrying out the plan should also be indicated in
unambiguous terms.
(2) The Plan should be Logical. The more facts it is based on, the
better it is. If facts are not available, reasonable assumptions must be
made about the future.
(3) The Plan should be Complete and Integrated. A plan is said to
be complete when it is comprehensive enough to cover all actions
expected from the individuals and sections of the undertaking as a whole.
It is said to be an integrated one when various administrative plans are
so welded into one another that the whole undertaking operates at the
peak of its efficiency.
(4) The Plan should be Flexible. No plan is infallible nor can it cover
all possible contingencies. Conditions under which a plan will be most
effective change, as do the variables and factors on which the plan is
formulated. Therefore, it is essential to introduce some flexibility in every
plan.
(5) The Plan should be Capable of being Controlled. Effective

planning of business activities depends upon the ability-to foresee with
utmost accuracy the nature and requirements of future events relating to
industry in general and the business undertaking in particular. Therefore,
the plan must distinguish between controllable and uncontrollable future
environment for better administrative control.
Fig. Steps in Planning-Schematic Representation
Establishment of Objectives Firecasting demand Planning Premises
Appraisal of Plans Developing Alternatives
Formulation of Derivative Plans Selection of Best Alternative Evaluation of Alternatives
2.9 FORMS OF PLANNING

Even though the basic process of planning is the same for every manager,
planning can take many forms and styles in practice. Planning may be
undertaken in an elaborate way or done in a limited manner. A galaxy of
intellectuals using modern forecasting techniques may do it or it may be
undertaken in a ‘seat-of-the-pants’ manner by a number of executives
sharing their thoughts over a cup of tea. Planning may begin at the top
with executives deciding on targets and passing them down for
implementation; or it may be undertaken in a participative manner, inviting
people designated at various levels to come forward with constructive
ideas and useful suggestions. Thus, there are many forms and varieties of
planning. The planning practices, further, are likely to differ from
organization to organization. One useful way of looking at the whole
aspect is to distinguish between long-range planning and short-range
planning or strategic planning and operational planning. Other forms of
distinction, that follow are outlined for academic purpose only. In actual
practice, the distinctions suggested may not surface in such a neat and
clear-cut manner.
Long Range Planning (LRP) vs. Short-Range Planning (SRP)
Long-range planning covers a relatively long period of time (anything
over a five-year period), and affects many departments/divisions of the
organization. It includes the formulation of overall broad objectives and
the selection of appropriate means by which the objectives are to be
achieved. LRP is quite common in stable industries such as steel, public-

utilities and automobiles. In India, public sector companies generally adopt
the national planning period of five years. LRP is the rest of a series of
interrelated steps:
(i) The first basic step is the estimation of the international, national and
local situation. The possible future changes that might take place, in
areas external to an organization are examined.
(ii) The second step of LRP is defining the goals to be pursued by the
organization and the philosophy to be adopted.
(iii) The third step in LRP answers the simple question: where are we
now? For this, an objective assessment of the degree of success in
accomplishing goals, on a day-to-day basis, is made.
(iv) In the fourth step, an attempt is made to find out the strong or weak
spots in the company’s programmes till date in the light of additional
information on sales, selling expenses, production targets, capital
inflow, etc. The deficiencies are rectified promptly.
(v) Now, a full-blown programme of longer range planning is developed
and approval is sought for its adoption.
(vi) The last step is concerned with placing LRP into work, to reduce
ambiguity and achieve some measure of specificity. LRP is divided
into action plans, that is, intermediate and short-term plans for the
sake of convenience and easy implementation.
Features of a Long-Range Plan
 Covers a time period of 5 years or more.
 States what the organization wants to become in the long run.
 Tries to focus on organization’s linkage with the external environment.
 Defines the mission of the organization, outlines major strategies and
specifies action plans to realize targets.
 Involves a great deal of uncertainty
 Developed by top management.
Uncertainty- The Reason For Long-Range Planning

Long-range planning is necessary precisely because we cannot forecast
the uncertain future. It is essential even though the eventuality for which
plans are prepared is not likely to occur. Is it not foolhardy to stop military
planning simply because the planner must operate under conditions of

uncertainty? This is doubly true in the case of business organizations, for
a failure to plan may have serious consequences on its survival and growth
in future. The business executives should not always sit back and wait
for lightning to strike. Even in times of emergency and adversity, long-range
planning is important. It is important because a planned contraction of
operations is less costly and disruptive than a make-shift contraction. It
is true, that accurate planning beyond one year is difficult and long-range
plans are very likely to be changed before completion. Nevertheless,
they definitely serve a purpose in setting up an orderly approach to the
problems of long-range growth of the company.
Example
The consequences of taking a short-term perspective can be severe.
The US automobile industry lost a large share of the market (28% by
1980) to imported cars because of an earlier failure to focus on the
long-term need to develop fuel-efficient vehicles. Long-range planning
helps in preparing in an orderly manner for future events. It opens up
new avenues, new ways of doing things and reveals specific opportunities,
previously unknown to the planner. It helps in seeking new opportunities
actively, instead of merely reacting defensively to competition. In fact, a
study by Ansof clearly shows that strategically planned companies
outperformed the non-planners. Stagner studied 109 firms and found
that those companies that used their top managers in long-range planning
consistently obtained better results than those that did not have a strong
planning activity. The evidence furnished in other studies is equally strong.
There is a good reason for confidence in long range planning. And there
is no substance in the argument that long range planning is useless in the
face of uncertainties.
Long-range planning.
A plan that covers many years and affects many departments or divisions
of an organization in a major way.
Long-range planning is not forecasting. Forecasting is of little use to
planners who seek to direct their organizations to the future. It does not
provide an adequate basis even for purely adaptive behavior. The answer
for this dilemma lies in long-range planning. Long range planning is much
more than a mere projection of trends. It is that activity in a company,
which sets long-range goals for the firm and then proceeds to formulate
specific plans for attaining these goals. Long-range planning attempts
typically to grapple with the question “what must our company do, today
to be ready for the uncertainties of tomorrow.” It does not deal with
future decisions. It deals with the futurity of present decisions. What an
organization should do tomorrow is not important or relevant. What is
more important is an answer to the question: What do we have to do
today to be ready for an uncertain tomorrow? Thus, long-range planning
is a risk-taking decision-making. There is no attempt to mastermind the
future.
Short Range Planning and Operational Planning
Short-range planning: A plan that (is specific and detailed) generally covers
a span of one year or less.
Short-range planning covers a period of one to twelve months, depending
on the nature of business, and the traditions prevailing in the industry.
Short-range plans are otherwise called operational plans. They are usually
made in a specific and detailed manner. The emphasis is on flexible
budgets, on goals and targets, expressed in a clear and precise language.
The primary concern is efficiency (doing things right) rather than
effectiveness (doing the right things). To this end, short-range plans gather
information, evaluate alternatives and select the most suitable course of
action. Operative plans provide content and form to long-range plans.
In fact, short-range planning is an extension of long-range corporate
plans. Market plans, production plans and financial plans are typical
examples of operational planning.
Long-Range Planning vs. Short-Range Planning

Long-range Planning Point of Short Range Meaning
Distinction
5 Years or more. Time factor Up to one year.
Mission, Long-term goals and Deals with Current operations of an
strategies. organization..
Organization’s linkage with Primary Focus Linkage with various parts of an
external factors. organization.
Demands changes in the Impact Operates within the existing
structure, resource allocation. structure and resources.
It goes too far into the future; Uncertainty The time horizon is limited and
It goes too far into the future; Uncertainty The time horizon is limited and
the risk and uncertainty level the risk associated with
is high. uncertainty level is low.
Top Management. Prepared by Lower level executives.
Long-range planning and short-range planning are expressions of the

breadth of planning periods. The terms, short term and long term,
sometimes present an erroneous picture because people generally
associate short term with a narrow perspective and long term with a
broad view. The time dimension of planning cannot be reduced to
simplified expressions such as short term or long term. The time span
varies usually depending on the factors like industry characteristics, market
demand, availability of resources and skills, environmental complexities,
etc. What may appear to be long-range planning, in the case of one
company may turn out to be short-range planning in the cases of other
companies.
Operational Planning and Strategic Planning
Strategic plan: A general plan outlining decisions of resource allocation,

priorities and action steps necessary to reach strategic goals.
Strategy refers to the ideas, plans and support that firms employ to
compete successfully against their rivals. Strategy is meant to help firms
achieve competitive advantage. Broadly speaking, competitive advantage
is what allows a firm to gain an edge over its rivals (superior design
skills, quality, distribution network, after sales service, low cost
manufacturing etc.). Unlike short-term planning, strategic planning
involves an extended time frame, the deployment of a substantial
percentage of organizational resources, a wide spectrum of activities,
and a major eventual impact. Basically, strategic planning is planning that
is conceptually and functionally long-term, wide ranging and critical to
organizational success, in terms of costs of the resources it affects and of
the outcomes it envisions.
The important features of operational and strategic plans are summarized

through the following table.
Characteristics of Strategic and Operational Plans

Strategic plan: A general plan outlining decisions of resource allocation,
priorities and action steps necessary to reach strategic goals.
Feature Strategic (Long-range) Operational (Short-range)
Time horizon 5 years or more Under I year
Adapt to external
Purpose environment based on Implement internal goals
internal strengths
Total institutional
Activity controlled Internal tasks and operations
performance
Decision range Relatively enduring Short-term
Organizational level Middle and lower management
involved Top management
Basis for planning Primarily judgmental Exact data and standards used
Predictability Uncertain. Highly certain
Anticipated accuracy Within 25 per cent Within 2 or 3 per cent
Management functions Planning and forecasting
Control primarily
involved dominant
Management control of Slight; contingency Almost complete single -option
outcomes plans required plans used
Tactical or Coordinative Planning

Tactical plans are less detailed than the short range plans. They are
concerned with implementation of strategic plans by coordinating the
work of different departments in the organization. They try to integrate
various organizational units and ensure commitment to strategic plans.
Based on the results obtained by implementing short-range plans, a mid
term review is undertaken. A moving average is usually obtained and the
success or failure of operational plans is assessed and the need for
readjustment is indicated. Coordinative planning, thus, helps in shifting
the gears, whenever pitfalls occur while implementing the short-range or
long-range plans.
Formal and Informal planning

Formal plan : A written record to what the organization intends to do,
within a time frame.
A formal plan is a well-documented plan. The record is made after a
careful evaluation of all relevant factors that have a bearing on
organizational functioning. Managers at various levels are deliberately
involved in the formal plan formulation and implementation processes. It
is systematic and rational. Informal planning does not offer a written

record. It is carried out without any direction. Managerial thoughts, which
do not find expression on, paper are informal plans. It encourages
managers to evade responsibility. Unhealthy tendencies like carelessness
in planning and implementation, haphazard actions, loss of memory and
direction might creep in. It should be followed as an exception rather
than a rule.
Functional and corporate Planning
Corporate plan : A comprehensive plan that outlines the broad
objectives of a company as a whole and develops plans to achieve those
objectives.
Functional planning is ‘unit planning’. It deals with parts such as
production, marketing, finance, manufacturing in an isolated manner. There
is no unified focus. As a result, functional planners develop a ‘parts
mentality.’ They often fail to see the total big picture. The impact of
internal as well as external factors may not be fully taken care of, in
respect of functional planning. Corporate planning outlines the broad
objectives of the company as a whole and develops plans designed to
meet those objectives. It has both the micro, as well as macro focus.
The various functional plans are integrated so as to meet the broad
objectives of the organization. It is integrative in nature. It takes a
long-term view. It tries to strike a balance between organizational
resources and environmental challenges. In the process, tendencies like
adhocism, parts-mentality, narrow functional outlook, and friction between
units are kept under constant control. The focus is always on overall
organizational performance.
Proactive and Reactive Planning

Proactive planning : In proactive planning managers challenge the future,
anticipating future contingencies and get ready with alternative routes for
unforeseen circumstances.
Proactive planning is a way of thinking about managing the future risks
and challenges. It tries to take care of all future contingencies and changes.
Plans are often tied to a time-frame. Within this period (say 2 year period),
many changes may occur and upset all projections and calculations.
Proactive planning makes managers alert and sensitive to all such changes.
They are forced to be dynamic, active and creative. Instead of reacting

to events passively, managers are ready with alternate plans and actions,
redefining and reshaping the future. It helps managers to challenge the
future rather than accept the same meekly. It is chiefly concerned with
initiating actions today so as to survive and grow tomorrow.
Reactive planning: The organization merely reacts to events as and
when they arise.
In reactive planning, the organization merely reacts to external events.
The organization is left to the vagaries of environmental forces. Automobile
companies that found that fuel efficiency is going to be the most important
demand of customers in eighties have registered consistent growth all
these years whereas those companies that did not visualize this in advance
are no more in existence in the market now (remember Fiat, Ambassador
cars?). In a fast changing world, reactive planning may prove to be costly.
Before we realize what has happened, we might be shown the door.
Managers, as rightly pointed out by Drucker, should not wait for future.
They have to make future by initiating original actions.
Controlling: It is concerned with monitoring employees’ activities,
keeping the organization on track towards its goals, and making
corrections as required.
Planning and Controlling: Relationship

Planning involves selecting enterprise objectives and then finding ways
to achieve them. Controlling is the process of assuring that actions are in
line with planned results. The relationship between the two terms could
be stated thus :
 Plans are the directions in which managers intend to lead the
organization in order to achieve its objectives. Controls are needed
to ensure that results are consistent with plans.
 Planning prescribes described behaviors and results. Controls can
maintain or redirect actual behaviors and results.
 Managers cannot effectively plan without information about the past
and current status of each department, product, etc. Much of this
essential information is obtained through the control process, It
provides valuable information derived from past experience and
allows managers to plan effectively in future. It helps managers to
learn from past mistakes and plan well.
 Managers cannot effectively control the organization unless there

are plans to indicate the purpose to be served by the control process.
Thus, the planning and control processes complement and support
one another.
2.10 TYPES OF PLANS

The plans were classified on the application basis in organization as
follows:
Plans
Standing Plans Single Use Plans
- Objectives - Programmes
- Policies & Strategies - Budgets
- Procedures - Projects
- Methods
- Rules
Misconception in the Planning

One of the glaring misconceptions in management states that futurity is
the essence of planning and controlling is nothing but a postmortem
examination of past events. Admittedly, planning is deciding in advance,
what is to be done in future. It is today’s projection of tomorrow’s activity.
It provides a scheme for future action, to bring about specified results at
specified cost, in a specified period of time. Instead of meeting each
crisis when it arises, planners actually try to find out threats and
opportunities in the environment and prepare the organizations to face
the challenges with confidence. Planning, thus, is not simply an attempt
to predict the future, it is also an attempt to control it. As Drucker pointed
out, managers do not wait for future, they make the future through
intelligent anticipation and careful planning.
Controlling, on the other hand, is not an examination of past events. It is
rightly said that the starting point of planning is control. Controlling helps
in the adoption of new plans and revision of existing plans on the basis of
actual performance against standards. It provides information about past
and current status of each department, product, etc. in the organization
and enables managers to plan the future changes. Managers thus learn
through past mistakes and plan effectively. Controlling aids in future
planning. Like planning, controlling is also forward looking.
2.10.1 Objectives
Objectives are the ends towards which the activities of the enterprise
are aimed. They represent not only the end point of planning but also the
end towards which organizing, directing and controlling are aimed.
Objectives provide direction to various activities. They also serve as the
benchmark of measuring the efficiency and effectiveness of the enterprise.
Objectives make every human activity purposeful. Planning has no
meaning if it is not related to certain objectives. It will be an empty mental
exercise if it does not determine what objectives are to be accomplished.
The management must determine (a) overall and departmental, (b) short-
term and long-term, and (c) economic and social objectives so as to
make planning effective. When objectives are clear, every individual in
the organization will understand what he can contribute for the
achievement of these objectives. It is important to point out that objectives
or goals are plans and they involve the same planning process as any
other type of planning, eventhough they are also endpoints of planning.
The objectives should be set very carefully. The goals of each and every
department must be directed towards the achievement of organizational
goals. Similarly, the short-range objectives must aim at helping the
achievement of overall long-range goals of the enterprise. In many
organizations, where the main activities involve the implementation of
projects to carry out the overall goals, the setting of project goals assumes
greater importance.
Characteristics of Objectives
Objectives have the following features :
Objectives form a hierarchy. In many organizations, objectives are
structured in a hierarchy of importance. There are objectives within
objectives. They all require painstaking definition and close analysis, if
they are to be useful separately and profitable as a whole. The hierarchy
of objectives is a graded series in which each succeeding managerial
level down to the level of the individual supports organization’s goals.
The objectives of each unit contribute to the objectives of the next higher
unit. Each operation has a simple objective, which must fit in and add to
the final objective. Hence, no work should be undertaken unless it
contributes to the overall goal. Usually, the hierarchy or objectives in an

organization is described through means-ends chain. Understanding the

means-ends chain helps us to see how broad goals arc translated into
operational objectives. In the organization the relationship between means
and ends in hierarchical goals established at one level require certain
means for their accomplishment. These means then become the sub goals
for the next level, and more specific operational objectives are developed
as we move down the hierarchy.
In the goal hierarchy, the objectives of each lower level become means
to the ends (objectives) of the next higher level in the organization. The
goals at the second level are the means used for achieving the ends set at
the top level. Thus, each level of objectives stands as ends relative to the
levels below it and as a means relative to the levels above it.
Means Ends
Overall Objectives
Divisional Objectives
Departmental Objectives
Individual Objectives
Figure : Hierarchy of Objectives in the Form of a Mean-Ends Chain

For example, the broad objective of customer oriented profitable growth
can be achieved if the two divisions, plastics and metal products, work
out their individual goals (for example, turning out quality products and
developing new products) effectively. And if the production, marketing,
and other departments accomplish their departmental objectives, they
contribute to the achievement of divisional goals. Thus, the means-ends
chain directs the behavior of every individual and every department
towards the highest objective of the organization. If we observe the
hierarchy of objectives ranging from top management to individual
objectives, two things clearly emerge: the objectives at the lower level
are more specific and they are tied to a time capsule.
Objectives form a network. Objectives interlock in a network fashion.
They are inter-related and inter-dependent. The concept of network of
objectives implies that once objectives are established for every
department and every individual in an organization, these subsidiary
objectives should contribute to meet the basic objectives of the total
organization. If the various objectives in an organization do not support
one another, people may pursue goals that may be good for their own
function but may be detrimental to the company as a whole. Managers

have to trade off among the conflicting objectives and see that the
components of the network fit one another. As rightly pointed out by
Koontz et al., “It is bad enough when goals do not support and interlock
with one another. It may be catastrophic when they interfere with one
another”
Multiplicity of objectives: Organizations pursue multifarious objectives.
At every level in the hierarchy, goals are likely to be multiple. For example,
the marketing division may have the objective of sale and distribution of
products. This objective can be broken down into a group of objectives
for managers of functional departments like product, advertising, research,
and promotion. The advertising manager’s goals may include: designing
product messages carefully, create a favorable image of the product in
the market, etc. Similar goals can be set for others marketing managers.
To describe the single, specific goal of an organization is to say very little
about it. It turns out that there are several goals involved. This may be
due to the fact that the enterprise has to meet internal as well as external
challenges effectively. Internal problems may hover around profitability,
survival, growth, government, society, stockholders, customers; etc may
pose and so on external problems. In order to meet the conflicting
demands from various internal and external groups, organizations
generally pursue multiple objectives. Moreover, no single objective would
place the organization on the path of prosperity and progress in the long
run. According to Drucker, “To emphasize profit, for instance, misdirects
managers to the point where they may endanger the survival of the
business. To obtain profit today, they tend to undermine the future.” Where
several goals are involved, maximizing one goal would usually be at the
cost of another. Managers have to see that various goals exist in harmony
and for this purpose they must assign a definite priority of 1, 2 or 3
depending on the importance of each objective. Such assignment of
priorities helps to keep a perspective, especially when there are many
goals for one position.
Long and short-range objectives: Organizational objectives are usually
related to time. Long range objectives extending over five or more years
are the ultimate or ‘dream’ objectives for the organization. They are
abstractions of the entire hierarchy of objectives of the organization. For
example, planning in India has got objectives like eradication of poverty;
checking population growth through birth control etc., reflect certain

‘ideals’, which the government wishes to accomplish in the long run.
Short-range objectives (one year goals) and medium-range objectives
(two to four-year period goals) reflect immediate, attainable goals. The
short-range and medium range objectives arc the means for achieving
long-term goals and the long-term goals supply a framework within which
the lower level goals are designed. Thus, all these goals reinforce each
other in such a way that the total result is greater than the sum of the
effects taken individually. That is why goal setting is called a ‘synergistic
process’. In order to remain viable, every organization needs to set goals
in all three time periods.
Importance of Objectives
Objectives are essential to organizations. Organizations produce and
market economic products and services, universities provide teaching
and research, governments provide welfare and security and so on.
Organizations are instruments to attainment. Without some purpose, there
is no need for the organization. All organizations are goal-seeking, that
is, they exist for the purpose of achieving some goals efficiently and
effectively. Objectives affect the size, shape, and design of the
organization, and they are important in motivating and directing personnel.
Objectives serve the following functions :
1.Legitimacy. Objectives describe the purpose of the organization, so
that people know what it stands for and will accept its existence and
continuance.
Thus, Ford sells American transportation;
Chrysler sells know-how’ and
Godrej sells quality products.
Objectives help to legitimize the presence of the organization in its
environment. The organization can, and then emphasize its uniqueness
and identity.
2. Direction: Objectives provide guidelines for organisational efforts.
They keep attention focused on the common purpose. Once objectives
are formulated, they become the Polar Star by which the voyage is
navigated. Every activity is directed towards the objectives, every
individual contributes to meet the goals. ‘Without seeing the target, a
manager would be like a blindfolded archer-expanding useless effort
and creating havoc.’

3. Coordination: Objectives keep activities on the right track. They
make behavior in organizations; more rational, more coordinated and
thus more effective, because everyone knows the accepted goals to work
towards. In setting effective goals managers help members at all levels of
the organization to understand how they can best achieve their own goals
by directing their behavior toward the goals of the organization.
4. Benchmarks for success: Objectives serve as performance
standards against which actual performance may be checked. They
provide a benchmark for assessment. They help in the control of human
effort in an organization.
Motivation: Goals are motivators. The setting of a goal, that is both specific
and challenging, leads to an increase in performance because it makes it
clear to the individual what he is supposed to do. He can compare how
well he is doing now versus how well he has done in the past and in some
instances how well he is performing in comparison to others.
Area Needing Objectives

Peter Drucker, while working as a consultant for General Electric,
identified eight key areas in which organizations establish objectives.
(1) Market standing,
(2) Innovation,
(3) Productivity,
(4) Physical and financial resources,
(5) Managerial performance and development,
(6) Worker performance and attitudes,
(7) Profitability and
(8) Public and social responsibility.
1. Market standing: Market standing and innovation are the foundation
areas in management. Essentially, an organization exists to obtain results
in these areas only. Market standing is an answer to the question regarding
optimum market share, which the firm should try to capture ultimately.
This requires a careful analysis of (i) customers and products or services;
(ii) market segments (what groups are buying the product or service);
and (iii) distribution channels (who is getting the product to the customers).
2. Innovation: In every business, there are three kinds of innovations:
Innovation in product or service; innovation in market place, consumer
behavior and value; and innovation in the various skills and activities
needed to make the products and services and to bring them to the market.
The chief problem in setting innovation objectives is the difficulty of
measuring the importance of various innovations. Management must, first
of all, anticipate the innovation goals needed to reach marketing goals. It
must also find out the technological developments in all areas of business.
For example, the survival of an insurance company depends on: the
development of new forms of insurance, the modification of existing
policies, finding out cheaper ways of selling policies and settling claims
etc. Operating in a competitive world forces business firms to place
emphasis on innovation goals.
3. Productivity. Productivity is the ratio of an organization’s inputs to its
outputs. All business will have the same resources to work with; it is the
quality of management that differentiates one business from another. It
must decide as to what inputs of labour, equipment and finances are
necessary to produce the firm’s outputs.
4. Physical and financial resources: Every business must be able to
attract resources-physical, financial and human and put them to
productive use for effective performance. Resource mobilization is a two
step process anticipating the needs of the business and planning to obtain
the resources in an economical fashion. After mobilizing resources, one
also has to say, “This is what is available; what do we have to be, how
we have to behave to get the fullest benefit?”
5. Managerial performance and development: In order to ‘stay in’
and remain profitable, every business needs strong, innovative managers.
So, it is highly important, especially in the case of large organizations, to
set objectives relating to the quality of management performance, the
development of managers at various levels in the organization.
6. Worker performance and attitudes: Organizations must provide
tangible benefits to the individuals working for its continued growth. Thus,
workers want wages, managers want salaries, owners want profits. These
are the inducements that an organization must provide, in order to obtain
performance (contributions) from various groups. Operative level
employees in every organization perform most of the routine or normal

work. Unless goals arc established in terms of output per employee,
quality of product etc. the organizational activities may be disrupted by
labour strife, union problems etc.
7. Profitability: (i) Profit objectives are important for accomplishing
other objectives like covering risks in the business; (ii) ensuring supply
of future capital for modernization and expansion; and (iii) satisfying
customer needs. “A fundamental objective of the business firm is to
produce and distribute products and services that the customer is willing
to buy. Its reason for being is to create value. Utility must be created or
consumers will spend their money elsewhere. Profits arc essential for the
survival and growth of the firm.” They arc the rewards for the effective
utilization of resources in creating value for consumers. Instead of trying
to maximize profits, the firm must try to create utilities for consumers.
How to strike a happy balance between multiple and sometimes,
conflicting goals? As rightly pointed out, by Drucker, ‘to manage a
business is to balance a variety of needs and goals’. Most organization
has a set of ‘multiple’ goals. In order to accomplish these multiple, and
sometimes conflicting goals, it is necessary to strike a happy balance
between them. According to Haimann, the real difficulty is not so much
in determining the goals and the objectives; the real difficulty is in deciding
how to balance the various objectives. How to achieve the trade-off?
First of all, management must determine the optimum balance or mix of
the objectives. For example, shareholders may demand larger dividends,
customers may clamour for better quality products at cheaper prices,
workers may demand higher wages, society may expect high standards
of social conduct, and government may seek compliance with tax policies
and industrial regulations. While formulating overall goals, the
business must do well to protect the interests of each group reasonably.
This requires judgement. And, there is no magic formula to replace intuition
and judgement. Managers have to achieve the equilibrium by assigning
priorities and by differentiating between long-term goals and short-term
goals. To ward off internal conflicts, it is necessary to clearly communicate
the objectives of each department to other departments. If all the
departments in the organization are able to see the big picture and their
role in it, misunderstandings and conflicts can be minimized. The
fundamental objective of the firm is to create value, and profit is the
result of meeting that objective effectively. It must be understood that

profit is to our private enterprise system as breathing is to life, but it is
not the purpose of existence any more than breathing is the purpose of
life. The term ‘profit’ as is used in business should be taken as a ‘catalytic
agent‘ in chemistry; it is the actuator and not the goal or end result.
8. Public and social responsibility: In recent years, social responsibility
of business is to achieve the economic objective, a firm must produce
the goods, the consumer wants. If a firm is not able to create economic
value for society, it may not stay in business long enough to make a
profit.
2.10.2 Projects
A project may be defined as a complex cluster of related activities with
a distinct objective and a definite completion time period. In some cases,
major plans can be decomposed into a number of projects each with a
clear cut set of objectives. Such projects can be isolated and taken up
for completion as a package; a project may involve the introduction of
large automatic plant, building of a dam or a building, or the introduction
of a new product. The task of executing the project is put under the
charge of a Project Manager.
Project Manager is an expert in his area and he formulates various plans,
programs and policies and takes ultimate decisions. He designs various
budgets and authorizes expenditure on various items. However, he draws
personnel and assistance from the functional departments of the
organization like finance, marketing, engineering and production. People
from various departments go back to their departments when their job is
over.
2.10.3 Policies
Policies are guidelines or general limits within which the members of an
enterprise act. They are general statements or understandings, which
guide thinking and action. Policies exist at various levels of the
enterprise-corporate, divisional and departmental. They are valuable
because they allow lower levels of management to handle problems
without going to top management for a decision each time. Some
examples of policies at various levels of the enterprise are given below:
1. No employee will accept any gift from any supplier except for token
gifts of purely nominal or advertising value.
2. Each employee will proceed on one week’s vacation each year.
3. No employee will accept any outside employment.
Policies provide a broad guide as to how the objectives of a business
are to be achieved. While objectives provide the ends which a manager
should try to achieve, the policies provide the guidelines: which he should
keep in view while achieving the ends, A policy is “an established guiding
canon premised on objective, devised to govern the activities of the
business enterprise and from which the basic precepts of conduct are
derived”. A policy is devised to guide the organizational members to
deal with a particular situation in a particular manner. It delimits the area
within which a decision is to be made and assures that the decision will
be consistent with and contributive to business objectives.
Characteristics of a Policy
Policies tend to predefine issues, avoid repeated analysis, and give a
unified structure to other types of plans. Thus, policies are not simple
statements, they have certain purpose behind them. A statement should
have the following characteristics in order to be accepted as a policy.
(i) Policy is an expression of intentions of Top Management. It should
present the principle that will guide the organization actions. Most of
the policy statements reflect a faith in the ethical value of the people.
(ii) Policy is stated in Broad Terms. The purpose of a policy statement
is to serve as a guide to practice now and in future; so it should be
stated in the broadest possible terms.
(iii) Policy is Long Lasting. A policy should be formulated after taking
into account the long-range plans and needs of the organization.
(iv) Policy is developed with the Active Participation of Top Management.
Policy development calls for serious thinking and participation of all
the top executives. Policies live longer than people who frame them.
They are framed in such a manner that they apply to all members of
the organization alike from top to bottom. The policies should also
get approval of the highest authority in the organization.
(v) Policy is in Writing. Policies take concrete shape when they are put
in writing. This will ensure uniformity in application. In case of
disagreement at lower levels, written policy serves as the final
reference point. Written policies ensure continuity and greater
conformity.
Advantages of Policies
A policy is a guide for repetitive action in major areas of activity. It is a
statement of commonly accepted understanding of decision-making
criteria. Policies are set up to achieve several benefits. By taking policy
decisions on frequently occurring problems, the top management provides
the guidelines to lower level managers. It will permit decisions to be
made in similar situations without repeating the reasons and expensive
analysis required initially to state the policy or make the decision. Policies
help managers at various levels to act with confidence without the need
of consulting the superiors every time. This will also ensure promptness
of action.
The benefits of policies are as follows
(i) By making policy decisions on frequently recurring problems, the
top management provides the guidelines to lower level managers.
(ii) Policies help managers at various levels to act with confidence without
the need for consulting the superiors every time. This also ensures
promptness of action.
(iii) Policies facilitate better administrative control. Policies provide the
rational basis for evaluating the results.
(iv) By setting up policies, the management ensures that decisions made
will be consistent and in tune with the objectives, and interests of the
enterprise.
(v) Policies secure coordination and integration of efforts in
accomplishing the organizational objectives.
(vi) Policies save time and effort by pre-deciding problems in repetitive
situations. They save the management from the botheration of
repeating the expensive analysis required to take the policy decision
every time.

Limitations of Policies
(i) Policies are repeatedly used plans and they bring about rigidity in
operations. They leave no room for initiative by the subordinates.
(ii) Policies do not cover all the problems. Sometimes, unforeseen
situations arise which are not covered by the existing policies.
(iii) Policies are no substitute for human judgment. Policies only delimit
the area within which decisions are to be made.
(iv) Policies are not ever lasting.
Difference between Policies and Objectives
S.No. Policies Objectives
1. Policies are guidelines, which - Objectives are the ends

facilitate the achievement of predetermined towards which all the activities
objectives of the enterprise are - directed.
2. Policies determine how the - Objectives determine
work is to be done. what is to be done.
3. Policies prescribe the mode - Objectives are the end
and the manner in which points of planning
objectives can be achieved.
4. Policies are formulated at - Objectives are determined
the top level, middle level by the owners or top
ad lower level management. management of the business.
Policy Formulation
It is the responsibility of the top management to make policies or to take
policy decisions. Policies involve standing decisions, which are used
repetitively over a period of time by different levels in the organization.
Policies are required in different functions of the enterprise. But the top
executives may not have the total expertise to lay down policies for all
functional areas in the organization. It is here that the contribution of
functional and other line managers and staff officials assumes significance.
Such participation will boost the morale of the participants and will ensure
better acceptance of these policies. No policy will produce the desired
result if it is not acceptable to those who are to use the policy.
A policy represents a management decision. That means policy
formulation involves various stages of decision making process, namely,
defining the problem, analyzing the problem, collecting information,
developing alternatives, selecting the best alternative, putting the decision
into practice and follow up. These steps have been discussed in detail in

the chapter entitled ‘Decision Making.’ It is important to point out the

difference between a policy decision and other decisions. A policy
decision is a standing decision, which serves as a framework for taking
other decisions.
The task of formulation and revision of policies is generally entrusted to
a committee of top executives. Before proceeding to formulate a policy,
the executives must understand the environment under which the need of
a policy for a specific purpose is felt. Various policy alternatives should
be analyzed carefully and it is also important to examine the effect of
alternatives on the value system of the organization. That policy alternative
should be adopted which is expected to yield the best possible results in
terms of achievement of objectives of the enterprise.
The policies must be put into writing. There are two compelling reasons
for this. Firstly, a policy will be vague unless it is written down. Secondly,
if a policy is in writing, it will reveal exactly the intentions of the top
management. Special skill is required to select and adhere to policy
language, which will state and synthesize the general principles and the
scope for discretion. As said earlier, the policy should be finalized after
consulting the persons who are supposed to use the policy. The reaction
of such people should be analyzed carefully. After a policy is framed, it
must be properly communicated to the people who are expected to use
it. It is also necessary to appraise the policies after a certain period of
time to know their effectiveness. The policies, which have become
outdated, should be discarded without any delay.
Types of Policies
The management should always be in search of areas where there may
be a need for a policy. Policies must be set up in the key areas of the
enterprise like production, purchase, finance, personnel and marketing.
If this is done, the policies will be classified by major functions of the
enterprise. Policies may also be classified on the basis of source of the
policy, i.e., (i) external, (ii) internal, and (iii) appealed. External policies
include those policies, which arise to meet the various controls and
requests of forces outside the enterprise, such as government, trade unions
and trade associations. Internal policies include those initiated by managers
at various levels to guide the subordinates. Appealed policies come into
existence from the appeal of an exceptional problem by a subordinate to
his superior regarding how to handle the problem. They are formed since
the existing policies are insufficient to solve the problem.
G.R.Terry has given another classification of policies based on the
organizational levels of managers. There may, be policies which are used
primarily by the top managers, other principles by the middle managers
and still other policies which are applicable chiefly to the first line
managers. The policies at these three levels may be termed as basic,
general and departmental policies, Basic policies affect and relate to the
topmost level of managerial hierarchy. General policies affect the middle
level managers and are more specific than the basic policies. Departmental
policies are highly specific and are applicable at the lowest level of
management to deal with the day-to-day problems in dealing with the
people at work.
2.10.4 Procedures
A procedure is a systematic way of handling regular events. It is stated in
terms of steps to be followed in carrying out certain kinds of work.
According to Terry, a procedure is a series of related tasks that make up
the chronological sequence and the established way of performing the
work to be accomplished.” It is a list of systematic steps for handling
events that occur regularly. Chronological sequence of required actions
is the essence of any procedure. A procedure is a guide to action rather
than to thinking, so it hardly leaves any room for judgment. Procedures
involve planned sequence and consistency. For instance, there may be
different procedures in an enterprise for processing an order, shipping
the goods, handling claims, collection of payments, and so on.
Procedures are operational guides to action as they routinise the way
certain recurring jobs are to be performed. The establishment of various
procedures tends to impart systematized order in place of confusion in
the organization. They help in management by system. They serve as
means by which decisions are implemented. Well-conceived procedures
allow effective delegation and decentralization of authority without loss
of control and coordination.
A streamlined, simplified and sound procedure helps to expedite and
accelerate clerical work without duplication and waste of efforts and
resources. It will lubricate the channels of information and, thus, help top
management in timely decision-making. Even the information flow can
be procedural so that management gets information continuously in vital

areas like sales performance, cash flow, inventory position and so on.
However, procedures must be periodically reviewed and updated to keep
pace with the changing requirements of the volume of work. This will
lead to work simplification, rationalization, increased efficiency and
reduced costs.
Advantages of Procedures
(i) Procedures minimize the burden of decision-making because the
sequence of steps to be followed is standardized.
(ii) Procedures often lead to simplification of workflow and elimination
of unnecessary steps.
(iii) Procedures ensure uniformity and consistency of action under
recurring situations.
(iv) Procedures are developed after careful analysis of various operations,
which are necessary for bringing coordination in the organization.
(v) Procedures are an important aid to communication because they
communicate the steps to be followed to complete a, particular piece
of work.
(vi) Procedures serve as a medium of control by enabling the managers
to evaluate the performance of their subordinates.
Limitations of Procedures
(i) Procedures bring about rigidity in the performance of operations.
Thus, they discourage the search for any improvement.
(ii) A procedure lays down the fixed way of doing a particular job and
thus a more effective, way of doing a job may not be given proper
attention.
(iii) Procedures need to be reviewed and updated constantly because
they become obsolete with the change in the nature of business
operations.
Distinction between Policies and Procedures

Policies are specific guidelines and constraints for managerial thinking
and action. They are planned expressions of the organization’s official
attitude towards certain issues. But procedures, on the other hand, are
systematic ways of handling regular events. They involve chronological

sequence of actions required to do particular tasks. They are operational
guides to action and routinise the way certain recurring jobs are to be
done. The other points of difference between policies and procedures
are as follows:
1. Policies are guides to decision-making while procedures are guides
to action.
2. Policies have some room for managerial thinking and discretion while
procedures are generally detailed and rigid.
3. Policies form part of strategies of the organization while procedures
are operational as tactical tools.
4. Policies are generally framed by the top management and procedures
are laid down at somewhat low-level in the light of policies.
5. Policies serve as the bases on which different procedures are based.
The difference between policies and procedures can be further explained
by means of an example. An industrial concern may adopt a policy of
centralized recruitment and selection through the labor department. The
labor department may then chalk out the procedure of recruitment and
selection. This procedure may consist of several steps like inviting
applications, preliminary interview, aptitude and other tests, final interview,
medical examination and issue of appointment letter. However, both
policies and procedures can be termed as standing plans because they
guide action. Moreover, both are time and labor-saving devices because
they provide ready-made guidelines for dealing with the recurring
situations.
2.10.5 Strategies
The term ‘strategy’ has been adapted from war and is being increasingly
used in business to reflect broad overall objectives and policies of an
enterprise. In the context of business, strategy refers to the firm’s overall
plan for dealing with and existing in its environment. Strategies most often
denote a general programme of action and deployment of emphasis and
resources to attain comprehensive objectives. Strategies are plans made
in the light of the plans of the competitors because a modern business
institution operates in a competitive environment. They are a useful
framework for guiding enterprise thinking and action. For instance, a
company may follow a strategy of charging a lower price or using more

sales force than competitors or advertising more heavily than competitors.
The purpose of strategies is to determine and communicate through a
system of major objectives and policies, a picture of what kind of
enterprise is envisioned. They do not attempt to outline exactly how the
enterprise is to accomplish its objectives since this is the task of countless
major and minor supporting programmes. But they are a useful framework
for guiding enterprise thinking and action. This usefulness in practice and
importance in guiding planning do, however, justify their separation as a
type of plan for purposes of analysis.”
Why Strategic Planning?

No military officer would undertake to engage his enemy without a clear
idea of strategy. No politician would undertake a campaign for a major
office without a clear concept of his Likewise, no business firm can afford
to get ahead without a clear map of why and where it go. Strategic
planning provides the route map for the firm.
Benefits of Strategic Planning

 It provides the road map for the firm; it shows the way for achieving
targets.
 It helps the firm utilize its resources in the best possible manner. It
allows more effective allocation of time and resources for identifying
opportunities.
 The firm can respond to environmental changes in a better way by
exploiting opportunities to its advantages and avoiding costly
mistakes in investment decisions.
 It minimizes the chances of mistakes and unpleasant surprises.
 It creates a framework for internal communication among personnel.
 It helps to integrate the behavior into a total effort.
 It provides a basis for the clarification of individual responsibilities.
 It gives encouragement to thinking.
 It encourages a favorable attitude toward change.
 It provides a cooperative, integrated and approach to tackling
problems and opportunities.
 It serves as a comprehensive guide.

 It provides the big picture for all employees of an organization
By defining the mission of the organization in specific terms, it helps
managers to achieve the given purpose through organizational efforts.
The organization is able to function better as it becomes more responsive
to a dynamic environment. It helps in identifying opportunities exploit the
same vigorously. It helps decide where and when to use the available
resource optimal way. Additionally, it provides a complete and broad
base for judging each contributions. Targets are clarified and the means
to follow are outlined. The future adequate controls can be established
to evaluate whether the right course of action has been taken or not. it
also gives that whether the results are satisfactory or not.
Strategic planning also minimizes the mistakes and unpleasant surprises,
because goals and strategies are subjected to careful exercise. There
are less chances of committing mistakes and decisions arrived at ultimately
on time.
Pitfalls: Strategic planning is laborious and time-consuming. There are
very few shortcuts. Immediate results are rarely obtained. Further,
establishing and maintaining functioning system involves many expenses.
Strategic planning, quite often, restricts the origination and executives to
the non rational and risk free options. Managers are wedded to a
philosophy of adopting those strategies or objectives that bear the weight
of careful scrutiny and detailed analysis. In the process, many attractive
opportunities may be lost since they are characterized by a high degree
of risk and uncertainty.
Strategic Management Process

Strategic Management is a process through which manager:
 Formulates and implements strategies
 Obtains strategic goal achievement
Elements of Strategic Management

The above definitions clearly reveal four important elements of strategic
management: (a) Analysis, (b) Strategic choice, (c) Strategy
implementation and (d) Strategy evaluation.
 Strategic analysis: This is concerned with the strategic situation of

the organization. Organization looks into issues such as changes in
the organizational environment and impact on the organization,
assessment of its resources and strengths and light of changes in
environment. A vigilant and proactive organization always tries to
get of competition through a constant re-examination of its position
in the marketplace in its products, services, strategies, etc.
 Strategic choice: Strategic analysis provides a basis for strategic
choice. This is basically with formulation of suitable courses of action,
their evaluation and the choices The relevant issues include deciding
what new businesses to enter, what businesses to how to allocate
resources, whether to expand operations or diversified whether to
enter international markets, whether to merge or form a joint venture
and how to avoid a hostile; takeover etc. Since an organization has
to utilize its resources judiciously, it must decide alternative strategies
which benefit the firm most.
 Strategy implementation: This is the action stage of strategic
management. Implementation means mobilizing employees to translate
formulated strategies into concrete action. This step requires a firm
to (a) establish annual objectives, (b) devise policies, (c) motivate
(d) allocate resources, (e) develop a strategy of supportive culture
(f) create an organization structure (g) channel marketing efforts (h)
prepare budgets (i) develop information systems and (j) link
employee rewards to organizational performance. Successful strategy
implementation hinges upon a manager’s ability to motivate people.
 Strategy evaluation: This is the final stage in strategic management.
Evaluation is because success today is no guarantee of success
tomorrow. Success creates new problems. So, managers need to
constantly (a) review external and internal factors basis for current
strategies, (b) measure performance and, (c) take corrective steps.
All strategies are subject to change because the environment in which
they operate is changing.
The Process of Strategy Formulation

Important steps in the strategy formulation process are given below.
1. Mission and objectives: The strategic management process begins

by spelling out the firm’s mission and objectives. The mission of a firm is
the unique purpose that sets it apart from other companies of its type
and identifies the scope of its operations. A company mission is designed
to accomplish several outcomes?
 To ensure unanimity of purpose within the organization.
 To provide a basis for motivating the use of the organization’s
resources.
 To develop a basis, or standard, for allocating organizational
resources.
 To establish a general tone or organizational climate; for example, to
suggest a business like operation.
 To serve as a focal point, for those who can identify with the
organization’s purpose and direction as well deter those who cannot
do so, from participating further in its activities.
 To facilitate the translation of objectives and goals into a work
structure, involving the assignment of tasks to responsible elements
within the organization.
 To specify organizational purposes and. the translation of these
purposes in such a way that cost, time and performance parameters
can be assessed and controlled (King and Cleiand).
Mission is a broad term and it reflects considerable idealism. We
therefore, require specific or objectives to be achieved within a time
frame, which would help us, compare with its rivals. Objective is an end
result, the end point, something that you aim for and to reach. It is a kind
of desired result towards which behavior is directed in the organization.
To achieve long-term prosperity, managers generally establish long-term
objectives in certain areas (Pears and Robinson), namely:
 Profitability: How much can the firm earn that is an acceptable
level of profit stay in the business and get ahead?
 Productivity: Whether the firm can improve the input-output
relationship in a sustained way, in terms of number of items produced
or the number of services rendered per unit of input.
 Competitive position: This is usually expressed in terms of increasing

total sales or market share when compared to rivals in the field.
 Employee development and employee relations: Employees
value growth and career opportunities. Providing such stimulating
opportunities increase productivity and decrease turnover. Therefore,
employee development becomes a key issue in every firm’s long
term plan- Improving employee relations (union-workers-employers)
also, is an important issue because poor industrial relations could
upset all the calculations of managers regarding growth, profitability,
etc.
2. External Analysis: The External Environment needs to be analyzed
to find the firm’s opportunities or to minimize the threats.
3. Internal Analysis: After taking note of the opportunities present in
the environment, the firm has to identify the key areas where it wants to
focus its energies based on its own strength and weakness.
4. Formulate Strategies: The situation analysis will give the lead to the
explicit strategic plans at three levels; corporate, business and functional.
Appropriateness of Business Strategy

A business strategy is a pragmatic plan of action to achieve certain
objectives. To evaluate its appropriateness requires certain criteria. We
may identify six criteria to measure the appropriateness of a business
strategy
1. Internal Consistency. A business strategy in a particular area of
business should be consistent with strategies in other areas and objectives
and policies of business. Internal inconsistency in any strategy will create
problem in its implementation.
2. Consistency with Environment. A strategy is basically an enterprise’s
response to cope with external environmental. Therefore, it should aim
at meeting the threats and pressures of external forces.
3. Appropriateness in the light of available resources. Formulation
of a strategy requires a realistic assessment of the resources of the
enterprise men, money and materials both existing resources and the
resources it can command. The resources of an enterprise also include
the skills of management and other manpower, command over sources
of scarce raw materials, production facilities, technology, marketing

capabilities and public image, and so on. It is desirable that every
enterprise formulates its strategy within the limitations imposed by its
resources. The objective is to ensure that the enterprise’s resources are
not over-stretched or over-strained on the one hand and to utilize the
existing and commendable resources in the best possible manner on the
other.
4. Acceptable degree of risk. Any major strategy carries with it certain
element of risk and uncertainty because it covers a long future horizon
and because it seeks to cope with complex environment. The degree of
risk inherent in a strategy should be within the bearable capability of the
enterprise. Resources should not be committed irrevocably, nor should
they be concentrated on a single or narrow range of ventures. Also,
there should be match between risk and returns, financial and otherwise.
5. Appropriate Time Horizon. Time is the essence of any strategy.
While a reasonably long time span imparts some flexibility, the problem
of forecasting is ever present. How far in the future can top management
predict with credibility is a measure of its capability. An optimal time
span cannot be mathematically determined; it is a matter of environmental
conditions, the objectives to be sought and the judgment of management.
6. Workability. A strategy should be feasible and produce desired results
within the constraints and parameters known to management. It should
be realistic and capable of implementation. Certain quantitative measures
like volume of sales and profit, growth rate, asset formation, market
share, introduction of new products and so on, are to be set. These are
to be combined with qualitative criteria like the degree of confidence
with which managers implement the strategy, the extent to which major
areas of decision situations are handled by reference to the criteria
embedded in the strategy, the extent to which opportunities are exploited,
threats averted, resources mobilized, and environmental control gained.
2.10.6 Methods
There is a method for accomplishing each phase of work within a
procedure. A method is the manual or mechanical means by which each
operation is performed. It means an established manner of doing an
operation, thus, a method is more limited in scope than procedure because
it deals with a task that is only one step of a procedure. For instance, in
the procedure for processing order, there are methods for acknowledging
the incoming order, checking the credit status of the customer, preparing
the sales invoice and distributing the copies of the invoice.
2.10.7 Programmes
A programme involves planning for future events and establishing a
sequence of required actions. For instance, it might include such general
activities as locating new suppliers as a source of additional raw materials,
purchasing new machines that will enable to increase output, changing
over some existing machines to meet new demands or hiring new people
to operate new equipment. Thus, a programme is a complex of objectives,
policies, procedures, task assignments, steps to be taken, resources to
be employed and other elements necessary to carry out a given course
of action. A programme may be as major as to start a new factory or
may be as minor as a scheme formulated by a foreman to improve the
morale of the workers.
2.10.8 Budgets
Budgets are plans for using money and materials. Budgeting is an
important part of overall planning as different kinds of budgets are
prepared to utilize scarce resources in the best possible manner. A budget
is a statement of expected results expressed in numerical terms like
rupees, product units, or man hours. Since it is a statement of expected
results, it is also used as an instrument of managerial control. It provides
a standard by which actual operations can be measured and variations
can be checked. But it should not be forgotten that making a budget is
clearly planning. A budget forces an enterprise to make in advance a
numerical compilation of expected cash flow, expenses and revenues,
capital outlays, man or machine-hour utilization etc. Budgeting is essential
for control, but it cannot serve as a control mechanism unless it reflects
plans. As a means of effective planning, the process of budgeting may
involve the preparation of budgets of sales, purchase, materials, labor,
manufacturing expenses, etc.
Budgeting is a key managerial process and is important for coordinating the
activities of various departments. It coordinates by adjusting every departmental
budget into the master budget. Every departmental head is forced to conscious
plan the future operations of his department in tangible terms.
Since budgets portray verifiable and measurable goals to be reached

within a period of one year, they inject a sense of clarity, direction and
purpose in the activities of the organization. However, to be effective
means of planning, budgets should have functional flexibility. They should
not be rigid instruments. They should be able to cope with the unforeseen
circumstances within a predictable range of activities. The budgets should
be drafted carefully and should not represent a mere projection on the
basis of the past performance. They should be forward looking
documents.
2.10.9. Rules
Every organization attempts to operate in an orderly way by laying down
certain rules. Rules are the simplest and the most specific type of standing
plans. They are used for guiding what may or may not be done. A rule
demands a specific action. It is more rigid than a policy. Rules generally
pertain to the administrative area of a procedure. A rule may not be
apart of any procedure. For example, a rule like ‘No smoking’ is not
related to any procedure. Rules demand strict compliance. Their violation
is generally associated with some sort of disciplinary action.
Significance of Standing Plans like budget

Standing plans are formulated to achieve unity and uniformity of efforts
in meeting repetitive situations arising at various levels of the enterprise.
They act as ready guides to deal with recurring problems. They help in
the effective management of a business enterprise in several respects as
stated below:
(i) Standing plans facilitate delegation of authority to lower levels without
abdication of accountability at successively higher levels.
(ii) They are effective means of achieving the goals of the enterprise.
Goals tend to be vague, complex, multi dimensional and, sometimes,
conflicting with one another in the absence of standing plans. In order
to overcome such difficulties, it is essential to develop a hierarchy of
policies, methods, procedures and rules to serve as ready frames of
reference whenever there is some difficulty in taking a managerial
decision.
(iii) Standing plans help in achieving co-ordination in the enterprise. They
tend to achieve consistency, uniformity and unity of efforts in the
enterprise.
(iv) Standing plans ensure quick action whenever need arises because
there is no need to repeat the reasoning and analysis required initially
to design a standing plan whenever a similar situation arises. Thus,
they are great labor saving devices as they provide frames of reference
for tackling recurring situations.
(v) Standing plans facilitate better administrative control. They provide
the rational bases of evaluating the results of efforts of persons
working at the various levels in the enterprise.
2.11 DECISION MAKING

Introduction
Decision-making is an important part of management process. It covers
every part of an enterprise. In fact, whatever a manager does, and he
does through decision-making only. For example, a manager has to decide
(i) What are the long-term objectives of the organization; how to achieve
these objectives, what strategies, policies, procedures to be adopted
(planning);
(ii) How the jobs should be structured what type of structure, how to
match jobs with individuals (organizing);
(iii) How to motivate people to peak performance, which leadership style
should be used, how to integrate effort and resolve conflicts (leading);
(iv) What activities should be controlled, how to control them,
(controlling) decision-making is a central, important part of the
process of managing? Managers are essentially decision makers only.
Almost everything managers do involves decision-making.
Managers scout for problems, make decisions for solving them and
monitor the consequences to see whether additional decisions are
required. Good decision-making is a vital element of good management
because decisions determine how the organization solves its problems,
allocates its resources and accomplishes its goals. However,
decision-making is not easy it must be done amid ever-changing factors,
unclear information and conflicting points of view. A decision is a choice
made from available alternatives. Decision-making is the process by which
individuals select a course of action among several alternatives, to produce
a desired result.
Characteristics of Decision-Making
The important characteristics of decision-making may be listed thus:
1. Goal-oriented: Decision-making is a goal-oriented process. Decisions
are usually made to achieve some purpose or goal. The intention is to
move ‘toward some desired state of affairs’.
2.Alternatives: A decision should be viewed as ‘a point reached in a
stream of action’. It is characterized by two activities : search and choice.
The manager searches for opportunities to arrive at decisions and for
alternative solutions, so that action may take place. Choice leads to
decision; it is the selection of a course of action needed to solve a
problem. When there is no choice of action, no decision is required. The
need for decision-making arises only when some uncertainty, as to
outcome exists.
3. Analytical-intellectual: Decision-making is not a purely intellectual
process. It has both the intuitive and deductive logic; it contains conscious
and unconscious aspects. Part of it can be learned, but part of it depends
upon the personal characteristics of the decision maker. Decision-making
cannot be completely quantified; nor is it based mainly on reason or
intuition. Many decisions are based on emotions or instincts. “A decision
represents a judgment; a final resolution of a conflict of needs, means or
goals; and a commitment to action made in the face of uncertainty,
complexity, and even irrationality.” Decision implies freedom to the
decision maker regarding the final choice; it is uniquely human and is the
product of deliberation, evaluation and thought.
4. Dynamic process: Decision-making is characterized as a process,
rather than as, one static entity. It is a process of using inputs effectively
in the solution of selected problems and the creation of outputs that a
course of action among has utility. Moreover, it is a process concerned
with ‘identifying worthwhile things to do’ in a dynamic setting. A manager
for example, may hire people based on merit regularly and also pick up
candidates recommended by an influential party, at times. Depending on
the situational requirements, managers take suitable decisions using
discretion and judgment.
5. Pervasive function: Decision-making permeates all management and
covers every part of an enterprise. In fact, whatever a manager does, he
does through decision-making only; the end products of a manager’s
work are decisions and actions. Decision-making is the substance of a

manager’s job.
6. Continuous activity: The life of a manager is a perpetual choice
making activity. He decides things on a continual and regular basis. It is
not a one shot deal.
7. Commitment of time, effort and money: Decision-making implies
commitment of time, effort and money. The commitment may be for-short
term or long-term depending on the type of decision (e.g. strategic,
tactical or operating). Once a decision is made, the organization moves
in a specific direction, in order to achieve the goals.
8. Human and social process: Decision-making is a human and social
process involving intellectual abilities, intuition and judgment. The human
as well as social imparts of a decision are usually taken into account
while making the choice from several alternatives. For example, in a
labor surplus, capital-hungry country like India managers cannot suddenly
shut down plants, lop off divisions and extend the golden handshake to
thousands of workers, in the face of intense competition.
9. Integral part of planning: As Koontz indicated, ‘decision making is
the core of planning’. Both are intellectual processes, demanding
discretion and judgment. Both aim at achieving goals. Both are situational
in nature. Both involve choice among alternative courses of action. Both
are based on forecasts and assumptions about future risk and uncertainty.
2.11.1 TYPES OF DECISIONS

Decisions may be classified according to different bases, which are
discussed below:
(i) Routine and Strategic Decisions. Tactical or routine decisions are
made repetitively following certain established rules, procedures and
policies. They neither require collection of new data nor conferring with
people. Thus they can be taken without much deliberation. They may be
complicated but are always one-dimensional. They do not require any
special effort by the manager. The managers at the middle and lower
management level generally take such decisions. Strategic or basic
decisions, on the other hand, are more important and so the top
management and middle management take them generally. The higher
the level of a manager, the more strategic decisions he is required to
take. The strategic decisions relate to policy matters and so require a

thorough fact finding and analysis of the possible alternatives. Finding
the correct problem in such decisions assumes great importance. The
managers are more serious about such decisions as they influence
decision-making at the lower levels.
(ii) Policy and Operating Decisions. Policy decisions are of vital
importance and are taken by the top management. They affect the entire
enterprise. But operating decisions are taken by the lower management
in order to put into action the policy decisions. For instance, the bonus
issue is a policy matter that is to be decided by the top management, and
calculation of bonus is an operating decision, which is taken at the lower
levels to execute the policy decision.
(iii) Organizational and Personal Decisions. Organizational decisions
are those, which a manager takes in his official capacity. Such decisions
can be delegated. But personal decisions, which relate to the manager
as an individual, and not as a member of the organization, cannot be
delegated.
(iv) Programmed and Non-programmed Decisions. The programmed
decisions are of a routine and repetitive nature, which are to be dealt
with according to specific procedures. But the non-programmed decisions
arise because of unstructured problems. There is no standard procedure
for handling such problems. For instance, if an employee absents himself
from his work for a long time without any intimation, the supervisor need
not refer this matter to the chief executive. He can deal with such an
employee according to the standard procedure, which may include charge
sheet, suspension, etc. But if a large number of employees absent
themselves from work without any information such a problem cannot
be dealt in a routine manner. It has to be dealt with as an unstructured
pro blem and t he chief executive sho uld take t he decision.
Non-programmed decisions require thorough study of the problem and
scientific analysis of the situational factors. There has to be adequate
probing and analysis of various alternatives before taking such decisions.
(v) Individual and Group Decisions. When an individual in the
organization takes a decision, it is known as individual decision. Such
decisions are generally taken in small organizations and in those
organizations where autocratic style of management prevails. Groups or
collective decisions refer to the decisions, which are taken by a group of

organizational members, say Board of Directors or a committee.
2.11.2 DIFFICULTIES IN DECISION MAKING

A business manager can make decisions by intuition, i, e., without
considering carefully all the alternatives. Practically, every one takes
decisions in this way because of the feeling that the particular course of
action is the best one. This kind of feeling may have no logic behind it.
Moreover, it is difficult to explain why one is feeling a particular way.
Psychologists emphasize that there are forces other than reason within a
person, which influence and shape a decision. Decisions based on intuition
are subjective and are taken without any conscious effort to weigh the
advantages and disadvantages of various alternatives.
Effective decision-making requires a rational choice of a course of action.
There is a need to define the term ‘rational’ here. Rationality is the ability
to follow a systematical, logical, thorough approach in decision-making.
Thus, if a decision is taken after thorough analysis and reasoning and
weighing the consequences of various alternatives, such a decision will
be called an objective or rational decision.
In actual practice, each person takes a decision, which involves a
combination of intuition and rational thinking. A person who depends
much upon intuition is more subjective and a person who depends much
upon logical thinking is more objective. This is what Herbert Simon has
called the ‘principle of bounded rationality’. Simon emphasized that a
person makes decisions not only on absolutely logical analysis of facts
but also on his intuition, value system and way of thinking, which are
subjective in nature.
The subjectivity in decision-making arises because:
(i) The individual does not want to study and analyze the problem
because of his perception.
(ii) The individual does not have the full knowledge of the alternatives
and/or their consequences.
(iii) The individual interprets the organizational goals in his own way. He
may adopt a course of action, which according to him will meet the
goals effectively.
(iv) The individual is careless in taking the decision. He may be indifferent
towards the consequences of his decision.
The rationality of the individuals is generally affected by the above

limitations. The concept of bounded rationality explains the behavior of
people in practice. It recognizes that a man cannot be expected to have
full knowledge and information and his capacity to perceive, retain and
retrieve information is not unlimited. Human goals are multiple and
conflicting. The traditional theory of complete rational and economic man
cannot work in practice.
Rationality is the ability to follow a systematic, logical and thorough
approach in decision-making process. Gross suggested three dimensions
to determine rationality: (i) the extent to which a given action satisfies
human interests; (ii) feasibility of means to the given end; and (iii)
consistency.
Rationality requires complete knowledge of the consequences that will
follow each choice. But it is not always possible. Rationality further
requires a choice among all possible alternatives. But every individual
has his limitations. He may not be able to perceive all possible alternatives.
Moreover, decision-making relates to future. This requires some degree
of imagination. One may not be able to imagine objectively because of
his frame of mind. From this, we can say that a man cannot be completely
rational. As said by Simon, a man has only bounded rationality because
there are certain limitations to complete rationality. Thus, Simon’s point
of view is highly realistic as it helps in understanding the actual behavior
of the decision maker. It also modifies substantially the traditional theory
of decision-making based on complete rational man. Subjective factors
are bound to affect a person’s decisions even though he is otherwise
rational.
2.11.3 Steps in Rational Decision Making

The decision making process can be explained by studying the following
steps:
(i) Diagnosing and Defining the problem
(ii) Analyzing the problem.
(iii) Collecting of data.
(iv) Developing alternatives.
(v) Review of key factors.
(vi) Selecting the best alternative.

