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After studying this lesson, you should be able to:

understand the nature of management familiarise with the basic managerial functions describe the levels in management and acquire an indepth knowledge of the skills required of a manager.


A. Introduction

B. What is Management?

C. Nature of Management

1. Management as a Science

2. Management as an Art

3. Management as a Profession

4. Professionalisation of Management in India

D. Functions of Management

1. Planning

2. Organising

3. Leading

4. Controlling

E. Management Levels

1. Front-line Managers


Top level Managers

F. Managerial Skills

1. Technical Skills

2. Human Skills

3. Conceptual Skills

G. Summary

1. Review Questions

2. Case Study

3. Further Readings


Modern societies are often described as 'Societies of organisations'. When we think of any modern society, institutions like business enterprises, hospitals, religious and social organisations naturally come to our mind. All these organisations affect our lives in many ways. Despite the differences in their functioning and approaches, they all strive to achieve certain objectives. It must also be noted that organisations cannot achieve the objectives effortlessly. Several activities have to be performed in a cohesive way. As such, it is the function of the management to facilitate the performance of activities in a systematic fashion such that the accomplishment of the objectives becomes possible.


Management means many things to many people. Economists regard it as a factor of production. Sociologists see it as a class or group of persons while practitioners of management treat it as a process. In simple terms, management is what a manager does. It has been called by Mary Parker Follet as "the art of getting things done through people". This definition throws light on the fact that managers achieve organisational goals by arranging others to perform rather than performing the tasks themselves.

Management, in fact, is much more that no one single definition has been universally accepted. Nor can any one definition capture all the facets of management, given its dynamic nature. That is why, it is often said that there are as many definitions of management as there are authors in the field. However, the definition given by James A.F. Stoner encompasses all the important facets of management. According to him:

"Management is the process of planning, organising, leading and controlling the efforts of organisation members and of using all other organisational resources to achieve stated organisational goals".

This definition suggests that:

- Management is a process because all managers irrespective of their level in the

organisation, engage in certain interrelated activities in order to achieve the desired


- Managers use all the resources of the organisation, both physical as well as human;

- Management aims at achieving the organisations goals.

To achieve the objectives, every organisation uses certain inputs like materials, machinery, money and the services of men. These inputs are drawn from the environment in which the organisation exists. Whether in organisation is engaged in business or non-business, the various inputs are judiciously used to produce the outlays. This process which involves the conversion of inputs into outputs is common to all organisations and it shown in exhibit 1.

The output of the firm may be a physical product or service. Since a business organisation is an economic entity, the justification for its existence lies in producing goods and services that satisfy the needs of the people. Here arises the question of effectiveness in transforming the inputs into outputs. How effectively the goods and services are produced is a matter of concern for any society, given the scarcity of resource. Effective management plays a crucial role in this context.


Inspire of the growing importance of management as an academic discipline immensely contributing to the quality of human life, the concept is still clouded by certain misconceptions. No doubt, management as an academic body of knowledge has come a long way in the last few years, has grown in stature and gained acceptance all over the world. Yet, it is paradox that the term 'management' continues to be the most misunderstood and misused.

1. Management as a Science:

It is therefore relevant to examine the exact nature of management whether it is a science or an art. Before arriving at a conclusion, let us understand the nature of science as well as art. Any branch of knowledge to be considered as science, (like the ones we have physics, chemistry, engineering, etc.) should fulfill the following conditions:

a. the existence of a systematic body of knowledge encompassing a wide array of


b. the principles have to be evolved on the basis of constant enquiry and examination;


the principles must explain a phenomenon by establishing cause-effect relationship;

d. the principles have to be amenable for verification.

Looked at from this angle, management as a discipline fulfils the above criterion. Over the years, thanks to the contributions of many thinkers and practitioners, management has emerged with its own principle. The application of these principles helps any practising manager to achieve the desired goals. However, while using the principles, one should not lose sight of the variables in the situation, since situations differ from one another. Thus the importance of personal judgment cannot be undermined in the application of principles. Further, management is a dynamic subject in that it has drawn heavily from economics, psychology, sociology, engineering and mathematics, to mention a few. It is multi-disciplinary in nature.

Though management, considering its subject matter and the practical utility, may be considered as 'Science' for reasons discussed below, it cannot be viewed as an 'exact science'. In other words, it is a science, but an 'inexact science' because:

i. Management by definition, involves getting the things done through people.

Compared to the other inputs, 'people', who constitute the human resource of any organisation are unique in respect of their aspirations, attitudes, perceptions and the like. Dissimilarities in the behaviour patterns are so obvious that standard results may not be obtained in otherwise similar conditions.

ii. Secondly, the behaviour of the human beings cannot be accurately predicted. Hence

readymade and standard solutions cannot be prescribed.

iii. Thirdly, management is more concerned with future which is complex and unpredictable. As the saying goes, 'many a slip between the cup and lip', many variables in the environment may affect the plans and render them ineffective.

iv. Lastly, since a business organisation exists in an environment, it has a two-way interaction with the environment. The organisation influences the environment by its several decisions and in turn, is influenced by the various elements of the environment Important among these are technological, economic, socio-cultural and political factors. The whole thing is so complex that however effective the plans are, one is prone to be taken unaware of unexpected changes in the environment.

Unlike the pure or exact sciences where the results are accurate, in the Case of Management the various factors totalized above may force even the excellent plans and strategies go haywire. Too many complexities and uncertainties renders management an 'inexact science'.

2. Management as an Art:

Art refers to the 'know-how' to accomplish a desired result. The focus is on the ways of doing things. As the saying goes 'practice makes a man perfect', constant practice of the

theoretical concepts (knowledge base) contributes for the formation of skills. The skills can be acquired only through practice. In a way the attributes of science and art are the two sides of the same coin. Medicine, engineering, accountancy and the like require expertise on the part of the practitioners and can only be acquired through practice. Management is no exception. A university gold medalist in surgery may not necessarily turn out to be a good surgeon. Similarly a management graduate from the best of the institutes may not be very effective in practice. In both cases, the application of the knowledge acquired through formal education, requires ingenuity, correct understanding of the variables in the situation, pragmatism and creativity in finding solutions to problems.

Effective practice of any art requires a thorough understanding of the science underlying it. Thus science and art are not mutually exclusive, but are complementary. Executives who attempt to manage without the conceptual understanding of the management principles and techniques have to depend on luck and intuition. With organised knowledge and the necessary skills to use such knowledge, they have a better chance to succeed. Therefore, it may be concluded that management is both a science and an art.

3. Management as a Profession:

Another important dimension of the nature of management is whether it is a profession. McFarland gives the following characteristics of a profession:

existence of an organised and systematic body of knowledge,

formalised methods of acquiring knowledge and skills,

existence of an apex level body with professionalisation as its goal,

existence of an ethical code to regulate the behaviour of the members of the

profession, charging of fees based on service, and

a concern for the social responsibilities.

Management as a profession does not strictly conform to the above criterion. Unlike medicine or law, management has to go a long way to have a universally acceptable norm of behaviour. There is no uniform code of conduct that governs the behaviour of managers. The apex level body, All India Management Association (AIMA) provides only guidelines and does not have any controlling power over the erring members. Vast differences are also found among managers in respect of their concern for the ethics and values of the system in which they function. Many a time, in their obsession with profit, the societal interests are neglected. However, as in the case of other professions, it is implied that managers are expected to set an example in doing good to the society. After all, given the enormous resources they have at their command, the expectation that managers should address themselves to the problems of society is not unnatural.

Compared to other professions like engineering, medicine, accountancy, etc., the entry to management positions is not restricted to individuals with a special degree. To quote Peter Drucker, 'no greater damage could be done to an economy or to any society than

to attempt to professionalize management by licensing managers, for instance, or by limiting access to management to people with a special academic degree'.

The question whether management is a profession often breathes life into the widely debated issue "whether managers are born or made". It is true that many founding fathers of the industry in India and elsewhere too, did not study management in the formal way. The native wisdom coupled with their vision and ingenuity in organising the enterprises helped them earn name and fame. Huge industrial empires were built with sheer business acumen. Business history of any nation is fully replete with many "rags to riches" stories. The Marwaris and Parsees in North India and Chettiars and Naidus in South India, for instance, offer a classic example of such success stories. The success achieved by the pioneers in these cases amply demonstrates that success in business requires much more than the academic degrees.

The achievements of the pioneers of the industrial development need not, however, shadow the importance of management as a profession, in arguing for and against, we must not ignore the context of the business. There has been a sea change in the environment of the business. Modern business has become more complex due to the uncertainties arising mainly from:

* rapid technological changes

* increased sophistication in technology

* expansion in the size of organisations and consequently the markets.

All these variables which have a significant bearing on the functioning of a business point to the need for formal training and acquisition of skills in management by pursuing management education.

4. Professionalisation of Management in India:

In the last few years, management as a profession has gained a firm footing in India. The awareness about the contributions of professional managers has been increasing. Consequently, there has been a manifold increase in the number of institutes offering MBA and related diploma courses. There has also been a phenomenal increase in the number of students seeking admission into the management programmes.

The following factors seem to be mainly responsible for the growing demand for professional managers:

- The liberalisation policies pursued by the government opened up new vistas for the

Indian organisations. As a consequence, competition has increased in all the sectors of Indian economy.

- Private industrial houses which were indifferent before, have fully realised the need for professional managers. While the promoters in many cases reserve the policy

formulation for themselves, the day-to-day managerial activities are entrusted to the professional managers.

- Public sector undertakings are also, of late, forced to perform. As a result, qualified managers are sought after by PSU's than ever before.

- Apart from the manufacturing concerns, public utilities like transport,

telecommunications, and a host of service organisations are recruiting professional

managers in a big way.


Management is widely regarded as a process. A manager no matter what his level is in the organisation, performs a series of functions. Surprisingly, there is no consensus among the management thinkers on the classification of management functions. The number of functions as well as the terminology used to describe them are not alike. Henry Fayol identifies five functions, vis., planning, organising, commanding, coordinating and controlling. For instance, Newman and Summer recognize only four functions, namely organising, planning, leading and controlling. Luther Guile's popular catch word POSDCORB suggests seven functions, namely, planning, organising, staffing, directing, coordinating, reporting and budgeting. Koontz and O'Donnel classify the functions into planning, organising, staffing, directing and controlling. For the purpose of our study, we shall examine the following four functions of management

- planning, organising, leading and controlling.

1. Planning

Planning, simply, is outlining a future course of action. It is unique in that it precedes all the other managerial functions. It attempts to capture the future. It involves deciding the objectives and formulating the policies and procedures to achieve them. Effective planning provides answers to questions like - what to do, how to do, who is to do it, and when to do?

Planning is a function performed by managers at all levels. However, plan made by top managers have a wider scope with a focus on the organisation as a whole and normally cover a longer period. On the other hand, plans developed by middle and lower level managers relate to the divisions or departments and usually cover a short period. Systematic planning helps in facing the uncertainties of future with less embarrassment. It helps in making things happen in the expected way.

2. Organising

Organisations achieve objectives by using physical and human resources. When people work in groups, everyone in the group should know what he is expected to achieve and what reporting relationship he has with others. The manager's task in organising aims at creating a structure that facilitates the achievement of goals.

Organising involves:

determination of activities required to achieve goals;

grouping of these activities into departments;

assignment of such groups of activities to a manager;

delegation of authority to carry them out; and

provision for coordination horizontally and vertically in the organisation.

It must be remembered that the structure varies with the task. A large organisation with huge markets needs a different structure compared to a small organisation. Similarly, structure of an organisation operating in a stable environment may be different from the one operating in a dynamic environment. The way one goes about in organising the affairs of the organisation, is thus influenced by the size and nature of the activities involved, the type of environment, and the overall business strategy.

3. Leading

Once plans are finalised and the structure of the organisation is determined, the next step is to help the people achieve the objectives. This involves directing or leading the activities of the people. The manager directs the activities of his subordinates by explaining what they have to do and by helping them perform it to the best of their ability. In leading the people, the manager performs the following three distinct tasks:

Communication - the process of passing information from one person to another

Leadership - the process of directing the activities of the people by explaining them what they have to do.

