dba1601

DBA 1601 MANAGEMENT CONCEPTS

1Anna Universtiy Chennai

Preface

This course consists of five units. The first unit introduces the concept ofmanagement, its features and functions. This unit will familiarize us withthe evolution of the management thoughts. The second unit discusses theconcept of planning. It also makes an attempt to highlight the nature andscope of the planning, process and steps involved in planning, the sameunit provides information to enrich our knowledge on objectives, policies,procedures, and throw light on strategic formulations. It also helps us toread about the decision-making process types, and to enhance ideas onManagement By Objectives. Unit three aims to make us learn theprinciples of organizations with the support of types and structures oforganization. The same unit is planned to discuss about the methods ofdelegation, the ways and means of span of control and the significanceof staff and committees. Fourth unit of the subject highlights the style andsources of recruitment. Here, in the same unit, objective and scope ofthe training are also discussed. Along with the same, communicationprocess and practices in the organization are also discussed .The fifthunit of the subject promotes us to take up the discussion on basicrequisites for coordination and control in any organization. This unit willenable us to realize the importance and functions of control in anorganization. This unit shall progress to discuss on the control practicesand control techniques used by the organization.

MANAGEMENT CONCEPTS


2 Anna Universtiy Chennai

UNIT - I

INTRODUCTION TOMANAGEMENT

LEARNING OBJECTIVES

After reading this unit you should be able to understand

the nature and purpose of management

that management is both an art and science

the managerial functions such as planning, organizing, staffing, leadingand controlling.

the evolution of management thoughts

the contribution of selected management thinkers

various approaches to management

contemporary management practices

managing global environment

1.1 NATURE AND SCOPE OF MANAGEMENT

1.1.1 DEFINITION OF MANAGEMENTThere are different thoughts on the definition of management. Some areas follows:

Management as an art of getting things done by others

Management as a process

Management as a group of Managers

Management as a discipline



The above said views are taken closely for consideration to definemanagement. Mary Parker Follet defined management as “the art ofgetting things done by others”. This definition was criticized for the smackof a manipulative character about the practice of a manager and also fortreating the employees for mere means to certain ends. Managementwas redefined by a strong understanding that it is not only getting thingsdone by others but there should be something more than that. This canbe achieved by providing them good opportunities for growth andadvancement.

Harold Koontz defined management as the art of getting things donethrough formally organised groups. It is “the art of creating an environmentin which people can perform as individuals and yet cooperate towardsattainment of group goals”.

G.R.Terry has viewed management as a process. Management is a distinctprocess consisting of planning, organizing, actuating and controlling,performed to determine and accomplish stated objectives by the use ofhuman beings and other resources.

According to McFarland, “Management is defined as the process bywhich managers create, direct, maintain and operate purposiveorganizations through a systematic, coordinated and cooperative way”.

Though F.W. Taylor developed principles of management, credit goesto Henri Fayol, a French management theorist for advocating andpublicizing certain principles (or laws) for the soundness and goodworking of the management. Henri Fayol warned that the principles ofmanagement should be :

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

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

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

Kreitner defines management as “A problem solving process of effectivelyachieving organizational objectives through the efficient use of scarceresources in changing environment”.



1.1.2 CHARACTERISTICS OF MANAGEMENT

Management is a distinct activity having the following salient features orcharacteristics :

1. Economic Resource : Management is one of the factors ofproduction together with land, labor and capital. As industrializationincreases, the need for managers also increases. Efficient managementis the most critical input in the success of any organized group activityas it is the force, which assembles and integrates other factors ofproduction, namely, labor, capital and materials. Inputs of labor,capital and materials do not by themselves ensure production; theyrequire the catalyst of management to produce goods and servicesrequired by the society. Thus, management is an essential ingredientof an organization.

2. Goal Oriented : Management is a purposeful activity. It coordinatesthe efforts of workers to achieve the goals of the organization. Thesuccess of management is measured by the extent to which theorganizational goals are achieved. It is imperative that theorganizational goals must be well-defined and properly understoodby the managers at various levels.

3. Distinct Process : Management is a distinct process consisting ofsuch functions as planning, organizing, staffing, directing andcontrolling. These functions are so interwoven that it is not possibleto lay down exactly the sequence of various functions or their relativesignificance. In essence, the process of management involvesdecision-making and putting of decisions into practice.

4. Integrative Force : The essence of management is integration ofhuman and other resources to achieve the desired objectives. Allthese resources are made available to those who manage. Managersapply knowledge, experience and management principles for gettingthe results from the workers by the use of non-human resources.Managers also seek to harmonize the individuals’ goals with theorganizational goals.

5. System of Authority : Management as a team of managers representa system of authority, a hierarchy of command and control. Managersat different levels process varying degrees of authority. Generally, aswe move down in the managerial hierarchy, the degree of authority



gets gradually reduced. Authority enables the managers to performtheir functions effectively.

6. Dynamic function : Management is a dynamic function of businessorganization. Its functions change from time to time depending uponthe circumstance of the business, i.e., changes in economic, social,political, technological and human conditions. Management adjustsitself to the changing atmosphere making suitable forecasts andchanges in the policies.

7. Social process : Management is a social process as it primarilydeals with emotional, dynamic and sensitive human beings. The majorachievement is to win their confidence and cooperation. Thus, it isdifficult to precisely define the principles of management.Management principles are constantly influenced by social traditions,customs and regulations.

8. Management make things happen : Managerial ability is distinctlydifferent from technical ability. Management is the art of getting thingsdone through people. It implies that under a given set of constraintsor problem boundaries, positive results can emerge, by taking well-defined actions.

9. Management is a multi-faceted discipline : Management has todeal with heterogeneous resources. Their performance depends uponthe proper knowledge and skill of various disciplines. Managementhas grown as a body of discipline taking the help of so many socialsciences like-Anthropology, Sociology, Psychology etc. Due to this,management is also known as a “Behavioral Science.”

10. Intangible force: Managerial ability is an intangible force; it is asocial skill, which cannot be seen with the eyes but evidenced by thequality and level of an organization.

1.1.3 MANAGEMENT – SCIENCE OR ART ?

Science : An organized or systematized body of knowledge pertainingto a specific field of enquiry.

Art : It is the application of knowledge and personal skills to achieve results.

Profession : It is an



occupation for which specialized knowledge, skills and training arerequired

these skills are used for larger interests of the society and

the success of these skills is not measured in monetary terms always.

The question whether management is a science, art or profession is putto debate quite frequently. There are arguments on all sides. Let usexamine these in detail.

Properties of Science

Science is a systematized body of knowledge based on certain principles,capable of general application. This knowledge is obtained through theprocess of observation, experimentation and testing. Science has fourelements :

Systematic body of knowledge: Science is systematized in the sensethat it is based on the cause and effect relationship between differentvariables. Such a knowledge helps in explaining past events and predictsthe outcome of specific actions.

Scientific inquiry and observation: Scientific inquiry is unaffected bythe personal likes and dislikes of a scientist. When we say that the rotationof earth causes days and nights, we do not express the opinion of justone person. This can be scientifically proved at any time.

Experimentation: The principles of science are derived after repeatedobservations and experiments. The results of each experiment can beverified and outcomes predicted in a definite way. When results getconfirmed after repeated experimentation, they become principles.

Universal truths: Scientific principles represent basic truths. They aredeveloped after a series of experiments. They can be applied in allsituations and at all times.

Management as a Science

Management is a science because it has all the characteristics of science,namely, Systematized body of knowledge. Management is a distinctdiscipline. It has a number of principles, which can be studied and put toapplication. Management offers principles that could be put to good usewhile solving problems.



Management is a social science : Management is a social science as itdeals with human behavior about which little is known at present. As weall know, it is not possible to study human behavior under controlledlaboratory conditions. Human behavior is unpredictable and therefore,defies experimentation. As a result, the principles of management cannotbe accepted as absolute truths. They are still at a developing stage andevolutionary in nature. Management, at best, can be called as a softscience.

Management is an inexact science : Management is not an exact sciencelike physics, chemistry or biology. It does not offer absolute principles.It can offer only flexible guidelines that would be of use in solvingproblems. Management can never be an exact science because businessis highly dynamic and business conditions change continually.

Manager vs. scientist : A scientist can afford to wait until all theinformation (about a thing) is available. He can indulge in a series ofexperiments till the truth emerges clearly. However, a manager cannotafford to do that. He must take decisions based on inadequate information,insufficient knowledge and resources. He must make decisions today inorder to survive in the future.

Scientific management : When Taylor used the term ‘scientificmanagement’, he was aware of the fact that experimentation andverification of facts is not possible in managing human resources. He hadused the term ‘scientific’, as an organized body of knowledge as opposedto traditional rules and empirical dexterity. Over the years, the traditionalhit-or-miss methods have yielded place to several systematic methodsbased on principles. No wonder, management is known as a‘sophisticated behavioral science’ these days. Thus, art and scienceare complementary and mutually supportive.

Properties of Art

Art is the application of knowledge and personal skills to achieve results.It is a way of living. Art is based on the knowledge of principles offeredby science. A surgeon or a physician without the knowledge of medicalscience becomes a witch doctor, with the knowledge of science an artfuldoctor. Art is basically concerned with application of knowledge, howto do things creatively and skillfully. It can be improved through constantpractice only. Terry has drawn the distinctions between science and art.Therefore :



Management is basically an art as it involves the use of know-how andskills like any other art such as painting, sculpture, etc. The practicalknowledge acquired in the areas of planning, decision making andmotivating certainly help managers to tackle problems in a better way.The arguments in favour of management as an art run as follows:

Use of knowledge : Just as a doctor uses the science of medicine whilediagnosing and treating the patients, a manager uses the knowledge ofmanagement theory while performing the managerial functions. Thus heuses sound knowledge in place of hit-or-miss methods with a view toachieve results effectively.

Creative art : Management is creative like any other art. It combineshuman and non-human resources in a useful way so as to achieve results.It tries to produce sweet music by combining the chords in an effectivemanner. It makes things happen by changing the behavior of human beings.

Personalized : Like any other art, management is a personalized activity.Every manager has his own way of managing things and people, basedon his knowledge and experience. As years roll by, managers learn theart of managing through a process of trial and error.

Constant practice : Managers learn from mistakes. The application ofmanagerial principle over a period of time enables them to tackle difficultproblems with confidence. In other words, they develop their skills throughconstant practice just as artistic skills can be developed through training.

Management is Science as well as Art

Management is thus an art as well as a science. The art of management isas old as civilization. The science of management is young and developing.Both are complementary and mutually supporting. Managers need toacquire the knowledge of management principles and practice in orderto be successful. They need to sharpen this knowledge through constantpractice. The theoretical knowledge in management must be put to gooduse in a skilful way, while achieving results. As Drucker has pointed out,every organization has the same resources to work with. It is the qualityof management that spells the difference between success and failure.Managers need to acquire knowledge systematically and put the sameto good use, using intuition, judgement and experience. A successfulmanager is one who is able to visualize problems before they turn into



emergencies. The ability to meet the problems head-on does not comeby chance. It requires sound knowledge and constant practice. Managerstherefore, have to fruitfully combine their scientific knowledge with artisticskills in order to emerge as winners, in a competitive environment.

1.2 EVOLUTION OF MANAGEMENT THOUGHTS

More than 200 years ago, Adam Smith described the advantages ofdivision and specialization. However, the study of management as ascience began recently, especially after the Industrial Revolution. Therehas been a deluge of research during the last few decades on management.It has attracted the attention of psychologists, sociologists,anthropologists, mathematicians, political scientists, economists and soon. Unfortunately, the approaches by these scholars have created chaosand resulted in a ‘confused and destructive warfare’.

Harold Koontz described the present state of management theory as a‘jungle’. According to Koontz, Donnell and Weihrich there are elevenapproaches for studying management. Stogdill has identified not less thaneighteen approaches for studying management. Hutchinson has identifiedfive approaches. Thus, different writers have provided differentcategorization schemes for studying management. In order to facilitateeasy understanding, we can identify four broad approaches namely, theclassical, neo-classical, behavioral and modern theory.

(i) Classical School: It is the oldest school of management thought.The classical theorists concentrated on organization structure for theachievement of organizational goals and also developed certainprinciples of management. Many of the classical concepts andprinciples hold good even today. Classical thought can be studiedunder two st reams namely (a) Scient ific Management(b) Bureaucracy

(ii) Neo-Classical School : The neo-classical writers tried to removethe deficiencies of the classical school and suggested improvementsfor good human relations in the organization. Their propositions arebased on ‘human relations studies’ conducted at the Hawthorne Plantof General Electricals, U.S.A. That is why, they are also known as‘human relationists.’

(iii) Behavioral Sciences School : This approach emerged as a resultof the contributions of psychologists, sociologists and anthropologists



to the field of management. The behavioral science perspectivebelieves that it is difficult to understand the sociology of a group,separate from the psychology of the individuals comprising it andthe anthropology of the culture within which it exists. Thus, thebehavioral sciences are transactional; they are concerned with allrelevant aspects of human behavior including the interactions amongall important factors.

(iv) Modern School : The modern management thinkers defineorganization as a system and also consider the impact of environmenton the effectiveness of the organization. As a result, two approacheshave gained prominence after 1960s which are as follows: (a)Systems approach, and (b) Contingency approach.

1.2.1 SCIENTIFIC MANAGEMENT APPROACH

The impetus for the scientific management approach came from the firstindustrial revolution. Because it brought about such an extraordinarymechanization of industry, this revolution necessitated the developmentof new management principles and practices. The main contributors toscientific management include Frederick Taylor, Henry L. Gantt, FrankGilbreth, Lillian Gilbreth and Harrington Emerson and others.

1.2.1.1 Fredrick W. Taylor’s views on Scientific Management

Taylor was the first person who insisted on the introduction of methodsin management and it was he who, along with his associates, made thefirst systematic study of management. He launched a new managementapproach in 1910 which is known as ‘Scientific Management.’ That iswhy Taylor is regarded as the father of scientific management.

Taylor was born in 1856 in Philadelphia, U.S.A. He started his career asan apprentice in a small machine making shop in 1870 and rose to the positionof a Chief Engineer of Midvale Steel Works in 1884 at the age of 28.

Meaning of Scientific Management

According to Taylor, “Scientific Management is the substitution ofexact scientific investigations and knowledge for the old individualjudgment or opinion in all matters relating to the work done in theshop”. It implies the application of science to the management of abusiness concern. It aims at replacement of traditional techniques byscientific techniques.



Principles of Scientific Management

Taylor’s contribution has two dimensions: (i) mechanical and (ii)philosophical. On the mechanical side, Taylor introduced time and motionstudies. Standardization of tools, methods and working conditions,differential piece rate were considered for the payment of wages, etc.On the philosophical side, he tried to develop the science of managementbased on scientific investigation and experiment. Before studying thetechniques or elements of scientific management, a proper understandingof Taylor’s philosophy is a must. Scientific management is based on thefollowing five principles:

1. Science, not rule of thumb.

2. Harmony in group action, rather than discord.

3. Maximum output in the place of restricted output.

4. Scientific selection, training and placement of the workers.

5. Development of all workers to the fullest extent possible for theirown and organization’s highest prosperity.

The above principles are discussed below :

1. Replacement of old rules of thumb method : Scientificinvestigation should be used for taking managerial decisions insteadof basing decisions on opinion, intuition or rule of thumb. Underscientific management, decisions are made on the basis of facts asdeveloped by the application of scientific method to the problemconcerned. This is in contrast with the approach followed undertraditional management according to which decisions are based onopinions, prejudices, or rule of thumb.

2. Scientific selection and training of workers: The procedure forselection of workers should be designed scientifically. The errorscommitted at the time of selection may prove to be very costly lateron. If we do not have the right worker on the right job, the efficiencyof the organization will be reduced. Therefore, every organizationshould follow a scientific system of selection. The selected workersare to be trained to avoid wrong methods of work. Management isresponsible for their scientific education and training.

3. Co-operation between labour and management: There shouldbe co-operation between the management and the workers. This



requires change of mental attitudes of the workers and themanagement towards each other. Taylor called it a mental revolution.When this mental revolution takes place, workers and managementturn their attention towards increasing profits. They do not quarrelabout the distribution of profits.

4. Maximum output: The management and the workers should try toachieve maximum output, in place of restricted output. This will bebeneficial to both the parties. Maximum output will also be in theinterest of the society.

5. Equal division of responsibility: There must be equal division ofresponsibility between the managers and the workers. Themanagement should assume responsibility for the work for which itis better suited. For instance, management should decide the methodof work, working conditions, time for completion of work, etc.instead of leaving these to the discretion of workers. The managementshould be responsible for planning and organizing the work, whereasworkers should be responsible for the execution of work as perinstruction of the management.

Techniques of Scientific Management

To put the philosophy of scientific management into practice, Taylor andhis associates have suggested the following techniques:

1. Scientific Task Setting : It is essential to set the standard taskwhich an average worker should do during a working day. Taylorcalled it a fair day’s work. He emphasized the need for fixing a fairday’s work because it will prevent the workers from doing workmuch below their capacity.

2. Work Study: Work-study implies an organized, objective,systematic, analytical and critical assessment of the efficiency ofvarious operations in an enterprise. It is a generic term used forthose techniques which are used in the analysis of human work in itsentire context and which lead systematically to the investigation ofall factors, which affect the efficiency, and economy of operations.Work-study includes the following techniques:

(i) Method study: This study is conducted to know the best method ofdoing a particular job. It helps in reducing the distance traveled by



materials, and brings improvement in handling, transporting, inspectionand storage of raw materials and goods.

(ii) Motion study: It is the study of the movement of an operator or amachine. Its purpose is to eliminate useless motions and find out thebest method of doing a particular job. By undertaking motion study,an attempt is made to know whether some elements of a job can beeliminated, combined or their sequence changed to achieve thenecessary rhythm.

(iii) Time study: Time study is the technique of observing and recordingthe time required to do each element of an industrial operation.Through time study, the precise time required for each element of aman’s work is determined. It helps in fixing the standard time requiredto do a particular job.

(iv) Fatigue study: Fatigue, (physical or mental) has an adverse effecton worker’s health and efficiency. Fatigue study helps in reducingfatigue among the workers. Fatigue is generally caused by longworking hours without rest pauses, repetitive operations, excessivespecialization and poor working conditions. The purpose of fatiguestudy is to maintain the operational efficiency of the workers.

3. Planning the Task: Taylor emphasized the need for planning work.He advocated that planning function should be separated. Workersshould not be asked to choose their own methods and decide whatthey have to do. The planning department should do the detailedplanning. The planning department should prepare detailedinstructions for the workers as to the type, quality and quantity ofthe products to be used.

4. Standardization: Taylor advocated the standardization of tools, andequipments, cost system and several other items. Efforts should bemade to provide standardized working environment and methods ofproduction to the workers. Standardization would help to reducespoilage and wastage of materials, improve quality of work, reducecost of production and reduce fatigue among the workers.

5. Scientific Selection and Training: The management should designscientific selection procedure so that the right men are selected forthe right jobs. The first step in scientific selection is determining the



jobs for which workers are required. After that, the most appropriatequalification, training, experience and the level of efficiency for therequisite post are determined. Employees are selected according topredetermined standards in an impartial way. Workers should bespecifically trained for the jobs they are appointed to, so that theycan perform their jobs effectively.

6. Differential Piece-Wage Plan: Taylor suggested this plan to attracthighly efficient workers. Under this plan, there are two-piece workrates, one is lower and another is higher. The standard of efficiencyis determined either in terms of time or output based on time andmotion study. If a worker finishes work within the standard time orproduces more than standard output within the standard time, hewill be given higher piece rate. On the other hand, if a worker isbelow the standard, he shall be given lower piece rate.

7. Specialization: Taylor advocated that specialization must beintroduced in a factory. He advocated functional foremanship forthis purpose. In his scheme, planning was separated from executing.He recommended eight foremen in all, to control the various aspectsof production. He suggested four foremen in the planning department,namely, route clerk, instruction card clerk, time and cost clerk andshop disciplinarian. The four foremen recommended for getting therequired performance from the workers include gang boss, speedboss, repair boss and inspector.

Evaluation of Scientific Management

Taylor’s scientific management was associated with many benefits to theindustry. According to Gilberts, the main benefits of scientific managementare “conservation and savings, making an adequate use of everyone’s energy of any type that is expended.” Scientific managementleads to the following benefits:

1. Replacement of traditional rule of thumb method by scientifictechniques for each element of a man at work.

2. Proper selection and training of the workers.

3. Establishment of harmonious relationship between the workers andthe management.

4. Achievement of equal division of responsibilities between the workersand the management.



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

6. Detailed instructions and constant guidance to the workers.

7. Incentive wages to the workers for higher production.

8. Elimination of wastes and rationalization of system of control.

9. Better utilization of various resources.

10. Satisfaction of the needs of the customers by providing higher qualityproducts at lower prices.

Criticism of Scientific Management:

Taylor’s scientific management was criticized not only by the workersand managers but also by the psychologists, the general public, etc. Themain grounds of criticism are given below:

1. The use of the word ‘Scientific’ before ‘Management’ was objectedbecause what is actually meant by scientific management is nothingbut a scientific approach to management.

2. It was argued that the principles of scientific management asadvocated by Taylor were confined mostly to productionmanagement. He ignored certain other essential aspects ofmanagement like finance, marketing, accounting and personnel.

3. Taylor advocated the concept of functional foremanship to bringabout specialization in the organization. But this is not feasible inpractice as it violates the principle of unity of command.

4. Trade unionists regarded the principles of scientific management asthe means to exploit labour because the wages of the workers werenot increased in direct proportion to productivity.

The other contributors to scientific management like Henri L. Gantt, FrankGilbreth, Lillian Gilbreth and Harrington Emerson later remedied manyof the above objections. Taylor’s theory is still being applied by themodern business undertakings. In short, it can be said that Taylor wasthe pioneer in introducing scientific reasoning to the discipline ofmanagement.

Management process school is also called the ‘traditional’ or‘universality’ school, as it believes that management principles areapplicable to all kinds of group activities. Henri Fayol is regarded as the



father of this school. Henri Fayol defined management in terms of certainfunctions and then laid down fourteen principles of management whichaccording to him have universal applicability.

1.2.1.2 Henri Fayol-Theory of Management

Fayol was born in 1841 and was appointed as an engineer of a Frenchmining company in 1860. In 1880, he became the managing director ofthe same company. When he took charge, the company was on the vergeof bankruptcy. When he retired in 1918, its financial position was verystrong. Fayol attributed his success to his system of management whichhe emphasized could be both taught and learnt. Unlike Taylor, Fayolstudied management from the board of directors down. Taylor’s approachto management dealt with specifics of job analysis, employees’ motionand time standards while Fayol viewed management as a teachable theorydealing with planning, organizing, commanding, coordinating andcontrolling.

Fayol’s long practical experience is simply reflected in his written work.He tried to develop a theory of management. He discussed the principlesof general management and argued that managerial ability can be acquiredas any other technical ability. He not only recommended formal teachingin management but also practiced it by founding the Center forAdministrative Studies in Paris. Thus, he was a pioneer in the field ofmanagement education. In brief, Fayol’s views on management isacceptable even today because they are much in tune with the requirementsof the management in the present day world. He has been rightly calledthe father of general management.

Fayol’s Theory of Management

Fayol began by classifying all operations in business organizations underthe following six categories:

(i) Technical (production);

(ii) Commercial (purchases and sales);

(iii) Financial (funding and controlling capital);

(iv) Security (protection);

(v) Accounting (balance sheet, costing records); and

(vi) Administrative or Managerial (planning, organizing, commanding,coordinating and controlling).



Fayol pointed out that managerial activity deserved more attention. Inhis view, management is the process composed of five elements orfunctions: planning, organizing, commanding, coordination and control.

Fayol observed :

(i) To plan means to study the future and arrange the plan of operations;

(ii) To organize means to build up the material and human organizationof the business;

(iii) To command means to make the staff do their work;

(iv) To coordinate means to unite all activities; and

(v) To control means to see that everything is done in accordance withthe standards that have been laid down.

Principles of Management

Principles of Management implies a list of current management practices.Though F.W. Taylor developed principles of management, credit goesto Henri Fayol, a French management theorist for advocating andpublishing certain principles (or laws) for the soundness and good workingof the management. Henri Fayol warned that the principles of managementshould be, (i) Flexible and not absolute; must be usable regardless ofchanging conditions, (ii) Used with intelligence and with a sense ofproportion, etc. Henri Fayol listed 14 principles which are briefed below:

1. Division of Work (or Labour)

- Division of work means dividing the work on the principle that differentworkers (and different places) are best fitted for different jobs (or things)depending upon influences arising from geography, natural conditions,personal aptitude and skills.

- Division of work leads to specialization.

- Concept of division of labour can be applied to all kinds of work,managerial as well as technical.

Advantages of Division of Labour :

Since the same worker does the same work repeatedly,

(i) He gains proficiency and skill on the jobs,

(ii) Rate of production increases,



(iii) Product quality improves,

(iv) He is in a position to suggest changes in product, processing ormethods of doing that work.

Disadvantages of Division of Labour:

(i) Division of labour gives rise to loss of craftsmanship; workers becomemachine-minders and no more,

(ii) With the passage of time, the same job becomes dull and monotonous,

(iii) Workers can not remain all-around and one cannot work in place ofanother if he is absent.

2. Authority and Responsibility

- Authority and Responsibility should go together, hand-in-hand andmust be related.

- An executive can do justice with his responsibility only when he hasthe proper authority.

- Responsibility without Authority or vice versa is meaningless.

3. Discipline

- Discipline is absolutely necessary for efficient functioning of allenterprises.

- Discipline may be described as a respect for agreements that aredirected at achieving obedience, application, and the outward marksof respect.

4. Unity of Command

- Unity of command means, employees should receive orders andinstructions from one boss (or supervisor) only. In other words aworker should not be under the control of more than one supervisor.

- Unity of command avoids confusion, mistakes and delays in gettingthe work done.

5. Unity of Direction

- It is a broader concept than the unity of command.

- Unlike unity of command which concerns itself with the personnel,unity of direction deals with the functioning of the body corporate.



- Unity of direction implies that there should be one plan and onehead for each group of activities having the same objective.

In other words, there should be one common plan for an enterprise as awhole.

6. Subordination of Individual to General Interest

- The interests of an individual person should be permitted to supersedeor prevail upon the general interests of the enterprise.

- This is necessary to maintain unity and to avoid friction among theemployees.

7. Remuneration

Remuneration is the price paid to the employees for the services renderedby them for the enterprise. Remuneration should (i) be fair, and (ii) bringmaximum satisfaction to both employees and the employer.

8. Centralization of Authority

- Centralization of authority means that the authority is in the hands ofthe center, i.e., the authority is not dispersed among different sections.

- In a business organization, authority should be centralized only tothat degree or extent which is essential for the best overallperformance.

- Degree of centralization is decided by keeping in view the nature,size and complexity of the (business) enterprise.

9. Scalar Chain

- Managers may be regarded as a chain of superiors. There should bean unbroken line of authority and command through all levels fromthe highest (i.e., general manager) to the lowest ranks (employee).

- The chain of superiors should be short circuited, when following itstrictly will be detrimental to performance.

10. Order

- This promotes the idea that everything (e.g., materials) and everyone(human being) has his place in the organization.

- Materials and human beings should be arranged such that rightmaterial (things)/person are in the right place.



11. Equity of Treatment

- Manager should have equality of treatment for all his subordinates.

- Manager should deal with his subordinates with kindness and justice.

-This will make employees more loyal and devoted towards themanagement/enterprise.

12. Stability

- Stable and secure work force is an asset to the enterprise, becauseunnecessary labour turnover is costly.

- An average employee who stays with the concern is much better thanoutstanding employees who merely come and go.

- Instability is the result of bad management.

13. Initiative

- Initiative is one of the keenest satisfactions for an intelligent employeeto experience.

- Managers should sacrifice their personal vanity in order to permit theirsubordinates to exercise their own initiative.

- A manger should encourage his subordinates to take initiative.

14. Esprit de Corps

- This principle of management emphasizes the need for teamwork(harmony and proper understanding) among the employees and showsthe importance of communications in obtaining such team work.

FOLLOWERS OF TAYLOR

Among the immediate disciples of Taylor were such outstanding pioneersas Henry L. Gantt and Frank and Lillian Gilbreth, to mention only a few.

1.2.1.3 Henry L. Gantt’s Contribution of Management

Gantt like Taylor , a mechanical engineer joined Taylor at the MidvaleSteel Company in 1887. He stayed with Taylor in his various assignmentsuntil 1901, when he formed his own consulting engineering firm. Althoughhe strongly espoused Taylor’s ideas and did much consulting work onthe scientific selection of workers and the development of incentive bonussystems, he was far more cautious than Taylor in selling and implementing



his scientific management methods. Like Taylor, he emphasized the needfor developing a mutuality of interests between management and labour,a harmonious cooperation. In doing this, he stressed the importance ofteaching, developing an understanding of systems on both labour andmanagement, and appreciating that “in all problems of management thehuman element is the most important one.”

Gantt is perhaps best known for his development of graphic methods ofdescribing plans and making possible better managerial control. Heemphasized the importance of time, as well as cost, in planning andcontrolling work. This led eventually to the famous Gantt chart, which isin wide use today and was the forerunner of such modern techniques asthe Program Evaluation and Review Technique (PERT). Some socialhistorians regard the Gantt chart as the most important social inventionof the twentieth century.

1.2.1.4 Frank and Lillian Gilbreth

The ideas of Taylor were also strongly supported and developed by thefamous husband and wife team of Frank and Lillian Gilbreth. FrankGilbreth gave up going to the university to become a bricklayer at theage of 17 in 1885; he rose to the position of chief superintendent of abuilding contracting firm 10 years later and became a building contractoron his own shortly thereafter. During this period, and quite independentlyof Taylor’s work, he became interested in wasted motions in work. Byreducing the number of bricklaying motions from 18 to 5, he madepossible the doubling of a bricklayer’s productivity with no greaterexpenditure of effort. His contracting firm soon gave way largely toconsulting on the improvement of human productivity. After meeting Taylorin 1907, he combined his ideas with Taylor’s to put scientific managementinto effect.

Lillian Gilbreth’s interest in the human aspects of work and her husband’sinterest in efficiency search for the one best way of doing a given task,led to a rare combination of talents. It is therefore not surprising thatFrank Gilberth long emphasized in applying scientific managementprinciples; we must look at workers first and understand their personalitiesand needs. It is interesting too that the Gilbreths came to the conclusionthat it is not the monotony of work that causes so much workerdissatisfaction but, rather, management’s lack of interest in workers.



Bureaucracy-Definition

A Structure with highly routine operating tasks achieved throughspecialization, much formalized rules and regulations, tasks that aregrouped into functional departments, centralized authority, narrow spansof control and decision making that follows the chain of command.

Elements of Bureaucracy are:

1. Hierarchy

2. Division of work

3. Rules, regulations and procedures

4. Records

5. Impersonal Relationships

6. Administrative class

Advantages of Bureaucracy: It is having the following qualities ofdistinction like

Specialization

Rationality

Predictability

Democracy

Disadvantages of Bureaucracy are as follows :

Rigidity

Impersonality

Displacement of objectives

Compartmentalization of activities

Empire building

Red tape

1.2.2 NEO-CLASSICAL APPROACH

Theories resulted in work behavior and the researches tried to investigatethe reasons for human behavior at work. They discovered that the realcause of human behavior is somewhat more than the physiological variable.These findings generated a new phenomenon about the organizational



functioning and focused attention, on human beings in the organizations.These exercises were given new names such as ‘behavioral theory ofan organization’, ‘human view of an organization’ or ‘humanrelations approach in an organization.’

The neoclassical approach was developed as a reaction to the classicalapproach, which attracted so many behaviorists to make furtherresearches into the human behavior at work. ‘Mayo’ and his associatesat Hawthorne Plant of the Eastern Electric Company, Chicago startedthis movement in the late twenties, gained momentum and continued todominate till the sixties. Douglas M. McGregor has given an impressiveaccount of thinking of human relations in his book entitled ‘The HumanSide of Enterprise.’

The classical theory was the product of the time and the following reasonswere responsible for its development:

(i) The management thinking was showing signs of change because ofthe improved standards of living and education level. Thetechnological changes were forcing the management to expand thesize of the organization and complexities were increasing. This alsoled to the fact that the management be somewhat more sympatheticand considerate towards their workers.

(ii) The trade union movement got momentum and made the workersconscious of their rights. It was no longer possible for the managementto treat the human beings at work as ‘givens’.

These were the two main reasons, which were responsible for the changeof management behavior from autocratic to the custodial approach, whichwas based on offer of fringe benefits apart from wages to meet theirsecurity needs.

Though neoclassical approach was developed as a reaction to the classicalprinciples, it did not abandon the classical approach altogether, rather itpointed to the limitations of the classical approach and attempted to fillin the deficiencies through highlighting certain points which were not givendue place in the classical approach. In this regard, there were two schoolsof thought. One school of thought with writers as Simon, Smith burg,and Thompson, pointed out the limitations of the classical approach tostructural aspect only and the analysts called this group as ‘neoclassicists’.



This school of thought suggested modifications to the classical principlesbut did not abandon the basic principles. The other school of thoughtwhich consisted of large number of writers focused on the human aspectneglected by the classicists. This group was called as human relationistsor ‘behaviorists’. Both these schools were reactions to the classical theorybut failed to suggest or develop any new theory except providing somepoints of criticism on varying counts. Both of them could be referred asneoclassicists.

Neoclassicists endeavored to identify the weaknesses of classiciststhrough empirical research and most of the criticisms of classical theoryhave emerged through researches. Hawthorne studies were the beginningof the series. The other contributors are Roethlisberger, Dickson,Whitehead, Lippitt and White, Coach and French Jr., etc.

1.2.3 HUMAN RELATIONS APPROACH

The classical writers including Weber, Taylor and Fayol neglected thehuman relations aspect. The human relationists, (also known asneo-classicists) focused on the human aspect of industry. They modifiedthe classical theory by emphasizing the fact that organization is a socialsystem and the human factor is the most important element within it.They conducted some experiments (known as Hawthorne Experiments)and investigated informal groupings, informal relationships, patterns ofcommunication, patterns of informal leadership, etc. Elton Mayo isgenerally recognized as the father of the Human Relations School. Otherprominent contributors to this school include Roethlisberger, Dickson,Dewey, Lewin, etc.

Hawthorne Studies

In 1927, a group of researchers led by George Elton Mayo and FritzJ. Roethlisberger at the Harvard Business School were invited to join inthe studies at the Hawthorne Works of Western Electric Company,Chicago. The experiment lasted up to 1932. Earlier, from 1924 to 1927,the National Research Council made a study in collaboration with theWestern Electric Company to determine the effect of illumination andother conditions upon workers and their productivity.



Illumination Experiment. This experiment was conducted to establishrelationship between output and illumination. The output tended toincrease every time as the intensity of light was improved. But the outputagain showed an upward trend when the illumination was brought downgradually from the normal level. Thus, it was found that there is noconsistent relationship between output of workers and illumination in thefactory. There were some other factors, which influenced the productivityof workers when the intensity of light was increased or decreased.

Relay Assembly Room Experiment. In this experiment, a smallhomogeneous work-group of girls was constituted. Several new elementswere introduced in the work atmosphere of this group. These includedshorter working hours, rest pauses, improved physical conditions, friendlyand informal supervision, free social interaction among group members,etc. Productivity and morale increased considerably during the period ofthe experiment.Morale and productivity were maintained even ifimprovements in working conditions were withdrawn. The researchersconcluded that socio-psychological factors such as feeling of beingimportant, recognition, attention, participation, cohesive work-group, andnon-directive supervision held the key for higher productivity.

Bank Wiring Observation Room Experiment. This experiment wasconducted to study a group of workers under conditions, which were asclose as possible to normal. This group comprised of 14 workers. Afterthe experiment, the production records of this group were comparedwith their earlier production records. There were no significant changesin the two because of ‘the maintenance of ‘normal conditions’. However,the researchers observed existence of informal cliques in the group andinformal production norms.

The findings of Bank Wiring Experiment included the followingobservations:

1. Each individual was restricting output.

2. The group had its own “unofficial” standards of performance.

3. Individual output remained fairly constant over a period of time.

4. Departmental records were distorted due to differences betweenactual and reported output or between standard and reportedworking time.



Mass Interview Programme. The researchers interviewed a largenumber of workers with regard to their opinions on work, workingconditions and supervision. Initially, managers and researchers used adirect approach whereby interviewers asked questions which areconsidered important. Later, this approach was replaced by an indirecttechnique where the interviewer simply listened to what the employeeshad to say. The findings confirmed the importance of social factors atwork in the total work environment.

Contributions of Human Relations Approach or HawthorneStudies

The human relationists proposed the following points as a result of theirfindings of the Hawthorne experiments:

1. The organization in general, is a social system composed of numerousinteracting parts. The social system defines individual roles andestablishes norms that may differ from those of the formalorganization. The workers follow a social norm determined by theirco-workers, which defines the proper amount of work, rather thantry to achieve the targets, management thinks they can achieve, eventhough this would have helped them to earn as much as they physicallycan.

2. The social environment on the job affects the workers and is alsoaffected by them. Management is not the only variable.

3. The informal organization does also exist within the framework offormal organization and it affects the formal organization.

4. At the workplace, the workers often do not act or react as individualsbut as members of groups. A person who resists pressure to changehis behavior as an individual often changes it quite readily if the groupof which he is a member changes its behavior. The group plays animportant role in determining the attitudes and performance ofindividual workers.

5. There is an emergence of informal leadership as against formalleadership and the informal leader sets and enforces group norms.He helps the workers to function as a social group and the formalleader is rendered ineffective unless he conforms to the norms of thegroup of which he is supposed to be in charge.



6. Both way communication is necessary because it carries necessaryinformation downward for the proper functioning of the organizationand transmits upward the feelings and sentiments of people whowork in the organization.

7. Money is only one of the motivators, but not the sole motivator ofhuman behavior. Man is diversely motivated and socio-psychologicalfactors act as important motivators.

8. Man’s approach is not always rational. He may behave irrationallyas far as rewards from the job are concerned.

Appraisal of Neoclassical Theory Contribution

The neoclassical theory provides various modifications and improvementsover the earlier theory and offers a more humanistic view towards peopleat work. Neoclassicists have also introduced behavioral science in thestudy of organizational functioning which has helped managers quite alot. This approach emphasized the micro-analysis of the human behavior.The theory has brought into light certain important factors which werealtogether ignored by the classicists such as informal group, group norms,informal leader, non-economic rewards, etc. Thus, the approach givesevidence of accepting the classical doctrine though superimposing itsmodifications, resulting from individual behavior and the influence of theinformal group.

Criticism of Human Relations Approach

The human relations approach has been criticized on the following grounds:

(i) Lack of Scientific Validity : The human relationists drew conclusionsfrom Hawthorne studies. These conclusions are based on clinicalinsight rather than on scientific evidence. The groups chosen for studywere not representative in character. The findings based upontemporary groups do not apply to groups that have continuingrelationship with one another. Moreover, the experiments focusedon operative employees only.

(ii) Limited Focus on Work : The human relations approach lacksadequate focus on work. It puts all the emphasis on interpersonalrelations and on the informal group. It tends to overemphasize thepsychological aspects at the cost of the structural and technicalaspects.



(iii) Over-emphasis on Group : The human relations approachover-emphasizes the group and group decision-making. But inpractice, groups may create problems and collective decision-makingmay not be possible.

(iv) Over-stretching of Human Relations : It is assumed that allorganizational problems are amenable to solutions through humanrelations. This assumption does not hold good in practice.

(v) Conflict between Organizational and Individual goals : It viewsconflict between the goals of the organization and those of individualsas destructive. The positive aspects of conflicts such as overcomingweaknesses and generation of innovative ideas are ignored.

1.2.4 BEHAVIOURAL SCIENCE APPROACH

Under behavioural science approach, the knowledge drawn frombehavioural sciences, namely, psychology, sociology and anthropology,is applied to explain and predict human behavior. It focuses on humanbehavior in organizations and seeks to promote verifiable propositionsfor scientific understanding of human behavior in organizations. It laysemphasis on the study of motivation, leadership, communication, groupdynamics, participative management, etc.

The essential characteristics of behavioural science approach are as under:

(1) Data must be objectively collected and analyzed.

(2) Findings must be presented so that the distinction between causeand effect, as opposed to chance occurrences, is clear.

(3) Facts must be systematically related to one another within a systematicframework. Data collection alone does not constitute a science.

(4) The findings of a study must always be open to further examinationand question.

The proponents of behavioural science approach made the followingpropositions :

(i) An organization is a socio-technical system.

(ii) Individuals differ with regard to attitudes, perceptions and valuesystems. As a result, they behave differently to different stimuli underdifferent conditions.



(iii) People working in the organization have their needs and goals, whichmay differ, from the organizational goals. Attempts should be madeto achieve fusion between organizational goals and human needs.

(iv) A wide range of factors influence inter-personal and group behaviorof people in organizations.

1.2.5 SOCIAL SYSTEM APPROACH

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

Chester I. Barnard –Contribution to Management

Barnard’s treatment of management differed considerably from that ofTaylor and Fayol. Taylor concentrated on improving the task efficiencyof the individual. Fayol, on the other hand, moving to the totality conceptof management directed his analysis to the operational side, i.e., principlesand functions of management. But Barnard started with the individual,moved to cooperative organised endeavor and ended with executivefunctions. His publication ‘The Functions of the Executive’ (1938) is ahighly significant work. He wrote this book with two objectives: to setforth a theory of cooperation and organization, and to present adescription of the executive process.

The broad features of the Social System approach are as follows:

(i) Organization is treated as a social system. That is why, this approachresembles the human relations approach.

(ii) Relationships exist among the external and internal environment ofthe organization.

(iii) Cooperation among group members is necessary for the achievementof organizational goals.



(iv) For effective management, efforts should be made for establishingharmony between the goals of the organization and those of thevarious groups therein.

Barnard identified the following functions of an executive: (a) themaintenance of organizational communication, (b) securing essentialservices from individuals in the organization, and (c) formulating anddefining the purpose. By performing these functions, the executives canachieve good human relations in the organization.

Barnard also developed a new concept of authority-known as acceptanceauthority. He suggested that a person will accept the communication asauthoritative only when-four conditions are satisfied: (a) he can understandthe communication, (b) he believes that it is consistent with organizationalpurpose, (c) he believes it to be compatible with his own personalinterests, and (d) he is mentally and physically able to comply with it.

Barnard is often remembered for his views on social responsibility ofmanagement. The philosophy of social responsibility of managementemphasizes that management should consider itself as a provider of fairwages and security, and a creator of an atmosphere conducive to thegrowth and development of the worker as an employee and as a citizen.

1.2.6 SYSTEMS APPROACH TO AN ORGANIZATION

We may look at the organization from two different angles:

1. We may consider the overall picture of the organization as a unit; or

2. We may consider the relationship between its various internalcomponents.

When we consider the overall picture of the organization, we considerall the elements-internal and external-and their effects on each offersimultaneously. This approach may be called the ‘goalistic view’ becauseit tries to reach the goal of an organization by unifying the efforts of allthe elements. For example, when we consider finance, workers and theirattitude, technological developments, etc. we are following goalistic view.It serves as a mean-ends analysis, which in turn facilitates division ofwork and helps in judging the extent of success of comparing actual andtargeted performance. But it does not answer many problems such asinterdependence of elements, organizations environment, interface, etc.It gives a systematic view when we consider the second approach,



i.e., we examine the relationship between each element of the organizationand their interdependence. If we examine employer-employee, customerand organization, debtors-organization relationships, we follow systematicview.

The systems approach focused attention on the following aspects:

(i) It integrates all elements for the proper and smooth functioning ofthe organization.

(ii) The organization overall goals can be achieved successfully becauseit considers all the aspects of the problems deeply and maintains aharmonious relationship between various elements so that they workuntidily to achieve the goals.

(iii) The approach helps in acquisition and maintenance of variousresources, i.e., man, material, money, and machinery, etc. forpertaining the smooth functioning of the organization.

(iv) It allows adaptation to internal - requirements and environmentalchanges in order to survive and grow.

Definition and Characteristics of System

1. Definition of System: Kast and Rosenzweig define the system as anorganised unitary whole composed of two or more interdependent parts,components or sub-systems defined by identifiable boundaries that formits environmental suprasystem. More simply, a system may be referredas units composed of several interdependent parts. System may bedenoted as a grouping of parts and not simply an agglomeration ofindividual parts. Though each part performs its own functions, yet theywork towards a common goal. The behavior of the entity is a joint functionof the behaviors of the individual parts and their interactions. Anorganization is composed of a number of sub-systems such as internalorganization, technological, psychological, structural, managerial andenvironmental etc., that are constantly changing and evolving. A changein one may affect the other.

2. Characteristics of System: From the analysis of foregoing definitionand discussion following characteristics of a system emerge:

1. Interdependence of parts: A system has several parts. Each part isdynamic and affects all other parts. They are interrelated and



interdependent. Interdependence of different parts is a must in anorganization as a system, because of division of labour, specialization,sharing of limited resources, scheduling of activities, etc. The workof the organization is divided into various departments,sub-departments and so on, assigning each unit an independentspecialized task, which on integration culminates into theaccomplishment of overall organizational goals. These parts areinterconnected in such a way that a change in one part may affectthe other part and in this way, the whole organization.

2. Composition of several sub-systems: A system is composed ofseveral sub-systems. For example, in a manufacturing organization,total manufacturing is one system, within which may exist a completeproduction system, which again may contain an inventory controlsystem. Conversely, a system or sub-system may form part orcontainer of other system. For example, an individual who may be apart of one system may also be a part or container for anotherphysiological system.

3. Every system has its own norms: Every system may bedistinguished from other systems in terms of objectives, processes,roles, structures, and norms of conduct. So, every system is unique.If anything happens in the organization, we regard it as an outcomeof a particular system and we locate the fault in the system.

4. Systems influence and are influenced by other systems: Assystems are open, they influence other systems in the environmentdepending upon its strengths and capacities in relation to othersystems. Obviously, the influence of environment, in most cases isgreater than the systems over all impact on the environment.

Concept of Sub-system in an Organization

In the previous section, we have suggested that a system is an integratedwhole of various sub-systems. An organization, as a system can betterbe understood by identifying the various sub-systems within it. The levelsof systems within a sub-system are called sub-systems and certainobjectives, processes, role, structures and norms of conduct identifylevels of systems within. A system is composed of various lower ordersub-systems and is also a part of a super-system.



The various sub-systems of the system constitute the mutually dependentparts of the large system, called organization. These sub-systems interact,and through interaction create new patterns of behavior that are separatefrom, but related to, the patterns specified by original system. Theinterdependence of different parts as characterized by Thompson, maybe pooled, sequential, or reciprocal. When dependence is not direct, itis pooled interdependence. For example, an organization, having salesdivisions in different cities making their own buying and selling, butdrawing upon its common funds is an example of pooled interdependence.When one sub-system is directly dependent upon another, it is sequentialinterdependence. Such type of interdependence may be seen inproduction job or assembly line when output of one sub-system is theinput for the other department or sub-system. Reciprocal interdependencerefers to the situation where outputs of each unit become inputs for anothersuch as in production and maintenance divisions. Thus, system behavioremerged as one, and since different variables are mutually interdependent,the true influence of alerting one aspect of the system cannot be determinedby changing it alone.

Classification of Sub-systems

There are various ways of classifying sub-systems and one may supportany of them. Each of the organization unit may be treated as a sub-system.In other words, each functional unit of an organization may be regardedas different sub-systems such as production sub-system, personnel orfinance or sales sub-systems, etc. Seiler has classified four componentsin an organization, i.e., human inputs, technological inputs, organizationalinputs and social structure and norms. From these inputs, he has derivedthe concept of socio-technical system, Kast and Rosenzweig haveidentified five subsystems, i.e., goal and values sub-system, technicalsub-system, psychological sub-system, structural sub-system, andmanagerial sub-system. Katz and Kahn have, identified five sub-systems.These are: technical sub-system concerned with the work that gets done;supportive sub-system concerning with the procurement, disposal andinstitutional relations; maintenance sub-system for uniting people into theirfunctional roles; adaptive sub-system concerned with organizationalchange; and managerial sub-system for direction, adjudication and controlof many sub-systems and activities of the whole structure. Carzo andYunouzas give three kinds of sub-systems in an organization as a system,



i.e., technical, social and power sub-systems. We shall here discuss thesethree sub-systems.

1. Technical Sub-system: The technical sub-system may be referredto as the formal organization. It refers to the knowledge required forthe performance of tasks including the techniques used in thetransformation of inputs into outputs. Being a formal organization, itdecides to make use of a particular technology; there is a given layout;policies, rules and regulations are framed; different hierarchical levelsare developed; authority is given and responsibilities are fixed; andnecessary technical engineering and efficiency consideration are laiddown. The behavior in the organization cannot be explained fully bytechnical sub-system, also because there is a fundamental conflictbetween the individual , a part of the system and the system itselfresulting from the expectancies of the organization and that of thepeople regarding the work he has to perform. It requires certainmodifications in the behavior of the man through the social and powersub-systems (explained later).

The objective of the technical sub-system is to make necessaryimports from the environment, transform them into products orservices and expert them back to the environment. For this purpose,it involves decisions, communications, action and balance processes.Through the decision process, three main problems of what toproduce, for whom to produce and how to produce are resolved.Decisions are based on information gathered from various sources.Such informations are communicated through the communicationprocess to action centres to implement them. Through balanceprocess, an administrative balance is obtained so that all parts maybe co-ordinated and no one part can dominate all other parts in theorganization. These processes take place on the basis of rolesassigned to people according to the requirements of the job. In orderto handle the job properly, one is given authority from the superiorsand is assigned a status matching with the importance of the job andthe individual’s ability to do the job. Norms of conduct are definedin the well-designed policies, norms, rules, procedures anddescription of the job. Thus, the arrangement of job in relation toeach other, process and authority relations, etc. provide a structureto the technical sub-system.



2. Social Sub-system: As we have explained earlier, there exists aconflict between an individual and the system itself because peoplediffer very widely in abilities, capacities, attitudes and beliefs, likesand dislikes, etc. People find the formal set-up quite inadequate tosatisfy all their needs especially social ones. Gradually they are seeninteracting with each other and at times by cutting across thehierarchical and departmental lines, etc., on non-formal matters, anddisplay their positive and negative sentiments towards each other.

Another group of elements in social sub-system consists of status,role, norms and values. Status is a position determined as beingimportant in the interpersonal relationship of the group. Thus, it is asocial rank, prestige, sentiments and feelings of a person incomparison with a social system. Some members come to be morehighly respected than others while some others born to be followers.Role is a pattern of action, expected of a person in his positioninvolving others. Thus, it describes specific form of behavior anddevelops originally from the task-requirements. Different membershave to play different roles assigned to them by the group. Norm isthat the general expectation demands character for all role incumbentsof a system or subsystem. The members of the group follow unwrittennorms. Anybody not adhering to norms are reprimanded or punished.Value is the more generalized ideological justification and aspiration.Value guides the behavior of the members.

3. Power Sub-system: Power behavior of the people in an organizationplays a very important role. As the organization starts functioning,people realize the importance of their job in relation to others in theorganization; the benefits of their experience to the organization; thecrucial location of their jobs and their personality characteristics;the fact of their access to the superior authority holder. In this way,they have acquired power to some degree or the others based onthe source of their power that influences the decision-making andregulate others behavior.

Individual’s abilities to regulate the behavior of others vary. Some personsare more powerful and some others have powerful influence areas thanothers have. Consequently, a power differentiation based on the amountof power enjoyed (which is again a function of success achieved andattempts made to influence the behavior of others) develops in a power



structure. It gives birth to politicking and people play opportunistic roles.Power minded people have no norms. Generally, the individual’s interestsand the opportunity of serving those interests decide norms and therefore,sheer expediency is the norm. The power holder enjoys the status inaccordance with his abilities to influence the behavior of others in orderto carry out his wishes. This part of the system is known as power sub-system

Appraisal of Social System School

Chester I. Barnard is regarded as the founding father of social systemschool. He studied the inter-relationships within the organization. Hisdefinition of formal organization is regarded to be a major contribution inthe field of management. The main focus of the official system is to studydifferent aspects of social systems. For the adherents of this school,organization is essentially a socio-cultural system composed of groupsof people who work in cooperation. For achieving the goals of theorganization, a cooperative system of management can be developedonly by understanding the social behavior of groups and individuals. Inother words, the socio-cultural environment and different types ofpressures affect an organization as a social system.

The concept of informal organization is also a contribution of the socialsystem school. The analysis of social and group behavior in the contextof social system has added to the knowledge of management. Thesupporters of this school advocate that efforts should be directed towardsestablishing harmony between the goals of the organization and the goalsof the groups and individual members.

1.2.7 CONTINGENCY APPROACH

Environmental change and uncertainty, work technology, and the size ofa company are all identified as environmental factors impacting theeffectiveness of different organizational forms. According to thecontingency perspective, stable environments suggest mechanisticstructures that emphasize centralization, formalization, standardization,and specialization to achieve efficiency and consistency. Certainty andpredictability permit the use of policies, rules, and procedures to guidedecision making for routine tasks and problems. Unstable environmentssuggest organic structures which emphasize decentralization to achieveflexibility and adaptability. Uncertainty and unpredictability require general



problem solving methods for nonroutine tasks and problems. PaulLawrence and Jay Lorsch suggest that organizational units operating indiffering environments develop different internal unit characteristics, andthat the greater the internal differences, the greater the need forcoordination between units.

Joan Woodward found that financially successful manufacturingorganizations with different types of work technologies (such as unit orsmall batch; large-batch or mass-production; or continuous-process)differed in the number of management levels, span of management, andthe degree of worker specialization. She linked differences in organizationto firm performance and suggested that certain organizational forms wereappropriate for certain types of work technologies.

Organizational size is another contingency variable thought to impact theeffectiveness of different organizational forms. Small organizations canbehave informally while larger organizations tend to become moreformalized. The owner of a small organization may directly control mostthings, but large organizations require more complex and indirect controlmechanisms. Large organizations can have more specialized staff, units,and jobs. Hence, a divisional structure is not appropriate for a smallorganization but may be for a large organization.

In addition to the contingencies identified above, customer diversity andthe globalization of business may require product or service diversity,employee diversity, and even the creation of special units or divisions.Organizations operating within the United States may have to adapt tovariations in local, state, and federal laws and regulations. Organizationsoperating internationally may have to adapt their organizational structures,managerial practices, and products or services to differing cultural values,expectations, and preferences. The availability of support institutions andthe availability and cost of financial resources may influence anorganization’s decision to produce or purchase new products. Economicconditions can affect an organization’s hiring and layoff practices as wellas wage, salary, and incentive structures. Technological change cansignificantly affect an organization. The use of robotics affects the leveland types of skills needed in employees. Modern information technologyboth permits and requires changes in communication and interactionpatterns within and between organizations.



1.3 THE OTHER MAJOR CONTRIBUTIONS BY LEADINGMANAGEMENT THINKERS

1.3.1 MARRY FOLLETT (1868 - 1933)

M.P.Follet is a social philosopher. Important contributions of Follett tomanagement thought are:

Constructive conflict

Law of the situation

Group ethic important

Leadership

Authority and responsibility

Coordination principles

1.3.2 RENSIS LIKERT (1903 - 1972)

According to Rensis Likert, Director of the Institute of Social Research,University of Michigan, the traditional job-centered supervision is mainlyresponsible for low productivity and poor morale of employees. He,therefore, advocated the employee-centered approach where maximumparticipation would be given to operatives while setting goals and makingdecisions. Likert is best known for his classifications of managementstyles into four categories:

System 1 (exploitative autocratic): Leaders have no confidence ortrust in subordinates. Subordinates are deprived of participation indecision-making.

System 2 (benevolent autocratic): Management has condescendingconfidence in subordinates just as a master has towards a servant.

System 3 (participative): Leaders have substantial but not totalconfidence in subordinates. Participation is meaningful and employeesare permitted to participate in decision making.

System 4 (democratic): Participation is meaningful, as leaders havecomplete confidence and trust in subordinates.

According to Likert, system 4 is an ideal management style and isassociated with high production, low costs and good labour relations. Inan attempt to integrate individual and organizational Likert developed



the concept of ‘linking pin’. In this approach, each work group isintegrated to the rest of the organization by means of persons who aremembers of more than one group. Such overlapping membership is knownas ‘linking pin’.

1.3.3 PETER F. DRUCKER

Peter F. Drucker had revolutionalised management thinking in early 50’swith his path breaking books, presentations. He came into prominencewith the publication of “The New Society”. Drucker is often hailed as agenius who had pioneered several modern management concepts in thefields of innovation, creativity,problem solving, organization design, MBOetc. His major contributions include:

Nature of Management

Management is a dynamic, life-giving element in an organization.

Management is a distinct, discipline and a social function.

Managers should be creative and innovative in order to produceresults. He opined that management is a great profession full ofchallenges.

Mangers job

Managers are known by their performance. They must set meaningfulgoals for the entire organization.

Business is inextricably interwoven with society. It has certain socialobligations. Managers impact society through their actions. It is theirduty to meet social expectations regarding quality, service, etc

Drucker wanted business community to stand on their own. Profit is notthe only goal always. He knew that ‘a healthy business cannot exist in asick society’. Managers should realize that businesses survive and flourishonly through the blessing, while meeting social expectations and enterpriseobjectives managers need to strike fine balance. He stressed theimportance of setting goals, defining problems correctly motivating people.

He wanted businesses to deliver want satisfying goods and services. Thepurpose of an enterprise is to create a customer.

He wanted managers to set meaningful objectives in eight key areas ofbusiness. Market standing, innovation, productivity, physical and financial



resources, profitability, manager performance and development, workerperformance and social responsibility.

The Highlight of the Drucker’s elements

1. MBO: Drucker stressed the importance of joint goal setting througha novel concept called Management By Objectives (MBO). Heemphasized the importance of participative goals that are tangible,verifiable and measurable. He wanted managers to focus on whatbe accomplished (goals) rather than how it was to be accomplished(methods).

2. Decentralization: Drucker vehemently criticized the functional focusof managers, confirming their work to their own narrow specializedfields of study (such as marketing manager, finance manager,production manager, etc.). He wanted managers to createautonomous, self contained independent product divisions within alarge undertaking, giving adequate and proportionate emphasis tovarious products. In place of task specialization, he advocated fordecentralization. The federal structure, he felt, would make managersaccountable for and allow them to grow steadily.

3. Structure: Drucker wanted managers to reduce the number of layerswithin the organization; the organization structure should be dynamicin nature. To realize this, he suggested concrete steps: activityanalysis, decision analysis and relations analysis.

Activity analysis: What is to be done, how it should be put together,how much emphasis to be put on each activity.

4. Decision analysis: The degree of futurity in the decision, the impactof a decision on activities, the various qualitative elements that enterthe decision-making process, whether the decision is a recurringphenomenon or a rare one, etc.

5. Relation’s analysis: Helps in providing a concrete shape to thestructure and manning structure properly.

6. Decision-making: According to Drucker, the life of a manager is aperpetual choice-making activity. Management is nothing butdecision-making only. He wanted managers to understand theproblems correctly before trying to find solutions. He wantedmanagers to look into the following questions carefully:



What is the problem?

Which problem to solve?

What is the real, cause of the problem? (According to Drucker, criticalfactor analysis helps in identifying the causes properly)

1.4 MANAGERIAL FUNCTIONS

Many authorities and scholars on management have discussed thefunctions of management. But there is no unanimity among them aboutthe nomenclatures of the functions of management.

Ralph Davis classified managerial functions into three categories, viz.,organization, coordination and control. He was of the view that commandand coordination facilitate control and, therefore, should be consideredas parts of it. However some authors argue that co-ordination is not aseparate function, the essence of management.

Joseph Massie prescribed a list of seven functions of management,namely, making, organizing, staffing, planning, controlling, communicatingand directing. G.R. Terry described managerial functions under fourheads, which are: planning, organizing, actuating and controlling. Koontzand O’Donnell have adopted the following classification: planning,organizing, directing and controlling. They have further said, “In practiceit is not always possible to place all managerial activities neatly into thesecategories since the functions tend to coalesce.”

Luther Gulick coined the word ‘PODSCORB’ to describe the functionsof management. This word is made up of the initials of the followingfunctions, (i) planning, (ii) organizing, (iii) directing, (iv) staffing,(v) co-ordinating, (vi) reporting, and (vii) budgeting. Thus, we can saythat there is no universally accepted classification of managerial functions.But at the same time it is significant to note that though there is disagreementover the grouping and classification of management functions, there isgeneral agreement that certain functions exist.

Henri Fayol gave for the first time a clear functional definition ofmanagement. According to him, “To manage is to forecast and plan, toorganize, to command, to coordinate and to control.” Thus, Fayol hasgiven following five functions of management: Forecasting and planning,Organizing, Commanding, Coordination and Control.



The basic reason for so many classifications of functions of managementis that different authors discussed them by studying different organizations.If we accept one of these classifications, it should be kept in mind thatfunctions are not independent and they frequently overlap each other.According to C.S. George, the management process is not a series ofseparate functions, which can be performed independently; it is acomposite process made up of these ingredients. He further said that noone function could be performed without involving the others.

For the purpose of analysis of management process, we can divide themanagement functions into

(1) Planning, (2) organizing, (3) staffing, (4) directing and (5) controlling.

1.4.1 Planning

Planning is a mental process requiring the use of intellectual faculties,foresight and sound judgment. It is the determination of a course of actionto achieve the desired result. “It is the selecting and relating of facts andthe making and using of assumptions regarding the future in the visualizationand formation of proposed activities believed necessary to achieve desiredresults.” It involves deciding in advance what to do, when to do it, whereto do it, how to do it and who is to do it and how the results are to beevaluated. Thus, planning is the systematic thinking about the ways andmeans for the accomplishment of pre-determined objectives. Goals orobjectives have to be clarified first before taking any other decision.Goals provide the basis for looking into the future and for evaluating theperformance with the predetermined standards.

Planning bridges the gap between where we are , to where we want togo. It is a prerequisite to doing anything. Systematic planning is necessaryfor any business activity; otherwise it will be done in a haphazard manner.Proper planning is a must to ensure effective utilization of human andnon-human resources to achieve the desired goals. It has to be done atall levels of management. The process of planning involves the followingsteps:

(i) Determination of goals or objectives of the enterprise, (ii) forecasting,(iii) search of alternative courses of action, (iv) evaluation of variousalternatives and formulation of a plan. (v) Formulation of policies andprocedures, (vi) preparation of schedules, programmes and budgets.



1.4.2 Organizing

Organizing is an important managerial activity by which management bringstogether the manpower and material resources for the achievement ofpre-determined objectives. Organization is the process of establishingrelationships among the members of the enterprise. The relationships arecreated in terms of authority and responsibility. Each member in theorganization is assigned a specific responsibility or duty to perform andis granted the corresponding authority to perform his duty.

In the words of Louis A. Allen, “Organization involves identification andgrouping the activities to be performed and dividing them among theindividuals and creating authority and responsibility relationships amongthem for the accomplishment of organizational objectives”. Thus,organizing involves the determination of activities to be performed,grouping them and assigning them to various individuals and creating astructure of authority and responsibility among the individuals to achievethe organizational goals. Organization involves the following steps:

(1) Identification of activities required for the achievement of objectivesand Implementation of plans.

(2) Grouping of activities so as to create well-defined jobs

(3) Assignment of jobs to employees

(4) Delegation of authority to subordinates

(5) Establishment of authority-responsibility relationships throughout theorganization

1.4.3 Staffing

The staffing function of management pertains to recruitment, selection,training, development and appraisal of personnel. There is a controversywhether staffing is a function of every manager in the organization asthere is personnel department in every organization. Since every manageris concerned with management of human resources, he must perform thefunction. In fact, every manager is associated with the employment,training and appraisal of human resources.

1.4.4 Directing

The term ‘directing’ or ‘direction’ is generally used in every walk of life.It has got a wide interpretation these days. It is no more restricted to



‘commanding’ as viewed by Henri Fayol. In the words of Marshall,“Directing , determining the course, giving orders and instructions andproviding dynamic leadership.”” It relates to those activities, which dealdirectly with influencing, guiding, supervising and motivating subordinatesin their jobs. This function does not cease with mere issuance of directives.According to A.Terry, “Directing means moving to action and supplyingstimulative power to group of persons”. Thus, directing involves issuinginstructions (or communication) to the subordinates, guiding, motivatingand supervising

These sub-functions of directing are discussed below:

(a) Communication. Communication is the process of passinginformation and understanding from one person to another. This processis necessary making the subordinates understand what the managementexpects from him. A manager has always to tell the subordinates what todo, how to do it and when to do it. He has to create an understanding intheir minds in regard to these things. Communication is a two way process.A manager to be successful must develop an effective system ofcommunication so that he may issue instructions, receive the reactions ofthe subordinates and guide and motivate them.

(b) Leadership. A manager must perform the function of leadership ifhe is to guide the people effectively for the achievement of organizationalobjectives. Leadership may be defined as the process by which a managerguides and influences the behavior of his subordinates. A manager mustpossess the leadership qualities if he has to get others to follow him andaccept his directions. He should also build up confidence and zeal towork among the subordinates.

(c) Motivation. A manager can get the desired results from the peopleworking in the organization by providing them with proper stimulation ormotivation. Motivation means inspiring the subordinates with zeal to dowork for the accomplishment of organizational objectives. Motivation isthe process of indoctrinating personnel with unity of purpose and theneed to maintain continuous harmonious relationship.

A successful manager makes appropriate use of motivation to actuatethe subordinates to work harmoniously towards the achievement oforganizational goals. Effective motivation is necessary for getting voluntaryco-operation of the subordinates. Different types of rewards motivate



different people. The manager should study the behavior of individualsworking under him to provide them proper inducements. To some,financial incentives are important while others are motivated by nonpecuniary incentives like job security, job enlargement, freedom to workand recognition by peers and management.

1.4.5 Controlling

The function of controlling deals with the measurement and correction ofthe performance of persons against the pre-determined standards. E.F.L.Brech defined control as the process of checking actual performanceagainst standards to ensure satisfactory performance. Fayol viewedcontrol as verifying whether everything occurs in conformity with theplan adopted, the instructions issued and principles established.Controlling leads to taking corrective action if the results do not conformto plans.

The process of control involves the following steps:

(i) Establishment of Standards. The management must establishStandards with which the actual performance of the subordinateswill be compared. The standards of performance should be laid downin unambiguous terms and should be understood by everyone in theestablishment.

(ii) Measurement of Performance. After the performance is over, theactual performance has to be measured in terms of quantity, quality,cost and time.

(iii) Appraisal of performance. The establishment of standards has nomeaning unless they are used in actual practice. The managementmust compare the actual performance with the pre-establishedstandards. The deviations from the standards should be recordedand brought to knowledge of the management.

(iv) Taking Corrective Action. When the deviations from the standardsare reported to the management, it must take corrective action sothat such things do not occur again. While taking corrective steps,management should consider the improvement of plans andstandards.

1.5. Managerial Skills

The job of a manager demands a mixture of many types of skills, whetherhe belongs to business organization, an educational institution, a hospital



or a club. A Manager is successful when he is able to make a smoothfunctioning team of people working under him. He is to reconcile,coordinate and appraise us viewpoints and talents of people workingunder him towards, the organization goals. He has also to plan andorganize the operations of the enterprise so that the subordinates areable to use the material resources in the best possible manner. For this,he must use the various skills in appropriate degrees.

We can broadly classify the skills required by managers into the followingthree categories: (i) Conceptual skills (ii) Human skills, and (iii) Technicalskills. Technical skills deal with jobs, human skills with persons andconceptual skills with ideas. The three types of skills are interrelated andall managers require them. But the proportion or relative significance ofthese skills varies with the level of management.

(i) Conceptual Skills

Conceptual skill is the ability to see the organization as a whole, torecognize inter-relationships among different functions of the businessand external forces and to guide effectively the organizational efforts.Conceptual skills are used for abstract thinking, and for the conceptdevelopment involved in planning and strategy formulation. Conceptualskills involve the ability to understand how the parts of an organizationdepend on each other. A manager needs conceptual skills to recognizethe interrelationships of various situational factors and, therefore, makedecisions that will be in the best interests of the organization.

(ii) Human Skills

Human skills are the abilities needed to resolve conflicts, motivate, leadand communicate effectively with others. Because all work is done whenpeople work together, human relations skills are equally important at alllevels of management.

(iii) Technical Skills

Technical skills refer to specialized knowledge and proficiency in handlingmethods, processes and techniques of specific jobs. These skills aremost important at lower levels of management and much less importantat upper levels. A production supervisor in a manufacturing plant, forexample, must know the processes used and be able to physically performthe tasks he supervises. A word processing supervisor must have



specialized knowledge about computer software used in, the process.In most cases, technical skills are important at this level becausesupervisory managers must train their subordinates in the proper use ofwork-related tools, machines and equipment.

1.6 Levels of Management

Management/Industrial Management has got the following activity levels.

1. Top Management.

2. Upper Middle Management.

3. Middle Management.

4. Lower Management

1.6.1 Top Management :

It is the function of top management to watch, interpret, exploit of wherenecessary, and counter external influences with appropriate decisionsand plans and to initiate the appropriate adjustment in the functionalauthority and status structures of the organization. It is the topmanagement’s duty to protect the integrity of the organization, so that itcan survive for its own employee’s , the shareholder’s, supplier’s andcustomer’s interests and for the general good of the social and economicsystem within which it operates. Top Management Functions are settingbasic goals and objectives, Expanding or contracting activities,Establishing policies, Monitoring performance, Designing/Redesigningorganization and system, and shouldering financial responsibilities, etc.

Top Management includes

(a) Board of Directors,

(b) Managing Directors,

(c) Chief Executives,

(d) General Managers,

(e) Owners, and

(f) Shareholders and financiers.

1.6.2 Middle Management :

The middle management level generally consists of divisional anddepartmental heads such as plant manager, production manager,



marketing manager, personal directors etc. Their job is to interpret policiesand directions set by the top level management into specific plans andguidelines for action. Their responsibility is to coordinate the working oftheir departments so that the set objectives can be achieved. They areconcerned with short term goals and specific results. They spend moretime on operational planning, information processing and day-to–daymonitoring of their divisional activities. Middle Management Functionsare running the details of the organization, cooperating to run organizationsmoothly, understanding interlocking of departments in major policies,achieving coordination between different parts of the organization,conducting training for employee development and building an efficientcompany team spirit.

1.6.3 Lower Management :

This level of management consists of supervisors, superintendents, unitheads, foremen, chief clerks etc, their primary concern is with themechanics of the job and they are responsible for coordinating the workof their employees. They must possess technical skills so that they canassist their subordinates when necessary. They plan day to day operations,assign personnel to specific job, oversee their activities, evaluate theirperformances, and become a link between the workers and the middlelevel management.

Importance of Skills at Different Levels

There are various levels of management; and the managers at variouslevels perform all the functions of management though in varying degrees.Thus, the level of skills required at different managerial levels will bedifferent. Conceptual skills are critical in top executive positions whereastechnical skills are very essential for lower level management. Technicalskills can be learnt easily, but other skills cannot be learnt unless anindividual has the potential and capacity and an inner urge to learn them.Conceptual skills are highly important for top management, which isresponsible for formulating long-range plans and policies for the wholebusiness. Human skills are important at all levels of management.

1.7 Roles of managers

In1973, Henry Mintzberg conducted one of the first comprehensivestudies of the nature of managerial work and gives us a complete picture



of what a manager actually does. Based on his study of the activities offive practicing chief executives, Mintzberg generalized his description ofthe nature of managerial work in actual practice. He identified ten basicroles performed by managers and classified them under three heads.(i) Interpersonal, (ii) informational, and (iii) decisional. Theseroles-organized sets of behaviors belonging to a position-describe whatmanagers actually do, whereas functions of managers had historicallydescribed what managers should do?

The interpersonal roles are as follows:

1. A manager is a symbol, or a figurehead. This role is necessarybecause of the position occupied. It consists of such duties as signingcertain documents required by law and officially receiving visitors.

2. A manager serves as a leader that is, hires, trains, encourages,remunerates, judges the subordinates.

3. A manager serves as a liaison between outside contacts such as thecommunity, suppliers, and others and the organization.

The informational roles found by Mintzberg are:

1. As monitors, managers gather information in order to be wellinformed.

2. Managers are disseminators of information flowing from both externaland internal sources.

3. Managers are spokes-persons or representatives of the organization.They speak for subordinates to superiors and represent uppermanagement to subordinates.

Mintz berg’s decisional roles are:

1. Managers as entrepreneurs are initiators, innovators, problemdiscoverers and designers of improvement projects that direct andcontrol change in the organization.

2. As disturbance handlers, managers react to situations that areunexpected, such as mass absenteeism, resignation of subordinates,or losing of customers.

3. A third decisional role is that of resource allocator.

4. Finally, managers are negotiators. At times, this role can be partiallydelegated; however, managers assume it when conflicts arise.



1.8 Managing in global environment

Management fundamentals may be applicable in different countries. However the practice of carrying out the managerial function of planning,organizing, staffing, leading and controlling differs considerably in domesticand international enterprises.

Planning

Planning requires setting objectives and then selecting strategies, policies,programs and procedures for achieving them. A critically importantactivity for the MNC is the assessment of opportunities and threats inthe external environment. This is a complex task even for a domesticenterprise, but it becomes much more intricate when many different, ever-changing world markets must be scanned.

External threats and opportunities must be matched with the internalstrengths and weaknesses of the firm. For example, a poor educationalsystem makes it difficult to find qualified personnel. Similarly, culturalorientation towards time will affect planning. Finally, political andeconomic instability in a country makes it difficult to forecast and willdiscourage long term commitment of resources. Each big MNC finds itdifficult to face the competency in the world wide market. So they aregrouping in to a form global strategic partnerships. American telephonecorp. and telegraph comp. shares technology with Olivetti and Philips,both large MNC’s in Europe.

Organizing

Objective of the organization is to achieve the corporate goals. One canchoose the best among the variety of structures for them to suit. Forexample vice president at corporate head quarters may be responsiblefor the international division. Another alternative may be to organizeaccording to geographic areas. For example managers may be put incharge of regions such as North America, Latin America, Europe, Africaand the Far East. Still another way of grouping organizational activities isaccording to product lines. For instance at corporate headquarters,managers may be put in charge of product line which is marketedworldwide. The truly MNC may integrate domestic and internationalbusiness into a global structure which gives similar importance to domesticand foreign business activities. Each structure has advantages and



limitations, as we have in the domestic management structure internationalorganization structure may be of any one type or may be of mixed typedepending on the environmental and task demand

Staffing

Staffing involves identifying the vacancy positions and filling up by thequalified persons.

Managers of the MNC can be classified in three ways. First managersmay be nationals selected from the country in which the headquarters islocated .These expatriates are chosen to represent and manage theenterprise abroad. These managers because of their experience are usuallyfamiliar with the parent company’s policies and operations.

Second managers are those who are nationals of the host country. Thesemanagers are familiar with the country’s environment, its education systemits culture its legal and political processes and its economic environment.They usually also know local customers, suppliers, government officials,behavioural characteristics of employees and the public in general.