(vii) Putting the decision into practice.
(viii) Follow up.
(i) Diagnosing and Defining the Problem

It is true to a large extent that a problem well defined is half solved. A lot
of bad decisions are made because the person making the decision does
not have a good grasp of the problem. Too often what managers consider,
as problems are really symptoms of problems. For instance, a company
is losing money. Its problem can’t be stated as “How can we stop losing
money?” That is only a symptom. The real problem is to identify what
business practices are causing the company to incur losses. Are the prices
too low or expenses too high? Therefore, it is essential for the decision
maker to find and define the problem before he takes any decision.
Objectives Decision of Alternatives
Problem fact finding Alternatives Evaluation
information Testing Selections
Implementation
Feedback information
Figure - Decision-making Process.
Sufficient time should be spent on defining the problem, as it is not always

easy to define the problem and to see the fundamental thing that is causing
the trouble and that needs correction. Practically, no problem ever
presents itself in a manner that an immediate decision may be taken. It is
therefore, essential to define the problem before any action is taken,
otherwise the manager will answer the wrong question rather than the
core problem. Clear definition of the problem is very important as the
right answer can be found only to a right question.
(ii) Analyzing the Problem

After clearly recognizing the problem, the next phase of decision-making
is the analysis of problem, which involves classifying the problem and
gathering information. Classification is necessary in order to know who
should take the decision and who should be consulted in taking it. Without
proper classification, the effectiveness of the decision may be jeopardized.
The problem should be classified keeping in view the following factors:
(i) The nature of the decision, i.e., whether it is strategic or
it is routine,
(ii) The impact of the decision on other functions,
(iii) The futurity of the decision,
(iv) The periodicity of the decision, and
(v) The limiting or strategic factor relevant to the decision.
(iii) Collection of Data

A lot of information is required to classify any problem. So long as the
required information is not available, any classification would be
misleading. This will also have an adverse impact on the quality of the
decision. Trying to analyze without facts is like guessing directions at a
crossing without reading the highway signboards, Thus collection of right
type of information is very important in decision making. It would not be
an exaggeration to say that a decision is as good as the information on
which it is based.
Collection of facts and figures also requires certain decisions on the part
of the manager. He must decide what type of information he requires and
how he can obtain this. Before gathering the information, one must be
clear as to how much time and money he can spend in gathering the
information he needs. It is also important to note that when one gathers
the facts to analyze a problem, he wants facts that relate to alternative
courses of action. So one must know what the several alternatives are
and then should collect information that will help in comparing the
alternatives. Needless to say, collection of information is not sufficient;
the manager must also know how to use it.
It is not always possible to get all the information that is needed for
defining and classifying the problem. In such circumstances, a manager
has to judge how much risk the decision involves as well as the degree of
precision and rigidity that the proposed course of action can afford. It
should also be noted that fact finding for the purpose of decision should
be solution oriented. The manager must lay down the various alternatives
first and then proceed to collect facts, which will help in comparing
alternatives.
(iv) Developing Alternatives

After defining and analyzing the problem the next step in the decision
making process is the development of alternative courses of action.
Without resorting to the process of developing alternatives, a manager is
likely to be guided by his limited imagination. It is rare for alternatives to
be lacking for any course of action. But, sometimes, a manager assumes
that there is only one way of doing a thing. In such a case, what the
manager has probably not done is to force himself consider other
alternatives. Unless he does so, he cannot reach the decision, which is
the best possible. From this can be derived a key planning principle
which may be termed as the principle of alternatives. Alternatives exist
for every decision problem. Effective planning, involves a search for the
alternatives towards the desired goal.
(v) Review of Key Factors

While developing alternatives, the principle of limiting factor has to be
taken care of. A limiting factor is one, which stands in the way of
accomplishing the desired goal. It is a key factor in decision-making. If
such factors are properly identified, manager can confine his search for
alternatives to those, which will overcome the limiting factors. In choosing
from among alternatives, the more an individual can recognize those
factors which are limiting or critical to the attainment of the desired goal,
the more clearly and accurately he or she can select the most favorable
alternativesgenerally use. It should also be noted that development of
alternatives is no guarantee of finding the best possible decision, but it
certainly helps in weighing one alternative against others and, thus,
minimizing uncertainties.
It is not always necessary that the alternative solutions should lead to
taking some action. To decide to take no action is also a decision as
much as to take a specific action. It is imperative in all organizational
problems that the alternative of taking no action is being considered. For

instance, if there is an unnecessary post in a department, the alternative
not to fill it will be the best one. The ability to develop alternatives is
often as important as making a right decision among the alternatives. The
development of alternatives, if thorough, will often unearth so many choices
that the manager cannot possibly consider them all. He will have to take
the help of certain mathematical techniques and electronic computers to
make a choice among the alternatives.
(vi) Selecting the Best Alternative

In order to make the final choice of the best alternative, one will have to
evaluate all the possible alternatives. There are various ways to evaluate
alternatives. The most common method is through intuition, i.e., choosing
a solution that seems to be good at that time. There is an inherent danger
in this process because a manager’s intuition may be wrong on several
occasions. The second way to choose the best alternative is to weigh the
consequences of one against those of the others. Peter Drucker has laid
down four criteria in order to weigh the consequences of various
alternatives. They are:
(a) Risk. A manager should weigh the risks of each course of action
against the expected gains. As a matter a fact, risks are involved in all the
solutions. What matters is the intensity of different types of risks in various
solutions.
(b) Economy of Effort. The best manager is one who can mobilize the
resources for the achievement of results with the minimum of efforts. The
decision to be chosen should ensure the maximum possible economy of
efforts, money and time.
(c) Situation or Timing. The choice of a course of action will depend
upon the situation prevailing at a particular point of time. If the situation
has great urgency, the preferable course of action is one that alarms the
organization that something important is happening. If a long and
consistent effort is needed, a ‘slow start gathers momentum approach’
may be preferable.
(d) Limitation of Resources. In choosing among the alternatives,
primary attention must be given to those factors that are limiting or
strategic to the decision involved. The search for limiting factors in
decision-making should be a never-ending process. Discovery of the

limiting factor lies at the basis of selection from the alternatives and hence
of planning and decision-making.
Koontz and O’Donnell have suggested three bases, which should be
followed by a manager for selecting among the alternatives, these are
experience, experimentation and research and analysis, which are
discussed below :
(i) Experience: In making a choice, a manager is influenced to a great
extent by his past experience. Sometimes, he may give undue importance
to past experience. He should compare both the situations. However, he
can give more reliance to past experience in case of routine decisions;
but in case of strategic decisions, he should not rely fully on his past
experience to reach at a rational decision.
(ii) Experimentation: Under this approach, the manager tests the solution
under actual or simulated conditions. This approach has proved to be of
considerable help in many cases in test marketing of a new product. But
it is not always possible to put this technique into practice because it is
very expensive. It is utilized as the last resort after all other techniques of
decision making have been tried. It can be utilized on a small scale to
test the effectiveness of the decision. For instance, a company may test
a new product in a certain territory before expanding its sale nationwide.
(iii) Research and Analysis: It is considered to be the most effective
technique of selecting among alternatives where a major decision is
involved. It involves a search for relationships among the more critical
variables, constraints and premises that bear upon the goal sought. In a
real sense, it is the pencil and paper approach to decision making. It
weighs various alternatives by making models. It takes the help of
computers and certain mathematical techniques. This makes the choice
of the alternative more rational and objective.
(vii) Putting the Decision into Practice

The choice of an alternative will not serve any purpose if it is not put into
practice. The manager is not only concerned with taking a decision, but
also with its implementation. He should try to ensure that systematic
steps are taken to implement the decision. The main problem which the
manager may face at the implementation stage is the resistance by the
subordinates who are affected by the decision. If the manager is unable
to overcome this resistance, the energy and efforts consumed in decision-

making will go waste. In order to make the decision acceptable, it is
necessary for the manager to make the people understand what the
decision involves, what is expected of them and what they should expect
from the management. The principle of slow and steady progress should
be followed to bring about a change in the behavior of the subordinates.
In order to make the subordinates committed to the decision, it is essential
that they should be allowed to participate in the decision making process.
The managers, who discuss problems with their subordinates and give
them opportunities to ask questions and make suggestions, find more
support for their decisions than the managers who don’t let the
subordinates participate.
Now the question arises at what level of the decision-making process
the subordinates should participate. The subordinates should not
participate at the stage of defining the problem because the manager
himself is not certain as to whom the decision will affect. The area where
the subordinates should participate is the development of alternatives.
They should be encouraged to suggest alternatives. This may bring to
surface certain alternatives, which may not be thought of by the manager,
moreover, they will feel attached to the decision. At the same time, there
is also a danger that a group decision may be poorer than the one-man
decision. Group participation does not necessarily improve the quality
of the decision, but sometimes impairs it. Someone has described group
decision like a train in which every passenger has a brake. It has also
been pointed out that all employees are unable to participate in decision-
making. Nevertheless,, it is desirable if a manager consults his subordinates
while making decision. Participative management is more successful than
the other styles of management. It will help in the effective implementation
of the decision.
(viii) Follow Up
It is better to check the results after putting the decision into practice.
The reasons for following up of decisions are as follows:
(i) If the decision is a good one, one will know what to do if faced with
the similar problem again.
(ii) If the decision is a bad one, one will know what not to do the next
time.
(iii) If the decision is bad and one follows up soon enough, corrective
action may still be possible.
In order to achieve proper follow up, the management should devise an
efficient system of feedback information. This information will be very
useful in taking the corrective measures and in taking right decisions in
the future.
2.11.4.1 Quantitative Techniques in Decision Making

The process of managerial decision-making has become very
cumbersome. In order to evaluate the alternatives, certain quantitative
techniques have been developed which facilitate making objective
decisions. Some of these techniques are discussed below:
(i) Marginal Analysis
This technique is also known as marginal costing as under it the additional
revenues from additional costs are compared. The profits are maximum
at the level where marginal revenues and marginal costs are equal.
Marginal analysis can also be used in comparing factors other than costs
and revenues. For instance, in order to find the optimum output of a
machine. one can vary inputs against output until the additional inputs
equal the additional output. This would be the point of maximum efficiency
of the machine. Break-even analysis is the modification of this technique,
which tells the management the point of production where there is no
profit and no loss.
(ii) Cost-Benefit Analysis
It is a technique of weighing alternatives where the optimum solution
cannot be conveniently reduced to monetary terms as in the case of
marginal cost analysis. It is used for choosing among alternatives to identify
a preferred choice when objectives are far less specific than those
expressed by such clear quantities as sales, costs or profits. For instance,
social objectives may be to reduce pollution of air and water, which
lacks precision. Cost models may be developed to show cost estimates
for each alternative and benefit models to show the relationship between
each alternative and its effectiveness. Then, synthesizing models,
combining these results, may be made to show the relationships of costs
and effectiveness for each alternative.
(iii) Operations Research

Operations Research has been defined as the scientific method of analysis
of decision problems to provide the executive the needed quantitative
information in making these decisions. The object of operations research
is to provide the managers with a scientific basis for solving organizational
problems involving the interaction of components of the organization. In
days gone by, executive decisions used to be taken on the basis of intuition,
subjectivity or past experience even in big organizations. Operations
research seeks to replace this process by an analytic, objective and
quantitative basis based on information supplied by the system in
operation and possibly without disturbing the operation.
Operations research is widely used in modern business organizations.
For instance, inventory models are used to control the level of inventory.
Linear programming is useful for allocation of work among individuals in
the organization. Sequencing theory helps the management to determine
the sequence of particular operations. In addition to these, there are
other techniques like queuing theory, games theory, reliability theory and
marketing theory, which are important tools of operations research, which
can be used by the management to analyze the problems and take
decisions.
(iv) Linear Programming

Linear programming is a technique devised for determining the optimum
combination of limited resources to achieve a given objective. It is based
on the assumption that there exists a linear relationship between variables
and that the limits of variations could be ascertained. It is particularly
helpful where input data can be quantified and objectives are subject to
definite measurement. It is applicable in such problem areas as production
planning, transportation, warehouse location and utilization of production
and warehousing facilities at an overall minimum cost. Linear programming
involves maximization or minimization of a linear function of several
primary variables known as objective function subject to a set of some
real or assumed restrictions known as constraints.
2.11.4.2 Qualitative Decision making:

Decision making is extremely involved and emphasizes detailed application
of operations research techniques. These techniques are especially useful
in this era of increasingly complex problems. Only initial, brief and simple
aspects will be explained here. Israel Brosch has explained the
quantitative approach to decision making as follows:
The quantitative approach is based on data, facts, information and logic.
It consists of an orderly and systematic framework of defining, analyzing
and solving problems in an objective and scientific manner. The quantitative
approach is not intended to replace perception, good judgement and
common sense, the fundamental decision making tools of competent
managers. It is intended to improve manager’s decision making ability
and to provide them an accountable means for justifying and evaluating
their own managerial performance.
While the ultimate responsibility for making decisions rests on the
managerial judgement quantitative analysis of the situation provides an
excellent tool for managerial appraisal of available alternatives. This tool
is in the form of a mathematical model, which in a way is a powerful
extension of thinking. It consists of a symbolic representation of the
situation of the real world. This model may simply describe and explain
the actual behaviour of the system with relevant variables interconnected
in such a manner so that the interdependence of actual variables in the
situation.
The model can be formulated in such a manner that changes in the input
variables would reflect changes in the output of the system.
In general, a mathematical model consists of three basic components.
These are:
Decision variables: These are controllable variables which are within
the domain of the decision maker and can be changed and manipulated
by him. Different values assigned to decision variables would give the
manager different courses of action to choose from. A specific set of
values of these variables would determine a specific solution or a specific
course of action. For example, in the case of making an investment, the
decision variables would be different areas in which the investment can
be made, the amount that the decision maker wants to invest and the
timing of such investment.
Uncontrollable variables: The uncontrollable variables are all those
factors whose effect on the situation is beyond the control of the manager.
The factors or parameters may be legal, social, economic or political in
nature, and might include inflation, prices of competitors, costs of raw

material etc. For example, in the decision to make an investment, the
uncontrollable variables may be the prime rate, risk level etc.
Output variables: Output variables are the results of efforts and are
known as measures of effectiveness or the objective function. The
objective function in the case of investment decision would be rate of
return on investment or the total net profit. In other words, the total
profit in the case of producing an item would depend upon such decision
variables as what to produce, when to produce and how much to produce;
and upon such uncontrollable variables as demand, disposable income,
state of the economy etc.
The decision maker’s primary concern is to maximize the value of the
output variable which would give him the best solution. The following is
the appropriate sequence of steps that the decision maker would follow
in order to formulate the mathematical model and find the best solution.
Define the objective function: The objective function is a measurable
characteristic which defines the particular goal to be met. It is expressed
in a mathematical equation and is a function of decision variables. By
substituting a set of values for the decision variables, a clear understanding
of the level of achievement can be obtained.
Isolate all the decision variables that are pertinent to the attainment of
the objective. For example, if an oil refinery is purchasing oil from three
different countries then the quantities decided to be purchased from each
country would become the decision variables, since the values of these
variables become the domain of the decision maker. These are also known
as independent variables.
Develop the relationships that exist between these independent variables.
Isolate the non-controllable variables which are beyond the control of
the decision maker. These may be defined as states of nature or unknown
strategies of the competitors, left the energy users quite unprepared.
Similarly a competitor may come up with a better substitute for your
product, taking away your market share. These uncontrollable variables
must be distinguished from controllable variables which are parts of
strategies of the decision maker.
Develop forecasts for the values of non-controllable variables and
determine whether these forecasts are based upon stable processes. This
determination can be intuitive or the concept of probability or some other

statistical methods can be used to establish these forecasts. For example,
to take an umbrella with you when go out will depend upon the forecast
about the weather and the accuracy of such a forecast. Since this is a
state of nature and beyond the control of the decision maker, the more
accurate and reliable the forecast be, the more success of the decision.
Develop the function that relates the output variables to the decision
variables. This would describe the relationship between the objective
function which is a dependent variable and the independent variables.
For example, in the case of oil refinery, the cost function would be the
dependent variable and the number of barrels purchased from different
countries would be the independent variables. The combination of costs
of purchasing oil from these countries would constitute the objective
function.
Identify and state the constraints that put a limitation on the values of
controllable variables. These are the special requirements that restrict
the attainment oft the goals. These constraints may be in the form of
scarce resources, saturation of market, governmental regulations,
contractual agreements etc. for example, the oil refinery may be allotted
a set quantity of oil from one or more of these countries.
Find and choose optimal solution. An optimal solution is the one which is
feasible and gives the best value of the objective function. In other words,
such strategy should be chosen which maximizes the degree of attainment
of our objective within the constraints that have been established.
It is possible that there may be more than one optimal solution, in which
case the manager would have the flexibility in implementing a desired
strategy.
Since all quantitative decisions involve knowledge of probability theory,
a brief exposure to the probability concept is necessary.
Probability Theory
Probability refers to a chance that a particular event will occur. Informally,
the word chance or probability is commonly used in our day- to – day
routine. Whether we should take an umbrella when we go out in the
morning would depend upon the likelihood of rain for that day. We are
living in a world where there are so many uncertainties, that in order for
us to make some intelligent decisions and function effectively, we must
have some ideas of events that are most likely to occur, those that are
not likely to occur at all and others that are in between. Only then we
can plan our life. For example, if we take a train to go to our work, we
are practically sure that it will reach our destination at a particular time
so that we can start our journey at a particular time. However, if we have
some doubts that it may break down on the way, we may leave the home
earlier in order to accommodate and absorb such delay. Similarly, when
we drive in our car, we have only one spare tyre in the trunk of our car
because it is extremely unlikely that we will have more than one flat tyre
within a given period of time. This likelihood of an event occurring or the
probability of such an event gives us some confidence or a degree of
assurance that a particular event will occur.
The probability can only be assigned to events that occur at random and
are only affected by chance and not by design. The interest is centered
on the probility of an outcome or success where success simply identifies
the desirability of the outcome. The probability of success is defined as
the number of successful outcomes divided by the total number of
outcomes. In other words the probability of an event is infinitely long
series of identical sampling experiments.
This means, for example, that the probability of a head in tossing of a fair
coin is ½ because a great number of tosses will produce about 50 percent
heads. Accordingly, the probability (p) is equal to (s/n) where s = the
number of successful outcomes. It must be understood though that all
possible outcomes are equally likely to occur. As discussed earlier, the
probability of a head occurring as an outcome of tossing a fair coin is ½
since there are only two possible outcomes in the tossing of coin, with
each outcome being equally likely to occur and one of these is the outcome
of a head. It must be noted, however that the coin is fair and the experiment
of tossing the coin is random in that a number of causes contribute to
produce the final outcome. In this particular case, the outcome of tossing
the coin is affected by many forces such as the force of tossing , the
amount of spin, air movements and the position of the hand at the time
catching the coin. Since all these factors are chance elements, the
probability of the desired outcome (head) is the percentage of times in
which this outcome will occur if the event was repeated many times. It is
not difficult to deduce that this would happen 50 percent of the times.
The probability can be subjective or objective in nature. The subjective
probability measures the degree of belief in the likelihood of occurrence

of a given outcome. The objective probability, on the other hand is a
measurable and observable fact relating to long run frequencies of
occurance. In our discussion on quantitative methods in decision making,
we are only concerned with objective brobability.
Expected value: it is simply an arithmetic average of probability distribution
where the probability distriburion is the distribution of probabilities
assigned to the likelihood of each and all outcomes of an event such that
all these probabilities add up to 1.
As an illustration let x1,x2,x3,….. and so on represent the possible
outcomes with numerical values assigned to these outcomes , and
p1,p2,p3,… etc represent the respective probabilities that each of these
outcomes will occur , so that p1+p2+p3…will all add upto 1.
If we assume that there are only three possible outcomes x1,x2 and x3
with respective probabilities of occurrence p1,p2 and p3 then the
expected value of this probability distribution is given as below:
Expected value (EV)=p1x1+p2x2+p3x3
Generalizing this relationship for n number of outcomes we can express
EV=p1x1+p2x2+p3x3……+pnxn
= i=1  i=n p i x i
Where  (Sigma) represents the symbol of summation and is an
instruction to add up what follows this symbol. In this case, it is all the
terms of the form “p i x i ” with i starting at the value of 1 and ends at the
value of an increment of unit of 1 in the value of i at each addition.
The numerical values of x1 can either be positive or negative. In gambling,
for example, a positive value will show a profit and a negative value will
represent a loss. The expected value has many uses. In the gambling
game, for example, it tells us what our average loss per play in the long
run will be. In investment problems and inventory problems where there
are a number of strategies (decision and controllable variables) and a
number of possible outcomes (states of nature and uncontrollable
variables), the expected value of the outcome for each strategy will
determine as to which strategy should be used.
The Analysis of decisions.
Basically, there are three types of circumstances in which the decisions
are to be made, These are:
1. Decisions under certainty.

2. Decisions under risk.
3. Decisions under uncertainty.
We shall take each of these conditions separately.
1. Decisions under certainty.

This is the simplest form of decision making. The condition of certainty
exists when there is no doubt about the factual basis of a particular decision
and its outcome can be predicted accurately. There is just one state of
nature for each alternative course of action and there is complete and
accurate knowledge about the outcome of each alternative. We would
simply select the alternative with the best outcome.
If the number of alternatives is relatively small then the outcomes can be
compared with each other, either all at once and then picking the best or
two at a time, comparing the two and discarding the inferior alternative
and the better one of the two is compared with the next one and the
inferior alternative discarded and so on until all outcomes have been
compared and the best one identified.
However, if the number of alternative is large then some mathematical
tools such as linear programming and deterministic inventory models are
available to identify the best alternative.
Some situations of decision making under certainty include the allocation
of resources to various product line where the manager knows the
relationship of resources to the finished goods and their values. The
alternatives are evaluated by conducting cost studies of each alternative
and then choosing the one which optimizes the utility of these resources.
In the area of quantitative methods, problems relating to linear
programming techniques which deal with the problems of using limited
resources of a business to obtain a particular objective within given
conditions or constraints: transportation problems where certain
transporting vehicles are dispatched to certain destinations in order to
minimize the total costs of entire transportation operation; assignment
problems where certain jobs are assigned to certain machines in order
to minimize the total costs, are all examples or decision making under
conditions of certainty.
Another example would be buying a new car. Once the decision to buy
the car has been made, there are a number of alternatives in which the
payment for the car can be made. These alternatives are paying with all
cash, part cash and part loan, all loan so that you can put your own
money to other quantifiable uses or lease the car for monthly or yearly
rental. It is possible to calculate the total cost of each of these alternatives
and choose the one which gives you the lowest cost.
2. Decisions under risk.

A condition of risk exists when a decision must be made on the basis of
incomplete but reliable information. Here, there is no longer just one
outcome for each strategy but a number of possible outcomes, one for
each possible state of nature where the probability of each outcome is
known and calculated or assigned and an expected value for each
alternative or strategy is obtained. The strategy that yields the best
expected value is selected as a decision.
The decision problem is put in the form of a matrix. A matrix is simply a
two-dimensional array of figures arranged in rows and columns. The
rows represent the available strategies or courses of action available to
the decision maker (one row for each strategy) and the columns represent
the states of nature (one column for each state of nature). The matrix
could be in the form of a payoff matrix or in the form of an opportunity
cost matrix. In the case of the payoff matrix the entry at the intersection
of each row and column represents the payoff or profit for a given strategy
and its corresponding stage of nature. Each state of nature is assigned a
probability which identifies the odds that such a state of nature would
prevail. Typically, in many organizational problems, the probabilities of
various states of nature are known by virtue of determining as to how
frequently they occurred in the past.
A condition of risk exists for assumptions: Some of the assumptions that
are required for the formulation and solution of the decision matrix are:
1. The number of feasible alternative courses of action or strategies is
limited and finite.
2. The number of possible state of nature are also limited and the
probabilities assigned to all states of nature must add up to 1.
3. Each state of nature is independent of the other so that only one
event will occur for any given strategy.

4. The outcome for each combination of a strategy and its corresponding
states of nature are known and are considered stable and constant
for a given situation.
5. The objective of the decision maker is single and identified, either to
maximize or to minimize a given objective function, which is expressed
either in terms of expected payoff or cost of opportunity or loss.
6. There are no constraints imposed upon the problem.
A simple illustration of using the payoff matrix in a decision problem is
given by “Alex at the Falls” situation. Alex is a vendor who has a choice
to take either ice cream or coffee at the falls to sell and the choice will
depend upon the weather for a given day. Assume that he has determined
from his past experience that if he takes ice cream and the day is sunny,
he makes $50.00. However, if he takes ice cream and the day is rainy,
then he makes $ 20.00. On the other hand, if he takes coffee and the
day is sunny, he makes $ 30.00 and he makes $ 60.00 if he takes coffee
and it happens to be a rainy day.
These amounts represent net profits and the day can only be either sunny
or rainy. Depending upon the probability or being sunny or rainy, a
decision has to be made whether to take ice cream or coffee to the falls.
Let us put this information in the form of payoff matrix.
States of nature
Ice Cream 50 20 EV = (50 x .6) + (20 x .4) = $ 38.00
Coffee
30 60 EV = (30 x .6) + (60 x .4) = $ 42.00
Assume that on a given day, the reliable forecast is 60 per cent chance of
being sunny or the probability of the day being sunny is 0.6, so that the
probability of the day being rainy become 0.4. These probabilities are
recorded along with the states of nature of sunny and rainy in the above
table.
The strategies or alternatives or courses of action available to Alex

represent his choices and are within his control. The states of nature are
uncontrollable variables and can best be predicted by the probabilities
of occurrence assigned to each state of nature.
The expected value (or expected profit) can be calculated for each of
these courses of action by using the expected value relationship as
discussed earlier, as follows:
EV = p1x 1+ p2x1
In the particular case:
For ice cream : EV = (50 x .6) + (20 x .4) = $ 38.00
For coffee : EV = (30 x .6) + (6 x .4) = $ 42.00
Given these factors of the situation, Alex would decide to take coffee to
the “falls” since he expects to make more money ($ 42.00) as against
taking ice cream in which case he expects to make only $ 38.00.
These decisions are frequently made in the area of investments where
investments in different areas would bring in different amounts of payoffs
over a given period of time depending upon the different states of the
economy, or in the area of inventories in which decision is to be made in
determining the level of inventory of a particular item to be kept in the
store or the warehouse depending upon the demand for the item and the
probability for such a demand.
We will take up a problem of inventory and follow it through.
Suppose that there is a vendor who sells strawberry cakes. He has 4
fixed customers who buy a cake each every day, so that the vendor is
assumed of selling at least 4 cakes every day. He also found from his
past experience that he never sold more than 8 cakes on any day. Also
based upon his past sales experience, he found that 10% of the days he
sells only 4 cakes. 20% of the days he sells 5 cakes. 40% of the time,
he sells 6 cakes, 20% of days he sells 7 cakes and the balance 10% of
the days he sells 8 cakes. The cake costs $ 3.00 each and he sells it for
$ 8.00 each so that his net profit per cake is $ 5.00. If any of the cakes
not sold at the end of the day, it has to be thrown out and there is no
salvage value. The decision is, how many cakes he should stock each
day in order to maximize his total profit in the long run? This problem
can be solved by two types of matrices. One is the payoff matrix and
the other is the opportunity cost matrix. In the first method, the objective
is to maximize the payoff and in the second method, the objective is to

maximize the cost or the opportunity cost and both these methods should
give the same conclusion.
The problem stated above can be formulated as follows:
Demand % of days Problem of demand/day
4 10 .1
5 20 .2
6 40 .4
7 20 .2
8 10 .1
Cost per cake = $ 3.00

Sale price per cake = $ 8.00
Net Profit per cake = $ 5.00
Salvage Value = 0
First we are going to solve it by using the payoff matrix.
Pay-off matrix
States of nature
(.1) (.2) (.4) (.2) (.1) Prob.of demand
4 5 6 7 8 demand
Row
(1) 4
(2) 5
(3) 6
(4) 7
(5) 8

Cakes
to stock
or
Courses
of
action
Column (1) (2) (3) (4) (5)

The payoff matrix is constructed as follows:
Starting from row 1 across:
Row 1:
- If we stock 4 cakes and the demand is for 4 cakes then the pay off
is $ 20.00.
- If we stock 4 cakes and the demand is for 5 cakes, the payoff is
still only $ 20.00 since we can only sell 4 cakes and the subsequent
customers will have to be turned away.
Row 2 :
- If we stock 5 cakes and the demand is for only 4 cakes then we
make $ 20.00 on the 4 cakes that we sell and we lose $ 3.00 (our
cost) on the 1 cake left that we are unable to sell and hence our
profit is $ 17.00..
- If we stock 5 cakes and the demand is also for 5 cakes then we
sell them all and make $ 25.00
- If we stock is 5 cakes and the demand is for 6 or more cakes, we
can still make only $ 25.00 since we do not have any cakes left over
5 to sell.
Row 3:
- If we have 6 cakes in stock and there is a demand for only 4, then
we make a net profit of $ 14.00 (we make $ 20.00 on the 4 cakes
that we sell and we lose $ 6.00 on the 2 cakes that we do not sell).
- If we have 6 cakes in stock and there is a demand for 5 cakes,

then we make $ 25.00 on the 5 that we sell and we lose $ 3.00 on
the 1 which we do not sell, giving us a net profit of $ 22.00.
- If we have 6 cakes in stock and there is a demand for 6 cakes,
then we sell them all, giving us $ 30.00 net profit.
- If we have 6 cakes in stock and there is a demand for 7, we still
make only $ 30.00 on sale of 6 cakes.
By this reasoning, we develop the entire matrix. The expected value for
each course of action is evaluated by using the expected value formula
discussed earlier. For each row or for each course of action, the numerical
payoff corresponding to each state of nature in that row is multiplied by
its probability, and all values obtained by such multiplications are added
up to obtain the expected value for that course of action. Thus we obtain
an expected value for each course of action.
Mathematically speaking, if there are m alternatives or courses of action
and n states of nature then for each alternative a i the expected profit z i
can be calculated as:
n
Expected profit =  [prob. of state s j] [out come is state sj
occurs]
j=1
Or
Where : a i = alternative i = 1,2 ……….m
sj.= state of nature, j = 1,2 ………n
p i = probability that state of nature s will occur.
uij= numerical outcome as result of choosing alternative a and
the occurrence of state of nature s j.
After all the expected values for each course of action have been calculated
then we select the alternative which results in the highest expected value,
which would give us the number of cakes to stock for optimum benefit.
This would be the optimum stocking policy.
The expected value for each course of action of stocking 4, 5, 6, 7 and
8 cakes is calculated as follows:
EV (4) = (20 x .1) + (20 x 0.2) + (20 x .4) + (20 x .2) + (20 x .1) = $ 20.00
EV (5) = (17 x .1) + (25 x 0.2) + (25 x .4) + (25 x .2) + (25 x .1) = $ 24.20
EV (6) = (14 x .1) + (22 x 0.2) + (30 x .4) + (30 x .2) + (30 x .1) = $ 26.80
EV (7) = (11 x .1) + (19 x 0.2) + (27 x .4) + (35 x .2) + (35 x .1) = $ 24.30
EV (8) = (8 x .1) + (16 x 0.2) + (24 x .4) + (32 x .2) + (40 x .1) = $ 24.00
The problem is solved above and in this particular case, the maximum
profit of $ 26.80 is obtained by stocking 6 cakes each day. This solution
assumes that the process is stable and that probabilities for all states of
nature remain constant and the values for all other variables remain the
same.
Opportunities cost matrix: The same problem can be solved by using
the opportunity cost matrix. The objective is to minimize the expected
opportunity loss and for the same problem, it should give us the same
solution. This means that the policy maximizes the expected opportunity
cost.
The idea is based upon the concept of regret which can be defined as
the difference between the best outcome that can be achieved for a given
state of nature and the actual outcome resulting from a selected course
of action. If this difference is zero then that would be the best decision
that the decision maker could make and hence his regret value is zero.
This means that he has no regret for making that decision. The greater
the difference between the actual outcome and the best outcome of a
given alternative, the greater the regret. The objective of the decision
maker is to minimize the long run opportunity losses.
Continuing our earlier problem for which the demand structure and the
probability distribution remains the same where the demand is for 4, 5,
6, 7 and 8 cakes and their respective probabilities are .1, .2,.4, .2 and
.1. The opportunity cost matrix for this problem is shown below:
Opportunity Cost matrix

States of nature
(.1) (.2) (.4) (.2) (.1) Prob. of demand
4 5 6 7 8 Demand
Row
(1) 4
0 5 10 15 20
(2) 5
3 0 5 10 15
Courses
of
action (3) 6
6 3 0 5 10
(4) 7
9 6 3 0 5
(5) 8
12 9 6 3 0
Column (1) (2) (3) (4) (5)
The matrix and the expected value for each course of action are
developed. Starting from the North-West corner of the first row, the
reasoning would be as follows:
Row 1:
- If we have 4 units in stock and the demand is also 4, then this
would be the right decision and no other alternative would give us
better results. Hence the opportunity cost for this decision is zero.
- If we have 4 cakes in stock and the demand is for 5 cakes, we
wish that we had an additional cake is stock, for which we could
have made additional $ 5.00. Hence by choosing the alternative to
stock 4 cakes instead of alternative of stocking 5 cakes, incurred
the opportunity cost of $ 5.00. That is the cost of losing the
opportunity of stocking 5 cakes instead of 4.
- Similarly, if the demand is for 6 cakes and we stock only 4, we
choose the wrong alternative and hence we lost $ 10.00, and so on.
Row 2:
- If we have 5 cakes in stock and the demand is only 4, we wish we
did not have the 5th cake. It cost us $ 3.00 to have this additional
cake. Hence the lost opportunity of stocking only 4 cakes instead
of 5, cost us $ 3.00.
- If there are 5 cakes in stock and there is a demand for 5 cakes,
then it was the right decision and hence the opportunity cost is 0.

- If there is a demand for 6 and we have 5 in stock, then with the

same reasoning as above, the cost of lost opportunity of stocking
only 5 instead of 6 is $ 5.00, and so on.
By this reasoning, we can complete the entire opportunity cost table
with the actual cost values or opportunity cost values, which are the
costs incurred by choosing an alternative, other than the best.
The expected value of the opportunity loss for each alternative can be
calculated in the similar manner as for payoff matrix and is given below:
EV (4) = (0 x .1) + (5 x 0.2) + (10 x .4) + (15 x .2) + (20 x .1) = $ 10.00
EV (5) = (3 x .1) + (0 x 0.2) + (5 x .4) + (10 x .2) + (15 x .1) = $ 5.8
EV (6) = (6 x .1) + (3 x 0.2) + (0 x .4) + (5 x .2) + (10 x .1) = $ 3.2
EV (7) = (9 x .1) + (6 x 0.2) + (3 x .4) + (0 x .2) + (5 x .1) = $ 3.8
EV (8) = (12 x .1) + (9 x 0.2) + (6 x .4) + (3 x .2) + (0 x .1) = $ 6.0
The lowest cost is $ 3.2 for the strategy of stocking 6 cakes, which is the
same as was determined by using the pay-off matrix.
3. Decision Making under Uncertainty.

The conditions of uncertainty make the decision making process much
more complicated. The decision maker has no idea or knowledge about
the probabilities of the various states of nature and hence the expected
values of various alternatives cannot be calculated. Such problems arise
wherever there is no basis in the past experience for estimating such
probabilities. For example, in the case of marketing a new product, it is
difficult to make judgments as to how much this product will sell in
different geographical areas or about probabilities of selling certain
predetermined quantities in these areas in order to a make profit.
In such situations there is no single best criterion for selecting a strategy.
However, there are a number or a criterion each justified by rationale
and is a function primarily of the organization policies and the attitude of
the decision maker. The selection of strategy would depend upon the
criteria to be used. Some of these criteria are discussed below. We are
still following the same problem except that now the demand probabilities
are not known. However, it is established that the 4 customers are still
definite and the maximum demand cannot be more than 8 cakes.
Criteria of pessimism :
Suggested by Abraham Wald, it is also known as Wald criterion or a
max-min principle for it tries to maximize the minimum pay off. This a
conservative approach to an intrinsically difficult situation and the decision

maker assumes that whatever alternative is chosen, the worst will happen.
For each pay off of each course of action, under each state of nature
(the probabilities of states of nature are not known)ï the decision maker
picks the worst payoff so that there will be a value of the worst payoff
for each course of action and the decision maker will pick the highest
value among these.
Coming back to our example the payoff table is given below:
4 5 6 7 8 Worst pay – off
20 20 20 20 20
4 20
Courses
of 5 17 25 25 25 25 17
action
6 14 22 30 30 30 14
7 11 19 27 35 35 11
8 8 16 24 32 40 8
From these worst payoffs, we select the maximum payoff which is $

20.00, for stocking 4 cakes. This means that given the situation of the
problems, the decision maker, who is a total pessimist, will not take any
chances and go for the sure thing by stocking only 4 cakes.
Criterion of optimism :
Suggested by Leonid Hurwicz, to guide a complete optimist, it is also
known as Hurwicz criterion and is based upon maxi-max principle, which
is maximizing the maximum payoff for each alternative. The decision
maker assumes that for each course of action, the best state of nature
will prevail, giving him the best of each strategy so that he can choose
the best of these bests.
In the payoff matrix above:
- For stocking 4 cakes, the best payoff is $ 20.00
The total optimist always expects the best to happen. Hence he will
choose the strategy of stocking 8 cakes which would give him the best
of the best payoffs of $ 40.00.
However, a rational decision maker cannot always be totally optimist
under all situations. To overcome this difficulty, Hurwicz introduced the
idea of degree of optimism or coefficient of optimism, the value of which
is determined by the attitude of the decision maker. He called this
coefficient   (Alpha) and it is measured on 0 to 1 scale. Its value is 1
for a complete optimist and 0 for a complete pessimist. For a person
who is neither a complete pessimist nor a complete optimist, the value of
will have different values between 0 and 1, depending upon the degree
of optimism. For example, a person with a degree of optimism of  = .4
is more pessimistic than optimistic while a person with  = .7 is more
optimistic than pessimistic. For all values of , except for the values of
0 and 1, the expected value of each course of action, in a payoff table
can be calculated as follows:
Expected value = ( Max. payoff x ) + Min. payoff (1- ). For example,
assume that the decision maker is 60 percent optimist, that means that
his coefficient of optimism  = 6. The expected value of each course of
action in our payoff table would be given as :
Stock Max. payoff Min. Payoff
4 20 20
5 25 17
6 30 14
7 35 11
8 40 8
Then
EV(4) = (20 x .6) + (20 x .4) = $ 20.00
EV(5) = (25 x .6) + (17 x .4) = $ 21.80
EV(6) = (30 x .6) + (14 x .4) = $ 23.60
EV(7) = (35 x .6) + (11 x .4) = $ 25.40
EV(8) = (40 x .6) + (8 x .4) = $ 27.20
In this example, the decision, maker who is 60 per cent optimist would
choose the alternative of stocking 8 cakes, for this strategy gives him the
most benefit of $ 27.20.
(c) Criterion of regret:

It is also known as Savage criterion, and it minimizes the maximum regret
of not making the right decision and uses the opportunity cost matrix to
make the decision. For each course of action, there are costs involved
in choosing the opportunity of having a different course of action after
states of nature have been known. These costs are really regrets of not
choosing the best course of action. Out of the maximum regret for each
course of action, we choose the minimum regret and the corresponding
course of action.
Taking our previous example, the opportunity cost matrix is restated as
follows:
STATE OF NATURE 4 5 6 7 8 Max.
Regret
4
0 5 10 15 20
20
5
3 0 5 10 15
15
6
Courses
of 6 3 0 0 10
10
action 7
9 6 3 0 5 9
8
12 9 6 3 0 12
Based on this strategy, we choose the minimum of the maximum regrets

of $ 9.00 and a policy of stocking 7 cakes.
Laplace Strategy
The Laplace strategy assumes that all states of nature are equally to
occur. This means that the decision maker does not give any reasons to
believe that any one outcome is more likely to occur than others. Hence,
both in the case of payoff matrix as well as opportunity cost matrix, all
states of nature have the same probability of occurrence. The demand
probability distribution for our problem, then would be as follows:
Demand Problem of demand
4 .2
5 .2
6 .2
7 .2
8 .2

Then the procedure for calculating the expected value and choosing the
largest expected value is the same as in the original payoff matrix or the
minimum expected value in the opportunity cost matrix method.
In the problem that we have undertaken, we have assumed that there is
no salvage value of the cake if it is not sold by the end of the day.
However, in case there is a salvage value, then this salvage value must be
deducted from the cost of the unsold cake before computing the net
profit. For example, if the cake at the end of the day could be given for
$ 1.00 as a salvage value then the net loss for the unsold cake would be
$ 2.00 per cake, instead of the $ 3.00 per cake previously computed
into the payoff matrix and the opportunity cost matrix.
Bay’s Decision Approach

The decision making under uncertainty, as we have discussed previously,
assumes that there is absolutely no knowledge about the probabilities of
state of nature. No rational decision maker would go into any business
without any prior knowledge about the states of nature. The degree of
optimism as well as pessimism takes into consideration only the best and
the worst outcomes and does not involve states of nature in between.
Similarly using Laplace strategy may not be the logical solution since it is
highly unlikely that all states of nature would be equally likely to occur.
Hence a rational decision maker would like to have a more definite idea
about each state of nature. This idea was suggested by Thomas Bays,
an 18th century philosopher who investigated the notion of inverse
probability or subjective probability. The contributors to Baysian school
regard probability an a measure of the degree of personal belief, as
against objective probability which relates to long run relative frequency
of occurrences of a given outcome
The subjective probability is a function of the decisions maker’s
experience, past performance in similar situation, intuitive judgement etc.
Based upon these characteristics, the decision maker is able to assign
probabilities to each state of nature, depending upon the strength of his
belief regarding the likelihood of occurrence of various state of nature.
These subjective probabilities assigned by the decision maker are called
“prior probabilities”. Based upon these prior probabilities, the expected
value of the payoff or the opportunity cost can be computed as discussed
previously and the highest expected value or the lowest opportunity cost
is selected with the corresponding course of action.
The prior probabilities are based upon the current information available
to the decision maker as well as his assessment of the environment.
However, the decision maker must decide whether these prior
probabilities are adequate or whether additional information is needed
to revise these values. The cost of collecting additional information through
sampling and other means must be weighted against the benefits derived
from improved assignment of probabilities to the various states of nature.
This additional information, if justified, is combined with prior information
in order to make the degree of belief regarding the states of nature
stronger.
Based on this information, the prior probabilities are adjusted or revised
and these revised probabilities are called “posterior probabilities”. This
revision can be accomplished through Bay’s Theorm, which calculates
probabilities of “causes” based upon the observed “effects”.
These posterior probabilities are then used to calculate the expected
payoffs or expected opportunity costs in the same manner as before and
the optimum strategy selected.
Decision under Conflict:

So far, in the decision making strategies that we have discussed, all
decisions have been against nature, over which the decision maker has
no control and the state of nature that will occur will be independent of
the strategy of the decision maker. However, there are situations in
which a manager is involved with a rational opponent whose strategies
are carefully considered by the manager before making his own move.
These decisions are known as decisions under conflict and form a basis
of game theory. The games with complete conflict of interest are known
as zero-sum games, in which the gain of the decision maker equals the
loss of the opponent. For example, if the marketing manager of a
company wants to increase the market share of his product, it will be at
the expense of the market share of his competitors.
As an example and for simplicity, let us assume that a manager wants to
increase his share of the market against only one opponent. It is also
assumed that both the manager and the opponent are rational strategists
and if any one of the two shows irrational behavior, he can only suffer as
a result of it. It is also assumed that the possible results of the strategies
of both competitors are either known or predictable. These outcomes

are presented in a payoff matrix form excect that the states of nature are
replaced by the opponent’s strategies. The matrix is given in the case of
increasing the market share.
Opponent’s Strategies
Y1 Y2 Y3
Manager’s X1 : 3 -.7 .8
Strategies X2 : 1.5 1.0 .9
X3 : -2 2.5 -1.5
This matrix can be interpreted as follows:
If the manager chooses strategy X1 and the opponent chooses strategy
Y1 then the manager gains 3 per cent of the market share and the
opponent loses the same percentage. Negative entries represent losses
to the manager and gains to the opponent. Given the situation the manager
has to rationally decide as to which strategies to use in order to gain as
much as possible.
Logic would dictate that the manager would use the Wald criterion to
select the maximum of the minimum payoff, and the competitor would
try to minimize his maximum losses for each strategy.
Now, if the manager uses strategy, X1, it is logical and rational to believe
that the competitor will use strategy Y2 and the manager will lose .7 per
cent of the market share to the competitor. If the manager uses strategy
X2, then the opponent will use strategy Y2, giving the manager a gain of
.9 per cent. Finally, if the manager uses strategy X3, the opponent will
use strategy of Y1 resulting in the loss to the manager of 2 per cent of
market share.
Since both players are rational players, the manager will try to maximize
his minimum payoff as follows
Strategy Minimum payoff
X1 -.7
X2 .9
X3 -2.0
He will choose strategy X2.
Similarly the opponent is trying to minimize his maximum loss as follows

Strategy Maximum loss
Y1 3
Y2 2.5
Y3 .9
The competition will employ strategy Y3 in order to minimize his maximum
loss from each strategy.
This is the simplest case of decisions under complete conflict where the
strategies of the opponents and their outcomes are known.
Decisions Trees :
The payoff and opportunities cost tables are useful and convenient when
a single decision needs to be made in a single time period so that the
decision is made at the beginning of a given period and the outcomes of
the decisions are only estimated ones. However, most decisions are time
dependent and are sequential in nature so that each decision has an impact
on the successive decisions. The decision trees satisfy this complex need
where a series of decisions are to be made simultaneously.
A decision tree is a graphical method to display various parts of the
decision process including courses of action, risks involved and likely
outcomes. It enables the decision makers to consider alternative solutions,
assign financial values to them, estimate the probability of a given outcome
for each alternative, make comparisons and choose the best alternative.
Barry Shore has proposed the following procedure to solve a problem
by the decision tree method.
1. The problem is illustrated by developing a decision tree diagram.
Each course of action is represented by a separate emerging branch.
2. Each outcome for each course of action is assigned a probability,
which is the most likely chance of that particular outcome occurring.
3. Determine the financial results of each outcome.
4. The expected value for each outcome is calculated and the alternative
which will yield the highest expected value is chosen.
The best way to explain the use of a decision tree method is to illustrate
by an example.
Let us assume that a company has two products to introduce. Let these
products be X and Y. The company has decided that it would be too
expensive to introduce both products at the same time. So, a decision

has been made to introduce only one product to start with, and depending
upon the degree of success generated by this first product and the funds
obtained by the sales of this product, such funds could be used either to
expand the production and marketing efforts for the same product or to
use these funds to introduce the second product.
Assume that the company introduces product X first. Our surveys have
shown that the chances are 70 per cent that the product will succeed,
meaning that there are only 30 per cent chances that product will fail.
Even if the product fails and less funds are generated, product Y could
still be introduced, but product X will not be expanded. The terminal
expected payoff for each alternative can be calculated statistically from
surveys or pilot studies.
This process in the form of a decision tree would diagrammatically be as
follows:
Expected
Payoff
d X $ 70.000
pan
Ex
Intro
duce
Y
ble
ro fita .7 $ 60.000
P b=
Introduce X Pro
Decision Un p
rofi X Impractival
Pro
tabl
e Expand
b=
.3
Intro
duce
Y
$ 20.000
We could also introduce product Y first instead of product X, by the

same reasoning as above.
According to our decision tree, the most profitable sequence of actions
would be to introduce product X first and later expand the same product,
for that decision would give us the highest estimated profit of $ 70.000.
This technique can be equally used for more complex situations and has
been successfully used in the areas of marketing, investment, equipment
purchases, new venture analysis etc.
The essence of the process is to isolate all relevant decisions and assign
realistic probabilities to all possible outcomes.
Expected profit
$ 70.000
X
nd
pa
Ex
Introd
uce
bl e Y $ 60.000
fit a
Pro .7
b. =
Pro
an dX Impractical
Unprofitable Exp
eX
uc Prob
rod .= .3 Introd
Int uce Y $ 20.000
Introduce both Not feasible

Decision
Y $ 50.000
nd
pa
Int Ex
rod
uc Profitable In trod
eY uce X
Prob. = .6 $ 40.000
Unp
rof it
Pr ob ab Y
. = .4 le Expand Impractical
Introd
u ce X
$ 25.000
Action Outcome Action Outcome
2.12 DECISION MAKING WITH BREAK-EVEN ANALYSIS

Break-even analysis can be a very useful and relatively simple tool for
management to use in making decisions. It can be used for dealing with
unknown variables such as demand. By specifying the levels of known
variables such as cost or profit, a required or minimum level can be
found for the unknown variable. Any problem requiring income estimation
can be set up so that the most difficult variable to estimate is isolated for
solution.
Break-even analysis can be applied to sales, profits, and costs. It also
illustrates how it can be used to help make sound decisions for your
business such as employing idle plant capacity, planning advertising,
granting credit, and expanding production. Break-even analysis is not a
universal remedy. It is only one of the many tools available to the business
decision maker.
In your business planning, have you ever asked: How much do I have to
sell to reach my profit goal? How will a change in my fixed costs affect
my net income? How much do my sales need to increase in order to
cover a planned increase in advertising costs? What price should I charge
to cover my costs and allow for a planned amount of profit?
These are some of the questions that you can easily answer by using
simple break-even analysis. You will learn break-even analysis through
the examples of how the technique works in manufacturing, retailing,

and service businesses and find out how to use it in your own business
planning. Break-even analysis is a very useful tool because it can help
you understand the sources of profit in your business.
Definitions
Break-even analysis is simple to use. Mathematical formula to determine
the sales level at which the business neither incurs a loss nor makes a
profit. The break-even point, in mathematical terms, is simply the point
where:
Total Expenses = Net Sales Revenue
The amount of sales revenue should be readily available on your income
statement as net sales. Net sales revenue is all sales revenue (often called
“Gross Revenue”) less any returns and allowances. If your business is
brand new and you have no income statement yet, you will need to use a
projected sales figure. This will work for any of the calculations outlined
here. Total expenses also appear on your income statement (or
projections). You will find most expenses listed under the heading
“Operating Expenses” or “General and Administrative Expenses.”
Additional expenses to include in your analysis are found on the line
labeled “Cost of Goods Sold,” which appears on income statements for
retailers and manufacturers. To use the break-even technique, you need
to do further analysis of your expenses so that you can classify them as
either “fixed” or “variable.”
Total expenses consist of two cost components: fixed costs and variable
costs.
Fixed Costs. are those expense items which generally do not change in
the short run, regardless of how much you produce or sell. These costs
are typically the expenses you pay out regularly that do not go up or
down with your sales level. Examples of fixed costs include general office
expenses, rent, depreciation, utilities, telephone, property tax, and the
like. Obviously, all expenses vary over the long run. For example, rent
and property taxes increase every year. In break-even analysis though,
our calculations are based upon short-run information in order to reveal
the current profit structure of the business.
Variable Costs. are those expenses that change with the unit level of
either production or sales. Generally, these costs increase with increased
production or sales because they are directly involved in either making

the product or making the sale. Examples of variable costs for
manufacturing firms include direct materials and direct labor. In retail
firms, variable costs include the cost of goods, sales commissions, and
billing costs. These are only a few of the many kinds of variable costs
you will encounter.
Typically, service businesses do not have large variable costs, except for
labour. For example, a travel agency’s only variable cost may be the
expense of billing its clients. Other expenses that may be variable costs
for service businesses include: materials routinely given to clients, materials
used to offer their service, the cost of hourly labor to provide the service,
and commissions paid to individuals who sell the service.
Some Shortcomings of Break-even Analysis

The major problem with break-even analysis is that no project really
exists in isolation. There are alternative uses for the firm’s funds in every
case. For example, in a manufacturer’s case, a vacant plant could be
leased to another company for some return. It could also be used for
another product. We must, therefore, always consider not only the value
of an individual project, but how it compares to other uses of the funds
and facilities.
Another shortcoming of break-even analysis is that it does not permit
proper examination of cash flows. It is generally accepted in basic
financial theory that the appropriate way to make investment or capital
decisions is to consider the value of a proposed project’s anticipated
cash flows. If the discounted value of the cash flows exceeds the required
investment outlay in cash, then the project is acceptable.
There are other objections. Break-even analysis makes many restrictive
assumptions about cost-revenue relationships; in normal use, it’s basically
a negative technique, defining constraints rather than looking at benefits;
and it’s essentially a static tool for analyzing a single period. What all
this theory boils down to is that break-even analysis is too simplistic a
technique to be used to make final investment decisions on its own.
Break-even Applied to Uncertainty

Break-even analysis is a management control that approximates how
much you must sell in order to cover your costs with NO profit and NO
loss. Profit comes after break-even.
The following formula will help in the calculation of your break-even

sales volume level:
Break-even = Fixed Costs * / Contribution Margin %**
= $250,000 / 15%
= $1,666,667
* Fixed Costs are those costs that are not variable as a result of the sales
activity. For example, rent of the building or insurance costs may be
fairly constant no matter how sales vary while expenses such as advertising
and usage of shop or store supplies will vary with sales.
** Contribution Margin = (Revenue - Variable Costs) / Revenue. In a
retail business, the gross margin % is generally recognized as the
Contribution Margin %. Gross Margin equals the difference between
the Sales and the Cost of the Sales.
In this example, $1,667,667 are the sales that are required to cover
fixed costs of $250,000 and a margin of 15%, with nothing left over for
profit.
If you wanted to calculate the sales that are required to build in a profit
factor, add the profit factor you want to allow for to the fixed costs. If in
this example, the fixed costs are $250,000 and you want a $150,000
profit, add the two together and then apply the break-even formula to
this.
Break-even = (Fixed Costs + Profit Margin) / Contribution Margin %
= ($250,000 + $150,000) / 15%
= $400,000 / 15%
= $2,666,667
If this was a small manufacturing company and you wanted to calculate

how many unit sales you need to break-even, you could divide the break-
even sales volume by the unit selling price. For example, if the unit sells
for $10, the break-even unit sales before a profit is allowed for is 166,667
units and after a profit is allowed for it is 266,667 units.
Limitations of Break-Even Analysis

Break-even analysis has four important limitations. First, break-even
analysis requires estimated projections of expected sales, fixed costs,
variable costs, and any costs that have both fixed and variable
characteristics. You must not be lulled into a false sense of security

regarding your mathematically-sound results which are, after all, based
upon projections.
Second, break-even analysis is useful only over a limited range of sales
volume extending not too far from the expected level of sales. Moving
much beyond that range will require additional capital expenditures for
more floor space, more machinery, or more sales people, which will
distort the estimates of fixed and variable costs.
Third, it is generally accepted in basic financial theory that the appropriate
way to make investment or capital decisions is to consider the “discounted
value of the cash flows” of a proposed project. Such an analysis focuses
on the time value of money to better describe the “true” value of an
investment. Break-even analysis does not focus on the time value of
money. Nor does it focus on opportunity costs. Opportunity costs relate
to the best alternative use of your money. There are always alternative
uses for funds that may be more profitable than the project or expansion
under consideration. Break-even analysis views every project in isolation.
Finally, break-even analysis assumes that the cost-revenue relationship
is linear. This may or may not be the case for any particular business.
For example, many businesses experience a reduction in fixed and variable
costs per unit as the overall scale of the business increases. This is referred
to as “economies of scale.” Most very small businesses do not experience
significant economies of scale.
Despite its limitations, break-even analysis is a very useful tool with which
to approach a variety of decision problems. Such questions as the costs
of expansion, evaluation of sales or profit performance, estimation of the
impact of various expenses on profit, setting prices, and financial analysis
in general are appropriately addressed using break-even analysis. But it
is not a panacea. It is only one of the many tools available to the decision
maker. It is best used in conjunction with other financial analysis
techniques or as a screening device to determine whether more study is
needed. In any case, familiarity with break-even analysis is essential for
any business owner.
Break-even analysis requires above all, realistic definition of costs, both
in amount and type. For many small businesses, break-even analysis can
be a very useful management tool. At the same time, it is not a panacea,
and should be used along with other management tools when making a
decision.
Summary
Planning is essential to survive and grow in a fast changing environment.
A plan helps a firm take an advantageous position in the market, in line
with its internal capabilities. To be useful, planning has to be carried out
in a systematic way outlining objectives, developing premises, evaluating
options, formulating derivative plans, securing commitment from people
and ensuring a suitable follow up. While doing so, one can adopt a
top-down approach, a bottom-up approach or a combination of both.
Planning helps a firm achieve its goals. It reduces the risks of uncertainty
and improves the quality of decisions. It has a healthy impact on people,
too. On the negative side, planning puts enterprise activities in a rigid
framework. It may prove to be a costly and time-consuming exercise.
To be effective, plans must receive support from people at all levels.
They should also know the payoffs from planning well in advance.
Learning organizations offer a stimulating environment, for even ordinary
people to work with zeal and enthusiasm and come out with extra ordinary
results.
Planning can take many forms and styles in practice. Both long-range
and short-range plans have to be combined effectively to produce results.
Also, there must be effective monitoring to see whether everything is on
track or not. Forecasting is used to predict future environmental
happenings that will influence the operations of an organization.
Forecasting improves the quality of planning by supplying vital facts and
pertinent information about major environmental factors. Several
deterministic, symptomatic and systematic techniques are pressed into
service in order to collect data in an objective manner.
To process work in a systematic and methodical way, standing plans and
single use plans are used in every organization. Policies guide executive
thinking and action by setting certain broad behavioral limits. They in
fact convert objectives into a workable form. To avoid loose
interpretation, policies need to be expressed in writing.
Policy formulation requires foresight, imagination and a careful evaluation
of all relevant factors impacting organizational work. Once a policy is
formulated, it must be communicated to lower level people in a proper
way. Everyone should be motivated to apply the policies in a consistent

manner. When circumstances change, one should not hesitate to change
the policies.
Establishing successful policies in a fast changing environment is a tough
job. First, it is not easy to express policies in a simple language. Second,
expressed policies may come in the way of implied policies. Third, policies
may not be consistent with the overall philosophy of an organization.
Fourth, there is the danger of not communicating the policies in a
understandable format. Finally, it may be difficult to interpret policies
correctly using sound judgment. To overcome these difficulties, policies
must be formulated and implemented with utmost care and caution.
Apart from policies, other standing plane such as procedures, methods
and rules are designed to carry out a course of action that is likely to be
repeated several times. Single use plans such as programmes, schedules,
projects and budgets are non-recurring in nature and deal with problems
that probably will not be repeated in the same form in future.
Have you understood questions.

1. Taking a planning problem that is now facing you, proceed to deal
with it in accordance with the planning steps outlined in this Section.
2. Interview a manager in your area, and ask about the planning process
(i.e., the steps in planning).
3. Read two articles in magazines such as Fortune or Business Week
that deal with strategy. List the strength and weakness of the company
as well as the opportunities and threats faced by the firm.
4. Take a major decision problem facing you, and outline the critical
planning premises surrounding it. How many of these are matters of
knowledge, and how many are matters of forecast? How many are
qualitative, and how many are quantitative? How many are within
your control?
5. Assume that your boss offers you a promotion to a position in a
location your family does not like. Make the necessary assumptions
and then state how and what you would decide.
6. Interview a manager in any company and obtain information about
the decision making process in his / her organization.
Review questions.
1. Define planning.
2. List the benefits of planning.
3. State the principles of planning.
4. List the levels of planning.
5. Describe steps in planning. Illustrate with suitable examples.
6. Distinguish the different type of plans.
7. What do you mean by decision making? State different types of
decisions used in an organization.
8. What are all the difficulties faced by a manager in decision making?
9. Discuss decision making with break-even analysis.
10. Describe the steps in rational decision making with a suitable example.

UNIT - III
ORGANIZING
LEARNING OBJECTIVES
 the purpose of the organization
 the meaning of organizing and organization.
 the organization structure and their levels.
 departmentalization and span of control.
 the nature of authority and power.
 the nature of relationship between the line and staff.
 the scope of centralization and decentralization.
 the importance of obtaining balance in the degree of delegation of
authority.
3.1 INTRODUCTION
It is often said that good people can make any organization pattern work.
Some even assert that vagueness in organization is a good thing in that it
forces teamwork, since people know that they must cooperate to get
anything done. However, there can be no doubt that good people and
those who want to cooperate will work together most effectively if they
know the parts they are to play in any team operation and the way their
roles relate to one another. This is as true in business or government as it
is in football or in a symphony orchestra. Designing and maintaining these
systems of roles is basically the managerial function of organizing.
It is in this sense that we think of organizing as

(1) the identification and classification of required activities,
(2) the grouping of activities necessary to attain objectives,
(3) the assignment of each grouping to a manager with the authority
(delegation) necessary to supervise it, and
(4) the provision for coordination horizontally (on the same or a similar
organizational level) and vertically (for example: corporate
headquarters, division, and department) in the organization structure.
An organization structure should be designed to clarify who is to do
what tasks and who is responsible for what results, to remove obstacles
to performance caused by confusion and uncertainty of assignment, and
to furnish decision making and communications networks, reflecting and
supporting enterprise objectives.
“Organization” is a word many people use loosely. Some would say it
includes all the behavior of all participants. Others would equate it with
the total system of social and cultural relationships. Still others refer to
an enterprise, such as United States Steel Corporation or the Department
of Defense, as an “organization.” But for most practicing managers, the
term organization implies a formalized intentional structure of roles or
positions. In this book, the term is generally used in reference to a
formalized structure of roles, although it is sometimes used to denote an
enterprise.
3.2 DEFINITION OF ORGANIZATION

The term ‘organization’ connotes different things to different people. Many
writers have attempted to state the nature, characteristics and principles
of organization in their own way. For instance, to the sociologist
organization means a study of the interactions of the people, classes, or
the hierarchy of an enterprise; to the psychologist organization means
any attempt to explain, predict and influence behavior of individuals in
an enterprise; to a top executive it may mean the weaving together of
functional components in the best possible combination so that an
enterprise can achieve its goals. The word ‘organization’ is also used
widely to connote a group of people and the structure of relationships.
The term ‘organization’ is used in many ways. It means different thing to
different people. Currently the following uses of the term are popular
 A group of people united by a common purpose.