Motivation - the act of stimulating the people so that they give their best to the organisation

Leading is a function predominantly interpersonal in nature. In the organisational context many problems arise because of the failure of managers to understand the people, their aspirations, attitudes, behaviour as individuals and in groups. If the manager fails in leading the people towards better performance, any amount of planning and organising, however effective they are, may not help the organisation.

4. Controlling

While plans of the organisation spell out the objectives to be achieved, control as a managerial function facilitates to know whether the actual performance is in conformity with the planned one. So that, in the event of deviations, appropriate corrective measures can be taken. In the absence of adequate control mechanism, unexpected changes in the environment may push the organisation off the track. Thus, controlling implies measuring and correcting the activities to assure that events conform to plans. It involves four main elements:

a. Establishing standards of performance;

b. Measuring the actual performance and comparing it against the standard


c. Detecting deviations, if any, in order to make corrections before it is too late; and

d. Taking appropriate corrective measures.

is too late; and d. Taking appropriate corrective measures. Please use headphones E. MANAGEMENT LEVELS Though

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Though the term 'manager' is used to mean anyone who gets the things done through other people, we find the managers in any organisation with varying authority and responsibilities. In any company the total management job requires many skills and talents. Obviously, therefore, the job of manager is divided and subdivided. Such an arrangement implies different levels of management. As a matter of custom and convenience, we normally visualise a company's management as a pyramid as shown in


Levels of Management

The three levels of management that are commonly found in any organisation are lower or front-line, middle and top managers.

1. Front-Line Managers

This is the entry level job in the management. Managers at this level direct the operating employees (workers). They are close to the action, for their job involves supervising the activities of operatives. Front-Line managers are called foreman, supervisor, inspector and so on in any organisation.

2. Middle Level Managers

Middle management level includes, in many organisations, more than one level. Managers who work at all the levels between the lower arid top levels constitute the middle management, departmental heads and regional managers. Zonal managers and so on fall in this category. They report to top managers. Their principal responsibilities are to direct the activities of lower level managers who implement the organisation's policies.

3. Top level Managers

This level consists of a small group of executives. Board of Directors, Chairman, Managing Director and the top functional heads and divisional managers comprise this level. Top managers are responsible for the overall management of the organisation. They decide the enterprise objectives, policies and strategies to be pursued to achieve those objectives. They provide direction to the organisation by guiding the organisation's interactions with its environment.


Management job is different from other jobs. It requires elements of stewardship and commitment to the purpose. It involves the obligation to make prudent use of human and material resources. It requires resourcefulness and capacity for judgment to handle complex situations. Further, the nature of the job becomes increasingly complex at each higher level because of the increase in the scope of authority and responsibility. Therefore, each higher level requires increased knowledge, broader perspective and greater skills.

For purpose of analysis, skills required of any manager are classified under three different heads - technical, human (Employee relations skill) and conceptual skill as shown in Exhibit 3. The exhibit helps in understanding the levels of management responsibility, the principal skill requirements, and the extent to which each kind of skill is required at each level.

1. Technical Skill

Technical skill is the ability to use the procedures, techniques, and knowledge of a specialised field. It is primarily concerned with the ways of doing the things. It implies proficiency in a specific field of activity. Technical skill is most important for the lower level managers because by nature their job involves supervision of the workers. Effective supervision and coordination of the work of the subordinates, therefore, depends on the technical skill possessed by the lower level manager. Any supervisor without a sound knowledge of the job cannot make an effective supervisor. Such supervisors are not respected by the subordinates at the shop floor. The relative importance of the technical skill as compared to the other skills diminishes as one moves up to higher levels of management.


Human Skill

Human skill is the ability of the manager to work effectively as a group member and to build cooperative effort in the team he leads. It is the ability to work with, understand and motivate people. This skill is primarily concerned with persons, as contrasted with "things". When a man is highly skilled in employee relations, he is aware of his own attitudes, assumptions, and beliefs and recognizes their limitations as well as their usefulness. He accepts as an important fact of life the existence of viewpoints and feelings different from his own. He understands why people behave as they do and is able to make his own behaviour understandable to them. He can foresee their reactions to possible courses of action and, is able to take their attitudes into account. His skill in working with others is natural and continuous. He does not apply it in random or in inconsistent fashion. It is a natural ingredient of his every action.

3. Conceptual Skill

This skill is also called design and problem-solving skill. It involves the ability to see the organisation as a whole, to understand how its various parts and functions mesh together, and to foresee how changes in any one of these may affect all the others.

Conceptual skill extends to visualising the relation of the organisation to industry, to the community and to the political, economic and social forces of the nation as a whole, and even to forces which operate beyond the national boundaries. It is the creative force within the organisation.

A high degree of conceptual skill helps in analyzing the environment and in identifying the opportunities and threats. Managements of companies like ITC, Larsen & Turbo, Asian Paints, Bajaj Auto in the private sector and National Dairy Development Board in the public sector, to mention a few have amply demonstrated this skill in competitive edge over their competitors.

All the three types of skills discussed so far are not mutually exclusive. In other words, management job always requires all the three skills but in different proportions depending upon the level of management. There is a gradual shift in the emphasis from the bottom to the top of the pyramid. Technical skill and human skill are always in greater demand at the base of the pyramid, for it is there the productive processes and operations are carried out. It is there where you find most of the people. It is there where the action takes place. The need for conceptual skill is greatest at the peak of the pyramid. Obviously, the top managers are not often involved in the direct application of specific methods, procedures and techniques than those at the lower echelons of management.

Although, each of these skills is needed in some degree at every level of management, there are successful executives who have no great amount of technical skills. But they are able to compensate the lack of that skill through superior creative ability and skill in selecting, planning and effectively motivating subordinates who are strong in technical skill.

As you have understood by now, at every level, management job is different from all other jobs in respect of the skills required. At the entry level into the management job, that is, at the supervisory level, besides technical skills, you have to realise the need to acquire human skill and the problem-solving skills (conceptual). To climb up the organisational ladder, you must not only be good at the skills required for the present job. But also learn and acquaint yourself with the skills required at the next level. As a result, in the event of promotion to the next higher level, you would feel at home and discharge the responsibilities with ease.

feel at home and discharge the responsibilities with ease. G. SUMMARY Please use headphones Organisations engaged


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Organisations engaged in business or non-business use the inputs to produce the output (may be products or services). The conversion of inputs into outputs depends on the effectiveness of management. Management as a discipline has both the elements of science and art. The theory with principles and techniques constitute the science component, while skills and talent required for the use of the principles constitute the art. Management has, of late, emerged as highly respected profession. The process of management is understood under the four basic functions, viz., planning, organising, leading and controlling. To execute the managerial job successfully, every manager

requires three types of skills - technical, human and conceptual skills. The proportion in which these skill are required varies from one level to the other. Technical skills are important it the lower while human skills and conceptual skills are required in that order at higher levels of management.

Review questions

1. Describe whether management is a science or art.

2. What do you mean by a profession? Examine the recent trends towards

professionalisation of management in India.

3. Discuss the important functions of management.

4. Present a detailed account of the levels of management that are commonly found in

any large scale organisation. What are the important skills at each level?


Traditional Manager or Professional Manager

Ravi, a brilliant young man, obtained his MBA degree from an Indian university in 1991 with specialisation in the area of Finance. His basic degree is B.E. in Chemical Engineering. The engineering background coupled with the management education aroused in him new spirits to strike on his own. Careful and systematic analysis of the various opportunities enabled him finally to zero in on the production and marketing of polythene bags that are increasingly used by fertilize and cement industries. The location of a fairly good number of units of these two industries in South India influenced his decision of the product choice. The fact that technology involved is not complicated or volatile further reinforced his belief about the market potential.

To reap certain locational advantages, he preferred to set up the unit in a fast growing district headquarters town in Tamilnadu connected with a good network of transport and communication facilities. But the cost of land as well as its availability became a problem. With the limited funds at his disposal, he could not afford to buy land and construct the unit which involved the commitment of substantial portion of his meager funds. On enquiry he came to know of certain sick units in the industrial estate in the outskirts of the town, which had ceased to function for sometime in the past. The machinery in a few such units having been already auctioned, the sheds were available for sale and/or lease. This opportunity came in handy for Ravi. He took on lease one such shed and spent about one lakh to effect a few changes to suit his requirements.

He started contacting the suppliers of the plant and machinery. He is confident of obtaining financial assistance to meet the fixed as well as working capital requirements of the business. But at the same time, he is also confused of the multiplicity of organisations/agencies that have come up to cater to the needs of small-scale

entrepreneurs. He doesn't have adequate knowledge of the assistance available and the incentives offered by all these agencies.

Further, even though he doesn't foresee any problems in the technical aspects relating to production, he is rather apprehensive of marketing the product. The demand for his product, being a derived one, is influenced by two factors - one, the demand for fertilisers, cement and other bulk commodities and two, the extent of the success made in replacing the gunny bags which are still in wider use. To add to his bother, Government of India, of late, has made use of gunny bags mandatory to protect the jute industry which has been languishing and is likely to vanish. However, all these problems could not deter the spirit of Ravi who is fully determined and bent on going ahead.

Please Answer:

1. Is Ravi a professional manager? Substantiate your answer with the characteristics of a

professional manager.

2. Does Ravi face any problem? If so, analyse the problem.

3. Has Ravi acted in a professional way in analysing the environment before taking a

decision? How could he have averted the problem?


Drucker, Peter P., 1981, Management Tasks, Responsibilities and Practices, Allied Publishers, New Delhi

Hodgets, Richard M., 1986, Management Theory: Process and Practice, Academic Press, London.

Katz R.L., 1974, Skills of an Effective Administrator, Harvard Business Review, 52(5)


Koontz, Harold and Cyril O'Donnell, 1976, Management: A System and Contingency Analysis of Managerial Functions, McGraw-Hill, Tokyo

Newman, William H. Summer, Charles E. and Warren, E, 1974, The Process of Management Concepts, Behaviour and Practice, Prentice Hall of India, New Delhi.

Stoner, James A P, and Freeman Edward, R, 1989, Management, Prentice Hall of India, New Delhi.

- End of Chapter -




After studying this lesson, you should be able to:

gain insights into the historical perspective of management, appraise the major contributions to the management thought, and analyse the trends that have taken place in the evolution of management thought over the years.



Pre-Scientific Era

* Charles Babbage

* Robert Owen

Scientific Management Era

* F. W. Taylor

* Henry Fayol

Human Relations Era

* Elton Mayo and the Hawthorne Experiments

Social Sciences Era

* Chester I. Barnard

* Rensis Likert

* Douglas McGregor

* Herbert A. Simon

* Peter F. Drucker


Review Questions

Self-assessment Test

Further Readings


The practice of management is as old as human civilisation. In fact, much of the progress of mankind over the centuries may be attributed to the effective management of resources. The irrigation systems, existence of public utilities, the construction of various monuments like Taj Mahal, and the Egyptian pyramids of the bygone era amply demonstrate the practice of management in the olden days also. The ancient civilisations of Mesopotamia, Greece, Rome and Indus valley displayed the marvellous results of good management practices. However, the study of management in a systematic way as a distinct body of knowledge is only of recent origin. That is why, management is often described as "oldest of the arts and youngest of the sciences". Thus, the practice of management is not new. It has been practiced for thousands of years. But the science part of it the systematic body of knowledge is, no doubt, a phenomenon of the present century.

The traditional management practices remained quite stable through the centuries until the birth of Industrial Revolution in the mid 18th century. The industrial revolution brought about the substitution of machine power for manpower through several scientific inventions. As a result, within a few decades, the picture of industrial activity had undergone a metamorphic change. Man's quest for new ways of doing things, coupled with his ingenuity in adopting the scientific and technological inventions in the production of various goods and services resulted in:

Mass production in anticipation of demand; Advent of corporate form of organisation which facilitated such large scale production; Spectacular improvements in the transport and communication facilities; Increase in competition fox markets; The establishment of the new employer-employee relationship and so on.