Third source of managerial personnel consists of third county nationals.These managers who have a nationality that is different from the parentcompany or the host country. Such managers may have gained experienceby working at the company head quarters as well as in different countries.Thus, they would have developed behavioural flexibility that eases theiradaptation to different cultures. These managers may by truly transcultural.

Each of the three sources for managers has advantages and disadvantagesand a firm may use a variety of combinations. A few factors that influencethe trend in staffing MNCs are worth noting. First, the cost of sendingU.S. dollar in the 1970s and in 1986. Second, people in the host countriesare now better prepared to assume responsible managerial positions.

Motivating and leading demand an understanding of employees and theircultural environment. For instance, participative management may workin one country but may cause confusion among employees in anothercountry with tradition of autocratic rule.

Communication is often a problem in multinational firms with subsidiariesand affiliates in countries where different languages are spoken. Even afirm with operations in a country where English is the primary languagemay encounter communication problems because of the distance between



headquarters and subsidiary. But new communications technology hasgreatly improved the transmission of information. Still, a telephone call isnot quite the same as a visit and a person to person discussion.

Controlling in the Multinational Corporation– The measurement andcorrection of performance to ensure that events conform to plans – is anessential managerial function that is influenced by several environmentfactors unique to international enterprises. First, revenues, costs andprofits are measured in different currencies. Second, the ratios betweencurrencies are subject to considerable fluctuations. Third, accountingpractices and financial reporting often differ from country to country.For example, accounting procedures may have to satisfy the demands oftax authorities of the host country as well as the government of the parentfirm. The procedures must also satisfy stockholders in various countries,agencies in charge of regulating securities and banks. Procedures mustalso be suitable to meet the internal requirements of the firm. Developinga procedure that meets all these demands at the same time is extremelydifficult. The complex nature of measurement of performance may delaydetecting deviations from standard and initiating corrective action.Computers, however, have done much to speed up the process. In all,then, these few examples indicate that controlling the internationalcorporation is considerably more difficult than monitoring a domesticoperation.

Summary

Management is the process of planning, organizing, staffing, directingand controlling to accomplish objectives through the coordinated use ofhuman and material resources. Management thinkers have tried to interpretthe term in multifarious ways: as a noun, as a process, as a team, as adiscipline, as an activity, as an economic resource, as a system ofauthority or as a distinct class in society having its own value system.

Management is the life-blood of a business. It ensures optimum use ofscarce resources, offers competent leadership, ensures peaceful industrialrelations, achieves goals, improves standard of living and enables acompany to manage change effectively.

Management is being increasingly accepted as a soft science and also asa difficult and complex art, as it deals with human behavior, which ishighly unpredictable. Management, from another standpoint, is alsointerpreted as a profession having a well-defined set of principles and



practices capable of universal application. Professionalisation, no doubt,helps the discipline to acquire a distinct character and recognition of itsown but trying to link and measure managerial success in terms of degreesmay come in the way of developing creative entrepreneurs having brilliantideas but not professional qualifications.

Over the years, the subject of management has been written and re-writtenin terms of certain well-accepted principles and time-tested practices.These principles are the products of years of experience, research andanalysis. They are not to be interpreted as absolute truths. When appliedcarefully, using discretion and judgement, they have proved to be quitesuccessful in delivering results at various points of time all over the world.

Management can be studied from various angles. The classical theoryhas three important branches. Bureaucracy prescribed that an organizationbe built around the work to be done. The work must be logically dividedand assigned to subordinates, who are expected to report the progressto superiors at various levels. The whole system should have some welldefined rules so that results can be obtained without friction. Scientificmanagement emphasized the importance of work design and encouragedmanagers to find ‘one best way’ to do things with minimum effort andcost. The classical school of thought, thus, focused attention on thetechnical and administrative aspect and ignored the contributions of humanbeings completely.

The neo-classical theory tried to correct this deficiency by drawing richinputs from various behavioural sciences and practical experiments carriedout by Elton Mayo. The theory attempted creation of workforce withhigh morale through democratic means. The focus was on people,incentives, democratization of workplace, and social interactions. Thehuman resources theory went a step ahead by suggesting that humanbeings are the most valuable assets in every organization. Every attemptmust, therefore, be made to exploit the latent potential of human resourcesby emphasizing things such as self-direction, self-control and creativity.

To improve the quality of decision-making, the quantitative approachhas advocated the use of mathematics, statistics and computersextensively. The variables affecting each problem must be identified andmeasured in a definite way. This would help in solving issues in an objectivemanner, eliminating the subjective element in decision-making completely.



The systems approach views the organization as a unified, purposefulentity, consisting of interrelated parts. While deciding things, executivesmust look at the totality of the situation and the resultant consequencescarefully. They must strike a fine balance between the needs of variousparts of the enterprise and the goals of the firm as a whole.

According to the contingency approach there are no plans, organizationstructures, leadership styles, or controls that will fit all situations. Thereare few if any, universal truths, concepts and principles that can be appliedunder all conditions. Managers must find different ways that fit differentsituations. Their actions, in the final analysis, must be consistent with therequirements of internal as trial factors.

Have you understood Questions :

1. Frequently visit any one of the organization on your choice andobserve the management functions and skills which is characterizedby variety, fragmentation, and record how do managers perform basicmanagement functions such has planning, organizing, etc., keepreflected and analyzed of your study.

2. Observe any organization that how a manager can use tools andtechniques from each of the major management perspectives in acontemporary manner.

3. Try to enroll your self as a trainee in any one of the organizations tofind out whether the organization is practicing the management as inthe style of art or science.

4. Regularly read the business and management magazines to areasonable period to find out the professionalism practices and thedevelopment over in this practice.

Review Questions :

1. Define management.

2. Is management – science or art? Discuss.

3. State the Managerial functions.

4. What are skills required to a manager?

5. Describe different levels of management.

6. List the roles of managers.

7. Discuss the evolution of management thoughts.



UNIT - II

PLANNING

LEARNING OBJECTIVES


what is managerial planning and why it is important.

the various types of plans and show how they relate to one another.

the logical steps in planning and see how these steps are essentiallya rational approach to setting objectives and selecting the means ofreaching them.

the basic principle underlying the determination of how far in thefuture to plan and how to build desirable flexibility into plans to meetfuture uncertainties at the lowest cost.

the importance of reviewing plans periodically to make sure thatthey are up to date in light of any new developments.

decision making as a rational process, with special attention given toevaluating alternatives in light of the goals sought.

alternative courses of action with due consideration of the limitingfactor.

select alternatives on the basis of experience and experimentation,as well as research and analysis.

differentiate between programmed and non-programmed decisions,understand the differences between decisions made under conditionsof certainty, uncertainty and risks.



2.1 INTRODUCTION

Planning is the systematic thinking about the ways and means for theaccomplishment of predetermined objectives. Planning producesfundamental decisions and actions that shape and guide what anorganization is, what it does, and why it does it. Planning bridges the gapbetween where we are and where we want to go. It requires broad-scale information gathering, an exploration of alternatives, and an emphasison the future implications of present decisions. Top level managers engagechiefly in strategic planning or long range planning. They answer suchquestions as “What is the purpose of this organization?” , “What doesthis organization have to do in the future to remain competitive?” Toplevel managers clarify the mission of the organization and set its goals.The output needed by top management for long range planning is summaryreports about finances, operations, and the external environment.

Goals or objectives have to be clarified first before taking any otherdecision. Goals provide the basis for looking into the future and forevaluating the performance with the predetermined standards. It is aprerequisite to doing anything. Systematic planning is necessary for anybusiness activity, otherwise it will be done in a haphazard manner. Properplanning is a must to ensure effective utilization of human and non humanresources to achieve the desired goals. It has to be done at all levels ofmanagement.

The necessity for planning arises because of the fact that businessorganizations have to operate, survive and progress in a highly dynamiceconomy where change is the rule, not the exception. The change maybe sudden and extensive, or it may be slow and almost imperceptible.Some of the important forces of change may be: changes in technology,changes in population and income distribution, changes in the tastes ofconsumers, changes in competition, changes in government policies etc.These changes often give rise to innumerable problems and throwcountless challenges. Most of these changes are thrust on managers;thus, managers are forced to adjust their activities in order to take fulladvantage of favourable developments or to minimize the adverse effectsof unfavourable ones. Successful managers try to visualize the problemsbefore they turn into emergencies. As pointed out by Terry, “successfulmanagers deal with foreseen problems, and unsuccessful managersstruggle with unforeseen problems. The difference lies in planning.”



Managers charged with the responsibility of achieving definite targets,do not wait for future. They make the future. They introduce originalaction by removing present difficulties, anticipating future problems,changing the goals to suit the internal and external changes, experimentwith creative ideas and take the initiative, attempting to shape the futureand create a more desirable environment.

Top level managers engage chiefly in strategic planning or long rangeplanning. They answer such questions as “What is the purpose of thisorganization?” “What does this organization have to do in the future toremain competitive?” Top level managers clarify the mission of theorganization and set its goals. The output needed by top management forlong range planning is summary reports about finances, operations, andthe external environment.

MEANING

A plan is a forecast for accomplishment. It is a predetermined course ofaction. It is today’s projection for tomorrow’s activity. In other words,to plan is to produce a scheme for future action, to bring about specifiedresults at a specified cost, in a specified period of time. Managementthinkers have defined the term, basically, in two ways:

Based on futurity: “Planning is a trap laid down to capture the future”(Allen). “Planning is deciding in advance what is to be done in future”(Koontz). “Planning is informed anticipation of future” (Haimann).“Planning is ‘anticipatory’ decision-making” (R.L. Ackoff).

As a thinking function: “Planning is a thinking process, an organisedforesight, a vision based on fact and experience that is required forintelligent action” (Afford and Beatty)“Planning is deciding in advance what to do, how to do it, when to do itand who is to do it.” (Koontz and O’Donnel)

It is deciding in the present, what is to be done in future? It is the processof thinking before doing. A plan is a specific, documented intentionconsisting of an objective and an action statement. The objective portionis the end, and the action statement represents the means to that end.Stated another way, objectives give management targets to shoot at,whereas action statements provide arrows for hitting the targets. Properlyconceived plans tell what, where and how something is to done.



Is Planning Really Necessary?

Planning is an activity of a highly ubiquitous character. Every function ofbusiness is planned in most of the enterprises as is evident from the factthat there are production plans, sales plans, financial plans, purchaseplans, research and development plans and so on. This is done becauseof the necessity to ensure proper utilization of human and materialresources to achieve the objectives of the business. Without properplanning, the affairs of any enterprise are most likely to be haphazard.Less important task may be done ahead of more important one or differentindividuals using different procedures or methods may do the same pieceof work. There may be unnecessary repetition of certain businessoperations leading to wastage of efforts and resources. In short, withoutplans, action must become merely random activity, producing nothingbut chaos. Therefore planning is a must to achieve a consistent andcoordinated structure of operations focused on desired objectives.

“Henri Fayol” explained the importance of planning as a managementfunction. According to him, “ Managing means looking ahead, gives someidea of the importance attached to planning in the business world, and itis true that if foresight is not the whole of management, at least it is anessential part of it. The plan of action is, at one and the same time, theresult envisaged, the line of action to be followed, the stages to go through,and the methods to use.” George Terry viewed planning as basic to theother managerial functions. Without the activities determined by planning,there would be nothing to organize, no -one to actuate and no need tocontrol.” This stresses the importance of planning in the managementprocess. Thus, planning is a prerequisite to good management.

Planning provides a rational approach to predetermined objectives, as itrequires a lot of systematic mental exercise on the part of planners.Planning helps in selecting from among alternative future courses of actionfor the enterprise as a whole and for its every department. It lays downclearly what every segment of the enterprise should do to achieve theorganizational objectives. No organization can achieve its objectiveswithout proper planning because of certain obvious reasons. Thesereasons are as follows:

(i) Growing complexities of modern business because of rapidtechnological changes and keen competition in the market.



(ii) Rapid social, economic and political changes.

(iii) Recognition of social responsibilities.

(iv) Growth of trade unionism.

(v) Uncertainties caused by trade cycles.

(vi) Shortage of certain resources.

(vii) Increasing government control over business.

(viii) Need for research and development activities.

These are the challenges before the managers of modern era, which canbe dealt with effectively only through proper planning. Looking at thesignificance of planning, management of every organization should givedue weightage to the planning function. Good planning is the foundationof efficient management.

2.2 FEATURES OF PLANNING

Planning has a number of characteristics:

(i) Planning is goal-oriented: All plans arise from objectives. Objectivesprovide the basic guide for planning activities. Planning has no meaningunless it contributes some positive achievement of predetermined goals.

(ii) Planning is a primary function: Planning is the foundation ofmanagement. It is a parent exercise in management process. It is a prefaceto business activities. According to Koontz, “Planning provides the basicfoundation from which all future management functions arise”. Terry alsosupported the view, that “without planning there is nothing to organize,no one to motivate and no need to control”. The idea of primacy ofplanning emphasizes the fact that planning takes precedence over othermanagerial functions like organizing, directing and controlling becausenone of these functions can come into being until there is a plan.

(iii) Planning is all-pervasive: Planning is a function of all managers. Itis needed and practiced at all managerial levels. Planning is inherent ineverything a manager does. Managers have to plan before launching anew business. They have to plan whenever things change. Even whenthey decide to close down a plant, they have to plan meticulously toavoid problems from employees. The scope of planning, however, differsat different levels and among different departments.



(iv) Planning is a mental exercise: Planning is a mental processinvolving imagination, foresight and sound judgement. Planning compelsmanagers to abandon guesswork and wishful thinking. It makes themthink in a logical and systematic manner. Plans arc based on a carefulstudy of internal and external factors influencing business activities.

(v) Planning is a continuous process: Planning is continuous. It is anever-ending activity. Once plans for a specific period are prepared,they are translated into action. At the end of that period, there is a needfor a new plan to be drawn based on new situations and conditions.Planning is thus, an ongoing process of adjustment to change. There isalways need for a new plan to be drawn on the basis of new demandsand changes in the circumstances.

(vi) Planning involves choice: Planning essentially involves choiceamong various alternative courses of action. If there is one way of doingsomething, there is no need for planning. The need for planning arisesonly when alternatives are available. Planning presupposes the existenceof alternatives. From out of these alternatives, a manager would selectthe best alternative, after careful analysis and evaluation.

(vii) Planning is forward looking: Planning means looking ahead andpreparing for the future. It means peeping into the future, analyzing it andpreparing for it. Managers plan today with a view to flourish tomorrow.Without planning, business becomes random in nature and decisionswould become meaningless, adhoc choices.

(viii) Planning is flexible: Planning is based on a forecast of futureevents. Since future is uncertain, plans should be reasonably flexible.The onset of colour television sets forced many a manufacturer in theWest to abandon production of black and white television sets long back.When market conditions change, planners have to make necessarychanges in the existing plans.

(ix) Planning is the most basic of all management functions: Sincemanagerial operations in organizing, staffing, leading, and controlling aredesigned to support the accomplishment of enterprise objectives, planninglogically precedes the execution of all other managerial functions.

(x) Planning is a pervasive function of management. Planning is afunction of all managers, although the character and breadth of planningwill vary with their authority and with the nature of policies and plansoutlined by their superiors.



Planning is a managerial process requiring the use of intellectual faculties,foresight and sound judgement. It is the determination of a course ofaction to achieve the desired result. “It is selecting, relating of facts,making use of assumptions regarding the future in the visualization andformation of proposed activities believed necessary to achieve desiredresults.” It involves deciding in advance what to do, when to do it, whereto do it, how to do it and who is to do it and how the results are to beevaluated. Thus, planning is the systematic thinking about the ways andmeans for the accomplishment of pre determined objectives. Goals orobjectives have to be clarified first before taking any other decision.Goals provide the basis for looking into the future and for evaluating theperformance with the predetermined standards.

2.3 BENEFITS OF PLANNING

Good planning will have the results in the following advantages:

(i) Focuses Attention on Objectives. Since all planning is directedtowards achieving enterprise objectives, the very act of planning focusesattention on these objectives. Laying down the objectives is the first stepin planning. If the objectives are clearly laid down, the execution of planswill also be directed towards these objectives.

(ii) Ensures Economical Operation. Planning involves a lot of mentalexercise, which is directed towards achieving efficient operation in theenterprise. It substitutes joint directed effort for uncoordinated piecemealactivity, even flow of work for uneven flow, and deliberate decisions forsnap judgements. This helps in better utilization of resources and thusminimizing costs.

(iii) Reduces Uncertainty. Planning helps in reducing uncertainties offuture because it involves anticipation of future events. Effective planningis the result of deliberate thinking based on facts and figures. It involvesforecasting also. Planning gives an opportunity to a business manager toforesee various uncertainties, which may be caused by changes intechnology, taste and fashion of the people, etc. Sufficient provision ismade in the plans to offset these uncertainties.

(iv) Facilitates Control. Planning helps the managers in performing theirfunction of control. Planning and control are inseparable in the sense thatunplanned action cannot be controlled because control involves keeping



activities on the predetermined course by rectifying deviations from plans.Planning helps control by furnishing standards of control. It lays downobjectives and standards of performance, which are essential for theperformance of control function.

(v) Encourages Innovation and Creativity. Planning is basically thedeciding function of management. It helps innovative and creative thinkingamong the managers because many new ideas come to the mind of amanager when he is planning. It creates a forward-looking attitude amongthe managers.

(vi) Improves Motivation. A good planning system ensures participationof all managers, which improves their motivation. It improves themotivation of workers also because they know clearly what is expectedof them. Moreover, planning serves as a good training device for futuremanagers.

(vii) Improves Competitive Strength. Effective planning gives acompetitive edge to the enterprise over other enterprises that do nothave planning or have ineffective planning. This is because planning mayinvolve expansion of capacity, changes in work methods, changes inquality, anticipation tastes and fashion of people and technological changes,etc.

(viii) Achieves Better Coordination. Planning secures unity of directiontowards the organizational objectives. All the activities are directedtowards the common goals. There is an integrated effort throughout theorganization.

2.4 LIMITATIONS OF PLANNING

Sometimes, planning fails to achieve the expected results. There are manycauses of failure of planning in practice. These are discussed below:

1. Lack of reliable data. There may be lack of reliable facts and figuresover which plans may be based. Planning loses its value if reliableinformation is not available or if the planner fails to utilize the reliableinformation. In order to make planning successful, the planner mustdetermine the reliability of facts and figures and must base his plans onreliable information only.



2. Lack of initiative. Planning is a forward-looking process. If amanager has a tendency to follow rather than lead, he will not be able tomake good plans. Therefore, the planner must take the required initiative.He should be an active planner and should take adequate follow upmeasures to see that plans are understood and implemented properly.

3. Costly process. Planning is time consuming and expensive process.This may delay action in certain cases. But it is also true that if sufficienttime is not given to the planning process, the plans so produced mayprove to be unrealistic. Similarly, planning involves costs of gatheringand analyzing information and evaluation of various alternatives. If themanagement is not willing to spend on planning, the results may not begood.

4. Rigidity in organizational working. Internal inflexibility in theorganization may compel the planners to make rigid plans. This maydeter the managers from taking initiative and doing innovative thinking.So the planners must have sufficient discretion and flexibility in theenterprise. They should not always be required to follow the proceduresrigidly.

5. Non-acceptability of change. Resistance to change is another factor,which puts limits on planning. It is a commonly experienced phenomenonin the business world. Sometimes, planners themselves do not like changeand on other occasions they do not think it desirable to bring change asit makes the planning process ineffective.

6. External limitations. The effectiveness of planning is sometimeslimited because of external factors, which are beyond the control of theplanners. External stringencies are very difficult to predict. Suddenbreak-out of war, government control, natural havocs and many otherfactors are beyond the control of management. This makes the executionof plans very difficult.

7. Psychological barriers. Psychological factors also limit the scope ofplanning. Some people consider present more important than futurebecause present is certain. Such persons are psychologically opposedto planning. But it should not be forgotten that dynamic managers alwayslook ahead. Long-range well-being of the enterprise cannot be achievedunless proper planning is done for future



Measures to Overcome Limitations of Planning

Some people say that planning is a mere ritual in the fast changingenvironment. This is not a correct assessment of managerial planning.Planning may be associated with certain difficulties such as non-availabilityof data, lethargy on the part of planners, rigidity of procedures, resistanceto change and changes in external environment. But these problems canbe overcome by taking the following steps :

1. Setting Clear-cut Objectives. The existence of clear-cut objectivesis necessary for efficient planning. Objectives should not only beunderstandable but rational also. The overall objectives of the enterprisemust be the guiding pillars for determining the objectives of variousdepartments. This would help in having coordinated planning in theenterprise.

2. Management Information System. An efficient system ofmanagement information should be installed so that all relevant facts andfigures are made available to the managers before they perform theplanning function. Availability of right type of information will help inovercoming the problems of complete understanding of the objectivesand resistance to change on the part of the subordinates.

3. Careful Premising. The planning premises constitute a frameworkwithin which planning is done. They are the assumptions of what is likelyto happen in future. Planning always requires some assumptions to bemade regarding future happenings. In other words, it is a pre-requisite todetermine future settings such as marketing, pricing, Government policy,tax structure, business cycle, etc. before giving the final shape to theoverall business plan. The planning premises should be set up verycarefully. Due weightage should be given to the relevant factors at thetime of premising. It may be pointed out that the premises which may beof strategic significance to one enterprise may not be of equal significanceto another because of size, nature of business, nature of market, etc.

4. Business Forecasting. Business is greatly influenced by economic,social, political and international environment. The management must havea mechanism of forecasting changes in such environment. Good forecastswill contribute to the effectiveness of planning.

5. Dynamic Managers. The persons concerned with the task ofplanning should be dynamic in outlook. They must take the required



initiative to make business forecasts and develop planning premises. Amanager should always keep in mind that planning is looking ahead andhe is making plans for future, which is highly uncertain.

6. Flexibility. Some element of flexibility must be introduced in theplanning process because modern business operates in an environment,which keeps on changing. For achieving effective results, there shouldalways be a scope to make necessary addition, deletion, or alteration inthe plans as is demanded by the circumstances.

7. Availability of Resources. Determination and evaluation ofalternatives should be done in the light of resources available to themanagement. Alternatives are always present in any, decision makingproblem. But their relative plus and minus points are to be evaluated inthe light of the resources available. The alternative which is chosen shouldnot only be concerned with the objectives of the enterprise, but alsocapable of being accomplished with the help of the given resources.

8. Cost-Benefit Analysis. The planners must undertake cost-benefitanalysis to ensure that the benefits of planning are more than the costinvolved in it. This necessarily calls, for establishing measurable goals,clear insight to the alternative courses of action available, premisingreasonably and formulation of derivative plans keeping in view the factthat environment is fast-changing.

2.5 PRINCIPLES OF PLANNING

The important principles of planning are discussed below :

1. Principle of contribution to objectives. The purpose of plans andtheir components is to develop and facilitate the realization oforganizational aims. Long-range plans should be interwoven withmedium-range plans, which in turn, should be meshed with short-rangeones in order to accomplish organizational objectives effectively andeconomically.

2. Principle of pervasiveness of planning. Planning is found at alllevels of management. Strategic planning or long-range planning is relatedto top management, while intermediate and short-range planning are theconcern of middle and operating management respectively.

3. Principle of limiting factors. Planning must take the limiting factors(manpower, money, machines, materials, and management) into account



by concentrating on them, when developing alternative plans, strategies,policies, procedures, and standards.

4. Principle of flexibility. Flexibility should be built into organizationplans. Possibility of error in forecasting and decision making and futureuncertainties are the two common factors which call for flexibility inmanagerial planning. The principle of flexibility states that managementshould be able to change an existing plan because of change inenvironment without undue cost or delay so that activities keep movingtowards established goals. Thus an unexpected slump in demand for aproduct will require change in sales plan as well as production plan.Changes in these plans can be introduced only when these possess thecharacteristic of flexibility. Adapting plans to suit future uncertainties orchanging environment is easier if flexibility is an important considerationwhile planning.

Both short-term and long-term plans need to have the element of flexibility.However, flexibility is more important in long-range plans. The reason isnot difficult to trace. Possibility of error or uncertainty is much higher forlong-term plans than for short-term plans. However, the managementcan have flexibility in planning only within limits. External and internalrigidities and pressures greatly limit flexibility in managerial planning. Thus,the existing pattern of human behavior, policy and procedure rigidities,union pressures, government policy and legal requirements are importantinflexibilities greatly restricting adaptability of plans to changingenvironment.

5. Principle of navigational change. This principle requires thatmanagers should periodically check on events and redraw plans tomaintain a course towards the desired goal. It is the duty of the navigatorto check constantly whether his ship is following the right direction in thevast ocean to reach the destination as scheduled. The navigator changesthe path of the ship, in case it is not going on the right path. In the sameway, a manager should check his plans to ensure that these areprogressing as required. He should change the direction of his plans if hefaces unexpected events. It is useful if plans contain an element offlexibility. But built-in flexibility in plans does not mean that plans getrevised automatically. It is the responsibility of the manager to adapt andchange direction of plans to meet the challenge of constantly changing



environment that could not be foreseen. In this regard, the role of amanager is analogous to the role of the navigator of a ship to change itscourse, if it is not going on the right path.

2.6 KINDS OF PLANNING

Planning can be classified on different bases, which are discussed below:

1.Strategic and Functional PlanningIn strategic or corporate planning, the top management determines thegeneral objectives of the enterprise and the steps necessary to accomplishthem in the light of resources currently available and likely to be availablein the future. Functional planning, on the other hand, is planning thatcovers functional areas like production, marketing, finance and purchasing.

2. Long-range and Short-range PlanningLong-range planning sets long-term goals for the enterprise and thenproceeds to formulate specific plans for attaining these goals. It involvesan attempt to anticipate, analyze and make decisions about basic problemsand issues which have significance reaching well beyond the presentoperating horizon of the enterprise. Short-range planning, on the otherhand, is concerned with the determination of short-term activities toaccomplish long term objectives. Short-range planning relates to arelatively short period and has to be consistent with the long-range plans.Operational plans are generally related to short periods.

3. Ad hoc and Standing PlanningAd hoc planning committees may be constituted for certain specificmatters, as for instance, project planning. But standing plans are designedto be used over and over again. They include organizational structure,standard procedures, standard methods, etc.

4. Administrative and Operational PlanningAdministrative planning is done by the middle level management, whichprovides the foundation for operative plans. The lower level managersto put the administrative plans into action, on the other hand, do operativeplanning.

5. Physical PlanningIt is concerned with the physical location and arrangement of buildingand equipment. City planning and regional planning are the illustrationsof physical planning.



6. Formal and Informal PlanningVarious types of planning discussed above are of formal nature. Themanagement carries them on systematically. They specify in black andwhite, the specific goals and the steps to achieve them. They also facilitatethe installation of internal control systems. Informal planning, on the otherhand, is mere thinking by some individuals, which may become the basisof formal planning in future.

2.7 LEVELS OF PLANNING

In management theory, it is usual to consider that there are three basiclevels of planning, though in practice there may be more than three levelsof management and to an extent there will be some overlapping of planningoperations. The three levels of planning are discussed below :

Top Level Planning. Also known as overall or strategic planning, bythe top management, i.e., board of directors or governing body. Itencompasses the long-range objectives and policies of organization andis concerned with corporate results rather than sectional objectives. Toplevel planning is entirely long-range and is inextricably linked withlong-term objectives. It might be called the ‘what’of planning.

Second Level Panning. Also known as tactical planning, it is done bymiddle level managers or departmental heads. It is concerned with ‘how’of planning. It deals with deployment of resources to the best advantage.It is concerned mainly, but not exclusively, with long-range planning, butits nature is such that the time spans are usually shorter than those ofstrategic planning. This is because its attentions are usually devoted tothe step-by-step attainment of the organization’s main objectives. It is,in fact, oriented to functions and departments rather than to theorganization as a whole.

Third Level Planning. Also known as operational or activity planning,it is the concern of departmental managers and supervisors. It is confinedto putting into effect the tactical or departmental plans. It is usually for ashort term and may be revised quite often to be in tune with the tacticalplanning.

Corporate Planning. Corporate planning is a new concept, which hasgained popularity these days. It may be defined as a systematic andcomprehensive process of long range planning taking account of the



resources and capability of the organization and the environment withinwhich it has to operate, and viewing the organization as a total, corporate unit

Corporate planning is specifically strategic in nature as it takes the overallview of the organization. Its time span is normally over a minimum periodof five years and frequently extends very much longer than this. Acorporate plan must be frequently updated. Most organizations reviewperformance at least once a year so that modifications may be made inthe light of experience.

2.8 STEPS IN PLANNING

It is difficult to specify the steps in the planning process for all organizationsbecause of their differences in size and complexity. Nevertheless, it ispossible to suggest some important steps for effective planning. The steps,which are applicable to the most types of plans are discussed below.

(i) Establishing Objectives :

Planning is an intellectual process, which an executive carries out beforehe does any job with the help of other people. But while planning, thequestion, which must arise in the mind of the executive, is ‘what is theobjective of doing that job?’ So the first step in planning is thedetermination of objectives.

Objectives provide direction to various activities in the enterprise. Planninghas no utility if it is not related to certain objectives.

The establishment of objectives can, at times, be more important thanthe objectives themselves since their establishment emphasizes howvarious people and units fit into the overall organization framework. Theformalization of this process can also be used to motivate individuals toachieve objectives, which they have helped to establish. Objectives clarifythe tasks to be accomplished. Overall objectives define what is to beaccomplished in general terms.

The derivative objectives focus on more details; that is, what is to beaccomplished, where action is to take place, who is to perform it, how itis to be undertaken, and when it is to be accomplished.

(ii) Collection and Forecasting of Information :

Sufficient information must be collected in order to make the plans andsub-plans; Necessary information includes the critical assessment of the



current status of the organization together with a forward look at theenvironment that is anticipated. The collection and forecasting ofinformation should be done in terms of external and internal environment.The assessment of external environment should include consideration ofcompetition now and in the future. The assessment of internal environmentmay consider the strong and weak points of the organization. Collectionof information and making forecasts serve as an important basis ofplanning.

(iii) Development of Planning Premises :

This step involves making assumptions concerning the behavior of internaland external factors mentioned in the second step. It is essential to identifythe assumptions on which the plans will be based. Assumptions denotethe expected environment in the future and are known as ‘planningpremises’. Again, forecasting is important in premising. It helps in makingrealistic assumptions about sales, costs, prices, products, technologicaldevelopments, etc. in the future. The assumptions along with the futureforecasts provide a basis for the plans. Since future environment is socomplex and uncertain, it would not be realistic to make assumptions ingreat details about every environment factor. It is advisable to limitpremising to those factors, which are critical or strategic to the planningprocess.

(iv) Search of Alternatives :

Usually, there are several alternatives for any plan. The planner must tryto find out all the possible alternatives. Without resorting to such a search,he is likely to be guided by his limited imagination. At the time of findingor developing alternatives, the planner should try to screen out the mostunviable alternatives so that there are only a limited number of alternativesfor detailed analysis. It may be noted that determination of alternativeplans can be a time consuming task because objectives, which have beenestablished initially, may be found to be inflexible. It is also possible thatthe assumptions need revision in the light of the changed circumstances.

(v) Evaluation of Alternatives :

Once alternative action plans have been determined, they must beevaluated with reference to considerations like cost, long-rangeobjectives, limited resources, expected payback, risk, and many



intangible factors to select the satisfactory course of action. Manyquantitative techniques are available to evaluate alternatives. The managermay take the help of these techniques to reach the most objective result.The manager may choose the best possible alternative after detailedanalysis. Sometimes, evaluation of available alternatives may disclosethat two or more courses are advisable and so the concerned managermay decide to choose two or more alternatives and combine them to suitthe requirements of the situation.

(vi) Selection of Plan and Development of Derivative Plans :

The final step in the planning process is to select the most feasible planand develop its derivative plans. The plans must also include the feedbackmechanism. The hierarchy of plans must be both integrated and flexibleto meet the changing internal and external environment.

Essential requirements of Planning

An effective plan is one, which helps, in the better management of theenterprise. In order to be effective, a plan should possess the followingcharacteristics :

(1) The Plan should be Specific. The more specific it is, the less chancethere is for it to be misinterpreted. Objectives should be clearly defined.The means for carrying out the plan should also be indicated inunambiguous terms.

(2) The Plan should be Logical. The more facts it is based on, thebetter it is. If facts are not available, reasonable assumptions must bemade about the future.

(3) The Plan should be Complete and Integrated. A plan is said tobe complete when it is comprehensive enough to cover all actionsexpected from the individuals and sections of the undertaking as a whole.It is said to be an integrated one when various administrative plans areso welded into one another that the whole undertaking operates at thepeak of its efficiency.

(4) The Plan should be Flexible. No plan is infallible nor can it coverall possible contingencies. Conditions under which a plan will be mosteffective change, as do the variables and factors on which the plan isformulated. Therefore, it is essential to introduce some flexibility in everyplan.



(5) The Plan should be Capable of being Controlled. Effectiveplanning of business activities depends upon the ability-to foresee withutmost accuracy the nature and requirements of future events relating toindustry in general and the business undertaking in particular. Therefore,the plan must distinguish between controllable and uncontrollable futureenvironment for better administrative control.

Fig. Steps in Planning-Schematic Representation

Establishment of Objectives Firecasting demand Planning Premises

Developing Alternatives

Evaluation of AlternativesSelection of Best AlternativeFormulation of Derivative Plans

Appraisal of Plans

2.9 FORMS OF PLANNING

Even though the basic process of planning is the same for every manager,planning can take many forms and styles in practice. Planning may beundertaken in an elaborate way or done in a limited manner. A galaxy ofintellectuals using modern forecasting techniques may do it or it may beundertaken in a ‘seat-of-the-pants’ manner by a number of executivessharing their thoughts over a cup of tea. Planning may begin at the topwith executives deciding on targets and passing them down forimplementation; or it may be undertaken in a participative manner, invitingpeople designated at various levels to come forward with constructiveideas and useful suggestions. Thus, there are many forms and varieties ofplanning. The planning practices, further, are likely to differ fromorganization to organization. One useful way of looking at the wholeaspect is to distinguish between long-range planning and short-rangeplanning or strategic planning and operational planning. Other forms ofdistinction, that follow are outlined for academic purpose only. In actualpractice, the distinctions suggested may not surface in such a neat andclear-cut manner.

Long Range Planning (LRP) vs. Short-Range Planning (SRP)

Long-range planning covers a relatively long period of time (anythingover a five-year period), and affects many departments/divisions of theorganization. It includes the formulation of overall broad objectives andthe selection of appropriate means by which the objectives are to be



achieved. LRP is quite common in stable industries such as steel, public-utilities and automobiles. In India, public sector companies generally adoptthe national planning period of five years. LRP is the rest of a series ofinterrelated steps:

(i) The first basic step is the estimation of the international, national andlocal situation. The possible future changes that might take place, inareas external to an organization are examined.

(ii) The second step of LRP is defining the goals to be pursued by theorganization and the philosophy to be adopted.

(iii) The third step in LRP answers the simple question: where are wenow? For this, an objective assessment of the degree of success inaccomplishing goals, on a day-to-day basis, is made.

(iv) In the fourth step, an attempt is made to find out the strong or weakspots in the company’s programmes till date in the light of additionalinformation on sales, selling expenses, production targets, capitalinflow, etc. The deficiencies are rectified promptly.

(v) Now, a full-blown programme of longer range planning is developedand approval is sought for its adoption.

(vi) The last step is concerned with placing LRP into work, to reduceambiguity and achieve some measure of specificity. LRP is dividedinto action plans, that is, intermediate and short-term plans for thesake of convenience and easy implementation.

Features of a Long-Range Plan

Covers a time period of 5 years or more.

States what the organization wants to become in the long run.

Tries to focus on organization’s linkage with the external environment.

Defines the mission of the organization, outlines major strategies andspecifies action plans to realize targets.

Involves a great deal of uncertainty

Developed by top management.

Uncertainty- The Reason For Long-Range Planning

Long-range planning is necessary precisely because we cannot forecastthe uncertain future. It is essential even though the eventuality for whichplans are prepared is not likely to occur. Is it not foolhardy to stop military



planning simply because the planner must operate under conditions ofuncertainty? This is doubly true in the case of business organizations, fora failure to plan may have serious consequences on its survival and growthin future. The business executives should not always sit back and waitfor lightning to strike. Even in times of emergency and adversity, long-rangeplanning is important. It is important because a planned contraction ofoperations is less costly and disruptive than a make-shift contraction. Itis true, that accurate planning beyond one year is difficult and long-rangeplans are very likely to be changed before completion. Nevertheless,they definitely serve a purpose in setting up an orderly approach to theproblems of long-range growth of the company.

Example

The consequences of taking a short-term perspective can be severe.The US automobile industry lost a large share of the market (28% by1980) to imported cars because of an earlier failure to focus on thelong-term need to develop fuel-efficient vehicles. Long-range planninghelps in preparing in an orderly manner for future events. It opens upnew avenues, new ways of doing things and reveals specific opportunities,previously unknown to the planner. It helps in seeking new opportunitiesactively, instead of merely reacting defensively to competition. In fact, astudy by Ansof clearly shows that strategically planned companiesoutperformed the non-planners. Stagner studied 109 firms and foundthat those companies that used their top managers in long-range planningconsistently obtained better results than those that did not have a strongplanning activity. The evidence furnished in other studies is equally strong.There is a good reason for confidence in long range planning. And thereis no substance in the argument that long range planning is useless in theface of uncertainties.

Long-range planning.

A plan that covers many years and affects many departments or divisionsof an organization in a major way.Long-range planning is not forecasting. Forecasting is of little use toplanners who seek to direct their organizations to the future. It does notprovide an adequate basis even for purely adaptive behavior. The answerfor this dilemma lies in long-range planning. Long range planning is muchmore than a mere projection of trends. It is that activity in a company,



which sets long-range goals for the firm and then proceeds to formulatespecific plans for attaining these goals. Long-range planning attemptstypically to grapple with the question “what must our company do, todayto be ready for the uncertainties of tomorrow.” It does not deal withfuture decisions. It deals with the futurity of present decisions. What anorganization should do tomorrow is not important or relevant. What ismore important is an answer to the question: What do we have to dotoday to be ready for an uncertain tomorrow? Thus, long-range planningis a risk-taking decision-making. There is no attempt to mastermind thefuture.

Short Range Planning and Operational Planning

Short-range planning: A plan that (is specific and detailed) generally coversa span of one year or less.

Short-range planning covers a period of one to twelve months, dependingon the nature of business, and the traditions prevailing in the industry.Short-range plans are otherwise called operational plans. They are usuallymade in a specific and detailed manner. The emphasis is on flexiblebudgets, on goals and targets, expressed in a clear and precise language.The primary concern is efficiency (doing things right) rather thaneffectiveness (doing the right things). To this end, short-range plans gatherinformation, evaluate alternatives and select the most suitable course ofaction. Operative plans provide content and form to long-range plans.In fact, short-range planning is an extension of long-range corporateplans. Market plans, production plans and financial plans are typicalexamples of operational planning.

Long-Range Planning vs. Short-Range PlanningLong-range Planning Point of

Distinction

Short Range Meaning

5 Years or more. Time factor Up to one year.

Mission, Long-term goals and

strategies.

Deals with Current operations of an

organization..

Organization’s linkage with

external factors.

Primary Focus Linkage with various parts of an

organization.

Demands changes in the

structure, resource allocation.

Impact Operates within the existing

structure and resources.

It goes too far into the future; Uncertainty The time horizon is limited and



It goes too far into the future;

the risk and uncertainty level

is high.

Uncertainty The time horizon is limited and

the risk associated with

uncertainty level is low.

Top Management. Prepared by Lower level executives.

Long-range planning and short-range planning are expressions of thebreadth of planning periods. The terms, short term and long term,sometimes present an erroneous picture because people generallyassociate short term with a narrow perspective and long term with abroad view. The time dimension of planning cannot be reduced tosimplified expressions such as short term or long term. The time spanvaries usually depending on the factors like industry characteristics, marketdemand, availability of resources and skills, environmental complexities,etc. What may appear to be long-range planning, in the case of onecompany may turn out to be short-range planning in the cases of othercompanies.

Operational Planning and Strategic Planning

Strategic plan: A general plan outlining decisions of resource allocation,priorities and action steps necessary to reach strategic goals.

Strategy refers to the ideas, plans and support that firms employ tocompete successfully against their rivals. Strategy is meant to help firmsachieve competitive advantage. Broadly speaking, competitive advantageis what allows a firm to gain an edge over its rivals (superior designskills, quality, distribution network, after sales service, low costmanufacturing etc.). Unlike short-term planning, strategic planninginvolves an extended time frame, the deployment of a substantialpercentage of organizational resources, a wide spectrum of activities,and a major eventual impact. Basically, strategic planning is planning thatis conceptually and functionally long-term, wide ranging and critical toorganizational success, in terms of costs of the resources it affects and ofthe outcomes it envisions.

The important features of operational and strategic plans are summarizedthrough the following table.



Characteristics of Strategic and Operational Plans

Strategic plan: A general plan outlining decisions of resource allocation,priorities and action steps necessary to reach strategic goals.

Feature Strategic (Long-range) Operational (Short-range)

Time horizon 5 years or more Under I year

Purpose

Adapt to external

environment based on

internal strengths

Implement internal goals

Activity controlled Total institutional

performance Internal tasks and operations

Decision range Relatively enduring Short-term

Organizational level

involved Top management Middle and lower management

Basis for planning Primarily judgmental Exact data and standards used

Predictability Uncertain. Highly certain

Anticipated accuracy Within 25 per cent Within 2 or 3 per cent

Management functions

involved

Planning and forecasting

dominant Control primarily

Management control of

outcomes

Slight; contingency

plans required

Almost complete single -option

plans used

Tactical or Coordinative Planning

Tactical plans are less detailed than the short range plans. They areconcerned with implementation of strategic plans by coordinating thework of different departments in the organization. They try to integratevarious organizational units and ensure commitment to strategic plans.Based on the results obtained by implementing short-range plans, a midterm review is undertaken. A moving average is usually obtained and thesuccess or failure of operational plans is assessed and the need forreadjustment is indicated. Coordinative planning, thus, helps in shiftingthe gears, whenever pitfalls occur while implementing the short-range orlong-range plans.

Formal and Informal planning

Formal plan : A written record to what the organization intends to do,within a time frame.

A formal plan is a well-documented plan. The record is made after acareful evaluation of all relevant factors that have a bearing onorganizational functioning. Managers at various levels are deliberatelyinvolved in the formal plan formulation and implementation processes. It



is systematic and rational. Informal planning does not offer a writtenrecord. It is carried out without any direction. Managerial thoughts, whichdo not find expression on, paper are informal plans. It encouragesmanagers to evade responsibility. Unhealthy tendencies like carelessnessin planning and implementation, haphazard actions, loss of memory anddirection might creep in. It should be followed as an exception ratherthan a rule.

Functional and corporate Planning

Corporate plan : A comprehensive plan that outlines the broadobjectives of a company as a whole and develops plans to achieve thoseobjectives.

Functional planning is ‘unit planning’. It deals with parts such asproduction, marketing, finance, manufacturing in an isolated manner. Thereis no unified focus. As a result, functional planners develop a ‘partsmentality.’ They often fail to see the total big picture. The impact ofinternal as well as external factors may not be fully taken care of, inrespect of functional planning. Corporate planning outlines the broadobjectives of the company as a whole and develops plans designed tomeet those objectives. It has both the micro, as well as macro focus.The various functional plans are integrated so as to meet the broadobjectives of the organization. It is integrative in nature. It takes along-term view. It tries to strike a balance between organizationalresources and environmental challenges. In the process, tendencies likeadhocism, parts-mentality, narrow functional outlook, and friction betweenunits are kept under constant control. The focus is always on overallorganizational performance.

Proactive and Reactive Planning

Proactive planning : In proactive planning managers challenge the future,anticipating future contingencies and get ready with alternative routes forunforeseen circumstances.

Proactive planning is a way of thinking about managing the future risksand challenges. It tries to take care of all future contingencies and changes.Plans are often tied to a time-frame. Within this period (say 2 year period),many changes may occur and upset all projections and calculations.Proactive planning makes managers alert and sensitive to all such changes.



They are forced to be dynamic, active and creative. Instead of reactingto events passively, managers are ready with alternate plans and actions,redefining and reshaping the future. It helps managers to challenge thefuture rather than accept the same meekly. It is chiefly concerned withinitiating actions today so as to survive and grow tomorrow.

Reactive planning: The organization merely reacts to events as andwhen they arise.

In reactive planning, the organization merely reacts to external events.The organization is left to the vagaries of environmental forces. Automobilecompanies that found that fuel efficiency is going to be the most importantdemand of customers in eighties have registered consistent growth allthese years whereas those companies that did not visualize this in advanceare no more in existence in the market now (remember Fiat, Ambassadorcars?). In a fast changing world, reactive planning may prove to be costly.Before we realize what has happened, we might be shown the door.Managers, as rightly pointed out by Drucker, should not wait for future.They have to make future by initiating original actions.

Controlling: It is concerned with monitoring employees’ activities,keeping the organization on track towards its goals, and makingcorrections as required.

Planning and Controlling: Relationship

Planning involves selecting enterprise objectives and then finding waysto achieve them. Controlling is the process of assuring that actions are inline with planned results. The relationship between the two terms couldbe stated thus :

Plans are the directions in which managers intend to lead theorganization in order to achieve its objectives. Controls are neededto ensure that results are consistent with plans.

Planning prescribes described behaviors and results. Controls canmaintain or redirect actual behaviors and results.

Managers cannot effectively plan without information about the pastand current status of each department, product, etc. Much of thisessential information is obtained through the control process, Itprovides valuable information derived from past experience andallows managers to plan effectively in future. It helps managers tolearn from past mistakes and plan well.



Managers cannot effectively control the organization unless thereare plans to indicate the purpose to be served by the control process.Thus, the planning and control processes complement and supportone another.

2.10 TYPES OF PLANS

The plans were classified on the application basis in organization asfollows:

- Objectives- Policies & Strategies- Procedures- Methods- Rules

- Programmes- Budgets- Projects

Plans

Single Use PlansStanding Plans

Misconception in the Planning

One of the glaring misconceptions in management states that futurity isthe essence of planning and controlling is nothing but a postmortemexamination of past events. Admittedly, planning is deciding in advance,what is to be done in future. It is today’s projection of tomorrow’s activity.It provides a scheme for future action, to bring about specified results atspecified cost, in a specified period of time. Instead of meeting eachcrisis when it arises, planners actually try to find out threats andopportunities in the environment and prepare the organizations to facethe challenges with confidence. Planning, thus, is not simply an attemptto predict the future, it is also an attempt to control it. As Drucker pointedout, managers do not wait for future, they make the future throughintelligent anticipation and careful planning.

Controlling, on the other hand, is not an examination of past events. It isrightly said that the starting point of planning is control. Controlling helpsin the adoption of new plans and revision of existing plans on the basis ofactual performance against standards. It provides information about pastand current status of each department, product, etc. in the organizationand enables managers to plan the future changes. Managers thus learnthrough past mistakes and plan effectively. Controlling aids in futureplanning. Like planning, controlling is also forward looking.



2.10.1 Objectives

Objectives are the ends towards which the activities of the enterpriseare aimed. They represent not only the end point of planning but also theend towards which organizing, directing and controlling are aimed.Objectives provide direction to various activities. They also serve as thebenchmark of measuring the efficiency and effectiveness of the enterprise.Objectives make every human activity purposeful. Planning has nomeaning if it is not related to certain objectives. It will be an empty mentalexercise if it does not determine what objectives are to be accomplished.

The management must determine (a) overall and departmental, (b) short-term and long-term, and (c) economic and social objectives so as tomake planning effective. When objectives are clear, every individual inthe organization will understand what he can contribute for theachievement of these objectives. It is important to point out that objectivesor goals are plans and they involve the same planning process as anyother type of planning, eventhough they are also endpoints of planning.

The objectives should be set very carefully. The goals of each and everydepartment must be directed towards the achievement of organizationalgoals. Similarly, the short-range objectives must aim at helping theachievement of overall long-range goals of the enterprise. In manyorganizations, where the main activities involve the implementation ofprojects to carry out the overall goals, the setting of project goals assumesgreater importance.

Characteristics of Objectives

Objectives have the following features :

Objectives form a hierarchy. In many organizations, objectives arestructured in a hierarchy of importance. There are objectives withinobjectives. They all require painstaking definition and close analysis, ifthey are to be useful separately and profitable as a whole. The hierarchyof objectives is a graded series in which each succeeding manageriallevel down to the level of the individual supports organization’s goals.The objectives of each unit contribute to the objectives of the next higherunit. Each operation has a simple objective, which must fit in and add tothe final objective. Hence, no work should be undertaken unless itcontributes to the overall goal. Usually, the hierarchy or objectives in an



organization is described through means-ends chain. Understanding themeans-ends chain helps us to see how broad goals arc translated intooperational objectives. In the organization the relationship between meansand ends in hierarchical goals established at one level require certainmeans for their accomplishment. These means then become the sub goalsfor the next level, and more specific operational objectives are developedas we move down the hierarchy.

In the goal hierarchy, the objectives of each lower level become meansto the ends (objectives) of the next higher level in the organization. Thegoals at the second level are the means used for achieving the ends set atthe top level. Thus, each level of objectives stands as ends relative to thelevels below it and as a means relative to the levels above it.

Means Ends

Overall Objectives

Divisional Objectives

Departmental Objectives

Individual Objectives

Figure : Hierarchy of Objectives in the Form of a Mean-Ends Chain

For example, the broad objective of customer oriented profitable growthcan be achieved if the two divisions, plastics and metal products, workout their individual goals (for example, turning out quality products anddeveloping new products) effectively. And if the production, marketing,and other departments accomplish their departmental objectives, theycontribute to the achievement of divisional goals. Thus, the means-endschain directs the behavior of every individual and every departmenttowards the highest objective of the organization. If we observe thehierarchy of objectives ranging from top management to individualobjectives, two things clearly emerge: the objectives at the lower levelare more specific and they are tied to a time capsule.

Objectives form a network. Objectives interlock in a network fashion.They are inter-related and inter-dependent. The concept of network ofobjectives implies that once objectives are established for everydepartment and every individual in an organization, these subsidiaryobjectives should contribute to meet the basic objectives of the totalorganization. If the various objectives in an organization do not supportone another, people may pursue goals that may be good for their own



function but may be detrimental to the company as a whole. Managershave to trade off among the conflicting objectives and see that thecomponents of the network fit one another. As rightly pointed out byKoontz et al., “It is bad enough when goals do not support and interlockwith one another. It may be catastrophic when they interfere with oneanother”

Multiplicity of objectives: Organizations pursue multifarious objectives.At every level in the hierarchy, goals are likely to be multiple. For example,the marketing division may have the objective of sale and distribution ofproducts. This objective can be broken down into a group of objectivesfor managers of functional departments like product, advertising, research,and promotion. The advertising manager’s goals may include: designingproduct messages carefully, create a favorable image of the product inthe market, etc. Similar goals can be set for others marketing managers.To describe the single, specific goal of an organization is to say very littleabout it. It turns out that there are several goals involved. This may bedue to the fact that the enterprise has to meet internal as well as externalchallenges effectively. Internal problems may hover around profitability,survival, growth, government, society, stockholders, customers; etc maypose and so on external problems. In order to meet the conflictingdemands from various internal and external groups, organizationsgenerally pursue multiple objectives. Moreover, no single objective wouldplace the organization on the path of prosperity and progress in the longrun. According to Drucker, “To emphasize profit, for instance, misdirectsmanagers to the point where they may endanger the survival of thebusiness. To obtain profit today, they tend to undermine the future.” Whereseveral goals are involved, maximizing one goal would usually be at thecost of another. Managers have to see that various goals exist in harmonyand for this purpose they must assign a definite priority of 1, 2 or 3depending on the importance of each objective. Such assignment ofpriorities helps to keep a perspective, especially when there are manygoals for one position.

Long and short-range objectives: Organizational objectives are usuallyrelated to time. Long range objectives extending over five or more yearsare the ultimate or ‘dream’ objectives for the organization. They areabstractions of the entire hierarchy of objectives of the organization. Forexample, planning in India has got objectives like eradication of poverty;



checking population growth through birth control etc., reflect certain‘ideals’, which the government wishes to accomplish in the long run.Short-range objectives (one year goals) and medium-range objectives(two to four-year period goals) reflect immediate, attainable goals. Theshort-range and medium range objectives arc the means for achievinglong-term goals and the long-term goals supply a framework within whichthe lower level goals are designed. Thus, all these goals reinforce eachother in such a way that the total result is greater than the sum of theeffects taken individually. That is why goal setting is called a ‘synergisticprocess’. In order to remain viable, every organization needs to set goalsin all three time periods.

Importance of Objectives

Objectives are essential to organizations. Organizations produce andmarket economic products and services, universities provide teachingand research, governments provide welfare and security and so on.Organizations are instruments to attainment. Without some purpose, thereis no need for the organization. All organizations are goal-seeking, thatis, they exist for the purpose of achieving some goals efficiently andeffectively. Objectives affect the size, shape, and design of theorganization, and they are important in motivating and directing personnel.Objectives serve the following functions :

1.Legitimacy. Objectives describe the purpose of the organization, sothat people know what it stands for and will accept its existence andcontinuance.Thus, Ford sells American transportation;Chrysler sells know-how’ andGodrej sells quality products.Objectives help to legitimize the presence of the organization in itsenvironment. The organization can, and then emphasize its uniquenessand identity.

2. Direction: Objectives provide guidelines for organisational efforts.They keep attention focused on the common purpose. Once objectivesare formulated, they become the Polar Star by which the voyage isnavigated. Every activity is directed towards the objectives, everyindividual contributes to meet the goals. ‘Without seeing the target, amanager would be like a blindfolded archer-expanding useless effort



and creating havoc.’

3. Coordination: Objectives keep activities on the right track. Theymake behavior in organizations; more rational, more coordinated andthus more effective, because everyone knows the accepted goals to worktowards. In setting effective goals managers help members at all levels ofthe organization to understand how they can best achieve their own goalsby directing their behavior toward the goals of the organization.4. Benchmarks for success: Objectives serve as performancestandards against which actual performance may be checked. Theyprovide a benchmark for assessment. They help in the control of humaneffort in an organization.

Motivation: Goals are motivators. The setting of a goal, that is both specificand challenging, leads to an increase in performance because it makes itclear to the individual what he is supposed to do. He can compare howwell he is doing now versus how well he has done in the past and in someinstances how well he is performing in comparison to others.

Area Needing Objectives

Peter Drucker, while working as a consultant for General Electric,identified eight key areas in which organizations establish objectives.

(1) Market standing,

(2) Innovation,

(3) Productivity,

(4) Physical and financial resources,

(5) Managerial performance and development,

(6) Worker performance and attitudes,

(7) Profitability and

(8) Public and social responsibility.

1. Market standing: Market standing and innovation are the foundationareas in management. Essentially, an organization exists to obtain resultsin these areas only. Market standing is an answer to the question regardingoptimum market share, which the firm should try to capture ultimately.This requires a careful analysis of (i) customers and products or services;(ii) market segments (what groups are buying the product or service);



and (iii) distribution channels (who is getting the product to the customers).

2. Innovation: In every business, there are three kinds of innovations:Innovation in product or service; innovation in market place, consumerbehavior and value; and innovation in the various skills and activitiesneeded to make the products and services and to bring them to the market.The chief problem in setting innovation objectives is the difficulty ofmeasuring the importance of various innovations. Management must, firstof all, anticipate the innovation goals needed to reach marketing goals. Itmust also find out the technological developments in all areas of business.For example, the survival of an insurance company depends on: thedevelopment of new forms of insurance, the modification of existingpolicies, finding out cheaper ways of selling policies and settling claimsetc. Operating in a competitive world forces business firms to placeemphasis on innovation goals.

3. Productivity. Productivity is the ratio of an organization’s inputs to itsoutputs. All business will have the same resources to work with; it is thequality of management that differentiates one business from another. Itmust decide as to what inputs of labour, equipment and finances arenecessary to produce the firm’s outputs.

4. Physical and financial resources: Every business must be able toattract resources-physical, financial and human and put them toproductive use for effective performance. Resource mobilization is a twostep process anticipating the needs of the business and planning to obtainthe resources in an economical fashion. After mobilizing resources, onealso has to say, “This is what is available; what do we have to be, howwe have to behave to get the fullest benefit?”

5. Managerial performance and development: In order to ‘stay in’and remain profitable, every business needs strong, innovative managers.So, it is highly important, especially in the case of large organizations, toset objectives relating to the quality of management performance, thedevelopment of managers at various levels in the organization.

6. Worker performance and attitudes: Organizations must providetangible benefits to the individuals working for its continued growth. Thus,workers want wages, managers want salaries, owners want profits. Theseare the inducements that an organization must provide, in order to obtainperformance (contributions) from various groups. Operative level



employees in every organization perform most of the routine or normalwork. Unless goals arc established in terms of output per employee,quality of product etc. the organizational activities may be disrupted bylabour strife, union problems etc.

7. Profitability: (i) Profit objectives are important for accomplishingother objectives like covering risks in the business; (ii) ensuring supplyof future capital for modernization and expansion; and (iii) satisfyingcustomer needs. “A fundamental objective of the business firm is toproduce and distribute products and services that the customer is willingto buy. Its reason for being is to create value. Utility must be created orconsumers will spend their money elsewhere. Profits arc essential for thesurvival and growth of the firm.” They arc the rewards for the effectiveutilization of resources in creating value for consumers. Instead of tryingto maximize profits, the firm must try to create utilities for consumers.

How to strike a happy balance between multiple and sometimes,conflicting goals? As rightly pointed out, by Drucker, ‘to manage abusiness is to balance a variety of needs and goals’. Most organizationhas a set of ‘multiple’ goals. In order to accomplish these multiple, andsometimes conflicting goals, it is necessary to strike a happy balancebetween them. According to Haimann, the real difficulty is not so muchin determining the goals and the objectives; the real difficulty is in decidinghow to balance the various objectives. How to achieve the trade-off?First of all, management must determine the optimum balance or mix ofthe objectives. For example, shareholders may demand larger dividends,customers may clamour for better quality products at cheaper prices,workers may demand higher wages, society may expect high standardsof social conduct, and government may seek compliance with tax policiesand industrial regulations. While formulating overall goals, thebusiness must do well to protect the interests of each group reasonably.This requires judgement. And, there is no magic formula to replace intuitionand judgement. Managers have to achieve the equilibrium by assigningpriorities and by differentiating between long-term goals and short-termgoals. To ward off internal conflicts, it is necessary to clearly communicatethe objectives of each department to other departments. If all thedepartments in the organization are able to see the big picture and theirrole in it, misunderstandings and conflicts can be minimized. Thefundamental objective of the firm is to create value, and profit is the



result of meeting that objective effectively. It must be understood thatprofit is to our private enterprise system as breathing is to life, but it isnot the purpose of existence any more than breathing is the purpose oflife. The term ‘profit’ as is used in business should be taken as a ‘catalyticagent‘ in chemistry; it is the actuator and not the goal or end result.

8. Public and social responsibility: In recent years, social responsibilityof business is to achieve the economic objective, a firm must producethe goods, the consumer wants. If a firm is not able to create economicvalue for society, it may not stay in business long enough to make aprofit.

2.10.2 Projects

A project may be defined as a complex cluster of related activities witha distinct objective and a definite completion time period. In some cases,major plans can be decomposed into a number of projects each with aclear cut set of objectives. Such projects can be isolated and taken upfor completion as a package; a project may involve the introduction oflarge automatic plant, building of a dam or a building, or the introductionof a new product. The task of executing the project is put under thecharge of a Project Manager.

Project Manager is an expert in his area and he formulates various plans,programs and policies and takes ultimate decisions. He designs variousbudgets and authorizes expenditure on various items. However, he drawspersonnel and assistance from the functional departments of theorganization like finance, marketing, engineering and production. Peoplefrom various departments go back to their departments when their job isover.

2.10.3 Policies

Policies are guidelines or general limits within which the members of anenterprise act. They are general statements or understandings, whichguide thinking and action. Policies exist at various levels of theenterprise-corporate, divisional and departmental. They are valuablebecause they allow lower levels of management to handle problemswithout going to top management for a decision each time. Someexamples of policies at various levels of the enterprise are given below:



1. No employee will accept any gift from any supplier except for tokengifts of purely nominal or advertising value.

2. Each employee will proceed on one week’s vacation each year.

3. No employee will accept any outside employment.

Policies provide a broad guide as to how the objectives of a businessare to be achieved. While objectives provide the ends which a managershould try to achieve, the policies provide the guidelines: which he shouldkeep in view while achieving the ends, A policy is “an established guidingcanon premised on objective, devised to govern the activities of thebusiness enterprise and from which the basic precepts of conduct arederived”. A policy is devised to guide the organizational members todeal with a particular situation in a particular manner. It delimits the areawithin which a decision is to be made and assures that the decision willbe consistent with and contributive to business objectives.

Characteristics of a Policy

Policies tend to predefine issues, avoid repeated analysis, and give aunified structure to other types of plans. Thus, policies are not simplestatements, they have certain purpose behind them. A statement shouldhave the following characteristics in order to be accepted as a policy.

(i) Policy is an expression of intentions of Top Management. It shouldpresent the principle that will guide the organization actions. Most ofthe policy statements reflect a faith in the ethical value of the people.

(ii) Policy is stated in Broad Terms. The purpose of a policy statementis to serve as a guide to practice now and in future; so it should bestated in the broadest possible terms.

(iii) Policy is Long Lasting. A policy should be formulated after takinginto account the long-range plans and needs of the organization.

(iv) Policy is developed with the Active Participation of Top Management.Policy development calls for serious thinking and participation of allthe top executives. Policies live longer than people who frame them.They are framed in such a manner that they apply to all members ofthe organization alike from top to bottom. The policies should alsoget approval of the highest authority in the organization.



(v) Policy is in Writing. Policies take concrete shape when they are putin writing. This will ensure uniformity in application. In case ofdisagreement at lower levels, written policy serves as the finalreference point. Written policies ensure continuity and greaterconformity.

Advantages of Policies

A policy is a guide for repetitive action in major areas of activity. It is astatement of commonly accepted understanding of decision-makingcriteria. Policies are set up to achieve several benefits. By taking policydecisions on frequently occurring problems, the top management providesthe guidelines to lower level managers. It will permit decisions to bemade in similar situations without repeating the reasons and expensiveanalysis required initially to state the policy or make the decision. Policieshelp managers at various levels to act with confidence without the needof consulting the superiors every time. This will also ensure promptnessof action.

The benefits of policies are as follows

(i) By making policy decisions on frequently recurring problems, thetop management provides the guidelines to lower level managers.

(ii) Policies help managers at various levels to act with confidence withoutthe need for consulting the superiors every time. This also ensurespromptness of action.

(iii) Policies facilitate better administrative control. Policies provide therational basis for evaluating the results.

(iv) By setting up policies, the management ensures that decisions madewill be consistent and in tune with the objectives, and interests of theenterprise.

(v) Policies secure coordination and integration of efforts inaccomplishing the organizational objectives.

(vi) Policies save time and effort by pre-deciding problems in repetitivesituations. They save the management from the botheration ofrepeating the expensive analysis required to take the policy decisionevery time.



Limitations of Policies

(i) Policies are repeatedly used plans and they bring about rigidity inoperations. They leave no room for initiative by the subordinates.

(ii) Policies do not cover all the problems. Sometimes, unforeseensituations arise which are not covered by the existing policies.

(iii) Policies are no substitute for human judgment. Policies only delimitthe area within which decisions are to be made.

(iv) Policies are not ever lasting.

Difference between Policies and Objectives

Policies ObjectivesS.No.

Policies are guidelines, whichfacilitate the achievement of predeterminedobjectivesPolicies determine how thework is to be done.Policies prescribe the modeand the manner in whichobjectives can be achieved.Policies are formulated atthe top level, middle levelad lower level management.

1.

2.

3.

4.

Objectives are the endstowards which all the activitiesof the enterprise are - directed.Objectives determinewhat is to be done.Objectives are the endpoints of planning

Objectives are determinedby the owners or topmanagement of the business.

-

-

-

-

Policy Formulation

It is the responsibility of the top management to make policies or to takepolicy decisions. Policies involve standing decisions, which are usedrepetitively over a period of time by different levels in the organization.Policies are required in different functions of the enterprise. But the topexecutives may not have the total expertise to lay down policies for allfunctional areas in the organization. It is here that the contribution offunctional and other line managers and staff officials assumes significance.Such participation will boost the morale of the participants and will ensurebetter acceptance of these policies. No policy will produce the desiredresult if it is not acceptable to those who are to use the policy.

A policy represents a management decision. That means policyformulation involves various stages of decision making process, namely,defining the problem, analyzing the problem, collecting information,developing alternatives, selecting the best alternative, putting the decisioninto practice and follow up. These steps have been discussed in detail in



the chapter entitled ‘Decision Making.’ It is important to point out thedifference between a policy decision and other decisions. A policydecision is a standing decision, which serves as a framework for takingother decisions.

The task of formulation and revision of policies is generally entrusted toa committee of top executives. Before proceeding to formulate a policy,the executives must understand the environment under which the need ofa policy for a specific purpose is felt. Various policy alternatives shouldbe analyzed carefully and it is also important to examine the effect ofalternatives on the value system of the organization. That policy alternativeshould be adopted which is expected to yield the best possible results interms of achievement of objectives of the enterprise.

The policies must be put into writing. There are two compelling reasonsfor this. Firstly, a policy will be vague unless it is written down. Secondly,if a policy is in writing, it will reveal exactly the intentions of the topmanagement. Special skill is required to select and adhere to policylanguage, which will state and synthesize the general principles and thescope for discretion. As said earlier, the policy should be finalized afterconsulting the persons who are supposed to use the policy. The reactionof such people should be analyzed carefully. After a policy is framed, itmust be properly communicated to the people who are expected to useit. It is also necessary to appraise the policies after a certain period oftime to know their effectiveness. The policies, which have becomeoutdated, should be discarded without any delay.

Types of Policies

The management should always be in search of areas where there maybe a need for a policy. Policies must be set up in the key areas of theenterprise like production, purchase, finance, personnel and marketing.If this is done, the policies will be classified by major functions of theenterprise. Policies may also be classified on the basis of source of thepolicy, i.e., (i) external, (ii) internal, and (iii) appealed. External policiesinclude those policies, which arise to meet the various controls andrequests of forces outside the enterprise, such as government, trade unionsand trade associations. Internal policies include those initiated by managersat various levels to guide the subordinates. Appealed policies come intoexistence from the appeal of an exceptional problem by a subordinate to



his superior regarding how to handle the problem. They are formed sincethe existing policies are insufficient to solve the problem.

G.R.Terry has given another classification of policies based on theorganizational levels of managers. There may, be policies which are usedprimarily by the top managers, other principles by the middle managersand still other policies which are applicable chiefly to the first linemanagers. The policies at these three levels may be termed as basic,general and departmental policies, Basic policies affect and relate to thetopmost level of managerial hierarchy. General policies affect the middlelevel managers and are more specific than the basic policies. Departmentalpolicies are highly specific and are applicable at the lowest level ofmanagement to deal with the day-to-day problems in dealing with thepeople at work.

2.10.4 Procedures

A procedure is a systematic way of handling regular events. It is stated interms of steps to be followed in carrying out certain kinds of work.According to Terry, a procedure is a series of related tasks that make upthe chronological sequence and the established way of performing thework to be accomplished.” It is a list of systematic steps for handlingevents that occur regularly. Chronological sequence of required actionsis the essence of any procedure. A procedure is a guide to action ratherthan to thinking, so it hardly leaves any room for judgment. Proceduresinvolve planned sequence and consistency. For instance, there may bedifferent procedures in an enterprise for processing an order, shippingthe goods, handling claims, collection of payments, and so on.

Procedures are operational guides to action as they routinise the waycertain recurring jobs are to be performed. The establishment of variousprocedures tends to impart systematized order in place of confusion inthe organization. They help in management by system. They serve asmeans by which decisions are implemented. Well-conceived proceduresallow effective delegation and decentralization of authority without lossof control and coordination.

A streamlined, simplified and sound procedure helps to expedite andaccelerate clerical work without duplication and waste of efforts andresources. It will lubricate the channels of information and, thus, help topmanagement in timely decision-making. Even the information flow can



be procedural so that management gets information continuously in vitalareas like sales performance, cash flow, inventory position and so on.However, procedures must be periodically reviewed and updated to keeppace with the changing requirements of the volume of work. This willlead to work simplification, rationalization, increased efficiency andreduced costs.

Advantages of Procedures

(i) Procedures minimize the burden of decision-making because thesequence of steps to be followed is standardized.

(ii) Procedures often lead to simplification of workflow and eliminationof unnecessary steps.

(iii) Procedures ensure uniformity and consistency of action underrecurring situations.

(iv) Procedures are developed after careful analysis of various operations,which are necessary for bringing coordination in the organization.

(v) Procedures are an important aid to communication because theycommunicate the steps to be followed to complete a, particular pieceof work.

(vi) Procedures serve as a medium of control by enabling the managersto evaluate the performance of their subordinates.

Limitations of Procedures

(i) Procedures bring about rigidity in the performance of operations.Thus, they discourage the search for any improvement.

(ii) A procedure lays down the fixed way of doing a particular job andthus a more effective, way of doing a job may not be given properattention.

(iii) Procedures need to be reviewed and updated constantly becausethey become obsolete with the change in the nature of businessoperations.

Distinction between Policies and Procedures

Policies are specific guidelines and constraints for managerial thinkingand action. They are planned expressions of the organization’s officialattitude towards certain issues. But procedures, on the other hand, are



systematic ways of handling regular events. They involve chronologicalsequence of actions required to do particular tasks. They are operationalguides to action and routinise the way certain recurring jobs are to bedone. The other points of difference between policies and proceduresare as follows:

1. Policies are guides to decision-making while procedures are guidesto action.

2. Policies have some room for managerial thinking and discretion whileprocedures are generally detailed and rigid.

3. Policies form part of strategies of the organization while proceduresare operational as tactical tools.

4. Policies are generally framed by the top management and proceduresare laid down at somewhat low-level in the light of policies.

5. Policies serve as the bases on which different procedures are based.

The difference between policies and procedures can be further explainedby means of an example. An industrial concern may adopt a policy ofcentralized recruitment and selection through the labor department. Thelabor department may then chalk out the procedure of recruitment andselection. This procedure may consist of several steps like invitingapplications, preliminary interview, aptitude and other tests, final interview,medical examination and issue of appointment letter. However, bothpolicies and procedures can be termed as standing plans because theyguide action. Moreover, both are time and labor-saving devices becausethey provide ready-made guidelines for dealing with the recurringsituations.

2.10.5 Strategies

The term ‘strategy’ has been adapted from war and is being increasinglyused in business to reflect broad overall objectives and policies of anenterprise. In the context of business, strategy refers to the firm’s overallplan for dealing with and existing in its environment. Strategies most oftendenote a general programme of action and deployment of emphasis andresources to attain comprehensive objectives. Strategies are plans madein the light of the plans of the competitors because a modern businessinstitution operates in a competitive environment. They are a usefulframework for guiding enterprise thinking and action. For instance, a



company may follow a strategy of charging a lower price or using moresales force than competitors or advertising more heavily than competitors.

The purpose of strategies is to determine and communicate through asystem of major objectives and policies, a picture of what kind ofenterprise is envisioned. They do not attempt to outline exactly how theenterprise is to accomplish its objectives since this is the task of countlessmajor and minor supporting programmes. But they are a useful frameworkfor guiding enterprise thinking and action. This usefulness in practice andimportance in guiding planning do, however, justify their separation as atype of plan for purposes of analysis.”

Why Strategic Planning?

No military officer would undertake to engage his enemy without a clearidea of strategy. No politician would undertake a campaign for a majoroffice without a clear concept of his Likewise, no business firm can affordto get ahead without a clear map of why and where it go. Strategicplanning provides the route map for the firm.

Benefits of Strategic Planning

It provides the road map for the firm; it shows the way for achievingtargets.

It helps the firm utilize its resources in the best possible manner. Itallows more effective allocation of time and resources for identifyingopportunities.

The firm can respond to environmental changes in a better way byexploiting opportunities to its advantages and avoiding costlymistakes in investment decisions.

It minimizes the chances of mistakes and unpleasant surprises.

It creates a framework for internal communication among personnel.

It helps to integrate the behavior into a total effort.

It provides a basis for the clarification of individual responsibilities.

It gives encouragement to thinking.

It encourages a favorable attitude toward change.

It provides a cooperative, integrated and approach to tacklingproblems and opportunities.



It serves as a comprehensive guide.

It provides the big picture for all employees of an organization

By defining the mission of the organization in specific terms, it helpsmanagers to achieve the given purpose through organizational efforts.The organization is able to function better as it becomes more responsiveto a dynamic environment. It helps in identifying opportunities exploit thesame vigorously. It helps decide where and when to use the availableresource optimal way. Additionally, it provides a complete and broadbase for judging each contributions. Targets are clarified and the meansto follow are outlined. The future adequate controls can be establishedto evaluate whether the right course of action has been taken or not. italso gives that whether the results are satisfactory or not.

Strategic planning also minimizes the mistakes and unpleasant surprises,because goals and strategies are subjected to careful exercise. Thereare less chances of committing mistakes and decisions arrived at ultimatelyon time.

Pitfalls: Strategic planning is laborious and time-consuming. There arevery few shortcuts. Immediate results are rarely obtained. Further,establishing and maintaining functioning system involves many expenses.

Strategic planning, quite often, restricts the origination and executives tothe non rational and risk free options. Managers are wedded to aphilosophy of adopting those strategies or objectives that bear the weightof careful scrutiny and detailed analysis. In the process, many attractiveopportunities may be lost since they are characterized by a high degreeof risk and uncertainty.

Strategic Management Process

Strategic Management is a process through which manager:

Formulates and implements strategies

Obtains strategic goal achievement

Elements of Strategic Management

The above definitions clearly reveal four important elements of strategicmanagement: (a) Analysis, (b) Strategic choice, (c) Strategyimplementation and (d) Strategy evaluation.



Strategic analysis: This is concerned with the strategic situation ofthe organization. Organization looks into issues such as changes inthe organizational environment and impact on the organization,assessment of its resources and strengths and light of changes inenvironment. A vigilant and proactive organization always tries toget of competition through a constant re-examination of its positionin the marketplace in its products, services, strategies, etc.

Strategic choice: Strategic analysis provides a basis for strategicchoice. This is basically with formulation of suitable courses of action,their evaluation and the choices The relevant issues include decidingwhat new businesses to enter, what businesses to how to allocateresources, whether to expand operations or diversified whether toenter international markets, whether to merge or form a joint ventureand how to avoid a hostile; takeover etc. Since an organization hasto utilize its resources judiciously, it must decide alternative strategieswhich benefit the firm most.

Strategy implementation: This is the action stage of strategicmanagement. Implementation means mobilizing employees to translateformulated strategies into concrete action. This step requires a firmto (a) establish annual objectives, (b) devise policies, (c) motivate(d) allocate resources, (e) develop a strategy of supportive culture(f) create an organization structure (g) channel marketing efforts (h)prepare budgets (i) develop information systems and (j) linkemployee rewards to organizational performance. Successful strategyimplementation hinges upon a manager’s ability to motivate people.