 An entity, an ongoing, business unit engaged in utilizing resources to
create a result.
 A structure of relationships between various positions in an enterprise.
 A process by which employees, facilities and tasks are related, to
each other, with a view to achieve specific goals.
Group of Persons Organization is very often viewed as a group of
persons contributing their efforts towards certain goals. The evolution of
organization dates back to the early stages of human civilization when
two or more persons began to cooperate and combine together for fulfilling
their basic needs of food, clothing, shelter and protection of life.
Organization begins when people combine their efforts for some common
purpose. It is a universal truth that an individual is unable to fulfill his
needs and desires alone because he lacks strength, ability and resources.
So he seeks the cooperation of other people who have similarity of goals.
Organizations are not a new invention. People have always formed
organizations to pool their efforts for the accomplishment of their common
objectives. The Pharaohs used organizations to build pyramids. The
Emperors of China used organizations more than a thousand years ago
to construct irrigation systems. And the first Popes created a universal
church to serve a world religion. Modern society, however, has more
organizations; these fulfilling a greater variety of societal and personal
needs, involving a greater proportion of its citizens, and affecting, a large
segment of their lives.
Barnard defined organization as an identifiable group of people
contributing their efforts towards the attainment of goals. “An organization
comes into existence when there are a number of persons in
communication and relationship to each other and are willing to contribute
towards a common endeavor”. People form groups or organizations and
pool their efforts by defining and dividing various activities, responsibility
and authority. As such an organization has the following characteristics:
1. Communication.
2. Cooperative efforts.
3. Common objectives.
4. Rules and regulations.
Structure of Relationships
Some people view organization in a very narrow sense by defining it as a
framework of duties and responsibilities through which an undertaking
functions. If organization is merely recognized as a structure, it will be
viewed as a static thing used to explain formal relationships. But an
organization is a dynamic entity consisting of individuals, means,
objectives and relationships among the individuals. An organization is
certainly more than a chart. It is the mechanism through which management
directs, coordinates and controls the activities of the enterprise.
Function of Management
Organization is one of the basic functions of management. It involves the
determination and provision of whatever capital, materials, equipment
and personnel may be required for the achievement of certain
predetermined goals. By performing this function, management brings
together human and non-human resources to form a manageable unit
(which is also identified as an organization). Thus, organization is a process
of integrating and coordinating the efforts of manpower and material
resources for the accomplishment of certain objectives. Just as planning
is applied to every other managerial function, the process of organization
is also used in every aspect of management. For instance, organization
of the planning department is essential for the formulation of plans and
policies. Similarly, organization of other managerial functions is also
necessary.
Organization as a Process
Organization is the process of establishing relationships among the
members of the enterprise. The relationships are created in terms of
authority and responsibility. Each member in the organization is assigned
a specific responsibility or duty to perform and is granted the
corresponding authority to perform his duty. According to Louis A. Allen,
“organization involves identification and grouping the activities to be
performed and dividing them among the individuals and creating authority
and responsibility relationships among them for the accomplishment of
organizational objectives”.
3.3 STEPS IN ORGANIZING

Organizing involves the following interrelated steps :
(i) Determination of Objectives. Organization is always related to

certain objectives. Therefore, it is essential for the management to
identify the objectives before starting any activity. It will help the
management in the choice of men and materials with the help of
which it can achieve its objectives. Objectives also serve as the
guidelines for the management and the workers. They bring about
unity of direction in the organization.
(ii) Identification and Grouping of Activities. If the members of the
group are to pool their efforts effectively, there must be proper
division of the major activities. Each job should be properly classified
and grouped. This will enable the people to know what is expected
of them as members of the group and will help in avoiding duplication
of efforts. For instance, the total activities of an industrial organization
may be divided into major functions like production, purchasing,
marketing, financing, etc. and each such function is further subdivided
into various jobs. The jobs, then, can be classified and grouped to
ensure the effective implementation of the other steps.
(iii) Assignment of Duties. After classifying and grouping the activities
into various jobs, they should be allotted to the individuals so that
there are round pegs in round holes. Each individual should be given
a specific job to do according to his ability and made responsible
for that. He should also be given the adequate authority to do the
job assigned to him.
(iv) Developing Authority, Responsibility and Relationships. Since
so many individuals work in the same organization, it is the
responsibility of management to lay down structure of relationships
in the organization. Everybody should clearly know to whom he is
accountable. This will help in the smooth working of the enterprise
by facilitating delegation of responsibility and authority.
3.4 IMPORTANCE OF SOUND ORGANIZATION

Organization is the backbone of management. Without efficient
organization, no management can perform its functions smoothly. Sound
organization contributes greatly to the continuity and success of the
enterprise. Once A. Carnegie, an American industrialist, said, “Take away
our factories, take away our trade, our avenues of transportation, and
our money. Leave nothing but our organization, and in four years we
shall have re-established ourselves”. That shows the significance of

managerial skills and organization. However, good organization structure
does not by itself produce good performance - just as a good constitution
does not guarantee great presidents, or good laws a moral society. But a
poor organization structure makes good performance impossible, no
matter how good the individuals may be. The right organizational structure
is the necessary foundation; without it the best performance in all other
areas of management will be ineffectual and frustrated.
Sound organization brings about the following advantages :
1. Facilitates attainment of the objectives of the enterprise.
2. Facilitates optimum use of resources and new technological
developments.
3. Facilitates growth and diversification.
4. Stimulates creativity and innovation.
5. Facilitates effective communication.
6. Encourages better relations between the labor and the management.
7. Increases employee satisfaction and decreases employee turnover.
Sound organization is an essential prerequisite of efficient management.
It helps an organization in the following ways:
1. Enlarges abilities: It helps individuals to enlarge their capabilities.
Division of work enables an individual to specialize in the job in
which he is proficient, leading to better utilization of resources and
talents.
2. Facilitates administration: It facilitates administration by avoiding
waste motions, overlapping work and duplication of effort.
Departmentation enables proper planning of work. Confusion and
misunderstanding, over who is to perform what work, is avoided by
specifying the role of managers clearly. Proportionate and balanced
emphasis is put on various activities.
3. Facilitates growth and diversification: Sound organization helps
in keeping activities under constant vigil and control. The organization
can undertake more activities without dislocation. Talents and
resources are put to good use. Opportunities are seized quickly and
exploited fully, which ultimately pave way for growth and
diversification.
4. Permits optimum use of resources: Human, technical and material

resources are put to good use. Right persons are given right jobs.
There is proper allocation of work. People know that they are
supposed to do, well in advance. Necessary functions are determined
and assigned, so that personnel and physical facilities are utilized
effectively.
5. Stimulates creativity. It offers stimulating opportunities to people
at all levels, to use their skills on jobs best suited to their nature.
Delegation helps people at lower levels to do more challenging work.
The higher ups, in turn, can concentrate on strategic issues putting
their creative abilities to good use.
6. Facilitates coordination: Organization is an important way of
achieving coordination among different departments of an enterprise.
Clear authority relationships and proper assignment of work facilitates
the task of achieving coordination at all levels. Poor organization
leads to improper arrangement of duties and responsibilities. As a
result, unimportant and trivial issues are given top priority. Activities
that should be integrated or centralized are spread out and put to
improper supervision. Incompetent individuals are overused while
talented people are under utilized. Delays, duplications and waste
motions occur with frustrating regularity. Expenses mount up. These
would create utter confusion, chaos and conflict. Poor organization
may mean improper arrangement of facilities and failure to achieve
goals.
PRINCIPLES OF ORGANIZATION
As a tool of management, organization is expected to facilitate the
achievement of certain objectives. In order to facilitate the achievement
of objectives, management thinkers have laid down certain statements
from time to time, from certain generally accepted understandings, which
may be called the principles of organization. The principles are guidelines
for planning an efficient organization structure. Therefore, a thorough
understanding of the principles of organization is essential for good
organization. The important principles of organization are discussed below:
1. Consideration of Objectives. An enterprise strives to accomplish
certain objectives. Organization serves as a tool to attain these
objectives. The objectives must be stated in clear terms as they play
an important role in determining the type of structure, which should

be developed. The principle of consideration of objectives states
that only after the objectives have been stated, an organization
structure should be developed to achieve them.
2. Division of Work and Specialization. The entire work in the
organization should be divided into various parts so that every
individual is confined to the performance of a single job, as far as
possible, according to his ability and aptitudes. This is also called
the principle of specialization. More a person continues on a particular
job, the better will be his performance.
3. Definition of Jobs. Every position in the organization should be
clearly defined in relation to other positions in the organization. The
duties and responsibilities assigned to every position and its
relationship with other positions should be clearly defined so that
there may not be any overlapping of functions.
4. Separation of Line and Staff Functions. Whenever possible, line
functions should be separated from staff activities. Line functions
are those, which accomplish the main objectives of the company. In
many manufacturing companies, the manufacturing and marketing
departments are considered to be accomplishing the main objectives
of the business and so are called the line functions and other functions
like personnel, plant maintenance, financing and legal are considered
as staff functions.
5. Chain of Command. There must be clear lines of authority running
from the top to the bottom of the organization. Authority is the right
to decide, direct and coordinate. The organization structure should
facilitate delegation of authority. Clarity is achieved through delegation
by steps or levels from the top position to the operating level. From
the chief executive, a line of authority may proceed to departmental
managers, to supervisors or foremen and finally to workers. This
chain of command is also known as scalar principle of organization.
6. Parity of Authority and Responsibility. Responsibility should
always be coupled with corresponding authority. Each subordinate
must have sufficient authority to discharge the responsibility entrusted
to him. This principle suggests that if a plant manager in a multi-plant
organization is held accountable for all activities in his plant, he should
not be subject to orders from company headquarters specifying the

quantity of raw materials he should buy or from whom he should
purchase raw materials. If a supervisor is responsible for the quality
of work of his department, he should not be asked to accept as a
member of his workforce an employee who has been hired without
consulting him.
7. Unity of Command. No one in the organization should report to
more than one supervisor. Everyone in the organization should know
to whom he reports and who reports to him. Stated simply, everyone
should have only one boss. Receiving directions from several
supervisors may result in confusion, chaos, conflicts and lack of
action. So each member of the organization should receive directions
from and report to one superior only. This will avoid conflict of
command and help in fixing responsibilities.
8. Exceptional Matters. This principle requires that organization
structure should be so designed that managers are required to go
through the exceptional matters only. The subordinates should take
all the routine decisions, whereas problems involving unusual matters
and policy decisions should be referred to higher levels.
9. Span of Supervision. The span of supervision means the number
of persons a manager or a supervisor can direct. If too less number
of employees are reporting to a supervisor, his time will not be utilized
properly. But, on the other hand, there is a limit to the number of
subordinates that can be efficiently supervised by an executive. Both
these points should be kept in mind while grouping and allocating
the activities to various departments. It is difficult to give a definite
number of persons a manager can direct. It will depend upon the
nature of the work and a number of other factors.
10. Balance of Various Factors. There should be proper balance in
the formal structure of the organization in regard to factors having
conflicting claims, e.g., between centralization and decentralization,
span of supervision and lines of communication and authority
allocated to departments and personnel at various levels.
11. Communication. A good communication network is essential to
achieve the objectives of an organization. No doubt the line of
authority provides readymade channels of communication downward
and upward, still some blocks in communication occur in many

organizations. The confidence of the superior in his subordinates
and two-way communication are the factors that unite an organization
into an effectively operating system.
12. Flexibility. The organization structure should be flexible so that it
can be easily and economically adapted to the changes in the nature
of business as well as technical innovations. Flexibility of organization
structure ensures the ability to change with the environment before
something serious may occur. So the organization structure should
be such that it permits expansion and contraction without disrupting
the basic activities.
13. Continuity. Change is the law of nature. Many changes take place
outside the organization. These changes must be reflected in the
organization. For this, the form of organization structure must be
able to serve the enterprise and to attain its objectives for a long
period of time.
3.5 TYPES OF ORGANIZATION
3.5.1 According to Talcott Parson Scheme, organizations can be

classified primarily into four categories based on functions
(a) Economic Organizations:

Economic organizations are primarily concerned with producing
something of value to the society. They are wedded to a philosophy of
generating surplus / profit. Industrial, commercial and trading concerns
are included in this category.
(b) Political organizations:

Political organizations survive on the basis of service to society. They
help in achieving the basic values cherished by the society. They collect
resources from the society, employ them judiciously, and help in
maintaining peace and stability in the society. All governmental agencies
are included in this category.
(c) Integrative organizations:

Integrative organization are tied with social, control and maintenance.
Police departments and other protective organizations (courts etc.) are
included in this category.
(d) Pattern maintenance organizations:

Pattern maintenance organizations, like, educational institutions, research
institutions, religious organizations, clubs etc. are primarily concerned
with long-term interests of society, culture, knowledge values, etc.,
3.5.2 According to Blau and Scott an organization survives on the basis

of the services tendered to the society. Its success depends on how
best it is able to serve the interests of its members, owners or
managers, clients and the society.
1. Mutual benefits associations:

Mutual benefit association like trade unions, political parties, professional,
bodies etc., crop up to serve the interests of members. It is not always
possible for these associations to achieve the seemingly easy objective
because of two problems : membership apathy and oligarchical control.
Membership in mutual benefit associations may be exciting initially but
after a time it becomes a monotonous feature. Members lose interest
and develop apathy toward the associations’ activities. Consequently,
control passes into hands of a selected few; oligarchial control replaces
the internal democratic character of the association.
2. Business organizations:
Owners are the primary beneficiaries in business organization. They are
mainly concerned with maintaining operational efficiency that is achieving
maximum gain at minimum cost. It is true that other groups like employees,
customers, society etc. receive benefits simultaneously from business
organizations but in the final analysis, the survival of such institutions
depends on how effectively the owners are rewarded for the risks
undertaken.
3. Service organizations:
In service organizations like hospitals, educational institutions, social

welfare agencies etc. public are primary beneficiaries. In order to tender
effective service to the clients, the professionals looking after these
organizations must emphasize two things : service is more important than
observing procedures and the nature of service is to be decided.
3.5.3 According to Samuel Deep’s Classification Scheme
1. For profit organizations:

These organizations provide goods and services at a profit. Companies,
partnership firms, sole proprietorship firms are organised, along these
lines and they generate profit for survival and continuance in the market.
2. Government organizations:
These organizations satisfy the public need for order and provide a means
for people to exercise some measure of control over their environment.
3. Protective organizations:
They shield citizens from danger police, and military services etc.
4. Service organizations:
They act in the interest of the general public without always receiving
payments in full for services rendered.
5. Political organizations:
They seek to influence legislation by electing a member of their group to
public office (political parties, groups and associations).
6. Religious organizations:
They provide for the spiritual needs of members and try to enlist
nonbelievers into their fold (churches, sects, orders etc.).
7. Social organizations:
They satisfy the needs of persons to make friendships and to have contact
with others who have contact with others who have compatible interests
(clubs, teams, fraternities).
3.5.4 Types of Organization Based on Authority, Responsibility and

Accountability
Formal Organization and Informal Organization

Formal organization, which refers to the structure of well-defined jobs,
each bearing a definite measure of authority, responsibility and
accountability, is not capable of accomplishing organizational objectives
all alone. It needs the help of informal organization for this purpose. In
other words, informal organization, which does not appear on the
organization chart, supplements the formal organization in achieving

organizational goals effectively and efficiently. The working of informal
groups and leaders is not as simple as it may appear to be. Therefore, it
is obligatory for every manager to study thoroughly the working pattern
of informal relationships in the organization and to use them for achieving
organizational objectives. In this chapter, an attempt has been made to
study the behavior of informal groups, which develop automatically along
with the formal organization.
3.5.4.1 FORMAL ORGANIZATION

Chester 1. Barnard defined formal organization as “a system of
consciously coordinated activities or forces of two or more persons”.
A formal organization is deliberately designed to achieve some particular
objectives. It refers to the structure of well-defined jobs, each bearing a
definite measure of authority, responsibility and accountability. The
structure is consciously designed to enable the organizational members
to work together for accomplishing common objectives. The individual
must adjust to the formal organization. It tells him to do certain things in
a specified manner, to obey orders from designated individuals and to
cooperate with others. Co-ordination also proceeds according to a
prescribed pattern in the formal organization structure.
The formal organization is built around four key pillars; namely, (i) division
of labor, (ii) scalar and functional processes, (iii) structure, and (iv) span
of control. These may also be called the principles of formal organization.
Division of labor and specialization is the basic principle of formal
organization. The whole work is divided into a number of small operations
and a different person performs each operation so that there is maximum
specialization. The scalar and functional processes imply the growth of
the organization both vertically and horizontally. The structure of the
organization refers to the overall arrangement in the organization which
ensures proper balance between different parts of the organization and
secures the execution of all operations and the achievement of
organizational objectives. The span of control refers to the number of
subordinates directly reporting and accountable to one superior.
CHARACTERISTICS OF FORMAL ORGANIZATION

The basic characteristics of formal organization are as follows:
(i) Organization structure is laid down by the top management to achieve
organizational goals.
(ii) Organization structure is based on division of labor and specialization

to achieve efficiency in operations.
(iii) Organization structure concentrates on the jobs to be performed
and not the individuals who are to perform jobs.
(iv) The organization does not take into consideration the sentiments of
organizational members.
(v) The authority and responsibility relationships created by the
organization structure are to be honoured by everyone. The position
in the organization hierarchy determines the relative status of the
incumbent.
3.5.4.2 INFORMAL ORGANIZATION

Informal organization refers to the relationship between people in the
organization based on personal attitudes, emotions, prejudices, likes,
dislikes, etc. These relations are not developed according to procedures
and regulations laid down in the formal organization structure. Generally,
large formal groups give rise to small informal or social groups. These
groups may be based on common taste, language, culture or some other
factor. These groups are not preplanned. They develop automatically
within the organization according to the environment in the organization.
The salient features of informal organization are as follows:
(i) Informal relations are unplanned. They arise spontaneously.
(ii) Formation of informal organizations is a natural process.
(iii) Informal organization reflects human relationships.
(iv) Informal organizations are based on common tastes, problems,
languages, religions, culture, etc.
(v) The membership of informal organizations is voluntary. At the same
time, a person may be a member of a number of informal groups.
Thus, there can be overlapping in these groups.
Significance of Informal Organization

The importance of informal organization arises from the functions
performed by informal groups. The important functions of informal
organization are as under:
(i) It serves as a very useful channel of communication in the
organization. The informal communication is very fast.
(ii) It blends with the formal organization to make it more effective. It

gives support to the formal organization.
(iii) The informal leader lightens the burden of the formal manager and
tries to fill in the gaps in the manager’s abilities.
(iv) Informal organization gives psychological satisfaction to the
members. They get a platform to express their feelings.
(v) The presence of informal organization encourages the manager to
plan and act carefully.
Thus, informal organizations support and supplement the formal
organization. There are certain disadvantages of informal
organizations. They put up resistance to change and conform to old
practices. The communication in informal organization is very fast;
sometimes, it creates rumors, which may prove dangerous to the
enterprise.
Management’s Attitude towards Informal Organization

Modern authors on organization behavior view organization as consisting
of both types of relationships, i.e., formal and informal. It is true that
while laying down an organizational plan, management can only develop
formal structure of relationships, but organization is not only a formal
chart or structure of relationships. Formal organization, no doubt it is an
important part of the organization. But informal organization is also not
less important. If handled properly, it will help in performing the activities
of the organization very efficiently and effectively. In short, informal
relations are complementary to formal relations and procedures laid
down in the organization structure. Both formal and informal organizations
are necessary for any group action just as two blades are essential to
make a pair of scissors workable.
The management should not look down upon the informal organization
as it arises spontaneously along with the formal organization and fills in
some of the vital gaps in the formal organization. It may be noted that
formal organization is unable to meet all the needs (e.g., affiliation,
affection; esteem, etc.) of its members. Management can fulfill these
needs of the workers by encouraging healthy interaction among informal
groups and their members.
Also, informal organization provides a buffer to absorb the shock of
tensions and frustrations among the members as a result of formal
organizational pinpricks.
Informal organization may act to fill in gaps in a manager’s abilities. For

instance, if a manager is weak in planning, one of his subordinates may
informally help him in such a situation. Management may also make use
of informal group leaders by taking them into confidence to mediate as
bridges of understanding between the management and the employees.
Shartle has rightly said, “Informal structure is one index of the dynamics
of getting work done and it appears that, for efficiency, it will necessarily
deviate from the formal structure.” Therefore, management should adopt
a positive attitude towards informal organization. It should use it along
with formal structure to make a workable system for achieving the
organizational objectives.
3.5.4.3 COMPARATIVE STUDY OF FORMAL AND INFORMAL

ORGANIZATION
The formal and informal organizations differ from each other in the
following respects:
(i) Origin. The reasons and circumstances of origin of both formal and
informal organizations are totally different. Formal organizations are
created by conscious managerial decisions. But informal
organizations arise naturally within the formal organization because
of the tendency of individuals to associate and interact. Management
has no hand either in emergence or in abolition of informal groups.
(ii) Purpose. Formal organizations are created for realizing certain well-
defined objectives. But informal groups are created by organizational
members for their social and psychological satisfaction. There may
be a conflict between the goals of the formal organization and those
of the informal groups.
(iii) Activities. Activities in case of formal organization are differentiated
and integrated around the objectives of the enterprise and are
formalized into work units or departments on a horizontal basis.
Individuals are fitted into jobs and positions and work groups as a
result of managerial decisions. In case of informal organization, there
are no specific activities. They arise from time to time as a result of
interactions and sentiments of the individuals. Informal groups may
be based on common taste, language, culture or some other factor.
The following table summarizes the differences between formal and
informal organizations:
Formal Organization vs. Informal Organization
Point Formal organization Informal organization
Origin and goals Deliberately created; reflects Arises spontaneously; reflects individual
organizational goals. and group goals.
Basic purpose is to achieve Basic purpose is to improve human
organization goals. relations.
Structure It has a definite structure and is Structure less, organization chart built
reflected in an organization chart built around people.
around group positions.
Integrating Formal organization is held together by Held together by feelings of friendship,

Mechanisms rules, regulations, and procedures. mutual help and trust, and so on; it has
unwritten rules and is bound by group
norms rather than organizational goals.
Communication Formal organization depends on The informal organization designs its own.
formal, official channels of Communication popularly known as
communication to sell the ideas of grapevine, for both organizational and
management to the organization; social communication process;
communication is a one-way traffic. communication is a two-way traffic.
Size Tends to be large in size, generally Tends to be small and manageable.

unwieldy and unmanageable.
Durability Tends to be permanent and stable. Characterized by instability.
Orientation It is more or less, an impersonal and A highly flexible structure designed to

arbitrary structure, to which individuals satisfy social and psychological needs of
must adjust. individuals.
(iv) Structure. Formal organization is hierarchical, pyramid shaped and

bureaucratic in structure with well defined positions, rigid delineation
of roles and superior subordinate relationships on impersonal basis,
enforcement of organizational order through a set of policies,
procedures, and rules, conscious emphasis on status, differential
based on authority, narrow and downward oriented communication
system, etc. On the other hand, informal organization is uncharitable;
it looks like a complicated and common social network of
interpersonal relationships. Informal organization is loosely structured,
with only unwritten norms of behavior enforced by consent.
Communication is informal and multidirectional. There are no rigid
status differentials.
(v) Membership. In a formal organization, every individual belongs to

one work group only and works under one superior. But in case of
informal organization, one person can be a member of more than
one group, according to his choice. He may be a leader in one group
and follower in another. There is no rigidity about group membership.
(vi) Orientation. In case of formal organization, values, goals and tasks
are dominantly economic and technical and they concern productivity,
profitability, efficiency, survival and growth. But in case of informal
organization, values, goals and tasks are dominantly psycho-social,
setting around individual and group satisfaction, affiliation,
cohesiveness and friendship.
(vii) Norms of Behavior. In a formal organization, individuals are
required to behave in the prescribed manner in their work situations.
They are expected to behave in a rational manner. Deviations from
the standard norms are dealt with according to the processes of
organizational law and order. There is also a system of rewards and
punishments. But in case of informal organization, individual behavior
and group behavior influence each other. Behavior is more natural
and social. Interactions cut across formally established positions and
relationships and there is free exchange of feelings and ideas. An
informal organization develops its own norms of behavior and a
system of rewards and punishments to ensure adherence of group
norms.
3.6 GROUP DYNAMICS

Informal organization does not last so long informal organization reflects
human aspect. It is based on the attitudes, likes and dislikes, tastes,
language, etc. of people. It is loosely structured. It is highly flexible in
nature. The group members choose informal leaders.
Social needs are among the most powerful and compelling on-the-job
motivating forces. In order to fulfill their social needs, workers form small
groups on the job itself. It was shown by Hawthorne experiments that
people behave as members of group and their membership of group
helps shape their work-behavior and attitudes towards the organization.
Management can use groups successfully for the accomplishment of
organizational objectives. According to Likert, an organization will function
best when its personnel function not as individuals but as members of
highly effective work-groups with high performance goals.
The social process by which people interact face-to-face in small groups

is called group dynamics. Group dynamics is concerned with the
interaction of individuals in a face-to-face relationship. It focuses on
teamwork wherein small groups are constantly in contact with each other
and share their ideas to accomplish the given tasks. The group develops
its goals clearly and furnishes suggestions to its members for the
accomplishment of goals. Every group chooses its leader (who may be
called informal leader as he is not recognized in the formal organizational
structure) who may effectively coordinate the group efforts towards the
accomplishment of its objectives.
3.7 ORGANIZATION STRUCTURE

An organization structure shows the authority and responsibility
relationships between the various positions in the organization by showing
who reports to whom. It is a set of planned relationships between groups
of related functions and between physical factors and personnel required
for the achievement of organizational goals.
Organization involves establishing an appropriate structure for the goal
seeking activities. The structure of an organization is generally shown on
an organization chart or a job task pyramid. It shows the authority and
responsibility relationships between various positions in the organization.
It is significant to note that the organization structure is directly related to
the attainment of the organization objectives. For instance, if an
undertaking is in production line, the dominant element in its organization
chart would be manufacturing and assembling. A good organization
structure should not be static but dynamic. It should be subject to change
from time to time in the light of the changes in the business environment.
While designing the organization structure, due attention should be given
to the principles of sound organization.
3.7.1 SIGNIFICANCE OF ORGANIZATION STRUCTURE

Organization structure contributes in the following ways to the efficient
functioning of organizations:
1. Clear-cut Authority Relationships. Organization structure
allocates authority and responsibility. It specifies who is to direct
whom and who is accountable for what results. The structure helps
an organization member to know what his role is and how it relates
to other roles.
2. Pattern of Communication. Organization structure provides the

patterns of communication and co-ordination. By grouping activities
and people, structure facilitates communication between people
centered on their job activities. People who have joint problems to
solve often need to share information.
3. Location of Decision Centers. Organization structure determines
the location of decision-making in the organization. A departmental
store, for instance, may follow a structure that leaves pricing, sales
promotion and other matters largely up to individual departments to
ensure that varied departmental conditions are considered. In
contrast, an oil refinery may concentrate on production, scheduling
and maint enance decisio ns at to p levels t o ensure t hat
interdependencies along the flow of work are considered.
4. Proper Balancing. Organization structure creates the proper
balance and emphasis of activities. Those more critical to the
enterprise’s success might be placed higher in the organization.
Research in a pharmaceutical company, for instance, might be singled
out for reporting to the general manager or the managing director of
the company. Activities of comparable importance might be given
roughly equal levels in the structure to give them equal emphasis.
5. Stimulating Creativity. Sound organization structure stimulates
creative thinking and initiative among organizational members by
providing well defined patterns of authority. Everybody knows the
area where he specializes and where his efforts will be appreciated.
6. Encouraging Growth. An organization structure provides the
framework within which an enterprise functions. If it is flexible, it
will help in meeting challenges and creating opportunities for growth.
A sound organization structure facilitates growth of enterprise by
increasing its capacity to handle increased level of activity.
7. Making Use of Technological Improvements. A sound
organization structure, which is adaptable to changes, can make the
best possible use of latest technology. It will modify the existing
pattern of authority, responsibility and relationships in the wake of
technological improvements.
In short, existence of a good organization structure is essential for better
management. Properly designed organization can help improve teamwork
and productivity by providing a framework within which the people can

work together most effectively. While building the organization structure,
it is essential to relate the people to design. The organization structure,
which has technical excellence, may be quite useless for practical
purposes because it is not suited to the needs of the people. Thus, an
organization structure should be developed according to the needs of
the people in the organization.
3.7.2 DEVELOPING THE ORGANIZATION STRUCTURE

There are two types of structural variables : namely, basic structure and
operating mechanism. Designing of basic structure involves such central
issues as how the work of the organization will be divided and assigned
among positions, groups, departments, divisions, etc. and how the
coordination necessary to achieve organizational objectives will be
brought about. But operating mechanism, on the other hand, includes
such factors as information system, control procedures, rules and
regulations, system of reward and punishment, etc.
The development of organization structure deals with two facets which
are : the functions to be performed, and the form of structure. The first
facet requires the determination of activities, the organization needs and
division of these activities keeping in mind degree of specialization it can
afford. The second facet that is form of structure requires a detailed
study and application of many organizational principles and practices.
Organization structure establishes formal relationships among various
positions in the enterprise. The formal relations may be classified into
the following categories :
(i) Relations between the senior and the subordinates and vice versa;
(ii) Relations between the specialist positions and the line positions;
(iii) Staff relations and
(iv) Lateral relations.
The formal relations in an organization arise from the patterns of
responsibilities that are created by the management. They are static in
nature, but afford the framework for dynamic action. As soon as the
management action starts, the formal relations are absorbed or
overplayed by the personal attitudes and behavior patterns of the
individuals in the organization. The latter are generally described as
‘informal relations’. Such relations must also be kept in mind while

developing the organization structure. If the formal relations are rigid
and lay down long procedures, the individuals will develop certain
‘short-cuts’ to perform their responsibilities in a better way.
3.7.3 NEED FOR DIFFERENTIATION AND INTEGRATION OF

ACTIVITIES
Differentiation and integration of activities and authority relationships are
very important considerations in organization designing. Differentiation
may be defined as the differences in cognitive and emotional orientations
among managers in different functional departments and the differences
in formal structure among these departments. Integration, on the other
hand, refers to the quality of the state of collaboration that is required to
achieve unity of effort. System approach suggests that since various
departments are integral part of the whole system, they should not be
considered in isolation of others. But since each department is interacting
with the environment in a different way, various departments are likely to
develop some degree of differentiation depending upon the nature of
environment. Therefore, designing of the structure of one department
may be different from that of the other. But the overall objective of
organizational designing should be integration of activities and authority
roles and relationships existing in different departments.
3.7.4 DETERMINING THE KIND OF STRUCTURE

Organization structure is an indispensable means towards business
objectives. Wrong structure will seriously deter the enterprise from
achieving its objectives. Thus, it is essential that a great deal of care
should be taken while determining the organization structure. Peter
Drucker has pointed out three specific ways to find out what kind of
structure is needed to attain the objectives of a specific business, which
are discussed below:
1. Activities Analysis. It is the first stage in building an organization
structure, which involves finding out what activities are needed to
attain the objectives of the enterprise. Each business undertaking
has a set of functions to perform such as manufacturing, purchasing,
marketing, personnel, accounting, etc. These functions can be
identified after proper analysis. It may be pointed out that in every
organization one or two functional areas of business dominate. For
instance, printing is an important function of a printing firm and

designing is an important activity of the readymade garments
manufacturer. After the activities have been identified and classified
into functional areas, they should be listed in the order of importance.
It is advisable to divide and subdivide the whole work into smaller
homogeneous units so that the same may be assigned to different
individuals. For instance, the Chief Executive may divide the whole
activities into various functional departments and delegate authority
to the departmental managers. Deputy managers, assistant managers
and so on, may assist the departmental managers. It should be
remembered that the job constitutes the basic building block in
designing an organization structure.
2. Decision Analysis. What decisions are needed to obtain the
performance necessary to attain objectives? What kind of decisions
are they? On what level of the organization should they be made?
What activities are involved in or affected by them? Which managers
must therefore participate in the decisions? Though it is difficult to
predict the content (kind) of decision problems, which will arise in
future, yet the subject matter has a high degree of predictability.
Analysis of the foreseeable decisions shows the structure of top
management the enterprise needs and the nature of authority and
responsibility different levels of operating management should have.
Peter Drucker has emphasized four basic characteristics, viz.,
(i) the decision is the degree of futurity in the decision (ii) the impact
that decision has on other functions; (iii) the character of the decision
as determined by a number of qualitative factors, such as basic
principles of conduct, ethical values, social and political beliefs, etc.
and (iv) whether the decisions are periodically recurrent or rare as
recurrent decisions may require general guidelines whereas a rare
decision is to be treated as a distinctive event.
3. Relations Analysis. With whom will a manager-in-charge of an
activity have to work? Such other questions of relations, e.g., line
and staff relations, relations between subordinates and superior will
also help in deciding the structure of the organization. As said earlier,
downward, upward and side-ways relations must be analyzed to
determine the organization structure.
3.8. AUTHORITY AND RESPONSIBILITY

Authority is defined as the right to give orders and the power to get
obedience. In the context of an organization, authority might be termed
as ‘institutionalized power’. A person in an organization, is an authority
by virtue of the requirements is the role held by him. Authority resides in
a person and arises out of the demands of position in organizations.
Responsibility is the obligation of a subordinate to perform the duty as
required by the superior. There should be parity between authority and
responsibilities. This means that the subordinate must have been delegated
enough authority to undertake all the duties which have been assigned to
him and for which he has accepted responsibility. Authority without
responsibility is liable to be abused; responsibility without authority is
frustrating. Thus, inequity between delegated authority and responsibility
produces undesirable results.
3.8.1. Challenges to the Traditional View of Organizations :

The classical writer’s recommendations for organizing and managing do
not work in all situations. Prescriptions for machine like efficiency that
works in military organizations and simple operations often fail to produce
results in complex organizations. Fayol’s principles do not guarantee
success. Experience proves that organizing is more than just the strict
compliance of rules that Taylor had stressed. Weber’s efficient
organizational formula fails to offer any benefits in actual practice.
Bureaucracy, in fact, highlights the epitome of inefficiency. Additional
challenges emerge from two other sources:
(a) Bottom-up authority: Traditionalists favored flow of authority from
top to bottom in an uninterrupted fashion. Owners preferred to
exercise their authority over those who are cut off by distance, through
this route, much to the resentment of those working at lower levels.
(b) Chester L Barnard, instead, described organizations as cooperative
systems. He felt that a leader’s authority is eventually determined by
the willingness of subordinates to follow commands. Barnard’s
acceptance theory opened the door for a whole set of new ideas
such upward communication and the informal communication that is
based on friendship than work rules.
3.8.2 Open systems theory (the modern approach) :

The traditional concept of the organizing process is task-oriented and
emphasizes the work to be performed by individuals, who are part of
organization. The organization is viewed as a closed system, enclosed
and sealed off from outside world. The organization has all the energy it
needs and there is no need to look into the environmental changes. The
environment, it is assumed, would be stable, predictable and would not
pose problems.
Table : Comparison of Traditional and Modern Approaches
Classical organizations Modern organizations
Closed system. Open system.

Stable environment. Dynamic Environment.
Division of labor and specialization. Job enlargement and job enrichment.
Centralization. Decentralization.
Use of authority to achieve coordination. Free from Organization structures.
Authority. Consensus.
Rigid rules, precise role requirements. Flexibility and adaptability.
Command to exact obedience. Participation to achieve ends.
Communication: one-way street. Communication: open and multidirectional.
Maintenance needs. Motivational needs.
Tight control; emphasis on positions to Emphasis on goals; management by objectives.
achieve goals.
Autocratic approach. Democratic approach.
Negative environment: robs employees of Positive work environment: supportive of the
freedom and motivation to work. feelings, beliefs and values of people.
Sources: Adapted from H.G. Hicks and C.R. Gullet, Organizations:

Theory and Behavior, Tokyo, McGraw-Hill, 1975.
The essential objective of management should be to provide a sound
organization structure that promises efficient goal accomplishment. To
this end, managers must try to find out ways for increasing internal
efficiency; the task should be made as simple as possible by ignoring
factors that increase uncertainty. People in an organization are viewed as
inert instruments in the production process, as parts of a complex
organizational machine.
Recognizing the inadequacies in the traditional approach, Thompson
suggested the open-systems view, in order to develop an accurate picture
of organizational life. The open-systems view accepts the environment

as an integral part of organizational reality. Organizations are complex,
goal-seeking social units. In addition to the penultimate task of
accomplishing goals, they must adapt to and shape the external
environment. The open-systems view conceives of the organizational
system as a set of interrelated elements that acquires inputs, transforms
them and delivers outputs to the external environment. Thus, an
organization is a social system composed of a number of sub-systems,
all of which are independent and interrelated. It is open and dynamic
having inputs, outputs, operations and feedback.
3.9 C O N TI NG EN CY T H E O RY A ND O RG AN IZAT IO N
STRUCTURE
The contingency theory puts the stress of organizing on a number of
variables. The theory supports the idea that there is no best way to
organize, there is no one pattern of organization style that is universally
appropriate. The design is conditional. The organization structure may
be contingent upon many factors; it is a product of many forces: internal
as well as external. These factors, it should be remembered, do not
determine structure; rather they establish the parameters within which
management choices are made.
Strategy and Structure

Strategy is a contingency variable. It refers to the long-term decisions
adopted by managers to achieve organizational goals. Top managers
generally formulate strategy after a careful analysis of opportunities in
the environment and after evaluating strengths and weakness of the
organization. Managers decide at the start, what industry the organization
will enter, how it will compete, where it will be located, and the kind of
organization it will be, who will be the top managers, and who will directly
influence the organization structure.
Alfred Chandler has clearly shown the close relationship between the
strategy which a business adopts, and the structure of its organization.
After carrying out intensive case studies of four of the largest American
companies (Sears Roebuck, General Motors, Standard Oil and Du Pont),
he concluded that changes in corporate strategy would precede and cause
changes in the organization structure. He found that all the companies
studied had shifted their designs from a simple centralized pattern, to a
more elaborate divisionalised pattern following changes in population,

national income, technological innovations, expanding product lines etc.
The strategy chosen by the manager is the primary explanatory variable
for organizational structure, in all the cases. The influence of strategy on
structure may be expressed thus:
 Strategy determines organizational tasks.
 Strategy influences the choice of technology and people, appropriate
for accomplishment of such organizational tasks and in turn, these
influence the appropriate structure.
 Strategy determines the specific environment, within which the
organization will operate.
Size and Structure

How important is size in determining structure, remains a controversial
question. Opinions vary from ‘size is the most important condition affecting
the structure of organization’ to size is irrelevant’. Peter Blau and Richard
Schoenherr concluded that size is the most important condition affecting
the structure of organizations. Size determines structure. Size provides a
greater opportunity to utilize the economies of specialization. As an
organization grows in size, there is a tendency to assign more and more
persons to specialized services. The numbers of subunits increases, more
levels are created in the hierarchy, impersonal rules, procedures and
control increase formalization and the organization will become more
and more structured. The Aston Group also found (46 organizations
studied) that increased size promotes greater specialization and
formalization.
The effects of size do not seem to be all-pervasive. In the words of
Jackson and Morgan, ‘Taken as a whole, size may be the most important
contextual variable in predicting some dimensions of structure, but it is
difficult to conclude that it dictates all of an organization’s structure.’
Hall and his associates studied seventy-five highly diverse organizations
and concluded that all aspects of structure cannot be predicted from
size. It is not easy to assimilate the bundle of information and establish a
clear-cut relationship between the size and structure of an organization.
Research evidence, however, indicates that size has a significant influence
on vertical differentiation.

Technology and Structure

Technology is an important variable in the design of organization structure.
To achieve satisfactory performance, managers must create an
organization design with the proper mix of technology, structure and
human behavior. Technology, in simple terms, is the organization’s
transformation process. It is the combination of skills, equipment and
relevant technical knowledge needed to bring about desired transformation
in materials, information and people. Technology looks at how the inputs
are transformed into outputs. Broadly speaking, it is the application of
knowledge to actual performance.
3.10 COMPONENTS OF ORGANIZATION STRUCTURE

Within the framework of the formal organization, there are three basic
organizational relationships, namely, (i) responsibility (ii) authority, and
(iii) accountability. These relationships are designated as formal because
they are predetermined by the management as a way of relating and
combining the diverse functions of the enterprise. This section aims at
providing an insight into these relationships.
3.10.1 RESPONSIBILITY
“By responsibility we mean the work or duties assigned to a person by
virtue of his position in the organization. It refers to the mental and physical
activities, which must be performed to carry out a task or duty. That
means every person who performs any kind of mental or physical effort
as an assigned task has responsibility.”’ In order to enable the subordinate
to perform his responsibility well, the superior must clearly tell the former
as to what is expected of him. In other words, the delegant must determine
clearly the task or duty that is assigned to the delegate. The duty must be
expressed either in terms of functions or of objectives. If a subordinate
is asked to control the operations of a machine, the duty is in terms of
function. But if he is asked to produce a particular number of pieces of a
product, the duty is in terms of target or objective. Determination of
duties in terms of objectives will enable the subordinate to know by
what standards his performance will be evaluated.
3.10.2 AUTHORITY
Authority is a derivative of responsibility. It is the right to order or
command and is delegated from the superior to the subordinate to
discharge his responsibilities. Right to procure or use raw materials, to

spend money or ask for the allotment of money, to hire or fire people,
etc. has to be delegated to the individuals to whom the work has been
assigned. For instance, if the chief executive of a plant assigns the
production manager with the production of particular types of goods
and services, he should also grant him the authority to use raw materials,
money and machinery, hire workers and so on to fulfill the production
schedules prescribed as his duty.
A superior delegating the authority should also determine what types of
authority are to be delegated. Authority should not be confused with
unlimited authority. The amount of authority delegated should be
commensurate with the responsibilities or duties assigned. In other words,
there must be a balance between responsibility and authority. However,
in practice, the powers or rights necessary to perform a given
responsibility may vary from one situation to another.
3.10.3 ACCOUNTABILITY
Accountability is the obligation to carry out responsibility and exercise
authority in terms of performance standards established by the superior.
Creation of accountability is the process of justifying the granting of
authority to a subordinate for the accomplishment of a particular task. In
order to make this process effective, the standards of performance should
be determined before assigning a task and should be accepted by the
subordinate. An important principle of management governing this basic
relationship is that of single accountability. An individual should be
answerable to only one immediate superior and no more.
Power
The term ‘power’ may be defined as the ability to exert influence. If a
person has power, it means that he is able to change the behavior or
attitudes of other individuals. “In-one’s role as a supervisor, a manager’s
power may be seen as the ability to cause subordinates to do what the
manager wishes him to do. A manager’s power may be measured in
terms of the ability to
(1) Give rewards,
(2) Promise rewards,
(3) Threaten to withdraw current rewards,
(4) Withdraw current rewards,

(5) Threaten punishment, and
(6) Punish.
The term ‘authority’, on the other hand, denotes the right of a manager
to decide and command. For example, a manager has a right to assign
tasks to subordinates and expect and require satisfactory performance
from them. But the manager may not have the means (or power) available
to enforce this right. Thus, whether a manager can enforce his rights is a
question of power. Similarly, there may be a situation where a person
has a power to do something, but lacks authority to do it. Such situations
may cause conflicts in organizations. Therefore, for organizational
stability, power and right to do things should be equated. “When power
and authority for a given person or position are roughly equated, we
have a condition we may call legitimate power.”
Distinction between authority and power

The terms ‘authority’ and ‘power’ are generally used inter-changeably
in practice, but there is a clear-cut distinction between the two. Whereas
authority is the right to command; power is the ability to exercise
influence. Authority usually resides in the position in the organization,
but the person exercises power. Authority includes the rights to command,
which have been institutionalized. Thus, authority is always positional
and legitimate and is conferred on the position. But power is not
institutional, rather it is personal. It is acquired by people in various ways
and exercised upon others. It is acquired through political means or by
having certain personal attributes.
Authority increases as one goes up the organizational hierarchy. But ii
need not necessarily be accompanied by more power. In actual practice,
the power centers may be located at the lower levels in the organization.
Thus, one cannot get any idea of power centers in an organization by
merely looking at its organization chart.
The formal structure of an organization merely shows its authority
relationships. It is in practice modified by power politics in the
organization, some individuals may have more power and less authority
or more authority and less power. It is the operating mechanism of the
organization, which is relevant for studying organizational behavior.
Authority is a downward flowing concept whereas power flows in all

directions. Authority can be delegated to the lower levels in the
organization. The lower we go down the hierarchy, the lesser is the
authority. But it is not so in case of power which has been defined as the
ability or capacity to influence the behavior of others. If a worker
succeeds to influence the behavior of a departmental manager, it is implied
that the worker has exercised power over the departmental manager.
Similarly, the departmental manager may be able to influence the behavior
of his superior, peers and subordinates. Thus power flows in all
directions.
Sources of power
John French and Bertram Raven have identified five sources or bases of
power which may occur at all levels of the organization. These are
discussed below :
(i) Reward Power. It is based on the influencer having the ability to
reward the influencee for carrying out orders.
(ii) Coercive Power. It is based on the influencer’s ability to punish the
influencee for not carrying out orders or for not meeting requirements.
(iii) Legitimate Power. It corresponds to the term ‘authority’. It exists
when an influencee acknowledges that the influencer is lawfully
entitled to exert influence. It is also implied that the influencee has
an obligation to accept this power.
(iv) Expert Power. It is based on the perception or belief that the
influencer has some expertise or special knowledge that the influecee
does not have. For example, a doctor has expert power on his
patients.
(v) Referent Power. It is based on the influencee’s desire to identify
with or imitate the influencer. For example, a manager will have
referent power over the subordinates if they are motivated to emulate
his work habits.
. These are potential sources of power only. Possession of some or
all of them does not guarantee the ability to influence particular
individuals in specific ways. The role of the influencee in accepting
or rejecting the attempted influence is very important. It may also
be noted that, normally, each of the five power bases is potentially
inherent in a manager’s position.
Sources of authority
Management scholars are divided on whether authority originates at the
top and flows down in traditional fashion or whether it originates at the
bottom as a kind of consent of the subordinates. We can classify the
views of various management writers under the three headings, namely,
formal authority theory, acceptance theory and competence theory.
These viewpoints are discussed below:
(i) Formal Authority Theory: According to this theory, ‘authority’ is
viewed as originating at the top of an organization hierarchy and
flowing downward through the process of delegation. The ultimate
authority in a company lies with the shareholders who are its owners.
The shareholders entrust the management of the company to the
Board of Directors and delegate to it most of their authority. The
Board of Directors delegates authority to the Chief Executive and
the Chief Executive in turn to the departmental heads and so on.
Every manager in the organization has some authority because of his
organizational position. That is why, the authority is known as formal
authority. Subordinates accept the authority of a superior because
of his formal position in the organization. A manager in the organization
has only that much of authority which is delegated to him by his
superior.
The shareholders of a company have authority over the company
because of the institution of private property in the society. Various
social factors, laws, political and ethical considerations, and economic
factors put certain limits on their authority and the organization has
to function within these limits. In fact, the basic sources of authority
can rest in the social institutions themselves. In a society, where
private property does not exist as in the case of socialist economies,
the origin of authority can be traced to the elements of basic group
behavior.
The concept of authority as being a right transmitted from the public
through social institutions to business managers is the central theme
of the formal authority theory.
(ii) Acceptance Theory. According to this theory, the authority is the
power which is accepted by others. Formal authority has no
significance unless the subordinates accept it. The degree of effective
authority assessed by a manager is measured by the willingness of

the subordinates who accept it. “An individual will accept an exercise
of authority if the advantages accruing to him from accepting plus
the disadvantages accruing to him from not exceed the advantages
accruing to him from not accepting plus the disadvantages accruing
to him from accepting; and conversely, he will not accept an exercise
of authority if the latter factors exceed the former.” Thus, the
acceptability of an order will depend upon relative consequences,
both positive and negative. Many orders may be fully acceptable,
many fully unacceptable, and others only partially acceptable.
Barnard maintains that a subordinate will accept a order if he
understands it well, if he believes it is consistent with the organization
objectives and compatible with his own interest.
The acceptance theory of authority has certain limitations. According
to it, a manager has authority if he gets obedience from the
subordinates. But a manager is not able to know whether his
subordinates will obey his order unless the order is carried out or
disobeyed by them.
(iii) Competence Theory. According to this theory, an individual derives
authority because of his personal competence. Urwick identified
formal authority as being conferred by organization, technical
authority as being implicit in a special knowledge or skill, personal
authority as being conferred by seniority or popularity. Thus, a person
may get his order or advice accepted not because he is having any
formal authority, but because of his personal qualities. These qualities
may be technical competence and social prestige in the organization.
For example, a person is expert in a particular field and other people
go to him for guidance and follow his advice as if that were an order.
Limits of authority
The authority of an organization is not absolute. It is subject to various
economic, social, political and other factors. Similarly, the authority of a
manager is restricted by various factors, such as:
(i) Physical limitations. Physical laws, climate, geographical factors,
etc. restrict managerial authority to a great extent. Thus, an order to
make silver from aluminum would be meaningless.
(ii) Economic constraints. The authority of an executive is restricted

by economic constraints. The chief executive would not like to ask
his sales personnel to sell products at a high price in a highly
competitive market or to ask the purchase department to procure
raw materials for use in the next twelve months when capital and
storage space are not available for this purpose.
(iii) Social constraints. The use of managerial authority is also subject
to many social limitations. Thus, the task assigned to employees must
conform to the group’s fundamental social beliefs, habits and codes
of ethics.
(iv) Legal constraints. Various acts of the Central and Slate
Governments also impose restrictions on the exercise of authority
by a manager. For instance, a manager can’t ask the workers not to
form or join a union.
(v) Biological limitations. A manager cannot command a subordinate
to do something, which he is, not capable of doing. For example, a
manager cannot ask a subordinate to climb the side-wall of a building.
(vi) Internal constraints. A manager’s authority is limited by the
objectives and policies laid down by the top management of the
organization. He can’t go against the internal policies and rules of
the organization.
3.11 DELEGATION OF AUTHORITY

Delegation is the essence of good organization. It is an important process
to manage the affairs of an enterprise satisfactorily. Delegation of authority
means conferring authority to another to accomplish a particular
assignment. That means a manager can get things done through others
by sharing authority with them. Delegation stands for calling others to
render help in accomplishing a job.
3.11.1 DEFINITION
Delegation means devolution of authority on subordinates to make them
perform the assigned duties or tasks. It is that part of the process of
organization by which managers make it possible for others to share the
work of accomplishing organizational objectives. Delegation consists of
granting authority or the right to decision-making in certain defined areas
and charging the subordinate with responsibility for carrying through the
assigned task.
Delegation refers to the assignment of work to others and confer them
the requisite authority to accomplish the job assigned. It enables the
managers to distribute their load of work to others and concentrate on
more important functions, which they can perform better because of their
position in the organization. Allen has rightly said, “Delegation is the
dynamics of management; it is the process a manager follows in dividing
the work assigned to him so that he performs that part which only he,
because of his unique organizational placement, can perform effectively
and so that he can get others to help him with what remains”. Thus,
delegation is the ability of a manager to share his burden with others,
how can he best share his burden? First, he must entrust to others the
performance of a part of the work he would otherwise have to do himself,
secondly, he must provide a means of checking up on the work that is
done for him to ensure that it is done as he wishes.
So far we have talked about downward delegation, i.e., delegation from
superior to subordinate. Delegation may also be upward or sideways. A
federating government may delegate its power to make laws to the federal
government. This is called upward delegation. Sideways delegation is
generally found in religious organizations or trusts which may delegate
authority other religious organizations or trusts.
3.11.2 SIGNIFICANCE OF DELEGATION

Delegation of authority is the key to organization. An executive confers
authority on the subordinates to accomplish specific tasks which he may
not be able to do alone. That means a manager can get things done
through others by sharing authority with them. A manager has to resort
to delegation because in a big enterprise it is not possible for one person
to exercise all the authority for taking decisions. Moreover, there is a
limit to the number of persons which a manager can effectively supervise
and for whom he can take decisions. Once this limit is exceeded, authority
must be delegated to the subordinates who will make decisions within
the area of their assigned duties.
Delegation of authority is widely recognized as one of the best methods
of getting better results through the subordinates. It is a must for better
management. Once a man’s job grows beyond his personal capacity, his
success lies in his ability to multiply himself through other people. How
well he delegates determines how well he can manage. Andrew Carnagie,
a leading industrialist of America remarked, “When a man realizes he
can call others in to help him to do the job better than he can do it alone,
he has taken a big step in his life.”
Delegation lightens the burden of the executive by relieving him of the
botheration of taking routine decisions which others can also take
efficiently. This will help him in concentrating on vital aspects of
management. Delegation will enable quick decisions relating to various
matters because the authority of decision-making has been shared with
others. Granting of authority to subordinates motivates them to perform
their duties well. If they are not given adequate authority, they will be
reluctant to accept the assignments as they will be required to approach
the boss every time whenever a need arises to take a decision.
Delegation helps in maintaining healthy relationship between the executive
and his subordinates by clearly defining the authority and responsibility
of the subordinates. According to Douglas C. Basil, “Delegation can be
one of management’s best techniques for satisfying needs and for
motivating subordinates to better performance. In terms of technical aspect
of business, delegation, through task assignment, can achieve faster
decisions and eliminate cumbersome information system. In terms of
behavioral aspects, delegation can satisfy man’s demands for
responsibility, recognition and the opportunity to exercise authority.”
Delegation of authority is an art of higher order. Every manager should
be proficient in this art. Louis A. Allen has rightly remarked,” How well
one delegate determines how well one manages.” Delegation of authority
facilitates the job of managing by offering the following advantages:
(i) Delegation lightens the burden of key executives in tackling routine
matters and enables them to concentrate on vital aspects of
management.
(ii) Delegation enables taking of quick decisions at all levels within the
policy framework provided by the top1evel management.
(iii) Delegation of authority is an important tool to motivate the
subordinates to contribute their best for the achievement of enterprise
objectives.

(iv) Delegation helps in maintaining healthy relationship between the

managers and their subordinates by clearly laying down their authority
and responsibility.
(v) Delegation helps in developing managerial personnel for the future.
(vi) Delegation improves work performance because responsibility is
given to the subordinates on the basis of specialization.
3.11.3 What can be delegated?

Authority is delegated when a superior grants some organization discretion
to a subordinate. Superiors can neither delegate authority they do not
have and nor they can delegate all their authority without, in effect, passing
on their position to their subordinates. The authority of a top executive
can be divided into three broad categories:
(i) Authority, which must be delegated such as authority to take routine
decisions for the accomplishment of tasks
(ii) Authority which can be delegated such as implementation of policies;
and
(iii) Authority, which cannot be delegated at all such as authority to take
policy decisions.
A manager must delegate the authority to do the routine work, which
does not involve any policy decision. A part of work in every management
position consists of activities, which are subsidiary to primary task of the
position itself. The power to perform subsidiary activities must be
delegated to others so that, they may do the subsidiary activities well.
For instance, the sales manager of a concern is responsible for selling its
products. In order to sell the products, the sales manager has to perform
many functions like market research, employment of sales-force, training
of sales-force, development of means of sale promotion and so on. The
sales manager cannot perform all these functions in a better way himself.
So he can entrust certain operations to his subordinates and give them
authority to perform them.
There are certain other activities, which a manager can entrust to his
subordinates, provided the manager has the necessary skill to delegate
and the subordinates have been educated to accept these assignments.
These activities relate to execution of policies. The manager can keep
the control mechanism in his hands and let others execute the policy
decisions. However, he cannot delegate the authority to take policy
decisions, develop plans and establish appropriate organization for the
execution of plans. These are managerial functions of higher order on
which the manager must concentrate, himself. Similarly, control function
is also to be performed by the manager himself. A manager who delegates
his authority to others must keep the authority to control their activities
with himself. He should evaluate the functioning of various individuals
himself and take necessary action wherever necessary.
3.11.4 ELEMENTS OF DELEGATION OF AUTHORITY

The process of delegation involves three essential elements or aspects:
(i) Entrustment of responsibility (duties or work) to another for
performance;
(ii) Granting of authority to make use of resources, take necessary
decisions and so on for carrying out the responsibility; and
(iii) Creation of an obligation or accountability on the part of the person
accepting the delegation to perform in terms of the standards
established.
If an executive wants others to help him, he must first divide his work
and determine what portion of work can be assigned to others. If he
requires the subordinate to do the work as he would have done it himself,
he must entrust him with sufficient authority which otherwise would have
been exercised by him to do that work. That means if the subordinate
needs to spend money, engage people, and use materials or equipment,
the superior must permit him to do so. Merely assignment of work or
duty and granting of authority are not sufficient, the manager must have
some means of checking up to make sure that the work is done in the
way he wants. He must create an obligation on the part of person accepting
the responsibility to perform the work assigned to him in terms of certain
standards of performance.
Different authors have used different terms to explain the process of
delegation. We have used the terms responsibility, authority and
accountability. These terms have also been used by Louis A. Allen who
says that the terms must be clearly distinguished for proper understanding
of the process of delegation. It is important to point out that these three
elements are inseparable parts of the process of delegation. A brief

explanation of the components of delegation is given below:
(i) Entrustment of Responsibility or Duty
Responsibility means the work or duties assigned to a person by
virtue of his position in the organization. In order to enable the
subordinate to perform his responsibility well, the superior must
clearly tell the former as to what is expected of him. In other words,
the superior must determine clearly the task or duty to be assigned
to the subordinate. The duty must be expressed either in terms of
functions or in terms of objectives. If a subordinate is asked to control
the operations of a machine, the duty is in terms of function. But if he
is asked to produce a number of pieces of a product, the duty is in
terms of target or objectives. Determination of duties in terms of
objectives will enable the subordinate to know by what standards
his performance will be evaluated.
(ii) Granting of Authority
Authority is the right or power granted to an individual to make
possible the performance of work assigned. Power to produce or
use raw materials, spend money, or ask for allotment of money, to
hire and fire people, etc. has to be delegated to individuals to whom
the work is assigned. For instance, if the General Manager of a plant
assigns to the Production Manager the production of particular goods
and services, he will also grant him the authority to use materials,
money, and machinery, hire workers and so on to fulfill the production
schedule prescribed as his duty.
(iii) Creation of Obligation or Accountability
According to Louis A. Allen,” Accountability is the obligation to
carry out responsibility and exercise authority in terms of performance
standards established.” It means holding an individual answerable
for final results. The subordinate is held accountable to the superior.
Accountability originates because the manager has a right to require
an accounting for the authority delegated and task assigned to a
subordinate. The process of delegation of authority is incomplete
unless accountability is created.
The term ‘accountability’ should not be confused with ‘responsibility’.
Responsibility denotes the work to be done; it can be assigned to

the subordinates. A subordinate will perform his responsibility well if
he is given sufficient authority along with it. When the subordinate
accepts the authority he commits himself to account for the use of
authority. Thus, accountability is the obligation for the performance
of work assigned and authority delegated.
Authority can be delegated but accountability (responsibility to
account for results) cannot be delegated. When a senior executive
assigns some duties to a junior executive, he has to delegate
corresponding authority also. The junior executive may, in turn, take
the help of a foreman working under him in performing the work
assigned. But the junior executive will continue to be accountable
for performance to the senior executive. For example, if the worker
does not do the job properly, it is the junior executive who is
responsible to the senior executive. Thus, accountability can’t be
delegated, it always moves upward. In simple words, an executive
cannot escape the responsibility (or answerability) for the
performance of tasks assigned to him by delegating authority to his
subordinates. However, he can take action against the subordinate
for his carelessness or negligence in doing the job.
Accountability moves upward because a person who is delegated
the authority is always accountable to the person who delegated him
the authority. However, as is obvious from the mechanism of the
delegation process, responsibility and authority move downward.
What is the Extent of Accountability? The extent of accountability
depends upon the extent of delegation of authority and responsibility.
A person cannot be held answerable for the acts not assigned to him
by his superior. For instance, if the production manager is given
responsibility and authority to produce a specified quantity and quality
of certain product and the personnel department is given
responsibility and authority for the development of workforce, the
production manager cannot be held accountable for the development
of workforce, “Accountability is, by the act which creates it, of the
same quality and weight as the accompanying responsibility and
authority”.
3.11.5. PRINCIPLES OF DELEGATION

The following principles are guides to successful delegation. Unless
carefully recognized in practice, delegation may be ineffective, organization
may fail and the managerial process may be seriously impeded.
1. Assignment of Duties in terms of Results. Delegation by results
expected implies that goals or objectives have being set and plans
made and are understood and accepted by the subordinates and
that jobs have been designed to fit in with them. The subordinates
must understand clearly what activities they must undertake and what
results they must show. This will enable them to know by what
standards their performance will be judged and will direct their efforts
for the achievement of those results.
2. Functional Definitions. According to Koontz and O’Donnell, the
more a position or a department has clear definitions of results
expected, activities to be undertaken, organization authority
delegated, and authority and informational relationship with other
positions understood, the more adequately the individuals responsible
can contribute toward accomplishing enterprise objective. To do
otherwise is to risk confusion as to what is expected of whom. This
principle although simple in concept, is often difficult to apply. To
define a job and delegate authority to do it requires, in most cases,
patience, intelligence and clarity of objectives and plans. It is
obviously difficult to define a job if the superior does not know what
results are desired.
3. Parity of Authority and Responsibility. Authority and responsibility
should bear logical relation to each other. So much authority should
be granted which is sufficient to fulfill the responsibility. This parity is
not mathematical, but rather coextensive, because both relate to the
same assignment. Authority can never be delegated equal to
responsibility as both are different things. Responsibility is the work
assigned to a position and is related to objectives, whereas authority
is related to the rights given to perform the work assigned. There is
no common denominator for measuring equality between these.
However, authority should be delegated commensurate with
responsibility. For instance, if a manager tries to hold subordinates
accountable for duties for which they do not have the requisite
authority, it will be unfair. It is also not proper if the subordinates are given
sufficient authority, but are not held accountable for its proper use.
4. Clarification of Limits of Authority. Limits of authority must be
clarified to the subordinates so that they may not assume excessive
authority than desired. Clear limits of authority will allow subordi
nates to exercise initiative, develop themselves through freedom of
action and to know their area of operation. This will also avoid misuse
of authority.
5. Absoluteness of Accountability. Accountability, being an
obligation owed, cannot be delegated. No superior can escape
accountability for the activities of his subordinates, as it is the superior
who has delegated authority and assigned duties. The superior cannot
pass on his obligation to account for to his superior to the
subordinates along with hit authority. Likewise, the accountability of
the subordinates to their superior for the performance of assigned
tasks is absolute.
6. Unity of Command. This principle states that accountability is
unitary. Each person should be accountable only to one superior for
delegated authority, as he cannot serve two masters well. If a person
report to two superiors for the same duty, confusion and friction will
result. He will find himself frequently receiving conflicting instructions.
When this is the case, his only hope is to get either his two bosses or
to run the risk of displeasing either or both. Therefore, as far as
possible, dual subordination should be avoided.
3.11.6. TYPES OF DELEGATION

Delegation of authority may be specific or general, written or unwritten,
precise or vague. In general delegation, the superior tells his subordinate
to do whatever the latter feels necessary. This is a case of unclear
delegation under which the subordinate does not fully understand the
nature of duties and limits of authority. Actually, the usefulness of
delegation will be lost in such cases. There will be overlapping of activities
and misunderstanding among the people. On the other hand, if delegation
is specific i.e., precise and clear, there will be no need for the subordinates
to wonder how far their authority goes and to experiment by hit or miss.
It will also help the boss to hold the subordinates accountable. Therefore,
it is advisable that delegations of authority should be precise and clear

and it would be better if they were in writing.
Some people suggest that especially in the upper levels of management
if the authority delegations are specific and written, they will bring rigidity
in the organization. Sometimes, particularly for new jobs at the top,
delegation cannot be very specific, at least at the outset. But this situation
can remedied with the passage of time. If the delegations are not specific,
it could lead to organizational frictions, unnecessary meetings and
negotiations and overlapping of activities. Therefore, delegations should
be specific as far as possible. The fear that specific delegations will result
in inflexibility can be best met by developing a tradition of flexibility in
the organization.
Shared and Splintered Authority

Authority is shared when it is delegated to two or more persons together.
These persons are responsible for making decisions without following
the chain of command. For instance, the chief executive of a company
may delegate his authority to production manager, marketing manager,
and finance manager for diversification of company’s products. In such
a case, three persons who will take the decisions jointly for diversification
of company’s products share the authority.
Splintered authority exists wherever a problem cannot be solved without
pooling the authority delegations of two or more persons. For instance,
if the in-charge of Plant A thinks that costs can be reduced through minor
modifications in procedures in Plant B, he cannot bring about this change.
He will have to contact the in charge of Plant B for taking any decision;
the change will take place if they pool their authority. Individually, their
authority is said to be “splintered”. It should also be noted that their
boss could also take the same decision. Such practice should not be
encouraged, as the superior will be over burdened. The managers in
charge of both the plants who have splintered authority can meet and
pools their authority delegated and can quickly take the decision jointly.
3.11.7. WEAKNESS OF DELEGATION IN PRACTICE

Though delegation appears to be a simple process, many difficulties come
in the way of effective delegation. Either one or more of the followings
may cause these difficulties:
(a) Superior;
(b) Subordinate; and
(c) Organization.
3.11.7. 1. Difficulties on the Part of Superior

Managerial failure in delegation arises because of the absence of one or
more of the following factors:
(i) Receptiveness. The manager must be willing to give other people’s
ideas a chance. But when a manager feels that he can do the job
better himself, he will be reluctant to delegate authority “I can do it
better myself” fallacy obstructs delegation of authority.
(ii) Ability to direct. Lack of ability of a manager to correctly plan and
issue suitable directions in guiding the subordinates, though he is
willing to delegate, creates hurdles in effective delegation.
(iii) Willingness to let go. The manager who wishes to delegate
effectively must be willing to release the right to make decisions to
the subordinates. The desire of dominance over the work of
subordinates at each step hampers the process of delegation.
Moreover, a manager may be afraid that if he lets the subordinate
make decisions, he may outshine him.
(iv) Willingness to trust subordinates and let them make mistakes.
Delegation implies a trustful attitude between the superior and the
subordinate. Lack of confidence in the capacity, ability and
dependability of the subordinates obstructs the superior to delegate
authority. The superior may distrust the subordinates because of
inability of the subordinates or because he does not wish to let go,
does not delegate wisely or does not know how to set up controls
to assure proper use of authority. Since a manager lacks confidence
in the subordinate he will not delegate authority to give them any
chance to make mistakes and learn how to take correct decisions.
(v) Establishment of controls. While delegating authority, the superior
must find means of assuring himself that the authority is being used
to accomplish the given assignments. Where the manager does not
set up adequate controls or has no means of knowing the proper
use a authority, he may hesitate to delegate the authority.
3.11.7. 2. Difficulties on the Part of Subordinate
Delegation of authority may fail because the subordinates want to avoid

shouldering responsibilities even though there is no fault on the part of
the superior. The subordinates may be reluctant to accept authority
because of following reasons:
(i) Lack of self-confidence.
(ii) Desire to play safe by depending on the boss for all decisions.
(iii) Fear of committing mistakes and being criticized by the boss.
(iv) Lack of incentives. Overburdening with duties.
(v) Inadequacy of authority, information and working facilities for

performing the duties.
3.11.7. 3. Difficulties on the Part of Organization
The faults contributing to the weakness of delegation in practice may lie

with the organization. They may include the following:
(i) Defective organization structure and non-clarity of authority

responsibility relationships. (ii) Inadequate planning. (iii) Splintered
authority. (iv) Infringement of the principle of unity of command. (v) Lack
of effective control mechanism.
3.11.8. GUIDELINES FOR EFFECTIVE DELEGATION

We have discussed above the causes of weakness of delegation in
practice. If these causes are remedied, delegation will become effective.
Thus, in order to achieve better delegation, consideration should be given
to the following guidelines:
1. Assignments should be clearly defined in terms of goals or results
expected the subordinate should be given the adequate authority to
do the work assigned. The limits of authority should also be well
defined.
2. Selection of persons should be done in the light of the jobs to be
done. Appointments should not be made arbitrarily as it will lead to
‘square pigeons in round holes’ and vice versa. Only proper selection
is not sufficient for better delegation. The persons selected must also
be given necessary training to accept assignments and authority. The

superior must
(a) coach the subordinate;
(b) review his performance on the basis of predetermined standards;
and
(c) counsel him for improvement.
3. Motivation of subordinates through incentives of various kinds for
their excellent performance is also essential for better delegation.
An important incentive for some subordinates is to allow them to
function with a measure of freedom.
4. Lines of communication must be kept open from superior to
subordinate and vice versa for delegation to be meaningful. The
subordinate should feel free to get in touch with the superior as and
when necessary to seek clarification and guidance from the latter.
The boss should also pass on all relevant information to the
subordinate promptly.
5. Proper controls should be established to provide means of
information regarding use of authority. The delegant must set up
standards to measure the performance of the subordinates in the
light of authority granted to the latter. Broad based controls and
frequent reviewing in respect of the use of authority by the
subordinates to perform the duties assigned make delegation of
authority fruitful.
6. Strict adherence to the principles of delegation like parity of authority
and responsibility, unity of command and absoluteness of
accountability is most essential for achieving better delegation.
3.12. CENTRALIZATION OF AUTHORITY

Centralization of authority means concentration of decision-making power
at the top hierarchy of management. Centralization is the systematic and
consistent reservation of authority at central points within the organization.
“Under centralization, all important decisions are taken by the top
executives; operative decisions and actions at lower levels in the
organization are subject to the close supervision of the top executives.
Thus, centralization denotes that most of the decisions are taken not at a
point where work is being done but at a point higher in the organization.
As Fayol put it, “Everything that goes to increase the importance of the
subordinate’s role is decentralization; everything which goes to reduce it
is centralization.”
3.12. 1.What Factors Dictate Centralization?