Industrial Revolution had thus sown the seeds of modern management. The early scientific inquiries into the practice of management began. In what follows in this lesson, the evolution of management thought over the years is discussed in a chronological way.


The captains of the industry in the early 18th and 19th centuries were confronted with many problems in managing the organisations. They had no previous experience to

guide them. The concept of automation and the consequent mass production were totally new. For the first time, the need for standard systems and procedures was felt. The new situation around the academic interest and the search for new principles and theories to ensure better management began.

Notable among the early thinkers is Charles Babbage, the British professor of Mathematics. He is often regarded as father of Operations Research. In the early 1800's he was convinced that the application of scientific principles to work processes would both increase productivity and reduce expenses. He introduced work measurement methods, profit sharing and bonus plans. He had invented a predecessor to the modern day computer, an invention he called the "difference machine" that performed mathematical calculations. He had also published a book titled "On Economy of Machinery and Manufacturing". Babbage was an early advocate of division of labour. He believed that each factory operation should be analysed so that the various skills necessary to execute the operation could be identified. It is interesting to note that our modem assembly line in the manufacturing concerns is based on Babbage's ideas.

At about the same time Robert Owen, an entrepreneur and manager of several cotton textile mills in Scotland introduced many reforms to improve the working conditions of the employees. He built better houses for workers and started company store to supply goods to the employees cheaply. He also reduced the working day to 10 hours and refused to hire children under the age of 10. Owen argued that better working conditions would contribute to larger output and profits. At a time when his counterparts concentrated on investing only on machines, he believed in investing in the workers in terms of improving their working and living conditions. He considered workers as "vital machines". He also introduced "rating system" to evaluate the employees' work on a daily basis and emphasised the human element in the factories.

Similarly, the thinking of James Montgomery, a textile mill owner in Scotland who addressed himself to the problems of planning, organising and controlling in early factories and Henry Varnm Poor, editor of the American Rail road Journal created good impact on the then management practices.

Though the contributions of the owner managers and a few academicians in the 19th century were in haphazard manner and had failed to stimulate interest in management it must be accepted that some thought provoking issues on the day to day management of organizations were raised. Their ideas created awareness about managerial problems. Thus by the end of the 19th century, adequate ground was prepared for a more systematic effort for the study of management.


Frederick Winslow Taylor (1856-1915) should be ever remembered for his contribution to the management movement. In an effort to address several organisational problems, Taylor developed the body of knowledge what is now called "scientific management". Taylor investigated the effective use of human beings at the shop floor level in the industrial organisation. He defined managing as the art of

"knowing exactly what you want men to do and then seeing that they do it in the best and cheapest way". For the emphasis he had placed on the scientific way of doing things, he is often called the "Father of Scientific Management".

Salient Features of Scientific Management

Taylor conducted various experiments at the work place to find out how human beings could be made more efficient by standardising the work. These experiments have provided the following features of scientific management.

i. Separation of planning and doing

Taylor emphasized the separation of planning from actual doing. Before Taylor's Scientific Management, a worker used to plan about how he had to work and what instruments were necessary for that. This was creating lot of problems. Taylor insisted that planning should be left to the supervisor and the worker should concentrate on doing the work.

ii. Functional Foremanship

Separation of planning from doing resulted in the development of supervision system. For this purpose, Taylor evolved the concept of functional foremanship based on speclalisiation of functions.

iii. Job analysis

According to Taylor the best way of doing a job is one which requires the least movements, consequently less time and cost. He analysed the various jobs to find out the best way of doing the things with the help of Time and Motion and Fatigue studies.

a) Time Study involves the determination of time, a movement takes to complete.

The movement which takes minimum time is the best one. This helps in fixing the fair work for a period.

b) Motion Study involves the study of movements which are involved in doing a

job and thereby eliminating the wasteful movements and performing only

necessary movements.

c) Fatigue Study shows the amount and frequency of rest required in completing

the work. Thus job analysis, as given by Taylor, suggests the fair amount of a day's

work requiring certain movements and rest periods to complete it.

iv. Standardisation

Instruments and tools, period of work, amount of work, working conditions and cost of production have to be standardized on the basis of job analysis and various elements of costs that go into the job.

v. Scientific Selection and Training of Workers

Taylor suggested that workers should be selected on a scientific basis taking into account their education, work experience, aptitude, physical strength, etc. A worker should be given work for which he is physically and technically most suitable. Apart from selection, proper emphasis should be laid on the training of workers to make them efficient and effective.

vi. Financial Incentives

Taylor introduced financial incentives to motivate workers to put in their maximum efforts. He applied the concept of differential piece rate system. According to this scheme, a worker who completes the normal work gets wages at higher rate per piece and one who does not complete gets at lower rate. To make the differential piece rate system work, he has suggested that wages should be based on individual performance.

vii. Economy

While applying scientific management, not only scientific and technical aspects should be considered but adequate consideration should be given to economy and profit. For this purpose, techniques of cost estimates and control should be adopted. The economy and profit can be achieved by making the resources more productive as well as by eliminating the wastages.

viii. Mental Revolution

Taylor strongly suggested a change in the attitude of employers and employees. Mutual conflict should be replaced by mutual cooperation which is beneficial to both. Taylor argued that mental revolution is the most important feature of scientific management because in its absence, no principle of scientific management could be applied.

In his crusade against the unscientific methods of management which were prevalent at that time, Taylor had to face bitter criticism from different quarters. It is an irony that in the beginning both workers and the managements did not understand Taylor's preachings correctly. Workers had struck work in protest against the proposed changes in the work routine and systems. The American congress had even called Taylor for an explanation. Taylor's philosophy, in simple, as reiterated by him before the congress and also in his book "The Principles of Scientific Management", rested on the following four basic principles:

Development of a true science of management, so that the best method for

performing each task could be determined; Scientific selection of the workers, so that each worker would be given

responsibility for the task for which he or she was best suited; Scientific education and development of the worker; and

Intimate, friendly co-operation between management and labour.

Henry Fayol (1841-1925), is widely acclaimed as the founder of the classical management school. He was the first to systematise what management is all about. Fayol believed that sound managerial practice falls into certain patterns that can be identified and analysed. From this basic insight, he developed a comprehensive philosophy of management which is found relevant to this day. Fayol was a contemporary of Taylor. It is important to note that, while Taylor was basically concerned with technical aspects at the shop floor, Fayol was interested in the total organization. He looked at the problems of managing an organisation from top management point of view.

His emphasis that management was not a personal talent but a skill like any other was a major contribution to managerial thought. It had generally been believed that "managers were born, not made". Fayol, opposed that view and argued that management could be taught once its underlying principles were understood and a general theory of management was formulated. Many of the managerial concepts we take for granted today were first articulated by Fayol.

In an attempt to develop a science of management, Fayol began by dividing business operations into six activities. These activities were

1) Technical - producing and manufacturing products

2) Commercial - buying raw materials and selling products

3) Financial - acquiring and using capital

4) Security - protecting employees and property

5) Accounting - recording and taking stock of costs, profits, and liabilities, keeping balance sheets and compiling statistics, and

6) Managerial.

Fayol's primary focus, of course, was on the last activity because he felt managerial skills had been the most neglected aspect of business operations. He defined management in terms of five functions - planning, organizing, commanding, coordinating, and controlling.

Fayol's Principles of Management

1. Division of Labour

The more people specialize, the more efficiently they can perform their work. The principle is epitomized by the modern assembly line.



Managers must give orders so that they can get things done. While their formal authority gives them the right to command, managers will not always compel obedience unless they have personal authority (such as relevant expertise as well).

3. Discipline

Members in an organization need to respect the rules and agreements that govern the organization. To Fayol, discipline will result from good leadership at all levels of the organisation, fair agreements (such as provisions for rewarding superior performance), and judiciously enforced penalties for infractions.

4. Unity of Command

Each employee must receive instruction about a particular operation from only one person. Fayol believed that when an employee reported to more than one superior, conflicts in instruction and confusion of authority would result.

5. Unity of Direction

Those operations within the organization that have the same objective should be directed by only one manager using one plan. For example, the personnel department in a company should not have two directors, each with a different hiring policy.

6. Subordination of Individual Interest to the Common Good

In any undertaking, the interests of employees should not take precedence over the interests of the organization as a whole.

7. Remuneration

Compensation for work done should be fair to both employers and employees.

8. Centralization

Decreasing the role of subordinates in decision making is centralization, increasing their role is decentralization. Fayol believed that managers should retain final responsibility but also need to give their subordinates enough authority to do their jobs properly.

9. The Hierarchy

The line of authority in an organization often represented today by the neat boxes and lines of the organization chart runs in order of rank from top management to the lowest level of the enterprise.


Orders Materials and people should be in the right place at the right


People in particular should be in the jobs or positions most suited for them.

11. Equity

Managers should be both friendly and fair to their subordinates.

12. Stability of Staff

A high employee turnover rate is not good for the efficient functioning of an organisation.

13. Initiative

Subordinates should be given the freedom to conceive and carry out their plans, even though some mistakes may result.

14. Espirit de Corps

Promoting Team Spirit will give the organization a sense of unity. To Fayol, even small factors could help to develop this spirit. He suggested, for example the use of verbal communication instead of formal, written communication, whenever possible.

Please use headphones HUMAN RELATIONS ERA The Human Relations Era, also Called Behavioural School emerged

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The Human Relations Era, also Called Behavioural School emerged because the Scientific Management principles propounded by classical thinkers like F. W. Taylor, Henry Fayol, Frank and Lillian Gilbreth did not achieve sufficient production efficiency and industrial harmony at the work place. Understanding human behaviour at work still remained a big puzzle for the managers. Therefore, systematic attempts were made by a few psychologists and sociologists to help managers understand the dynamics of human behaviour.

The term 'human relation' is used to describe the employer-employee relation in the organisational context. When the relations are effective employees contribute their maximum for the achievement of the organisational goals. On the other hand, human relations are ineffective when morale and efficiency of the workers deteriorate. They are present at the work place but do not perform. Therefore, to create effective human relations, it is essential that managers must know why employees behave as they do and what psychological and sociological factors motivate them.

Elton Mayo and the Hawthorne Experiments

The Hawthorne Experiments conducted by Elton Mayo and his associates at the Western Electric Company from 1924 to 1933 provided new insights into the human behaviour. Many of the experiments were performed at the Western Electric's Hawthorne plant near Chicago. Mayo's findings in these experiments marked the beginning of the human relations era.

The studies attempted to investigate the relationship between the physical conditions at the workplace and the productivity of workers. The researchers divided the employees into two groups. One group called the test group was subjected to changes in lighting. The lighting condition for the other group called the control group remained constant throughout the study. When the test group's lighting conditions were improved, productivity increased as expected. What surprised the researchers most was the fact that productivity continued to increase even when the lighting was reduced. Further, to add to the mystery, the control group's output also increased as the test group's lighting conditions were changed, though there was no change in the lighting conditions for the control group. As a result, for the first time, it was realised that something in addition to lighting was influencing the worker's performance.

In another set of experiments, the changes in the performance of a group of workers were observed by changing the various work related factors such as:

* increasing the wages;

* introducing rest periods; and

* reducing the workdays and workweek.

Workers were also allowed to choose their own rest periods and to have a say in all these changes. These experiments revealed that financial incentives alone were not causing the productivity improvements. It was found that a complex set of attitudes were responsible for the productivity increase. Employers develop group norms at the work place. The test and the control groups developed some group understanding that motivated them to perform well. The fact that employees would work hard if they are convinced that supervisors pay special attention to their welfare was also made abundantly clear. This is often referred as the Hawthorne Effect.

Another conclusion of the studies was that informal work groups exist in the work place. The informal groups help the individuals share common values, understanding and beliefs. These informal groups exert significant influence on the employees' performance. It is our common knowledge that many a time we find in the organisations how employees associations and friendships with co-workers influence their attitude towards the work and the superiors.

The contribution of the Human Relations Movement is quite significant in that the individual and the impact of his association with a group had received due attention. Employee productivity was viewed as a function of the human relations at work rather

than an engineering problem. Elton Mayo's studies in fact, contributed for a thorough change in the attitude and approach towards training.


