50 Marks

Part-A
Principles and Functions
of Management
Unit Name of the Unit Marks
1. Nature and Significance of Management
2. Principles of Management 16
3. Business Environment
4. Planning
14
5. Organising
6. Staffing
7. Directing 20
8. Controlling
Total 50
CBSE Syllabus Unit 5: Organising
• Concept and Importance • Organising Process • Structure
Unit 1 : Nature and Significance of Management of Organisation—Functional and Divisional concept. Formal
• Management—Concept, Objectives and Importance and Informal Organisation— concept • Delegation—Concept,
• Management as Science, Art, Profession • Levels of Elements and Importance • Decentralisation—Concept and
Importance
Management • Management Functions—Planning, Organising,
Staffing, Directing and Controlling • Coordination—Concept Unit 6: Staffing
and Importance • Concept and Importance of Staffing • Staffing as a part of
Human Resource Management-Concept • Staffing Process
Unit 2: Principles of Management • Recruitment Process • Selection Process • Training and
• Principles of Management—Concept and Significance • Fayol’s Development—Concept and Importance; Methods of Training—
Principles of Management • Taylor’s Scientific Management— on the job and off the job—vestibule training, apprenticeship
training and internship training
Principles and Techniques
Unit 7: Directing
Unit 3: Management and Business Environment • Concept and Importance • Elements of Directing • Supervision:
• Business Environment— Concept and Importance • Dimensions Concept, Functions of a Supervisor • Motivation: Concept,
of Business Environment— Economic, Social, Technological, Political Maslow’s hierarchy of needs; Financial and Non-financial
and Legal; Demonetization - concept and features • Impact of Incentives • Leadership: Concept; Styles— authoritative,
Government Policy Changes on Business with special reference democratic and laissez-faire • Communication: Concept,
to Liberalisation, Privatisation and Globalisation in India. Formal and Informal Communication; Barriers to Effective
Communication, How to overcome the barriers
Unit 4: Planning Unit 8: Controlling
• Concept, Importance and Limitations • Planning Process • Concept and Importance • Relationship between Planning
Single use and Standing Plans—Objectives, Strategy, Policy, and Controlling • Steps in Process of Control
Procedure, Method, Rule, Budget and Programme

Exam Handbook in Economics-XII – by Subhash Dey 1

Unit 1 Nature and Significance
of Management
 1.1 Management: Concept, Objectives, Importance and Levels
Concept of Management
Successful organisations do not achieve their goals by
chance but by following a deliberate process called
‘management’.
Management is defined as a process of getting things done
with the aim of achieving goals effectively and efficiently.
• Management is the process of working with and through
others to effectively achieve organisational objectives by
efficiently using limited resources in the changing environment.
• Management is the process of designing and maintaining
an environment in which individuals work together in groups
and efficiently accomplish selected aims.
• Process in the definition means the primary functions
or activities that management performs to get things
done. These functions are planning, organising, staffing,
directing and controlling.
• ‘Effectiveness’ in management is concerned with
doing the right task, completing activities and achieving
goals. Thus, being effective basically means finishing
the given task.
• Efficiency means doing the task correctly and with
minimum cost. Efficiency in increased if by using less
resources (i.e., the inputs) more benefits are derived (i.e.,
the outputs).
For management, it is important to be both effective
and efficient, i.e. to achieve goals (effectiveness) with
minimum resources (efficiency).
Suppose a company’s target production is 10,000 units in
a year. To achieve this target the manager has to operate
on double shifts due to power failure most of the time. The
manager is able to produce 10,000 units but at a higher
production cost. In this case, the manager was effective
but not so efficient, since for the same output, more inputs
(labour cost, electricity costs) were used.
Characteristics/Features of Management
G2IP MCD
1. Management is a goal oriented process
which unites the efforts of different individuals in the
organization towards achieving these goals.
2. Management is all pervasive as the activities
involved in managing an enterprise are common to all
organizations whether economic, social or political.
A petrol pump needs to be managed as much as a hospital
or a school. What managers do in India, the USA, Germany
or Japan is the same. How they do it may be quite different.
3. Management is a continuous process consisting
of continuous, composite, but separate functions
(planning, organising, staffing, directing and controlling).
2 Exam Handbook in Business Studies-XII – by Subhash Dey
4. Management is a dynamic function and has to
adapt itself to the changing environment.
In order to be successful, an organisation must change itself
and its goals according to the needs of the environment.
For instance, McDonalds, the fast food giant made major
changes in its menu to be able to survive in the Indian
market , e.g. it offers Aloo Tikki burger.
5. Management is an intangible force that cannot
be seen but its presence can be felt in the way the
organization functions – When targets are achieved and
there is orderliness instead of chaos.
6. Management is multidimensional/multi-
faceted concept as it is a complex activity that has
three dimensions: Management of work, Management
of people, Management of operations.
Management of work: All organisations exist for the
performance of some work, e.g. in a factory, a product is
manufactured, in a hospital a patient is treated. Management
translates this work in terms of goals to be achieved and
assigns the means to achieve it.
Management of people: Getting work done through people
is a major task for the manager. Managing people has
two dimensions: (i) dealing with employees as individuals
with diverse needs and behaviour; and (ii) dealing with
employees as a group of people.
Management of operations: Management requires a
production process of transforming input material and the
technology into the desired output for consumption.
7. Management is a group activity which ensures
team work and coordination of individual effort in a
common direction.
Objectives of Management
1. Organisational or Economic Objectives
• Survival–An organisation must earn enough revenues
for survival.
• Profit–Profit is essential to cover costs and risks of
the business.
• Growth–Management must exploit fully the growth
potential of the organisation. Indicators of growth
are increase in sales turnover, capital investment and
number of products and employees.
2. Social Objectives: Social objectives of
management involve the creation of benefits for the
society. This includes • using environmental friendly
methods of production, • providing basic amenities like
schools and creches to employees, • giving employment
opportunities to the disadvantaged sections of the
society, etc.
3. Personal Objectives: Personal objectives which
aim to satisfy the needs of the employees working in
the organisation such as • financial needs by giving
them competitive salary and perks, • social needs
such as peer recognition, and • higher level needs
such as personal growth and development.
Importance of Management DPS EG
1. Management increases efficiency by reducing
costs and increasing productivity through better
planning, organising, directing and controlling the
activities of the organisation.
2. Management helps in the development of
the society by providing good quality products,
creating employment opportunities and adopting new
technology, etc.
3. Management helps in achieving group goals by
giving a common direction to individual effort.
4. Management creates a dynamic organisation
by making the organisation adapt itself to the changing
environment.
5. Management helps in achieving personal
objectives by motivating and leading in such a way
that both personal goals and organisational objectives
are accomplished.
Levels of Management
1. Top Level Management consists of Chief Operating
Officer, Chief Executive Officer (CEO), Chief Finance
Officer, Director, Chairman, President, Vice-President,
etc. Their functions are:
(i) To coordinate the activities of different departments
according to the overall objectives of the organisation.
 1.2 Nature of Management as Science, Art and Profession
Science is a systematised body of knowledge that explains
certain general truths or the operation of general laws.
Art is the skillful and personal application of existing
knowledge to achieve desired results. It can be acquired
through study, observation and experience.
Management is both art and science. The practice of
management is an art. However, managers can work better
if their practice is based on the principles of management.
These principles constitute the science of management.
Management as an art and a science are therefore not
mutually exclusive, but complementary to each other.
Management as a Science
Management is a science but not an exact science
because of the following reasons:
1. Systematised body of knowledge: Like science,
management is a systematic body of knowledge with its
own theories and principles that have developed over a
period of time. So, this feature of science is present in
management.
2. Principles based on observation and
experimentation: Like science, management
principles are derived through observation and repeated
experimentation. However, since management deals
with human beings the outcome of these experiments
are not capable of being accurately predicted. So, this
feature of science is not fully present in management.
Exam Handbook in Business Studies-XII – by Subhash Dey 3
(ii) To be responsible for welfare and survival of the
organisation.
(iii) To analyse the business environment and its
implications for the survival of the firm.
(iv) To formulate overall organisational goals and
strategies for their achievement.
(v) To be responsible for all the activities of the business
and for its impact on the society.
2. Middle Level Management consists of divisional/
departmental heads, such as Production Manager,
Marketing Manager, Operations Manager, Plant
Superintendent, etc. Their functions are:
(i) To interpret the policies framed by the top
management.
(ii) To ensure that their department has the necessary
personnel.
(iii) To assign necessary duties and responsibilities
to the employees of their respective departments for
implementation of the plan.
(iv) To motivate employees of their respective
departments to achieve the desired objectives.
(v) To cooperate with other departments for smooth
functioning of the organisation.
3. Operational or Supervisory Management consists
of Supervisors and Foremen. Their functions are:
(i) To oversee the efforts of the workforce.
(ii) To interact with the actual workforce and pass on the
instructions of the middle management to the workers.
(iii) To ensure that the quality of output is maintained
and wastage of material is minimized.
(iv) To ensure safety standards are maintained.
3. Universal validity: Principles of management like
principles of pure science provide managers with certain
standardised techniques that can be used in different
situations. However, since the principles of management
have to be modified according to a given situation, their
application and use is not universal. So, this feature of
science is not fully present in management.
Management as an Art
Management is an art. Three features that establish it
as an art are:
1. Existence of theoretical knowledge: As in art, in
management too, there is a lot of literature available in
various areas of management which the manager has
to specialise in.
2. Personalised application: Like in any art, in
management too, a manager applies his acquired
knowledge in a personalised and unique manner. This
gives rise to different styles of management.
3. Based on practice and creativity: Management
satisfies this criteria as manager gains experience
through regular practice and becomes more effective.
Management as a Profession SWEEP
Management is a profession but not a full-fledged
profession like legal, accounting or medical professions
because it does not meet the exact criteria of a
profession.
1. Well-defined body of knowledge: All professions
are based on a well-defined body of knowledge that
can be acquired through instruction. Management too
is based on a systematic body of knowledge comprising
well-defined principles. This feature of profession is
present in management.
2. Restricted entry: The entry to the above stated
profession is restricted through a prescribed qualification.
But there is no restriction on anyone being appointed
as a manager in any business enterprise. So, presently
this feature of profession is not present in management
3. Professional association: Legal and medical
professions are affiliated to a professional association
like bar council and medical council which regulates
entry, grants certificate of practice and formulates
and enforces a code of conduct. There are several
associations of practising managers in India, like the
AIMA that has laid down a code of conduct to regulate
 1.3 Coordination: Concept and Importance
Concept of Coordination
Coordination is the process by which a manager
synchronises the activities of different departments
towards the achievement of a common goal.
• Coordination is the process whereby an executive
develops an orderly pattern of group efforts among his
subordinates and secures unity of action in the pursuit of
common purposes. • Coordination is balancing and keeping
together the team by ensuring suitable allocation of tasks
to the various members and seeing that the tasks are
performed with harmony among the members themselves.
• Coordination is the orderly synchronisation of efforts of
subordinates to provide proper amount, timing and quality
of execution towards the achievement of a common goal.
• The primary reason for coordination is that departments
and individuals in the organisation are interdependent, i.e.
they depend on each other for information and resources to
perform their respective activities. Thus, managers need to
reconcile differences in approach, timing, effort or interest.
• Coordination is the common thread that runs through all
activities such as purchase, production, sales, and finance
to ensure continuity in the working of the organisation.
• It is through the process of coordination that a manager
ensures the orderly arrangement of individual and group efforts
to ensure unity of action in the realisation of common objectives.
• Coordination provides the requisite amount, quality,
timing and sequence of efforts which ensures that planned
objectives are achieved with a minimum of conflict.
Nature/Characteristics/
Features of Coordination DU PCR I
(i) Coordination integrates group efforts by unifying
diverse interests thereby giving them a common focus to
ensure that the performance is according to the plans.
(ii) It ensures unity of action by acting as a binding
force between departments and ensuring that all action
is aimed at achieving the goals of the organisation.
(iii) It is a continuous process as it starts at the
planning stage and continues till controlling.
Coordination is not a separate function of management,
but the essence of management. • Top management
plans for the entire organisation. • According to these
plans, the organisational structure is developed and staffed.
4 Exam Handbook in Business Studies-XII – by Subhash Dey
the activities of their members. There is, however, no
compulsion for managers to be members of such an
association. So, presently this feature of profession is
not present in management.
4. Ethical code of conduct: Legal and medical
professions are bound by a code of conduct which
guides the behaviour of its members. AIMA has devised
a code of conduct for Indian managers but there is
no statutory backing for this code. So, presently this
feature of profession is not present in management.
5. Service motive: The motive of legal and medical
profession is to serve their client’s interests by rendering
dedicated and committed service. The basic purpose
of management to help the organisation achieve its
goals by providing good quality products at reasonable
prices, thereby serving the society is being increasingly
recognised. So, presently this feature of profession is
not fully present in management.
• Directing is required for execution of plans. • Controlling
corrects the deviation between standards and actual
performance. Thus, like a thread in a garland coordination
is a part of all management functions.
(iv) It is a pervasive function as it is required at all
levels of management and in all departments.
Coordination is required at all levels of management due to
the interdependent nature of activities of various departments.
In the absence of coordination there is overlapping and chaos
instead of harmony and integration of activities.
(v) It is the responsibility of all managers at the
top, middle and lower level.
• Top level managers need to coordinate with their
subordinates to ensure that the overall policies are duly
carried out. • Middle level management coordinates with
both the top level and first line managers. • Operational
level management coordinates the activities of its workers to
ensure that work proceeds according to plans.
(vi) It is a deliberate function as every manager
has to coordinate the efforts of different people in a
conscious and deliberate manner.
Cooperation in the absence of coordination may lead to
wasted effort and coordination without cooperation may lead
to dissatisfaction among employees.
Need and Importance of Coordination
1. Growth in size: As organisations grow in size, number
of people in the organisation also increases. Coordination
is needed to integrate their efforts and activities.
2. Functional differentiation: In an organisation, there
are different departments for production, marketing,
finance, etc. All departments have their own objectives,
policies, strategies, etc. There may arise conflict among
them. Coordination is needed to ensure unity of action
among them and to avoid inter-departmental conflicts.
3. Specialisation: In modern organisations, there is high
degree of specialisation. Organisations, therefore, employ a
number of specialists. They do not take advice or suggestions
from others. Coordination is needed to reconcile the
differences in approach, interest or opinion of the specialists.
 Application, HOTS, Evaluation and Multi-Disciplinary Questions
1. Identify the concepts of management highlighted in the
following statements:
(a) This requires establishing an atmosphere that encourages
employees to do their best. (b) It means creating an
environment that makes them want to work willingly and
enthusiastically. (c) It is influencing people to work willingly
to achieve organisational goals. (d) It is the management
function of monitoring organisational performance towards the
attainment of organisational goals.
Ans. (a) Directing (b) Motivation (c) Leadership
(d) Controlling
2. Through __________ management helps individuals to
develop team spirit, cooperation and commitment to group
success.
Ans. Motivation and leadership.
3. Raheja Ltd. is diversifying its product lines. What
organisational objective it is trying to achieve?
Ans. Growth
4. Policy formulation is the function of __________
Ans. Top level managers
5. Ritu is the manager of the northern division of a large
corporate house. At what level of management does she work
in the organisation? What is her main task?
Ans. Middle level management. Her main task is to carry
out the plans formulated by the top managers.
6. In Flipmart Co. Ltd. the production and sales department
have to coordinate their work, so that production takes place
according to the demand in the market. State the feature of
coordination highlighted above.
Ans. Coordination ensures unity of action.
7. In a company, the marketing department’s objective is
to increase sales by 10 per cent by offering discounts. But,
the finance department does not approve of such discounts
as it means loss of revenue. These kinds of conflict arise in
organisations because of the lack of one of the concepts
of management. (a) Identify the concept of management
highlighted above. (b) State the characteristic of management
the company is violating.
Ans. (a) Coordination (b) Management is a group activity.
8. Company X is facing a lot of problems these days. It
manufactures white goods like washing machines, microwave
ovens, refrigerators and air conditioners. The company’s
margins are under pressure and the profits and market share
are declining. The production department blames marketing
for not meeting sales targets and marketing blames production
department for producing goods, which are not of good quality
meeting customers expectations. The finance department blames
both production and marketing for declining return on investment
and bad marketing. What quality/concept of management do
you think the company is lacking? (NCERT)
Ans. Coordination
9. The management of Vrinda Ltd. strongly believes that the
members of an organisation should work towards fulfilling
the common organisational goals. This requires team work
and integration of efforts of all individuals, departments and
specialists. This is because all the individuals and departments
depend on each other for information and resources to perform
their respective activities. Managers need to reconcile differences
in approach, timing, effort or interest. At the same time it should
enable all its members to grow and develop. Thus, there is a
need to harmonise individual goals and organisational goals.
Identify the concept of management discussed above.
Ans. Coordination
10. In which two functions of management do managers at
the top level spend more time than managers at lower level of
the organisations?
Ans. Planning and Organising
11. Name the level of management which is a team consisting
of managers from different functional levels, heading finance,
marketing, etc, for example, chief finance officer, vice president
(marketing).
Ans. Top level management

Unit 2 Principles of Management

 2.1 Principles of Management: Concept and Significance
Concept of Principles of Management
Principles of management are broad and general
guidelines for managerial decision making and behaviour.
 Management principles are not as rigid as principles of
pure science. They deal with human behaviour and, thus,
are to be applied creatively given the demands of the
situation.  
Management principles have gained importance
with increasing professionalisation of management.
Nature/Characteristics/Features of
Principles of Management UGC2
1. General guidelines: The principles of management
are guidelines to action but do not provide readymade,
straitjacket solutions to all managerial problems since
real business situations are very complex and dynamic
and are a result of many factors.
2. Formed by practice and experimentation: The
principles of management are derived by observation,
experimentation and personal experience of managers.
3. Universal applicability: The principles of
management apply to all types of organisations, at all
levels and at all times.
4. Flexible: They are not rigid but are flexible and can be
modified by the manager when the situation so demands.
F2B
For example, the degree of concentration of authority
(centralisation) or its dispersal (decentralisation) will depend
upon the situations and circumstances of each enterprise.

Exam Handbook in Business Studies-XII – by Subhash Dey 5

5. Contingent: The application of principles of
management is contingent or dependent upon the
prevailing situation at a particular point of time.
For example, employees deserve fair and just remuneration.
But what is just and fair is determined by multiple factors
such as contribution of the employee, paying capacity of the
employer and also prevailing wage rate for the occupation
under consideration.
6. Mainly behavioural: Management principles aim
at influencing behaviour of human beings.
7. Cause and effect relationships: The principles of
management establish cause and effect relationship so
that they can be used in similar situations in a large
number of cases.
The principles of management are less than perfect since
they mainly apply to human behaviour. In real life, situations
are not identical. So, accurate cause and effect relationships
may be difficult to establish.
Significance of Management Principles
TOP SMS
1. They provide the managers with useful
insights into reality. They add to their knowledge,
ability and understanding of managerial situations and
circumstances.
 2.2 Fayol’s Principles of Management
1. Division of work:  The principle of Division of
work states that work is divided into small tasks/jobs.
 A trained specialist who is competent is required to
perform each job.  Thus, division of work leads to
specialisation and results in efficient and effective output.
For example, in a company there are separate departments
for finance, marketing, production and human resource. All
of them have specialised persons. Collectively they achieve
production and sales targets of the company.
2. Authority and Responsibility: There should be
a balance between authority and responsibility.  An
organisation should build safeguards against abuse of
managerial power.  At the same time, the manager
should have the necessary authority to carry out his
responsibility.  The manager should have the right to
punish a subordinate for not obeying orders but only
after sufficient opportunity has been given to him/her
for presenting his /her case.
For example, a manager enhances the production target
from 500 units to 700 units per month but the authority to
draw raw material was not given by him. The production
manager should not be blamed if he could not achieve the
revised production target. He should have the necessary
authority to carry out his responsibility.
3. Discipline:  It is the obedience to organizational
rules and employment agreement which are necessary
for the working of the organization.  It requires
good superiors at all levels, clear and fair agreement
and judicious application of penalties.  Workers and
management both should honour their commitments
towards one another without prejudice.
6 Exam Handbook in Business Studies-XII – by Subhash Dey
2. They help in optimum utilisation of resources as
the wastages associated with trial and error approach can
be overcome. They help in effective administration
as the decisions are free from personal bias.
3. They help managers in taking scientific decisions
as they are based on objective assessment of the
situation and emphasise on logic rather than blind faith.
4. They help in meeting changing environment
requirements as they can be modified according to
the needs of the environment.
5. They help in fulfilling social responsibility by
responding to the demands of the public.
For example, the principle of “Remuneration of Employees”
insists on payment of adequate salary to employees, which
should give them at least a reasonable standard of living.
6. They are used as a basis for management
training, education and research by providing the
basic groundwork for the development of management
as a discipline.
New management techniques like Operations Research,
Cost Accounting, Just in Time, Kaizen, Lean Manufacturing,
Six Sigma, etc. have developed due to research on the
principles of management.
Example: Suppose management and labour union have entered
into an agreement whereby workers have agreed to work
overtime without any additional payment to revive the company
out of loss. In return, the management has promised to increase
wages when this mission is accomplished. Here, ‘discipline’
would mean that both workers and management honour their
commitments without any prejudice towards one another.
4. Unity of command:  The principle of unity of
command states that each employee in an organisation
should receive orders from one superior only and he
should be responsible to only one superior.  It prevents
confusion regarding tasks to be done.  Fayol felt that
if this principle is violated “authority is undermined,
discipline is in jeopardy, order disturbed and stability
threatened.” (This principle resembles military organisation.)
Aim: It prevents dual subordination.
Implications: It affects an individual employee.
Example: Suppose a salesperson is asked to make a deal
with a buyer and is allowed to give 10% discount by the
marketing manager. But the finance manager does not
permit him to offer more than 5% discount. In this case,
there is no unity of command. This can be avoided if there is
coordination between the two departments.
5. Unity of Direction:  Unity of direction states
that all the units of an organisation should be moving
towards the same objectives through coordinated and
focused efforts.  Each group of activities having the
same objective must have one head and one plan. 
This ensures unity of action and coordination.
Aim: It prevents overlapping of activities.
Implications: It affects the entire organisation.
 Example: If a company is manufacturing motorcycles as well
as cars, then it should have two separate divisions for both
of them. Each division should have its own in-charge, plans
and execution resources. The working of the two divisions
should not overlap on any account.
6. Subordination of individual interest to general
interest:  The interests of an organisation should take
priority over the interests of any individual employee.
 The larger interests of the workers and stakeholders
are more important than the interest of any one person.
For example, interests of various stakeholders i.e., owners,
shareholders, creditors, debtors, financers, tax authorities,
customers and the society at large cannot be sacrificed for
one individual or a small group of individuals who want to exert
pressure on the company. A manager can ensure this by
his exemplary behaviour. For example, he should not fall
into temptation of misusing his powers for individual/ family
benefit at the cost of larger general interest of the workers/
company. This will raise his stature in the eyes of the workers
and at the same time ensure same behaviour by them.
7. Remuneration of employees:  It states that the
remuneration of employees should be just and equitable.
 Employees should be paid fair wages, which should
give them at least a reasonable standard of living. At
the same time it should be within the paying capacity of
the company.  This will ensure good relations between
workers and management.
8. Centralisation and Decentralisation:  The
concentration of decision-making authority by the
top management is called centralisation whereas its
dispersal among more than one person is known as
decentralisation.  In general, large organisations have
more decentralisation than small organisations.
 According to Fayol, “There is a need to balance subordinate
involvement through decentralisation with managers’
retention of final authority through centralisation.”
9. Scalar chain:  It refers to chain of authority and
communication that runs from top to bottom and should
be followed by the managers and the subordinates.
 It facilitates smooth flow of communication and
unity of command in the organisation.  This chain
should not be violated in the normal course of formal
communication. However, in case of any emergency, a
shorter route named ‘gang plank’ may be used to avoid
delay in communication.
For example: There is one head A who has two lines
of authority under him, B-C-D and L-M-N. If C has to
 2.3 Taylor’s Scientific Management: Principles and Techniques
Scientific management means knowing exactly what you
want men to do and seeing that they do it in the best and
cheapest way.
Principles of Scientific Management
1. Science not rule of thumb:  It states that there is
only one best method to maximise efficiency.
 This method can be developed through scientific
study and analysis of each element of a job and should
substitute ‘Rule of Thumb’. · This standard method then
should be followed throughout the organisation.
2. Harmony Not Discord:  The principle emphasises
that there should be complete harmony between the
Exam Handbook in Business Studies-XII – by Subhash Dey 7
communicate with M who A
is at the same level of
authority, then he has to B L
transverse the route C-B- C M
A-L-M due to the principle
of scalar chain. However, if D Gang Plank N
there is an emergency, then
C can directly contact M SCALAR CHAIN
through gang plank.
10. Order:  It states that there should be a place for
everything and everyone in an organization and that
thing or person should be found in its allotted place.
 People and materials must be in suitable places at
appropriate time for maximum efficiency.  This will
lead to increased productivity and efficiency.
11. Equity:  Equity states that there should be no
discrimination against anyone on account of sex,
religion, language, caste, belief, nationality etc.  It
emphasises kindliness and justice in the behaviour
of managers towards the workers.  This will ensure
loyalty and devotion.
12. Stability of personnel:  “Employee turnover
should be minimized to maintain organizational efficiency”
according to Fayol.  Personnel should be selected and
appointed after due and rigorous procedure. But once
selected they should be kept at their post/position
for a minimum fixed tenure.  They should be given
reasonable time to show results.  Instability will create
insecurity among employees, so they will tend to leave
to organisation. Recruitment, selection and training cost
of new employees will be high.
13. Initiative:  Initiative means thinking out
and executing the plan within the prescribed limits
of authority.  It states that the workers should be
encouraged to develop and carry out their plans for
improvement in the organisation.  A good company
should have an employee suggestion system whereby
initiative/suggestions which result in substantial cost/
time reduction should be rewarded.
14. Esprit de Corps:  It states that management
should promote a team spirit of unity and harmony among
employees to realise organisational objectives. Otherwise,
it will result in a loss of coordination.  A manager should
replace ‘I’ with ‘We’ in all his conversations with workers
to foster team spirit.  This will give rise to a spirit of
mutual trust and belongingness among team members.
 It will also minimise the need for using penalties.
management and the workers.  Management should
share gains of the company if any with the workers and
workers should work hard and be wiling to embrace
change for the good of the company.  This requires
‘Mental revolution’ on the part of both management and
workers. Both management and the workers should
transform their thinking. Mental revolution involves a
change in the attitude of workers and management
towards one another from competition to cooperation.
Both should realise that they require one another. Both
should aim to increase the size of surplus.
3. Cooperation, not individualism:  There should
be complete cooperation between the management and
the workers instead of individualism.  This principle
is an extension of principle of ‘Harmony, Not Discord’.
Competition should be replaced by cooperation. 
According to Taylor, there should be an almost equal
division of work and responsibility between workers and
management. The management should work almost
side by side with the workers helping, encouraging
and smoothing the way for them.  For all important
decisions taken by the management, workers should
be taken into confidence. The management should
be open to any constructive suggestions made by the
employees and suitably reward them.
4. Development of each and every person to his/
her greatest efficiency and prosperity:  This
principle is concerned with efficiency of employees
which could be built in right from the process of
employee selection.  The work assigned to employees
should suit their capabilities. They should be given the
required training to increase their efficiency.  Efficient
employees would produce more and earn more. This
will ensure their greatest efficiency and prosperity for
both the company and the workers.
Techniques of Scientific Management
1. Functional Foremanship:  Functional
foremanship is a technique which aims to improve the
quality of supervision at shop floor.  Taylor identified
a list of qualities of a good foreman or a supervisor.
Since all the qualities could not be found in a single
person, Taylor proposed eight specialists.  In this
technique, planning is separated from execution. 
It is an extension of the principle of division of work
and specilaisation.  Taylor suggested four foremen for
planning and four foremen for execution.
FACTORY MANAGER
PLANNING INCHARGE PRODUCTION INCHARGE
Instruction Route Time & Discipli- Speed Gang Repairs Inspectors
Card Clerk Clerk Cost Clerk narian Boss Boss Boss
Workman
The four foremen for planning and their role:
 Instruction card clerk: To draft instructions for
the workers.  Route clerk: To specify the route of
production.  Time and cost clerk: To prepare time and
cost sheet.  Disciplinarian: To ensure discipline.
The four foremen for execution and their role:
 Speed boss: To be responsible for timely and accurate
completion of the job.  Gang boss: To keep machines
and tools ready for operation by the workers.  Repair
boss: To ensure proper working conditions of machines
and tools.  Inspector: To checking the quality of work.
2. Standardisation and simplification of work:
Standardisation is the process of setting standards for
every business activity. These standards are benchmarks
which must be adhered during production process.
The standards were set for every business activity –
standardisation of process, raw material, time, etc.
8 Exam Handbook in Business Studies-XII – by Subhash Dey
The objectives of standardisation of work are:  To reduce
a given line or product to fixed types, sizes and characteristics.
To establish standards of excellence and quality in
materials. To establish standards of performance of
men and machines.  To establish interchange ability of
manufactured parts and products.
Simplification of Work is a technique to eliminate
superfluous varieties, sizes and dimensions of products.
It leads to reduced inventories, fuller utilization of
equipment and increased turnover to reduce costs.
3. Method Study:  The objective of method study is
to find the one best way of doing the work.  It helps
to minimize the cost of production, improve the quality
and maximize satisfaction of the customer.  It includes
all activities from procurement of raw materials till the
final product is delivered to the customer.
For example, for designing a car, the assembly line production
would entail deciding the sequence of operations, place
for men, machines and raw materials etc. All this is part of
method study.
4. Motion Study:  It is a technique to study the
movements like lifting, putting objects, sitting &
changing positions etc. which are undertaken while
doing a well defined job.  The movement could be
productive, incidental and unproductive.  Motion study
seeks to eliminate unnecessary and wasteful movements
so that it takes less time to complete a job efficiently.
Taylor used stopwatches and various symbols and colours
to identify different motions. Through motion studies, Taylor
was able to design suitable equipment and tools to educate
workers on their use. In recent times, Videography can be
used to identify different types of motions/movement.
5. Time Study:  It is a technique to determine the
standard time taken by a worker of reasonable skill and
efficiency to perform a well-defined job.  The objective
of time study is to determine the number of workers
to be employed, frame suitable incentive schemes and
determine labour costs.
Time measuring devices (e.g., stopwatch) are used for each
element of task. The standard time is fixed for the whole task
by taking several readings/observations. For example, on the
basis of several observations, it is determined that standard
time taken by the worker to make one lunch box is 30
minutes. So, in one hour he/she will make 2 boxes. Assuming
that a worker works for 8 hours per day and deducting one
hour for rest and lunch, it is determined that in 7 hours a
worker makes 14 boxes @ 2 boxes per hour. Now this is the
standard task a worker has to do. Wages can be decided
accordingly. The method of time study will depend upon: (i)
volume and frequency of the task, (ii) the cycle time of the
operation and (iii) time measurement costs.
6. Fatigue study:  A person is bound to feel tired
physically and mentally if he/she does not rest while
working. The rest intervals will help one to regain
stamina and work again with the same capacity.  This
will result in increased productivity.  Fatigue study
seeks to determine the amount and frequency of rest
intervals in completing a task.
 For example, normally in a plant, work takes place in three Fayol versus Taylor– A Comparison
shifts of eight hours each. Even in a single shift a worker Fayol’s and Taylor’s contributions are complementary
has to be given some rest interval to take her/his lunch etc. to each other. However, the differences between their
If the work involves heavy manual labour then small pauses contributions are:
have to be frequently given to the worker so that she/he can
recharge her/his energy level for optimum contribution. BASIS HENRI FAYOL F.W. TAYLOR
There can be many causes for fatigue like long working Perspective Top level of Shop floor level of
hours, doing unsuitable work, having uncordial relations with
the boss or bad working conditions etc. Such hindrances in
management a factory
good performance should be removed. Basis of Personal Observations and
7. Differential piece wage system:  It is a formation experience experimentation
technique which differentiates between efficient and Focus Improving overall Increasing
less efficient workers.  It rewards the efficient workers administration productivity
and motivates the less efficient ones to improve their
efficiency.  In this plan, there are two piece rates – one Unity of Fayol strongly Taylor did not feel
for those workers who produce the standard output or Command propounded unity that it is important
more, and the other for those who produce less than of command, as under functional
the standard output. i.e. dual foremanship a
Example: Standard output (per worker per day) = 100 units. subordination worker received
Wage rate I = `4 per unit (for output >= 100 units) should be orders from eight
Wage rate II = `3 per unit (for output < 100 units). avoided. specialists.
Worker A produced 101 units and Worker B 99 units. Applicability Applicable Applicable to
Total wages of Worker A = 101 × 4 = ` 404 and of universally specialised
Worker B = 99 × 3 = `297. situations
Difference in units produced = 2
Difference in wages = `107. Expression General Theory of Scientific
According to Taylor, this loss of ` 107 should be enough Administration Management
for the inefficient worker (worker B) to be motivated to Personality Practitioner Scientist
perform better.
Application, HOTS, Evaluation and Multi-Disciplinary Questions
1. The principles of management are significant because of benefit of all. In this institution work is worship. The institution
(a) Increase in efficiency (b) Initiative (c) Optimum utilisation is open to everybody who has faith in its basic concepts.
of resources (d) Adaptation to changing technology (NCERT) To what aspect of the significance of principles of management
Ans. (c) Optimum utilisation of resources would you attribute the endeavours of BHEL and Shri Mahila
2. Principles of management help in meeting changing Griha Udyog Lijjat Papad?
environment requirements. What nature of principles of Ans. Principles of management help in fulfilling social
management does this highlight? responsibility.
Ans. Principles of management are flexible. 4. In a company, a sales manager has to negotiate a deal with
3. The principle of ‘equity’ today does not apply to wages alone. a buyer. She finds that if she can offer credit period of 60 days
Value to the customer, care for the environment, dealings she is likely to clinch the deal which is supposed to fetch the
with business associates would all come under the purview of company net margin of say `50 crores. But the company gives
this principle. Today, we find that Public Sector Undertakings power to the manager to offer a credit period of only 40 days.
(PSUs) have developed entire townships as, for example, BHEL As a result, she could not negotiate the deal with the buyer.
has developed Ranipur in Hardwar (Uttaranchal). (a) Is the sales manager liable for this? (b) Should the sales
Similarly, Shri Mahila Griha Udyog Lijjat Papad is famous for its manager be given a power to offer a credit period of 100 days?
quality Papad throughout the world. The organisation which Ans. (a) No, the sales manager is not responsible if she
could not negotiate the deal with the buyer. She should be
started with a modest loan of `80 now has a turnover of over
granted authority of offering credit period of 60 days in the
`301 crores. Its exports exceed `10 crore.The company has interest of the company. Here, the principle of Authority
at least 61 branches.The company is synthesis of three core and Responsibility is violated. A manager should have
values(or concepts), namely the concept of business, the necessary authority to carry out his responsibility.
concept of family and the concept of devotion. All its dealings (b) No, the sales manager should not be given a power to
are carried out on a sound and pragmatic footing-production offer a credit period of 100 days because it is not required.
of quality goods and at reasonable prices.Besides, its member- An organisation should build safeguards against abuse of
sisters donate collectively for good causes from time-to-time managerial power.
according to their capacity. All the affairs of the institution 5. In a formal organisation, a worker cannot directly contact
are dealt with in a manner similar to that of a family carrying the CEO of the company. If at all he has to, then all the formal
out its own daily household chores. For the member-sisters, levels, i.e. foreman, superintendent, manager, director, etc
employees and well-wishers, the institution is never merely have to know about the matter. However, in an emergency it
a place to earn one’s livelihood – it is a place of worship to can be possible that a worker can contact CEO directly.
devote one’s energy not for his or her own benefits but for the (a) Identify the principle of management highlighted above.