Strategy evaluation: This is the final stage in strategic management.Evaluation is because success today is no guarantee of successtomorrow. Success creates new problems. So, managers need toconstantly (a) review external and internal factors basis for currentstrategies, (b) measure performance and, (c) take corrective steps.

All strategies are subject to change because the environment in whichthey operate is changing.

The Process of Strategy Formulation

Important steps in the strategy formulation process are given below.



1. Mission and objectives: The strategic management process beginsby spelling out the firm’s mission and objectives. The mission of a firm isthe unique purpose that sets it apart from other companies of its typeand identifies the scope of its operations. A company mission is designedto accomplish several outcomes?

To ensure unanimity of purpose within the organization.

To provide a basis for motivating the use of the organization’sresources.

To develop a basis, or standard, for allocating organizationalresources.

To establish a general tone or organizational climate; for example, tosuggest a business like operation.

To serve as a focal point, for those who can identify with theorganization’s purpose and direction as well deter those who cannotdo so, from participating further in its activities.

To facilitate the translation of objectives and goals into a workstructure, involving the assignment of tasks to responsible elementswithin the organization.

To specify organizational purposes and. the translation of thesepurposes in such a way that cost, time and performance parameterscan be assessed and controlled (King and Cleiand).

Mission is a broad term and it reflects considerable idealism. Wetherefore, require specific or objectives to be achieved within a timeframe, which would help us, compare with its rivals. Objective is an endresult, the end point, something that you aim for and to reach. It is a kindof desired result towards which behavior is directed in the organization.

To achieve long-term prosperity, managers generally establish long-termobjectives in certain areas (Pears and Robinson), namely:

Profitability: How much can the firm earn that is an acceptablelevel of profit stay in the business and get ahead?

Productivity: Whether the firm can improve the input-outputrelationship in a sustained way, in terms of number of items producedor the number of services rendered per unit of input.



Competitive position: This is usually expressed in terms of increasingtotal sales or market share when compared to rivals in the field.

Employee development and employee relations: Employeesvalue growth and career opportunities. Providing such stimulatingopportunities increase productivity and decrease turnover. Therefore,employee development becomes a key issue in every firm’s longterm plan- Improving employee relations (union-workers-employers)also, is an important issue because poor industrial relations couldupset all the calculations of managers regarding growth, profitability,etc.

2. External Analysis: The External Environment needs to be analyzedto find the firm’s opportunities or to minimize the threats.

3. Internal Analysis: After taking note of the opportunities present inthe environment, the firm has to identify the key areas where it wants tofocus its energies based on its own strength and weakness.

4. Formulate Strategies: The situation analysis will give the lead to theexplicit strategic plans at three levels; corporate, business and functional.

Appropriateness of Business Strategy

A business strategy is a pragmatic plan of action to achieve certainobjectives. To evaluate its appropriateness requires certain criteria. Wemay identify six criteria to measure the appropriateness of a businessstrategy

1. Internal Consistency. A business strategy in a particular area ofbusiness should be consistent with strategies in other areas and objectivesand policies of business. Internal inconsistency in any strategy will createproblem in its implementation.

2. Consistency with Environment. A strategy is basically an enterprise’sresponse to cope with external environmental. Therefore, it should aimat meeting the threats and pressures of external forces.

3. Appropriateness in the light of available resources. Formulationof a strategy requires a realistic assessment of the resources of theenterprise men, money and materials both existing resources and theresources it can command. The resources of an enterprise also includethe skills of management and other manpower, command over sources



of scarce raw materials, production facilities, technology, marketingcapabilities and public image, and so on. It is desirable that everyenterprise formulates its strategy within the limitations imposed by itsresources. The objective is to ensure that the enterprise’s resources arenot over-stretched or over-strained on the one hand and to utilize theexisting and commendable resources in the best possible manner on theother.

4. Acceptable degree of risk. Any major strategy carries with it certainelement of risk and uncertainty because it covers a long future horizonand because it seeks to cope with complex environment. The degree ofrisk inherent in a strategy should be within the bearable capability of theenterprise. Resources should not be committed irrevocably, nor shouldthey be concentrated on a single or narrow range of ventures. Also,there should be match between risk and returns, financial and otherwise.

5. Appropriate Time Horizon. Time is the essence of any strategy.While a reasonably long time span imparts some flexibility, the problemof forecasting is ever present. How far in the future can top managementpredict with credibility is a measure of its capability. An optimal timespan cannot be mathematically determined; it is a matter of environmentalconditions, the objectives to be sought and the judgment of management.

6. Workability. A strategy should be feasible and produce desired resultswithin the constraints and parameters known to management. It shouldbe realistic and capable of implementation. Certain quantitative measureslike volume of sales and profit, growth rate, asset formation, marketshare, introduction of new products and so on, are to be set. These areto be combined with qualitative criteria like the degree of confidencewith which managers implement the strategy, the extent to which majorareas of decision situations are handled by reference to the criteriaembedded in the strategy, the extent to which opportunities are exploited,threats averted, resources mobilized, and environmental control gained.

2.10.6 Methods

There is a method for accomplishing each phase of work within aprocedure. A method is the manual or mechanical means by which eachoperation is performed. It means an established manner of doing anoperation, thus, a method is more limited in scope than procedure because



it deals with a task that is only one step of a procedure. For instance, inthe procedure for processing order, there are methods for acknowledgingthe incoming order, checking the credit status of the customer, preparingthe sales invoice and distributing the copies of the invoice.

2.10.7 Programmes

A programme involves planning for future events and establishing asequence of required actions. For instance, it might include such generalactivities as locating new suppliers as a source of additional raw materials,purchasing new machines that will enable to increase output, changingover some existing machines to meet new demands or hiring new peopleto operate new equipment. Thus, a programme is a complex of objectives,policies, procedures, task assignments, steps to be taken, resources tobe employed and other elements necessary to carry out a given courseof action. A programme may be as major as to start a new factory ormay be as minor as a scheme formulated by a foreman to improve themorale of the workers.

2.10.8 Budgets

Budgets are plans for using money and materials. Budgeting is animportant part of overall planning as different kinds of budgets areprepared to utilize scarce resources in the best possible manner. A budgetis a statement of expected results expressed in numerical terms likerupees, product units, or man hours. Since it is a statement of expectedresults, it is also used as an instrument of managerial control. It providesa standard by which actual operations can be measured and variationscan be checked. But it should not be forgotten that making a budget isclearly planning. A budget forces an enterprise to make in advance anumerical compilation of expected cash flow, expenses and revenues,capital outlays, man or machine-hour utilization etc. Budgeting is essentialfor control, but it cannot serve as a control mechanism unless it reflectsplans. As a means of effective planning, the process of budgeting mayinvolve the preparation of budgets of sales, purchase, materials, labor,manufacturing expenses, etc.

Budgeting is a key managerial process and is important for coordinating theactivities of various departments. It coordinates by adjusting every departmentalbudget into the master budget. Every departmental head is forced to consciousplan the future operations of his department in tangible terms.



Since budgets portray verifiable and measurable goals to be reachedwithin a period of one year, they inject a sense of clarity, direction andpurpose in the activities of the organization. However, to be effectivemeans of planning, budgets should have functional flexibility. They shouldnot be rigid instruments. They should be able to cope with the unforeseencircumstances within a predictable range of activities. The budgets shouldbe drafted carefully and should not represent a mere projection on thebasis of the past performance. They should be forward lookingdocuments.

2.10.9. Rules

Every organization attempts to operate in an orderly way by laying downcertain rules. Rules are the simplest and the most specific type of standingplans. They are used for guiding what may or may not be done. A ruledemands a specific action. It is more rigid than a policy. Rules generallypertain to the administrative area of a procedure. A rule may not beapart of any procedure. For example, a rule like ‘No smoking’ is notrelated to any procedure. Rules demand strict compliance. Their violationis generally associated with some sort of disciplinary action.

Significance of Standing Plans like budget

Standing plans are formulated to achieve unity and uniformity of effortsin meeting repetitive situations arising at various levels of the enterprise.They act as ready guides to deal with recurring problems. They help inthe effective management of a business enterprise in several respects asstated below:

(i) Standing plans facilitate delegation of authority to lower levels withoutabdication of accountability at successively higher levels.

(ii) They are effective means of achieving the goals of the enterprise.Goals tend to be vague, complex, multi dimensional and, sometimes,conflicting with one another in the absence of standing plans. In orderto overcome such difficulties, it is essential to develop a hierarchy ofpolicies, methods, procedures and rules to serve as ready frames ofreference whenever there is some difficulty in taking a managerialdecision.

(iii) Standing plans help in achieving co-ordination in the enterprise. Theytend to achieve consistency, uniformity and unity of efforts in theenterprise.



(iv) Standing plans ensure quick action whenever need arises becausethere is no need to repeat the reasoning and analysis required initiallyto design a standing plan whenever a similar situation arises. Thus,they are great labor saving devices as they provide frames of referencefor tackling recurring situations.

(v) Standing plans facilitate better administrative control. They providethe rational bases of evaluating the results of efforts of personsworking at the various levels in the enterprise.

2.11 DECISION MAKING

Introduction

Decision-making is an important part of management process. It coversevery part of an enterprise. In fact, whatever a manager does, and hedoes through decision-making only. For example, a manager has to decide

(i) What are the long-term objectives of the organization; how to achievethese objectives, what strategies, policies, procedures to be adopted(planning);

(ii) How the jobs should be structured what type of structure, how tomatch jobs with individuals (organizing);

(iii) How to motivate people to peak performance, which leadership styleshould be used, how to integrate effort and resolve conflicts (leading);

(iv) What activities should be controlled, how to control them,(controlling) decision-making is a central, important part of theprocess of managing? Managers are essentially decision makers only.Almost everything managers do involves decision-making.

Managers scout for problems, make decisions for solving them andmonitor the consequences to see whether additional decisions arerequired. Good decision-making is a vital element of good managementbecause decisions determine how the organization solves its problems,allocates its resources and accomplishes its goals. However,decision-making is not easy it must be done amid ever-changing factors,unclear information and conflicting points of view. A decision is a choicemade from available alternatives. Decision-making is the process by whichindividuals select a course of action among several alternatives, to producea desired result.



Characteristics of Decision-Making

The important characteristics of decision-making may be listed thus:

1. Goal-oriented: Decision-making is a goal-oriented process. Decisionsare usually made to achieve some purpose or goal. The intention is tomove ‘toward some desired state of affairs’.

2.Alternatives: A decision should be viewed as ‘a point reached in astream of action’. It is characterized by two activities : search and choice.The manager searches for opportunities to arrive at decisions and foralternative solutions, so that action may take place. Choice leads todecision; it is the selection of a course of action needed to solve aproblem. When there is no choice of action, no decision is required. Theneed for decision-making arises only when some uncertainty, as tooutcome exists.

3. Analytical-intellectual: Decision-making is not a purely intellectualprocess. It has both the intuitive and deductive logic; it contains consciousand unconscious aspects. Part of it can be learned, but part of it dependsupon the personal characteristics of the decision maker. Decision-makingcannot be completely quantified; nor is it based mainly on reason orintuition. Many decisions are based on emotions or instincts. “A decisionrepresents a judgment; a final resolution of a conflict of needs, means orgoals; and a commitment to action made in the face of uncertainty,complexity, and even irrationality.” Decision implies freedom to thedecision maker regarding the final choice; it is uniquely human and is theproduct of deliberation, evaluation and thought.

4. Dynamic process: Decision-making is characterized as a process,rather than as, one static entity. It is a process of using inputs effectivelyin the solution of selected problems and the creation of outputs that acourse of action among has utility. Moreover, it is a process concernedwith ‘identifying worthwhile things to do’ in a dynamic setting. A managerfor example, may hire people based on merit regularly and also pick upcandidates recommended by an influential party, at times. Depending onthe situational requirements, managers take suitable decisions usingdiscretion and judgment.

5. Pervasive function: Decision-making permeates all management andcovers every part of an enterprise. In fact, whatever a manager does, hedoes through decision-making only; the end products of a manager’s



work are decisions and actions. Decision-making is the substance of amanager’s job.

6. Continuous activity: The life of a manager is a perpetual choicemaking activity. He decides things on a continual and regular basis. It isnot a one shot deal.

7. Commitment of time, effort and money: Decision-making impliescommitment of time, effort and money. The commitment may be for-shortterm or long-term depending on the type of decision (e.g. strategic,tactical or operating). Once a decision is made, the organization movesin a specific direction, in order to achieve the goals.

8. Human and social process: Decision-making is a human and socialprocess involving intellectual abilities, intuition and judgment. The humanas well as social imparts of a decision are usually taken into accountwhile making the choice from several alternatives. For example, in alabor surplus, capital-hungry country like India managers cannot suddenlyshut down plants, lop off divisions and extend the golden handshake tothousands of workers, in the face of intense competition.

9. Integral part of planning: As Koontz indicated, ‘decision making isthe core of planning’. Both are intellectual processes, demandingdiscretion and judgment. Both aim at achieving goals. Both are situationalin nature. Both involve choice among alternative courses of action. Bothare based on forecasts and assumptions about future risk and uncertainty.

2.11.1 TYPES OF DECISIONS

Decisions may be classified according to different bases, which arediscussed below:

(i) Routine and Strategic Decisions. Tactical or routine decisions aremade repetitively following certain established rules, procedures andpolicies. They neither require collection of new data nor conferring withpeople. Thus they can be taken without much deliberation. They may becomplicated but are always one-dimensional. They do not require anyspecial effort by the manager. The managers at the middle and lowermanagement level generally take such decisions. Strategic or basicdecisions, on the other hand, are more important and so the topmanagement and middle management take them generally. The higherthe level of a manager, the more strategic decisions he is required to



take. The strategic decisions relate to policy matters and so require athorough fact finding and analysis of the possible alternatives. Findingthe correct problem in such decisions assumes great importance. Themanagers are more serious about such decisions as they influencedecision-making at the lower levels.

(ii) Policy and Operating Decisions. Policy decisions are of vitalimportance and are taken by the top management. They affect the entireenterprise. But operating decisions are taken by the lower managementin order to put into action the policy decisions. For instance, the bonusissue is a policy matter that is to be decided by the top management, andcalculation of bonus is an operating decision, which is taken at the lowerlevels to execute the policy decision.

(iii) Organizational and Personal Decisions. Organizational decisionsare those, which a manager takes in his official capacity. Such decisionscan be delegated. But personal decisions, which relate to the manageras an individual, and not as a member of the organization, cannot bedelegated.

(iv) Programmed and Non-programmed Decisions. The programmeddecisions are of a routine and repetitive nature, which are to be dealtwith according to specific procedures. But the non-programmed decisionsarise because of unstructured problems. There is no standard procedurefor handling such problems. For instance, if an employee absents himselffrom his work for a long time without any intimation, the supervisor neednot refer this matter to the chief executive. He can deal with such anemployee according to the standard procedure, which may include chargesheet, suspension, etc. But if a large number of employees absentthemselves from work without any information such a problem cannotbe dealt in a routine manner. It has to be dealt with as an unstructuredproblem and the chief executive should take the decision.Non-programmed decisions require thorough study of the problem andscientific analysis of the situational factors. There has to be adequateprobing and analysis of various alternatives before taking such decisions.

(v) Individual and Group Decisions. When an individual in theorganization takes a decision, it is known as individual decision. Suchdecisions are generally taken in small organizations and in thoseorganizations where autocratic style of management prevails. Groups or



collective decisions refer to the decisions, which are taken by a group oforganizational members, say Board of Directors or a committee.

2.11.2 DIFFICULTIES IN DECISION MAKING

A business manager can make decisions by intuition, i, e., withoutconsidering carefully all the alternatives. Practically, every one takesdecisions in this way because of the feeling that the particular course ofaction is the best one. This kind of feeling may have no logic behind it.Moreover, it is difficult to explain why one is feeling a particular way.Psychologists emphasize that there are forces other than reason within aperson, which influence and shape a decision. Decisions based on intuitionare subjective and are taken without any conscious effort to weigh theadvantages and disadvantages of various alternatives.

Effective decision-making requires a rational choice of a course of action.There is a need to define the term ‘rational’ here. Rationality is the abilityto follow a systematical, logical, thorough approach in decision-making.Thus, if a decision is taken after thorough analysis and reasoning andweighing the consequences of various alternatives, such a decision willbe called an objective or rational decision.

In actual practice, each person takes a decision, which involves acombination of intuition and rational thinking. A person who dependsmuch upon intuition is more subjective and a person who depends muchupon logical thinking is more objective. This is what Herbert Simon hascalled the ‘principle of bounded rationality’. Simon emphasized that aperson makes decisions not only on absolutely logical analysis of factsbut also on his intuition, value system and way of thinking, which aresubjective in nature.

The subjectivity in decision-making arises because:

(i) The individual does not want to study and analyze the problembecause of his perception.

(ii) The individual does not have the full knowledge of the alternativesand/or their consequences.

(iii) The individual interprets the organizational goals in his own way. Hemay adopt a course of action, which according to him will meet thegoals effectively.

(iv) The individual is careless in taking the decision. He may be indifferenttowards the consequences of his decision.



The rationality of the individuals is generally affected by the abovelimitations. The concept of bounded rationality explains the behavior ofpeople in practice. It recognizes that a man cannot be expected to havefull knowledge and information and his capacity to perceive, retain andretrieve information is not unlimited. Human goals are multiple andconflicting. The traditional theory of complete rational and economic mancannot work in practice.

Rationality is the ability to follow a systematic, logical and thoroughapproach in decision-making process. Gross suggested three dimensionsto determine rationality: (i) the extent to which a given action satisfieshuman interests; (ii) feasibility of means to the given end; and (iii)consistency.

Rationality requires complete knowledge of the consequences that willfollow each choice. But it is not always possible. Rationality furtherrequires a choice among all possible alternatives. But every individualhas his limitations. He may not be able to perceive all possible alternatives.Moreover, decision-making relates to future. This requires some degreeof imagination. One may not be able to imagine objectively because ofhis frame of mind. From this, we can say that a man cannot be completelyrational. As said by Simon, a man has only bounded rationality becausethere are certain limitations to complete rationality. Thus, Simon’s pointof view is highly realistic as it helps in understanding the actual behaviorof the decision maker. It also modifies substantially the traditional theoryof decision-making based on complete rational man. Subjective factorsare bound to affect a person’s decisions even though he is otherwiserational.

2.11.3 Steps in Rational Decision Making

The decision making process can be explained by studying the followingsteps:

(i) Diagnosing and Defining the problem

(ii) Analyzing the problem.

(iii) Collecting of data.

(iv) Developing alternatives.

(v) Review of key factors.



(vi) Selecting the best alternative.

(vii) Putting the decision into practice.

(viii) Follow up.

(i) Diagnosing and Defining the Problem

It is true to a large extent that a problem well defined is half solved. A lotof bad decisions are made because the person making the decision doesnot have a good grasp of the problem. Too often what managers consider,as problems are really symptoms of problems. For instance, a companyis losing money. Its problem can’t be stated as “How can we stop losingmoney?” That is only a symptom. The real problem is to identify whatbusiness practices are causing the company to incur losses. Are the pricestoo low or expenses too high? Therefore, it is essential for the decisionmaker to find and define the problem before he takes any decision.

Objectives

Problem fact finding Alternatives Evaluation

Decision of Alternatives

Selections

Implementation

Feedback information

information Testing

Figure - Decision-making Process.

Sufficient time should be spent on defining the problem, as it is not alwayseasy to define the problem and to see the fundamental thing that is causingthe trouble and that needs correction. Practically, no problem everpresents itself in a manner that an immediate decision may be taken. It istherefore, essential to define the problem before any action is taken,otherwise the manager will answer the wrong question rather than thecore problem. Clear definition of the problem is very important as theright answer can be found only to a right question.



(ii) Analyzing the Problem

After clearly recognizing the problem, the next phase of decision-makingis the analysis of problem, which involves classifying the problem andgathering information. Classification is necessary in order to know whoshould take the decision and who should be consulted in taking it. Withoutproper classification, the effectiveness of the decision may be jeopardized.The problem should be classified keeping in view the following factors:

(i) The nature of the decision, i.e., whether it is strategic orit is routine,

(ii) The impact of the decision on other functions,

(iii) The futurity of the decision,

(iv) The periodicity of the decision, and

(v) The limiting or strategic factor relevant to the decision.

(iii) Collection of Data

A lot of information is required to classify any problem. So long as therequired information is not available, any classification would bemisleading. This will also have an adverse impact on the quality of thedecision. Trying to analyze without facts is like guessing directions at acrossing without reading the highway signboards, Thus collection of righttype of information is very important in decision making. It would not bean exaggeration to say that a decision is as good as the information onwhich it is based.

Collection of facts and figures also requires certain decisions on the partof the manager. He must decide what type of information he requires andhow he can obtain this. Before gathering the information, one must beclear as to how much time and money he can spend in gathering theinformation he needs. It is also important to note that when one gathersthe facts to analyze a problem, he wants facts that relate to alternativecourses of action. So one must know what the several alternatives areand then should collect information that will help in comparing thealternatives. Needless to say, collection of information is not sufficient;the manager must also know how to use it.

It is not always possible to get all the information that is needed fordefining and classifying the problem. In such circumstances, a manager



has to judge how much risk the decision involves as well as the degree ofprecision and rigidity that the proposed course of action can afford. Itshould also be noted that fact finding for the purpose of decision shouldbe solution oriented. The manager must lay down the various alternativesfirst and then proceed to collect facts, which will help in comparingalternatives.

(iv) Developing Alternatives

After defining and analyzing the problem the next step in the decisionmaking process is the development of alternative courses of action.Without resorting to the process of developing alternatives, a manager islikely to be guided by his limited imagination. It is rare for alternatives tobe lacking for any course of action. But, sometimes, a manager assumesthat there is only one way of doing a thing. In such a case, what themanager has probably not done is to force himself consider otheralternatives. Unless he does so, he cannot reach the decision, which isthe best possible. From this can be derived a key planning principlewhich may be termed as the principle of alternatives. Alternatives existfor every decision problem. Effective planning, involves a search for thealternatives towards the desired goal.

(v) Review of Key Factors

While developing alternatives, the principle of limiting factor has to betaken care of. A limiting factor is one, which stands in the way ofaccomplishing the desired goal. It is a key factor in decision-making. Ifsuch factors are properly identified, manager can confine his search foralternatives to those, which will overcome the limiting factors. In choosingfrom among alternatives, the more an individual can recognize thosefactors which are limiting or critical to the attainment of the desired goal,the more clearly and accurately he or she can select the most favorablealternativesgenerally use. It should also be noted that development ofalternatives is no guarantee of finding the best possible decision, but itcertainly helps in weighing one alternative against others and, thus,minimizing uncertainties.

It is not always necessary that the alternative solutions should lead totaking some action. To decide to take no action is also a decision asmuch as to take a specific action. It is imperative in all organizational



problems that the alternative of taking no action is being considered. Forinstance, if there is an unnecessary post in a department, the alternativenot to fill it will be the best one. The ability to develop alternatives isoften as important as making a right decision among the alternatives. Thedevelopment of alternatives, if thorough, will often unearth so many choicesthat the manager cannot possibly consider them all. He will have to takethe help of certain mathematical techniques and electronic computers tomake a choice among the alternatives.

(vi) Selecting the Best Alternative

In order to make the final choice of the best alternative, one will have toevaluate all the possible alternatives. There are various ways to evaluatealternatives. The most common method is through intuition, i.e., choosinga solution that seems to be good at that time. There is an inherent dangerin this process because a manager’s intuition may be wrong on severaloccasions. The second way to choose the best alternative is to weigh theconsequences of one against those of the others. Peter Drucker has laiddown four criteria in order to weigh the consequences of variousalternatives. They are:

(a) Risk. A manager should weigh the risks of each course of actionagainst the expected gains. As a matter a fact, risks are involved in all thesolutions. What matters is the intensity of different types of risks in varioussolutions.

(b) Economy of Effort. The best manager is one who can mobilize theresources for the achievement of results with the minimum of efforts. Thedecision to be chosen should ensure the maximum possible economy ofefforts, money and time.

(c) Situation or Timing. The choice of a course of action will dependupon the situation prevailing at a particular point of time. If the situationhas great urgency, the preferable course of action is one that alarms theorganization that something important is happening. If a long andconsistent effort is needed, a ‘slow start gathers momentum approach’may be preferable.

(d) Limitation of Resources. In choosing among the alternatives,primary attention must be given to those factors that are limiting orstrategic to the decision involved. The search for limiting factors in



decision-making should be a never-ending process. Discovery of thelimiting factor lies at the basis of selection from the alternatives and henceof planning and decision-making.

Koontz and O’Donnell have suggested three bases, which should befollowed by a manager for selecting among the alternatives, these areexperience, experimentation and research and analysis, which arediscussed below :

(i) Experience: In making a choice, a manager is influenced to a greatextent by his past experience. Sometimes, he may give undue importanceto past experience. He should compare both the situations. However, hecan give more reliance to past experience in case of routine decisions;but in case of strategic decisions, he should not rely fully on his pastexperience to reach at a rational decision.

(ii) Experimentation: Under this approach, the manager tests the solutionunder actual or simulated conditions. This approach has proved to be ofconsiderable help in many cases in test marketing of a new product. Butit is not always possible to put this technique into practice because it isvery expensive. It is utilized as the last resort after all other techniques ofdecision making have been tried. It can be utilized on a small scale totest the effectiveness of the decision. For instance, a company may testa new product in a certain territory before expanding its sale nationwide.

(iii) Research and Analysis: It is considered to be the most effectivetechnique of selecting among alternatives where a major decision isinvolved. It involves a search for relationships among the more criticalvariables, constraints and premises that bear upon the goal sought. In areal sense, it is the pencil and paper approach to decision making. Itweighs various alternatives by making models. It takes the help ofcomputers and certain mathematical techniques. This makes the choiceof the alternative more rational and objective.

(vii) Putting the Decision into Practice

The choice of an alternative will not serve any purpose if it is not put intopractice. The manager is not only concerned with taking a decision, butalso with its implementation. He should try to ensure that systematicsteps are taken to implement the decision. The main problem which themanager may face at the implementation stage is the resistance by thesubordinates who are affected by the decision. If the manager is unable



to overcome this resistance, the energy and efforts consumed in decision-making will go waste. In order to make the decision acceptable, it isnecessary for the manager to make the people understand what thedecision involves, what is expected of them and what they should expectfrom the management. The principle of slow and steady progress shouldbe followed to bring about a change in the behavior of the subordinates.In order to make the subordinates committed to the decision, it is essentialthat they should be allowed to participate in the decision making process.The managers, who discuss problems with their subordinates and givethem opportunities to ask questions and make suggestions, find moresupport for their decisions than the managers who don’t let thesubordinates participate.

Now the question arises at what level of the decision-making processthe subordinates should participate. The subordinates should notparticipate at the stage of defining the problem because the managerhimself is not certain as to whom the decision will affect. The area wherethe subordinates should participate is the development of alternatives.They should be encouraged to suggest alternatives. This may bring tosurface certain alternatives, which may not be thought of by the manager,moreover, they will feel attached to the decision. At the same time, thereis also a danger that a group decision may be poorer than the one-mandecision. Group participation does not necessarily improve the qualityof the decision, but sometimes impairs it. Someone has described groupdecision like a train in which every passenger has a brake. It has alsobeen pointed out that all employees are unable to participate in decision-making. Nevertheless,, it is desirable if a manager consults his subordinateswhile making decision. Participative management is more successful thanthe other styles of management. It will help in the effective implementationof the decision.

(viii) Follow Up

It is better to check the results after putting the decision into practice.The reasons for following up of decisions are as follows:

(i) If the decision is a good one, one will know what to do if faced withthe similar problem again.

(ii) If the decision is a bad one, one will know what not to do the nexttime.



(iii) If the decision is bad and one follows up soon enough, correctiveaction may still be possible.

In order to achieve proper follow up, the management should devise anefficient system of feedback information. This information will be veryuseful in taking the corrective measures and in taking right decisions inthe future.

2.11.4.1 Quantitative Techniques in Decision Making

The process of managerial decision-making has become verycumbersome. In order to evaluate the alternatives, certain quantitativetechniques have been developed which facilitate making objectivedecisions. Some of these techniques are discussed below:

(i) Marginal Analysis

This technique is also known as marginal costing as under it the additionalrevenues from additional costs are compared. The profits are maximumat the level where marginal revenues and marginal costs are equal.Marginal analysis can also be used in comparing factors other than costsand revenues. For instance, in order to find the optimum output of amachine. one can vary inputs against output until the additional inputsequal the additional output. This would be the point of maximum efficiencyof the machine. Break-even analysis is the modification of this technique,which tells the management the point of production where there is noprofit and no loss.

(ii) Cost-Benefit Analysis

It is a technique of weighing alternatives where the optimum solutioncannot be conveniently reduced to monetary terms as in the case ofmarginal cost analysis. It is used for choosing among alternatives to identifya preferred choice when objectives are far less specific than thoseexpressed by such clear quantities as sales, costs or profits. For instance,social objectives may be to reduce pollution of air and water, whichlacks precision. Cost models may be developed to show cost estimatesfor each alternative and benefit models to show the relationship betweeneach alternative and its effectiveness. Then, synthesizing models,combining these results, may be made to show the relationships of costsand effectiveness for each alternative.



(iii) Operations Research

Operations Research has been defined as the scientific method of analysisof decision problems to provide the executive the needed quantitativeinformation in making these decisions. The object of operations researchis to provide the managers with a scientific basis for solving organizationalproblems involving the interaction of components of the organization. Indays gone by, executive decisions used to be taken on the basis of intuition,subjectivity or past experience even in big organizations. Operationsresearch seeks to replace this process by an analytic, objective andquantitative basis based on information supplied by the system inoperation and possibly without disturbing the operation.

Operations research is widely used in modern business organizations.For instance, inventory models are used to control the level of inventory.Linear programming is useful for allocation of work among individuals inthe organization. Sequencing theory helps the management to determinethe sequence of particular operations. In addition to these, there areother techniques like queuing theory, games theory, reliability theory andmarketing theory, which are important tools of operations research, whichcan be used by the management to analyze the problems and takedecisions.

(iv) Linear Programming

Linear programming is a technique devised for determining the optimumcombination of limited resources to achieve a given objective. It is basedon the assumption that there exists a linear relationship between variablesand that the limits of variations could be ascertained. It is particularlyhelpful where input data can be quantified and objectives are subject todefinite measurement. It is applicable in such problem areas as productionplanning, transportation, warehouse location and utilization of productionand warehousing facilities at an overall minimum cost. Linear programminginvolves maximization or minimization of a linear function of severalprimary variables known as objective function subject to a set of somereal or assumed restrictions known as constraints.

2.11.4.2 Qualitative Decision making:

Decision making is extremely involved and emphasizes detailed applicationof operations research techniques. These techniques are especially useful



in this era of increasingly complex problems. Only initial, brief and simpleaspects will be explained here. Israel Brosch has explained thequantitative approach to decision making as follows:

The quantitative approach is based on data, facts, information and logic.It consists of an orderly and systematic framework of defining, analyzingand solving problems in an objective and scientific manner. The quantitativeapproach is not intended to replace perception, good judgement andcommon sense, the fundamental decision making tools of competentmanagers. It is intended to improve manager’s decision making abilityand to provide them an accountable means for justifying and evaluatingtheir own managerial performance.

While the ultimate responsibility for making decisions rests on themanagerial judgement quantitative analysis of the situation provides anexcellent tool for managerial appraisal of available alternatives. This toolis in the form of a mathematical model, which in a way is a powerfulextension of thinking. It consists of a symbolic representation of thesituation of the real world. This model may simply describe and explainthe actual behaviour of the system with relevant variables interconnectedin such a manner so that the interdependence of actual variables in thesituation.

The model can be formulated in such a manner that changes in the inputvariables would reflect changes in the output of the system.In general, a mathematical model consists of three basic components.These are:

Decision variables: These are controllable variables which are withinthe domain of the decision maker and can be changed and manipulatedby him. Different values assigned to decision variables would give themanager different courses of action to choose from. A specific set ofvalues of these variables would determine a specific solution or a specificcourse of action. For example, in the case of making an investment, thedecision variables would be different areas in which the investment canbe made, the amount that the decision maker wants to invest and thetiming of such investment.

Uncontrollable variables: The uncontrollable variables are all thosefactors whose effect on the situation is beyond the control of the manager.The factors or parameters may be legal, social, economic or political in



nature, and might include inflation, prices of competitors, costs of rawmaterial etc. For example, in the decision to make an investment, theuncontrollable variables may be the prime rate, risk level etc.

Output variables: Output variables are the results of efforts and areknown as measures of effectiveness or the objective function. Theobjective function in the case of investment decision would be rate ofreturn on investment or the total net profit. In other words, the totalprofit in the case of producing an item would depend upon such decisionvariables as what to produce, when to produce and how much to produce;and upon such uncontrollable variables as demand, disposable income,state of the economy etc.

The decision maker’s primary concern is to maximize the value of theoutput variable which would give him the best solution. The following isthe appropriate sequence of steps that the decision maker would followin order to formulate the mathematical model and find the best solution.

Define the objective function: The objective function is a measurablecharacteristic which defines the particular goal to be met. It is expressedin a mathematical equation and is a function of decision variables. Bysubstituting a set of values for the decision variables, a clear understandingof the level of achievement can be obtained.

Isolate all the decision variables that are pertinent to the attainment ofthe objective. For example, if an oil refinery is purchasing oil from threedifferent countries then the quantities decided to be purchased from eachcountry would become the decision variables, since the values of thesevariables become the domain of the decision maker. These are also knownas independent variables.

Develop the relationships that exist between these independent variables.Isolate the non-controllable variables which are beyond the control ofthe decision maker. These may be defined as states of nature or unknownstrategies of the competitors, left the energy users quite unprepared.Similarly a competitor may come up with a better substitute for yourproduct, taking away your market share. These uncontrollable variablesmust be distinguished from controllable variables which are parts ofstrategies of the decision maker.

Develop forecasts for the values of non-controllable variables anddetermine whether these forecasts are based upon stable processes. This



determination can be intuitive or the concept of probability or some otherstatistical methods can be used to establish these forecasts. For example,to take an umbrella with you when go out will depend upon the forecastabout the weather and the accuracy of such a forecast. Since this is astate of nature and beyond the control of the decision maker, the moreaccurate and reliable the forecast be, the more success of the decision.Develop the function that relates the output variables to the decisionvariables. This would describe the relationship between the objectivefunction which is a dependent variable and the independent variables.For example, in the case of oil refinery, the cost function would be thedependent variable and the number of barrels purchased from differentcountries would be the independent variables. The combination of costsof purchasing oil from these countries would constitute the objectivefunction.

Identify and state the constraints that put a limitation on the values ofcontrollable variables. These are the special requirements that restrictthe attainment oft the goals. These constraints may be in the form ofscarce resources, saturation of market, governmental regulations,contractual agreements etc. for example, the oil refinery may be allotteda set quantity of oil from one or more of these countries.

Find and choose optimal solution. An optimal solution is the one which isfeasible and gives the best value of the objective function. In other words,such strategy should be chosen which maximizes the degree of attainmentof our objective within the constraints that have been established.It is possible that there may be more than one optimal solution, in whichcase the manager would have the flexibility in implementing a desiredstrategy.

Since all quantitative decisions involve knowledge of probability theory,a brief exposure to the probability concept is necessary.

Probability Theory

Probability refers to a chance that a particular event will occur. Informally,the word chance or probability is commonly used in our day- to – dayroutine. Whether we should take an umbrella when we go out in themorning would depend upon the likelihood of rain for that day. We areliving in a world where there are so many uncertainties, that in order forus to make some intelligent decisions and function effectively, we must



have some ideas of events that are most likely to occur, those that arenot likely to occur at all and others that are in between. Only then wecan plan our life. For example, if we take a train to go to our work, weare practically sure that it will reach our destination at a particular timeso that we can start our journey at a particular time. However, if we havesome doubts that it may break down on the way, we may leave the homeearlier in order to accommodate and absorb such delay. Similarly, whenwe drive in our car, we have only one spare tyre in the trunk of our carbecause it is extremely unlikely that we will have more than one flat tyrewithin a given period of time. This likelihood of an event occurring or theprobability of such an event gives us some confidence or a degree ofassurance that a particular event will occur.

The probability can only be assigned to events that occur at random andare only affected by chance and not by design. The interest is centeredon the probility of an outcome or success where success simply identifiesthe desirability of the outcome. The probability of success is defined asthe number of successful outcomes divided by the total number ofoutcomes. In other words the probability of an event is infinitely longseries of identical sampling experiments.

This means, for example, that the probability of a head in tossing of a faircoin is ½ because a great number of tosses will produce about 50 percentheads. Accordingly, the probability (p) is equal to (s/n) where s = thenumber of successful outcomes. It must be understood though that allpossible outcomes are equally likely to occur. As discussed earlier, theprobability of a head occurring as an outcome of tossing a fair coin is ½since there are only two possible outcomes in the tossing of coin, witheach outcome being equally likely to occur and one of these is the outcomeof a head. It must be noted, however that the coin is fair and the experimentof tossing the coin is random in that a number of causes contribute toproduce the final outcome. In this particular case, the outcome of tossingthe coin is affected by many forces such as the force of tossing , theamount of spin, air movements and the position of the hand at the timecatching the coin. Since all these factors are chance elements, theprobability of the desired outcome (head) is the percentage of times inwhich this outcome will occur if the event was repeated many times. It isnot difficult to deduce that this would happen 50 percent of the times.The probability can be subjective or objective in nature. The subjective



probability measures the degree of belief in the likelihood of occurrenceof a given outcome. The objective probability, on the other hand is ameasurable and observable fact relating to long run frequencies ofoccurance. In our discussion on quantitative methods in decision making,we are only concerned with objective brobability.

Expected value: it is simply an arithmetic average of probability distributionwhere the probability distriburion is the distribution of probabilitiesassigned to the likelihood of each and all outcomes of an event such thatall these probabilities add up to 1.

As an illustration let x1,x2,x3,….. and so on represent the possibleoutcomes with numerical values assigned to these outcomes , andp1,p2,p3,… etc represent the respective probabilities that each of theseoutcomes will occur , so that p1+p2+p3…will all add upto 1.

If we assume that there are only three possible outcomes x1,x2 and x3with respective probabilities of occurrence p1,p2 and p3 then theexpected value of this probability distribution is given as below:

Expected value (EV)=p1x1+p2x2+p3x3

Generalizing this relationship for n number of outcomes we can expressEV=p1x1+p2x2+p3x3……+pnxn

= i=1 i=n p i x iWhere (Sigma) represents the symbol of summation and is an

instruction to add up what follows this symbol. In this case, it is all theterms of the form “p i x i ” with i starting at the value of 1 and ends at thevalue of an increment of unit of 1 in the value of i at each addition.

The numerical values of x1 can either be positive or negative. In gambling,for example, a positive value will show a profit and a negative value willrepresent a loss. The expected value has many uses. In the gamblinggame, for example, it tells us what our average loss per play in the longrun will be. In investment problems and inventory problems where thereare a number of strategies (decision and controllable variables) and anumber of possible outcomes (states of nature and uncontrollablevariables), the expected value of the outcome for each strategy willdetermine as to which strategy should be used.

The Analysis of decisions.

Basically, there are three types of circumstances in which the decisionsare to be made, These are:



1. Decisions under certainty.

2. Decisions under risk.

3. Decisions under uncertainty.

We shall take each of these conditions separately.

1. Decisions under certainty.

This is the simplest form of decision making. The condition of certaintyexists when there is no doubt about the factual basis of a particular decisionand its outcome can be predicted accurately. There is just one state ofnature for each alternative course of action and there is complete andaccurate knowledge about the outcome of each alternative. We wouldsimply select the alternative with the best outcome.

If the number of alternatives is relatively small then the outcomes can becompared with each other, either all at once and then picking the best ortwo at a time, comparing the two and discarding the inferior alternativeand the better one of the two is compared with the next one and theinferior alternative discarded and so on until all outcomes have beencompared and the best one identified.

However, if the number of alternative is large then some mathematicaltools such as linear programming and deterministic inventory models areavailable to identify the best alternative.

Some situations of decision making under certainty include the allocationof resources to various product line where the manager knows therelationship of resources to the finished goods and their values. Thealternatives are evaluated by conducting cost studies of each alternativeand then choosing the one which optimizes the utility of these resources.In the area of quantitative methods, problems relating to linearprogramming techniques which deal with the problems of using limitedresources of a business to obtain a particular objective within givenconditions or constraints: transportation problems where certaintransporting vehicles are dispatched to certain destinations in order tominimize the total costs of entire transportation operation; assignmentproblems where certain jobs are assigned to certain machines in orderto minimize the total costs, are all examples or decision making underconditions of certainty.



Another example would be buying a new car. Once the decision to buythe car has been made, there are a number of alternatives in which thepayment for the car can be made. These alternatives are paying with allcash, part cash and part loan, all loan so that you can put your ownmoney to other quantifiable uses or lease the car for monthly or yearlyrental. It is possible to calculate the total cost of each of these alternativesand choose the one which gives you the lowest cost.

2. Decisions under risk.

A condition of risk exists when a decision must be made on the basis ofincomplete but reliable information. Here, there is no longer just oneoutcome for each strategy but a number of possible outcomes, one foreach possible state of nature where the probability of each outcome isknown and calculated or assigned and an expected value for eachalternative or strategy is obtained. The strategy that yields the bestexpected value is selected as a decision.

The decision problem is put in the form of a matrix. A matrix is simply atwo-dimensional array of figures arranged in rows and columns. Therows represent the available strategies or courses of action available tothe decision maker (one row for each strategy) and the columns representthe states of nature (one column for each state of nature). The matrixcould be in the form of a payoff matrix or in the form of an opportunitycost matrix. In the case of the payoff matrix the entry at the intersectionof each row and column represents the payoff or profit for a given strategyand its corresponding stage of nature. Each state of nature is assigned aprobability which identifies the odds that such a state of nature wouldprevail. Typically, in many organizational problems, the probabilities ofvarious states of nature are known by virtue of determining as to howfrequently they occurred in the past.

A condition of risk exists for assumptions: Some of the assumptions thatare required for the formulation and solution of the decision matrix are:

1. The number of feasible alternative courses of action or strategies islimited and finite.

2. The number of possible state of nature are also limited and theprobabilities assigned to all states of nature must add up to 1.

3. Each state of nature is independent of the other so that only one



event will occur for any given strategy.

4. The outcome for each combination of a strategy and its correspondingstates of nature are known and are considered stable and constantfor a given situation.

5. The objective of the decision maker is single and identified, either tomaximize or to minimize a given objective function, which is expressedeither in terms of expected payoff or cost of opportunity or loss.

6. There are no constraints imposed upon the problem.

A simple illustration of using the payoff matrix in a decision problem isgiven by “Alex at the Falls” situation. Alex is a vendor who has a choiceto take either ice cream or coffee at the falls to sell and the choice willdepend upon the weather for a given day. Assume that he has determinedfrom his past experience that if he takes ice cream and the day is sunny,he makes $50.00. However, if he takes ice cream and the day is rainy,then he makes $ 20.00. On the other hand, if he takes coffee and theday is sunny, he makes $ 30.00 and he makes $ 60.00 if he takes coffeeand it happens to be a rainy day.

These amounts represent net profits and the day can only be either sunnyor rainy. Depending upon the probability or being sunny or rainy, adecision has to be made whether to take ice cream or coffee to the falls.

Let us put this information in the form of payoff matrix.

States of nature

50

20

30

60

EV = (30 x .6) + (60 x .4) = $ 42.00

EV = (50 x .6) + (20 x .4) = $ 38.00 Ice Cream Coffee

Assume that on a given day, the reliable forecast is 60 per cent chance ofbeing sunny or the probability of the day being sunny is 0.6, so that theprobability of the day being rainy become 0.4. These probabilities arerecorded along with the states of nature of sunny and rainy in the abovetable.

The strategies or alternatives or courses of action available to Alex



represent his choices and are within his control. The states of nature areuncontrollable variables and can best be predicted by the probabilitiesof occurrence assigned to each state of nature.

The expected value (or expected profit) can be calculated for each ofthese courses of action by using the expected value relationship asdiscussed earlier, as follows:

EV = p1x 1+ p2x1

In the particular case:For ice cream : EV = (50 x .6) + (20 x .4) = $ 38.00For coffee : EV = (30 x .6) + (6 x .4) = $ 42.00

Given these factors of the situation, Alex would decide to take coffee tothe “falls” since he expects to make more money ($ 42.00) as againsttaking ice cream in which case he expects to make only $ 38.00.

These decisions are frequently made in the area of investments whereinvestments in different areas would bring in different amounts of payoffsover a given period of time depending upon the different states of theeconomy, or in the area of inventories in which decision is to be made indetermining the level of inventory of a particular item to be kept in thestore or the warehouse depending upon the demand for the item and theprobability for such a demand.

We will take up a problem of inventory and follow it through.

Suppose that there is a vendor who sells strawberry cakes. He has 4fixed customers who buy a cake each every day, so that the vendor isassumed of selling at least 4 cakes every day. He also found from hispast experience that he never sold more than 8 cakes on any day. Alsobased upon his past sales experience, he found that 10% of the days hesells only 4 cakes. 20% of the days he sells 5 cakes. 40% of the time,he sells 6 cakes, 20% of days he sells 7 cakes and the balance 10% ofthe days he sells 8 cakes. The cake costs $ 3.00 each and he sells it for$ 8.00 each so that his net profit per cake is $ 5.00. If any of the cakesnot sold at the end of the day, it has to be thrown out and there is nosalvage value. The decision is, how many cakes he should stock eachday in order to maximize his total profit in the long run? This problemcan be solved by two types of matrices. One is the payoff matrix andthe other is the opportunity cost matrix. In the first method, the objective



is to maximize the payoff and in the second method, the objective is tomaximize the cost or the opportunity cost and both these methods shouldgive the same conclusion.

The problem stated above can be formulated as follows:

Demand % of days Problem of demand/day

4 10 .1 5 20 .2 6 40 .4 7 20 .2

8 10 .1

Cost per cake = $ 3.00Sale price per cake = $ 8.00Net Profit per cake = $ 5.00Salvage Value = 0

First we are going to solve it by using the payoff matrix.

Pay-off matrixStates of nature

(.1) (.2) (.4) (.2) (.1) Prob.of demand

4 5 6 7 8 demand

Row

(1) 4

(2) 5

(3) 6

(4) 7

(5) 8



Cakes to stock or Courses of action

Column (1) (2) (3) (4) (5)The payoff matrix is constructed as follows:

Starting from row 1 across:

Row 1:

- If we stock 4 cakes and the demand is for 4 cakes then the pay offis $ 20.00.

- If we stock 4 cakes and the demand is for 5 cakes, the payoff isstill only $ 20.00 since we can only sell 4 cakes and the subsequentcustomers will have to be turned away.

Row 2 :

- If we stock 5 cakes and the demand is for only 4 cakes then wemake $ 20.00 on the 4 cakes that we sell and we lose $ 3.00 (ourcost) on the 1 cake left that we are unable to sell and hence ourprofit is $ 17.00..

- If we stock 5 cakes and the demand is also for 5 cakes then wesell them all and make $ 25.00

- If we stock is 5 cakes and the demand is for 6 or more cakes, wecan still make only $ 25.00 since we do not have any cakes left over5 to sell.

Row 3:

- If we have 6 cakes in stock and there is a demand for only 4, thenwe make a net profit of $ 14.00 (we make $ 20.00 on the 4 cakesthat we sell and we lose $ 6.00 on the 2 cakes that we do not sell).



- If we have 6 cakes in stock and there is a demand for 5 cakes,then we make $ 25.00 on the 5 that we sell and we lose $ 3.00 onthe 1 which we do not sell, giving us a net profit of $ 22.00.

- If we have 6 cakes in stock and there is a demand for 6 cakes,then we sell them all, giving us $ 30.00 net profit.

- If we have 6 cakes in stock and there is a demand for 7, we stillmake only $ 30.00 on sale of 6 cakes.

By this reasoning, we develop the entire matrix. The expected value foreach course of action is evaluated by using the expected value formuladiscussed earlier. For each row or for each course of action, the numericalpayoff corresponding to each state of nature in that row is multiplied byits probability, and all values obtained by such multiplications are addedup to obtain the expected value for that course of action. Thus we obtainan expected value for each course of action.

Mathematically speaking, if there are m alternatives or courses of actionand n states of nature then for each alternative a i the expected profit z i

can be calculated as:

n

Expected profit = [prob. of state s j] [out come is state sj

occurs]j = 1

Or

Where : a i = alternative i = 1,2 ……….m

sj.= state of nature, j = 1,2 ………n

p i = probability that state of nature s will occur.

uij= numerical outcome as result of choosing alternative a andthe occurrence of state of nature s j.

After all the expected values for each course of action have been calculatedthen we select the alternative which results in the highest expected value,which would give us the number of cakes to stock for optimum benefit.This would be the optimum stocking policy.

The expected value for each course of action of stocking 4, 5, 6, 7 and8 cakes is calculated as follows:



EV (4) = (20 x .1) + (20 x 0.2) + (20 x .4) + (20 x .2) + (20 x .1) = $ 20.00EV (5) = (17 x .1) + (25 x 0.2) + (25 x .4) + (25 x .2) + (25 x .1) = $ 24.20EV (6) = (14 x .1) + (22 x 0.2) + (30 x .4) + (30 x .2) + (30 x .1) = $ 26.80EV (7) = (11 x .1) + (19 x 0.2) + (27 x .4) + (35 x .2) + (35 x .1) = $ 24.30EV (8) = (8 x .1) + (16 x 0.2) + (24 x .4) + (32 x .2) + (40 x .1) = $ 24.00

The problem is solved above and in this particular case, the maximumprofit of $ 26.80 is obtained by stocking 6 cakes each day. This solutionassumes that the process is stable and that probabilities for all states ofnature remain constant and the values for all other variables remain thesame.

Opportunities cost matrix: The same problem can be solved by usingthe opportunity cost matrix. The objective is to minimize the expectedopportunity loss and for the same problem, it should give us the samesolution. This means that the policy maximizes the expected opportunitycost.

The idea is based upon the concept of regret which can be defined asthe difference between the best outcome that can be achieved for a givenstate of nature and the actual outcome resulting from a selected courseof action. If this difference is zero then that would be the best decisionthat the decision maker could make and hence his regret value is zero.This means that he has no regret for making that decision. The greaterthe difference between the actual outcome and the best outcome of agiven alternative, the greater the regret. The objective of the decisionmaker is to minimize the long run opportunity losses.

Continuing our earlier problem for which the demand structure and theprobability distribution remains the same where the demand is for 4, 5,6, 7 and 8 cakes and their respective probabilities are .1, .2,.4, .2 and.1. The opportunity cost matrix for this problem is shown below:

Opportunity Cost matrix



States of nature

(.1) (.2) (.4) (.2) (.1) Prob. of demand

4 5 6 7 8 Demand

0

5

10

15

20

3

0

5

10

15

6

3

0

5

10

9

6

3

0

5

12

9

6

3

0

Column (1) (2) (3) (4) (5)

Row

(1) 4 (2) 5 (3) 6 (4) 7 (5) 8

Courses of action

The matrix and the expected value for each course of action aredeveloped. Starting from the North-West corner of the first row, thereasoning would be as follows:

Row 1:

- If we have 4 units in stock and the demand is also 4, then thiswould be the right decision and no other alternative would give usbetter results. Hence the opportunity cost for this decision is zero.

- If we have 4 cakes in stock and the demand is for 5 cakes, wewish that we had an additional cake is stock, for which we couldhave made additional $ 5.00. Hence by choosing the alternative tostock 4 cakes instead of alternative of stocking 5 cakes, incurredthe opportunity cost of $ 5.00. That is the cost of losing theopportunity of stocking 5 cakes instead of 4.

- Similarly, if the demand is for 6 cakes and we stock only 4, wechoose the wrong alternative and hence we lost $ 10.00, and so on.

Row 2:

- If we have 5 cakes in stock and the demand is only 4, we wish wedid not have the 5th cake. It cost us $ 3.00 to have this additionalcake. Hence the lost opportunity of stocking only 4 cakes insteadof 5, cost us $ 3.00.

- If there are 5 cakes in stock and there is a demand for 5 cakes,then it was the right decision and hence the opportunity cost is 0.



- If there is a demand for 6 and we have 5 in stock, then with thesame reasoning as above, the cost of lost opportunity of stockingonly 5 instead of 6 is $ 5.00, and so on.

By this reasoning, we can complete the entire opportunity cost tablewith the actual cost values or opportunity cost values, which are thecosts incurred by choosing an alternative, other than the best.

The expected value of the opportunity loss for each alternative can becalculated in the similar manner as for payoff matrix and is given below:

EV (4) = (0 x .1) + (5 x 0.2) + (10 x .4) + (15 x .2) + (20 x .1) = $ 10.00EV (5) = (3 x .1) + (0 x 0.2) + (5 x .4) + (10 x .2) + (15 x .1) = $ 5.8EV (6) = (6 x .1) + (3 x 0.2) + (0 x .4) + (5 x .2) + (10 x .1) = $ 3.2EV (7) = (9 x .1) + (6 x 0.2) + (3 x .4) + (0 x .2) + (5 x .1) = $ 3.8EV (8) = (12 x .1) + (9 x 0.2) + (6 x .4) + (3 x .2) + (0 x .1) = $ 6.0

The lowest cost is $ 3.2 for the strategy of stocking 6 cakes, which is thesame as was determined by using the pay-off matrix.

3. Decision Making under Uncertainty.

The conditions of uncertainty make the decision making process muchmore complicated. The decision maker has no idea or knowledge aboutthe probabilities of the various states of nature and hence the expectedvalues of various alternatives cannot be calculated. Such problems arisewherever there is no basis in the past experience for estimating suchprobabilities. For example, in the case of marketing a new product, it isdifficult to make judgments as to how much this product will sell indifferent geographical areas or about probabilities of selling certainpredetermined quantities in these areas in order to a make profit.

In such situations there is no single best criterion for selecting a strategy.However, there are a number or a criterion each justified by rationaleand is a function primarily of the organization policies and the attitude ofthe decision maker. The selection of strategy would depend upon thecriteria to be used. Some of these criteria are discussed below. We arestill following the same problem except that now the demand probabilitiesare not known. However, it is established that the 4 customers are stilldefinite and the maximum demand cannot be more than 8 cakes.

Criteria of pessimism :

Suggested by Abraham Wald, it is also known as Wald criterion or amax-min principle for it tries to maximize the minimum pay off. This a



conservative approach to an intrinsically difficult situation and the decisionmaker assumes that whatever alternative is chosen, the worst will happen.For each pay off of each course of action, under each state of nature(the probabilities of states of nature are not known)ï the decision makerpicks the worst payoff so that there will be a value of the worst payofffor each course of action and the decision maker will pick the highestvalue among these.

4 5 6 7 8

Courses of action

20 17 14 11 8

Coming back to our example the payoff table is given below:

4 5 6 7 8 Worst pay – off

20

20

20

20

20

17

25

25

25

25

14

22

30

30

30

11

19

27

35

35

8

16

24

32

40

From these worst payoffs, we select the maximum payoff which is $20.00, for stocking 4 cakes. This means that given the situation of theproblems, the decision maker, who is a total pessimist, will not take anychances and go for the sure thing by stocking only 4 cakes.

Criterion of optimism :

Suggested by Leonid Hurwicz, to guide a complete optimist, it is alsoknown as Hurwicz criterion and is based upon maxi-max principle, whichis maximizing the maximum payoff for each alternative. The decisionmaker assumes that for each course of action, the best state of naturewill prevail, giving him the best of each strategy so that he can choosethe best of these bests.

In the payoff matrix above:- For stocking 4 cakes, the best payoff is $ 20.00- For stocking 5 cakes, the best payoff is $ 25.00- For stocking 6 cakes, the best payoff is $ 30.00- For stocking 7 cakes, the best payoff is $ 35.00- For stocking 8 cakes, the best payoff is $ 40.00



The total optimist always expects the best to happen. Hence he willchoose the strategy of stocking 8 cakes which would give him the bestof the best payoffs of $ 40.00.

However, a rational decision maker cannot always be totally optimistunder all situations. To overcome this difficulty, Hurwicz introduced theidea of degree of optimism or coefficient of optimism, the value of whichis determined by the attitude of the decision maker. He called thiscoefficient (Alpha) and it is measured on 0 to 1 scale. Its value is 1for a complete optimist and 0 for a complete pessimist. For a personwho is neither a complete pessimist nor a complete optimist, the value ofwill have different values between 0 and 1, depending upon the degreeof optimism. For example, a person with a degree of optimism of = .4is more pessimistic than optimistic while a person with = .7 is moreoptimistic than pessimistic. For all values of , except for the values of0 and 1, the expected value of each course of action, in a payoff tablecan be calculated as follows:

Expected value = ( Max. payoff x ) + Min. payoff (1- ). For example,assume that the decision maker is 60 percent optimist, that means thathis coefficient of optimism = 6. The expected value of each course ofaction in our payoff table would be given as :

Stock Max. payoff Min. Payoff 4 20 20 5 25 17 6 30 14 7 35 11 8 40 8

ThenEV(4) = (20 x .6) + (20 x .4) = $ 20.00EV(5) = (25 x .6) + (17 x .4) = $ 21.80EV(6) = (30 x .6) + (14 x .4) = $ 23.60EV(7) = (35 x .6) + (11 x .4) = $ 25.40EV(8) = (40 x .6) + (8 x .4) = $ 27.20

In this example, the decision, maker who is 60 per cent optimist wouldchoose the alternative of stocking 8 cakes, for this strategy gives him themost benefit of $ 27.20.

(c) Criterion of regret:

It is also known as Savage criterion, and it minimizes the maximum regret



of not making the right decision and uses the opportunity cost matrix tomake the decision. For each course of action, there are costs involvedin choosing the opportunity of having a different course of action afterstates of nature have been known. These costs are really regrets of notchoosing the best course of action. Out of the maximum regret for eachcourse of action, we choose the minimum regret and the correspondingcourse of action.

Taking our previous example, the opportunity cost matrix is restated asfollows:

STATE OF NATURE 4 5 6 7 8 Max.

Regret

0

5

10

15

20

3

0

5

10

15

6

3

0

0

10

9

6

3

0

5

12

9

6

3

0

4 5 6 7 8

Courses of action

20 15 10 9 12

Based on this strategy, we choose the minimum of the maximum regretsof $ 9.00 and a policy of stocking 7 cakes.

Laplace Strategy

The Laplace strategy assumes that all states of nature are equally tooccur. This means that the decision maker does not give any reasons tobelieve that any one outcome is more likely to occur than others. Hence,both in the case of payoff matrix as well as opportunity cost matrix, allstates of nature have the same probability of occurrence. The demandprobability distribution for our problem, then would be as follows:

Demand Problem of demand

4 .2

5 .2

6 .2

7 .2

8 .2



Then the procedure for calculating the expected value and choosing thelargest expected value is the same as in the original payoff matrix or theminimum expected value in the opportunity cost matrix method.

In the problem that we have undertaken, we have assumed that there isno salvage value of the cake if it is not sold by the end of the day.However, in case there is a salvage value, then this salvage value must bededucted from the cost of the unsold cake before computing the netprofit. For example, if the cake at the end of the day could be given for$ 1.00 as a salvage value then the net loss for the unsold cake would be$ 2.00 per cake, instead of the $ 3.00 per cake previously computedinto the payoff matrix and the opportunity cost matrix.

Bay’s Decision Approach

The decision making under uncertainty, as we have discussed previously,assumes that there is absolutely no knowledge about the probabilities ofstate of nature. No rational decision maker would go into any businesswithout any prior knowledge about the states of nature. The degree ofoptimism as well as pessimism takes into consideration only the best andthe worst outcomes and does not involve states of nature in between.Similarly using Laplace strategy may not be the logical solution since it ishighly unlikely that all states of nature would be equally likely to occur.Hence a rational decision maker would like to have a more definite ideaabout each state of nature. This idea was suggested by Thomas Bays,an 18th century philosopher who investigated the notion of inverseprobability or subjective probability. The contributors to Baysian schoolregard probability an a measure of the degree of personal belief, asagainst objective probability which relates to long run relative frequencyof occurrences of a given outcome

The subjective probability is a function of the decisions maker’sexperience, past performance in similar situation, intuitive judgement etc.Based upon these characteristics, the decision maker is able to assignprobabilities to each state of nature, depending upon the strength of hisbelief regarding the likelihood of occurrence of various state of nature.These subjective probabilities assigned by the decision maker are called“prior probabilities”. Based upon these prior probabilities, the expectedvalue of the payoff or the opportunity cost can be computed as discussedpreviously and the highest expected value or the lowest opportunity costis selected with the corresponding course of action.



The prior probabilities are based upon the current information availableto the decision maker as well as his assessment of the environment.However, the decision maker must decide whether these priorprobabilities are adequate or whether additional information is neededto revise these values. The cost of collecting additional information throughsampling and other means must be weighted against the benefits derivedfrom improved assignment of probabilities to the various states of nature.This additional information, if justified, is combined with prior informationin order to make the degree of belief regarding the states of naturestronger.

Based on this information, the prior probabilities are adjusted or revisedand these revised probabilities are called “posterior probabilities”. Thisrevision can be accomplished through Bay’s Theorm, which calculatesprobabilities of “causes” based upon the observed “effects”.

These posterior probabilities are then used to calculate the expectedpayoffs or expected opportunity costs in the same manner as before andthe optimum strategy selected.

Decision under Conflict:

So far, in the decision making strategies that we have discussed, alldecisions have been against nature, over which the decision maker hasno control and the state of nature that will occur will be independent ofthe strategy of the decision maker. However, there are situations inwhich a manager is involved with a rational opponent whose strategiesare carefully considered by the manager before making his own move.These decisions are known as decisions under conflict and form a basisof game theory. The games with complete conflict of interest are knownas zero-sum games, in which the gain of the decision maker equals theloss of the opponent. For example, if the marketing manager of acompany wants to increase the market share of his product, it will be atthe expense of the market share of his competitors.

As an example and for simplicity, let us assume that a manager wants toincrease his share of the market against only one opponent. It is alsoassumed that both the manager and the opponent are rational strategistsand if any one of the two shows irrational behavior, he can only suffer asa result of it. It is also assumed that the possible results of the strategies



of both competitors are either known or predictable. These outcomesare presented in a payoff matrix form excect that the states of nature arereplaced by the opponent’s strategies. The matrix is given in the case ofincreasing the market share.

Opponent’s Strategies

Y1 Y2 Y3Manager’s X1 : 3 -.7 .8Strategies X2 : 1.5 1.0 .9

X3 : -2 2.5 -1.5

This matrix can be interpreted as follows:

If the manager chooses strategy X1 and the opponent chooses strategyY1 then the manager gains 3 per cent of the market share and theopponent loses the same percentage. Negative entries represent lossesto the manager and gains to the opponent. Given the situation the managerhas to rationally decide as to which strategies to use in order to gain asmuch as possible.

Logic would dictate that the manager would use the Wald criterion toselect the maximum of the minimum payoff, and the competitor wouldtry to minimize his maximum losses for each strategy.

Now, if the manager uses strategy, X1, it is logical and rational to believethat the competitor will use strategy Y2 and the manager will lose .7 percent of the market share to the competitor. If the manager uses strategyX2, then the opponent will use strategy Y2, giving the manager a gain of.9 per cent. Finally, if the manager uses strategy X3, the opponent willuse strategy of Y1 resulting in the loss to the manager of 2 per cent ofmarket share.

Since both players are rational players, the manager will try to maximizehis minimum payoff as follows

Strategy Minimum payoffX1 -.7X2 .9X3 -2.0

He will choose strategy X2.



Similarly the opponent is trying to minimize his maximum loss as follows Strategy Maximum loss

Y1 3Y2 2.5Y3 .9

The competition will employ strategy Y3 in order to minimize his maximumloss from each strategy.

This is the simplest case of decisions under complete conflict where thestrategies of the opponents and their outcomes are known.

Decisions Trees :

The payoff and opportunities cost tables are useful and convenient whena single decision needs to be made in a single time period so that thedecision is made at the beginning of a given period and the outcomes ofthe decisions are only estimated ones. However, most decisions are timedependent and are sequential in nature so that each decision has an impacton the successive decisions. The decision trees satisfy this complex needwhere a series of decisions are to be made simultaneously.

A decision tree is a graphical method to display various parts of thedecision process including courses of action, risks involved and likelyoutcomes. It enables the decision makers to consider alternative solutions,assign financial values to them, estimate the probability of a given outcomefor each alternative, make comparisons and choose the best alternative.Barry Shore has proposed the following procedure to solve a problemby the decision tree method.

1. The problem is illustrated by developing a decision tree diagram.Each course of action is represented by a separate emerging branch.

2. Each outcome for each course of action is assigned a probability,which is the most likely chance of that particular outcome occurring.

3. Determine the financial results of each outcome.

4. The expected value for each outcome is calculated and the alternativewhich will yield the highest expected value is chosen.

The best way to explain the use of a decision tree method is to illustrateby an example.

Let us assume that a company has two products to introduce. Let theseproducts be X and Y. The company has decided that it would be too



expensive to introduce both products at the same time. So, a decisionhas been made to introduce only one product to start with, and dependingupon the degree of success generated by this first product and the fundsobtained by the sales of this product, such funds could be used either toexpand the production and marketing efforts for the same product or touse these funds to introduce the second product.

Assume that the company introduces product X first. Our surveys haveshown that the chances are 70 per cent that the product will succeed,meaning that there are only 30 per cent chances that product will fail.Even if the product fails and less funds are generated, product Y couldstill be introduced, but product X will not be expanded. The terminalexpected payoff for each alternative can be calculated statistically fromsurveys or pilot studies.

This process in the form of a decision tree would diagrammatically be asfollows:

DecisionIntroduce X

ExpectedPayoff

$ 70.000

$ 60.000

Impractival

$ 20.000

Profitable

Expand X

Introduce Y

Expand XProb = .3

Introduce Y

Prob = .7

Unprofitable

We could also introduce product Y first instead of product X, by thesame reasoning as above.

According to our decision tree, the most profitable sequence of actionswould be to introduce product X first and later expand the same product,for that decision would give us the highest estimated profit of $ 70.000.This technique can be equally used for more complex situations and hasbeen successfully used in the areas of marketing, investment, equipmentpurchases, new venture analysis etc.

The essence of the process is to isolate all relevant decisions and assignrealistic probabilities to all possible outcomes.



Decision

Introduce X

Introduce Y

Introduce both

$ 70.000

Profitable

Prob. = .7

Unprofitable

Not feasible

Profitable

Prob. = .6

Unprofitable

Prob.= .3

Prob. = .4

Expand X

Introduce Y

Expand X

Introduce Y

Expand Y

Introduce X

Expand Y

Introduce X

$ 60.000

Impractical

$ 20.000

$ 50.000

$ 40.000

Impractical

$ 25.000

Action ActionOutcome Outcome

Expected profit

Decision

Introduce X

Introduce Y

Introduce both

$ 70.000

Profitable

Prob. = .7

Unprofitable

Not feasible

Profitable

Prob. = .6

Unprofitable

Prob.= .3

Prob. = .4

Expand X

Introduce Y

Expand X

Introduce Y

Expand Y

Introduce X

Expand Y

Introduce X

$ 60.000

Impractical

$ 20.000

$ 50.000

$ 40.000

Impractical

$ 25.000

Action ActionOutcome Outcome

Expected profit

2.12 DECISION MAKING WITH BREAK-EVEN ANALYSIS

Break-even analysis can be a very useful and relatively simple tool formanagement to use in making decisions. It can be used for dealing withunknown variables such as demand. By specifying the levels of knownvariables such as cost or profit, a required or minimum level can befound for the unknown variable. Any problem requiring income estimationcan be set up so that the most difficult variable to estimate is isolated forsolution.

Break-even analysis can be applied to sales, profits, and costs. It alsoillustrates how it can be used to help make sound decisions for yourbusiness such as employing idle plant capacity, planning advertising,granting credit, and expanding production. Break-even analysis is not auniversal remedy. It is only one of the many tools available to the businessdecision maker.

In your business planning, have you ever asked: How much do I have tosell to reach my profit goal? How will a change in my fixed costs affectmy net income? How much do my sales need to increase in order tocover a planned increase in advertising costs? What price should I chargeto cover my costs and allow for a planned amount of profit?

These are some of the questions that you can easily answer by usingsimple break-even analysis. You will learn break-even analysis through



the examples of how the technique works in manufacturing, retailing,and service businesses and find out how to use it in your own businessplanning. Break-even analysis is a very useful tool because it can helpyou understand the sources of profit in your business.

Definitions

Break-even analysis is simple to use. Mathematical formula to determinethe sales level at which the business neither incurs a loss nor makes aprofit. The break-even point, in mathematical terms, is simply the pointwhere:

Total Expenses = Net Sales Revenue

The amount of sales revenue should be readily available on your incomestatement as net sales. Net sales revenue is all sales revenue (often called“Gross Revenue”) less any returns and allowances. If your business isbrand new and you have no income statement yet, you will need to use aprojected sales figure. This will work for any of the calculations outlinedhere. Total expenses also appear on your income statement (orprojections). You will find most expenses listed under the heading“Operating Expenses” or “General and Administrative Expenses.”Additional expenses to include in your analysis are found on the linelabeled “Cost of Goods Sold,” which appears on income statements forretailers and manufacturers. To use the break-even technique, you needto do further analysis of your expenses so that you can classify them aseither “fixed” or “variable.”

Total expenses consist of two cost components: fixed costs and variablecosts.

Fixed Costs. are those expense items which generally do not change inthe short run, regardless of how much you produce or sell. These costsare typically the expenses you pay out regularly that do not go up ordown with your sales level. Examples of fixed costs include general officeexpenses, rent, depreciation, utilities, telephone, property tax, and thelike. Obviously, all expenses vary over the long run. For example, rentand property taxes increase every year. In break-even analysis though,our calculations are based upon short-run information in order to revealthe current profit structure of the business.

Variable Costs. are those expenses that change with the unit level ofeither production or sales. Generally, these costs increase with increased



production or sales because they are directly involved in either makingthe product or making the sale. Examples of variable costs formanufacturing firms include direct materials and direct labor. In retailfirms, variable costs include the cost of goods, sales commissions, andbilling costs. These are only a few of the many kinds of variable costsyou will encounter.

Typically, service businesses do not have large variable costs, except forlabour. For example, a travel agency’s only variable cost may be theexpense of billing its clients. Other expenses that may be variable costsfor service businesses include: materials routinely given to clients, materialsused to offer their service, the cost of hourly labor to provide the service,and commissions paid to individuals who sell the service.

Some Shortcomings of Break-even Analysis

The major problem with break-even analysis is that no project reallyexists in isolation. There are alternative uses for the firm’s funds in everycase. For example, in a manufacturer’s case, a vacant plant could beleased to another company for some return. It could also be used foranother product. We must, therefore, always consider not only the valueof an individual project, but how it compares to other uses of the fundsand facilities.

Another shortcoming of break-even analysis is that it does not permitproper examination of cash flows. It is generally accepted in basicfinancial theory that the appropriate way to make investment or capitaldecisions is to consider the value of a proposed project’s anticipatedcash flows. If the discounted value of the cash flows exceeds the requiredinvestment outlay in cash, then the project is acceptable.

There are other objections. Break-even analysis makes many restrictiveassumptions about cost-revenue relationships; in normal use, it’s basicallya negative technique, defining constraints rather than looking at benefits;and it’s essentially a static tool for analyzing a single period. What allthis theory boils down to is that break-even analysis is too simplistic atechnique to be used to make final investment decisions on its own.

Break-even Applied to Uncertainty

Break-even analysis is a management control that approximates howmuch you must sell in order to cover your costs with NO profit and NOloss. Profit comes after break-even.



The following formula will help in the calculation of your break-evensales volume level:

Break-even = Fixed Costs * / Contribution Margin %** = $250,000 / 15% = $1,666,667

* Fixed Costs are those costs that are not variable as a result of the salesactivity. For example, rent of the building or insurance costs may befairly constant no matter how sales vary while expenses such as advertisingand usage of shop or store supplies will vary with sales.

** Contribution Margin = (Revenue - Variable Costs) / Revenue. In aretail business, the gross margin % is generally recognized as theContribution Margin %. Gross Margin equals the difference betweenthe Sales and the Cost of the Sales.

In this example, $1,667,667 are the sales that are required to coverfixed costs of $250,000 and a margin of 15%, with nothing left over forprofit.

If you wanted to calculate the sales that are required to build in a profitfactor, add the profit factor you want to allow for to the fixed costs. If inthis example, the fixed costs are $250,000 and you want a $150,000profit, add the two together and then apply the break-even formula tothis.

Break-even = (Fixed Costs + Profit Margin) / Contribution Margin %

= ($250,000 + $150,000) / 15%

= $400,000 / 15%

= $2,666,667

If this was a small manufacturing company and you wanted to calculatehow many unit sales you need to break-even, you could divide the break-even sales volume by the unit selling price. For example, if the unit sellsfor $10, the break-even unit sales before a profit is allowed for is 166,667units and after a profit is allowed for it is 266,667 units.

Limitations of Break-Even Analysis

Break-even analysis has four important limitations. First, break-evenanalysis requires estimated projections of expected sales, fixed costs,variable costs, and any costs that have both fixed and variable



characteristics. You must not be lulled into a false sense of securityregarding your mathematically-sound results which are, after all, basedupon projections.

Second, break-even analysis is useful only over a limited range of salesvolume extending not too far from the expected level of sales. Movingmuch beyond that range will require additional capital expenditures formore floor space, more machinery, or more sales people, which willdistort the estimates of fixed and variable costs.

Third, it is generally accepted in basic financial theory that the appropriateway to make investment or capital decisions is to consider the “discountedvalue of the cash flows” of a proposed project. Such an analysis focuseson the time value of money to better describe the “true” value of aninvestment. Break-even analysis does not focus on the time value ofmoney. Nor does it focus on opportunity costs. Opportunity costs relateto the best alternative use of your money. There are always alternativeuses for funds that may be more profitable than the project or expansionunder consideration. Break-even analysis views every project in isolation.

Finally, break-even analysis assumes that the cost-revenue relationshipis linear. This may or may not be the case for any particular business.For example, many businesses experience a reduction in fixed and variablecosts per unit as the overall scale of the business increases. This is referredto as “economies of scale.” Most very small businesses do not experiencesignificant economies of scale.

Despite its limitations, break-even analysis is a very useful tool with whichto approach a variety of decision problems. Such questions as the costsof expansion, evaluation of sales or profit performance, estimation of theimpact of various expenses on profit, setting prices, and financial analysisin general are appropriately addressed using break-even analysis. But itis not a panacea. It is only one of the many tools available to the decisionmaker. It is best used in conjunction with other financial analysistechniques or as a screening device to determine whether more study isneeded. In any case, familiarity with break-even analysis is essential forany business owner.

Break-even analysis requires above all, realistic definition of costs, bothin amount and type. For many small businesses, break-even analysis canbe a very useful management tool. At the same time, it is not a panacea,



and should be used along with other management tools when making adecision.