Chester I. Barnard's contribution is often described as the Social Science Era in the development of management thought. His book "The Functions of the Executive" is regarded as a classic on management even to date. He argued in favour of looking at the organisations as social systems and analysing the managerial tasks in the system in which they operate. This is a significant departure from the earlier approaches.

Barnard used his work experience as the chief executive of New Jersey Bell. Based on his experience and extensive readings in sociology and philosophy, he had formulated his theories on organisational life. According to him, people come together in formal organisations to achieve things they could not achieve working alone. As they pursue organisation's goals they also try to satisfy their individual needs. Thus Bernard arrived at the theme: 'an enterprise can operate efficiently and survive only when both the organisation's goals and the needs of the individuals working for it are kept in balance.'

According to Barnard, an organisation exists when the following three conditions are fulfilled:

1. There are persons able to communicate with each other

2. They are willing to contribute to the action

3. They attempt to accomplish a common purpose

He has identified three types of functions which an executive performed in an organisation. These are:

* Maintenance of organisational communication.

* Securing of essential services from individuals in the organisation so as to achieve the overall purpose.

* Formulation and definition of organisational purpose.

Barnard's views on the concept of authority are noteworthy. He does not agree with the traditional view that authority transcends from the top to down. In his view, a person does not simply obey an order or directive because it has been given by a superior. As such, the exercise of authority depends on its acceptance, which is possible only when an individual:

* understands the communication;

* believes that it is not inconsistent with the organisational purpose;

* believes it to be compatible with the personal interest as a whole; and

* is mentally and physically able to comply with it.

The contribution of Barnard shows his perception of the organisation as a social system. His contribution is regarded quite high in management. Commenting on Barnard's book "The Functions of Chief Executive", William Wolf once said, "The book is a sociology of management. Its style of writing was purposely pitched at a high level of discourse. He believed that the field of management was lacking In concepts and was clouded by ambiguous and even erroneous thinking, hi a sense, he hoped that the functions would set things right and guide the social scientists to more realistic studies of organisation and management.

Mary Parker Follet (1868-1933) - USA, strongly believed that management and labour share a common purpose as members of the same organisation, however the distinction is order givers and order takers. She believed leadership should not come from the power of formal authority, as was traditional, but from the manager's greater knowledge and expertise. The manager should simply be the person best equipped to head the group. She believed that the participative mode of management could increase cohesiveness, the sense of belonging and creativity the root cause of conflict is 'desire to dominate'. The tendency to acquire man power to oneself and reluctance to delegate authority are two consequences such behaviour pattern. She advocated 'behavioural approach' in management

Rensis Likert is an American social psychologist born in 1903. Likert and his associates carried out extensive research on management practices in a wide variety of situations like industrial units, railways, hospitals, schools and voluntary organisations and covered unskilled workers in factories to top scientists in research laboratories. He believed that the body of knowledge of social sciences can pave the way to frame a generalised theory of organisation and management. His findings provided deep insights into supervision, general management systems and Likert classified supervisors into two categories: "job centered' and "employee centered". The primary concern of the first category of supervisors is to ensure performance of assigned tasks and maintenance of prescribed standards. On the other hand supervisors in the second category are primarily concerned with the human aspects of their subordinates and effective team- building for high task performance.

It is argued that high performing managers are humane to their subordinates, and low performing managers are compelled to get tough with their subordinates to achieve better results. To resolve this dilemma, Likert and his colleagues conducted a series of experiments in which high and low performing managers were changed into each other's jobs. While high performing managers succeeded in improving the performance of low production units, low performing managers placed in high production units brought down their output over a span of time.

Management Systems 1-4

The most important contribution of Likert is his conceptualisation of different systems of management along a continuum. He identifies four distinct points along the continuum for purpose of illustration of the characteristics of each of the management systems. He labels these points

1. Exploitative - Authoritative

2. Benevolent - Authoritative

3. Consultative

4. Participative

The four management systems are then arrayed along the two important dimensions, the type of authority or control an organisation exercises over its members is represented as one dimension. The second dimension relates to the motivational forced used to control the activity of the people.

The operating characteristics include leadership, motivation, communication, interaction influence, decision-making, goal-operating characteristics are juxtaposed over the four types of management systems.

Likert rigidly points out that authoritarian-exploitative management system displays a steep hierarchical structure, centralised decision-making, top-down communication, tight supervision, performance under pressure, and low degree of employee motivation. On the other hand, the participative management system displays flat structure, group decision processes, open and authentic three-way communication (up, down and lateral), adaptive supervision. individual and work groups with a high degree of achievement motivation. The other management systems 2 and 3 reveal intermediate combination on forms and processes.

The intermediate forms of management systems 2 and 3 will reveal transitory characteristics of progression from management system from 1 to 4 over a period. In system 2 management orientation is still authoritative, but becomes less exploitative and more benevolent towards the members of the organisation. In system 3, exercise of authority is more broad-based with delegation of powers to middle levels and consultation of effected interests at tower levels. To the extent motivation, communication and involvement of subordinates replace reliance on exercise of formal authority, consultative management systems will be well set to move forward to the management system 4.

Douglas McGregor proved that reliance on authority as the primary means of control leads to resistance, restriction of output and indifference to organisational objectives. His monumental classic "The Human side of the Enterprise" (1960) marked the watershed in the history of management movement. He questioned the various models describing man as rational, economic, and self-actualizing.

McGregor's assumptions, on the other hand, about human beings in the form of Theory

X and Theory Y present contrasting nature of man.

Theory X revolves around the Traditional Theory of Human Behaviour. In his own words these assumptions are as follows:

* The average human being has an inherent dislike of work and will avoid if he can;

* Hence most people must be controlled, directed and coerced with punishment to get

them to put forth adequate effort towards the achievement of organisational objectives;

* The average human being prefers to be directed, wishes to avoid responsibility, has relatively little ambition, wants security above all.

Theory Y assumptions on the other hand, hold an optimistic view of human nature. According to this set of assumptions modern industrial life does not fully tap the potential of the average human being. They suggest managers should take advantage of the subordinates willingness and ability to work by providing a climate for their performance. The assumptions under Theory Y as pronounced by McGregor are as


* The expenditure of physical and mental effort in work is as natural as play or rest;

* External control and the threat of punishment are not the only means for producing

effort towards organisational objectives. People will exercise self direction and self-

control in the service of objectives to which they are committed;

* The degree of commitment to objectives is in proportion to the size of the rewards associated with their achievement:

* Average human beings learn, under proper conditions, not only accept but also to check responsibility

* The capacity to exercise a relatively high degree of imagination, ingenuity and

creativity in the solution of organisational problem is widely, not narrowly distributed in the population;

* Under the conditions of modern industrial life, the intellectual potentialities of human being are only partially utilised.

As can be easily seen, these two sets of assumptions are fundamentally different. Theory

X is pessimistic, static and rigid. Control is external in that it is imposed on the

subordinate by the superior. In contrast. Theory Y is optimistic, dynamic and flexible with an emphasis on self-direction. It also advocates the integration of individual needs

with organisational demands.

Herbert A. Simon is an eminent American social scientist. Born in 1916, he was awarded the Nobel Prize in Economics in 1978, in recognition of his outstanding contribution in analysing the decision-making process. He goes to the extent of equating decision-making with management. He laid emphasis on how decisions are made and how they can be made more effectively.

In his writings on decision-making, he maintained that to be scientific, one must exclude value judgments and concentrate on facts, apply rigorous analysis and test factual statements. Simon viewed an organisation as a structure of decision-makers. The missing factor, according to him is correct decision-making. He argued that optimum rational choice between alternative courses of action is rarely made.

Simon divides the decision-making process into three phases, namely:

1. Intelligence activity: This involves finding occasions calling for decision. The

manager analyses the environment and identifies conditions that need action;

2. Design activity: Identifying, developing and analysing all possible alternative

courses of action are the important tasks in this stage.

3. Choice activity: Finally, the manager selects one of the alternative sources of action

available to him.

According to Simon, every decision consists of a logical combination of facts and value propositions. He argues that complete rationality in decision-making is not always possible. He, in fact, disputes the concept of total rationality in administrative behaviour. Human behaviour is neither totally rational nor totally non-rational. It involves, to use his own word, "bounded rationality" and "satisfying" are the two important terms used by him to drive home the point further. "Satisfaction" involves the choice of a course of action which is satisfactory or at least good enough. Simon argues that managers do not aim at maximum satisfaction or result from a decision but are satisfied with reasonably good enough outcome or result. It is because of the limitations involved in identifying the alternatives, collecting all the facts and data, knowing the values of all the alternatives, etc.

Though some of Simon's views on decision-making are widely acclaimed, his critics point out that social, political, economic and cultural factors did not get due attention. His theory is criticised as being extremely general and does not provide the details to guide the managers in decision-making. Inspite of some imperfections, Simon's


is undoubtedly a major breakthrough in the decision-making behaviour of


Peter F. Drucker is a highly respected management thinker. He is a prolific writer and has published several books and articles on the management practices. He is so versatile that there is hardly any area in management which is not touched by him. He has drawn heavily from his consultancy experience spread over the last four to five decades. Drucker perhaps is the only western management thinker who is admired by

even the socialist block countries also. His views on management may be summarised as follows:

i. Management as a practice:

According to Drucker management has two important functions: Innovation and Marketing. He has treated management as a discipline as well as a profession. For him, management is more a practice. It is always goal oriented. His comment on the purpose of business as the creation of customer, if understood and in the right way helps any organisation to achieve success.

Drucker's view on innovation are equally important for the emphasis they place on new product development. He argues that "new products should drive out the existing products" rather than the other way round. As such, he is against bureaucratic management for it stifles the innovative spirit and the initiative among the people in the organisation. He contends that modern organisations are knowledge based organisation and describes the modern workers as 'knowledge workers' considering their skills, and innovative abilities.

ii. Functions of management:

Drucker points out three basic functions of management. The actions of management should contribute to

* the achievement of purpose and mission of the institution;

* make the work productive and the worker achieving; and

* effective management of social responsibilities.

iii. Objective setting:

Drucker has attached great importance to objective setting. He has specified that

objectives should be set for all the result areas of business.

setting and their achievement more meaningful, he has given a new tool, what is popularly known as 'Management by Objectives' (MBO). MBO is regarded as one of his most important contributions to the discipline of management. He has discussed the concept in great detail in his book, 'The Practice of Management' (1954). MBO is a process whereby superiors and subordinates jointly identify the common objective, set the results that should be achieved by subordinates and assess the contribution of each individual. It is viewed more as a philosophy than as a tool or technique to achieve the objectives.

To make the objective

iv. Orientation towards future:

Drucker is a great visionary and futurologist. He was ahead of others in visualising the future trends that affect the society. He visualised the concept of modern organisation

and its impact on the society several years ago. His views on the many facets of the modern corporations have almost all become reality now. To put it in his own words, he described the present age as the "age of discontinuity".

v. Federalism:

Drucker has advocated the concept of federalism. Federalism according to him, involves centralised control in a decentralised structure. Federalism has certain positive values over other methods of organising. These are as follows:

* It sets the top management free to devote itself to major policy formulation and strategy development;

* It defines the functions and responsibilities of the operating people;

* It creates yardsticks to measure twin success and effectiveness in operating jobs; and

* It helps to resolve the problem of continuity through giving education to the managers of various units while in an operating position.

Drucker's realistic way of looking at the organisations and society has earned him the status of a management guru. His contributions have made tremendous impact on the management practices all over the world. He is one of the few contemporary management thinkers, who is highly admired in Japan. Similarly, the contributions of Peter's and Waterman who extensively studied a few American companies known for their excellence in modern management practices is no less significant. McKingsly consultancy firm's contribution of the 7S model for the management of the firm and Edward Deming's preachings on Quality Control created tremendous impact on modern management all over the world in the recent past. Michael Porter's work on competitive strategy turned a new leaf in the strategic, management area. His books on competitive strategy suggest the ways: and means that help organisations and nations to gain competitive edge.