Exam Handbook in Business Studies-XII – by Subhash Dey 9

(b) Name the device that can be used when in an emergency
a worker can contact CEO directly.
Ans. (a) Scalar Chain (b) Gang Plank
6. Zoya International Ltd. is a multinational company in which
people of various nationalities work together with a team spirit of
unity and harmony in a discrimination free environment. Equal
opportunities are available for everyone in the company. The
pay and compensation of all the employees is just and equitable.
(a) State the principles of management being followed by Zoya
International Ltd. (b) What benefits will Zoya International Ltd.
derive by following the principles identified in part (a).
Ans. (a) The principles of management being followed by
Zoya International Ltd. are: (i) Espirit de corps (ii) Equity (iii)
Remuneration of employees
(b) Benefits that Zoya International Ltd. will derive by following
the above principles are: (explain)
7. Zaika Ltd. is a company manufacturing garments under the
brand name ‘Amol’. The management of the company does
not give the workers reasonable time to show results. Even
the management does not promote a team spirit of unity and
harmony among the workers. The workers often have to work
under two superiors at the same time.
(a) Identify and state the principles of management overlooked in
the above case. (b) State the consequences which Zaika Ltd. will
have to face by not following the principles identified in part (a).
Ans. (a) The principles of management overlooked by the
management of Zaika Ltd. are: (i) Stability of Personnel (ii)
Esprit De Corps (iii) Unity of Command
(b) The consequences which Zaika Ltd. will have to face by not
following the above principles are: (explain)
8. ‘F’ limited was engaged in the business of food processing and
selling its products under a popular brand. Lately the business
was expanding due to good quality and reasonable prices. Also
with more people working the market for processed food was
increasing. New players were also coming to cash in on the
new trend. In order to keep its market share in the short run
the company directed its existing workforce to work overtime.
But this resulted in many problems. Due to increased pressure
of work the efficiency of the workers declined. Sometimes the
subordinates had to work for more than one superior resulting in
declining efficiency. The divisions that were previously working
on one product were also made to work on two or more products.
This resulted in a lot of overlapping and wastage. The spirit of
teamwork, which had characterised the company, previously
was beginning to wane. The quality of the products was
beginning to decline and market share was on the verge of
decrease. Actually the company had implemented changes
without creating the required infrastructure.
Identify the principles/technique of management given by
Fayol/Taylor that were violated by the company.
Ans. (i) Unity of command (ii) Unity of direction (iii) Espirit
de corps (iv) Fatigue study
9. Nutan Tiffin Box service was started in Mumbai by Mumbai
Dabbawalas. The Dabbawalas who are the soul of entire
Mumbai aim to provide prompt and efficient services by
providing tasty homemade tiffin to all office goers at right time
and place. The service is uninterrupted even on the days of
bad weather, political unrest and social disturbances. Recently
they have started online booking system through their website
‘mydabbawala.com’. Owing to their tremendous popularity
amongst the happy and satisfied customers and members, the
dabbawalas were invited as guest lecturers by top business
10 Exam Handbook in Business Studies-XII – by Subhash Dey
schools. The Dabbawalas operate in a group of 25-30 people
along with a group leader. Each group teams up with other
groups in order to deliver the tiffin on time. They are not
transferred on frequent basis as they have to remember the
addresses of their customers. They follow certain rules while
doing trade- No alcohol during working hours; No leave
without permission; Wearing of white cap & carrying ID cards
during business hours. Identify the principles of management
given by Fayol. (CBSE SQP 2016)
Ans. (i) Stability of Personnel (ii) Discipline (iii) Esprit de corps
10. Rajat joined as a CEO of Bharat Ltd, a firm manufacturing
Computer hardware. On the first day he addressed the
employees. He said that he believed that a good company
should have an employee suggestion system and he wished
to minimise employee turnover to maintain organisational
efficiency. He informed all employees that he would ensure
that all agreements were clear, fair and there was judicious
application of penalties. However, he said that he believed
that lazy personnel should be dealt with sternly to send the
message that everyone was equal in the eyes of management.
Also that he would want to promote a team spirit of unity
and harmony among employees, which would give rise to a
spirit of mutual trust and belongingness among team members
and eventually minimise need for using penalties. He told all
present that the interests of the organisation should take
priority over the interests of any one individual employee.
Identify the principles of management given by Fayol, which Rajat
highlighted in his address to the employees. (CBSE SQP 2018)
Ans. Following are the principles of management highlighted by
Rajat in his address to the employees: (i) Initiative (ii) Stability
of personnel (iii) Discipline (iv) Equity (v) Espirit de corps
(vi) Subordination of individual interest to general interest.
11. According to Taylor, there are various ways of doing the
job. To determine the best way there are several parameters.
Right from procurement of raw materials till the final product
is delivered to the customer every activity is part of it. For
designing a car, the assembly line production would entail
deciding the sequence of operations, place for men, machines
and raw materials etc. All this is part of this technique of
scientific management. Ford Motor Company used this concept
very successfully. Even now auto companies are using it.
Taylor also demonstrated that productivity increased to about four
times by following his another technique. On close examination
of body movements, it is possible to find out the productive,
incidental and unproductive movements. He used stopwatches
and various symbols and colours to identify different movements.
Through this technique, Taylor was able to design suitable
equipment and tools to educate workers on their use. Identify
the two techniques of scientific management highlighted above.
Ans. (i) Method Study (ii)Motion Study
12. Factory system of production implies that managers serve as
a link between the owners and the workers. Since as managers
they had the mandate to ‘get work done’ from the workers,
there always exist the possibility of a kind of class-conflict, the
managers versus workers. Taylor recognised that this conflict
helped none, the workers, the managers or the factory owners.
Both should realise that each one is important. In such a
situation even trade unions will not think of going on strike
etc. According to Taylor, ‘Scientific management has for its
foundation the firm conviction that the true interests of the two
are one and the same; that prosperity of the business cannot
exist for a long time unless it is accompanied by prosperity/well-
being of its workers.’ Japanese work culture is a classic example
of such a situation. In Japanese companies, paternalistic style
of management is in practice. There is complete openness
between the management and workers. If at all workers go
to strike they wear a black badge but work more than normal
working hours to gain the sympathy of the management.
(a) Identify the principle of scientific management highlighted
in the above paragraph.
(b) To achieve a state like that of Japanese work culture,
Taylor called for an important concept. Identify that concept.
Ans. (a) Harmony, Not Discord (b) Mental Revolution
13. Taylor’s prescription for efficiency depends to a large extent
on personnel competencies. To increase efficiency, workers
should be given the required training. Efficient employees
will produce more and earn more. Efficiency also requires the
search for one best method of doing the job. The best method
chosen must lead to the determination of a fair day’s work.
There must be a compensation system that differentiates
those who are able to accomplish/exceed the fair day’s work.
This system must be based on the premise that efficiency is
the result of the joint efforts of the managers and the workers.
Thus, rather than quarrelling over the share in the resultant
surplus, the workers and managers should work in harmony
for maximising the output rather than restricting it.
Identify the principles / techniques of scientific management
as given by Taylor discussed above.
Ans. The principles of scientific management as given
by Taylor discussed above are: (i) Development of each
and every person to his or her greatest efficiency and
prosperity (ii) Harmony, Not Discord
The techniques of scientific management as given by Taylor
discussed above are: (i) Method study (ii) Differential Piece
Wage System
14. According to Taylor, scientific method should be used to
analyse methods of production prevalent under the rule of
thumb. The best practices can be kept and further refined
to develop a standard which should be followed throughout
the organisation. These are the benchmarks, which must be
adhered to during production. Its objective is to reduce a given
line or product to fixed types, sizes and characteristics; and to
establish interchange ability of manufactured parts and products.
Scientific management also aims at eliminating unnecessary
diversity of products. Most large companies like Nokia, Toyota
and Microsoft etc. have successfully implemented these
technique of scientific management. This is evident from their
large share in their respective markets. Identify the technique
of scientific management highlighted in the above paragraph.
Ans. Standardisation and Simplification of Work
15. According to Taylor, management should not close its
ears to any constructive suggestions made by the employees
.They should be rewarded for their suggestions which results
in substantial reduction in costs. They should be part of
management and, if any important decisions are taken, workers
should be taken into confidence. At the same time workers
should desist from going on strike and making unreasonable
demands on the management. Both should realise that they
need each other. In fact, when there will be open communication
system and goodwill there will be no need for even a trade
union. Paternalistic style of management, whereby the
employer takes care of the needs of employees, would prevail
as in the case of Japanese companies. Identify the principle
of scientific management highlighted in the above paragraph.
Exam Handbook in Business Studies-XII – by Subhash Dey 11
Ans. Cooperation, Not Individualism
16. In the factory set-up / system ,Taylor concentrated on
improving the performance of the managerial figure with
whom the workers are in face-to-face contact on a daily basis.
He is the pivot around whom revolves the entire production
planning, implementation and control. In fact, Taylor identified
a list of qualities of that person such as intelligence, education,
tact, grit, judgement, special knowledge, manual dexterity,
and energy, honesty and good health. Taylor found that no
single person could fit them all. This prompted him to suggest
a technique of scientific management which is an extension
of the principle of division of work and specialisation to the
shop floor. This concept was extended to the lowest level of
the shop floor. Identify the technique of scientific management
discussed in the above paragraph.
Ans. Functional Foremanship
17. Mr. Karan, HR Manager of a company, selects each
person scientifically, assigns work to each employee according
to her/his physical, mental and intellectual capabilities. He also
gives them the required training so that they may produce
more and earn more. This will ensure their prosperity for both
company and workers. Identify the principle of management
highlighted in the above case.
Ans. Development of each and every person to his or her
greatest efficiency and prosperity.
18. In order to set up standard target of performance for
workers, it was necessary for Shiv Ltd. to fix standard time
for workers to perform a particular job. For this Mr. Ganesh,
the Production Manager of the company observed the workers
when they were performing the job. He used a stop watch
in hand and noted down the average time taken by workers
for completion of the job. He repeated the same observation
for 100 times and then calculated average time for the
performance of the job. This was fixed as the standard time
on the basis of which efficient and inefficient workers were
distinguished. Identify technique of scientific management
followed by Mr. Ganesh.
Ans. Time Study.
19. According to Taylor, even a small production activity like
loading pigs of iron into boxcars can be scientifically planned
and managed. This can result in tremendous saving of human
energy as well as wastage of time and materials. The more
sophisticated the processes, greater would be the savings. In the
present context, the use of internet has brought about dramatic
improvements in internal efficiencies and customer satisfaction.
Identify the principle of management highlighted above.
Ans. Science not Rule of Thumb
20. ‘She/he keeps machines, materials, tools etc., ready for
operations by concerned workers’. Whose work is described by
this sentence under functional foremanship?
(a) Instruction Card Clerk (b) Repair Boss
(c) Gang Boss (d) Route Clerk (NCERT)
Ans. (c) Gang Boss
21. Which of the following statements best describes ‘Mental
Revolution’?
(a) It implies change of attitude.
(b) The management and workers should not play the game
of one upmanship.
(c) Both management and workers require each other.
(d) Workers should be paid more wages. (NCERT)
Ans. (c) Both management and workers require each other.
22. Sitaram, the production manager of X Ltd., wants to increase
the speed of packaging. In order to identify and eliminate
unnecessary and unproductive movements of workers in
packaging, he installed a CCTV camera in the factory. Which
technique of scientific management is adopted by Sitaram?
Ans. Motion Study
23. Identify the techniques of scientific management, which
are described by the statements given below.
(a) Each specialist is to be assigned work according to her/
his qualities. For example, those with technical mastery,
intelligence and grit may be given planning work. Those with
energy and good health may be assigned execution work.
(b) Devising new varieties instead of the existing ones and
eliminating unnecessary diversity of products.
(c) Fixing the standard time taken to perform a well-defined
job so as to determine the number of workers to be employed;
frame suitable incentive schemes and determine labour costs.
(d) Finding out one best way of doing the job to minimise the
cost of production and maximise the quality and satisfaction
of the customer. Ans. (a) Functional foremanship (b)
Standardisation and simplification of work (c) Time study
(d) Method study
24. Ram Kishan is the owner of a shoe manufacturing factory.
He follows the traditional practice of fixing standard time of
work based on his own past experiences. He could not match
the supply with the demand for shoes produced in his factory.
His son, Shyam who has done MBA from FMS joined business
and suggested to fix the standard time by analysing the work
scientifically. The production increased and supply could match
the demand. Which principle of scientific management of
Taylor is highlighted in above case?
Ans. Science, not rule of thumb.
25. Raghav, a manager, expects his subordinates to adapt to
the new environs and working conditions without giving them
time to settle down. Identify the principle of management
overlooked by the manager.
Ans. Stability of Personnel
26. What light does the idea of ‘Gang Plank’ show about the
nature of principles of management?
Ans. Flexible
27. Principles of Taylor and Fayol are mutually complementary.
One believed that management should not close its ears to
constructive suggestions made by the employees, while
the other suggested that a good company should have an
employee suggestion system, whereby suggestions which
Unit 3 Business Environment
 3.1 Business Environment: Concept, Dimensions and Importance
Meaning of Business Environment Dimensions/Components/Elements of
Business environment means the sum total of all individuals,
institutions and other forces that are outside the control of
a business enterprise but that may affect its performance.
12 Exam Handbook in Business Studies-XII – by Subhash Dey
result in substantial time or cost reduction should be rewarded.
Identify the principles of Taylor and Fayol referred in the
above para. (CBSE 2014)
Ans. (i) Cooperation, not Individualism (ii) Initiative
28. Gopal, a manager of A Ltd. believes that the degree of
concentration of authority or its dispersal will depend upon
the situations and circumstances of each enterprise.
(a) What characteristic of nature of principles of management
is highlighted in the above case? (b) Which principle of
management is highlighted here? Explain.
Ans. (a) Flexible (b) Centralisation and Decentralisation
29. Fayol, in one of his principles, insists that employees
deserve fair and just wages or salary. But what is just and fair
is determined by multiple factors, such as contribution of the
employee, paying capacity of the employer and also prevailing
wage rate for the occupation under consideration.
(a) Identify and state the feature of principles of management
highlighted above. (b) Identify and explain the principle of
Fayol highlighted above.
Ans. (a) Contingent (b) Remuneration of Employees
30. In today’s dynamic business environment, companies
are specialising in their core competency and divesting non-
core businesses. In this context, one may cite the decision of
Hindustan Unilever Limited in divesting non-core businesses
of chemicals and seeds. Some companies are outsourcing
their non-core activities like share-transfer management and
advertising to outside agencies. So much so, that even core
processes such as R&D, manufacturing and marketing are
being outsourced today. Thus, significance of ‘Business Process
Outsourcing’(BPO) and ‘Knowledge Process Outsourcing’
(KPO) has increased.
(a) Identify the significance of principles of management
highlighted above. (b) Identify the principle of management
followed by the companies which are outsourcing their non-
core and core activities.
Ans. (a) Principles of management help in meeting
changing environment requirements.
(b) Division of work and specialisation
31. Taylor’s techniques of management are universally
applicable. Do you agree? Give reasons.
Ans. No, they are applicable to specialised situations. For
example: (i) Functional foremanship is not applicable in the
organisations following the principle of unity of command.
(ii) Differential piece wage system is also not applicable in
the organisation following the principle of equity.
Business Environment
1. Economic Environment: It consists of  Change
in disposable income  Inflation rate  Value of rupee 
Interest rates  Stock market indices.
 Components of Economic Environment: Rates of saving
and investment, Volume of imports and exports, Balance
of payments and changes in foreign exchange reserves,
Money supply in the economy, etc.
Examples of Economic Environment affecting the
functioning of a business enterprise:
(i) In case of construction companies and automobile
manufacturers, low longer-term interest rates are beneficial
because they result in increased spending by consumers for
buying homes and cars on borrowed money.
(ii) High inflation rates generally result in constraints on
business enterprises as they increase costs of raw materials
or machinery and payment of wages and salaries.
2. Social Environment: Social Environment includes
social forces like:  customs and traditions  values 
social trends and  society’s expectation from business.
Components of Social Environment: Attitudes towards
product innovations, Concern with quality of life, Life
expectancy, Shifts in the presence of women in the
workforce, Birth and death rates, Educational system and
literacy rates,Consumption habits, Composition of family.
Social trends present various opportunities and threats to
business enterprises. For example, the health-and-fitness
trend has created a demand for diet soft drinks, bottled
(mineral) water and food supplements but harmed tobacco
and liquor businesses.
Customs and traditions, e.g. celebration of Diwali, Eid,
Christmas, and Guru Parv in India provides significant
financial opportunities for greetings card companies, sweets
or confectionery manufacturers, tailoring outlets, etc.
3. Political environment: Political environment
includes  political conditions such as general stability
and peace in the country and  specific attitudes that
elected government representatives hold towards
business. Attitudes of the government officials may
have either positive or negative impact upon business.
Components of Political Environment: The Constitution of
the country, Political practices of the ruling party, etc.
Example: Political stability builds up confidence among
business people to invest in the long term projects. Political
instability can shake that confidence.
4. Legal environment: Legal environment includes
 various legislations passed by the Government, 
administrative orders issued by government authorities,
 court judgments and  the decisions rendered by
various commissions and agencies at every level of the
government— Centre, state or local.
It is imperative for the management of every enterprise
to obey the law of the land. Non-Compliance of laws
can land the business enterprises into legal problems.
For example, knowledge of Companies Act 2013; Consumer
Protection Act, 1986, etc. is important for doing business.
Examples of government regulations to protect consumer’s
interests: (i) Advertisements for packets of cigarettes must carry
the statutory warning– ‘Cigarette smoking is injurious to health’
(ii) Advertisement of alcoholic beverages is prohibited on
Doordarshan (iii) Advertisements of baby food must necessarily
inform that mother’s milk is the best.
Exam Handbook in Business Studies-XII – by Subhash Dey 13
5. Technological Environment: Technological
Environment includes forces relating to:  scientific
improvements and innovations which provide new ways
of producing goods and services and  new methods
and techniques of operating a business.
Examples: Airline companies have internet and www pages
where customers can look for flight times, destinations and
fares and book their tickets online.
Innovations in different scientific and engineering fields
such as lasers, robotics, food preservatives, medicine,
telecommunication, etc. have provided numerous
opportunities and threats for many different enterprises.
Features/Characteristics of Business
Environment TUSI C DR
1. Business environment is totality of all external
forces affecting a business. Therefore, it is aggressive
in nature.
2. It includes both specific and general forces.
Specific forces (e.g. investors, customers, competitors
and suppliers) affect individual enterprises directly and
immediately in their day-to-day working. General forces
(e.g. economic, social, political, legal and technological
conditions) have impact on all business enterprises and
thus may affect an individual firm only indirectly.
3. Its elements are closely inter-related.
For example, increased life expectancy of people and
increased awareness for health care have increased the
demand for many health products and services like diet Coke,
fat-free cooking oil.
4. It is dynamic as it keeps on changing (in terms of
technological improvement, shifts in consumer preferences or
new competition in the market).
5. It is uncertain as it is difficult to predict future
happenings (especially when environment changes are taking
place frequently as in the case of information technology or
fashion industries).
6. It is complex as it comprises of numerous
interrelated and dynamic conditions which arise from
different sources.
It is relatively easier to understand business environment in
parts but difficult to grasp in its totality. For example, it may be
difficult to know the extent of the relative impact of the social,
economic, political, technological or legal.
7. It is a relative concept as it differs from region to
region.
For example, political conditions in the USA differ from those
in Japan or China. Similarly, demand for sarees may be fairly
high in India whereas it may be almost non-existent in France.
Importance of Business Environment
CPT TOP
1. It helps to identify opportunities and getting the
first mover advantage instead of losing them to the
competitors.
‘Opportunities’ refer to the positive external trends and
changes that will help to improve a firm’s performance. For
example, Maruti Udyog became the leader in the small car
market because it was the first to recognise the need for
small cars in India, where petroleum prices were rising and
there was a large middle-class population.
2. It helps to identify threats on time which
serves as an early warning signal.(‘Threats’ refer to the
negative external trends and changes that will hinder a firm’s
performance. For example, if an Indian firm finds that an MNC is
entering the Indian market with new substitutes, it can improve
the quality of its products, reduce cost of production, etc.)
3. It helps in assisting in planning and policy
formulation. (An understanding of business environment
3.2 Government Policy Changes and their Impact on Business
Government Policy Changes
Liberalisation means removal of unnecessary controls
and restrictions on business. (e.g. Abolishing licensing
requirement, Freedom in deciding the scale of business,
Freedom in fixing the prices, Reduction in tax rates, Simplifying
procedures for imports and exports, Making it easier to attract
foreign capital, etc.)
Privatisation means giving greater role to the private
sector in the nation building process and a reduced role
to the public sector. (‘Disinvestments’ means transferring
the public sector enterprises to the private sector.)
Globalisation means integrating the various
economies of the world leading towards the emergence
of a cohesive global economy. (e.g. Removal of quantitative
as well as tariff restrictions, Import liberalisation and export
promotion through rationalisation of the tariff structure and
foreign exchange reforms, etc.)
Demonetisation is the act of the government to cancel
the legal tender status of a currency unit in circulation. The
aim of demonetisation was to curb corruption, especially
the accumulation of ‘black money’ generated by income
that has not been declared to the tax authorities.
Features of Demonetisation:
1. Demonetisation is a tax administration measures.
People with black money had to declare their
unaccounted wealth and pay tax at a penalty rate.
2. Demonetisation is a measure to improve tax compliance
as tax collection increased because of increased desclosure.
3. Demonetisation led to channelizing more savings through
the formal financial system. Bank deposits increased.
4. Demonetisation aimed to create a less-cash or cash-lite
Application, HOTS, Evaluation and Multi-Disciplinary Questions
1. Lately many companies have planned for significant
investment in organised retailing in India. Several factors have
prompted their decisions in this regard. Customer income is
rising. People have developed a taste for better quality products
even though they may have to pay more. The aspiration
levels have increased. The government has also liberalised
its economic policies in this regard and permitted even cent
percent foreign direct investment in some sectors of retailing.
Identify changes in business environment under different
heads that have facilitated the companies’ decisions to plan
significant investments in organised retailing. (NCERT)
Ans. (i) Economic environment (”Customer income is rising.”)
(ii) Social environment (”People have developed a taste for
better quality products...”)
(iii) Political environment (”The government ... permitted even
cent percent foreign direct investment in some sectors of retailing.”)
14 Exam Handbook in Business Studies-XII – by Subhash Dey
can be the basis for deciding the future course of action
(planning) or training guidelines for decision-making (policy).)
4. It helps in tapping useful resources so that it can
convert them into output that the environment desires.
5. It helps in coping with rapid changes in an
increasingly dynamic environment.
6. It helps in improving performance by continuously
monitoring the environment and adopting suitable practices.
economy. Cash transactions declined. Digital transactions
using Rupay cards and Debit Cards, etc. increased.
Impact on Business and Industry NRI - LM2 N
1. Increasing competition: Competition has
increased for Indian firms due to the entry of foreign firms
especially in service industries like telecommunications,
airlines, banking, insurance, etc.
2. More demanding customers: Customers have
become more demanding as they have a wider choice.
3. Rapidly changing technological environment:
Technological environment is rapidly changing creating
tough challenges for smaller firms.
4. Necessity for change: It has become necessary
for enterprises to change and modify their operations
to cope with the turbulent market forces.
5. Need for developing human resource: There is a
need for developing human resource as the new market
conditions require people with higher competence and
greater commitment.
6. Market orientation: Enterprises are forced to
adopt a market orientation so that they could study the
market and produce goods accordingly.
7. Loss of budgetary support to the public sector:
There is loss of budgetary support to the public sector
as the government felt that the public sector needs
to be more efficient in order to survive and grow.
Managerial Responses to Business Environment: (i) Use
of latest technology (ii) Customer focus (iii) Diversification
(iv) Brand building (v) Sharply improved compensation
levels
2. Mr. Ajay after completing MBA from USA comes to India to
start a new business under the banner Ecom Creations Ltd.
He launches a new product in e-learning for Senior Secondary
School students in Commerce stream, which already has an
established market in UK and USA but not in India. His business
starts flourishing in India. Now more Indian companies entered
into the market with other subjects also.
Identify and quote the lines from above para which highlight the
significance of understanding business environment.
(CBSE SQP 2015)
Ans: ( a) “Comes to India to start a new business ... launches a
new product in e-learning for Senior secondary school students
in Commerce stream.” (i) It helps in assisting in planning
and policy formulation. (ii) It helps the firm to identify
opportunities and get the first mover advantage.
(b) “His business starts flourishing in India.” (iii) It helps in
improving performance.
(c) “Now more Indian companies entered into the market with
be applicable to all the public sector undertakings for wages
different subjects also.” (iv) It helps the firm to identify threats
disbursement using e-payment options. This is another
and early warning signals. milestone in the direction to further push to cashless economy.
Identify the dimensions of business environment which relate
3. Naman and Govind after finishing their graduation under
to the above mentioned case.
vocational stream decided to start their own travel agency (CBSE SQP 2018-19)
Ans. (a) Political Environment (b) Legal Environment (c)
which will book Rail Tickets and Air Tickets on commission
Technological Environment
basis. They also thought of providing tickets within ten minutes
through the use of internet. They discussed the idea with their
7. Which of the following is an example of social environment?
Professor Mr. Mehta who liked the idea and suggested them
(a) Money supply in the economy (b) Consumer Protection Act
to first analyse the business environment which consists of
(c) The Constitution of the country (d) Composition of family
investors, competitors and other forces like social, political
Ans. (d) Composition of family
etc. that may affect their business directly or indirectly. He
8. T
he Reserve Bank of India (RBI) increased the Cash Reserve
further told them about the technological improvements and
Ratio (CRR) by 0.25 Basis Points to overcome the inflationary
shifts in consumer preferences that were taking place and
trends in the economy. Identify the dimension of business
hence they should be aware of the environmental trends and
environment highlighted int the given statement.
changes which may hinder their business performance. HeAns. Economic environment.
emphasised on making plans keeping in mind the threat posed
9. It is the process by which government control over the
by the competitors, so that they can deal with the situation
industry is being loosened. Give the term to which this
effectively. This alignment of business operations with the
statement is trying to indicate.
business environment will result in better performance.
Ans. Liberalisation
(i) Identify the component of business environment highlighted
in the above Para. 10. Identify the following major concepts related to government
(ii) State any two features of business environment as policy changes:
discussed by Professor Mehta with Naman and Govind. (a) Ceasing the legal tender status of large denomination
currency notes.
(iii) Also state two points of importance of business environment
as stated by Professor Mehta in the above situation. (b) The end of the licence-permit-quota raj.
(c) Transfer of ownership and management of the enterprise
(CBSE SQP 2017)
Ans. ( i) Technological Environment to the private sector.
(ii) (a) Specific and general forces (b) Dynamic nature(d) Import liberalisation and export promotion through
rationalisation of the tariff structure and foreign exchange
(iii) (a) It helps the firm to identify threats and early warning
reform.
signals. (b) It helps in planning and policy formulation.
Ans. (a) Demonetisation (b) Liberalisation (c) Privatisation
4. Phillips, a company manufacturing light bulbs incurred
(d) Globalisation
heavy expenditure on scientific Research and Development
11. Identify the following major concepts related to government
and discovered a technology that made it possible to produce
policy changes and one impact of each on business and industry:
an energy efficient light bulb that lasts at least twenty times as
(a) Removal of quantitative as well as tariff restrictions
long as a standard bulb. It resulted in growth and profitability
of the company. (b) Diluation of stake of the government in the public sector
enterprises through ‘disinvestment’.
(a) Identify the dimension of business environment mentioned
above. (b) State the point of importance of business Ans. (a) Globalisation, Impact: Increasing competition
(b) Privatisation, Impact: Loss of budgetary support to the
environment mentioned above by quoting the lines.
public sector
Ans. (a) Technological environment
(b) Business environment helps a firm to improve its 12. Identify the impact of the government policy changes of
liberalisation and globalisation from the following statements:
performance. ‘It resulted in growth and profitability of the
company.’ (a) Earlier firms used to produce first and go to the market for
sale later. In a fast changing world, the firms have to study and
5. ‘Konark Ltd.’ is an electronic goods manufacturing enterprise
analyse the market first and produce goods accordingly.
situated in Shivpuri, Madhya Pradesh. It is earning a very
(b) In a regulated environment of pre-1991 era, the firms
low revenue in comparison to a competing electronic goods
could have relatively stable policies and practices. After 1991,
manufacturing enterprise, ‘Nova Ltd.’ situated in Mumbai.
the market forces have become turbulent as a result of which
Both Konark’s and Nova’s operations are affected directly by
the enterprises have to continuously modify their operations.
the investors, customers, competitors and suppliers, which
(c) Increased competition in the market gives the customers
are unique to their respective locations. In addition to this,
wider choice in purchasing better quality of goods and services.
individual firms of this field are affected indirectly by the
Ans. (a) Market orientation (b) Necessity for change (c)
factors like the money supply in the economy, composition of
the families, the technological changes, etc. More demanding customers
13. It is heartening that the implementation of compliance
Identify the feature of the concept discussed in the above
paragraph. requirements of the Companies Act, 2013 has progressed
Ans. Specific and General Forces substantially with NIFTY 500 companies. Data shows a
6. The Government of India has recently come up with ansignificant increase in women’s participation in the top
management of Indian Companies from 5% few years ago to
amendment to Section 6 of the Payment of Wages Act 1936, to
13% now. Even companies which are not in NIFTY 500 have
allow employers of certain industries to make payment through
undertaken drives to increase women’s participation across
various electronics modes of payments. The amendment will
different areas of work. The government had also announced
that it would support such companies. Identify and explain the
Exam Handbook in Business Studies-XII – by Subhash Dey 15
dimensions of business environment discussed above which
brought about the change. (CBSE SQP 2018)
Ans. (a) Legal environment (b) Political environment
14. The Government of India announced ‘demonetisation’ of `
500 and ` 1,000 currency notes with effect from the midnight
of November 8, 2016. As a result, the existing ` 500 and
`  1000 currency notes ceased to be legal tender from that
date. New currency notes of the denomination of ` 500 and `
Unit 4 Planning
 4.1 Planning: Concept, Process, Importance and Limitations
Concept of Planning
Planning is define as the process of:  setting objectives
for a given time period,  formulating various courses
of action to achieve them and then  selecting the best
possible alternative from among the various courses of
action available.
Planning is concerned with both ends and means i.e., what
is to be done and how it is to be done. This is the essence
of planning. But before doing something, the manager must
formulate an idea of how to work on a particular task. Thus,
planningiscloselyconnectedwithcreativityandinnovation.
The plan that is developed must have a given time frame. If
time factor is not taken into consideration, conditions in the
environment may change and the plan may go waste. Thus,
planning is a futile exercise if it is not implemented on time.
Steps in Planning Process SD IES IF
1. Setting objectives: The first and foremost step
is setting objectives. Objectives may be set for the
entire organization and each department or unit within
the organization. Objectives or goals specify what the
organization wants to achieve. Objectives should be
stated clearly.
2. Developing Premises: Planning premises are the
assumptions made about the future on the basis of
which the plans are drawn. (Assumptions are made in the
form of forecasts about the demand for the product etc. Planning
premises are base material upon which plans are to be drawn.)
3. Identifying alternative courses of action which
may be used to achieve the set objectives.
4. Evaluating alternative courses of action: The next
step is to weigh the pros and cons of each alternative.
The positive and negative aspects (i.e., feasibility and
consequences) of each proposal are evaluated.
For example, in financial plans, the risk-return trade-off is
very common. The more risky the investment, the higher the
returns it is likely to give. To evaluate such proposals detailed
calculations of earnings, earnings per share, interest, taxes,
dividends are made and decisions taken.
5. Selecting the best alternative which involves
scrutinizing the feasibility and consequences of each
alternative before a choice is made.
16 Exam Handbook in Business Studies-XII – by Subhash Dey
2000 issued by Reserve Bank of India after the announcement.
Discuss ‘demonetisation’ in the light of the changes in business
environment under various heads. (NCERT)
Ans. (a) Legal environment
“Government of India announced ‘demonetisation’ of `500 and
`1000 currency notes...”
(b) Economic environment: “New currency notes of the
denomination of `500 and `2000 issued by Reserve Bank of
India after the announcement.”
Thisistherealpointofdecision-making.Thebestplanwouldbethe
most feasible, profitable and with least negative consequences.
Sometimes, a combination of plans may be selected instead of
one best course. The manager will have to apply permutations
and combinations and select the best possible course of action.
6. Implementing the plan: It means putting the plan
into action.
This is the step where other managerial functions also come
into the picture. This step would also involve organising for
labour and purchase of machinery.
7. Follow up action which involves seeing that activities
are performed according to plans. Monitoring the plans is
equally important to ensure that objectives are achieved.
Features of Planning CM OP2D F
1. Planning focuses on achieving objectives as specific
goals are set out in the plans along with activities to be
undertaken to achieve the goals. (Thus, planning is purposeful.)
2. Planning is futuristic as it involves looking ahead and
preparing for the future (based on forecasting which involves
anticipating future events and drawing plans accordingly).
3. Planning involves decision making as it involves
evaluation of each alternative course of action and
choosing the most appropriate one.
4. Planning is a mental exercise. Planning is an
intellectual activity of thinking rather than doing, because
planning determines the action to be taken. (Planning
requires logical and systematic thinking, application of mind
involving foresight, intelligent imagination and sound judgement.)
5. Planning is the primary function of management as
it lays down the basis for all other functions of management.
All other managerial functions are performed within the
framework of the plans drawn. Thus, planning precedes other
functions. This is also referred to as the ‘primacy of planning’.
6. Planning is pervasive as it is required in all
organisations, at all levels and in all departments.
Planning is not an exclusive function of top management.
Planning is what managers at all levels and in all departments
do.  Top management undertakes planning for the whole
organisation.  Middle management does the departmental
planning.  At the lowest level, day-to-day operational
planning is done by supervisors.
7. Planning is continuous because a plan is framed
and implemented for a specific period of time and is
followed by another plan and so on.
Importance of Planning DR SODI
1. Provides direction: Planning provides directions by
deciding in advance what action should be taken.
Objectives/goals defined in a plan act as a guide for action
of managers and employees. Departments and individuals
are able to work in coordination.  If there was no planning,
employees would be working in different directions and the
organisation would not be able to achieve its desired goals.
2. Reduces the risks of uncertainty: Planning
reduces the risks of uncertainty by anticipating changes
and developing managerial responses to them.
Planning cannot eliminate changes/uncertainties but can
predict them and prepare contingency plans to deal with them.
3. Reduces overlapping and wasteful activities:
Planning reduces overlapping and wasteful activities
by coordinating the activities of different divisions,
departments and individuals.
4. Promotes innovative ideas: Planning promotes
innovative ideas requiring application of mind and foresight.
It is the most challenging activity for the management as it guides
all future actions leading to growth and prosperity of the business.
5. Facilitates decision making: Planning facilitates
decision making by making a choice from among the
alternative courses of action.
6. Establishes standards for controlling: Planning
establishes standards against which actual performance
 4.2 Types of Plans
A single-use plan is developed for a one-time event or
project, not repeated in future, e.g. budgets, programmes.
A standing plan is used for activities that occur regularly
over a period of time, e.g. policies, procedures, methods and
rules. It enhances efficiency in routine decision-making.
1. Objectives: Objectives are the end points which are
numerically expressed, that the management seeks to
achieve within a given time period, e.g. increasing sales
by 10% in the next quarter. ( set by top management  focus
on broad general issues  serve as a guide for overall planing)
2. Strategy: A strategy provides broad contours of an
organsiation’s business and refers to future decisions
defining the organisation’s direction and scope in the
long run. Example: Marketing strategy of an organisation
– which channel of distribution to use? what is the pricing
policy? and how to advertise the product?
A strategy is a comprehensive plan for accomplishing
an organisation’s objectives taking competition and
business environment into consideration. It includes three
dimensions: (i) determining long-term objectives of the
enterprise, (ii) adopting a particular course of action, and
(iii) allocating resources necessary to achieve the objectives.
3. Rule: A rule is a statement that specifies what is to be
done or not to be done. It is a guide to behaviour. A rule
does not allow for any flexibility or discretion and prescribes
a penalty for violation. Example: No smoking in office.
Exam Handbook in Business Studies-XII – by Subhash Dey 17
is measured. (A comparison of actual performance with the
standards helps to identify the deviations and to take corrective
action. Thus, planning is a prerequisite for controlling.)
Limitations of Planning RS DTC2
1. Planning leads to rigidity because once a well
defined plan is drawn, the managers may not be in a
position to change it with the changed circumstances.
2. Planning may not work in a dynamic environment
as the environment in which a business operates keeps
on changing and planning may not foresee everything.
3. Planning reduces creativity as middle management
and other decision makers are neither allowed to deviate
from plans nor are they permitted to act on their own.
(Thus, their initiative or creativity gets lost or reduced. Planning
in a way reduces creativity since people tend to think on the
same lines as others.)
4. Huge costs are involved in formulating the plans
(e.g. expenses on boardroom meetings, discussions with
professional experts, etc.) and sometimes costs incurred
may not justify the benefit derived from the plan.
5. Planning is a time consuming process as checking
accuracy of facts may involve lot of time and sometimes
not much time is left for its implementation.
6. Planning does not guarantee success as
managers have a tendency to rely on previously tried
and tested successful plans which may create a false
sense of security and lead to failure.
The success of an enterprise is possible only when plans
are properly drawn up and implemented. Planning is
meaningless unless it is translated into action.
Rules are usually the simplest type of plans because there is
no compromise or change unless a policy decision is taken.
4. Method: Method is the prescribed way or manner
in which a task has to be performed taking into
consideration the objective of the organisation. It deals
with a task comprising of one step of a procedure and
specifies how this step is to be performed. Selection
of right method saves time, money and effort and
increases efficiency. Example: For imparting training
to higher level managers orientation programmes,
lectures and seminars can be organised whereas on the
job methods are appropriate at the lower level.
5. Policy: Policy is a general guideline that guides
thinking or channelises energies towards a particular
direction. It defines the broad parameters within which
a manager may function. It brings uniformity in decision
making and action for interpretation of strategy.
Example: Recruitment Policy, Purchase Policy, etc.
6. Procedure: It consists of sequence of routine steps
performed in a chronological order to carry out activities
within a broad policy framework. It details the exact
manner in which any work is to be performed. Example:
Procedure for reporting progress in production.
7. Budget: A budget is a statement of expected results
for a given future period expressed in numerical terms.
Examples: Sales budget, Cash budget, etc.
 A budget is a statement of expenses, revenue and income for
a specified period. A budget is also a control device from which
deviations can be taken care of. But making a budget involves
forecasting, therefore, it is a fundamental planning instrument.
8. Programme is a detailed statement about a project
which outlines the objectives, policies, procedures,
rules, resources required and the budget to implement
Application, HOTS, Evaluation and Multi-Disciplinary Questions
1. S uhasini a home science graduate from a reputed college
has recently done a cookery course. She wished to start her
own venture with a goal to provide ‘health food’ at reasonable
price. She discussed her idea with her teacher (mentor) who
encouraged her. After analyzing various options for starting her
business venture, they shortlisted the option to sell readymade
and ‘ready to make’ vegetable shakes and sattu milk shakes.
Then, they both weighed the pros and cons of both the
shortlisted options. Name the function of management being
discussed above. (CBSE SQP 2016)
Ans. Planning.
2. Super Fine Rice Ltd. has the largest share of 55% in the
market. The company’s policy is to sell only for cash. In 2015,
for the first time company’s number one position in the industry
has been threatened because other companies started selling
rice on credit also. But the managers of Super Fine Rice Ltd.
continued to rely on it s previously tried and tested successful
plans which didn’t work because the environment is not static.
This led to decline in sales of Super Fine Rice Ltd. The above
situation is indicating two limitations of planning which led to
decline in it sales. Identify these limitations. (CBSE SQP 2017)
Ans. (i) Planning does not guarantee success.
(ii) Planning may not work in dynamic environment.
3. Having transformed 2500 Kirana stores across eight cities
in to virtual super markets, the start up Quick Bizz further
decided in advance, to collaborate with 15000-20000 store
owners in top 30 cities of the country by the end of this year.
The company has set its eye on digitizing over 100000 kirana
stores over next 18-24 months. Identify the step in the process
of one of the functions of management discussed above. (v) It provides the manner in which a task has to be performed.
(CBSE SQP 2018)
Ans. Setting objectives
4. Laxmi Chemicals Ltd., a soap manufacturing company
wanted to increase its market share from 30% to 55% in
the long run. A recent report submitted by the Research &
Development Department of the company had predicted a
growing trend of herbal and organic products. On the basis of
this report the company decided to diversify into new variety of
soaps with natural ingredients having benefits and fragrances
of Jasmine, Rose, Lavendear, Mogra, Lemon Grass, Green
Apple, Strawberry etc. The Unique Selling Proposition (USP)
was to promote eco-friendly living in the contemporary life
style. The company decided to allocate ` 30 crores to achieve
the objective. Identify the type of one of the functions of
management mentioned above which will help the company to
acquire dominant position in the market. (CBSE SQP 2016)
Ans. Strategy
5. Vardan Patel started the business of preparation and
supplying sweets through home delivery at a production cum
show-room ‘Express Sweets’ at Ahmedabad. He made a plan
forecasting the sales of different types of sweets in various
18 Exam Handbook in Business Studies-XII – by Subhash Dey
any course of action. Examples: Construction of a
shopping mall, opening a new department, etc.
Programmes will include the entire gamut of activities as
well as the organisation’s policy and how it will contribute to
the overall business plan. The minutest details are worked
out i.e., procedures, rules, budgets, within the broad policy
framework.
localities of Ahmedabad for each month of the year to earn a
profit of 20% on Capital employed. He sets a sales target of
`2000000 in the current year with a 10% increase every year.
He then set the criteria for selecting suppliers from whom he
would make purchases of raw material. The planning paid off
and the business was able to achieve its targets. Identify any
two types of plans by quoting the lines from the above.
Ans. (i) Objective – ‘He set a sales target of ` 2000000 in the
current year with a 10% increase every year.’
(ii) Policy – ‘He then set the criteria for selecting suppliers
from whom he would make purchases of raw material.’
6. Gunjan is the director of Zyesha Ltd., a ladies garments
manufacturing company. In a Board’s meeting, she addresses
certain questions such as What is the demand for the product?
Which channel of distribution to use? What is the pricing
policy? How do we advertise the product?
Identify the type of plan highlighted above.
Ans. Strategy
7. Panorama Ltd. is a company selling LED television sets.
Shivek, a manager of the company, makes certain decisions
in the nature of manufacturing or buying decisions, should the
company make or buy its requirements of packages, printing
of labels, selection of vendors for procuring supplies?
Identify the type of plan highlighted above.
Ans. Policy (The manager of Panorama Ltd. is making the
company’s Purchase Policy.)
8. Identify the types of plan:
(i) It may consist of identifying steps, procedures required for
opening a new department to deal with other minor work.
(iii) It specifies the organisation’s response to a certain situation.
(vii) It is a general plan prepared by top management outlining
resource allocation, priorities and takes into consideration the
business environment and competition.
Ans. (i) Programme (iii) Policy (v) Method (vii) Strategy
9. Ravi was working in a mobile company. It had an
assembling unit in Noida. In this assembling unit, standard
output of producing 12 units per day per worker had been
set. While assembling mobile phones, he realised that by
simply reorganising the sequence of tasks more units can
be assembled at a lower cost. He went to his supervisor and
informed him about his new discovery. The supervisor, on the
contrary, instructed him to carry out work as per the method
and techniques decided earlier.
Identify this limitation of one of the functions of management.
Ans. Planning reduces creativity.
10. Mr. Mohan, Financial manager of ABC Ltd., has prepared
the annual Statement of proposed expenditure to be presented
in the Annual General Meeting. Identify the type of plan
formulated by the financial manager. (CBSE SQP 2018-19)
Ans. Budget
11. Rahul decided to start a desert cooler manufacturing
business. He sets the target of earning 20% profit on sales in
the first year. He was very much concerned about the future
prospects of the business, which were uncertain. For this, he
gathered information from the potential market and analyzed
that the demand for wall-mounted coolers is increasing day by
day. He used this information as the base for future planning. On
the basis of the gathered information, he called a meeting in the
following week to find new methods to achieve the objective.
(a) Identify the function of management involved in the above case.
(b) Enumerate the next two steps, which have been followed
by Rahul that are related to the process of one of the functions
of management. (CBSE SQP 2018-19)
Unit 5 Organising
 5.1 Organising: Concept, Process and Importance
Organising as a Process
Organising is the process of defining and grouping the
activities of the enterprise and establishing authority
relationships among them.
 The ‘organising’ function is a means for translating plans
into action. It involves organising resources needed ,
optimum utilisation of resources, translation of work into
attainable tasks, empowering the workforce to accomplish
these tasks, etc.   The management function of organising
ensures that efforts are directed towards the attainment of
goals laid down in the planning function in such a manner
that resources are used optimally and people are able to
work collectively and effectively for a common purpose. 
Organising is the process of identifying and grouping the
work to be performed, defining and delegating responsibility
and authority, and establishing relationships for the purpose
of accomplishing objectives.  Organising essentially implies
a process which coordinates human efforts, assembles
resources and integrates both into a unified whole to be
utilised for achieving specified objectives.  Organising
can be defined as a process that initiates implementation
of plans by clarifying jobs and working relationships and
effectively deploying resources for attainment of identified
and desired results (goals).  Organising is a process by
which the manager brings order out of chaos, removes
conflict among people over work or responsibility sharing
and creates an environment suitable for teamwork.
Steps in the Process of Organising IDAE
1. Identification and division of work: Identifying
and dividing the work into manageable activities so that
duplication can be avoided.
2. Departmentalisation: Activities of a similar nature
are grouped together. It facilitates specialisation.
(Departments can be created on the basis of territory (north,
south, etc.) and products (garments, footwear etc).)
 5.2 Organisation Structure: Functional and Divisional
Organising as a Structure
Organisation structure is the outcome of the organising
process. The organisation structure of a firm is shown
in an organisation chart. The span of management
Exam Handbook in Business Studies-XII – by Subhash Dey 19
Ans. (a) Planning (b) (i) Identifying alternative courses of
action. (ii) Evaluating alternative courses of action.
12. An auto company C Ltd. is facing a problem of declining
market share due to increased competition from other new and
existing players in the market. Its competitors are introducing
lower priced models for mass consumers who are price
sensitive. C Ltd. sets its long-term objective to increase profits
by 20% in the next year. For quality conscious consumers, the
company is introducing new models with added features and
new technological advancements. Identify the type of plan the
company is preparing. (NCERT)
Ans. Strategy
3. Assignment of duties to job positions: Jobs are
allocated to the members of each department according
to their skills and competencies for effective performance.
4. Establishing reporting relationships: Authority-
responsibility relationships are clearly established so
that each individual knows who he has to take orders
from and to whom he is accountable. This helps in
coordination amongst various departments.
Importance of Organising SAD-C-GOA
1. Specialisation: A systematic allocation of jobs
enhances productivity and leads to specialisation
because of the repetitive performance of a particular task.
2. Clarity in working relationships: Authority-
responsibility relationships are clearly established so
that each individual knows who he has to take orders
from and to whom he is accountable.
3. Effective administration: Clarity in working
relationships enables proper execution of work.
Management of an enterprise becomes easy and this
brings effectiveness in administration.
4. Optimum utilisation of resources by avoiding
duplication of work and minimising wastage of resources
and efforts.
5. Growth and expansion by allowing a business
enterprise to add more job positions, departments and
product lines.
6. Adaptation to change by allowing the organisation
structure to be suitably modified according to the
changes in business environment.
7. Development of personnel by effective delegation
of work to subordinates.
gives shape to the organisational structure. Span of
management refers to the number of subordinates that
can be effectively managed by a superior. This determines
the levels of management in the organisation structure.
Organisation structure refers to the framework within
which managerical and operating tasks are performed.
 It specifies the relationship between people, work
and resources.  It allows coordination among human,
physical and financial resources.  A proper organisation
structure is essential to ensure a smooth flow of
Each division works as a profit center where the divisional
head is responsible for the profit or loss of his division.
Each division is multi-functional because within each division
functions like production, marketing, finance, etc. are
performed together to achieve a common goal.
MANAGING DIRECTOR