Summary

Planning is essential to survive and grow in a fast changing environment.A plan helps a firm take an advantageous position in the market, in linewith its internal capabilities. To be useful, planning has to be carried outin a systematic way outlining objectives, developing premises, evaluatingoptions, formulating derivative plans, securing commitment from peopleand ensuring a suitable follow up. While doing so, one can adopt atop-down approach, a bottom-up approach or a combination of both.Planning helps a firm achieve its goals. It reduces the risks of uncertaintyand improves the quality of decisions. It has a healthy impact on people,too. On the negative side, planning puts enterprise activities in a rigidframework. It may prove to be a costly and time-consuming exercise.To be effective, plans must receive support from people at all levels.They should also know the payoffs from planning well in advance.Learning organizations offer a stimulating environment, for even ordinarypeople to work with zeal and enthusiasm and come out with extra ordinaryresults.

Planning can take many forms and styles in practice. Both long-rangeand short-range plans have to be combined effectively to produce results.Also, there must be effective monitoring to see whether everything is ontrack or not. Forecasting is used to predict future environmentalhappenings that will influence the operations of an organization.Forecasting improves the quality of planning by supplying vital facts andpertinent information about major environmental factors. Severaldeterministic, symptomatic and systematic techniques are pressed intoservice in order to collect data in an objective manner.

To process work in a systematic and methodical way, standing plans andsingle use plans are used in every organization. Policies guide executivethinking and action by setting certain broad behavioral limits. They infact convert objectives into a workable form. To avoid looseinterpretation, policies need to be expressed in writing.

Policy formulation requires foresight, imagination and a careful evaluationof all relevant factors impacting organizational work. Once a policy isformulated, it must be communicated to lower level people in a proper



way. Everyone should be motivated to apply the policies in a consistentmanner. When circumstances change, one should not hesitate to changethe policies.

Establishing successful policies in a fast changing environment is a toughjob. First, it is not easy to express policies in a simple language. Second,expressed policies may come in the way of implied policies. Third, policiesmay not be consistent with the overall philosophy of an organization.Fourth, there is the danger of not communicating the policies in aunderstandable format. Finally, it may be difficult to interpret policiescorrectly using sound judgment. To overcome these difficulties, policiesmust be formulated and implemented with utmost care and caution.

Apart from policies, other standing plane such as procedures, methodsand rules are designed to carry out a course of action that is likely to berepeated several times. Single use plans such as programmes, schedules,projects and budgets are non-recurring in nature and deal with problemsthat probably will not be repeated in the same form in future.

Have you understood questions.

1. Taking a planning problem that is now facing you, proceed to dealwith it in accordance with the planning steps outlined in this Section.

2. Interview a manager in your area, and ask about the planning process(i.e., the steps in planning).

3. Read two articles in magazines such as Fortune or Business Weekthat deal with strategy. List the strength and weakness of the companyas well as the opportunities and threats faced by the firm.

4. Take a major decision problem facing you, and outline the criticalplanning premises surrounding it. How many of these are matters ofknowledge, and how many are matters of forecast? How many arequalitative, and how many are quantitative? How many are withinyour control?

5. Assume that your boss offers you a promotion to a position in alocation your family does not like. Make the necessary assumptionsand then state how and what you would decide.

6. Interview a manager in any company and obtain information aboutthe decision making process in his / her organization.



Review questions.

1. Define planning.

2. List the benefits of planning.

3. State the principles of planning.

4. List the levels of planning.

5. Describe steps in planning. Illustrate with suitable examples.

6. Distinguish the different type of plans.

7. What do you mean by decision making? State different types ofdecisions used in an organization.

8. What are all the difficulties faced by a manager in decision making?

9. Discuss decision making with break-even analysis.

10. Describe the steps in rational decision making with a suitable example.



UNIT - III

ORGANIZING

LEARNING OBJECTIVES


the purpose of the organization

the meaning of organizing and organization.

the organization structure and their levels.

departmentalization and span of control.

the nature of authority and power.

the nature of relationship between the line and staff.

the scope of centralization and decentralization.

the importance of obtaining balance in the degree of delegation ofauthority.

3.1 INTRODUCTION

It is often said that good people can make any organization pattern work.Some even assert that vagueness in organization is a good thing in that itforces teamwork, since people know that they must cooperate to getanything done. However, there can be no doubt that good people andthose who want to cooperate will work together most effectively if theyknow the parts they are to play in any team operation and the way theirroles relate to one another. This is as true in business or government as itis in football or in a symphony orchestra. Designing and maintaining thesesystems of roles is basically the managerial function of organizing.



It is in this sense that we think of organizing as

(1) the identification and classification of required activities,

(2) the grouping of activities necessary to attain objectives,

(3) the assignment of each grouping to a manager with the authority(delegation) necessary to supervise it, and

(4) the provision for coordination horizontally (on the same or a similarorganizational level) and vertically (for example: corporateheadquarters, division, and department) in the organization structure.

An organization structure should be designed to clarify who is to dowhat tasks and who is responsible for what results, to remove obstaclesto performance caused by confusion and uncertainty of assignment, andto furnish decision making and communications networks, reflecting andsupporting enterprise objectives.

“Organization” is a word many people use loosely. Some would say itincludes all the behavior of all participants. Others would equate it withthe total system of social and cultural relationships. Still others refer toan enterprise, such as United States Steel Corporation or the Departmentof Defense, as an “organization.” But for most practicing managers, theterm organization implies a formalized intentional structure of roles orpositions. In this book, the term is generally used in reference to aformalized structure of roles, although it is sometimes used to denote anenterprise.

3.2 DEFINITION OF ORGANIZATION

The term ‘organization’ connotes different things to different people. Manywriters have attempted to state the nature, characteristics and principlesof organization in their own way. For instance, to the sociologistorganization means a study of the interactions of the people, classes, orthe hierarchy of an enterprise; to the psychologist organization meansany attempt to explain, predict and influence behavior of individuals inan enterprise; to a top executive it may mean the weaving together offunctional components in the best possible combination so that anenterprise can achieve its goals. The word ‘organization’ is also usedwidely to connote a group of people and the structure of relationships.

The term ‘organization’ is used in many ways. It means different thing todifferent people. Currently the following uses of the term are popular



A group of people united by a common purpose.

An entity, an ongoing, business unit engaged in utilizing resources tocreate a result.

A structure of relationships between various positions in an enterprise.

A process by which employees, facilities and tasks are related, toeach other, with a view to achieve specific goals.

Group of Persons Organization is very often viewed as a group ofpersons contributing their efforts towards certain goals. The evolution oforganization dates back to the early stages of human civilization whentwo or more persons began to cooperate and combine together for fulfillingtheir basic needs of food, clothing, shelter and protection of life.Organization begins when people combine their efforts for some commonpurpose. It is a universal truth that an individual is unable to fulfill hisneeds and desires alone because he lacks strength, ability and resources.So he seeks the cooperation of other people who have similarity of goals.

Organizations are not a new invention. People have always formedorganizations to pool their efforts for the accomplishment of their commonobjectives. The Pharaohs used organizations to build pyramids. TheEmperors of China used organizations more than a thousand years agoto construct irrigation systems. And the first Popes created a universalchurch to serve a world religion. Modern society, however, has moreorganizations; these fulfilling a greater variety of societal and personalneeds, involving a greater proportion of its citizens, and affecting, a largesegment of their lives.

Barnard defined organization as an identifiable group of peoplecontributing their efforts towards the attainment of goals. “An organizationcomes into existence when there are a number of persons incommunication and relationship to each other and are willing to contributetowards a common endeavor”. People form groups or organizations andpool their efforts by defining and dividing various activities, responsibilityand authority. As such an organization has the following characteristics:

1. Communication.

2. Cooperative efforts.

3. Common objectives.

4. Rules and regulations.



Structure of Relationships

Some people view organization in a very narrow sense by defining it as aframework of duties and responsibilities through which an undertakingfunctions. If organization is merely recognized as a structure, it will beviewed as a static thing used to explain formal relationships. But anorganization is a dynamic entity consisting of individuals, means,objectives and relationships among the individuals. An organization iscertainly more than a chart. It is the mechanism through which managementdirects, coordinates and controls the activities of the enterprise.

Function of Management

Organization is one of the basic functions of management. It involves thedetermination and provision of whatever capital, materials, equipmentand personnel may be required for the achievement of certainpredetermined goals. By performing this function, management bringstogether human and non-human resources to form a manageable unit(which is also identified as an organization). Thus, organization is a processof integrating and coordinating the efforts of manpower and materialresources for the accomplishment of certain objectives. Just as planningis applied to every other managerial function, the process of organizationis also used in every aspect of management. For instance, organizationof the planning department is essential for the formulation of plans andpolicies. Similarly, organization of other managerial functions is alsonecessary.

Organization as a Process

Organization is the process of establishing relationships among themembers of the enterprise. The relationships are created in terms ofauthority and responsibility. Each member in the organization is assigneda specific responsibility or duty to perform and is granted thecorresponding authority to perform his duty. According to Louis A. Allen,“organization involves identification and grouping the activities to beperformed and dividing them among the individuals and creating authorityand responsibility relationships among them for the accomplishment oforganizational objectives”.

3.3 STEPS IN ORGANIZING

Organizing involves the following interrelated steps :



(i) Determination of Objectives. Organization is always related tocertain objectives. Therefore, it is essential for the management toidentify the objectives before starting any activity. It will help themanagement in the choice of men and materials with the help ofwhich it can achieve its objectives. Objectives also serve as theguidelines for the management and the workers. They bring aboutunity of direction in the organization.

(ii) Identification and Grouping of Activities. If the members of thegroup are to pool their efforts effectively, there must be properdivision of the major activities. Each job should be properly classifiedand grouped. This will enable the people to know what is expectedof them as members of the group and will help in avoiding duplicationof efforts. For instance, the total activities of an industrial organizationmay be divided into major functions like production, purchasing,marketing, financing, etc. and each such function is further subdividedinto various jobs. The jobs, then, can be classified and grouped toensure the effective implementation of the other steps.

(iii) Assignment of Duties. After classifying and grouping the activitiesinto various jobs, they should be allotted to the individuals so thatthere are round pegs in round holes. Each individual should be givena specific job to do according to his ability and made responsiblefor that. He should also be given the adequate authority to do thejob assigned to him.

(iv) Developing Authority, Responsibility and Relationships. Sinceso many individuals work in the same organization, it is theresponsibility of management to lay down structure of relationshipsin the organization. Everybody should clearly know to whom he isaccountable. This will help in the smooth working of the enterpriseby facilitating delegation of responsibility and authority.

3.4 IMPORTANCE OF SOUND ORGANIZATION

Organization is the backbone of management. Without efficientorganization, no management can perform its functions smoothly. Soundorganization contributes greatly to the continuity and success of theenterprise. Once A. Carnegie, an American industrialist, said, “Take awayour factories, take away our trade, our avenues of transportation, andour money. Leave nothing but our organization, and in four years we



shall have re-established ourselves”. That shows the significance ofmanagerial skills and organization. However, good organization structuredoes not by itself produce good performance - just as a good constitutiondoes not guarantee great presidents, or good laws a moral society. But apoor organization structure makes good performance impossible, nomatter how good the individuals may be. The right organizational structureis the necessary foundation; without it the best performance in all otherareas of management will be ineffectual and frustrated.

Sound organization brings about the following advantages :

1. Facilitates attainment of the objectives of the enterprise.

2. Facilitates optimum use of resources and new technologicaldevelopments.

3. Facilitates growth and diversification.

4. Stimulates creativity and innovation.

5. Facilitates effective communication.

6. Encourages better relations between the labor and the management.

7. Increases employee satisfaction and decreases employee turnover.

Sound organization is an essential prerequisite of efficient management.It helps an organization in the following ways:

1. Enlarges abilities: It helps individuals to enlarge their capabilities.Division of work enables an individual to specialize in the job inwhich he is proficient, leading to better utilization of resources andtalents.

2. Facilitates administration: It facilitates administration by avoidingwaste motions, overlapping work and duplication of effort.Departmentation enables proper planning of work. Confusion andmisunderstanding, over who is to perform what work, is avoided byspecifying the role of managers clearly. Proportionate and balancedemphasis is put on various activities.

3. Facilitates growth and diversification: Sound organization helpsin keeping activities under constant vigil and control. The organizationcan undertake more activities without dislocation. Talents andresources are put to good use. Opportunities are seized quickly andexploited fully, which ultimately pave way for growth anddiversification.



4. Permits optimum use of resources: Human, technical and materialresources are put to good use. Right persons are given right jobs.There is proper allocation of work. People know that they aresupposed to do, well in advance. Necessary functions are determinedand assigned, so that personnel and physical facilities are utilizedeffectively.

5. Stimulates creativity. It offers stimulating opportunities to peopleat all levels, to use their skills on jobs best suited to their nature.Delegation helps people at lower levels to do more challenging work.The higher ups, in turn, can concentrate on strategic issues puttingtheir creative abilities to good use.

6. Facilitates coordination: Organization is an important way ofachieving coordination among different departments of an enterprise.Clear authority relationships and proper assignment of work facilitatesthe task of achieving coordination at all levels. Poor organizationleads to improper arrangement of duties and responsibilities. As aresult, unimportant and trivial issues are given top priority. Activitiesthat should be integrated or centralized are spread out and put toimproper supervision. Incompetent individuals are overused whiletalented people are under utilized. Delays, duplications and wastemotions occur with frustrating regularity. Expenses mount up. Thesewould create utter confusion, chaos and conflict. Poor organizationmay mean improper arrangement of facilities and failure to achievegoals.

PRINCIPLES OF ORGANIZATION

As a tool of management, organization is expected to facilitate theachievement of certain objectives. In order to facilitate the achievementof objectives, management thinkers have laid down certain statementsfrom time to time, from certain generally accepted understandings, whichmay be called the principles of organization. The principles are guidelinesfor planning an efficient organization structure. Therefore, a thoroughunderstanding of the principles of organization is essential for goodorganization. The important principles of organization are discussed below:

1. Consideration of Objectives. An enterprise strives to accomplishcertain objectives. Organization serves as a tool to attain theseobjectives. The objectives must be stated in clear terms as they play



an important role in determining the type of structure, which shouldbe developed. The principle of consideration of objectives statesthat only after the objectives have been stated, an organizationstructure should be developed to achieve them.

2. Division of Work and Specialization. The entire work in theorganization should be divided into various parts so that everyindividual is confined to the performance of a single job, as far aspossible, according to his ability and aptitudes. This is also calledthe principle of specialization. More a person continues on a particularjob, the better will be his performance.

3. Definition of Jobs. Every position in the organization should beclearly defined in relation to other positions in the organization. Theduties and responsibilities assigned to every position and itsrelationship with other positions should be clearly defined so thatthere may not be any overlapping of functions.

4. Separation of Line and Staff Functions. Whenever possible, linefunctions should be separated from staff activities. Line functionsare those, which accomplish the main objectives of the company. Inmany manufacturing companies, the manufacturing and marketingdepartments are considered to be accomplishing the main objectivesof the business and so are called the line functions and other functionslike personnel, plant maintenance, financing and legal are consideredas staff functions.

5. Chain of Command. There must be clear lines of authority runningfrom the top to the bottom of the organization. Authority is the rightto decide, direct and coordinate. The organization structure shouldfacilitate delegation of authority. Clarity is achieved through delegationby steps or levels from the top position to the operating level. Fromthe chief executive, a line of authority may proceed to departmentalmanagers, to supervisors or foremen and finally to workers. Thischain of command is also known as scalar principle of organization.

6. Parity of Authority and Responsibility. Responsibility shouldalways be coupled with corresponding authority. Each subordinatemust have sufficient authority to discharge the responsibility entrustedto him. This principle suggests that if a plant manager in a multi-plantorganization is held accountable for all activities in his plant, he should



not be subject to orders from company headquarters specifying thequantity of raw materials he should buy or from whom he shouldpurchase raw materials. If a supervisor is responsible for the qualityof work of his department, he should not be asked to accept as amember of his workforce an employee who has been hired withoutconsulting him.

7. Unity of Command. No one in the organization should report tomore than one supervisor. Everyone in the organization should knowto whom he reports and who reports to him. Stated simply, everyoneshould have only one boss. Receiving directions from severalsupervisors may result in confusion, chaos, conflicts and lack ofaction. So each member of the organization should receive directionsfrom and report to one superior only. This will avoid conflict ofcommand and help in fixing responsibilities.

8. Exceptional Matters. This principle requires that organizationstructure should be so designed that managers are required to gothrough the exceptional matters only. The subordinates should takeall the routine decisions, whereas problems involving unusual mattersand policy decisions should be referred to higher levels.

9. Span of Supervision. The span of supervision means the numberof persons a manager or a supervisor can direct. If too less numberof employees are reporting to a supervisor, his time will not be utilizedproperly. But, on the other hand, there is a limit to the number ofsubordinates that can be efficiently supervised by an executive. Boththese points should be kept in mind while grouping and allocatingthe activities to various departments. It is difficult to give a definitenumber of persons a manager can direct. It will depend upon thenature of the work and a number of other factors.

10. Balance of Various Factors. There should be proper balance inthe formal structure of the organization in regard to factors havingconflicting claims, e.g., between centralization and decentralization,span of supervision and lines of communication and authorityallocated to departments and personnel at various levels.

11. Communication. A good communication network is essential toachieve the objectives of an organization. No doubt the line ofauthority provides readymade channels of communication downward



and upward, still some blocks in communication occur in manyorganizations. The confidence of the superior in his subordinatesand two-way communication are the factors that unite an organizationinto an effectively operating system.

12. Flexibility. The organization structure should be flexible so that itcan be easily and economically adapted to the changes in the natureof business as well as technical innovations. Flexibility of organizationstructure ensures the ability to change with the environment beforesomething serious may occur. So the organization structure shouldbe such that it permits expansion and contraction without disruptingthe basic activities.

13. Continuity. Change is the law of nature. Many changes take placeoutside the organization. These changes must be reflected in theorganization. For this, the form of organization structure must beable to serve the enterprise and to attain its objectives for a longperiod of time.

3.5 TYPES OF ORGANIZATION

3.5.1 According to Talcott Parson Scheme, organizations can beclassified primarily into four categories based on functions

(a) Economic Organizations:

Economic organizations are primarily concerned with producingsomething of value to the society. They are wedded to a philosophy ofgenerating surplus / profit. Industrial, commercial and trading concernsare included in this category.

(b) Political organizations:

Political organizations survive on the basis of service to society. Theyhelp in achieving the basic values cherished by the society. They collectresources from the society, employ them judiciously, and help inmaintaining peace and stability in the society. All governmental agenciesare included in this category.

(c) Integrative organizations:

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



(d) Pattern maintenance organizations:

Pattern maintenance organizations, like, educational institutions, researchinstitutions, religious organizations, clubs etc. are primarily concernedwith long-term interests of society, culture, knowledge values, etc.,

3.5.2 According to Blau and Scott an organization survives on the basisof the services tendered to the society. Its success depends on howbest it is able to serve the interests of its members, owners ormanagers, clients and the society.

1. Mutual benefits associations:

Mutual benefit association like trade unions, political parties, professional,bodies etc., crop up to serve the interests of members. It is not alwayspossible for these associations to achieve the seemingly easy objectivebecause of two problems : membership apathy and oligarchical control.Membership in mutual benefit associations may be exciting initially butafter a time it becomes a monotonous feature. Members lose interestand develop apathy toward the associations’ activities. Consequently,control passes into hands of a selected few; oligarchial control replacesthe internal democratic character of the association.

2. Business organizations:

Owners are the primary beneficiaries in business organization. They aremainly concerned with maintaining operational efficiency that is achievingmaximum gain at minimum cost. It is true that other groups like employees,customers, society etc. receive benefits simultaneously from businessorganizations but in the final analysis, the survival of such institutionsdepends on how effectively the owners are rewarded for the risksundertaken.

3. Service organizations:

In service organizations like hospitals, educational institutions, socialwelfare agencies etc. public are primary beneficiaries. In order to tendereffective service to the clients, the professionals looking after theseorganizations must emphasize two things : service is more important thanobserving procedures and the nature of service is to be decided.



3.5.3 According to Samuel Deep’s Classification Scheme

1. For profit organizations:

These organizations provide goods and services at a profit. Companies,partnership firms, sole proprietorship firms are organised, along theselines and they generate profit for survival and continuance in the market.

2. Government organizations:

These organizations satisfy the public need for order and provide a meansfor people to exercise some measure of control over their environment.

3. Protective organizations:

They shield citizens from danger police, and military services etc.

4. Service organizations:

They act in the interest of the general public without always receivingpayments in full for services rendered.

5. Political organizations:

They seek to influence legislation by electing a member of their group topublic office (political parties, groups and associations).

6. Religious organizations:

They provide for the spiritual needs of members and try to enlistnonbelievers into their fold (churches, sects, orders etc.).

7. Social organizations:

They satisfy the needs of persons to make friendships and to have contactwith others who have contact with others who have compatible interests(clubs, teams, fraternities).

3.5.4 Types of Organization Based on Authority, Responsibility andAccountability

Formal Organization and Informal Organization

Formal organization, which refers to the structure of well-defined jobs,each bearing a definite measure of authority, responsibility andaccountability, is not capable of accomplishing organizational objectivesall alone. It needs the help of informal organization for this purpose. Inother words, informal organization, which does not appear on the



organization chart, supplements the formal organization in achievingorganizational goals effectively and efficiently. The working of informalgroups and leaders is not as simple as it may appear to be. Therefore, itis obligatory for every manager to study thoroughly the working patternof informal relationships in the organization and to use them for achievingorganizational objectives. In this chapter, an attempt has been made tostudy the behavior of informal groups, which develop automatically alongwith the formal organization.

3.5.4.1 FORMAL ORGANIZATION

Chester 1. Barnard defined formal organization as “a system ofconsciously coordinated activities or forces of two or more persons”. A formal organization is deliberately designed to achieve some particularobjectives. It refers to the structure of well-defined jobs, each bearing adefinite measure of authority, responsibility and accountability. Thestructure is consciously designed to enable the organizational membersto work together for accomplishing common objectives. The individualmust adjust to the formal organization. It tells him to do certain things ina specified manner, to obey orders from designated individuals and tocooperate with others. Co-ordination also proceeds according to aprescribed pattern in the formal organization structure.

The formal organization is built around four key pillars; namely, (i) divisionof labor, (ii) scalar and functional processes, (iii) structure, and (iv) spanof control. These may also be called the principles of formal organization.Division of labor and specialization is the basic principle of formalorganization. The whole work is divided into a number of small operationsand a different person performs each operation so that there is maximumspecialization. The scalar and functional processes imply the growth ofthe organization both vertically and horizontally. The structure of theorganization refers to the overall arrangement in the organization whichensures proper balance between different parts of the organization andsecures the execution of all operations and the achievement oforganizational objectives. The span of control refers to the number ofsubordinates directly reporting and accountable to one superior.

CHARACTERISTICS OF FORMAL ORGANIZATION

The basic characteristics of formal organization are as follows:

(i) Organization structure is laid down by the top management to achieveorganizational goals.



(ii) Organization structure is based on division of labor and specializationto achieve efficiency in operations.

(iii) Organization structure concentrates on the jobs to be performedand not the individuals who are to perform jobs.

(iv) The organization does not take into consideration the sentiments oforganizational members.

(v) The authority and responsibility relationships created by theorganization structure are to be honoured by everyone. The positionin the organization hierarchy determines the relative status of theincumbent.

3.5.4.2 INFORMAL ORGANIZATION

Informal organization refers to the relationship between people in theorganization based on personal attitudes, emotions, prejudices, likes,dislikes, etc. These relations are not developed according to proceduresand regulations laid down in the formal organization structure. Generally,large formal groups give rise to small informal or social groups. Thesegroups may be based on common taste, language, culture or some otherfactor. These groups are not preplanned. They develop automaticallywithin the organization according to the environment in the organization.

The salient features of informal organization are as follows:

(i) Informal relations are unplanned. They arise spontaneously.

(ii) Formation of informal organizations is a natural process.

(iii) Informal organization reflects human relationships.

(iv) Informal organizations are based on common tastes, problems,languages, religions, culture, etc.

(v) The membership of informal organizations is voluntary. At the sametime, a person may be a member of a number of informal groups.Thus, there can be overlapping in these groups.

Significance of Informal Organization

The importance of informal organization arises from the functionsperformed by informal groups. The important functions of informalorganization are as under:

(i) It serves as a very useful channel of communication in theorganization. The informal communication is very fast.



(ii) It blends with the formal organization to make it more effective. Itgives support to the formal organization.

(iii) The informal leader lightens the burden of the formal manager andtries to fill in the gaps in the manager’s abilities.

(iv) Informal organization gives psychological satisfaction to themembers. They get a platform to express their feelings.

(v) The presence of informal organization encourages the manager toplan and act carefully.

Thus, informal organizations support and supplement the formalorganization. There are certain disadvantages of informalorganizations. They put up resistance to change and conform to oldpractices. The communication in informal organization is very fast;sometimes, it creates rumors, which may prove dangerous to theenterprise.

Management’s Attitude towards Informal Organization

Modern authors on organization behavior view organization as consistingof both types of relationships, i.e., formal and informal. It is true thatwhile laying down an organizational plan, management can only developformal structure of relationships, but organization is not only a formalchart or structure of relationships. Formal organization, no doubt it is animportant part of the organization. But informal organization is also notless important. If handled properly, it will help in performing the activitiesof the organization very efficiently and effectively. In short, informalrelations are complementary to formal relations and procedures laiddown in the organization structure. Both formal and informal organizationsare necessary for any group action just as two blades are essential tomake a pair of scissors workable.

The management should not look down upon the informal organizationas it arises spontaneously along with the formal organization and fills insome of the vital gaps in the formal organization. It may be noted thatformal organization is unable to meet all the needs (e.g., affiliation,affection; esteem, etc.) of its members. Management can fulfill theseneeds of the workers by encouraging healthy interaction among informalgroups and their members.

Also, informal organization provides a buffer to absorb the shock oftensions and frustrations among the members as a result of formalorganizational pinpricks.



Informal organization may act to fill in gaps in a manager’s abilities. Forinstance, if a manager is weak in planning, one of his subordinates mayinformally help him in such a situation. Management may also make useof informal group leaders by taking them into confidence to mediate asbridges of understanding between the management and the employees.Shartle has rightly said, “Informal structure is one index of the dynamicsof getting work done and it appears that, for efficiency, it will necessarilydeviate from the formal structure.” Therefore, management should adopta positive attitude towards informal organization. It should use it alongwith formal structure to make a workable system for achieving theorganizational objectives.

3.5.4.3 COMPARATIVE STUDY OF FORMAL AND INFORMALORGANIZATION

The formal and informal organizations differ from each other in thefollowing respects:

(i) Origin. The reasons and circumstances of origin of both formal andinformal organizations are totally different. Formal organizations arecreated by conscious managerial decisions. But informalorganizations arise naturally within the formal organization becauseof the tendency of individuals to associate and interact. Managementhas no hand either in emergence or in abolition of informal groups.

(ii) Purpose. Formal organizations are created for realizing certain well-defined objectives. But informal groups are created by organizationalmembers for their social and psychological satisfaction. There maybe a conflict between the goals of the formal organization and thoseof the informal groups.

(iii) Activities. Activities in case of formal organization are differentiatedand integrated around the objectives of the enterprise and areformalized into work units or departments on a horizontal basis.Individuals are fitted into jobs and positions and work groups as aresult of managerial decisions. In case of informal organization, thereare no specific activities. They arise from time to time as a result ofinteractions and sentiments of the individuals. Informal groups maybe based on common taste, language, culture or some other factor.

The following table summarizes the differences between formal andinformal organizations:



Formal Organization vs. Informal Organization

Point Formal organization Informal organization

Origin and goals Deliberately created; reflects

organizational goals.

Basic purpose is to achieve

organization goals.

Arises spontaneously; reflects individual

and group goals.

Basic purpose is to improve human

relations.

Structure It has a definite structure and is

reflected in an organization chart built

around group positions.

Structure less, organization chart built

around people.

Integrating

Mechanisms

Formal organization is held together by

rules, regulations, and procedures.

Held together by feelings of friendship,

mutual help and trust, and so on; it has

unwritten rules and is bound by group

norms rather than organizational goals.

Communication Formal organization depends on

formal, official channels of

communication to sell the ideas of

management to the organization;

communication is a one-way traffic.

The informal organization designs its own.

Communication popularly known as

grapevine, for both organizational and

social communication process;

communication is a two-way traffic.

Size Tends to be large in size, generally

unwieldy and unmanageable.

Tends to be small and manageable.

Durability Tends to be permanent and stable. Characterized by instability.

Orientation It is more or less, an impersonal and

arbitrary structure, to which individuals

must adjust.

A highly flexible structure designed to

satisfy social and psychological needs of

individuals.

(iv) Structure. Formal organization is hierarchical, pyramid shaped andbureaucratic in structure with well defined positions, rigid delineationof roles and superior subordinate relationships on impersonal basis,enforcement of organizational order through a set of policies,procedures, and rules, conscious emphasis on status, differentialbased on authority, narrow and downward oriented communicationsystem, etc. On the other hand, informal organization is uncharitable;it looks like a complicated and common social network ofinterpersonal relationships. Informal organization is loosely structured,with only unwritten norms of behavior enforced by consent.Communication is informal and multidirectional. There are no rigidstatus differentials.



(v) Membership. In a formal organization, every individual belongs toone work group only and works under one superior. But in case ofinformal organization, one person can be a member of more thanone group, according to his choice. He may be a leader in one groupand follower in another. There is no rigidity about group membership.

(vi) Orientation. In case of formal organization, values, goals and tasksare dominantly economic and technical and they concern productivity,profitability, efficiency, survival and growth. But in case of informalorganization, values, goals and tasks are dominantly psycho-social,setting around individual and group satisfaction, affiliation,cohesiveness and friendship.

(vii) Norms of Behavior. In a formal organization, individuals arerequired to behave in the prescribed manner in their work situations.They are expected to behave in a rational manner. Deviations fromthe standard norms are dealt with according to the processes oforganizational law and order. There is also a system of rewards andpunishments. But in case of informal organization, individual behaviorand group behavior influence each other. Behavior is more naturaland social. Interactions cut across formally established positions andrelationships and there is free exchange of feelings and ideas. Aninformal organization develops its own norms of behavior and asystem of rewards and punishments to ensure adherence of groupnorms.

3.6 GROUP DYNAMICS

Informal organization does not last so long informal organization reflectshuman aspect. It is based on the attitudes, likes and dislikes, tastes,language, etc. of people. It is loosely structured. It is highly flexible innature. The group members choose informal leaders.

Social needs are among the most powerful and compelling on-the-jobmotivating forces. In order to fulfill their social needs, workers form smallgroups on the job itself. It was shown by Hawthorne experiments thatpeople behave as members of group and their membership of grouphelps shape their work-behavior and attitudes towards the organization.Management can use groups successfully for the accomplishment oforganizational objectives. According to Likert, an organization will functionbest when its personnel function not as individuals but as members ofhighly effective work-groups with high performance goals.



The social process by which people interact face-to-face in small groupsis called group dynamics. Group dynamics is concerned with theinteraction of individuals in a face-to-face relationship. It focuses onteamwork wherein small groups are constantly in contact with each otherand share their ideas to accomplish the given tasks. The group developsits goals clearly and furnishes suggestions to its members for theaccomplishment of goals. Every group chooses its leader (who may becalled informal leader as he is not recognized in the formal organizationalstructure) who may effectively coordinate the group efforts towards theaccomplishment of its objectives.

3.7 ORGANIZATION STRUCTURE

An organization structure shows the authority and responsibilityrelationships between the various positions in the organization by showingwho reports to whom. It is a set of planned relationships between groupsof related functions and between physical factors and personnel requiredfor the achievement of organizational goals.

Organization involves establishing an appropriate structure for the goalseeking activities. The structure of an organization is generally shown onan organization chart or a job task pyramid. It shows the authority andresponsibility relationships between various positions in the organization.It is significant to note that the organization structure is directly related tothe attainment of the organization objectives. For instance, if anundertaking is in production line, the dominant element in its organizationchart would be manufacturing and assembling. A good organizationstructure should not be static but dynamic. It should be subject to changefrom time to time in the light of the changes in the business environment.While designing the organization structure, due attention should be givento the principles of sound organization.

3.7.1 SIGNIFICANCE OF ORGANIZATION STRUCTURE

Organization structure contributes in the following ways to the efficientfunctioning of organizations:

1. Clear-cut Authority Relationships. Organization structureallocates authority and responsibility. It specifies who is to directwhom and who is accountable for what results. The structure helpsan organization member to know what his role is and how it relatesto other roles.



2. Pattern of Communication. Organization structure provides thepatterns of communication and co-ordination. By grouping activitiesand people, structure facilitates communication between peoplecentered on their job activities. People who have joint problems tosolve often need to share information.

3. Location of Decision Centers. Organization structure determinesthe location of decision-making in the organization. A departmentalstore, for instance, may follow a structure that leaves pricing, salespromotion and other matters largely up to individual departments toensure that varied departmental conditions are considered. Incontrast, an oil refinery may concentrate on production, schedulingand maintenance decisions at top levels to ensure thatinterdependencies along the flow of work are considered.

4. Proper Balancing. Organization structure creates the properbalance and emphasis of activities. Those more critical to theenterprise’s success might be placed higher in the organization.Research in a pharmaceutical company, for instance, might be singledout for reporting to the general manager or the managing director ofthe company. Activities of comparable importance might be givenroughly equal levels in the structure to give them equal emphasis.

5. Stimulating Creativity. Sound organization structure stimulatescreative thinking and initiative among organizational members byproviding well defined patterns of authority. Everybody knows thearea where he specializes and where his efforts will be appreciated.

6. Encouraging Growth. An organization structure provides theframework within which an enterprise functions. If it is flexible, itwill help in meeting challenges and creating opportunities for growth.A sound organization structure facilitates growth of enterprise byincreasing its capacity to handle increased level of activity.

7. Making Use of Technological Improvements. A soundorganization structure, which is adaptable to changes, can make thebest possible use of latest technology. It will modify the existingpattern of authority, responsibility and relationships in the wake oftechnological improvements.

In short, existence of a good organization structure is essential for bettermanagement. Properly designed organization can help improve teamwork



and productivity by providing a framework within which the people canwork together most effectively. While building the organization structure,it is essential to relate the people to design. The organization structure,which has technical excellence, may be quite useless for practicalpurposes because it is not suited to the needs of the people. Thus, anorganization structure should be developed according to the needs ofthe people in the organization.

3.7.2 DEVELOPING THE ORGANIZATION STRUCTURE

There are two types of structural variables : namely, basic structure andoperating mechanism. Designing of basic structure involves such centralissues as how the work of the organization will be divided and assignedamong positions, groups, departments, divisions, etc. and how thecoordination necessary to achieve organizational objectives will bebrought about. But operating mechanism, on the other hand, includessuch factors as information system, control procedures, rules andregulations, system of reward and punishment, etc.

The development of organization structure deals with two facets whichare : the functions to be performed, and the form of structure. The firstfacet requires the determination of activities, the organization needs anddivision of these activities keeping in mind degree of specialization it canafford. The second facet that is form of structure requires a detailedstudy and application of many organizational principles and practices.

Organization structure establishes formal relationships among variouspositions in the enterprise. The formal relations may be classified intothe following categories :

(i) Relations between the senior and the subordinates and vice versa;

(ii) Relations between the specialist positions and the line positions;

(iii) Staff relations and

(iv) Lateral relations.

The formal relations in an organization arise from the patterns ofresponsibilities that are created by the management. They are static innature, but afford the framework for dynamic action. As soon as themanagement action starts, the formal relations are absorbed oroverplayed by the personal attitudes and behavior patterns of theindividuals in the organization. The latter are generally described as



‘informal relations’. Such relations must also be kept in mind whiledeveloping the organization structure. If the formal relations are rigidand lay down long procedures, the individuals will develop certain‘short-cuts’ to perform their responsibilities in a better way.

3.7.3 NEED FOR DIFFERENTIATION AND INTEGRATION OFACTIVITIES

Differentiation and integration of activities and authority relationships arevery important considerations in organization designing. Differentiationmay be defined as the differences in cognitive and emotional orientationsamong managers in different functional departments and the differencesin formal structure among these departments. Integration, on the otherhand, refers to the quality of the state of collaboration that is required toachieve unity of effort. System approach suggests that since variousdepartments are integral part of the whole system, they should not beconsidered in isolation of others. But since each department is interactingwith the environment in a different way, various departments are likely todevelop some degree of differentiation depending upon the nature ofenvironment. Therefore, designing of the structure of one departmentmay be different from that of the other. But the overall objective oforganizational designing should be integration of activities and authorityroles and relationships existing in different departments.

3.7.4 DETERMINING THE KIND OF STRUCTURE

Organization structure is an indispensable means towards businessobjectives. Wrong structure will seriously deter the enterprise fromachieving its objectives. Thus, it is essential that a great deal of careshould be taken while determining the organization structure. PeterDrucker has pointed out three specific ways to find out what kind ofstructure is needed to attain the objectives of a specific business, whichare discussed below:

1. Activities Analysis. It is the first stage in building an organizationstructure, which involves finding out what activities are needed toattain the objectives of the enterprise. Each business undertakinghas a set of functions to perform such as manufacturing, purchasing,marketing, personnel, accounting, etc. These functions can beidentified after proper analysis. It may be pointed out that in everyorganization one or two functional areas of business dominate. For



instance, printing is an important function of a printing firm anddesigning is an important activity of the readymade garmentsmanufacturer. After the activities have been identified and classifiedinto functional areas, they should be listed in the order of importance.It is advisable to divide and subdivide the whole work into smallerhomogeneous units so that the same may be assigned to differentindividuals. For instance, the Chief Executive may divide the wholeactivities into various functional departments and delegate authorityto the departmental managers. Deputy managers, assistant managersand so on, may assist the departmental managers. It should beremembered that the job constitutes the basic building block indesigning an organization structure.

2. Decision Analysis. What decisions are needed to obtain theperformance necessary to attain objectives? What kind of decisionsare they? On what level of the organization should they be made?What activities are involved in or affected by them? Which managersmust therefore participate in the decisions? Though it is difficult topredict the content (kind) of decision problems, which will arise infuture, yet the subject matter has a high degree of predictability.Analysis of the foreseeable decisions shows the structure of topmanagement the enterprise needs and the nature of authority andresponsibility different levels of operating management should have.Peter Drucker has emphasized four basic characteristics, viz.,(i) the decision is the degree of futurity in the decision (ii) the impactthat decision has on other functions; (iii) the character of the decisionas determined by a number of qualitative factors, such as basicprinciples of conduct, ethical values, social and political beliefs, etc.and (iv) whether the decisions are periodically recurrent or rare asrecurrent decisions may require general guidelines whereas a raredecision is to be treated as a distinctive event.

3. Relations Analysis. With whom will a manager-in-charge of anactivity have to work? Such other questions of relations, e.g., lineand staff relations, relations between subordinates and superior willalso help in deciding the structure of the organization. As said earlier,downward, upward and side-ways relations must be analyzed todetermine the organization structure.



3.8. AUTHORITY AND RESPONSIBILITY

Authority is defined as the right to give orders and the power to getobedience. In the context of an organization, authority might be termedas ‘institutionalized power’. A person in an organization, is an authorityby virtue of the requirements is the role held by him. Authority resides ina person and arises out of the demands of position in organizations.Responsibility is the obligation of a subordinate to perform the duty asrequired by the superior. There should be parity between authority andresponsibilities. This means that the subordinate must have been delegatedenough authority to undertake all the duties which have been assigned tohim and for which he has accepted responsibility. Authority withoutresponsibility is liable to be abused; responsibility without authority isfrustrating. Thus, inequity between delegated authority and responsibilityproduces undesirable results.

3.8.1. Challenges to the Traditional View of Organizations :

The classical writer’s recommendations for organizing and managing donot work in all situations. Prescriptions for machine like efficiency thatworks in military organizations and simple operations often fail to produceresults in complex organizations. Fayol’s principles do not guaranteesuccess. Experience proves that organizing is more than just the strictcompliance of rules that Taylor had stressed. Weber’s efficientorganizational formula fails to offer any benefits in actual practice.Bureaucracy, in fact, highlights the epitome of inefficiency. Additionalchallenges emerge from two other sources:

(a) Bottom-up authority: Traditionalists favored flow of authority fromtop to bottom in an uninterrupted fashion. Owners preferred toexercise their authority over those who are cut off by distance, throughthis route, much to the resentment of those working at lower levels.

(b) Chester L Barnard, instead, described organizations as cooperativesystems. He felt that a leader’s authority is eventually determined bythe willingness of subordinates to follow commands. Barnard’sacceptance theory opened the door for a whole set of new ideassuch upward communication and the informal communication that isbased on friendship than work rules.



3.8.2 Open systems theory (the modern approach) :

The traditional concept of the organizing process is task-oriented andemphasizes the work to be performed by individuals, who are part oforganization. The organization is viewed as a closed system, enclosedand sealed off from outside world. The organization has all the energy itneeds and there is no need to look into the environmental changes. Theenvironment, it is assumed, would be stable, predictable and would notpose problems.

Table : Comparison of Traditional and Modern Approaches

Classical organizations Modern organizations

Closed system. Open system.

Stable environment. Dynamic Environment.

Division of labor and specialization. Job enlargement and job enrichment.

Centralization. Decentralization.

Use of authority to achieve coordination. Free from Organization structures.

Authority. Consensus.

Rigid rules, precise role requirements. Flexibility and adaptability.

Command to exact obedience. Participation to achieve ends.

Communication: one-way street. Communication: open and multidirectional.

Maintenance needs. Motivational needs.

Tight control; emphasis on positions toachieve goals.

Emphasis on goals; management by objectives.

Autocratic approach. Democratic approach.

Negative environment: robs employees offreedom and motivation to work.

Positive work environment: supportive of thefeelings, beliefs and values of people.

Sources: Adapted from H.G. Hicks and C.R. Gullet, Organizations:Theory and Behavior, Tokyo, McGraw-Hill, 1975.

The essential objective of management should be to provide a soundorganization structure that promises efficient goal accomplishment. Tothis end, managers must try to find out ways for increasing internalefficiency; the task should be made as simple as possible by ignoringfactors that increase uncertainty. People in an organization are viewed asinert instruments in the production process, as parts of a complexorganizational machine.

Recognizing the inadequacies in the traditional approach, Thompsonsuggested the open-systems view, in order to develop an accurate picture



of organizational life. The open-systems view accepts the environmentas an integral part of organizational reality. Organizations are complex,goal-seeking social units. In addition to the penultimate task ofaccomplishing goals, they must adapt to and shape the externalenvironment. The open-systems view conceives of the organizationalsystem as a set of interrelated elements that acquires inputs, transformsthem and delivers outputs to the external environment. Thus, anorganization is a social system composed of a number of sub-systems,all of which are independent and interrelated. It is open and dynamichaving inputs, outputs, operations and feedback.

3.9 CONTINGENCY THEORY AND ORGANIZATIONSTRUCTURE

The contingency theory puts the stress of organizing on a number ofvariables. The theory supports the idea that there is no best way toorganize, there is no one pattern of organization style that is universallyappropriate. The design is conditional. The organization structure maybe contingent upon many factors; it is a product of many forces: internalas well as external. These factors, it should be remembered, do notdetermine structure; rather they establish the parameters within whichmanagement choices are made.

Strategy and Structure

Strategy is a contingency variable. It refers to the long-term decisionsadopted by managers to achieve organizational goals. Top managersgenerally formulate strategy after a careful analysis of opportunities inthe environment and after evaluating strengths and weakness of theorganization. Managers decide at the start, what industry the organizationwill enter, how it will compete, where it will be located, and the kind oforganization it will be, who will be the top managers, and who will directlyinfluence the organization structure.

Alfred Chandler has clearly shown the close relationship between thestrategy which a business adopts, and the structure of its organization.After carrying out intensive case studies of four of the largest Americancompanies (Sears Roebuck, General Motors, Standard Oil and Du Pont),he concluded that changes in corporate strategy would precede and causechanges in the organization structure. He found that all the companiesstudied had shifted their designs from a simple centralized pattern, to a



more elaborate divisionalised pattern following changes in population,national income, technological innovations, expanding product lines etc.The strategy chosen by the manager is the primary explanatory variablefor organizational structure, in all the cases. The influence of strategy onstructure may be expressed thus:

Strategy determines organizational tasks.

Strategy influences the choice of technology and people, appropriatefor accomplishment of such organizational tasks and in turn, theseinfluence the appropriate structure.

Strategy determines the specific environment, within which theorganization will operate.

Size and Structure

How important is size in determining structure, remains a controversialquestion. Opinions vary from ‘size is the most important condition affectingthe structure of organization’ to size is irrelevant’. Peter Blau and RichardSchoenherr concluded that size is the most important condition affectingthe structure of organizations. Size determines structure. Size provides agreater opportunity to utilize the economies of specialization. As anorganization grows in size, there is a tendency to assign more and morepersons to specialized services. The numbers of subunits increases, morelevels are created in the hierarchy, impersonal rules, procedures andcontrol increase formalization and the organization will become moreand more structured. The Aston Group also found (46 organizationsstudied) that increased size promotes greater specialization andformalization.

The effects of size do not seem to be all-pervasive. In the words ofJackson and Morgan, ‘Taken as a whole, size may be the most importantcontextual variable in predicting some dimensions of structure, but it isdifficult to conclude that it dictates all of an organization’s structure.’Hall and his associates studied seventy-five highly diverse organizationsand concluded that all aspects of structure cannot be predicted fromsize. It is not easy to assimilate the bundle of information and establish aclear-cut relationship between the size and structure of an organization.Research evidence, however, indicates that size has a significant influenceon vertical differentiation.



Technology and Structure

Technology is an important variable in the design of organization structure.To achieve satisfactory performance, managers must create anorganization design with the proper mix of technology, structure andhuman behavior. Technology, in simple terms, is the organization’stransformation process. It is the combination of skills, equipment andrelevant technical knowledge needed to bring about desired transformationin materials, information and people. Technology looks at how the inputsare transformed into outputs. Broadly speaking, it is the application ofknowledge to actual performance.

3.10 COMPONENTS OF ORGANIZATION STRUCTURE

Within the framework of the formal organization, there are three basicorganizational relationships, namely, (i) responsibility (ii) authority, and(iii) accountability. These relationships are designated as formal becausethey are predetermined by the management as a way of relating andcombining the diverse functions of the enterprise. This section aims atproviding an insight into these relationships.

3.10.1 RESPONSIBILITY

“By responsibility we mean the work or duties assigned to a person byvirtue of his position in the organization. It refers to the mental and physicalactivities, which must be performed to carry out a task or duty. Thatmeans every person who performs any kind of mental or physical effortas an assigned task has responsibility.”’ In order to enable the subordinateto perform his responsibility well, the superior must clearly tell the formeras to what is expected of him. In other words, the delegant must determineclearly the task or duty that is assigned to the delegate. The duty must beexpressed either in terms of functions or of objectives. If a subordinateis asked to control the operations of a machine, the duty is in terms offunction. But if he is asked to produce a particular number of pieces of aproduct, the duty is in terms of target or objective. Determination ofduties in terms of objectives will enable the subordinate to know bywhat standards his performance will be evaluated.

3.10.2 AUTHORITY

Authority is a derivative of responsibility. It is the right to order orcommand and is delegated from the superior to the subordinate to



discharge his responsibilities. Right to procure or use raw materials, tospend money or ask for the allotment of money, to hire or fire people,etc. has to be delegated to the individuals to whom the work has beenassigned. For instance, if the chief executive of a plant assigns theproduction manager with the production of particular types of goodsand services, he should also grant him the authority to use raw materials,money and machinery, hire workers and so on to fulfill the productionschedules prescribed as his duty.

A superior delegating the authority should also determine what types ofauthority are to be delegated. Authority should not be confused withunlimited authority. The amount of authority delegated should becommensurate with the responsibilities or duties assigned. In other words,there must be a balance between responsibility and authority. However,in practice, the powers or rights necessary to perform a givenresponsibility may vary from one situation to another.

3.10.3 ACCOUNTABILITY

Accountability is the obligation to carry out responsibility and exerciseauthority in terms of performance standards established by the superior.Creation of accountability is the process of justifying the granting ofauthority to a subordinate for the accomplishment of a particular task. Inorder to make this process effective, the standards of performance shouldbe determined before assigning a task and should be accepted by thesubordinate. An important principle of management governing this basicrelationship is that of single accountability. An individual should beanswerable to only one immediate superior and no more.

Power

The term ‘power’ may be defined as the ability to exert influence. If aperson has power, it means that he is able to change the behavior orattitudes of other individuals. “In-one’s role as a supervisor, a manager’spower may be seen as the ability to cause subordinates to do what themanager wishes him to do. A manager’s power may be measured interms of the ability to

(1) Give rewards,

(2) Promise rewards,

(3) Threaten to withdraw current rewards,



(4) Withdraw current rewards,

(5) Threaten punishment, and

(6) Punish.

The term ‘authority’, on the other hand, denotes the right of a managerto decide and command. For example, a manager has a right to assigntasks to subordinates and expect and require satisfactory performancefrom them. But the manager may not have the means (or power) availableto enforce this right. Thus, whether a manager can enforce his rights is aquestion of power. Similarly, there may be a situation where a personhas a power to do something, but lacks authority to do it. Such situationsmay cause conflicts in organizations. Therefore, for organizationalstability, power and right to do things should be equated. “When powerand authority for a given person or position are roughly equated, wehave a condition we may call legitimate power.”

Distinction between authority and power

The terms ‘authority’ and ‘power’ are generally used inter-changeablyin practice, but there is a clear-cut distinction between the two. Whereasauthority is the right to command; power is the ability to exerciseinfluence. Authority usually resides in the position in the organization,but the person exercises power. Authority includes the rights to command,which have been institutionalized. Thus, authority is always positionaland legitimate and is conferred on the position. But power is notinstitutional, rather it is personal. It is acquired by people in various waysand exercised upon others. It is acquired through political means or byhaving certain personal attributes.

Authority increases as one goes up the organizational hierarchy. But iineed not necessarily be accompanied by more power. In actual practice,the power centers may be located at the lower levels in the organization.Thus, one cannot get any idea of power centers in an organization bymerely looking at its organization chart.

The formal structure of an organization merely shows its authorityrelationships. It is in practice modified by power politics in theorganization, some individuals may have more power and less authorityor more authority and less power. It is the operating mechanism of theorganization, which is relevant for studying organizational behavior.



Authority is a downward flowing concept whereas power flows in alldirections. Authority can be delegated to the lower levels in theorganization. The lower we go down the hierarchy, the lesser is theauthority. But it is not so in case of power which has been defined as theability or capacity to influence the behavior of others. If a workersucceeds to influence the behavior of a departmental manager, it is impliedthat the worker has exercised power over the departmental manager.Similarly, the departmental manager may be able to influence the behaviorof his superior, peers and subordinates. Thus power flows in alldirections.

Sources of power

John French and Bertram Raven have identified five sources or bases ofpower which may occur at all levels of the organization. These arediscussed below :

(i) Reward Power. It is based on the influencer having the ability toreward the influencee for carrying out orders.

(ii) Coercive Power. It is based on the influencer’s ability to punish theinfluencee for not carrying out orders or for not meeting requirements.

(iii) Legitimate Power. It corresponds to the term ‘authority’. It existswhen an influencee acknowledges that the influencer is lawfullyentitled to exert influence. It is also implied that the influencee hasan obligation to accept this power.

(iv) Expert Power. It is based on the perception or belief that theinfluencer has some expertise or special knowledge that the influeceedoes not have. For example, a doctor has expert power on hispatients.

(v) Referent Power. It is based on the influencee’s desire to identifywith or imitate the influencer. For example, a manager will havereferent power over the subordinates if they are motivated to emulatehis work habits.

. These are potential sources of power only. Possession of some orall of them does not guarantee the ability to influence particularindividuals in specific ways. The role of the influencee in acceptingor rejecting the attempted influence is very important. It may alsobe noted that, normally, each of the five power bases is potentiallyinherent in a manager’s position.



Sources of authority

Management scholars are divided on whether authority originates at thetop and flows down in traditional fashion or whether it originates at thebottom as a kind of consent of the subordinates. We can classify theviews of various management writers under the three headings, namely,formal authority theory, acceptance theory and competence theory.

These viewpoints are discussed below:

(i) Formal Authority Theory: According to this theory, ‘authority’ isviewed as originating at the top of an organization hierarchy andflowing downward through the process of delegation. The ultimateauthority in a company lies with the shareholders who are its owners.The shareholders entrust the management of the company to theBoard of Directors and delegate to it most of their authority. TheBoard of Directors delegates authority to the Chief Executive andthe Chief Executive in turn to the departmental heads and so on.Every manager in the organization has some authority because of hisorganizational position. That is why, the authority is known as formalauthority. Subordinates accept the authority of a superior becauseof his formal position in the organization. A manager in the organizationhas only that much of authority which is delegated to him by hissuperior.

The shareholders of a company have authority over the companybecause of the institution of private property in the society. Varioussocial factors, laws, political and ethical considerations, and economicfactors put certain limits on their authority and the organization hasto function within these limits. In fact, the basic sources of authoritycan rest in the social institutions themselves. In a society, whereprivate property does not exist as in the case of socialist economies,the origin of authority can be traced to the elements of basic groupbehavior.

The concept of authority as being a right transmitted from the publicthrough social institutions to business managers is the central themeof the formal authority theory.

(ii) Acceptance Theory. According to this theory, the authority is thepower which is accepted by others. Formal authority has nosignificance unless the subordinates accept it. The degree of effective



authority assessed by a manager is measured by the willingness ofthe subordinates who accept it. “An individual will accept an exerciseof authority if the advantages accruing to him from accepting plusthe disadvantages accruing to him from not exceed the advantagesaccruing to him from not accepting plus the disadvantages accruingto him from accepting; and conversely, he will not accept an exerciseof authority if the latter factors exceed the former.” Thus, theacceptability of an order will depend upon relative consequences,both positive and negative. Many orders may be fully acceptable,many fully unacceptable, and others only partially acceptable.Barnard maintains that a subordinate will accept a order if heunderstands it well, if he believes it is consistent with the organizationobjectives and compatible with his own interest.

The acceptance theory of authority has certain limitations. Accordingto it, a manager has authority if he gets obedience from thesubordinates. But a manager is not able to know whether hissubordinates will obey his order unless the order is carried out ordisobeyed by them.

(iii) Competence Theory. According to this theory, an individual derivesauthority because of his personal competence. Urwick identifiedformal authority as being conferred by organization, technicalauthority as being implicit in a special knowledge or skill, personalauthority as being conferred by seniority or popularity. Thus, a personmay get his order or advice accepted not because he is having anyformal authority, but because of his personal qualities. These qualitiesmay be technical competence and social prestige in the organization.For example, a person is expert in a particular field and other peoplego to him for guidance and follow his advice as if that were an order.

Limits of authority

The authority of an organization is not absolute. It is subject to variouseconomic, social, political and other factors. Similarly, the authority of amanager is restricted by various factors, such as:

(i) Physical limitations. Physical laws, climate, geographical factors,etc. restrict managerial authority to a great extent. Thus, an order tomake silver from aluminum would be meaningless.



(ii) Economic constraints. The authority of an executive is restrictedby economic constraints. The chief executive would not like to askhis sales personnel to sell products at a high price in a highlycompetitive market or to ask the purchase department to procureraw materials for use in the next twelve months when capital andstorage space are not available for this purpose.

(iii) Social constraints. The use of managerial authority is also subjectto many social limitations. Thus, the task assigned to employees mustconform to the group’s fundamental social beliefs, habits and codesof ethics.

(iv) Legal constraints. Various acts of the Central and SlateGovernments also impose restrictions on the exercise of authorityby a manager. For instance, a manager can’t ask the workers not toform or join a union.

(v) Biological limitations. A manager cannot command a subordinateto do something, which he is, not capable of doing. For example, amanager cannot ask a subordinate to climb the side-wall of a building.

(vi) Internal constraints. A manager’s authority is limited by theobjectives and policies laid down by the top management of theorganization. He can’t go against the internal policies and rules ofthe organization.

3.11 DELEGATION OF AUTHORITY

Delegation is the essence of good organization. It is an important processto manage the affairs of an enterprise satisfactorily. Delegation of authoritymeans conferring authority to another to accomplish a particularassignment. That means a manager can get things done through othersby sharing authority with them. Delegation stands for calling others torender help in accomplishing a job.

3.11.1 DEFINITION

Delegation means devolution of authority on subordinates to make themperform the assigned duties or tasks. It is that part of the process oforganization by which managers make it possible for others to share thework of accomplishing organizational objectives. Delegation consists ofgranting authority or the right to decision-making in certain defined areas



and charging the subordinate with responsibility for carrying through theassigned task.

Delegation refers to the assignment of work to others and confer themthe requisite authority to accomplish the job assigned. It enables themanagers to distribute their load of work to others and concentrate onmore important functions, which they can perform better because of theirposition in the organization. Allen has rightly said, “Delegation is thedynamics of management; it is the process a manager follows in dividingthe work assigned to him so that he performs that part which only he,because of his unique organizational placement, can perform effectivelyand so that he can get others to help him with what remains”. Thus,delegation is the ability of a manager to share his burden with others,how can he best share his burden? First, he must entrust to others theperformance of a part of the work he would otherwise have to do himself,secondly, he must provide a means of checking up on the work that isdone for him to ensure that it is done as he wishes.

So far we have talked about downward delegation, i.e., delegation fromsuperior to subordinate. Delegation may also be upward or sideways. Afederating government may delegate its power to make laws to the federalgovernment. This is called upward delegation. Sideways delegation isgenerally found in religious organizations or trusts which may delegateauthority other religious organizations or trusts.

3.11.2 SIGNIFICANCE OF DELEGATION

Delegation of authority is the key to organization. An executive confersauthority on the subordinates to accomplish specific tasks which he maynot be able to do alone. That means a manager can get things donethrough others by sharing authority with them. A manager has to resortto delegation because in a big enterprise it is not possible for one personto exercise all the authority for taking decisions. Moreover, there is alimit to the number of persons which a manager can effectively superviseand for whom he can take decisions. Once this limit is exceeded, authoritymust be delegated to the subordinates who will make decisions withinthe area of their assigned duties.

Delegation of authority is widely recognized as one of the best methodsof getting better results through the subordinates. It is a must for bettermanagement. Once a man’s job grows beyond his personal capacity, his



success lies in his ability to multiply himself through other people. Howwell he delegates determines how well he can manage. Andrew Carnagie,a leading industrialist of America remarked, “When a man realizes hecan call others in to help him to do the job better than he can do it alone,he has taken a big step in his life.”

Delegation lightens the burden of the executive by relieving him of thebotheration of taking routine decisions which others can also takeefficiently. This will help him in concentrating on vital aspects ofmanagement. Delegation will enable quick decisions relating to variousmatters because the authority of decision-making has been shared withothers. Granting of authority to subordinates motivates them to performtheir duties well. If they are not given adequate authority, they will bereluctant to accept the assignments as they will be required to approachthe boss every time whenever a need arises to take a decision.

Delegation helps in maintaining healthy relationship between the executiveand his subordinates by clearly defining the authority and responsibilityof the subordinates. According to Douglas C. Basil, “Delegation can beone of management’s best techniques for satisfying needs and formotivating subordinates to better performance. In terms of technical aspectof business, delegation, through task assignment, can achieve fasterdecisions and eliminate cumbersome information system. In terms ofbehavioral aspects, delegation can satisfy man’s demands forresponsibility, recognition and the opportunity to exercise authority.”

Delegation of authority is an art of higher order. Every manager shouldbe proficient in this art. Louis A. Allen has rightly remarked,” How wellone delegate determines how well one manages.” Delegation of authorityfacilitates the job of managing by offering the following advantages:

(i) Delegation lightens the burden of key executives in tackling routinematters and enables them to concentrate on vital aspects ofmanagement.

(ii) Delegation enables taking of quick decisions at all levels within thepolicy framework provided by the top1evel management.

(iii) Delegation of authority is an important tool to motivate thesubordinates to contribute their best for the achievement of enterpriseobjectives.



(iv) Delegation helps in maintaining healthy relationship between themanagers and their subordinates by clearly laying down their authorityand responsibility.

(v) Delegation helps in developing managerial personnel for the future.

(vi) Delegation improves work performance because responsibility isgiven to the subordinates on the basis of specialization.

3.11.3 What can be delegated?

Authority is delegated when a superior grants some organization discretionto a subordinate. Superiors can neither delegate authority they do nothave and nor they can delegate all their authority without, in effect, passingon their position to their subordinates. The authority of a top executivecan be divided into three broad categories:

(i) Authority, which must be delegated such as authority to take routinedecisions for the accomplishment of tasks

(ii) Authority which can be delegated such as implementation of policies;and

(iii) Authority, which cannot be delegated at all such as authority to takepolicy decisions.

A manager must delegate the authority to do the routine work, whichdoes not involve any policy decision. A part of work in every managementposition consists of activities, which are subsidiary to primary task of theposition itself. The power to perform subsidiary activities must bedelegated to others so that, they may do the subsidiary activities well.For instance, the sales manager of a concern is responsible for selling itsproducts. In order to sell the products, the sales manager has to performmany functions like market research, employment of sales-force, trainingof sales-force, development of means of sale promotion and so on. Thesales manager cannot perform all these functions in a better way himself.So he can entrust certain operations to his subordinates and give themauthority to perform them.

There are certain other activities, which a manager can entrust to hissubordinates, provided the manager has the necessary skill to delegateand the subordinates have been educated to accept these assignments.These activities relate to execution of policies. The manager can keep



the control mechanism in his hands and let others execute the policydecisions. However, he cannot delegate the authority to take policydecisions, develop plans and establish appropriate organization for theexecution of plans. These are managerial functions of higher order onwhich the manager must concentrate, himself. Similarly, control functionis also to be performed by the manager himself. A manager who delegateshis authority to others must keep the authority to control their activitieswith himself. He should evaluate the functioning of various individualshimself and take necessary action wherever necessary.

3.11.4 ELEMENTS OF DELEGATION OF AUTHORITY

The process of delegation involves three essential elements or aspects:

(i) Entrustment of responsibility (duties or work) to another forperformance;

(ii) Granting of authority to make use of resources, take necessarydecisions and so on for carrying out the responsibility; and

(iii) Creation of an obligation or accountability on the part of the personaccepting the delegation to perform in terms of the standardsestablished.

If an executive wants others to help him, he must first divide his workand determine what portion of work can be assigned to others. If herequires the subordinate to do the work as he would have done it himself,he must entrust him with sufficient authority which otherwise would havebeen exercised by him to do that work. That means if the subordinateneeds to spend money, engage people, and use materials or equipment,the superior must permit him to do so. Merely assignment of work orduty and granting of authority are not sufficient, the manager must havesome means of checking up to make sure that the work is done in theway he wants. He must create an obligation on the part of person acceptingthe responsibility to perform the work assigned to him in terms of certainstandards of performance.

Different authors have used different terms to explain the process ofdelegation. We have used the terms responsibility, authority andaccountability. These terms have also been used by Louis A. Allen whosays that the terms must be clearly distinguished for proper understandingof the process of delegation. It is important to point out that these three



elements are inseparable parts of the process of delegation. A briefexplanation of the components of delegation is given below:

(i) Entrustment of Responsibility or Duty

Responsibility means the work or duties assigned to a person byvirtue of his position in the organization. In order to enable thesubordinate to perform his responsibility well, the superior mustclearly tell the former as to what is expected of him. In other words,the superior must determine clearly the task or duty to be assignedto the subordinate. The duty must be expressed either in terms offunctions or in terms of objectives. If a subordinate is asked to controlthe operations of a machine, the duty is in terms of function. But if heis asked to produce a number of pieces of a product, the duty is interms of target or objectives. Determination of duties in terms ofobjectives will enable the subordinate to know by what standardshis performance will be evaluated.

(ii) Granting of Authority

Authority is the right or power granted to an individual to makepossible the performance of work assigned. Power to produce oruse raw materials, spend money, or ask for allotment of money, tohire and fire people, etc. has to be delegated to individuals to whomthe work is assigned. For instance, if the General Manager of a plantassigns to the Production Manager the production of particular goodsand services, he will also grant him the authority to use materials,money, and machinery, hire workers and so on to fulfill the productionschedule prescribed as his duty.

(iii) Creation of Obligation or Accountability

According to Louis A. Allen,” Accountability is the obligation tocarry out responsibility and exercise authority in terms of performancestandards established.” It means holding an individual answerablefor final results. The subordinate is held accountable to the superior.Accountability originates because the manager has a right to requirean accounting for the authority delegated and task assigned to asubordinate. The process of delegation of authority is incompleteunless accountability is created.

The term ‘accountability’ should not be confused with ‘responsibility’.



Responsibility denotes the work to be done; it can be assigned tothe subordinates. A subordinate will perform his responsibility well ifhe is given sufficient authority along with it. When the subordinateaccepts the authority he commits himself to account for the use ofauthority. Thus, accountability is the obligation for the performanceof work assigned and authority delegated.

Authority can be delegated but accountability (responsibility toaccount for results) cannot be delegated. When a senior executiveassigns some duties to a junior executive, he has to delegatecorresponding authority also. The junior executive may, in turn, takethe help of a foreman working under him in performing the workassigned. But the junior executive will continue to be accountablefor performance to the senior executive. For example, if the workerdoes not do the job properly, it is the junior executive who isresponsible to the senior executive. Thus, accountability can’t bedelegated, it always moves upward. In simple words, an executivecannot escape the responsibility (or answerability) for theperformance of tasks assigned to him by delegating authority to hissubordinates. However, he can take action against the subordinatefor his carelessness or negligence in doing the job.

Accountability moves upward because a person who is delegatedthe authority is always accountable to the person who delegated himthe authority. However, as is obvious from the mechanism of thedelegation process, responsibility and authority move downward.

What is the Extent of Accountability? The extent of accountabilitydepends upon the extent of delegation of authority and responsibility.A person cannot be held answerable for the acts not assigned to himby his superior. For instance, if the production manager is givenresponsibility and authority to produce a specified quantity and qualityof certain product and the personnel department is givenresponsibility and authority for the development of workforce, theproduction manager cannot be held accountable for the developmentof workforce, “Accountability is, by the act which creates it, of thesame quality and weight as the accompanying responsibility andauthority”.



3.11.5. PRINCIPLES OF DELEGATION

The following principles are guides to successful delegation. Unlesscarefully recognized in practice, delegation may be ineffective, organizationmay fail and the managerial process may be seriously impeded.

1. Assignment of Duties in terms of Results. Delegation by resultsexpected implies that goals or objectives have being set and plansmade and are understood and accepted by the subordinates andthat jobs have been designed to fit in with them. The subordinatesmust understand clearly what activities they must undertake and whatresults they must show. This will enable them to know by whatstandards their performance will be judged and will direct their effortsfor the achievement of those results.

2. Functional Definitions. According to Koontz and O’Donnell, themore a position or a department has clear definitions of resultsexpected, activities to be undertaken, organization authoritydelegated, and authority and informational relationship with otherpositions understood, the more adequately the individuals responsiblecan contribute toward accomplishing enterprise objective. To dootherwise is to risk confusion as to what is expected of whom. Thisprinciple although simple in concept, is often difficult to apply. Todefine a job and delegate authority to do it requires, in most cases,patience, intelligence and clarity of objectives and plans. It isobviously difficult to define a job if the superior does not know whatresults are desired.

3. Parity of Authority and Responsibility. Authority and responsibilityshould bear logical relation to each other. So much authority shouldbe granted which is sufficient to fulfill the responsibility. This parity isnot mathematical, but rather coextensive, because both relate to thesame assignment. Authority can never be delegated equal toresponsibility as both are different things. Responsibility is the workassigned to a position and is related to objectives, whereas authorityis related to the rights given to perform the work assigned. There isno common denominator for measuring equality between these.However, authority should be delegated commensurate withresponsibility. For instance, if a manager tries to hold subordinatesaccountable for duties for which they do not have the requisite



authority, it will be unfair. It is also not proper if the subordinates are givensufficient authority, but are not held accountable for its proper use.

4. Clarification of Limits of Authority. Limits of authority must beclarified to the subordinates so that they may not assume excessiveauthority than desired. Clear limits of authority will allow subordinates to exercise initiative, develop themselves through freedom ofaction and to know their area of operation. This will also avoid misuseof authority.

5. Absoluteness of Accountability. Accountability, being anobligation owed, cannot be delegated. No superior can escapeaccountability for the activities of his subordinates, as it is the superiorwho has delegated authority and assigned duties. The superior cannotpass on his obligation to account for to his superior to thesubordinates along with hit authority. Likewise, the accountability ofthe subordinates to their superior for the performance of assignedtasks is absolute.

6. Unity of Command. This principle states that accountability isunitary. Each person should be accountable only to one superior fordelegated authority, as he cannot serve two masters well. If a personreport to two superiors for the same duty, confusion and friction willresult. He will find himself frequently receiving conflicting instructions.When this is the case, his only hope is to get either his two bosses orto run the risk of displeasing either or both. Therefore, as far aspossible, dual subordination should be avoided.

3.11.6. TYPES OF DELEGATION

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



it is advisable that delegations of authority should be precise and clearand it would be better if they were in writing.

Some people suggest that especially in the upper levels of managementif the authority delegations are specific and written, they will bring rigidityin the organization. Sometimes, particularly for new jobs at the top,delegation cannot be very specific, at least at the outset. But this situationcan remedied with the passage of time. If the delegations are not specific,it could lead to organizational frictions, unnecessary meetings andnegotiations and overlapping of activities. Therefore, delegations shouldbe specific as far as possible. The fear that specific delegations will resultin inflexibility can be best met by developing a tradition of flexibility inthe organization.

Shared and Splintered Authority

Authority is shared when it is delegated to two or more persons together.These persons are responsible for making decisions without followingthe chain of command. For instance, the chief executive of a companymay delegate his authority to production manager, marketing manager,and finance manager for diversification of company’s products. In sucha case, three persons who will take the decisions jointly for diversificationof company’s products share the authority.

Splintered authority exists wherever a problem cannot be solved withoutpooling the authority delegations of two or more persons. For instance,if the in-charge of Plant A thinks that costs can be reduced through minormodifications in procedures in Plant B, he cannot bring about this change.He will have to contact the in charge of Plant B for taking any decision;the change will take place if they pool their authority. Individually, theirauthority is said to be “splintered”. It should also be noted that theirboss could also take the same decision. Such practice should not beencouraged, as the superior will be over burdened. The managers incharge of both the plants who have splintered authority can meet andpools their authority delegated and can quickly take the decision jointly.

3.11.7. WEAKNESS OF DELEGATION IN PRACTICE

Though delegation appears to be a simple process, many difficulties comein the way of effective delegation. Either one or more of the followingsmay cause these difficulties:



(a) Superior;

(b) Subordinate; and

(c) Organization.

3.11.7. 1. Difficulties on the Part of Superior

Managerial failure in delegation arises because of the absence of one ormore of the following factors:

(i) Receptiveness. The manager must be willing to give other people’sideas a chance. But when a manager feels that he can do the jobbetter himself, he will be reluctant to delegate authority “I can do itbetter myself” fallacy obstructs delegation of authority.

(ii) Ability to direct. Lack of ability of a manager to correctly plan andissue suitable directions in guiding the subordinates, though he iswilling to delegate, creates hurdles in effective delegation.

(iii) Willingness to let go. The manager who wishes to delegateeffectively must be willing to release the right to make decisions tothe subordinates. The desire of dominance over the work ofsubordinates at each step hampers the process of delegation.Moreover, a manager may be afraid that if he lets the subordinatemake decisions, he may outshine him.

(iv) Willingness to trust subordinates and let them make mistakes.Delegation implies a trustful attitude between the superior and thesubordinate. Lack of confidence in the capacity, ability anddependability of the subordinates obstructs the superior to delegateauthority. The superior may distrust the subordinates because ofinability of the subordinates or because he does not wish to let go,does not delegate wisely or does not know how to set up controlsto assure proper use of authority. Since a manager lacks confidencein the subordinate he will not delegate authority to give them anychance to make mistakes and learn how to take correct decisions.

(v) Establishment of controls. While delegating authority, the superiormust find means of assuring himself that the authority is being usedto accomplish the given assignments. Where the manager does notset up adequate controls or has no means of knowing the properuse a authority, he may hesitate to delegate the authority.



3.11.7. 2. Difficulties on the Part of Subordinate

Delegation of authority may fail because the subordinates want to avoidshouldering responsibilities even though there is no fault on the part ofthe superior. The subordinates may be reluctant to accept authoritybecause of following reasons:

(i) Lack of self-confidence.

(ii) Desire to play safe by depending on the boss for all decisions.

(iii) Fear of committing mistakes and being criticized by the boss.

(iv) Lack of incentives. Overburdening with duties.

(v) Inadequacy of authority, information and working facilities forperforming the duties.

3.11.7. 3. Difficulties on the Part of Organization

The faults contributing to the weakness of delegation in practice may liewith the organization. They may include the following:

(i) Defective organization structure and non-clarity of authorityresponsibility relationships. (ii) Inadequate planning. (iii) Splinteredauthority. (iv) Infringement of the principle of unity of command. (v) Lackof effective control mechanism.

3.11.8. GUIDELINES FOR EFFECTIVE DELEGATION

We have discussed above the causes of weakness of delegation inpractice. If these causes are remedied, delegation will become effective.Thus, in order to achieve better delegation, consideration should be givento the following guidelines:

1. Assignments should be clearly defined in terms of goals or resultsexpected the subordinate should be given the adequate authority todo the work assigned. The limits of authority should also be welldefined.

2. Selection of persons should be done in the light of the jobs to bedone. Appointments should not be made arbitrarily as it will lead to‘square pigeons in round holes’ and vice versa. Only proper selectionis not sufficient for better delegation. The persons selected must also



be given necessary training to accept assignments and authority. Thesuperior must

(a) coach the subordinate;

(b) review his performance on the basis of predetermined standards;and

(c) counsel him for improvement.

3. Motivation of subordinates through incentives of various kinds fortheir excellent performance is also essential for better delegation.An important incentive for some subordinates is to allow them tofunction with a measure of freedom.

4. Lines of communication must be kept open from superior tosubordinate and vice versa for delegation to be meaningful. Thesubordinate should feel free to get in touch with the superior as andwhen necessary to seek clarification and guidance from the latter.The boss should also pass on all relevant information to thesubordinate promptly.

5. Proper controls should be established to provide means ofinformation regarding use of authority. The delegant must set upstandards to measure the performance of the subordinates in thelight of authority granted to the latter. Broad based controls andfrequent reviewing in respect of the use of authority by thesubordinates to perform the duties assigned make delegation ofauthority fruitful.

6. Strict adherence to the principles of delegation like parity of authorityand responsibility, unity of command and absoluteness ofaccountability is most essential for achieving better delegation.

3.12. CENTRALIZATION OF AUTHORITY

Centralization of authority means concentration of decision-making powerat the top hierarchy of management. Centralization is the systematic andconsistent reservation of authority at central points within the organization.“Under centralization, all important decisions are taken by the topexecutives; operative decisions and actions at lower levels in theorganization are subject to the close supervision of the top executives.Thus, centralization denotes that most of the decisions are taken not at apoint where work is being done but at a point higher in the organization.



As Fayol put it, “Everything that goes to increase the importance of thesubordinate’s role is decentralization; everything which goes to reduce itis centralization.”