SUMMARY Please use headphones Though management has been in practice in some form or other


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Though management has been in practice in some form or other since time immemorial, the development of a systematic body of knowledge dates back to the last few decades. Industrial revolution has immensely contributed for the development of management thought. Over the years, it has drawn heavily from various disciplines like economics, psychology, sociology, operations research and so on. The contributions of prominent thinkers who have created an everlasting impact on management have been discussed in this lesson in detail. An attempt is made to expose the learner to the historical development of management over the years.


1. "Management is oldest of the Arts and youngest of the Sciences". Discuss.

2. Analyse the contributions of F. W. Taylor and Henry Fayol to the Modern

Management Thought and discuss how the two differ in their approaches.

3. Examine the significance of 'Hawthorne studies' to the development of managerial



Assess the contributions of Chester Barnard and Herbert Simon to the management


5. "Among the contemporary management thinkers, Peter F.Drucker, perhaps,

outshines all". Elucidate,


Indicate whether the following statements are True or False.

1. Scientific management is concerned with the application on mathematics to the

practice of management. (


2. Henry Fayol is known as the father of modern management theory. (


3. Scientific management lays emphasis on the top management functions. (


4. Hawthorne experiments proved that productivity of the workers depends on the

physical conditions at the work place only.



5. Elton Mayo completely ruled out the possibility of the existence of informal groups at

the work place. (


6. Herbert Simon is widely known for his thesis that absolute rationality is not always

possible in the decision making. (



Theory X is optimistic of the human behaviour while Theory Y is pessimistic. (



Hawthorne is the management thinker who conducted 'Hawthorne experiments'.




Unity of command suggests the exercise of multiple commands.



10. Rensis Likert's system-4 management is highly authoritative. (




Barnard, Chester, I. 1938. The functions of the Executive, Harvard University Press, Cambridge.

Drucker, Peter F. 1954, The Practice of Management, Harper & Row, New York.

Koontz Harold, O'Donnell Cyril, 1984, Management, McGraw Hill, New York.

Likert Rensis, 1961, New Patterns of Management, McGraw Hill, New York.

McGregor, Douglas 1960, The Human Side of Enterprise, McGraw Hill, New York.

Terry, George R and Franklin, Stephen G. 1988, Principles of Management, All India Traveller Bookseller, Delhi.


- End of Chapter -



After studying this lesson, you should be able to:

Understand the nature and purpose of planning;

Acquaint with the important principles of planning; and

Describe the basic steps in planning.



Purpose of planning

To achieve objectives

To make the things happen

To cope with change

To control the events

Principles of planning

Take time to plan

Planning can be top down and bottom up

Involve and communicate to all those concerned

Plans must be flexible and dynamic

Evaluate and revise

Steps in planning

Establish goals

Establish planning premises

Decide the planning period

Develop a course of action

Develop derivative plans

Review periodically


Review Questions

Case Illustration: Bajaj Auto - Corporate Mission and Objectives

Further Readings


Most of us plan many things in our day to day lives. We plan to go on a holiday trip, plan our careers, plan our investments and so on. Organisations are no exception and lot of planning is done by managers at all levels. Thus individuals and organisations both need to plan. Planning is the basic process by which we use to select our goals and determine the means to achieve them. Lot of information has to be gathered and processed before a plan is formulated. In other words, a plan is like a jigsaw puzzle. All the pieces have to be put together property, so that they make sense.

Planning is necessarily forward looking. It is looking into the future. It bridges the gap between where we are and where we want to go. Let us look at what the following observations suggest about planning:

"Planning is outlining a future course of action in order to achieve an objective" "Planning is looking ahead" "Planning is getting ready to do something tomorrow" "Plan is a trap laid down to capture the future"


Needless to say, in the absence of planning, events are left to chance. As a manager, in such a case, you are depending on luck. You may, as a result, in all probability, end up in chaos. Organisations often fail not because of lack of resources, but because of poor planning. The following factors further highlight the importance of planning:

i. To achieve objectives

While developing a plan, you have to ask yourself a few-questions:

- Why am I making this plan?

- What am I trying to accomplish?

- What resources do I need to execute the plan?

These questions, obviously, force you to be clear about the objectives, the time frame required to achieve them and the resources required. It forces you to visualise the future in an organised manner.

The saying that "when a man doesn't know what harbour he is making for, no wind is the right wind" is quite appropriate in the case of planning. Systematic planning, thus, starts with a clear statement of objectives. All the important inputs necessary to achieve the objectives are carefully thought of including the uncertainties of the future.

ii. To make the things happen

Effective manager is rather proactive. He takes the initiative to make things happen in the desired way. In any modern business, the interests of many people are at stake. The shareholders, employees, creditors, consumers and the government are the major interest groups in city organisation. Further, the interests and expectations of all these groups are varied and at times are in conflict. If the management fails to achieve, the interests of these groups are affected and the whole exercise results in heartburns. As a result, you will be forced to indulge in fire-fighting activity.

Therefore, your job, as a manager, is to foresee the future and predict the consequences of actions. In other words, you have to look down the road into future and prepare yourself to meet the uncertainties and the eventualities ahead. A well thought out plan solves many of the problems associated with the uncertain future.

iii. To cope with change

Both human beings and organisations are products of environment. The ability to deal with the environment has enabled many an organisation to survive, despite other weaknesses. Alert managements continually tune in to the environmental forces. On the other hand, managements which fail to adapt would eventually fall on the way side. Therefore, in the managerial job, you have to constantly analyse the impending changes in the environment and assess their impact on your business.

For instance, business environment in 1990s is totally different from that of 1970s and 1980s. The liberalisation policies pursued by the government have, of late, brought in too many changes. Markets are shifting due to increased competition, pressure on the resources is increasing, expectations of the employees as well as the consumers are changing, and product life-cycles are becoming shorter due to rapid technological changes. All these changes exert a tremendous pressure on the management.

Certain changes will throw open new opportunities while certain others affect the very survival. If you are not prepared, you will definitely be in trouble. Since environmental scanning is an important element in planning, plans are normally formulated on the basis of a thorough analysis of the environment. Necessary flexibility is built in the plans to meet the unexpected changes. Effective planning thus shows the preparedness of the organisation to manage the change. It helps the organisation to keep itself afloat even in the worst circumstances.

iv. To control the events

Planning and control are often described as the Siamese twins of management. When you plan the events, you expect them to happen in a particular way. Therefore, it goes without saying that you need some mechanisms to know whether the events are happening in the way expected. Planning is important in that it provides the necessary yardsticks to measure the performance. It ensures the events to conform to plans. Thus, if you do not plan (no clear objectives), you do not know you are reaching the goal or not you do not know what to control. Control assumes significance in a dynamic environment as of today, where several forces push you away from the desired path. Appropriate control devices help you to check the course from time to time so that you will be able to keep yourself onto the track.


Effectiveness in planning depends on the understanding of the following principles. They are relevant to planning the activities of any organisation whether business or non- business. A thorough understanding of the principles underlying the planning, therefore, would enable you to guard yourself against the possible mistakes that are often committed by many managers.

1. Take time to plan

Any plan is a decision regarding a future course of action. It specifies the sequence of events to be performed. It involves the commitment of organisational resources in a particular way. Therefore, if the plan is not conceived well, the resources would be put to wrong use. It becomes a wasteful exercise resulting in frustration. Hence utmost care has to be exercised in formulating the plans. Several probing questions have to be asked. Planning in haste with incorrect information, unsound assumptions and inadequate analysis of the environment has to be avoided by all means. Otherwise, you may save some time in quickly developing a plan, but in the event of things going wrong, you are hard pressed for time and resources to correct yourself.

2. Planning can be top-down and bottom-up

Normally in any organisation overall enterprise plans are developed by the top management. These plans are wider in scope and provide the direction to the whole organisation. They spell out what the organisation wants to achieve. The overall plan thus formulated by the top management is split into departmental plans. Accordingly, plans for production marketing, finance, personnel and so on, stem from the basic plan of the organisation. The other operational plans at various levels down the organisation flow from the departmental plans. This approach is called top-down approach to planning.

On the other hand, proponents of bottom up approach argue that top management needs information from lower level, that is, about the realities at the ground level in terms of strengths and weaknesses. In this approach, the initiative for planning comes

from the lower levels in the organisation. This approach makes use of the rich experience of the subordinates who are close to the action. It also helps to motivate the people and elicit commitment from them. The choice of the method depends on the size of the organisation, the organisational culture, the preferred leadership style of the executive and the urgency of the plan.

3. Involve and communicate with all those concerned

Operations in modern business organisations are highly interrelated. Organisational plans affect many departments in the enterprise. For instance, a plan to improve the quality of the products (quality control plan) may require the cooperation of the people in the production, finance, marketing departments and so on. It is, therefore, desirable to involve the concerned people in these departments. Such participation helps in instilling a sense of commitment among the people. They also in turn gain a sense of pride for having been a party in deciding the plan. Such an involvement makes possible the process of sharing information. If plans are not communicated to all those affected by them, there may be unnecessary gaps in the execution.

4. Plans must be flexible and dynamic

You would be very happy as a manager if there are no unexpected changes in the environment. Day in and day out, you are confronted with too many problems. Most of such problems are caused by unexpected events in the environment. A plan is rigid if there is less scope for a change in its course. In a static environment, of course, there may not be a problem with a rigid plan. But in a dynamic environment, to meet the unexpected changes, adequate flexibility has to be built into a plan. Otherwise, the plan itself becomes a limiting factor.

plan. Otherwise, the plan itself becomes a limiting factor. Please use headphones 5. Evaluate and revise

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5. Evaluate and revise

Evaluation of the plan at regular intervals is necessary to make sure that it is contributing to the objectives. Like a navigator, who in the high seas checks the course to make sure that he is sailing in the right direction, the manager has to, from time to time, look back and evaluate the plan. Such an exercise enables to initiate the corrective measure at the right time before it is too late. This depends on the accuracy of the

information systems in the organisation through which information reaches the management.


The process of planning may be understood as having the following steps:

a. Establish goals

Planning begins with decisions about what the organisation wants to achieve over a period of time. The goals of an organisation and its various subunits have to be decided and spelt out in clear terms. it is always desirable to express the goals in quantitative terms for all the key areas of the business like production, profit, productivity, market share, employee relations, social responsibilities, etc. For instance, instead of saying that the objective of business is to achieve a fair rate of return or the investment, it may be given quantitative expression, say, 10 or 15 percent return on the investment. Specific goals enable the organisations to use the resources effectively.

Since goal setting is the essential first step in planning, managers who fail to set meaningful goals will be unable to make effective plans. If Bajaj Auto is able to retain its prominence in the two wheeler industry (scooter segment), it is because all the employees of the organisation know cleanly that the primary objective is retaining the leadership in the industry.

An awareness of the opportunities and their evaluation in the light of the organisational strengths and weaknesses is essential to set the goals in a realistic way. The mission of the organisation, the corporate values, experience, policies of other enterprises, observation and data secured from research and experiences provide adequate guidance to the managers in goal setting.

b. Establish planning premises

Since plans operate in the future, it is imperative to make certain assumptions about the future. This act is called premising. Planning assumptions or premises provide the basic framework in which plans operate. Appropriate assumptions have to be made on various aspects of the environment - both internal and external to the organisation.

i. Internal premises: Important internal premises include sales forecasts, policies of the organisation, skills, attitudes and beliefs of the people, the resources of the organisation.

ii. External premises: Important external premises relate to all those factors in the environment outside the organisation. They include technological changes, general economic conditions, government policies and attitude towards business, demographic trends, socio-cultural changes in the society, political stability, production costs and their behaviour, degree of competition in the market, availability of various resources and so on.

It is evident that some of these premises are tangible while others are intangible. For example, resources, availability, etc. are tangible factors which can be stated in quantitative terms. On the other hand factors like political stability, attitudes of the people, certain of the sociological factors are intangible in that they cannot be measured quantitatively.