communication, better control over business operations

and achievement of organisational goals. Footwear Garments
The need for an adequate organisation structure is felt
when an enterprise grows in size or complexity because Human Resource Marketing Finance Production

coordination then, becomes difficult due to new functions

or increase in number of products. Human Resource Marketing Finance Production

Functional Structure Organisation Chart Showing Divisional Structure

Functional structure is an organisational structure formed
by grouping of jobs of similar nature according to functions
and organising these major functions as separate
departments. For example, a company manufacturing
garments may have separate departments
Production, Marketing, Finance, etc.
MANAGING DIRECTOR
Human Resource Marketing Finance
Divisional structure is suitable for those business enterprises
where a large variety of products are manufactured using
different productive resources.
When an organisation grows and needs to add more
for employees, create more departments and introduce new levels
of management, it will decide to adopt a divisional structure.
Advantages
1. Product Specialisation helps in the development of
varied skills in a divisional head and this prepares him
for higher positions.
Production

Organisation Chart Showing Functional Structure 2. Divisional heads are accountable for profits, as
Functional structure is suitable for those enterprises which revenues and costs related to different departments can
have only one category of products to offer. However, the size be easily identified and assigned to them.
of the organisation is large, it has diversified activities and 3. It promotes flexibility and initiative because each
operations require a high degree of specialisation. division functions as an autonomous unit which leads to
Advantages faster decision making.
1. It leads to occupational specialisation since emphasis 4. It facilitates expansion and growth as new divisions
is placed on specific functions. (This promotes efficiency can be added without interrupting existing operations
in utilisation of manpower as employees perform similar tasks by merely adding another divisional head and staff for
within a department and are able to improve performance.) the new product line.
2. It promotes control and coordination within a department Limitations
because of similarity in the tasks being performed. 1. Conflict may arise among different divisions with
3. It increases managerial and operational efficiency. reference to allocation of funds.
4. It lowers cost as it reduces duplication of effort. 2. It may lead to increase in costs since there may be a
5. It makes training of employees easier as it focuses on duplication of activities across products.
a limited range of skills. 3. Divisional interests may supersede organisational
6. It ensures that different functions get due attention. interests.
Disadvantages Functional Divisional Structure
Basis
1. It may lead to functional empires, i.e. pursuing own Structure SRCC FM
departmental interests at the cost of organisational interests. Formation Formation is based Formation is based on
2. Inter-departmental conflicts: A conflict of interests on functions product lines and is
may arise when the interests of two or more supported by functions
departments are not compatible. (For example, the sales
Specialisation Functional Product specialisation
department insisting on a customer friendly design may cause
difficulties in production.) specialisation
3. It may lead to problems in coordination as information Cost Functions are not Duplication of resources
has to be exchanged across functionally differentiated duplicated, hence in various departments;
departments. economical hence costly
4. It may lead to inflexibility as people with same skills Coordination Difficult for a multi- Easy; because all
and knowledge base may develop a narrow perspective product company functions related to a
and may not appreciate others’ point of view. particular product are
Functional heads do not get training for top management positions integrated in one division
because they are unable to gather experience in diverse areas. Responsibility Difficult to fix Easy to fix responsibility
Divisional Structure responsibility on a for performance
Divisional structure is an organisation structure particular department
comprising of separate business units or divisions Managerial Difficult; as each Easier; autonomy as well
created on the basis of different products, geographical Development functional manager as chance to perform
area, customer groups etc. has to report to the multiple functions help in
For example, a large company may have two divisions, top management managerial development.
say Footwear and Garments.
20 Exam Handbook in Business Studies-XII – by Subhash Dey
 5.3 Formal and Informal Organisation
Formal Organisation 5. It has no definite structure or form (because it is a
Formal organisation refers to the organisation structure complex network of social relationships among members.)
which is designed by the management to accomplish its Advantages
objectives. The structure in a formal organisation can 1. It leads to faster spread of information as well a quick
be functional or divisional. feedback (since fixed lines of communication are not followed.)
 The formal organisation is a system of well-defined jobs, 2. It fulfills the social needs of the members. (This
each bearing a definite measure of authority, responsibility enhances their job satisfaction since it gives them a sense of
and accountability.  Formal organisation is a system of belongingness in the organisation.)
consciously coordinated activities of two or more person 3. It contributes towards fulfillment of organisational
towards a common objective. objectives by compensating for inadequacies in the formal
Features organisation. (For example, employees‘ reactions towards
1. It is deliberately designed by the top management to plans and policies can be tested through the informal network.)
facilitate smooth functioning of the organisation. Limitations
2. It specifies the relationships among various job 1. It may spread rumours which may work against the
positions. This clarifies who has to report to whom. interest of the formal organization. (Thus, it becomes a
3. It places more emphasis on work rather than destructive force.)
interpersonal relationships. 2. It may lead to resistance to change which may delay
4. It is a means to achieve the objectives as it lays down or restrict growth.
rules and procedures for their achievement. 3. It pressurizes members to conform to group norms
5. It coordinates the efforts of various departments.
or expectations which may be against organisational
Advantages
1. It is easier to fix responsibility since mutual interest.
relationships are clearly defined. Informal organisation cannot be altogether eliminated.
2. It avoids duplication of effort since there is no  It would be in the best interest of the organisation if the
ambiguity in the role that each member has to play. existence of such groups is recognised and the roles that their
3. It maintains unity of command through an established members play are identified.  The knowledge of such groups
chain of command can be used to gather their support and consequently lead
4. It leads to accomplishment of goals by providing a to improved organisational performance.  Such groups can
framework for the operations to be performed. also provide useful communication channels (i.e. grapevine).
5. It provides stability to the organisation because there Instead of confronting them, the management should skillfully
are specific rules to guide behaviour of employees. take advantage of both the formal and informal organisation
so that work continues smoothly.
Limitations
1. Procedural delays—delay in decision-making because
Basis Formal Informal Organisation
communication flows through scalar chain.
Organisation LOAN-FBM
2. Fails to recognise creative talent of employees since
it does not allow any deviations from rigidly laid down Meaning Structure Network of social
policies. of authority relationships arising out
3. Non-fulfilment of social needs of employees because relationships of interaction among
it places more emphasis on structure and work. created by the employees
Informal Organisation management
Informal organisation is a network of personal and
social relations within the formal organisation arising Origin Arises as a result Arises as a result of social
spontaneously as people associate with one another, e.g., of company rules interaction
managers and subordinates taking part in cricket matches. and policies

 Informal organisation is a network of personal and social Authority Arises by virtue Arises out of personal
relations not established by the formal organisation but of position in qualities
arising spontaneously as people associate with one another. management
 An informal organisation is an aggregate of inter-personal
relationships without any conscious purpose by which may Behaviour It is directed by There is no set behaviour
contribute to joint results. rules pattern
Features Leadership Managers are Leaders may or may not
1. It originates from within the formal organisation (as a leaders be managers. They are
result of personal interaction among employees.) chosen by the group
2. It emerges spontaneously and is not deliberately Flow of Communication Flow of communication
created by the management. communi- takes place is not through a planned
3. The standards of behaviour evolve from group norms. cation through the route. It can take place in
4. Independent channels of communication are scalar chain any direction.
developed by group members. (It does not have fixed lines of
communication. It has no written rules, is fluid in form and scope.) Nature Rigid Flexible