Centralization represents certain attitude and approach which the
management follows. The major implication of centralization is the
reservation of decision-making power in regard to planning, organizing,
directing, and control at the top level. The other implications will depend
on the philosophy of management for instance, in a company where the
top management is very particular about the use of authority; it will make
all the operations and decisions at lower levels subject to its approval.
The top management of a company may prefer to reserve maximum
authority with itself for the following reasons:
(i) To Facilitate Personal Leadership. Personal leadership is an
important factor for the success of small enterprises. Personal
leadership is also important during the early stages of big enterprises.
In both the cases, the operation is relatively on a small scale and the
top manager can concentrate entire authority with himself. This will
result in quick decisions and enterprising and imaginative action,
which are essential for the success of the business.
(ii) To Promote Uniformity of Action. Where a company wishes all
operative units to do the same things in the same way and at the
same time there must be centralization of appropriate decision making.
Only the top management having central authority to make decisions
can bring uniformity of action by the operating units.
(iii) To Provide for Integration. A certain degree of centralization of
authority is necessary to unite and integrate the total operations of
the enterprise. This is the coordination function of management. If
the management has to perform this function better, it must reserve
some authority with it, yet centralized control is needed to keep all
the parts of the enterprise moving harmoniously towards a common
objective.
(iv) To Handle Emergencies. Centralization of decision - making
essential when the business conditions are uncertain. There are
chances that emergency conditions may develop to endanger the
very existence of a company. Centralization will help in taking rational

decisions from both short as well as long-term perspectives to meet
such uncertainties.
3.12. 2. Decentralization of Authority

Decentralization means dispersal of decision-making power to the low
levels of the organization. McFarland has defined it as a situation in which
ultimate authority to command and ultimate responsibility for results is
localized as far down in the organization as efficient management of the
organization permit. According to Allen, “Decentralization refers to the
systematic effort to delegate to the lowest levels all authority except that
which can only be exercised at central points.” Thus, decentralization
means reservation of some authority (power to plan, organize, direct
and control) at the top level and delegation of authority to make decisions
at points as near as possible to where actions take place.
3.12. 3. What factors bring about decentralization?

The important factors that cause decentralization of authority are as
follows:
Decentralization is facilitated when need is realized to take quick and
appropriate decision on the spot at a level at which it is really required,
with a view to cash on the opportunity present.
When the top management wants to reduce communication,
decentralization is preferred.
(i) The nature of the company’s products or markets may require
decentralization of decision - making to provide special emphasis
on a product line or a market. Technological changes may also create
conditions favorable to decentralization.
(ii) Growth and diversification of activities of the company may make
decentralization necessary to introduce flexibility in operation,
facilitate good direction and to relieve the top executives of the
burden of extra work.
(iii) Physical dispersion of activities of the company may require
decentralization of authority for better results.
3.12. 4. Degree of Decentralization

Some degree of decentralization is usually found in every big enterprise.
Allen has given three criteria to judge the degree of decentralization.
They are:
(i) What kind of authority is delegated?

(ii) How far down in the organization is it delegated?
(iii) How consistently is it delegated?
These three criteria may be applied to know the degree of decentralization
in different areas like appointment of employees, promotion of employees,
acquisition of capital equipment, approval of travel expenses,
procurement of raw materials, etc.
Ernest Dale has given four tests to know the degree of decentralization
in an organization. The degree of decentralization of authority is greater
when:
(i) The number of decisions made lower down the management hierarchy
is greater.
(ii) The more important decisions are made lower down the management
hierarchy. For example, the greater the sum of capital expenditure
that can be approved by the plant manager without consulting any
one else, the greater the degree of decentralization in this field.
(iii) More functions are affected by decisions made at lower levels. Thus,
companies, which permit only operational decisions to be made at
different plants are less decentralized than those which also permit
financial and other decisions at the plant level.
(iv) There is less checking on the decisions taken at the lower levels.
Decentralization is greater when no check at all must be made; less
when superiors have to be informed of the decision after it has been
made; still less if superiors have to be consulted before decision is
made. The fewer the people to be consulted, and the lower they are
on managerial hierarchy, the greater the degree of decentralization.
3.12. 5. Decentralization is Extension of Delegation

Decentralization is not the same thing as delegation. It is something more
than delegation. Delegation means entrustment of responsibility and
authority from one individual to another. But decentralization means
scattering of authority throughout the organization. It is the diffusion of
authority within the entire enterprise. Delegation can take place from
one person to another and be a complete process. But decentralization
is completed only when the fullest possible delegation is made to all or
most of the people. Under delegation, control rests entirely with the
delegant, but under decentralization, the top management may exercise
minimum control and delegate the authority of controlling to the
departmental managers. It should be noted that complete decentralization
may not be possible or desirable but it certainly involves more than one
level in the organization.
3.12. 6. Distinction between Delegation and Decentralization

Decentralization is the result of delegation. It is a management philosophy
whereby the centers of decision-making are dispersed at various levels
in the organization. The points of distinction between delegation and
decentralization are given below:
1. Delegation is a process of devolution of authority whereas
decentralization is the end-result, which is achieved when delegation
of authority is exercised at more than one level.
2. Delegation takes place between a superior and a subordinate and is
a complete process. It may consist of certain tasks alone. But
decentralization involves spreading out the total decision-making
power throughout the organization.
3. In delegation, control rests entirely with the superior but in
decentralization, the top management may exercise control only in a
general manner and delegate the authority for control to the
departmental managers.
4. Delegation is a must for management. Subordinates must be given
sufficient authority to perform their assignments otherwise they will
come to the superior time and again even for minor decisions.
However, decentralization is optional in the sense that the top
management may or may not decide to disperse authority.
3.12. 7. The advantages of decentralization are discussed

hereunder:
(i) Reduction in the Burden of Chief Executive. When there is
centralization of authority in an enterprise, the chief executive alone
has to bear the entire burden of decision-making. This diminishes
the time at his disposal to concentrate on important managerial
functions. Decentralization of authority reduces his burden as he
delegates a major part of his authority to his subordinates and this
will enable him to devote more time on important functions.
(ii) Quick Decisions. Decentralization avoids red-tapism in making

decisions as it places responsibility for decision-making as near as
possible with the place where actions take place. Those closest to
the work situation can make reasonably quick and accurate decisions;
because they are well aware of the realities of the situation.
Decentralization also minimizes the delay in transmitting information
from and to the workplace.
(iii) Diversification of Activities. With the addition of new product
lines, an organization may grow complex and pose a challenge to
the top executives. The challenge can be met effectively by
decentralizing the authority under the overall coordinating purview
of the top management.
(iv) Development of Managerial Personnel. When authority is
decentralized, the subordinates get the opportunity of taking initiative
to develop their talents and to enable them to develop qualities for
managerial positions. They learn how to decide and depend on their
own judgment and how to manage. This will lay down the foundation
for the growth of prospective managerial personnel.
(v) Effective Control and Supervision. The greater the degree of
decentralization, more effective is the span of control. It leads to
effective supervision as managers at the lower levels have complete
authority to make changes in work assignment, to change production
schedules, to recommend promotions and to take disciplinary actions.
(vi) Effective Coordination. Under decentralization, coordinated efforts
are required o nly at t he levels of segment s created by
decentralization. This makes coordination more effective.
(vii) Improvement of Motivation and Morale. Decentralization of
authority fulfils the human needs of power, independence and status.
It gives the local executives an opportunity to take initiative and to
try new ideas. This improves their motivation and heightens their
morale. This will also foster team spirit and group cohesiveness
among the subordinates.
(viii) Miscellaneous Economies. In addition to the above advantages,
decentralization also achieves several internal and external
economies. Internal economies include speedier communication,
better utilization of lower level and middle level executives, greater
incentive to work and greater opportunities for training. These make

it possible for the management to reduce the cost of production and
meet competition effectively.
3.12. 8. Limitations of Decentralization

There are certain disadvantages and limitations of decentralization which
are discussed below:
1. Decentralization increases the administrative expenses because it
requires the employment of trained personnel to accept authority.
The services of such highly paid personnel may not be fully utilized
particularly in small organizations.
2. Decentralization requires the product lines of the concern to be broad
enough to allow creation of autonomous units, which is not possible
in small concerns.
3. Decentralization of authority may create problems in bringing
coordination among the various units.
4. Decentralization may not be possible because of external factors. If
a company is subject to uncertainties, it will not be able to meet
these under decentralization.
5. Decentralization may bring about inconsistencies in the company.
For instance, uniform procedures may not be followed for the same
type of work in various divisions.
From the above discussion, we can say that decentralization requires a
balance of necessary centralization of important managerial functions
and creation of certain facilities. Firstly, managers capable of undertaking
the operations of the autonomous business units must be developed.
Secondly, provision must be made for coordination and communication
between various units. Finally, effective decentralization requires
adequate controls. Unless the top managers have a well established
system for measuring the operating results, it is very difficult to achieve
the benefits of effective decentralization.
3.12. 9. Centralization vs. Decentralization
When a firm establishes divisions or departments, when the departmental

managers are given considerable freedom or autonomy in decision-making
and when there are reasonably effective ways of evaluating the

performance of each division, the firm is considered to be decentralized.
To the extent that an organization does not delegate a large part of
responsibility and authority in decision-making, the organization is
considered to be centralized. Centralization and decentralization are the
opposite ends of the organization continuum. On the one hand,
centralization produces uniformity of policy and action, utilizes the skills
of centralized and specialized staff, and enables closer control over
operating units. And on the other hand, decentralization tends to effect
faster decision-making and action on the spot without consulting higher
levels. Decentralization has the effect of motivating the subordinates since
they get a greater share in management decision-making.
3.12. 10. Balance between Centralization and Decentralization

Centralization and decentralization are the opposite ends of an
organization continuum. In practice, there is neither complete
centralization nor complete decentralization. Both are relative concepts
because every organization structure contains both features in different
degrees. Absolute centralization is not found in practice because it would
mean taking of all decisions by the top management, which may lead to
considerable cost and delay. Absolute decentralization is also not feasible
because in that case entire authority will be delegated to the lower levels
and the top management will be left with no authority at all. Even in a
highly decentralized structure, some authority is reserved at the center.
Unless the top management (central authority) does the work of overall
planning, organization, direction and control and takes the policy decisions
necessary to coordinate the affairs of different units or divisions, the
company will disintegrate.
Many organizations find difficulties in deciding the appropriate mix of
centralization and decentralization, which would be most appropriate
for achieving the organization objectives. Let us take the case of an
organization with a highly centralized organization structure. In this case,
the top management is concerned in detail with the ongoing operations.
This requires a mass of detailed information. A time may come when the
volume of information grows to exceed the capacity of the top
management to handle and use it. This may compel the top management
to think of reducing the degree of centralization and increasing the degree

of decentralization. It may be pointed out that when there is a high degree
of centralization, the operating managers become frustrated, as they can’t
take quick decisions. Moreover, an operative decision made at the top
may not be fully effective.
If the degree of decentralization practiced is quite high, the activities of
various divisions may tend to become uncoordinated and conflicting.
This may impel the organization structure towards recentralisation. But
the management would certainly be interested in finding the ways to
overcome the problem of oscillating between two organization structures.
The important factors which should be considered to determine the
relative degree of centralization and decentralization required are
discussed below:
(i) Size and Complexity of Organization. The larger the size of the
organization, the more authority and responsibility should be
delegated to the subordinates. If the operations of the organization
are not complex, there is higher need of decentralization. On the
other hand, if the firm is relatively small and carries on simple
operations, centralization of authority should be advocated.
(ii) Competence of Personnel. If personnel capable of making intelligent
decisions at the lower levels are available, it is advisable for the firm
to move towards decentralization. If the management personnel are
followers and lack initiative, the firm should follow a highly centralized
structure.
(iii) Effectiveness of Communication System. The existence of an
adequate and effective communication system will favor centralization
of authority because it would be easier to control the operational
units. The advent of computerized management information system
has increased the capacity of managers to take effective decisions.
If the communication system is ineffective, decentralization should
be advocated.
(iv) Dispersion of Organization Units or Plants. If the firm is having
a number of plants, which are located at different places,
decentralization is more beneficial. However, the finance function
should be centrally controlled in order to ensure effective control
over the assets and capital expenditure of the organization.
(v) Degree of Standardization. The great er the degree of

standardization in the organization, the greater is the degree of
centralization. Control becomes easier if uniformity of operations
can be introduced. Only the centralized structure can bring uniformity
of actions at the operative levels.
(vi) Complexities of Situation. The situational factors also influence
the degree of centralization required for the organization. For instance,
when the business conditions are highly uncertain and there is every
chance that some conditions may develop to endanger the very
existence of the organization, centralization should be advocated to
deal with such situations in the future. Centralization will help in taking
rational decisions from both short as well as long-term perspectives
to meet such challenges.
3.13. SPAN OF MANAGEMENT OR SPAN OF CONTROL

The term ‘span of management’ is also known as ‘span of control,’ ‘span
of supervision’ and ‘span of authority’. It represents a numerical limit of
subordinates to be supervised and controlled by a manager. It is an
important principle of sound organization. This principle is based on the
theory of relationships propounded by V.A.Graicunas, a French
management consultant. Graicunas analyzed superior-subordinate
relationships and developed a mathematical formula based on the
geometric increase in complexities of managing as the number of
subordinates’ increases.
3.13. 1. SPAN OF CONTROL

According to the principle of the span of control (also called span of
management/supervision) there is a limit to the number of subordinates
which a manager can effectively supervise. It states that a single executive
should have more people looking towards him for guidance and leadership
than he can reasonably be expected to serve. Because of personal
limitations arising from lack of complete and sufficient knowledge, limited
time, limited finance, a manager has to delegate work to as many
subordinators working in various departments as he can effectively
manage. Thus, the principle of span of management presupposes
departmentation and delegation of authority.
The ideal ratio was considered to be 15 to 25 subordinates for first level
supervision and 5 to 8 subordinates in executive spans.
3.13. 2. IMPACT OF SPAN OF SUPERVISION

The number of persons an executive supervises has an important influence
on the nature of organization structure. If the span is large, it means that
fewer levels are needed in the organization. The structure would tend to
be flat and wide. Presumably the possibility of communication blockages
would be minimized because more people report directly to the top
executive. If the span is small, the structure would be narrow and deep.
There would be more levels in the organization. More people will have
to communicate to the top manager through intervening layers of
executives. The possibility of communication blockages and distortions
would increase.
3.13. 3. WIDE SPAN OF SUPERVISION

When the span of supervision is wider, the number of executives needed
to supervise the workers will be less. This will make the organization
structure wide. Such a structure would be less expensive because of less
overhead costs of supervision. Since the number of levels is less, there
will be better communication between the worker and the management
and better coordination. However, the quality of performance is likely to
deteriorate because one executive cannot effectively supervise a large
number of subordinates. Supervisor will not be able to devote sufficient
time in directing each and every subordinate.
For instance, if there are 256 persons in an organization and all are
reporting to one executive, there will be one level of management. If it is
thought that only four subordinates should directly report to the chief
executive, then the number of management levels will increase to two as
four executives directly report to the top executive and each executive
controls 64 persons as shown in Fig.1
Chief Executive-1
II Level Executives=4
Workers = 256
64W 64W 64W 64W
Fig 1- Flat Structure (Span of control=64)

Chief Executive-1
II Level Executives=4
III Level Executives=16
Tall Structure (Span of control=4workers)
Fig 2-Tall Structure (Span of control=4workers)

This structure is flat as the span of control is very large at the lowest
level and there are only two layers of management. If it is thought that an
executive can manage only 4 subordinates effectively, the number of
managerial levels will increase to four as shown in Fig. 2. This will make
the organization structure look like a tall pyramid.
3.13. 4. NARROW SPAN OF SUPERVISION

The narrow span of supervision will lead to a tall structure and to an
increase in the executive payroll as compared to the flat structure. Another
drawback is that the additional layers of supervisors will complicate
communication from the chief executive down to operative employees
and back up the line. There will also be a problem of effective
coordination of the activities of different persons in the organization
because of more levels of executives. However, the narrow span of
supervision has the benefit of better personal contacts between the
supervisors and the subordinates. It facilitates tight control and close
supervision. Tall organization structure gives sufficient control to an
executive for developing relations with the subordinates.
In recent years, there has been a controversy around the significance of
the concept of span of control. The transformation in the style of decision-
making has had an inevitable bearing on question relating to the number
of people an executive can supervise. Moreover, the use of delegation
and decentralization is highly advocated these days. It is realized that
narrow span of control is an effective means of forcing the executives to
delegate. It is also argued that if an executive has enough number of
subordinates to supervise, there is a point beyond which intimate control
becomes very difficult. But how this point should be determined is the
main question.
3.13. 5. FACTORS DETERMINING SPAN OF SUPERVISION

The span of control varies from individual to individual, time to time and
place to place. The factors which determine the span of control are
discussed below:
1. Ability of the Managers. Individuals differ in various qualities like
leadership, decision-making and communication. The span may be
wider if the manager possesses these skills in greater degree as
compared to others.
2. Time available for Supervision. The span should be narrow at
the higher levels because top managers have less time available for
supervision. They have to devote the major portion of their time to
planning, organizing, directing, and controlling. Each top manager
will delegate the task of supervision to his subordinates who have to
devote comparatively less time on the important functions of
management.
3. Nature of Work. When the spans are narrowed, the levels in the
organization increase. This involves delegation of authority and
responsibility. If the work is of a routine and repetitive nature, it can
easily be delegated to the subordinates.
4. Capacity of Subordinates. If the subordinates are skilled, efficient
and knowledgeable they will require less supervision. In such a case,
the superior may go in for a wider span.
5. Degree of Decentralization. Under decentralization the power to
make decisions is delegated to the lower levels. The span of
management will be narrow in such cases so as to exercise more
and more control.
6. Effectiveness of Communication. An effective system of
communication in the organization favors large number of levels
because there will be no difficulty in transmission of information in
spite of a large number of intervening layers.
7. Control Mechanism. The span of control also depends upon the
control mechanism being followed. Control may be followed either
through personal supervision or through reporting. The former favors
narrow span and the latter favors a wide span.
To sum up, it can be said that an executive should be expected to

supervise a reasonable number of subordinates. What is reasonable
depends on a variety of factors like individual differences in executives,
number and capacity of subordinates, the nature of work, availability of
time, ease of communication, internal checks and controls and degree of
delegation in the organization. If the span of control is narrow, there will
be more organizational levels, which in turn may impede communication.
If the number of levels is reduced and the span of control is widened, the
supervisory load may become too heavy. Sound management requires a
proper balance between supervisory load and organization levels.
3.14. ORGANIZATION CHARTS

A major reason why conflicts occur in organizations is that people do
not understand their assignments and those of their coworkers. No matter
how well conceived an organization structure might be, people must
understand in order to make it work. Understanding is aided to a great
extent by the proper use of organization charts. Every organization
structure can be charted, even a poor one, for a chart merely indicates
how departments are tied together along the principal lines of authority.
Organizational charts range from simple drawings, which merely outline
the structure of major units to very complex drawings, which attempt to
include all minor units as well and which purport to show minor variations
to level of authority, cross - relationships among departments, and
sometimes other features.
3.14. 1. DEFINITION
An organization chart is a diagrammatical form, which shows important
aspects of an organization including the major functions and their
respective relationships. In other words, it is a graphic portrayal of
positions in the enterprise and of the formal lines of communication among
them. It provides a bird’s eye view of the relationships between different
departments or divisions of an enterprise as well as the relationships
between the executives and subordinates at various levels. It enables
each executive and employee to understand his position in the organization
and to know to whom he is accountable. Thus, it is obvious that an
organization chart has the following characteristics:
1. It is a diagrammatical presentation.
2. It shows principal lines of authority in the organization.
3. It shows the interplay of various functions and relationships.

4. It indicates the channels of communication.
The organization chart should not be confused with the organization
structure. An organization chart is merely a type of record showing the
formal organizational relationships which management intends should
prevail. It is primarily a technique of presentation. It presents
diagrammatically the lines of authority and responsibility among different
individuals and positions. It may be either personnel or functional.
Personnel organization chart depicts the relationship between positions
held by different persons. Functional organization chart depicts the
functions or activities of each unit and subunit in the organization.
Master and Supplementary Charts

Master chart shows the whole structure of the enterprise portraying all
positions and relationships. It provides a clear picture of the entire
organization structure. Supplementary charts are used to separately show
department wise structure portraying the positions and relationships within
each department. Such charts are popular in big organizations where it is
difficult to show the necessary details through the master chart.
Advantages of Oganization Chart

Following are the advantages of an organization chart:
(i) It is a tool of administration to tell the employees how their positions
fit into the total organization and how they relate to others.
(ii) It shows at a glance the lines of authority and responsibility. It is a
reliable blueprint of how the positions are arranged. From it, the
individuals can sense the limits of their authority, and can see who
their associates are, to whom they report and from whom they get
instructions.
(iii) It serves as a valuable guide to the new personnel in understanding
the organization and for their training.
(iv) It provides a frame-work of personnel classification and evaluation
systems.
(v) It plays a significant part in organization improvement by pointing
out inconsistencies and deficiencies in certain relationships, when
management sees how its organization structure actually looks, it
may discover some unintended relationships.
Limitations of Organization Chart

While the organization chart is an important tool of management, its mere
existence does not ensure effective organization because of the following
limitations:
(i) Organization chart shows only the formal relationships and fails to
show the informal relations within the organization. In modern
enterprises, informal relationships exert important influence on various
decisions.
(ii) It shows the lines of authority, but is not able to answer the questions
like how much authority can be exercised by a particular executive,
how far he is responsible for his functions and to what extent he is
accountable.
(iii) It shows a static state of affairs and does not represent flexibility,
which usually exists in the structure of a dynamic organization.
(iv) It introduces rigidity in the relationships. Updating is not possible
without disturbing the entire set-up.
(v) Faulty organization chart may cause confusion and misunderstanding
among the organizational members. Moreover, it gives rise to a feeling
of superiority and inferiority, which causes conflicts in the
organization.
(vi) It does not show the relationships, which exist actually in the
organization, but shows only the ‘supposed to’ relationships.
Despite these limitations, an organization chart is a must for all enterprises.
It can serve as a useful tool of management. It is a reliable blueprint of
how positions are related to each other. It shows the employees how
their positions fit into the organization and how they relate to others. It is
a must to create a proper understanding about the organization structure.
3.15. TYPES OF ORGANIZATION CHARTS

There are three types of organization charts, viz., (a) Vertical that is
from top down; (b) Horizontal that is from left to right; and (c) Circular
or concentric. These are briefly discussed below:
(a) Vertical Chart: Most organizations use this type of chart which
presents the different levels of organization in the form of a pyramid
with senior executive at the top of the chart and successive levels of
management depicted vertically below that. Thus, lines of command
proceed from top to bottom in vertical lines as shown in Fig.
Fig -Vertical Chart

(b) Horizontal Chart. Horizontal charts, which read from left to right,
are occasionally used. The pyramid lies horizontally instead of
standing in the vertical position. The line of command proceeds
horizontally, i.e., from left to right showing top level at the left and
each successive level extending to the right as shown in Fig.
However, this chart does not decrease the importance of levels. But it is
feared that some people may make erroneous inferences about differences
in status and importance of various echelons.
(c) Circular Chart. In this chart, top positions are located in the center
of the concentric circle. Positions of successive echelons extend in
all directions outward from the center. Positions of equal status lie at
the same distance from the center on the same concentric circle.
This chart shows the flow of formal authority from the chief executive
in many directions. The main weakness of this chart is that it is often

confusing.
3.16. LINE AND STAFF ORGANIZATION
The question of how to establish the right organization structure confronts

every manager. A small organization may have a simple structure that is
easily understood. It may even be informal and can be subjected to sudden
and frequent changes. By contrast, large and complex organizations
usually have a highly rigid, formalized structure. Determining the most
appropriate organization structure is a difficult job. Three organization
structures namely, line, functional, line and staff are commonly employed.
Each structural pattern has distinct advantages and disadvantages.
Line Organization
The line, or military organization, is the simplest and the oldest form of
organization. Line structures are more common in small-scale units.
Authority flows in a direct line from superiors to subordinates. Each
employee knows who his superior is and who has authority to issue orders.
The one-man one boss principle is strictly applied. Managers have full
authority in their own areas of operation and are responsible for final
results. Similarly, each subordinate is directly responsible for the
performance of assigned duties. If the subordinates fail to carry out
reasonable orders or directives, the superior has the right to take
disciplinary action. Thus, authority flows downward and responsibility
flows upward, throughout the organization. The essential characteristics
of line organization is the flow of authority that is straight and vertical. In
line organization, every superior enjoys line authority. This is often referred
to as direct authority because it is directly associated with the attainment
of the primary objectives of the organization. In other words, line authority
implies the right to give orders and to have decisions implemented. For
example, in a military organization, the General has line authority over
the Colonel, who has line authority over the Major, and so on down the
hierarchy. Figure provides an illustration of a line Chief .

Chief Executive
Sales Production Finance
Foreman A Foreman B Foreman C
Workers Workers Workers

Figure - Line Organisation
Advantages and Disadvantages of Line Organization
Advantages
The advantages of line organization include the following:
(i) Simplicity: A line organization is simple to establish and easy to
explain to employees. It is easy to understand and follow.
(ii) Fixed responsibility: Responsibility is fixed. Each employee knows
who his superior is and who has authority to issue orders. Each
employee knows to whom he is responsible and who is or are, in
turn, responsible to him. This facilitates the fixing of accountability
for non-performance.
(iii) Quick decisions: In a line organization, one executive controls all
the activities affecting one department. He is in complete charge of
all operations in the department. Direct lines of authority eliminate a
considerable amount of bureaucratic buck-passing, thus the line
organization enables a manager to take quick decisions.
(iv) Develops managers: The line manager is responsible for results.
He is charged with getting things done properly. Non-performance
may mean demotion and loss of prestige. To survive and succeed,
he has to accomplish tasks, thus utilizing his potential fully. It can be
concluded then that a line organization encourages and forces
managers to grow.
(v) Flexibility: Each executive has full freedom to make decisions in his
area of command. This enables him to adjust policies and procedures
to the changing needs.
(vi) Economical: A line organization is economical for a small business,
as no specialists are needed, and a limited number of executives are
employed. Quick decisions, better coordination and prompt actions
contribute greatly to organizational success.
Disadvantages
The line organization is not free from limitations. As organizations begin
to grow in size, the line organization becomes unwieldy and unsuitable.
The disadvantages may be catalogued thus:
(i) Lack of specialization: With growth and diversification,
organizational problems multiply in number. Factors like changing
economic conditions, technological innovations, and ever growing
competition turn administration into a funnel where the executives
may find it extremely difficult to process bundles of data and take
appropriate decisions.
(ii) Scarce talent: Capable line executives who can look after such
diverse activities like planning activities, office operations, research
activities, personnel policies, etc., are rarely available. With growth,
the manager’s duties, too, continue to expand. Working under time
and cost constraints, managers may overlook or ignore important
activities and are forced to grapple with trivial issues.
(iii) Arbitrary actions: Line organization is based on the one-man
management principles. The evils are well known. Work may be
divided arbitrarily and assigned to incompetent individuals. Nepotism
and favoritism may prevail in the selection, recruitment, and training
of operatives.
Line and Staff Organization

The line and staff organization combines the good features of both the
line organization and functional organization. The staff specialists provide
advice and support to the line managers in getting the work done. Staff
specialists concentrate on a narrow portion of the firm’s activities.
However, their authority is purely advisory, not functional. Thus, when
the staff organization is superimposed on the line organization, the result

is a line-staff organization. The line organization is paramount and the
staff organization is created to service it. The role of staff is considered a
‘service’ to managers. Two features characterize it: it provides service
to the line and it is devoid of the right to command. The staff man advises,
but his sole authority lies in the authority of ideas. On the other hand,
two important features, the rights to decide and right to direct characterize
line authority. Line elements have a ‘direct responsibility for the
accomplishment of the objective of an enterprise’. They have the ultimate
authority to command, act, decide, approve or disapprove of all the
organizational activities. Both line and staff department managers exercise
line authority over their immediate subordinates. In fact, all managers
exercise line authority over their subordinates.
Advantages of Line and Staff Organization

Important advantages of line and staff organization may be listed thus:
Table - Differences between Line organization, Line and Staff organization
and Functional Organization
Line and Staff

Line organization Functional Organization
Organization
This is suitable for Line and Staff Suitable for large enterprises.
small enterprises, organization is suitable
Suitability where the work is for medium and large
simple and routine in enterprises.
nature.
It is simple to This is also very The relationships are complex.
understand. The complex. Experts and Functional organization is also
organization does not specialists demand high expensive because of division
require the wages. This increases of activities.
Simplicity employment of the cost of
and specialists and administration
Economy experts as staff inevitably.
assistants. The
extra expenditure in
employment
is saved.
The principle of unity The principle of unity of Principle of unity of command
of command is command is not is not followed because
followed because followed because advice employees get instructions
Unity of is sought from from more than one superior.
command authority flows
vertically. specialists.

Lack of Managers are There is specialization There is complete

Specializati responsible for all the and division of labor. specialization and more
on activities of their Experts and specialists importance is attached to
departments. Hence, are appointed to give specialists working at various
specialization in one advice to line executives. levels.
area
is not possible.
Discipline There is strict There is loose discipline There is loose discipline
discipline. It is because because authority and because authority relationships
of well-defined chain responsibilities of are not clearly defined.
of command. position holders are not
clearly defined.
Division of The workload of a The workload of Workload of managers is

work manager increases managers is relatively uneven. This is because some
because he has to less. managers have only line or
perform a wide variety staff authority while others
of functions. have functional authority.
(i) Planned Specialization- As business grows, the pure line

organization may overburden the line managers with complex
problems, and the need for staff assistance would be felt acutely.
The primary advantage of line and staff organization is that it uses
the expertise of specialists, i.e., it brings expert knowledge to bear
upon managerial and operational problems. Line executive can then
plan effectively and be responsible for proper execution while the
staff specializes to assist as and when needed.
(ii) Scientific actions: The actions of a line manager can become more
scientific by means of concentrated and skilful examination of
business problems. Expert advice definitely helps line executives in
arriving at a sound decision.
(iii) Definiteness: In a line-staff organization, authority and responsibility

are fixed. The unity of command principle is honored as each
individual reports to only one superior, while specialized help is
available as and when needed. In addition, accountability is definite.
Only line executives are accountable for the results of their divisions
or departments. Undivided responsibility compels line executives to
enforce discipline strictly. Control and coordination are effective.
(iv) Training ground for developing people: As everyone is expected

to concentrate on one area, one’s training needs can be expressed
easily. Line managers can improve their problem-solving abilities by
observing staff specialists’ work on complex problems. Similarly,
working with line people, staff specialists can try to overcome their
‘parts mentality’ and begin to view problems more rationally and
objectively.
Line and Staff Authority

Classical writers (Taylor, Fayol, Weber) based their explanations of
line authority on simplistic assumptions. It is said that line authority is the
ultimate authority to command, act, decide, approve or disapprove all
the activities. It is quite possible to classify finance or personnel as a
staff function, but it is a serious mistake to assume that either is insignificant.
Statements that line is associated with the final objectives or organization,
or line elements are income-producing components of the organization
create an erroneous impression that staff functions are of secondary
importance and unimportant.
Efforts to classify such functions, like product research and development,
production processes as staff and line, proved useless in the past. The
customer pays for a product whose qualities are determined by design
as well as manufacturing. Designating one function as highly important
contributes to the overall objectives of the organization and relegating
the other as an unimportant level appears to be a superficial exercise.
Who is Staff?
Staff authority is advisory, which means that the staff is a supporting unit
that recommends action or alternative actions to the line manager. Catch
phrases like: “staff have the authority of ideas”, “lines have the authority
of command” “staffs think, lines do”; “staffs advise, lines work” have
gained wide currency over the years. However, staff authority is not
confined to mere advisory roles of recommending activities only.
According to McFarland a staff manager helps, serves, investigates,
plans, solves special problems, supports line efforts, and provides ideas
and special expertise. The above functions are supporting functions;
functions that help in some way the accomplishment of the primary
objectives of the line departments. One distinguishing feature of staff
functions is regarding the right to command, and direct others. Staff

positions are devoid of the right to command, staff work is essentially
an intellectual process consisting of such activities like planning, thinking,
studying, informing, recommending, persuading and suggesting, and so
on. Even the above seemingly sensible explanations fail to answer certain
questions associated with classification of organizational function in a
university, teachers are line. But what about people who are wedded to
research activities? In a hospital, do nurses have line or staff authority?
Experts are not always in agreement on these issues. Such borderline
functions defy clear-cut classification. Many functions are obviously line
or obviously staff (Brech).
Peculiarities of Line and Staff Relationship
The principles enunciated by the traditional theorist have been under

attack for years either because they are too general or too specific for
organizational application. In this section, we will examine peculiarities
of line-staff relationship.
One Center of Authority (Etzioni): It is one of the basic features of

classical organization structures to have one and only one center of
authority. This is often vested in the role of the head (line manager) of
the organization. He is the ultimate authority in the internal structure and
is finally responsible for organizational activity. As such, it is believed
that line people are more committed or loyal to the organizational goals.
Staff experts are more oriented towards their professional reference
and membership groups. They are thought to make a narrower,
occupational view of the firm’s problems.
Peculiar Subordinate Relationship (Dubin): It is the leader who has

the power to make decisions that guides the actions of all including staff
officers. But at the same time there enters into this very decision making
process the contribution of the staff specialist in their area of competence.
The president of a company, for example, may issue orders regarding
the production schedule which becomes binding on the operating
departments but before the schedule is validated by the president and
issued as a directive, the staff specialists in marketing, production,
purchasing, etc., may have influenced the contents in the schedule. The
concept of extending the personality of the line executive by advice,
counsel appears to be the keystone of the staff idea. (Inffiner and
Shertmod)
Staff Obedient to an Impersonal Body of Rules: In all bureaucratic
organizations, authority is delegated to lower levels. The leader has the
maximum authority by virtue of his position in the organization. The leader
may change, retire or die but the office of the leader retains the authority
that goes with it. “Staff obedience to the leader and to the organization is
in terms of impersonal body of rules that establish the governmental
framework of the organization.” (Dubin)
False Assumptions (Carzo): The line and staff structure seems to suffer
from some false assumptions: (a) Staff specialists are able and willing to
operate without formal authority. They would be reasonably content to
function without a measure of formal authority. (b) Their advice,
suggestions and recommendations will be readily accepted and applied
by the line officials. (c) A clear delineation of line responsibilities is possible
and is essential to minimize jurisdictional conflict.
3.17. Committee
Committees exist both in business and non-business organizations. It is
difficult to give a precise definition of the term “ Committee”.
Because there are many different kinds of committees and the concept
of committee varies widely from one organization to another. In many
organizations, committees constitute an important part of the organization
structure. Committees are usually relatively formal bodies with a definite
structure. They have their own organization. To them are entrusted definite
responsibility and authority. A committee may review budgets, formulate
plans for new products or make policy decisions. Or the committee may
only have a power to make recommendations and suggestions to a
designated official.
According to Louis A. Allen, “A committee is a body of persons appointed
or elected to meet on an organised basis for the consideration of matters
brought before it.” A committee is a group of persons performing a group
task with the object of solving certain problems. The area of operation
of a committee is determined by its constitution. A committee may
formulate plans, make policy decisions or review the performance of

certain units. In some cases, it may only have the power to make
recommendations to a designated official. Whatever may be the scope
of their activities, committees have come to be recognized as an important
instrument in modern business as well as non-business organizations.
They help in taking collective decisions, coordinating the affairs of different
departments and meeting communication requirements in the organization.
Generally, committees are constituted to achieve one or more of the
following objectives
(i) to have consultation with various persons to secure their view-points
on different aspects of business.
(ii) to give participation to various groups of people.
(iii) to secure cooperation of different departments.
(iv) to coordinate the functioning of different departments and individuals
by bringing about unity of direction.
Types of Committee
According to the nature of their constitution and functions, committees
can be classified as follows:
(i) Line and Staff Committees. If a committee is vested with the
authority and responsibility to decide and whose decision is
implemented invariably, it is known as a line committee. For example,
board of directors of a company is a line committee of the
representatives of its members, which is authorized to take and
implement, policy decisions. On the other hand, if a committee is
appointed merely to counsel and advise, it is known as a staff
committee. For instance, a committee composed of the heads of
various departments may meet at periodical intervals to counsel the
chief executive.
(ii) Formal and Informal Committees. When a committee is
constituted as a part of the organization structure and has clear-cut
jurisdiction, it is a formal committee. But an informal committee is
formed to advise on certain complicated matters on which the
management does not want to set up formal committee, which is a
costly device. Informal committees do not form part of the
organization structure.
(iii) Standing and Ad hoc Committees. Formal committees, which are

of permanent character, are known as standing committees. Ad hoc
committees are temporary bodies, which may be formal or informal.
An ad hoc committee is appointed to deal with some special problem
and stops functioning after its job are over.
(iv) Executive Committee. It is a committee which has power to
administer the affairs of the business.
(v) Coordinating Committee. Such a committee is generally constituted
to coordinate the functioning of different departments. It consists of
the representatives of different departments who meet periodically
to discuss their common problems.
In addition, a business enterprise may have other committees like (a)
Finance Committee, (b) Planning Committee, (c) Production Committee,
(d) Workers’ Welfare Committee, and so on.
Why are Committees Used?

A committee is used almost invariably to carry out responsibilities, which
cannot be undertaken by a single person. Committees have certain
inherent advantages because people in groups react differently from
people as individuals. The advantages or merits are discussed below:
1. Pooled Knowledge and Experience. A committee is an effective
method of bringing together the collective knowledge and experience
of a number of persons to solve many intricate problems that are
beyond the reach of a single person. In a committee, such members
may be taken who are experts in their fields. This will help in
concentrating knowledge and judgment of experts for the solution
of the intricate problems.
2. Enforces Participation. A committee tends to enforce participation
by different people in the organization. A major source of resistance
to new policies and plans by those who are asked to carry them out
is lack of participation on their part at the planning stage. The
management can give representation to the employees in various
committees. This will motivate the employees for better performance
as they feel that they have a say in the affairs of the organization.
3. Facilitates Coordination. When it is necessary to integrate varying
points of view, which cannot conveniently be coordinated by
individuals, the committee may be used to bring about coordination.

A committee consists of representatives of different departments or
persons who represent different points of view, who will sit around
a table and discuss their common problems. The direct contact
among various individuals will bring about proper understanding and
coordination in the activities of various departments and individuals.
4 Overcoming Resistances. The committee is an important means
of cooling off agitation and temper on the part of affected people.
Establishment of a committee is recognized as a strategy for
overcoming resistance, opposition or pressure from the affected
parties. For purposes of strategy, committees have a wider
application in Government, educational, and other non-business
institutions.
5 Checks against Misuse of Powers. It acts as a check and
safeguard against the abuse and misuse of powers. The Governments
of all nations establish numerous boards and commissions to
circumscribe the executive authority and to hold it in balance. Plural
executives in the form of committees are more common in
non-business organizations than in business organizations.
Limitations of Committees.
Some people consider committee as an organised means of passing the
buck. A committee is created when some top people can’t make up
their minds and they want a committee to do it for them. Though use of
committees brings about certain advantages, they have certain inherent
drawbacks also which are discussed below:
1. Evasion of Decision-making Responsibilities. If a manager has
an opportunity to carry a problem to a committee, he may take it as
a means of avoiding decision-making or to escape the consequences
of an unpopular decision. Thus, managers, who want to avoid the
laborious and difficult process of logical thinking that leads to a sound
decision and to escape responsibility, take resort to committee
device.
2. Slow Decision-making. Committees take more time in procedural
matters before any decision is taken. In some cases, slowness
seriously handicaps the administration of the organization. The delay
in decision-making often reduces the usefulness of the decisions.

The delay is caused by many factors like giving sufficient membership
and lack of preparation, before meeting. That is why committees are
sometimes used by managements to cool off agitation by their
employees, which may create difficulties in the long-run.
3. Costly Device. Committees are an expensive device both in terms
of cost and time. Committee meetings take too much time, which
absorbs the sum total of the salary of its members for that time.
Sometimes, committee members deliberately tend to pass time in
order to show that they have taken pains in reaching the decision.
4. Lack of Definite Decision. When the committee findings represent
a compromise of different viewpoints, they may be found weak and
indecisive. They may cloud the real issues and get extraneous matters
involved in decision making. In case of committee decisions, it is
very difficult to fix responsibility on a particular person. So the
committee member’s are apt to be irresponsible and indifferent.
5. Incompetent Membership. When a committee is formed, it is
implied that the individual members of the committee will exert
pressure on the ideas, suggestions, comments and judgments of other
members, but this may not happen in practice. The chairman or any
strong member of the committee may not force the committee to
come to a foregone conclusion on the basis of his own thinking and
the incompetent members may keep silent. Thus, the decision may
be overshadowed by the force of strong personality.
6. Source of Misunderstanding. The committee meeting may prove
to be a source of misunderstanding instead of providing a forum for
teamwork and settlement of problems. The chairman of the meeting
may not be effective in bringing about reconciliation of ideas of
different individuals. Moreover, committee actions are characterized
by voting and dissenting practices, which may leave behind a legacy
of bitterness, discontent and frustration.
Making Better Use of Committees

Notwithstanding the dangers of committees mentioned above, committees
are used by most organizations because their advantages far outweigh
their disadvantages.
1. Management can make committees a useful agency of administration

rather than a doubtful and much bedeviled administrative gimmick.
For the successful operation of the committees, the management
should keep in mind the following points:
2. Members of the committee should be carefully selected. This is an
important factor for the success of the committee. The members
must be capable of understanding the real issues entrusted to the
committee and taking part in the discussion. As far as practicable,
members of the committee should be of similar organizational rank
if they are expected to discuss and contribute on an equal basis.
The choice of committee members requires a nice judgment as to
personality differences, ability in expression as well as their status.
3. The committee should be of proper size. The group should not be
too large. If it is too large, many of its members will not have adequate
opportunity to express their viewpoints. It may become chaotic if
there are many vocal members. But if the group is too small, it is
difficult to secure a well-rounded viewpoint. The size of committee
should depend on the purpose of forming it and the need to give
representation to different viewpoints.
4. The committee should have a capable chairman. The chairman of
the committee has to conduct the proceedings of the committee
meeting. He should understand his proper role. His job is to
encourage others to express themselves, to settle differences and to
add a touch of humor when the going is tough. He is an arbiter, a
peacemaker and an expediter. He should not be an advocate of one
point of view. His job is to get members of the group to think and
not to think for them.
5. There should be adequate preparation for the committee meeting.
The major cause of not reaching any decision by the committee is
lack of preparation by the committee members and the office. The
office should keep all the details ready for use by the committee.
The chairman should be provided with adequate clerical and staff
assistance so that he can furnish all available factual data for each
member before the meeting takes place. The agenda of the meeting
and the concerned data, reports and notes should be circulated
among the members of the committee well ahead in time so that
they get raw material for discussion in the meeting.
6. There should be adequate follow up. In order to encourage the proper

functioning of committees, the management should take adequate
follow up measures to implement the intent of the committee. Minutes
of the committee meeting should be prepared and distributed to each
member and also to the top management so that it may evaluate the
work done by the committee.
Summary
Formal organization is the intentional structure of roles. Informal
organization is a network of personal and social relations neither
established nor required by formal authority but arising spontaneously.
The term span of management refers to the number of people a manager
can effectively supervise. A wide span of management results in few
organizational levels and a narrow span results in many levels. The
organizing steps are
Formulating objectives to achieve the end,
Identifying and classifying activities,
Grouping these activities,
Delegating authority and
Coordinating authority as well as information relationships.
Organizing involves developing an intentional structure of roles for effective
performance. Many mistakes in organizing can be avoided by first
planning the ideal organization for goal achievement and then making
modifications for the human or other situational factors. An effective
organization remains flexible and adjusts for changes in the environment.

1. Select a company and identify the departmentation pattern used by
the enterprise. Draw an organization chart for the firm. Why do you
think the company selected the type of departmentation it did? Would
do you recommend a different departmentation arrangement? State
your recommendation.
2. Interview a line manager and a staff person at a local company. Ask
them what they like and dislike about their jobs. Reflect on the
interviews, and ask yourself whether a line position or a staff one is
the major aim of your career plan.
3. Interview two line managers about their views on delegation. Do

they think that their superior delegates sufficient authority to them?
Also inquire how they feel about delegating authority to their
subordinates.
4. Visit a company in your area that is considered a model of effective
management. Get any information on this company that gives you
some insight into its operation. What makes this organization
excellent? Would you like to work for this enterprise? Why or why
not?
Review questions.
1. What do you mean by organization?
2. Write the steps in organizing.
3. Describe the types of organization with suitable example.
4. Distinguish authority and responsibility.
5. Illustrate the components of organization structure.
6. Define delegation of authority.
7. Explain the types of delegation in an organization.
8. What are the limitations of decentralization? Differentiate
decentralization with centralization.
9. Define span of control.
10. Define Organization charts.
11. Illustrate the types of organization charts with suitable example.


UNIT - IV
STAFFING
LEARNING OBJECTIVES
After reading this unit you should able to understand
 the managerial function of staffing and what it means to be a manager.
 the management inventory and the factors in the external and internal
environment affecting staffing.
 the policy of open competition and ways to make staffing more
effective.
 the orientation and socialization process for new employees.
 about the sources of recruitment process.
 the selection process in recruitment.
 the training process and methods.
 the concepts of leading and leadership
 about the nature and purpose of directing
 about the communication process and barriers of communication
4.1. AN INTRODUCTION
Staffing is now recognized as a separate management function. Previously,
it was considered to be a part of organization function of management.
The reason for separating the staffing from organizing is to give proper
emphasis to the actual manning of organizational roles. The staffing function
has assumed greater importance these days because of rapid
advancement of technology, increasing size of organizations and complex

behavior of human-beings. The management of an enterprise must give
due importance to human resource planning, recruitment and selection,
training, appraisal and remuneration of workers.
Definition
Staffing is concerned with manning various positions in the organization.
In the words of Koontz, O’Donnell, and Weihrich, “The managerial
function of staffing involves manning the organizational structure through
proper and effective selection, appraisal, and development of personnel
to fill the role designed into the structure”.
Staffing involves the determination of manpower requirements of the
enterprise and providing it with adequate competent people at all levels.
Thus, manpower planning, procurement (i.e., selection and placement),
training and development, appraisal and remuneration of workers are
included in staffing.
The staffing function of management pertains to recruitment, selection,
training, development, appraisal and remuneration of personnel. It is the
duty of every manager to perform these activities. It is the tendency in
modern enterprises to create a separate department known as Personnel
Department to perform the staffing function. But it does not mean that
the line managers do not have the responsibility for staffing. The Personnel
Department is created to provide the necessary help to the managers in
performing the staffing or personnel function.
4.2. NATURE AND SCOPE OF STAFFING FUNCTION

The staffing function has assumed greater significance these days because
of a number of factors. Almost all the big organizations have a separate
personnel department to look after this function. This does not mean
that the managers of other departments are not required to perform the
staffing function. In fact, staffing is also a pervasive function of
management. The chief executive, middle level managers and first line
mangers, all are engaged in performing the staffing function when they
participate in selecting, training, and evaluating their subordinates. The
various reasons, which have increased the significance of staffing function
of management, are discussed below:
(i) Advancement of Technology. Many significant changes are taking

place in technology. In order to make use of the latest technology,
the appointment of right type of persons is necessary. The personnel
can be fitted into new jobs properly only if the management performs
its staffing function satisfactorily.
(ii) Increasing Size of Organizations. Advancement in science and
technology has given rise to large-scale companies employing
thousands of workers. The performance of the company depends
on the quality and character of the people employed. This has
increased the significance of staffing.
(iii) Long-range Needs for Manpower. In some industries, labor
turnover is very high. The management is required to determine the
manpower requirements well in advance. It has also to develop the
existing personnel for future promotion. The role of staffing function
has also increased because of the shortage of really good managerial
talent in the country.
(iv) High Wage Bill. The outlay of big concerns on its personnel is quite
high. Management has to spend money on recruitment and selection,
training, wages and salaries, etc. In order to get the optimum output
from the personnel, it is essential that the staffing function be
performed in an efficient manner. For instance, if the right type of
person is not appointed, the management will have to pay wages
even though the quality of work is very low.
(v) Recognition of Human Relations. The behavior of individuals has
become very complicated. That is why, the human aspect of
organization has become very important. The workers are to be
motivated properly by employing financial and non-financial
incentives. Right type of atmosphere should also be created for the
workers to contribute to the achievement of organizational objectives.
By performing the staffing function, management can show the
significance it attaches to the manpower working in the enterprise.
The managers can also use their knowledge in moulding the behavior
of workers to the maximum advantage of the concern.
In short, the management of human resource is very important in any
modern organization because management can achieve the organizational
objectives only with the cooperation of the people working in the
organization. It does not matter how perfect the planning and organization
and sophisticated machines are. If the people do not want to work, the
management will not be able to accomplish the desired objectives.
Therefore, in order to build a team of cooperative workforce, it is essential
to manage the workforce efficiently.
Since personnel department does so much personnel work, it is often
assumed to be personnel management. While the contributions of this
department may be great, its role must be that of a companion to the line
managers. It should not be assumed that personnel function is the sole
responsibility of personnel department. Personnel management is inherent
in the process of management and, as a consequence, this function is
performed by all the line managers throughout the organization rather
than only by the in charge of personnel department. If a line manager is
to get the best of his people, he must perform this function. He must
undertake the basic responsibility of selecting people who would work
under him and to develop, motivate and integrate them and to build up
their morale. Thus, personnel function is the prime responsibility of every
line manager. The personnel department can do a great deal by assisting
them in discharging this responsibility. “Personnel management is a
responsibility of all those who manage people as well as being a
description of the work of those who are employed as specialists. It is
that part of management which is concerned with people at work and
with their relationships within an enterprise.”
Objectives of Staffing
The general objective of staffing is to contribute towards the
accomplishment of the goals of an enterprise. However, the staffing in
any working organization should have the following specific objectives:
(i) To attain maximum individual development;
(ii) To establish desirable working relationship between employers and
employees and between groups of employees;
(iii) To mould the human resources effectively ;
(iv) To ensure satisfaction of the workers so that they are ready to work;
(v) To provide fair wages, good working conditions and service benefits
to the workers;
(vi) To ensure that every employee makes his maximum contribution to
the success of the enterprise.
Functions of Staffing
Department of Human Resource Management specially looks after various
problems and issues relating to workforce. Normally, the scope of its
activities includes the following functions:
1. Employment. The responsibility for employment consists of
appointing the best possible talents suitable to the requirements of
the enterprise. This function includes various activities like job
analysis, manpower demand analysis, recruitment, selection and
placement. Before appointing the people, manpower requirements
are estimated both in terms of number and quality. After this, different
sources of manpower supply are tapped. The applications of various
applicants are screened and the selected applicants are required to
take certain tests and appear in the final interview. The employment
function is complete when the workers join the organization and are
placed on the right jobs.
2. Training and Development. Training and development of personnel
is a follow up of selection. It is a duty of management to train each
employee and also to develop him for the higher jobs in the
organization. Proper development of personnel is necessary to
increase their skills in doing their jobs and in satisfying their growth
need. For this purpose, the personnel department will devise
appropriate training programmes. There are several on the job and
off the job methods available for training purposes. A good training
programme should include a mixture of both types of methods. It is
important to point out that personnel department arranges for training
not only of new employees but also of old employees to update their
knowledge in the use of latest techniques of production.
3. Compensation. This function is concerned with the determination
of adequate and equitable remuneration of the employees in the
organization for their contribution to the organizational goals. The
personnel can be compensated both in terms of monetary as well as
non-monetary rewards. Factors which must be borne in mind while
fixing the remuneration of personnel are their basic needs,
requirements of jobs, legal provisions regarding minimum wage levels
afforded by competitors, etc. For fixing the wage levels, the personnel
department can make use of certain techniques like job evaluation
and performance evaluation.
4. Integration. This function aims to achieve a reasonable reconciliation

of the interests of the personnel with those of the organization. The
important problem related to integration is communication. The
personnel manager must provide an efficient system of communication
to ensure two-way traffic of personnel programmes and policies
because many a time industrial disputes arise because of poor
communication. The personnel manager should always keep himself
in contact with the trade unions to understand their grievances and
remove the same so that harmony is maintained in the organization.
5. Working Conditions. Mere appointment and training of employees
is not sufficient, they must be provided with good working conditions
so that they may like their work and work-place and maintain their
efficiency. Working conditions certainly influence the motivation and
morale of the employees. These include the measures to be taken
for health and safety of the employees.
6. Welfare Services. The department provides for various welfare
services, which relate to the physical and social well-being of the
employees. They may include provision for cafeterias, rest-rooms,
counseling, group insurance, education of children of employees,
recreational facilities, etc.
7. Personnel Records. The HR department maintains the personal
records of the employees working in the enterprise. It keeps full
records about their training, achievements, transfer, promotion, etc.
It also preserves many other records relating to the behavior of
personnel like absenteeism and labor turnover and the personnel
programme and policies of organization.
8. Industrial Relations. These days, the personnel managers mainly
discharge the responsibility of industrial relations. Personnel managers
help in collective bargaining, joint consultation and settlement of
disputes, if they arise. This is because personnel manager is in
possession of full information relating to personnel and he possesses
the working knowledge of various labor enactments. It is important
to point out that the responsibility of fulfilling the requirements of
various labor laws like Factories Act, Industrial Disputes Act, etc.,
rests with the personnel department. The personnel manager can do
a great deal in maintaining industrial peace in the organization as he
is responsible for setting various committees on discipline, labour

welfare, safety, grievance, etc. He helps in laying down the grievance
procedure to redress the grievances of the employees. He also gives
authentic information to the trade union leaders and tries to convey
to them the personnel policies and programmes of the enterprise.
Significance of Staffing
The Staffing function of management deals with the proper handling of
personnel in the organization. If people working in the organization are
not handled or managed properly, good industrial relations will not
develop in the enterprise, which will jeopardize the survival of the
enterprise. It is not possible to achieve the organizational goals without
active cooperation of the personnel. The significance of personnel
management has increased with the growth of industrial undertakings.
Now it is recognized that personnel management is not only the
responsibility of personnel manager, but also of all managers in the
enterprise.
The various aspects of personnel function are procurement, development,
compensation and motivation of the personnel. Every manager has some
responsibility towards these areas, but now it has been recognized that
these functions cannot be the specialty of every line manager. So it is
very common to create the personnel department under a Personnel
Director or Personnel Manager. Though personnel department does not
produce anything, which is tangible, yet it helps the other departments to
contribute towards organizational objectives.
Personnel function has become a specialized task and so it is entrusted
to the person who is well conversant with the principles of personnel
management. The personnel manager organizes the personnel department
to carry out the functions entrusted to him. Personnel department develops
the sources of recruitment, selects the people and help the line manager
in rectifying placements by devising a suitable transfer policy. Personnel
department keep the record of every person in the organization and
provides important information to departmental heads in taking decisions
about promotion and transfers.
Personnel department is also responsible for training and development
of the employees. It develops various programmes for increasing the
knowledge and skills of the employees in consultation with line managers.