Effective premising - the making of appropriate assumptions helps the organisation to identify the favourable and unfavourable elements in the environment. Though accurate premising is difficult, anticipating future situations, problems and opportunities to the extent possible is an essential part of planning.

c. Decide the planning period

How far in the future should a plan be made is another pertinent question in the process of planning. Businesses vary in their planning periods. In some cases plans are made for a short period, varying from a few months to a year, while in some other cases, they are made to cover a longer period, to cover a period of more than a year. The period may extend upto 5-10 years and even beyond. Companies normally plan for a period that can be reasonably anticipated. The lead time involved in the development and commercialisation of a product and time required to recover the capital investment (payback period) influence the choice of the length of the plan.

d. Develop alternatives and select the course of action

The next logical step in planning involves the development of various alternative courses of action, evaluating these alternatives and choosing the most suitable alternatives. Objectives may be achieved by different courses of action (alternatives). For example, technical knowhow may be developed by in-house research, collaboration with a foreign, company or by tying up with a research laboratory. Technical feasibility, economic viability and the impact on the society are the general thumb rules to select the course of action. The alternative courses are evaluated in the light of the premises and the overall goals of the organisation.

e. Make derivative plans

The plan thus decided after a thorough analysis of various alternatives suggests the proposed course of action. To make it operational, it has to be split into departmental plans. Plans for the various operational units within the departments also have to be formulated. The plans thus developed for the various levels down the organisation are called derivative plans. For instance, production and marketing of 10,000 units of a product and thus achieving a return of 10 percent on the investment may be the enterprise's plan relevant for the whole organisation. Its effective execution is possible only when specific plans are finalised for the various departments like production, marketing, finance, personnel and so on with clear-cut objectives to be pursued by these departments.

f. Review periodically

Success of the plan is measured by the results and the ease with which it is implemented. Therefore, provision for adequate follow-up to determine compliance should be included in the planning work. To make sure that the plan is contributing for the results, its review at regular intervals is essential. Such a review helps in taking corrective action, if necessary, when the plan is in force.

It is an irony that at times even the best of the plans may flounder in spite of careful analysis and mental commitment. So as to avoid the 'pitfalls' in planning make sure of the following:

Set realisation and achievable goals;

Communicate the assumptions on which plans are formulated to all the people

and departments concerned; Encourage and make people participate in the planning programme so as to

ensure the right commitment; Ensure proper coordination between the short-term and long-term plans. They

should not be viewed as mutually exclusive; Encourage creativity in planning. Creativity helps in identifying the best

alternatives; and Pay attention to the resources position of the organisation so as to ensure the availability as and when required.

to the resources position of the organisation so as to ensure the availability as and when

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Planning is the most fundamental responsibility of a manager. Planning is deciding a future of action. It helps in setting the objectives, to make the events happen, coping with the changes and to control the events. Effective planning is a process and involves a few logical steps. The process includes goal setting, promising, identification of the alternative courses of action, and selection of a course of action after a vigorous analysis of the pros and cons. However, successful implementation and achievement of results depend on the degree of participation and commitment of the people of various levels in the planning exercise, in the absence of which plans would remain as wishful statements.


1. 'In the absence of planning, things are left to change'. What significance does this

statement hold in the present day business context? Discuss.

2. What precautions do you take to make planning a successful event in the


3. Describe the important steps in the formal planning process.

4. 'Planning and Control are the twins of management'. Explain the relationship

between planning and control with suitable examples.

5. Explain the significance of participation in formulating the plans. How do you ensure

participation of people in the planning exercise.



Be a relevant and responsible corporate citizen by –

serving as a catalyst in the creation and sharing of wealth and prosperity with every constituent of our business environment; orienting company policies to be in consonance with national priorities and social needs; adopting work ethics inspired by integrity and excellence; providing the best value for money in our products and services; and fulfill an ambition to be the biggest and the best in every endeavour undertaken.


1. Productivity and Growth:

Continuously generating new ideas in designing, planning, research and

development and value engineering leading to quantum jumps in productivity. Optimum utilisation of production capacity by minimising wastage, rejection and

re-work and maximising efficiency of man and equipment. Sustaining minimum annual growth of 20% in real terms by mechanisation,

automation methods and productivity improvement and better utilisation of existing manpower. Developing a long term and fruitful relationship with vendors for:

a) Obtaining raw materials and components of finest quality at competitive cost.

b) Achieving faster development of new features and models.

c) Increasing off-loading of parts and operations.

Adhering to high standards of safety and cleanliness thus ensuring an environment of beauty and joy.

Research and Development:

Establishing our leadership in the design of two and three wheelers. Where foreign know how is required, the aim would be early self-reliance. Continuing product upgradation and aspiring for development of at least one new model every year.

Human Resource:

Strengthening the sense of belonging in all employees and sustaining their pride

In being associated with the company. Recognising and rewarding individual merit and contribution while emphasising

team spirit and healthy competition. Stressing discipline and diligence, innovation and creativity, superior

performance and professional integrity leading to increased job satisfaction. Creating a corporate culture of dignity, character and competence.

Developing an efficient team of personnel by providing training at various levels and grooming deserving personnel for higher responsibilities.


Promoting sales aggressively while providing excellent after-sales-service through a network of trained personnel. Increasing exports by remaining internationally competitive.

Social Welfare:

Caring for the well being of our employees by providing canteen, medical, sports, cultural, educational and other facilities. Encouraging employee education programmes so as to develop respected and responsible citizens. Contributing to the national cause by promoting family welfare and community and rural development schemes.

Adopted from: Chopra, BSKS., 1989. Cases in Corporate Planning, Times Research Foundation, (Pune).


1. Dale, Ernest, 1973. Management Theory and Practice, McGraw-Hill, New York.

2. Drucker, Peter F.I974. Management Tasks, Responsibilities, Practices, Harper &

Row, New York.

3. Koontz, Harold and Cyril O'Donnel. 1976. Management: A System and Contingency

Analysis of Managerial Functions, McGraw-Hill New York.

4. Massie, Joseph L.1971. Essentials of Management, Prentice Hall, Englewood cliffs,


5. Terry, George R and Franklin, Stephen. G. 1988. Principles of Management. All India

Traveller Bookseller, New Delhi.

6. Steiner, George A. 1969. Top Management Planning, Macmillan, New York.


- End of Chapter -



After studying this lesson, you should be able to :

Distinguish between strategic planning and operational planning. Comprehend how strategic planning is useful for the organisation's long-term survival; and The different types of plans that are formulated in organisations.



Strategic Planning

Anticipates future opportunities and threats Provides clarity of purpose and direction

Operational Planning Types of Plans

Mission or purpose






Review questions

Self-assessment test

Case - Fairdeal Company vs. Government

Further Readings


Planning is so pervasive in every organisation that it touches every part or segment of the organisation. One common ingredient of all planning is time - the period in future that a plan covers. Based on the length of time involved, plans are usually classified as strategic and operational plans. Strategic plans are designed to meet the broad objectives of the organisation - to implement the mission that provides justification for the organisation's existence. Operational plans provide details as to how strategic plans will be accomplished. We will first discuss strategic planning and then proceed to operational planning.


The terms Corporate planning, long-range planning and strategic planning are used synonymously by many authors. Strategic planning has its origin in military organisations where such planning envisaged a variety of contingencies that may arise when large forces move into operation. When viewed in this backdrop, strategic planning in a business organisation envisages a comprehensive study of the various external and internal parameters that affect a company in charting a course of action to achieve the goals.

George Steiner has defined strategic planning as "the process of determining the major objectives of an organisation and the policies and strategies that will govern the acquisition, use and disposition of resources to achieve those objectives". Strategic plans reflect the socio-economic purpose of the organisation and the values and philosophy of the top management. In simple, they relate the organisation to the environment in which it operates by providing answers to the basic questions like:

Where are we now?

Where do we want to go?

Why do we want to go?

They help the management in:

coping effectively with future contingencies; providing an early opportunity to correct mistakes; making decisions about the right things at the right time; and understanding what actions to take in order to shape the future as desired.

Strategic planning has been in vogue in the West since long. In India, multinational corporations made a beginning in this direction. Other Indian companies (private and public sector) have also realised the importance of strategic planning, thanks to the changed realities in the last few years. As a result every company has now begun to speak in terms of corporate mission, strategic planning and organisational vision. These have almost all become buzz words of the Indian corporate sectors in the 1990s. Strategic planning serves the following two functions:

1. Anticipates future opportunities and threats

Business environment is changing so fast these days that a deliberate corporate effort is called for to keep a tab on the broad spectrum over which changes occur. The changes that occur may be precursors of future threats and opportunities. The investment in a large business enterprise today runs into hundreds of crores of rupees. During this period many things may change. Take for instance, the case of the Tata Power Company. They proposed a 500 MW power station in 1972. The proposal kept shuttling between officialdom for 5 years before it was approved in 1977, but not before the change of government. The project went through so many hurdles and was eventually commissioned in 1983, a full 11 years since it was mooted. In the meantime cost had escalated to nearly 3 times the original estimate. This case demonstrates the need for close monitoring of the potential threats in the environment.

Just as threats can be reasonably anticipated, so too can be opportunities. For instance, when the crude oil prices were hiked in 1973, by the OPEC countries it created havoc on petro-based industries. Automobile companies as a result were forced to change to small fuel efficient cars. In this case, the threat was converted into an excellent opportunity. Small car thus has become the fashion of the day. Similarly ITC in India, continuously hounded by excise levies and taxes on their

main product cigarettes, had to think of diversification into hotels, paper agro products and aqua-culture, which ultimately turned out to be a god sent opportunity.

2. Provide Clarity of Purpose and Direction

With the overall increase in the size of companies, the internal departments (production, marketing, finance, personnel etc.) have also become quite large. With growing specialization in each of these areas, these departments are prone to become watertight compartments giving rise to inter-departmental rifts.

It is not unusual, for instance, for marketing department to ask the production department to shorten their production runs to cater to demands of various models which is normally resisted by the latter. Similarly, the design department may often specify certain change in the product which may raise the cost of production. The finance department, may try to block any measure that increases the cost of production.

In such a situation, corporate objectives spelt out clearly help in smoothening out some of the interdepartmental conflicts. Thus, strategic planning provides unity of purpose and direction, the much emphasised management principle.

The process of strategic planning in any organisation is similar to the general planning process which has been discussed in Lesson 3. However, the emphasis on strategic planning is more on long-term objectives, goals, purpose or mission, rather than the day-to-day issues of management. The objective is to keep firm afloat in the long-run in the light of the several unforeseen contingencies that lie ahead in future. The following are the important steps in the process of strategic planning:

deciding the corporate mission and broad objectives; gathering and analysing information; conducting a resource audit (analysis of strength, weaknesses in the light of the opportunities and threats); identifying strategic alternatives; and making the choice (selection of the right strategy)

The manager's success lies in understanding the trends in the environment. The trends contain signals and give clues about the potential opportunities and impending threats. Many organisations have paid a heavy price for their failure to draw the right meanings from the signals. Therefore what is required is "the ability to read the writing on the wall".

Take the case of the public sector giant, HMT which prided itself, for a long time, on its dominance in the Indian wrist watch market. The company was in an upbeat mood and failed to understand the shift in the consumer preference towards the trendier, sleek quartz watches. In the meantime TITAN had entered the market with a wide array of products and began to give HMT a run for its money. TITAN with its innovative

marketing strategies has, no doubt, changed the face of the Indian watch market so much that HMT was in fact struggling hard to face TITAN. This is only one of the several examples of failures in strategic planning in the contemporary business world.

Technological, economic, sociological and political changes in the environment are so extensive and affect so many activities of an enterprise that is essential to keep their effects in mind. Failure to read the changes and complacent attitude on the part of management costs the firm dearly. There are numerous examples, where yesterday's leaders have become today's non-entities solely because of their failure to adapt to the changing realities.


Strategic Planning vs. Operational Planning

While strategic planning is the prerogative of the top management which is the highest policy making body in any organisation, operational planning is done at the lower levels.

Strategic planning is mostly concerned with the "why" of the things whereas operational planning is concerned with the "how" of the things, that is, the nitty-gritty of achieving the things.

The focus in strategic planning is on long-term while it is short-term in operational planning.

Further, planning is less detailed in the former because it is not involved with the day- to-day operations whereas it is more detailed in the latter. Tactical planning is the other name used to describe 'operational planning'.