Exam Handbook in Business Studies-XII – by Subhash Dey 21

 5.4 Delegation and Decentralisation
Concept of Delegation Decentralisation has wide scope. “When we delegate
Delegation is the transfer of authority from superior to authority, we multiply it by two. When we decentralise
subordinate, entrustment of responsibility and creation of authority, we multiply it by many.” For example, consider
accountability for performance which helps a manager to an organisation where all leave applications are processed
extend his area of operations. by the General Manager. He feels over-burdened and
transfers this authority of leave processing to the Production
Delegation is the process a manager follows in dividing the
Manager. This is an example of Delegation of Authority. If the
work assigned to him so that he performs that part which
Production Manager also feels over-burdened and requests
only he because of his unique organisational placement, can
the General Manager to give him some relief, he may disperse
perform effectively and so that he can get others to help with
this authority to various heads throughout the organisation
what remains.
and instruct them to process the leave applications of their
Elements of Delegation respective departments.This is how delegated authority may
1. Authority: Meaning– It refers to the right of an be extended to decentralised authority.
individual to command his subordinates and to take
action within the scope of his position. Origin–It arises Centralisation and Decentralisation: The concentration
from formal position. Flow–Authority flows from top of decision-making authority by the top management is
to bottom, i.e. the superior has authority over the called centralisation whereas its dispersal among more
subordinate. Delegation– Can be delegated. than one person is known as decentralisation. Complete
2. Responsibility: Meaning–It is the obligation of a centralisation and complete decentralisation–both the
subordinate to perform the assigned duty. Origin–It scenarios are unrealistic. An organisation can never be
arises from delegated authority. Flow–It flows upwards, completely centralised or decentralised. As it grows in
i.e. a subordinate will always be responsible to his size and complexity, there is a tendency to move towards
superior. Delegation– Cannot be entirely delegated. decentralised decision-making. This is because in large
3. Accountability: Meaning–It implies being organisations those employees who are directly and
answerable for the final outcome. It cannot be closely involved with certain operations tend to have more
delegated. Origin–It arises from responsibility. Flow–It knowledge about them than the top management which may
flows upwards, i.e. a subordinate will be accountable only be indirectly associated with individual operations.
to a superior for satisfactory performance of work.
Delegation– Cannot be delegated at all. Basis Delegation Decentralisation
Delegation does not mean abdication NPFSS
Delegation helps a manager to extend his area of operation Nature Delegation is a Decentralisation is an
as without it his activities would be restricted to only compulsory act because optional policy decision.
what he himself can do. However, delegation does not no individual can It is done at the
mean abdication; the manger shall still be accountable perform all tasks. discretion of the top
for the assigned task. Accountability cannot be delegated management.
at all. Moreover, the authority granted to a subordinate
can be taken back and redelegated to another person. Purpose To lessen the burden of To increase the role of
the manager. the subordinates in the
Example: Suppose the directors of a company organisation by giving
manufacturing computers have asked their marketing
them more autonomy.
manager to achieve a target sale of 100 computers per
day. The marketing manager has delegated the task to his Freedom More control by Less control over
deputy sales managers working under him. The deputy of action superiors, hence less executives, hence
sales managers could not achieve the target. freedom to take own greater freedom of
In this case, the marketing manager shall still be accountable decisions. action.
to the directors. The process of delegation does not
relieve the marketing manager of his own accountability. Scope It has narrow scope as It has wide scope as
Accountability cannnot be delegated at all. it is limited to a superior it implies extension of
Concept of Decentralisation and his immediate delegation to the lowest
Decentralisation refers to systematic delegation of subordinate. level of management.
authority through all the levels of management and in all
Status It is a process followed It is the result of the
the departments except that which can be exercised only
to share tasks. policy decision of the
at central points.
top management.
Decentralisation implies selective dispersal of authority
and believes that people are competent, capable and
Importance of Delegation GEM – EMC
Delegation is a pre-requisite to the efficient functioning of
resourceful. It recognises the decision-maker’s need for
autonomy. The management, however, needs to carefully an organisation because of the following reasons:
select those decisions which will be pushed down to lower 1. Effective management: It helps in effective
levels (operational decisions) and those that will be retained management as the managers get more time to
for higher levels (major policy decisions). It can lead to concentrate on important matters.
organisational disintegration if the departments start to 2. Employee development: It helps in development
operate on their own guidelines which may be contrary to of employees as the employees get more opportunities
the interest of the organisation. to utilize their talent.
22 Exam Handbook in Business Studies-XII – by Subhash Dey
3. Motivation of employees: It helps to motivate
employees as the employees feel encouraged and try to
improve their performance further. (Delegation involves
entrustment of responsibility. It is not merely the sharing of task
but involves trust on the superior’s part and commitment on the
part of the subordinate. Responsibility for work builds his self-
esteem and improves his confidence.)
4. Facilitation of growth: It facilitates growth by
providing a ready workforce to take up leading positions
in new ventures.
5. Basis of management hierarchy: It establishes
a management hierarchy through clear superior
subordinate relationships.
6. Better coordination: It helps in better coordination
by avoiding overlapping of duties.
Importance of Decentralisation TC–RIGD
1. It gives relief to the top management who can
now concentrate on important policy decisions, e.g.
develop new strategies, coordination and control, etc.
Application, HOTS, Evaluation and Multi-Disciplinary Questions
1. In a school fete, the whole activity is divided into task groups
each dealing with a specific area like the food committee, the
decoration committee, the ticketing committee and so on.
These are under the overall supervision of the official in-charge
of the event. Coordinating relationships are established among
the various groups to enable smooth interaction and clarity
about each group’s contribution towards the event.
(a) Identify the function of management highlighted above.
(b) State the steps involved in the function of management
identified in part (a) by quoting the lines from the above paragraph.
Ans. (a) Organising
(b) (i) Identification and division of work
“...the whole activity is divided into task groups...”
(ii) Departmentalisation/Departmentation
“...each dealing with a specific area...”
(iii) Assignment of duties “... the food committee, the
decoration committee, the ticketing committee ... are under the
overall supervision of the official in-charge of the event.”
(iv) Establishing reporting relationships
“... Coordinating relationships are established ... clarity about
each group’s contribution towards the event.”
2.  Rishu, Ashu and Ravi have decided to start a business
of manufacturing toys. They identified the following main
activities which they have to perform: (i) Purchase of raw
materials, (ii) Purchase of machinery, (iii) Production of toys,
(iv) Arrangement of finance, (v) Sale of toys, (vi) Identifying the
areas where they can sell their toys (vii) Selection of employees.
In order to facilitate the work they thought that four managers
should be appointed to look after (a) Production, (b) Finance,
(c) Marketing, (d) Personnel.
Identify the function of management involved in the above-
mentioned para by quoting the lines.
Ans. Organising. ‘They identified the following main activities
which they have to perform.’ ‘In order to facilitate the work they
thought that four managers should be appointed to look after.
(a) Production, (b) Finance, (c) Marketing, (d) Personnel.’
3. Ramdas, aged 49 is working in an aviation company. He is
the senior-most employee in his division. He is even senior to
the division manager, Kanaputti. Ramdas is considered one of
Exam Handbook in Business Studies-XII – by Subhash Dey 23
2. It develops initiative amongst subordinates by
promoting self-reliance and confidence in them. This
is because when lower managerial levels are given
freedom to take their own decisions, they learn to
depend on their own judgement.
3. It develops managerial talent for the future by
creating a reservoir of qualified manpower to fill up
challenging positions in future.
4. It facilitates growth by fostering competition
amongst the departments leading to increase in
productivity. Consequently, the organisation is able to
generate more profits which can be used for growth
and expansion purposes.
5. It helps in quick decision-making has there is
no requirement for approval from many levels. There
are also less chances of information getting distorted
because it does not have to go through long channels.
6. It leads to better control by evaluating performance
at each level of management. The departments/divisions
can be individually held accountable for their results.
the most committed, capable and hard-working employees. As
a result of his abilities and seniority, he generally received the
work assignments of his choice. Although there was no formal
designation of various „special projects assigned to Ramdas, he
handled them as a matter of routine. A problem developed when
an able and intelligent person Nagarjuna, aged 33, was appointed
by Kanaputti. Nagarjun s previous three years experience in the
closely related work, made it possible for him to catch on to the
routine work of his new job more rapidly than was customary
for a new employee. On several occasions, Kanaputti noticed
the tension developing between the two employees. However,
he didn’t want to get involved in their personal issues as long
as the work was completed effectively and efficiently by them.
One day, the tension between them reached the boiling point
and Ramdas complained to Kanaputti stating that his duties
were being largely taken over by Nagarjun. Kanaputti issued the
order stating the clear allocation of the jobs and related duties
between the two. He further clarified the working relationship
between them by specifying who was to report to whom. This
helped in reducing the workload, enhancing productivity and
removing ambiguity.
(i) Identify the step of organising process which has not been
carried out properly and contributed to this problem.
(ii) State the two steps of the organising process which have
been taken by Kanaputti to respond to the complaint of Ramdas.
(iii) Also state three points of importance of organising as
reflected in the above case. (CBSE SQP 2017)
Ans. (i) Assignment of duties
(ii) (a) Assigning the duties (b) Establishing reporting
relationship
(iii) (a) clarity in working relationship (b) Benefits of
specialisation (c) Effective administration
4. Zamon Ltd. is manufacturer of electronics goods based in
Pune. On one hand it deals in items like books, music instrument,
videotapes etc., and on the other hand it deals in laptops and
mobile phones. The company had a functional structure with
separate heads for production, marketing and finance. All
the functional heads were looking after the products, but at
times their activities overlapped. This led to problems related
to coordination and inter-departmental conflicts. To facilitate
specialization Ramit, the CEO of the company decided to group
books, music instrument, videotapes etc. under ‘Media’ and
laptops and mobile phones under ‘consumer electronics’. While
doing so Ramit has performed a step in the process of one of
the functions of management. Identify the step. (CBSE 2018)
Ans. Departmentalisation
5. A company, which manufactures a popular brand of toys,
has been enjoying good market reputation. It has separate
departments for Production, Marketing, Finance, Human
Resources and Research and Development. Lately to use its
brand name and also to cash on to new business opportunities
it is thinking to diversify into manufacture of new range of
electronic toys for which a new market is emerging.
Identify the type of the organisational structure the company
should adopt with diversification.
Ans. Divisional structure
6. Neha runs a factory wherein she manufactures shoes. The
business has been doing well and she intends to expand by
diversifying into leather bags as well as western formal wear
thereby making her company a complete provider of corporate
wear. This will enable her to market her business unit as the
one stop for working women. Which type of structure would
you recommend for her expanded organisation?
Ans. Divisional structure
7. A truck manufacturing company has its registered office in
Delhi, manufacturing unit at Gurgaon and marketing department
is located at Faridabad. Which type of organisational structure
should it adopt to achieve its target?
Ans. Functional Structure
8. A company has been registered under the Companies
Act with an authorised share capital of ` 20000 crores. Its
registered office is situated in Delhi and manufacturing unit
in a backward district of Rajasthan. Its marketing department
is situated in Bhopal. The company is manufacturing Fast
Moving Consumer Goods (FMCG). Which type of organisational
structure would suit the requirements of the company?
Ans. Divisional Structure
9. ‘Shan Spices Ltd. are the manufacturer of different food
specific spices like Rajmaa Masala, Cholley Masala, Aaloo
Parantha Masala etc. Mr. Raghav, the owner of the company
has created different departments for purchase, production,
marketing, finance and human resource. There are thirty
employees working in the organisation. Planning is of paramount
importance to the company as Mr. Raghav believes that effective
planning leads to achievement of organisational objectives. So
in order to make employees focus on objectives, he issued
instructions that during working hours only official matters will
be discussed. He made certain rules and code of conduct for
the employees to follow, according to which employees are not
allowed to visit and talk to the employees of other departments
except for official work. He emphasised on work perfor-mance
which resulted in smooth functioning of the organisation.
(i) I dentify and state the type of organisation mentioned in
the above para. (ii) State one feature of the concept identified
in part (i) as mentioned in the above para. (iii) What was the
purpose behind the formulation of rules for the employees that
restricted their personal communication with the employees of
other departments? (CBSE SQP 2017)
Ans. (i) Formal organisation (ii) Focus on objective and work
24 Exam Handbook in Business Studies-XII – by Subhash Dey
performance(iii)Avoidanceoftheemergenceofinformalorganisation
which may obstruct the fulfilment of organisational goals.
10. K iran Industries is a company manufacturing office
furniture. The company chose to diversify its operations to
improve its growth potential and increase market share. As
the project was important many alternatives were generated
for the purpose and were thoroughly discussed amongst the
members of the organisation. After evaluating the various
alternatives Sukhvinder, the Managing Director of the company
decided that they should add ‘Home Interiors and Furnishings’
as a new line of business activity. Name the framework, which
the diversified organisation should adopt, to enable it to cope
with the emerging complexity? (CBSE SQP 2016)
Ans. D ivisional Structure
11. A tall structure has a (a) Narrow span of management
(b) Wide span of management (c) No span of management
(d) Less levels of management (NCERT)
Ans. (a) Narrow span of management
12. ABC Ltd. is manufacturing shoes. Their business has been
doing well as their organisation specifies how much work should
a worker do and in what manner. It follows a rigid structure which
has been deliberately planned and created by top management
for the coordination of activities. But inspite of all these, there
are procedural delays. Identify the type of organisation.
Ans. Formal organisation
13. The directors of Gunjan Ltd., an organisation manufacturing
colour televisions, have asked their production manager to
achieve a target production of 150 televisions per day. The
production manager has asked his foreman to achieve this
target, but he did not give him the authority for the requisition
of tools and materials from the stores department. The foreman
could not achieve the desired target. Can the directors blame the
production manager, and can the production manager blame his
foreman for not achieving the target? Explain in brief the relevant
principles relating to this situation in support of your answer.
Ans. Yes, the directors can blame the production manager,
because delegation does not mean abdication. The
production manager shall still be accountable for the
performance of the assigned tasks.
However, the production manager cannot blame his
foreman for not achieving the target because he did not
give him the authority for the requisition of tools and
materials from the stores department. Responsibility
without authority will make the subordinate ineffective.
14. Shreya Ltd. has been awarded recently with the ‘Best
Employer of the Year Award’. The company has believed in
the ideas and suggestions of its employees. There is selective
dispersal of decision making authority at all levels. There is
no delay in delivery of orders to customers due to prompt
decisions taken by employees.
Identify the concept of management followed by the company.
Ans. Decentralisation
15. A company manufacturing sewing machines set up in 1945
by the British promoters follows formal organisation culture in
totality. It is facing lot of problems in delays in decisionmaking.
As the result it is not able to adapt to changing business
environment. The work force is also not motivated since they
cannot vent their grievances except through formal channels,
which involve red tape. Employee turnover is high. Its market
share is also declining due to changed circumstances and
business environment.
You are to advise the company with regard to change it should
bring about in its organisation structure to overcome the
problems faced by it. (NCERT)
Ans. Introduction of informal organisation
16. A company X limited manufacturing cosmetics, which
has enjoyed a pre-eminent position in business, has grown
in size. Its business was very good till 1991. But after that,
new liberalised environment has seen entry of many MNC’s
Unit 6 Staffing
 6.1 Staffing: Concept, Importance and Process
Concept of Staffing
Staffing function of management is concerned with
obtaining, utilising and maintaining a satisfactory and
satisfied work force.
 Staffing is the managerial function of filling and keeping
filled the positions in the organisation structure. This is
achieved by, first of all, identifying requirements of work
force, followed by recruitment, selection, placement,
promotion, appraisal and development of personnel, to fill
the roles designed into the organisation structure.
 In an existing enterprise, staffing is a continuous process
because new jobs may be created and some of the existing
employees may leave the organisation.
 The staffing function has assumed greater importance these
days because of rapid advancement of technology, increasing
size of organisation and complicated behaviour of human beings.
Importance of Staffing SHO CM
1. It helps in obtaining competent personnel for
various jobs.
2. It ensures higher performance by putting right
person on the right job.
3. It ensures continuous survival and growth of
business through succession planning for managers.
4. It ensures optimum utilisation of human resources
by indicating in advance surplus/shortage of personnel.
5. It improves job satisfaction and morale of
employees through training and promotion.
Staffing as a Part of HRM PTM HARD2
Human Resource Management (HRM) includes many
specialised activities and duties which the human resource
personnel must perform. These duties are:
1. Recruitment i.e. searching for qualified people.
2. Analyzing job, collecting information about jobs to
prepare job descriptions.
3. Developing compensation and incentives plans.
4. Training and development of employees for efficient
performance and career growth.
5. Maintaining labour relations and union management
relations.
6. Handling grievances and complaints.
7. Providing for social security and welfare of employees.
8. Defending the company in law suits and avoiding
legal complications.
Exam Handbook in Business Studies-XII – by Subhash Dey 25
in the sector. With the result the market share of X limited
has declined. The company had followed a very centralised
business model with Directors and divisional heads making
even minor decisions. Before 1991 this business model had
served the company very well as consumers had no choice.
But now the company is under pressure to reform.
What organisation structure changes should the company
bring about in order to retain its market share? (NCERT)
Ans. Decentralisation
Steps in Saffing Process ERSPTP2C
1. Estimation of manpower requirement. It
involves determining the number and type of employees
required. It would necessitate workload analysis and
workforce analysis.
 Workload Analysis would enable an assessment of
the number and types of human resources necessary for
the performance of various jobs.  Workforce Analysis
estimates the number and type of human resources available.
2. Recruitment is the process of searching for
prospective employees and stimulating them to apply
for jobs in the organisation.
Recruitment is a positive process because there is
no rejection. Aim/objective is to attract more and more
candidates for the vacant job.
Various activities involved with the process of
recruitment: (a) identification of the different sources of
labour supply, (b) assessment of their validity, (c) choosing the
most suitable source or sources, and (d) inviting applications
from the prospective candidates, for the vacancies.
3. Selection is the process of choosing from among
the pool of the prospective candidates developed at the
stage of recruitment.
Selection is a negative process because the candidates
are required to take a series of employment tests and
interviews. At every stage, many are eliminated and a few
move on to the next stage until the right type is found.
The selection process serves two important purposes:
(i) It ensures that the organisation gets the best among the
available, and (ii) It enhances the self-esteem and prestige
of those selected and conveys to them the seriousness
with which the things are done in the organisation.
4. Placement and Orientation:  Orientation is
introducing the selected employee to other employees and
familiarizing him with the rules and policies of the organization.
 Placement refers to the employee occupying the position or
post which the person has been selected.
5. Training and Development: Training is the process
of improving the skills and knowledge of employees to do the
current job.  It is to enable the employee to do the job
better.  It is a job-oriented process.
Development means to acquire skills and competence for
handling higher jobs in future.  It is to enable the overall
growth of the employee.  It is a career-oriented process.
In today’s highly sophisticated and complex society,
jobs have become more complex. So, the importance of
employee training has increased.
6. Performance Appraisal: Performance Appraisal
means evaluating an employee’s current and/or past
performance as against certain predetermined standards.
The performance appraisal process includes defining the
job, appraising performance, and providing feedback.
7. Promotion and Career Planning: Promotion
means shifting/placing an employee to a higher position
 6.2 Recruitment, Selection and Training
Factors influencing three main aspects of staffing —
Recruitment, Selection and Training: Supply and demand
of specific skills in the labour market, Unemployment rate
Labour market conditions, Legal and political considerations,
Company’s image and policy, Human resource planning cost,
Technological developments, General economic environment.
Internal sources of recruitment
1. Transfers: Transfers involve shifting of an employee
from one job to another, one department to another or
from on shift to another, without a substantive change
in the responsibilities and status of the employee. It
may lead to changes in duties and responsibilities,
working condition etc., but not necessarily salary.
2. Promotions: Promotions involve shifting an
employee to a higher position, carrying higher
responsibilities, facilities, status and pay. This practice
helps to improve the motivation and increases loyalty
and satisfaction level of employees.
Merits of internal source of recruitment
1. Employees are motivated as promotion at a higher
level may lead to a chain of promotions at lower levels
in the organisation.
2. Internal sources simplify the process of selection as
the candidates are already known to the organisation.
3. People recruited from within the organisation do not
need induction training as the employees are already
familiar with the organisation.
4. These sources help in adjustment of surplus staff in
those departments where there is shortage of staff.
5. Filling of jobs internally is economical as compared to
external sources of recruitment.
6. Transfer is a tool of training the employees to prepare
them for higher jobs.
Limitations of internal source of recruitment
1. It is an incomplete source. No organisation can fill all
its vacancies from internal sources (because the existing
staff may be insufficient or they may not fulfill the eligibility
criteria of the jobs to be filled.)
2. The spirit of competition among the employees may
be hampered because employees are likely to expect
automatic promotion by seniority.
3. It reduces the scope of fresh talent.
4. A new enterprise cannot use internal sources of
recruitment.
5. There is limited choice of candidates.
26 Exam Handbook in Business Studies-XII – by Subhash Dey
carrying higher responsibility, facilities, status and
pay. Career planning includes all activities associated with
promotion of employees.
8. Compensation refers to all forms of pay or rewards
to employees.
It may be in the form of direct financial payments like wages,
salaries, incentives, commissions and bonuses and indirect
payments like employer paid insurance and vacations.
Direct financial payments are of two types: (a) Time
based wage plan (b) Performance based wage plan
Factors which influence the design of any pay plan/
compensation plan: (i) Time devoted by the employee (ii)
Performance of the employee (iii) Legal factors (labour laws)
(iv) Labour union (v) Company policy (vi) ‘Equity’ principle.
External Sources of Recruitment
1. Casual callers: It is an external source of
recruitment in which a list of job seekers is prepared
and screened to fill the vacancies as they arise, from
the database of unsolicited applications kept in the
office. It reduces the cost of recruitment.
2. Labour Contractors: It is an external source of
recruitment in which a Labour Contractor maintains
close contacts with labourers and provides the required
number of unskilled workers at short notice. Labour
contractors who recruit the workers are employees of
the organisation who recruit the workers.
3. Direct recruitment: It is a source of external
recruitment in which a notice is placed on the notice-
board of the enterprise specifying the details of the
jobs available. Unskilled or semi-skilled job-seekers
assemble outside the premises of the organisation on
the specified date and selection is done on the spot.
Such workers are called badli workers; payment on
daily wage basis; suitable when there is rush of work or
some permanent workers are absent.
4. Advertisement: It is a source of external
recruitment in which vacancies are advertised in
newspapers or trade and professional journals to search
for qualified and experienced personnel. It gives the
management a wider range of candidates from which
to choose. Most of the senior positions in businesses are
filled by advertising by this method. Disadvantage: It may
bring in a flood of response, and many times from quite
unsuitable candidates.
5. Campus recruitment: Recruitment of technical,
professional and managerial jobs from educational
institutions (e.g. colleges and institutes of management and
technology).
6. Placement agencies and Management
consultants: Placement agencies compile bio-data of
a large number of candidates and recommend suitable
names to their clients. They charge fee for their services.
They are useful where extensive screening is required. They
can entice the needed top executives from other companies
by making the right offers.
Management consultancy firms help the organisations
to recruit technical, professional and managerial
personnel. They specialise in middle level and top level
executive placements.
7. Recommendations of employees: Applicants
introduced by present employees, or their friends and
relatives may prove to be a good source of recruitment.
Such applicants are likely to be good employees because their
background is sufficiently known.Atype of preliminary screening
takes place because the present employees know both the
company and the candidates and they would try to satisfy both.
8. Employment exchanges: Employment exchanges
help to match personnel demand and supply by serving
as link between job-seekers and employers. They
are suitable for unskilled and skilled operative jobs.
Disadvantage: The records of employment exchanges
are often not up-to-date and many of the candidates
referred by them may not be found suitable.
9. Web publishing: Internet is becoming a common
source of recruitment, e.g., www.naukri.com
Merits of external sources of recruitment
1. The management can attract qualified and trained
people to apply for vacant jobs in the organisation.
2. Management has a wider choice while selecting the
right candidates.
3. External sources bring fresh talent in the organisation.
4. Competitive spirit: If a company taps external sources,
the extisting staff will have to compete with the outsiders.
They will work harder to show better performance.
Limitations of external source of recruitment
1. It may lead to dissatisfaction among existing
employees as they may feel that their chances of
promotion are reduced.
2. It is a lengthy process as the vacancies have to be
notified and applications received before selection.
3. It is a costly process as a lot of money is spent on
advertisement and processing of applications.
Steps involved in the selection process changing environment.
PSER SMJ C
1. Preliminary Screening: Preliminary screening
helps the manager eliminate unqualified or unfit job
seekers based on the information supplied in the
application forms.
2. Selection Tests: An employment test is a
mechanism (either a paper and pencil test or an exercise)
that attempts to measure certain characteristics of
individuals, such as intelligence, aptitude, etc.
3. Employment Interview: Employment interview is a
formal, in-depth conversation conducted to evaluate the
applicant’s suitability for the job. The role of the interviewer
is to seek information and that of the interviewee is
to provide the same. Though, in present times, the
interviewee also seeks information from interviewer.
4. Reference and Background Checks for the purpose
of verifying the information and gaining additional
information. Previous employers, known persons,
teachers and university professors can act as references.
5. Selection Decision from among the candidates
who pass the tests, interviews and reference checks.
(The views of the concerned manager will be generally
considered in the final selection because it is he who is
responsible for the performance of the new employee.)
6. Medical Examination which includes a medical
fitness test which the candidate is required to undergo.
(The job offer is given to the candidate being declared fit after
the medical examination.)
7. Job offer: Job offer is made through a letter of
appointment, which contains the date by which the
appointed candidate must report on duty.
Exam Handbook in Business Studies-XII – by Subhash Dey 27
8. Contract of employment: After the job offer has
been made and candidate accepts the offer, certain
documents need to be executed by the employer and
the candidate–the attestation form and a contract of
employment (regarding terms and conditions of employment,
pay, hours of work, leave rules, etc.)
Types of Selection/Employment Tests PI2TA
1. Intelligence Test measures to level of intelligence
quotientofanindividual.Itisanindicatorofaperson’slearning
ability or the ability of make decisions and judgements.
2. Aptitude test is conducted to measure an
individual’s potential for learning new skills. It indicates
the person’s capacity to develop.
3. Personality Test provides clues to a person’s
emotions, reactions, maturity, value systems etc. These
tests probe the overall personality. Hence, these are
difficult to design and implement.
4. Trade test: These tests measure the existing/
actual skills possessed by the individual. They measure
the level of knowledge and proficiency in the area of
professions or technical training.
5. Interest tests are used to know the pattern of
interests or involvement of a person
Importance of Training
Benefits of training to the organisation
1. It avoids wastage of efforts and money as training is
systematic learning, better than hit and trial methods.
2. It enhances employee productivity both in terms of
quantity and quality leading to higher profits.
3. It equips the future manager to take over in an
emergency.
4. It reduces employee turnover as it increases
employee morale and reduces absenteeism.
5. It helps in obtaining effective response in a fast
Benefits to Employees
1. It may lead to promotion and career growth of the
employees due to improved skills and knowledge.
2. It helps employees to earn more due to improved
performance.
3. It reduces accidents as employees will be more
efficient to handle machines.
4. It increases satisfaction and morale of the employees.
Methods of Training
On-the-job training methods are used at the workplace. It
means ‘learning while doing’. E.g., Apprenticeship training.
Off-the-job training methods are used away from the work
place. It means ‘learning before doing’. E.g., Vestibule training.
1. Apprenticeship Training:  Apprenticeship
Training is a method of training in which the trainee is
kept under guidance of a master worker for a prescribed
period of time.  It is designed to acquire a higher level
of skill.  People who want to enter skilled trades e.g.
plumbers, electricians, iron workers, motor mechanic
etc. are often required to undergo such training.
2. Internship Training:  Internship Training is a joint
programme of training between education institutions
and business firms.  Besides carrying out regular
studies, the trainees also work in some factory or office
to acquire practical knowledge and skills.
3. Vestibule training:  This training is given with
the help of similar equipment and machine.  But the
training is conducted away from actual work place.  It
is used where the employees are required to handle
sophisticated machinery.
 Application, HOTS, Evaluation and Multi-Disciplinary Questions
1. Ms. Jayshree recently completed her Post Graduate
Diploma in Human Resource Management. A large steel
manufacturing company which employs 800 persons
appointed her as its human resource manager. Ms. Jayshree
has been given complete charge of the company’s Human
Resource Department. The company has an expansion plan
in hand which may require another 200 persons for various
types of additional requirements. (a) Identify the step of
one of the functions of management involved in the above
case. (b) Identify the concept which will help in deciding the
number of persons required. (c) Identify the next two steps in
the function of management identified in part (a) to fulfill the
additional requirements of 200 persons.
Ans. (a) Estimating Manpower Requirements. (b) Workload
Analysis (c) (i) Recruitment (ii) Selection
2. The IT major GIPRA is terminating the employment of its
senior managers, if after evaluating their performance against
pre-determined standards if it is found lacking. With this
disruption analysts say a large portion of the employees may
become irrelevant unless they learn new skills and apply the
knowledge to work on emerging technologies. GIPRA is ready
to facilitate employee learning, through its in-house centers.
A. Name the function of management performed by GIPRA to
maintain a satisfactory work force. B. Identify the two steps in
the process of the function of management discussed above. conducting different selection tests. Identify the next three
(CBSE SQP 2018)
Ans. A. Staffing. B. (a) Training and development (b)
Performance Appraisal
3. Aakanksha, Nikita and Parishma are the owners of a
handicraft unit in the urban area of Dibrugarh in Assam, which
is involved in the manufacturing and marketing of Sital Pati,
traditional mats and Jappi (the traditional headgear). They
decided to shift this manufacturing unit to a rural area with an
objective of reducing the cost and providing job opportunities
to the locals. They followed the functional structure in this
organisation with a view to increasing managerial and
operational efficiency. They assessed and analysed the type
and number of employees required, keeping in mind that they
had to encourage the women, and the people with special
needs belonging to the rural area. State the next three steps
that they will have to undertake, for obtaining a satisfied
workforce for their handicraft unit. (CBSE SQP 2016)
Ans. (i) Recruitment (ii) Selection (iii) Placement and
orientation
4. A company is manufacturing paper plates and bowls.
It produces 100000 plates and bowls per day. Due to local
festival there is a rush of work and some permanent workers
have gone to their villages. The company got an urgent order
of extra 50,000 plates and bowls per day.
Advise how the company will fulfill its order and which method
of recruitment would you suggest.
Ans. To fulfill the urgent order of extra 50000 plates and
bowls per day the company should follow the recruitment
step of the staffing process. The suitable method of
recruitment is ‘direct recruitment’ (an external source of
recruitment).
5. Mr. Murthy is the Human Resource Manager of Jai Hind
Hospital in Vellore. He has to appoint nurses for the hospital.
Since patients in the hospital are of different types, he wants
to find out the candidates’ maturity and emotions in dealing
with the patients. He also wants to know about the candidates’
28 Exam Handbook in Business Studies-XII – by Subhash Dey
ability to make decisions. Identify two types of tests that Mr.
Murthy can use to meet his requirements.
Ans. (i) Personality Test (ii) Intelligence Test
6. Blue Heavens Ltd. purchased a new hi-tech machine from
Germany for manufacturing high quality auto components in a
cost effective manner. But during the production process, the
manager observed that the quality of production was not as
per standard. On investigation it was found that there was lack
of knowledge amongst the employees of using these hi-tech
machines. So, frequent visit of engineers was required from
Germany. This resulted in high overhead charges.
Suggest what can be done to develop the skills and abilities of
employees for producing high quality products by using these
hi-tech machines. (CBSE SQP 2015)
Ans. Training of employees (Vestibule Training)
7. Nishant, the director of a garments company, is planning to
manufacture bags for the utilisation of waste material from one
of his garments units. He has decided that this manufacturing
unit will be set up in a rural area of Odisha where people
have very few job opportunities and labour is available at very
low rates. He has also thought of giving equal opportunities
of men and women. For this he wants four different heads
for Sales, Accounts, Purchase and Production. He gives an
advertisement and shortlists ten candidates per post after
steps for choosing the best candidate out of the candidates
short listed. (CBSE 2013)
Ans. (a) Employment interview (b) Reference and
background checks (c) Selection decision
8. After passing his secondary school examination, David left
the school at the age of 15 years and started getting training
under his father. His father, a renowned electrician, had worked
for many companies. He everyday started accompanying his
father on work and watched him carefully while working.
David was a good learner and learnt the techniques of work
quickly. Now his father started passing on the tricks of the
trade to David. With the passage of time David acquired a high
level skill and became a well-known electrician at Indore. Big
business-houses started calling him for electrical -wiring.
Name the method of training discussed in the above para.
Ans. Apprenticeship Training
9. There were two vacancies for the post of Assistant Manager
in ‘Gyan Electrics Private Ltd.’ ‘Parth’ the Human Resources
Manager identified one suitable candidate ‘Vishwas’ from
within the organization and promoted him to the post of
Assistant Manager. For another post, the Manager ‘Parth’ took
help of a placement agency and selected ‘Saleem’. After six
months, Parth observed that ‘Vishwas’s’ performance was
much better than ‘Saleem’s’ performance though ‘Vishwas’
was less qualified than ‘Saleem’. Hence, ‘Parth’ decided that in
future he will not make any appointment with the help of an
outside source. Explain any four reasons on the basis of which
‘Parth’ would have taken the above decision.
Ans. (Explain any four advantages of internal sources of
recruitment)
10. Identify the following aspects of staffing:
(a) Identifying and attracting prospective employees. (b)
Assessment, evaluation and final match. (c) Acquainting and
skill development.
Ans. (a) Recruitment (b) Selection (c) Training
11. “Some learning opportunities are designed and delivered
to improve skills and abilities of employees whereas some
others are designed to help in the growth of individuals in all
respects.” Identify the two concepts.
Ans. Training: ‘Some learning opportunities are designed and
delivered to improve skills and abilities of employees.’
Development: ‘Some others are designed to help in the
growth of individuals in all respects.’
12. What kind of tests will primarily be used while selecting
these people in an organisation?
(i) An interior decorator (ii) A computer operator (iii) A public
dealing officer (iv) A school teacher
Ans. (i) Interest test (ii) Trade test (iii) Personality test (iv)
Intelligence test
13. A public transport corporation has hired 2000 buses for
the different routes for the passengers of metropolitan city.
In order to fill vacancies, it advertised in the newspaper and
number of applicants applied for the same. The company has
to now undertake the process of selection to identify and select
the best. Explain the first six steps involved in the process. knowledge and skills along with regular studies.
(CBSE SQP 2019)
Unit 7 Directing
 7.1 Directing: Concept, Importance and Elements
Concept of Directing
Directing means instructing, guiding, counseling,
motivating and leading people in the organisation to
achieve its objectives.
Features/Characteristics of Directing
1. Directing initiates action. While other functions
prepare a setting for action, directing initiates action in
the organisation. Thus, directing is an executive function.
2. It takes place at every level of management, i.e.,
from top management to supervisory level. That is why it
takes place wherever superior subordinate relation exists.
3. It flows from top to bottom. Every manager
gives direction to his immediate subordinate and takes
instructions from his immediate boss.
4. It is a continuous process. It takes place
throughout the life of the organisation irrespective of
people occupying managerial positions.
Importance of Directing PI2CS
1. Directing helps to initiate action in the
organization towards attainment of desired objectives.
(For example, if a supervisor guides his subordinates and
clarifies their doubts in performing a task, it will help the worker
to achieve work targets given to him.)
2. Directing integrates employees’ efforts in the
organization in such a way that every individual effort
contributes to the organisational performance. (Thus, it
ensures that the individuals work for organisational goals.)
3. Directing guides employees to realise their
potential and capabilities by motivation and effective
leadership.
Exam Handbook in Business Studies-XII – by Subhash Dey 29
Ans. (Explain the first six steps involved in the selection
process of employees.)
14. Name the methods of recruitment in the following cases:
(i) A company gets applications on and off even without
declaring any vacancy. However, as and when the vacancy
arises, the company makes use of such applications.
(ii) Casual vacancies of unskilled or semi-skilled jobs when there
is a rush of order or when some permanent workers are absent.
(iii) Recruitment by which most of the senior positions of the
industry as well as commerce are filled.
Ans. (i) Casual callers (ii) Direct recruitment
(iii) Advertisement
15. Name the methods of training:
(i) The trainee learns under the guidance of a master worker.
(ii) Trainees learn on the equipment they will be using, but
training is conducted away from the actual work floor.
(iii) Trainees work in some factory or office to acquire practical
Ans. (i) Apprenticeship training (ii) Vestibule training
(iii) Internship training.
4. Directing facilitates introduction of needed
changes in the organisation by reducing resistance to
change and developing cooperation.
5. Directing brings stability and balance in
the organisation since it fosters cooperation and
commitment among the people.
Elements of Directing
1. Supervision means instructing, observing,
monitoring and guiding the efforts of the subordinates for
the achievement of work targets in the desired manner.
Supervision can also be understood as the function to
be performed by supervisor, a managerial position in the
organisation hierarchy at the operative level, i.e. immediately
above the worker. The functions and performance of the
supervisor are vital to any organisation because he is
directly related with workers whereas other mangers have
no direct touch with bottom level workers.
2. Motivation means stimulating people to action to
accomplish desired goals.
Motivation means inducement to act or move. It means the
process of making subordinates to act in a desired manner
to achieve certain organisational goals.
Motivation refers to the way in which urges, drives, desires,
aspirations, strivings or needs direct, control and explain the
behaviour of human beings.
Motivation is a complex force starting with keeping a person
at work in an organisation. Motivation is something which
moves the person to action and continues in the course of
action already initiated.
 Motivation is a process which begins with a physiological or
psychological need or deficiency which triggers behaviour or
a drive that is aimed at a goal or incentive.
Motive is an inner state that energises and directs behaviour
towards goals. It arises out of the needs of people.
Motivators are the techniques/incentives used to motivate
people in an organisation, e.g., bonus, promotion, etc.
Motivation process is based on Unsatisfied
human needs. An unsatisfied need of need
an individual creates tension which
Tension
stimulates his or her drives. These drives
generate a search behaviour to satisfy Drives
such need. If such need is satisfied,
the individual is relieved of tension. Search
behaviour
For example, the need for food causes
hunger on account of which a person
Satisfied
need
searches for food. After taking a meal, he Reduction
feals that he has regained energy. of tension
Motivation Process
Features of motivation:
(i) It is an internal feeling. (The urge, drives, desires,
aspirations, striving or needs of human being, which are
internal, influence human behaviour.)
(ii) It produces goal directed behaviour. (For example, if
the employee is interested in promotion, it helps to produce a
behaviour to improve performance.)
(iii) It can be positive or negative. (Positive motivation
provides positive rewards like increase in pay, promotion,
recognition etc. Negative motivation uses negative means like
punishment, stopping increments, threatening etc. which also
may induce a person to act in the desired way.)
(iv) It is a complex process because any type of
motivation may not have a uniform effect on all the
members. (The individuals are heterogeneous in their
expectations, perceptions and reactions.)
3. Leadership is the process of influencing people so
that they strive willingly and enthusiastically towards
the achievement of group goals.
 7.2 Supervision, Motivation, Leadership and Communication
Importance of Supervision/Functions of a
Supervisor PTM FUL
1. Supervisor maintains day-to-day contact and
maintains friendly relations with workers. (A good
supervisor acts as a guide, friend and philosopher to the
workers.)
2. Supervisor acts as a link between management
and workers. He conveys management policies and
ideas to the workers and brings workers’ problems to
the notice of management. (This role played by supervisor
helps to avoid misunderstandings and conflicts between
management and workers/ employees.)
3. Supervisor maintains group unity among workers
by resolving their conflicts.
4. Supervisor ensures performance of work
according to the targets set.
5. Supervisor provides on-the-job training to the
workers and employees. (A skilled and knowledgeable
supervisor can build efficient team of workers.)
6. Supervisor analyses the work performed and gives
feedback to the workers. (He suggests ways and
means of developing work skills.)
30 Exam Handbook in Business Studies-XII – by Subhash Dey
• Leadership is the art or process of influencing people so
that they will strive willingly and enthusiastically towards the
achievement of group goals. • Leadership is the activity of
influencing people to strive willingly for group objectives.
• Leadership is a set of interpersonal behaviours designed to
influence employees to cooperate in the achievement of objectives.
• Leadership involves the use of non-coercive influence to direct
and coordinate the activities of the members of an organised
group towards the accomplishment of group objectives.
Features of Leadership: (i) It is a continuous process.
(ii) It indicates ability of an individual to influence
others. (iii) It tries to bring change in the behaviour of
others. (iv) It is exercised to achieve common goals of
the organisation. (v) It indicates inter-personal relations
between leaders and followers.
4. Communication is the process of exchange of
ideas and information among people to create common
understanding.
• Communication is transfer of information from the sender
to the receiver with the information being understood by
the receiver. • Communication is the sum of all things one
person does when he wants to create understanding in
the mind of another. It involves systematic and continuous
process of telling, listening and understanding.
Elements in communication process:
(i) Sender–source of communication.
(ii) Message–information to be communicated.
(iii) Encoding–converting the message into communication
symbols such as words, pictures, gestures etc.
(iv) Media/channel–face to face, phone call, internet etc.
(v) Decoding–converting encoded symbols.
(vi) Receiver of the communication.
(vii) Feedback–actions of receiver indicating that he has
received and understood message.
(viii) Noise–obstruction or hindrance to communication, e.g.
a poor telephone connection, an inattentive receiver, faulty
decoding, etc.
7. Supervisor builds high morale amongst the
workers.
Maslow’s Need Hierarchy Theory of
Motivation
Maslow’s theory of motivation was based on human
needs. He felt that within every human being, there
exists a hierarchy of five needs. These are:
1. Basic Physiological Needs: Hunger, thirst, shelter
and sleep are some examples of these needs. In the
organisational context, basic salary helps to satisfy
these needs.
2. Safety/Security Needs: These needs provide
security and protection from physical and emotional
harm. Examples: job security, stability of income,
Pension plans etc.,
3. Affiliation/Belonging Needs: These needs refer
to affection, sense of belongingness, cordial relations
with colleagues, acceptance and friendship.
4. Esteem Needs: These include factors such as self-
respect, autonomy status, recognition and attention,
job titles, etc.
5. Self Actualization Needs: It is the highest level of
need in the hierarchy. It refers to the drive to become
what one is capable of becoming. These needs include
growth, self-fulfillment and achievement of goals.
Individual Example
Self-fulfillment
Self
actualisation
Status
needs
Esteem needs
Friendship
Affiliation/
Belongingness needs
Stability of Income
Safety/Security needs
Hunger Basic Physiological needs
Maslow’s Need Hierarchy Theory of Motivation
Assumptions: (i) People’s behaviour is based on
their needs. Satisfaction of such needs influences their
behaviour. (ii) People’s needs are in hierarchical order,
starting from basic needs to higher level needs. (iii) A
satisfied need no longer can motivate a person; only
next higher level need can motivate him. (iv) A person
moves to the next higher level need only when the
lower need is satisfied.
Importance: Maslow’s Theory focuses on the needs
as the basis for motivation. It helps managers to realise
that need level of employee should be identified to
provide motivation to them.
Financial incentives to motivate employees committees, work committees, canteen committees, etc.
P4C RB
Financial incentives are measurable in terms of money.
To satisfy basic physiological needs of lower level
employees, financial incentives are important.
1. Productivity linked wage incentive involves
linking payment of wages of employees to the increase
in their productivity at individual or group level.
2. Bonus involves offering an amount of funds over
and above the wages/ salary to the employees.
3. Profit Sharing involves providing a share in the
profits of the organization to employees. (This motivates
them to improve their performance and contributes to increase
in profits of the organisation.)
4. Co-partnership/Stock option is an incentive
under which the employees are offered company
shares at a set price which is lower than market price.
(The allotment of shares at lower price creates a feeling of
ownership to the employees and makes them to contribute for
the growth of the organisation.)
5. Retirement Benefits include benefits such as
provident fund, pension and gratuity that provide
financial security to employees after their retirement.
(This acts as an incentive when they are in service in the
organisation.)
6. Perquisites include incentives such as car allowance,
housing, medical aid and education to the children etc.,
which are offered over and above the salary.
7. Pay and allowances – salary, dearness allowance,
etc. Salary is the basic financial incentive.
Exam Handbook in Business Studies-XII – by Subhash Dey 31
Non-financial Incentives to Motivate
Employees CSO J2P - ER
All the needs of individuals are not satisfied by money
alone. Psychological, social and emotional factors also
Organisational Example
play important role in providing motivation. Nonfinancial
incentives mainly focus on these needs. Some times,
Achievement of goals monetary aspect may be involved in non-financial incentives
as well. However, the emphasis is to provide psychological
and emotional satisfaction rather than money driven
Job title
satisfaction. For example, if an individual gets promotion
in the organisation, it satisfies him psychologically more as
Cordial relations with he gets a feeling of elevation, increase in status, increase
colleagues
in authority, challenge in the job etc. Though promotion
involves payment of extra money, non-monetary aspects
Pension plan over-ride monetary aspects.
1. Job enrichment is concerned with designing jobs
Basic Salary that include greater variety of work content and provide
the opportunity for personal growth and a meaningful
work experience.
2. Employee recognition which means
acknowledgement with a show of appreciation. (e.g.,
rewarding an employee for giving valuable suggestions,
congratulating and giving award for good performance,
Displaying on the notice board or in the company newsletter
about the achievement of employee, distributing mementos,
complimentaries like T-shirts in recognition of employee
services, etc.) When such appreciation is given to the
work performed by employees, they feel motivated to
perform at higher level.
3. Employee participation which means involving
employees in decision making of issues related to them,
for example, making them a part of joint management
4. Employee empowerment which means giving
more autonomy and powers to subordinates. (It motivates
them to use their skills and talents in the job performance.)
5. Job security which refers to providing stability to the
employees about future income and work so that they do
not feel worried on these aspects and work with greater
zeal. (Negative aspect of job security: When people feel that
they are not likely to lose their jobs, they may become complacent.)
6. Career advancement opportunity/Promotion
means providing an opportunity to employees to
improve their skills to be promoted to higher level of
jobs. Appropriate skill development programmes and
sound promotion policy provide career advancement
opportunity to the employees.
7. Status: Status given to a manager is indicated by the
authority, responsibility, rewards, recognition, etc. given
to him. Status given to a job satisfies psychological,
social and esteem needs of an individual.
8. Organisational climate: It indicates the
characteristics which influence the behaviour of
individuals in the organisation such as individual
autonomy, reward orientation, consideration to
employees, risk taking, etc.
Leadership Styles
1. Autocratic or Authoritarian leadership:
Autocratic style of leadership is one in which the leader
gives orders and insists that they are obeyed. He does
not give the subordinates any freedom to influence
his decision. He determines the policies for the group
without consulting them. He does not give information
about future plans but simply tells the group what
immediate steps they must take.  There is one way
communication only.  This leader is dogmatic i.e., does
not wish to be contradicted.  His following is based on
the assumption that reward or punishment both can be
given depending upon the result.  It is like “bossing
people around.” It is called Boss-Centred Leadership.
Benefits of Autocratic or Authoritarian leader: (a) This
leadership style is effective in getting productivity in
many situations. (b) Quick decision-making is also
facilitated by this style of leadership.
2. Democratic or Participative leadership:
Democratic style of leadership is one in which the
leader develops action plans and makes decisions in
consultation with his subordinates. A democratic leader
favours decision making by the group. This improves
the attitude of the employees towards their jobs and the
organization thereby increasing their morale. Using this
style is of mutual benefit – it allows them (subordinates)
to become part of the team and helps leaders (seniors)
to make better decisions.  The leader respects the
other’s opinion.  It is called Group-Centred Leadership
3. Laissez Faire or Free –rein leadership: ‘Laissez
Faire’ style of leadership is one in which the leader gives
complete freedom to the subordinates and depends
largely upon the group to establish its own goals and
work out its own problems.  The group members
work on their own tasks resolving issues themselves.
 Such a leader does not believe in the use of power
unless it is absolutely essential.  The leader is there
only to support them and supply them the required
information to complete the assigned task.  It is called
Subordinate-Centred Leadership.
C
A
B C
B A D the loss of goodwill, e.g., instruction of a boss to his
D E
B C D E
Autocratic/Boss-Centred Democratic/Group-Centred
Leadership Leadership
A is the leader and B, A is the leader and B,
C, D are subordinates. C, D, E are subordinates.
A language, e.g., tariff, quotas, etc. Therefore, workers
Free-rein/Subordinate-
Centred Leadership
A is the leader and B, C,
D, E are subordinates.
needs of employees to exchange their views, which cannot
be done through formal channels. •  Informal system of
communication is generally referred to as the ‘grapevine’
because it spreads throughout the organisation with its
branches going out in all directions in utter disregard to
the levels of authority.
Two positive aspects of informal communication: (i) It
carries information rapidly and therefore may be useful
to the manager at times. (ii) It is used by the manager
to transmit information so as to know the reaction of
his/ her subordinates.
Two negative aspects of informal communication: (i) The
grapevine/informal communication spreads rapidly and
sometimes gets distorted. (ii) It may lead to generate
rumours, or may hamper work environment.
Barriers to Communication
A. Semantic Barriers   BBS TUF
These are related to process of encoding and decoding
of message into words or impressions, use of wrong
words, faulty translations, different interpretations, etc.
1. Badly expressed message: Badly expressed
message in which the intended meaning may not be
conveyed on account of inadequate vocabulary, usage
of wrong words, omission of needed words etc.
2. Symbols with different meanings: A word may
have several meanings. For example, What is the value
of this ring? I value our friendship. What is the value of
learning computer skills?
Wrong perception by the receiver about the word ‘value’
may lead to communication problems.
3. Faulty translations: If the communication drafted
in one language (say, English) is not properly translated
in a language understandable to workers (say, Hindi),
communication becomes ineffective.
4. Technical jargon: Specialists use technical
may not understand them.
5. Unclarified assumptions create confusion and
subordinate “Take care of our foreigner guest” may
mean care of transport, accommodation and food of
the guest, but the subordinate may interpret that guest
should be taken to hotel with care.
6. Body language and gesture decoding becomes
a barrier when there is no match between what is said