3.12. 1.What Factors Dictate Centralization?

Centralization represents certain attitude and approach which themanagement follows. The major implication of centralization is thereservation of decision-making power in regard to planning, organizing,directing, and control at the top level. The other implications will dependon the philosophy of management for instance, in a company where thetop management is very particular about the use of authority; it will makeall the operations and decisions at lower levels subject to its approval.

The top management of a company may prefer to reserve maximumauthority with itself for the following reasons:

(i) To Facilitate Personal Leadership. Personal leadership is animportant factor for the success of small enterprises. Personalleadership is also important during the early stages of big enterprises.In both the cases, the operation is relatively on a small scale and thetop manager can concentrate entire authority with himself. This willresult in quick decisions and enterprising and imaginative action,which are essential for the success of the business.

(ii) To Promote Uniformity of Action. Where a company wishes alloperative units to do the same things in the same way and at thesame time there must be centralization of appropriate decision making.Only the top management having central authority to make decisionscan bring uniformity of action by the operating units.

(iii) To Provide for Integration. A certain degree of centralization ofauthority is necessary to unite and integrate the total operations ofthe enterprise. This is the coordination function of management. Ifthe management has to perform this function better, it must reservesome authority with it, yet centralized control is needed to keep allthe parts of the enterprise moving harmoniously towards a commonobjective.

(iv) To Handle Emergencies. Centralization of decision - makingessential when the business conditions are uncertain. There arechances that emergency conditions may develop to endanger the



very existence of a company. Centralization will help in taking rationaldecisions from both short as well as long-term perspectives to meetsuch uncertainties.

3.12. 2. Decentralization of Authority

Decentralization means dispersal of decision-making power to the lowlevels of the organization. McFarland has defined it as a situation in whichultimate authority to command and ultimate responsibility for results islocalized as far down in the organization as efficient management of theorganization permit. According to Allen, “Decentralization refers to thesystematic effort to delegate to the lowest levels all authority except thatwhich can only be exercised at central points.” Thus, decentralizationmeans reservation of some authority (power to plan, organize, directand control) at the top level and delegation of authority to make decisionsat points as near as possible to where actions take place.

3.12. 3. What factors bring about decentralization?

The important factors that cause decentralization of authority are asfollows:

Decentralization is facilitated when need is realized to take quick andappropriate decision on the spot at a level at which it is really required,with a view to cash on the opportunity present.

When the top management wants to reduce communication,decentralization is preferred.

(i) The nature of the company’s products or markets may requiredecentralization of decision - making to provide special emphasison a product line or a market. Technological changes may also createconditions favorable to decentralization.

(ii) Growth and diversification of activities of the company may makedecentralization necessary to introduce flexibility in operation,facilitate good direction and to relieve the top executives of theburden of extra work.

(iii) Physical dispersion of activities of the company may requiredecentralization of authority for better results.

3.12. 4. Degree of Decentralization

Some degree of decentralization is usually found in every big enterprise.Allen has given three criteria to judge the degree of decentralization.They are:



(i) What kind of authority is delegated?

(ii) How far down in the organization is it delegated?

(iii) How consistently is it delegated?

These three criteria may be applied to know the degree of decentralizationin different areas like appointment of employees, promotion of employees,acquisition of capital equipment, approval of travel expenses,procurement of raw materials, etc.

Ernest Dale has given four tests to know the degree of decentralizationin an organization. The degree of decentralization of authority is greaterwhen:

(i) The number of decisions made lower down the management hierarchyis greater.

(ii) The more important decisions are made lower down the managementhierarchy. For example, the greater the sum of capital expenditurethat can be approved by the plant manager without consulting anyone else, the greater the degree of decentralization in this field.

(iii) More functions are affected by decisions made at lower levels. Thus,companies, which permit only operational decisions to be made atdifferent plants are less decentralized than those which also permitfinancial and other decisions at the plant level.

(iv) There is less checking on the decisions taken at the lower levels.Decentralization is greater when no check at all must be made; lesswhen superiors have to be informed of the decision after it has beenmade; still less if superiors have to be consulted before decision ismade. The fewer the people to be consulted, and the lower they areon managerial hierarchy, the greater the degree of decentralization.

3.12. 5. Decentralization is Extension of Delegation

Decentralization is not the same thing as delegation. It is something morethan delegation. Delegation means entrustment of responsibility andauthority from one individual to another. But decentralization meansscattering of authority throughout the organization. It is the diffusion ofauthority within the entire enterprise. Delegation can take place fromone person to another and be a complete process. But decentralizationis completed only when the fullest possible delegation is made to all or



most of the people. Under delegation, control rests entirely with thedelegant, but under decentralization, the top management may exerciseminimum control and delegate the authority of controlling to thedepartmental managers. It should be noted that complete decentralizationmay not be possible or desirable but it certainly involves more than onelevel in the organization.

3.12. 6. Distinction between Delegation and Decentralization

Decentralization is the result of delegation. It is a management philosophywhereby the centers of decision-making are dispersed at various levelsin the organization. The points of distinction between delegation anddecentralization are given below:

1. Delegation is a process of devolution of authority whereasdecentralization is the end-result, which is achieved when delegationof authority is exercised at more than one level.

2. Delegation takes place between a superior and a subordinate and isa complete process. It may consist of certain tasks alone. Butdecentralization involves spreading out the total decision-makingpower throughout the organization.

3. In delegation, control rests entirely with the superior but indecentralization, the top management may exercise control only in ageneral manner and delegate the authority for control to thedepartmental managers.

4. Delegation is a must for management. Subordinates must be givensufficient authority to perform their assignments otherwise they willcome to the superior time and again even for minor decisions.However, decentralization is optional in the sense that the topmanagement may or may not decide to disperse authority.

3.12. 7. The advantages of decentralization are discussedhereunder:

(i) Reduction in the Burden of Chief Executive. When there iscentralization of authority in an enterprise, the chief executive alonehas to bear the entire burden of decision-making. This diminishesthe time at his disposal to concentrate on important managerialfunctions. Decentralization of authority reduces his burden as hedelegates a major part of his authority to his subordinates and thiswill enable him to devote more time on important functions.



(ii) Quick Decisions. Decentralization avoids red-tapism in makingdecisions as it places responsibility for decision-making as near aspossible with the place where actions take place. Those closest tothe work situation can make reasonably quick and accurate decisions;because they are well aware of the realities of the situation.Decentralization also minimizes the delay in transmitting informationfrom and to the workplace.

(iii) Diversification of Activities. With the addition of new productlines, an organization may grow complex and pose a challenge tothe top executives. The challenge can be met effectively bydecentralizing the authority under the overall coordinating purviewof the top management.

(iv) Development of Managerial Personnel. When authority isdecentralized, the subordinates get the opportunity of taking initiativeto develop their talents and to enable them to develop qualities formanagerial positions. They learn how to decide and depend on theirown judgment and how to manage. This will lay down the foundationfor the growth of prospective managerial personnel.

(v) Effective Control and Supervision. The greater the degree ofdecentralization, more effective is the span of control. It leads toeffective supervision as managers at the lower levels have completeauthority to make changes in work assignment, to change productionschedules, to recommend promotions and to take disciplinary actions.

(vi) Effective Coordination. Under decentralization, coordinated effortsare required only at the levels of segments created bydecentralization. This makes coordination more effective.

(vii) Improvement of Motivation and Morale. Decentralization ofauthority fulfils the human needs of power, independence and status.It gives the local executives an opportunity to take initiative and totry new ideas. This improves their motivation and heightens theirmorale. This will also foster team spirit and group cohesivenessamong the subordinates.

(viii) Miscellaneous Economies. In addition to the above advantages,decentralization also achieves several internal and externaleconomies. Internal economies include speedier communication,better utilization of lower level and middle level executives, greater



incentive to work and greater opportunities for training. These makeit possible for the management to reduce the cost of production andmeet competition effectively.

3.12. 8. Limitations of Decentralization

There are certain disadvantages and limitations of decentralization whichare discussed below:

1. Decentralization increases the administrative expenses because itrequires the employment of trained personnel to accept authority.The services of such highly paid personnel may not be fully utilizedparticularly in small organizations.

2. Decentralization requires the product lines of the concern to be broadenough to allow creation of autonomous units, which is not possiblein small concerns.

3. Decentralization of authority may create problems in bringingcoordination among the various units.

4. Decentralization may not be possible because of external factors. Ifa company is subject to uncertainties, it will not be able to meetthese under decentralization.

5. Decentralization may bring about inconsistencies in the company.For instance, uniform procedures may not be followed for the sametype of work in various divisions.

From the above discussion, we can say that decentralization requires abalance of necessary centralization of important managerial functionsand creation of certain facilities. Firstly, managers capable of undertakingthe operations of the autonomous business units must be developed.Secondly, provision must be made for coordination and communicationbetween various units. Finally, effective decentralization requiresadequate controls. Unless the top managers have a well establishedsystem for measuring the operating results, it is very difficult to achievethe benefits of effective decentralization.

3.12. 9. Centralization vs. Decentralization

When a firm establishes divisions or departments, when the departmentalmanagers are given considerable freedom or autonomy in decision-making



and when there are reasonably effective ways of evaluating theperformance of each division, the firm is considered to be decentralized.To the extent that an organization does not delegate a large part ofresponsibility and authority in decision-making, the organization isconsidered to be centralized. Centralization and decentralization are theopposite ends of the organization continuum. On the one hand,centralization produces uniformity of policy and action, utilizes the skillsof centralized and specialized staff, and enables closer control overoperating units. And on the other hand, decentralization tends to effectfaster decision-making and action on the spot without consulting higherlevels. Decentralization has the effect of motivating the subordinates sincethey get a greater share in management decision-making.

3.12. 10. Balance between Centralization and Decentralization

Centralization and decentralization are the opposite ends of anorganization continuum. In practice, there is neither completecentralization nor complete decentralization. Both are relative conceptsbecause every organization structure contains both features in differentdegrees. Absolute centralization is not found in practice because it wouldmean taking of all decisions by the top management, which may lead toconsiderable cost and delay. Absolute decentralization is also not feasiblebecause in that case entire authority will be delegated to the lower levelsand the top management will be left with no authority at all. Even in ahighly decentralized structure, some authority is reserved at the center.Unless the top management (central authority) does the work of overallplanning, organization, direction and control and takes the policy decisionsnecessary to coordinate the affairs of different units or divisions, thecompany will disintegrate.

Many organizations find difficulties in deciding the appropriate mix ofcentralization and decentralization, which would be most appropriatefor achieving the organization objectives. Let us take the case of anorganization with a highly centralized organization structure. In this case,the top management is concerned in detail with the ongoing operations.This requires a mass of detailed information. A time may come when thevolume of information grows to exceed the capacity of the topmanagement to handle and use it. This may compel the top management



to think of reducing the degree of centralization and increasing the degreeof decentralization. It may be pointed out that when there is a high degreeof centralization, the operating managers become frustrated, as they can’ttake quick decisions. Moreover, an operative decision made at the topmay not be fully effective.

If the degree of decentralization practiced is quite high, the activities ofvarious divisions may tend to become uncoordinated and conflicting.This may impel the organization structure towards recentralisation. Butthe management would certainly be interested in finding the ways toovercome the problem of oscillating between two organization structures.The important factors which should be considered to determine therelative degree of centralization and decentralization required arediscussed below:

(i) Size and Complexity of Organization. The larger the size of theorganization, the more authority and responsibility should bedelegated to the subordinates. If the operations of the organizationare not complex, there is higher need of decentralization. On theother hand, if the firm is relatively small and carries on simpleoperations, centralization of authority should be advocated.

(ii) Competence of Personnel. If personnel capable of making intelligentdecisions at the lower levels are available, it is advisable for the firmto move towards decentralization. If the management personnel arefollowers and lack initiative, the firm should follow a highly centralizedstructure.

(iii) Effectiveness of Communication System. The existence of anadequate and effective communication system will favor centralizationof authority because it would be easier to control the operationalunits. The advent of computerized management information systemhas increased the capacity of managers to take effective decisions.If the communication system is ineffective, decentralization shouldbe advocated.

(iv) Dispersion of Organization Units or Plants. If the firm is havinga number of plants, which are located at different places,decentralization is more beneficial. However, the finance functionshould be centrally controlled in order to ensure effective controlover the assets and capital expenditure of the organization.



(v) Degree of Standardization. The greater the degree ofstandardization in the organization, the greater is the degree ofcentralization. Control becomes easier if uniformity of operationscan be introduced. Only the centralized structure can bring uniformityof actions at the operative levels.

(vi) Complexities of Situation. The situational factors also influencethe degree of centralization required for the organization. For instance,when the business conditions are highly uncertain and there is everychance that some conditions may develop to endanger the veryexistence of the organization, centralization should be advocated todeal with such situations in the future. Centralization will help in takingrational decisions from both short as well as long-term perspectivesto meet such challenges.

3.13. SPAN OF MANAGEMENT OR SPAN OF CONTROL

The term ‘span of management’ is also known as ‘span of control,’ ‘spanof supervision’ and ‘span of authority’. It represents a numerical limit ofsubordinates to be supervised and controlled by a manager. It is animportant principle of sound organization. This principle is based on thetheory of relationships propounded by V.A.Graicunas, a Frenchmanagement consultant. Graicunas analyzed superior-subordinaterelationships and developed a mathematical formula based on thegeometric increase in complexities of managing as the number ofsubordinates’ increases.

3.13. 1. SPAN OF CONTROL

According to the principle of the span of control (also called span ofmanagement/supervision) there is a limit to the number of subordinateswhich a manager can effectively supervise. It states that a single executiveshould have more people looking towards him for guidance and leadershipthan he can reasonably be expected to serve. Because of personallimitations arising from lack of complete and sufficient knowledge, limitedtime, limited finance, a manager has to delegate work to as manysubordinators working in various departments as he can effectivelymanage. Thus, the principle of span of management presupposesdepartmentation and delegation of authority.

The ideal ratio was considered to be 15 to 25 subordinates for first levelsupervision and 5 to 8 subordinates in executive spans.



3.13. 2. IMPACT OF SPAN OF SUPERVISION

The number of persons an executive supervises has an important influenceon the nature of organization structure. If the span is large, it means thatfewer levels are needed in the organization. The structure would tend tobe flat and wide. Presumably the possibility of communication blockageswould be minimized because more people report directly to the topexecutive. If the span is small, the structure would be narrow and deep.There would be more levels in the organization. More people will haveto communicate to the top manager through intervening layers ofexecutives. The possibility of communication blockages and distortionswould increase.

3.13. 3. WIDE SPAN OF SUPERVISION

When the span of supervision is wider, the number of executives neededto supervise the workers will be less. This will make the organizationstructure wide. Such a structure would be less expensive because of lessoverhead costs of supervision. Since the number of levels is less, therewill be better communication between the worker and the managementand better coordination. However, the quality of performance is likely todeteriorate because one executive cannot effectively supervise a largenumber of subordinates. Supervisor will not be able to devote sufficienttime in directing each and every subordinate.

For instance, if there are 256 persons in an organization and all arereporting to one executive, there will be one level of management. If it isthought that only four subordinates should directly report to the chiefexecutive, then the number of management levels will increase to two asfour executives directly report to the top executive and each executivecontrols 64 persons as shown in Fig.1

Chief Executive-1

II Level Executives=4

Workers = 25664W 64W 64W 64W

Fig 1- Flat Structure (Span of control=64)



Tall Structure (Span of control=4workers)

Chief Executive-1

II Level Executives=4

III Level Executives=16

Fig 2-Tall Structure (Span of control=4workers)

This structure is flat as the span of control is very large at the lowestlevel and there are only two layers of management. If it is thought that anexecutive can manage only 4 subordinates effectively, the number ofmanagerial levels will increase to four as shown in Fig. 2. This will makethe organization structure look like a tall pyramid.

3.13. 4. NARROW SPAN OF SUPERVISION

The narrow span of supervision will lead to a tall structure and to anincrease in the executive payroll as compared to the flat structure. Anotherdrawback is that the additional layers of supervisors will complicatecommunication from the chief executive down to operative employeesand back up the line. There will also be a problem of effectivecoordination of the activities of different persons in the organizationbecause of more levels of executives. However, the narrow span ofsupervision has the benefit of better personal contacts between thesupervisors and the subordinates. It facilitates tight control and closesupervision. Tall organization structure gives sufficient control to anexecutive for developing relations with the subordinates.

In recent years, there has been a controversy around the significance ofthe concept of span of control. The transformation in the style of decision-making has had an inevitable bearing on question relating to the numberof people an executive can supervise. Moreover, the use of delegationand decentralization is highly advocated these days. It is realized thatnarrow span of control is an effective means of forcing the executives todelegate. It is also argued that if an executive has enough number ofsubordinates to supervise, there is a point beyond which intimate controlbecomes very difficult. But how this point should be determined is themain question.



3.13. 5. FACTORS DETERMINING SPAN OF SUPERVISION

The span of control varies from individual to individual, time to time andplace to place. The factors which determine the span of control arediscussed below:

1. Ability of the Managers. Individuals differ in various qualities likeleadership, decision-making and communication. The span may bewider if the manager possesses these skills in greater degree ascompared to others.

2. Time available for Supervision. The span should be narrow atthe higher levels because top managers have less time available forsupervision. They have to devote the major portion of their time toplanning, organizing, directing, and controlling. Each top managerwill delegate the task of supervision to his subordinates who have todevote comparatively less time on the important functions ofmanagement.

3. Nature of Work. When the spans are narrowed, the levels in theorganization increase. This involves delegation of authority andresponsibility. If the work is of a routine and repetitive nature, it caneasily be delegated to the subordinates.

4. Capacity of Subordinates. If the subordinates are skilled, efficientand knowledgeable they will require less supervision. In such a case,the superior may go in for a wider span.

5. Degree of Decentralization. Under decentralization the power tomake decisions is delegated to the lower levels. The span ofmanagement will be narrow in such cases so as to exercise moreand more control.

6. Effectiveness of Communication. An effective system ofcommunication in the organization favors large number of levelsbecause there will be no difficulty in transmission of information inspite of a large number of intervening layers.

7. Control Mechanism. The span of control also depends upon thecontrol mechanism being followed. Control may be followed eitherthrough personal supervision or through reporting. The former favorsnarrow span and the latter favors a wide span.



To sum up, it can be said that an executive should be expected tosupervise a reasonable number of subordinates. What is reasonabledepends on a variety of factors like individual differences in executives,number and capacity of subordinates, the nature of work, availability oftime, ease of communication, internal checks and controls and degree ofdelegation in the organization. If the span of control is narrow, there willbe more organizational levels, which in turn may impede communication.If the number of levels is reduced and the span of control is widened, thesupervisory load may become too heavy. Sound management requires aproper balance between supervisory load and organization levels.

3.14. ORGANIZATION CHARTS

A major reason why conflicts occur in organizations is that people donot understand their assignments and those of their coworkers. No matterhow well conceived an organization structure might be, people mustunderstand in order to make it work. Understanding is aided to a greatextent by the proper use of organization charts. Every organizationstructure can be charted, even a poor one, for a chart merely indicateshow departments are tied together along the principal lines of authority.Organizational charts range from simple drawings, which merely outlinethe structure of major units to very complex drawings, which attempt toinclude all minor units as well and which purport to show minor variationsto level of authority, cross - relationships among departments, andsometimes other features.

3.14. 1. DEFINITION

An organization chart is a diagrammatical form, which shows importantaspects of an organization including the major functions and theirrespective relationships. In other words, it is a graphic portrayal ofpositions in the enterprise and of the formal lines of communication amongthem. It provides a bird’s eye view of the relationships between differentdepartments or divisions of an enterprise as well as the relationshipsbetween the executives and subordinates at various levels. It enableseach executive and employee to understand his position in the organizationand to know to whom he is accountable. Thus, it is obvious that anorganization chart has the following characteristics:

1. It is a diagrammatical presentation.

2. It shows principal lines of authority in the organization.



3. It shows the interplay of various functions and relationships.

4. It indicates the channels of communication.

The organization chart should not be confused with the organizationstructure. An organization chart is merely a type of record showing theformal organizational relationships which management intends shouldprevail. It is primarily a technique of presentation. It presentsdiagrammatically the lines of authority and responsibility among differentindividuals and positions. It may be either personnel or functional.Personnel organization chart depicts the relationship between positionsheld by different persons. Functional organization chart depicts thefunctions or activities of each unit and subunit in the organization.

Master and Supplementary Charts

Master chart shows the whole structure of the enterprise portraying allpositions and relationships. It provides a clear picture of the entireorganization structure. Supplementary charts are used to separately showdepartment wise structure portraying the positions and relationships withineach department. Such charts are popular in big organizations where it isdifficult to show the necessary details through the master chart.

Advantages of Oganization Chart

Following are the advantages of an organization chart:

(i) It is a tool of administration to tell the employees how their positionsfit into the total organization and how they relate to others.

(ii) It shows at a glance the lines of authority and responsibility. It is areliable blueprint of how the positions are arranged. From it, theindividuals can sense the limits of their authority, and can see whotheir associates are, to whom they report and from whom they getinstructions.

(iii) It serves as a valuable guide to the new personnel in understandingthe organization and for their training.

(iv) It provides a frame-work of personnel classification and evaluationsystems.

(v) It plays a significant part in organization improvement by pointingout inconsistencies and deficiencies in certain relationships, whenmanagement sees how its organization structure actually looks, itmay discover some unintended relationships.



Limitations of Organization Chart

While the organization chart is an important tool of management, its mereexistence does not ensure effective organization because of the followinglimitations:

(i) Organization chart shows only the formal relationships and fails toshow the informal relations within the organization. In modernenterprises, informal relationships exert important influence on variousdecisions.

(ii) It shows the lines of authority, but is not able to answer the questionslike how much authority can be exercised by a particular executive,how far he is responsible for his functions and to what extent he isaccountable.

(iii) It shows a static state of affairs and does not represent flexibility,which usually exists in the structure of a dynamic organization.

(iv) It introduces rigidity in the relationships. Updating is not possiblewithout disturbing the entire set-up.

(v) Faulty organization chart may cause confusion and misunderstandingamong the organizational members. Moreover, it gives rise to a feelingof superiority and inferiority, which causes conflicts in theorganization.

(vi) It does not show the relationships, which exist actually in theorganization, but shows only the ‘supposed to’ relationships.

Despite these limitations, an organization chart is a must for all enterprises.It can serve as a useful tool of management. It is a reliable blueprint ofhow positions are related to each other. It shows the employees howtheir positions fit into the organization and how they relate to others. It isa must to create a proper understanding about the organization structure.

3.15. TYPES OF ORGANIZATION CHARTS

There are three types of organization charts, viz., (a) Vertical that isfrom top down; (b) Horizontal that is from left to right; and (c) Circularor concentric. These are briefly discussed below:

(a) Vertical Chart: Most organizations use this type of chart whichpresents the different levels of organization in the form of a pyramid



with senior executive at the top of the chart and successive levels ofmanagement depicted vertically below that. Thus, lines of commandproceed from top to bottom in vertical lines as shown in Fig.

Fig -Vertical Chart(b) Horizontal Chart. Horizontal charts, which read from left to right,

are occasionally used. The pyramid lies horizontally instead ofstanding in the vertical position. The line of command proceedshorizontally, i.e., from left to right showing top level at the left andeach successive level extending to the right as shown in Fig.

However, this chart does not decrease the importance of levels. But it isfeared that some people may make erroneous inferences about differencesin status and importance of various echelons.

(c) Circular Chart. In this chart, top positions are located in the centerof the concentric circle. Positions of successive echelons extend inall directions outward from the center. Positions of equal status lie atthe same distance from the center on the same concentric circle.This chart shows the flow of formal authority from the chief executive



in many directions. The main weakness of this chart is that it is oftenconfusing.

3.16. LINE AND STAFF ORGANIZATION

The question of how to establish the right organization structure confrontsevery manager. A small organization may have a simple structure that iseasily understood. It may even be informal and can be subjected to suddenand frequent changes. By contrast, large and complex organizationsusually have a highly rigid, formalized structure. Determining the mostappropriate organization structure is a difficult job. Three organizationstructures namely, line, functional, line and staff are commonly employed.Each structural pattern has distinct advantages and disadvantages.

Line Organization

The line, or military organization, is the simplest and the oldest form oforganization. Line structures are more common in small-scale units.Authority flows in a direct line from superiors to subordinates. Eachemployee knows who his superior is and who has authority to issue orders.The one-man one boss principle is strictly applied. Managers have fullauthority in their own areas of operation and are responsible for finalresults. Similarly, each subordinate is directly responsible for theperformance of assigned duties. If the subordinates fail to carry outreasonable orders or directives, the superior has the right to takedisciplinary action. Thus, authority flows downward and responsibilityflows upward, throughout the organization. The essential characteristicsof line organization is the flow of authority that is straight and vertical. Inline organization, every superior enjoys line authority. This is often referredto as direct authority because it is directly associated with the attainmentof the primary objectives of the organization. In other words, line authorityimplies the right to give orders and to have decisions implemented. Forexample, in a military organization, the General has line authority overthe Colonel, who has line authority over the Major, and so on down thehierarchy. Figure provides an illustration of a line Chief .



Chief Executive

Sales Production Finance

Foreman A Foreman B Foreman C

Workers Workers Workers

Figure - Line Organisation

Advantages and Disadvantages of Line Organization

Advantages

The advantages of line organization include the following:

(i) Simplicity: A line organization is simple to establish and easy toexplain to employees. It is easy to understand and follow.

(ii) Fixed responsibility: Responsibility is fixed. Each employee knowswho his superior is and who has authority to issue orders. Eachemployee knows to whom he is responsible and who is or are, inturn, responsible to him. This facilitates the fixing of accountabilityfor non-performance.

(iii) Quick decisions: In a line organization, one executive controls allthe activities affecting one department. He is in complete charge ofall operations in the department. Direct lines of authority eliminate aconsiderable amount of bureaucratic buck-passing, thus the lineorganization enables a manager to take quick decisions.

(iv) Develops managers: The line manager is responsible for results.He is charged with getting things done properly. Non-performancemay mean demotion and loss of prestige. To survive and succeed,he has to accomplish tasks, thus utilizing his potential fully. It can beconcluded then that a line organization encourages and forcesmanagers to grow.



(v) Flexibility: Each executive has full freedom to make decisions in hisarea of command. This enables him to adjust policies and proceduresto the changing needs.

(vi) Economical: A line organization is economical for a small business,as no specialists are needed, and a limited number of executives areemployed. Quick decisions, better coordination and prompt actionscontribute greatly to organizational success.

Disadvantages

The line organization is not free from limitations. As organizations beginto grow in size, the line organization becomes unwieldy and unsuitable.The disadvantages may be catalogued thus:

(i) Lack of specialization: With growth and diversification,organizational problems multiply in number. Factors like changingeconomic conditions, technological innovations, and ever growingcompetition turn administration into a funnel where the executivesmay find it extremely difficult to process bundles of data and takeappropriate decisions.

(ii) Scarce talent: Capable line executives who can look after suchdiverse activities like planning activities, office operations, researchactivities, personnel policies, etc., are rarely available. With growth,the manager’s duties, too, continue to expand. Working under timeand cost constraints, managers may overlook or ignore importantactivities and are forced to grapple with trivial issues.

(iii) Arbitrary actions: Line organization is based on the one-manmanagement principles. The evils are well known. Work may bedivided arbitrarily and assigned to incompetent individuals. Nepotismand favoritism may prevail in the selection, recruitment, and trainingof operatives.

Line and Staff Organization

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



the staff organization is superimposed on the line organization, the resultis a line-staff organization. The line organization is paramount and thestaff organization is created to service it. The role of staff is considered a‘service’ to managers. Two features characterize it: it provides serviceto the line and it is devoid of the right to command. The staff man advises,but his sole authority lies in the authority of ideas. On the other hand,two important features, the rights to decide and right to direct characterizeline authority. Line elements have a ‘direct responsibility for theaccomplishment of the objective of an enterprise’. They have the ultimateauthority to command, act, decide, approve or disapprove of all theorganizational activities. Both line and staff department managers exerciseline authority over their immediate subordinates. In fact, all managersexercise line authority over their subordinates.

Advantages of Line and Staff Organization

Important advantages of line and staff organization may be listed thus:

Table - Differences between Line organization, Line and Staff organizationand Functional Organization

Line organization Line and Staff Organization Functional Organization

Suitability

where the

This is suitable for small enterprises,

work is simple and routine in nature.

Line and Staff organization is suitable for medium and large enterprises.

Suitable for large enterprises.

Simplicity and

Economy

It is simple to understand. The organization does not require the employment of specialists and experts as staff assistants. The extra expenditure in employment is saved.

This is also very complex. Experts and specialists demand high wages. This increases the cost of administration inevitably.

The relationships are complex. Functional organization is also expensive because of division of activities.

Unity of command

The principle of unity of command is followed becauseauthority flows vertically.

special

The principle of unity ofcommand is not followed because advice is sought from

ists.

Principle of unity of command is not followed because employees get instructions from more than one superior.



Lack of Specialization

Managers are responsible for all the activities of their departments. Hence, specialization in one area is not possible.

There is specialization and division of labor. Experts and specialists are appointed to give advice to line executives.

There is complete specialization and more importance is attached to specialists working at various levels.

Discipline There is strict discipline. It is because of well-defined chain of command.

There is loose discipline because authority and responsibilities of position holders are not clearly defined.

There is loose discipline because authority relationships are not clearly defined.

Division of work

The workload of a manager increases because he has to perform a wide variety of functions.

The workload of managers is relatively less.

Workload of managers is uneven. This is because some managers have only line or staff authority while others have functional authority.

(i) Planned Specialization- As business grows, the pure lineorganization may overburden the line managers with complexproblems, and the need for staff assistance would be felt acutely.The primary advantage of line and staff organization is that it usesthe expertise of specialists, i.e., it brings expert knowledge to bearupon managerial and operational problems. Line executive can thenplan effectively and be responsible for proper execution while thestaff specializes to assist as and when needed.

(ii) Scientific actions: The actions of a line manager can become morescientific by means of concentrated and skilful examination ofbusiness problems. Expert advice definitely helps line executives inarriving at a sound decision.

(iii) Definiteness: In a line-staff organization, authority and responsibilityare fixed. The unity of command principle is honored as eachindividual reports to only one superior, while specialized help isavailable as and when needed. In addition, accountability is definite.Only line executives are accountable for the results of their divisionsor departments. Undivided responsibility compels line executives toenforce discipline strictly. Control and coordination are effective.



(iv) Training ground for developing people: As everyone is expectedto concentrate on one area, one’s training needs can be expressedeasily. Line managers can improve their problem-solving abilities byobserving staff specialists’ work on complex problems. Similarly,working with line people, staff specialists can try to overcome their‘parts mentality’ and begin to view problems more rationally andobjectively.

Line and Staff Authority

Classical writers (Taylor, Fayol, Weber) based their explanations ofline authority on simplistic assumptions. It is said that line authority is theultimate authority to command, act, decide, approve or disapprove allthe activities. It is quite possible to classify finance or personnel as astaff function, but it is a serious mistake to assume that either is insignificant.Statements that line is associated with the final objectives or organization,or line elements are income-producing components of the organizationcreate an erroneous impression that staff functions are of secondaryimportance and unimportant.

Efforts to classify such functions, like product research and development,production processes as staff and line, proved useless in the past. Thecustomer pays for a product whose qualities are determined by designas well as manufacturing. Designating one function as highly importantcontributes to the overall objectives of the organization and relegatingthe other as an unimportant level appears to be a superficial exercise.

Who is Staff?

Staff authority is advisory, which means that the staff is a supporting unitthat recommends action or alternative actions to the line manager. Catchphrases like: “staff have the authority of ideas”, “lines have the authorityof command” “staffs think, lines do”; “staffs advise, lines work” havegained wide currency over the years. However, staff authority is notconfined to mere advisory roles of recommending activities only.According to McFarland a staff manager helps, serves, investigates,plans, solves special problems, supports line efforts, and provides ideasand special expertise. The above functions are supporting functions;functions that help in some way the accomplishment of the primaryobjectives of the line departments. One distinguishing feature of staff



functions is regarding the right to command, and direct others. Staffpositions are devoid of the right to command, staff work is essentiallyan intellectual process consisting of such activities like planning, thinking,studying, informing, recommending, persuading and suggesting, and soon. Even the above seemingly sensible explanations fail to answer certainquestions associated with classification of organizational function in auniversity, teachers are line. But what about people who are wedded toresearch activities? In a hospital, do nurses have line or staff authority?Experts are not always in agreement on these issues. Such borderlinefunctions defy clear-cut classification. Many functions are obviously lineor obviously staff (Brech).

Peculiarities of Line and Staff Relationship

The principles enunciated by the traditional theorist have been underattack for years either because they are too general or too specific fororganizational application. In this section, we will examine peculiaritiesof line-staff relationship.

One Center of Authority (Etzioni): It is one of the basic features ofclassical organization structures to have one and only one center ofauthority. This is often vested in the role of the head (line manager) ofthe organization. He is the ultimate authority in the internal structure andis finally responsible for organizational activity. As such, it is believedthat line people are more committed or loyal to the organizational goals.Staff experts are more oriented towards their professional referenceand membership groups. They are thought to make a narrower,occupational view of the firm’s problems.

Peculiar Subordinate Relationship (Dubin): It is the leader who hasthe power to make decisions that guides the actions of all including staffofficers. But at the same time there enters into this very decision makingprocess the contribution of the staff specialist in their area of competence.The president of a company, for example, may issue orders regardingthe production schedule which becomes binding on the operatingdepartments but before the schedule is validated by the president andissued as a directive, the staff specialists in marketing, production,



purchasing, etc., may have influenced the contents in the schedule. Theconcept of extending the personality of the line executive by advice,counsel appears to be the keystone of the staff idea. (Inffiner andShertmod)

Staff Obedient to an Impersonal Body of Rules: In all bureaucraticorganizations, authority is delegated to lower levels. The leader has themaximum authority by virtue of his position in the organization. The leadermay change, retire or die but the office of the leader retains the authoritythat goes with it. “Staff obedience to the leader and to the organization isin terms of impersonal body of rules that establish the governmentalframework of the organization.” (Dubin)

False Assumptions (Carzo): The line and staff structure seems to sufferfrom some false assumptions: (a) Staff specialists are able and willing tooperate without formal authority. They would be reasonably content tofunction without a measure of formal authority. (b) Their advice,suggestions and recommendations will be readily accepted and appliedby the line officials. (c) A clear delineation of line responsibilities is possibleand is essential to minimize jurisdictional conflict.

3.17. Committee

Committees exist both in business and non-business organizations. It isdifficult to give a precise definition of the term “ Committee”.

Because there are many different kinds of committees and the conceptof committee varies widely from one organization to another. In manyorganizations, committees constitute an important part of the organizationstructure. Committees are usually relatively formal bodies with a definitestructure. They have their own organization. To them are entrusted definiteresponsibility and authority. A committee may review budgets, formulateplans for new products or make policy decisions. Or the committee mayonly have a power to make recommendations and suggestions to adesignated official.

According to Louis A. Allen, “A committee is a body of persons appointedor elected to meet on an organised basis for the consideration of mattersbrought before it.” A committee is a group of persons performing a grouptask with the object of solving certain problems. The area of operationof a committee is determined by its constitution. A committee may



formulate plans, make policy decisions or review the performance ofcertain units. In some cases, it may only have the power to makerecommendations to a designated official. Whatever may be the scopeof their activities, committees have come to be recognized as an importantinstrument in modern business as well as non-business organizations.They help in taking collective decisions, coordinating the affairs of differentdepartments and meeting communication requirements in the organization.

Generally, committees are constituted to achieve one or more of thefollowing objectives

(i) to have consultation with various persons to secure their view-pointson different aspects of business.

(ii) to give participation to various groups of people.

(iii) to secure cooperation of different departments.

(iv) to coordinate the functioning of different departments and individualsby bringing about unity of direction.

Types of Committee

According to the nature of their constitution and functions, committeescan be classified as follows:

(i) Line and Staff Committees. If a committee is vested with theauthority and responsibility to decide and whose decision isimplemented invariably, it is known as a line committee. For example,board of directors of a company is a line committee of therepresentatives of its members, which is authorized to take andimplement, policy decisions. On the other hand, if a committee isappointed merely to counsel and advise, it is known as a staffcommittee. For instance, a committee composed of the heads ofvarious departments may meet at periodical intervals to counsel thechief executive.

(ii) Formal and Informal Committees. When a committee isconstituted as a part of the organization structure and has clear-cutjurisdiction, it is a formal committee. But an informal committee isformed to advise on certain complicated matters on which themanagement does not want to set up formal committee, which is acostly device. Informal committees do not form part of theorganization structure.



(iii) Standing and Ad hoc Committees. Formal committees, which areof permanent character, are known as standing committees. Ad hoccommittees are temporary bodies, which may be formal or informal.An ad hoc committee is appointed to deal with some special problemand stops functioning after its job are over.

(iv) Executive Committee. It is a committee which has power toadminister the affairs of the business.

(v) Coordinating Committee. Such a committee is generally constitutedto coordinate the functioning of different departments. It consists ofthe representatives of different departments who meet periodicallyto discuss their common problems.

In addition, a business enterprise may have other committees like (a)Finance Committee, (b) Planning Committee, (c) Production Committee,(d) Workers’ Welfare Committee, and so on.

Why are Committees Used?

A committee is used almost invariably to carry out responsibilities, whichcannot be undertaken by a single person. Committees have certaininherent advantages because people in groups react differently frompeople as individuals. The advantages or merits are discussed below:

1. Pooled Knowledge and Experience. A committee is an effectivemethod of bringing together the collective knowledge and experienceof a number of persons to solve many intricate problems that arebeyond the reach of a single person. In a committee, such membersmay be taken who are experts in their fields. This will help inconcentrating knowledge and judgment of experts for the solutionof the intricate problems.

2. Enforces Participation. A committee tends to enforce participationby different people in the organization. A major source of resistanceto new policies and plans by those who are asked to carry them outis lack of participation on their part at the planning stage. Themanagement can give representation to the employees in variouscommittees. This will motivate the employees for better performanceas they feel that they have a say in the affairs of the organization.

3. Facilitates Coordination. When it is necessary to integrate varyingpoints of view, which cannot conveniently be coordinated by



individuals, the committee may be used to bring about coordination.A committee consists of representatives of different departments orpersons who represent different points of view, who will sit arounda table and discuss their common problems. The direct contactamong various individuals will bring about proper understanding andcoordination in the activities of various departments and individuals.

4 Overcoming Resistances. The committee is an important meansof cooling off agitation and temper on the part of affected people.Establishment of a committee is recognized as a strategy forovercoming resistance, opposition or pressure from the affectedparties. For purposes of strategy, committees have a widerapplication in Government, educational, and other non-businessinstitutions.

5 Checks against Misuse of Powers. It acts as a check andsafeguard against the abuse and misuse of powers. The Governmentsof all nations establish numerous boards and commissions tocircumscribe the executive authority and to hold it in balance. Pluralexecutives in the form of committees are more common innon-business organizations than in business organizations.

Limitations of Committees.

Some people consider committee as an organised means of passing thebuck. A committee is created when some top people can’t make uptheir minds and they want a committee to do it for them. Though use ofcommittees brings about certain advantages, they have certain inherentdrawbacks also which are discussed below:

1. Evasion of Decision-making Responsibilities. If a manager hasan opportunity to carry a problem to a committee, he may take it asa means of avoiding decision-making or to escape the consequencesof an unpopular decision. Thus, managers, who want to avoid thelaborious and difficult process of logical thinking that leads to a sounddecision and to escape responsibility, take resort to committeedevice.

2. Slow Decision-making. Committees take more time in proceduralmatters before any decision is taken. In some cases, slownessseriously handicaps the administration of the organization. The delay



in decision-making often reduces the usefulness of the decisions.The delay is caused by many factors like giving sufficient membershipand lack of preparation, before meeting. That is why committees aresometimes used by managements to cool off agitation by theiremployees, which may create difficulties in the long-run.

3. Costly Device. Committees are an expensive device both in termsof cost and time. Committee meetings take too much time, whichabsorbs the sum total of the salary of its members for that time.Sometimes, committee members deliberately tend to pass time inorder to show that they have taken pains in reaching the decision.

4. Lack of Definite Decision. When the committee findings representa compromise of different viewpoints, they may be found weak andindecisive. They may cloud the real issues and get extraneous mattersinvolved in decision making. In case of committee decisions, it isvery difficult to fix responsibility on a particular person. So thecommittee member’s are apt to be irresponsible and indifferent.

5. Incompetent Membership. When a committee is formed, it isimplied that the individual members of the committee will exertpressure on the ideas, suggestions, comments and judgments of othermembers, but this may not happen in practice. The chairman or anystrong member of the committee may not force the committee tocome to a foregone conclusion on the basis of his own thinking andthe incompetent members may keep silent. Thus, the decision maybe overshadowed by the force of strong personality.

6. Source of Misunderstanding. The committee meeting may proveto be a source of misunderstanding instead of providing a forum forteamwork and settlement of problems. The chairman of the meetingmay not be effective in bringing about reconciliation of ideas ofdifferent individuals. Moreover, committee actions are characterizedby voting and dissenting practices, which may leave behind a legacyof bitterness, discontent and frustration.

Making Better Use of Committees

Notwithstanding the dangers of committees mentioned above, committeesare used by most organizations because their advantages far outweightheir disadvantages.



1. Management can make committees a useful agency of administrationrather than a doubtful and much bedeviled administrative gimmick.For the successful operation of the committees, the managementshould keep in mind the following points:

2. Members of the committee should be carefully selected. This is animportant factor for the success of the committee. The membersmust be capable of understanding the real issues entrusted to thecommittee and taking part in the discussion. As far as practicable,members of the committee should be of similar organizational rankif they are expected to discuss and contribute on an equal basis.The choice of committee members requires a nice judgment as topersonality differences, ability in expression as well as their status.

3. The committee should be of proper size. The group should not betoo large. If it is too large, many of its members will not have adequateopportunity to express their viewpoints. It may become chaotic ifthere are many vocal members. But if the group is too small, it isdifficult to secure a well-rounded viewpoint. The size of committeeshould depend on the purpose of forming it and the need to giverepresentation to different viewpoints.

4. The committee should have a capable chairman. The chairman ofthe committee has to conduct the proceedings of the committeemeeting. He should understand his proper role. His job is toencourage others to express themselves, to settle differences and toadd a touch of humor when the going is tough. He is an arbiter, apeacemaker and an expediter. He should not be an advocate of onepoint of view. His job is to get members of the group to think andnot to think for them.

5. There should be adequate preparation for the committee meeting.The major cause of not reaching any decision by the committee islack of preparation by the committee members and the office. Theoffice should keep all the details ready for use by the committee.The chairman should be provided with adequate clerical and staffassistance so that he can furnish all available factual data for eachmember before the meeting takes place. The agenda of the meetingand the concerned data, reports and notes should be circulatedamong the members of the committee well ahead in time so thatthey get raw material for discussion in the meeting.



6. There should be adequate follow up. In order to encourage the properfunctioning of committees, the management should take adequatefollow up measures to implement the intent of the committee. Minutesof the committee meeting should be prepared and distributed to eachmember and also to the top management so that it may evaluate thework done by the committee.

Summary

Formal organization is the intentional structure of roles. Informalorganization is a network of personal and social relations neitherestablished nor required by formal authority but arising spontaneously.The term span of management refers to the number of people a managercan effectively supervise. A wide span of management results in feworganizational levels and a narrow span results in many levels. Theorganizing steps are

Formulating objectives to achieve the end,

Identifying and classifying activities,

Grouping these activities,

Delegating authority and

Coordinating authority as well as information relationships.

Organizing involves developing an intentional structure of roles for effectiveperformance. Many mistakes in organizing can be avoided by firstplanning the ideal organization for goal achievement and then makingmodifications for the human or other situational factors. An effectiveorganization remains flexible and adjusts for changes in the environment.


1. Select a company and identify the departmentation pattern used bythe enterprise. Draw an organization chart for the firm. Why do youthink the company selected the type of departmentation it did? Woulddo you recommend a different departmentation arrangement? Stateyour recommendation.

2. Interview a line manager and a staff person at a local company. Askthem what they like and dislike about their jobs. Reflect on theinterviews, and ask yourself whether a line position or a staff one isthe major aim of your career plan.



3. Interview two line managers about their views on delegation. Dothey think that their superior delegates sufficient authority to them?Also inquire how they feel about delegating authority to theirsubordinates.

4. Visit a company in your area that is considered a model of effectivemanagement. Get any information on this company that gives yousome insight into its operation. What makes this organizationexcellent? Would you like to work for this enterprise? Why or whynot?

Review questions.

1. What do you mean by organization?

2. Write the steps in organizing.

3. Describe the types of organization with suitable example.

4. Distinguish authority and responsibility.

5. Illustrate the components of organization structure.

6. Define delegation of authority.

7. Explain the types of delegation in an organization.

8. What are the limitations of decentralization? Differentiatedecentralization with centralization.

9. Define span of control.

10. Define Organization charts.

11. Illustrate the types of organization charts with suitable example.



UNIT - IV

STAFFING

LEARNING OBJECTIVES

After reading this unit you should able to understand

the managerial function of staffing and what it means to be a manager.

the management inventory and the factors in the external and internalenvironment affecting staffing.

the policy of open competition and ways to make staffing moreeffective.

the orientation and socialization process for new employees.

about the sources of recruitment process.

the selection process in recruitment.

the training process and methods.

the concepts of leading and leadership

about the nature and purpose of directing

about the communication process and barriers of communication

4.1. AN INTRODUCTION

Staffing is now recognized as a separate management function. Previously,it was considered to be a part of organization function of management.The reason for separating the staffing from organizing is to give properemphasis to the actual manning of organizational roles. The staffing functionhas assumed greater importance these days because of rapid



advancement of technology, increasing size of organizations and complexbehavior of human-beings. The management of an enterprise must givedue importance to human resource planning, recruitment and selection,training, appraisal and remuneration of workers.

Definition

Staffing is concerned with manning various positions in the organization.In the words of Koontz, O’Donnell, and Weihrich, “The managerialfunction of staffing involves manning the organizational structure throughproper and effective selection, appraisal, and development of personnelto fill the role designed into the structure”.

Staffing involves the determination of manpower requirements of theenterprise and providing it with adequate competent people at all levels.Thus, manpower planning, procurement (i.e., selection and placement),training and development, appraisal and remuneration of workers areincluded in staffing.

The staffing function of management pertains to recruitment, selection,training, development, appraisal and remuneration of personnel. It is theduty of every manager to perform these activities. It is the tendency inmodern enterprises to create a separate department known as PersonnelDepartment to perform the staffing function. But it does not mean thatthe line managers do not have the responsibility for staffing. The PersonnelDepartment is created to provide the necessary help to the managers inperforming the staffing or personnel function.

4.2. NATURE AND SCOPE OF STAFFING FUNCTION

The staffing function has assumed greater significance these days becauseof a number of factors. Almost all the big organizations have a separatepersonnel department to look after this function. This does not meanthat the managers of other departments are not required to perform thestaffing function. In fact, staffing is also a pervasive function ofmanagement. The chief executive, middle level managers and first linemangers, all are engaged in performing the staffing function when theyparticipate in selecting, training, and evaluating their subordinates. Thevarious reasons, which have increased the significance of staffing functionof management, are discussed below:



(i) Advancement of Technology. Many significant changes are takingplace in technology. In order to make use of the latest technology,the appointment of right type of persons is necessary. The personnelcan be fitted into new jobs properly only if the management performsits staffing function satisfactorily.

(ii) Increasing Size of Organizations. Advancement in science andtechnology has given rise to large-scale companies employingthousands of workers. The performance of the company dependson the quality and character of the people employed. This hasincreased the significance of staffing.

(iii) Long-range Needs for Manpower. In some industries, laborturnover is very high. The management is required to determine themanpower requirements well in advance. It has also to develop theexisting personnel for future promotion. The role of staffing functionhas also increased because of the shortage of really good managerialtalent in the country.

(iv) High Wage Bill. The outlay of big concerns on its personnel is quitehigh. Management has to spend money on recruitment and selection,training, wages and salaries, etc. In order to get the optimum outputfrom the personnel, it is essential that the staffing function beperformed in an efficient manner. For instance, if the right type ofperson is not appointed, the management will have to pay wageseven though the quality of work is very low.

(v) Recognition of Human Relations. The behavior of individuals hasbecome very complicated. That is why, the human aspect oforganization has become very important. The workers are to bemotivated properly by employing financial and non-financialincentives. Right type of atmosphere should also be created for theworkers to contribute to the achievement of organizational objectives.By performing the staffing function, management can show thesignificance it attaches to the manpower working in the enterprise.The managers can also use their knowledge in moulding the behaviorof workers to the maximum advantage of the concern.

In short, the management of human resource is very important in anymodern organization because management can achieve the organizationalobjectives only with the cooperation of the people working in the



organization. It does not matter how perfect the planning and organizationand sophisticated machines are. If the people do not want to work, themanagement will not be able to accomplish the desired objectives.Therefore, in order to build a team of cooperative workforce, it is essentialto manage the workforce efficiently.

Since personnel department does so much personnel work, it is oftenassumed to be personnel management. While the contributions of thisdepartment may be great, its role must be that of a companion to the linemanagers. It should not be assumed that personnel function is the soleresponsibility of personnel department. Personnel management is inherentin the process of management and, as a consequence, this function isperformed by all the line managers throughout the organization ratherthan only by the in charge of personnel department. If a line manager isto get the best of his people, he must perform this function. He mustundertake the basic responsibility of selecting people who would workunder him and to develop, motivate and integrate them and to build uptheir morale. Thus, personnel function is the prime responsibility of everyline manager. The personnel department can do a great deal by assistingthem in discharging this responsibility. “Personnel management is aresponsibility of all those who manage people as well as being adescription of the work of those who are employed as specialists. It isthat part of management which is concerned with people at work andwith their relationships within an enterprise.”

Objectives of Staffing

The general objective of staffing is to contribute towards theaccomplishment of the goals of an enterprise. However, the staffing inany working organization should have the following specific objectives:

(i) To attain maximum individual development;

(ii) To establish desirable working relationship between employers andemployees and between groups of employees;

(iii) To mould the human resources effectively ;

(iv) To ensure satisfaction of the workers so that they are ready to work;

(v) To provide fair wages, good working conditions and service benefitsto the workers;

(vi) To ensure that every employee makes his maximum contribution tothe success of the enterprise.



Functions of Staffing

Department of Human Resource Management specially looks after variousproblems and issues relating to workforce. Normally, the scope of itsactivities includes the following functions:

1. Employment. The responsibility for employment consists ofappointing the best possible talents suitable to the requirements ofthe enterprise. This function includes various activities like jobanalysis, manpower demand analysis, recruitment, selection andplacement. Before appointing the people, manpower requirementsare estimated both in terms of number and quality. After this, differentsources of manpower supply are tapped. The applications of variousapplicants are screened and the selected applicants are required totake certain tests and appear in the final interview. The employmentfunction is complete when the workers join the organization and areplaced on the right jobs.

2. Training and Development. Training and development of personnelis a follow up of selection. It is a duty of management to train eachemployee and also to develop him for the higher jobs in theorganization. Proper development of personnel is necessary toincrease their skills in doing their jobs and in satisfying their growthneed. For this purpose, the personnel department will deviseappropriate training programmes. There are several on the job andoff the job methods available for training purposes. A good trainingprogramme should include a mixture of both types of methods. It isimportant to point out that personnel department arranges for trainingnot only of new employees but also of old employees to update theirknowledge in the use of latest techniques of production.

3. Compensation. This function is concerned with the determinationof adequate and equitable remuneration of the employees in theorganization for their contribution to the organizational goals. Thepersonnel can be compensated both in terms of monetary as well asnon-monetary rewards. Factors which must be borne in mind whilefixing the remuneration of personnel are their basic needs,requirements of jobs, legal provisions regarding minimum wage levelsafforded by competitors, etc. For fixing the wage levels, the personneldepartment can make use of certain techniques like job evaluationand performance evaluation.



4. Integration. This function aims to achieve a reasonable reconciliationof the interests of the personnel with those of the organization. Theimportant problem related to integration is communication. Thepersonnel manager must provide an efficient system of communicationto ensure two-way traffic of personnel programmes and policiesbecause many a time industrial disputes arise because of poorcommunication. The personnel manager should always keep himselfin contact with the trade unions to understand their grievances andremove the same so that harmony is maintained in the organization.

5. Working Conditions. Mere appointment and training of employeesis not sufficient, they must be provided with good working conditionsso that they may like their work and work-place and maintain theirefficiency. Working conditions certainly influence the motivation andmorale of the employees. These include the measures to be takenfor health and safety of the employees.

6. Welfare Services. The department provides for various welfareservices, which relate to the physical and social well-being of theemployees. They may include provision for cafeterias, rest-rooms,counseling, group insurance, education of children of employees,recreational facilities, etc.

7. Personnel Records. The HR department maintains the personalrecords of the employees working in the enterprise. It keeps fullrecords about their training, achievements, transfer, promotion, etc.It also preserves many other records relating to the behavior ofpersonnel like absenteeism and labor turnover and the personnelprogramme and policies of organization.

8. Industrial Relations. These days, the personnel managers mainlydischarge the responsibility of industrial relations. Personnel managershelp in collective bargaining, joint consultation and settlement ofdisputes, if they arise. This is because personnel manager is inpossession of full information relating to personnel and he possessesthe working knowledge of various labor enactments. It is importantto point out that the responsibility of fulfilling the requirements ofvarious labor laws like Factories Act, Industrial Disputes Act, etc.,rests with the personnel department. The personnel manager can doa great deal in maintaining industrial peace in the organization as he



is responsible for setting various committees on discipline, labourwelfare, safety, grievance, etc. He helps in laying down the grievanceprocedure to redress the grievances of the employees. He also givesauthentic information to the trade union leaders and tries to conveyto them the personnel policies and programmes of the enterprise.

Significance of Staffing

The Staffing function of management deals with the proper handling ofpersonnel in the organization. If people working in the organization arenot handled or managed properly, good industrial relations will notdevelop in the enterprise, which will jeopardize the survival of theenterprise. It is not possible to achieve the organizational goals withoutactive cooperation of the personnel. The significance of personnelmanagement has increased with the growth of industrial undertakings.Now it is recognized that personnel management is not only theresponsibility of personnel manager, but also of all managers in theenterprise.

The various aspects of personnel function are procurement, development,compensation and motivation of the personnel. Every manager has someresponsibility towards these areas, but now it has been recognized thatthese functions cannot be the specialty of every line manager. So it isvery common to create the personnel department under a PersonnelDirector or Personnel Manager. Though personnel department does notproduce anything, which is tangible, yet it helps the other departments tocontribute towards organizational objectives.

Personnel function has become a specialized task and so it is entrustedto the person who is well conversant with the principles of personnelmanagement. The personnel manager organizes the personnel departmentto carry out the functions entrusted to him. Personnel department developsthe sources of recruitment, selects the people and help the line managerin rectifying placements by devising a suitable transfer policy. Personneldepartment keep the record of every person in the organization andprovides important information to departmental heads in taking decisionsabout promotion and transfers.

Personnel department is also responsible for training and developmentof the employees. It develops various programmes for increasing the



knowledge and skills of the employees in consultation with line managers.Personnel department also helps the other departments in evaluating theperformance of the employees for future reference by developing asuitable system of merit rating or performance appraisal. Determiningthe wages and salaries to be paid to different categories of employees inthe organization is another important function of the personnel department.Personnel department looks after the wage and salary administration inthe organization and devises suitable incentives to reward the efficientworkers to motivate them. Personnel department also undertakesresearch of human behavior by conducting attitude and morale surveys.Every manager can utilize those morale surveys to understand the behaviorof his subordinates.

4.3. MANPOWER PLANNING

“Manpower may be regarded as the quantitative and qualitativemeasurement of labor force required in an organization and planning inrelation to manpower may be regarded as establishing objectives todevelop human resources in line with broad objectives of the organization”quote Chhabra, Ahuja and Jain. ‘Manpower planning may be expressedas a process by which the management ensures the right number of peopleand right kind of people, at the right place, at the right time doing theright things. It is a two phased process by which management can projectthe future manpower requirements and develop manpower action-plansto accommodate the implications of projections. Thus, we can say that,manpower planning is the process of developing and determiningobjectives, policies and programmes that will develop, utilize anddistribute manpower so as to achieve the goals of the organization.

Manpower or Human Resource Planning aims at ascertaining themanpower needs of the organization both in right number and of rightkind. It further aims at the continuous supply of right kind of personnelto man various positions in the organization. “Human Resource Planningis a process of determining and assuring that the organization will havean adequate number of qualified persons, available at the proper times,performing jobs which meet the needs of the enterprise and which providesatisfaction for the individuals involved”.

Significance of Manpower Planning

There is no doubt about the fact that failure in planning for developingpersonnel will prove to be a limiting factor in achieving the organization



objectives. If the number of persons in an organization is less than thenumber of persons required for carrying out the organizational plans,there will be disruptions in the flow of work and the pace of production,will also be low. But if, on the other hand, some persons are surplus inthe organization, they will have to be paid remuneration if they are retainedor compensated if their services are terminated.

A sound personnel policy requires that there should be adequate numberof persons of the right type to attain the organizational objectives. Forthis, the manpower planner should be concerned with the timing andscheduling of planning of personnel and persuading the management touse the results of manpower planning studies, in the conduct of thebusiness. Manpower planning can prove to be an important aid to framethe training and development programmes for the personnel because ittakes into account the effects of anticipated changes in technology, marketsand products on manpower requirements and educational and trainingprogramme requirements.

Manpower planning helps in formulating managerial succession plans asa part of the replacement planning process. It provides enough opportunityfor identifying and developing managers to move up the corporate ladder.Man-power planning is not an isolated activity. It is a part of the overallplanning process. Viewed from this angle, manpower planning will helpbetter management of the organization.

Process of Man Power Planning

The manpower planning process encompasses the following steps

1. Job Analysis.

2. Skill Inventory.

3. Personnel Forecasting.

4. Employment Plan.

5. Training and Development of Personnel.

Manpower planning is a continuous process. The manager responsiblefor manpower planning has to be concerned doing some exercise in thisregard every time. He may have to revise employment plan and trainingand development programme from time to time depending upon thechanges in circumstances such as sudden changes in the volume ofproduction, unexpected high rate of labor turnover, obsolescence ofexisting skills and so on. A brief explanation of the steps of the manpowerplanning process in given below:



1. Job Analysis

Job analysis is the qualitative aspect of manpower requirements since itdetermines the demands of a job in terms of responsibilities and dutiesand, then translates these demands in terms of skills, qualities and otherhuman attributes. It helps in determining the number and kinds of jobsand qualifications needed to fill these jobs. With the help of job analysisit is known what is the quantum of work, that an average person can doon a job in a day. It facilitates the division of work into different jobs.Thus, it is an essential element of effective manpower planning. Atmanagerial levels, accurate job descriptions help in preparation ofinventories of executive talent.

Job analysis may be defined as a process of discovering and identifyingthe pertinent information relating to the nature of a specific job. It is thedetermination of the tasks, which comprise the job, and of the skills,knowledge, abilities and responsibilities required of the worker forsuccessful performance of the job. The process of job analysis isessentially one of data collection and then analyzing that data. It providesthe analyst with basic data pertaining to specific jobs in terms of duties,responsibilities, skills, knowledge, etc. This data may be classified asfollows

(a) Job identification.

(b) Nature of the job.

(c) Operations involved in doing the job.

(d) Materials and equipment to be used in doing the job.

(e) Personal attributes required to do the job, e.g., education, training,physical strength, mental capabilities, etc.

(f) Relation with the other jobs.

The information relating to a job, which is thus classified, if examinedcarefully, would suggest that some information relates to the job andsome concerns the individual doing the job. The requirements of a jobare known as job description and the qualities demanded from thejobholder are termed as Job Specification. Thus, job description andjob specification are the immediate products of job analysis.

2. Skill Inventory

The scarcity of talent, difficulty of discovering it and the time required to



develop it fully have forced big organizations to think about theirmanpower in a systematic way. They attempt to know the inventory ofmanpower resources, develop and appraise their executives, draw upmanagement succession plans and calculate the replacements that willbe needed because of retirements and other causes. To understand thenature of the recruitment and development problems, it is necessary todetermine the inventory of different skills and talents existing in theorganization. The management must try to develop in advance the talentedemployees to occupy the managerial positions in the future. It can nolonger rely upon finding talented manpower just when it is needed.Systematic steps must be taken in order to ensure that a reservoir oftalent within the organization must be continuous. Thus, the identificationof manpower potential within the organization is a critical factor for thelong-range success of any organization.

3. Personnel (Manpower) Forecasting

In order to forecast the number of personnel required at a particularplant, the work-load analysis will have to be done; and on the basis ofwork-load of the plant, work-force analysis will have to be carried out.

Work-load Analysis. In work-load analysis, the manpower planningexpert needs to find out sales forecasts, work schedules and thusdetermine the manpower required per unit of product. The sales forecastsare translated into work performance for the various departments of theenterprise. In a manufacturing enterprise, one shall first find out the masterschedule and then departmental schedules. The departmental work-loadsare converted into man - hours in terms of different skills required.Workload analysis is used to determine how many employees of varioustypes are required to achieve total production targets. Similarly, plansare made concerning the amount of work that each other part (marketingdepartment, purchase department, etc.) of the organization is expectedto accomplish during the coming year. It is essential to determine thework-load in some tangible units so that they may be translated intoman-hours required per unit. Past experience can, of course, be utilizedfor translating work-loads into man-hours required.

To take an illustration, let us assume that the annual production budgetof a company is 1,80,000 units. The standard man-hours required tocomplete a unit of the product are 2 hours. The past experience revealsthat a worker on an average can contribute about 2,000 hours per year.The work-load may be calculated as under:



(a) Annual Production Budget = 1,80,000 units.

(b) Standard Man-hours required per unit = 2hrs.

(c) Planned Man-hours for the year (axb) = 3,60,000hrs.

(d) Annual contribution of a Worker = 2,000 hrs.

(e) No. of Workers required ( c/d ) = 180.

Thus, 180 workers are needed throughout the year to meet the productiontarget of 1,80,000 units. But this figure cannot be relied upon fully as theactual production is influenced by many other factors such as availabilityof inputs and power, breakdown of machinery, strike, lockout, etc.Nonetheless, work-load analysis is quite suitable for short-termprojections of manpower requirements. Long-term projections can bemade with the help of workforce analysis.

Work-force Analysis. In the above illustration, we came to theconclusion that 180 workers are required to make 1,80,000 units in ayear. Assuming that all other factors are favorable, this conclusion isillusory because it is almost certain that all the 180 workers will not beavailable on all working days because of the two major problems: (i)Absenteeism, and (ii) Labor Turnover. Both these factors operate toreduce the number of workers available. Therefore, it is essential to dothe analysis of work-force in the light of these major problems, whichhave been discussed later in this chapter. In other words, it is necessaryto keep a sufficient margin for absenteeism, labor turnover and idle timeon the basis of past experience. It is essential to keep a margin of 20%of the manpower required as per work-load analysis, the company mustensure that it has at least 216 workers on its payroll to meet the annualproduction target.

4. Employment Plan

This phase deals with planning how the organization can obtain therequired number of right types of personnel as reflected by the personnelforecasting. In other words, there is a need to prepare programme ofrecruitment, selection, training, transfer and promotion so that personnelneeds of various departments of the organization are met.



5.Training and Development of Personnel

The preparation of skill inventory helps in identifying the training anddevelopment needs of the organization. Training for learning new skillsand for refreshing the memory is necessary not only for new employeesbut also for old employees. Executive development programmes haveto be devised for the development of managerial personnel.

Absenteeism

Absenteeism is said to be there when an employee fails to come to work whenhe is scheduled to work. It is an important problem in many enterprises.Excessive absenteeism involves a considerable loss to the enterprise becausework schedules are upset and delayed and management has to give overtimewages to meet the delivery dates. The rates of overtime wages are doublethan the normal rates of wages. Therefore, study of causes of absenteeism isessential to deal with the problem.The rate of absenteeism can be calculated by the following formula

Man-days lost during a period x 100 ---------------------------------------------- Average number of workers x No. Of working days

Personnel researchers have found that generally a small percentage ofemployees (15%) account for a large percentage of absenteeism (70%).These employees are likely to have low interest in their tasks and to bephysically below par. Research studies have further revealed that

1. The days before and after a holiday are liable to higher rate ofabsenteeism.

2. Women are absent more often than men.

3. Bad weather increases absenteeism, especially among employeeswho live at distant places.

4. Employees under the age of 25 years and above the age of 55 yearsare absent more often than those in the age group of 26 to 55 years.

5. Operative employees are absent more frequently than theirsupervisors.

Causes of Absenteeism. The important causes of absenteeism arediscussed below:



1. Sickness is high on the list of causes of absenteeism running as highas 50% of the absenteeism in some cases.

2. Industrial accidents and occupational diseases bring aboutabsenteeism, depending upon the nature of the process andmachinery used.

3. Poor production and material control can result in absenteeism.Unless the flow of work between departments is balanced andcontinuous workers may stay away from their jobs because theylose their interest in the work and also lose the feeling of theimportance of being dependable.

4. Lack of interest and worthwhileness are fundamental causes ofabsenteeism.

5. After pay-day, sickness and hangovers contribute to absenteeism,particularly when combined with poor working conditions, lack ofinterest in work and high wages.

6. Attitude of mind caused by environmental and sociological factorsmay condition some people to develop a feeling of irresponsibilityabout going to work.

7. A miscellaneous group of causes includes such facts as bad weather,lack of transportation, search for another job, personal businessand friends visiting from distant locations.

Measures to Control Absenteeism. The management may use thefollowing measures to control absenteeism:

1 The new employees should be inducted in such a way that theircritical attitude is reduced as quickly as possible to avoid absenteeismdue to this cause.

2 The management should properly analyze the various causes ofabsenteeism and classify the chronic offenders.

3. The chronic offenders may be ridiculed by publicizing their names.

4. The chronic offenders may be disciplined by lay-offs, dischargesand loss of promotion and other privileges.

5. All absent workers should be interviewed on their return to determinecauses and to impress upon them the seriousness of their absence.



Labor TurnoverIn every organization, employees constantly join and leave the organization forone reason or the other. The relation between the number of persons joiningthe organization and leaving due to resignation, retirement or retrenchment tothe average number on the pay-roll is called labour turnover. The rate of laborturnover may be calculated by the following formula: Number of workers joined and left

____________________________________ X 100 Average number of workers on the payroll

In order to exercise control over high rate of labor turnover, it is importantto consider the causes for which persons leave the enterprise. Themanagement should try to keep the rate of labor turnover as low aspossible because it involves huge costs. The management spends moneyon recruitment, selection and training of new employees. If an employeeleaves the enterprise, the expenditure incurred on his employment,training, etc. will go waste. Separation by personnel also results in a fallin production because it takes time to get substitutes. The new employeesmay be inexperienced and take time to reach the desired level of efficiency.

There may be many causes of high labor turnover. Either employee leavesthe enterprise on his or her own accord or they are discharged. Thecauses of resignations and dismissals may be either avoidable orunavoidable. Management may discharge the employees because of fallin work-load, shortage of materials, etc. Such a situation should not beallowed to occur. Workers may leave the enterprise because of jobdissatisfaction, poor relations, and bad working conditions and lowremuneration, which can be avoided.

The unavoidable causes of dismissals may be misconduct by an employee.The employees may resign from the enterprise because of getting betterjobs, domestic affairs, and illness etc. Separations also occur because ofdeath and recruitment. Such causes cannot be avoided.

Management can control high rate of labor turnover by reducing theavoidable causes of turnover. It should provide better working conditionsto the workers, introduce a satisfactory wage and incentive plan, adopta sound selection policy, set up procedure for handling grievances andprovide counseling to the employees over their personal problems.Retirement benefits should also be provided to maintain the workers inthe enterprise.



4.4. RECRUITMENT

Recruitment is shortly defined as discovering of potential applicants foractual or anticipated organizational vacancies. The human resources arethe most important assets of an organization. The success or failure of anorganization is largely dependent on the caliber of the people workingtherein. Without positive and creative contributions from people,organizations cannot progress or prosper. In order to achieve the goalsor the activities of an organization therefore, we need to recruit peoplewith requisite skills, qualifications, and experience. While doing so, wehave to keep the present as well as the forth coming requirements of theorganization in mind. Recruitment is a linking process; joining togetherthose with jobs to fill and those seeking jobs. It is a joining process tobring together job seekers and employers with a view to encourage theformer to apply for a job with the letter.

The basic purpose of recruiting is to develop a group of potentiallyqualified people. To this end the organization must communicate theposition in such a way that job seekers respond. To be cost effective, therecruitment process should attract qualified applicants and provide enoughinformation for unqualified persons to self-select themselves out.

The sources of recruitment may be broadly divided into two categories:internal sources and external sources: These sources include the employeesalready on the payroll i.e., present force. Whenever any new vacancyarises, people from within the organization will be promoted, transferredor demoted. The process of filling job openings by selecting from thepool of present workforce can be implemented by the following methods:

Sources of Recruitment

The sources of recruitment may be broadly into two categories: internalsources and external sources.

Internal Sources: These sources include the employees already on thepayroll i.e., present work force.

Reviewing the personnel records.

Job posting and job bidding.

Inside moonlighting and employee’s friends.



Review of the personnel records and skills inventory provides adequateinformation for the personnel director to find suitable candidates for aparticular position. Under job posting and bidding system, the organizationnotifies its present employees of openings, using bulletin boards, andcompany publications, etc. This is a more open approach where everyonegets the same right to apply for a job and bid for the same. If the laborshortage is of short term and great amount of additional labor is notnecessary, then organization employs ‘ inside moonlighting.’ It is atechnique where organization pays bonuses of various types to peopleon a time payroll. Overtime procedures are, in many organizations,developed for those on time payroll. Furthermore, before going outsideto recruit many organizations ask the present employees to encouragefriends and relatives to apply.

External Sources: External sources lie outside an organization. Herethe organization can have the services of:

(a) employees working in other organizations; (b) job aspirants registeredwith employment exchanges; (c) students from reputed educationalinstitutions; (d) candidates referred by unions, friends, relatives andexisting employees; (e) candidates forwarded by search firms andcontractors; (f) candidates responding to the advertisements, issued bythe organization; and (g) unstructured applications/walk-ins.

Methods of Recruitment

Transfer: A lateral movement within the same grade, from one job toanother.

The following are the most commonly used methods of recruiting people:

(i) Promotions and transfers: This is a method of filling vacanciesfrom within through transfers and promotions. A transfer is a lateralmovement within the same grade, from one job to another. It maylead to changes, in duties and responsibilities, working conditions,etc., but not necessarily salary. Promotion, on the other hand, involvesmovement of employee from a lower level position to a higher-levelposition accompanied by (usually) changes in duties, responsibilities,status and value. Organizations generally prepare lists of a centralpool of persons from which vacancies can be filled for manual jobs.Such persons are usually passed on to various departments,



depending on internal requirements. If a person remains on suchrolls for 240 days or more, he gets the status of a permanent employeeas per the Industrial Disputes Act and is, therefore, entitled to allrelevant benefits, including provident fund, gratuity, retrenchment andcompensation.

(ii) Job posting: Job posting is another way of hiring people from within.In this method, the organization publicizes job openings on bulletinboards, electronic media and similar outlets. One of the importantadvantages of this method is that it offers a chance to highly qualifiedapplicants working within the company to look for growthopportunities within the company without looking for greener pasturesoutside.

(iii) Employee referrals: Employee referral means using personalcontacts to locate job opportunities. It is a recommendation from acurrent employee regarding a job applicant. The logic behindemployee referral is that “it takes one to know one”. Employeesworking in the organization, in this case, are encouraged torecommend the names of their friends working in other organizationsfor a possible vacancy in the near future.

(iv) Campus recruitment: It is a method of recruiting by visiting andparticipating in college campuses and their placement centers. Here,the recruiters visit reputed educational institutions such as IITs, IlMs,colleges and universities with a view to pick up job aspirants havingrequisite technical or professional skills. Job seekers are providedinformation about the jobs and the recruiters, in turn, get a snapshotof job seekers through constant interchange of information withrespective institutions. A preliminary screening is done within thecampus and the short listed students are then subjected to theremainder of the selection process. In view of the growing demandfor young managers, most reputed organizations (such as HindustanLever Ltd, Procter & Gamble, Citibank, State Bank of India, Tataand Birla group companies) visit IIMs and IIT regularly and evensponsor certain popular campus activities with a view to earn goodwillin the job market. Advantages of this method include: the placementcenter helps locate applicant and provides resumes to organizations;applicants can be prescreened; applicants will not have to be luredaway from a current job and lower salary expectations. On the



negative front, campus recruiting means hiring people with little orno work experience. The organization will have to offer some kindof training to the applicant almost immediately after hiring. It demandscareful advance planning, looking to the placement weeks of variousinstitutions in different parts of the country. Further campus recruitingcan be costly for organizations situated in another city (airfare,boarding and lodging expenses of recruiters, site visit for applicantsif allowed, etc.).

(v) Advertisements: These include advertisements in newspapers,trade, professional and technical journals, radio and television, etc.In recent times, this medium has become just as colorful, lively andimaginative as consumer advertising. The ads generally give a briefoutline of the job responsibilities, compensation package, prospectsin the organization, etc. This method is appropriate when (a) theorganization intends to reach a large target group and (b) theorganization wants a fairly good number of talented people - whoare geographically spread out to apply for the advertised vacancies.

Let us briefly examine the wide variety of alternatives available to acompany as far as ads are concerned.

(vi) Private Employment Search Firms: A search firm is a privateemployment agency that maintains computerized lists of qualifiedapplicants and supplies these to employers willing to hire peoplefrom the list for a fee. Firms like Arthur Anderson, Noble and Hewitt,ABC consultants, SR Billimoria, KPMG, Ferguson Associates offerspecialized employment related services to corporate houses for afee, especially for top and middle level executive vacancies. At thelower end, a number of search firms operate providing multifariousservices to both recruiters and the recruitees.

(vii) Employment Exchanges: As a statutory requirement, companiesare also expected to notify (wherever the Employment ExchangesAct, 1959, applies) their vacancies through the respectiveemployment exchanges, created all over India for helping unemployedyouth, displaced persons, ex-military personnel, physicallyhandicapped etc. As per the Act, all employers are supposed tonotify the vacancies arising in their establishment with certainexemptions to the prescribed employment exchanges before they



are filled. The Act covers all establishments in public sector andnonagricultural establishments employing 25 or more workers in theprivate sector. However, in view of the practical difficulties involvedin implementing the provisions of the Act (such as filling a quarterlyreturn in respect of their staff strength, vacancies and shortages,returns showing occupational distribution of their employees, etc.)many organizations have successfully fought court battles when theywere asked to pick up candidates from among those sponsored bythe employment exchanges.

(viii) Gate Hiring and Contractors: Gate hiring is a process wherejob seekers (where job seekers, generally blue collar employees,present themselves at the factory gate and offer their services on adaily basis), hiring through contractors, recruiting throughword-of-mouth publicity are still in use despite the many possibilitiesfor their misuse in the small scale sector in India.