Strategic planning provides guidance and boundaries for operational management. Effective management, therefore, must have a strategy and must operate on the day-to- day level to achieve it. At times both may overlap. However, they should not be viewed as mutually exclusive because operational planning identifies the major activities to achieve the objectives of strategic planning. For example, if the strategic plan is to face competition with new and innovative products, major tasks to achieve this goal would be clarified by operational planning. The possible tasks at the operational level include:

strengthening the research and development department;

motivating the people to work on new products; and

creating a climate in the organisation where people are willing to take risks.

In the implementation of strategic plans, it is common that certain departments have far more to do than others. In the above example, in order to bring out new products the operational aspects of the R & D department's work culture, and the incentives systems to motivate the people need attention.

TYPES OF PLANS Please use headphones Planning by definition involves deciding a future course of


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Planning by definition involves deciding a future course of action. Different types of plans are developed by an organisation, namely mission, strategies and policies, procedures, rules, programmes and budgets. All these refer to a future course of action. However, some variances in respect of the scope and operation are found in the implementation. Some are single-use plans while some others are standing plans. They are discussed below:

1. Mission or purpose:

The terms mission or purpose are often used interchangeably. An organisation's mission statement includes its philosophy and basic purpose for which it exists. It establishes the values, beliefs, and guidelines that the organisation holds in high esteem. Mission statement suggests how an organisation is going to conduct its business. It defines the basic intentions of the firm. A clear definition of mission or purpose is necessary to formulate meaningful objectives.

Answers to two important questions are provided by the mission statement: a. What is our business? and b. What should it be? These questions force the management to define their customers and their needs.

The essence of corporate mission or purpose can be understood from the IBM's philosophy, as enunciated by Thomas Watson, its founder way back in 1960's.

Respect for the individual; We want to give the best customer service of any company in the world; and We believe that an organisation should pursue all tasks with the idea that they can be accomplished in a superior fashion.

It is interesting to note that almost 30 years after Watson stated these three basis beliefs, IBM's present Chairman stated: "We have changed our technology, changed our organisation, changed our marketing and manufacturing techniques many times, and we expect to go on changing. But through all this change, those three basic beliefs remain. We steer our course by those stars."

Please use headphones 2. Policies: Koontz and O'Donnel define policy as "a general statement or

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2. Policies:

Koontz and O'Donnel define policy as "a general statement or understanding which guides the thinking and action in decision-making. Policy is a one time decision. When decisions are to be made, managers consult the policy relevant to the decisions. Policy stipulates how an activity has to be performed. It provides the basic framework within which managers operate.

Policies exist at all levels in the organisation. Some may be major company policies affecting the whole organisation while others may be minor or derivative policies affecting the functioning of departments or sections within the departments.

Policies may be very clear and explicit. Good policies are flexible, easy to interpret and consistent with overall objectives of the organisation. Policies are laid down by the management for all the important functional areas. As such, we hear about production policies, financial policies, marketing policies and personnel policies, to mention a few. For instance, in the personnel area, specific policies may be formulated for recruitment, training, compensation, etc. Accordingly, whenever the need for recruitment arises, the personnel manager consults the existing recruitment policy of the company and initiates the steps necessary to fill the vacancies. Thus it is evident that the personnel manager operates within the broad policy of the company in recruiting the people. Thus policy is

a one-time standing decision that helps the manager in making day-to-day decisions, in their operational areas.

3. Procedures:

Another term that is frequently heard in any organisation is 'procedures'. The term

sounds of some bureaucratic element where issues are finalised only after they undergo

a long drawn scrutiny. But procedures, if simple and clear would ensure order in the

performance of operations. Though procedures exist at all levels in an organisation, they are more detailed at the lower levels. In common parlance, they are called 'Standard

Operating Procedures' (SOPs).

Procedures for placing orders for material and equipment, for sanctioning different types of employee leave, for handling grievances at the shop floor level, etc., to mention

a few, suggest how each of these has to be handled. Policies and procedures are closely

interrelated. For instance, a company may follow time-bound promotion policy to promote people from within. But the operational part of the policy is specified by the procedure - the formalities to be fulfilled to effect the promotion are dictated by the


4. Rules:

A rule is also a plan, but the simplest type of plan. Rules are plans in that they suggest the required actions. A rule requires that a definite action has to be taken in a particular way with respect to a situation. Some definiteness is associated with rules. For example, 'no smoking' is a rule. No deviation is normally allowed from the rule. The essence of a rule is that it reflects a managerial decision that certain actions be taken or not be taken.

Rules vs Policies and Procedures - Rules should not be confused with policies and procedures. Policies contain some operational way or discretion while rules allow no discretion in their application. Similarly, procedures though different from rules may contain rules. For example, there may be a procedure to enable customer grievances in respect of post-sale service. The procedure may contain a rule that free service is available only for a period of two years after the sale.

5. Programmes:

Terry and Franklin define programme as "a comprehensive plan that includes future use different resources in an integrated pattern and establishes a sequence of required actions and time schedules for each in order to achieve stated objectives". Thus, a programme includes objectives, policies, procedures, methods, standards and budgets. For instance, launching 'Prithvi' satellite is a programme; 'Jawahar Rojgar Yojana' is a programme. The essential ingredients of any programme are time phasing and budgeting. It implies that specific dates are prescribed for the completion of various phases of a programme. Adequate budgetary provisions are made for financing the programme.

Programmes may be major or minor. For instance, a company may embark upon modernisation programme of the plant and machinery and other manufacturing systems in a big way. By all means, such an effort is a major programme. Similarly a large organisation may start computerising all its activities. On the other hand, modernisation of small equipment in some section of the factory and computerisation of a particular operation in a certain department may be considered as minor programmes.

6. Budgets:

Budgets are plans in that they contain statements of expected results in numerical terms. A budget is a quantitative expression of a plan. It specifies the future course of action as laid down by a plan. In fact budgeting is a planning device. It is the fundamental planning instrument in many companies.

Organisational budgets vary in scope. Master budget which contains the consolidated plan of action of the whole enterprise is in a way the translated version of the overall business plan of the enterprise. Similarly, production budget represents the plan of the production department. Again, capital expenditure budget, raw material budget, labors budget, etc. are a few minor budgets in the production department.

One of the advantages of budgets is they facilitate the comparison of actual results with the planned ones by providing yardsticks for measuring performance. 'Zero-based budgeting' - a recent innovation in budgeting practices makes planning more complete. It emphasises the need to examine every commitment afresh in terms of decision packages.


Any plan is a future course of action. It facilitates the achievement of goals. Different types of plans are formulated in any organisation. Though all the plans, by whatever name they are called, involve a future course of action, they differ in respect of the length of time, relative importance and the level at which they are more relevant. Strategic plans provide the direction to the organisation and concerned with the achievement of organisational mission where as operational plans are concerned with the day-to-day managerial activities. The various types of plans namely, policies, procedures, rules, programmes and budgets plans are also discussed.


1. Distinguish between strategic planning and operational planning. How are they

relevant for the management of an organisation?

2. Present the business strategy of any organisation that you are familiar with. Could

you offer a better strategy?

3. Briefly describe the following types of management plans: a) Policies, b) Procedures,

c) Programmes, d) Budgets.


"The importance of strategic planning is now fully realised by the Indian corporate

sector than before". Discuss.

5. 'Environmental scanning is the core of all planning activity'. Elucidate.


From what you have understood in this lesson, respond to the following by indicating T/F (True or False) as the case may be:

1. Strategic planning is wasteful exercise because future cannot be predicted

accurately. ( )

2. Strategic planning is another name for long-range planning. ( )

3. Strategic plans and operational plans are independent of each other. ( )

4. The emphasis in operational planning is achievement of corporate mission. ( )

5. Strategic planning is usually done by top management. (


6. Operational plans are more concerned with day-to-day managerial operations. ( )

7. A policy is a standing plan. (


8. Budget is a plan prepared only by the government. (


9. Rules offer great flexibility in the implementation.



10. Success in business depends on luck, no matter how you plan.




In line with the Government of India's liberalisation policies, the State Government of Andhra Pradesh, to woo the NRI investment, a few years back permitted the Fairdeal Company, promoted by an NRI, to manufacture chemicals. The factory was set up in 1988 at a place 5 kms west of the city of Vijayawada, a fast growing city in Andhra Pradesh on the banks of river Krishna. The State Government, in return for a guarantee of year round employment for at least 5000 persons, offered an attractive package of incentives to the company which include:

* Sale of 50 acres of land to the company at a nominal price of Rs. 1000 an acre;

* Constitution of a building to Fairdeal's specifications with the company repaying the

building cost in equal annual payments over a 20 year period with annual interest of 10

percent on the unpaid balance; and

* No State Government levies for 10 years.

The company with a gestation period of 3 years went on stream in 1991. For two years 1991-92 and 1992-93, the company did not make any profit and it was only in the last financial year (1993-94), the company posted some profit.

Subsequent to the establishment of the factory in 1988, contrary to the expectations of the city planners, the city has grown westward during the last 4-5 years. To cope with the growth needs, the urban development authority (called Vijayawada Urban Development Authority, VUDA) has undertaken several civic plans in the vast areas on the western side of the city. One of the plans includes the development of a park featuring boating and picnic facilities centering around the river Krishna. VUDA has embarked on a detailed study of the prospects of developing the whole area into a premier tourist centre. In the study it was found that the chemical plant was discharging effluents into the river in a big way contaminating the river water.

In the wake of the plan to develop the area into a tourist spot considering the scenic beauty of the place, VUDA required the company to install special equipment to neutralise the waste materials now emptied into the river. Company engineers estimated the cost of waste treatment at Rs. 2 crores for equipment and Rs. 5 lakhs for annual operating costs. The management of the company contends that the expenditure is well above the affordable limits. Fairdeal's Chairman states that insistence on such an outlay by the Government would force the company to abandon the plant and locate it elsewhere. He further points out that the company has fulfilled every requirement of the initial agreement reached when the decision was made to set up the plant. For example, the company has met all the required payments, and since opening the plant, has never employed fewer than 6000 persons - which accounts for nearly 5 percent of the employment in the organised sector of the city. The chairman also points out that the building is specially designed built for the company's particular type of chemical manufacturing. It is not an all-purpose building and can be utilised only by a firm such as theirs. The available trends both at the national and international level show that the company has a bright future.

However, the Government takes the view that the initial deal was offered to help the company in getting established. With nominal land, cost, favourably financed building cost, and availability of labour in the area, the company should have volunteered itself. The company is part of the community and therefore should assume its social obligations as such. Pouring waste into a public stream is harmful and simply cannot continue. Also, in the opinion of the government officials, the threat from the company to abandon its plant is a pure bluff. A suitable land and building elsewhere at today's prices would cost several times more than the present one, leave alone losing a well trained work force.


1. How does this problem relate to modern management planning?


Develop a set of tactical plans for the Fairdeal Company.

3. What solutions do you offer to overcome the present impasse?


Chopra, BSKS. 1988 Business Policy for Indian Industries, Times Research Foundations, Pune.

Gleuck, William F. 1980 Business Policy and Strategic Management, McGraw-Hill, New York.

Koontz, Harold and others, 1984 Management McGraw-Hill, Tokyo.

McCathay, Danil J, and others 1987, Business Policy and Strategy: Concepts and Readings, Richard D. Irwin Inc. Illinois.

Steiner George, 1969, Top Management Planning, Macmillan, New York.

Terry, George.R. and Franklin, Stephen.G. 1988 All India Traveller Bookseller, New Delhi.

- End of Chapter -




After studying this lesson, you should be able to:

Understand the importance of policies; Describe the basic sources of policies in the organisations; Familiarise with the steps in the policy formulation; and Identify the key areas where policies are needed.



Importance of policies

Furnish the framework for decisions Assure consistency in operations

Types of policies

Originated policies Appealed policies Implied policies Externally imposed policies

Principles of policy making

Process of policy formulation

Basic areas of policy making






Review Questions


Further Readings


Decision-making is the primary task of a manager. While making decisions, it is common that managers consult the existing organisational policies relevant to the decisions Thus, policies are intended to provide guidance to managers in decision- making. It has to be remembered that a policy is also a decision. But it is a one-time standing decision in the light of which so many routine decisions are made.