and what is expressed in body movements.

Formal and Informal Communication
Formal Communication flows through official
channels designed in the organisation chart. Formal
communication may take place from
(i) a superior to subordinate (downward communication,
e.g. ordering subordinates to complete an assigned work),
(ii) a subordinate to superior (upward communication,
e.g. submission of progress report) or
(iii) among same level of managers or employees
(horizontal communication, e.g. the production manager
of a company contacts the marketing manager to
discuss about schedule of product delivery, product
design, quality, etc.).
Formal communications may be oral or written but generally
recorded and filed in the office.
Informal Communication takes place without
following the formal lines of communication, e.g.
workers chit chating in a canteen about the behaviour
of the superior. • The informal communication arises out of
B. Psychological Barriers DPL2
These are related to the state of mind of both sender
and receiver of communication, e.g. a worried sender
or an angry receiver.
1. Lack of attention: Non-listening of message due to
the preoccupied mind. (For example, an employee explains
about his problems to the boss who is pre-occupied with an
important file before him. The boss does not listen attentively
and the employee is disappointed.)
2.  Distrust: The sender and the receiver of
communication do not believe each other; they can not
understand each others message.
3. Premature evaluation: Evaluating the meaning
of message before the sender completes; due to
pre-conceived notions or prejudices against the
communication.
4.  Loss by transmission and poor retention:
Successive transmissions of oral message results in loss

32 Exam Handbook in Business Studies-XII – by Subhash Dey

of information, or transmission of inaccurate information.
Poor retention of the information if not attentive or
interested.
C. Personal Barriers FULL
These are related to the personal factors of both sender
and receiver of communication.
1. Because of fear of challenge to authority, a
superior may withhold or suppress communication.
2. Because of lack of confidence of superior on
his subordinates, he may not seek their advice or
opinions.
3. Unwillingness to communicate by a subordinate
to his superior if it may adversely affect his interests.
4. Lack of incentives, i.e. no reward or appreciation
for a good suggestion; the subordinates may not be
willing to offer useful suggestions.
D. Organisational Barriers CO2RS
Organisational barrier which arises from organisational
structure, authority relationships, rules and regulations etc.
1. Rigid rules and regulations may be a hurdle to
communication; communications through scalar chain
may result in delays.
2. Complexity in organisation structure i.e. large
number of levels of management, so communication
gets delayed and distorted as number of filtering points
are more.
3. Lack of organisational facilities like frequent
meetings, suggestion box, complaint box, social and
Application, HOTS, Evaluation and Multi-Disciplinary Questions
1. Is directing required at planning stage? Give reason to
support your answer.
Ans. No, directing is not required at planning stage
since it is an executive function. It initiates action in the
organisation.
2. Identify the elements of directing mentioned below: support to the workers.’
(i) Mr. Pramod Aggarwal, a manager explains a worker about
operations to be carried out by him on a hi-tech machine.
(ii) Mr. Rajinder Tyagi, a mining engineer explains about safety
precautions to be followed while working in a coal mine.
(iii) Mr. Anil Sarraf, a managing director declares share in
the profits to the managers for their contribution to enhance
profits of the company.
(iv) Mr. Rajiv Asopa, a manager inspires his employees by
playing a lead role in performing a work.
Ans. (i) Supervision (ii) Communication (iii) Motivation
(iv) Leadership
3. M/s Beta Ltd. deals in consumer goods. It employs 100
workers and 10 operative managers who give guidance and
support to the workers while operating the machinery. The
company has a policy of granting leave as per the requirement
of the workers. Workers are generally granted leave on
festivals and special occasions. Recently on Puja festival, it
received a big order. Workers are keen to take Puja holidays
while management is pressing hard for overtime. This matter
was placed before the Personnel Manager who called the
meeting of operative managers and workers to inform them
about the changes in the incentive plan which states payment
of double wages for working overtime and triple wages for
working on holidays. Workers without any pressure volun-
tarily took limited holidays and were able to increase their
earning by working overtime and on holidays. During Board
of Directors’ meeting, Personnel Manager was asked to update
the management for achieving higher output, meeting timely
Exam Handbook in Business Studies-XII – by Subhash Dey 33
cultural gathering, transparency in operations etc. will
not encourage free flow of communication.
4. Organisational policy not supportive to free
flow of communication; may hamper effectiveness of
communications, e.g. highly centralised pattern (i.e.,
concentration of decision-making authority by the top
management).
5. Status conscious manager may not allow his
subordinates to express their feelings freely.
Measures to improve communication
effectiveness/Measures to overcome
communication barriers
1. Clarify the ideas before communication, i.e. purpose
of the message should be clear to the sender himself
before conveying to the receivers.
2. Communicate according to the needs of the receiver,
education and understanding levels of subordinates,
avoiding technical jargon.
3. Be aware of the language, tone and content of the
message to make it understandable to the receiver. The
language should not offend the sentiments of listeners.
4. Ensure proper feedback to improve the communication
process and make it more responsive. Communication
is complete only when the sender gets a feedback.
5. Follow up communications and review the instructions
given to subordinates.
6. Be a good listener. Manager should be an attentive
listener. Patient and attentive listening solves half of the
problems.
supplies without any confrontation with workers. Personnel
Manager replied, “I just used a carrot with no sticks approach”.
By quoting the lines from above paragraph identify any two
elements of directing. (CBSE SQP 2017)
Ans. Supervision ‘it employs 10 operating managers …….
Motivation ‘to pay double wages for working overtime and
triple wages for working on holidays.’
4. Name the concept of management which stimulates people
to take up work voluntarily.
Ans. Motivation
5. Name the element of directing function under which:
(i) t he superiors oversee the activities of their subordinates.
(ii) the superiors assure the subordinates that their needs will
be taken care of.
(iii) the superior attempts to influence the behaviour of people
at work towards the realisation of specified goals.
(iv) the superiors share information with the subordinates in
order to reach common understanding.
Ans. (i) Supervision (ii) Motivation (iii) Leadership
(iv) Communication.
6. N ame the element of directing which can be understood
as the process of guiding the efforts of employees and other
resources to accomplish the desired objectives.
Ans. Supervision
7. Name the element of directing in which a manager maintains
good inter-personal relations with his subordinates and motivate
them to contribute to achieve organisational objectives.
Ans. Leadership
8. S tate the element of directing which helps in implementing
the principle of ‘scalar chain’.
Ans. Communication
9. A t which level of management directing takes place?
Ans. Directing takes place at every level of management,
i.e., from top management to supervisory level.
10. Mrs. Rajlaxmi is working as the Human Resource
Consultant in a firm manufacturing cosmetic, which is facing a
problem of high employee turnover. The CEO of the company
has invited suggestions from her for retaining the talented
employees and reducing the employee turnover. Mrs. Rajlaxmi
recommends that the good employees be rewarded in a way
that it creates a feeling of ownership among the employees
and at the same time makes them contribute towards the
growth of the organization.
Identify the incentive and its type, which has been suggested
by Mrs. Rajlaxmi to the CEO of the company. (CBSE SQP 2016)
Ans. Financial incentive; Co -Partnership/ Stock Option
11. In an organisation all the employees take things easy and
are free to approach anyone for minor queries and problems.
This has resulted in everyone talking to each other and thus
resulting in inefficiency in the office. It has also resulted in loss
of secrecy and confidential information being leaked out.
(a) Identify the type of communication discussed above.
(b) State any two negative aspects of the type of communication
identified in part (a).
(c) What system of communication do you think the manager
should adopt to improve communication?
Ans. (a) Informal communication
(b) Give two negative aspects of informal communication.
(c) Formal communication system.
12. Rahim was working in an enterprise on daily wages basis.
It was difficult for him to fulfill the basic needs of his family. His
daughter fell ill. He had no money for his daughter’s treatment.
To meet the expenses of her treatment, he participated in
a cycle race and won the prize money. The cycle company
offered him a permanent pensionable job which he happily
accepted. Ans. Employee recognition programmes
(i) By quoting the lines from the above para identify the needs
of Rahim that are satisfied by the offer of the cycle company.
(ii) Also, identify two other needs of Rahim followed by above
that are still to be satisfied. (CBSE 2014)
Ans. (i) Physiological and Safety/Security needs. ‘The cycle
company offered him a permanent pensionable job’.
(ii) (a) Affiliation/Belongingness needs (b) Esteem needs
13. Sadaf is the Chief Executive Officer of a reputed company.
She introduced appropriate skill development programmes and
a sound promotion policy for the employees of her company.
to motivate and retain the best talent in the company, she
designed the jobs of the managers to include greater variety of
work content. Identify the two incentives introduced by Sadaf
to motivate the employees of her company. (CBSE 2017)
Ans. (i) Career Advancement Opportunity (ii) Job
Enrichment
14. L akhan, an expert in the area of Financial Management,
sent an e-mail to his subordinate Thomas about a new project
for a client in France. Though, the mail was in English, a
language known to Thomas, he was not able to understand the
actual meaning of many words used in the mail. He was also
not a specialist in the field of Financial Management. Not only
this, some portions of the mail were translated from French to
English in such a manner that many mistakes crept in, causing
different meaning to the message. (a) Identify two specific
barriers to communication in Lakhan’s e-mail. (b) State any
two measures which can be taken by Lakhan to overcome
the barriers identified in part (a)above to improve in future the
effectiveness of his communication.
Ans. Two specific barriers to communication in Lakhan’s
e-mail were: (i) Faulty translations (ii) Technical jargon
Measures to overcome communication barriers:
(i) Lakhan should communicate according to the needs,
education and understanding levels of subordinates. (ii)  He
should be aware of languages, tone and content of the
message to make it understandable to the receiver.
15. In an organization, employees always feel that they are
under enormous unnecessary stress, as the manager does
not provide any information about future plans but simply
instructs them what to do. He also does not listen to any of the
suggestions given by the subordinates.
34 Exam Handbook in Business Studies-XII – by Subhash Dey
I dentify the type of leadership style followed by the manager in
the above situation. (CBSE SQP 2018-19)
Ans. Autocratic style of leadership
16. Kavita recently joined as the human resource director of
Arjun Vidyamandir School, a senior secondary educational
institute. She observed that the school had an experienced
medical team on its payroll. They regularly offered useful
suggestions which were neither appreciated nor rewarded
by the school authorities. Instead the school outsourced the
task of maintenance of health records of the students and
paid them a good compensation for their services. Because of
this, the existing medical team felt disheartened and stopped
giving useful suggestions. (a) Identify the communication
barrier discussed above. (b) Identify the category of this
communication barrier. (CBSE SQP 2018-19)
Ans. (i) Lack of proper incentives. (ii) Personal barrier.
17. Ayushi worked in a call center. Her team manager did
not wish to be contradicted and gave rewards depending on
the result. State one benefit of the style of leadership being
followed by Ayushi’s team manager. (CBSE SQP 2018)
Ans. This leadership style is effective in getting
productivity in many situations.
18. Sanjana Ltd. assured their employees that in spite of
recession no worker will be retrenched from the job. Name the
type of incentive offered to the employees. (CBSE 2010)
Ans. Job security (Non-financial incentive)
19. Rajat a Sales Manager, achieved his sales target one
month in advance. This achievement was displayed on
the notice board and the CEO of the Company awarded a
certificate for the best performance to him. Name the incentive
provided to Rajat.
20. Prachi is working in an MNC. She has been given an option
to buy the shares of the company at an amount less than the
market price because of her performance as an incentive.
Identify which incentive is being given to her.
Ans. Co-partnership/Stock option
21. Mohan and Sohan are friends working in Surya Ltd. as
Production Manager and Sales Manager respectively. In an
interdepartmental meeting, Sohan informed Mohan about a
change in the marketing policy of the company. Identify the
type of communication used in the above example.
Ans. Formal Communication
22. Radha and Meera are working in the same organisation
but in different departments. One day at lunch time Meera
informs Radha that due to computerisation many people are
going to be retrenched soon from the organisation. Which type
of communication is this?
Ans. Informal Communication
23. Rakesh is working under his superior Neeraj. He always
communicates useful ideas and suggestions to his superior
regarding reduction of cost, improvement in the product, etc.
Neeraj implements his suggestions and has always found
favourable results, but he never appreciates Rakesh for his
suggestions. Now Rakesh decided not to communicate any
suggestion or idea to Neeraj. Identify the factor which acts as
a communication barrier.
Ans. Lack of proper incentives (Personal Barriers to
Communication)
24. ‘KPM Ltd.’ is manufacturing breads and biscuits for many
years. It has approximately 150 employees and most of
them are not happy with the working environment. Because
of this, the labour turnover rate is very high. Therefore
the company appoints a new Human Resource Manager,
Naveen, to analyse the situation. Naveen finds that there is
no free flow of communication and there is no suggestion box
for the employees to voice their suggestions or grievances.
The company rarely organises a social or cultural gathering,
the employees just come, finish their work and leave the
organisation.
Identify the communication barrier discussed above and the
category of this communication barrier.
Ans. Organisational Facilities (Organisation Barrier)
Unit 8 Controlling
Controlling: Meaning and Process
Controlling means the measurement of accomplishment
against the standards and the correction of deviations to
assure attainment of objectives according to plans.
Steps in Controlling Process
1. Setting performance standards. Standards are
the criteria against which actual performance would be
measured. Standards can be set in both quantitative
terms (cost to be incurred, revenue to be earned, product
units to be produced and sold, time to be spent in performing
a task) as well as qualitative terms (improving goodwill and
motivation level of employees).
2. Measurement of actual performance. Actual
performance is measured in an objective and
reliable manner. • There are several techniques for
measurement of performance—personal observation,
sample checking, performance reports, etc. • As far as
possible, performance should be measured in the same
units in which standards are set as this would make
their comparison easier.
3. Comparing actual performance with standards.
Actual performance is compared with the standards
to find out the deviation between actual and desired
results. • Comparison becomes easier when standards
are set in quantitative terms.
4. Analysing deviations. Some deviation in
performance can be expected in all activities. It is,
therefore, important to determine the acceptable
range of deviations (Management by Exception). Also,
deviations in key areas of business need to be attended
more urgently as compared to deviations in certain
insignificant areas (Critical Point Control). After identifying
significant deviations in key result areas, these
deviations need to be analysed for their causes.
Causes of deviations may be: (i) Defective materials
(ii)  Defective machinery (iii) Obsolete machinery (iv)
Defective process (v) Defective physical conditions of work.
  Management by Exception helps in the controlling
process by identifying only significant deviations which
go beyond the permissible limit and bringing them
to the notice of the management. It is based on the
belief that an attempt to control everything results in
controlling nothing. (For example, if the plans lay down
2 per cent increase in labour cost as an acceptable range
of deviation, then only increase in labour cost beyond 2 per
cent (say, 5 per cent) should be brought to the notice of the
management. It saves the time and efforts of managers as
they deal with only significant deviations.)
Advantages of Management by Exception (MBE): (i) The
routine problems are left to the subordinates. Management by
exception, thus, facilitates delegation of authority and increases
morale of the employees. (ii) It saves the time and efforts of
managers as they deal with only significant deviations.
Exam Handbook in Business Studies-XII – by Subhash Dey 35
 Critical Point Control helps in controlling process
by focusing on key result areas which are critical to
the success of an organisation. It emphasizes that
deviations in the key result areas need to be attended
more urgently as compared to deviations in certain
insignificant areas since it is neither economical nor
easy to keep a check on each and every activity of the
organisation. (For example, in a manufacturing organization,
an increase of 5 percent in the labour cost may be more
troublesome than a 15 percent increase in postal charges. It
focuses managerial attention on important areas. Thus, there
is better utilisation of managerial talent.)
Advantages of Critical Point Control (CPC): (i) It focuses
managerial attention on important areas. Thus, there is
better utilisation of managerial talent. (ii) It identifies critical
problems which need timely action to keep the organisation
in right track.
5. Taking corrective action. Corrective action is
taken if deviations go beyond the acceptable limits.
• However, no corrective action is required when
the deviations are within acceptable limits. • If the
deviations cannot be corrected through managerial
action, the standards may have to be revised.
Corrective actions include: (i) Change the quality
specification for the materials used (ii) Repair the existing
machine or replace the machine if it cannot be repaired
(iii) Undertake technological upgradation of machinery
(iv) Modify the existing process (v) Improve the physical
conditions of work.
Importance of Controlling Function of
Management   SR G OM
1. Controlling helps in accomplishing organisational
goals by bringing to light, deviations if any and indicating
corrective action. (Thus, it guides the organisation and keeps it
on the right track so that organisational goals might be achieved.)
2. Controlling helps in making efficient use of
resources by ensuring that each activity is performed
in accordance with pre-determined standards. (By
exercising control, a manager seeks to reduce wastage and
spoilage of resources. This ensures that resources are used in
the most effective and efficient manner.)
3. Controlling ensures order and discipline: It helps to
minimise dishonest behaviour on the part of the employees
by keeping a close check on their activities. (For example,
a company may track dishonest employees by using computer
monitoring (through CCTV) as a part of their control system.)
4. Controlling improves employee motivation as
the employees know well in advance the standards of
performance on the basis of which they will be appraised.
5. Controlling helps in judging accuracy of standards
in the light of changes taking place in the organisation
and in the environment.
6. Controlling facilitates coordination in action as each
employee and department is governed by pre-determined
standards which are well coordinated with one another.
Relationship between Planing and
Controlling
1. Controlling takes place on the basis of standards
developed by planning because if the standards are
not set in advance, managers have nothing to control.
(In other words, when there is no plan, there is no basis of
controlling. Controlling is blind without planning.)
2. Planning without controlling is meaningless
because once a plan becomes operational, controlling
ensures that events conform to the plans.
3. Planning is prescriptive whereas controlling
is evaluative because planning prescribes an
appropriate course of action for achieving objectives.
while controlling evaluates whether decisions have
been translated into desired actions.
4. Planning and controlling both are forward
looking because while plans are prepared for the future,
controlling seeks to improve the future performance on
the basis of the past experience.
Application, HOTS, Evaluation and Multi-Disciplinary Questions
1. D&D Ltd. is a large manufacturing unit. Recently, the
company has conducted the ‘time’ and ‘motion’ studies and
concluded that on an average a worker could produce 120
units per day. However, it has been noticed that average daily
production of a worker is in the range of 80-90 units. Ans. (a) Controlling–“Comparing actual performance with
Which function of management is needed to ensure that the
actual performance is in accordance with the performance as
per ‘time’ and ‘motion’ studies?
Ans. Controlling
2. Babita Ltd. is engaged in manufacturing machine
components. The target production is 250 units per day per
worker. The company had been successfully attaining this
target until two months ago. Over the last two months it has
been observed that daily production varies between 200–210
units per worker. (a) Name the function of management and
identify the step in the process of this function which helped
36 Exam Handbook in Business Studies-XII – by Subhash Dey
5. Planning and controlling are both looking back
because, while planning is guided by past experiences,
controlling compares the actual performance with the
standards, set in the past.
Nature/Features of Controlling
1. Controlling is a goal-oriented function as it
ensures that an organisation’s resources are being
used effectively and efficiently for the achievement of
predetermined goals.
2. Controlling is a pervasive function as it is
required in all types of organisations and at all levels of
management—top, middle and lower.
3. Controlling is a continuous function as it
involves a constant review of actual performance to
ensure that activities in the organisation are performed
as per the plans. Controlling is not the last function of
management. It brings back the management cycle back to
the planning function. It helps in formulation of future plans in
the light of the problems identified in the past and, thus, helps
in better planning in the future periods.
4. Controlling is both looking back and forward
looking.
in finding out that the actual production of a worker is less
than the set target. (b) To complete the process of the function
identified and to ensure the performance as per set targets,
what further steps a manager has to take.
standards.” (b) (i) Analysing deviations (ii) Taking corrective action
3. Rudrakshi Ltd. is engaged in manufacturing high end luxury
pens. The target production is 700 units daily. The company
had been successfully attaining this target until three months
ago. Over the last few month, it has been observed that daily
productions varies between 600-650 units. (i) Identify the
function of management, which has been highlighted in the
above context. (ii) Discuss the first four steps involved in the
process of the function identified above. (CBSE SQP 2018-19)
Ans. (i) Controlling (ii) Explain the first four steps involved in
the controlling process
 30 Marks

Part-B
Business Finance and
Marketing
Unit Name of the Unit Marks
9. Financial Management
15
10. Financial Markets
11. Marketing Management
15
12. Consumer Protection
Total 30

CBSE Syllabus
Unit 9 : Financial Management
• Concept, Role and Objectives of Financial Management
• Financial Decisions—Investment, Financing and Dividend;
Meaning and Factors affecting
• Financial Planning—Concept and Importance
• Capital Structure—Concept
• Fixed and Working Capital—Concept and Factors affecting
their requirements
Unit 10: Financial Markets
• Financial Markets: Concept, Functions and Types
• Money Market and its Instruments
• Capital Market and its Types (Primary and Secondary),
methods of floatation in the primary market
• Stock Exchange—Functions and Trading Procedure.
• Securities and Exchange Board of India (SEBI)— Objectives
and Functions
Unit 11: Marketing Management
• Selling and Marketing—Concept
• Marketing management—Concept
• Marketing functions
• Marketing Management Philosophies
• Marketing Mix– Concept and Elements
• Product: Branding, Labelling and Packaging – Concept
• Price: Concept, Factors determining price
• Physical distribution: Concept and Components, Channels of
Distribution—Types, Choice of Channels
• Promotion: Concept and Elements
Advertising—concept, role, objections against advertising
Personal Selling—concept and qualities of a good salesman
Sales promotion—concept and techniques
Public Relations—concept and role
Unit 12: Consumer Protection
• Concept and Importance of Consumer Protection
• Consumer Protection Act, 1986:
Meaning of Consumer
Rights and Responsibilities of Consumers
Who can file a complaint and against whom?
Redressal machinery
Remedies available
• Consumer Awareness—Role of consumer organisations and
NGOs.