(ix) Unsolicited applicants/walk-ins: Companies generally receiveunsolicited applications from job seekers at various points of time.The number of such applications depends on economic conditions,the image of the company and the job seeker’s perception of thetypes of jobs that might be available, etc. Such applications aregenerally kept in a data bank and whenever a suitable vacancy arises,the company would intimate the candidate to apply through a formalchannel. One important problem with this method is that job seekersgenerally apply to a number of organizations and when they areactually required by the organization, either they are alreadyemployed in other organizations or are not simply interested in theposition.

(x) e-hiring: The first step in e-hiring is to get a URL (Universal ResourceLocator) that people can conveniently guess and thus, not have touse a search engine. There is no point in being a famous company ifpeople cannot find you without trouble on the net. Step two is to putout detailed job postings spelling out your exact requirements. Aseparate web page would help potential applicants to find whetherthey fit into the announced job openings or not. You are likely to geta lot of surf-ins if the details of openings are listed category-wise.Allow people to apply on-line. Create an e-form which can be filledup on line, and then, you do the calling-up. Finally, ask HR to maintain



a database on all applications. You may not have an opening today.But, remember tomorrow may be another desperate day for you tolook for people with requisite skills, qualifications and experience.

4.5. SELECTION

To select means to choose. Selection is the process of picking individualswho have relevant qualifications to fill jobs in an organization. The basicpurpose is to choose the individual who can most successfully performthe job from a pool of qualified candidates.

The purpose of selection is to pick up the most suitable candidate whowould meet the requirements of the job and the organization best and tofind out which job applicant will be successful if hired. To meet this goal,the company obtains and assesses information about the applications interms of age, qualifications, skills, experience, etc. The needs of the jobare matched with the profile of candidates. The most suitable person isthen picked up after eliminating the unsuitable applicants throughsuccessive stages of selection process. How well an employee is matchedto a job is very important because it directly affects the amount andquality of employee’s work. Any mismatch in this regard can cost anorganization a great deal of money, time and trouble, especially, in termsof training and operating costs. In course of time, the employee may findthe job distasteful and frustrating. He may even circulate ‘hot news’ andjuicy bits of negative information about company, causing incalculableharm in the long run. Effective selection, therefore, demands monitoringthe ‘fit’ between person and the job.

4.5.1. THE PROCESS OF SELECTION

Selection is usually a series of hurdles or steps. Each one must besuccessfully cleared before applicant proceeds to the next. The followingfigure outlines the important steps in the selection process of typicalorganization. The time and emphasis placed on each step will, of course,vary from organization to organization and indeed, from job to job withinthe same organization. The sequence of steps may also vary from job tojob and organization to organization.

1. Reception: A company is known by the people it employs. In orderto attract people with talents, skills and experience a company hasto create a favorable impression on the applicants right from the



stage of reception. Whoever meets the applicant initially should betactful and able to extend help in a friendly and courteous way.Employment possibilities must be presented honestly and clearly. Ifno jobs are available at that point of time, the applicant may beasked to call back the personnel department after some time.

2. Screening Interview: A preliminary interview is generally plannedby large organizations to cut the costs of selection by allowing onlyeligible candidates to go through the further stages in selection. Ajunior executive from the Personnel Department may elicit responsesfrom applicants on important items determining the suitability of anapplicant for a job such as age, educational experience, payexpectations, aptitude, location, choice etc. This courtesy interview,as it often called, helps the department screen out obvious misfits. Ifthe department finds candidate suitable, a prescribed application form

is given to the applicants to fill and submit.

Fig Steps in selection process

Hiring Decision Step 8

Reference Checks Step 7

Medical Examination Step 6

Selection Interview Step 5

Selection Tests Step 4

Application Blank Step 3

Screening Interview Step 2

Reception Step 1

3. Application Blank: Application blank or form is one of the mostcommon methods used to collect information on various aspects ofthe applicants’ academic, social, demographic, work-relatedbackground and references. It is a brief history sheet of an employee’sbackground, usually containing the following things:



Contents of Application Blanks

• Personal data (address, sex, identification marks)

• Marital data (single or married, children, dependents)

• Physical data (height, weight, health condition)

• Educational data (levels of formal education, marks, distinctions)

• Employment data (past experience, promotions, nature of duties,reasons for leaving previous jobs; salary drawn, etc.)

• Extra-curricular activities data (sports/games, NSS, NCC, prizeswon, leisure-time activities)

• References (names of two or more people who certify the suitabilityof an applicant to the advertised position)

Weighted Application Blanks (WABs): To make the application formmore job-related, some organizations assign numeric values or weightsto responses provided by applicants. Generally, the items that have astrong relationship to job performance are given high scores. For example,for a medical representative’s position items such as previous sellingexperience, martial status, age, commission earned on sales previously,etc, may be given high scores when compared to other items such asreligion, sex, language, place of birth, etc. The total score of each applicantis obtained by summing the weights of the individual item responses. Theresulting scores are then used in the selection decision. The WAB is bestsuited for jobs where there are many workers, especially for sales andtechnical jobs and it is particularly useful in reducing labour turnover.There are, however, several problems associated with WABs. It takestime to develop such a form. The cost of developing a WAB could beprohibitive if the organization has several operating levels with uniquefeatures. The WAB must be “updated every few years to ensure that thefactors previously identified are still valid predictors of job success”.And finally, the organization should be careful not to depend on weightsof a few items while selecting an employee.

4. Selection Testing: A test is a standardized, objective measure of aperson’s behavior, performance or attitude. It is standardized becausethe way the test is carried out, the environment in the test isadministered and the ways the individual scores are calculated areuniformly applied. It is objective in that it tries to measure individual



differences in a scientific way, giving very little room for individualbias and interpretation.

Over the years, employment tests have not only gained importancebut also a certain amount of inevitability in employment decisions.Since they try to objectively determine how well an applicant meetsjob requirements, most companies do not hesitate to invest their timeand money in selection testing in a big way. Some of the commonlyused employment tests are:

(a) Intelligence tests: These are mental ability tests. They measurethe incumbent’s learning ability and also the ability to understandinstructions and make judgments. The basic objective of intelligencetests is to pick up employees who are alert and quick at learningthings so that they can be offered adequate training to improve theirskills for the benefit of the organization. Intelligence tests measurenot a single trait, but rather several abilities such as memory,vocabulary, verbal fluency, numerical ability, perception, spatialvisualization, etc. Stanford-Binet test, Binet-Simon test, WechslerAdult Intelligence scale are examples of standard intelligence tests.Some of these tests are increasingly used in competitive examinationswhile recruiting graduates and postgraduates at entry managementpositions in banking, insurance and other financial services sectors.

(b) Aptitude tests: Aptitude tests measure an individual’s potential tolearn certain skills, clerical, mechanical, mathematical, etc. Thesetests indicate whether or not an individual has the ability to learn agiven job quickly and efficiently. In order to recruit efficient officestaff, aptitude tests are necessary. Clerical tests, for example, maymeasure the incumbent’s ability to take notes, perceive thingscorrectly and quickly locate things, ensure proper movement of files,etc. Aptitude tests, unfortunately, do not measure on the jobmotivation. That is why the aptitude test is administered incombination with other tests like, intelligence and personality tests.

(c) Personality tests: Of all the tests required for selection, personalitytests have generated lot of heat and controversy. The definition ofpersonality, method of measuring personality factors and therelationship between personality factors and actual job criteria hasbeen the subject of much discussion. Researchers have also



questioned whether applicants answer all the items truthfully orwhether they try to respond in a socially desirable manner.Regardless of these objections, many people still consider personalityas an important component of job success.

(d) Achievement tests: These are designed to measure what theapplicant can do on the job currently, i.e., whether the testee actuallyknows what he or she claims to know. A typing test shows typingproficiency, a short hand test measures the testees ability to takedictation and transcribe, etc., Such proficiency tests are also knownas work sampling tests. Work sampling is a selection test whereinthe job applicant’s ability to do a small portion of the job is tested.These tests are of two types; Motor, involving physical manipulationof things e.g., trade tests for carpenters, plumbers, electricians orVerbal, involving problem situations that are primarilylanguage-oriented-or people oriented (e.g., situational tests forsupervisory jobs).

(e) Simulation tests: Simulation exercise is a test, which duplicatesmany of the activities and problems an employee faces while at work.Such exercises are commonly used for hiring managers at variouslevels in an organization. To assess the potential of a candidate formanagerial positions, assessment centers are commonly used.

(f) Assessment center: An assessment center is an extended worksample. It uses procedures that incorporate group and individualexercises. These exercises are designed to simulate the type of work,which the candidate will be expected to do. Initially, a small batch ofapplicants comes to the assessment center (a separate room). Theirperformance in the situational exercises is observed and evaluatedby a team of 6 to 8 trained assessors. The assessor’s judgments oneach exercise are compiled and combined to have a summary ratingfor each candidate being assessed.

Initially, a small batch of applicants comes to the assessment centre(a separate room). The examples of the real-life but simulatedexercises included in a typical assessment centre are as follows:

a. The in-basket. Here the candidate is faced with an accumulation ofreports, memos, letters and other materials collected in the in-basket



of the simulated job he is supposed to take over .The candidate isasked to take necessary action on each of these materials, say, bywriting letters, notes, agendas for meetings, etc. The results of theapplicant’s actions are then reviewed by the evaluators.

b. The leaderless group discussion: In this exercise, a leaderlessgroup is given a discussion question and asked to arrive at a groupdecision. The evaluators then evaluate each participant’s interpersonalskills, acceptance by the group, leadership and individual influence,etc.

c. Business games: Here participants try to solve a problem, usuallyas members of two or more simulated companies that are competingin the market place. Decisions might include how to advertise theproduct, how to penetrate the market, how much to keep in stock,etc. Participants thereby exhibit planning and organizational abilities,interpersonal skills and leadership abilities. Business games haveseveral merits: they reduce time, events that might not take place formonths or years are made to occur in a matter of hours. They arerealistic and competitive in nature. They offer immediate feedbackalso.

d. Individual presentations: A participant’s communication skills areevaluated by having the person make an oral presentation of a giventopic.

e. Structured interview: Evaluators ask a series of questions aimedat the participant’s level of achievement, motivation, potential forbeing a self-starter and commitment to the company.

g. Graphology Tests: Graphology involves a trained evaluator toexamine the lines, loops, hooks, strokes, curves and flourishes in aperson’s handwriting to assess the person’s personality and emotionalmake-up. The recruiting company may, for example, ask applicantsto complete application forms and write about why they want a job.These samples may be finally sent to a graphologist for analysis andthe results may be put to use while selecting a person. The use ofgraphology, however, is dependent on the training and expertise ofthe person doing the analysis. In actual practice, questions of validityand just plain skepticism have limited its use.



h. Polygraph (Lie-detector) tests. The polygraph records physicalchanges in the body as the test subject answers a series of questions.It records fluctuations in respiration, blood pressure and perspirationon a moving roll of graph paper. The polygraph operator form ajudgment as to whether the subject’s response was truthful ordeceptive by examining the biological movements recorded on thepaper. Polygraphs, despite strong resistance by many applicants,are increasingly being used by companies, which have problems withinventory and security of funds. Government agencies have begun touse the polygraph, especially for filling security, police, fire and healthpositions. Critics, however, question the appropriateness ofpolygraphs in establishing the truth about an applicant’s behavior.The fact is that polygraph records biological reaction in response tostress and does not record lying or even the conditions necessarilyaccompanying lying. Is it possible to prove that the responsesrecorded by the polygraph occur only because a lie has been told?What about those situations in which a person lies without guilt (apathological liar) or lies believing the response to be true? The factof the matter is that polygraphs are neither reliable nor valid. Sincethey invade the privacy of those tested, many applicants vehementlyoppose the use of polygraph as a selection tool.

i. Integrity tests: These are designed to measure employee’s honestyto predict those who are more likely to steal from an employer orotherwise act in a manner unacceptable to the organization.

5. Selection Interview: Interview is the oral examination of candidatesThis is the most essential step in the selection process. In this stepthe interviewer matches the information obtained about the candidatethrough various means to the job requirements.

6. Medical Examination: Certain jobs require certain physical qualitieslike clear vision, perfect hearing, unusual stamina, tolerance of hardworking conditions, clear tone, etc. Medical examination revealswhether or not a candidate possesses these qualities. Medicalexamination can give the following information:

Whether the applicant is medically suitable for the specified job or not.

Whether the applicant has health problems or psychological attitudeslikely to interfere with work efficiency or future attendance.



Whether the applicant suffers from bad health, which should becorrected before he can work satisfactorily (such as the need forspectacles).

Whether the applicant’s physical measurements are in accordancewith job requirements or not.

7. Reference Checks: Once the interview and medical examinationof the candidate is over, the Personnel Department will engage inchecking references. Candidates are required to give the names oftwo or three references in their application forms. These referencesmay be from the individuals who are familiar with the candidate’sacademic achievements or from the applicant’s previous employer,who is well versed with the applicant’s job performance andsometimes from co-workers. In case the reference check is fromthe previous employer, information in the following areas may beobtained. They are job title, job description, period of employment,pay and allowances, gross emoluments, benefits provided, rate ofabsence, willingness of the previous employer to employ the candidateagain, etc. Further, information regarding candidate’s regularity atwork, character, progress, etc., can be obtained. Often a telephonecall is much quicker. The method of mail query provides detailedinformation about the candidate’s performance, character andbehavior. However, a personal visit is superior to the mail andtelephone methods and is used where it is highly essential to getdetailed, first-hand information, which can also be secured byobservation. Reference checks are taken as a matter of routine andtreated casually or omitted entirely in many organizations. But a goodreference check, when used sincerely will fetch useful and reliableinformation to the organization.

8. Hiring decision: The line manager concerned has to make the finaldecision now whether to select or reject a candidate after solicitingthe required information through different methods discussed earlier.The line manager has to take adequate care in taking the final decisionbecause of economic, behavioral and social implications of theselection decisions. A careless decision of rejecting a candidate wouldimpair the morale of the people and they are likely suspected the



selection procedure and the very basis of selection of a particularorganization. A true understanding between line managers andpersonnel managers should be established so as to facilitate goodselection decisions. After taking the final decision, the organizationhas to intimate this decision to the successful as well as unsuccessfulcandidates. The organization sends the appointment order to thesuccessful candidates either immediately or after sometime dependingupon its time schedule.

Placement

After selecting a candidate, he should be placed on a suitable job.Placement is the actual posting of an employee to a specific job. It involvesassigning a specific rank and responsibility to an employee. The linemanager takes the placement decisions after matching the requirementsof a job with the qualification of a candidate. Most organizations putnew recruits on probation for a given period of time, after which theirservices are confirmed. During this period, the performance of probationeris closely monitored. If the new recruit fails to adjust himself to the joband turns out poor performance, the organization may consider his namefor placement elsewhere. Such as placement is called ‘differentialplacement’. Usually the employees’ supervisor, in consultation with thehigher levels of line management, takes decisions regarding the futureplacement of each employee.

Placement is an important human resource activity. If neglected, it maycreate employee adjustment problems leading to absenteeism, labourturnover, accidents, poor performance, etc. The employee will also sufferseriously. He may quit the organization in frustration, complaining bitterlyabout everything. Proper placement is therefore, important to both theemployee and the organization.

Induction/Orientation

Induction or orientation is the process through which a new employee isintroduced to the job and the organization. In the words of Armstrong,induction is “the process of receiving and welcoming an employee whenhe first joins a company”to the job and giving him the basic informationhe needs to settle down quickly and start work.



Induction serves the following purposes:

(a) Removes fears: A newcomer steps into an organization as astranger. He is new to the workplace and work environment. He isnot very sure about to do what he is supposed to. Induction helps anew employee overcome such fears and perform better on the job.

(b) Creates a good impression: Another purpose of induction is tomake the newcomer feel at home and develop a sense of pride in theorganization. Induction helps him to:

Adjust and adapt to new demands of the job.

Get along with people.

Get off to a good start.

Through induction, a new recruit is able to see more clearly as to what heis supposed to do, how good the colleagues are, how important is thejob, etc. He can pose questions and seek clarifications on issues relatingto his job. Induction is a positive step, in the sense, it leaves a goodimpression about the company and the people working there in the mindsof new recruits. They begin to take pride in their work and are morecommitted to their jobs.

(c) Acts as a valuable source of information: Induction serves as avaluable source of information to new recruits. It. clarifies many thingsthrough employee manuals/handbook. Informal discussions withcolleagues may also clear the fog surrounding certain issues. Thebasic purpose of induction is to communicate specific jobrequirements to the employee, put him at ease and make him feelconfident about his abilities.

Induction Programme Steps:

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



(b) Socialization: Socialization is a process through which a new recruitbegins to understand and accept the values, norms and beliefs heldby others in the organization. HR department representative’s helpnew recruit to “Internalize the way things are done in theorganization”. Orientation helps the newcomers to interact freelywith employees working at various levels and learn behaviors thatare acceptable. Through such formal and informal interaction anddiscussion, newcomers begin to understand how the department/company is run, who holds power and who does not, who ispolitically active within in the department, how to-behave in thecompany, what is expected of them and so on.

( c) Follow-up: Despite the best efforts of supervisors, certain dark areasmay still remain in the orientation programme. New hires may nothave understood certain things. The supervisior while covering alarge ground may have ignored certain important matters. Toovercome the resultant communication gaps, it is better to use asupervisory checklist and find out whether all aspects have beencovered or not (covering organizational issues, employee benefits,job duties, introduction to supervisors and co-workers, etc). Followup meetings could be held at fixed intervals, say after every three orsix months on a face-to-face basis. The basic purpose such follow-uporientations is to offer guidance to employees on various general aswell as job related matters without leaving anything to chance.

4.6. TRAINING AND DEVELOPMENT

Training is a process of learning a sequence of programmed behavior.It is application of knowledge. It gives people an awareness of the rulesand procedures to guide their behavior. It attempts to improve theirperformance on the current job or prepare them for an intended job.

Development is a related process, it covers not only those activitieswhich improve job performance, but also those which bring about growthof the personality; help individuals in the progress towards maturity andactualization of their potential capacities so that they become not onlygood employees but better men and women.

Difference between Training and Development

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



and skills for a definite purpose. Development is a long-term educationalprocess utilizing a systematic and organised procedure by whichmanagerial personnel learn conceptual and theoretical knowledge forgeneral purpose.”

“Training” refers only to instruction in technical and mechanicaloperations, while “development” refers to philosophical and theoreticaleducational concepts. Training is designed for non-managers, whiledevelopment involves managerial personnel. In the words of Campbell,“training courses are typically designed for a short-term, stated setpurpose, such as the operation of some piece(s) of machinery, whiledevelopment involves a broader education for long-term purposes.”

Training and development differ in four ways:

(a) “What” is learned;

(b) “Who” is learning;

(c) “Why” such learning takes place; and

(d) “When” learning occurs.

Learning Principles

The outcomes and process of learning

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

The outcomes of learning:

Skill

Competence

‘know-how’ and tacit knowledge

hierarchies of cognitive and other skills;

the process of learning;

theories of the process of learning

elements in the process of learning

the stages of learning

cyclical models of learning, learning styles.



Need for Basic Purposes of Training

The need for the training of employees would be clear from theobservations made by the different authorities.

(i) To increase productivity by the performance.

(ii) To improve quality by good relationship between employer andemployee.

(iii) To help a company fulfill its future personnel needs.

(iv) To improve organizational climate.

(v) To improve health and safety.

(vi)Obsolescence prevention.

(vii) Personal growth.

Need for training arises from more than one reason like:

(i) An increased use of technology in production;

(ii) Labor turnover arising from normal separations due to death orphysical incapacity, for accidents, disease, super-annuation voluntaryretirement, promotion within the organization and change ofoccupation or job;

(iii) Need for additional hands to cope with an increased production ofgoods and services;

(iv) Employment of inexperienced, new labor requires detailed instructionfor an effective performance of a job;

(v) Old employees need training to enable them to keep abreast of thechanging methods, techniques and use of sophisticated tools andequipment;

(vi) Need for enabling employees to do the work in a more effectiveway, to reduce learning time, reduce supervision time, reduce wasteand spoilage of raw material and produce quality goods, and developtheir potential.

(viii) Need for reducing grievances and minimizing accident rates;

(ix) Need for maintaining the validity of an organization as a whole andraising the morale of its employees.



Importance of Training

Training is the corner stone of sound management, for it makes employeesmore effective and productive. It is actively and intimately connectedwith all the personnel or managerial activities. It is an integral part of thewhole management programme, with all its many activities functionallyinterrelated.

Training is a practical and vital necessity because apart from the otheradvantages mentioned above it enables employees to develop and risewithin the organization, and increase their “market value”, earning powerand job security. It enables management to resolve sources of frictionarising from parochialism, to bring home to the employees the fact thatthe management is not divisible. It moulds the employees’ attitudes andhelps them to achieve a better with the company and a greater loyaltytowards it. The management is benefited in the sense that higher standardsof quality are achieved; a satisfactory organisational structure is built up;authority can be delegated and stimulus for progress applied to employees.Training, moreover, heightens the morale of the employees, for it helps inreducing dissatisfaction, complaints, grievances and absenteeism, reducesthe rate of turnover. Further, trained employees make better andeconomical use of materials and equipment; therefore, wastage andspoilage are lessened, and the need for constant supervision is reduced.

The importance of training has been expressed in these words:

“Training is a widely accepted problem-solving device. Indeed, ournational superiority in manpower productivity can be attributed in nosmall measure to the success of our educational and industrial trainingprogrammes. This success has been achieved by a tendency in manyquarters to regard training as a panacea”.

Responsibility for Training

Training is the responsibility of four main groups:

(a) The top management, which frames the training policy;

(b) The personnel department, which plans, establishes and evaluatesinstructional programmes;

(c) Supervisors, who implement and apply developmental procedure;and



(d) Employees, who provide feedback, revision and suggestions forcorporate educational endeavors.

Creation of a Desire for Training

The employees can be persuaded to be interested in training programmesin one of the following three ways:

1. They will respond to programmes involving changed behavior if theybelieve that the resulting modification in the behaviour is in their owninterest, that they will receive personal benefits as a result of theirnew behaviour.

2. Trainees will change their behaviour if they became aware of betterways of performing (more productive or otherwise more satisfactoryways) and gain experience in the new pattern of behaviour so that itbecomes their normal manner of operation.

3. A trainee may change his behaviour in compliance with the forceddemands of his superiors or others with more power than the traineepossesses.

Principles or Concepts of Training

Since training is a continous process and not a one shot affair, and sinceit consumes time and entails much expenditure, it is necessary that atraining programme or policy should be prepared with great thought andcare, for it should serve the purposes of the establishment as well as theneeds of employees.

A successful training programme presumes that sufficient care has beentaken to discover areas in which it is needed most and to create thenecessary environment for its conduct. The selected trainer should beone who clearly understands his job and has professional expertise, hasan aptitude and ability for teaching, possesses a pleasing personality anda capacity for leadership, is well-versed in the principles and methods oftraining, and is able to appreciate the value of training in relation to anenterprise.

Certain general principles need be considered while organizing a trainingprogramme. For example :

1. Trainees in work organizations tend to be most responsive to trainingprogrammes. When they feel the need to learn, i.e., the trainee willbe more eager to learn training, if training promises answers to



problems or needs he has. The individual who perceives training asthe solution to problems will be more willing to enter into a trainingprogramme than will the individual who is satisfied with his presentperformance abilities.

2. Learning is more effective where there is reinforcement in the formof rewards and punishments, i.e., individuals do things that givepleasure and avoid things that give pain. In other words, after anaction, if satisfaction is received, the action will be repeated. If nosatisfaction is received, the action will not be repeated.

3. In the long run, awards tend to be more effective for changingbehaviour and increasing one’s learning than punishments.

4. Rewards for the application of learned behaviour are most usefulwhen they quickly follow the desired performance.

5. The larger the reward for good performance following theimplementation of learned behaviour; the greater will be thereinforcement of the new behaviour.

6. Negative reinforcement, through application of penalties and heavycriticism following inadequate performance, may have a disruptiveeffect upon the learning experience of the trainee than positivereinforcement.

7. Training that requests the trainee to make changes in his values,attitudes, and social beliefs, usually achieves better results if thetrainee is encouraged to participate, discuss and discover new,desirable behaviour norms.

8. The trainee should be provided with ‘feedback’ on the progress heis making in utilizing the training he has received. As Miller has stated,“If a person with the required abilities is to improve his performance,he must (i) know what aspect of his performance is not up to par;(ii) know precisely what corrective actions he must take to improvehis performance.” The feedback should be fast and frequent,especially for the lower level jobs, which are often routine and quicklycompleted.

9. The development of new behaviour norms and skills is facilitatedthrough practice and repetition. Skills that are practiced often arebetter learned and less easily forgotten.



10. The training material should be made as meaningful as possible,because if the trainee understands the general principles underlyingwhat is being taught, he will probably understand it better than if hewere just asked to memorize a series of isolated steps.

Training Programmes

Training programmes are a costly affair, and a time consuming process.Therefore, they need to be drafted very carefully. Usually in theorganisation of training programmes, the following steps are considerednecessary:

1. Discovering or identifying the training needs.

2. Getting ready for the job.

3. Preparation of the learner.

4. Presentation of operations and knowledge.

5. Performance try-out.

6. Follow-up and evaluation of the programme.

The training needs have been identified to solve the specific problems asfollows:

(i) Identifying Specific Problems: Such problems are productivity,high costs, poor material control, poor quality, excessive scrap andwaste, excessive labour-management troubles, excessive grievances,excessive violation of rules of conduct, poor discipline, high employeeturnover and transfers, excessive absenteeism, accidents, excessivefatigue, fumbling discouragement, struggling with the job; standardsof work performance not being met, bottlenecks in production,deadlines not being met, and delayed production. Problems like thesesuggest that training may be necessary. For this task, the workersshould be closely observed and the difficulties found out.

(ii) Anticipating Impending and Future Problems: Bearing on theexpansion of business, the introduction of new products, newservices, new designs, new plant, new technology and oforganisational changes concerned with manpower inventory, presentand future needs.



(iii)Management Requests: The supervisors and managers makespecific request for setting training programmes. Though this methodis simple and a correct evaluation of the employee’s performancedeficiencies can be made, but often such recommendations may bebuilt on faulty assumptions and requests may not coincide with eachother or organisational goals.

(iv)Interviewing and Observing the Personnel on the Job:Interviewing personnel and direct questioning and observation ofthe employee by his superiors may also reveal training needs.

(v) Performance Appraisal: An analysis of the past performancerecords of the perspective trainee and comparing his actualperformance with the target performance may provide clues tospecific interpersonal skills that may need development.

(vi) Questionnaires: Questionnaires may be used for eliciting opinionsof the employees on topics like communication, satisfaction, jobcharacteristics, their attitude towards working conditions, pay,promotion policies etc. These will reveal much information aboutwhere an employee’s skills and knowledge are deficient.

(vii) Checklist: The use of checklist is a useful supplement to interviewsand observations. Through it, more reliable information can beobtained and the data got are quantifiable. This facility evaluates thetraining programme’s effectiveness.

(viii) Morale and Attitude Surveys: An occasional personnel surveymay be conducted to forecast future promotions, skill requirements,and merit rating, to initiate informal discussions and an examinationof records and statistics regarding personnel, production, cost,rejects and wastages. All these generally reveal the potentialproblems to be tackled through training programmes.

In addition, tests of the interpersonal skills through handling of posedcases and incidents may also reveal training needs.

Support Material for Training

A variety of tools and equipment are utilized to impart effective training.These are:

(a) Lectures (learning by hearing supplemented by reading assignments);conferences, seminars and staff-meetings (learning by participation);



demonstrations (learning by seeing); and short courses, throughcoaching.

(b) Role-playing (learning by doing) and job rotation (learning byexperience).

(c) Case or Project studies and problem-solving sessions (learning bypersonal investigation).

(d) Use of pamphlets, charts, brochures, booklets, handbooks, manuals,etc.

(e) Graphs, pictures, books, slides, movie projectors, filmstrips, taperecorders, etc.

(f) Posters, displays, notice and bulletin boards.

(g) Reading rooms and libraries where specified books and journalsare maintained for reference and use.

(h) Under-study and visits to plants.

(i) Correspondence courses under which knowledge about businesslaw, statistics, industrial management, marketing, office procedures,retailing and many other similar subjects may be imparted.

(j) Teaching machines.

(k) Membership of professional or trade associations, which offer newtechniques and ideas to their members.

Training Methods / Techniques

The forms and types of employee training methods are inter-related. It isdifficult, if not impossible, to say which of the methods or combination ofmethods is more useful than the other. In fact, methods are multi- facetedin scope and dimension, and each is suitable for a particular situation.

The methods of training as follows

On-the-Job-Training (OJT)

Job Instruction Training (JIT)

Vestibule Training

Training by experienced workmen

Classroom or Off-the-Job-Training like ,



lecture conferences group discussion case studies role playing programme instruction T-group training

On-the-Job-Training (OJT)

There are a variety of OJT methods, such as :

1. coaching

2. under study

3. job rotation

4. internship

5. apprenticeship

Merits of On-the-Job-Training

Firstly, trainee learns on the actual equipment in use and in the trueenvironment of his job.

Secondly, it is highly economical since no additional personnel or facilitiesare required for training.

Thirdly, the trainee learns the rules, regulations and procedures byobserving their day-to-day applications. The management can therefore,easily size him up.

Fourthly, this type of training is a suitable alternative for a company inwhich there is almost as many jobs as there are employees.

Finally, it is most appropriate for teaching the knowledge and skills,which can be acquired in a relatively short period, say, a few days orweeks.

Demerits of On-the-Job-Training

Instruction is often highly disorganized.

Job Instruction Training (JIT)

This method is very popular in the United States for preparing supervisorsto train operatives. The JIT method requires skilled trainers, extensive



job analysis, training schedules, and prior assessment of the trainee’sjob knowledge. This method is also known as “training through step-by-step learning.” It involves listing all necessary steps in the job, each inproper sequence. These steps show what is to be done. Along side eachstep is also listed a corresponding “Key point”, which shows how it is tobe done and why.

The job instruction training process is in four steps:

(i) the preparation of the trainee for instruction. This includes puttinghim at ease, emphasizing the importance of the task and giving ageneral description of job duties and responsibilities;

(ii) presentation of the instructions, giving essential information in a clearmanner. This includes positioning the trainee at work site, telling andshowing him each step of the job, stressing why and how each stepis carried out as it is shown;

(iii) having the trainee try out the job to show that he has understood theinstructions, if there are any errors they are corrected; and

(iv) encouraging the question and allowing the trainee to work along andthe trainer follows up regularly.

The JIT method provides immediate feedback on results, quick correctionof errors, and provision of extra practice when required.

However, it demands a skilled trainer and can interfere with productionand quality.

Vestibule Training (or Training-Center Training)

It is a classroom training, is often imparted with the help of the equipment,and machines, which are identical with those in use in the place of work.This technique enables the trainee to concentrate on learning the newrather than on performing an actual job. It is a very efficient method oftraining semi-skilled personnel, particularly when many employees haveto be simultaneously trained for the same kind of training at the sametime.

Training is generally given in the form of lectures, conferences, casestudies, role-playing and discussion.

Merits of the Vestibule Training

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



Trained instructor, who knows how to teach, can be more effectivelyutilized.

The correct method can be taught without interrupting production.

It permits the trainee to practice without the fear of supervisors’/co-workers’ observation and their possible ridicule.

Demerits of the Vestibule Training

The splitting of responsibilities leads to organisational problems.

An additional investment in equipment is necessary, though gettingsome productive work done by trainees while in the school mayreduce the cost.

This method is of limited value for the jobs, which utilize equipment,which can be duplicated.

The training situation is somewhat artificial.

Class room or Off-the-Job Methods

“Off-the-job-training” simply means that training is not a part of everydayjob activity. The actual location may be in the company classrooms or inplaces, which are owned by the company, or in universities, orassociations, which have no connection with the company.

These methods consist of :

1. Lectures

2. Conferences

3. Group Discussions

4. Case Studies

5. Role-playing

6. Programme Instruction

7. T-Group Training.

1. Lectures (or Class-Room Instruction): Lectures are regardedas one of the simplest ways of imparting knowledge to the trainees,especially when facts, concepts, or principles, attitudes, theoriesand problem-solving abilities are to be taught. Lectures are formalorganised talks by the training specialist, the formal superior or other



individual on specific topics. The lecture method can be used forvery large groups, which are to be trained within a short time, thusreducing the cost per trainee.

In training, the most important uses of lectures include:

Reducing anxiety about upcoming training programmes ororganisational changes by explaining their purposes.

Introducing a subject and presenting an overview of its scope.

Presenting basic material that will provide a common backgroundfor subsequent activities.

Illustrating the application of rules, principles; reviewing, clarifyingand summarizing.

Limitations of the Lecture System

(i) The learners are passive instead of active participants. The lecturemethod violates the principle of learning by doing.

(ii) A clear and vigorous verbal presentation requires a great deal ofpreparation for which management personnel often lack the time.

(iii) The attention span of even a well-motivated and adequately informedlistener is only from 15 minutes to 20 minutes so that, in the courseof an hour, the attention of listeners drifts.

(iv) It is difficult to stimulate discussion following a lecture, particularly ifthe listener is uninformed or awestruck by the lecturer.

(v) The untrained lecturer either rambles or packs far too muchinformation in the lecture, which often becomes unpalatable to thelistener.

(vi) The presentation of material should be geared to a common level ofknowledge.

(vii) It tends to emphasize the accumulation and memorization of factsand figures and does not lay stress on the application of knowledge.

(viii) Though a skilful lecturer can adapt his material to the specific group,he finds it difficult to adjust it for individual differences within a group.

2. The Conference Method: In this method, the participatingindividuals ‘confer’ to discuss points of common interest to each



other. A conference is basic to most participative group-centeredmethods of development. It is a formal meeting, conducted inaccordance with an organised plan, in which the leader seeks todevelop knowledge and understanding by obtaining a considerableamount of oral participation of the trainees.

Three types of conferences are

Directed discussion

Training conference

Seminar conference

3. Seminar or Team Discussion: This is an established method fortraining. A seminar is conducted in many ways:

(i) It may be based on a paper prepared by one or more trainees on asubject selected in consultation with the person in charge of theseminar. It may be a part of a study or related to theoretical studiesor practical problems. The trainees read their papers, and this isfollowed by a critical discussion. The chairman of the seminarsummarizes the contents of the papers and the discussions, whichfollow their reading.

(ii) It may be based on the statement made by the person in charge ofthe seminar or on a document prepared by an expert, who is invitedto participate in the discussion.

(iii) The person in charge of the seminar distributes in advance the materialto be analyzed in the form of required readings. The seminarcompares the reactions of trainees, encourages discussion, definesthe general trends and guides the participants to certain conclusions.

(iv) Valuable working material may be provided to the trainees by actualfiles. The trainees may consult the files and bring these to the seminarwhere they may study in detail the various aspects, ramificationsand complexities of a particular job or work or task.

4. Case Studies (or Learning by Doing): This method was firstdeveloped in the 1880s by Christopher Langdell at the Harvard LawSchool to help students to learn for themselves by independentthinking and by discovering in the ever tangled scene of human affairs,principles and ideas which have lasting validity and general



applicability. A collateral object is to help them develop skills in usingtheir knowledge.

In case study method the trainee is expected to:

Master the facts and become acquainted with the content of thecase;

Define the objectives sought in dealing with the issues in the case,

Identify the problems in the case and uncover their probable causes;

Develop alternative course of action;

Screen the alternatives using the objectives as the criteria;

Select the alternative that is most in keeping with the statedobjectives.

Define the controls needed to make the action effective and

To ‘role play’ the action to test its effectiveness and find conditionsthat may limit it.

5. Role-playing: This method was developed by Moreno, a Venetianpsychiatrist. He coined the terms “role-playing,” “role-reversal,”“socio-drama,” “psychodrama,” and a variety of specialized terms,with emphasis on learning human relations skills through practiceand insight into one’s own behaviour and its effect upon others. Ithas been defined as “a method of human interaction which involvesrealistic behaviour in the imaginary situations.”

Merits of the role playing method are:

Learning by doing is emphasized;

Human sensitivity and interactions are stressed;

The knowledge of results is immediate;

Trainee interest and involvement tend to be high;

It is a useful method to project the living conditions between learningin the classroom and working on a job and creating a live businesssituation in the classroom;

It develops skills and ability to apply knowledge, particularly in areaslike human relations and

It brings about desired changes in behaviour and attitudes.

6. Programmed Instruction (or Teaching by the Machine



Method): Programmed instruction involves a sequence of steps,which is often set up through the central panel of an electroniccomputer as guides in the performance of a desired operation orseries of operation. It incorporates a pre-arranged, proposed, ordesired course of proceedings pertaining to the learning or acquisitionof some specific skills or general knowledge.

The merits of the methods are:

Trainees learn at their own pace;

Instructors are not a key part in learning;

The materials to be learned are broken down into small units;

Immediate feedback is available;

Active learner participation takes place at each step in the programme;

Individual differences can be taken into account;

Training can be imparted at odd times and in odd places; and

There is a high level of learner motivation.

Demerits of the methods are:

The impersonality of instructional setting;

An advanced study is not possible until preliminary informationhas been acquired;

Only factual subject matters can be programmed;

Philosophical and attitudinal concepts and motor skills cannot betaught by this method and

The cost of creating any such programme is very great.

7. T-Group Training: This method of training is a technique ofcomposition of audio visual aids and planned reading programmes.

Audio-visual aids, records, tapes, and films are generally used inconjunction with other conventional teaching methods.

Retraining

Retraining programmes are generally arranged for employees who havelong been in the service of an organisation. The retraining programmemay be necessitated by the following facts:



Some employees are engaged in a confined phase of a particulartask and lose their all round skills in a particular trade. Hence, tokeep them active in all-round skills, such training is needed.

During prolonged lay-off periods, employees on certain highly skilledjobs are given retraining when they are called back to work.

Technological changes may make a particular job, on which anemployee is working unnecessary and the company may desire toretrain him rather than discharge him.

An employee, because of illness, accident or incapacity due to age,may no longer be able to do his share of the work that performedwhen he was in normal health.

Economic depression or cyclical variations in production createconditions in which employment stabilization may be achieved byhaving a versatile workforce capable or performing more than onejob.

Steps to improve Effectiveness of Training

The training programmes can be made effective and successful if thefollowing hints are considered:

1. Specific training objectives should be outlined on the basis of thetype of performance required to achieve organisational goals andobjectives. An audit of personal needs compared with operationalrequirements will help to determine the specific training needs ofindividual employees. This evaluation should form a well-defined setof performance standards toward which each trainee should bedirected.

2. Attempt should be made to determine if the trainee has theintelligence, maturity, and motivation to successfully complete thetraining programmes. If deficiencies are noted in these respects, thetraining may be postponed or cancelled till improvements are visible.

3. The trainee should be helped to see the need for training by makinghim aware of the personal benefits he can achieve through betterperformance. He should be helped to discover the rewards andsatisfactions that might be available to him through changes inbehaviour.



4. The training programme should be planned so that it is related to thetrainee’s previous experiences and background. This backgroundshould be used as a foundation for new development and newbehaviour.

5. Attempts should be made to create organisational conditions thatare conducive to a good learning environment. It should be madeclear why changes are needed. Any distractions, in the way of trainingenvironment, should be removed. The support of the upper levels ofmanagement should be obtained before applying training at lowerlevels.

6. If necessary, a combination of training methods should be selectedso that variety is permitted and as many of the senses as possibleare utilized.

7. It should be recognized that all the trainees do not progress at thesame rate. Therefore, flexibility should be allowed in judging therates of progress in the training programme.

8. If possible, the personal involvement or active part of the traineeshould be got in the training programmes. He should be providedwith opportunity to practice the newly needed behaviour norms.

9. As a trainee acquires new knowledge, skills or attitudes and appliesthem in job situations, he should be significantly rewarded for hisefforts.

10. The trainee should be provided with regular, constructive feedback.

11. The trainee should be provided with personal assistance when heencounters learning obstacles.

Designs for Evaluating Training

After deciding on the criteria to use in evaluating a training program, theHR professional should choose an experimental design. The design isused to answer two primary questions: (1) whether or not a change hasoccurred in the criteria (e.g., learning, behavior, organizational results)and (2) whether or not the change can he attributed to the trainingprogram.

Designs employ two possible strategies to answer these questions. Thefirst is to compare trainees’ performance before and after participation



in training. This is done to determine what changes may have occurred inlearning, behavior, or organizational results. While this is important foranswering the question of whether a change has taken place, it is deficientin answering the question of whether the change can be attributed to thetraining program, since the criteria may have changed for any number ofreasons. What is needed to answer the second question is a designcomparing the changes which took place in the trainees with changesthat occurred in another group of employees who did not receive thetraining (e.g., a control group), yet who are similar to the training groupin important ways (e.g., in that they have similar job titles and ranks andare in the same geographical location). The most effective experimentaldesigns use both strategies (i.e., before-after measures and a controlgroup) and are thus able to answer both questions.

Some of the more commonly used designs for training evaluation aredescribed below.

One Shot Post Test only Design:

In many organizations, training is designed and conducted with no priorthought given to evaluation. For example, a sales manager may decide toput all his or her sales personnel through a course entitled “EffectiveCustomer Relations.” After the course is completed, the sales managerdecides to evaluate it. This design looks like the one shown here.

TRAINING —— MEASURE

Any of the four types of criteria (e.g., reactions, learning, behavior, andorganizational results) could be used as the “after” measures. It wouldbe difficult, however, to know what, if any, changes occurred since no“before” measure (e.g., no pretest) was made. In addition, since theresults may not be compared with those of another group who did notreceive training, it would not be possible to say whether any change wasdue to the training. As a result, this design is not recommended.

One Group Pretest Post Test Design:

Another design for evaluating the training group on the criteria of interestis to measure the group before and after the training. This design is asfollows:

MEASURE————— —TRAINING ——————MEASURE

This design is able to assess whether a change has occurred for the



training group in the criteria (e.g., learning, behavior). Unfortunately, it isnot able to tell whether or not the change is due to training, since there isno control group. A change that is detected could have been caused bythe introduction of new equipment or a new manager, or by any numberof other reasons. Thus, this design is not extremely useful and is notrecommended.

Post Test only Control Group Design:

A much stronger design for assessing the effectiveness of a trainingprogram is shown here.

GROUP 1—R: TRAINING MEASURE

GROUP 2—R: NO TRAINING MEASURE

In this design, two groups are used and individuals are randomly assigned(R) to either group (i.e., an individual has an equal chance of being put ineither group 1, the training group, or group 2, the control group). Theuse of random assignment helps to initially equalize the two groups. Thisis important to ensure that any differences between the two groups aftertraining are not simply caused by differences in ability, motivation, orexperience. The post test only control group design is useful when it isdifficult to collect criteria measures on individuals prior to offering themthe training. (For example, an HR professional may believe that givingindividuals a pretest, such as a learning test might overly influence theirscores on the post test, which might he the same learning measure. AnotherHR professional may not have time to give tests.) Individuals are randomlyassigned to the two groups, and their scores on the post test arecompared. Any differences on the post test can be attributed to the trainingprogram, since it is assumed that the two groups were somewhat equalprior to training. From the organization’s standpoint, it would be beneficialto make sure the employees from the control group are placed in a trainingprogram at a later time.

Pre Test Post Test Control Group Design:

Another powerful design that is recommended for use in training evaluationis as follows:

GROUP 1 —R: MEASURE—-——TRAINING————MEASUREGROUP 2—R: MEASURE——NO TRAINING——MEASURE



Individuals are randomly assigned to the two groups. Criteria measuresare collected on both groups before and after the training program isoffered, yet only one group actually receives the training. Comparisonsare made of the changes detected in both groups. If the change in-group1is significantly different from the change in group 2, we can be somewhatcertain that it was caused by the training. Since many organizations willwant all the employees in both groups to receive the training, the trainingcan be offered to group 2 at a later time.

Multiple Time Series Design:

Another design recommended for use in training evaluation is shownbelow.

GROUP 1—R: MEASURE—MEASURE-MEASURE-— TRAINING— MEASURE - MEASURE -

MEASURE

GROUP 2—R; MEASURE - MEASURE - MEASURE — NOTRAINING—MEASURE-MEASURE- MEASURE

In this design, individuals are randomly assigned to two groups, and thecriteria measures are collected at several times before and after the traininghave been offered. This design allows the HR professional to observeany changes between the two groups over time. If the effects of trainingheld up over several months, this design would offer stronger supportfor the program.

Assessing the Costs and Benefits of Training

To conduct a thorough evaluation of a training program, it is important toassess the costs and benefits associated with the program. This is difficultto do but may be important for showing top management the value oftraining for the organization. For example, in one case, the net return ofa training program for bank supervisors was calculated to be $148,400over a 5-year period. Generally, a utility model would be used to estimatethe value of training (benefits minus costs).

Some of the costs that should be measured for a training program includeneeds assessment costs, salaries of training designers, purchase ofequipment (computers, videos, handouts), program development costs,evaluation costs, trainers’ costs (e.g., salaries, travel, lodging, meals),facilities rental, trainee wages during training, and other trainee costs(e.g., travel, lodging, meals).



It is important to compare the benefits of the training program with itscosts. One benefit that should be estimated is the dollar paybackassociated with the improvement in trainees’ performance after receivingtraining. Since the results of the experimental design will indicate anydifferences in behavior between those trained and those untrained, theHR professional can estimate for that particular group of employees (e.g.,managers, engineers) what this difference is worth in terms of the salariesof those employees. Another factor that should be considered whenestimating the benefits of training is the duration of the training’s impactthat is, the length of time during which the improved performance will bemaintained. While probably no programs will show benefits forever, thosethat do incur longer term improved performance will have greater valueto the organization.

4.7 DIRECTING

Direction represents one of the essential functions of management becauseit deals with human relations. Once the organizational plans have beenlaid down, the structure being designed, and competent people broughtin to fill various positions in organization, direction starts. Direction is themanagerial function of guiding, motivating, leading and supervising thesubordinates to accomplish desired objectives. Acquiring physical andhuman assets and suitably placing them will not suffice; what is moreimportant is that people must be directed toward organizational goals.Without redirection and supervision, employees become inactive, dulland inefficient and consequently the physical assets like machinery andplant will be put to ineffective use.

Direction is an important managerial function that initiates organizer’saction. It is a connecting and activating link between various functions ofmanagement. It is essentially concerned with mobilizing and synthesizinghuman resources and efforts to accomplish the goals of the organization.A manager’s most important job is to direct the efforts of employees.Direction phase of management is the heart of management-in-action. Itprovides necessary guidance and inspiration to people at work in orderto carry out their assigned duties. Direction is the essence of operations.It is a continuous function. A manager never ceases to direct, guide,teach, watch, and supervise his subordinate employees.



4.7.1 Meaning

According to Dale, direction is telling people what to do and seeing thatthey do it to the best of their ability. It is through directing that managersget the work done through people. It consists of:

Issuing orders and instructions by a superior to his subordinates(Communication).

Guiding, advising and helping subordinates in the proper methods ofwork (Leadership).

Motivating them to achieve goals by providing incentives, goodworking environment, etc. (Motivation).

Supervising subordinates to ensure compliance with plans(Supervision).

Thus, the scope of direction is very wide. It includes all those activities,which a manager undertakes to influence the actions of hissubordinates and achieve goals. (Koontz and O’Donnell).

4.7.2 Features

Direction is the process of guiding, inspiring, supervising and commandingsubordinates towards the accomplishment of goals. It has the followingfeatures:

Deals with people: Direction deals with people. It is the process ofinspiring people to achieve goals. To this end, it seeks to createharmonious relationships between people. However, this is not an easyaffair. People are not primarily interested in enterprise objectives, theyhave objectives of their own (Koontz and O’Donnell). Directing is,therefore, a complex function, as managers have to deal with peoplehaving diverse goals.

Seeks performance: Direction makes things happen. It translates plansinto action. It makes people goal-oriented. To obtain results, managersnot only issue orders but also supervise the performance of subordinates.They also try to integrate effort at various levels. This helps in securingdesired performance at minimum cost.

Provides a link: Direction is the function of management, which followsplanning, organizing and staffing. It lends meaning to them by ensuringaccomplishment of goals. It provides an important link between different



functions in an organization. Without direction, the individual goals andorganisational goals would never intermesh.

Pervasive: All managers at all levels of an organization perform direction.Every manager is expected to supervise, motivate, lead and communicatewith his subordinates to get the results. However, the time spent on theseactivities decreases at higher levels of authority.

Dynamic and continuous: Direction is a dynamic and continuing activityof managers. Whenever plans change, the techniques of direction alsochange. A manager has to suitably modify the techniques of direction inorder to keep pace with changing times. Further, a manager needs todirect, guide, teach, motivate and lead his subordinates on a continuousbasis. It is an ongoing activity of managers.

4.7.3 Nature and Purpose

Direction is a vital managerial function. Planning, organizing and staffingare preparatory functions. It is through direction that managers get thingsdone. Hence, it is also called management in action. The importance ofdirecting function in the process of management may be discussed underthe following heads :

Initiates action : Direction lends meaning to other managerial functionssuch as planning, organizing and staffing. It is through direction, managersseek to achieve goals. In most systematic planning, sound organizationand staffing do not ensure accomplishment along with these functions.Managers must initiate action by:

(i) issuing instructions,

(ii) providing guidance,

(iii) supervising work, and

(iv) motivating subordinates to realize goals.

Without direction, other functions of management remain ineffective.Direction makes happen.

Achieves integration: Direction creates harmony and cooperationamong the members of a group. In an organization, different people atdifferent levels perform the total work. Unless managers supervise thework in a proper way, things do not move in a desired direction. Directionsecures the whole-hearted cooperation of people at all levels through



good communication, people-oriented supervision and motivation. It triesto integrate the efforts of individuals in a proper way.

Motivates people: Direction motivates employees to achieve superiorperformance. To this end, attractive incentives, healthy work climate,guidance and counseling etc., are provided to employees. Employeesare made to realize that their performance alone guarantees theorganization’s success. Unless they contribute in a real way, there is nofuture. This ultimately helps in getting superior performance fromemployees. Direction, thus, makes common men do uncommon things.

Facilitates changes: Direction facilitates necessary changes in anorganization. It helps an organization to introduce changes smoothly. Forexample, employees often resist introduction of computers and robots inmanufacturing operations, fearing loss of employment. Managers canremove such doubts by emphasizing the fact that automation andcomputerization will ultimately help the organization to achieve growthand thereby, provide attractive incentives to employees. Throughpersuasive leadership and proper communication managers can securethe cooperation of employees. They can introduce changes in a smoothway.

Attains balance and stability: Direction helps an organization to strikea harmonious balance between individual needs and organisationaldemands. People are made to work hard in an attempt to realizeorganisational goals and thereby earn their rewards. They are compelledto use resources judiciously and achieve steady progress. In the Wordsof Dimock, “The heart of administration is the direction function whichinvolves determining the scope, giving orders and instructions andproviding dynamic leadership”. Direction converts plans into action. It isthe nucleus around which the practice of management is built. Withoutproper direction, people do not work to their full capacity, and goalsmay remain as dreams. By putting everything on the right trackcontinuously, direction ensures stability to an organization.

4.7.4 Principles of Direction

Important principles of direction may be summarized thus:

(a) Principle of harmony of objectives: Direction function must firstof all resolve the conflict between individual goals and organisationalobjectives. A manager must try to bring harmony and fusion between



individual employees, groups, and organization. A manager shouldfoster the sense of belonging to the organization among the individualsso that they can identify themselves with the company. When boththe interests are integrated, contribution of subordinates to thecompany will be maximum. It leads to efficiency and effectiveness.

(b) Principle of unity of command: A sound principle of direction isthat the subordinates should receive orders from one and only onesuperior. That means to say there should not be dual subordination.Dual subordination brings disorder, confusion, chaos, and underminesthe authority of a superior. Any violation of this principle may becatastrophic to the organization.

(c) Principle of direct supervision: Since direction involves motivatingthe employees towards work, it is almost essential for the managerconcerned to have a personal touch with the subordinates and involvein face-to-face communication regarding work-related matters. Heshould also develop informal relationships with his employees. Directsupervision makes the subordinates happy and boosts their morale.It also ensures quick feedback of necessary information.

(d) Appropriate techniques: The technique used for direction shouldbe appropriate to the people, the task and the situation. Democraticstyle may work in some cases but autocratic style may produce resultsin certain other cases especially where subordinates are incapableof doing things on their own.

(e) Managerial communication: Two-way communication is animportant part of direction. The manager should explain the policiesand practices to subordinates and the results expected of them.Proper feedback should come through upward communication. Themanager should actively encourage subordinates to express theirviews freely and fearlessly.

(f) Informal organisation: Managers should make use of informalgroups to supplement, support and strengthen the formal structure.The cooperation of informal leaders will go a long way in putting thehouse in order.

(g) Principle of maximum individual contribution: Performanceimproves greatly when every employee gives his best to theorganization. The manager, therefore, should inspire the subordinates



in such a way that they contribute their maximum while realizingorganisational objectives.

(h) Use of motivation techniques: A manager should know how tomotivate and inspire the employees. A manager should developselective motivation techniques such as money, pay, status, jobenrichment, etc., so that the productivity and the quality of thecommodity produced increases. Motivation almost always leads tohigher job satisfaction. To properly direct and motivate theemployees, an executive must have insight into how his personalityworks, how employees perceive the work environment, the attitudesof employees, etc. Understanding others and self are important forthis. Understanding self is important for understanding others;understanding others is necessary for motivating them effectively.

(i) Principle of follow-up: Successful direction is a never-endingactivity. It involves constant continuous supervision, coaching, advice,counseling and helping the employees in their respective activities.Direction is also concerned with ensuring that people do what theyare told to do. This requires continuous feedback. Feedback isessential to turn or stop or adjust the wheel of management-in-action.

4.7.5 Elements of Direction

The directing function of management consists of the following elements(Newman):

(a) issuing orders and instructions to subordinates,

(b) follow-up of instructions,

(c) standard practice and indoctrination,

(d) explanations,

(e) consultative direction.

(a) Good instructions: As William Newman has rightly pointed out,every instruction given by the manager in the process of directingthe employees must be reasonable, complete, and clear. Theinstructions must be in writing. Written instructions are desirable whenseveral individuals are subject to or are directly affected byinstructions, and execution of the instructions will extend over aconsiderable period of time and the matter is of such importancethat steps to avoid the possibility of misunderstanding are needed.



(b) Follow-up of instruction: Another well recognized principle is thatonce the orders are issued, they should be followed up to see whetherthey are executed properly or the instructions should becountermanded. If the executive is indifferent in follow-up, it willlead to administrative lax, time schedules become insignificant andwill result in inefficiency. Insistence on execution of instructions isessential to ensure efficiency in direction.

(c) Standard practice and indoctrination: The use of standardoperating procedures and customary ways of doing things is anessential part of direction. Standard practice simplified the instructionto be given by manager. Unfortunately, a large part of inadequatedirection can be traced the misunderstanding about standard practice.Another associated aspect of standard practice is the indoctrination.Indoctrination means instilling in the subordinates a set of beliefsand attitudes so that they look at an operating situation in a desirableway.

(d) Explanations: While issuing instructions, the manager should explainwhy the order is given.

(e) Consultative direction: Before an order is issued, the peopleresponsible for executing it will be consulted about its feasibility,workability and better ways of accomplishing the results.

Characteristics of a Good Order

1. The order should be clear and easily understandable.

2. It should be reasonable and attainable.

3. It must be complete in all respects leaving no doubt in the minds ofsubordinates as to what is expected of them.

4. It should be compatible with the overall objectives of the organization.

5. It must indicate the time period within which it should be carried outand completed.

6. The tone of the order should be appropriate and should stimulateready acceptance.

7. It should preferably be in writing. This helps in ensuring uniformactions everywhere.

8. All orders should follow the chain of command.



9. When issuing the order, the manager should explain the purposebehind it. i.e., why it is being given.

10. The order should be regularly followed up and suggestions given bysubordinates should be incorporated when it is reissued.

4.8 Supervision

Need for Supervision

There is no universally agreed definition of leading. Supervisory jobsdiffer widely in content, scope and implementation. Some supervisorsmanage their departments completely; others have authority in limitedareas only, while others take marching orders from somebody else.Generally, supervisors deal with workers directly and are sometimescalled ‘first-line managers’. In the words of G.R. Terry, “Supervision isthe achieving of desired results by means of the intelligent utilization ofhuman talents and facilitating resources in a manager that provides thegreatest challenge and interest to human talents.” This definition impliesthat supervision includes:

Overseeing employees at work.

Intelligent utilization of human talents.

Motivating employees to peak performance.

Maintenance of good human relations.

These days most employees complain of monotonous, dull anduninteresting jobs. When organizational jobs do not provide any challengeto employees, frustration, resentment and antagonism are the expectedbyproducts. No wonder then that employees are somewhat antagonistictoward the organization in which they are working and its leaders.Consequently, their morale is low. Managers, in turn are at a loss tounderstand why employees do not take interest in their work. How tomaintain good personnel relations happens to be one of the majorcontemporary puzzles of the business world. A good supervisor fills thevacuum in such cases. He assists employees in doing a good job. Hetranslates the ‘foggy’ management directives to workers in anunderstandable language. He finds better ways to achieve results, inspiresgood team effort and achieves the targets within a reasonable time andat a reasonable cost. In other words, a supervisor not only helps in



developing wholesome attitudes toward managerial actions, but alsoexercises tremendous influence in securing full support and cooperationfrom employees. He is extremely influential in motivating employees, indeveloping them, and in building teams which carry out specific duties.

An organization has the greatest chance of being successful when all ofthe employees work toward achieving its goals. Since leadership involvesthe exercise of influence by one person over others, the quality ofleadership exhibited by supervisors is a critical determinant oforganizational success. Thus, supervisors study leadership in order toinfluence the actions of employees toward the achievement of the goalsof the organization.

Supervisors can learn about leadership through research. Leadershipstudies can be classified as trait, behavioral, contingency, andtransformational. Earliest theories assumed that the primary source ofleadership effectiveness lay in the personal traits of the leaders themselves.Yet, traits alone cannot explain leadership effectiveness. Thus, laterresearch focused on what the leader actually did when dealing withemployees. These behavioral theories of leadership sought to explainthe relationship between what the leaders did and how the employeesreacted, both emotionally and behaviorally. Yet, behavior can’t alwaysaccount for leadership in different situations. Thus, contingency theoriesof leadership studied leadership style in different environments.Transactional leaders, such as those identified in contingency theories,clarify role and task requirements for employees. Yet, contingency can’taccount for the inspiration and innovation that leaders need to competein today’s global marketplace. Newer transformational leadership studieshave shown that leaders, who are charismatic and visionary, can inspirefollowers to transcend their own self-interest for the good of theorganization.

The Skills of a Supervisor : To perform his job effectively, the supervisormust possess certain skills. According to Prof Robert Kahn these maybe classified into three categories: human skills, technical skills, andconceptual skills. Effective supervision should give equal emphasis andattention to all three roles. As the demands of their jobs change,supervisors must switch roles continually. Sometimes, they may have touse their human skills, and at other times they need their technicalexpertise.



Human skills : Working with people, perhaps, poses the greatestchallenge to the supervisor. Human skills do not come easily. The abilityto create an atmosphere of goodwill, confidence and trust must becomea natural part of supervisory life. The supervisor must try to understandthe problems of the operatives and provide workable solutions, whichnot only solve the problem on hand but also satisfy the operatives tosome extent. As rightly summarized by Terry and Stallard, “Thesupervisor must always be objective, find out and review both sides ofproblems or disputes, refrain from jumping to conclusions, and solveissues fairly without playing favorites.” He must be impartial in his dealingswith management and workers. The following human relations guidelinesmay help supervisors acquire or improve their human skills:

Try to look at the positive side of the coin first.

Judge each group member by his good qualities.

Analyze the behavior of those above you and at par with you beforeanalyzing the behavior of your subordinates.

Develop helpful and constructive contacts with group members, tobring out the best in them.

Invite group members to participate in your schemes.

Work on common motives and try to improve teamwork.

Think through a problem objectively, patiently and carefully beforedetermining what action to take.

Spot the key figures of each informal group and seek theircooperation.

Give instructions clearly.

Provide sufficient details.

Realize the difficulty of introducing any change to individuals ratherthan to groups.

Request and explain; don’t demand.

Be persuasive, not coercive.

Technical skills: The supervisor should have a thorough knowledge ofthe work he is supervising. He must be able to staff adequately anddistribute the workload properly. Adequate knowledge of systems,



procedures, materials, office forms, equipment, and the way the resultshave to be achieved enables a supervisor to be a good leader and obtainsatisfactory results.

Conceptual skills: The supervisor should have the ability to see thetotal picture. He should visualize how the various functions of theorganization depend on one another and how changes in one departmentaffect the organization as a whole. The dangers of extreme specializationlike ‘parts mentality’, ‘tunnel vision’, and inability to look beyond theconfines of one’s specialty should be avoided. Ability to look at the‘whole picture’, broad vision, and friendly attitude are the hallmarks ofeffective supervisors. Supervisors should have the conceptual skills tounify and coordinate the various components of the organization.

Supervisory Roles

What is the role of a supervisor in an organization? A person caught inthe middle? A buffer between management and workers taking the blows?Is he a friend or a foe? Over the years, the role of the supervisor inorganizations has undergone a tremendous change. Till the 60s,supervisors were treated as members of the management, enjoying therespect, loyalty and cooperation of workers. With the advent of giantcorporations, the job of the supervisor has become very complex andconfusing. He is expected to be a clerk shuffling papers and filling outforms. He is to be the master technician or the master craftsman of hisgroup. He is to be an expert on tools and equipment.

He is to be a leader of people. To make the confusion worse, he isexpected to perform every one of these jobs to perfection. Such highlyconflicting and confusing jobs have resulted in his role that is shrinking instatus, in importance and in esteem. He has become a buffer betweenmanagement, union and workers, continually receiving the arrows ofcriticism, justified as well as unjustified. He has become highly vulnerablelike a pawn in the game of chess. He is being branded increasingly as an‘enemy’. “He is separated from the men he supervises by an ever higherwall of hostility, suspicion and resentment. On the other hand, he is alsoseparated from management by his lack of managerial knowledge.”Workers expect the supervisor to be fair and impartial, open mindedand friendly. Management expects the supervisor to have a completeknowledge of his work, genuine interest in his work, curiosity to



constantly update his job knowledge; and the ability to meet deadlines.Over the years, the job of a supervisor has become ‘a hybrid.’ It is nowonder that the supervisor is being rejected by both, “by his subordinatesbecause he is no longer truly a scientist or an expert but has ‘sold out’ tomanagement, and by management because he is parochial,departmentalized and one sided.” In this heated atmosphere it is easy toprovoke controversy and promote a spirited discussion. Let’s brieflydwell on the roles performed by supervisors over the years beforesuggesting a contingency framework.

1. Scientific management roles: Every supervisor needs to appreciatethe importance of scientific management under certain conditions.There is only one best way to do a job and it is the primary duty ofa supervisor to study and analyze the jobs carefully and suggestsuitable work procedures and methods. According to the scientificmanagement approach, the supervisor is expected to assume thefollowing types of roles:

(a) Technician: Supervisors should possess a sound knowledge of thejobs entrusted to them. They must be able to solve the technicalproblems posed to them by the employees.

(b) Analyst: Most of the jobs in an organization can be efficiently andeffectively performed in the right way . It is the job of a supervisorto find out better and improved ways of performing jobs.

(c) Controller: It is the job of a supervisor to provide rewards toproductive workers and punishments to unproductive workers.

2. Human relations roles: Under the scientific management approach,workers are assigned mechanical roles. They are expected to perform‘watch dog’ functions. The emphasis on finding out appropriate workprocedures and gearing employees to work schedules hasunfortunately produced negative results. It was realized that, toimprove performance, the needs of the employees must berecognized, and must be met adequately. Under the human relationsapproach, the supervisors are expected to be sensitive to employeeneeds and to help them to integrate the goals of the organization. Asa result of this viewpoint, supervisors are expected to do the followingroles:



(a) Counselor: Supervisors must be problem-solvers, notproblem-creators. They must listen to employee grievancessympathetically and try to solve them. They should not try to chiselon just complaints. In case of trouble, they must investigatethoroughly and give workers a chance to explain their side of thestory. Everyone should be a given a fair hearing.

(b) Linking pin: The primary duty of a supervisor is to get the jobdone, at the right time and in the right way. As a group leader hemust be fair, just and dependable. As a management member, hemust meet the deadlines and show good performance. He must useresources well, maintain good personal relations and allow employeesto use their potential fully.

(c) Human relations expert: A supervisor must possess goodinterpersonal skills. He must be able to communicate the needs,problems and concerns of the employees to management. As pointedout by H. L. Wylie, a good supervisor “takes a personal interest inemployees, he is willing to help, willing to take responsibility; doesnot pass the buck; willing to go all the way ‘up the line’ for employeeswhen necessary.” In order to exercise human relations skills,supervisors must possess a genuine interest in people and a deepdesire to get along with them.

(d) The person caught in the middle: The supervisory position is alonely occupation. Top management treats a supervisor as anoperative and workers, in turn, view him as a representative of themanagement. He is on the fringe of both, management and employeegroups, and implying less than full acceptance by both. Supervisors,thus, are forced to perform a ‘tight rope walk’ in their daily life. Towalk a fine line and to gain acceptance from both management andemployees, a supervisor should possess good conceptual andinterpersonal skills.

(e) Motivator: Successful supervisors pay adequate attention toemployee needs and appreciate the importance of fulfilling these needswhile realizing organizational goals. To elicit effective performancefrom employees, it is necessary to listen to their grievances andprovide a satisfactory work climate. Good performance should berecognized and adequately rewarded. Employees should also be



motivated to assume additional responsibilities. Jobs should be mademore stimulating. Opportunities must be provided to employees toutilize their mental faculties fully.

(f) Trainer: A good supervisor lets each employee know where hestands. He is aware of the differences among employees and iscapable of responding to each employee as an individual. He assignswork fairly so that the right man is placed on the right job. He providesnecessary training and coaching to employees and makes them moreproductive.

3. Functional roles: According to the Universal principles approach(as propagated by Henry L Fayol and others), the supervisor shouldhave a broad perspective while getting things done through others.He must be able to organize and coordinate the department’s humanand physical assets to achieve the overall goals of the organization.

According to the functional approach, a supervisor is expected toassume the following roles:

(a) Leader: A good supervisor must demonstrate good leadershipqualities. Giving orders and instructions does not make him a leader.Research studies have shown that employees react negatively toorders and commands issued by leaders. Task oriented styles,emphasizing work and its components, make employees unhappyand bring frustration and resentment among them. The feelings andconcerns of workers should be given importance while getting thingsdone through them. Therefore, effective supervisors adopt apeople-oriented style where the results are achieved by satisfyingsubordinates’ needs.

(b) Organizer: A supervisor is much like the conductor of a symphonyorchestra bringing into play each of the instruments at just the rightmoment to produce beautiful music. A supervisor is expected toestablish the proper relationships between people, task andresources. He has to convert the disorganized resources of men,machines and materials into a useful, productive organization. Hehas to maintain an effective manpower system for achieving establishedplans. To meet these purposes, the work must be divided, properlyallocated and placed under the charge of responsible and competentindividuals. A suitable work climate must be provided to makesubordinates productive and efficient.



(c) Planner: A supervisor should educate subordinates regarding theoverall objectives of the organization and the importance of realizingthese objectives against a time schedule. He must allow thesubordinates to see ‘the big picture’. The work group must know inadvance what they are doing and how they contribute to the successof the organization by performing assigned tasks effectively. A goodsupervisor must provide a convenient break up of major, overallobjectives for subordinates and guide them in accomplishing thegoals. He should point out the way by planning step by step anddetermining how to get there from them.

(d) Decision-maker: Supervisors have direct access to the informationon which most operational decisions are taken. By virtue of theircrucial position in the organisation, supervisors are most likely to bethe first to identify ‘potential problem areas’, and provide thenecessary warning signals. Exposure to day-to-day problems enablesthem to come out with appropriate solutions to such problems quickly.Additionally, they can also implement the decision and monitorperformance along desired channels. By serving as critical linkbetween management and subordinates, supervisors make manydecisions needed for the successful day-to-day functioning of modernorganizations.

How to Supervise Effectively

The question of how to supervise effectively has been widely andthoroughly discussed in management. Most of these prescriptions aresomewhat idealistic and academic. However, Terry and Stallard’sguidelines appear to be sound enough for implementation. After surveyingthe ever growing literature on this subject, they have provided the followingrecommendations for achieving effective supervision:

1. Practice participation: Supervisors should allow employees to airtheir feelings about organizational policies and procedures openly.Employees should be given an opportunity to ventilate their grievancesfreely. Even if an employee is wrong, the supervisor should listen tohim, because this can be a means to relieve tension and establishmutual support. To ensure commitment and loyalty, it is better toinvolve employees in the goal setting process.



2. Be aware of the resources available to accomplish theprescribed work: Supervisors should be able to manage resourceflows properly. However, striking a fine balance between humanand non-human resources is not easy. This requires information thatis usually found in schedules, budgets, etc. Since supervisors areaccountable for the effective deployment of resources, it is better toinvolve them in the initial stages.

3. Know and enforce policies and rules: Policies define theboundaries of supervisory action. They guide the current and futureoperations of an organisation. In cases where rules violated andpolicies are not enforced rigorously, rectification steps should betaken without delay. “Side stepping issues, by-passing grievancecases, overlooking infringements of regulations, all are indications ofsupervisory weakness.” If corrective action is necessary, a supervisormust take it promptly. In order to enforce policies, rules andregulations, a supervisor must be equipped with facts; he must havethe ability to interpret the facts intelligently and act quickly. “Promptaction on his part will often prevent minor irritations from becomingmajor problems.”

4. Find out the existing relationships inside and outside theimmediate department being supervised: To show goodperformance, supervisors should understand the network oforganisational relationships that exist between various departments.They should know the importance of these relationships. They shouldalso know how each department contributes to the realization ofoverall goals. This means knowing the organisation and being ableto grasp how a particular project or way of doing something fits intothe total picture. Understanding these relationships enablessupervisors to manage employees effectively.

5. Watch waste-material loss and time loss: Supervisors shouldview time as a vital and precious possession, which must always beused wisely. They must be able to get the most out of their workinghours. This requires that they must clearly define the long-andshort-term objectives and outline the priorities properly. The problemis not just cutting activities and doing things more quickly but alsospending additional time in selected activities. Some time of eachday should be devoted to planning, in a similar way, supervisors



should guard against waste of all types affecting organisationalperformance.

6. Measure performance to aid in having a fair wage plan:Supervisors should establish performance standards for employees.Each employee has a right to know what performance standards areexpected of him and how such standards are determined. He mustbe able to assess his own performance and keep his scorecardup-to-date. The employee should know in what respects he isconsidered weak and where he ‘shines’. However, while fixingperformances standards care should be taken to keep them atreasonably attainable level. The standards fixed should neither betoo high nor too low. High standards breed frustration and resentmentand low standards make employees docile and unproductive.Moreover, the standards fixed must be same for all employeesperforming similar jobs.

7. Secure employees’ opinions regarding supervision: Supervisorsshould talk to employees frequent ly, in a simple andeasy-to-understand language. Talking reveals much about how thepolicies, rules and regulations are interpreted by the work group. Italso reveals a lot about how the supervisory actions are received. Ithelps in finding out what is bothering the employees and what ‘gripes’are developing. Attitude surveys, spot interviews, casualconversations help in testing the pulse of the employees from time totime. While establishing two-way communication with the employees,care should be taken to use words carefully. Don’t let your feelingsrun away with your words, whether it is words of reproof or wordsof commendation. It may be hard to live up to hasty promises ofreward, and it might be equally difficult to fulfill angry threats.

8. Develop capable assistants: Supervisors should develop capableassistants. They must encourage potential supervisors to exploit theircapacities fully. When potential supervisor and managerial materialhas been located, supervisors should encourage these people to studyfurther, to acquire new skills and information that will make themmore valuable members of the company. Obviously, a supervisorcannot aspire for promotion without developing competentunderstudies.



9. Know from whom help is supplied when it is requested orneeded: Supervisors should know which supervisors and qualifiedstaff personnel to turn to for help from time to time. Without theblessings from the top management and staff personnel, it may notbe possible to show good results.

10. Inform top and middle management members what supervisoryaction is taking place and why: Supervisors should keepmanagement in touch with organisational activities and trends.Information regarding absenteeism, employee turnover, volume ofwork produced, condition of office equipment, budget requirements,trends, bottlenecks and the like, should be provided to managementperiodically.

Traditional vs. Developmental Supervision

The basic objective of supervision is to see that the worker does whathe is supposed to do through:

(i) Proper understanding of the needs of the workers,

(ii) Observing, guiding and evaluating this work and

(iii) Rewarding the workers whenever they accomplish something.

Over the years, the concept of supervision has undergone significantchanges.

4.9 A Definition of Leadership

A traditional definition of leadership: Leadership is an interpersonalinfluence directed toward the achievement of a goal or goals.

Three important parts of this definition are the terms interpersonal,influence, and goal.

Interpersonal means between persons. Thus, a leader has more thanone person (group) to lead.

Influence is the power to affect others.

Goal is the end one strives to attain.

Basically, this traditional definition of leadership says that a leaderinfluences more than one person toward a goal.

Another definition of leadership follows :



LEADERSHIP is a dynamic relationship based on mutual influence andcommon purpose between leaders and collaborators in which both aremoved to higher levels of motivation and moral development as theyaffect real, intended change. (Kevin Freiberg and Jackie Freiberg, NUTS!Southwest Airlines’ Crazy Recipe for Business and Personal Success,Bard Press, 1996, p. 298)

Three important parts of this definition are the terms relationship, mutual,and collaborators. Relationship is the connection between people. Mutualmeans shared in common. Collaborators cooperate or work together.

This definition of leadership says that the leader is influenced by thecollaborators while they work together to achieve an important goal.

Leadership versus Management

A leader can be a manager, but a manager is not necessarily a leader.The leader of the work group may emerge informally as the choice of thegroup. If a manager is able to influence people to achieve the goals ofthe organization, without using his or her formal authority to do so, thenthe manager is demonstrating leadership.

According to John P. Kotter in his book, “A Force for Change: HowLeadership Differs From Management” (The Free Press, 1990), managersmust know how to lead as well as manage. Without leading as well asmanaging, today’s organizations face the threat of extinction. Managementis the process of setting and achieving the goals of the organization throughthe functions of management: planning, organizing, directing (or leading),and controlling. A manager is hired by the organization and is given formalauthority to direct the activity of others in fulfilling organization goals.Thus, leading is a major part of a manager’s job. Yet a manager mustalso plan, organize, and control. Generally speaking, leadership dealswith the interpersonal aspects of a manager’s job, whereas planning,organizing, and controlling deal with the administrative aspects.Leadership deals with change, inspiration, motivation, and influence.Management deals more with carrying out the organization’s goals andmaintaining equilibrium.

The key point in differentiating between leadership and management isthe idea that employees willingly follow leaders because they want to,not because they have to. Leaders may not possess the formal power to



reward or sanction performance. However, employees give the leaderpower by complying with what he or she requests. On the other hand,managers may have to rely on formal authority to get employees toaccomplish goals.