Personnel department also helps the other departments in evaluating the
performance of the employees for future reference by developing a
suitable system of merit rating or performance appraisal. Determining
the wages and salaries to be paid to different categories of employees in
the organization is another important function of the personnel department.
Personnel department looks after the wage and salary administration in
the organization and devises suitable incentives to reward the efficient
workers to motivate them. Personnel department also undertakes
research of human behavior by conducting attitude and morale surveys.
Every manager can utilize those morale surveys to understand the behavior
of his subordinates.
4.3. MANPOWER PLANNING

“Manpower may be regarded as the quantitative and qualitative
measurement of labor force required in an organization and planning in
relation to manpower may be regarded as establishing objectives to
develop human resources in line with broad objectives of the organization”
quote Chhabra, Ahuja and Jain. ‘Manpower planning may be expressed
as a process by which the management ensures the right number of people
and right kind of people, at the right place, at the right time doing the
right things. It is a two phased process by which management can project
the future manpower requirements and develop manpower action-plans
to accommodate the implications of projections. Thus, we can say that,
manpower planning is the process of developing and determining
objectives, policies and programmes that will develop, utilize and
distribute manpower so as to achieve the goals of the organization.
Manpower or Human Resource Planning aims at ascertaining the
manpower needs of the organization both in right number and of right
kind. It further aims at the continuous supply of right kind of personnel
to man various positions in the organization. “Human Resource Planning
is a process of determining and assuring that the organization will have
an adequate number of qualified persons, available at the proper times,
performing jobs which meet the needs of the enterprise and which provide
satisfaction for the individuals involved”.
Significance of Manpower Planning

There is no doubt about the fact that failure in planning for developing
personnel will prove to be a limiting factor in achieving the organization
objectives. If the number of persons in an organization is less than the

number of persons required for carrying out the organizational plans,
there will be disruptions in the flow of work and the pace of production,
will also be low. But if, on the other hand, some persons are surplus in
the organization, they will have to be paid remuneration if they are retained
or compensated if their services are terminated.
A sound personnel policy requires that there should be adequate number
of persons of the right type to attain the organizational objectives. For
this, the manpower planner should be concerned with the timing and
scheduling of planning of personnel and persuading the management to
use the results of manpower planning studies, in the conduct of the
business. Manpower planning can prove to be an important aid to frame
the training and development programmes for the personnel because it
takes into account the effects of anticipated changes in technology, markets
and products on manpower requirements and educational and training
programme requirements.
Manpower planning helps in formulating managerial succession plans as
a part of the replacement planning process. It provides enough opportunity
for identifying and developing managers to move up the corporate ladder.
Man-power planning is not an isolated activity. It is a part of the overall
planning process. Viewed from this angle, manpower planning will help
better management of the organization.
Process of Man Power Planning

The manpower planning process encompasses the following steps
1. Job Analysis.
2. Skill Inventory.
3. Personnel Forecasting.
4. Employment Plan.
5. Training and Development of Personnel.
Manpower planning is a continuous process. The manager responsible
for manpower planning has to be concerned doing some exercise in this
regard every time. He may have to revise employment plan and training
and development programme from time to time depending upon the
changes in circumstances such as sudden changes in the volume of
production, unexpected high rate of labor turnover, obsolescence of
existing skills and so on. A brief explanation of the steps of the manpower
planning process in given below:
1. Job Analysis
Job analysis is the qualitative aspect of manpower requirements since it
determines the demands of a job in terms of responsibilities and duties
and, then translates these demands in terms of skills, qualities and other
human attributes. It helps in determining the number and kinds of jobs
and qualifications needed to fill these jobs. With the help of job analysis
it is known what is the quantum of work, that an average person can do
on a job in a day. It facilitates the division of work into different jobs.
Thus, it is an essential element of effective manpower planning. At
managerial levels, accurate job descriptions help in preparation of
inventories of executive talent.
Job analysis may be defined as a process of discovering and identifying
the pertinent information relating to the nature of a specific job. It is the
determination of the tasks, which comprise the job, and of the skills,
knowledge, abilities and responsibilities required of the worker for
successful performance of the job. The process of job analysis is
essentially one of data collection and then analyzing that data. It provides
the analyst with basic data pertaining to specific jobs in terms of duties,
responsibilities, skills, knowledge, etc. This data may be classified as
follows
(a) Job identification.
(b) Nature of the job.
(c) Operations involved in doing the job.
(d) Materials and equipment to be used in doing the job.
(e) Personal attributes required to do the job, e.g., education, training,
physical strength, mental capabilities, etc.
(f) Relation with the other jobs.
The information relating to a job, which is thus classified, if examined
carefully, would suggest that some information relates to the job and
some concerns the individual doing the job. The requirements of a job
are known as job description and the qualities demanded from the
jobholder are termed as Job Specification. Thus, job description and
job specification are the immediate products of job analysis.
2. Skill Inventory
The scarcity of talent, difficulty of discovering it and the time required to
develop it fully have forced big organizations to think about their

manpower in a systematic way. They attempt to know the inventory of
manpower resources, develop and appraise their executives, draw up
management succession plans and calculate the replacements that will
be needed because of retirements and other causes. To understand the
nature of the recruitment and development problems, it is necessary to
determine the inventory of different skills and talents existing in the
organization. The management must try to develop in advance the talented
employees to occupy the managerial positions in the future. It can no
longer rely upon finding talented manpower just when it is needed.
Systematic steps must be taken in order to ensure that a reservoir of
talent within the organization must be continuous. Thus, the identification
of manpower potential within the organization is a critical factor for the
long-range success of any organization.
3. Personnel (Manpower) Forecasting

In order to forecast the number of personnel required at a particular
plant, the work-load analysis will have to be done; and on the basis of
work-load of the plant, work-force analysis will have to be carried out.
Work-load Analysis. In work-load analysis, the manpower planning
expert needs to find out sales forecasts, work schedules and thus
determine the manpower required per unit of product. The sales forecasts
are translated into work performance for the various departments of the
enterprise. In a manufacturing enterprise, one shall first find out the master
schedule and then departmental schedules. The departmental work-loads
are converted into man - hours in terms of different skills required.
Workload analysis is used to determine how many employees of various
types are required to achieve total production targets. Similarly, plans
are made concerning the amount of work that each other part (marketing
department, purchase department, etc.) of the organization is expected
to accomplish during the coming year. It is essential to determine the
work-load in some tangible units so that they may be translated into
man-hours required per unit. Past experience can, of course, be utilized
for translating work-loads into man-hours required.
To take an illustration, let us assume that the annual production budget
of a company is 1,80,000 units. The standard man-hours required to
complete a unit of the product are 2 hours. The past experience reveals
that a worker on an average can contribute about 2,000 hours per year.
The work-load may be calculated as under:
(a) Annual Production Budget = 1,80,000 units.
(b) Standard Man-hours required per unit = 2hrs.
(c) Planned Man-hours for the year (axb) = 3,60,000hrs.
(d) Annual contribution of a Worker = 2,000 hrs.
(e) No. of Workers required ( c/d ) = 180.
Thus, 180 workers are needed throughout the year to meet the production
target of 1,80,000 units. But this figure cannot be relied upon fully as the
actual production is influenced by many other factors such as availability
of inputs and power, breakdown of machinery, strike, lockout, etc.
Nonetheless, work-load analysis is quite suitable for short-term
projections of manpower requirements. Long-term projections can be
made with the help of workforce analysis.
Work-force Analysis. In the above illustration, we came to the

conclusion that 180 workers are required to make 1,80,000 units in a
year. Assuming that all other factors are favorable, this conclusion is
illusory because it is almost certain that all the 180 workers will not be
available on all working days because of the two major problems: (i)
Absenteeism, and (ii) Labor Turnover. Both these factors operate to
reduce the number of workers available. Therefore, it is essential to do
the analysis of work-force in the light of these major problems, which
have been discussed later in this chapter. In other words, it is necessary
to keep a sufficient margin for absenteeism, labor turnover and idle time
on the basis of past experience. It is essential to keep a margin of 20%
of the manpower required as per work-load analysis, the company must
ensure that it has at least 216 workers on its payroll to meet the annual
production target.
4. Employment Plan
This phase deals with planning how the organization can obtain the
required number of right types of personnel as reflected by the personnel
forecasting. In other words, there is a need to prepare programme of
recruitment, selection, training, transfer and promotion so that personnel
needs of various departments of the organization are met.
5.Training and Development of Personnel

The preparation of skill inventory helps in identifying the training and
development needs of the organization. Training for learning new skills
and for refreshing the memory is necessary not only for new employees
but also for old employees. Executive development programmes have
to be devised for the development of managerial personnel.
Absenteeism
Absenteeism is said to be there when an employee fails to come to work when
he is scheduled to work. It is an important problem in many enterprises.
Excessive absenteeism involves a considerable loss to the enterprise because
work schedules are upset and delayed and management has to give overtime
wages to meet the delivery dates. The rates of overtime wages are double
than the normal rates of wages. Therefore, study of causes of absenteeism is
essential to deal with the problem.
The rate of absenteeism can be calculated by the following formula
Man-days lost during a period x 100

----------------------------------------------
Average number of workers x No. Of working days
Personnel researchers have found that generally a small percentage of

employees (15%) account for a large percentage of absenteeism (70%).
These employees are likely to have low interest in their tasks and to be
physically below par. Research studies have further revealed that
1. The days before and after a holiday are liable to higher rate of
absenteeism.
2. Women are absent more often than men.
3. Bad weather increases absenteeism, especially among employees
who live at distant places.
4. Employees under the age of 25 years and above the age of 55 years
are absent more often than those in the age group of 26 to 55 years.
5. Operative employees are absent more frequently than their
supervisors.
Causes of Absenteeism. The important causes of absenteeism are
discussed below:
1. Sickness is high on the list of causes of absenteeism running as high

as 50% of the absenteeism in some cases.
2. Industrial accidents and occupational diseases bring about
absenteeism, depending upon the nature of the process and
machinery used.
3. Poor production and material control can result in absenteeism.
Unless the flow of work between departments is balanced and
continuous workers may stay away from their jobs because they
lose their interest in the work and also lose the feeling of the
importance of being dependable.
4. Lack of interest and worthwhileness are fundamental causes of
absenteeism.
5. After pay-day, sickness and hangovers contribute to absenteeism,
particularly when combined with poor working conditions, lack of
interest in work and high wages.
6. Attitude of mind caused by environmental and sociological factors
may condition some people to develop a feeling of irresponsibility
about going to work.
7. A miscellaneous group of causes includes such facts as bad weather,
lack of transportation, search for another job, personal business
and friends visiting from distant locations.
Measures to Control Absenteeism. The management may use the
following measures to control absenteeism:
1 The new employees should be inducted in such a way that their
critical attitude is reduced as quickly as possible to avoid absenteeism
due to this cause.
2 The management should properly analyze the various causes of
absenteeism and classify the chronic offenders.
3. The chronic offenders may be ridiculed by publicizing their names.
4. The chronic offenders may be disciplined by lay-offs, discharges
and loss of promotion and other privileges.
5. All absent workers should be interviewed on their return to determine
causes and to impress upon them the seriousness of their absence.

Labor Turnover
In every organization, employees constantly join and leave the organization for
one reason or the other. The relation between the number of persons joining
the organization and leaving due to resignation, retirement or retrenchment to
the average number on the pay-roll is called labour turnover. The rate of labor
turnover may be calculated by the following formula:
Number of workers joined and left
____________________________________ X 100
Average number of workers on the payroll
In order to exercise control over high rate of labor turnover, it is important
to consider the causes for which persons leave the enterprise. The
management should try to keep the rate of labor turnover as low as
possible because it involves huge costs. The management spends money
on recruitment, selection and training of new employees. If an employee
leaves the enterprise, the expenditure incurred on his employment,
training, etc. will go waste. Separation by personnel also results in a fall
in production because it takes time to get substitutes. The new employees
may be inexperienced and take time to reach the desired level of efficiency.
There may be many causes of high labor turnover. Either employee leaves
the enterprise on his or her own accord or they are discharged. The
causes of resignations and dismissals may be either avoidable or
unavoidable. Management may discharge the employees because of fall
in work-load, shortage of materials, etc. Such a situation should not be
allowed to occur. Workers may leave the enterprise because of job
dissatisfaction, poor relations, and bad working conditions and low
remuneration, which can be avoided.
The unavoidable causes of dismissals may be misconduct by an employee.
The employees may resign from the enterprise because of getting better
jobs, domestic affairs, and illness etc. Separations also occur because of
death and recruitment. Such causes cannot be avoided.
Management can control high rate of labor turnover by reducing the
avoidable causes of turnover. It should provide better working conditions
to the workers, introduce a satisfactory wage and incentive plan, adopt
a sound selection policy, set up procedure for handling grievances and
provide counseling to the employees over their personal problems.
Retirement benefits should also be provided to maintain the workers in
the enterprise.
4.4. RECRUITMENT
Recruitment is shortly defined as discovering of potential applicants for
actual or anticipated organizational vacancies. The human resources are
the most important assets of an organization. The success or failure of an
organization is largely dependent on the caliber of the people working
therein. Without positive and creative contributions from people,
organizations cannot progress or prosper. In order to achieve the goals
or the activities of an organization therefore, we need to recruit people
with requisite skills, qualifications, and experience. While doing so, we
have to keep the present as well as the forth coming requirements of the
organization in mind. Recruitment is a linking process; joining together
those with jobs to fill and those seeking jobs. It is a joining process to
bring together job seekers and employers with a view to encourage the
former to apply for a job with the letter.
The basic purpose of recruiting is to develop a group of potentially
qualified people. To this end the organization must communicate the
position in such a way that job seekers respond. To be cost effective, the
recruitment process should attract qualified applicants and provide enough
information for unqualified persons to self-select themselves out.
The sources of recruitment may be broadly divided into two categories:
internal sources and external sources: These sources include the employees
already on the payroll i.e., present force. Whenever any new vacancy
arises, people from within the organization will be promoted, transferred
or demoted. The process of filling job openings by selecting from the
pool of present workforce can be implemented by the following methods:
Sources of Recruitment
The sources of recruitment may be broadly into two categories: internal
sources and external sources.
Internal Sources: These sources include the employees already on the
payroll i.e., present work force.
 Reviewing the personnel records.
 Job posting and job bidding.
 Inside moonlighting and employee’s friends.
Review of the personnel records and skills inventory provides adequate

information for the personnel director to find suitable candidates for a
particular position. Under job posting and bidding system, the organization
notifies its present employees of openings, using bulletin boards, and
company publications, etc. This is a more open approach where everyone
gets the same right to apply for a job and bid for the same. If the labor
shortage is of short term and great amount of additional labor is not
necessary, then organization employs ‘ inside moonlighting.’ It is a
technique where organization pays bonuses of various types to people
on a time payroll. Overtime procedures are, in many organizations,
developed for those on time payroll. Furthermore, before going outside
to recruit many organizations ask the present employees to encourage
friends and relatives to apply.
External Sources: External sources lie outside an organization. Here
the organization can have the services of:
(a) employees working in other organizations; (b) job aspirants registered
with employment exchanges; (c) students from reputed educational
institutions; (d) candidates referred by unions, friends, relatives and
existing employees; (e) candidates forwarded by search firms and
contractors; (f) candidates responding to the advertisements, issued by
the organization; and (g) unstructured applications/walk-ins.
Methods of Recruitment
Transfer: A lateral movement within the same grade, from one job to
another.
The following are the most commonly used methods of recruiting people:
(i) Promotions and transfers: This is a method of filling vacancies
from within through transfers and promotions. A transfer is a lateral
movement within the same grade, from one job to another. It may
lead to changes, in duties and responsibilities, working conditions,
etc., but not necessarily salary. Promotion, on the other hand, involves
movement of employee from a lower level position to a higher-level
position accompanied by (usually) changes in duties, responsibilities,
status and value. Organizations generally prepare lists of a central
pool of persons from which vacancies can be filled for manual jobs.
Such persons are usually passed on to various departments,
depending on internal requirements. If a person remains on such

rolls for 240 days or more, he gets the status of a permanent employee
as per the Industrial Disputes Act and is, therefore, entitled to all
relevant benefits, including provident fund, gratuity, retrenchment and
compensation.
(ii) Job posting: Job posting is another way of hiring people from within.
In this method, the organization publicizes job openings on bulletin
boards, electronic media and similar outlets. One of the important
advantages of this method is that it offers a chance to highly qualified
applicants working within the company to look for growth
opportunities within the company without looking for greener pastures
outside.
(iii) Employee referrals: Employee referral means using personal
contacts to locate job opportunities. It is a recommendation from a
current employee regarding a job applicant. The logic behind
employee referral is that “it takes one to know one”. Employees
working in the organization, in this case, are encouraged to
recommend the names of their friends working in other organizations
for a possible vacancy in the near future.
(iv) Campus recruitment: It is a method of recruiting by visiting and
participating in college campuses and their placement centers. Here,
the recruiters visit reputed educational institutions such as IITs, IlMs,
colleges and universities with a view to pick up job aspirants having
requisite technical or professional skills. Job seekers are provided
information about the jobs and the recruiters, in turn, get a snapshot
of job seekers through constant interchange of information with
respective institutions. A preliminary screening is done within the
campus and the short listed students are then subjected to the
remainder of the selection process. In view of the growing demand
for young managers, most reputed organizations (such as Hindustan
Lever Ltd, Procter & Gamble, Citibank, State Bank of India, Tata
and Birla group companies) visit IIMs and IIT regularly and even
sponsor certain popular campus activities with a view to earn goodwill
in the job market. Advantages of this method include: the placement
center helps locate applicant and provides resumes to organizations;
applicants can be prescreened; applicants will not have to be lured
away from a current job and lower salary expectations. On the
negative front, campus recruiting means hiring people with little or

no work experience. The organization will have to offer some kind
of training to the applicant almost immediately after hiring. It demands
careful advance planning, looking to the placement weeks of various
institutions in different parts of the country. Further campus recruiting
can be costly for organizations situated in another city (airfare,
boarding and lodging expenses of recruiters, site visit for applicants
if allowed, etc.).
(v) Advertisements: These include advertisements in newspapers,
trade, professional and technical journals, radio and television, etc.
In recent times, this medium has become just as colorful, lively and
imaginative as consumer advertising. The ads generally give a brief
outline of the job responsibilities, compensation package, prospects
in the organization, etc. This method is appropriate when (a) the
organization intends to reach a large target group and (b) the
organization wants a fairly good number of talented people - who
are geographically spread out to apply for the advertised vacancies.
Let us briefly examine the wide variety of alternatives available to a
company as far as ads are concerned.
(vi) Private Employment Search Firms: A search firm is a private
employment agency that maintains computerized lists of qualified
applicants and supplies these to employers willing to hire people
from the list for a fee. Firms like Arthur Anderson, Noble and Hewitt,
ABC consultants, SR Billimoria, KPMG, Ferguson Associates offer
specialized employment related services to corporate houses for a
fee, especially for top and middle level executive vacancies. At the
lower end, a number of search firms operate providing multifarious
services to both recruiters and the recruitees.
(vii) Employment Exchanges: As a statutory requirement, companies
are also expected to notify (wherever the Employment Exchanges
Act, 1959, applies) their vacancies through the respective
employment exchanges, created all over India for helping unemployed
youth, displaced persons, ex-military personnel, physically
handicapped etc. As per the Act, all employers are supposed to
notify the vacancies arising in their establishment with certain
exemptions to the prescribed employment exchanges before they
are filled. The Act covers all establishments in public sector and
nonagricultural establishments employing 25 or more workers in the
private sector. However, in view of the practical difficulties involved
in implementing the provisions of the Act (such as filling a quarterly
return in respect of their staff strength, vacancies and shortages,
returns showing occupational distribution of their employees, etc.)
many organizations have successfully fought court battles when they
were asked to pick up candidates from among those sponsored by
the employment exchanges.
(viii) Gate Hiring and Contractors: Gate hiring is a process where
job seekers (where job seekers, generally blue collar employees,
present themselves at the factory gate and offer their services on a
daily basis), hiring through contractors, recruiting through
word-of-mouth publicity are still in use despite the many possibilities
for their misuse in the small scale sector in India.
(ix) Unsolicited applicants/walk-ins: Companies generally receive
unsolicited applications from job seekers at various points of time.
The number of such applications depends on economic conditions,
the image of the company and the job seeker’s perception of the
types of jobs that might be available, etc. Such applications are
generally kept in a data bank and whenever a suitable vacancy arises,
the company would intimate the candidate to apply through a formal
channel. One important problem with this method is that job seekers
generally apply to a number of organizations and when they are
actually required by the organization, either they are already
employed in other organizations or are not simply interested in the
position.
(x) e-hiring: The first step in e-hiring is to get a URL (Universal Resource
Locator) that people can conveniently guess and thus, not have to
use a search engine. There is no point in being a famous company if
people cannot find you without trouble on the net. Step two is to put
out detailed job postings spelling out your exact requirements. A
separate web page would help potential applicants to find whether
they fit into the announced job openings or not. You are likely to get
a lot of surf-ins if the details of openings are listed category-wise.
Allow people to apply on-line. Create an e-form which can be filled
up on line, and then, you do the calling-up. Finally, ask HR to maintain
a database on all applications. You may not have an opening today.

But, remember tomorrow may be another desperate day for you to
look for people with requisite skills, qualifications and experience.
4.5. SELECTION
To select means to choose. Selection is the process of picking individuals
who have relevant qualifications to fill jobs in an organization. The basic
purpose is to choose the individual who can most successfully perform
the job from a pool of qualified candidates.
The purpose of selection is to pick up the most suitable candidate who
would meet the requirements of the job and the organization best and to
find out which job applicant will be successful if hired. To meet this goal,
the company obtains and assesses information about the applications in
terms of age, qualifications, skills, experience, etc. The needs of the job
are matched with the profile of candidates. The most suitable person is
then picked up after eliminating the unsuitable applicants through
successive stages of selection process. How well an employee is matched
to a job is very important because it directly affects the amount and
quality of employee’s work. Any mismatch in this regard can cost an
organization a great deal of money, time and trouble, especially, in terms
of training and operating costs. In course of time, the employee may find
the job distasteful and frustrating. He may even circulate ‘hot news’ and
juicy bits of negative information about company, causing incalculable
harm in the long run. Effective selection, therefore, demands monitoring
the ‘fit’ between person and the job.
4.5.1. THE PROCESS OF SELECTION

Selection is usually a series of hurdles or steps. Each one must be
successfully cleared before applicant proceeds to the next. The following
figure outlines the important steps in the selection process of typical
organization. The time and emphasis placed on each step will, of course,
vary from organization to organization and indeed, from job to job within
the same organization. The sequence of steps may also vary from job to
job and organization to organization.
1. Reception: A company is known by the people it employs. In order

to attract people with talents, skills and experience a company has
to create a favorable impression on the applicants right from the
stage of reception. Whoever meets the applicant initially should be

tactful and able to extend help in a friendly and courteous way.
Employment possibilities must be presented honestly and clearly. If
no jobs are available at that point of time, the applicant may be
asked to call back the personnel department after some time.
2. Screening Interview: A preliminary interview is generally planned

by large organizations to cut the costs of selection by allowing only
eligible candidates to go through the further stages in selection. A
junior executive from the Personnel Department may elicit responses
from applicants on important items determining the suitability of an
applicant for a job such as age, educational experience, pay
expectations, aptitude, location, choice etc. This courtesy interview,
as it often called, helps the department screen out obvious misfits. If
the department finds candidate suitable, a prescribed application form
is given to the applicants to fill and submit.
Fig Steps in selection process
Hiring Decision Step 8

Reference Checks Step 7
Medical Examination Step 6
Selection Interview Step 5
Selection Tests Step 4
Application Blank Step 3
Screening Interview Step 2
Reception Step 1
3. Application Blank: Application blank or form is one of the most

common methods used to collect information on various aspects of
the applicants’ academic, social, demographic, work-related
background and references. It is a brief history sheet of an employee’s
background, usually containing the following things:
Contents of Application Blanks

• Personal data (address, sex, identification marks)
• Marital data (single or married, children, dependents)
• Physical data (height, weight, health condition)
• Educational data (levels of formal education, marks, distinctions)
• Employment data (past experience, promotions, nature of duties,
reasons for leaving previous jobs; salary drawn, etc.)
• Extra-curricular activities data (sports/games, NSS, NCC, prizes
won, leisure-time activities)
• References (names of two or more people who certify the suitability
of an applicant to the advertised position)
Weighted Application Blanks (WABs): To make the application form
more job-related, some organizations assign numeric values or weights
to responses provided by applicants. Generally, the items that have a
strong relationship to job performance are given high scores. For example,
for a medical representative’s position items such as previous selling
experience, martial status, age, commission earned on sales previously,
etc, may be given high scores when compared to other items such as
religion, sex, language, place of birth, etc. The total score of each applicant
is obtained by summing the weights of the individual item responses. The
resulting scores are then used in the selection decision. The WAB is best
suited for jobs where there are many workers, especially for sales and
technical jobs and it is particularly useful in reducing labour turnover.
There are, however, several problems associated with WABs. It takes
time to develop such a form. The cost of developing a WAB could be
prohibitive if the organization has several operating levels with unique
features. The WAB must be “updated every few years to ensure that the
factors previously identified are still valid predictors of job success”.
And finally, the organization should be careful not to depend on weights
of a few items while selecting an employee.
4. Selection Testing: A test is a standardized, objective measure of a
person’s behavior, performance or attitude. It is standardized because
the way the test is carried out, the environment in the test is
administered and the ways the individual scores are calculated are
uniformly applied. It is objective in that it tries to measure individual
differences in a scientific way, giving very little room for individual

bias and interpretation.
Over the years, employment tests have not only gained importance
but also a certain amount of inevitability in employment decisions.
Since they try to objectively determine how well an applicant meets
job requirements, most companies do not hesitate to invest their time
and money in selection testing in a big way. Some of the commonly
used employment tests are:
(a) Intelligence tests: These are mental ability tests. They measure
the incumbent’s learning ability and also the ability to understand
instructions and make judgments. The basic objective of intelligence
tests is to pick up employees who are alert and quick at learning
things so that they can be offered adequate training to improve their
skills for the benefit of the organization. Intelligence tests measure
not a single trait, but rather several abilities such as memory,
vocabulary, verbal fluency, numerical ability, perception, spatial
visualization, etc. Stanford-Binet test, Binet-Simon test, Wechsler
Adult Intelligence scale are examples of standard intelligence tests.
Some of these tests are increasingly used in competitive examinations
while recruiting graduates and postgraduates at entry management
positions in banking, insurance and other financial services sectors.
(b) Aptitude tests: Aptitude tests measure an individual’s potential to
learn certain skills, clerical, mechanical, mathematical, etc. These
tests indicate whether or not an individual has the ability to learn a
given job quickly and efficiently. In order to recruit efficient office
staff, aptitude tests are necessary. Clerical tests, for example, may
measure the incumbent’s ability to take notes, perceive things
correctly and quickly locate things, ensure proper movement of files,
etc. Aptitude tests, unfortunately, do not measure on the job
motivation. That is why the aptitude test is administered in
combination with other tests like, intelligence and personality tests.
(c) Personality tests: Of all the tests required for selection, personality
tests have generated lot of heat and controversy. The definition of
personality, method of measuring personality factors and the
relationship between personality factors and actual job criteria has
been the subject of much discussion. Researchers have also
questioned whether applicants answer all the items truthfully or

whether they try to respond in a socially desirable manner.
Regardless of these objections, many people still consider personality
as an important component of job success.
(d) Achievement tests: These are designed to measure what the
applicant can do on the job currently, i.e., whether the testee actually
knows what he or she claims to know. A typing test shows typing
proficiency, a short hand test measures the testees ability to take
dictation and transcribe, etc., Such proficiency tests are also known
as work sampling tests. Work sampling is a selection test wherein
the job applicant’s ability to do a small portion of the job is tested.
These tests are of two types; Motor, involving physical manipulation
of things e.g., trade tests for carpenters, plumbers, electricians or
Verbal, invo lving pro blem sit uatio ns t hat are primarily
language-oriented-or people oriented (e.g., situational tests for
supervisory jobs).
(e) Simulation tests: Simulation exercise is a test, which duplicates
many of the activities and problems an employee faces while at work.
Such exercises are commonly used for hiring managers at various
levels in an organization. To assess the potential of a candidate for
managerial positions, assessment centers are commonly used.
(f) Assessment center: An assessment center is an extended work
sample. It uses procedures that incorporate group and individual
exercises. These exercises are designed to simulate the type of work,
which the candidate will be expected to do. Initially, a small batch of
applicants comes to the assessment center (a separate room). Their
performance in the situational exercises is observed and evaluated
by a team of 6 to 8 trained assessors. The assessor’s judgments on
each exercise are compiled and combined to have a summary rating
for each candidate being assessed.
Initially, a small batch of applicants comes to the assessment centre
(a separate room). The examples of the real-life but simulated
exercises included in a typical assessment centre are as follows:
a. The in-basket. Here the candidate is faced with an accumulation of
reports, memos, letters and other materials collected in the in-basket
of the simulated job he is supposed to take over .The candidate is

asked to take necessary action on each of these materials, say, by
writing letters, notes, agendas for meetings, etc. The results of the
applicant’s actions are then reviewed by the evaluators.
b. The leaderless group discussion: In this exercise, a leaderless
group is given a discussion question and asked to arrive at a group
decision. The evaluators then evaluate each participant’s interpersonal
skills, acceptance by the group, leadership and individual influence,
etc.
c. Business games: Here participants try to solve a problem, usually
as members of two or more simulated companies that are competing
in the market place. Decisions might include how to advertise the
product, how to penetrate the market, how much to keep in stock,
etc. Participants thereby exhibit planning and organizational abilities,
interpersonal skills and leadership abilities. Business games have
several merits: they reduce time, events that might not take place for
months or years are made to occur in a matter of hours. They are
realistic and competitive in nature. They offer immediate feedback
also.
d. Individual presentations: A participant’s communication skills are
evaluated by having the person make an oral presentation of a given
topic.
e. Structured interview: Evaluators ask a series of questions aimed
at the participant’s level of achievement, motivation, potential for
being a self-starter and commitment to the company.
g. Graphology Tests: Graphology involves a trained evaluator to
examine the lines, loops, hooks, strokes, curves and flourishes in a
person’s handwriting to assess the person’s personality and emotional
make-up. The recruiting company may, for example, ask applicants
to complete application forms and write about why they want a job.
These samples may be finally sent to a graphologist for analysis and
the results may be put to use while selecting a person. The use of
graphology, however, is dependent on the training and expertise of
the person doing the analysis. In actual practice, questions of validity
and just plain skepticism have limited its use.
h. Polygraph (Lie-detector) tests. The polygraph records physical

changes in the body as the test subject answers a series of questions.
It records fluctuations in respiration, blood pressure and perspiration
on a moving roll of graph paper. The polygraph operator form a
judgment as to whether the subject’s response was truthful or
deceptive by examining the biological movements recorded on the
paper. Polygraphs, despite strong resistance by many applicants,
are increasingly being used by companies, which have problems with
inventory and security of funds. Government agencies have begun to
use the polygraph, especially for filling security, police, fire and health
positions. Critics, however, question the appropriateness of
polygraphs in establishing the truth about an applicant’s behavior.
The fact is that polygraph records biological reaction in response to
stress and does not record lying or even the conditions necessarily
accompanying lying. Is it possible to prove that the responses
recorded by the polygraph occur only because a lie has been told?
What about those situations in which a person lies without guilt (a
pathological liar) or lies believing the response to be true? The fact
of the matter is that polygraphs are neither reliable nor valid. Since
they invade the privacy of those tested, many applicants vehemently
oppose the use of polygraph as a selection tool.
i. Integrity tests: These are designed to measure employee’s honesty
to predict those who are more likely to steal from an employer or
otherwise act in a manner unacceptable to the organization.
5. Selection Interview: Interview is the oral examination of candidates
This is the most essential step in the selection process. In this step
the interviewer matches the information obtained about the candidate
through various means to the job requirements.
6. Medical Examination: Certain jobs require certain physical qualities
like clear vision, perfect hearing, unusual stamina, tolerance of hard
working conditions, clear tone, etc. Medical examination reveals
whether or not a candidate possesses these qualities. Medical
examination can give the following information:
 Whether the applicant is medically suitable for the specified job or not.
 Whether the applicant has health problems or psychological attitudes
likely to interfere with work efficiency or future attendance.
 Whether the applicant suffers from bad health, which should be

corrected before he can work satisfactorily (such as the need for
spectacles).
 Whether the applicant’s physical measurements are in accordance
with job requirements or not.
7. Reference Checks: Once the interview and medical examination
of the candidate is over, the Personnel Department will engage in
checking references. Candidates are required to give the names of
two or three references in their application forms. These references
may be from the individuals who are familiar with the candidate’s
academic achievements or from the applicant’s previous employer,
who is well versed with the applicant’s job performance and
sometimes from co-workers. In case the reference check is from
the previous employer, information in the following areas may be
obtained. They are job title, job description, period of employment,
pay and allowances, gross emoluments, benefits provided, rate of
absence, willingness of the previous employer to employ the candidate
again, etc. Further, information regarding candidate’s regularity at
work, character, progress, etc., can be obtained. Often a telephone
call is much quicker. The method of mail query provides detailed
information about the candidate’s performance, character and
behavior. However, a personal visit is superior to the mail and
telephone methods and is used where it is highly essential to get
detailed, first-hand information, which can also be secured by
observation. Reference checks are taken as a matter of routine and
treated casually or omitted entirely in many organizations. But a good
reference check, when used sincerely will fetch useful and reliable
information to the organization.
8. Hiring decision: The line manager concerned has to make the final
decision now whether to select or reject a candidate after soliciting
the required information through different methods discussed earlier.
The line manager has to take adequate care in taking the final decision
because of economic, behavioral and social implications of the
selection decisions. A careless decision of rejecting a candidate would
impair the morale of the people and they are likely suspected the
selection procedure and the very basis of selection of a particular

organization. A true understanding between line managers and
personnel managers should be established so as to facilitate good
selection decisions. After taking the final decision, the organization
has to intimate this decision to the successful as well as unsuccessful
candidates. The organization sends the appointment order to the
successful candidates either immediately or after sometime depending
upon its time schedule.
Placement
After selecting a candidate, he should be placed on a suitable job.
Placement is the actual posting of an employee to a specific job. It involves
assigning a specific rank and responsibility to an employee. The line
manager takes the placement decisions after matching the requirements
of a job with the qualification of a candidate. Most organizations put
new recruits on probation for a given period of time, after which their
services are confirmed. During this period, the performance of probationer
is closely monitored. If the new recruit fails to adjust himself to the job
and turns out poor performance, the organization may consider his name
for placement elsewhere. Such as placement is called ‘differential
placement’. Usually the employees’ supervisor, in consultation with the
higher levels of line management, takes decisions regarding the future
placement of each employee.
Placement is an important human resource activity. If neglected, it may
create employee adjustment problems leading to absenteeism, labour
turnover, accidents, poor performance, etc. The employee will also suffer
seriously. He may quit the organization in frustration, complaining bitterly
about everything. Proper placement is therefore, important to both the
employee and the organization.
Induction/Orientation
Induction or orientation is the process through which a new employee is
introduced to the job and the organization. In the words of Armstrong,
induction is “the process of receiving and welcoming an employee when
he first joins a company”to the job and giving him the basic information
he needs to settle down quickly and start work.

Induction serves the following purposes:

(a) Removes fears: A newcomer steps into an organization as a
stranger. He is new to the workplace and work environment. He is
not very sure about to do what he is supposed to. Induction helps a
new employee overcome such fears and perform better on the job.
(b) Creates a good impression: Another purpose of induction is to
make the newcomer feel at home and develop a sense of pride in the
organization. Induction helps him to:
 Adjust and adapt to new demands of the job.
 Get along with people.
 Get off to a good start.
Through induction, a new recruit is able to see more clearly as to what he
is supposed to do, how good the colleagues are, how important is the
job, etc. He can pose questions and seek clarifications on issues relating
to his job. Induction is a positive step, in the sense, it leaves a good
impression about the company and the people working there in the minds
of new recruits. They begin to take pride in their work and are more
committed to their jobs.
(c) Acts as a valuable source of information: Induction serves as a
valuable source of information to new recruits. It. clarifies many things
through employee manuals/handbook. Informal discussions with
colleagues may also clear the fog surrounding certain issues. The
basic purpose of induction is to communicate specific job
requirements to the employee, put him at ease and make him feel
confident about his abilities.
Induction Programme Steps:

(a) Introduction: Induction training tries to put the new recruits at ease.
Each new employee is usually taken on a formal tour of the facilities,
introduced to key personnel and informed about company policies,
procedures and benefits. The training opportunities and career
prospects are also explained clearly. Every attempt is made to clarify
the doubts of the new recruits. They are encouraged, in fact, to come
out with questions on various issues confronting their working lives.
The company’s manual is also handed over at the end of the
programme.
(b) Socialization: Socialization is a process through which a new recruit

begins to understand and accept the values, norms and beliefs held
by others in the organization. HR department representative’s help
new recruit to “Internalize the way things are done in the
organization”. Orientation helps the newcomers to interact freely
with employees working at various levels and learn behaviors that
are acceptable. Through such formal and informal interaction and
discussion, newcomers begin to understand how the department/
company is run, who holds power and who does not, who is
politically active within in the department, how to-behave in the
company, what is expected of them and so on.
( c) Follow-up: Despite the best efforts of supervisors, certain dark areas
may still remain in the orientation programme. New hires may not
have understood certain things. The supervisior while covering a
large ground may have ignored certain important matters. To
overcome the resultant communication gaps, it is better to use a
supervisory checklist and find out whether all aspects have been
covered or not (covering organizational issues, employee benefits,
job duties, introduction to supervisors and co-workers, etc). Follow
up meetings could be held at fixed intervals, say after every three or
six months on a face-to-face basis. The basic purpose such follow-up
orientations is to offer guidance to employees on various general as
well as job related matters without leaving anything to chance.
4.6. TRAINING AND DEVELOPMENT

Training is a process of learning a sequence of programmed behavior.
It is application of knowledge. It gives people an awareness of the rules
and procedures to guide their behavior. It attempts to improve their
performance on the current job or prepare them for an intended job.
Development is a related process, it covers not only those activities
which improve job performance, but also those which bring about growth
of the personality; help individuals in the progress towards maturity and
actualization of their potential capacities so that they become not only
good employees but better men and women.
Difference between Training and Development

“Training is short-term process utilizing a systematic and organised
procedure by which non-managerial personnel learn technical knowledge

and skills for a definite purpose. Development is a long-term educational

process utilizing a systematic and organised procedure by which
managerial personnel learn conceptual and theoretical knowledge for
general purpose.”
“Training” refers only to instruction in technical and mechanical
operations, while “development” refers to philosophical and theoretical
educational concepts. Training is designed for non-managers, while
development involves managerial personnel. In the words of Campbell,
“training courses are typically designed for a short-term, stated set
purpose, such as the operation of some piece(s) of machinery, while
development involves a broader education for long-term purposes.”
Training and development differ in four ways:
(a) “What” is learned;
(b) “Who” is learning;
(c) “Why” such learning takes place; and
(d) “When” learning occurs.
Learning Principles
The outcomes and process of learning

The previous section concluded that human resource managers needed
to understand the processes and nature of learning and development.
This section will, therefore, examine the following:
The outcomes of learning:

 Skill
 Competence
 ‘know-how’ and tacit knowledge
 hierarchies of cognitive and other skills;
 the process of learning;
 theories of the process of learning
 elements in the process of learning
 the stages of learning
 cyclical models of learning, learning styles.
Need for Basic Purposes of Training

The need for the training of employees would be clear from the
observations made by the different authorities.
(i) To increase productivity by the performance.
(ii) To improve quality by good relationship between employer and
employee.
(iii) To help a company fulfill its future personnel needs.
(iv) To improve organizational climate.
(v) To improve health and safety.
(vi) Obsolescence prevention.
(vii) Personal growth.
Need for training arises from more than one reason like:
(i) An increased use of technology in production;
(ii) Labor turnover arising from normal separations due to death or
physical incapacity, for accidents, disease, super-annuation voluntary
retirement, promotion within the organization and change of
occupation or job;
(iii) Need for additional hands to cope with an increased production of
goods and services;
(iv) Employment of inexperienced, new labor requires detailed instruction
for an effective performance of a job;
(v) Old employees need training to enable them to keep abreast of the
changing methods, techniques and use of sophisticated tools and
equipment;
(vi) Need for enabling employees to do the work in a more effective
way, to reduce learning time, reduce supervision time, reduce waste
and spoilage of raw material and produce quality goods, and develop
their potential.
(viii) Need for reducing grievances and minimizing accident rates;
(ix) Need for maintaining the validity of an organization as a whole and
raising the morale of its employees.

Importance of Training
Training is the corner stone of sound management, for it makes employees
more effective and productive. It is actively and intimately connected
with all the personnel or managerial activities. It is an integral part of the
whole management programme, with all its many activities functionally
interrelated.
Training is a practical and vital necessity because apart from the other
advantages mentioned above it enables employees to develop and rise
within the organization, and increase their “market value”, earning power
and job security. It enables management to resolve sources of friction
arising from parochialism, to bring home to the employees the fact that
the management is not divisible. It moulds the employees’ attitudes and
helps them to achieve a better with the company and a greater loyalty
towards it. The management is benefited in the sense that higher standards
of quality are achieved; a satisfactory organisational structure is built up;
authority can be delegated and stimulus for progress applied to employees.
Training, moreover, heightens the morale of the employees, for it helps in
reducing dissatisfaction, complaints, grievances and absenteeism, reduces
the rate of turnover. Further, trained employees make better and
economical use of materials and equipment; therefore, wastage and
spoilage are lessened, and the need for constant supervision is reduced.
The importance of training has been expressed in these words:

“Training is a widely accepted problem-solving device. Indeed, our
national superiority in manpower productivity can be attributed in no
small measure to the success of our educational and industrial training
programmes. This success has been achieved by a tendency in many
quarters to regard training as a panacea”.
Responsibility for Training

Training is the responsibility of four main groups:
(a) The top management, which frames the training policy;
(b) The personnel department, which plans, establishes and evaluates
instructional programmes;
(c) Supervisors, who implement and apply developmental procedure;
and

(d) Employees, who provide feedback, revision and suggestions for

corporate educational endeavors.
Creation of a Desire for Training

The employees can be persuaded to be interested in training programmes
in one of the following three ways:
1. They will respond to programmes involving changed behavior if they
believe that the resulting modification in the behaviour is in their own
interest, that they will receive personal benefits as a result of their
new behaviour.
2. Trainees will change their behaviour if they became aware of better
ways of performing (more productive or otherwise more satisfactory
ways) and gain experience in the new pattern of behaviour so that it
becomes their normal manner of operation.
3. A trainee may change his behaviour in compliance with the forced
demands of his superiors or others with more power than the trainee
possesses.
Principles or Concepts of Training

Since training is a continous process and not a one shot affair, and since
it consumes time and entails much expenditure, it is necessary that a
training programme or policy should be prepared with great thought and
care, for it should serve the purposes of the establishment as well as the
needs of employees.
A successful training programme presumes that sufficient care has been
taken to discover areas in which it is needed most and to create the
necessary environment for its conduct. The selected trainer should be
one who clearly understands his job and has professional expertise, has
an aptitude and ability for teaching, possesses a pleasing personality and
a capacity for leadership, is well-versed in the principles and methods of
training, and is able to appreciate the value of training in relation to an
enterprise.
Certain general principles need be considered while organizing a training
programme. For example :
1. Trainees in work organizations tend to be most responsive to training
programmes. When they feel the need to learn, i.e., the trainee will
be more eager to learn training, if training promises answers to
problems or needs he has. The individual who perceives training as

the solution to problems will be more willing to enter into a training
programme than will the individual who is satisfied with his present
performance abilities.
2. Learning is more effective where there is reinforcement in the form
of rewards and punishments, i.e., individuals do things that give
pleasure and avoid things that give pain. In other words, after an
action, if satisfaction is received, the action will be repeated. If no
satisfaction is received, the action will not be repeated.
3. In the long run, awards tend to be more effective for changing
behaviour and increasing one’s learning than punishments.
4. Rewards for the application of learned behaviour are most useful
when they quickly follow the desired performance.
5. The larger the reward for good performance following the
implementation of learned behaviour; the greater will be the
reinforcement of the new behaviour.
6. Negative reinforcement, through application of penalties and heavy
criticism following inadequate performance, may have a disruptive
effect upon the learning experience of the trainee than positive
reinforcement.
7. Training that requests the trainee to make changes in his values,
attitudes, and social beliefs, usually achieves better results if the
trainee is encouraged to participate, discuss and discover new,
desirable behaviour norms.
8. The trainee should be provided with ‘feedback’ on the progress he
is making in utilizing the training he has received. As Miller has stated,
“If a person with the required abilities is to improve his performance,
he must (i) know what aspect of his performance is not up to par;
(ii) know precisely what corrective actions he must take to improve
his performance.” The feedback should be fast and frequent,
especially for the lower level jobs, which are often routine and quickly
completed.
9. The development of new behaviour norms and skills is facilitated
through practice and repetition. Skills that are practiced often are
better learned and less easily forgotten.
10. The training material should be made as meaningful as possible,

because if the trainee understands the general principles underlying
what is being taught, he will probably understand it better than if he
were just asked to memorize a series of isolated steps.
Training Programmes
Training programmes are a costly affair, and a time consuming process.
Therefore, they need to be drafted very carefully. Usually in the
organisation of training programmes, the following steps are considered
necessary:
1. Discovering or identifying the training needs.
2. Getting ready for the job.
3. Preparation of the learner.
4. Presentation of operations and knowledge.
5. Performance try-out.
6. Follow-up and evaluation of the programme.
The training needs have been identified to solve the specific problems as
follows:
(i) Identifying Specific Problems: Such problems are productivity,
high costs, poor material control, poor quality, excessive scrap and
waste, excessive labour-management troubles, excessive grievances,
excessive violation of rules of conduct, poor discipline, high employee
turnover and transfers, excessive absenteeism, accidents, excessive
fatigue, fumbling discouragement, struggling with the job; standards
of work performance not being met, bottlenecks in production,
deadlines not being met, and delayed production. Problems like these
suggest that training may be necessary. For this task, the workers
should be closely observed and the difficulties found out.
(ii) Anticipating Impending and Future Problems: Bearing on the
expansion of business, the introduction of new products, new
services, new designs, new plant, new technology and of
organisational changes concerned with manpower inventory, present
and future needs.

(iii)Management Requests: The supervisors and managers make

specific request for setting training programmes. Though this method
is simple and a correct evaluation of the employee’s performance
deficiencies can be made, but often such recommendations may be
built on faulty assumptions and requests may not coincide with each
other or organisational goals.
(iv)Interviewing and Observing the Personnel on the Job:
Interviewing personnel and direct questioning and observation of
the employee by his superiors may also reveal training needs.
(v) Performance Appraisal: An analysis of the past performance
records of the perspective trainee and comparing his actual
performance with the target performance may provide clues to
specific interpersonal skills that may need development.
(vi) Questionnaires: Questionnaires may be used for eliciting opinions
of the employees on topics like communication, satisfaction, job
characteristics, their attitude towards working conditions, pay,
promotion policies etc. These will reveal much information about
where an employee’s skills and knowledge are deficient.
(vii) Checklist: The use of checklist is a useful supplement to interviews
and observations. Through it, more reliable information can be
obtained and the data got are quantifiable. This facility evaluates the
training programme’s effectiveness.
(viii) Morale and Attitude Surveys: An occasional personnel survey
may be conducted to forecast future promotions, skill requirements,
and merit rating, to initiate informal discussions and an examination
of records and statistics regarding personnel, production, cost,
rejects and wastages. All these generally reveal the potential
problems to be tackled through training programmes.
In addition, tests of the interpersonal skills through handling of posed
cases and incidents may also reveal training needs.
Support Material for Training

A variety of tools and equipment are utilized to impart effective training.
These are:
(a) Lectures (learning by hearing supplemented by reading assignments);
conferences, seminars and staff-meetings (learning by participation);
demonstrations (learning by seeing); and short courses, through

coaching.
(b) Role-playing (learning by doing) and job rotation (learning by
experience).
(c) Case or Project studies and problem-solving sessions (learning by
personal investigation).
(d) Use of pamphlets, charts, brochures, booklets, handbooks, manuals,
etc.
(e) Graphs, pictures, books, slides, movie projectors, filmstrips, tape
recorders, etc.
(f) Posters, displays, notice and bulletin boards.
(g) Reading rooms and libraries where specified books and journals
are maintained for reference and use.
(h) Under-study and visits to plants.
(i) Correspondence courses under which knowledge about business
law, statistics, industrial management, marketing, office procedures,
retailing and many other similar subjects may be imparted.
(j) Teaching machines.
(k) Membership of professional or trade associations, which offer new
techniques and ideas to their members.
Training Methods / Techniques

The forms and types of employee training methods are inter-related. It is
difficult, if not impossible, to say which of the methods or combination of
methods is more useful than the other. In fact, methods are multi- faceted
in scope and dimension, and each is suitable for a particular situation.
The methods of training as follows
 On-the-Job-Training (OJT)
 Job Instruction Training (JIT)
 Vestibule Training
 Training by experienced workmen
 Classroom or Off-the-Job-Training like ,
 lecture
 conferences
 group discussion
 case studies
 role playing
 programme instruction
 T-group training
On-the-Job-Training (OJT)
There are a variety of OJT methods, such as :
1. coaching
2. under study
3. job rotation
4. internship
5. apprenticeship
Merits of On-the-Job-Training
Firstly, trainee learns on the actual equipment in use and in the true
environment of his job.
Secondly, it is highly economical since no additional personnel or facilities
are required for training.
Thirdly, the trainee learns the rules, regulations and procedures by
observing their day-to-day applications. The management can therefore,
easily size him up.
Fourthly, this type of training is a suitable alternative for a company in
which there is almost as many jobs as there are employees.
Finally, it is most appropriate for teaching the knowledge and skills,
which can be acquired in a relatively short period, say, a few days or
weeks.
Demerits of On-the-Job-Training
Instruction is often highly disorganized.
Job Instruction Training (JIT)

This method is very popular in the United States for preparing supervisors
to train operatives. The JIT method requires skilled trainers, extensive
job analysis, training schedules, and prior assessment of the trainee’s

job knowledge. This method is also known as “training through step-by-
step learning.” It involves listing all necessary steps in the job, each in
proper sequence. These steps show what is to be done. Along side each
step is also listed a corresponding “Key point”, which shows how it is to
be done and why.
The job instruction training process is in four steps:

(i) the preparation of the trainee for instruction. This includes putting
him at ease, emphasizing the importance of the task and giving a
general description of job duties and responsibilities;
(ii) presentation of the instructions, giving essential information in a clear
manner. This includes positioning the trainee at work site, telling and
showing him each step of the job, stressing why and how each step
is carried out as it is shown;
(iii) having the trainee try out the job to show that he has understood the
instructions, if there are any errors they are corrected; and
(iv) encouraging the question and allowing the trainee to work along and
the trainer follows up regularly.
The JIT method provides immediate feedback on results, quick correction
of errors, and provision of extra practice when required.
However, it demands a skilled trainer and can interfere with production
and quality.
Vestibule Training (or Training-Center Training)

It is a classroom training, is often imparted with the help of the equipment,
and machines, which are identical with those in use in the place of work.
This technique enables the trainee to concentrate on learning the new
rather than on performing an actual job. It is a very efficient method of
training semi-skilled personnel, particularly when many employees have
to be simultaneously trained for the same kind of training at the same
time.
Training is generally given in the form of lectures, conferences, case
studies, role-playing and discussion.
Merits of the Vestibule Training

 Training is given in a separate room, distractions are minimized.

 Trained instructor, who knows how to teach, can be more effectively

utilized.
 The correct method can be taught without interrupting production.
 It permits the trainee to practice without the fear of supervisors’/
co-workers’ observation and their possible ridicule.
Demerits of the Vestibule Training

 The splitting of responsibilities leads to organisational problems.
 An additional investment in equipment is necessary, though getting
some productive work done by trainees while in the school may
reduce the cost.
 This method is of limited value for the jobs, which utilize equipment,
which can be duplicated.
 The training situation is somewhat artificial.
Class room or Off-the-Job Methods

“Off-the-job-training” simply means that training is not a part of everyday
job activity. The actual location may be in the company classrooms or in
places, which are owned by the company, or in universities, or
associations, which have no connection with the company.
These methods consist of :
1. Lectures
2. Conferences
3. Group Discussions
4. Case Studies
5. Role-playing
6. Programme Instruction
7. T-Group Training.
1. Lectures (or Class-Room Instruction): Lectures are regarded
as one of the simplest ways of imparting knowledge to the trainees,
especially when facts, concepts, or principles, attitudes, theories
and problem-solving abilities are to be taught. Lectures are formal
organised talks by the training specialist, the formal superior or other
individual on specific topics. The lecture method can be used for

very large groups, which are to be trained within a short time, thus
reducing the cost per trainee.
In training, the most important uses of lectures include:
 Reducing anxiety about upcoming training programmes or
organisational changes by explaining their purposes.
 Introducing a subject and presenting an overview of its scope.
 Presenting basic material that will provide a common background
for subsequent activities.
 Illustrating the application of rules, principles; reviewing, clarifying
and summarizing.
Limitations of the Lecture System
(i) The learners are passive instead of active participants. The lecture
method violates the principle of learning by doing.
(ii) A clear and vigorous verbal presentation requires a great deal of
preparation for which management personnel often lack the time.
(iii) The attention span of even a well-motivated and adequately informed
listener is only from 15 minutes to 20 minutes so that, in the course
of an hour, the attention of listeners drifts.
(iv) It is difficult to stimulate discussion following a lecture, particularly if
the listener is uninformed or awestruck by the lecturer.
(v) The untrained lecturer either rambles or packs far too much
information in the lecture, which often becomes unpalatable to the
listener.
(vi) The presentation of material should be geared to a common level of
knowledge.
(vii) It tends to emphasize the accumulation and memorization of facts
and figures and does not lay stress on the application of knowledge.
(viii) Though a skilful lecturer can adapt his material to the specific group,
he finds it difficult to adjust it for individual differences within a group.
2. The Conference Method: In this method, the participating
individuals ‘confer’ to discuss points of common interest to each
other. A conference is basic to most participative group-centered

methods of development. It is a formal meeting, conducted in
accordance with an organised plan, in which the leader seeks to
develop knowledge and understanding by obtaining a considerable
amount of oral participation of the trainees.
Three types of conferences are
 Directed discussion
 Training conference
 Seminar conference
3. Seminar or Team Discussion: This is an established method for
training. A seminar is conducted in many ways:
(i) It may be based on a paper prepared by one or more trainees on a
subject selected in consultation with the person in charge of the
seminar. It may be a part of a study or related to theoretical studies
or practical problems. The trainees read their papers, and this is
followed by a critical discussion. The chairman of the seminar
summarizes the contents of the papers and the discussions, which
follow their reading.
(ii) It may be based on the statement made by the person in charge of
the seminar or on a document prepared by an expert, who is invited
to participate in the discussion.
(iii) The person in charge of the seminar distributes in advance the material
to be analyzed in the form of required readings. The seminar
compares the reactions of trainees, encourages discussion, defines
the general trends and guides the participants to certain conclusions.
(iv) Valuable working material may be provided to the trainees by actual
files. The trainees may consult the files and bring these to the seminar
where they may study in detail the various aspects, ramifications
and complexities of a particular job or work or task.
4. Case Studies (or Learning by Doing): This method was first
developed in the 1880s by Christopher Langdell at the Harvard Law
School to help students to learn for themselves by independent
thinking and by discovering in the ever tangled scene of human affairs,
principles and ideas which have lasting validity and general
applicability. A collateral object is to help them develop skills in using

their knowledge.
In case study method the trainee is expected to:
 Master the facts and become acquainted with the content of the
case;
 Define the objectives sought in dealing with the issues in the case,
 Identify the problems in the case and uncover their probable causes;
 Develop alternative course of action;
 Screen the alternatives using the objectives as the criteria;
 Select the alternative that is most in keeping with the stated
objectives.
 Define the controls needed to make the action effective and
 To ‘role play’ the action to test its effectiveness and find conditions
that may limit it.
5. Role-playing: This method was developed by Moreno, a Venetian
psychiatrist. He coined the terms “role-playing,” “role-reversal,”
“socio-drama,” “psychodrama,” and a variety of specialized terms,
with emphasis on learning human relations skills through practice
and insight into one’s own behaviour and its effect upon others. It
has been defined as “a method of human interaction which involves
realistic behaviour in the imaginary situations.”
Merits of the role playing method are:
 Learning by doing is emphasized;
 Human sensitivity and interactions are stressed;
 The knowledge of results is immediate;
 Trainee interest and involvement tend to be high;
 It is a useful method to project the living conditions between learning
in the classroom and working on a job and creating a live business
situation in the classroom;
 It develops skills and ability to apply knowledge, particularly in areas
like human relations and
 It brings about desired changes in behaviour and attitudes.
6. Programmed Instruction (or Teaching by the Machine

Method): Programmed instruction involves a sequence of steps,

which is often set up through the central panel of an electronic
computer as guides in the performance of a desired operation or
series of operation. It incorporates a pre-arranged, proposed, or
desired course of proceedings pertaining to the learning or acquisition
of some specific skills or general knowledge.
The merits of the methods are:
 Trainees learn at their own pace;
 Instructors are not a key part in learning;
 The materials to be learned are broken down into small units;
 Immediate feedback is available;
 Active learner participation takes place at each step in the programme;
 Individual differences can be taken into account;
 Training can be imparted at odd times and in odd places; and
 There is a high level of learner motivation.
Demerits of the methods are:
 The impersonality of instructional setting;
 An advanced study is not possible until preliminary information
has been acquired;
 Only factual subject matters can be programmed;
 Philosophical and attitudinal concepts and motor skills cannot be
taught by this method and
 The cost of creating any such programme is very great.
7. T-Group Training: This method of training is a technique of
composition of audio visual aids and planned reading programmes.
Audio-visual aids, records, tapes, and films are generally used in
conjunction with other conventional teaching methods.
Retraining
Retraining programmes are generally arranged for employees who have
long been in the service of an organisation. The retraining programme
may be necessitated by the following facts:
 Some employees are engaged in a confined phase of a particular

task and lose their all round skills in a particular trade. Hence, to
keep them active in all-round skills, such training is needed.
 During prolonged lay-off periods, employees on certain highly skilled
jobs are given retraining when they are called back to work.
 Technological changes may make a particular job, on which an
employee is working unnecessary and the company may desire to
retrain him rather than discharge him.
 An employee, because of illness, accident or incapacity due to age,
may no longer be able to do his share of the work that performed
when he was in normal health.
 Economic depression or cyclical variations in production create
conditions in which employment stabilization may be achieved by
having a versatile workforce capable or performing more than one
job.
Steps to improve Effectiveness of Training

The training programmes can be made effective and successful if the
following hints are considered:
1. Specific training objectives should be outlined on the basis of the
type of performance required to achieve organisational goals and
objectives. An audit of personal needs compared with operational
requirements will help to determine the specific training needs of
individual employees. This evaluation should form a well-defined set
of performance standards toward which each trainee should be
directed.
2. Attempt should be made to determine if the trainee has the
intelligence, maturity, and motivation to successfully complete the
training programmes. If deficiencies are noted in these respects, the
training may be postponed or cancelled till improvements are visible.
3. The trainee should be helped to see the need for training by making
him aware of the personal benefits he can achieve through better
performance. He should be helped to discover the rewards and
satisfactions that might be available to him through changes in
behaviour.
4. The training programme should be planned so that it is related to the

trainee’s previous experiences and background. This background
should be used as a foundation for new development and new
behaviour.
5. Attempts should be made to create organisational conditions that
are conducive to a good learning environment. It should be made
clear why changes are needed. Any distractions, in the way of training
environment, should be removed. The support of the upper levels of
management should be obtained before applying training at lower
levels.
6. If necessary, a combination of training methods should be selected
so that variety is permitted and as many of the senses as possible
are utilized.
7. It should be recognized that all the trainees do not progress at the
same rate. Therefore, flexibility should be allowed in judging the
rates of progress in the training programme.
8. If possible, the personal involvement or active part of the trainee
should be got in the training programmes. He should be provided
with opportunity to practice the newly needed behaviour norms.
9. As a trainee acquires new knowledge, skills or attitudes and applies
them in job situations, he should be significantly rewarded for his
efforts.
10. The trainee should be provided with regular, constructive feedback.
11. The trainee should be provided with personal assistance when he
encounters learning obstacles.
Designs for Evaluating Training

After deciding on the criteria to use in evaluating a training program, the
HR professional should choose an experimental design. The design is
used to answer two primary questions: (1) whether or not a change has
occurred in the criteria (e.g., learning, behavior, organizational results)
and (2) whether or not the change can he attributed to the training
program.
Designs employ two possible strategies to answer these questions. The
first is to compare trainees’ performance before and after participation
in training. This is done to determine what changes may have occurred in

learning, behavior, or organizational results. While this is important for
answering the question of whether a change has taken place, it is deficient
in answering the question of whether the change can be attributed to the
training program, since the criteria may have changed for any number of
reasons. What is needed to answer the second question is a design
comparing the changes which took place in the trainees with changes
that occurred in another group of employees who did not receive the
training (e.g., a control group), yet who are similar to the training group
in important ways (e.g., in that they have similar job titles and ranks and
are in the same geographical location). The most effective experimental
designs use both strategies (i.e., before-after measures and a control
group) and are thus able to answer both questions.
Some of the more commonly used designs for training evaluation are
described below.
One Shot Post Test only Design:
In many organizations, training is designed and conducted with no prior
thought given to evaluation. For example, a sales manager may decide to
put all his or her sales personnel through a course entitled “Effective
Customer Relations.” After the course is completed, the sales manager
decides to evaluate it. This design looks like the one shown here.
TRAINING —— MEASURE
Any of the four types of criteria (e.g., reactions, learning, behavior, and
organizational results) could be used as the “after” measures. It would
be difficult, however, to know what, if any, changes occurred since no
“before” measure (e.g., no pretest) was made. In addition, since the
results may not be compared with those of another group who did not
receive training, it would not be possible to say whether any change was
due to the training. As a result, this design is not recommended.
One Group Pretest Post Test Design:

Another design for evaluating the training group on the criteria of interest
is to measure the group before and after the training. This design is as
follows:
MEASURE————— —TRAINING ——————MEASURE
This design is able to assess whether a change has occurred for the
training group in the criteria (e.g., learning, behavior). Unfortunately, it is

not able to tell whether or not the change is due to training, since there is
no control group. A change that is detected could have been caused by
the introduction of new equipment or a new manager, or by any number
of other reasons. Thus, this design is not extremely useful and is not
recommended.
Post Test only Control Group Design:

A much stronger design for assessing the effectiveness of a training
program is shown here.
GROUP 1—R: TRAINING MEASURE
GROUP 2—R: NO TRAINING MEASURE
In this design, two groups are used and individuals are randomly assigned
(R) to either group (i.e., an individual has an equal chance of being put in
either group 1, the training group, or group 2, the control group). The
use of random assignment helps to initially equalize the two groups. This
is important to ensure that any differences between the two groups after
training are not simply caused by differences in ability, motivation, or
experience. The post test only control group design is useful when it is
difficult to collect criteria measures on individuals prior to offering them
the training. (For example, an HR professional may believe that giving
individuals a pretest, such as a learning test might overly influence their
scores on the post test, which might he the same learning measure. Another
HR professional may not have time to give tests.) Individuals are randomly
assigned to the two groups, and their scores on the post test are
compared. Any differences on the post test can be attributed to the training
program, since it is assumed that the two groups were somewhat equal
prior to training. From the organization’s standpoint, it would be beneficial
to make sure the employees from the control group are placed in a training
program at a later time.
Pre Test Post Test Control Group Design:
Another powerful design that is recommended for use in training evaluation
is as follows:
GROUP 1 —R: MEASURE—-——TRAINING————MEASURE
GROUP 2—R: MEASURE——NO TRAINING——MEASURE
Individuals are randomly assigned to the two groups. Criteria measures

are collected on both groups before and after the training program is
offered, yet only one group actually receives the training. Comparisons
are made of the changes detected in both groups. If the change in-group1
is significantly different from the change in group 2, we can be somewhat
certain that it was caused by the training. Since many organizations will
want all the employees in both groups to receive the training, the training
can be offered to group 2 at a later time.
Multiple Time Series Design:
Another design recommended for use in training evaluation is shown
below.
GROUP 1—R: MEASURE—MEASURE-MEASURE-— TRAINING
— MEASURE - MEASURE -
MEASURE
GROUP 2—R; MEASURE - MEASURE - MEASURE — NO
TRAINING—MEASURE-MEASURE- MEASURE
In this design, individuals are randomly assigned to two groups, and the
criteria measures are collected at several times before and after the training
have been offered. This design allows the HR professional to observe
any changes between the two groups over time. If the effects of training
held up over several months, this design would offer stronger support
for the program.
Assessing the Costs and Benefits of Training

To conduct a thorough evaluation of a training program, it is important to
assess the costs and benefits associated with the program. This is difficult
to do but may be important for showing top management the value of
training for the organization. For example, in one case, the net return of
a training program for bank supervisors was calculated to be $148,400
over a 5-year period. Generally, a utility model would be used to estimate
the value of training (benefits minus costs).
Some of the costs that should be measured for a training program include
needs assessment costs, salaries of training designers, purchase of
equipment (computers, videos, handouts), program development costs,
evaluation costs, trainers’ costs (e.g., salaries, travel, lodging, meals),
facilities rental, trainee wages during training, and other trainee costs
(e.g., travel, lodging, meals).
It is important to compare the benefits of the training program with its

costs. One benefit that should be estimated is the dollar payback
associated with the improvement in trainees’ performance after receiving
training. Since the results of the experimental design will indicate any
differences in behavior between those trained and those untrained, the
HR professional can estimate for that particular group of employees (e.g.,
managers, engineers) what this difference is worth in terms of the salaries
of those employees. Another factor that should be considered when
estimating the benefits of training is the duration of the training’s impact
that is, the length of time during which the improved performance will be
maintained. While probably no programs will show benefits forever, those
that do incur longer term improved performance will have greater value
to the organization.
4.7 DIRECTING
Direction represents one of the essential functions of management because
it deals with human relations. Once the organizational plans have been
laid down, the structure being designed, and competent people brought
in to fill various positions in organization, direction starts. Direction is the
managerial function of guiding, motivating, leading and supervising the
subordinates to accomplish desired objectives. Acquiring physical and
human assets and suitably placing them will not suffice; what is more
important is that people must be directed toward organizational goals.
Without redirection and supervision, employees become inactive, dull
and inefficient and consequently the physical assets like machinery and
plant will be put to ineffective use.
Direction is an important managerial function that initiates organizer’s
action. It is a connecting and activating link between various functions of
management. It is essentially concerned with mobilizing and synthesizing
human resources and efforts to accomplish the goals of the organization.
A manager’s most important job is to direct the efforts of employees.
Direction phase of management is the heart of management-in-action. It
provides necessary guidance and inspiration to people at work in order
to carry out their assigned duties. Direction is the essence of operations.
It is a continuous function. A manager never ceases to direct, guide,
teach, watch, and supervise his subordinate employees.
4.7.1 Meaning
According to Dale, direction is telling people what to do and seeing that
they do it to the best of their ability. It is through directing that managers
get the work done through people. It consists of:
 Issuing orders and instructions by a superior to his subordinates
(Communication).
 Guiding, advising and helping subordinates in the proper methods of
work (Leadership).
 Motivating them to achieve goals by providing incentives, good
working environment, etc. (Motivation).
 Supervising subordinates to ensure compliance with plans
(Supervision).
 Thus, the scope of direction is very wide. It includes all those activities,
which a manager undertakes to influence the actions of his
subordinates and achieve goals. (Koontz and O’Donnell).
4.7.2 Features
Direction is the process of guiding, inspiring, supervising and commanding
subordinates towards the accomplishment of goals. It has the following
features:
Deals with people: Direction deals with people. It is the process of
inspiring people to achieve goals. To this end, it seeks to create
harmonious relationships between people. However, this is not an easy
affair. People are not primarily interested in enterprise objectives, they
have objectives of their own (Koontz and O’Donnell). Directing is,
therefore, a complex function, as managers have to deal with people
having diverse goals.
Seeks performance: Direction makes things happen. It translates plans
into action. It makes people goal-oriented. To obtain results, managers
not only issue orders but also supervise the performance of subordinates.
They also try to integrate effort at various levels. This helps in securing
desired performance at minimum cost.
Provides a link: Direction is the function of management, which follows
planning, organizing and staffing. It lends meaning to them by ensuring
accomplishment of goals. It provides an important link between different
functions in an organization. Without direction, the individual goals and

organisational goals would never intermesh.
Pervasive: All managers at all levels of an organization perform direction.
Every manager is expected to supervise, motivate, lead and communicate
with his subordinates to get the results. However, the time spent on these
activities decreases at higher levels of authority.
Dynamic and continuous: Direction is a dynamic and continuing activity
of managers. Whenever plans change, the techniques of direction also
change. A manager has to suitably modify the techniques of direction in
order to keep pace with changing times. Further, a manager needs to
direct, guide, teach, motivate and lead his subordinates on a continuous
basis. It is an ongoing activity of managers.
4.7.3 Nature and Purpose

Direction is a vital managerial function. Planning, organizing and staffing
are preparatory functions. It is through direction that managers get things
done. Hence, it is also called management in action. The importance of
directing function in the process of management may be discussed under
the following heads :
Initiates action : Direction lends meaning to other managerial functions
such as planning, organizing and staffing. It is through direction, managers
seek to achieve goals. In most systematic planning, sound organization
and staffing do not ensure accomplishment along with these functions.
Managers must initiate action by:
(i) issuing instructions,
(ii) providing guidance,
(iii) supervising work, and
(iv) motivating subordinates to realize goals.
Without direction, other functions of management remain ineffective.
Direction makes happen.
Achieves integration: Direction creates harmony and cooperation
among the members of a group. In an organization, different people at
different levels perform the total work. Unless managers supervise the
work in a proper way, things do not move in a desired direction. Direction
secures the whole-hearted cooperation of people at all levels through
good communication, people-oriented supervision and motivation. It tries

to integrate the efforts of individuals in a proper way.
Motivates people: Direction motivates employees to achieve superior
performance. To this end, attractive incentives, healthy work climate,
guidance and counseling etc., are provided to employees. Employees
are made to realize that their performance alone guarantees the
organization’s success. Unless they contribute in a real way, there is no
future. This ultimately helps in getting superior performance from
employees. Direction, thus, makes common men do uncommon things.
Facilitates changes: Direction facilitates necessary changes in an
organization. It helps an organization to introduce changes smoothly. For
example, employees often resist introduction of computers and robots in
manufacturing operations, fearing loss of employment. Managers can
remove such doubts by emphasizing the fact that automation and
computerization will ultimately help the organization to achieve growth
and thereby, provide attractive incentives to employees. Through
persuasive leadership and proper communication managers can secure
the cooperation of employees. They can introduce changes in a smooth
way.
Attains balance and stability: Direction helps an organization to strike
a harmonious balance between individual needs and organisational
demands. People are made to work hard in an attempt to realize
organisational goals and thereby earn their rewards. They are compelled
to use resources judiciously and achieve steady progress. In the Words
of Dimock, “The heart of administration is the direction function which
involves determining the scope, giving orders and instructions and
providing dynamic leadership”. Direction converts plans into action. It is
the nucleus around which the practice of management is built. Without
proper direction, people do not work to their full capacity, and goals
may remain as dreams. By putting everything on the right track
continuously, direction ensures stability to an organization.
4.7.4 Principles of Direction

Important principles of direction may be summarized thus:
(a) Principle of harmony of objectives: Direction function must first
of all resolve the conflict between individual goals and organisational
objectives. A manager must try to bring harmony and fusion between
individual employees, groups, and organization. A manager should

foster the sense of belonging to the organization among the individuals
so that they can identify themselves with the company. When both
the interests are integrated, contribution of subordinates to the
company will be maximum. It leads to efficiency and effectiveness.
(b) Principle of unity of command: A sound principle of direction is
that the subordinates should receive orders from one and only one
superior. That means to say there should not be dual subordination.
Dual subordination brings disorder, confusion, chaos, and undermines
the authority of a superior. Any violation of this principle may be
catastrophic to the organization.
(c) Principle of direct supervision: Since direction involves motivating
the employees towards work, it is almost essential for the manager
concerned to have a personal touch with the subordinates and involve
in face-to-face communication regarding work-related matters. He
should also develop informal relationships with his employees. Direct
supervision makes the subordinates happy and boosts their morale.
It also ensures quick feedback of necessary information.
(d) Appropriate techniques: The technique used for direction should
be appropriate to the people, the task and the situation. Democratic
style may work in some cases but autocratic style may produce results
in certain other cases especially where subordinates are incapable
of doing things on their own.
(e) Managerial communication: Two-way communication is an
important part of direction. The manager should explain the policies
and practices to subordinates and the results expected of them.
Proper feedback should come through upward communication. The
manager should actively encourage subordinates to express their
views freely and fearlessly.
(f) Informal organisation: Managers should make use of informal
groups to supplement, support and strengthen the formal structure.
The cooperation of informal leaders will go a long way in putting the
house in order.
(g) Principle of maximum individual contribution: Performance
improves greatly when every employee gives his best to the
organization. The manager, therefore, should inspire the subordinates
in such a way that they contribute their maximum while realizing

organisational objectives.
(h) Use of motivation techniques: A manager should know how to
motivate and inspire the employees. A manager should develop
selective motivation techniques such as money, pay, status, job
enrichment, etc., so that the productivity and the quality of the
commodity produced increases. Motivation almost always leads to
higher job satisfaction. To properly direct and motivate the
employees, an executive must have insight into how his personality
works, how employees perceive the work environment, the attitudes
of employees, etc. Understanding others and self are important for
this. Understanding self is important for understanding others;
understanding others is necessary for motivating them effectively.
(i) Principle of follow-up: Successful direction is a never-ending
activity. It involves constant continuous supervision, coaching, advice,
counseling and helping the employees in their respective activities.
Direction is also concerned with ensuring that people do what they
are told to do. This requires continuous feedback. Feedback is
essential to turn or stop or adjust the wheel of management-in-action.
4.7.5 Elements of Direction

The directing function of management consists of the following elements
(Newman):
(a) issuing orders and instructions to subordinates,
(b) follow-up of instructions,
(c) standard practice and indoctrination,
(d) explanations,
(e) consultative direction.
(a) Good instructions: As William Newman has rightly pointed out,
every instruction given by the manager in the process of directing
the employees must be reasonable, complete, and clear. The
instructions must be in writing. Written instructions are desirable when
several individuals are subject to or are directly affected by
instructions, and execution of the instructions will extend over a
considerable period of time and the matter is of such importance
that steps to avoid the possibility of misunderstanding are needed.
(b) Follow-up of instruction: Another well recognized principle is that

once the orders are issued, they should be followed up to see whether
they are executed properly or the instructions should be
countermanded. If the executive is indifferent in follow-up, it will
lead to administrative lax, time schedules become insignificant and
will result in inefficiency. Insistence on execution of instructions is
essential to ensure efficiency in direction.
(c) Standard practice and indoctrination: The use of standard
operating procedures and customary ways of doing things is an
essential part of direction. Standard practice simplified the instruction
to be given by manager. Unfortunately, a large part of inadequate
direction can be traced the misunderstanding about standard practice.
Another associated aspect of standard practice is the indoctrination.
Indoctrination means instilling in the subordinates a set of beliefs
and attitudes so that they look at an operating situation in a desirable
way.
(d) Explanations: While issuing instructions, the manager should explain
why the order is given.
(e) Consultative direction: Before an order is issued, the people
responsible for executing it will be consulted about its feasibility,
workability and better ways of accomplishing the results.
Characteristics of a Good Order

1. The order should be clear and easily understandable.
2. It should be reasonable and attainable.
3. It must be complete in all respects leaving no doubt in the minds of
subordinates as to what is expected of them.
4. It should be compatible with the overall objectives of the organization.
5. It must indicate the time period within which it should be carried out
and completed.
6. The tone of the order should be appropriate and should stimulate
ready acceptance.
7. It should preferably be in writing. This helps in ensuring uniform
actions everywhere.
8. All orders should follow the chain of command.
9. When issuing the order, the manager should explain the purpose
behind it. i.e., why it is being given.
10. The order should be regularly followed up and suggestions given by
subordinates should be incorporated when it is reissued.
4.8 Supervision
Need for Supervision

There is no universally agreed definition of leading. Supervisory jobs
differ widely in content, scope and implementation. Some supervisors
manage their departments completely; others have authority in limited
areas only, while others take marching orders from somebody else.
Generally, supervisors deal with workers directly and are sometimes
called ‘first-line managers’. In the words of G.R. Terry, “Supervision is
the achieving of desired results by means of the intelligent utilization of
human talents and facilitating resources in a manager that provides the
greatest challenge and interest to human talents.” This definition implies
that supervision includes:
 Overseeing employees at work.
 Intelligent utilization of human talents.
 Motivating employees to peak performance.
 Maintenance of good human relations.
These days most employees complain of monotonous, dull and
uninteresting jobs. When organizational jobs do not provide any challenge
to employees, frustration, resentment and antagonism are the expected
byproducts. No wonder then that employees are somewhat antagonistic
toward the organization in which they are working and its leaders.
Consequently, their morale is low. Managers, in turn are at a loss to
understand why employees do not take interest in their work. How to
maintain good personnel relations happens to be one of the major
contemporary puzzles of the business world. A good supervisor fills the
vacuum in such cases. He assists employees in doing a good job. He
translates the ‘foggy’ management directives to workers in an
understandable language. He finds better ways to achieve results, inspires
good team effort and achieves the targets within a reasonable time and
at a reasonable cost. In other words, a supervisor not only helps in
developing wholesome attitudes toward managerial actions, but also

exercises tremendous influence in securing full support and cooperation
from employees. He is extremely influential in motivating employees, in
developing them, and in building teams which carry out specific duties.
An organization has the greatest chance of being successful when all of
the employees work toward achieving its goals. Since leadership involves
the exercise of influence by one person over others, the quality of
leadership exhibited by supervisors is a critical determinant of
organizational success. Thus, supervisors study leadership in order to
influence the actions of employees toward the achievement of the goals
of the organization.
Supervisors can learn about leadership through research. Leadership
studies can be classified as trait, behavioral, contingency, and
transformational. Earliest theories assumed that the primary source of
leadership effectiveness lay in the personal traits of the leaders themselves.
Yet, traits alone cannot explain leadership effectiveness. Thus, later
research focused on what the leader actually did when dealing with
employees. These behavioral theories of leadership sought to explain
the relationship between what the leaders did and how the employees
reacted, both emotionally and behaviorally. Yet, behavior can’t always
account for leadership in different situations. Thus, contingency theories
of leadership studied leadership style in different environments.
Transactional leaders, such as those identified in contingency theories,
clarify role and task requirements for employees. Yet, contingency can’t
account for the inspiration and innovation that leaders need to compete
in today’s global marketplace. Newer transformational leadership studies
have shown that leaders, who are charismatic and visionary, can inspire
followers to transcend their own self-interest for the good of the
organization.
The Skills of a Supervisor : To perform his job effectively, the supervisor
must possess certain skills. According to Prof Robert Kahn these may
be classified into three categories: human skills, technical skills, and
conceptual skills. Effective supervision should give equal emphasis and
attention to all three roles. As the demands of their jobs change,
supervisors must switch roles continually. Sometimes, they may have to
use their human skills, and at other times they need their technical
expertise.
Human skills : Working with people, perhaps, poses the greatest

challenge to the supervisor. Human skills do not come easily. The ability
to create an atmosphere of goodwill, confidence and trust must become
a natural part of supervisory life. The supervisor must try to understand
the problems of the operatives and provide workable solutions, which
not only solve the problem on hand but also satisfy the operatives to
some extent. As rightly summarized by Terry and Stallard, “The
supervisor must always be objective, find out and review both sides of
problems or disputes, refrain from jumping to conclusions, and solve
issues fairly without playing favorites.” He must be impartial in his dealings
with management and workers. The following human relations guidelines
may help supervisors acquire or improve their human skills:
 Try to look at the positive side of the coin first.
 Judge each group member by his good qualities.
 Analyze the behavior of those above you and at par with you before
analyzing the behavior of your subordinates.
 Develop helpful and constructive contacts with group members, to
bring out the best in them.
 Invite group members to participate in your schemes.
 Work on common motives and try to improve teamwork.
 Think through a problem objectively, patiently and carefully before
determining what action to take.
 Spot the key figures of each informal group and seek their
cooperation.
 Give instructions clearly.
 Provide sufficient details.
 Realize the difficulty of introducing any change to individuals rather
than to groups.
 Request and explain; don’t demand.
 Be persuasive, not coercive.
Technical skills: The supervisor should have a thorough knowledge of
the work he is supervising. He must be able to staff adequately and
distribute the workload properly. Adequate knowledge of systems,
procedures, materials, office forms, equipment, and the way the results
have to be achieved enables a supervisor to be a good leader and obtain
satisfactory results.
Conceptual skills: The supervisor should have the ability to see the
total picture. He should visualize how the various functions of the
organization depend on one another and how changes in one department
affect the organization as a whole. The dangers of extreme specialization
like ‘parts mentality’, ‘tunnel vision’, and inability to look beyond the
confines of one’s specialty should be avoided. Ability to look at the
‘whole picture’, broad vision, and friendly attitude are the hallmarks of
effective supervisors. Supervisors should have the conceptual skills to
unify and coordinate the various components of the organization.
Supervisory Roles
What is the role of a supervisor in an organization? A person caught in
the middle? A buffer between management and workers taking the blows?
Is he a friend or a foe? Over the years, the role of the supervisor in
organizations has undergone a tremendous change. Till the 60s,
supervisors were treated as members of the management, enjoying the
respect, loyalty and cooperation of workers. With the advent of giant
corporations, the job of the supervisor has become very complex and
confusing. He is expected to be a clerk shuffling papers and filling out
forms. He is to be the master technician or the master craftsman of his
group. He is to be an expert on tools and equipment.
He is to be a leader of people. To make the confusion worse, he is
expected to perform every one of these jobs to perfection. Such highly
conflicting and confusing jobs have resulted in his role that is shrinking in
status, in importance and in esteem. He has become a buffer between
management, union and workers, continually receiving the arrows of
criticism, justified as well as unjustified. He has become highly vulnerable
like a pawn in the game of chess. He is being branded increasingly as an
‘enemy’. “He is separated from the men he supervises by an ever higher
wall of hostility, suspicion and resentment. On the other hand, he is also
separated from management by his lack of managerial knowledge.”
Workers expect the supervisor to be fair and impartial, open minded
and friendly. Management expects the supervisor to have a complete
knowledge of his work, genuine interest in his work, curiosity to
constantly update his job knowledge; and the ability to meet deadlines.
Over the years, the job of a supervisor has become ‘a hybrid.’ It is no
wonder that the supervisor is being rejected by both, “by his subordinates
because he is no longer truly a scientist or an expert but has ‘sold out’ to
management, and by management because he is parochial,
departmentalized and one sided.” In this heated atmosphere it is easy to
provoke controversy and promote a spirited discussion. Let’s briefly
dwell on the roles performed by supervisors over the years before
suggesting a contingency framework.
1. Scientific management roles: Every supervisor needs to appreciate
the importance of scientific management under certain conditions.
There is only one best way to do a job and it is the primary duty of
a supervisor to study and analyze the jobs carefully and suggest
suitable work procedures and methods. According to the scientific
management approach, the supervisor is expected to assume the
following types of roles:
(a) Technician: Supervisors should possess a sound knowledge of the
jobs entrusted to them. They must be able to solve the technical
problems posed to them by the employees.
(b) Analyst: Most of the jobs in an organization can be efficiently and
effectively performed in the right way . It is the job of a supervisor
to find out better and improved ways of performing jobs.
(c) Controller: It is the job of a supervisor to provide rewards to
productive workers and punishments to unproductive workers.
2. Human relations roles: Under the scientific management approach,
workers are assigned mechanical roles. They are expected to perform
‘watch dog’ functions. The emphasis on finding out appropriate work
procedures and gearing employees to work schedules has
unfortunately produced negative results. It was realized that, to
improve performance, the needs of the employees must be
recognized, and must be met adequately. Under the human relations
approach, the supervisors are expected to be sensitive to employee
needs and to help them to integrate the goals of the organization. As
a result of this viewpoint, supervisors are expected to do the following
roles:
(a) Counselor: Superviso rs must be pro blem- so lvers, no t

problem-creators. They must listen to employee grievances
sympathetically and try to solve them. They should not try to chisel
on just complaints. In case of trouble, they must investigate
thoroughly and give workers a chance to explain their side of the
story. Everyone should be a given a fair hearing.
(b) Linking pin: The primary duty of a supervisor is to get the job
done, at the right time and in the right way. As a group leader he
must be fair, just and dependable. As a management member, he
must meet the deadlines and show good performance. He must use
resources well, maintain good personal relations and allow employees
to use their potential fully.
(c) Human relations expert: A supervisor must possess good
interpersonal skills. He must be able to communicate the needs,
problems and concerns of the employees to management. As pointed
out by H. L. Wylie, a good supervisor “takes a personal interest in
employees, he is willing to help, willing to take responsibility; does
not pass the buck; willing to go all the way ‘up the line’ for employees
when necessary.” In order to exercise human relations skills,
supervisors must possess a genuine interest in people and a deep
desire to get along with them.
(d) The person caught in the middle: The supervisory position is a
lonely occupation. Top management treats a supervisor as an
operative and workers, in turn, view him as a representative of the
management. He is on the fringe of both, management and employee
groups, and implying less than full acceptance by both. Supervisors,
thus, are forced to perform a ‘tight rope walk’ in their daily life. To
walk a fine line and to gain acceptance from both management and
employees, a supervisor should possess good conceptual and
interpersonal skills.
(e) Motivator: Successful supervisors pay adequate attention to
employee needs and appreciate the importance of fulfilling these needs
while realizing organizational goals. To elicit effective performance
from employees, it is necessary to listen to their grievances and
provide a satisfactory work climate. Good performance should be
recognized and adequately rewarded. Employees should also be
motivated to assume additional responsibilities. Jobs should be made

more stimulating. Opportunities must be provided to employees to
utilize their mental faculties fully.
(f) Trainer: A good supervisor lets each employee know where he
stands. He is aware of the differences among employees and is
capable of responding to each employee as an individual. He assigns
work fairly so that the right man is placed on the right job. He provides
necessary training and coaching to employees and makes them more
productive.
3. Functional roles: According to the Universal principles approach
(as propagated by Henry L Fayol and others), the supervisor should
have a broad perspective while getting things done through others.
He must be able to organize and coordinate the department’s human
and physical assets to achieve the overall goals of the organization.
According to the functional approach, a supervisor is expected to
assume the following roles:
(a) Leader: A good supervisor must demonstrate good leadership
qualities. Giving orders and instructions does not make him a leader.
Research studies have shown that employees react negatively to
orders and commands issued by leaders. Task oriented styles,
emphasizing work and its components, make employees unhappy
and bring frustration and resentment among them. The feelings and
concerns of workers should be given importance while getting things
done through them. Therefore, effective supervisors adopt a
people-oriented style where the results are achieved by satisfying
subordinates’ needs.
(b) Organizer: A supervisor is much like the conductor of a symphony
orchestra bringing into play each of the instruments at just the right
moment to produce beautiful music. A supervisor is expected to
establish the proper relationships between people, task and
resources. He has to convert the disorganized resources of men,
machines and materials into a useful, productive organization. He
has to maintain an effective manpower system for achieving established
plans. To meet these purposes, the work must be divided, properly
allocated and placed under the charge of responsible and competent
individuals. A suitable work climate must be provided to make
subordinates productive and efficient.
(c) Planner: A supervisor should educate subordinates regarding the

overall objectives of the organization and the importance of realizing
these objectives against a time schedule. He must allow the
subordinates to see ‘the big picture’. The work group must know in
advance what they are doing and how they contribute to the success
of the organization by performing assigned tasks effectively. A good
supervisor must provide a convenient break up of major, overall
objectives for subordinates and guide them in accomplishing the
goals. He should point out the way by planning step by step and
determining how to get there from them.
(d) Decision-maker: Supervisors have direct access to the information
on which most operational decisions are taken. By virtue of their
crucial position in the organisation, supervisors are most likely to be
the first to identify ‘potential problem areas’, and provide the
necessary warning signals. Exposure to day-to-day problems enables
them to come out with appropriate solutions to such problems quickly.
Additionally, they can also implement the decision and monitor
performance along desired channels. By serving as critical link
between management and subordinates, supervisors make many
decisions needed for the successful day-to-day functioning of modern
organizations.
How to Supervise Effectively

The question of how to supervise effectively has been widely and
thoroughly discussed in management. Most of these prescriptions are
somewhat idealistic and academic. However, Terry and Stallard’s
guidelines appear to be sound enough for implementation. After surveying
the ever growing literature on this subject, they have provided the following
recommendations for achieving effective supervision:
1. Practice participation: Supervisors should allow employees to air
their feelings about organizational policies and procedures openly.
Employees should be given an opportunity to ventilate their grievances
freely. Even if an employee is wrong, the supervisor should listen to
him, because this can be a means to relieve tension and establish
mutual support. To ensure commitment and loyalty, it is better to
involve employees in the goal setting process.
2. Be aware of the resources available to accomplish the

prescribed work: Supervisors should be able to manage resource
flows properly. However, striking a fine balance between human
and non-human resources is not easy. This requires information that
is usually found in schedules, budgets, etc. Since supervisors are
accountable for the effective deployment of resources, it is better to
involve them in the initial stages.
3. Know and enforce policies and rules: Policies define the
boundaries of supervisory action. They guide the current and future
operations of an organisation. In cases where rules violated and
policies are not enforced rigorously, rectification steps should be
taken without delay. “Side stepping issues, by-passing grievance
cases, overlooking infringements of regulations, all are indications of
supervisory weakness.” If corrective action is necessary, a supervisor
must take it promptly. In order to enforce policies, rules and
regulations, a supervisor must be equipped with facts; he must have
the ability to interpret the facts intelligently and act quickly. “Prompt
action on his part will often prevent minor irritations from becoming
major problems.”
4. Find out the existing relationships inside and outside the
immediate department being supervised: To show good
performance, supervisors should understand the network of
organisational relationships that exist between various departments.
They should know the importance of these relationships. They should
also know how each department contributes to the realization of
overall goals. This means knowing the organisation and being able
to grasp how a particular project or way of doing something fits into
the total picture. Understanding these relationships enables
supervisors to manage employees effectively.
5. Watch waste-material loss and time loss: Supervisors should
view time as a vital and precious possession, which must always be
used wisely. They must be able to get the most out of their working
hours. This requires that they must clearly define the long-and
short-term objectives and outline the priorities properly. The problem
is not just cutting activities and doing things more quickly but also
spending additional time in selected activities. Some time of each
day should be devoted to planning, in a similar way, supervisors
should guard against waste of all types affecting organisational

performance.
6. Measure performance to aid in having a fair wage plan:
Supervisors should establish performance standards for employees.
Each employee has a right to know what performance standards are
expected of him and how such standards are determined. He must
be able to assess his own performance and keep his scorecard
up-to-date. The employee should know in what respects he is
considered weak and where he ‘shines’. However, while fixing
performances standards care should be taken to keep them at
reasonably attainable level. The standards fixed should neither be
too high nor too low. High standards breed frustration and resentment
and low standards make employees docile and unproductive.
Moreover, the standards fixed must be same for all employees
performing similar jobs.
7. Secure employees’ opinions regarding supervision: Supervisors
sho uld t alk t o emp lo yees frequ ent ly, in a simp le and
easy-to-understand language. Talking reveals much about how the
policies, rules and regulations are interpreted by the work group. It
also reveals a lot about how the supervisory actions are received. It
helps in finding out what is bothering the employees and what ‘gripes’
are developing. Attitude surveys, spot interviews, casual
conversations help in testing the pulse of the employees from time to
time. While establishing two-way communication with the employees,
care should be taken to use words carefully. Don’t let your feelings
run away with your words, whether it is words of reproof or words
of commendation. It may be hard to live up to hasty promises of
reward, and it might be equally difficult to fulfill angry threats.
8. Develop capable assistants: Supervisors should develop capable
assistants. They must encourage potential supervisors to exploit their
capacities fully. When potential supervisor and managerial material
has been located, supervisors should encourage these people to study
further, to acquire new skills and information that will make them
more valuable members of the company. Obviously, a supervisor
cannot aspire for promotion without developing competent
understudies.
9. Know from whom help is supplied when it is requested or

needed: Supervisors should know which supervisors and qualified
staff personnel to turn to for help from time to time. Without the
blessings from the top management and staff personnel, it may not
be possible to show good results.
10. Inform top and middle management members what supervisory
action is taking place and why: Supervisors should keep
management in touch with organisational activities and trends.
Information regarding absenteeism, employee turnover, volume of
work produced, condition of office equipment, budget requirements,
trends, bottlenecks and the like, should be provided to management
periodically.
Traditional vs. Developmental Supervision

The basic objective of supervision is to see that the worker does what
he is supposed to do through:
(i) Proper understanding of the needs of the workers,
(ii) Observing, guiding and evaluating this work and
(iii) Rewarding the workers whenever they accomplish something.
Over the years, the concept of supervision has undergone significant
changes.
4.9 A Definition of Leadership

A traditional definition of leadership: Leadership is an interpersonal
influence directed toward the achievement of a goal or goals.
Three important parts of this definition are the terms interpersonal,
influence, and goal.
 Interpersonal means between persons. Thus, a leader has more than
one person (group) to lead.
 Influence is the power to affect others.
 Goal is the end one strives to attain.
Basically, this traditional definition of leadership says that a leader
influences more than one person toward a goal.
Another definition of leadership follows :
LEADERSHIP is a dynamic relationship based on mutual influence and

common purpose between leaders and collaborators in which both are
moved to higher levels of motivation and moral development as they
affect real, intended change. (Kevin Freiberg and Jackie Freiberg, NUTS!
Southwest Airlines’ Crazy Recipe for Business and Personal Success,
Bard Press, 1996, p. 298)
Three important parts of this definition are the terms relationship, mutual,
and collaborators. Relationship is the connection between people. Mutual
means shared in common. Collaborators cooperate or work together.
This definition of leadership says that the leader is influenced by the
collaborators while they work together to achieve an important goal.
Leadership versus Management

A leader can be a manager, but a manager is not necessarily a leader.
The leader of the work group may emerge informally as the choice of the
group. If a manager is able to influence people to achieve the goals of
the organization, without using his or her formal authority to do so, then
the manager is demonstrating leadership.
According to John P. Kotter in his book, “A Force for Change: How
Leadership Differs From Management” (The Free Press, 1990), managers
must know how to lead as well as manage. Without leading as well as
managing, today’s organizations face the threat of extinction. Management
is the process of setting and achieving the goals of the organization through
the functions of management: planning, organizing, directing (or leading),
and controlling. A manager is hired by the organization and is given formal
authority to direct the activity of others in fulfilling organization goals.
Thus, leading is a major part of a manager’s job. Yet a manager must
also plan, organize, and control. Generally speaking, leadership deals
with the interpersonal aspects of a manager’s job, whereas planning,
organizing, and controlling deal with the administrative aspects.
Leadership deals with change, inspiration, motivation, and influence.
Management deals more with carrying out the organization’s goals and
maintaining equilibrium.
The key point in differentiating between leadership and management is
the idea that employees willingly follow leaders because they want to,
not because they have to. Leaders may not possess the formal power to
reward or sanction performance. However, employees give the leader

power by complying with what he or she requests. On the other hand,
managers may have to rely on formal authority to get employees to
accomplish goals.
4.10 THEORIES OF LEADERSHIP
4.10.1 Trait Theories
In the 1920s and 1930s, leadership research focused on trying to identify

the traits that differentiated leaders from non-leaders. These early
leadership theories were content theories, focusing on “what” an effective
leader is, not on ‘how’ to effectively lead. The trait approach to
understanding leadership assumes that certain physical, social, and
personal characteristics are inherent in leaders. Sets of traits and
characteristics were identified to assist in selecting the right people to
become leaders. Physical traits include being young to middle-aged,
energetic, tall, and handsome. Social background traits include being
educated at the “right” schools and being socially prominent or upwardly
mobile. Social characteristics include being charismatic, charming, tactful,
popular, cooperative, and diplomatic. Personality traits include being self-
confident, adaptable, assertive, and emotionally stable. Task-related
characteristics include being driven to excel, accepting of responsibility,
having initiative, and being results-oriented.
Trait theories intended to identify traits to assist in selecting leaders since
traits are related to leadership effectiveness in many situations. The trait
approach to understanding leadership supports the use of tests and
interviews in the selection of managers. The interviewer is typically
attempting to match the traits and characteristics of the applicant to the
position. For example, most interviewers attempt to evaluate how well
the applicant can work with people.
Trait theory has not been able to identify a set of traits that will consistently
distinguish leaders from followers. Trait theory positions key traits for
successful leadership (drive, desire to lead, integrity, self-confidence,
intelligence, and job-relevant knowledge). Yet the theory does not make
a judgment as to whether these traits are inherent to individuals or whether
they can be developed through training and education. No two leaders
are alike. Furthermore, no leader possesses all of the traits. Comparing
leaders in different situations suggests that the traits of leaders depend

on the situation. Thus, traits were de-emphasized to take into account
situational conditions (contingency perspective).
4.10.2 Behavioral Theories
The behavioral theorists identified determinants of leadership so that

people could be trained to be leaders. They developed training programs
to change managers’ leadership behaviors and assumed that the best
styles of leadership could be learned.
Theory X and Theory Y

Douglas McGregor described Theory X and Theory Y in his book, The
Human Side of Enterprise. Theory X and Theory Y each represent
different ways in which leaders view employees. Theory X managers
believe that employees are motivated mainly by money, are lazy,
uncooperative, and have poor work habits. Theory Y managers believe
that subordinates work hard, are cooperative, and have positive attitudes.
Theory X is the traditional view of direction and control by managers.
1. The average human being has an inherent dislike of work and will
avoid it if he or she can.
2. Because of this human characteristic of dislike of work, most people
must be controlled, directed, and threatened with punishment to get
them to put forth adequate effort toward the achievement of
organizational objectives.
3. The average human being prefers to be directed, wishes to avoid
responsibility, and has relatively little ambition, wants security above
all.
Theory X leads naturally to an emphasis on the tactics of control to
procedures and techniques for telling people what to do, for determining
whether they are doing it, and for administering rewards and punishment.
Theory X explains the consequences of a particular managerial strategy.
Because its assumptions are so unnecessarily limiting, it prevents
managers from seeing the possibilities inherent in other managerial
strategies. As long as the assumptions of Theory X influence managerial
strategy, organizations will fail to discover, let alone utilize, the potentialities
of the average human being.
Theory Y is the view that individual and organizational goals can be

integrated.
1. The expenditures of physical and mental effort in work are as natural
as play or rest.
2. External control and the threat of punishment are not the only means
for bringing out effort toward organizational objectives.
3. Commitment to objectives is a function of the rewards associated
with their achievement.
4. The average human being learns, under proper conditions, not only
to accept but also to seek responsibility.
5. The capacity to exercise a relatively high degree of imagination,
ingenuity, and creativity in the solution of organizational problems is
widely, not narrowly, distributed in the population.
6. Under the condition of modern industrial life, the intellectual
potentialities of the average human being are only partially utilized.
Theory Y’s purpose is to encourage integration, to create a situation in
which an employee can achieve his or her own goals best by directing
his or her efforts toward the objectives of the organization. It is a deliberate
attempt to link improvement in managerial competence with the
satisfaction of higher-level ego and self-actualization needs. Theory Y
leads to a preoccupation with the nature of relationships, with the creation
of an environment which will encourage commitment to organizational
objectives and which will provide opportunities for the maximum exercise
of initiative, ingenuity, and self-direction in achieving them.
University of Iowa
Another approach to leader behavior focused on identifying the best
leadership styles. Work at the University of Iowa identified democratic
(participation and delegation), autocratic (dictating and centralized) and
laissez-faire styles (group freedom in decision making). Research findings
were also inconclusive.
4.10.3 The Managerial Grid

The dimensions identified at the University of Michigan provided the
basis for the development of the managerial grid model developed by
Robert Blake and Jane Mouton. It identifies five various leadership styles
that represent different combinations of concern for people and concern

for production. Managers who scored high on both these dimensions
simultaneously (labeled team management) performed best.
The five leadership styles of the managerial grid include impoverished,
country club, produce or perish, middle-of-the road, and team. The
impoverished style is located at the lower left-hand corner of the grid,
point (1, 1). It is characterized by low concern for both people and
production. The primary objective of the impoverished style is for
managers to stay out of trouble. The country club style is located at the
upper left-hand corner of the grid, point (1, 9). It is characterized as a
high concern for people and a low concern for production. The primary
objective of the country club style is to create a secure and comfortable
atmosphere and trust that subordinates will respond positively. The
produce or perish style is located at the lower right-hand corner of the
grid, point (9,1). A high concern for production and a low concern for
people characterize it. The primary objective of the produce or perish
style is to achieve the organization’s goals. To accomplish the organization’s
goals, it is not necessary to consider employees’ needs as relevant. The
middle-of-the-road style is located at the middle of the grid, point (5, 5).
A balance between workers’ needs and the organization’s productivity
goals characterize it. The primary objective of the middle-of-the-road
style is to maintain employee morale at a level sufficient to get the
organization’s work done. The team style is located at the upper right-
hand of the grid, point (9, 9). It is characterized by a high concern for
people and production. The primary objective of the team style is to
establish cohesion and foster a feeling of commitment among workers.
4.10.4 Contingency Theories

Successful leaders must be able to identify clues in an environment and
adapt their leadership behavior to meet the needs of their followers and
of the particular situation. Even with good diagnostic skills, leaders may
not be effective unless they can adapt their leadership style to meet the
demands of their environment.
4.10.4.1 Fiedler’s Contingency Model

Leadership Theory and Research: Perspectives and Directions
(Academic Press Inc (HBJ), 1993) was a tribute to Fred Fiedler’s 40
year study of leadership and organizational effectiveness. The editors,
Martin M. Chemers and Roya Ayman, write of Fiedler’s contribution:

“The realization that leadership effectiveness depends on the interaction
of qualities of the leader with demands of the situation in which the leader
functions, made the simplistic “one best way” approach of earlier eras
obsolete.”
Fred E. Fiedler’s contingency theory postulates that there is no best
way for managers to lead. Situations will create different leadership style
requirements for a manager. The solution to a managerial situation is
contingent on the factors that impinge on the situation. For example, in a
highly routinized (mechanistic) environment where repetitive tasks are
the norm, a certain leadership style may result in the best performance.
The same leadership style may not work in a very dynamic environment.
Fiedler looked at three situations that could define the condition of a
managerial task:
1. Leader member relations: How well do the manager and the
employees get along?
2. The task structure: Is the job highly structured, fairly unstructured,
or somewhere in between?
3. Position power: How much authority does the manager possess?
Managers were rated as to whether they were relationship oriented or
task oriented. Task oriented managers tend to do better in situations that
have good leader-member relationships, structured tasks, and either weak
or strong position power. They do well when the task is unstructured but
position power is strong. Also, they did well at the other end of the
spectrum when the leader member relations were moderate to poor and
the task was unstructured. Relationship oriented managers do better in
all other situations. Thus, a given situation might call for a manager with
a different style or a manager who could take on a different style for a
different situation.
These environmental variables are combined in a weighted sum that is
termed “Favorable” at one end and “unfavorable” at the other. Task
oriented style is preferable at the clearly defined extremes of “favorable”
and “unfavorable” environments, but relationship orientation excels in
the middle ground. Managers could attempt to reshape the environment
variables to match their style.
Another aspect of the contingency model theory is that the leader-member

relations, task structure, and position power dictate a leader’s situational
control. Leader-member relations are the amount of loyalty, dependability,
and support that the leader receives from employees. It is a measure of
how the manager perceives him or her and the group of employees is
getting along together. In a favorable relationship the manager has a high
task structure and is able to reward and or punish employees without
any problems. In an unfavorable relationship the task is usually unstructured
and the leader possesses limited authority. The spelling out in detail
(favorable) of what is required of subordinates affects task structure.
Positioning power measures the amount of power or authority the manager
perceives the organization has given him or her for the purpose of directing,
rewarding, and punishing subordinates. Positioning power of managers
depends on the taking away (favorable) or increasing (unfavorable) the
decision-making power of employees.
The task-motivated style leader experiences pride and satisfaction in the
task accomplishment for the organization, while the relationship-motivated
style seeks to build interpersonal relations and extend extra help for the
team development in the organization. There is no good or bad leadership
style. Each person has his or her own preferences for leadership. Task-
motivated leaders are at their best when the group performs successfully
such as achieving a new sales record or outperforming the major
competitor. Relationship-oriented leaders are at their best when greater
customer satisfaction is gained and a positive company image is
established.
4.10.4.2 Hersey-Blanchard Situational Leadership

The Hersey-Blanchard Situational Leadership theory is based on the
amount of direction (task behavior) and amount of socio-emotional
support (relationship behavior) a leader must provide given the situation
and the “level of maturity” of the followers. Task behavior is the extent
to which the leader engages in spelling out the duties and responsibilities
to an individual or group. This behavior includes telling people what to
do, how to do it, when to do it, where to do it, and who is to do it. In
task behavior the leader engages in one-way communication. Relationship
behavior is the extent to which the leader engages in two-way or multi-
way communications. This includes listening, facilitating, and supportive
behaviors. In relationship behavior the leader engages in two-way

communication by providing socio-emotional support. Maturity is the
willingness and ability of a person to take responsibility for directing his
or her own behavior. People tend to have varying degrees of maturity,
depending on the specific task, function, or objective that a leader is
attempting to accomplish through their efforts.
To determine the appropriate leadership style to use in a given situation,
the leader must first determine the maturity level of the followers in relation
to the specific task that the leader is attempting to accomplish through
the effort of the followers. As the level of followers’ maturity increases,
the leader should begin to reduce his or her task behavior and increase
relationship behavior until the followers reach a moderate level of maturity.
As the followers begin to move into an above average level of maturity,
the leader should decrease not only task behavior but also relationship
behavior.
Once the maturity level is identified, the appropriate leadership style can
be determined. The four leadership styles are telling, selling,
participating, and delegating. High task/low relationship behavior (S1)
is referred to as “telling.” The leader provides clear instructions and
specific direction. Telling style is best matched with a low follower
readiness level. High task/high relationship behavior (S2) is referred to
as “selling.” The leader encourages two-way communication and helps
build confidence and motivation on the part of the employee, although
the leader still has responsibility and controls decision making. Selling
style is best matched with a moderate follower readiness level. High
relationship/low task behavior (S3) is referred to as “participating.” With
this style, the leader and followers share decision making and no longer
need or expect the relationship to be directive. Participating style is best
matched with a moderate follower readiness level. Low relationship/low
task behavior (S4) is labeled “delegating.” This style is appropriate for
leaders whose followers are ready to accomplish a particular task and
are both competent and motivated to take full responsibility. Delegating
style is best matched with a high follower readiness level.
4.10.4.3 House’s Path-Goal Model
The path-goal theory developed by Robert House is based on the

expectancy theory of motivation. The manager’s job is viewed as coaching
or guiding workers to choose the best paths for reaching their goals.
“Best” is judged by the accompanying achievement of organizational goals.
It is based on the precepts of goal setting theory and argues that leaders
will have to engage in different types of leadership behavior depending
on the nature and demands of the particular situation. It’s the leader’s
job to assist followers in attaining goals and to provide direction and
support needed to ensure that their goals are compatible with the
organizations.
A leader’s behavior is acceptable to subordinates when viewed as a
source of satisfaction and motivation. Satisfaction is contingent on
performance, and the leader facilitates, coaches and rewards effective
performance. Path goal theory identifies achievement-oriented, directive,
participative and supportive leadership styles. In achievement-oriented
leadership, the leader sets challenging goals for followers, expects them
to perform at their highest level, and shows confidence in their ability to
meet this expectation. This style is appropriate when the follower suffers
from a lack of job challenge. In directive leadership, the leader lets
followers know what is expected of them and tells them how to perform
their tasks. This style is appropriate when the follower has an ambiguous
job. Participative leadership involves leaders consulting with followers
and asking for their suggestions before making a decision. This style is
appropriate when the follower is using improper procedures or is making
poor decisions. In supportive leadership, the leader is friendly and
approachable. He or she shows concern for followers’ psychological
well being. This style is appropriate when the followers lack confidence.
Path-Goal theory assumes that leaders are flexible and that they can
change their style, as situations require. The theory proposes two
contingency variables (environment and follower characteristics) that
moderate the leader behavior-outcome relationship. Environment is
outside the control of followers-task structure, authority system, and
work group. Environmental factors determine the type of leader behavior
required if follower outcomes are to be maximized. Follower
characteristics are the locus of control, experience, and perceived ability.
Personal characteristics of subordinates determine how the environment
and leader are interpreted. Effective leaders clarify the path to help their
followers achieve their goals and make the journey easier by reducing
roadblocks and pitfalls. Research demonstrates that employee
performance and satisfaction are positively influenced when the leader

compensates for the shortcomings in either the employee or the work
setting.
4.10.4.4 Vroom, Yetton, Jago Leader-Participation Model

The Vroom, Yetton, Jago leader-participation model relates leadership
behavior and participation to decision making. The model provides a set
of sequential rules to determine the form and amount of participative
decision making in different situations. It is a decision tree, requiring yes
and no answers incorporating contingencies about task structure and
alternative styles.
The following contingency questions must be answered to determine the
appropriate leadership style in the leader-participation model.
 Quality Requirement: How important is the technical quality of
this decision?
 Commitment Requirement: How important is subordinate
commitment to the decision?
 Leader’s Information: Do you have sufficient information to make
a high-quality decision?
 Problem Structure: Is the problem well structured?
 Commitment Probability: If you were to make the decision yourself,
are you reasonably certain that your subordinates would be committed
to the decision?
 Goal Congruence: Do subordinates share the organizational goals
to be attained in solving this problem?
 Subordinate Conflict: Is conflict among subordinates over preferred
solutions likely?
 Subordinate Information: Do subordinates have sufficient
information to make a high-quality decision?
4.10.4.5 Transformational Leadership

Transformational leadership blends the behavioral theories with a little
dab of trait theories. Transactional leaders, such as those identified in
contingency theories, guide followers in the direction of established goals
by clarifying role and task requirements. However, transformational
leaders, who are charismatic and visionary, can inspire followers to

transcend their own self-interest for the good of the organization.
Transformational leaders appeal to followers’ ideals and moral values
and inspire them to think about problems in new or different ways. Leader
behaviors used to influence followers include vision, framing, and
impression management. Vision is the ability of the leader to bind people
together with an idea. Framing is the process whereby leaders define the
purpose of their movement in highly meaningful terms. Impression
management is a leader’s attempt to control the impressions that others
form about the leader by practicing behaviors that make the leader more
att ract ive and appealing to o t hers. Research indicat es t hat
transformational, as compared to transactional, leadership is more
strongly correlated with lower turnover rates, higher productivity, and
higher employee satisfaction.
A transformational leader instills feelings of confidence, admiration and
commitment in the followers. He or she is charismatic, creating a special
bond with followers, articulating a vision with which the followers identify
and for which they are willing to work. Each follower is coached, advised,
and delegated some authority. The transformational leader stimulates
followers intellectually, arousing them to develop new ways to think about
problems. The leader uses contingent rewards to positively reinforce
performances that are consistent with the leader’s wishes. Management
is by exception. The leader takes initiative only when there are problems
and is not actively involved when things are going well. The
transformational leader commits people to action and converts followers
into leaders.
Transformational leaders are relevant to today’s workplace because they
are flexible and innovative. While it is important to have leaders with the
appropriate orientation defining tasks and managing interrelationships, it
is even more important to have leaders who can bring organizations into
futures they have not yet imagined. Transformational leadership is the
essence of creating and sustaining competitive advantage.
4.11 MOTIVATION
Motivation is the set of processes that moves a person toward a goal.
Thus, motivated behaviors are voluntary choices controlled by the
individual employee. The supervisor (motivator) wants to influence the
factors that motivate employees to higher levels of productivity. Since

motivation influences productivity, supervisors need to understand what
motivates employees to reach peak performance. It is not an easy task
to increase employee motivation because employees respond in different
ways to their jobs and their organization’s practices.
Factors that affect work motivation include individual differences, job
characteristics, and organizational practices. Individual differences are
the personal needs, values, and attitudes, interests and abilities that people
bring to their jobs. Job characteristics are the aspects of the position that
determine its limitations and challenges. Organizational practices are the
rules, human resources policies, managerial practices, and rewards
systems of an organization. Supervisors must consider how these factors
interact to affect employee job performance.
Simple Model of Motivation

The purpose of behavior is to satisfy needs. A need is anything that is
required, desired, or useful. A want is a conscious recognition of a need.
A need arises when there is a difference in self-concept (the way I see
myself) and perception (the way I see the world around me). The
presence of an active need is expressed as an inner state of tension from
which the individual seeks relief.
4.11.1 Theories of Motivation

Many methods of employee motivation have been developed. The study
of work motivation has focused on the motivator (supervisor) as well as
the motivatee (employee). Motivation theories are important to
supervisors attempting to be effective leaders. Two primary approaches
to motivation are content and process.
The content approach to motivation focuses on the assumption that
individuals are motivated by the desire to fulfill inner needs. Content
theories focus on the needs that motivate people.
4.11.2. Maslow’s Hierarchy of Needs

Identifies five levels of needs, which are best seen as a hierarchy with the
most basic need emerging first and the most sophisticated need last.
People move up the hierarchy one level at a time. Gratified needs lose
their strength and the next level of needs is activated. As basic or lower-
level needs are satisfied, higher-level needs become operative. A satisfied

need is not a motivator. The most powerful employee need is the one
that has not been satisfied. Abraham Maslow first presented the five-tier
hierarchy in 1942 to a psychoanalytic society and published it in 1954 in
Motivation and Personality (New York: Harper and Row).
Self-Actualization
Need to do the work we like
Esteem
Need to feel worthy
and respected
Social
Need for love, to be a
member of a group
Safety
Need to feel safe and secure
Need to stay alive, to breathe,

to eat, to drink, to sleep
Level I - Physiological needs are the most basic human needs. They
include food, water, and comfort. The organization helps to satisfy
employees’ physiological needs by a paycheck.
Level II - Safety needs are the desires for security and stability, to feel
safe from harm. The organization helps to satisfy employees’ safety needs
by benefits.
Level III - Social needs are the desires for affiliation. They include
friendship and belonging. The organization helps to satisfy employees’
social needs through sports teams, parties, and celebrations. The
supervisor can help fulfill social needs by showing direct care and concern
for employees.
Level IV - Esteem needs are the desires for self-respect and respect
or recognition from others. The organization helps to satisfy employees’
esteem needs by matching the skills and abilities of the employee to the
job. The supervisor can help fulfill esteem needs by showing workers
that their work is appreciated.
Level V - Self-actualization needs are the desires for self-fulfillment
and the realization of the individual’s full potential. The supervisor can
help fulfill self-actualization needs by assigning tasks that challenge
employees’ minds while drawing on their aptitude and training.
4.11.3 Alderfer’s ERG :

Identified three categories of needs. The most important contribution of
the ERG model is the addition of the frustration-regression hypothesis,
which holds that when individuals are frustrated in meeting higher level
needs, the next lower level needs reemerge.
Existence needs are the desires for material and physical well being.
These needs are satisfied with food, water, air, shelter, working conditions,
pay, and fringe benefits.
Relatedness needs are the desires to establish and maintain interpersonal
relationships. These needs are satisfied with relationships with family,
friends, supervisors, subordinates, and co-workers.
Growth needs are the desires to be creative, to make useful and
productive contributions and to have opportunities for personal
development.
4.11.4 McClelland’s Learned Needs

divides motivation into needs for power, affiliation, and achievement.
Achievement motivated people thrive on pursuing and attaining goals.
They like to be able to control the situations in which they are involved.
They take moderate risks. They like to get immediate feedback on how
they have done. They tend to be preoccupied with a task-orientation
towards the job to be done.
Power motivated individuals see almost every situation as an opportunity
to seize control or dominate others. They love to influence others. They
like to change situations whether or not it is needed. They are willing to
assert themselves when a decision needs to be made.
Affiliation motivated people are usually friendly and like to socialize
with others. This may distract them from their performance requirements.
They will usually respond to an appeal for cooperation.
4.11.5 Herzberg’s Two-Factor Theory

describes needs in terms of satisfaction and dissatisfaction. Frederick
Herzberg examined motivation in the light of job content and contest.
(See Work and the Nature of Man, Crowell Publications, 1966.)
Motivating employees is a two-step process. First provide hygienes and
then motivators. One continuum ranges from no satisfaction to satisfaction.
The other continuum ranges from dissatisfaction to no dissatisfaction.
Satisfaction comes from motivators that are intrinsic or job content, such
as achievement, recognition, advancement, responsibility, the work itself,
and growth possibilities. Herzberg uses the term motivators for job
satisfiers since they involve job content and the satisfaction that results
from them. Motivators are considered job turn-ons. They are necessary
for substantial improvements in work performance and move the employee
beyond satisfaction to superior performance. Motivators correspond to
Maslow’s higher-level needs of esteem and self-actualization.
Dissatisfaction occurs when the following hygiene factors, extrinsic or
job context, are not present on the job: pay, status, job security, working
conditions, company policy, peer relations, and supervision. Herzberg
uses the term hygiene for these factors because they are preventive in
nature. They will not produce motivation, but they can prevent motivation
from occurring. Hygiene factors can be considered job stay-ons because
they encourage an employee to stay on a job. Once these factors are
provided, they do not necessarily promote motivation; but their absence
can create employee dissatisfaction. Hygiene factors correspond to
Maslow’s physiological, safety, and social needs in that they are extrinsic,
or peripheral, to the job. They are present in the work environment or
job context.
Motivation comes from the employee’s feelings of accomplishment or
job content rather than from the environmental factors or job context.
Motivators encourage an employee to strive to do his or her best. Job
enrichment can be used to meet higher-level needs. To enrich a job, a
supervisor can introduce new or more difficult tasks, assign individuals
specialized tasks that enable them to become experts, or grant additional
authority to employees.
The process approach emphasizes how and why people choose certain
behaviors in order to meet their personal goals. Process theories focus
on external influences or behaviors that people choose to meet their

needs. External influences are often readily accessible to supervisors.
4.11.6 Vroom’s Expectancy Model

suggests that people choose among alternative behaviors because they
anticipate that particular behaviors will lead to one or more desired
outcomes and that other behaviors will lead to undesirable outcomes.
Expectancy is the belief that effort will lead to first-order outcomes,
any work related behavior that is the direct result of the effort an employee
expends on a job.
4.11.7 Equity
is the perception of fairness involved in rewards given. A fair or equitable
situation is one in which people with similar inputs experience similar
outcomes. Employees will compare their rewards with the rewards
received by others for their efforts. If employees perceive that an inequity
exists, they are likely to withhold some of their contributions, either
consciously or unconsciously, to bring a situation into better balance.
For example, if someone thinks he or she is not getting enough pay (output)
for his or her work (input), he or she will try to get that pay increased or
reduce the amount of work he or she is doing. On the other hand, when
a worker thinks he or she is being paid too much for the work he or she
is doing, he or she tends to increase the amount of work. Not only do
workers compare their own inputs and outputs; they compare their input/
output ratio with the input/output ratio of other workers. If one work
team believes they are doing more work than a similar team for the same
pay, their sense of fairness will be violated and they will tend to reduce
the amount of work they are doing. It is a normal human inclination to
want things to be fair.
Bowditch and Buono note (see Bowditch, James L. and Anthony F.
Buono, A Primer on Organizational Behavior, 4th, John Wiley & Sons,
1997) that while equity theory was originally concerned with differences
in pay, it may be applied to other forms of tangible and intangible rewards
in the workplace. That is, if any input is not balanced with some fair
output, the motivation process will be difficult. Supervisors must manage
the perception of fairness in the mind of each employee. If subordinates
think they are not being treated fairly, it is difficult to motivate them.
4.11.8 Reinforcement
involves four types of consequence. Positive reinforcement creates a
pleasant consequence by using rewards to increase the likelihood that a
behavior will be repeated. Negative reinforcement occurs when a person
engages in behavior to avoid unpleasant consequences or to escape from
existing unpleasant consequences. Punishment is an attempt to discourage
a target behavior by the application of negative outcomes whenever it is
possible. Extinction is the absence of any reinforcement, either positive
or negative, following the occurrence of a target behavior. Employees
have questions about their jobs. Can I do what the management is asking
me to do? If I do the job, will I be rewarded? Will the reward I receive
be satisfactory to me?
Reinforcement is based primarily on the work of B.F. Skinner, a
psychologist, who experimented with the theories of operant conditioning.
Skinner’s work shows that many behaviors can be controlled through
the use of rewards. In fact, a person might be influenced to change his or
her behavior by giving him or her rewards.
Employees who do an exceptionally good job on a particular project

should be rewarded for that performance. It will motivate them to try to
do an exceptional job on their next project. Employees must associate
the reward with the behavior. In other words, the employee must know
for what specifically he or she is being rewarded. The reward should
come as quickly as possible after the behavior. The reward can be almost
anything, but it must be something desired by the employee. Some of the
most powerful rewards are symbolic; things that cost very little but mean
a lot to the people who get them. Examples of symbolic rewards are
things like plaques or certificates.
4.12 COMMUNICATION
4.12.1 Significance of Communication

Communication is an indispensable activity in all organizations. No
organization can think of its existence without effective communication.
Communication is a managerial skill, which is essential for effective
direction of people at work. A manager who is in a position to
communicate well will perform the direction function successfully, i.e.,
he will be able to get the subordinates involved towards the objectives

of the organization.
The success of a manager depends on how clear he is in his mind about
his basic functions and how effectively he can transfer this clarity of thought
to others. This involves a skill of helping others to understand the manager
and to be understood by him. Thus, the need for better mutual
understanding between labor and management in industry cannot be over
emphasized as a pre-requisite of suitable congenial climate necessary
for the overall advancement and productivity. The importance of
communication in management for getting the work done may also be
seen from the estimate of time, which is spent by a manager in
communication- verbal or written, in conferences or meetings, giving
directions or receiving information. Most of the managers spend more
than 60% of their time in communication with others.
The performance of all other managerial functions depends on successful
communication by the managers at various levels. Planning which is one
of the most important functions of management requires extensive
communication among the executives and other personnel. Moreover,
effective communication is important in executing a plan or a programme
and then controlling the activities with the help of feedback information.
Information about subordinate’s performance is necessary to determine
whether the planned objectives are being realized. Communication is of
utmost importance in organizing. It is an important aid in directing the
employees of the organization. In short, communication is quite
indispensable for the management in getting the things done by other
personnel in the organization. That is why, Chester Barnard remarked,”
The first executive function is to develop and maintain a system of
communication.’
Majority of the complex problems, which the managers generally face,
are people centered. These have their roots in lack of understanding
which cause hostile attitudes among the subordinates. Such problems
can be solved through effective communication. The concept of
democratic leadership places a high premium on communication. It is
only through communication that executives can attempt to mould the
attitudes of persons within the organization, and subordinates to carry
out certain functions, fulfill a leadership role, and coordinate the efforts
of people within the organization.
One of the important aspects concerning the management of resources

relates to development of effective communication system among people
in an organization. People are subjected to continuously changing patterns
of motives, aspirations and attitudes and they significantly differ with
others in ability. In the process of assigning specific responsibilities, a
situation is reached where facts and ideas must pass from person to
person, group to group and level to level. The success and effectiveness
of operations of the organization would depend on how timely, adequate
and appropriate the flow of information is. An effective communication
system is essential to pass messages, ideas and information for explaining
objectives and plans, controlling performance, and taking corrective
action.
From the above discussion, we can say that communication is an
indispensable process for effective management. The role of
communication is summarized in the following points:
(i) Communication helps the management in making the employees
understand the objectives, plans and policies of the enterprise.
(ii) Communication develops understanding between the superiors and
the subordinates. It leads to congenial human relations in the
organization.
(iii) Communication helps in controlling the performances of different
individuals and departments of the enterprise.
(iv) Communication facilitates decision making by providing necessary
information in time.
(v) Communication provides unity of direction to various activities of
the enterprise.
(vi) Communication is an effective device for achieving participation by
the workers. Management can consult the workers and receive their
grievances, complaints and suggestions.
(vii) Communication facilitates change on the part of employees by
modifying their behavior.
Meaning and Nature of Communication