Exam Handbook in Business Studies-XII – by Subhash Dey 37

Unit 9 Financial Management
 9.1 Financial Management and Financial Planning
Concept and Decisions of Financial
Management
Financial Management refers to management of flow of
funds and involves decisions relating to procurement of
funds , investment of funds and distribution of earnings
to the owners.
Financial Decisions
1. Investment Decision: Investment decision
involves deciding about how the funds are invested in
different assets so that they are able to earn the highest
possible return for their investors. Investment decision
can be long-term or short-term.
Long-term investment decision/Capital Budgeting
Decision involves allocation of firm’s capital to
different projects or assets with long-term implications
for the business.
Examples of capital budgeting decisions: • Acquiring a
new fixed asset such as land, building, plant and machinery,
etc. • Opening a new branch • Expenditure on acquisition,
expansion, modernisation and their replacement • Launching
a new product line • Investing in advanced techniques of
production • Major expenditures on advertising campaign or
research and development programme
Reasons that make capital budgeting decision to be
made carefully: (a) These decisions have a bearing on the
long term growth. (b) These decisions result in a substantial
portion of capital funds being blocked in long-term project.
(c) These decisions influence the overall business risk
complexion of the firm. (d) These decisions once taken, are
not reversible without incurring heavy losses.
Short-term investment decisions (also called
working capital decisions) are concerned with
the decisions about the levels of cash, inventory and
receivables.
These decisions affect the day-to-day working of a business.
Efficient cash management, inventory management and
receivables management are essential ingredients of sound
working capital management.
2. Financing Decision: It relates to the quantum of
finance to be raised from various long term sources—
Shareholders’ funds (or Equity) and Borrowed funds
(or Debt). Financing decision determines the overall cost of
capital and the financial risk of the enterprise.
3. Dividend Decision: It relates to how much of the
profit earned by the company (after paying tax) is to
be distributed to the shareholders as dividend and
how much of it should be retained in the business. The
decision regarding dividend should be taken keeping in view
the overall objective of maximising shareholder’s wealth.
Objectives of Financial Management
The primary objective of financial management is
38 Exam Handbook in Business Studies-XII – by Subhash Dey
to maximise shareholders’ wealth, which means to
maximise the current market price of equity shares of the
company. The market price of equity shares increases,
if the benefit from a financial decision exceeds the cost
involved, so that some value addition takes place. For
example, when a decision is taken about investment in
a new machine, the aim of financial management is to
ensure that benefits from the investment exceed the
cost so that some value addition takes place.
Maximising shareholders’ wealth is only possible by:
(i) Ensuring availability of sufficient funds at reasonable
cost. (ii) Ensuring effective utilisation of funds.
(iii)  Ensuring safety of funds procured by creating
reserves, reinvesting profits.
Role of Financial Management: (i) Financial Management
is concerned with optimal procurement as well as the usage
of finance. (ii) Good financial management aims at procuring
funds at a lower cost and achieving effective deployment of
such funds in most productive activities. (iii) It also aims at
ensuring availability of enough funds whenever required as
well as avoiding idle finance. (iv) The financial statements,
such as Balance Sheet and Statement of Profit and Loss
Account, of a business are largely determined by financial
management decisions taken earlier.
Factors affecting Investment Decision/
Capital Budgeting Decision
1. Cash flows of the project: The amount of cash
flows should be carefully analyzed before considering
the decision.
2. Rate of return of the project: The rate of return of
the project based on expected return and assessment of
the risk involved from each proposal should be analyzed.
3. Investment criteria: The decision to invest in a
particular project involves a number of calculations
regarding the amount of investment, interest rate, cash
flows and rate of return.
There are different techniques, such as Pay Back Period,
Net Present Value(NPV), Internal Rate of Return(IRR), etc.
to evaluate investment proposals which are known as capital
budgeting techniques. These techniques are applied to each
proposal before selecting a particular project.
Factors affecting Financing Decision FORC3
1. Cost: The cheapest source of finance should be
selected, i.e., debt. Cost of debt is lower than cost of equity
because the lender’s risk is lower than the equity shareholder’s
risk. Since the lenders earn an assured return and
repayment of capital on maturity, therefore, they should
require a lower rate of return. Moreover, interest paid
on debt is a deductible expense for computation of tax
liability whereas dividends are paid out of after-tax
profits. Therefore, increased use of debt is likely to lower the
overall cost of capital of the firm.
2. Risk: The less risky source of finance should be
preferred, i.e., equity. Debt is cheaper, but is more risky
for a business because the payment of interest and
the return of principal is obligatory for the business.
Any default in meeting these commitments may force
the business to go into liquidation. There is no such
compulsion in case of equity, which is therefore,
considered riskless for the business. Therefore, increased
use of debt increases the financial risk. Financial risk is the
chance that a firm would fail to meet its payment obligations,
i.e., interest and principal amount. Thus, overall financial
risk depends upon proportion of ‘Debt’ in the total capital.
3. Floatation costs: Cost of raising funds is called
floatation cost, e.g. costs of advertising, printing
prospectus, etc. Issue of equity involves floatation cost
while debt (e.g., loan from banks) does not involve
floatation costs.
4. Cash flow position: Debt financing is better than
funding through equity if cash flow position is strong.
5. Control: Debt normally does not cause a dilution
of control while issue of equity shares may reduce
management control over the business. (Therefore,
companies afraid of a takeover bid would prefer debt to equity.)
6. Level of fixed operating costs: If a business has
high fixed operating costs, i.e. high business risk (e.g.,
building rent, insurance premium, salaries, etc.), lower debt
financing is better.
7. State of the capital market: During the period when
stock market is rising (i.e., a bullish phase), equity shares are
more easily sold even at a higher price. However, during a
bearish phase a company may opt for debt.
Factors affecting Dividend Decision SAS ECG
1. Amount of earnings: Dividends are paid out of
current and past earning. Therefore, earnings is a
major determinant of the dividend decision.
2. Stability of earnings: A company having stable
earnings is in a position to declare higher dividends.
3. Stability of Dividends: Companies generally follow
a policy of stable dividend per share. The increase in
dividends is made only when the earning potential
increases and not just the earnings of the current year.
4. Cash Flow position: A good cash flow position is
necessary for declaration of dividend.
5. Growth opportunities: If a company has good
growth opportunities, it pays out less dividend and
retain more profits to invest in new projects.
6. Shareholders’ preference: Shareholder’s
preference is kept in mind by the management before
declaring dividends.
7. Access to capital market: Large companies can
raise funds easily from the capital market to invest in
new projects. So, they can pay higher dividend.
8. Stock market reaction: Increase in dividend
increases the market price of shares in the stock market.
9. Taxation policy: A dividend distribution tax is levied
on companies. So, if tax rate on dividend is higher, it
would be better for a company to pay less dividend.
 9.2 Capital Structure: Concept and Factors Affecting
Concept of Capital Structure
Capital structure refers to the mix between owners
funds and borrowed funds. OR, Capital structure means
the proportion of debt and equity used for financing the
Exam Handbook in Business Studies-XII – by Subhash Dey 39
10. Legal constraints: Certain provisions of the Companies
Act, 2013 place restrictions on pay outs as dividend.
11. Contractual constraints: While granting loans to a
company, sometimes banks/financial institutions may impose
certain restrictions on the payment of dividends in future.
Financial Planning
The process of estimating the funds requirements
of a business and specifying the sources of
funds is called financial planning. OR Financial
planning is the preparation of a financial blueprint
of an organisation’s future operations. It takes into
consideration the growth, performance, investments and
requirement of funds for a given period.
Objectives: (i) To ensure availability of funds
whenever required: It involves estimation of the funds
required, the time at which these funds are to be made
available and the sources of these funds.
(ii) To see that the firm does not raise resources
unnecessarily as it will increase the costs and the
resources will remain idle.
Importance: PCS LC W
1. It helps the company to prepare for the future
by forecasting what may happen in the future under
different business situations.
2. It helps in avoiding business shocks and surprises.
3. It helps in co-ordinating various business
functions, e.g. sales and production functions by
providing clear policies and procedures.
4. It helps in reducing waste, duplication of efforts,
gaps in planning and confusion.
5. It provides a link between investment and
financing decisions.
6. It serves as a control technique as it makes
evaluation of actual performance easier.
7. It links the present with the future.
Types of Financial Planning: (i) Long-term financial
planning relates to long term growth and investment. It focuses
on capital expenditure programmes. (ii) Short-term financial
planning covers short-term financial plan called budget.
Financial Planning Process: (i) Preparation of a sales
forecast: Suppose a company is making a financial plan
for the next five years. Financial planning usually begins
with the preparation of a sales forecast. (ii) Preparation of
financial statements: Based on sales forecast, the financial
statements are prepared keeping in mind the requirement of
funds for investment in the fixed capital and working capital.
(iii) Estimation of expected profits: Then the expected
profits during the period are estimated so that an idea can
be made of how much of the fund requirements can be met
internally i.e., through retained earnings. (iv) Estimation
of sources of external funds: The sources from which
the external funds requirement can be met are identified.
(v) Preparation of cash budget: Cash budgets are made
incorporating the above factors.
operations of a business.
It can be calculated as debt-equity ratio, i.e., Debt/
Equity or as the proportion of debt in the total capital,
i.e., Debt/Debt + Equity.
The proportion of debt in the total capital is also
called financial leverage. As the financial leverage
increases, the cost of funds declines because of
increased use of cheaper debt, but the financial risk
increases. When ROI is higher than cost of debt,
financial leverage is favourable. When ROI is less
than cost of debt, financial leverage is unfavourable.
Capital structure of a business affects both the profitability and
the financial risk. Ideally, a company must choose that
risk-return combination which maximises shareholders’
wealth. The debt-equity mix that achieves it, is the
optimum capital structure.
Factors affecting the Choice of Capital
Structure FDI RCT
1. Risk consideration: (Already explained as factor
affecting financing decision)
2. Cost of debt: More debt can be used if debt can be
raised at a lower rate.
3. Tax rate: Since interest on debt is a tax deductible
expense, a higher tax rate makes debt relatively
cheaper and hence, more debt can be used. Example:
Borrowing @ 10% and the tax rate 30%, means that
the after-tax cost of debt is only 7%.
4. Return on Investment (RoI): When the RoI of
the company is higher than cost of debt, it can choose
to use trading on equity. Trading on Equity refers to
the increase in profit earned by the equity shareholders
due to presence of fixed financial charges like interest.
Shareholders are likely to gain due to debt/loan component
in the total capital employed. How—With a higher debt EPS
rises. Why—It is because RoI is higher than cost of debt.
Example: Company X Ltd. has total capital employed
of `30 lakh. Tax rate is 30%. Rate of interest on debt
is 10% p.a., EBIT = `4 lakh. Three situations are
considered: Situation-I: There is no debt (i.e., unlevered
firm). Situation-II: There is debt of `10 lakh. Situation-III:
There is debt of `20 lakh.
5. Cash flow position of the company
6. Floatation costs
7. Control considerations
8. Stock market conditions
 9.3 Fixed and Working Capital
Fixed Capital DTC CNG
Fixed capital refer to investment in fixed assets (e.g.,
plant and machinery, land and building, etc.).
Factors Affecting Fixed Capital Requirements
1. Nature of business: A trading concern needs
a lower investment in fixed assets as compared to a
manufacturing concern since it doesn’t require to
purchase plant and machinery.
2. Scale of operations: A larger organisation
operating at a higher scale needs bigger plant and more
space and hence higher investment in fixed assets.
3. Choice of technique: A capital intensive
organisation requires higher investment in plant and
machinery and thus requires higher fixed capital than a
labour intensive organisation.
4. Technology upgradation: Industries where assets
become obsolete (e.g. computers) sooner require
40 Exam Handbook in Business Studies-XII – by Subhash Dey
EBIT-EPS Analysis
Situation I Situation II Situation III
EBIT `400000 `400000 `400000
Less: Interest NIL `100000 `200000
EBT (Earnings Before Tax) `400000 `300000 `200000
Less: Tax @ 30% `1,20,000 `90,000 `60000
EAT (Earnings After Tax) `280000 `210000 `140000
No. of shares of `10 300000 200000 1,00,000
EPS (EAT/No. of Shares) `0.93 `1.05 `1.40
The Company X Ltd. earns `0.93 per share if it is
unlevered. With debt of `10 lakh its EPS is
`1.05. With a still higher debt of `20 lakh, EPS rises
to `1.40. It is because the cost of debt (i.e. rate of
interest) is lower than the company’s Return On
Investment (ROI), which is calculated as: (EBIT/Capital
Employed) × 100.
ROI of company X Ltd. = (`400000/`3000000) × 100 =
13.33%, which is higher than 10% interest rate on debt.
9. Cost of equity: ‘Cost of equity’ means the desired rate of
return on equity capital for assuming risk. When a company
increases debt, the financial risk faced by the equity holders
also increases. So, cost of equity increases. Therefore, a
company cannot use debt beyond a point because share
price may decrease in spite of increased EPS.
10. Flexibility: If a firm uses its debt potential to the
full, it loses flexibility to issue further debt. To maintain
flexibility, it must maintain some borrowing power to
take care of unforeseen circumstances.
11. Interest Coverage Ratio (ICR): The higher the
ratio, the lower shall be the risk of company failing to
meet its interest payment obligations.
12. Debt Service Coverage Ratio (DSCR): A higher
DSCR indicates better ability to meet cash commitments.
It raises the company’s potential to increase debt
component in its capital structure.
13. Capital structure of other companies: Debt equity
ratios of other companies in the same industry is a useful
guideline for planning the capital structure. However, it
should not follow the industry norms blindly.
higher fixed capital to purchase such assets.
5. Growth prospects: Higher growth prospects
require higher investment in fixed assets to meet
anticipated demand quicker.
6. Financing alternatives: Availability of leasing
facilities requires lower investment in fixed assets and
hence requires less fixed capital. (Such a strategy is
specially suitable in high risk lines of business.)
7. Collaboration: Collaboration reduces the level of
investment in fixed assets for each firm. Therefore, fixed
capital requirement is lower. (For example, a bank may use
another’s ATM or some of them may jointly establish a particular
facility. This is feasible if the scale of operations of each one of
them is not sufficient to make full use of the facility.)
8. Diversification: With diversification, the fixed
capital requirements will increase as the investment in
fixed capital will increase.
Working Capital PNB GIC
Working capital refers to investment in current assets
such as cash, bills receivables, prepaid expenses,
inventories, etc. Net working capital is the excess of
current assets over current liabilities.
This investment facilitates smooth day-to-day operations of
the business. Current assets are expected to get converted
into cash or cash equivalents within a period of one year.
Examples of current assets (in order of their liquidity) are cash
in hand/cash at bank, marketable securities, bills receivable,
debtors, finished goods inventory, work-in-progress, raw
materials and prepaid expenses. Current assets are
more liquid but less profitable than fixed assets. Thus,
working capital decisions affect the liquidity as well as
profitability of a business. Current liabilities are those
payment obligations which are due for payment within one
year; such as bills payable, creditors, outstanding expenses
and advances received from customers, etc. Some part of
current assets is financed through short-term sources, i.e.
current liabilities. The rest is financed through long-term
sources and is called ‘Net Working Capital’.
Factors affecting working capital requirements:
1. Nature of business: A trading business needs
less working capital because there is no processing. A
manufacturing business requires more working capital
since raw material is converted into finished goods.
Service industries (e.g., transport, banking, insurance,
warehousing, advertising etc.) require less working
capital since they do not maintain inventory.
2. Business cycle: In case of boom, larger working
capital is required as the sales and production are more.
During depression, working capital requirement will be
lower since production and sales will be low.
3. Production cycle: It is the time span between
the receipt of raw materials and their conversion into
finished goods. Working capital requirement is higher
in firms with longer production cycle because funds are
blocked in raw materials and semi-finished goods.
Application, HOTS, Evaluation and Multi-Disciplinary Questions
1. S Ltd. is manufacturing steel at its plant in India. It is
enjoying a buoyant demand for its products as economic
growth is about 7%-8% and the demand for steel is growing.
The company has decided to set up a new steel plant to cash
on the increased demand. It is estimated that it will require
about `2000 crore to set up and about `500 crore of working
capital to start the new plant.
(a) Identify the decision taken by the finance manager in the
above case. (b) Explain any two factors affecting the fixed and
working capital requirements of S Ltd. (c) Explain any four
factors affecting the capital structure of S Ltd. (d) Explain the
importance of having a financial plan for this company.
Ans. (a) Investment decision/Capital Budgeting decision
(b) Factors affecting fixed capital requirements of S Ltd.:
(i) Nature of business: Since it is a steel manufacturing
company, it needs higher investment in fixed assets such
as plant and machinery, etc. Therefore, its fixed capital
requirement will be larger.
(ii) Scale of operations: Since it is a large scale organisation,
its fixed capital requirement is more as it needs bigger plant,
more space, etc.
Factors affecting working capital requirements of S Ltd.:
(i) Business cycle: It case of a boom, the sales as well as
production of steel are likely to be larger, therefore larger
amount of working capital is required.
Exam Handbook in Business Studies-XII – by Subhash Dey 41
4. Operating efficiency: Operating efficiency reduces
the levels of inventories and debtors. So working capital
requirements will decrease.
Efficiency in managing raw materials is reflected in higher
inventory turnover ratio. Reducing the amount tied up
in debtors and receivables is reflected in higher trade
receivables turnover ratio.
5. Availability of raw materials: Easy and continuous
availability of raw materials enables the firms to keep
lesser stock and hence work with smaller working
capital. (In addition, the time lag between the placement
of order and actual receipt of the material (called lead time)
is also relevant. Larger the lead time, larger the quantity of
material to be stored and larger shall be the amount of working
capital required.)
6. Growth prospects: Higher growth prospects will
require larger amounts of working capital so that the
firm is able to meet higher production and sales targets
7. Level of competition: Higher competition requires
larger stocks to meet urgent orders from customers and
thus higher working capital. (Competition may also force
the firm to extend liberal credit terms.)
8. Inflation: With rising prices larger amounts are
required to maintain a constant volume of production
and sales. Thus working capital requirement of a
business will be high.
9. Seasonal factors: Peak season requires higher working
capital than lean season due to higher level of activity.
10. Credit allowed affects the amount of debtors and
consequently the working capital requirement of a firm.
11. Credit availed: To the extent the firm avails
credit on purchases, the working capital requirement
is reduced.
12. Scale of operations: A large-scale organisation
requires larger amount of working capital as compared
to a small-scale organisation because the quantum of
inventory, debtors and cash required is generally high.
( ii) Growth prospects: Since the growth potential S Ltd. is
higher, it will require larger amount of working capital to meet
higher production and sales target.
(c) Explanation of any four factors affecting the capital
structure.
(d) Since this is a capital budgeting decision, the operations
are likely to be at a higher scale. The amount of expenses and
revenues are likely to increase. Financial planning process
tries to forecast all the items which are likely to undergo
changes. It enables the management to foresee the fund
requirements both the quantum as well as the timing.
Likely shortage and surpluses are forecast so that necessary
activities are taken in advance to meet those situations.
2. ‘ A business that doesn’t grow dies’, says Mr. Shah, the
owner of Shah Marble Ltd. with glorious 36 months of its grand
success having a capital base of `80 crore. Within a short span
of time, the company could generate cash flow which not
only covered fixed cash payment obligations but also create
sufficient buffer. The company is on the growth path and a
new breed of consumers is eager to buy the Italian marble
sold by Shah Marble Ltd. To meet the increasing demand, Mr.
Shah decided to expand his business by acquiring a mine. This
required an investment of `120 crore. To seek advice in this
matter, he called his financial advisor Mr. Seth who advised him
about the judicious mix of equity (40%) and Debt (60%). Mr.

Seth also suggested him to take loan from a financial institution
as the cost of raising funds from financial institutions is low.
Though this will increase the financial risk but will also raise the
return to equity shareholders. He also apprised him that issue
of debt will not dilute the control of equity shareholders. At the
same time, the interest on loan is a tax deductible expense
for computation of tax liability. After due deliberations with Mr.
Seth, Mr. Shah decided to raise funds from a financial institution.
(a) Identify the concept of Financial Management as advised by
Mr. Seth in the above situation. (b) Name the factors affecting
the concept as identified in part (a) above which have been
discussed between Mr. Shah and Mr. Seth. (CBSE SQP 2017)
Ans. (a) Capital structure (b) 1. Cash flow position 2.
Floatation cost 3. Risk consideration 4. Tax rate 5. Control
3. The directors of a manufacturing company are thinking of
issuing v20 crores worth additional debentures for expansion
of their production capacity. This will lead to an increase in
debt equity ratio from 2 : 1 to 3 : 1. What are the risks involved
in it? State any four factors other than risk do you think the
directors should keep in view.
Ans. Financial risk (Explain)
Explanation of any four other factors affecting capital
structure
4. Name the concept which increases the return on equity
shares with a change in the capital structure of a company. (b) S cale of operations: Shyam should keep the scale of his
Ans. Trading on Equity
5. Pinnacle Ltd. deals in the sale of stationery and office
furniture. They source the finished products from reputed
brands who give them four to six months credit. Seeing the
demand for electronic items, they are also planning to market
these items by opening outlets throughout India. For this, they
have decided to join hands with a japanese electronic goods
manufacturer. Identify any two factors that would affect the
fixed capital requirement of Pinnacle Ltd. as discussed above.
Ans. (i) Diversification (ii) Level of collaboration
6. Explain whether the following manufacturing concerns
require large or small working capital: (a) Bread, (b) Sugar, (c)
Coolers, (d) Furniture manufacturing against orders, (e) Motor
car/Scooters, (f) Clothes, (g) Industrial chemicals.
Ans. ( a) Bread: Small—No need to maintain inventory and
production cycle is short. (b) Sugar: Large—Availability of
raw material (sugarcane) is seasonal. (c) Coolers: Large—
It is a seasonal product. Therefore, it requires large amount
of working capital to store the output during the non-season
period. (d) Furniture manufacturing against orders:
Small—It is quickly converted into cash sales, advance from
customers is also available and it does not require to maintain
inventory. (e) Motor car/ Scooters: Large—The production
cycle is long and these are costly items and are manufactured
in large scale. So, funds are blocked up for a long period.
(f)  Clothes: Large—The ratio of cost of raw materials to
total cost is high. Moreover, different kinds of clothes are
Unit 10
10.1 Financial Markets: Concept, Functions and Types
The process of allocation of funds into their most
productive investment opportunity by financial market
is called financial intermediation. When the allocative
function is performed well, two consequences follow:
42 Exam Handbook in Business Studies-XII – by Subhash Dey
manufactured in different seasons. So, the inventory required
is more. (g)  Industrial chemicals: Large—These chemicals
are produced on a large scale and sold mostly on credit basis.
Liberal credit terms are to be allowed.
7. Aarohan Ltd. an automobile manufacturer was diversifying
into manufacturing two-wheelers. They knew that India is
on a growth path and a new breed of consumer is eager for
a first vehicle. The market responded very well to the new
product. The company did not have to allow credit, as it had
advance orders from four to six months with deposits paid.
Also, due to efficiency in managing their operations as soon as
a vehicle was off the assembly line, it was out to the dealers.
Give any two reasons discussed above which helped the firm
in managing its working capital efficiently. (CBSE SQP 2018)
Ans. (a) Credit Allowed (b) Operating Efficiency
8. Shyam wanted to start a business of selling handicrafts
by getting in touch with the craftsmen in the rural areas of
Bengal. He wants to make a low investment in fixed Capital.
Advise him in taking suitable decisions regarding the Nature
of Business, Scale of operations and Financing Alternatives (in
a developed financial market) that he needs to take for the
purpose. (CBSE SQP 2018)
Ans. (a) Nature of Business: Instead of setting up a
manufacturing unit, Shyam should start a trading concern
of buying handicrafts from the craftsmen and selling them.
organization small. (c) Financing alternatives: A developed
financial market may provide for leasing facilities. So instead
of making outright purchase of assets, for example of office
space, Shyam should take them on lease and reduce his
requirement of fixed capital.
9. A fixed asset should be financed through:
(a) a long-term liability (b) a short-term liability (c) a mix of
long and short-term liabilities
Ans. (a) a long-term liability
10. M r. Rohit is into transport business. His buses are hired
by schools for transportation of students. He is willing to
expand and diversify his business to inter-state transportation
purposes. Enumerate any six factors that will affect his fixed
capital requirements. (CBSE SQP 2018-19)
Ans. Factors affecting fixed capital requirements are: (any six)
11. A mit is running an ‘Advertising agency’ and earning a lot
by providing this service to big industries. State whether the
working capital requirement of the firm will be ‘less’ or ‘more’.
Give reason in support of your answer. (CBSE SQP 2015)
Ans. Less working capital is required as service industries
which usually do not have to maintain inventory require
less working capital.
12. Current assets of a business firm should be financed
through: (a) current liability only (b) long-term liability only
(c)  both types (i.e. long and short term liabilities)
Ans. (c) both types (i.e. long and short term liabilities)
Financial Markets
(i)  The rate of return offered to the households would
be higher.
(ii) Scarce resources are allocated to those firms which
have the highest productivity for the economy.
Banks and financial markets are competing intermediaries Money market Instruments
in financial system. Households can deposit their surplus 1. Commercial Paper: It is a short-term unsecured,
funds with banks or they can buy the shares and negotiable promissory note with a fixed maturity period
debentures offered by a business using financial markets. of 15 days to one year, which is issued by large and
Functions of Financial Markets PCM L creditworthy companies to raise short term funds at
Financial Market is a market for the creation and exchange lower rates of interest than the market rates. • The
of financial assets. It performs four main functions: issue of commercial paper is an alternative to bank
1. Financial markets mobilise savings and borrowing • It is used to provide short term funds for
channelize them into the most productive uses. seasonal and working capital needs of the business. • It
2. It facilitates price determination/discovery of a is used to meet to floatation cost of new issue of shares
financial asset through interaction between supply and
(i.e. bridge financing).
demand of funds.
3. Financial markets provide liquidity to financial 2. Treasury bill: It is an instrument (in the form of
assets, so that they can be easily converted into cash a promissory note) issued by Reserve Bank of India
whenever required. on behalf of the Central government to meet its short
4. Financial markets provide valuable information about term requirements of funds. It is highly liquid, has an
securities being traded in the market and thereby, help assured yield and negligible risk of default. Treasury
to reduce cost of transactions in terms of time, Bills can be issued for a minimum amount of `25000
effort and money. and its multiples thereof. (Treasury Bills are also known
Types of Financial Markets as Zero Coupon Bonds because they are issued at a price
which is lower than their face value and repaid at par. The
Money Market: The money market is a market for
difference between the redemption value and the issue price is
short term funds which deals in monetary assets whose
the interest receivable and is called discount.)
period of maturity is up to one year. Money market
instruments are close substitutes for money. 3. Call money is the method by which banks borrow
Capital Market: Capital market refers to facilities and from each other to be able to maintain the cash reserve
institutional arrangements through which medium and long- ratio. It is repayable on demand, with a maturity period
term funds, both debt and equity are raised and invested. of one day to 15 days. (The interest rate paid on call money
loans is known as the call rate. It is a highly volatile rate that
Basis Money Market Capital Market
varies from day-to-day and sometimes even from hour-to-hour.)
IPL SIDE
Participants The participants are RBI, The participants are
4. Certificate of deposit: It is a short-term, unsecured,
financial institutions, banks, financial institutions,
negotiable instrument issued by commercial banks
corporates. banks, corporates,
or development financial institutions to individuals,
foreign investors and
corporations and companies. It is issued during periods
retail investors.
of tight liquidity when the deposit growth of banks is
Instruments Instruments traded are Instruments traded low but the demand for credit is high.
treasury bill, commercial are shares, debentures 5. Commercial bill: It is a bill of exchange used to
paper, certificates of deposit, and bonds. finance the working capital requirements of business
call money, etc. firms. It is a short-term, negotiable, self-liquidating
Investment Money market securities Capital market instrument. It is used to finance the credit sales of
outlay have a large investment securities have small firms. (When a trade bill is discounted with a commercial
outlay. investment outlay. bank, it is known as a commercial bill.)
Duration Money market deals in short Capital market deals in Types of Capital Market
term securities whose period medium term and long Primary Market (New Issues Market): It deals with new
of maturity is up to one year. term securities with securities being issued for the first time. Secondary
period of maturity of Market (Stock Market or Stock Exchange): It is a
more than one year. market for the purchase and sale of existing securities.
Liquidity Money market instruments Capital market
enjoy higher degree of securities are Primary Market Secondary Market SC2 BPL
liquidity (The Discount considered liquid but
There is sale of securities by There is trading of existing
Finance House of India) less liquid than money
new companies or further new securities only.
market securities.
issues of securities by existing
Safety Money market instruments Capital market
companies to investors.
are comparatively safer than instrument are riskier
capital market securities with than money market Only buying of securities takes Both the buying and the selling
a minimum risk of default instruments. place in the primary market, of securities can take place on
due to the shorter duration securities cannot be sold the stock exchange.
of investment and financial there.
soundness of the issuers. Securities are sold by the Ownership of existing
Expected Money market securities yield Generally yield a higher
company to the investors securities is exchanged
return comparatively less return due return than money
directly (or through an between investors. The
to shorter duration. market instruments
intermediary). company is not involved at all.
due to longer duration.