4.10 THEORIES OF LEADERSHIP

4.10.1 Trait Theories

In the 1920s and 1930s, leadership research focused on trying to identifythe traits that differentiated leaders from non-leaders. These earlyleadership theories were content theories, focusing on “what” an effectiveleader is, not on ‘how’ to effectively lead. The trait approach tounderstanding leadership assumes that certain physical, social, andpersonal characteristics are inherent in leaders. Sets of traits andcharacteristics were identified to assist in selecting the right people tobecome leaders. Physical traits include being young to middle-aged,energetic, tall, and handsome. Social background traits include beingeducated at the “right” schools and being socially prominent or upwardlymobile. Social characteristics include being charismatic, charming, tactful,popular, cooperative, and diplomatic. Personality traits include being self-confident, adaptable, assertive, and emotionally stable. Task-relatedcharacteristics include being driven to excel, accepting of responsibility,having initiative, and being results-oriented.

Trait theories intended to identify traits to assist in selecting leaders sincetraits are related to leadership effectiveness in many situations. The traitapproach to understanding leadership supports the use of tests andinterviews in the selection of managers. The interviewer is typicallyattempting to match the traits and characteristics of the applicant to theposition. For example, most interviewers attempt to evaluate how wellthe applicant can work with people.

Trait theory has not been able to identify a set of traits that will consistentlydistinguish leaders from followers. Trait theory positions key traits forsuccessful leadership (drive, desire to lead, integrity, self-confidence,intelligence, and job-relevant knowledge). Yet the theory does not makea judgment as to whether these traits are inherent to individuals or whetherthey can be developed through training and education. No two leadersare alike. Furthermore, no leader possesses all of the traits. Comparing



leaders in different situations suggests that the traits of leaders dependon the situation. Thus, traits were de-emphasized to take into accountsituational conditions (contingency perspective).

4.10.2 Behavioral Theories

The behavioral theorists identified determinants of leadership so thatpeople could be trained to be leaders. They developed training programsto change managers’ leadership behaviors and assumed that the beststyles of leadership could be learned.

Theory X and Theory Y

Douglas McGregor described Theory X and Theory Y in his book, TheHuman Side of Enterprise. Theory X and Theory Y each representdifferent ways in which leaders view employees. Theory X managersbelieve that employees are motivated mainly by money, are lazy,uncooperative, and have poor work habits. Theory Y managers believethat subordinates work hard, are cooperative, and have positive attitudes.

Theory X is the traditional view of direction and control by managers.

1. The average human being has an inherent dislike of work and willavoid it if he or she can.

2. Because of this human characteristic of dislike of work, most peoplemust be controlled, directed, and threatened with punishment to getthem to put forth adequate effort toward the achievement oforganizational objectives.

3. The average human being prefers to be directed, wishes to avoidresponsibility, and has relatively little ambition, wants security aboveall.

Theory X leads naturally to an emphasis on the tactics of control toprocedures and techniques for telling people what to do, for determiningwhether they are doing it, and for administering rewards and punishment.Theory X explains the consequences of a particular managerial strategy.Because its assumptions are so unnecessarily limiting, it preventsmanagers from seeing the possibilities inherent in other managerialstrategies. As long as the assumptions of Theory X influence managerialstrategy, organizations will fail to discover, let alone utilize, the potentialitiesof the average human being.



Theory Y is the view that individual and organizational goals can beintegrated.

1. The expenditures of physical and mental effort in work are as naturalas play or rest.

2. External control and the threat of punishment are not the only meansfor bringing out effort toward organizational objectives.

3. Commitment to objectives is a function of the rewards associatedwith their achievement.

4. The average human being learns, under proper conditions, not onlyto accept but also to seek responsibility.

5. The capacity to exercise a relatively high degree of imagination,ingenuity, and creativity in the solution of organizational problems iswidely, not narrowly, distributed in the population.

6. Under the condition of modern industrial life, the intellectualpotentialities of the average human being are only partially utilized.

Theory Y’s purpose is to encourage integration, to create a situation inwhich an employee can achieve his or her own goals best by directinghis or her efforts toward the objectives of the organization. It is a deliberateattempt to link improvement in managerial competence with thesatisfaction of higher-level ego and self-actualization needs. Theory Yleads to a preoccupation with the nature of relationships, with the creationof an environment which will encourage commitment to organizationalobjectives and which will provide opportunities for the maximum exerciseof initiative, ingenuity, and self-direction in achieving them.

University of Iowa

Another approach to leader behavior focused on identifying the bestleadership styles. Work at the University of Iowa identified democratic(participation and delegation), autocratic (dictating and centralized) andlaissez-faire styles (group freedom in decision making). Research findingswere also inconclusive.

4.10.3 The Managerial Grid

The dimensions identified at the University of Michigan provided thebasis for the development of the managerial grid model developed byRobert Blake and Jane Mouton. It identifies five various leadership styles



that represent different combinations of concern for people and concernfor production. Managers who scored high on both these dimensionssimultaneously (labeled team management) performed best.

The five leadership styles of the managerial grid include impoverished,country club, produce or perish, middle-of-the road, and team. Theimpoverished style is located at the lower left-hand corner of the grid,point (1, 1). It is characterized by low concern for both people andproduction. The primary objective of the impoverished style is formanagers to stay out of trouble. The country club style is located at theupper left-hand corner of the grid, point (1, 9). It is characterized as ahigh concern for people and a low concern for production. The primaryobjective of the country club style is to create a secure and comfortableatmosphere and trust that subordinates will respond positively. Theproduce or perish style is located at the lower right-hand corner of thegrid, point (9,1). A high concern for production and a low concern forpeople characterize it. The primary objective of the produce or perishstyle is to achieve the organization’s goals. To accomplish the organization’sgoals, it is not necessary to consider employees’ needs as relevant. Themiddle-of-the-road style is located at the middle of the grid, point (5, 5).A balance between workers’ needs and the organization’s productivitygoals characterize it. The primary objective of the middle-of-the-roadstyle is to maintain employee morale at a level sufficient to get theorganization’s work done. The team style is located at the upper right-hand of the grid, point (9, 9). It is characterized by a high concern forpeople and production. The primary objective of the team style is toestablish cohesion and foster a feeling of commitment among workers.

4.10.4 Contingency Theories

Successful leaders must be able to identify clues in an environment andadapt their leadership behavior to meet the needs of their followers andof the particular situation. Even with good diagnostic skills, leaders maynot be effective unless they can adapt their leadership style to meet thedemands of their environment.

4.10.4.1 Fiedler’s Contingency Model

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



Martin M. Chemers and Roya Ayman, write of Fiedler’s contribution:“The realization that leadership effectiveness depends on the interactionof qualities of the leader with demands of the situation in which the leaderfunctions, made the simplistic “one best way” approach of earlier erasobsolete.”

Fred E. Fiedler’s contingency theory postulates that there is no bestway for managers to lead. Situations will create different leadership stylerequirements for a manager. The solution to a managerial situation iscontingent on the factors that impinge on the situation. For example, in ahighly routinized (mechanistic) environment where repetitive tasks arethe norm, a certain leadership style may result in the best performance.The same leadership style may not work in a very dynamic environment.

Fiedler looked at three situations that could define the condition of amanagerial task:

1. Leader member relations: How well do the manager and theemployees get along?

2. The task structure: Is the job highly structured, fairly unstructured,or somewhere in between?

3. Position power: How much authority does the manager possess?

Managers were rated as to whether they were relationship oriented ortask oriented. Task oriented managers tend to do better in situations thathave good leader-member relationships, structured tasks, and either weakor strong position power. They do well when the task is unstructured butposition power is strong. Also, they did well at the other end of thespectrum when the leader member relations were moderate to poor andthe task was unstructured. Relationship oriented managers do better inall other situations. Thus, a given situation might call for a manager witha different style or a manager who could take on a different style for adifferent situation.

These environmental variables are combined in a weighted sum that istermed “Favorable” at one end and “unfavorable” at the other. Taskoriented style is preferable at the clearly defined extremes of “favorable”and “unfavorable” environments, but relationship orientation excels inthe middle ground. Managers could attempt to reshape the environmentvariables to match their style.



Another aspect of the contingency model theory is that the leader-memberrelations, task structure, and position power dictate a leader’s situationalcontrol. Leader-member relations are the amount of loyalty, dependability,and support that the leader receives from employees. It is a measure ofhow the manager perceives him or her and the group of employees isgetting along together. In a favorable relationship the manager has a hightask structure and is able to reward and or punish employees withoutany problems. In an unfavorable relationship the task is usually unstructuredand the leader possesses limited authority. The spelling out in detail(favorable) of what is required of subordinates affects task structure.

Positioning power measures the amount of power or authority the managerperceives the organization has given him or her for the purpose of directing,rewarding, and punishing subordinates. Positioning power of managersdepends on the taking away (favorable) or increasing (unfavorable) thedecision-making power of employees.

The task-motivated style leader experiences pride and satisfaction in thetask accomplishment for the organization, while the relationship-motivatedstyle seeks to build interpersonal relations and extend extra help for theteam development in the organization. There is no good or bad leadershipstyle. Each person has his or her own preferences for leadership. Task-motivated leaders are at their best when the group performs successfullysuch as achieving a new sales record or outperforming the majorcompetitor. Relationship-oriented leaders are at their best when greatercustomer satisfaction is gained and a positive company image isestablished.

4.10.4.2 Hersey-Blanchard Situational Leadership

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



behaviors. In relationship behavior the leader engages in two-waycommunication by providing socio-emotional support. Maturity is thewillingness and ability of a person to take responsibility for directing hisor her own behavior. People tend to have varying degrees of maturity,depending on the specific task, function, or objective that a leader isattempting to accomplish through their efforts.

To determine the appropriate leadership style to use in a given situation,the leader must first determine the maturity level of the followers in relationto the specific task that the leader is attempting to accomplish throughthe effort of the followers. As the level of followers’ maturity increases,the leader should begin to reduce his or her task behavior and increaserelationship behavior until the followers reach a moderate level of maturity.As the followers begin to move into an above average level of maturity,the leader should decrease not only task behavior but also relationshipbehavior.

Once the maturity level is identified, the appropriate leadership style canbe determined. The four leadership styles are telling, selling,participating, and delegating. High task/low relationship behavior (S1)is referred to as “telling.” The leader provides clear instructions andspecific direction. Telling style is best matched with a low followerreadiness level. High task/high relationship behavior (S2) is referred toas “selling.” The leader encourages two-way communication and helpsbuild confidence and motivation on the part of the employee, althoughthe leader still has responsibility and controls decision making. Sellingstyle is best matched with a moderate follower readiness level. Highrelationship/low task behavior (S3) is referred to as “participating.” Withthis style, the leader and followers share decision making and no longerneed or expect the relationship to be directive. Participating style is bestmatched with a moderate follower readiness level. Low relationship/lowtask behavior (S4) is labeled “delegating.” This style is appropriate forleaders whose followers are ready to accomplish a particular task andare both competent and motivated to take full responsibility. Delegatingstyle is best matched with a high follower readiness level.

4.10.4.3 House’s Path-Goal Model

The path-goal theory developed by Robert House is based on theexpectancy theory of motivation. The manager’s job is viewed as coaching



or guiding workers to choose the best paths for reaching their goals.“Best” is judged by the accompanying achievement of organizational goals.It is based on the precepts of goal setting theory and argues that leaderswill have to engage in different types of leadership behavior dependingon the nature and demands of the particular situation. It’s the leader’sjob to assist followers in attaining goals and to provide direction andsupport needed to ensure that their goals are compatible with theorganizations.

A leader’s behavior is acceptable to subordinates when viewed as asource of satisfaction and motivation. Satisfaction is contingent onperformance, and the leader facilitates, coaches and rewards effectiveperformance. Path goal theory identifies achievement-oriented, directive,participative and supportive leadership styles. In achievement-orientedleadership, the leader sets challenging goals for followers, expects themto perform at their highest level, and shows confidence in their ability tomeet this expectation. This style is appropriate when the follower suffersfrom a lack of job challenge. In directive leadership, the leader letsfollowers know what is expected of them and tells them how to performtheir tasks. This style is appropriate when the follower has an ambiguousjob. Participative leadership involves leaders consulting with followersand asking for their suggestions before making a decision. This style isappropriate when the follower is using improper procedures or is makingpoor decisions. In supportive leadership, the leader is friendly andapproachable. He or she shows concern for followers’ psychologicalwell being. This style is appropriate when the followers lack confidence.

Path-Goal theory assumes that leaders are flexible and that they canchange their style, as situations require. The theory proposes twocontingency variables (environment and follower characteristics) thatmoderate the leader behavior-outcome relationship. Environment isoutside the control of followers-task structure, authority system, andwork group. Environmental factors determine the type of leader behaviorrequired if follower outcomes are to be maximized. Followercharacteristics are the locus of control, experience, and perceived ability.Personal characteristics of subordinates determine how the environmentand leader are interpreted. Effective leaders clarify the path to help theirfollowers achieve their goals and make the journey easier by reducingroadblocks and pitfalls. Research demonstrates that employee



performance and satisfaction are positively influenced when the leadercompensates for the shortcomings in either the employee or the worksetting.

4.10.4.4 Vroom, Yetton, Jago Leader-Participation Model

The Vroom, Yetton, Jago leader-participation model relates leadershipbehavior and participation to decision making. The model provides a setof sequential rules to determine the form and amount of participativedecision making in different situations. It is a decision tree, requiring yesand no answers incorporating contingencies about task structure andalternative styles.

The following contingency questions must be answered to determine theappropriate leadership style in the leader-participation model.

Quality Requirement: How important is the technical quality ofthis decision?

Commitment Requirement: How important is subordinatecommitment to the decision?

Leader’s Information: Do you have sufficient information to makea high-quality decision?

Problem Structure: Is the problem well structured?

Commitment Probability: If you were to make the decision yourself,are you reasonably certain that your subordinates would be committedto the decision?

Goal Congruence: Do subordinates share the organizational goalsto be attained in solving this problem?

Subordinate Conflict: Is conflict among subordinates over preferredsolutions likely?

Subordinate Information: Do subordinates have sufficientinformation to make a high-quality decision?

4.10.4.5 Transformational Leadership

Transformational leadership blends the behavioral theories with a littledab of trait theories. Transactional leaders, such as those identified incontingency theories, guide followers in the direction of established goalsby clarifying role and task requirements. However, transformational



leaders, who are charismatic and visionary, can inspire followers totranscend their own self-interest for the good of the organization.Transformational leaders appeal to followers’ ideals and moral valuesand inspire them to think about problems in new or different ways. Leaderbehaviors used to influence followers include vision, framing, andimpression management. Vision is the ability of the leader to bind peopletogether with an idea. Framing is the process whereby leaders define thepurpose of their movement in highly meaningful terms. Impressionmanagement is a leader’s attempt to control the impressions that othersform about the leader by practicing behaviors that make the leader moreatt ract ive and appealing to others. Research indicates thattransformational, as compared to transactional, leadership is morestrongly correlated with lower turnover rates, higher productivity, andhigher employee satisfaction.

A transformational leader instills feelings of confidence, admiration andcommitment in the followers. He or she is charismatic, creating a specialbond with followers, articulating a vision with which the followers identifyand for which they are willing to work. Each follower is coached, advised,and delegated some authority. The transformational leader stimulatesfollowers intellectually, arousing them to develop new ways to think aboutproblems. The leader uses contingent rewards to positively reinforceperformances that are consistent with the leader’s wishes. Managementis by exception. The leader takes initiative only when there are problemsand is not actively involved when things are going well. Thetransformational leader commits people to action and converts followersinto leaders.

Transformational leaders are relevant to today’s workplace because theyare flexible and innovative. While it is important to have leaders with theappropriate orientation defining tasks and managing interrelationships, itis even more important to have leaders who can bring organizations intofutures they have not yet imagined. Transformational leadership is theessence of creating and sustaining competitive advantage.

4.11 MOTIVATION

Motivation is the set of processes that moves a person toward a goal.Thus, motivated behaviors are voluntary choices controlled by theindividual employee. The supervisor (motivator) wants to influence the



factors that motivate employees to higher levels of productivity. Sincemotivation influences productivity, supervisors need to understand whatmotivates employees to reach peak performance. It is not an easy taskto increase employee motivation because employees respond in differentways to their jobs and their organization’s practices.

Factors that affect work motivation include individual differences, jobcharacteristics, and organizational practices. Individual differences arethe personal needs, values, and attitudes, interests and abilities that peoplebring to their jobs. Job characteristics are the aspects of the position thatdetermine its limitations and challenges. Organizational practices are therules, human resources policies, managerial practices, and rewardssystems of an organization. Supervisors must consider how these factorsinteract to affect employee job performance.

Simple Model of Motivation

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

4.11.1 Theories of Motivation

Many methods of employee motivation have been developed. The studyof work motivation has focused on the motivator (supervisor) as well asthe motivatee (employee). Motivation theories are important tosupervisors attempting to be effective leaders. Two primary approachesto motivation are content and process.

The content approach to motivation focuses on the assumption thatindividuals are motivated by the desire to fulfill inner needs. Contenttheories focus on the needs that motivate people.

4.11.2. Maslow’s Hierarchy of Needs

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



level needs are satisfied, higher-level needs become operative. A satisfiedneed is not a motivator. The most powerful employee need is the onethat has not been satisfied. Abraham Maslow first presented the five-tierhierarchy in 1942 to a psychoanalytic society and published it in 1954 inMotivation and Personality (New York: Harper and Row).

SocialNeed for love, to be amember of a group

SafetyNeed to feel safe and secure

Need to stay alive, to breathe,to eat, to drink, to sleep

EsteemNeed to feel worthy

and respected

Self-ActualizationNeed to do the work we like

Level I - Physiological needs are the most basic human needs. Theyinclude food, water, and comfort. The organization helps to satisfyemployees’ physiological needs by a paycheck.

Level II - Safety needs are the desires for security and stability, to feelsafe from harm. The organization helps to satisfy employees’ safety needsby benefits.

Level III - Social needs are the desires for affiliation. They includefriendship and belonging. The organization helps to satisfy employees’social needs through sports teams, parties, and celebrations. Thesupervisor can help fulfill social needs by showing direct care and concernfor employees.

Level IV - Esteem needs are the desires for self-respect and respector recognition from others. The organization helps to satisfy employees’



esteem needs by matching the skills and abilities of the employee to thejob. The supervisor can help fulfill esteem needs by showing workersthat their work is appreciated.

Level V - Self-actualization needs are the desires for self-fulfillmentand the realization of the individual’s full potential. The supervisor canhelp fulfill self-actualization needs by assigning tasks that challengeemployees’ minds while drawing on their aptitude and training.

4.11.3 Alderfer’s ERG :

Identified three categories of needs. The most important contribution ofthe ERG model is the addition of the frustration-regression hypothesis,which holds that when individuals are frustrated in meeting higher levelneeds, the next lower level needs reemerge.

Existence needs are the desires for material and physical well being.These needs are satisfied with food, water, air, shelter, working conditions,pay, and fringe benefits.

Relatedness needs are the desires to establish and maintain interpersonalrelationships. These needs are satisfied with relationships with family,friends, supervisors, subordinates, and co-workers.

Growth needs are the desires to be creative, to make useful andproductive contributions and to have opportunities for personaldevelopment.

4.11.4 McClelland’s Learned Needs

divides motivation into needs for power, affiliation, and achievement.

Achievement motivated people thrive on pursuing and attaining goals.They like to be able to control the situations in which they are involved.They take moderate risks. They like to get immediate feedback on howthey have done. They tend to be preoccupied with a task-orientationtowards the job to be done.

Power motivated individuals see almost every situation as an opportunityto seize control or dominate others. They love to influence others. Theylike to change situations whether or not it is needed. They are willing toassert themselves when a decision needs to be made.

Affiliation motivated people are usually friendly and like to socializewith others. This may distract them from their performance requirements.They will usually respond to an appeal for cooperation.



4.11.5 Herzberg’s Two-Factor Theory

describes needs in terms of satisfaction and dissatisfaction. FrederickHerzberg examined motivation in the light of job content and contest.(See Work and the Nature of Man, Crowell Publications, 1966.)Motivating employees is a two-step process. First provide hygienes andthen motivators. One continuum ranges from no satisfaction to satisfaction.The other continuum ranges from dissatisfaction to no dissatisfaction.

Satisfaction comes from motivators that are intrinsic or job content, suchas achievement, recognition, advancement, responsibility, the work itself,and growth possibilities. Herzberg uses the term motivators for jobsatisfiers since they involve job content and the satisfaction that resultsfrom them. Motivators are considered job turn-ons. They are necessaryfor substantial improvements in work performance and move the employeebeyond satisfaction to superior performance. Motivators correspond toMaslow’s higher-level needs of esteem and self-actualization.

Dissatisfaction occurs when the following hygiene factors, extrinsic orjob context, are not present on the job: pay, status, job security, workingconditions, company policy, peer relations, and supervision. Herzberguses the term hygiene for these factors because they are preventive innature. They will not produce motivation, but they can prevent motivationfrom occurring. Hygiene factors can be considered job stay-ons becausethey encourage an employee to stay on a job. Once these factors areprovided, they do not necessarily promote motivation; but their absencecan create employee dissatisfaction. Hygiene factors correspond toMaslow’s physiological, safety, and social needs in that they are extrinsic,or peripheral, to the job. They are present in the work environment orjob context.

Motivation comes from the employee’s feelings of accomplishment orjob content rather than from the environmental factors or job context.Motivators encourage an employee to strive to do his or her best. Jobenrichment can be used to meet higher-level needs. To enrich a job, asupervisor can introduce new or more difficult tasks, assign individualsspecialized tasks that enable them to become experts, or grant additionalauthority to employees.

The process approach emphasizes how and why people choose certainbehaviors in order to meet their personal goals. Process theories focus



on external influences or behaviors that people choose to meet theirneeds. External influences are often readily accessible to supervisors.

4.11.6 Vroom’s Expectancy Model

suggests that people choose among alternative behaviors because theyanticipate that particular behaviors will lead to one or more desiredoutcomes and that other behaviors will lead to undesirable outcomes.Expectancy is the belief that effort will lead to first-order outcomes,any work related behavior that is the direct result of the effort an employeeexpends on a job.

4.11.7 Equity

is the perception of fairness involved in rewards given. A fair or equitablesituation is one in which people with similar inputs experience similaroutcomes. Employees will compare their rewards with the rewardsreceived by others for their efforts. If employees perceive that an inequityexists, they are likely to withhold some of their contributions, eitherconsciously or unconsciously, to bring a situation into better balance.

For example, if someone thinks he or she is not getting enough pay (output)for his or her work (input), he or she will try to get that pay increased orreduce the amount of work he or she is doing. On the other hand, when



a worker thinks he or she is being paid too much for the work he or sheis doing, he or she tends to increase the amount of work. Not only doworkers compare their own inputs and outputs; they compare their input/output ratio with the input/output ratio of other workers. If one workteam believes they are doing more work than a similar team for the samepay, their sense of fairness will be violated and they will tend to reducethe amount of work they are doing. It is a normal human inclination towant things to be fair.

Bowditch and Buono note (see Bowditch, James L. and Anthony F.Buono, A Primer on Organizational Behavior, 4th, John Wiley & Sons,1997) that while equity theory was originally concerned with differencesin pay, it may be applied to other forms of tangible and intangible rewardsin the workplace. That is, if any input is not balanced with some fairoutput, the motivation process will be difficult. Supervisors must managethe perception of fairness in the mind of each employee. If subordinatesthink they are not being treated fairly, it is difficult to motivate them.

4.11.8 Reinforcement

involves four types of consequence. Positive reinforcement creates apleasant consequence by using rewards to increase the likelihood that abehavior will be repeated. Negative reinforcement occurs when a personengages in behavior to avoid unpleasant consequences or to escape fromexisting unpleasant consequences. Punishment is an attempt to discouragea target behavior by the application of negative outcomes whenever it ispossible. Extinction is the absence of any reinforcement, either positiveor negative, following the occurrence of a target behavior. Employees



have questions about their jobs. Can I do what the management is askingme to do? If I do the job, will I be rewarded? Will the reward I receivebe satisfactory to me?

Reinforcement is based primarily on the work of B.F. Skinner, apsychologist, who experimented with the theories of operant conditioning.Skinner’s work shows that many behaviors can be controlled throughthe use of rewards. In fact, a person might be influenced to change his orher behavior by giving him or her rewards.

Employees who do an exceptionally good job on a particular projectshould be rewarded for that performance. It will motivate them to try todo an exceptional job on their next project. Employees must associatethe reward with the behavior. In other words, the employee must knowfor what specifically he or she is being rewarded. The reward shouldcome as quickly as possible after the behavior. The reward can be almostanything, but it must be something desired by the employee. Some of themost powerful rewards are symbolic; things that cost very little but meana lot to the people who get them. Examples of symbolic rewards arethings like plaques or certificates.

4.12 COMMUNICATION

4.12.1 Significance of Communication

Communication is an indispensable activity in all organizations. Noorganization can think of its existence without effective communication.Communication is a managerial skill, which is essential for effectivedirection of people at work. A manager who is in a position tocommunicate well will perform the direction function successfully, i.e.,



he will be able to get the subordinates involved towards the objectivesof the organization.

The success of a manager depends on how clear he is in his mind abouthis basic functions and how effectively he can transfer this clarity of thoughtto others. This involves a skill of helping others to understand the managerand to be understood by him. Thus, the need for better mutualunderstanding between labor and management in industry cannot be overemphasized as a pre-requisite of suitable congenial climate necessaryfor the overall advancement and productivity. The importance ofcommunication in management for getting the work done may also beseen from the estimate of time, which is spent by a manager incommunication- verbal or written, in conferences or meetings, givingdirections or receiving information. Most of the managers spend morethan 60% of their time in communication with others.

The performance of all other managerial functions depends on successfulcommunication by the managers at various levels. Planning which is oneof the most important functions of management requires extensivecommunication among the executives and other personnel. Moreover,effective communication is important in executing a plan or a programmeand then controlling the activities with the help of feedback information.Information about subordinate’s performance is necessary to determinewhether the planned objectives are being realized. Communication is ofutmost importance in organizing. It is an important aid in directing theemployees of the organization. In short, communication is quiteindispensable for the management in getting the things done by otherpersonnel in the organization. That is why, Chester Barnard remarked,”The first executive function is to develop and maintain a system ofcommunication.’

Majority of the complex problems, which the managers generally face,are people centered. These have their roots in lack of understandingwhich cause hostile attitudes among the subordinates. Such problemscan be solved through effective communication. The concept ofdemocratic leadership places a high premium on communication. It isonly through communication that executives can attempt to mould theattitudes of persons within the organization, and subordinates to carryout certain functions, fulfill a leadership role, and coordinate the effortsof people within the organization.



One of the important aspects concerning the management of resourcesrelates to development of effective communication system among peoplein an organization. People are subjected to continuously changing patternsof motives, aspirations and attitudes and they significantly differ withothers in ability. In the process of assigning specific responsibilities, asituation is reached where facts and ideas must pass from person toperson, group to group and level to level. The success and effectivenessof operations of the organization would depend on how timely, adequateand appropriate the flow of information is. An effective communicationsystem is essential to pass messages, ideas and information for explainingobjectives and plans, controlling performance, and taking correctiveaction.

From the above discussion, we can say that communication is anindispensable process for effective management. The role ofcommunication is summarized in the following points:

(i) Communication helps the management in making the employeesunderstand the objectives, plans and policies of the enterprise.

(ii) Communication develops understanding between the superiors andthe subordinates. It leads to congenial human relations in theorganization.

(iii) Communication helps in controlling the performances of differentindividuals and departments of the enterprise.

(iv) Communication facilitates decision making by providing necessaryinformation in time.

(v) Communication provides unity of direction to various activities ofthe enterprise.

(vi) Communication is an effective device for achieving participation bythe workers. Management can consult the workers and receive theirgrievances, complaints and suggestions.

(vii) Communication facilitates change on the part of employees bymodifying their behavior.

Meaning and Nature of Communication

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



established a common ground of understanding. Thus, communicationinvolves imparting a common idea and covers all types of behaviorresulting there from. This indicates that various factors enter into theprocess of communication.

These are the communicator or source of information, the receptor orreceiver of information, the content of communication and the manner ofcommunication. ‘Communication’ in its broad sense means both the actof communicating something and the manner of communication such asletter, notice or circular. The act of communicating does not necessarilyrequire a reaction on the part of the receiver.

According to Hudson,” Communication in its simplest form is conveyingof information from one person to another.” In the words of Alien,“Communication is the sum of all the things one person does when hewants to create understanding in the mind of another. It is a bridge ofmeaning. It involves a systematic and continuous process of telling, listeningand understanding.” Thus, communication may be defined as interchangeof thought or information, to bring about mutual understanding andconfidence. It is the information intercourse by words, letters, symbolsor messages. It is the exchange of facts, ideas and viewpoints, whichbring about commonness of interest, purpose and efforts.

Communication is an attempt to share understanding by two or morepersons. It is a two way process and is completed when there is someresponse from the receiver of information. It has two basic objectives:

1. To transmit message, ideas, or opinions;

2. To create an impression or understanding in the mind of the receiverof information.

The success of a manager depends to a great extent on his ability tocommunicate. Theo Haimann regards communication as fundamental andvital to all managerial functions. “Communication is the process of passinginformation and understanding from one person to another. It is theprocess of imparting ideas and making oneself understood by others”.

Communication is an attempt to affect a transfer of messages, ideas oropinions between minds. The word ‘transfer’ tell us that communicationis essentially a two way process, involving a sender and a receiver. Itcould be a mechanical piece of equipment like computer, a writer and a



reader, and a speaker and a hearer. Thus, communication always involvesat least two-persons : a sender and a receiver. One person alone cannotcommunicate. Only the receiver can complete the communication act.There is no communication until the message sent by the communicatoris received by the receiver. It should also be noted that communication isnot effective if it does not produce the desired response. It is not enoughfor a manager to give an order; he must also see that it is correctly received,understood and carried out by the receiver. We are not all perfect, sothe word ‘attempt’ becomes significant when we consider the media bywhich the communication is effected. Understanding means that thereceiver should interpret the message exactly as the sender intends. Butthis is not always the case. If the sender transmits the idea of a rectanglebut the receiver sees a square, this is a case of poor or ineffectivecommunication.

4.12.2 Process of Communication

A simple model of the communication process is illustrated in the Fig..The major elements of the communication process are discussed below:

(i) Sender. The person who initiates the communication process is knownas the sender, source or communicator. The sender has some information,which wants to communicate to some other person to achieve somepurpose. By initiating the message, the sender attempts to achieveunderstanding and change in the behavior of the receiver.

(ii) Encoding or Communication Symbol. The sender of informationorganizes his idea into a series of symbols (words, signs, etc.), which, hefeels, will communicate to the intended receiver or receivers. This isknown as encoding of message, i.e., converting ideas into communicablecodes which the receiver of the message will understand.

(iii) Message. The message is the physical form into which the senderencodes the information. The message may be in any form that could beexperienced and understood by one or more of the senses of the receiver.



Speech may be heard, written words may be read and gestures may beseen or felt. Thus, a message may take any of the three forms, viz., oral,written or gestural.

(iv) Communication Channel. After encoding the message, the senderchooses the mode of transmission (such as air for spoken words andpaper for letters). The mode of transmission is often inseparable fromthe message. The channel is the link that connects the sender and thereceiver. Air is the important communication channels. The receiver mustbe careful while selecting a channel. Some people respond better toformal letters or communications, others to the informally spoken words.The channels of communication, which are officially recognized by theorganization, are known as formal channels.

(v) Receiver. The person who receives the message is called receiver.The communication process is incomplete without the existence of receiverof the message. It is the receiver who receives and tries to understandthe message. If the message does not reach the receiver, communicationcannot be said to have taken place.

(vi) Decoding. Decoding is the process by which the receiver drawsmeanings from the symbols encoded by the sender. The receiver’s pastexperience, education, perception, expectations, and mutuality of meaningaffects it with the sender.

(vii) Feedback. After receiving the message, the receiver will takenecessary action and send feedback information to the communicator.Feedback is a reversal of the communication process in which a reactionto the sender’s message is expressed. The receiver becomes the senderand feedback goes through the same steps as the original communication.It may be noted that the dotted line in the Figure. suggests that feedbackis optional and may exist in any degree (from minimal to complete) in anygiven situation. Generally, greater the feedback, the more effective thecommunication process is likely to be. For instance, early feedback willenable the manager (sender) to know if his instructions have been properlyunderstood and carried out.

Importance of Feedback in Communication

Two way communication takes place when the receiver providesfeedback to the sender. For instance, giving an instruction to a subordinateand receiving its acceptance is an example of two way communication.



On the other hand, in case of one way communication, feedback is totallyabsent. Here the sender communicates without expecting or gettingfeedback from the receiver. A policy statement from the chief executiveis an example of one way communication. One way communication takesless time than two way communication. In certain situations, one waycommunication is more effective to get work done from the subordinates.

Two way communication is superior to one way communication in thefollowing respects:

(i) Two way communication is more accurate than one waycommunication. The feedback allows the sender to refine hiscommunication so that it becomes more precise and accurate.

(ii) Receivers’ self confidence is higher in case of two way communicationas they are permitted to ask questions and seek clarification fromthe senders.

However, in case of two way communication, the sender may feelembarrassed when the receiver draws his attention to sender’s mistakesand ambiguities.

4.12.3 Purpose of Communication

The basic purpose of communication is to give and receive information,which is of interest both to the communicator and the receiver ofinformation. A good communicator always attempts to transmit his ideasor information to create favorable impression in the mind of the receiver.Effective communication involves more than a mere receipt of messageby the receiver, it creates understanding, acceptance and action.Understanding of the message by the receiver is a very important part ofa good communication system.

A communicator may make others listen to him, but he may not be ableto make them understand what he says. Many executives forget this whilegiving instructions to their subordinates. Experience shows that one isvery often misled by the wrong image of the other in one’s mind. Thewords are empty vessels and the receiver pours meaning into them veryfrequently on the basis of the image, which he carries in his mind of thecommunicator. A skilful communicator has to find the suitable words andexpressions so as to make the receiver understand what he wants. Thus,both transmitting ideas and creating the desired impression have importantroles to play in proper understanding.



In an industrial organization, the communication system is conceived tolead ultimately to better industrial relations through the existence of well-informed workforce, greater degree of consultation at every level and anatmosphere of mutual confidence.

Through effective communication, skill to work is brought into touchwith will to work and both combined together lead to team spirit in theorganization. Advantages of effective communication are sense ofmotivation, clarity of thoughts and orders, non distorted information andconsequent increase in the productivity and morale of employees. In anorganization where mutual trust between the management and the workersexists, it is easy to communicate effectively. But it must be rememberedthat a good communication system is not a panacea for the ills of anorganization, nor it is a substitute for other techniques of management.However, if thoughtfully planned and systematically applied, a goodsystem of communication can go a long way towards achieving greateracceptance of new ideas and reducing resistance to change.

Glover has mentioned the following important purposes of communication:

(i) To keep employees informed of company’s progress.

(ii) To provide employees with orders and instructions in connectionwith their duties.

(iii) To solicit information from the employees, which may aidmanagement.

(iv) To make each employee interested in his respective job and in thework of company as a whole.

(v) To express management’s interest in its personnel.

(vi) To reduce or prevent labor turnover.

(vii) To indoctrinate employees with the will to work and the benefitsderived from their association with the company.

(viii) To instil each employee with personal pride in being a member ofthe company.

4.12.4 Communication Networks

A network of communication represents the pattern of contacts amongthe members of an organization. It mainly depends upon the nature ofchannels of communication and the number of persons involved in the



communication process. There may be three types of communicationnetworks in the organization, viz., and wheel, circular and free flow. Thechannels are discussed below:

(i) Wheel Communication Network. As shown in the figure below,the wheel network represents the communication pattern under whichthe subordinates can communicate with and through one manager. Itis called a wheel network since all communications pass through themanager who acts as a central authority like the hub of a wheel. Allthe workers receive instructions and guidance from one person.

(ii) Circular Communication Network. In case of circular network,the message moves in a circle. Each person can communicate withhis two neighborhood colleagues only. A disadvantage of circularnetwork is that communication is very slow.

(iii) Free Flow Communication Network. Under such an organizationaldesign, there is no restriction on the flow of communication. Everyone is free to communicate with anyone and everyone in theorganization. However, this network is rarely followed in formalorganizations.

Types of Communication

Channel Direction Method

Formal (1) DownWard (1) Oral

Informal (2) Upward (2) Written

(3) Horizontal (3) Gestural

4.12.5 Channels of Communication

A channel of communication is a path through which messages aretransmitted from the sender to the receiver. Channels of communicationmay be either formal or informal. These are discussed below:



Formal Communication

The paths of communication, which are institutionally determined by themanagement, are called formal channels of communication. They areassociated with the status or position of the communicator and thereceiver. Formal communication enforces a relationship between differentpositions. It derives its support from scalar chain of organization. Itgenerally adopts three directions: (i) Downward (ii) Upward and (iii)Horizontal. These channels are used for different purposes, which arediscussed later. It is significant to point out the first two channels arevertical in nature.

Significance of Formal Communication

Downward communication is used for giving orders and instructions,providing information, or for influencing attitudes and behavior of thesubordinates. Upward communication is used for reporting, informing,requesting and suggesting. It is also used to influence decisions and toprotest against certain actions or decisions of the management. Horizontalchannels are used for informing and coordinating. All these channels areequally important for the proper functioning of any organization.

In a well-organised communication system, upward communication isgiven as much importance as downward communication. This is becauseone of the most crucial factors in the process of communication isinformation, about how people feel about things in the organization. Unlessupward communication is encouraged and taken note of, downwardcommunication is not fully effective. Upward communication gives anopportunity to the workforce to inform management about their feelingsand to suggest improvements in the methods of work and also enablesmanagement to locate problem areas in the organization.

Informal Communication or Grapevine

When the employees are unable to communicate the required informationto higher authorities because of communication barriers, they may resortto informal channels of communication. Distortions may appear in thetransmission of such messages through grapevine in the form of rumorsand gossips. The managers may resort to such informal channels whenthey find that it is not possible to gather information through the establishedchannels in the formal communication system of the organization.



The important point which we must recognize is that grapevine is a naturaland normal activity. It is because of the desire of people to communicatewithout following the formal channels in the organization. It is an essentialpart of the total human environment. There is nothing inherently bad aboutgrapevine. It, as a matter of fact, fills in the gaps existing in the formalcommunication system. If it does not exist in the organization, the abilityof a manager to build team work, motivate people and create identificationwith the organization would be severely restricted.

Grapevine generally operates like a cluster chain. For instance, A tellsthree or four selected persons. Only one or two of these receivers willthen pass on the information and, again, they will usually tell more thanone person. As the information becomes older and the number of thoseknowing it grows larger, and it gradually dies out because those whoreceive it do not repeat it. This process is called a cluster chain becauseeach link in the chain tends to inform a cluster of other people instead ofonly one person. Grapevine may also move in the fashion of a long chainin which A tells B, who tells C, who in turn tells D and so on. But this israrely the case.

If we accept the idea that cluster chain is predominant, then we canconclude that only a few persons are active communicators on thegrapevine for any particular piece of information. The persons who keepthe grapevine active are called ‘liaison individuals’. The liaison agentsare generally different in each case because people tend to be active onthe grapevine when they have a cause to be. This means that they actpartly in a predictable manner. This element of predictability offersmanagement a chance to influence the grapevine. People are also activeon the grapevine when their friends and associates are involved. Thismeans if M is to be discharged, the other employees should be told thefull story by the management as soon as possible. If they are not informed,they will fill in the gap with their own conclusions and thus rumors willstart.

Another marked feature of grapevine is the speed with which it functions.The cluster chain makes it easy for a few people to convey too manyothers in a short period of time. The grapevine exists largely throughwords of mouth. Through modern networks of communication, it ispossible for the grape vine to leap hundreds of kilometers very quickly.



If there exist procedures which regularly bring people in contact, we canexpect these people to have an active grapevine or informalcommunication.

Merits of Informal Communication

The Informal communication has the following advantages:

It helps in achieving better human relations in the organization.

It links even those people who do not fall in the official chain ofcommand.

Its speed is very fast as it is free from all barriers.

It serves to fill the possible gaps in the formal communication.

Demerits of Informal Communication

The demerits of informal communication are as follows:

Informal communication is not authentic. The message may bedistorted.

It may lead to generation of rumors in the organization.

Informal channels may not always be active. So informalcommunication is not dependable.

It may lead to the leakage of confidential information.

Rumor

It is the most undesirable feature of the grapevine and it has given thegrapevine a bad reputation. That is why, to some people, grapevine meansrumor. But rumor is grapevine information, which is communicated withoutauthentic standards of evidence being present. It is thus an untrue part ofgrapevine. It can by chance be correct, but generally is incorrect; so it ispresumed to be undesirable. Rumor originates for a number of reasons.One cause is plain maliciousness, but it is probably not the most important.A more frequent cause is employees’ anxiety and insecurity because ofpoor communication in the organization. Rumor also serves as a meansof wish fulfillment or applying pressure upon the management.

Rumor largely depends on the interest and ambiguity perceived by eachperson; it tends to change as it passes from person to person. Its generaltheme may be maintained, but not its details. The rumor gets twisted and



distorted when it passes from one mouth to another. The message getsits own head, tail and wings on its journey and swells unproportionatelyto an exaggerated shape. Generally, each person chooses details in therumor to fit his particular focus on reality. Thus, the details given at thebeginning of a rumor are lost after a few transmissions because peoplereduce it to a rememberable number of details about items of interest tothem. A major outbreak of a rumor can be a devastating epidemic thatsweeps through an organization as fast as a summer storm and usuallywith as much damage. Therefore, the most important problem beforethe management is how to deal with rumors.

Dealing with Rumor

The best approach in dealing with rumor is to get at its causes, ratherthan try to kill it after it has started. When causes are known, it should bestopped as early as possible because once a rumor’s theme is knownand accepted, employees distort future happenings to conform to therumor. So the management must pass on the correct message in time.Once a rumour has been spread, it is difficult to erase it from the mindsof the people. The only solution is to get the facts across beforemisconceptions have a chance to gain a foothold. Usually, fact to facesupply of facts is the most effective way because it helps answer theparticular ambiguities in each individual’s mind.

The oral message may be repeated clearly. The message must containfacts and not the opinions. Neither it should contain the rumor. Themessage should not be exaggerated. The message should be confirmedby the written message and it should be circulated quickly. Managementmay also take the help of union leaders in combating the rumor, which isnot in the interest of workers and the organization.

4.12.6 Direction of Communication

From the point of view of direction, communication may be either verticalor horizontal. Vertical communication may move both downward as wellas upward. Horizontal communication is also known as sidewardcommunication.

Downward Communication. It represents the flow of information fromthe top level to the lower level of the organization. The purpose ofdownward communication is to communicate policies, procedures,



programmes and objectives, and to issue orders and instructions to thesubordinates. A major part of the formal communication takes the formof downward communication. Downward communication can take placethrough verbal or written orders and instructions, notices, circulars,letters, memos, posters, periodicals, publications, group meetings, etc.

Downward communication is needed:

to get the things done to prepare for changes

to discourage misinformation and suspicion; and

to let the people feel the pride of being well informed.

Upward communication. Feedback to the higher authorities by the lowerlevels is vertical upward communication. The examples of upwardcommunication are: (a) activity reports on subjects like raw materials,production, distribution, manhours, etc.; (b) opinions, ideas andsuggestions; and complaints and grievances.

Upward communication is needed:

to create receptiveness of communication;

to create a feeling of belongingness through participation;

to evaluate communication; and to demonstrate a concern for theideas of each employee.

Horizontal Communication. It refers to transmission of informationamong positions of the same level. The importance of horizontalcommunication is undermined due to three reasons. Firstly, it is largely aby product of communication. Secondly, with increasing size andspecialization, the opportunities for cross talks are cut down, and thirdly,in relative terms, lateral communication poses fewer difficulties thanupward or downward communication because it has fewer implicationsof authority and status. To secure coordination and cooperation ofemployees at horizontal level, the problems are generally handled throughinformal contacts.

Horizontal communication is more of an informal nature. If a departmentalhead needs some information from another departmental head, he mayget this by ringing him up directly. Inspite of presence of hierarchy in anylarge industrial organization, it is possible to accelerate exchange ofinformation if the management recognizes and encourages cross contacts



which cut across the organizational lines. Such, contacts may take placebetween individuals and groups, not only in their levels but also withother echelons of management. The crosswise communication can beeffective when a proper understanding exists among the superiors orthese points. The subordinates should refrain from making communicationbeyond their authority and should keep their superiors informed of theirinter departmental activities.

4.12.7 Methods of Expression

Oral Communication

Communication with the help of spoken words is known as oralcommunication. Oral communication may take place: (a) by face to faceconversation, and (b) through mechanical devices.

Face to face conversation is the most natural way of transmittingmessage. It is the best means of securing cooperation and resolvingproblems. Various studies have shown that face to face communicationcarries the message better than any other media. It avoidsmisunderstanding between the persons talking face to face. It is becauseby having face to face conservation, one can convey the message bothby words and expressions or gestures. Sometimes, it is desirable to haveface to face communication because of confidential nature of the message.

Mechanical devices which are used for oral communication in mostorganizations include signals, telephones, intercom systems, electric pagingsystems and dictating machines.

Both the methods of oral communication are frequently used inorganizations for downward and upward communication. Every executivemakes use of oral communication by instructing, lecturing, counselingand so on. Oral communication is also used for attending to thesuggestions and grievances of the workers. The greatest benefit of oralcommunication is that it saves time as it provides an immediate responseand feedback. It fosters a friendly and cooperative spirit. It permitspersonalized contacts and develops a sense of belongingness.Nonetheless, oral communication is not free from drawbacks. It may betime consuming because for having direct talks, the individuals concernedhave to move back and forth to and from their workplaces. It may notbe specific and so may be misunderstood. It may also create legaldifficulties if no written record of conversation is preserved.



Written Communication

Comprehensive devices for written communication in the form of circulars,bulletins, manuals, handbooks, notes, orders, instructions, etc., are widelyused in modem organizations. Howsoever elaborate a communicationsystem may be, it cannot be composed of verbal communication only.The objectives of written communication may be:

to give information;

to receive information;

to record recommendations and decisions of a meeting; to give ordersand instructions.

Written communication can be conveyed to the workers through housemagazines, notice boards, employee handbooks and memoranda.Workers can communicate upward through writing their suggestions andgrievances. Upward communication in written form is generallydiscouraged as the workers are reluctant to use it to express theiropinions. Management should encourage it by installing a suggestionsystem in the organization. Written communication serves as a permanentreference for future. It is formal and carries weight. It is not possible tochange the contents of written message by receivers. Written messagesare more clear and specific as they are carefully drafted.Writtencommunication serves as a reliable record for future reference and canbe used as evidence in legal proceedings. Response to writtencommunication is generally well thought out since the receiver gets toevaluate and understand the message. In many cases, writtencommunication is even more effective that the oral communication.

Written communication is slow as compared to oral communication. Itmay also become a source of dispute as once a written message is sent,it is difficult to withdraw it. Written messages may give rise to queries forclarification and elaboration which lead to loss of time. Writtencommunication is generally formal in nature and may be blocked due tobureaucratic procedures in the organization. Therefore, the managementshould take proper step to ensure that written communication does notlose its effectiveness.

Gestural Communication

Communication through gestures or postures is often used as a means tosupplement verbal communication. If there is a face-to-face conversation



between two persons, they can better understand the feelings, attitudesand emotions of each other. Gestural communication is very much helpfulto motivate the subordinates, as for instance, handshake with thesubordinate or a pat on the back of the subordinate. Similarly, gesturestaken by the listeners can help the communicator to know their reactions.

Oral vs. Written Communication

Oral Communication

1. Communication is expressed through spoken words.

2. It may not be precise.

3. Oral communication may not be complete. It may be difficult tounderstand it.

4. It is generally informal in nature.

5. It may not be taken seriously.

6. Oral message may not be verifiable.

Written Communication

1. Communication is expressed in writing.

2. It can be very precise.

3. It is not difficult to understand written communication if it is expressedin unambiguous terms.

4. It is generally formal in nature.

5. It is generally taken seriously.

6. Written message is verifiable from the records.

Choice of Method of Communication

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



used for exchanging lengthy messages. Written communication constitutesreliable records for future reference and action.

Oral communication is used effectively in the following situations:

(i) Executives use oral communication for instructing and counselingtheir subordinates.

(ii) Executives use oral communication while dealing with the trade unionleaders.

(iii) Workers use oral communication to convey their grievances andsuggestions to the management.

(iv) Workers use oral communication to give feedback to themanagement.

Written communication has been found to be effective in the followingsituations:

(i) Executives give written instructions where the assignment is importantand it is necessary to fix responsibility.

(ii) Written communication serves the purpose of a record for futurereference.

(iii) Workers and trade unions make use of written communication tocommunicate with the management formally and to get a formalresponse from the management.

4.12.8 Barriers or Gateways to Communication

Barriers or obstacles to communication cause break downs, distortionsand inaccurate rumors. They plague the daily life of the managers whomust depend upon the accurate transmission of the orders and informationfor efficient operations. Whenever a communication is made, there isalways a tendency on the part of the receiver to evaluate the messagereceived and then decide to approve or disapprove the same. Anotherimportant barrier to communication lies in the layers and spans ofmanagement.

In large organizations, there are a number of obstacles which maketransmission of message more difficult. In both upward and downwardcommunications, it may happen that some of the persons in theintermediate layers withhold the whole or part of the information, because



they may feel that by withholding the information they will be betterinformed than those whom they lead. It should be noted that althoughthere is no such thing as perfect communication, considerable degree ofperfection could be achieved in communication if the barriers tocommunication are overcome. The main barriers to communication arediscussed below :

1. Barriers due to Organization Structure. The breakdown ordistortion in communication, sometimes, arises due to:

(i) Several layers of management;

(ii) Long lines of communication;

(iii) Long distance of subordinates from top management;

(iv) Lack of instructions for passing information to the subordinates; and

(v) Heavy pressure of work on certain levels of authority.

2. Barriers due to Status and Position. (i) The temper and attitudeexhibited by the supervisor is sometimes a hurdle in two waycommunication. One common illustration is non-listening habit. Asupervisor may guard information for:

(a) Consideration of prestige, ego and strategy.

(b) Under - rating the understanding and intelligence of subordinates.

(c) Deriving satisfaction in being the store house of information and seeingpeople dance around him for information.

(ii) Prejudices among the supervisors and subordinates may stand inthe way of free flow of information and understanding.

(iii) The supervisors particularly at the middle level may sometimes liketo be in good books of top management by :

(a) not seeking clarification on instructions which are subject to differentinterpretations; and

(b) acting as a screen for passing only such information which may pleasethe boss.

3. Semantic Barriers. Semantic is the science of meaning. Wordsseldom mean the same thing to two persons. Symbols or wordsusually have a variety of meanings. The sender and the receiver have



to choose one meaning from among many. If both of them choosethe same meaning, the communication will be perfect. But this is notso always because of differences in formal education and specificsituations of the people. Strictly one cannot convey meaning, all onecan do is to convey words. But the same words may suggest quitedifferent meanings to different people, e.g., ‘Profits’ may mean tomanagement efficiency and growth, whereas to employees it maysuggest excess funds piled up through paying inadequate wages andbenefits.

4. Tendency to Evaluate. A major barrier to communication is thenatural tendency to judge the statement of the person of the othergroup. Every one tries to evaluate it from his point of view orexperience. Communication requires an open mind and willingnessto see things through the eyes of others.

5. Heightened Emotions. Barriers may also arise due to specificsituations, e.g., emotional reaction, physical conditions like noise orinsufficient light, past experience, etc. When emotions are strong, itis very difficult to know the frame of mind of the other person orgroup.

6. Lack of Ability to Communicate. All persons do not have the skillto communicate. Skill in communication may come naturally to some,but an average man may need some sort of training and practice byway of interviewing, public speaking, etc.

7. Inattention. The simple failure to read bulletins, notices, minutesand reports is a common feature. With regard to failure to listen tooral communications, it has been seen that nonlisteners are oftenturned off while they are preoccupied with other affairs or their familyproblems. In any case, the efforts to communicate with someonenot listening will fail.

8. Unclarified Assumptions. This point can be clarified by anillustration. A customer sends a message that he will visit a vendor’splant at a particular time on some particular date. Then he may assumethat the vendor will receive him and arrange for his lunch, etc.Whereas vendor may assume that the customer was arriving in thecity to attend some personal work and would make a routine call atthe plant. This is an unqualified assumption with possible loss ofgoodwill.



9. Closed Minds. Certain people, who think that they know everythingabout a particular subject, also create obstacles in the way of effectivecommunication. Persons suffering from the mirage of too muchknowledge become rigid and dogmatic in their attitude. They closetheir minds tightly to new ideas that are brought to them,

10. Resistance to Change. It is general tendency of human beings tomaintain status quo. When new ideas are being communicated, thelistening apparatus may act as a filter in rejecting new ideas. Thus,resistance to change is an important obstacle to effectivecommunication. Sometimes, organizations announce changes whichseriously affect the employees, e.g., changes in timings, place andorder of work, installation of new plant, etc. Changes affect peoplein different ways and it may take some time to think through the fullmeaning on the message. Hence, it is important for the managementnot to force changes before people are in a position to adjust totheir implications.

These are the problems or barriers to effective communication.Communication will not be perfectly effective if transmission of themessage is faulty. The above barriers should be removed to achieveeffective communication in the organization.

Communication Gap

The top management of an organization prepares a broad set of policiesto act as guideline and a framework within which the managers andsupervisors can operate to achieve the goals of the organization. Thecommunication up to the foreman level is generally quite smooth. But thedifficulty arises in communicating the management’s policies and guidelinesto the workers because an average worker has difficulty in learning thecorporate policies and has much less capacity in understanding them.This creates the problems of communication gap.

The communication gap lies where:

1. The worker does not know what is expected of him because he isnot told.

2. He cannot achieve it if he does not know.

3. He does not know how important his work is in producing the finalproduct.



4. He does not know how well he is doing and how far he is in thequeue for promotion.

5. He does not know how much skill he should acquire and what arethe basic requirements for his next grade promotion.

The worker must know the above mentioned information to ensure thathe produces a good quality product and is motivated to produce more.He must be aware what his mistakes will cost in terms of time and moneyto the organization and he must be motivated to reduce waste and tofollow safe procedures.

4.12.9 Steps to Overcome Barriers to Communication

The following steps are required to be followed to overcome barriers toeffective communication:

(i) Clarity of Information. Subordinates should be kept informed onpolicy matters that affect them on a regular basis. Clear cutinstructions should be issued and followup measures should be takento ensure that the instructions are thoroughly understood and arebeing implemented.

(ii) Prompt Information. The management should make a practice ofpassing along the information promptly to everyone concerned sothat action, where required, is not delayed.

(iii) Creation of Proper Atmosphere. In particular cases, as for instance,when a boss is talking to his subordinate, the atmosphere must bepeaceful so that there is effective communication of instructions andsuggestions.

(iv) Effective Listening. The sender must listen to the receiver’s wordsattentively so that the receiver may also listen to the sender at thesame time.

(v) Feedback. Communication should be a two way traffic. There shouldbe some system by which the workers should be able to conveytheir suggestions and grievances to the top management. Two waycommunication is also necessary for feedback for the purpose ofcontrol.

(vi) Efficient Channels. Management should try to cut the root of therumors. If the communication channel is well maintained, there will



be no room for rumours, lies, guesses and misconceptions. Workersshould get open doors for any clarification or consideration at alltimes. This will also increase the morale of the employees.

4.12.10 Building Effective Communication

With the advancement of technology, changes have become a regularfeature in any industrial organization. An effective communication systemis an essential part of good labor management relations. The primeobjective of setting up a communication system is to exchange facts andinformation in a manner, which is acceptable to all concerned and whichwill lead to cooperative action by all concerned. Problems of passinginformation from management to workers are very complicated and manytechniques are applied to encourage an easy two way flow of facts,ideas and opinions. But attitude of the persons involved in communicationis equally important for better communication, which will ultimately leadto better productivity and an atmosphere of mutual trust and confidenceamong the workers and the managers. If the communication system iscarefully planned and applied, it will reduce workers resistance to newideas and changes.

Communication problems are more complex in large organizations.Managers face difficulty in maintaining effective communications to passmessages accurately without distortion to their subordinates. Effectivecommunication is a broader process than merely passing orders andkeeping oneself informed about the activities going on in various divisionsof the organization. Organizational communications should satisfy theneeds of organization and its members.

In order to achieve effective communication in the organization, thefollowing principles or guidelines must be followed:

1. Principle of Clarity. The beginning of all communication is somemessage. The message must be as clear as possible. No ambiguityshould creep into it. The message can be conveyed properly only ifit is clearly formulated in the communicator.

2. Principle of Objective. The communicator must clearly know thepurpose of communication before actually transmitting the message.The objective may be to obtain information, give information, initiateaction, change another person’s attitude and so on. If the purposeof communication is clear it will help in the choice of mode ofcommunication.



3. Principle of Understanding the Receiver. Understanding is themain aim of any communication. The communication must createproper understanding in the mind of the receiver. Killian advised,“Communicate with an awareness of the total physical and humansetting in which the information will be received. Picture the place ofwork; determine the receptivity and understanding levels of thereceivers; be aware of social climate and customs; question theinformation’s timeliness. Ask what, when and in what manner youwould like to be communicated with if you were in a similarenvironment and position.”

4. Principle of Consistency.The message to be communicated shouldbe consistent with the plans, policies, programmmes and goals ofthe enterprise. The message should not be conflicting with previouscommunication and should not create confusion and chaos in theorganization.

5. Principle of Completeness. The message to be communicated mustbe adequate and complete; otherwise the receiver will misunderstandit. Inadequate communication delays action, spoils good relationsand affects the efficiency of the parties to communication.

6. Principle of feedback . This principle calls for makingcommunication a two way process and providing opportunity forsuggestion and criticism. Since the receiver is to accept and carryout the instructions, the sender of message must know his reactions.The latter must consider the suggestion and criticism of the receiverof information. But feedback principle is often given a back seat bymost managers, which defeats the very purpose of communication.

7. Principle of Time. Information should be communicated at the righttime. The communicator must consider the timing of communicationso that the desired response is created in the minds of the receivers.

Characteristics or a Good Communication System

A good system of communication has certain essential characteristics,which are explained below:

(i) Two way Channel. Communication involves two parties, the senderor transmitter and the receiver of the message. Mere transmission offacts, ideas, information, etc. does not make any communication



effective and meaningful. It is essential to keep the channel open forsending the receiver’s views, understanding and opinion about thecommunication. Therefore, a good communication should be like atwo way traffic. Transfer of information should take place from thesenders to receivers and vice-versa without any interruption.

(ii) Clarity of Message. The message must be as clear as possible. Noambiguity should creep into it, the message can be conveyed properlyonly if it is clearly formulated in the mind of the communicator. Themessage should be encoded in direct and simple language so thatthe receiver is able to understand it without much difficulty.

(iii) Credibility of Message. Credibility of the message is an importantfactor, which promotes understanding and cohesiveness amongorganizational members. It depends to a large extent on the rapportbetween the parties concerned. A related characteristic is timelinessof communication, which contributes to its credibility. The messageshould be complete also. Inadequate message delays action, spoilsgood relations and affects the efficiency of the parties tocommunication adversely.

(iv) Speed of Transmission. A good system of communication has shortlines of information flows, which help to minimize distortion anddilution of the messages transmitted. It should give considerableimportance to the speed of transmission of message. However, speedof communication should not impair the accuracy of the informationto be transmitted.

(v) Mutual Understanding. A good communication system shouldachieve better relations between the parties to communication.Transfer of information or knowledge should take place in a cordialatmosphere. Absence of mutual understanding signifies the lacuna inthe system in the sense that communication becomes a one sidedaffair. Mutual trust, belief and reliance should be the goals of anycommunication system.

(vi) Flexibility. A good system is flexible enough to adjust to the changingrequirements. It should carry extra loads of information without muchstrain. It should absorb new techniques of communication with littleresistance. Use of a wide range of media such as oral and writtenmessages, face to face contacts, telephonic calls, group meetings,etc. should be encouraged without any hesitation.



(vii) Reliance on Feedback. Feedback refers to transmission ofinformation concerning the effect of any act of communication.

Summary

Staffing is the process of attracting, developing, evaluating andcompensating people at work. It is an integral part of the managementprocess and is performed by every manager on a continuous basis.

Human resource management is concerned with the most effective useof people to achieve organizational and individual goals. It tries to securethe best from people by winning their wholehearted cooperation. GoodHRM practices can help in attracting and retaining the best people in theorganization.

Personnel management is concerned with people at work and theirrelationships with each other. It covers three important aspects basically:personnel aspect (recruitment, selection, placement training, appraisal,compensation, etc.), welfare aspect (working conditions, amenities,facilities, benefits), and industrial relations aspect (union managementrelations, disputes settlement, grievance handling, discipline, collectivebargaining).

Human resource development aims at helping people to acquirecompetencies required to perform all the functions effectively. It is adevelopment oriented, proactive function. It aims at overall developmentof human resources in order to contribute to the well being of employees,organization and the society at large.

Human resource planning is a system of matching the supply of peoplewith openings that the organization expects over a given time frame. Ittries to assess manpower requirements in advance keeping the productionschedules, market fluctuations, demand forecasts etc. in the background.In order to develop a human resource plan, HR professionals typicallyfollow a three step process: (i) workforce analysis (assessing manpowersupply) (ii) work load analysis (finding actual requirement for manpowerbased on work load) (iii) job analysis (find out the abilities and skillsneeded to undertake the jobs in question in an effective way).

Staffing is to determine the people available by making a managementinventory. Using an inventory chart can do this.

Staffing does not take place in a vacuum; one must consider manysituational factors, both internal and external. Staffing requires adherence



to Equal Employment Opportunity (EEO) laws so that practices do notdiscriminate, for example against minorities or women. Also, one mustevaluate the pros and cons of promoting people from within theorganization or selecting people from the outside.

In the systems model for selection, the comprehensive managerialrequirements plan is the basis for position requirements. In designingjobs, the enterprise must see that the scope of the job is appropriate;that the position involves a full time, challenging job; and that it reflectsrequired skills. The job structure must be appropriate in terms of content,function, and relationships. The jobs can be designed for individuals orwork teams. The importance of technical, human, conceptual and designskills varies with the level in the organizational hierarchy. The positionrequirements are matched with the various skills and characteristics ofindividuals, the matching is important in recruitment, selection, placement,and promotion.

Errors in selection can lead to actualization of the Peter Principle, whichstates that managers tend to be promoted to the level of theirincompetence. Although the advice of several people should be sought,the selection decision should generally rest with the immediate superiorof the candidate for the position.

The selection process may include interviews, various tests, and theassessment centers. To avoid dissatisfaction and employee turnover, themanagement must ensure that new employees are introduced to andintegrated with persons in the organization.

Direction is the process of guiding, motivating, leading and supervisingthe subordinates to accomplish desired objectives. It is an importantmanagerial function because it is through direction, managers get thingsdone. Proper direction helps employees show superior performance. Tobe effective, direction should be based on certain well establishedprinciples, e.g., in line with overall goals, command flowing from oneindividual, two way communication, and appropriate technique to suitsituational needs, etc. Clear instructions followed by appropriatecounseling help employees remain on track and achieve results withoutwasting resources.

A supervisor acts as a buffer between management and workers. Hehelps employees in doing a good job, using human, technical and



conceptual skills in an appropriate manner. He plays many roles andchanges many hats while at work. Important roles played by a supervisorare well documented in management literature, i.e., as a technician, analyst,controller, counselor, linking pin, human relations expert, motivator,trainer, leader, organizer, planner, decision maker, etc. Depending on thesituation, the supervisor is expected to enact a particular role to the bestof his abilities.

To achieve results, supervisors have to keep certain things in mind. Theymust encourage workers to participate in organizational matters.Resources should be put to good use. Rules and regulation must beadhered to. Wastages of various kinds must be avoided. They must setan acceptable standard for evaluating workers’ performance, developcapable assistants and offer help whenever it is requested.

Communication is the process of passing information and understandingfrom one person to other. It is important to all managers and is neededby all employees. It is the basis of action and people to give their best tothe organization. The process of communication involves several steps.

There are basically two types of channels formal and informal. Formalcommunication channel moves along the routes specified by managementeither downward, upward or horizontal. Informal communication channelsdo not adhere to the organization’s hierarchy. Here, there is no prescribeddirection for the flow of messages. Grapevine, generally, emanates fromtwo sources : gossip chain and cluster chain.

There are three main types of communication media, namely oral, writtenand non-verbal communication. Oral communication takes place on aface to face basis. Written communication transmitted through writtenwords in the form of letters, circulars, memos, reports, manuals, etc.Communication that takes place through facial expressions, body position,eye contact and other physical gestures is known as non verbalcommunication (NVC). NVC plays a great role in improving interpersonalrelations in an organization.

A communication network is the pattern through which the members of agroup communicate. It may take five different shapes in an organization,namely the wheel, Y pattern, chain, circle and star.

Several semantic, structural and interpersonal barriers come in the wayof effective communication. The same word, for example, may convey a



different meaning to different people. Some people can’t express properly.Information gets distorted as messages travel a distance. Statusdifferences compel people to hide their true feelings and emotions. Tocommunicate effectively, a manager has to improve his listening skills.He must think and plan before communicating. The timing of the messagemust also be appropriate. People must actively participate in developingappropriate messages. Simple words must be used to improve clarityand understanding. More importantly, the manager must encouragesubordinates to give their feedback openly and fearlessly.


1. Select an organization you know, and evaluate the effectiveness ofthe enterprise’s recruitment and selection of people. Howsystematically are these and other staffing activities carried out?

2. Interview two managers. Ask them what criteria are used for theirperformance appraisal. Are the criteria verifiable? Do these managersthink that the performance evaluation measures their performance ina proper manner?

3. Develop a career plan for yourself. Identify a personal profile foryourself and state your long range personal and professional goals.What are your strengths and weaknesses? Follow the steps explainedin this chapter to develop a comprehensive strategic career plan foryou.

Review questions.

1. Define staffing.

2. What do you mean by recruitment?

3. What is selection? Explain the process of selection.

4. Define directing. Illustrate the elements of direction

5. What is motivation? Describe theories of motivation.

6. Define leadership. Describe different theoretical approaches toleadership.

7. What is communication? State the barriers to communication.Illustrate the steps to overcome barriers to communication.

8. Elucidate the way of building effective communication.



UNIT - V

CONTROLLING

LEARNING OBJECTIVES


the steps in the basic control process.

the critical control points and standards.

application of the feedback system.

feedforward control system.

list of the requirements for effective controls.

the nature of budgeting and types of budgets.

modern techniques of budgeting, including variable budgeting andzero base budgeting.

the non budgetary control devices.

the nature and problems of program budgeting.

the special need for effective procedures planning and control.

5.1 Nature and Scope of Controlling

Controlling is directly related to planning. The controlling process ensuresthat plans are being implemented properly. In the functions of managementcycle are planning, organizing, directing, and controlling. Planning movesforward into all the other functions, and controlling reaches back.Controlling is the final link in the functional chain of management activitiesand brings the functions of management cycle full circle. Control is the



process through which standards for performance of people andprocesses are set, communicated, and applied. Effective control systemsuse mechanisms to monitor activities and take corrective action, ifnecessary. The supervisor observes what happens and compares thatwith what was supposed to happen. He or she must correct conditionsbelow standard and bring results up to expectations. Effective controlsystems allow supervisors to know how well implementation is going.Control facilitates delegating activities to employees. Since supervisorsare ultimately held accountable for their employees’ performance, timelyfeedback on employee activity is necessary.

Control is an important function of management. “In an undertaking,control consists in verifying whether everything occurs in conformity withthe plan adopted, the instructions issued and the principles established.It has to point out weaknesses and errors in order to rectify them andprevent recurrence. It operates on everything : things, people and action”.

A great deal of misunderstanding has arisen about the term controlbecause of confusing it with other terms like management, objectives,plans, policy statements, etc. It is important that the managers shouldhave a clear understanding of this concept because a manager who doesnot understand control cannot be expected to exercise it in the mostefficient and effective manner. “The manager who believes managing andcontrolling is the same thing, has wasted one word and needs a secondto be invented. And one who believes he has provided for control whenhe has established objectives, plans, policies, organization charts and soforth, has made himself vulnerable to really serious consequences. Aclear understanding of control is, therefore, indispensable for an effectivemanager.”

The modern concept of control envisages a system that not only providesa historical record of what has happened to the business as a whole butalso pinpoints the reasons why it has happened and provides data thatenable the chief executive or the departmental head to take correctivesteps if he finds he is on the wrong track.

Definition of Control

Control is a basic managerial function, which implies measurement andcorrection of performance of subordinates to ensure that the predetermined objectives are accomplished. E.F.L. Breach has defined



control as follows: “Control is the process of checking actual performanceagainst the agreed, standards or plans with a view to ensuring adequateprogress and satisfactory performance.” In other words, controllingconsists of those activities, which are necessary to ensure thatperformance takes place in accordance with the targets laid down by themanagement. It also involves taking corrective actions in case theperformance is not satisfactory. According to Koontz and Weihrich,“The managerial function of controlling is the measurement and correctionof the performance in order to make sure that enterprise objectives andthe plan devised to attain them are accomplished.’ Thus, managerialfunction of control implies measurement of actual performance, comparingit with the standards set by plans and correction of deviations to assureattainment of objectives according to plans.

Characteristics of Control

The process of control has the following characteristics:

1. Pervasive Function. Control is a function of every manager who isperforming other managerial functions like planning, organizing,staffing and directing. It is, in fact, a follow up action to other functionsof management. Managers at all levels have to perform this functionto contribute to the achievement of orgartisational objectives.

2. Review of Past Events. Control leads to appraisal of past activities.Thus, it is looking back, the deviations in the past are revealed bythe control process. This is also known as feedback information. Itwill help in knowing the reasons of poor performance. Correctiveactions can be initiated accordingly.

3. Forward Looking. Control is linked with future, as past cannot becontrolled. A manager can take corrective action only in regard tofuture operations. Control is usually preventive, as presence ofcontrol system tends to minimize wastages, losses and deviationsfrom standards.

4. Action Oriented. Control implies taking corrective measures. Actionis the essence of control. The purpose of control is achieved onlywhen corrective action is taken on the basis of feedback information.It is only action, which adjusts performance to predeterminedstandards whenever deviations occur. A good system of control



facilitates timely action so that there is minimum waste of time andenergy.

5. Continuous Process. Just like other functions of management,control is also a continuous activity. It involves constant analysis ofvalidity of standards, policies, procedures, etc. It also suggestscorrective actions in various processes. It does not stop anywhere.A manager has to perform this function continuously along with otherfunctions.

6. Dynamic Process. Control is a dynamic process. It is flexible andnot rigid. Control involves continuous review of standards ofperformance and results in corrective action, which may lead tochange in the performance of other functions of management. Sincemanagement is managing a business entity, which keeps on changing,managerial control is also dynamic. Management will be failing inits duty if its approach is not dynamic.

7. Control does not curtail the rights of individuals. To somepeople, control is opposite of freedom. It is not so. It is a preventiveaction so that losses may be avoided in future. It is, in fact, an act ofguidance. Control in an enterprise is based on facts and figures andnot on the whims of managers. Its purpose is to achieve and maintainacceptable productivity from all the resources of an enterprise.

Relationship between controlling and planning

Planning and controlling are closely related to each other as shown in thefollowing figure. After a plan becomes operational, control is necessaryto measure progress, to uncover deviations from the targets and to takecorrective steps. It is also not possible to think of an effective system ofcontrol without the existence of good plans. Billy E. Geotz has explainedthe relationship between planning and controlling in the following words,“Managerial planning seeks consistent, integrated and articulatedprogrammes, while management control seeks to compelete eventsconform to plans”.

PLANNING PERFORMANCE CONTROL

Fig. Relationship between Planning and Control.



Control is always based on planning. It is also true that in running aenterprise planning depends upon controlling. Every manager uses certainstandards for measuring and appraising performance, which are laid downby planning. The control process, in turn, may reveal the deficiency ofplans and may lead to the revision of planning. It may also lead to settingof new goals, improving staffing and making changes in the techniques ofsupervision, motivation and leadership.

Planning without control is meaningless and control without planning isblind. Planning is an empty exercise without controlling. A good plan willnot bring any concrete result if the management is lacking in controlling.Planning identifies the goals and determines the ways of achieving them.It is’ control which ensures attainment of goals by evaluating performanceand taking corrective action. Control presupposes the existence ofstandards with which the actual performance is to be compared. If thestandards of performance are not set in advance, the manager will haveno idea of ‘what is control’. Thus, planning must be done before theactual operation and control should follow plans during and after theactual operation. The experience gained in controlling will help improvethe process of planning.

Relation between Control and Coordination

Control and coordination are the twins of management. Control is animportant element in the process of management, whereas coordinationis the essence of management itself. Control is a function of managementlike planning, organizing, staffing and directing. But coordination is an allinclusive function. Each of the managerial functions including control isan exercise in coordination. Thus, control is a facilitative function thatpromotes coordination in the organization. If control does not aim atachieving coordination, it will not be performed effectively and the basicpurpose of control will be lost. Control and coordination are closelyrelated in many ways. Firstly, authority is the basis of both the processes.Secondly, the managers at all levels perform both. Thirdly, both are aimedat achieving organizational goals. Fourthly, both are necessary forachieving stability, continuity and growth of the organization andconsistency, precision and discipline in the organization. Lastly, bothcontrol and coordination are rational concepts in the sense that theyseek to relate organizational means with organizational ends or goals.They strive to maintain organizations as rational systems, relatively freefrom conflict, confusion and chaos.



5.1.1 Significance of Controlling

Controlling is an important function of management. Without control, amanager cannot complete his job. All other managerial functions are onlypreparatory steps for getting the work done, and controlling is concernedwith making sure that there is proper execution of these functions. Controlis necessary whenever a manager assigns duties and delegates authorityto his subordinates. He must exercise control over the actions of hissubordinates so that the delegated authority is used properly.

The road signals at a road crossing appropriately illustrate the significanceof control. Just as road signals are essential to ensure accident free andsmooth traffic, management controls are necessary in any organizationfor its smooth functioning. By controlling, the manager ensures thatresources are obtained and used economically and efficiently for theachievement of organizational objectives. A good control system providestimely information to the manager, which is very much useful for takingvarious decisions. Control simplifies supervision by pointing out thesignificant deviations from the standards of performance. It keeps thesubordinates under check and brings discipline among them.

An effective system of control will help in achieving the followingbenefits:

1. Coordination. The size of modem business organizations is quitelarge. A large amount of capital and large number of people areemployed in them. This complicates the problem of control as thereare many units producing and distributing different products. In orderto coordinate their activities, an efficient system of control isnecessary.

2. Corrective Action. An efficient system of control provides the basisfor future action. Taking corrective action may lead to modificationof planning, organizing and directing. Control will also check themistakes being repeated in future.