The word ‘communication’ is derived from the Latin word ‘communis’
that means common. If a person affects a communication, he has
established a common ground of understanding. Thus, communication

involves imparting a common idea and covers all types of behavior
resulting there from. This indicates that various factors enter into the
process of communication.
These are the communicator or source of information, the receptor or
receiver of information, the content of communication and the manner of
communication. ‘Communication’ in its broad sense means both the act
of communicating something and the manner of communication such as
letter, notice or circular. The act of communicating does not necessarily
require a reaction on the part of the receiver.
According to Hudson,” Communication in its simplest form is conveying
of information from one person to another.” In the words of Alien,
“Communication is the sum of all the things one person does when he
wants to create understanding in the mind of another. It is a bridge of
meaning. It involves a systematic and continuous process of telling, listening
and understanding.” Thus, communication may be defined as interchange
of thought or information, to bring about mutual understanding and
confidence. It is the information intercourse by words, letters, symbols
or messages. It is the exchange of facts, ideas and viewpoints, which
bring about commonness of interest, purpose and efforts.
Communication is an attempt to share understanding by two or more
persons. It is a two way process and is completed when there is some
response from the receiver of information. It has two basic objectives:
1. To transmit message, ideas, or opinions;
2. To create an impression or understanding in the mind of the receiver
of information.
The success of a manager depends to a great extent on his ability to
communicate. Theo Haimann regards communication as fundamental and
vital to all managerial functions. “Communication is the process of passing
information and understanding from one person to another. It is the
process of imparting ideas and making oneself understood by others”.
Communication is an attempt to affect a transfer of messages, ideas or
opinions between minds. The word ‘transfer’ tell us that communication
is essentially a two way process, involving a sender and a receiver. It
could be a mechanical piece of equipment like computer, a writer and a
reader, and a speaker and a hearer. Thus, communication always involves

at least two-persons : a sender and a receiver. One person alone cannot
communicate. Only the receiver can complete the communication act.
There is no communication until the message sent by the communicator
is received by the receiver. It should also be noted that communication is
not effective if it does not produce the desired response. It is not enough
for a manager to give an order; he must also see that it is correctly received,
understood and carried out by the receiver. We are not all perfect, so
the word ‘attempt’ becomes significant when we consider the media by
which the communication is effected. Understanding means that the
receiver should interpret the message exactly as the sender intends. But
this is not always the case. If the sender transmits the idea of a rectangle
but the receiver sees a square, this is a case of poor or ineffective
communication.
4.12.2 Process of Communication

A simple model of the communication process is illustrated in the Fig..
The major elements of the communication process are discussed below:
(i) Sender. The person who initiates the communication process is known
as the sender, source or communicator. The sender has some information,
which wants to communicate to some other person to achieve some
purpose. By initiating the message, the sender attempts to achieve
understanding and change in the behavior of the receiver.
(ii) Encoding or Communication Symbol. The sender of information

organizes his idea into a series of symbols (words, signs, etc.), which, he
feels, will communicate to the intended receiver or receivers. This is
known as encoding of message, i.e., converting ideas into communicable
codes which the receiver of the message will understand.
(iii) Message. The message is the physical form into which the sender
encodes the information. The message may be in any form that could be
experienced and understood by one or more of the senses of the receiver.
Speech may be heard, written words may be read and gestures may be
seen or felt. Thus, a message may take any of the three forms, viz., oral,
written or gestural.
(iv) Communication Channel. After encoding the message, the sender
chooses the mode of transmission (such as air for spoken words and
paper for letters). The mode of transmission is often inseparable from
the message. The channel is the link that connects the sender and the
receiver. Air is the important communication channels. The receiver must
be careful while selecting a channel. Some people respond better to
formal letters or communications, others to the informally spoken words.
The channels of communication, which are officially recognized by the
organization, are known as formal channels.
(v) Receiver. The person who receives the message is called receiver.
The communication process is incomplete without the existence of receiver
of the message. It is the receiver who receives and tries to understand
the message. If the message does not reach the receiver, communication
cannot be said to have taken place.
(vi) Decoding. Decoding is the process by which the receiver draws
meanings from the symbols encoded by the sender. The receiver’s past
experience, education, perception, expectations, and mutuality of meaning
affects it with the sender.
(vii) Feedback. After receiving the message, the receiver will take
necessary action and send feedback information to the communicator.
Feedback is a reversal of the communication process in which a reaction
to the sender’s message is expressed. The receiver becomes the sender
and feedback goes through the same steps as the original communication.
It may be noted that the dotted line in the Figure. suggests that feedback
is optional and may exist in any degree (from minimal to complete) in any
given situation. Generally, greater the feedback, the more effective the
communication process is likely to be. For instance, early feedback will
enable the manager (sender) to know if his instructions have been properly
understood and carried out.
Importance of Feedback in Communication

Two way communication takes place when the receiver provides
feedback to the sender. For instance, giving an instruction to a subordinate
and receiving its acceptance is an example of two way communication.
On the other hand, in case of one way communication, feedback is totally

absent. Here the sender communicates without expecting or getting
feedback from the receiver. A policy statement from the chief executive
is an example of one way communication. One way communication takes
less time than two way communication. In certain situations, one way
communication is more effective to get work done from the subordinates.
Two way communication is superior to one way communication in the
following respects:
(i) Two way communication is more accurate than one way
communication. The feedback allows the sender to refine his
communication so that it becomes more precise and accurate.
(ii) Receivers’ self confidence is higher in case of two way communication
as they are permitted to ask questions and seek clarification from
the senders.
However, in case of two way communication, the sender may feel
embarrassed when the receiver draws his attention to sender’s mistakes
and ambiguities.
4.12.3 Purpose of Communication

The basic purpose of communication is to give and receive information,
which is of interest both to the communicator and the receiver of
information. A good communicator always attempts to transmit his ideas
or information to create favorable impression in the mind of the receiver.
Effective communication involves more than a mere receipt of message
by the receiver, it creates understanding, acceptance and action.
Understanding of the message by the receiver is a very important part of
a good communication system.
A communicator may make others listen to him, but he may not be able
to make them understand what he says. Many executives forget this while
giving instructions to their subordinates. Experience shows that one is
very often misled by the wrong image of the other in one’s mind. The
words are empty vessels and the receiver pours meaning into them very
frequently on the basis of the image, which he carries in his mind of the
communicator. A skilful communicator has to find the suitable words and
expressions so as to make the receiver understand what he wants. Thus,
both transmitting ideas and creating the desired impression have important
roles to play in proper understanding.
In an industrial organization, the communication system is conceived to

lead ultimately to better industrial relations through the existence of well-
informed workforce, greater degree of consultation at every level and an
atmosphere of mutual confidence.
Through effective communication, skill to work is brought into touch
with will to work and both combined together lead to team spirit in the
organization. Advantages of effective communication are sense of
motivation, clarity of thoughts and orders, non distorted information and
consequent increase in the productivity and morale of employees. In an
organization where mutual trust between the management and the workers
exists, it is easy to communicate effectively. But it must be remembered
that a good communication system is not a panacea for the ills of an
organization, nor it is a substitute for other techniques of management.
However, if thoughtfully planned and systematically applied, a good
system of communication can go a long way towards achieving greater
acceptance of new ideas and reducing resistance to change.
Glover has mentioned the following important purposes of communication:
(i) To keep employees informed of company’s progress.
(ii) To provide employees with orders and instructions in connection
with their duties.
(iii) To solicit information from the employees, which may aid
management.
(iv) To make each employee interested in his respective job and in the
work of company as a whole.
(v) To express management’s interest in its personnel.
(vi) To reduce or prevent labor turnover.
(vii) To indoctrinate employees with the will to work and the benefits
derived from their association with the company.
(viii) To instil each employee with personal pride in being a member of
the company.
4.12.4 Communication Networks

A network of communication represents the pattern of contacts among
the members of an organization. It mainly depends upon the nature of
channels of communication and the number of persons involved in the
communication process. There may be three types of communication

networks in the organization, viz., and wheel, circular and free flow. The
channels are discussed below:
(i) Wheel Communication Network. As shown in the figure below,
the wheel network represents the communication pattern under which
the subordinates can communicate with and through one manager. It
is called a wheel network since all communications pass through the
manager who acts as a central authority like the hub of a wheel. All
the workers receive instructions and guidance from one person.
(ii) Circular Communication Network. In case of circular network,

the message moves in a circle. Each person can communicate with
his two neighborhood colleagues only. A disadvantage of circular
network is that communication is very slow.
(iii) Free Flow Communication Network. Under such an organizational
design, there is no restriction on the flow of communication. Every
one is free to communicate with anyone and everyone in the
organization. However, this network is rarely followed in formal
organizations.
Types of Communication
Channel Direction Method
Formal (1) DownWard (1) Oral

Informal (2) Upward (2) Written
(3) Horizontal (3) Gestural
4.12.5 Channels of Communication

A channel of communication is a path through which messages are
transmitted from the sender to the receiver. Channels of communication
may be either formal or informal. These are discussed below:
Formal Communication
The paths of communication, which are institutionally determined by the
management, are called formal channels of communication. They are
associated with the status or position of the communicator and the
receiver. Formal communication enforces a relationship between different
positions. It derives its support from scalar chain of organization. It
generally adopts three directions: (i) Downward (ii) Upward and (iii)
Horizontal. These channels are used for different purposes, which are
discussed later. It is significant to point out the first two channels are
vertical in nature.
Significance of Formal Communication
Downward communication is used for giving orders and instructions,
providing information, or for influencing attitudes and behavior of the
subordinates. Upward communication is used for reporting, informing,
requesting and suggesting. It is also used to influence decisions and to
protest against certain actions or decisions of the management. Horizontal
channels are used for informing and coordinating. All these channels are
equally important for the proper functioning of any organization.
In a well-organised communication system, upward communication is
given as much importance as downward communication. This is because
one of the most crucial factors in the process of communication is
information, about how people feel about things in the organization. Unless
upward communication is encouraged and taken note of, downward
communication is not fully effective. Upward communication gives an
opportunity to the workforce to inform management about their feelings
and to suggest improvements in the methods of work and also enables
management to locate problem areas in the organization.
Informal Communication or Grapevine
When the employees are unable to communicate the required information
to higher authorities because of communication barriers, they may resort
to informal channels of communication. Distortions may appear in the
transmission of such messages through grapevine in the form of rumors
and gossips. The managers may resort to such informal channels when
they find that it is not possible to gather information through the established
channels in the formal communication system of the organization.
The important point which we must recognize is that grapevine is a natural

and normal activity. It is because of the desire of people to communicate
without following the formal channels in the organization. It is an essential
part of the total human environment. There is nothing inherently bad about
grapevine. It, as a matter of fact, fills in the gaps existing in the formal
communication system. If it does not exist in the organization, the ability
of a manager to build team work, motivate people and create identification
with the organization would be severely restricted.
Grapevine generally operates like a cluster chain. For instance, A tells
three or four selected persons. Only one or two of these receivers will
then pass on the information and, again, they will usually tell more than
one person. As the information becomes older and the number of those
knowing it grows larger, and it gradually dies out because those who
receive it do not repeat it. This process is called a cluster chain because
each link in the chain tends to inform a cluster of other people instead of
only one person. Grapevine may also move in the fashion of a long chain
in which A tells B, who tells C, who in turn tells D and so on. But this is
rarely the case.
If we accept the idea that cluster chain is predominant, then we can
conclude that only a few persons are active communicators on the
grapevine for any particular piece of information. The persons who keep
the grapevine active are called ‘liaison individuals’. The liaison agents
are generally different in each case because people tend to be active on
the grapevine when they have a cause to be. This means that they act
partly in a predictable manner. This element of predictability offers
management a chance to influence the grapevine. People are also active
on the grapevine when their friends and associates are involved. This
means if M is to be discharged, the other employees should be told the
full story by the management as soon as possible. If they are not informed,
they will fill in the gap with their own conclusions and thus rumors will
start.
Another marked feature of grapevine is the speed with which it functions.
The cluster chain makes it easy for a few people to convey too many
others in a short period of time. The grapevine exists largely through
words of mouth. Through modern networks of communication, it is
possible for the grape vine to leap hundreds of kilometers very quickly.
If there exist procedures which regularly bring people in contact, we can

expect these people to have an active grapevine or informal
communication.
Merits of Informal Communication

 The Informal communication has the following advantages:
 It helps in achieving better human relations in the organization.
 It links even those people who do not fall in the official chain of
command.
 Its speed is very fast as it is free from all barriers.
 It serves to fill the possible gaps in the formal communication.
Demerits of Informal Communication

The demerits of informal communication are as follows:
 Informal communication is not authentic. The message may be
distorted.
 It may lead to generation of rumors in the organization.
 Informal channels may not always be active. So informal
communication is not dependable.
 It may lead to the leakage of confidential information.
Rumor
It is the most undesirable feature of the grapevine and it has given the
grapevine a bad reputation. That is why, to some people, grapevine means
rumor. But rumor is grapevine information, which is communicated without
authentic standards of evidence being present. It is thus an untrue part of
grapevine. It can by chance be correct, but generally is incorrect; so it is
presumed to be undesirable. Rumor originates for a number of reasons.
One cause is plain maliciousness, but it is probably not the most important.
A more frequent cause is employees’ anxiety and insecurity because of
poor communication in the organization. Rumor also serves as a means
of wish fulfillment or applying pressure upon the management.
Rumor largely depends on the interest and ambiguity perceived by each
person; it tends to change as it passes from person to person. Its general
theme may be maintained, but not its details. The rumor gets twisted and
distorted when it passes from one mouth to another. The message gets
its own head, tail and wings on its journey and swells unproportionately
to an exaggerated shape. Generally, each person chooses details in the
rumor to fit his particular focus on reality. Thus, the details given at the
beginning of a rumor are lost after a few transmissions because people
reduce it to a rememberable number of details about items of interest to
them. A major outbreak of a rumor can be a devastating epidemic that
sweeps through an organization as fast as a summer storm and usually
with as much damage. Therefore, the most important problem before
the management is how to deal with rumors.
Dealing with Rumor

The best approach in dealing with rumor is to get at its causes, rather
than try to kill it after it has started. When causes are known, it should be
stopped as early as possible because once a rumor’s theme is known
and accepted, employees distort future happenings to conform to the
rumor. So the management must pass on the correct message in time.
Once a rumour has been spread, it is difficult to erase it from the minds
of the people. The only solution is to get the facts across before
misconceptions have a chance to gain a foothold. Usually, fact to face
supply of facts is the most effective way because it helps answer the
particular ambiguities in each individual’s mind.
The oral message may be repeated clearly. The message must contain
facts and not the opinions. Neither it should contain the rumor. The
message should not be exaggerated. The message should be confirmed
by the written message and it should be circulated quickly. Management
may also take the help of union leaders in combating the rumor, which is
not in the interest of workers and the organization.
4.12.6 Direction of Communication

From the point of view of direction, communication may be either vertical
or horizontal. Vertical communication may move both downward as well
as upward. Horizontal communication is also known as sideward
communication.
Downward Communication. It represents the flow of information from
the top level to the lower level of the organization. The purpose of
downward communication is to communicate policies, procedures,
programmes and objectives, and to issue orders and instructions to the

subordinates. A major part of the formal communication takes the form
of downward communication. Downward communication can take place
through verbal or written orders and instructions, notices, circulars,
letters, memos, posters, periodicals, publications, group meetings, etc.
Downward communication is needed:
 to get the things done to prepare for changes
 to discourage misinformation and suspicion; and
 to let the people feel the pride of being well informed.
Upward communication. Feedback to the higher authorities by the lower
levels is vertical upward communication. The examples of upward
communication are: (a) activity reports on subjects like raw materials,
production, distribution, manhours, etc.; (b) opinions, ideas and
suggestions; and complaints and grievances.
Upward communication is needed:
 to create receptiveness of communication;
 to create a feeling of belongingness through participation;
 to evaluate communication; and to demonstrate a concern for the
ideas of each employee.
Horizontal Communication. It refers to transmission of information
among positions of the same level. The importance of horizontal
communication is undermined due to three reasons. Firstly, it is largely a
by product of communication. Secondly, with increasing size and
specialization, the opportunities for cross talks are cut down, and thirdly,
in relative terms, lateral communication poses fewer difficulties than
upward or downward communication because it has fewer implications
of authority and status. To secure coordination and cooperation of
employees at horizontal level, the problems are generally handled through
informal contacts.
Horizontal communication is more of an informal nature. If a departmental
head needs some information from another departmental head, he may
get this by ringing him up directly. Inspite of presence of hierarchy in any
large industrial organization, it is possible to accelerate exchange of
information if the management recognizes and encourages cross contacts
which cut across the organizational lines. Such, contacts may take place
between individuals and groups, not only in their levels but also with
other echelons of management. The crosswise communication can be
effective when a proper understanding exists among the superiors or
these points. The subordinates should refrain from making communication
beyond their authority and should keep their superiors informed of their
inter departmental activities.
4.12.7 Methods of Expression
Oral Communication
Communication with the help of spoken words is known as oral
communication. Oral communication may take place: (a) by face to face
conversation, and (b) through mechanical devices.
Face to face conversation is the most natural way of transmitting
message. It is the best means of securing cooperation and resolving
problems. Various studies have shown that face to face communication
carries the message bett er than any ot her media. It avoids
misunderstanding between the persons talking face to face. It is because
by having face to face conservation, one can convey the message both
by words and expressions or gestures. Sometimes, it is desirable to have
face to face communication because of confidential nature of the message.
Mechanical devices which are used for oral communication in most
organizations include signals, telephones, intercom systems, electric paging
systems and dictating machines.
Both the methods of oral communication are frequently used in
organizations for downward and upward communication. Every executive
makes use of oral communication by instructing, lecturing, counseling
and so on. Oral communication is also used for attending to the
suggestions and grievances of the workers. The greatest benefit of oral
communication is that it saves time as it provides an immediate response
and feedback. It fosters a friendly and cooperative spirit. It permits
personalized contacts and develops a sense of belongingness.
Nonetheless, oral communication is not free from drawbacks. It may be
time consuming because for having direct talks, the individuals concerned
have to move back and forth to and from their workplaces. It may not
be specific and so may be misunderstood. It may also create legal
difficulties if no written record of conversation is preserved.
Written Communication
Comprehensive devices for written communication in the form of circulars,
bulletins, manuals, handbooks, notes, orders, instructions, etc., are widely
used in modem organizations. Howsoever elaborate a communication
system may be, it cannot be composed of verbal communication only.
The objectives of written communication may be:
 to give information;
 to receive information;
 to record recommendations and decisions of a meeting; to give orders
and instructions.
Written communication can be conveyed to the workers through house
magazines, notice boards, employee handbooks and memoranda.
Workers can communicate upward through writing their suggestions and
grievances. Upward communication in written form is generally
discouraged as the workers are reluctant to use it to express their
opinions. Management should encourage it by installing a suggestion
system in the organization. Written communication serves as a permanent
reference for future. It is formal and carries weight. It is not possible to
change the contents of written message by receivers. Written messages
are more clear and specific as they are carefully drafted.Written
communication serves as a reliable record for future reference and can
be used as evidence in legal proceedings. Response to written
communication is generally well thought out since the receiver gets to
evaluate and understand the message. In many cases, written
communication is even more effective that the oral communication.
Written communication is slow as compared to oral communication. It
may also become a source of dispute as once a written message is sent,
it is difficult to withdraw it. Written messages may give rise to queries for
clarification and elaboration which lead to loss of time. Written
communication is generally formal in nature and may be blocked due to
bureaucratic procedures in the organization. Therefore, the management
should take proper step to ensure that written communication does not
lose its effectiveness.
Gestural Communication
Communication through gestures or postures is often used as a means to
supplement verbal communication. If there is a face-to-face conversation
between two persons, they can better understand the feelings, attitudes
and emotions of each other. Gestural communication is very much helpful
to motivate the subordinates, as for instance, handshake with the
subordinate or a pat on the back of the subordinate. Similarly, gestures
taken by the listeners can help the communicator to know their reactions.
Oral vs. Written Communication
Oral Communication
1. Communication is expressed through spoken words.
2. It may not be precise.
3. Oral communication may not be complete. It may be difficult to
understand it.
4. It is generally informal in nature.
5. It may not be taken seriously.
6. Oral message may not be verifiable.
Written Communication
1. Communication is expressed in writing.
2. It can be very precise.
3. It is not difficult to understand written communication if it is expressed
in unambiguous terms.
4. It is generally formal in nature.
5. It is generally taken seriously.
6. Written message is verifiable from the records.
Choice of Method of Communication

It is very difficult to predict which method of communication will be used
in a particular organization. In practice, all the three methods of
expression are used in varying degrees under different circumstances.
Postural communication is frequently used, to supplement oral
communication. Oral communication is very much useful for discussing
problems in groups. It is very much helpful when the time available is
very short. It also helps in knowing the reactions of the receivers quickly.
Nonetheless, written communication has its own value. It is frequently
used for exchanging lengthy messages. Written communication constitutes

reliable records for future reference and action.
Oral communication is used effectively in the following situations:
(i) Executives use oral communication for instructing and counseling
their subordinates.
(ii) Executives use oral communication while dealing with the trade union
leaders.
(iii) Workers use oral communication to convey their grievances and
suggestions to the management.
(iv) Workers use oral communication to give feedback to the
management.
Written communication has been found to be effective in the following
situations:
(i) Executives give written instructions where the assignment is important
and it is necessary to fix responsibility.
(ii) Written communication serves the purpose of a record for future
reference.
(iii) Workers and trade unions make use of written communication to
communicate with the management formally and to get a formal
response from the management.
4.12.8 Barriers or Gateways to Communication

Barriers or obstacles to communication cause break downs, distortions
and inaccurate rumors. They plague the daily life of the managers who
must depend upon the accurate transmission of the orders and information
for efficient operations. Whenever a communication is made, there is
always a tendency on the part of the receiver to evaluate the message
received and then decide to approve or disapprove the same. Another
important barrier to communication lies in the layers and spans of
management.
In large organizations, there are a number of obstacles which make
transmission of message more difficult. In both upward and downward
communications, it may happen that some of the persons in the
intermediate layers withhold the whole or part of the information, because
they may feel that by withholding the information they will be better
informed than those whom they lead. It should be noted that although
there is no such thing as perfect communication, considerable degree of
perfection could be achieved in communication if the barriers to
communication are overcome. The main barriers to communication are
discussed below :
1. Barriers due to Organization Structure. The breakdown or
distortion in communication, sometimes, arises due to:
(i) Several layers of management;
(ii) Long lines of communication;
(iii) Long distance of subordinates from top management;
(iv) Lack of instructions for passing information to the subordinates; and
(v) Heavy pressure of work on certain levels of authority.
2. Barriers due to Status and Position. (i) The temper and attitude
exhibited by the supervisor is sometimes a hurdle in two way
communication. One common illustration is non-listening habit. A
supervisor may guard information for:
(a) Consideration of prestige, ego and strategy.
(b) Under - rating the understanding and intelligence of subordinates.
(c) Deriving satisfaction in being the store house of information and seeing
people dance around him for information.
(ii) Prejudices among the supervisors and subordinates may stand in
the way of free flow of information and understanding.
(iii) The supervisors particularly at the middle level may sometimes like
to be in good books of top management by :
(a) not seeking clarification on instructions which are subject to different
interpretations; and
(b) acting as a screen for passing only such information which may please
the boss.
3. Semantic Barriers. Semantic is the science of meaning. Words
seldom mean the same thing to two persons. Symbols or words
usually have a variety of meanings. The sender and the receiver have
to choose one meaning from among many. If both of them choose

the same meaning, the communication will be perfect. But this is not
so always because of differences in formal education and specific
situations of the people. Strictly one cannot convey meaning, all one
can do is to convey words. But the same words may suggest quite
different meanings to different people, e.g., ‘Profits’ may mean to
management efficiency and growth, whereas to employees it may
suggest excess funds piled up through paying inadequate wages and
benefits.
4. Tendency to Evaluate. A major barrier to communication is the
natural tendency to judge the statement of the person of the other
group. Every one tries to evaluate it from his point of view or
experience. Communication requires an open mind and willingness
to see things through the eyes of others.
5. Heightened Emotions. Barriers may also arise due to specific
situations, e.g., emotional reaction, physical conditions like noise or
insufficient light, past experience, etc. When emotions are strong, it
is very difficult to know the frame of mind of the other person or
group.
6. Lack of Ability to Communicate. All persons do not have the skill
to communicate. Skill in communication may come naturally to some,
but an average man may need some sort of training and practice by
way of interviewing, public speaking, etc.
7. Inattention. The simple failure to read bulletins, notices, minutes
and reports is a common feature. With regard to failure to listen to
oral communications, it has been seen that nonlisteners are often
turned off while they are preoccupied with other affairs or their family
problems. In any case, the efforts to communicate with someone
not listening will fail.
8. Unclarified Assumptions. This point can be clarified by an
illustration. A customer sends a message that he will visit a vendor’s
plant at a particular time on some particular date. Then he may assume
that the vendor will receive him and arrange for his lunch, etc.
Whereas vendor may assume that the customer was arriving in the
city to attend some personal work and would make a routine call at
the plant. This is an unqualified assumption with possible loss of
goodwill.
9. Closed Minds. Certain people, who think that they know everything
about a particular subject, also create obstacles in the way of effective
communication. Persons suffering from the mirage of too much
knowledge become rigid and dogmatic in their attitude. They close
their minds tightly to new ideas that are brought to them,
10. Resistance to Change. It is general tendency of human beings to
maintain status quo. When new ideas are being communicated, the
listening apparatus may act as a filter in rejecting new ideas. Thus,
resistance to change is an important obstacle to effective
communication. Sometimes, organizations announce changes which
seriously affect the employees, e.g., changes in timings, place and
order of work, installation of new plant, etc. Changes affect people
in different ways and it may take some time to think through the full
meaning on the message. Hence, it is important for the management
not to force changes before people are in a position to adjust to
their implications.
These are the problems or barriers to effective communication.
Communication will not be perfectly effective if transmission of the
message is faulty. The above barriers should be removed to achieve
effective communication in the organization.
Communication Gap
The top management of an organization prepares a broad set of policies
to act as guideline and a framework within which the managers and
supervisors can operate to achieve the goals of the organization. The
communication up to the foreman level is generally quite smooth. But the
difficulty arises in communicating the management’s policies and guidelines
to the workers because an average worker has difficulty in learning the
corporate policies and has much less capacity in understanding them.
This creates the problems of communication gap.
The communication gap lies where:
1. The worker does not know what is expected of him because he is
not told.
2. He cannot achieve it if he does not know.
3. He does not know how important his work is in producing the final
product.
4. He does not know how well he is doing and how far he is in the
queue for promotion.
5. He does not know how much skill he should acquire and what are
the basic requirements for his next grade promotion.
The worker must know the above mentioned information to ensure that
he produces a good quality product and is motivated to produce more.
He must be aware what his mistakes will cost in terms of time and money
to the organization and he must be motivated to reduce waste and to
follow safe procedures.
4.12.9 Steps to Overcome Barriers to Communication

The following steps are required to be followed to overcome barriers to
effective communication:
(i) Clarity of Information. Subordinates should be kept informed on
policy matters that affect them on a regular basis. Clear cut
instructions should be issued and followup measures should be taken
to ensure that the instructions are thoroughly understood and are
being implemented.
(ii) Prompt Information. The management should make a practice of
passing along the information promptly to everyone concerned so
that action, where required, is not delayed.
(iii) Creation of Proper Atmosphere. In particular cases, as for instance,
when a boss is talking to his subordinate, the atmosphere must be
peaceful so that there is effective communication of instructions and
suggestions.
(iv) Effective Listening. The sender must listen to the receiver’s words
attentively so that the receiver may also listen to the sender at the
same time.
(v) Feedback. Communication should be a two way traffic. There should
be some system by which the workers should be able to convey
their suggestions and grievances to the top management. Two way
communication is also necessary for feedback for the purpose of
control.
(vi) Efficient Channels. Management should try to cut the root of the
rumors. If the communication channel is well maintained, there will
be no room for rumours, lies, guesses and misconceptions. Workers

should get open doors for any clarification or consideration at all
times. This will also increase the morale of the employees.
4.12.10 Building Effective Communication

With the advancement of technology, changes have become a regular
feature in any industrial organization. An effective communication system
is an essential part of good labor management relations. The prime
objective of setting up a communication system is to exchange facts and
information in a manner, which is acceptable to all concerned and which
will lead to cooperative action by all concerned. Problems of passing
information from management to workers are very complicated and many
techniques are applied to encourage an easy two way flow of facts,
ideas and opinions. But attitude of the persons involved in communication
is equally important for better communication, which will ultimately lead
to better productivity and an atmosphere of mutual trust and confidence
among the workers and the managers. If the communication system is
carefully planned and applied, it will reduce workers resistance to new
ideas and changes.
Communication problems are more complex in large organizations.
Managers face difficulty in maintaining effective communications to pass
messages accurately without distortion to their subordinates. Effective
communication is a broader process than merely passing orders and
keeping oneself informed about the activities going on in various divisions
of the organization. Organizational communications should satisfy the
needs of organization and its members.
In order to achieve effective communication in the organization, the
following principles or guidelines must be followed:
1. Principle of Clarity. The beginning of all communication is some
message. The message must be as clear as possible. No ambiguity
should creep into it. The message can be conveyed properly only if
it is clearly formulated in the communicator.
2. Principle of Objective. The communicator must clearly know the
purpose of communication before actually transmitting the message.
The objective may be to obtain information, give information, initiate
action, change another person’s attitude and so on. If the purpose
of communication is clear it will help in the choice of mode of
communication.
3. Principle of Understanding the Receiver. Understanding is the

main aim of any communication. The communication must create
proper understanding in the mind of the receiver. Killian advised,
“Communicate with an awareness of the total physical and human
setting in which the information will be received. Picture the place of
work; determine the receptivity and understanding levels of the
receivers; be aware of social climate and customs; question the
information’s timeliness. Ask what, when and in what manner you
would like to be communicated with if you were in a similar
environment and position.”
4. Principle of Consistency.The message to be communicated should
be consistent with the plans, policies, programmmes and goals of
the enterprise. The message should not be conflicting with previous
communication and should not create confusion and chaos in the
organization.
5. Principle of Completeness. The message to be communicated must
be adequate and complete; otherwise the receiver will misunderstand
it. Inadequate communication delays action, spoils good relations
and affects the efficiency of the parties to communication.
6. Principle of feedback. This principle calls fo r making
communication a two way process and providing opportunity for
suggestion and criticism. Since the receiver is to accept and carry
out the instructions, the sender of message must know his reactions.
The latter must consider the suggestion and criticism of the receiver
of information. But feedback principle is often given a back seat by
most managers, which defeats the very purpose of communication.
7. Principle of Time. Information should be communicated at the right
time. The communicator must consider the timing of communication
so that the desired response is created in the minds of the receivers.
Characteristics or a Good Communication System

A good system of communication has certain essential characteristics,
which are explained below:
(i) Two way Channel. Communication involves two parties, the sender
or transmitter and the receiver of the message. Mere transmission of
facts, ideas, information, etc. does not make any communication
effective and meaningful. It is essential to keep the channel open for

sending the receiver’s views, understanding and opinion about the
communication. Therefore, a good communication should be like a
two way traffic. Transfer of information should take place from the
senders to receivers and vice-versa without any interruption.
(ii) Clarity of Message. The message must be as clear as possible. No
ambiguity should creep into it, the message can be conveyed properly
only if it is clearly formulated in the mind of the communicator. The
message should be encoded in direct and simple language so that
the receiver is able to understand it without much difficulty.
(iii) Credibility of Message. Credibility of the message is an important
factor, which promotes understanding and cohesiveness among
organizational members. It depends to a large extent on the rapport
between the parties concerned. A related characteristic is timeliness
of communication, which contributes to its credibility. The message
should be complete also. Inadequate message delays action, spoils
good relations and affects the efficiency of the parties to
communication adversely.
(iv) Speed of Transmission. A good system of communication has short
lines of information flows, which help to minimize distortion and
dilution of the messages transmitted. It should give considerable
importance to the speed of transmission of message. However, speed
of communication should not impair the accuracy of the information
to be transmitted.
(v) Mutual Understanding. A good communication system should
achieve better relations between the parties to communication.
Transfer of information or knowledge should take place in a cordial
atmosphere. Absence of mutual understanding signifies the lacuna in
the system in the sense that communication becomes a one sided
affair. Mutual trust, belief and reliance should be the goals of any
communication system.
(vi) Flexibility. A good system is flexible enough to adjust to the changing
requirements. It should carry extra loads of information without much
strain. It should absorb new techniques of communication with little
resistance. Use of a wide range of media such as oral and written
messages, face to face contacts, telephonic calls, group meetings,
etc. should be encouraged without any hesitation.
(vii) Reliance on Feedback. Feedback refers to transmission of

information concerning the effect of any act of communication.
Summary
Staffing is the process of attracting, developing, evaluating and
compensating people at work. It is an integral part of the management
process and is performed by every manager on a continuous basis.
Human resource management is concerned with the most effective use
of people to achieve organizational and individual goals. It tries to secure
the best from people by winning their wholehearted cooperation. Good
HRM practices can help in attracting and retaining the best people in the
organization.
Personnel management is concerned with people at work and their
relationships with each other. It covers three important aspects basically:
personnel aspect (recruitment, selection, placement training, appraisal,
compensation, etc.), welfare aspect (working conditions, amenities,
facilities, benefits), and industrial relations aspect (union management
relations, disputes settlement, grievance handling, discipline, collective
bargaining).
Human resource development aims at helping people to acquire
competencies required to perform all the functions effectively. It is a
development oriented, proactive function. It aims at overall development
of human resources in order to contribute to the well being of employees,
organization and the society at large.
Human resource planning is a system of matching the supply of people
with openings that the organization expects over a given time frame. It
tries to assess manpower requirements in advance keeping the production
schedules, market fluctuations, demand forecasts etc. in the background.
In order to develop a human resource plan, HR professionals typically
follow a three step process: (i) workforce analysis (assessing manpower
supply) (ii) work load analysis (finding actual requirement for manpower
based on work load) (iii) job analysis (find out the abilities and skills
needed to undertake the jobs in question in an effective way).
Staffing is to determine the people available by making a management
inventory. Using an inventory chart can do this.
Staffing does not take place in a vacuum; one must consider many
situational factors, both internal and external. Staffing requires adherence
to Equal Employment Opportunity (EEO) laws so that practices do not

discriminate, for example against minorities or women. Also, one must
evaluate the pros and cons of promoting people from within the
organization or selecting people from the outside.
In the systems model for selection, the comprehensive managerial
requirements plan is the basis for position requirements. In designing
jobs, the enterprise must see that the scope of the job is appropriate;
that the position involves a full time, challenging job; and that it reflects
required skills. The job structure must be appropriate in terms of content,
function, and relationships. The jobs can be designed for individuals or
work teams. The importance of technical, human, conceptual and design
skills varies with the level in the organizational hierarchy. The position
requirements are matched with the various skills and characteristics of
individuals, the matching is important in recruitment, selection, placement,
and promotion.
Errors in selection can lead to actualization of the Peter Principle, which
states that managers tend to be promoted to the level of their
incompetence. Although the advice of several people should be sought,
the selection decision should generally rest with the immediate superior
of the candidate for the position.
The selection process may include interviews, various tests, and the
assessment centers. To avoid dissatisfaction and employee turnover, the
management must ensure that new employees are introduced to and
integrated with persons in the organization.
Direction is the process of guiding, motivating, leading and supervising
the subordinates to accomplish desired objectives. It is an important
managerial function because it is through direction, managers get things
done. Proper direction helps employees show superior performance. To
be effective, direction should be based on certain well established
principles, e.g., in line with overall goals, command flowing from one
individual, two way communication, and appropriate technique to suit
situational needs, etc. Clear instructions followed by appropriate
counseling help employees remain on track and achieve results without
wasting resources.
A supervisor acts as a buffer between management and workers. He
helps employees in doing a good job, using human, technical and
conceptual skills in an appropriate manner. He plays many roles and

changes many hats while at work. Important roles played by a supervisor
are well documented in management literature, i.e., as a technician, analyst,
controller, counselor, linking pin, human relations expert, motivator,
trainer, leader, organizer, planner, decision maker, etc. Depending on the
situation, the supervisor is expected to enact a particular role to the best
of his abilities.
To achieve results, supervisors have to keep certain things in mind. They
must encourage workers to participate in organizational matters.
Resources should be put to good use. Rules and regulation must be
adhered to. Wastages of various kinds must be avoided. They must set
an acceptable standard for evaluating workers’ performance, develop
capable assistants and offer help whenever it is requested.
Communication is the process of passing information and understanding
from one person to other. It is important to all managers and is needed
by all employees. It is the basis of action and people to give their best to
the organization. The process of communication involves several steps.
There are basically two types of channels formal and informal. Formal
communication channel moves along the routes specified by management
either downward, upward or horizontal. Informal communication channels
do not adhere to the organization’s hierarchy. Here, there is no prescribed
direction for the flow of messages. Grapevine, generally, emanates from
two sources : gossip chain and cluster chain.
There are three main types of communication media, namely oral, written
and non-verbal communication. Oral communication takes place on a
face to face basis. Written communication transmitted through written
words in the form of letters, circulars, memos, reports, manuals, etc.
Communication that takes place through facial expressions, body position,
eye contact and other physical gestures is known as non verbal
communication (NVC). NVC plays a great role in improving interpersonal
relations in an organization.
A communication network is the pattern through which the members of a
group communicate. It may take five different shapes in an organization,
namely the wheel, Y pattern, chain, circle and star.
Several semantic, structural and interpersonal barriers come in the way
of effective communication. The same word, for example, may convey a
different meaning to different people. Some people can’t express properly.

Information gets distorted as messages travel a distance. Status
differences compel people to hide their true feelings and emotions. To
communicate effectively, a manager has to improve his listening skills.
He must think and plan before communicating. The timing of the message
must also be appropriate. People must actively participate in developing
appropriate messages. Simple words must be used to improve clarity
and understanding. More importantly, the manager must encourage
subordinates to give their feedback openly and fearlessly.

1. Select an organization you know, and evaluate the effectiveness of
the enterprise’s recruitment and selection of people. How
systematically are these and other staffing activities carried out?
2. Interview two managers. Ask them what criteria are used for their
performance appraisal. Are the criteria verifiable? Do these managers
think that the performance evaluation measures their performance in
a proper manner?
3. Develop a career plan for yourself. Identify a personal profile for
yourself and state your long range personal and professional goals.
What are your strengths and weaknesses? Follow the steps explained
in this chapter to develop a comprehensive strategic career plan for
you.
Review questions.
1. Define staffing.
2. What do you mean by recruitment?
3. What is selection? Explain the process of selection.
4. Define directing. Illustrate the elements of direction
5. What is motivation? Describe theories of motivation.
6. Define leadership. Describe different theoretical approaches to
leadership.
7. What is communication? State the barriers to communication.
Illustrate the steps to overcome barriers to communication.
8. Elucidate the way of building effective communication.

UNIT - V
CONTROLLING
LEARNING OBJECTIVES
 the steps in the basic control process.
 the critical control points and standards.
 application of the feedback system.
 feedforward control system.
 list of the requirements for effective controls.
 the nature of budgeting and types of budgets.
 modern techniques of budgeting, including variable budgeting and
zero base budgeting.
 the non budgetary control devices.
 the nature and problems of program budgeting.
 the special need for effective procedures planning and control.
5.1 Nature and Scope of Controlling

Controlling is directly related to planning. The controlling process ensures
that plans are being implemented properly. In the functions of management
cycle are planning, organizing, directing, and controlling. Planning moves
forward into all the other functions, and controlling reaches back.
Controlling is the final link in the functional chain of management activities
and brings the functions of management cycle full circle. Control is the
process through which standards for performance of people and

processes are set, communicated, and applied. Effective control systems
use mechanisms to monitor activities and take corrective action, if
necessary. The supervisor observes what happens and compares that
with what was supposed to happen. He or she must correct conditions
below standard and bring results up to expectations. Effective control
systems allow supervisors to know how well implementation is going.
Control facilitates delegating activities to employees. Since supervisors
are ultimately held accountable for their employees’ performance, timely
feedback on employee activity is necessary.
Control is an important function of management. “In an undertaking,
control consists in verifying whether everything occurs in conformity with
the plan adopted, the instructions issued and the principles established.
It has to point out weaknesses and errors in order to rectify them and
prevent recurrence. It operates on everything : things, people and action”.
A great deal of misunderstanding has arisen about the term control
because of confusing it with other terms like management, objectives,
plans, policy statements, etc. It is important that the managers should
have a clear understanding of this concept because a manager who does
not understand control cannot be expected to exercise it in the most
efficient and effective manner. “The manager who believes managing and
controlling is the same thing, has wasted one word and needs a second
to be invented. And one who believes he has provided for control when
he has established objectives, plans, policies, organization charts and so
forth, has made himself vulnerable to really serious consequences. A
clear understanding of control is, therefore, indispensable for an effective
manager.”
The modern concept of control envisages a system that not only provides
a historical record of what has happened to the business as a whole but
also pinpoints the reasons why it has happened and provides data that
enable the chief executive or the departmental head to take corrective
steps if he finds he is on the wrong track.
Definition of Control
Control is a basic managerial function, which implies measurement and
correction of performance of subordinates to ensure that the pre
determined objectives are accomplished. E.F.L. Breach has defined
control as follows: “Control is the process of checking actual performance

against the agreed, standards or plans with a view to ensuring adequate
progress and satisfactory performance.” In other words, controlling
consists of those activities, which are necessary to ensure that
performance takes place in accordance with the targets laid down by the
management. It also involves taking corrective actions in case the
performance is not satisfactory. According to Koontz and Weihrich,
“The managerial function of controlling is the measurement and correction
of the performance in order to make sure that enterprise objectives and
the plan devised to attain them are accomplished.’ Thus, managerial
function of control implies measurement of actual performance, comparing
it with the standards set by plans and correction of deviations to assure
attainment of objectives according to plans.
Characteristics of Control
The process of control has the following characteristics:
1. Pervasive Function. Control is a function of every manager who is
performing other managerial functions like planning, organizing,
staffing and directing. It is, in fact, a follow up action to other functions
of management. Managers at all levels have to perform this function
to contribute to the achievement of orgartisational objectives.
2. Review of Past Events. Control leads to appraisal of past activities.
Thus, it is looking back, the deviations in the past are revealed by
the control process. This is also known as feedback information. It
will help in knowing the reasons of poor performance. Corrective
actions can be initiated accordingly.
3. Forward Looking. Control is linked with future, as past cannot be
controlled. A manager can take corrective action only in regard to
future operations. Control is usually preventive, as presence of
control system tends to minimize wastages, losses and deviations
from standards.
4. Action Oriented. Control implies taking corrective measures. Action
is the essence of control. The purpose of control is achieved only
when corrective action is taken on the basis of feedback information.
It is only action, which adjusts performance to predetermined
standards whenever deviations occur. A good system of control
facilitates timely action so that there is minimum waste of time and

energy.
5. Continuous Process. Just like other functions of management,
control is also a continuous activity. It involves constant analysis of
validity of standards, policies, procedures, etc. It also suggests
corrective actions in various processes. It does not stop anywhere.
A manager has to perform this function continuously along with other
functions.
6. Dynamic Process. Control is a dynamic process. It is flexible and
not rigid. Control involves continuous review of standards of
performance and results in corrective action, which may lead to
change in the performance of other functions of management. Since
management is managing a business entity, which keeps on changing,
managerial control is also dynamic. Management will be failing in
its duty if its approach is not dynamic.
7. Control does not curtail the rights of individuals. To some
people, control is opposite of freedom. It is not so. It is a preventive
action so that losses may be avoided in future. It is, in fact, an act of
guidance. Control in an enterprise is based on facts and figures and
not on the whims of managers. Its purpose is to achieve and maintain
acceptable productivity from all the resources of an enterprise.
Relationship between controlling and planning

Planning and controlling are closely related to each other as shown in the
following figure. After a plan becomes operational, control is necessary
to measure progress, to uncover deviations from the targets and to take
corrective steps. It is also not possible to think of an effective system of
control without the existence of good plans. Billy E. Geotz has explained
the relationship between planning and controlling in the following words,
“Managerial planning seeks consistent, integrated and articulated
programmes, while management control seeks to compelete events
conform to plans”.
PLANNING PERFORMANCE CONTROL
Fig. Relationship between Planning and Control.

Control is always based on planning. It is also true that in running a

enterprise planning depends upon controlling. Every manager uses certain
standards for measuring and appraising performance, which are laid down
by planning. The control process, in turn, may reveal the deficiency of
plans and may lead to the revision of planning. It may also lead to setting
of new goals, improving staffing and making changes in the techniques of
supervision, motivation and leadership.
Planning without control is meaningless and control without planning is
blind. Planning is an empty exercise without controlling. A good plan will
not bring any concrete result if the management is lacking in controlling.
Planning identifies the goals and determines the ways of achieving them.
It is’ control which ensures attainment of goals by evaluating performance
and taking corrective action. Control presupposes the existence of
standards with which the actual performance is to be compared. If the
standards of performance are not set in advance, the manager will have
no idea of ‘what is control’. Thus, planning must be done before the
actual operation and control should follow plans during and after the
actual operation. The experience gained in controlling will help improve
the process of planning.
Relation between Control and Coordination

Control and coordination are the twins of management. Control is an
important element in the process of management, whereas coordination
is the essence of management itself. Control is a function of management
like planning, organizing, staffing and directing. But coordination is an all
inclusive function. Each of the managerial functions including control is
an exercise in coordination. Thus, control is a facilitative function that
promotes coordination in the organization. If control does not aim at
achieving coordination, it will not be performed effectively and the basic
purpose of control will be lost. Control and coordination are closely
related in many ways. Firstly, authority is the basis of both the processes.
Secondly, the managers at all levels perform both. Thirdly, both are aimed
at achieving organizational goals. Fourthly, both are necessary for
achieving stability, continuity and growth of the organization and
consistency, precision and discipline in the organization. Lastly, both
control and coordination are rational concepts in the sense that they
seek to relate organizational means with organizational ends or goals.
They strive to maintain organizations as rational systems, relatively free
from conflict, confusion and chaos.
5.1.1 Significance of Controlling

Controlling is an important function of management. Without control, a
manager cannot complete his job. All other managerial functions are only
preparatory steps for getting the work done, and controlling is concerned
with making sure that there is proper execution of these functions. Control
is necessary whenever a manager assigns duties and delegates authority
to his subordinates. He must exercise control over the actions of his
subordinates so that the delegated authority is used properly.
The road signals at a road crossing appropriately illustrate the significance
of control. Just as road signals are essential to ensure accident free and
smooth traffic, management controls are necessary in any organization
for its smooth functioning. By controlling, the manager ensures that
resources are obtained and used economically and efficiently for the
achievement of organizational objectives. A good control system provides
timely information to the manager, which is very much useful for taking
various decisions. Control simplifies supervision by pointing out the
significant deviations from the standards of performance. It keeps the
subordinates under check and brings discipline among them.
An effective system of control will help in achieving the following
benefits:
1. Coordination. The size of modem business organizations is quite
large. A large amount of capital and large number of people are
employed in them. This complicates the problem of control as there
are many units producing and distributing different products. In order
to coordinate their activities, an efficient system of control is
necessary.
2. Corrective Action. An efficient system of control provides the basis
for future action. Taking corrective action may lead to modification
of planning, organizing and directing. Control will also check the
mistakes being repeated in future.
3. Decision making. Control is basic to decision making. The process
of control is complete when corrective actions are taken. This
involves making a right decision as to what type of follow up action
is to be taken. This will lead to accomplishment of organization
objectives. According to W.T. lerome, “Control is needed both to
simplify the making of subsequent decisions and to ensure the
realization of the objectives implicit in the original long range policy

decisions.”
4. Better Planning. Control is the only means to ensure that the plans
are being implemented in real sense. It points out the shortcomings
of planning by comparing the actual performance with the planned
standard and suggests steps to improve planning.
5. Decentralization of Authority. The modern trend of business
enterprises towards decentralization calls for a systematic attempt
for controlling. Under decentralization, the authority of decision
making is dispersed throughout the organization. Management must
keep control in its hands to know whether the authority is being
used properly. Without adequate controls, decentralization cannot
succeed.
6. Effective Supervision. Control facilitates effective supervision by
pointing out significant deviations. It keeps the subordinates under
check. While control cannot cure habitual dishonesty in all cases,
management is irresponsible if it does not make a reasonable effort
to provide order and discipline among its employees through effective
control processes. A good system of control detects the weak points
very quickly. This enables the expansion of span of control at all
levels in the organization.
Limitations of Control
A control system may be faced with the following limitations:
1. An enterprise cannot control the external factors such as government
policies, technological changes, fashion changes, social changes, etc.
2. Control is an expensive process because the management to observe
the performance of the subordinates. This requires expenditure of a
lot of time and effort.
3. Control system loses its effectiveness when standards of performance
cannot be defined in quantitative terms. For instance, it is very difficult
to measure human behavior and employee morale.
4. The effectiveness of controls mainly depends on their acceptance
by the subordinates. They may resist controls if they feel that these
will reduce or curtail their freedom. Control also loses its significance
when it is not possible to fix the accountability of the subordinates.
In order to achieve effective controlling in an enterprise, the following

steps may be taken:
1. Every manager should be conscious of the need of control while
performing any managerial task.
2. Standards of performance must be laid down for their use in
appraising the results of various operations.
3. Standards of performance should be laid down in consultation with
the subordinates. They must be put in writing wherever possible. It
should also be ensured that the concerned persons in the organization
properly understand them.
4. Standards of performance should not be too high. They must be
capable of being achieved by the average workers.
Elements of Control
The essential elements of any control system are:
(1) Establishment of standards
(2) Measurement of performance
(3) Comparing performance with the standards and
(4) Taking corrective action
These steps are discussed below:
1. Establishment of Standards
The first step in control process is the setting up of standards of
measurement. Standards represent criteria for performance. A standard
acts as a reference, line or a basis of appraisal of actual performance.
Standards should be set precisely and preferably in quantitative terms. It
should be noted that setting standard is also closely linked with and is an
integral part of the planning process. Standards are used as the criteria
or benchmarks by which performance is measured in the control process.
Different standards of performance are set up for various operations at
the planning stage. As a matter of fact, planning is the basis of control.
Establishment of standards in terms of quantity, quality and time is
necessary for effective control because it is essential to determine how
the performance is going to be appraised. The second step in the control
process i.e., measurement of performance, has no sense unless it can be
compared with some predetermined standards. Standards should be

accurate, precise, acceptable and workable. Standards should be flexible,
i.e., capable of being changed when the circumstances require so.
Standard is bound to fail if it is based on records of past performance,
which show either too high or too low achievement.
2. Measurement of Performance
After establishing the standards, the second step is to measure actual
performance of various individuals, groups or units. Management should
not depend upon the guess that standards are being met. It should measure
the performance and compare it with the standards. The quantitative
measurement should be done in cases where standards have been set in
numerical terms. This will make evaluation easy and simple. In all other
cases, the performance should be measured in terms of qualitative factors
as in case of performance of industrial relations manager. His performance
can be measured in terms of attitude of workers, frequency of strikes
and morale of workers. Again, attitude and morale of workers are not
capable of being measured quantitatively. They have to be measured
qualitatively.
3. Comparing Performance with Standards

Appraisal of performance or comparing of actual performance with
predetermined standards is an important step in control process.
Comparison is easy where standards have been set quantitatively as in
production and marketing. In other cases, where results are intangible
and cannot be measured quantitatively, direct personal observation,
inspection and reports are a few methods, which can be used for
evaluation. The evaluation will reveal some deviations from the set
standards. The evaluator should point out the defects or deficiencies in
performance and investigate the causes responsible for these.
All deviations need not be brought to the notice of top management.
Deviations should be brought to the notice of top management when
they are too high. A range of deviations should be established beyond
which the attention of top management is warranted. Only such cases
should be reported up which pinpoint exceptional situations. This is what
is known as ‘management by exception.’ According to Dale, the control
reports should meet three criteria. Firstly, control reports must produce
figures that are truly comparable from one period to another and from
one section of the business to another. Secondly, they must be coordinated
so that they not only portray the results in different sections of the business,
but also make plain the reasons why the business is or is not doing so
well as could be expected. Finally, they must be presented in such form
that the manager can get the bird’s eye-view.
4. Taking Corrective Action

The final step in the control process is taking corrective action so that
deviations may not occur again and the objectives of the organization
are achieved. This will involve taking certain decisions by the management
like replanning or redrawing of goals or standards, reassignment or
clarification of duties. It may also necessitate reforming the process of
selection and training of workers. Thus, control function may require
change in all other managerial functions. If the standards are found to be
defective, they will be set up again in the light of observations. Joseph
Massie has pointed out that a manager may commit two types of mistakes
at this stage: (1) taking action when no action is needed, and (2) failing
to take action when some corrective action is needed. A good control
system should provide some basis for helping the manager estimate the
risks of making either of these types of errors. Of course, the final test of
a control system is whether correct action is taken at the correct time.
Principles or Requirements of a Good Control System

For having an effective control system, certain prerequisites are
enumerated below:
1. Emphasis on Objectives. Before planning a control system, it is
essential to know the objectives of the organization clearly. The
control system must be directed towards the potential or actual
deviations from plans early enough to permit effective corrective
action.
2. Efficiency of Control Techniques. Control techniques and
approaches are efficient when they detect deviations from plans and
make possible corrective action with the minimum of unsought
consequences.
3. Responsibility for Control. The main responsibility for the exercise
of control should rest in the manager charged with the implementation
of plans.
4. Direct Control. Any control system should be designed to maintain

direct contact between the controllers and controlled. Even when
there are a number of control systems provided by staff specialists,
the foreman at the first level is still important because he has direct
knowledge of performance.
5. Suitability. Controls should be tailored to fit the needs of the
organization. The flow of information concerning current performance
should correspond with the organizational structure employed. If a
superior is to be able to control overall operations, he must find a
pattern that will provide control for individual parts. Budgets, quotas
and other techniques may be useful in controlling separate
departments.
6. Flexibility. A good control system must keep pace with the
continuously changing pattern of a dynamic business world. It must
be responsive to changing conditions. It should be adaptable to new
developments including the failure of the control system itself. Plans
may call for an automatic system to be backed up by a human system
that would operate in an emergency likewise an automatic system
may back up a human system.
7. Self Control. Units may be planned to control themselves. If a
department can have its own goals and control system, much of the
detailed controls can be handled within the department. These
subsystems of self-control can then be tied together by the overall
control system.
8. Controls by Exception. This is known as ‘management exception’.
According to this principle, only significant deviations from standards,
whether positive or negative, require management’s attention, as they
constitute exceptions. An attempt to go through all deviations tends
to increase unnecessary work and decrease attention on important
problems. In practice, it is not possible for a manager to check each
and every item being produced because of limited time available
with him. An attempt to control everything may prove to be a futile
exercise. Therefore, the control system should be designed in such a
manner that only significant deviations from the standard performance
are reported to the higher level managers. This will ensure effective
action by the manager.
9. Strategic Point Control. It is not sufficient merely to look at

exceptions. Some deviations from standards have rather little impact
and others have a great deal. Small deviations in certain areas may
have greater significance than larger in other areas. For example,
deviation of 5 per cent in budgeted labor cost may be more
troublesome to a manager than a deviation of 20 per cent in budgeted
postal charges. Therefore, the principle of exception must be
accompanied by the principle of strategic point control, which states
that effective control can be achieved if critical, key or strategic points
can be identified, and close attention directed to adjustment at those
points. It is not enough just to look for exceptions; a manager must
look for exceptions at critical points.
10. Corrective Action. Merely pointing of deviations is not sufficient in
a good control system. It must lead to corrective action to be taken
to check deviations from standards through appropriate planning,
organizing and directing.
11. Forward looking Control. The control system should be directed
towards future. It should report all the deviations from the standards
quickly in order to safeguard the future. If the control reports are
not directed at the future, they are of no use as they will not be able
to suggest the types of measures to be taken to rectify the past
deviations.
12. Human Factor. A good system of control should find the persons
accountable for results, whenever large deviations take place. They
must be guided and directed, if necessary. Thus, human factor must
be given proper attention while controlling. The use of controls should
not be resisted by the employees. A technically well designed control
system may fail because human beings may react unfavorably to the
system.
13. Economical. The systems of control must be worth their costs. They
must justify the expenses involved. A control system is justifiable if
the savings anticipated from it exceed the expected costs in its
working. Small-scale production units cannot afford elaborate and
expensive control systems.
14. Objective Standards. As far as possible, standards should be
objective. If they are subjective, a managers or a subordinate’s
personality may influence judgments of performance. Effective control

requires objective, accurate and suitable standards. Objective
standards may be quantitative or qualitative. However, in either case,
the standard should be determinable and verifiable.
From the analysis of the requirements of a good control system, it is
quite obvious that planning is the basis of control, action its essence,
delegation its key, and information its guide. As far as planning is
concerned, control has an important relation with planning. Planning refers
to visualization of the firm’s future position over a specified period of
time and the determination of the required course of action to enable the
firm to reach that position. Often, it is regarded the first stage of the
management process over which the subsequent stages are developed.
Planning lays down the objectives of various activities and determines
the standards of performance to evaluate the performance of various
individuals and departments. This serves as the basis of the control
process, which is concerned with ensuring that events conform to the
standards laid down in advance.
Without planning, there is nothing to control. Basic plans, derivative sub
plans and standards provide the benchmarks to monitor, measure,
evaluate and regulate actual performance as it takes place. To quote
Robert Anthony, “Management control is a process carried on within
the guidelines established by planning. The process is intended to make
possible the achievement of planned objectives effectively and efficiently”.
Action is the essence of control. There is no use of developing control
on mechanisms, if no action is to be taken afterwards. The comparison
of actual performance against the standards reveals the deviations, which
serve as a guide for future action. This may lead to improvement of
planning, organizing, staffing and directing. It may be pointed out that
top managers cannot perform the control function minutely themselves.
They have to delegate a portion of their authority of controlling. The task
of regulation of operational action plans can be delegated to the middle
level managers and first line managers. They may be asked to report
only exceptional matters to the top management. Thus, delegation is a
key to effective controlling.
The effectiveness of planning and controlling is influenced to a great extent
by the accuracy of the information on which these are based. Information
is a guide to controlling, Therefore, it is necessary that sufficient information

of the right type is available to the management for taking corrective
steps time. The control mechanism should provide for timely information
to the management. If a control mechanism does not transmit the important
information to the management, it is not going to last long. Therefore,
there must a provision for feedback in any good system of controlling.
Control By Exception
Management by exception is an important principle of organization. This
principle holds that only significant deviations (exceptions) from standards
of performance should be brought to the management’s attention. If actual
performance is according to the planned performance (i.e., standards
already laid down), it need not be brought to the attention of the
concerned managers as no follow-up action is necessary. But if there is a
major deviation from the standard, it should be reported to the manager.
For example, a manager establishes a quality control standard, which
says five defects per 100 units produced are permissible. Under the
management by exception principle, only significant deviations from this
standard : six of more defects per 100 units (in this case) should be
brought to the notice of the manager.
The exception principle has been devised to conserve managerial time,
effort and talent and apply these in more important areas. It is a technique
of separating important information from the unimportant information.
Only such information, which is critical for management control, is sent
to the management. This facilitates the installing of an effective control
system.
Management by exception recognizes an old saying that an attempt to
control everything may end up in controlling nothing. An executive who
wants to have an eye on each and every minor problem will prove to be
ineffective. He will not be able to devote much time to the critical
problems. The principle of control by exception suggests that manager’s
attention should be drawn, only when there are significant deviations in
performance in the critical areas of business. It will ensure better control
in the organization. It will also facilitate delegation of authority.
5.2 Control Process
The control process is a continuous flow between measuring, comparing
and action. There are four steps in the control process: establishing
performance standards, measuring actual performance, comparing
measured performance against established standards, and taking
corrective action.
An example of the control process is a thermostat.
Standard: The room thermostat is set at 68 degrees.
Measurement: The temperature is measured.
Corrective Action: If the room is too cold, the heat comes on. If the
room is too hot, the heat goes off.
Step 1. Establish Performance Standards. Standards are created
when objectives are set during the planning process. A standard is
any guideline established as the basis for measurement. It is a precise,
explicit statement of expected results from a product, service,
machine, individual, or organizational unit. It is usually expressed
numerically and is set for quality, quantity, and time. Tolerance is
the permissible deviation from the standard. What is expected? How
much deviation can be tolerated?
Step 2. Measure Actual Performance. Supervisors collect data to
measure actual performance to determine variation from standard.
Written data might include time cards, production tallies, inspection
reports, and sales tickets. Personal observation, statistical reports,
oral reports and written reports can be used to measure performance.
Management by walking around, or observation of employees
working, provides unfiltered information, extensive coverage, and
the ability to read between the lines. While providing insight, this
method might be misinterpreted by employees as mistrust. Oral
reports allow for fast and extensive feedback.
Computers give supervisors direct access to real time, unaltered data,
and information. Online systems enable supervisors to identify problems
as they occur. Database programs allow supervisors to query, spend
less time gathering facts, and be less dependent on other people.
Supervisors have access to information at their fingertips. Employees
can supply progress reports through the use of networks and electronic
mail. Statistical reports are easy to visualize and effective at demonstrating
relationships. Written reports provide comprehensive feedback that can
be easily filed and referenced. Computers are important tools for

measuring performance. In fact, many operating processes depend on
automatic or computer-driven control systems. Impersonal measurements
can count, time, and record employee performance.
Step 3. Compare Measured Performance Against Established
Standards. Comparing results with standards determines variation.
Some variation can be expected in all activities and the range of
variation - the acceptable variance - has to be established.
Management by exception lets operations continue as long as they
fall within the prescribed control limits. Deviations or differences
that exceed this range would alert the supervisor to a problem.
Step 4. Take Corrective Action. The supervisor must find the cause
of deviation from standard. Then, he or she takes action to remove
or minimize the cause. If the source of variation in work performance
is from a deficit in activity, then a supervisor can take immediate
corrective action and get performance back on track. Also, the
supervisors can opt to take basic corrective action, which would
determine how and why performance has deviated and correct the
source of the deviation. Immediate corrective action is more efficient;
however basic corrective action is more effective.
Kinds of Controls
Three kinds of control systems are used by the modern organizations,
namely, (i) historical or feedback control, (ii) concurrent control, and
(iii) predictive or feed forward control. The details of these controls are
discussed below.
Feedback Control
Feedback or Post action control measures results from a completed action.
The causes of deviations from the standards are determined and corrective
steps are taken so that such deviations do not occur again.
In all physical and biological systems, some message is transmitted in the
form of mechanical transfer of energy, a chemical reaction, or any other
means, which is known as ‘cybernetics’. In social systems also, some
information is sent back to exercise control. Any good managerial system
controls itself by information feedback, which discloses errors in
accomplishing goals and initiates corrective action. Feedback is the
process of adjusting future action based upon information about past

performance. Though feedback is ‘after the fact’, it is still vital to the
control process. Sometimes, input variables are immeasurable (e.g. the
values an employee brings to the job) or are not detected at the feed
forward control point. Feedback is necessary in any continuous activity
as it enables to take corrective action, which is essential for the
accomplishment of goals of the system; a simple feedback system is
shown in Figure.
The concept of feedback is important to the development of an effective
control system in any organization. Managerial control is somewhat akin
to the thermostat system of a refrigerator. Thermostat is a control device
of closed loop type that makes control instantaneous. In a refrigerator,
the thermostat records the actual temperature inside the refrigerator,
compares it with the required temperature and instantaneously initiates
corrective action to bring the actual temperature to what is required.
Similarly in an organization, management needs continuous flow of
information about actual performance so that deviations are promptly
corrected. Information, which the management receives, is nothing but
feedback. Feedback information may be received formally or informally.
Formal feedback involves all written information about actual
performance, reports, financial statements, etc. But informal feedback,
on the other hand, is through personal observations, personal contacts
and informal discussions.
Feed Forward Controls Concurrent Controls Flow of Information
Coercive Action
Inputs Processing Output
Feed Back Controls

Fig. Types of Conrols
Managerial control cannot be so instantaneous or self-correcting as

thermostat system or way other mechanical or electronic system. There
always exists a time lag between recording deviations and taking
corrective actions even when sophisticated system of information
collection is used. The collected information needs to be analyzed properly
before suggesting any corrective action.
Concurrent controls
It is also known as ‘real time’ or ‘steering’ control. It provides for taking
corrective action or making adjustments while programme is still in
operation and before any major damage is done. For instance, the
navigator of a ship adjusts its movements continuously or the driver of a
car adjusts its steering continuously depending upon the direction of
destination, obstacles and other factors. In a factory, control chart is an
example of concurrent control. Safety check is another illustration in this
regard. Concurrent control occurs while an activity is still taking place.
Feed forward Control

Feed forward control involves evaluation of inputs and taking corrective
measures before a particular sequence of operations is completed. It is
based on the timely and accurate information about changes in the
environment. If right information is not available in time, feed forward
control is likely to be imperfect. Feed forward follows the simple principle
that an organization is stronger than its weakest link. For instance, if a
machine is not functioning properly, the operator will look for certain
critical components to see whether they are working well or not. The
same logic applies to feed forward control; it is essential to determine
and monitor the critical inputs into any operating system. Preventive
maintenance programme is an important example of feed forward control.
It is employed to prevent a breakdown in machinery. Another example
of feed forward control is formulation of policies to prevent critical
problems from occurring. For instance, a policy on absenteeism may be
communicated to new employees to help prevent potential problems
created by absenteeism.
Feed forward control may be used with great advantages if the following
guidelines are followed:
1. Thorough planning and analysis must be done.
2. Careful discrimination must be applied in selecting input variables.
3. Data on input variables must be regularly collected and assessed.
4. The feed forward control system must be kept dynamic.
5. Corrective action must be taken as suggested by feed forward
control.