Exam Handbook in Business Studies-XII – by Subhash Dey 43

 The flow of funds is from Enhances encashability
savers to investors, i.e. the (liquidity) of securities, i.e. the
primary market directly secondary market indirectly
promotes capital formation. promotes capital formation.
Prices of securities are Prices are determined by
determined and decided by the demand and supply of the
management of the company. securities.
There is no fixed geographical Located at specified places.
location.
Methods of floating new issues in the
primary market RO2PE
1. Offer through prospectus: • Most popular
method of raising funds by public companies. •  Inviting
subscriptions from the public through issue of
prospectus, through an advertisement in newspapers
and magazines.
2. Offer for sale: • Securities are not issued directly
to the public but through intermediaries like Issuing
Houses or Stock Brokers. • A company sells securities
en-bloc at an agreed price to brokers who, in turn,
resell them to the investing public.
3. Private placement: • Allotment of securities to
institutional investors and some selected individuals.
•  Advantages: (i) raise capital more quickly than a public
issue (ii) Cheaper than public issue.
4. Rights issue: It is the right/privilege given to
existing shareholders to subscribe to new issue to
purchase new shares in proportion to the number of
shares they already hold.
10.2 Trading Procedure in a Stock Exchange and SEBI
Trading in securities is now executed through an on-line,
screen-based electronic trading system. A stock exchange
has its main computer system with many terminals spread
across the country. Trading in securities is done through
brokers who are members of the stock exchange. Every
broker has to have access to a computer terminal that
is connected to the main stock exchange. Business is
transacted during business hours of the stock exchange,
i.e. between 9:55 am and 3:30 pm, Indian Standard Time,
Monday to Friday. It follows rolling settlement system on a
T+2 basis, i.e. transactions in securities are settled within 2
days after the trade date.
Advantages of electronic trading system: 1. It ensures
transparency as participants can see the prices of all
securities in the market. 2. It increases efficiency of
information as the computer screens display information on
prices. 3. It increases the efficiency of operations since there
is reduction in time, cost and risk of error. 4. It improves the
liquidity of the market as people from all over the world can
buy or sell securities through brokers.
Dematerialisation
Dematerialisation is a process where securities held
by the investor in the physical form are cancelled and
the investor is given an electronic entry or number so
that she/he can hold it as an electronic balance in an
account. • For this, the investor has to open a ‘Demat
account’ with an organisation called a depository. •  This
is mainly done to eliminate problems associated with
44 Exam Handbook in Business Studies-XII – by Subhash Dey
5. e-IPO: • Issuing securities through the on-line
system of stock exchange. • A company has to enter
into an agreement with the stock exchange.
Stock Exchange
Stock Exchange is an institution which provides a
platform for purchase and sale of existing securities.
Functions LPS EGS
1. Provides liquidity and marketability of existing
securities because the main function of a stock
exchange is to provide a ready and continuous market
for the sale and purchase of existing securities.
2. Pricing of securities: Share prices on a stock exchange
are determined by the forces of demand and supply.
3. Safety of transactions because • the membership
of a stock exchange is well-regulated and • securities
are traded, cleared and settled within the regulatory
framework prescribed by SEBI.
4. Contributes to economic growth: Savings get
channelised into their most productive investment
opportunity. This leads to capital formation and
economic growth.
5. Spreading of equity cult: The stock exchanges
play a vital role in ensuring wider share ownership by
regulating new issues, better trading practices and
taking effective steps in educating the public about
investments.
6. Provides scope for speculation in a restricted
and controlled manner. A certain degree of healthy
speculation is necessary to ensure liquidity and price
continuity in the stock market.
share certificates or debentures held in physical form
like (a) theft (b) fake/forged transfers (c) transfer delays
and (d) paper work relating to share certificates, transfer,
forms, etc. These demat securities can even be pledged
or hypothecated to get loans. All transactions are settled
with greater speed, transparency and efficiency.
Depositories
Just like a bank keeps money in safe custody for
customers, a depository also is like a bank and keeps
securities in electronic form on behalf of the investor. In
India, there are two depositories: (i) National Securities
Depositories Limited (NSDL) and (ii) The Central
Depository Services Limited (CDSL).
Both depositories interact with the investors through
intermediaries, called ‘Depository Participants’ (DPs),
e.g. stock brokers, banks, financial institutions, non-
banking finance corporations and clearing corporations.
DPs maintain the accounts of dematerialised shares
of the investors and intimate them the status of their
holding from time to time.
Steps involved in screen-based trading for
buying and selling of securities
1. The investor has to approach a registered broker
or sub-broker and sign a broker-client agreement and
a client registration form before placing an order to
buy or sell securities. He has to provide certain other
details and information like • PAN (Permanent Account
Number) (This is mandatory), • Bank account details, •
Depository account details, etc.
2. The investor has to open a ‘Demat’ account or
‘Beneficial Owner’ (BO) account with a depository
participant (DP) for holding and transferring securities
in the demat form.
3. The investor then places an order with the broker to
buy or sell shares giving instructions about the number
of shares and the price. The broker will then go ahead
with the deal and issue an order confirmation slip to
the investor.
4. The broker then will go on-line and connect to the
main stock exchange and match the share and best
price available.
5. When the shares can be bought or sold at the price
mentioned, the broker will issue a trade confirmation
slip to the investor.
6. After the execution of trade, within 24 hours the
broker will issue a Contract Note (a Unique Order
Code number is printed on it), containing details of the
number of shares bought or sold, the price, the date
and time of deal, and the brokerage charges. Contract
Note is a legal document as it helps to settle disputes/
claims between the investor and the broker.
7. Now, the investor has to deliver the shares sold or
pay cash for the shares bought to the broker.
8. Cash is paid or securities are delivered to the stock
exchange by the broker on pay-in day, which is before
the T+2 day.
9. On the T+2 day, the stock exchange will deliver the
shares or make payment to the other broker. This is
called the pay-out day. The other broker makes payment
to the investor within 24 hours of the payout day.
10. The broker will make delivery of shares in demat
form directly to the investor’s Demat account.
Objectives of SEBI
1. To regulate stock exchanges and the securities
industry to promote their orderly functioning.
2. To protect the rights and interests of investors,
particularly individual investors and to guide and
educate them.
Application, HOTS, Evaluation and Multi-Disciplinary Questions
1. With the explosive growth of its subscriber base, to fuel its
expansion plan Airo Telecom Co. Ltd. wants to raise `500 crore
by issuing equity shares. Identify the market Airo Telecom Co.
Ltd. will look for to raise funds worth `500 crore to fuel its
expansion plan.
Ans. Primary market
2. S hreya Ltd. is a large credit-worthy company manufacturing
automobiles for the Indian market. It now wants to cater to
the other market and decided to invest in new machines. For
this, it requires long-term finance. It decides to raise funds by
issuing equity shares. The issue of equity shares involves huge
floatation cost. To meet the expenses of floatation cost the
company decides to tap the money market.
(a) Name the money market instrument the company can use
for the above purpose. the bank was paying regular dividends. The market price of
(b) What is the duration for which the company can get funds
through this instrument? to announce taking over of ‘Vena Bank’. Mr. Sanjay Nehra
(c) State any other purpose for which this instrument can be
used. (CBSE SQP 2018-19)
Ans. (a) Commercial paper (b) 15 days to one year (c)
It is used to provide short term funds for seasonal and
working capital needs of the business.
Exam Handbook in Business Studies-XII – by Subhash Dey 45
3. To prevent trading malpractices and achieve a balance
between self regulation by the securities industry and
its statutory regulation.
4. To regulate and develop a code of conduct and
fair practices by intermediaries like brokers, merchant
bankers etc., with a view to making them competitive
and professional.
Functions of SEBI
Protective functions
1. Prohibition of fraudulent and unfair trade practices
like making misleading statements, manipulations,
price rigging etc.
2. Controlling insider trading and imposing penalties for
such practices. (Insider trading—Directors/ Promoters
using inside information, e.g. bonus issue to make
personal profits.)
3. Undertaking steps for investor protection.
4. Promotion of fair practices and code of conduct in
securities market.
Development functions
1. Training of intermediaries of the securities market.
2. Conducting research and publishing information
useful to all market participants.
3. Undertaking measures to develop the capital markets
by adapting a flexible approach.
Regulatory functions
1. Registration of brokers and sub-brokers and other
players in the market.
2. Registration of collective investment schemes and
Mutual Funds.
3. Regulation of stock brokers, portfolio exchanges,
underwriters and merchant bankers and the business in
stock exchanges and any other securities market.
4. Regulation of takeover bids by companies.
5. Calling for information by undertaking inspection,
conducting enquiries and audits of stock exchanges and
intermediaries.
6. Levying fee or other charges for carrying out the
purposes of the Act.
7. Performing and exercising such power under
Securities Contracts (Regulation) Act 1956, as may be
delegated by the Government of India.
3. Supriya’s grandmother who was unwell, called her and gave
her a gift packet. Supriya opened the packet and saw many
crumpled share certificates inside. Her grandmother told her
that they had been left behind by her late grandfather. As no
trading is now done in physical form, Supriya wants to know
the process by adopting which she is in a position to deal with
these certificates. (a) Identify the process. (b) Also give two
reasons to Supriya why dealing with shares in physical form
had been stopped. (CBSE SQP 2015)
Ans. (a) Dematerialisation
(b) (i) Theft (ii) Fake/forged transfers
4. Mr. Sanjay Nehra was the Chairman of ‘Taran Bank’. The
bank was earning good profits. Shareholders were happy as
their shares was also steadily rising. The bank was about
knew that the share price of ‘Taran Bank’ would rise on this
announcement. Being a part of the bank, he was not allowed
to buy shares of the bank. He called one of his rich friends
Sudhir and asked him to invest `5 crores in shares of his bank
promising him the capital gains. As expected the share prices
went up by 40% and the market price of Sudhir’s shares was
now ` 7 crores. He earned a profit of ` 2 crores. He gave ` 1
crore to Mr. Sanjay Nehra and kept ` 1 crore with himself. On
regular inspection and by conducting enquiries of the brokers
involved, Securities and Exchange Board of India (SEBI) was
able to detect this irregularity. The SEBI imposed a heavy
penalty on Mr. Sanjay Nehra. By quoting the lines from the
above para identify and state any two functions that were
performed by SEBI in the above case. (CBSE 2016)
Ans. R egulatory function—calling for information by
undertaking inspection, conducting enquires and audits of
stock exchanges and intermediaries.
Protective function—Controlling insider trading and imposing
penalties for such practices.
5. ‘ Unicon Securities Pvt. Ltd.’ was established to deal in
securities. It was registered as a stock broker with National
Stock Exchange (NSE) and Bombay Stock Exchange (BSE)
to trade in securities listed at these exchanges. It is also a
depository participant with CDSL and NSDL. In the first three
years, it developed its business successfully. After that the
composition of Board of Directors changed. Some customers
complained to the customer care centre of the company that
shares purchased by them and for which the payment has
been duly made, were not transferred to their Demat Accounts
by Unicon securities Pvt. Ltd. The executive of customer care
centre promised the aggrieved customers that their shares will
be transferred to their respective Demat Accounts very soon.
But the company delayed the matter and didn’t transfer the
shares of the customers to their Demat Accounts. This eroded
investors’ confidence and multiplied their grievances.
Unit 11 Marketing Management
11.1 Marketing Management: Concept and Philosophies
Concept of Marketing
Marketing is a process whereby people exchange goods
and services for money or for something of value to them.
 Marketing is a social process by which individual groups
obtain what they need and want through creating offerings and
freely exchange products and services of value with others.
 Marketing is concerned with exchange of goods and
services from producers to consumers or users in such a
way that maximises the satisfaction of customer needs.
 Marketing is not merely a post-production activity.
It includes many activities that are performed even before
goods are actually produced, and continue even after the
goods have been sold. For example, activities such as
identification of customer needs, collection of information
for developing the product, designing suitable product
package and giving it a brand name are performed before
commencement of the actual production.
Features EVON
1. Needs and wants: Marketing involves satisfying
customer needs and wants better than the competitors.
A marketer’s job in an organisation is to identify needs
and wants of the target customers and develop products
and services that satisfy such needs and wants.
2. Creating a market offering: Market offering refers
to a complete offer for a product or service, having
46 Exam Handbook in Business Studies-XII – by Subhash Dey
(a) Identify the step of trading procedure in a stock exchange
which has not been followed by ‘Unicon Securities Pvt. Ltd.
(b) Name the Apex statutory body of capital market to whom
customer can complain to redress their grievances.
(CBSE QP 2017)
Ans. ( a) Delivery of shares in Demat form directly to
investors Demat Account by the broker.
(b) The Securities and Exchange Board of India (SEBI)
6. ABC Ltd. issued prospectus for the subscription of its shares
for ` 500 crores in 2008. The issue was oversubscribed by
20 times. The company issued shares to all the applicants
on pro-rata basis. Later SEBI inspected the prospectus and
found some misleading statement about the management of
the company in it. SEBI imposed a penalty of ` 5 crores and
banned its three executive directors for dealing in securities
market for three years. Identify the function and its type
performed by SEBI in the above case. (CBSE SQP 2017)
Ans. Protective function—Prohibition of fraudulent and unfair
trade practices
7. T
he directors of a company want to modernise its plant
and machinery by making a public issue of shares. They wish
to approach the stock exchange, while the finance manager
prefers to approach a consultant for the new public issue of
shares. Advise the directors whether to approach the stock
exchange or a consultant for new public issue of shares.
Ans. The directors should approach a consultant for new
public issue of shares. The stock exchanges deal with
sale and purchase of existing securities only, not in new
issue of securities.
given features like size, quality, taste, etc. at a certain
price; available at a given outlet or location and so on.
A good product is developed after analysing needs and
wants of the potential buyers.
3. Customer value: The buyers will purchase a product
only if it is perceived to be giving greatest benefit or
value for the money. The purpose of marketing is to
generate customer value at a profit.
4. Exchange mechanism: The process of marketing
involves exchange of goods and services for money or
for something of value to them.
Exchange is referred to as the essence of marketing. For
any exchange to take place, it is important that the following
conditions are satisfied: (i) Involvement of at least two
parties viz. the buyer and the seller. (ii) Each party should
be capable of offering something of value to the other.
(iii)  Each party should have the ability to communicate and
deliver the product or service. No exchange can take place
if the buyers and sellers are not able to communicate with
each other or if they can not deliver something of value to
the other. (iv) Each party should have freedom to accept
or reject the other party’s offer. (v) The parties should be
willing to enter into transactions with each other. Thus, the
acceptance or rejection of the offer takes place on voluntary
basis rather than on the bases of any compulsion.
Functions of Marketing SG MPC Concept of Marketing Management
1. Gathering and analysing market information: Marketing management refers to planning, organising,
This is necessary to identify the needs of the customers directing and control of the activities which facilitate
and take various decisions for the successful marketing exchange of goods and services between producers and
of goods and services. This is important in deciding consumers or users of products and services.
what opportunities can best be pursued by it. Features/Process
2. Marketing planning: Marketing planning includes (i) Choosing a target market, say a manufacturer may
the plan for increasing the level of production, promotion choose to make readymade garments for children up to
of products, etc. Marketing planning is necessary to the age of 5 years;
achieve the marketing objectives of the organisation. (ii) Getting, keeping as well as growing the customers.
3. Product designing and development: It helps That means, to create demand for products, customer
to make the product attractive to the target customers. satisfaction and attract more customers.
A good design can improve performance of a product (iii) Creating, developing and communicating superior
and also give it a competitive advantage in the market. values for the customers. The primary job of a
4. Standardisation and Grading: Standardisation marketing manager is to create superior values so that
refers to producing goods of predetermined specifications the customers are attracted to the products.
which help in achieving uniformity and consistency in Marketing Management Philosophies
the output. (Standardisation ensures the buyers that goods 1. Production Concept: Starting point: The marketing
conform to the predetermined standards of quality, price and
packaging and reduces the need for inspection, testing and
efforts start after the product is produced in the factory;
Focus: Quantity of product; Means: Product should be
evaluation of the products.)
widely available at an affordable price; Ends/Objective:
Grading is the process of classification of products into Its objective is to earn profits through large volume of
different groups on the basis of quality, size, etc. Grading production. (Greater emphasis was placed on improving the
ensures that goods belong to a particular quality and production and distribution efficiency.)
helps in realising higher prices for high quality output. 2. Product Concept: Starting point: The marketing
5. Customer support services such as after-sales efforts start after the product is produced in the factory;
services, handling customer complaints, maintenance Focus: Quality of product—product should be of high
services, etc. All these services aim at providing quality; Means: Continuous improvement in the quality
maximum satisfaction to the customers, which in turn of product; Ends/Objective: Its objective is to earn
helps in repeat sales and developing brand loyalty. profits through product quality improvements.
6. Packaging and labelling 7. Branding 8. Pricing of products 3. Selling Concept: Starting point: The marketing
9. Promotion 10. Physical distribution 11. Transportation efforts start after the product is produced in the factory;
12. Storage or Warehousing Focus: It involves pushing the sale of existing products;
Means: It uses aggressive selling and promotional
Marketing and Selling
techniques like advertising, personal selling and sales
Basis Selling Marketing D2PS TP promotion to achieve the objective; Ends/Objective: Its
Part of the Selling is only a Marketing is much wider objective is to earn profits through increased volume
process vs part of the process term; selling is merely a of sales. (Greater importance to attracting and persuading
Wider term of marketing. part of marketing. customers to buy the product.)
Transfer of title Main focus of Main focus of marketing 4. Marketing Concept: Starting point: The marketing
vs Satisfying selling is on is on satisfying customer’s efforts start from the identification of needs of the target
customer needs affecting transfer needs. market; Focus: Its focus is on satisfaction of customers’
of title. needs; Means: It uses integrated marketing (in respect
Profit through Selling aims at Marketing aims at profit
of product, price, promotion and physical distribution)
maximising profit maximisation maximisation through
as a means to achieve the objective; Ends/Objective:
sales vs through customer satisfaction.
Its objective is to earn profits by satisfying needs of the
Customer maximisation of
target market better than the competitors.
satisfaction sales.
Start and End Selling activities Marketing activities start Customer’s satisfaction become the focal point of all
of Activities start after the much before the product decision making in the organisation. The basic role of a firm
product has been is produced and continue is to ‘identify a need and fill it’. Pillars of the Marketing
developed. even after the product has Concept: (i) Identification of market or customer who are
been sold. chosen as the target of marketing effort. (ii) Understanding
Difference in Bending the Develop the product and
needs and wants of customers in the target market.
(iii) Development of products or services for satisfying needs
the Emphasis customer according other strategies as per the
of the target market. (iv) Satisfying needs of target market
to the product. customer needs. better than the competitors. (v) Doing all this at a profit.
Difference in Selling involves Integrated marketing
the Strategies efforts like efforts involving strategies
5. Societal Marketing Concept: Starting point: The
promotion and in respect of product,
marketing efforts start from the identification of needs
persuasion. promotion, pricing and
of the target market and the society; Focus: Customer
physical distribution.
needs and society’s well-being. It takes care of long
term well being of the consumers as well as the society;
Exam Handbook in Business Studies-XII – by Subhash Dey 47
Means: It uses integrated marketing as a means to achieve the objective; Ends/Objective: Its objective is to earn
profits through customer satisfaction and social welfare. (Apart from the customer satisfaction, it pays attention to the
social, ethical and ecological aspects of marketing.)
11.2 Marketing Mix: Concept and Elements
Marketing Mix and Elements
Marketing mix is the combination of variables chosen by
a firm to prepare its market offering.
Marketing Mix is described as the set of marketing tools
that a firm uses to pursue its marketing objectives in a
target market.
Elements: 4Ps
(i) PRODUCT: Product means goods and services or
‘anything of value’, which is offered to the market for
exchange. Product mix is the combination of all products
offered for exchange by a company. It relates to decisions
regarding planning, designing and developing the right
type of products and services for the consumers. It
includes branding, labelling and packaging.
(ii) PRICE: ‘Price’ means the amount of money paid
by a buyer in consideration of a product or a service.
Price affects the revenue and profits of the firm. The
marketers have to take several pricing decisions such
as: (i) Setting the pricing objectives, (ii) Determining
the pricing strategies, (iii) Determing the factors
affecting price, (iv) Fixing a price for the firm’s products.
(iii) PLACE/PHYSICAL DISTRIBUTION: It is
concerned with making the goods and services available
at the right place, in right quantity and at the right time.
There are two important decisions relating to this
aspect: (i) The decision regarding physical movement
of goods from producers to consumers or users. It
includes four major activities, viz. managing inventory,
order processing, warehousing and transportation.
(ii) The decision regarding the channels or using
intermediaries in the distribution process, such as
retailers, wholesalers, agents, etc.
(iv) PROMOTION: Promotion of goods and services
involves informing potential customers about the firm’s
product and persuading them to buy it. ‘Promotion mix’
refers to combination of promotional tools (or elements) used
by an organisation to achieve its marketing objectives—
(i) Advertising, (ii) Personal selling, (iii) Sales promotion,
(iv) Public relations.
Branding
It is the process of giving a name or a sign or a symbol,
etc. to a product
Brand–A brand is a name, term, sign, symbol, design or
some combination of them, used to identify the products
of one firm and to differentiate them from those of the
competitors. e.g., Mercedes, Parker, Nike, Woodland.
Brand name–That part of a brand which can be spoken,
e.g., Asian paints, Maggie and Uncle Chips.
Brand mark–That part of a brand which can be recognised
only but cannot be spoken, e.g., ‘Devil’ of Onida, etc.
Trade mark–A brand that is given legal protection
against its use by other firms.
Advantages of Branding
To marketers: (i) Enables making product differentiation.
(ii) Ease in introduction of new product. (iii) Firm
can charge higher price for its product. (iv) Helps in
advertising and display programmes.
To customers: (i) Helps in product identification. (ii)
48 Exam Handbook in Business Studies-XII – by Subhash Dey
Status symbol because of quality. (iii) Branding ensures
quality of product.
Characteristics of a good brand name
1. The brand name should be short, easy to pronounce, spell,
recognise and remember e.g., Ponds, VIP, Rin, Vim, etc.
2. A brand should suggest the product’s benefits and
qualities. It should be appropriate to the product’s function.
e.g., Rasika, Genteel, Promise, My Fair Lady and Boost.
3. A brand name should be distinctive e.g., Liril, Sprit,
Safari, Zodiac.
4. The brand name should be adaptable to packaging
or labelling requirements, to different advertising media
and to different languages.
5. The brand name should be sufficiently versatile to
accommodate new products, which are added to the
product line. e.g. Maggie, Colgate.
6. Chosen name should have staying power i.e., it
should not get out of date
Packaging
Packaging refers to the act of designing and producing
the container or wrapper of a product.
Levels of packaging
1. Primary Packaging: e.g. The ointment tube. The
primary package refers to the product’s immediate
container. It is kept till the consumer is ready to use
the product or it may be kept throughout the entire life
of the product.
2. Secondary Packaging: e.g. The Cardboard box. The
secondary package refers to the additional layers
of protection. When the consumer starts using the
product, the secondary packing is disposed off.
3. Transportation Packaging: e.g. The Corrugated box.
The transportation package refers to the package
necessary for storage, identification or transportation.
Functions of packaging
1. Product Identification: Packaging greatly helps in
identification of the products. For example, Colgate in
red colour, or Ponds cream jar can be easily identified
by its package.
2. Product Protection: Packaging protects the contents of
a product from spoilage, breakage, leakage, pilferage,
damage, climatic effect, etc. This kind of protection is
required during storing, distribution and transportation
of the product.
3. Facilitating Use of the Product: The size and shape of the
package should be such that it should be convenient to open,
handle and use for the consumers. Cosmetics, medicines
and tubes of toothpastes are good examples of this.
4. Product Promotion: Packaging is also used for promotion
purposes. A startling colour scheme, photograph or
typeface may be used to attract attention of the people
at the point of purchase. Sometimes it may work even
better than advertising. In self-service stores, this role of
packaging becomes all the more important.
Importance of packaging
1. Rising Standards of Health and Sanitation as the
chances of adulteration in such goods are minimised.
2. In Self Service Outlets­, packaging plays the role of a
silent salesman.
3. Packaging is a means of creating Product
Differentiation.
4. As a result of Innovational Opportunity (e.g., milk can
now be stored for 4 to 5 days without refrigeration),
the scope for the marketing of products has increased.
Labelling
It refers to designing the label to be put on the package.
Functions
1. It describes the product and specifies its contents, i.e.,
ingredients, net weight when packed, etc.
2. It helps in identification of the product or brand.
3. It helps in grading of products into different
categories, e.g., Brook Bond Red Label, Yellow Label,
Green Label, etc.
4. It helps in promotion of products by attracting
attention, e.g., “Baalon Mein Dum, Life Mein Fun”.
5. It provides information required by law, e.g., date
of manufacture, date of expiry, etc. For example, the
statutory warning on the package of Cigarette or Pan
Masala, ‘Smoking is Injurious to Health’ or ‘Chewing
Tobacco is Injurious to Health’.
Label for apple juice in tetra pack of 200 mililitres
Name of the product : Appice
Name of the manufacturer : Fine Juice Ltd.
Address of the manufacturer : 54, Chandni Chowk,
Delhi-110006
Net weight when packed : 200 ml
Manufacturing date : 20th Feb.2019
Expiry date : 20th July 2019
Maximum retail price (MRP) : ` 20
Batch number : D 4567
Directions for use : To be consumed within
3 days of opening.
Contents : Juice concentrate, sugar,
preservatives.
Factors Determining Fixation of Price
GM DOC2
1. Pricing objectives:  If the objective of a firm
is profit maximisation in the short run, it will charge
maximum price for its products but for long run profit
maximisation, it will charge lower per unit price so that
it can capture large market share.  Similarly, if the
objective is to attain product quality leadership, the firm
charges higher price for providing high quality products.
 While if the pricing objective is to obtain market share
leadership, a firm will charge the lower price so that
greater number of people are attracted to purchase
the products.  To survive in a competitive market, a
firm may resort to discounting its products or run a
promotion campaign to liquidate its stock.
2. Product cost: The cost sets the minimum level or
the floor price at which the product can be sold. Price
should recover total costs (fixed costs as well as variable
costs) plus a profit margin.
3. Competition: When a firm does not face any
competition (under monopoly situation), it can enjoy
complete freedom in fixing its price. But when there is
intense competition, a firm should fix lower price of its
products. Competitors’ prices and their anticipated reactions
must be considered before fixing the price of a product.
4. Utility and demand: The utility provided by the
product and the intensity of demand of the buyer
sets the upper limit of price, which a buyer would be
prepared to pay. When the demand of the product is
Exam Handbook in Business Studies-XII – by Subhash Dey 49
inelastic, a firm can fix higher price. However, when the
demand is elastic, lower price should be fixed.
5. Government and legal regulations: Government
fixes the price of essential commodities, e.g., medicines.
The Government does not allow the firms to charge a
higher price of the medicine.
6. Marketing methods used: Price determination
is also affected by the distribution system, quality of
salesmen employed, quality of advertising, the type of
packaging, etc.
Activities/ Components of Physical
Distribution WOTI
1. Order processing: A good physical distribution system
should provide for an accurate and speedy processing of
orders, in the absence of which goods would reach the
customers late or in wrong quantity or specifications.
2. Transportation: It is the means of carrying the
goods and raw materials from the point of production
to the point of sale. It is important because unless the
goods are physically made available, the sale cannot be
completed. Thus, it creates place utility.
3. Warehousing: It refers to the act of storing
products in order to create time utility in them. The
need for warehousing arises because there is a time lag
between the production of goods and their sale (or use).
4. Inventory Control: Higher the level of inventory,
higher will be the level of service to customers but the
cost of carrying the inventory will also be high because
lot of capital would be tied up in the stock. Thus, a
balance is to be maintained in respect of the cost and
customer satisfaction.
The major factors determining inventory levels include:
(a) Firm’s policy regarding the level of customer service to
be offered. (b) Cost of inventory, which includes holding
cost such as cost of warehousing, tied up capital, etc and
the manufacturing cost. (c) Degree of accuracy of the sales
forecasts. In case more accurate estimates are available,
the need for keeping very high level of inventory can be
minimised. (d) Responsiveness of the distribution system. In
case the lead time is high, there is a need to maintain higher
inventory.
Channels of distribution
Channels of Distribution are set of firms and
individuals that take title, or assist in transferring
title, to particular goods or services as it
moves from the producers to the consumers.
1. Direct channels of distribution—It means
making goods available to consumers directly by the
manufacturers, e.g., selling goods through own retail
outlets (e.g. Bata), Door to door selling, mail order
selling, Internet selling.
2. Indirect channels of distribution—It means
making goods available to consumers by employing one
or more intermediaries.
 One level channel (Manufacturer – Retailer –
Customer): Only one intermediary i.e., retailers is used,
e.g., Maruti Udyog sells its cars and vans through
company approved retailers; cover a wide area of
market while retaining control over the Channels.
 Two level channels (Manufacturer – Wholesaler –
Retailer – Customer): used for most consumer goods
like soaps, oils, clothes, rice, sugar and pulses; cover a
larger market area.
 Three level channels (Manufacturer – Agent –
Wholesaler – Retailer – Customer): Used when the
manufacturer carries a limited product line and has to
cover a wide market. An agent in each major area is
appointed, who in turn contact the wholesalers.
Factors Determining Choice of Channels of
Distribution MPC2E
1. Market Factors: (i) Size of market: Number of
buyers small, like for most industrial products, short
channels are used; number of buyers large, as in the
case of most consumer products, large number of
intermediaries are used. (ii) Geographical concentration
of potential buyers: If buyers concentrated in a small
place, shorter channels; if buyers are widely dispersed,
longer channels. (iii) Size of order: Small size of order
(as in case of most consumer products), large number
of intermediaries; if size of order large, direct channels.
2. Product Related Factors: (i) Industrial products
(complex products) purchased by few buyers require
direct channel or involving few middlemen; consumer
products (non-complex products) — better distributed
11.3 Promotion Mix: Concept and Elements
Concept and Elements of Promotion Mix
Promotion mix refers to combination of promotional tools
used by an organisation to achieve its communication
objectives. Various tools of communication are used by the
marketers to inform and persuade customers about their
firm’s products. These include: (i) Advertising, (ii) Personal
Selling, (iii) Sales Promotion, and (iv) Public Relations.
What combination of these elements is used by a firm
will depend upon various factors such as: (a) nature of
market, (b) nature product, (c) the promotions budget,
(d) objectives of promotion, etc.
1. Advertising: Advertising is an impersonal form of
communication, which is paid for by the marketers
(sponsors) to promote some goods or service.
Features of Advertising
(i) Paid Form: Advertising is a paid form of communication.
(ii) Impersonal method of promotion: There is no direct
face-to-face contact between the prospect and the
advertiser.
(iii) Identified Sponsor: Advertising is undertaken by
some identified individual or company, who makes the
advertising efforts and also bears the cost of it.
2. Personal Selling: Personal selling involves oral
presentation of message in the form of conversation
with one or more prospective customers for the purpose
of making sales.
Features of Personal Selling
(i) Personal Form: In personal selling a direct face-to-face
dialogue takes place between the seller and the buyer.
(ii) Development of Relationship: Personal selling allows a
salesperson to develop personal relationships with the
prospective customers, which may become important
in making sale.
3. Sales Promotion: Sales promotion refers to short-
term incentives, which are designed to encourage the
buyers to make immediate purchase of a product or
service, e.g. free gift offers, free sample distribution, etc.
50 Exam Handbook in Business Studies-XII – by Subhash Dey
by long network of channels. (ii) Perishable products like
fruits, dairy products are sold through short channels
while non-perishable products like soap, toothpaste,
tea, etc. require longer channels. (iii) Unit value of
product low — long channels; high value products—
shorter channels.
3. Company Characteristics: (i) Financial strength
of the company: Direct selling involves huge funds for
starting own retail outlets; Indirect selling through
intermediaries does not involve huge funds. Thus,
if the firm has plenty of funds, it may go for direct
distribution. (ii) Degree of control: If the management
wants greater control on the channel members, short
channels are used.
4. Competitive Factors: The choice is also affected
by the channel selected by competitors in the same
industry. A firm may adopt the similar channel or may
avoid the channels used by competitors.
5. Environmental Factors such as economic condition
and legal constraints. For example, in a depressed
economy marketers use shorter channels to distribute
their goods in an economical way.
Companies use sales promotion tools specifically
designed to promote to: 1. Customers (e.g., free samples,
discounts, and contests) 2.Tradesmen or middlemen
(e.g., cooperative advertising, dealer discounts and dealer
incentives and contests) 3. Salespersons (e.g., bonus,