3. Decision making. Control is basic to decision making. The processof control is complete when corrective actions are taken. Thisinvolves making a right decision as to what type of follow up actionis to be taken. This will lead to accomplishment of organizationobjectives. According to W.T. lerome, “Control is needed both tosimplify the making of subsequent decisions and to ensure the



realization of the objectives implicit in the original long range policydecisions.”

4. Better Planning. Control is the only means to ensure that the plansare being implemented in real sense. It points out the shortcomingsof planning by comparing the actual performance with the plannedstandard and suggests steps to improve planning.

5. Decentralization of Authority. The modern trend of businessenterprises towards decentralization calls for a systematic attemptfor controlling. Under decentralization, the authority of decisionmaking is dispersed throughout the organization. Management mustkeep control in its hands to know whether the authority is beingused properly. Without adequate controls, decentralization cannotsucceed.

6. Effective Supervision. Control facilitates effective supervision bypointing out significant deviations. It keeps the subordinates undercheck. While control cannot cure habitual dishonesty in all cases,management is irresponsible if it does not make a reasonable effortto provide order and discipline among its employees through effectivecontrol processes. A good system of control detects the weak pointsvery quickly. This enables the expansion of span of control at alllevels in the organization.

Limitations of Control

A control system may be faced with the following limitations:

1. An enterprise cannot control the external factors such as governmentpolicies, technological changes, fashion changes, social changes, etc.

2. Control is an expensive process because the management to observethe performance of the subordinates. This requires expenditure of alot of time and effort.

3. Control system loses its effectiveness when standards of performancecannot be defined in quantitative terms. For instance, it is very difficultto measure human behavior and employee morale.

4. The effectiveness of controls mainly depends on their acceptanceby the subordinates. They may resist controls if they feel that thesewill reduce or curtail their freedom. Control also loses its significancewhen it is not possible to fix the accountability of the subordinates.



In order to achieve effective controlling in an enterprise, the followingsteps may be taken:

1. Every manager should be conscious of the need of control whileperforming any managerial task.

2. Standards of performance must be laid down for their use inappraising the results of various operations.

3. Standards of performance should be laid down in consultation withthe subordinates. They must be put in writing wherever possible. Itshould also be ensured that the concerned persons in the organizationproperly understand them.

4. Standards of performance should not be too high. They must becapable of being achieved by the average workers.

Elements of Control

The essential elements of any control system are:

(1) Establishment of standards

(2) Measurement of performance

(3) Comparing performance with the standards and

(4) Taking corrective action

These steps are discussed below:

1. Establishment of Standards

The first step in control process is the setting up of standards ofmeasurement. Standards represent criteria for performance. A standardacts as a reference, line or a basis of appraisal of actual performance.Standards should be set precisely and preferably in quantitative terms. Itshould be noted that setting standard is also closely linked with and is anintegral part of the planning process. Standards are used as the criteriaor benchmarks by which performance is measured in the control process.Different standards of performance are set up for various operations atthe planning stage. As a matter of fact, planning is the basis of control.

Establishment of standards in terms of quantity, quality and time isnecessary for effective control because it is essential to determine howthe performance is going to be appraised. The second step in the controlprocess i.e., measurement of performance, has no sense unless it can be



compared with some predetermined standards. Standards should beaccurate, precise, acceptable and workable. Standards should be flexible,i.e., capable of being changed when the circumstances require so.Standard is bound to fail if it is based on records of past performance,which show either too high or too low achievement.

2. Measurement of Performance

After establishing the standards, the second step is to measure actualperformance of various individuals, groups or units. Management shouldnot depend upon the guess that standards are being met. It should measurethe performance and compare it with the standards. The quantitativemeasurement should be done in cases where standards have been set innumerical terms. This will make evaluation easy and simple. In all othercases, the performance should be measured in terms of qualitative factorsas in case of performance of industrial relations manager. His performancecan be measured in terms of attitude of workers, frequency of strikesand morale of workers. Again, attitude and morale of workers are notcapable of being measured quantitatively. They have to be measuredqualitatively.

3. Comparing Performance with Standards

Appraisal of performance or comparing of actual performance withpredetermined standards is an important step in control process.Comparison is easy where standards have been set quantitatively as inproduction and marketing. In other cases, where results are intangibleand cannot be measured quantitatively, direct personal observation,inspection and reports are a few methods, which can be used forevaluation. The evaluation will reveal some deviations from the setstandards. The evaluator should point out the defects or deficiencies inperformance and investigate the causes responsible for these.

All deviations need not be brought to the notice of top management.Deviations should be brought to the notice of top management whenthey are too high. A range of deviations should be established beyondwhich the attention of top management is warranted. Only such casesshould be reported up which pinpoint exceptional situations. This is whatis known as ‘management by exception.’ According to Dale, the controlreports should meet three criteria. Firstly, control reports must produce



figures that are truly comparable from one period to another and fromone section of the business to another. Secondly, they must be coordinatedso that they not only portray the results in different sections of the business,but also make plain the reasons why the business is or is not doing sowell as could be expected. Finally, they must be presented in such formthat the manager can get the bird’s eye-view.

4. Taking Corrective Action

The final step in the control process is taking corrective action so thatdeviations may not occur again and the objectives of the organizationare achieved. This will involve taking certain decisions by the managementlike replanning or redrawing of goals or standards, reassignment orclarification of duties. It may also necessitate reforming the process ofselection and training of workers. Thus, control function may requirechange in all other managerial functions. If the standards are found to bedefective, they will be set up again in the light of observations. JosephMassie has pointed out that a manager may commit two types of mistakesat this stage: (1) taking action when no action is needed, and (2) failingto take action when some corrective action is needed. A good controlsystem should provide some basis for helping the manager estimate therisks of making either of these types of errors. Of course, the final test ofa control system is whether correct action is taken at the correct time.

Principles or Requirements of a Good Control System

For having an effective control system, certain prerequisites areenumerated below:

1. Emphasis on Objectives. Before planning a control system, it isessential to know the objectives of the organization clearly. Thecontrol system must be directed towards the potential or actualdeviations from plans early enough to permit effective correctiveaction.

2. Efficiency of Control Techniques. Control techniques andapproaches are efficient when they detect deviations from plans andmake possible corrective action with the minimum of unsoughtconsequences.

3. Responsibility for Control. The main responsibility for the exerciseof control should rest in the manager charged with the implementationof plans.



4. Direct Control. Any control system should be designed to maintaindirect contact between the controllers and controlled. Even whenthere are a number of control systems provided by staff specialists,the foreman at the first level is still important because he has directknowledge of performance.

5. Suitability. Controls should be tailored to fit the needs of theorganization. The flow of information concerning current performanceshould correspond with the organizational structure employed. If asuperior is to be able to control overall operations, he must find apattern that will provide control for individual parts. Budgets, quotasand other techniques may be useful in controlling separatedepartments.

6. Flexibility. A good control system must keep pace with thecontinuously changing pattern of a dynamic business world. It mustbe responsive to changing conditions. It should be adaptable to newdevelopments including the failure of the control system itself. Plansmay call for an automatic system to be backed up by a human systemthat would operate in an emergency likewise an automatic systemmay back up a human system.

7. Self Control. Units may be planned to control themselves. If adepartment can have its own goals and control system, much of thedetailed controls can be handled within the department. Thesesubsystems of self-control can then be tied together by the overallcontrol system.

8. Controls by Exception. This is known as ‘management exception’.According to this principle, only significant deviations from standards,whether positive or negative, require management’s attention, as theyconstitute exceptions. An attempt to go through all deviations tendsto increase unnecessary work and decrease attention on importantproblems. In practice, it is not possible for a manager to check eachand every item being produced because of limited time availablewith him. An attempt to control everything may prove to be a futileexercise. Therefore, the control system should be designed in such amanner that only significant deviations from the standard performanceare reported to the higher level managers. This will ensure effectiveaction by the manager.



9. Strategic Point Control. It is not sufficient merely to look atexceptions. Some deviations from standards have rather little impactand others have a great deal. Small deviations in certain areas mayhave greater significance than larger in other areas. For example,deviation of 5 per cent in budgeted labor cost may be moretroublesome to a manager than a deviation of 20 per cent in budgetedpostal charges. Therefore, the principle of exception must beaccompanied by the principle of strategic point control, which statesthat effective control can be achieved if critical, key or strategic pointscan be identified, and close attention directed to adjustment at thosepoints. It is not enough just to look for exceptions; a manager mustlook for exceptions at critical points.

10. Corrective Action. Merely pointing of deviations is not sufficient ina good control system. It must lead to corrective action to be takento check deviations from standards through appropriate planning,organizing and directing.

11. Forward looking Control. The control system should be directedtowards future. It should report all the deviations from the standardsquickly in order to safeguard the future. If the control reports arenot directed at the future, they are of no use as they will not be ableto suggest the types of measures to be taken to rectify the pastdeviations.

12. Human Factor. A good system of control should find the personsaccountable for results, whenever large deviations take place. Theymust be guided and directed, if necessary. Thus, human factor mustbe given proper attention while controlling. The use of controls shouldnot be resisted by the employees. A technically well designed controlsystem may fail because human beings may react unfavorably to thesystem.

13. Economical. The systems of control must be worth their costs. Theymust justify the expenses involved. A control system is justifiable ifthe savings anticipated from it exceed the expected costs in itsworking. Small-scale production units cannot afford elaborate andexpensive control systems.

14. Objective Standards. As far as possible, standards should beobjective. If they are subjective, a managers or a subordinate’s



personality may influence judgments of performance. Effective controlrequires objective, accurate and suitable standards. Objectivestandards may be quantitative or qualitative. However, in either case,the standard should be determinable and verifiable.

From the analysis of the requirements of a good control system, it isquite obvious that planning is the basis of control, action its essence,delegation its key, and information its guide. As far as planning isconcerned, control has an important relation with planning. Planning refersto visualization of the firm’s future position over a specified period oftime and the determination of the required course of action to enable thefirm to reach that position. Often, it is regarded the first stage of themanagement process over which the subsequent stages are developed.Planning lays down the objectives of various activities and determinesthe standards of performance to evaluate the performance of variousindividuals and departments. This serves as the basis of the controlprocess, which is concerned with ensuring that events conform to thestandards laid down in advance.

Without planning, there is nothing to control. Basic plans, derivative subplans and standards provide the benchmarks to monitor, measure,evaluate and regulate actual performance as it takes place. To quoteRobert Anthony, “Management control is a process carried on withinthe guidelines established by planning. The process is intended to makepossible the achievement of planned objectives effectively and efficiently”.

Action is the essence of control. There is no use of developing controlon mechanisms, if no action is to be taken afterwards. The comparisonof actual performance against the standards reveals the deviations, whichserve as a guide for future action. This may lead to improvement ofplanning, organizing, staffing and directing. It may be pointed out thattop managers cannot perform the control function minutely themselves.They have to delegate a portion of their authority of controlling. The taskof regulation of operational action plans can be delegated to the middlelevel managers and first line managers. They may be asked to reportonly exceptional matters to the top management. Thus, delegation is akey to effective controlling.

The effectiveness of planning and controlling is influenced to a great extentby the accuracy of the information on which these are based. Information



is a guide to controlling, Therefore, it is necessary that sufficient informationof the right type is available to the management for taking correctivesteps time. The control mechanism should provide for timely informationto the management. If a control mechanism does not transmit the importantinformation to the management, it is not going to last long. Therefore,there must a provision for feedback in any good system of controlling.

Control By Exception

Management by exception is an important principle of organization. Thisprinciple holds that only significant deviations (exceptions) from standardsof performance should be brought to the management’s attention. If actualperformance is according to the planned performance (i.e., standardsalready laid down), it need not be brought to the attention of theconcerned managers as no follow-up action is necessary. But if there is amajor deviation from the standard, it should be reported to the manager.

For example, a manager establishes a quality control standard, whichsays five defects per 100 units produced are permissible. Under themanagement by exception principle, only significant deviations from thisstandard : six of more defects per 100 units (in this case) should bebrought to the notice of the manager.

The exception principle has been devised to conserve managerial time,effort and talent and apply these in more important areas. It is a techniqueof separating important information from the unimportant information.Only such information, which is critical for management control, is sentto the management. This facilitates the installing of an effective controlsystem.

Management by exception recognizes an old saying that an attempt tocontrol everything may end up in controlling nothing. An executive whowants to have an eye on each and every minor problem will prove to beineffective. He will not be able to devote much time to the criticalproblems. The principle of control by exception suggests that manager’sattention should be drawn, only when there are significant deviations inperformance in the critical areas of business. It will ensure better controlin the organization. It will also facilitate delegation of authority.

5.2 Control Process

The control process is a continuous flow between measuring, comparing



and action. There are four steps in the control process: establishingperformance standards, measuring actual performance, comparingmeasured performance against established standards, and takingcorrective action.

An example of the control process is a thermostat.

Standard: The room thermostat is set at 68 degrees.

Measurement: The temperature is measured.

Corrective Action: If the room is too cold, the heat comes on. If theroom is too hot, the heat goes off.

Step 1. Establish Performance Standards. Standards are createdwhen objectives are set during the planning process. A standard isany guideline established as the basis for measurement. It is a precise,explicit statement of expected results from a product, service,machine, individual, or organizational unit. It is usually expressednumerically and is set for quality, quantity, and time. Tolerance isthe permissible deviation from the standard. What is expected? Howmuch deviation can be tolerated?

Step 2. Measure Actual Performance. Supervisors collect data tomeasure actual performance to determine variation from standard.Written data might include time cards, production tallies, inspectionreports, and sales tickets. Personal observation, statistical reports,oral reports and written reports can be used to measure performance.Management by walking around, or observation of employeesworking, provides unfiltered information, extensive coverage, andthe ability to read between the lines. While providing insight, thismethod might be misinterpreted by employees as mistrust. Oralreports allow for fast and extensive feedback.

Computers give supervisors direct access to real time, unaltered data,and information. Online systems enable supervisors to identify problemsas they occur. Database programs allow supervisors to query, spendless time gathering facts, and be less dependent on other people.Supervisors have access to information at their fingertips. Employeescan supply progress reports through the use of networks and electronicmail. Statistical reports are easy to visualize and effective at demonstratingrelationships. Written reports provide comprehensive feedback that can



be easily filed and referenced. Computers are important tools formeasuring performance. In fact, many operating processes depend onautomatic or computer-driven control systems. Impersonal measurementscan count, time, and record employee performance.

Step 3. Compare Measured Performance Against EstablishedStandards. Comparing results with standards determines variation.Some variation can be expected in all activities and the range ofvariation - the acceptable variance - has to be established.Management by exception lets operations continue as long as theyfall within the prescribed control limits. Deviations or differencesthat exceed this range would alert the supervisor to a problem.

Step 4. Take Corrective Action. The supervisor must find the causeof deviation from standard. Then, he or she takes action to removeor minimize the cause. If the source of variation in work performanceis from a deficit in activity, then a supervisor can take immediatecorrective action and get performance back on track. Also, thesupervisors can opt to take basic corrective action, which woulddetermine how and why performance has deviated and correct thesource of the deviation. Immediate corrective action is more efficient;however basic corrective action is more effective.

Kinds of Controls

Three kinds of control systems are used by the modern organizations,namely, (i) historical or feedback control, (ii) concurrent control, and(iii) predictive or feed forward control. The details of these controls arediscussed below.

Feedback Control

Feedback or Post action control measures results from a completed action.The causes of deviations from the standards are determined and correctivesteps are taken so that such deviations do not occur again.

In all physical and biological systems, some message is transmitted in theform of mechanical transfer of energy, a chemical reaction, or any othermeans, which is known as ‘cybernetics’. In social systems also, someinformation is sent back to exercise control. Any good managerial systemcontrols itself by information feedback, which discloses errors inaccomplishing goals and initiates corrective action. Feedback is the



process of adjusting future action based upon information about pastperformance. Though feedback is ‘after the fact’, it is still vital to thecontrol process. Sometimes, input variables are immeasurable (e.g. thevalues an employee brings to the job) or are not detected at the feedforward control point. Feedback is necessary in any continuous activityas it enables to take corrective action, which is essential for theaccomplishment of goals of the system; a simple feedback system isshown in Figure.

The concept of feedback is important to the development of an effectivecontrol system in any organization. Managerial control is somewhat akinto the thermostat system of a refrigerator. Thermostat is a control deviceof closed loop type that makes control instantaneous. In a refrigerator,the thermostat records the actual temperature inside the refrigerator,compares it with the required temperature and instantaneously initiatescorrective action to bring the actual temperature to what is required.Similarly in an organization, management needs continuous flow ofinformation about actual performance so that deviations are promptlycorrected. Information, which the management receives, is nothing butfeedback. Feedback information may be received formally or informally.Formal feedback involves all written information about actualperformance, reports, financial statements, etc. But informal feedback,on the other hand, is through personal observations, personal contactsand informal discussions.

Feed Forward Controls Flow of Information

Coercive Action

Fig. Types of ConrolsFeed Back Controls

Inputs

Concurrent Controls

Processing Output

Managerial control cannot be so instantaneous or self-correcting asthermostat system or way other mechanical or electronic system. Therealways exists a time lag between recording deviations and takingcorrective actions even when sophisticated system of informationcollection is used. The collected information needs to be analyzed properlybefore suggesting any corrective action.



Concurrent controls

It is also known as ‘real time’ or ‘steering’ control. It provides for takingcorrective action or making adjustments while programme is still inoperation and before any major damage is done. For instance, thenavigator of a ship adjusts its movements continuously or the driver of acar adjusts its steering continuously depending upon the direction ofdestination, obstacles and other factors. In a factory, control chart is anexample of concurrent control. Safety check is another illustration in thisregard. Concurrent control occurs while an activity is still taking place.

Feed forward Control

Feed forward control involves evaluation of inputs and taking correctivemeasures before a particular sequence of operations is completed. It isbased on the timely and accurate information about changes in theenvironment. If right information is not available in time, feed forwardcontrol is likely to be imperfect. Feed forward follows the simple principlethat an organization is stronger than its weakest link. For instance, if amachine is not functioning properly, the operator will look for certaincritical components to see whether they are working well or not. Thesame logic applies to feed forward control; it is essential to determineand monitor the critical inputs into any operating system. Preventivemaintenance programme is an important example of feed forward control.It is employed to prevent a breakdown in machinery. Another exampleof feed forward control is formulation of policies to prevent criticalproblems from occurring. For instance, a policy on absenteeism may becommunicated to new employees to help prevent potential problemscreated by absenteeism.

Feed forward control may be used with great advantages if the followingguidelines are followed:

1. Thorough planning and analysis must be done.

2. Careful discrimination must be applied in selecting input variables.

3. Data on input variables must be regularly collected and assessed.

4. The feed forward control system must be kept dynamic.

5. Corrective action must be taken as suggested by feed forwardcontrol.



Areas of Control

It is very difficult to prescribe a precise list of areas where control shouldbe exercised. However, it may be safely suggested that any activity thataffects the survival and growth of the organization should be taken as thecritical area of control and dealt with effectively. According to PeterF. Drucker, there are key result areas where objectives should be setand controls should be exercised. These are: (i) marketing; (ii) innovation,(iii) productivity, (iv) human organization, (v) financial resources,(vi) physical resources, (vii) profitability, and (viii) social responsibilities.

Holden and others have identified the following thirteen areas wherecontrol should be exercised: (i) policies, (ii) organization, (iii) personnel,(iv) wages and salaries, (v) costs, (vi) methods and manpower, (vii) capitalexpenditure, (viii) service department efforts, (ix) line of products, (x)research and development, (xi) foreign operations, (xii) external relations,and (xiii) overall control.

Effective control requires that areas of control must be clearly identifiedfirst of all. Every organization should list the key areas on which its survivaland growth depend and devise suitable techniques of control in eacharea. This will help in effective delegation of authority and fixing up ofresponsibility.

Time controls relate to deadlines and time constraints. Materialcontrols relate to inventory and material yield controls. Equipmentcontrols are built into the machinery, imposed on the operator to protectthe equipment or the process. Cost controls help ensure cost standardsare met. Employee performance controls focus on actions andbehaviors of individuals and groups of employees. Examples includeabsences, tardiness, accidents, quality and quantity of work. Budgetscontrol cost or expense related standards. They identify quantity ofmaterials used and units to be produced.

Financial controls facilitate achieving the organization’s profit motive.One method of financial controls is budgets. Budgets allocate resourcesto important activities and provide supervisors with quantitative standardsagainst which to compare resource consumption. They become controltools by pointing out deviations between the standard and actualconsumption.



Operations control methods assess how efficiently and effectively anorganization’s transformation processes create goods and services.Methods of transformation controls include Total Quality Management(TQM), statistical process control and the inventory management control.Statistical process control is the use of statistical methods and proceduresto determine whether production operations are being performedcorrectly, to detect any deviations, and to find and eliminate their causes.A control chart displays the results of measurements over time andprovides a visual means of determining whether a specific process isstaying within predefined limits. As long as the process variables fall withinthe acceptable range, the system is in control. Measurements outside thelimits are unacceptable or out of control. Improvements in quality eliminatecommon causes of variation by adjusting the system or redesigning thesystem.

Inventory is a large cost for many organizations. The appropriate amountto order and how often to order impact the firm’s bottom line.The economic order quantity model (EOQ) is a mathematical modelfor deriving the optimal purchase quantity. The EOQ model seeks tominimize total carrying and ordering costs by balancing purchase costs,ordering costs, carrying costs and stock out costs. In order to computethe economic order quantity, the supervisor needs the followinginformation: forecasted demand during a period, cost of placing the order,value of the purchase price, and the carrying cost for maintaining thetotal inventory.

The just-in-time (JIT) system is the delivery of finished goods just intime to be sold, subassemblies just in time to be assembled into finishedgoods, parts just in time to go into subassemblies, and purchased materialsjust in time to be transformed into parts. Communication, coordination,and cooperation are required from supervisors and employees to deliverthe smallest possible quantities at the latest possible date at all stages ofthe transformation process in order to minimize inventory costs.

Control of Human Element

Recognition of human element is a significant factor while designing anycontrol system. The management must try to know the reactions ofsubordinates for various types of controls imposed on them. Subordinatesoften resist controls, which are likely to restrict their freedom and obstructthe achievement of their personal goals.



The control of human behavior has always been unpopular. Anyundisguised effort to control usually arouses emotional reactions. Wehesitate to admit, even to ourselves, that we are engaged in control, andwe may refuse a control, even when this would be helpful, for fear ofcriticism. Control creates problems not only for the subordinates but forthe superiors also. Subordinates resist controls because they restrict theirfreedom and some managers may not like to impose controls on theirsubordinates due to fear of criticism. It is also important to note thatmany people frequently try to reap the rewards of good performanceand tactfully shift the blame for poor results to others.

Whatever may be the behavioral implications of controls, controls arevery important as they create predictability in the behavior of employees.From the organization’s point of view, controls are almost indispensableto ensure that the employees work as per rules, procedures, standardsand norms of the organization. Thus, controls are necessary to regulatethe behavior of organizational members and to increase organizationaleffectiveness.

Exercise of control may have some serious behavioral implications forthe management. Generally, management uses both planned andunplanned controls to regulate the behavior of employees. The employeesagainst both types of controls generally offer some sort of resistance.But there might be serious repercussions of unplanned controls becausethey are unplanned and the subordinates are not mentally prepared toaccept them. Behaviorists consider this as an evidence of ineffectivemanagement. But it is difficult to rule out the use of unplanned controls inmodern organizations for meeting competition, reducing costs, orincreasing productivity. Whatever may be the situation, managementshould try to foresee the behavioral implications of control beforehand ifit is to exercise control effectively. But it is not always possible to recognizebehavioral dysfunctions of controls because of the following reasons:

(i) Sometimes, human behavior is unpredictable. It is difficult to analyzeunexpected and unconventional responses from the employees.

(ii) Many a time, there is a time lag between exercise of control andsurfacing of negative reactions of the people. Relating of slowreactions with a particular type of managerial behavior may be adifficult task.



(iii) Information system in an organization might not be able to sense orisolate factors, which cause resistance to controls on the part of theworkers.

(iv) Controls may slowly lead to deterioration of organizationalrelationships and performance, and these occurrences may not cometo the knowledge of the management.

Impact of Controls

Behavioral opposition to control may be caused by disagreement withstandards, reporting procedures, cost allocation and pertaining to thecontrol, systems and in some cases the need for control, The reaction ofdifferent employees to standards, performance appraisal and correctiveactions will, differ depending upon the situation and the organizationalposition of the members. The findings of Tannenbaum concerning theimpact of controls upon individuals are as follows:

Control has both rational and symbolic implications. It tells what anindividual must or must not do. It also implies something about theperson’s importance and freedom in the organization.

(i) Most persons prefer to exercise control over themselves and theirsurroundings. They usually experience greater satisfaction when theyare able to exercise self control.

(ii) When one can exercise some control, one is more likely to identifywith and support the organization’s objectives.

(iii) Persons who are unable to exercise control tend to be less satisfiedwith their work and to be apathetic and alienated. Such personslack the personal involvement of those who exercise control.

(iv) Those who exercise control may more willingly accept controls uponthemselves. Due to greater involvement and loyalty, such personsmight submit to control more readily.

Reasons for Human Resistance to Controls

The above discussion reveals that controls imply and involve a continuouscheck on the performance and behavior of individuals. Some individualsadjust with controls, whereas others resist controls in one-way or theother. People dislike and resist controls because of the following reasons:



(i) The controls may be perceived as curbs to freedom of individualsand as instruments of oppression.

(ii) The controls may suppress the creative and innovative urges andabilities of the people.

(iii) The standards of performance may be imposed from the top and thesubordinates may have no say in their determination. The standardsof performance may be rigid and unrealistic. The performanceappraised may concentrate on witch hunting and fault finding ratherthan guiding the people for better action.

(v) There may be no place for self control even for intelligent andresponsible people. Controls may be based on the assumption thatpeople are basically lazy, they shirk work and they need to besupervised closely and strictly.

(vi) The controls may be administered in a discriminatory, arbitrary andwhimsical manner.

Measures to overcome Resistance to Controls

The organizations should take up the following measures to overcomeresistance to controls:

The controls should be realistic and flexible.

They should make allowance for general human behavior.

The controls should give adequate emphasis to self direction andself control of people.

They should allow the people to make use of their creativity.

They should not operate to suppress the genuine aspirations of peoplefor self expression and for development.

The people whose behavior and performance are to be controlledmust have a say in the determination of standards and administrationof controls.

The management should have faith in the ability and capacity of thesubordinates and should follow selective control only. ‘Control byexception’ should be the rule where subordinates are responsibleand can be depended upon.



The reward system in the organization should be integrated with thevarious kinds of controls. The subordinates should be offered rewardsfor acceptable performance and behavior so that they may getpositive reinforcement.

There should be consistent operation of various kinds of controls.They should not give undue power to the superiors to discriminatebetween individuals.

There should be two - way communication in the organization.

The employees should be free to send their reactions and suggestionsto the top management.

The managers at various levels should be persuasive; they shouldtell their subordinates that controls are directed to achieve the goalsof the organization and not to curb the freedom of individuals.

Process and Techniques of Control

Modern business enterprises use a large number of techniques ofmanagerial control. These may be grouped into two categories as follows:

1. Traditional or conventional techniques such as budgetary control,statistical data and reports, marginal costing, break even analysis,standard costing, etc.

2. Modern or contemporary techniques such as Management Audit,PERT, CPM and Management Information System.

It may be noted that some of the control techniques are partial in naturein the sense that the standards on which they are based relate to thespecific areas. For instance, BEP, PERT and CPM are the techniques ofproduction control. On the other hand, there are techniques such asBudget Summaries, Profit and Loss Statements, Ratio Analysis,Management Audit, etc. which are used for the control of overallperformance of the organization. The rationale of measurement of overallperformance is explained below:

(i) Every enterprise has its overall objectives, which stand above thesectional objectives.

(ii) Overall control of activities signifies the need for coordination betweendifferent divisions of the enterprise.

(iii) Competence of top management can be measured by the techniquesof overall control.



A brief description of the commonly used management control devices isgiven below :

1. Written Reports. Each manager prepares reports on theperformance of his subordinates and submits them to his higherauthority. In this way, departmental managers submit reports to thegeneral manager. Ultimately, the Board of Directors has to submitan Annual Report to the members of the company, the virtual ownersand the highest authority.

2. Budgets. The budget, which is a component of planning, is alsoused as a tool of control. The budget predetermines the extent ofexpenditure, which cannot be normally exceeded. A budget meansprojected results, which are expected to be achieved. Budgetarycontrol is accepted to be one of the most common tools of control.Several kinds of budgets are used for controlling expenditure, whichhave been discussed later in the chapter.

3. Key Ratios. Control of overall performance can be exercisedthrough some ‘key ratios’ of which Return on Investment (ROI) isvery common. There are some expected returns on certain categoriesof investments. Those percentages must be achieved. Ratios betweencurrent assets and current liabilities, between, turnover and investmentetc. are the other kinds of key ratios.

4. Accounting Techniques. Various kinds of audit like cost audit,management audit are nowadays being used for better control.Management accounting, which is not merely based on double entrybook keeping but also concerned with resource utilization as a whole,is a powerful tool of control.

5. Internal Audit. Internal audit, also called the operation audit, hasbecome one of the important tools of management control. Internalauditing evolved as a branch of accounting and its scope was limitedto the verification of accounting transaction. But now the scope ofinternal auditing has been enlarged and is considered to be associatedclosely but objectively with every activity of the enterprise, whichcontributes to its profitability.

According to Koontz and O’Donnell, “Operation auditing in its broadestsense is the regular and independent appraisal, by a staff of internalauditors of the accounting, financial, and other operations of the business.



Although limited to the auditing of accounts, in its most useful, aspect,operational auditing involves appraisal of operations generally, weighingactual results in the light of planned results.” Thus, internal auditing controlis not only concerned with the effectiveness of the accounts department,but it also concerns itself with all the departments such as purchasing,marketing, production and personnel. The functions of internal auditingcontrol vary considerably from organization to organization dependingupon its size and nature. However, the internal auditor must be independentof all those departments, which come under his purview.

5.3. Budgetary Control

Budgetary control is the oldest technique of control, which is still beingused by business enterprises. According to Walter W. Bigg, “The termbudgetary control is applied to a system of management and accountingcontrol by which all operations and output are forecast as far ahead aspossible and the actual results, when known, are compared with thebudget estimates.

Budgetary control involves the use of budgets to plan, coordinate andcontrol day to day operations of business in accordance with the overallobjectives of business.

Before we discuss the nature, objectives, merits and limitations ofbudgetary control, it is appropriate to discuss the nature, purposes,significance and types of budgets are not only tools of control, but alsoof planning. This has been made quite clear in the chapter on planning.

Definition of Budget

A budget is an estimate of future needs, arranged according to an orderlybasis covering some or all the activities of an enterprise for a definiteperiod of time. The Institute of Cost and Management Accountants ofEngland has defined budget as “financial and/or a quantitative statementprepared prior to a definite period of time of the policy to be pursuedduring that period for the purpose of obtaining a given objective’.

A budget is an important device managerial control. It provides a standardby which actual operations can be evaluated to know variations from theplanned expenditures. A budget has the following characteristics :

(a) It is prepared in advance and is based on a future plan of actions.



(b) It relates to a future period and is based on objectives to be attained.

(c) It is a statement expressed in monetary and/or physical unitsprepared for the implementation of policy framed by the topmanagement.

Definition of Budgetary Control

Budgetary control may be defined as the establishment of budgets relatingto the responsibilities of executives to the requirements of a policy, andthe continuous comparison of actual with budgeted results, either to secureby individual action the objective of that policy or to provide a basis forits revision. Thus, budgetary control involves the following three steps :

(i) Preparation of budgets

(ii) Continuous comparison of actual results with the planned ones and

(iii) Revision of plans or budgets, in the light of changed circumstances.

Budgetary control is a useful technique of management control, whichbrings efficiency and economy in the working of a business enterprise. Itfacilitates control by establishing budgets in respect of each function andassigning responsibilities for achieving budgetary objectives. It imposescontrol by assigning responsibilities for control of actual performanceand, thus, prevents backpassing when the budget figures are not met. Itcoordinates the working of various divisions of a business and makesdelegation and decentralization of authority possible.

Objectives or Budgetary Control

The objectives of budgetary control are described as under:

(i) Determination of Goals. Budgets are sub-plans for a specificperiod. They serve as goals for certain individuals. They are specificaction programmes, which are amenable to implementation throughthe various activity centers of the enterprise.

(ii) Rationalization of Activities. Budgetary control is intended toimpart precision, discipline, direction and predictability to the dayto day activities of the enterprises.

(iii) Coordination. Budgets aim at coordination and integration ofenterprise functions and operations performed by variousdepartments. They highlight the interdependent nature of enterprise



functions and operations as also the need for consistency inoperations. Budgetary control involves the preparation of a masterbudget, which helps in bringing effective coordination of differentdepartments of the business.

(iv) Participation. Budgetary control provides participation to thesubordinates. The subordinates can make their suggestions andcomments on the budgets estimates. Thus, budget making providesan opportunity for cooperation and commitment of common goals.

(v) Efficiency in Operations. A budget lays down sufficient andsatisfactory norms of performance over various activities. It ensuresefficient utilization of various resources of the enterprise. The activityunits are also anxious to keep the overhead budgets.

(vi) Control of Activities. Budgetary control is an important instrumentof managerial control in any enterprise. It helps in comparing theperformance of various individuals and departments with thepredetermined standards laid down in various budgets. It reportsthe significant variations from the budgets to the top management.Since separate budgets are prepared for each department, this helpsin keeping down the cost of operations of different departments. Itbecomes easier to determine the weak points and the sources ofwaste of time, money and resources.

Budget : A Tool of Planning or Control?

Some people doubt whether budgets are a means of control. This isbecause budgets perform more than one function. First, they representthe objectives, plans and programmes of the enterprise and express themin financial and/or quantitative terms. Second, they help in reporting theprogress of actual performance against the predetermined objectives,plans and programmes, and finally, like job descriptions, they define theassignments, which have flowed down from the chief executive.

A budget is a kind of business plan for a particular period of time.Formulation of budget forces an enterprise to make in advance a numericalcalculation of cash flow, expenses and revenues, capital outlays andmachine hour utilization. It represents the planned expenditure on certainitems and expected revenues from various sources. Preparation of budgetrequires the same process as is required to make any other type of plan.



It is made well in advance and is based on scientific forecasts. Withoutsufficient budgeting, it may not be possible to control the expenditures.As a plan, it shows clearly the targets to be achieved in financial and /orphysical terms.

A budget is a tool of control. Since it is a statement of expected result, italso serves as an effective instrument of control. It provides the standardsagainst which the performance of different departments will be judged.Comparison of actual results with the budgeted figures will help indetecting sources of deviations and taking corrective steps, which is theessence of control process. This will bring efficiency in the organization.Economy will be achieved because of minimizing wastages of variouskinds. Budget also helps in fixing the responsibility of persons forunauthorized and uncalled for expenditures.

Budgeting is also a tool of coordination. In preparation of variousbudgets, knowledge, skills and experience of many executives arecombined and business plans are reduced to proper co-ordination of theefforts of various departments of the enterprise.

Benefits of Budgeting

The following benefits may be achieved from an effective system ofbudgetary control :

(i) Budgets provide management an overall view of the activities ofenterprise. They serve as a valuable aid to management throughplanning coordination and control. They provide standards againstwhich actual performance is measured. This helps in taking correctiveactions in time.

(ii) Budgets are based on well defined plans. In preparation of variousbudgets, knowledge, skills and experience of many managers arecombined and the plans of the enterprise are reduced into concretenumerical term and budgets enable the various departmental headsto know what is expected of them. They know the amount that theyare entitled to spend and the income they are expected to earn.Thus, budgeting introduces an element of definiteness in planning.

(iii) Budgeting helps in eliminating unproductive activities and minimizingwaste, because preparation of budgets involves a very careful analysisof various phases of business. All those who have to bear the



responsibility of executing the plans participate in the formulation ofplans. They are fully aware of the aims and objectives to be followed.Differences of opinion can be more easily reconciled throughbudgeting.

(iv) Budgeting coordinates effectively the activities of differentdepartments and develops a sound communication system throughmeetings and discussions on budgeting and efficient system ofreporting.

(v) Budgetary control assists the top management in measuring theefficiency of departments and individuals and taking correctiveactions. Thus budgeting is an important technique of control.

(vi) Budgetary control facilitates ‘control by exception’; it helps infocusing the time and effort of the managers upon areas which aremost important for the survival of the organization.

Dangers in Budgeting or Limitations of Budgetary Control

Budgets are widely used as a tool of planning and control. There arecertain dangers of budgeting, which are as follows:

(i) In some companies, budgetary control programmes are so detailedthat they become cumbersome, meaningless and unduly expensive.There is a danger in over - budgeting as it may bring rigidity in theenterprise, which may deprive the managers of the needed freedomin managing their departments. For instance, if the sales budget laysdown the expenditure on office stationery and supplies, the salesmanager may not be able to carry out his sales promotion programmefully because he will be held responsible for overspending on officesupplies.

(ii) Budgets are usually based on historical trends, which may not repeat.They may also be influenced by what top management would like tohappen. Naturally, top management is interested in larger profits,lower costs and greater market share and may make budgets toachieve these aims, which may not be possible in actual practice.

(iii) Another danger lies in allowing budgetary goals to supersedeenterprise goals. In their effort to keep within budget limits, themanagers may forget that budgets are only means to enterprise goals.Top management may also be reluctant to excuse deviations from



the budget estimates even though the causes of deviations may bejustified. This sort of over control will obstruct the achievement ofenterprise goals.

(iv) Sometimes, budgets may be used to hide inefficiencies. A departmentmay be inefficient even though its expenses are within the budgetlimits. Moreover, budgets are based on the past year’s figures and acertain expenditure incurred in the past may become an evidence tocut down the budget proposals sent by various departments. Thisnaturally leads to inflation of figures by various departments. Unlessbudget making is secured by constant evaluation of standards andconversion factors by which planning is translated into numericalterms, budgeting may become an umbrella for hiding inefficienciesof management.

(v) There may be psychological problems with the people supposed towork within the budget framework. While, on the one hand, people,like to know what they are working for and how they will be judged,on the other, many of them are resentful of budget restrictions. Theresentment is caused by the fear of inflexibility, which may be broughtabout by the budgets. When a budget is made in great detail, it willrestrict the freedom of the persons concerned to spend money. Theymay be more worried for being within budget limits rather thanachieving organizational objectives.

Precautions in the Use of Budgets

The following precautions should be taken while preparing and usingbudgets for the purpose of managerial planning and control :

1. Estimates are not too high to be attained.

2. Budgets are not prepared and installed hurriedly.

3. Administration and supervision of the operations are not ineffective

4. Organizational structure is not defective.

5. Accounting and cost systems are not inadequate.

6. Statistics of past operations are not inadequate and unreliable.

7. Results are not expected in too short a period.



Requirements of Effective Budgetary Control

The requirements of a good system of budgetary control are discussedbelow:

(i) Quick Reporting. A good system of budgetary control requires theestablishment of such procedures, which will provide reports on theperformance of various operations. The reports should reach thepersons concerned with the implementation of budgets without anydelay so that quick actions may be taken whenever necessary.

(ii) Sound Organization Structure. There should be a soundorganization structure with precisely defined authorities,responsibilities and lines of communication so that everybody in theorganization understands his role in the process of budgetary control.

(iii) Frequent Comparison. There should be frequent comparisonbetween budget estimates and operating results. Alford and Beattyare of the opinion that careful analysis of both operating results andbudget estimates is the essence of budgetary control.

(iv) Definite Plan. There should be comprehensive planning in theenterprise. All the operations should be planned in clear terms. Theadministration of the budgets should also be properly planned. Itmust be predetermined who is to be held responsible for theimplementation of budgets.

(v) Participation. The purpose of budgetary control is to achievecoordination of various functions of the business. Therefore, it isessential that participation upon the lowest level in the enterprise beensured to make the people committed to the budgets. Everybodyshould understand his role in achieving the budgeted targets.

(vi) Flexibility. Budgets should not be rigid, but flexible enough to allowalteration or remodeling in the light of any change in circumstances.Budgets are a means to an end. They must be flexible to achieve thedesired objectives. A good system of budgetary control allowssufficient flexibility to the persons concerned with the implementationof the budgets.

(vii) Support of Top Management. The top management should supporta good system of budgetary control. Top management should takethe preparation of budgets and their implementation seriously in orderto achieve the objectives of the enterprise.



Types of Budgets

A business enterprise can use various types of budgets for variouspurposes. A brief discussion of the budgets used in business is givenbelow

1. Sales Budget. It includes a forecast of total sales during a periodexpressed in money and/or quantities. The forecast relates to thetotal volume of sales and also its break up product wise and areawise. The responsibility for making sales budget lies with the salesmanager, Preparation of sales budget is the key factor in any businessenterprise. All other budgets are based on the sales budget. Salesbudget sets the tone for production, finance and personnel budgets.

The following factors are relevant for preparing the sales budget :

(i) Past figures and trend;

(ii) Salesmen’s estimates;

(iii) General economic conditions;

(iv) Orders on hand;

(v) Seasonal fluctuations;

(vi) Competition and

(vii) Government’s control and policy.

2. Productions or Output Budget. It includes a forecast of the outputfor a period analyzed according to (a) products ;(b) manufacturingdepartments and (c) periods of production. It is generally based onthe sales budget as it is the responsibility of the production departmentto schedule its production according to sales forecast. The productionmanager prepares it by taking into account the following majorfactors :

(i) The sales budget.

(ii) Plant capacity.

(iii) Inventory policy.

(iv) Availability of raw materials, labor, power, etc.

3. Materials Budget. Materials may be of two types, direct andindirect. The materials budget generally deals with the direct materials



for budgeted output. It is based on the production budget. Materialsrequirement for a unit of production is determined and is multipliedby budgeted output to arrive at total quantity of direct materialsrequired. Materials budget helps in scheduling the purchase ofmaterials to produce a given volume of output during a particularperiod to meet the requirements of customers during the period.

4. Labour Budget. It reveals the estimates of direct labor requirementsessential for carrying out the budgeted output. Labor of differentgrades required for a job or a product or a process is determined interms of man hours and is multiplied by wage rate per hour todetermine the total expenses on direct labor for budgeted production.

5. Factory Overhead Budget. It includes the estimated costs ofindirect materials; indirect labor and indirect factory expenses requiredduring the budget period for the achievement of budgeted productiontargets. The budget is prepared on departmental basis for effectivecontrol over costs. The factory or manufacturing overheads may beclassified into three categories: (i) fixed, (ii) variable, and (iii) semivariable expenses. This classification facilitates the preparation ofoverhead budgets for each department.

6. Personnel Budget. It sets out manpower requirements of alldepartments for the budget period. It expresses labor requirementsin terms of labor hours, cost and grade of workers. It helps thepersonnel manager in providing required labor to the departmentseither by transfers or by new appointments.

7. Administrative Overhead Budget. It includes the estimates ofadministrative expenses like expenses of all offices and salaries ofmanagerial personnel. Such expenses form a significant part of thetotal cost of production. Preparation of this budget will help inkeeping the administrative costs under control.

8. Selling and Distribution Expenses Budget. This budget includesthe estimates of all items of expenditure and promotion, maintenanceand distribution of finished products. The costs are divided into fixed,variable and semi variable categories and estimated on the basis ofpast experience. The various items of expenditure include sales officerent, salaries, depreciation and miscellaneous expenses, advertising,commission, bad debts, traveling expenses, etc.



9. Cash Budget. The cash budget usually consists of two parts givingdetailed estimates of (a) cash receipts, and (b) cash disbursementsfor the budget period. It is prepared: (i) to ensure that cash isavailable in time for meeting the financial commitments; and (ii) touse cash available in the best possible manner. It is prepared by thecontroller of finance considering the following points :

(a) Cash receipts expected from cash sales, credit sales having regardto credit collection policy, interest, etc., dividend and rent receivable,

(b) Estimated payments for purchases and expenses as set out indifferent budgets.

10. Master Budget. The Institute of Cost and ManagementAccountants, England has defined master budget as the summarybudget incorporating its component functional budgets, which is finallyapproved, adopted and employed. Thus, a master budget is preparedto incorporate all functional budgets. It projects a comprehensivepicture of the proposed activities and anticipated results during thebudget period. The top management of the enterprise must approve it.

Fixed and Flexible Budgets

Fixed budget is a budget, which is designed to remain, unchangedirrespective of the level of activity actually attained. The main purpose offixed budgeting is coordinating sectional activities to attain the enterpriseobjectives. It is prepared for a given level of production and does nottake into account the changes in circumstances. It becomes a rigid andunrealistic measuring rod in case the level of production actuallyaccomplished does not conform to the one assumed for the purpose offixed budgeting.

A flexible budget is prepared in a manner that it gives the budgeted costfor different levels of activity. Thus, it facilitates comparison of actualperformance with budgeted performance at different volumes of activity.Such a budget is prepared after considering the fixed and variable elementsof cost and the changes that may be expected for each item at variouslevels of activity. Flexible budgeting is of great help where it is not possibleto predict accurately the sales forecast and where the level of productiondepends upon the availability of a factor, which is in limited supply.



Zero Base Budgeting

The concept of zero base budgeting is based on the premise that thefuture is not a mere projection of the past. The likely behavior of futureevents is to be forecast systematically as the environments are changingfast. Organizations have to adapt to such changes with as much care aspossible. Goals, activities, efforts and resources need to be recast, notin a casual incremental manner, but in a logical, reasoned and optimalmanner.

Zero base budgeting represents a radical departure from traditionalbudgeting to the extent that it advocates comprehensive analysis andreview of budget proposals, every time such proposals are made. Intraditional budgeting, the normal practice is to take the current year’sbudget as the base for consideration and finalization of budget proposalsfor the next year. More often, budget for the next year is just a projectionof the current year’s budget with marginal changes made here and there.In zero base budgeting, the current year’s budget is not taken as thebase. Rather all budget proposals (which may be called possible decisionpackages) whether for existing programmes or new programmes, areconsidered from the ‘ground up’, almost from scratch, as if all proposalswere absolutely new.

The advocates of zero base budgeting assert that it permits managementa great degree of freedom and flexibility in allocating resources fororganizational activities, from year to year. There is nothing sacred inorganization goals, activities, resource allocations and programmes. Theyare all to be exposed to searching examination at periodic intervals totest their legitimacy, validity and effectiveness. Such tests take the formof thorough, rational, and judicious analysis and appraisal of previousbudget commitments and fresh budget proposals in the light of actualperformance and changed circumstances.

Performance Budgeting

Administrative Reforms Commission suggested the use of PerformanceBudgeting by the Government. A performance budget is an input - outputbudget. It considers both costs and results. It shows expenses as underthe traditional budgeting. In other words, it highlights the end results tobe achieved rather than money to be spent. It helps in knowing whether



the organization is getting adequate results for the money spent.

The steps involved in performance budgeting include the following

(i) Identification of goals, results or end output of the performingdepartment or enterprise.

(ii) Preparation of schedule of performance leading to the goals.

(iii) Linking of all expenses to performance heads.

(iv) Developing of standards of performance for the purpose of control.

The possible benefits of performance budgeting are as follows:

(i) It correlates the physical and financial aspects of every programmeor activity.

(ii) It improves budget formulation, review and decision making at alllevels of department or, undertaking.

(iii) It facilitates better appreciation and review of performance.

(iv) It makes effective performance possible.

(v) It measures progress towards long term objectives.

(vi) It brings annual budgets and development plans of the Governmentclosely together.

Performance budgeting suffers from the following limitations

(i) It is difficult to set performance goals and measure actualperformance where the output is intangible as in case of education,research, training, health, etc.

(ii) Performance budgeting is likely to fail if planning in the organizationis ineffective.

(iii) Subordinates often do not like the idea of performance budgeting.They resist its implementation.

Organization of Budgetary Control

The procedure of introducing budgetary control system in a businessenterprise involves the following steps:

1. Responsibility for Budgeting. The responsibility for budgeting isentrusted to a Budget Committee under the inchargeship of BudgetOfficer. The Budget Committee consists of heads of various



departments in addition to the Budget Officer. The Budget Officeracts as the convener of the Budget Committee. The BudgetCommittee formulates a general programme of budgeting; discussesdepartmental budgets and brings co ordination among them. TheOfficer is an expert in accounting and finance and plays an importantsale in preparing and implementation of budget. He advises the chiefexecutive and departmental heads on budgetary matters. He acts asa coordinating link between various departmental heads. He ensuresproper communication of budgets at all levels. He supervisesexecution of budgets, analyses varying performance and suggestssuitable actions to the concerned persons. He revises budgets inaccordance with the recommendations of the Budget Committee.

2. Extent of Budgeting. The people working in the enterprise shouldintroduce budgetary control in phases, so that there is least resistanceto it. It should be gradually introduced in other parts of the enterpriseafter it functions well in one part. Rigidities in budgetary control shouldbe avoided. The budgets should provide for some degree of flexibilityto executive’s implementing them. The extent of budgetary controldiffers from one firm to another.

3. Period of Budgeting. Budget is prepared for a certain period oftime. The length of the budget period depends upon: (i) nature of thebusiness; (ii) the degree of control required; (iii) production period;and (iv) timings of availability of finance. For instance, companieswith huge capital expenditure require long term budgeting, whereasseasonal firms require short period budgeting. When the businessconditions are changing fast, the preparation of budgets for a longerperiod will prove to be meaningless. Budgeted estimates may nothold well due to these changes. Therefore, the length of the budgetperiod should be restricted to such a span of time for which anaccurate forecast can be made.

4. Key or Limiting Factor. It is that factor which influences thefunctional budgets. It is also known as ‘Principal Budget’ or‘Governing’ factor. It is the factor the extent of whose influence mustfirst be assessed in order to ensure that the functional budgets arereasonably capable of fulfillment. Key factor may be raw materials,labor, plant capacity, sales or government restrictions; for instance,



shortage of power supply leads to under utilization of plant capacity.So industrial undertakings prepare first plant utilization budgetingand view the availability of power then other budgets like sale andproduction.

5. Preparation of Budgets. Most of the budgets are based on salesforecasts, which are made by the sales manager. If there is any otherkey factor, the budget estimate of such factor may be prepared first.Budget Committee discusses these estimates and gives its approvaltentatively. After that, all the departments make their budgets onthese estimates and submit them to the budget committee. Cashbudget is prepared on the basis of sales and other budgets. TheBudget Committee discusses these budgets and makes modificationswherever necessary and then incorporates all budgets into a ‘MasterBudget’, which is sent to the top management for approval.

Statistical Data and Reports

Statistical data are being widely used for the purpose of managerialcontrol. Statistical data may be presented in the form of statistical tables,graphical charts or special reports. The quality of presentation of essentialdata will determine their efficiency for the purpose of managerial control.

A report is a form of systematic presentation of information and statisticaldata relating to some aspect of business. It may arise out of availablefactual data, thorough enquiry, investigation or experiment. Theinformation provided by the report may be used for the purpose ofmanagerial control. It will help in knowing whether the policies of themanagement are being followed and if not, what steps should be takento implement them. The task of making reports is generally entrusted tocertain specialist who will collect the desired information and present thesame in the form of a report.

Marginal Costing

Marginal costing is a very useful technique, which guides management inpricing, decisions making and assessment of profitability. According toInstitute of Cost and Management Accountants, London, marginal costingis the ascertainment of marginal cost and of the effect on profit of changesin volume or type of output by differentiating between fixed and variablecosts. Fixed costs remain unchanged up to a certain level of production,



but variable costs change with the changes in the volume of production.Marginal cost is the amount of money at any given volume of output bywhich aggregate cost is changed, if the volume of output is increased ordecreased by one unit.

Suppose, a factory produces 1,000 units of product X per month. Thevariable cost per unit is Rs. 25 and the fixed expenses per month are Rs.10,000. The cost statement of 1,000 units of ‘X’ will be as follows:

Rs.

Variable cost (1,00 x )0 25 25,000

Fixed cost 10,000

Total cost 35,000

If one unit increases the production, the cost statement will be as

Variable cost (1,001 x 25) 25,025

Fixed cost 10,000

Total cost 35,025

Marginal cost is the total cost of producing 1,001 units minus total costof producing 1,000 units. It comes to Rs. 25 (i.e., Rs. 35,025 - 35,000),which is the variable cost of one unit. So long as the fixed cost does notchange, production can be increased and marginal cost for every extraunit of production will be the variable cost. Until the production at thefull capacity is achieved, the fixed costs are irrelevant for managerialdecisions and control. All the decisions are based on the variable costsof producing additional units. It is relevant here to define contribution.Contribution is the balance left by defecting total variable costs from thesales revenue. It is called contribution because it enables to meet fixedcosts and contributes to the profit.

Profit Volume Ratio. It is the ratio of contribution to sales. It is alsocalled ‘contribution ratio’ or ‘marginal ratio’. It can be expressed inpercentage by the following formula:

Contribution x 100P/V Ratio = ______________

Sales

The P/V ratio is used for appraising profitability of alternative products,operations and decisions. A higher ratio reflects greater profitability andlower ratio indicates lower profitability. Management tries to achieve



higher P/V ratio by reducing variable cost or by increasing the sale price.In most of the cases, it is not possible to increase the sale price, somanagement concentrates on decreasing the variable costs.

Usefulness of Marginal Costing

Marginal Costing is an important tool in the hands of management forexercising cost control. Since marginal costing is based on variable costs,the responsibility for controlling variable costs can be assigned to variousdepartments. The reports by various cost centers include only those costswhich can be controlled by them. The control of fixed costs is theresponsibility of the higher-level managers.

Marginal costing facilitates ‘management by exception’ by focusingattention of the management on results, which are moving out of controlsignificantly. It also helps the management in evaluating the performanceof individuals responsible for variable costs. The impact of fixed costs isconveyed to management in a more meaningful way under marginalcosting. This helps management to ensure better utilization of items, whichinvolve fixed expenditure such as plant and machinery, furniture,installations, etc. Finally, marginal costing helps the management inunderstanding the relationship between profit and major factors affectingprofit so that it may exercise control over these factors to achieve higherprofits.

Cost Volume Profit Analysis

Cost volume profit analysis is an attempt to determine the effect of achange in volume, cost, price or product mix on profits. It assistsmanagement in ascertaining which product is most profitable, what effecta reduction in sales price will have on final profit, what effect a change involume or product mix will have on production costs and profits, whateffect will be on costs, profits and sales volume if there is a change in theplant capacity and so forth. The important feature of this analysis is thatit calls for separation of variable costs from fixed costs with a view tounderstand the anatomy and structure of profit of an enterprise.

One of the most important determinants of cost is the volume of operations.The relationship between cost and volume is seldom simple as neithercost nor volume is homogeneous. Moreover, they depend on differentfactors. Cost is an aggregate of labor and material costs, supervision,



maintenance and other costs including on selling and administration.Volume is made up of many products each with its own specificationsand cost characteristics. Aggregate costs seldom, if ever, vary in directproportion to changes in composite volume. That is true even if volumeconsists of a single product, which can be physically measured. The reasonfor lack of proportionality between cost and volume is the existence of‘Fixed Costs’.

The starting point in the cost volume profit analysis is the classification ofall costs into fixed and variable costs. Fixed cost is that which remainsconstant irrespective of volume of output produced. On the other hand,a variable cost is one that changes in total as a result of change in thevolume of activity. The second step in cost volume profit analysis is todetermine the ratio of variable costs to volume of sales. It is important topoint out that profit is the function of the inter play of costs, prices andvolume of production. The important technique of cost volume profitanalysis is the Break Even Analysis.

Break Even Analysis

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

Break Even Point

The break even point is defined as that volume of sale at which revenueexactly equals total cost. It is that point where operations pass frombeing profitable to a loss or vice versa as shown in the figure. The verticalscale in the figure represents cost and revenue and the horizontal scalereflects the sales.



Cost and Revenue Total Revenue

Sales Volume

Variable Cost

Total Cost

Fixed Cost

Break even analysis helps the management in knowing the relationshipbetween cost, volume of production and profits or losses. By dividingthe total costs into fixed and variable, the management can determine thepoint up to which it must carry on production to cover fixed cost. It canexercise cost control at various levels of sale. This will also enable themanagement to accept orders during depression or off season at lowerprices which is more than the variable costs. The excess of price overthe variable costs will lead to reduction of losses, which will result if noproduction is carried on. Fixed costs remain unchanged whether there isproduction or not. However, the fixed costs do not remain constant forall levels of production. They are fixed only up to a certain level ofproduction. After that they will jump. This limitation of break even analysisshould be kept in mind. Moreover, variable costs do not always varyproportionately. There may be certain economies in large scaleproduction. The profit shown by the breakeven analysis may not beachieved as the prices in the market fluctuate frequently and the share ofevery firm in the market is also limited because of competition and otherforces beyond the control of the firm.

Management Audit

By audit we mean a review or examination of completed transactions tosee whether they represent a true state of affairs of the business or not.While conducting an audit, the auditor examines the degree ofconformance of business transactions with the accepted business practicesand the legal provisions. The main objective of financial audit is to knowthe correct profit or loss of the business during a particular year and todetermine the accuracy of the balance sheet as at the end of that year.Thus, audit serves as a control mechanism over the completed transactionsof the enterprise. It detects the errors and frauds committed in the booksof accounts of the enterprise.



Financial audit or examination of books of accounts has been in operationfor a long time. But management audit is relatively of the recent origin.Now it has come to be recognized that audit of performance ofmanagement of a big enterprise is not less important than the audit of itsfinancial transactions. But it is to be noted that there is no equivalent ofchartered accountants holding Certificate of Practice from the Instituteof Chartered Accountants of India for conducting management audit.However, a few management consultancy firms have come into existence,which offer to conduct management audit of organizations. But there isno central agency to regulate their code of conduct and practices andprocedures of management audit as in the case of financial and costaudits.

Management audit may be defined as a comprehensive and constructivereview of the performance of management team of any organization. It isan important aid for evaluation of management techniques andperformance. It undertakes a systematic search of the effectiveness andefficiency of the management. It investigates formally and in depth theperformance of management as contrasted with day to day informalimpressions. Management performs many functions like planning,organizing, staffing, directing and controlling. The chief objective ofmanagement audit is to see whether these functions are being performedefficiently or not. Management audit locates deficiencies in theperformance of various functions and suggests possible improvements.It assists the management in managing the operations of the enterpriseunder its control in the most efficient manner.

The scope of management audit is very wide. Economic outlook,adequacy of organization structure, flexibility of planning, reliability ofsystems of control, efficiency of communication and motivation, effectiveutilization of manpower and equipment, etc., all come under the purviewof management audit. The scope of management audit should be clearlylaid down before such audit is initiated.

There is no legal obligation to undergo management audit, but enlightenedmanagements understand its usefulness and voluntarily undergomanagement audit. Management audit measures the degree of efficiencyof management and points out the deficiencies in managing. As anenterprise grows, the need for such an audit increases. Continuous



feedback information is necessary for improved performance in the future.Management audit may be either comprehensive or may be restricted tosome functional areas only. If the management feels that a particulardepartment, say, marketing, production or personnel, is not working well,it may get its activities audited to identify its problems and deficiencies.

Advantages of Management Audit.

The benefits which the management may derive from the managementaudit are given below:

(a) It would locate present and potential danger spots.

(b) It would highlight possible opportunities.

(c) It would evaluate the performance of control mechanisms.

(d) It would reduce costs by suggesting how to reduce unnecessarywastes and losses.

(e) It would check the overall plans and policies of the business.

(f) It would determine whether or not the enterprise is operating asefficiently as it should.

(g) It would detect the cases where organizational policies andprocedures are not being complied with.

(h) It would evaluate the progress made by the enterprise by theintroduction of new techniques and ideas.

Conduct of Management Audit

There are no standard techniques of management audit as in case offinancial and cost audits. The auditor conducting management audit hasto devise a suitable audit programme consisting of various steps in eachand every case to achieve the objectives of such audit. The auditor mustensure that the terms of reference to him are quite clear. He should clearlyknow the scope of such audit before starting the audit. After the auditorhas examined the various phases of management, it is imperative for himto compile his observations, findings and recommendations in the formof a report. The style of audit report will depend upon the auditor, asthere is no set pattern of such report.

The audit report should be based on the observations and findings of theauditor. It should be precise and to the point. The findings should be



supported by factual information. In short, a management auditor shouldensure that his report contains the following essential elements :

(i) Table of contents to guide the readers as to what is contained in thereport.

(ii) Preface giving a brief statement of scope and objectives of audit.

(iii) Findings of the investigation carried out by the auditor. Audit ofdifferent functions may be discussed in separate sections.

(iv) Summary and Suggestions. This part should include the summary ofobservations of the auditor and his recommendations forimprovement.

(v) Appendix to include supporting data that may be too voluminous toappear in the body of the report.

Networks Techniques

Network analysis is being widely recognized as a management tool inboth commerce and Industry. Under network analysis, a project is brokendown to small activities or operations, which are arranged in a logicalsequence. After this the order in which various operations should beperformed is decided. A network diagram may be drawn to present therelationship between all the operations involved. The diagram will revealthe gaps in the flow plan. The network thus drawn shows theinterdependence of various activities of a project and also points out theactivities, which have to be completed before the others are initiated.

The object of network analysis is to help in planning, organizing andcontrolling the operations to enable the management in accomplishingthe project economically and efficiently. Various research scholars havedeveloped a number of network techniques. But PERT and CPM havegained wide popularity. Both PERT (Programme Evaluation and ReviewTechnique) and CPM (Critical Path Method) recognize the interrelatednature of elements within large work projects. Any project whether it isconstruction of a building or manufacture of a hydrogen bomb, is acomplex network of inter related activities. In network techniques, anactivity is defined as an operation required for accomplishing a particulargoal. An activity requires a specific span of time for completion. An eventis a point of time when an activity is begun or completed. In a project,some activities are sequential while others are concurrent to each other.



The former are those, which are to be arranged in a particular order. Inother words, they are interrelated.

Programme Evaluation and Review Technique (PERT)

PERT is an important technique in the field of project management. Thistechnique was first used in 1957 in U.S.A, as a tool of planning andcontrolling the ‘Polaris Missiles Program’ by Booz, Allen and Hamiltonin association with the U.S. Naval Department. It involves basic networktechnique, which includes planning, monitoring and controlling of projects.In addition to its use in schedule planning and control, the network conceptin PERT provides the framework for treating a wide range of projectmanagement problems. Recognizing this fact, the Navy Special ProjectOffice of U.S.A. extended PERT to include the elements of cost andtechnical performance.

PERT/cost is an integrated management system designed to provide,managers with the information they need in planning and controllingschedules and costs in development projects. Thus, PERT/cost systemis directed towards the dynamic management of projects. It specifiestechniques and procedures to assist project managers in:

(i) Planning schedules and costs.

(ii) Determining time and cost status.

(iii) Forecasting manpower skill requirements.

(iv) Predicting schedule slippages and cost overruns.

(v) Developing alternate time cost plans.

(vi) Allocating resources among tasks.

PERT uses ‘probability’ and ‘linear programming’ for planning andcontrolling the activities. Probability helps in estimating the timings ofvarious activities in the project, and linear programming is used tomaximize the achievement of the project objective. With the help of thesetools, PERT can foretell the probability of achieving the project targetsleading to main objective of the project.

Applications of PERT. PERT was developed as a research anddevelopment planning tool to estimate timings of various activities withenough certainty. It is being used by many large organizations forconducting the initial review of new projects. It helps in planning the time



and resources in case of projects. It can be employed with great advantagein those cases (e.g., nonrepetitive projects, research and developmentand defense projects) where a project cannot be easily defined in termsof time and resources required.

PERT is employed in construction of ships, buildings and highways, inthe planning and launching of new products, in the publication of books,in the installation and debugging of computer systems. Frequently, PERTsystems are used in conjunction with computers. A computer programmeis employed that permits calculations to be made without reference to aflow chart or diagram.

Critical Path Method (CPM)

CPM is the most versatile planning and control technique used in business.It. was first employed in U.S.A. in 1958 by the E.I. du Pont de NemoursCompany. Unlike PERT, it is applied in those projects where activitytimings are relatively well known. It is used for planning and controllingthe most logical sequence of activities for accomplishing a project.

Under CPM, the project is analyzed into different operations or activitiesand their relationships are determined and shown on the network diagram.The network or flow plan is then used for optimizing the use of resourcesand time. CPM marks critical activities in a project and concentrates onthem. It is based on the assumption that the expected time is actually thetime taken to complete the project. CPM is suitable for constructionprojects and plant maintenance.

CPM requires greater planning than required otherwise. Thus, it increasesthe planning cost, but concentrating on critical paths only and avoidingexpenses on the strict supervision and control of the whole project justifythis increase in cost. Besides ascertaining time schedule, CPM providesa standard method of communicating project plans, schedules and costs.

The application of CPM leads to the following advantages:

(i) It provides an analytical approach to the achievement of projectobjectives, which are defined clearly.

(ii) It identifies most critical elements and pays more attention on theseactivities.



(iii) It helps in ascertaining the time schedules.

(iv) It makes use of better and detailed planning.

(v) It assists in avoiding waste of time, energy and money on unimportantactivities.

(vi) It provides a standard method for communicating project plans,schedules and costs.

Steps in PERT/CPM

The application of network techniques in project management involvesthe following steps:

(i) Identification of Components. The first step in the application ofPERT/CPM is identification of all key activities and phases or eventsnecessary for the completion of project. The term ‘activity’ may bedefined as an operation or a job to be carried out which consumestime and resources. An arrow in the network diagram denotes it. Anevent may be defined as the beginning or completion of an activity.A circle in the network diagram denotes it.

(ii) Sequencing of Activities and Events. A network diagram isprepared to show the sequence of activities and events. It has abeginning point and a termination point for the project, each event isgiven a serial number for the sake of convenience. It may be notedthat some activities have to be under taken sequentially while othersare to be carried out concurrently. The project network clearly revealsthe sequence of activities. It also depicts a number of paths ofactivities and events from beginning to completion.

(iii) Time Analysis. After the network diagram is drawn, time estimatesare prepared for how long it will take to complete each activity. Thetotal time of all these activities will be the time required for thecompletion of the project. Three estimates of time span for thecompletion of each activity are made, viz., (i) optimistic or shortesttime, (it) pessimistic or longest time, and (iii) normal (most likely)time. These estimates are combined into a single workable time valueknown as expected time. The three estimates of time are used inPERT because the originator of PERT thought that the estimatedtime for an activity is better described by a probability distributionthan by a single estimate.



(iv) Determination of Critical Path. Under this stage, it is required toidentify the sequence of those activities whose completion is criticalfor the timely completion of the project. The line in the networkconnecting the critical activities from start to finish of the project isthe critical path. Once the critical path is known, the manager will bein a position to allocate resources more fruitfully, to spot troubleearly and to apply controls where it is more essential.

(v) Modification in Initial Plan. The project analysis should not stopafter the critical path has been identified. The potential exists forsubstantially improving upon the initial plan. There is sometimes thepossibility of resequencing of some activities that lie along the criticalpath. When this is possible, it will reduce the time along the criticalpath, resulting in a shorter expected project completion time.

(vi) Controlling the Project. In order to control the project, the emphasishas to be given on the activities along the critical path. If there aredelays in these activities, the completion of entire projects will bedelayed. Thus, the consequences will be serious. However, slippagesof activities that are not on the critical path are less serious. Theproject manager has to be in constant touch with the persons engagedon the critical activities. If there have been any difficulties or obstacles,these are to be removed.

Control of Overall Performance

The important techniques of control of overall performance of businessenterprises are discussed below:

1. Budget Summaries. A budget summary is a resume of all individualbudgets of the organization. It reflects overall business plans andidentifies limitations and deficiencies. It helps the top management invisualizing how the organization is functioning in the direction of itsobjectives. Budget summaries must be accompanied by the reportsof actual performance of various departments. This will help incomparing the actual performance with the budget targets and takingcorrective actions in case of wide deviations.

2. Profit and Loss Control. This is the most widely used means ofcontrol of overall performance of an enterprise. The Profit and Lossstatement shows all the revenue, expenses and income for a given



period. For better results, the management may supplement profitand loss control with budgetary control. This technique can becomemore effective if it is used with the profit and loss statements of theprevious years. By highlighting increases or decreases of variousexpenditures and incomes from year to year, these statements helpthe management in controlling certain expenditures and emphasizinggeneration of revenues.

3. Return on Investment. Rate of return on investment (ROI) isregarded a useful technique of control to evaluate the relative aswell as absolute success of a business enterprise. It determines theratio of earnings of the enterprise to its investment. That is why it isalso called return on capital employed. The essence of this approachis that profit is not taken as an absolute figure, but is considered inrelation to invested capital. This helps in comparing the rate of returnof two companies whose profit figures and capital invested aredifferent. Rate of return on investment is calculated by the followingformula.

EROI = ____

IWhere E stands for net earnings and I stand for investment (i.e., capitaland free reserves).

The advantages of ROI are as follows

(i) It focuses attention on profits and relates them to the most importantstake in the company, i.e., capital invested. It indicates how effectivelyresources are employed.

(ii) Rate of return on investment is useful to compare the performanceof a company over the years. It helps in comparing performance ofdifferent divisions, products and also different companies,

(iii) It helps in locating areas where capital is being fruitfully utilized andin planning future operations accordingly.

The limitations of this technique are as follows:

(i) It may be troublesome to compile information on sales, costs, assetsand investments of the products produced and sold.

(ii) Excessive emphasis on ROI may lead to neglect of other importantvariables like technological advance and morale of employees.



(iii) Because of inflation, there is appreciation in the value of variousassets. Therefore, to relate profits to the book value of the assets ismisleading.

(iv) Rate of return on investment may tend to encourage conservationand discourage risk taking in the long run. ROI does not considerqualitative factors, which are important in long term decision making.

4. Ratio Analysis. Ratio analysis is the process of analyzing therelationship between two sets of figures relating to two importantaspects of the company (e.g., current assets and current liabilities).A ratio may be financial, or non financial. Financial ratios arecalculated from the financial accounts of the firm such as currentratio. Non financial ratios are calculated from the operating resultsof the firm such as ratio of volume of production to man-hoursworked. Some of the important ratios used in modern organizationsare given below:

(b) Acid Test or Quick Ratio =

(c) Solvency Ratio =

II. Leverage Ratios - Measure the contribution to finance by owners visa-vis creditors.

(a) Debt - Equity Ratio =

III. Profitability Ratios - Measure the relationship between profit or earnings and capitalemployed or sales.

(a) Return on Capital Employed =

IV. Activity Ratios - Measure the effectiveness of employment of resources.

(b) Equity Capital Turnover =

(c) Average Collection Period =

(a) Current Ratio

1. Liquidity Ratios measure ability to meet maturing obligations.

=Current Assets

Current Liabilities

Cash & ReceivablesCurrent Liabilities

Long - term DebtNet worth

Net Earnings

Capital + Free Reserves

(b) Return on Sales = Net Earnings

Sales

(a) Inventory Turnover =Sales

Average Annual Inventory

SalesNet Worth

ReceivablesAverage Sales per Day

Total Outstanding LiabilitiesTotal Tangible Assets



5. Responsibility Accounting. Responsibility Accounting means asystem of accounting whereby the performance of various people isjudged by assessing how far they have been able to achieve thepredetermined targets set up for the sections, divisions, ordepartments for which they are responsible. A ‘ResponsibilityCentre’ is simply an organizational unit headed by a responsibleperson. The responsibility centers may be sub divided into threecategories :

1. Costs or Expense-center. Dividing the whole organization into anumber of centers for which a standard amount of expense to beincurred is predetermined may form it. The performance of each isappraised by comparing the actual expenditure with the budgetedcosts.

2. Profit center. The entire organization may be divided into a numberof divisions. The performance of each is judged in terms of both theincome that is earned and the costs that are incurred. It is an importanttool of control in large firms where each divisional manager is givena profit objective and the performance is measured accordingly.Transfer price is the notional price at which the output of onedepartment in a firm is transferred to another. This facilitates thepreparation of separate departmental profit and loss accounts.

3. Investment center. The head of every unit is responsible not onlyfor profits but also for the assets he uses. The investment made ineach center is separately ascertained and the amount of profits orthe ROI (i.e., return on investment) is used as the basis for judgingthe performance of the center. Every divisional manager is given ‘ROIObjective’ and full freedom to take decisions for its achievement.

The choice between the various types of responsibility centers may bemade by the following criteria :

(i) The factors towards which the top management wishes to direct thedivisional manager’s attention.

(ii) The factors, which can be controlled by the divisional manager.

(iii) The education, experience and special qualities of the particulardivisional manager.



Summary

There are several techniques employed by managers in order to achievethe highest level of quality and productivity possible.

Break even analysis tries to examine the impact on profit of the changesin price, volume, mix and costs with a certain amount of accuracy. Ithelps management in profit planning. Budgeting is the process of stating,in quantitative terms, planned organizational activities for a given periodof time. Budgets are useful because they provide a means of translatingdiverse activities and outcomes into a common measure, such as rupees.Zero Based Budgeting (ZBB) is a budget approach in which responsibility’centers start with zero in preparing their budget requests and must justifythe contributions of each of their activities to organizational goals, ratherthan focus on increments to the previous year’s budgets. While ZBBforces managers to justify their activities in terms of future goals ratherthan past practices, the process can be costly and time consuming toadminister, since every ongoing activity must be evaluated. HumanResource Accounting (HRA) is a process of identifying and measuringdata about human resources and communicating this information tointerested parties. HRA provides valuable feedback to managersregarding the effectiveness of policies and practices. It helps themanagement in taking appropriate decisions regarding the use of humanresources in an organization. Both monetary measures and non monetarymeasures are used to value human resources depending on necessity.

Standard costing is a sophisticated technique of costing under which thestandards are determined in advance, and actual costs are comparedwith the standards so that corrective action may be taken for anyunfavorable variances. Management audit is a systematic and in depthreview of the effectiveness and efficiency of management. The primaryfocus is on appraisal of general performance of management functions aswell as specific organizational areas.

Network models are used in planning and controlling large, complexprojects. The PERT involves the display of a complex project as networkof events and activities with three time estimates used to calculate theexpected time for each activity. The objective of PERT is to reduce theentire project completion time by a certain amount at the least cost. TheCPM also involves the display of a complex project, a network but with



one time estimate used for each step in the project.

A Management Information System (MIS) is an organized approach forobtaining relevant and timely information on which to base managementdecisions. MIS enhances management’s ability to plan, measure andcontrol performance by initiating appropriate actions at a right time. TotalQuality Management is an organization wide commitment to infusingquality into every activity through continuous improvement. The TQMphilosophy focuses on teamwork, increasing customer satisfaction andlowering costs.

Have you understood questions

1. Design a control system for measuring the progress you make inyour course work. Apply the feedback and feed forward conceptsdiscussed in this block.

2. Interview two managers about the controls used in their companies.Can you identify standards against which performance can beaccurately measured? How is performance measured against thestandards, and how timely is the reporting of deviations? If deviationsare detected, how long does it take before corrections are made inspecific situations?

3. Draw the layout of your apartment or your house, and indicate thepathways you walk while doing your typical daily chores. Show anyrearrangements you could make that would increase youreffectiveness and personnel productivity.

Review questions.

1. Define controlling.

2. Illustrate significance of controlling.

3. Elucidate the steps in the control process with suitable illustration.

4. What do you mean by budgetary control?

5. Describe the control techniques used in industry with suitableexample.

Anna Universtiy Chennai


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