Areas of Control
It is very difficult to prescribe a precise list of areas where control should
be exercised. However, it may be safely suggested that any activity that
affects the survival and growth of the organization should be taken as the
critical area of control and dealt with effectively. According to Peter
F. Drucker, there are key result areas where objectives should be set
and controls should be exercised. These are: (i) marketing; (ii) innovation,
(iii) productivity, (iv) human organization, (v) financial resources,
(vi) physical resources, (vii) profitability, and (viii) social responsibilities.
Holden and others have identified the following thirteen areas where
control should be exercised: (i) policies, (ii) organization, (iii) personnel,
(iv) wages and salaries, (v) costs, (vi) methods and manpower, (vii) capital
expenditure, (viii) service department efforts, (ix) line of products, (x)
research and development, (xi) foreign operations, (xii) external relations,
and (xiii) overall control.
Effective control requires that areas of control must be clearly identified
first of all. Every organization should list the key areas on which its survival
and growth depend and devise suitable techniques of control in each
area. This will help in effective delegation of authority and fixing up of
responsibility.
Time controls relate to deadlines and time constraints. Material
controls relate to inventory and material yield controls. Equipment
controls are built into the machinery, imposed on the operator to protect
the equipment or the process. Cost controls help ensure cost standards
are met. Employee performance controls focus on actions and
behaviors of individuals and groups of employees. Examples include
absences, tardiness, accidents, quality and quantity of work. Budgets
control cost or expense related standards. They identify quantity of
materials used and units to be produced.
Financial controls facilitate achieving the organization’s profit motive.
One method of financial controls is budgets. Budgets allocate resources
to important activities and provide supervisors with quantitative standards
against which to compare resource consumption. They become control
tools by pointing out deviations between the standard and actual
consumption.
Operations control methods assess how efficiently and effectively an

organization’s transformation processes create goods and services.
Methods of transformation controls include Total Quality Management
(TQM), statistical process control and the inventory management control.
Statistical process control is the use of statistical methods and procedures
to determine whether production operations are being performed
correctly, to detect any deviations, and to find and eliminate their causes.
A control chart displays the results of measurements over time and
provides a visual means of determining whether a specific process is
staying within predefined limits. As long as the process variables fall within
the acceptable range, the system is in control. Measurements outside the
limits are unacceptable or out of control. Improvements in quality eliminate
common causes of variation by adjusting the system or redesigning the
system.
Inventory is a large cost for many organizations. The appropriate amount
to order and how often to order impact the firm’s bottom line.
The economic order quantity model (EOQ) is a mathematical model
for deriving the optimal purchase quantity. The EOQ model seeks to
minimize total carrying and ordering costs by balancing purchase costs,
ordering costs, carrying costs and stock out costs. In order to compute
the economic order quantity, the supervisor needs the following
information: forecasted demand during a period, cost of placing the order,
value of the purchase price, and the carrying cost for maintaining the
total inventory.
The just-in-time (JIT) system is the delivery of finished goods just in
time to be sold, subassemblies just in time to be assembled into finished
goods, parts just in time to go into subassemblies, and purchased materials
just in time to be transformed into parts. Communication, coordination,
and cooperation are required from supervisors and employees to deliver
the smallest possible quantities at the latest possible date at all stages of
the transformation process in order to minimize inventory costs.
Control of Human Element

Recognition of human element is a significant factor while designing any
control system. The management must try to know the reactions of
subordinates for various types of controls imposed on them. Subordinates
often resist controls, which are likely to restrict their freedom and obstruct
the achievement of their personal goals.
The control of human behavior has always been unpopular. Any

undisguised effort to control usually arouses emotional reactions. We
hesitate to admit, even to ourselves, that we are engaged in control, and
we may refuse a control, even when this would be helpful, for fear of
criticism. Control creates problems not only for the subordinates but for
the superiors also. Subordinates resist controls because they restrict their
freedom and some managers may not like to impose controls on their
subordinates due to fear of criticism. It is also important to note that
many people frequently try to reap the rewards of good performance
and tactfully shift the blame for poor results to others.
Whatever may be the behavioral implications of controls, controls are
very important as they create predictability in the behavior of employees.
From the organization’s point of view, controls are almost indispensable
to ensure that the employees work as per rules, procedures, standards
and norms of the organization. Thus, controls are necessary to regulate
the behavior of organizational members and to increase organizational
effectiveness.
Exercise of control may have some serious behavioral implications for
the management. Generally, management uses both planned and
unplanned controls to regulate the behavior of employees. The employees
against both types of controls generally offer some sort of resistance.
But there might be serious repercussions of unplanned controls because
they are unplanned and the subordinates are not mentally prepared to
accept them. Behaviorists consider this as an evidence of ineffective
management. But it is difficult to rule out the use of unplanned controls in
modern organizations for meeting competition, reducing costs, or
increasing productivity. Whatever may be the situation, management
should try to foresee the behavioral implications of control beforehand if
it is to exercise control effectively. But it is not always possible to recognize
behavioral dysfunctions of controls because of the following reasons:
(i) Sometimes, human behavior is unpredictable. It is difficult to analyze
unexpected and unconventional responses from the employees.
(ii) Many a time, there is a time lag between exercise of control and
surfacing of negative reactions of the people. Relating of slow
reactions with a particular type of managerial behavior may be a
difficult task.
(iii) Information system in an organization might not be able to sense or

isolate factors, which cause resistance to controls on the part of the
workers.
(iv) Controls may slowly lead to deterioration of organizational
relationships and performance, and these occurrences may not come
to the knowledge of the management.
Impact of Controls
Behavioral opposition to control may be caused by disagreement with
standards, reporting procedures, cost allocation and pertaining to the
control, systems and in some cases the need for control, The reaction of
different employees to standards, performance appraisal and corrective
actions will, differ depending upon the situation and the organizational
position of the members. The findings of Tannenbaum concerning the
impact of controls upon individuals are as follows:
Control has both rational and symbolic implications. It tells what an
individual must or must not do. It also implies something about the
person’s importance and freedom in the organization.
(i) Most persons prefer to exercise control over themselves and their
surroundings. They usually experience greater satisfaction when they
are able to exercise self control.
(ii) When one can exercise some control, one is more likely to identify
with and support the organization’s objectives.
(iii) Persons who are unable to exercise control tend to be less satisfied
with their work and to be apathetic and alienated. Such persons
lack the personal involvement of those who exercise control.
(iv) Those who exercise control may more willingly accept controls upon
themselves. Due to greater involvement and loyalty, such persons
might submit to control more readily.
Reasons for Human Resistance to Controls

The above discussion reveals that controls imply and involve a continuous
check on the performance and behavior of individuals. Some individuals
adjust with controls, whereas others resist controls in one-way or the
other. People dislike and resist controls because of the following reasons:
(i) The controls may be perceived as curbs to freedom of individuals

and as instruments of oppression.
(ii) The controls may suppress the creative and innovative urges and
abilities of the people.
(iii) The standards of performance may be imposed from the top and the
subordinates may have no say in their determination. The standards
of performance may be rigid and unrealistic. The performance
appraised may concentrate on witch hunting and fault finding rather
than guiding the people for better action.
(v) There may be no place for self control even for intelligent and
responsible people. Controls may be based on the assumption that
people are basically lazy, they shirk work and they need to be
supervised closely and strictly.
(vi) The controls may be administered in a discriminatory, arbitrary and
whimsical manner.
Measures to overcome Resistance to Controls

 The organizations should take up the following measures to overcome
resistance to controls:
 The controls should be realistic and flexible.
 They should make allowance for general human behavior.
 The controls should give adequate emphasis to self direction and
self control of people.
 They should allow the people to make use of their creativity.
 They should not operate to suppress the genuine aspirations of people
for self expression and for development.
 The people whose behavior and performance are to be controlled
must have a say in the determination of standards and administration
of controls.
 The management should have faith in the ability and capacity of the
subordinates and should follow selective control only. ‘Control by
exception’ should be the rule where subordinates are responsible
and can be depended upon.
 The reward system in the organization should be integrated with the

various kinds of controls. The subordinates should be offered rewards
for acceptable performance and behavior so that they may get
positive reinforcement.
 There should be consistent operation of various kinds of controls.
They should not give undue power to the superiors to discriminate
between individuals.
 There should be two - way communication in the organization.
 The employees should be free to send their reactions and suggestions
to the top management.
 The managers at various levels should be persuasive; they should
tell their subordinates that controls are directed to achieve the goals
of the organization and not to curb the freedom of individuals.
Process and Techniques of Control
Modern business enterprises use a large number of techniques of
managerial control. These may be grouped into two categories as follows:
1. Traditional or conventional techniques such as budgetary control,
statistical data and reports, marginal costing, break even analysis,
standard costing, etc.
2. Modern or contemporary techniques such as Management Audit,
PERT, CPM and Management Information System.
It may be noted that some of the control techniques are partial in nature
in the sense that the standards on which they are based relate to the
specific areas. For instance, BEP, PERT and CPM are the techniques of
production control. On the other hand, there are techniques such as
Budget Summaries, Profit and Loss Statements, Ratio Analysis,
Management Audit, etc. which are used for the control of overall
performance of the organization. The rationale of measurement of overall
performance is explained below:
(i) Every enterprise has its overall objectives, which stand above the
sectional objectives.
(ii) Overall control of activities signifies the need for coordination between
different divisions of the enterprise.
(iii) Competence of top management can be measured by the techniques
of overall control.
A brief description of the commonly used management control devices is

given below :
1. Written Reports. Each manager prepares reports on the
performance of his subordinates and submits them to his higher
authority. In this way, departmental managers submit reports to the
general manager. Ultimately, the Board of Directors has to submit
an Annual Report to the members of the company, the virtual owners
and the highest authority.
2. Budgets. The budget, which is a component of planning, is also
used as a tool of control. The budget predetermines the extent of
expenditure, which cannot be normally exceeded. A budget means
projected results, which are expected to be achieved. Budgetary
control is accepted to be one of the most common tools of control.
Several kinds of budgets are used for controlling expenditure, which
have been discussed later in the chapter.
3. Key Ratios. Control of overall performance can be exercised
through some ‘key ratios’ of which Return on Investment (ROI) is
very common. There are some expected returns on certain categories
of investments. Those percentages must be achieved. Ratios between
current assets and current liabilities, between, turnover and investment
etc. are the other kinds of key ratios.
4. Accounting Techniques. Various kinds of audit like cost audit,
management audit are nowadays being used for better control.
Management accounting, which is not merely based on double entry
book keeping but also concerned with resource utilization as a whole,
is a powerful tool of control.
5. Internal Audit. Internal audit, also called the operation audit, has
become one of the important tools of management control. Internal
auditing evolved as a branch of accounting and its scope was limited
to the verification of accounting transaction. But now the scope of
internal auditing has been enlarged and is considered to be associated
closely but objectively with every activity of the enterprise, which
contributes to its profitability.
According to Koontz and O’Donnell, “Operation auditing in its broadest
sense is the regular and independent appraisal, by a staff of internal
auditors of the accounting, financial, and other operations of the business.
Although limited to the auditing of accounts, in its most useful, aspect,

operational auditing involves appraisal of operations generally, weighing
actual results in the light of planned results.” Thus, internal auditing control
is not only concerned with the effectiveness of the accounts department,
but it also concerns itself with all the departments such as purchasing,
marketing, production and personnel. The functions of internal auditing
control vary considerably from organization to organization depending
upon its size and nature. However, the internal auditor must be independent
of all those departments, which come under his purview.
5.3. Budgetary Control

Budgetary control is the oldest technique of control, which is still being
used by business enterprises. According to Walter W. Bigg, “The term
budgetary control is applied to a system of management and accounting
control by which all operations and output are forecast as far ahead as
possible and the actual results, when known, are compared with the
budget estimates.
Budgetary control involves the use of budgets to plan, coordinate and
control day to day operations of business in accordance with the overall
objectives of business.
Before we discuss the nature, objectives, merits and limitations of
budgetary control, it is appropriate to discuss the nature, purposes,
significance and types of budgets are not only tools of control, but also
of planning. This has been made quite clear in the chapter on planning.
Definition of Budget
A budget is an estimate of future needs, arranged according to an orderly
basis covering some or all the activities of an enterprise for a definite
period of time. The Institute of Cost and Management Accountants of
England has defined budget as “financial and/or a quantitative statement
prepared prior to a definite period of time of the policy to be pursued
during that period for the purpose of obtaining a given objective’.
A budget is an important device managerial control. It provides a standard
by which actual operations can be evaluated to know variations from the
planned expenditures. A budget has the following characteristics :
(a) It is prepared in advance and is based on a future plan of actions.
(b) It relates to a future period and is based on objectives to be attained.

(c) It is a statement expressed in monetary and/or physical units
prepared for the implementation of policy framed by the top
management.
Definition of Budgetary Control

Budgetary control may be defined as the establishment of budgets relating
to the responsibilities of executives to the requirements of a policy, and
the continuous comparison of actual with budgeted results, either to secure
by individual action the objective of that policy or to provide a basis for
its revision. Thus, budgetary control involves the following three steps :
(i) Preparation of budgets
(ii) Continuous comparison of actual results with the planned ones and
(iii) Revision of plans or budgets, in the light of changed circumstances.
Budgetary control is a useful technique of management control, which
brings efficiency and economy in the working of a business enterprise. It
facilitates control by establishing budgets in respect of each function and
assigning responsibilities for achieving budgetary objectives. It imposes
control by assigning responsibilities for control of actual performance
and, thus, prevents backpassing when the budget figures are not met. It
coordinates the working of various divisions of a business and makes
delegation and decentralization of authority possible.
Objectives or Budgetary Control

The objectives of budgetary control are described as under:
(i) Determination of Goals. Budgets are sub-plans for a specific
period. They serve as goals for certain individuals. They are specific
action programmes, which are amenable to implementation through
the various activity centers of the enterprise.
(ii) Rationalization of Activities. Budgetary control is intended to
impart precision, discipline, direction and predictability to the day
to day activities of the enterprises.
(iii) Coordination. Budgets aim at coordination and integration of
enterprise functions and operations performed by various
departments. They highlight the interdependent nature of enterprise
functions and operations as also the need for consistency in

operations. Budgetary control involves the preparation of a master
budget, which helps in bringing effective coordination of different
departments of the business.
(iv) Participation. Budgetary control provides participation to the
subordinates. The subordinates can make their suggestions and
comments on the budgets estimates. Thus, budget making provides
an opportunity for cooperation and commitment of common goals.
(v) Efficiency in Operations. A budget lays down sufficient and
satisfactory norms of performance over various activities. It ensures
efficient utilization of various resources of the enterprise. The activity
units are also anxious to keep the overhead budgets.
(vi) Control of Activities. Budgetary control is an important instrument
of managerial control in any enterprise. It helps in comparing the
performance of various individuals and departments with the
predetermined standards laid down in various budgets. It reports
the significant variations from the budgets to the top management.
Since separate budgets are prepared for each department, this helps
in keeping down the cost of operations of different departments. It
becomes easier to determine the weak points and the sources of
waste of time, money and resources.
Budget : A Tool of Planning or Control?

Some people doubt whether budgets are a means of control. This is
because budgets perform more than one function. First, they represent
the objectives, plans and programmes of the enterprise and express them
in financial and/or quantitative terms. Second, they help in reporting the
progress of actual performance against the predetermined objectives,
plans and programmes, and finally, like job descriptions, they define the
assignments, which have flowed down from the chief executive.
A budget is a kind of business plan for a particular period of time.
Formulation of budget forces an enterprise to make in advance a numerical
calculation of cash flow, expenses and revenues, capital outlays and
machine hour utilization. It represents the planned expenditure on certain
items and expected revenues from various sources. Preparation of budget
requires the same process as is required to make any other type of plan.
It is made well in advance and is based on scientific forecasts. Without

sufficient budgeting, it may not be possible to control the expenditures.
As a plan, it shows clearly the targets to be achieved in financial and /or
physical terms.
A budget is a tool of control. Since it is a statement of expected result, it
also serves as an effective instrument of control. It provides the standards
against which the performance of different departments will be judged.
Comparison of actual results with the budgeted figures will help in
detecting sources of deviations and taking corrective steps, which is the
essence of control process. This will bring efficiency in the organization.
Economy will be achieved because of minimizing wastages of various
kinds. Budget also helps in fixing the responsibility of persons for
unauthorized and uncalled for expenditures.
Budgeting is also a tool of coordination. In preparation of various
budgets, knowledge, skills and experience of many executives are
combined and business plans are reduced to proper co-ordination of the
efforts of various departments of the enterprise.
Benefits of Budgeting
The following benefits may be achieved from an effective system of
budgetary control :
(i) Budgets provide management an overall view of the activities of
enterprise. They serve as a valuable aid to management through
planning coordination and control. They provide standards against
which actual performance is measured. This helps in taking corrective
actions in time.
(ii) Budgets are based on well defined plans. In preparation of various
budgets, knowledge, skills and experience of many managers are
combined and the plans of the enterprise are reduced into concrete
numerical term and budgets enable the various departmental heads
to know what is expected of them. They know the amount that they
are entitled to spend and the income they are expected to earn.
Thus, budgeting introduces an element of definiteness in planning.
(iii) Budgeting helps in eliminating unproductive activities and minimizing
waste, because preparation of budgets involves a very careful analysis
of various phases of business. All those who have to bear the
responsibility of executing the plans participate in the formulation of

plans. They are fully aware of the aims and objectives to be followed.
Differences of opinion can be more easily reconciled through
budgeting.
(iv) Budgeting coordinates effectively the activities of different
departments and develops a sound communication system through
meetings and discussions on budgeting and efficient system of
reporting.
(v) Budgetary control assists the top management in measuring the
efficiency of departments and individuals and taking corrective
actions. Thus budgeting is an important technique of control.
(vi) Budgetary control facilitates ‘control by exception’; it helps in
focusing the time and effort of the managers upon areas which are
most important for the survival of the organization.
Dangers in Budgeting or Limitations of Budgetary Control

Budgets are widely used as a tool of planning and control. There are
certain dangers of budgeting, which are as follows:
(i) In some companies, budgetary control programmes are so detailed
that they become cumbersome, meaningless and unduly expensive.
There is a danger in over - budgeting as it may bring rigidity in the
enterprise, which may deprive the managers of the needed freedom
in managing their departments. For instance, if the sales budget lays
down the expenditure on office stationery and supplies, the sales
manager may not be able to carry out his sales promotion programme
fully because he will be held responsible for overspending on office
supplies.
(ii) Budgets are usually based on historical trends, which may not repeat.
They may also be influenced by what top management would like to
happen. Naturally, top management is interested in larger profits,
lower costs and greater market share and may make budgets to
achieve these aims, which may not be possible in actual practice.
(iii) Another danger lies in allowing budgetary goals to supersede
enterprise goals. In their effort to keep within budget limits, the
managers may forget that budgets are only means to enterprise goals.
Top management may also be reluctant to excuse deviations from
the budget estimates even though the causes of deviations may be

justified. This sort of over control will obstruct the achievement of
enterprise goals.
(iv) Sometimes, budgets may be used to hide inefficiencies. A department
may be inefficient even though its expenses are within the budget
limits. Moreover, budgets are based on the past year’s figures and a
certain expenditure incurred in the past may become an evidence to
cut down the budget proposals sent by various departments. This
naturally leads to inflation of figures by various departments. Unless
budget making is secured by constant evaluation of standards and
conversion factors by which planning is translated into numerical
terms, budgeting may become an umbrella for hiding inefficiencies
of management.
(v) There may be psychological problems with the people supposed to
work within the budget framework. While, on the one hand, people,
like to know what they are working for and how they will be judged,
on the other, many of them are resentful of budget restrictions. The
resentment is caused by the fear of inflexibility, which may be brought
about by the budgets. When a budget is made in great detail, it will
restrict the freedom of the persons concerned to spend money. They
may be more worried for being within budget limits rather than
achieving organizational objectives.
Precautions in the Use of Budgets

The following precautions should be taken while preparing and using
budgets for the purpose of managerial planning and control :
1. Estimates are not too high to be attained.
2. Budgets are not prepared and installed hurriedly.
3. Administration and supervision of the operations are not ineffective
4. Organizational structure is not defective.
5. Accounting and cost systems are not inadequate.
6. Statistics of past operations are not inadequate and unreliable.
7. Results are not expected in too short a period.
Requirements of Effective Budgetary Control

The requirements of a good system of budgetary control are discussed
below:
(i) Quick Reporting. A good system of budgetary control requires the
establishment of such procedures, which will provide reports on the
performance of various operations. The reports should reach the
persons concerned with the implementation of budgets without any
delay so that quick actions may be taken whenever necessary.
(ii) Sound Organization Structure. There should be a sound
organization structure with precisely defined authorities,
responsibilities and lines of communication so that everybody in the
organization understands his role in the process of budgetary control.
(iii) Frequent Comparison. There should be frequent comparison
between budget estimates and operating results. Alford and Beatty
are of the opinion that careful analysis of both operating results and
budget estimates is the essence of budgetary control.
(iv) Definite Plan. There should be comprehensive planning in the
enterprise. All the operations should be planned in clear terms. The
administration of the budgets should also be properly planned. It
must be predetermined who is to be held responsible for the
implementation of budgets.
(v) Participation. The purpose of budgetary control is to achieve
coordination of various functions of the business. Therefore, it is
essential that participation upon the lowest level in the enterprise be
ensured to make the people committed to the budgets. Everybody
should understand his role in achieving the budgeted targets.
(vi) Flexibility. Budgets should not be rigid, but flexible enough to allow
alteration or remodeling in the light of any change in circumstances.
Budgets are a means to an end. They must be flexible to achieve the
desired objectives. A good system of budgetary control allows
sufficient flexibility to the persons concerned with the implementation
of the budgets.
(vii) Support of Top Management. The top management should support
a good system of budgetary control. Top management should take
the preparation of budgets and their implementation seriously in order
to achieve the objectives of the enterprise.
Types of Budgets
A business enterprise can use various types of budgets for various
purposes. A brief discussion of the budgets used in business is given
below
1. Sales Budget. It includes a forecast of total sales during a period
expressed in money and/or quantities. The forecast relates to the
total volume of sales and also its break up product wise and area
wise. The responsibility for making sales budget lies with the sales
manager, Preparation of sales budget is the key factor in any business
enterprise. All other budgets are based on the sales budget. Sales
budget sets the tone for production, finance and personnel budgets.
The following factors are relevant for preparing the sales budget :
(i) Past figures and trend;
(ii) Salesmen’s estimates;
(iii) General economic conditions;
(iv) Orders on hand;
(v) Seasonal fluctuations;
(vi) Competition and
(vii) Government’s control and policy.
2. Productions or Output Budget. It includes a forecast of the output
for a period analyzed according to (a) products ;(b) manufacturing
departments and (c) periods of production. It is generally based on
the sales budget as it is the responsibility of the production department
to schedule its production according to sales forecast. The production
manager prepares it by taking into account the following major
factors :
(i) The sales budget.
(ii) Plant capacity.
(iii) Inventory policy.
(iv) Availability of raw materials, labor, power, etc.
3. Materials Budget. Materials may be of two types, direct and
indirect. The materials budget generally deals with the direct materials
for budgeted output. It is based on the production budget. Materials

requirement for a unit of production is determined and is multiplied
by budgeted output to arrive at total quantity of direct materials
required. Materials budget helps in scheduling the purchase of
materials to produce a given volume of output during a particular
period to meet the requirements of customers during the period.
4. Labour Budget. It reveals the estimates of direct labor requirements
essential for carrying out the budgeted output. Labor of different
grades required for a job or a product or a process is determined in
terms of man hours and is multiplied by wage rate per hour to
determine the total expenses on direct labor for budgeted production.
5. Factory Overhead Budget. It includes the estimated costs of
indirect materials; indirect labor and indirect factory expenses required
during the budget period for the achievement of budgeted production
targets. The budget is prepared on departmental basis for effective
control over costs. The factory or manufacturing overheads may be
classified into three categories: (i) fixed, (ii) variable, and (iii) semi
variable expenses. This classification facilitates the preparation of
overhead budgets for each department.
6. Personnel Budget. It sets out manpower requirements of all
departments for the budget period. It expresses labor requirements
in terms of labor hours, cost and grade of workers. It helps the
personnel manager in providing required labor to the departments
either by transfers or by new appointments.
7. Administrative Overhead Budget. It includes the estimates of
administrative expenses like expenses of all offices and salaries of
managerial personnel. Such expenses form a significant part of the
total cost of production. Preparation of this budget will help in
keeping the administrative costs under control.
8. Selling and Distribution Expenses Budget. This budget includes
the estimates of all items of expenditure and promotion, maintenance
and distribution of finished products. The costs are divided into fixed,
variable and semi variable categories and estimated on the basis of
past experience. The various items of expenditure include sales office
rent, salaries, depreciation and miscellaneous expenses, advertising,
commission, bad debts, traveling expenses, etc.
9. Cash Budget. The cash budget usually consists of two parts giving
detailed estimates of (a) cash receipts, and (b) cash disbursements
for the budget period. It is prepared: (i) to ensure that cash is
available in time for meeting the financial commitments; and (ii) to
use cash available in the best possible manner. It is prepared by the
controller of finance considering the following points :
(a) Cash receipts expected from cash sales, credit sales having regard
to credit collection policy, interest, etc., dividend and rent receivable,
(b) Estimated payments for purchases and expenses as set out in
different budgets.
10. Master Budget. The Institute of Cost and Management
Accountants, England has defined master budget as the summary
budget incorporating its component functional budgets, which is finally
approved, adopted and employed. Thus, a master budget is prepared
to incorporate all functional budgets. It projects a comprehensive
picture of the proposed activities and anticipated results during the
budget period. The top management of the enterprise must approve it.
Fixed and Flexible Budgets

Fixed budget is a budget, which is designed to remain, unchanged
irrespective of the level of activity actually attained. The main purpose of
fixed budgeting is coordinating sectional activities to attain the enterprise
objectives. It is prepared for a given level of production and does not
take into account the changes in circumstances. It becomes a rigid and
unrealistic measuring rod in case the level of production actually
accomplished does not conform to the one assumed for the purpose of
fixed budgeting.
A flexible budget is prepared in a manner that it gives the budgeted cost
for different levels of activity. Thus, it facilitates comparison of actual
performance with budgeted performance at different volumes of activity.
Such a budget is prepared after considering the fixed and variable elements
of cost and the changes that may be expected for each item at various
levels of activity. Flexible budgeting is of great help where it is not possible
to predict accurately the sales forecast and where the level of production
depends upon the availability of a factor, which is in limited supply.

Zero Base Budgeting

The concept of zero base budgeting is based on the premise that the
future is not a mere projection of the past. The likely behavior of future
events is to be forecast systematically as the environments are changing
fast. Organizations have to adapt to such changes with as much care as
possible. Goals, activities, efforts and resources need to be recast, not
in a casual incremental manner, but in a logical, reasoned and optimal
manner.
Zero base budgeting represents a radical departure from traditional
budgeting to the extent that it advocates comprehensive analysis and
review of budget proposals, every time such proposals are made. In
traditional budgeting, the normal practice is to take the current year’s
budget as the base for consideration and finalization of budget proposals
for the next year. More often, budget for the next year is just a projection
of the current year’s budget with marginal changes made here and there.
In zero base budgeting, the current year’s budget is not taken as the
base. Rather all budget proposals (which may be called possible decision
packages) whether for existing programmes or new programmes, are
considered from the ‘ground up’, almost from scratch, as if all proposals
were absolutely new.
The advocates of zero base budgeting assert that it permits management
a great degree of freedom and flexibility in allocating resources for
organizational activities, from year to year. There is nothing sacred in
organization goals, activities, resource allocations and programmes. They
are all to be exposed to searching examination at periodic intervals to
test their legitimacy, validity and effectiveness. Such tests take the form
of thorough, rational, and judicious analysis and appraisal of previous
budget commitments and fresh budget proposals in the light of actual
performance and changed circumstances.
Performance Budgeting
Administrative Reforms Commission suggested the use of Performance
Budgeting by the Government. A performance budget is an input - output
budget. It considers both costs and results. It shows expenses as under
the traditional budgeting. In other words, it highlights the end results to
be achieved rather than money to be spent. It helps in knowing whether

the organization is getting adequate results for the money spent.

The steps involved in performance budgeting include the following
(i) Identification of goals, results or end output of the performing
department or enterprise.
(ii) Preparation of schedule of performance leading to the goals.
(iii) Linking of all expenses to performance heads.
(iv) Developing of standards of performance for the purpose of control.
The possible benefits of performance budgeting are as follows:
(i) It correlates the physical and financial aspects of every programme
or activity.
(ii) It improves budget formulation, review and decision making at all
levels of department or, undertaking.
(iii) It facilitates better appreciation and review of performance.
(iv) It makes effective performance possible.
(v) It measures progress towards long term objectives.
(vi) It brings annual budgets and development plans of the Government
closely together.
Performance budgeting suffers from the following limitations

(i) It is difficult to set performance goals and measure actual
performance where the output is intangible as in case of education,
research, training, health, etc.
(ii) Performance budgeting is likely to fail if planning in the organization
is ineffective.
(iii) Subordinates often do not like the idea of performance budgeting.
They resist its implementation.
Organization of Budgetary Control

The procedure of introducing budgetary control system in a business
enterprise involves the following steps:
1. Responsibility for Budgeting. The responsibility for budgeting is
entrusted to a Budget Committee under the inchargeship of Budget
Officer. The Budget Committee consists of heads of various
departments in addition to the Budget Officer. The Budget Officer

acts as the convener of the Budget Committee. The Budget
Committee formulates a general programme of budgeting; discusses
departmental budgets and brings co ordination among them. The
Officer is an expert in accounting and finance and plays an important
sale in preparing and implementation of budget. He advises the chief
executive and departmental heads on budgetary matters. He acts as
a coordinating link between various departmental heads. He ensures
proper communication of budgets at all levels. He supervises
execution of budgets, analyses varying performance and suggests
suitable actions to the concerned persons. He revises budgets in
accordance with the recommendations of the Budget Committee.
2. Extent of Budgeting. The people working in the enterprise should
introduce budgetary control in phases, so that there is least resistance
to it. It should be gradually introduced in other parts of the enterprise
after it functions well in one part. Rigidities in budgetary control should
be avoided. The budgets should provide for some degree of flexibility
to executive’s implementing them. The extent of budgetary control
differs from one firm to another.
3. Period of Budgeting. Budget is prepared for a certain period of
time. The length of the budget period depends upon: (i) nature of the
business; (ii) the degree of control required; (iii) production period;
and (iv) timings of availability of finance. For instance, companies
with huge capital expenditure require long term budgeting, whereas
seasonal firms require short period budgeting. When the business
conditions are changing fast, the preparation of budgets for a longer
period will prove to be meaningless. Budgeted estimates may not
hold well due to these changes. Therefore, the length of the budget
period should be restricted to such a span of time for which an
accurate forecast can be made.
4. Key or Limiting Factor. It is that factor which influences the
functional budgets. It is also known as ‘Principal Budget’ or
‘Governing’ factor. It is the factor the extent of whose influence must
first be assessed in order to ensure that the functional budgets are
reasonably capable of fulfillment. Key factor may be raw materials,
labor, plant capacity, sales or government restrictions; for instance,

shortage of power supply leads to under utilization of plant capacity.

So industrial undertakings prepare first plant utilization budgeting
and view the availability of power then other budgets like sale and
production.
5. Preparation of Budgets. Most of the budgets are based on sales
forecasts, which are made by the sales manager. If there is any other
key factor, the budget estimate of such factor may be prepared first.
Budget Committee discusses these estimates and gives its approval
tentatively. After that, all the departments make their budgets on
these estimates and submit them to the budget committee. Cash
budget is prepared on the basis of sales and other budgets. The
Budget Committee discusses these budgets and makes modifications
wherever necessary and then incorporates all budgets into a ‘Master
Budget’, which is sent to the top management for approval.
Statistical Data and Reports

Statistical data are being widely used for the purpose of managerial
control. Statistical data may be presented in the form of statistical tables,
graphical charts or special reports. The quality of presentation of essential
data will determine their efficiency for the purpose of managerial control.
A report is a form of systematic presentation of information and statistical
data relating to some aspect of business. It may arise out of available
factual data, thorough enquiry, investigation or experiment. The
information provided by the report may be used for the purpose of
managerial control. It will help in knowing whether the policies of the
management are being followed and if not, what steps should be taken
to implement them. The task of making reports is generally entrusted to
certain specialist who will collect the desired information and present the
same in the form of a report.
Marginal Costing
Marginal costing is a very useful technique, which guides management in
pricing, decisions making and assessment of profitability. According to
Institute of Cost and Management Accountants, London, marginal costing
is the ascertainment of marginal cost and of the effect on profit of changes
in volume or type of output by differentiating between fixed and variable
costs. Fixed costs remain unchanged up to a certain level of production,
but variable costs change with the changes in the volume of production.
Marginal cost is the amount of money at any given volume of output by
which aggregate cost is changed, if the volume of output is increased or
decreased by one unit.
Suppose, a factory produces 1,000 units of product X per month. The
variable cost per unit is Rs. 25 and the fixed expenses per month are Rs.
10,000. The cost statement of 1,000 units of ‘X’ will be as follows:
Rs.
Variable cost (1,000 x 25) 25,000
Fixed cost 10,000
Total cost 35,000
If one unit increases the production, the cost statement will be as
Variable cost (1,001 x 25) 25,025
Fixed cost 10,000
Total cost 35,025
Marginal cost is the total cost of producing 1,001 units minus total cost
of producing 1,000 units. It comes to Rs. 25 (i.e., Rs. 35,025 - 35,000),
which is the variable cost of one unit. So long as the fixed cost does not
change, production can be increased and marginal cost for every extra
unit of production will be the variable cost. Until the production at the
full capacity is achieved, the fixed costs are irrelevant for managerial
decisions and control. All the decisions are based on the variable costs
of producing additional units. It is relevant here to define contribution.
Contribution is the balance left by defecting total variable costs from the
sales revenue. It is called contribution because it enables to meet fixed
costs and contributes to the profit.
Profit Volume Ratio. It is the ratio of contribution to sales. It is also
called ‘contribution ratio’ or ‘marginal ratio’. It can be expressed in
percentage by the following formula:
Contribution x 100
P/V Ratio = ______________
Sales
The P/V ratio is used for appraising profitability of alternative products,
operations and decisions. A higher ratio reflects greater profitability and
lower ratio indicates lower profitability. Management tries to achieve
higher P/V ratio by reducing variable cost or by increasing the sale price.
In most of the cases, it is not possible to increase the sale price, so
management concentrates on decreasing the variable costs.
Usefulness of Marginal Costing

Marginal Costing is an important tool in the hands of management for
exercising cost control. Since marginal costing is based on variable costs,
the responsibility for controlling variable costs can be assigned to various
departments. The reports by various cost centers include only those costs
which can be controlled by them. The control of fixed costs is the
responsibility of the higher-level managers.
Marginal costing facilitates ‘management by exception’ by focusing
attention of the management on results, which are moving out of control
significantly. It also helps the management in evaluating the performance
of individuals responsible for variable costs. The impact of fixed costs is
conveyed to management in a more meaningful way under marginal
costing. This helps management to ensure better utilization of items, which
involve fixed expenditure such as plant and machinery, furniture,
installations, etc. Finally, marginal costing helps the management in
understanding the relationship between profit and major factors affecting
profit so that it may exercise control over these factors to achieve higher
profits.
Cost Volume Profit Analysis

Cost volume profit analysis is an attempt to determine the effect of a
change in volume, cost, price or product mix on profits. It assists
management in ascertaining which product is most profitable, what effect
a reduction in sales price will have on final profit, what effect a change in
volume or product mix will have on production costs and profits, what
effect will be on costs, profits and sales volume if there is a change in the
plant capacity and so forth. The important feature of this analysis is that
it calls for separation of variable costs from fixed costs with a view to
understand the anatomy and structure of profit of an enterprise.
One of the most important determinants of cost is the volume of operations.
The relationship between cost and volume is seldom simple as neither
cost nor volume is homogeneous. Moreover, they depend on different
factors. Cost is an aggregate of labor and material costs, supervision,
maintenance and other costs including on selling and administration.

Volume is made up of many products each with its own specifications
and cost characteristics. Aggregate costs seldom, if ever, vary in direct
proportion to changes in composite volume. That is true even if volume
consists of a single product, which can be physically measured. The reason
for lack of proportionality between cost and volume is the existence of
‘Fixed Costs’.
The starting point in the cost volume profit analysis is the classification of
all costs into fixed and variable costs. Fixed cost is that which remains
constant irrespective of volume of output produced. On the other hand,
a variable cost is one that changes in total as a result of change in the
volume of activity. The second step in cost volume profit analysis is to
determine the ratio of variable costs to volume of sales. It is important to
point out that profit is the function of the inter play of costs, prices and
volume of production. The important technique of cost volume profit
analysis is the Break Even Analysis.
Break Even Analysis

Break even analysis determines the probable profit or loss at different
levels of activity. It establishes relationship among cost of production,
volume of production, profit and sales and, that is why, it is also known
as cost volume profit analysis. This technique is employed by the
management for exercising broad control over the functioning of the
enterprise. Management is interested in determining the volume of sale
at which costs are fully covered and beyond which profits emerge. This
analysis of cost behavior in relation to changing volume of sale and its
impact on profit is known as break even analysis. The volume of sale at
which there is no profit, no loss is known as ‘Break even point’.
Break Even Point

The break even point is defined as that volume of sale at which revenue
exactly equals total cost. It is that point where operations pass from
being profitable to a loss or vice versa as shown in the figure. The vertical
scale in the figure represents cost and revenue and the horizontal scale
reflects the sales.

Cost and Revenue Total Revenue
Total Cost
Variable Cost
Fixed Cost
Sales Volume
Break even analysis helps the management in knowing the relationship
between cost, volume of production and profits or losses. By dividing
the total costs into fixed and variable, the management can determine the
point up to which it must carry on production to cover fixed cost. It can
exercise cost control at various levels of sale. This will also enable the
management to accept orders during depression or off season at lower
prices which is more than the variable costs. The excess of price over
the variable costs will lead to reduction of losses, which will result if no
production is carried on. Fixed costs remain unchanged whether there is
production or not. However, the fixed costs do not remain constant for
all levels of production. They are fixed only up to a certain level of
production. After that they will jump. This limitation of break even analysis
should be kept in mind. Moreover, variable costs do not always vary
proportionately. There may be certain economies in large scale
production. The profit shown by the breakeven analysis may not be
achieved as the prices in the market fluctuate frequently and the share of
every firm in the market is also limited because of competition and other
forces beyond the control of the firm.
Management Audit
By audit we mean a review or examination of completed transactions to
see whether they represent a true state of affairs of the business or not.
While conducting an audit, the auditor examines the degree of
conformance of business transactions with the accepted business practices
and the legal provisions. The main objective of financial audit is to know
the correct profit or loss of the business during a particular year and to
determine the accuracy of the balance sheet as at the end of that year.
Thus, audit serves as a control mechanism over the completed transactions
of the enterprise. It detects the errors and frauds committed in the books
of accounts of the enterprise.
Financial audit or examination of books of accounts has been in operation

for a long time. But management audit is relatively of the recent origin.
Now it has come to be recognized that audit of performance of
management of a big enterprise is not less important than the audit of its
financial transactions. But it is to be noted that there is no equivalent of
chartered accountants holding Certificate of Practice from the Institute
of Chartered Accountants of India for conducting management audit.
However, a few management consultancy firms have come into existence,
which offer to conduct management audit of organizations. But there is
no central agency to regulate their code of conduct and practices and
procedures of management audit as in the case of financial and cost
audits.
Management audit may be defined as a comprehensive and constructive
review of the performance of management team of any organization. It is
an important aid for evaluation of management techniques and
performance. It undertakes a systematic search of the effectiveness and
efficiency of the management. It investigates formally and in depth the
performance of management as contrasted with day to day informal
impressions. Management performs many functions like planning,
organizing, staffing, directing and controlling. The chief objective of
management audit is to see whether these functions are being performed
efficiently or not. Management audit locates deficiencies in the
performance of various functions and suggests possible improvements.
It assists the management in managing the operations of the enterprise
under its control in the most efficient manner.
The scope of management audit is very wide. Economic outlook,
adequacy of organization structure, flexibility of planning, reliability of
systems of control, efficiency of communication and motivation, effective
utilization of manpower and equipment, etc., all come under the purview
of management audit. The scope of management audit should be clearly
laid down before such audit is initiated.
There is no legal obligation to undergo management audit, but enlightened
managements understand its usefulness and voluntarily undergo
management audit. Management audit measures the degree of efficiency
of management and points out the deficiencies in managing. As an
enterprise grows, the need for such an audit increases. Continuous
feedback information is necessary for improved performance in the future.

Management audit may be either comprehensive or may be restricted to
some functional areas only. If the management feels that a particular
department, say, marketing, production or personnel, is not working well,
it may get its activities audited to identify its problems and deficiencies.
Advantages of Management Audit.

The benefits which the management may derive from the management
audit are given below:
(a) It would locate present and potential danger spots.
(b) It would highlight possible opportunities.
(c) It would evaluate the performance of control mechanisms.
(d) It would reduce costs by suggesting how to reduce unnecessary
wastes and losses.
(e) It would check the overall plans and policies of the business.
(f) It would determine whether or not the enterprise is operating as
efficiently as it should.
(g) It would detect the cases where organizational policies and
procedures are not being complied with.
(h) It would evaluate the progress made by the enterprise by the
introduction of new techniques and ideas.
Conduct of Management Audit

There are no standard techniques of management audit as in case of
financial and cost audits. The auditor conducting management audit has
to devise a suitable audit programme consisting of various steps in each
and every case to achieve the objectives of such audit. The auditor must
ensure that the terms of reference to him are quite clear. He should clearly
know the scope of such audit before starting the audit. After the auditor
has examined the various phases of management, it is imperative for him
to compile his observations, findings and recommendations in the form
of a report. The style of audit report will depend upon the auditor, as
there is no set pattern of such report.
The audit report should be based on the observations and findings of the
auditor. It should be precise and to the point. The findings should be
supported by factual information. In short, a management auditor should

ensure that his report contains the following essential elements :
(i) Table of contents to guide the readers as to what is contained in the
report.
(ii) Preface giving a brief statement of scope and objectives of audit.
(iii) Findings of the investigation carried out by the auditor. Audit of
different functions may be discussed in separate sections.
(iv) Summary and Suggestions. This part should include the summary of
observations of the auditor and his recommendations for
improvement.
(v) Appendix to include supporting data that may be too voluminous to
appear in the body of the report.
Networks Techniques
Network analysis is being widely recognized as a management tool in
both commerce and Industry. Under network analysis, a project is broken
down to small activities or operations, which are arranged in a logical
sequence. After this the order in which various operations should be
performed is decided. A network diagram may be drawn to present the
relationship between all the operations involved. The diagram will reveal
the gaps in the flow plan. The network thus drawn shows the
interdependence of various activities of a project and also points out the
activities, which have to be completed before the others are initiated.
The object of network analysis is to help in planning, organizing and
controlling the operations to enable the management in accomplishing
the project economically and efficiently. Various research scholars have
developed a number of network techniques. But PERT and CPM have
gained wide popularity. Both PERT (Programme Evaluation and Review
Technique) and CPM (Critical Path Method) recognize the interrelated
nature of elements within large work projects. Any project whether it is
construction of a building or manufacture of a hydrogen bomb, is a
complex network of inter related activities. In network techniques, an
activity is defined as an operation required for accomplishing a particular
goal. An activity requires a specific span of time for completion. An event
is a point of time when an activity is begun or completed. In a project,
some activities are sequential while others are concurrent to each other.
The former are those, which are to be arranged in a particular order. In

other words, they are interrelated.
Programme Evaluation and Review Technique (PERT)

PERT is an important technique in the field of project management. This
technique was first used in 1957 in U.S.A, as a tool of planning and
controlling the ‘Polaris Missiles Program’ by Booz, Allen and Hamilton
in association with the U.S. Naval Department. It involves basic network
technique, which includes planning, monitoring and controlling of projects.
In addition to its use in schedule planning and control, the network concept
in PERT provides the framework for treating a wide range of project
management problems. Recognizing this fact, the Navy Special Project
Office of U.S.A. extended PERT to include the elements of cost and
technical performance.
PERT/cost is an integrated management system designed to provide,
managers with the information they need in planning and controlling
schedules and costs in development projects. Thus, PERT/cost system
is directed towards the dynamic management of projects. It specifies
techniques and procedures to assist project managers in:
(i) Planning schedules and costs.
(ii) Determining time and cost status.
(iii) Forecasting manpower skill requirements.
(iv) Predicting schedule slippages and cost overruns.
(v) Developing alternate time cost plans.
(vi) Allocating resources among tasks.
PERT uses ‘probability’ and ‘linear programming’ for planning and
controlling the activities. Probability helps in estimating the timings of
various activities in the project, and linear programming is used to
maximize the achievement of the project objective. With the help of these
tools, PERT can foretell the probability of achieving the project targets
leading to main objective of the project.
Applications of PERT. PERT was developed as a research and
development planning tool to estimate timings of various activities with
enough certainty. It is being used by many large organizations for
conducting the initial review of new projects. It helps in planning the time
and resources in case of projects. It can be employed with great advantage

in those cases (e.g., nonrepetitive projects, research and development
and defense projects) where a project cannot be easily defined in terms
of time and resources required.
PERT is employed in construction of ships, buildings and highways, in
the planning and launching of new products, in the publication of books,
in the installation and debugging of computer systems. Frequently, PERT
systems are used in conjunction with computers. A computer programme
is employed that permits calculations to be made without reference to a
flow chart or diagram.
Critical Path Method (CPM)

CPM is the most versatile planning and control technique used in business.
It. was first employed in U.S.A. in 1958 by the E.I. du Pont de Nemours
Company. Unlike PERT, it is applied in those projects where activity
timings are relatively well known. It is used for planning and controlling
the most logical sequence of activities for accomplishing a project.
Under CPM, the project is analyzed into different operations or activities
and their relationships are determined and shown on the network diagram.
The network or flow plan is then used for optimizing the use of resources
and time. CPM marks critical activities in a project and concentrates on
them. It is based on the assumption that the expected time is actually the
time taken to complete the project. CPM is suitable for construction
projects and plant maintenance.
CPM requires greater planning than required otherwise. Thus, it increases
the planning cost, but concentrating on critical paths only and avoiding
expenses on the strict supervision and control of the whole project justify
this increase in cost. Besides ascertaining time schedule, CPM provides
a standard method of communicating project plans, schedules and costs.
The application of CPM leads to the following advantages:
(i) It provides an analytical approach to the achievement of project
objectives, which are defined clearly.
(ii) It identifies most critical elements and pays more attention on these
activities.
(iii) It helps in ascertaining the time schedules.

(iv) It makes use of better and detailed planning.
(v) It assists in avoiding waste of time, energy and money on unimportant
activities.
(vi) It provides a standard method for communicating project plans,
schedules and costs.
Steps in PERT/CPM
The application of network techniques in project management involves
the following steps:
(i) Identification of Components. The first step in the application of
PERT/CPM is identification of all key activities and phases or events
necessary for the completion of project. The term ‘activity’ may be
defined as an operation or a job to be carried out which consumes
time and resources. An arrow in the network diagram denotes it. An
event may be defined as the beginning or completion of an activity.
A circle in the network diagram denotes it.
(ii) Sequencing of Activities and Events. A network diagram is
prepared to show the sequence of activities and events. It has a
beginning point and a termination point for the project, each event is
given a serial number for the sake of convenience. It may be noted
that some activities have to be under taken sequentially while others
are to be carried out concurrently. The project network clearly reveals
the sequence of activities. It also depicts a number of paths of
activities and events from beginning to completion.
(iii) Time Analysis. After the network diagram is drawn, time estimates
are prepared for how long it will take to complete each activity. The
total time of all these activities will be the time required for the
completion of the project. Three estimates of time span for the
completion of each activity are made, viz., (i) optimistic or shortest
time, (it) pessimistic or longest time, and (iii) normal (most likely)
time. These estimates are combined into a single workable time value
known as expected time. The three estimates of time are used in
PERT because the originator of PERT thought that the estimated
time for an activity is better described by a probability distribution
than by a single estimate.
(iv) Determination of Critical Path. Under this stage, it is required to

identify the sequence of those activities whose completion is critical
for the timely completion of the project. The line in the network
connecting the critical activities from start to finish of the project is
the critical path. Once the critical path is known, the manager will be
in a position to allocate resources more fruitfully, to spot trouble
early and to apply controls where it is more essential.
(v) Modification in Initial Plan. The project analysis should not stop
after the critical path has been identified. The potential exists for
substantially improving upon the initial plan. There is sometimes the
possibility of resequencing of some activities that lie along the critical
path. When this is possible, it will reduce the time along the critical
path, resulting in a shorter expected project completion time.
(vi) Controlling the Project. In order to control the project, the emphasis
has to be given on the activities along the critical path. If there are
delays in these activities, the completion of entire projects will be
delayed. Thus, the consequences will be serious. However, slippages
of activities that are not on the critical path are less serious. The
project manager has to be in constant touch with the persons engaged
on the critical activities. If there have been any difficulties or obstacles,
these are to be removed.
Control of Overall Performance

The important techniques of control of overall performance of business
enterprises are discussed below:
1. Budget Summaries. A budget summary is a resume of all individual
budgets of the organization. It reflects overall business plans and
identifies limitations and deficiencies. It helps the top management in
visualizing how the organization is functioning in the direction of its
objectives. Budget summaries must be accompanied by the reports
of actual performance of various departments. This will help in
comparing the actual performance with the budget targets and taking
corrective actions in case of wide deviations.
2. Profit and Loss Control. This is the most widely used means of
control of overall performance of an enterprise. The Profit and Loss
statement shows all the revenue, expenses and income for a given
period. For better results, the management may supplement profit

and loss control with budgetary control. This technique can become
more effective if it is used with the profit and loss statements of the
previous years. By highlighting increases or decreases of various
expenditures and incomes from year to year, these statements help
the management in controlling certain expenditures and emphasizing
generation of revenues.
3. Return on Investment. Rate of return on investment (ROI) is
regarded a useful technique of control to evaluate the relative as
well as absolute success of a business enterprise. It determines the
ratio of earnings of the enterprise to its investment. That is why it is
also called return on capital employed. The essence of this approach
is that profit is not taken as an absolute figure, but is considered in
relation to invested capital. This helps in comparing the rate of return
of two companies whose profit figures and capital invested are
different. Rate of return on investment is calculated by the following
formula.
E
ROI = ____
I
Where E stands for net earnings and I stand for investment (i.e., capital
and free reserves).
The advantages of ROI are as follows
(i) It focuses attention on profits and relates them to the most important
stake in the company, i.e., capital invested. It indicates how effectively
resources are employed.
(ii) Rate of return on investment is useful to compare the performance
of a company over the years. It helps in comparing performance of
different divisions, products and also different companies,
(iii) It helps in locating areas where capital is being fruitfully utilized and
in planning future operations accordingly.
The limitations of this technique are as follows:
(i) It may be troublesome to compile information on sales, costs, assets
and investments of the products produced and sold.
(ii) Excessive emphasis on ROI may lead to neglect of other important
variables like technological advance and morale of employees.
(iii) Because of inflation, there is appreciation in the value of various

assets. Therefore, to relate profits to the book value of the assets is
misleading.
(iv) Rate of return on investment may tend to encourage conservation
and discourage risk taking in the long run. ROI does not consider
qualitative factors, which are important in long term decision making.
4. Ratio Analysis. Ratio analysis is the process of analyzing the
relationship between two sets of figures relating to two important
aspects of the company (e.g., current assets and current liabilities).
A ratio may be financial, or non financial. Financial ratios are
calculated from the financial accounts of the firm such as current
ratio. Non financial ratios are calculated from the operating results
of the firm such as ratio of volume of production to man-hours
worked. Some of the important ratios used in modern organizations
are given below:
1. Liquidity Ratios measure ability to meet maturing obligations.
Current Assets
(a) Current Ratio =
Current Liabilities
Cash & Receivables
(b) Acid Test or Quick Ratio =
Current Liabilities
Total Tangible Assets
(c) Solvency Ratio =
Total Outstanding Liabilities
II. Leverage Ratios - Measure the contribution to finance by owners visa-vis creditors.
Long - term Debt
(a) Debt - Equity Ratio =
Net worth
III. Profitability Ratios - Measure the relationship between profit or earnings and capital
employed or sales.
Net Earnings
(a) Return on Capital Employed =
Capital + Free Reserves
Net Earnings
(b) Return on Sales =
Sales
IV. Activity Ratios - Measure the effectiveness of employment of resources.

Sales
(a) Inventory Turnover =
Average Annual Inventory
Sales
(b) Equity Capital Turnover =
Net Worth
Receivables
(c) Average Collection Period =
Average Sales per Day

5. Responsibility Accounting. Responsibility Accounting means a

system of accounting whereby the performance of various people is
judged by assessing how far they have been able to achieve the
predetermined targets set up for the sections, divisions, or
departments for which they are responsible. A ‘Responsibility
Centre’ is simply an organizational unit headed by a responsible
person. The responsibility centers may be sub divided into three
categories :
1. Costs or Expense-center. Dividing the whole organization into a
number of centers for which a standard amount of expense to be
incurred is predetermined may form it. The performance of each is
appraised by comparing the actual expenditure with the budgeted
costs.
2. Profit center. The entire organization may be divided into a number
of divisions. The performance of each is judged in terms of both the
income that is earned and the costs that are incurred. It is an important
tool of control in large firms where each divisional manager is given
a profit objective and the performance is measured accordingly.
Transfer price is the notional price at which the output of one
department in a firm is transferred to another. This facilitates the
preparation of separate departmental profit and loss accounts.
3. Investment center. The head of every unit is responsible not only
for profits but also for the assets he uses. The investment made in
each center is separately ascertained and the amount of profits or
the ROI (i.e., return on investment) is used as the basis for judging
the performance of the center. Every divisional manager is given ‘ROI
Objective’ and full freedom to take decisions for its achievement.
The choice between the various types of responsibility centers may be
made by the following criteria :
(i) The factors towards which the top management wishes to direct the
divisional manager’s attention.
(ii) The factors, which can be controlled by the divisional manager.
(iii) The education, experience and special qualities of the particular
divisional manager.
Summary
There are several techniques employed by managers in order to achieve
the highest level of quality and productivity possible.
Break even analysis tries to examine the impact on profit of the changes
in price, volume, mix and costs with a certain amount of accuracy. It
helps management in profit planning. Budgeting is the process of stating,
in quantitative terms, planned organizational activities for a given period
of time. Budgets are useful because they provide a means of translating
diverse activities and outcomes into a common measure, such as rupees.
Zero Based Budgeting (ZBB) is a budget approach in which responsibility’
centers start with zero in preparing their budget requests and must justify
the contributions of each of their activities to organizational goals, rather
than focus on increments to the previous year’s budgets. While ZBB
forces managers to justify their activities in terms of future goals rather
than past practices, the process can be costly and time consuming to
administer, since every ongoing activity must be evaluated. Human
Resource Accounting (HRA) is a process of identifying and measuring
data about human resources and communicating this information to
interested parties. HRA provides valuable feedback to managers
regarding the effectiveness of policies and practices. It helps the
management in taking appropriate decisions regarding the use of human
resources in an organization. Both monetary measures and non monetary
measures are used to value human resources depending on necessity.
Standard costing is a sophisticated technique of costing under which the
standards are determined in advance, and actual costs are compared
with the standards so that corrective action may be taken for any
unfavorable variances. Management audit is a systematic and in depth
review of the effectiveness and efficiency of management. The primary
focus is on appraisal of general performance of management functions as
well as specific organizational areas.
Network models are used in planning and controlling large, complex
projects. The PERT involves the display of a complex project as network
of events and activities with three time estimates used to calculate the
expected time for each activity. The objective of PERT is to reduce the
entire project completion time by a certain amount at the least cost. The
CPM also involves the display of a complex project, a network but with
one time estimate used for each step in the project.

A Management Information System (MIS) is an organized approach for
obtaining relevant and timely information on which to base management
decisions. MIS enhances management’s ability to plan, measure and
control performance by initiating appropriate actions at a right time. Total
Quality Management is an organization wide commitment to infusing
quality into every activity through continuous improvement. The TQM
philosophy focuses on teamwork, increasing customer satisfaction and
lowering costs.
Have you understood questions

1. Design a control system for measuring the progress you make in
your course work. Apply the feedback and feed forward concepts
discussed in this block.
2. Interview two managers about the controls used in their companies.
Can you identify standards against which performance can be
accurately measured? How is performance measured against the
standards, and how timely is the reporting of deviations? If deviations
are detected, how long does it take before corrections are made in
specific situations?
3. Draw the layout of your apartment or your house, and indicate the
pathways you walk while doing your typical daily chores. Show any
rearrangements you could make that would increase your
effectiveness and personnel productivity.
Review questions.
1. Define controlling.
2. Illustrate significance of controlling.
3. Elucidate the steps in the control process with suitable illustration.
4. What do you mean by budgetary control?
5. Describe the control techniques used in industry with suitable
example.


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DBA 1601 MANAGEMENT CONCEPTS

Anna Universtiy Chennai 1

1.1 NATURE AND SCOPE OF MANAGEMENT

1.1.1 DEFINITION OF MANAGEMENT

Harold Koontz defined management as the art of getting things done

G.R.Terry has viewed management as a process. Management is a distinct

According to McFarland, “Management is defined as the process by

Though F.W. Taylor developed principles of management, credit goes

(i) Flexible and not absolute - must be usable regardless of changing

(ii) Used with intelligence and with a sense of proportion, etc.

Henri Fayol listed 14 principles that grew out of his experience.

Kreitner defines management as “A problem solving process of effectively

1.1.2 CHARACTERISTICS OF MANAGEMENT

gets gradually reduced. Authority enables the managers to perform

1.1.3 MANAGEMENT – SCIENCE OR ART ?

 occupation for which specialized knowledge, skills and training are

Management is a social science : Management is a social science as it

Management is basically an art as it involves the use of know-how and

Management is Science as well as Art

1.2 EVOLUTION OF MANAGEMENT THOUGHTS

to the field of management. The behavioral science perspective

1.2.1 SCIENTIFIC MANAGEMENT APPROACH

1.2.1.1 Fredrick W. Taylor’s views on Scientific Management

Meaning of Scientific Management

Principles of Scientific Management

requires change of mental attitudes of the workers and the

Techniques of Scientific Management

materials, and brings improvement in handling, transporting, inspection

Evaluation of Scientific Management

5. Standardization of tools, equipment, materials and work methods.

Criticism of Scientific Management:

father of this school. Henri Fayol defined management in terms of certain

1.2.1.2 Henri Fayol-Theory of Management

Fayol’s Theory of Management

Fayol pointed out that managerial activity deserved more attention. In

Advantages of Division of Labour :

(iii) Product quality improves,

Disadvantages of Division of Labour:

11. Equity of Treatment

1.2.1.3 Henry L. Gantt’s Contribution of Management

his scientific management methods. Like Taylor, he emphasized the need

1.2.1.4 Frank and Lillian Gilbreth

1.2.2 NEO-CLASSICAL APPROACH

functioning and focused attention, on human beings in the organizations.

This school of thought suggested modifications to the classical principles

Neoclassicists endeavored to identify the weaknesses of classicists

1.2.3 HUMAN RELATIONS APPROACH

Illumination Experiment. This experiment was conducted to establish

Mass Interview Programme. The researchers interviewed a large

Contributions of Human Relations Approach or Hawthorne

6. Both way communication is necessary because it carries necessary

Appraisal of Neoclassical Theory Contribution

Criticism of Human Relations Approach

(iii) Over-emphasis on Group : The human relations approach

1.2.4 BEHAVIOURAL SCIENCE APPROACH

1.2.5 SOCIAL SYSTEM APPROACH

Chester I. Barnard –Contribution to Management

(iv) For effective management, efforts should be made for establishing

1.2.6 SYSTEMS APPROACH TO AN ORGANIZATION

i.e., we examine the relationship between each element of the organization

Definition and Characteristics of System

interdependent. Interdependence of different parts is a must in an