salesmen contests, special offers).
4. Public Relations: It becomes imperative to manage
public opinion and the company’s relation with the
public on a regular basis.
 The voice or opinion of the general public is equally
important as they may be interested in the company
and its product and have an impact on the business
ability to achieve its objectives.
 Consumer activist groups need to be satisfied because
they can impose restriction on the sales of the firm’s
products directly by urging customers to refrain from
buying them or through the imposition of laws.
 Public relations management can be performed by:
(i) the marketing department; or (ii) a separate
department to manage public relations, known as
the public relations department. Their main task is to
disseminate information and build goodwill about the business.
Public relations involve a variety of programmes designed
to promote or protect a company’s image and its
individual products in the eyes of the public. For example,
sponsoring sports and cultural events, contributing
money and time to certain causes like environment,
wildlife, children’s rights, education, etc. They are
especially useful when there is negative publicity about
the company or its products to ensure that negative
publicity does not take place at all.
Role of Advertising
1. It creates demand by making people aware of products.
2. It educates customers by providing useful information
about how products can be used for better satisfaction.
3. It enhances consumer confidence as they feel
more comfortable and assured about the quality of
advertised product.
4. It helps in introduction of new products by
communicating the positive features of new products.
5. It helps in creating customer loyalty through
repeated communication.
6. It creates better organisational image as
through advertising, message may reach people about
how the organisation stands for serving the society.
Objections to Advertising ACUSE
The opponents of advertising consider expenditure on
advertising as a social waste on the following grounds:
1. Advertising adds to cost which is ultimately passed
on to the buyers in the form of high prices. (However,
the increased demand due to advertising leads to higher
production, which brings with it the economies of scale. As a
result, the per unit cost of production comes down)
2. It undermines social values as it promotes
materialism. It encourages people to buy new and latest
products discarding old but still functional products.
(However, advertisements only inform the consumers, the
final choice of buying or not lies with the customers only).
3. It confuses the buyers rather than helps. Too
many advertisements of the same product of different
companies confuse the buyers to make the right choice.
(However, advertisements give wide choice to customers
and today’s customer is smart enough to know and select
the most suitable brand for him).
4. It encourages sale of inferior products as
its purpose is to promote sale of goods. It does not
differentiate between good and bad quality products.
(However, what is inferior and what is superior depends
upon the economic status and preference of the customer).
5. Some advertisements are in bad taste. They are
not based on ethics and values. Objectionable words
and scenes have an undesirable effect on the society,
e.g. women dancing when not required.
Conclusion: Most of the criticisms against advertising
are not entirely true. In fact, advertising is an important
tool of marketing which helps a firm in effectively
communicating with its target market and increase the
demand for the products. Thus, it is not a social waste,
rather it ads value to the social cause by giving a boost
to production and generating employment.
Qualities of a Good Salesman PG SH TC
1. Physical qualities: A salesman should have a good
personality, sound health and stamina.
2. Psychological qualities: A good salesman should
have good behaviour and should be sweet natured.
3. Technical qualities: A good salesman should have
full technical knowledge about the product.
4. Good communication skills: He should be able to
answer questions. He should be a good listener.
5. Honesty: He must be honest and sincere in
performing his duty.
6. Courtesy: He must be very polite, cooperative and
helpful.
Sales Promotion Techniques DR SUFI QP
1. Rebate (products are offered at special prices to
clear off inventory), e.g., WagonR car at ` 30,000 less
during December.
2. Discount (offering products at less than list price),
e.g., offer of 50 + 20% discount on Peter England Shirts.
3. Product combination (offering another product as
gift along with the purchase of a product), e.g., 2 GB
memory card free with a Nokia cell-phone.
Exam Handbook in Business Studies-XII – by Subhash Dey 51
4. Quantity gift (extra quantity of the product is
offered to increase sales), e.g., Buy three get one free’
offer, A Hotel’s offer of “Take a 2 Nights 3 Days Package
at the Hotel and Get an Extra Night Stay at Just ` 500”.
5. Sampling (free sample of a product is offered on
launching a new product), e.g., Surf Excel samples.
6. Financing (easy financing schemes are offered),
e.g., “Full finance @ 0%, 12 easy instalments, 4 down
payment and 8 post-dated cheques.”
7. Instant draw and assigned gifts (assured gifts
are given to the customers instantly by participating in
a draw, on purchase of a product), e.g., scratch a card
or burst a cracker and win a car, refrigerator etc. on
purchase of TV.
8. Lucky draw (it refers to taking out a draw on
purchase of a product and giving gift to the winner),
e.g., a lucky draw coupon for free petrol on purchase of
certain quantity of petrol.
9. Refunds (a part of price paid by customer is returned
back on presenting some proof of purchase), e.g., on
return of empty foils or wrapper, get a refund of ` 5.
10. Contests (competitive events involving application
of skills or luck are held), e.g., slogan writing competition.
11. Usable benefit, e.g., ‘Purchase goods worth
`50,000 and get a holiday package worth ` 10,000 free’,
Get a Discount Voucher of ` 500 on Apparel Purchase of
` 4,000 and above.
Role of Public Relations PPC LC
The public relations department performs five functions:
1. Press relations: The public relations departments
is in contact with the media to present true facts and a
correct picture about the company.
2. Product publicity: The public relations department
advises the top management that the company can
draw attention to new products by sponsoring sports
and cultural events like news conferences, seminars
and exhibitions.
3. Corporate communication: The company’s
image can be promoted through communication
with the public. This is usually done with the help of
annual reports, brochures, speeches by the company’s
executives, interviews with TV channels, etc.
4. Lobbying: Public relations professionals help
the company to maintain a healthy relationship with
government officials and ministers.
5. Counselling: The public relations department
advises the top management that the company can
build goodwill by contributing money and time to
certain causes like environment, wild life, children’s
rights, education, etc.
In addition, maintaining good public relations also helps
in achieving the following marketing objectives:
(i) Building awareness: Public relations department can
place stories and dramatise the product in the media to build
awareness about the product before it is launched. It creates
a favourable impression on the target customers.
(ii) Building credibility: If news about the company’s product
comes in the media whether print or electronic, it builds the
credibility of the product in the eyes of the public.
(iii) Stimulates sales force: It becomes easier for the sales
force to deal with the retailers and convince dealers if they have
already heard about the product in the news before it is launched.
(iv) Lowers promotion costs: Maintaining good public
relations costs much less than advertising and direct mail.
 Application, HOTS, Evaluation and Multi-Disciplinary Questions
1. The process of marketing involves creating a market offering
and to satisfy the needs and wants of the present and potential
buyers. The real question is how to create a market offering.
Suppose, after gathering and analysing market information, a
profitable business opportunity is seen by some firm in the field
of producing soft drinks. To develop and market a new brand
of soft drinks, the firm takes a number of important decisions,
for example whether to go for any collaboration with a foreign
manufacturer of soft drinks; whether to produce for the local
market or for a wider market; what will be the features of the
new product so that it is attractive to the target customers;
whether the drink will be packed in glass bottles or plastic
cans; what will be the name (brand name) of the drink; at
what price it will be sold, (at par with the price at which other
competitive brands are sold or below it or above it); and so on.
(a) Identify the two features of marketing discussed above.
(b) Identify the functions of marketing discussed above.
Ans. (a) (i) Needs and wants (ii) Creating a market offering
(b) (i) Gathering and analysing market information (ii)
Marketing planning (iii) Product designing and development
(iv) Packaging (v) Branding (vi) Pricing of product
2. Identify the Marketing Management philosophy adopted in
the following cases:
(i) Mansi, a shoe manufacturer for school students, decided to
maximise her profit by producing and distributing at large scale
and thereby reducing the average cost of production.
(ii) Nisha, a school bag manufacturer decided to improve the
product for profit maximisation and thus added a waterbottle
holder to the existing design.
(iii) Jasdeep, a dealer in school uniforms, decided to maximise
his profit by using different aggressive promotional efforts.
(iv) Amar is engaged in manufacturing of refrigerators.
He surveyed the market and found that customers need a
refrigerator with a separate provision of water cooler in it. He
decided to launch the same refrigerator in the market.
Ans. (i) Production concept (ii) Product concept (iii) Selling
concept (iv) Marketing concept
3. Good Living Ltd. manufactures mosquito repellent tablets.
These tablets are packed in strips of 12 tablets each. Each of
these strips are packed in a cardboard box, 48 such boxes are
then placed in a big corrugated box and delivered to various
retailers for sale. State the purpose of packaging the tablets in
a corrugated box. (CBSE SQP 2016)
Ans. Storage, identification and transportation.
4. ‘My Bakery’, a biscuit manufacturing company, launched
biscuits with different flavours based on quality and features
like ‘Crunchy biscuits’, ‘Sweet potato’, ‘Coffee Jolly’ etc. The
labels on the package of the biscuits are with pictures and
different colours indicating and specifying the flavours of
the biscuits and their contents. Identify the two functions of
labelling discussed above. in the neighbourhood. Everyday she detailed out the menu
Ans. (i) Describes the product and specifies its contents.
(ii) Helps in grading of products.
5. Name the element of marketing mix which affects the
revenue and profits of a firm.
Ans. Price
6. Malaysian budget airline group Sky Europe announced
discounted fares, starting as low as ` 1,099 for domestic
destinations operated by its Indian Joint Venture carrier and
` 2,099 for international flights operated by other group
airlines under a limited period offer. Identify the medium of
communication which can be used by the firm to inform a large
number of people about the new fares. (CBSE SQP 2018)
Ans. Advertising.
7. ‘Various tools of communication are used by the marketers
to promote their products.
(a) Why do companies use all tools at the same time?
52 Exam Handbook in Business Studies-XII – by Subhash Dey
(b) Name the most commonly used non-personal tool of
promotion which is paid for by the marketer.
(c) Which tool of promotion will primarily be used for the following?
(i) To promote or protect a company’s image or its individual
products. (ii) An existing product meant for mass usage by
literate people. (iii) To introduce a new product to a particular
class of people through door-to-door visits. (iv) To attract
attention of the people by using incentives.
Ans. (a) The companies use all tools at the same time
because of the nature of market, nature of product,
promotion budget and objectives of promotion being
different at different times.
(b) Advertising
(c) (i) Public Relations (ii) Advertisements (iii) Personal Selling
(iv) Sales Promotion
8. ‘Coconut Joy Ltd.’ are the manufacturer of vegetarian frozen
dessert food products made with coconut milk, agave syrup
and other certified ingredients. The founders of the company
Lovely and Lalita originally developed this treat to meet their
own needs but found that their friends and families around were
also keen to use the products. It was not only the vegetarians,
but also those who could not get enough environment friendly
sustainable food, that appreciated the product. It did not take
long for Lovely and Lalita to recognise the potential of their
little venture. In the beginning they started from their home
with the product being sold through local family parties that
enabled guests to personally meet the owner. This helped to
establish strong connections with the prospective buyers and
the company could put the product on shelves of natural food
store. The company used all marketing activities to grow and
expand. The company began sponsoring booths at festivals,
drawing attention to its newly created vegetarian products.
It also disseminated relevant information to media about its
products and the people who helped in building the company’s
reputation. Lovely and Lalita were invited for an interview with
one of the leading TV channels in which they talked about
their environment friendly vegetarian products. To show its
gratitude to customers, local business and government officials
who supported the company from the beginning, „Coconut
Joy Ltd. hosted a gala event and involved all of them to raise
funds for a few local NGOs. The company also asked its fans
and customers to send songs and poetry conveying their
impression about ‘Coconut Joy s Ltd.’ products.
Identify the communication tool used by ‘Coconut Joy Ltd.’
(CBSE SQP 2017)
Ans. Public Relation
9. Sara was pursuing her graduation. Everyday she saw her
mother working tirelessly at home after coming back from her
work-place. She decided to start a tiffin service to increase her
family income. To begin with she started supplying tiffin only
after consulting her mother. For informing the people about
her service she designed a beautiful informative pamphlet,
got it printed and started distributing it through the daily
newspapers. She also appointed two delivery boys to deliver
tiffins. The business was slow to begin with but picked-up
well afterwards. She was able to earn a profit of 20% of the
revenue in the first month.
Identify the promotional tool used by Sara to communicate to
the customers about her tiffin service. (CBSE 2018)
Ans. Advertising
10. Zoom Udyog, a car manufacturing Co., has started its
business with Zoom 800 and slowly launched Zoom-1000,
Wagon-Z, Swy-fy etc. and offered various services like after
sale service, availability of spare parts etc. Identify the element
of marketing mix referred here. (CBSE SQP 2015)
Ans. Product
12. Shreemaya Hotel in Indore was facing a problem of
low demand for its rooms due to off season. The Managing
Director (MD) of the hotel, Mrs. Sakina was very worried. She
called upon the Marketing Manager, Mr. Kapoor for his advice.
He suggested, that the hotel should announce an offer of
‘3 Days and 2 Nights’ hotel stay package with free breakfast
and one day religious visit to Omkarehswar and Mahakaleshwar
Temples’. The MD liked the suggestion very much. Identify the
promotional tool, which can be used by the hotel, through
which large number of prospective pilgrimage tourists, all over
the country and also abroad, can be reached, informed and
persuaded to use the incentive. (CBSE SQP 2016)
Ans. Advertising
13. ‘Time Line’ watch manufacturing company is a renowned
company marketing watches. It performs various activities
like, market analysis, product designing or merchandising,
Unit 12
12.1 Consumer Protection, Consumer Rights and Responsibilities
Consumer protection refers to protection of consumers
from unscrupulous, exploitative and unfair trade practices
of manufacturers, traders, sellers and service providers.
Scope of Consumer Protection Act, 1986
The Consumer Protection Act, 1986 seeks to protect and
promote the interests of consumers through speedy and
inexpensive redressal of their grievances. The scope of
the Act is very wide. The Act is applicable to all types
of undertakings, big and small, whether in the private
or public sector, or in the co-operative sector, whether a
manufacturer or a trader, and whether supplying goods
or providing services.
Importance of Consumer Protection
From Consumer’s Point of View CUW
1. Widespread exploitation of consumers:
Consumers might be exploited by unscrupulous,
exploitative and unfair trade practices like defective
and unsafe products, adulteration, false and misleading
advertising, hoarding, black-marketing etc. Consumers
need protection against such malpractices of the sellers.
2. Consumer ignorance: Due to widespread ignorance
of consumers about their rights and reliefs available to
them, it becomes necessary to educate them about the
same so as to achieve consumer awareness.
3. Unorganised consumers: Consumers need to be
organised in the form of consumer organisations which
would take care of their interests. Though, in India,
we do have consumer organisations which are working
in this direction, adequate protection is required to be
given to consumers till these organisations become
powerful enough to protect and promote the interests
of consumers.
From the Point of View of Business LMG SR
1. It is in the long-term interest of business
to protect and promote the interests of consumers
because satisfied customers lead to repeat sales and
provide good feedback.
2. A business which engage in exploitative and unfair
trade practices invite government intervention. This
Exam Handbook in Business Studies-XII – by Subhash Dey 53
packaging, warehousing, branding, pricing, promotion and
selling. The company maintains good customer relations
through various follow up activities. This helps the company in
procuring repeat sales orders.
Name the concept related to the activities mentioned in the
above paragraph. (CBSE SQP 2017)
Ans. Marketing
14. ‘You don’t close a sale, you open a relationship, if you
want to build a long term successful enterprise.’ Identify the
communication tool used by the marketer.
Ans. Personal selling
15. “If you’re trying to persuade people to do something, or
buy something, it seems to me you should use their language,
the language in which they think.” Identify the communication
tool used by the marketer.
Ans. Advertising
Consumer Protection
can impair and tarnish the image of the company. Therefore,
business organisations should voluntarily resort to such
practices where the customers’ needs and interests will be
taken care of.
3. Moral justification: It is the moral duty of any
business to take care of consumer’s interest and avoid
any form of their exploitation. Thus, a business must
avoid unscrupulous, exploitative and unfair trade practices
like defective and unsafe products, adulteration, false and
misleading advertising, hoarding, black marketing etc.
4. Since the business uses society’s resources,
therefore it has a responsibility to supply products or
services which are in public interest.
5. It is because the business has social responsibility
towards various interest groups, including consumers.
Role/Functions of NGOs and consumer
organisations PPT FEE
In India, several consumer organisations and non-
governmental organisations (NGOs) have been set
up for the protection and promotion of consumers’
interests, e.g. (i) Voluntary Organisation in Interest
of Consumer Education (VOICE), Delhi (ii) Consumer
Coordination Council, Delhi
1. Educating the general public about consumer
rights by organising training programmes, seminars and
workshops.
2. Publishing periodicals and other publications
to impart knowledge about consumer problems, reliefs
available and other matters of interest.
3. Carrying out comparative testing of consumer
products in accredited laboratories to test relative
qualities of competing brands and publishing the test
results for the benefit of consumers.
4. Encouraging consumers to strongly protest
and take an action against exploitative and unfair
trade practices of sellers.
5. Providing legal assistance to consumers by
way of providing aid, legal advice etc, in seeking legal
remedy.
6. Filing complaints in consumer courts on behalf of
consumers.
7. Taking an initiative in filing cases in consumer courts in
the interest of the general public, not for any individual.
Rights of a consumer SC HIRE
1. Right to Safety states that a consumer has a right
to be protected against goods and services which are
hazardous to life and health.  Right to get protection against
the risks caused due to the use of substandard products
or products that do not conform to the safety norms.
For instance, electrical appliances which are manufactured
with substandard products or do not conform to the safety
norms might cause serious injury. Thus, consumers are
educated that they should use electrical appliances which
are ISI marked as this would be an assurance of such
products meeting quality specifications.
2. Right to be informed states that a consumer
has a right to have complete information about the
product he intends to buy such as, ingredients, date
of manufacture, price, quantity etc.  It is because of
this reason that the legal framework in India requires
the manufacturers to provide such information on the
package and label of the product.
3. Right to be heard states that a consumer has
a right to file a complaint and to be heard in case
of dissatisfaction with a product or a service.  It is
because of this reason many firms have set up their
own consumer service and grievance cells.
12.2 Redressal Agencies under the Consumer Protection Act, 1986
Three-tier redressal machinery
1. District Consumer Disputes Redressal Forums
(District Forums)
 A complaint can be filed in a District Forum when the
value of good/service along with compensation claimed
does not exceed ` 20 lakh.
 If the consumer is not satisfied with the order of
the District Forum, he can appeal before the State
Commission within 30 days.
The District Forums are set up, in each District by the State
Government concerned. Composition/constitution–
President and two other members including a woman. They
are appointed by the State Government concerned.
2. State Consumer Disputes Redressal
Commission (State Commissions)
 A complaint can be filed in a State Commission when
the value of good/service along with compensation
claimed exceeds ` 20 lakh but does not exceed ` 1
crore. The appeals against the orders of a District
Forum can also be filed before the State Commission.
 If the consumer is not satisfied with order of the
State Commission, he can appeal before the National
Commission within 30 days.
The State Commissions are set up, in each State by the
State Government concerned. Composition/constitution–
President and at least two members including a woman.
They are appointed by the State Government concerned.
3. The National Consumer Disputes Redressal
Commission (National Commission)
 A complaint can be filed in the National Commission
when the value of good/service along with compensation
54 Exam Handbook in Business Studies-XII – by Subhash Dey
Many consumer organisations are also working towards
this direction and helping consumers in redressal of their
grievances. For example, they may file complaints in
appropriate consumer courts on behalf of the consumers.
4. Right to seek redressal states that a consumer
has a right to get relief in case the product or service
falls short of his expectations.  The Consumer
Protection Act, 1986 provides reliefs to consumers such
as replacement of product, removal of defect in the
product, compensation for any loss or injury suffered
by the consumer, etc.
5. Right to choose states that a consumer has
the freedom to choose from a variety of products at
competitive prices.  Marketers should offer a wide
variety of products in terms of quality, price, size etc. to
enable the consumer to make the choice.
6. Right to consumer education states that a
consumer has the right to acquire knowledge and to be
a well informed consumer.  He should be aware about
his rights and the reliefs available to him in case of a
product or service is falling short of his expectations.
Many consumer organisations and NGOs educate the
general public about consumer rights by organising training
programmes, seminars and workshops. They publish
periodicals and other publications to impart knowledge
about consumer problems, legal reporting, reliefs available
and other matters of interest.
claimed exceeds ` 1 crore. The appeals against the
orders of a State Commission can also be filed before
the National Commission.
 Appeals where value of compensation exceeds ` 1 crore
and consumer is not satisfied with order of the National
Commission, can be taken to the Supreme Court of India.
The National Commission is set up by the Central
Government. Composition/constitution–President and at
least four members including a woman. They are appointed
by the Central Government. The National Commission has
territorial jurisdiction over the whole country, except Jammu
and Kashmir.
Reliefs available to a consumer
1. To remove the defect in good or deficiency in service.
2. To replace the defective product with a new one, free
from any defect.
3. To refund the price paid for the product or charges
paid for the service.
4 To pay a reasonable amount of compensation for any
injury or loss suffered by the consumer.
5. To pay adequate costs.
6. To cease manufacture of hazardous goods and to
desist from offering hazardous services.
7. Not to offer hazardous goods for sale.
8. To withdraw the hazardous goods from sale.
9. To pay any amount (not less than 5% of the value
of the defective goods) to be credited to the Consumer
Welfare Fund to be utilised for promotion and protection
of consumers’ interests.
10. To discontinue the unfair/restrictive trade practice
and not to repeat it in the future.
Definition of a Consumer
Under the Consumer Protection Act, 1986, a consumer is
defined as:
(a) Any person who buys any goods for a consideration,
which has been paid or promised, or partly paid and
partly promised, or under any scheme of deferred
payment. It includes any user of such goods, when
such use is made with the approval of the buyer, but
does not include a person who obtains goods for re-sale
or any commercial purpose.
(b) Any person who hires or avails of any service, for
a consideration which has been paid or promised, or
partly paid and partly promised, or under any system
of deferred payment. It includes any beneficiary of
services when such services are availed of with the
approval of the person concerned, but does not include
Application, HOTS, Evaluation and Multi-Disciplinary Questions
1. ‘Grahak Shakti’, an N.G.O. organised a workshop to discuss
various issues relating to consumers. During the discussion,
one of the members drew attention towards exploitation of
consumers due to defective and unsafe products, adulteration,
black marketing, hoarding etc. To this another member argued
that consumers themselves are responsible as they do not
raise collective voice against the exploitation. The Chairperson
of the organization was of the opinion that it was also the duty
of the businessman to take care of the interests of various
stakeholders. Business organizations earn money by selling
goods and services to consumers. So the interests of the
stakeholders have to be well taken care of. State three points
that highlight the need for consumer protection as discussed
in ‘Grahak Shakti’s workshop. (CBSE SQP 2017)
Ans. (i) Widespread exploitation of consumers
(ii) Unorganized consumers (iii) Social responsibility
2. Aditi set-up a company ‘Dantik Ltd.’to manufacturer
toothpastes using herbs found in her village instead of
chemicals that are hazardous to health. The package of the
product was eco-friendly and had details like price, quantity,
ingredients, directions for use and other relevant information.
It also carries the contact details like address, phone number
and e-mail id of ‘Dantik Consumer Services and Grievance Cell’.
The toothpaste became very popular and she started getting
orders from reputed traders. Identify and explain any two
Rights of Consumers discussed above.
Ans. (i) Right to be Informed (ii) Right to be Heard
3. Himesh after completing his graduation started working
with a multinational company in Delhi. But due to ill health of
his parents he had to go back to his village. There he noticed
that the villagers were literate but ignorant about their rights.
Many vegetable vendors were using stones as weights to sell
their vegetables. Some shopkeepers were selling food items
without having ‘FPO mark’. Villagers did not find anything
wrong with these practices. So to create awareness among
villagers Himesh decided to publish a weekly Journal ‘Jan
Jagriti’. Identify the ‘Right’ which Himesh has exercised by
doing so. (CBSE SQP 2015)
Ans. Right to consumer education
4. Mohit purchased a smart phone for `30,000 from a mobile
phone seller on his verbal commitment that the smart phone
will be replaced in case of any defect, within a span of six
months. The phone started creating technical issues in spite
of proper maintenance and upkeep of the phone. The seller
denied taking any action on the complaint made by Mohit.
Name the redressal agency under the Consumer protection
Act where Mohit can file his complaint. (CBSE SQP 2018-19)
Ans. No, Mohit cannot file a complaint against the seller in
Exam Handbook in Business Studies-XII – by Subhash Dey 55
a person who avails of such services for any commercial
purpose.
Who can file a complaint?
(i) Any consumer can file a complaint on his/her own and
does not need the services of advocate/professionals;
(ii) Any registered consumers’ association;
(iii) The Central Government or any State Government;
(iv) One or more consumers, on behalf of many
consumers having the same interest; and
(v) A legal heir or representative of a deceased
consumer.
Against whom a complaint can be filed?
(i) the seller, dealer or manufacturer (in case of
defective goods).
(ii) the service provider (in case of deficient services).
the consumer court as he does not have cash-memo. He
had purchased mobile phone on the verbal commitment
only.
5. Aarushi buys a packet of dry cake from a cake shop without
asking for the bill. The pack does not bear any information
other than the name of shop. After reaching home she finds
the cake to be stale. Identify the consumer right that has been
violated. (CBSE SQP 2018-19)
Ans. Right to Information
6. Ronit Raj, a marketing manager is a patient of diabetes
for which he takes medicines regularly. One day, on his tour
to Patna, he met with an accident and was hospitalised. Due
to doctors negligence a delicate nerve of his right leg was
cut rendering him crippled throughout his life. Identify the
consumer right that has been violated by the doctors under
the Consumer Protection Act, 1986 in the above situation.
(CBSE SQP 2017)
Ans. Right to safety
7. Identify the right of a consumer under Consumer Protection Act,
1986 which Consumer organisations help a consumer to claim by
performing the function of “encouraging consumers to strongly
protest and take an action against unscrupulous, exploitative and
unfair trade practices of sellers”. (CBSE SQP 2018)
Ans. Right to be heard
8. Give any one responsibility of the consumer in addition to
obtaining a cash memo while purchasing an edible oil.
(CBSE 2012)
Ans. To look for the AGMARK label.
9. Rita wants to buy a packet of juice. As an aware customer,
how can she be sure about the quality of juice she plans to
buy? (CBSE 2008)
Ans. By FPO mark label
10. Government is actively advertising for ‘Jago Grahak Jago’.
Whch consumer right is highlighted in the given statement?
Ans. Right to Consumer Education.
11. On the eve of Diwali, Ravi purchased two kilograms of
sweets from Nandan Sweets. On consumption of sweets, his
wife fell sick and was to be hospitalised. Ravi wanted to file
a case in the consumer forum but could not do so because
he did not have any proof of buying the sweets from Nandan
sweets. Name the document that Ravi could have obtained for
filling the complaint in the consumer forum.
Ans. Cash Memo.
12. A school owned a swimming pool and offered swimming
facilities to the public on payment of a fee. The school
conducted winter and summer training camps to train boys
in swimming and for this purpose engaged a coach. Mr. Ajay
enrolled his only son for learning swimming under the guidance
of the coach. That due to the negligence of the coach, the boy
drowned and died. The school denied any responsibility on its
part. The coach claimed that he had considerable experience
in coaching young boys for swimming.
Mr Ajay decided to file a case in the appropriate consumer
court and decided to claim ` 50 lacs.
(a) Against whom can Mr Ajay file a case in the consumer
court? Justify your answer.
(b) Where can Mr Ajay file the case? Give reason.
(c) If the school authorities are not satisfied with the order of
the consumer court, where Mr Ajay had filed the case, what
option is available to them?
Ans. (a) Mr Ajay can file a case against the school as well
as the coach.
Reason: Failure to provide basic safeguards in the
swimming pool by the school and the negligence of the
coach amounts to deficiency in services.
(b) Mr Ajay can file the case in the State Commission since
he decided to claim ` 50 lacs, which exceeds ` 20 lacs but
does not exceed ` 1 crore.
(c) If the school authorities are not satisfied with the
order of the state commission, they can appeal before the
National Commission within 30 days of the passing of the
order.
13. Mr. Man Mohan Singh and his wife Kamlesh had bought
a railway journey cum-reservation ticket for `2000 at
Ahmedabad for travel from New Delhi to Kanpur Central by
the Shatabdi Express on 2 December 2001. The details on
the ticket, including the coach number, the date of journey,
etc., were illegible. Hence, they were forced to buy another
ticket for journey from New Delhi to Kanpur. They applied for a
refund for the earlier ticket but, as the Forum noted, they had
to suffer much for the purpose. In spite of the couple’s giving
the Ahmedabad residential address for sending the refund,
the Railways sent it to their Delhi address. They approached
Consumer Education and Research Society (CERS), Ahmedabad
for help. CERS filed a complaint against the Railways before a
District Consumer Dispute Redressal Forum, Ahmedabad City
and claimed that the two senior citizens had to face mental
harassment due to the deficiency in service by the Railways.
(a) Can CERS file a complaint against the Railways before the
District Consumer Dispute Redressal Forum, Ahmedabad?
Justify your answer. (b) Which consumer right is being
promoted by CERS in this case? (c) State any two reliefs
available to Mr. Man Mohan Singh and his wife Kamlesh.
Ans. (a) Yes, CERS can file a complaint against the Railways
before the District Consumer Dispute Redressal Forum,
Ahmedabad since as per the Consumer Protection Act,
1986 a complaint before the appropriate consumer forum
can be made by any registered consumers’ association
also. (b) ‘Right to be heard’ is being promoted by CERS in
this case. (c) The District Forum may order the Railways:
(i) To refund ` 2000, the charges paid for the railway
journey cum-reservation ticket, and/or (ii) To pay adequate
costs or reasonable amount of compensation for any loss
suffered.
14. Sirajuddin purchased a car for ` 15 lacs from an automobile
company and found that its airbags were defective. After many
complaints with the company that went unheard, he filed a case
in the District Forum. He was not satisfied with the orders of the
District Forum. He then appealed before the State Commission
and on being dissatisfied with the orders of State Commission,
56 Exam Handbook in Business Studies-XII – by Subhash Dey
he appealed before the National Commission. Sirajuddin was
not satisfied with the orders of National Commission. Suggest
him the highest authority where he could appeal against the
decision of the National Commission. (CBSE SQP 2017)
Ans. He cannot appeal to any other higher authority as
only those matters which have been directly filed in the
National Commission and where the value of goods and
services in question along with the compensation claimed
exceed `1 crore are appealable before Supreme Court.
15. Bhavya visited his friend, Raghav. On his returning from
Raghav’s home, Raghav booked a taxi for Bhavya from ‘Ganga
Travels’. The taxi driver drove UBAR Co. the car very fast and
his behaviour was rude with Bhavya.
Bhavya told about this to Raghav who in turn complained to
the proprietor of ‘Ganga travels’.
(a) Can Raghav file a complaint against UBAR Co.? Give reason.
(b) Can Bhavya file a complaint against UBAR Co. Give reason.
(c) Can Ganga travels file a complaint against UBAR Co. ? Give
reason.
Ans. (a) Yes, Raghav can file a complaint against UBAR
Co. since he is a ‘consumer’ as per the definition of a
consumer under the consumer protection Act, 1986 “A
consumer is any person who hires or avails of any services
for a consideration, which has been paid or promised, or
partly paid and party promised, or under any system of
deferred payment.”
(b) Yes, Bhavya can also file a complaint against UBAR
Co. since he is a ‘consumer’ as per the definition of a
‘consumer’ under the consumer protection Act, 1986. A
consumer includes “any beneficiary of such services with
the approval of the person concerned.....”
(c) No, ‘Ganga Travels’ cannot file a complaint against
UBAR Co. since it is not a consumer as per the definition
of a ‘consumer’ under the consumer protection Act, 1986
– “A consumer does not include any person who avails of
such services for any commercial purposes.”
16. Prakhar purchased an ISI mark electric iron from ‘Bharat
Electricals’. While using he found that it was not working
properly. He approached the seller and complained for
the same. The seller satisfies by saying that he will ask the
manufacture to replace this iron. The manufacture refused to
replace and Bharat Electricals decided to file a complaint in the
consumer court.
(a) Car ‘Bharat Electricals’ file a complaint in the consumer
court against the manufacture of the electric iron? give reason
in support of your answer.
(b) Who can file a complaint as per the provisions of the
consumer protection act, 1986?
Ans. (a) No, ‘Bharat electricals cannot file a complaint in
the consumer court against the manufacture of the electric
iron since it is not a consumer. As per the provisions of the
consumer protection Act, 1986, definition of a consumer
does not include a person who obtains goods for resale or
any commercial purpose.
(b) (i) Any consumer can file a complaint on his/her own
and does not need the services of advocate professionals:
(ii) Any registered consumer’s association; (iii) The
central Government or any State Government; (iv) One or
more consumers, on behalf of many consumers having
the same interest; and (v) A legal heir of representative of
a deceased consumer.
17. Name the apex institution under the Consumer Protection
Act, 1986.
Ans. National Consumer Disputes Redressal Commission
(National Commission)