-> Furnish the framework for decisions

Policies provide the broad framework within which decisions are to be made. In the absence of appropriate policies, managerial decision-making may be analogous to "reinventing the wheel" every time. For example, a policy greatly helps the manager in filling the vacancies (vacancies caused by the retirement have to be filled only by

internal promotions). Whenever vacancies arise, he simply goes by the existing promotion policy of the organisation. Sound policies thus save lot of time in decision- making and avoid confusion.

-> Assure Consistency in Operations

Since policies specify the boundary conditions of decisions, it goes without saying that when decisions are actually made, they conform to the policy relevant to the decision. Thus, decisions relating to a particular operational area of the business tend to be consistent if the policy of an organisations is to face competition with quality products, the emphasis naturally will be on issues relating to improving the quality of the product. All the decisions that affect the product quality are normally taken in the light of the explicit policy. Policies developed carefully and understood perfectly, result in consistency in planning. As a result, organisational resources would be deployed in those areas where they find a better use.


Policies come about in any organisation in different ways. Based on their source, Koontz and O'Donnell have classified policies under the following types.

1. Originated Policies : Originated policies are the result of top management

decisions. To guide the actions of the subordinates, top management formulates policies for the important functional areas of business such as Production, Marketing, Finance, Personnel and so on. These policies basically stem from the organisational objectives. They may be 'broad' or 'specific' depending on the centralisation or decentralisation of authority. If they are broad, they allow the subordinates some operational freedom. On

the other hand if they are specific, they are implemented as they are.

2. Appealed Policies : At times a manager may be in dilemma whether he has the

authority to take a decision on a particular problem. There may not be precedents to guide him. In such a case, he appeals the matter to his superiors for their thinking. Thus, appeals are taken upwards till they reach the appropriate level in the hierarchy for a decision. The decision taken by the higher-ups, thus becomes a ruling. For example, during festival seasons, the manager at the branch level may be in a dilemma to offer discount to the customers. There may not be any explicit policy to guide him. But to meet competition in a particular market situation where competitors offer discounts, top management, on the basis of an appeal made by the Branch Manager may allow him to offer discount. Unless otherwise stated, it becomes an unwritten policy and guides the manager's decision-making in all such future situations.

3. Implied Policies : As in the above case, there may not be specific policies for all the

contingencies. Managers draw meanings from the actions and behaviour of their superiors. In a particular situation, a manager may go all out to help a customer who is in a difficult situation. If customer service is on top of the agenda of the organisation, there may not be any objection from the top management to the stand taken by the

lower level manager in support of the customer. Though there is no explicit policy, managers may assume it in a particular way and go about in their day-to-day operations.

4. Externally Imposed Policies : These are the policies imposed by the agencies in the external environment like government, trade unions, industry associations, consumer councils, etc. These agencies, to protect the interests of the respective groups may lay down certain policies to be followed by the business. As the interaction of the business with external environment is increasing, one can find many policies thus coming into being in any modern business. For instance, the recruitment policy of the organisation is influenced by the government's policy towards reservations for weaker sections. Anti-pollution measures, concern for the quality of the product and customer service also fall in this category.


Policies help to ensure that all units of an organisation operate under the same ground rules. They facilitate coordination and communication between various organisational units. This is possible because policies make consistency in action possible. In view of the importance of policies in guiding executive behaviour, they have to be formulated carefully. In fact, policy formulation is one of the important executive responsibilities. Effectiveness of policies, therefore, lies in understanding the following principles underlying policy formulation:

(1) Define the Business: Correct definition of the business provides clarity to the policies. Two questions have to be asked in this regard - what is our business, and what kind of business are we in. Many businesses have failed because they did not attempt to seek answers to these simple and basic questions. Gramophone record companies for long did not realise that they are in the entertainment business. Hence they are now here in the corporate history. To define the business, a company must take a close look at its basic operations and analyse it's major strengths and weaknesses in all the functional areas like marketing, product development, finance, and public relations. Such an exercise enables the enterprise to correct it weaknesses, if any, and to capitalise on its strengths.

(2) Assess Future Environment: Future environment of the business has to be forecasted. A realistic estimate of the future trends in matters relating to technology, economic and market conditions, political stability, etc. is essential for policy formulation. As many people would agree, forecasting is a difficult task. Instances are not rare, where the best of the forecasts turned out to be just intentions. It is interesting to note that sometimes products which were predicted to be instant failures by the so called market surveys proved to be run-away successes. The Syntax water tank is a classic example where the product defied the gloom predicted by the market research. However, examples of this sort are few and far between.

(3) Ensure Availability of Resources: Formulating policies in an ambitious way without regard to the ground realities may land you in trouble. You would

encounter too many problems while implementing the policies. As a result, policies do not serve the intended purpose. For example, if the policy of the organisation is to cash in on the new opportunities, it does not mean that you can enter any field thrown open by the government. You have to assess yourself as to how strong you are in terms of resources required. Otherwise it amounts to overstretching.

(4) Communicate the Policies: The chief objective of many policies is to help managers in decision-making and to ensure consistency in action. As such, policies have to be communicated to all those who are to take decisions. The policy of the organisation towards competition, for instance has to be communicated to the people in the marketing department. Otherwise there will not be proper synchronisation between the policy and action.


As mentioned earlier, the basic intention of policies is to help executive thinking in decision-making. Policies are formulated for all the key functioned areas of business like production, marketing, finance, personnel and so on. Effectiveness and consistency of decisions in all these areas depend on how well the policies are formulated and understood. A policy is a plan. Therefore, the steps involved in policy formulation are similar to the steps in planning. Though policies vary, in respect of scope, the process of policy formulation usually involves the following steps:

Step 1 - Corporate Mission : Corporate mission specifies the purpose for which the organisation exists. It is natural, therefore, that all the activities of the organisation are geared towards the achievement of the mission. The mission statement provides the direction to the organisation. As such, thorough understanding of the corporate mission is the starting point for policy formulation.

Step 2 - Appraisal of the Environment : Integration of the organisation with the environment is the key function of the management. The nature of environment and the various forces in it that affect the business have to be analysed. It includes collection of relevant Information from the environment and interpreting its impact on the future of organisation.

Step 3 - Corporate Analysis : While the focus of the environmental appraisal is on the external factors of the business, corporate analysis takes into account the internal factors. Corporate analysis discloses strengths and weaknesses of the organisation and points out the areas that have potential.

Step 4 - Identification of Alternatives : The above two steps - environmental appraisal and corporate analysis popularly known as SWOT (strengths, weaknesses, opportunities and threats) analysis will help identifying the alternative policies. For example, the objective of the organisation is expansion. This may be achieved by several ways - diversification of the activities, acquisition of existing organisations, establishment of subsidiaries abroad, and so on. Again, if diversification is chosen, it has

to be decided whether it is into related or unrelated business. The alternative policies thus identified have to be evaluated in the light of the organisational mission and objectives.

Step 5 - Choice of the Right Policy : This stage involves choosing the right policy from several policy options that suits the organisational objectives. The corporate history, personal values and attitude of the management and the compulsions in the environment, if any, influence the choice of the policy.

Step 6 - Policy Implementation : Once the policy is decided, necessary steps have to be taken for its implementation. Effective implementation of the policy requires design of suitable organisational structure, developing and motivating people to contribute their best, design of effective control and information systems, allocation of resources, etc. At times, policies may have to be revised in line with the changes in the environment. To make good, any inadequacy at the time of making the policy, or to adopt to the changes in the business environment, policies like plans have to be monitored constantly during the implementation stage.

to be monitored constantly during the implementation stage. Please use headphones BASIC AREAS OF POLICY MAKING

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As mentioned earlier, policies are normally formulated for all the key areas of the business. Some of the important areas for which policies are required are discussed here:


In the area of production, make or buy decision is an important policy. For instance, automobile companies buy many accessories and parts from outside rather than making those parts themselves. This type of policy enables the organisation to concentrate on the basic product. However, it depends largely on the resources of the organisation and capabilities.

Another important policy pertains to the production run. The volume of output depends on the production run. The demand for the product in terms of the orders, costs of tooling, economics of scale are some of the factors that influence the production run. Some companies choose to produce to order, while some companies may produce in

anticipation of demand. During slack season, there are companies which produce some fill-in-products to make good use of the facilities.

Issues relating to innovation, new product development and diversification are other important aspects which require policy direction.

are other important aspects which require policy direction. Please use headphones Marketing As the business world

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As the business world has become increasingly competitive, marketing has acquired tremendous importance in the recent times. Peter Drucker regards innovation and marketing as the two important functions for every business. The success of any organisation depends on how strong it is in these two basic functions. In the functional area of marketing, answers to certain basic questions help in formulating the policies. The questions include:

Who are our customers and what do they buy?

Why do they buy our product?

What do we offer in relation to our competitors?

What supporting services do we offer?

What is the price to be charged?

Appropriate answers to these questions help in deciding the product, pricing, distribution and promotional policies of the firm. Among these, pricing policy is of utmost significance. Issues relating to how to face the competition are resolved with a sound pricing policy. For instance, whether to indulge in price competition or non-price competition are the two basic issues in this regard. In the former case, the firm meets competition by cutting the prices while in the later, competition is met by promotion, advertising and after sales service, etc. The emphasis is on non-price variables.


Financial aspects normally set the limits to the expansion of the business. Necessary steps have to be taken to raise the funds. The required funds for the business may be furnished by the owners or borrowed from outside sources. The actions of management with regard to procurement, utilisation and distribution of funds are guided by the broad policies laid down for the management of funds.

Important policy decision pertains to the proportion of the equity to debt capital. The relative merits and demerits in raising the funds through equity and debt have to be examined.

Further, in the case of a going concern, funds may also be raised through retaining a portion of the profits in the business. This in turn influences the dividend policy of the organisation.

Working capital management is another area which requires policy direction. Adequate working capital is essential for any business for maintaining credit and meeting obligations. Policies regarding working capital vary from company to company depending on the size and nature of the business. For instance, public utility concerns with regular cash collection may need less working capital than those engaged In the manufacture of specialised machines. Similarly, a company operating on strictly cash basis requires less working capital than one operating on predominantly credit sales.

Policies relating to the distribution of profits of the business are equally important. This is usually influenced by factors including - the desire of the shareholders, the company's future plans of expansion, availability of other sources of obtaining capital, the urgency of the need for additional capital and availability of re-investible profits. If multinational companies like Hindustan Lever, Brooke Bond, Colgate etc., enjoy tremendous investor clout and emerged as blue chip companies, it is because of investor friendly policies relating to dividends and frequent capitalisation of resources.


Any organisation can be as effective as the people in it. Many problems in the organisations are people related in nature. It is, therefore needless to say that sound personnel polices ensure good employer- employee relations.

Important policies in this area relate to recruitment and training, compensation and other employee benefits, and the attitude of the management towards labour unions. All these policies are normally influenced by factors such as skills required at various levels, the attitude of the people towards work and the philosophy of the management. On the whole, good employee-oriented personnel policies encompassing the above mentioned issues would contribute to employee motivation and morale.


Policy formulation is one of the important responsibilities of the executive. Policies provide the broad framework within which decisions are made by the managers in handling various day-to-day problems. They also assure consistency in managerial decision-making. Based on the source through which policies come into being in the organisations, they are classified into originated, appealed, implied and externally imposed policies. Thorough analysis of the strength and weaknesses of the organisation in the light of the opportunities and threats is a critical step in the formulation of

policies. A few important functional areas such as production, marketing, finance and personnel, where sound policies are essential have also been discussed.


1. Discuss the importance of policies and how they assure consistency in decision-


2. What are the important sources of policies in the organisations? Explain with the

help of examples.

3. Discuss the important steps in the policy formulation.

4. Identify a few important areas of the business where policies are necessary and

elaborate with appropriate

functional areas.

examples, the important policy decision in any one of the


Honesty Enterprises is a medium-size organisation operating in the highly competitive consumer goods industry. The company which started its operation in 1970s in a humble way has come a long way and emerged as a force to reckon with in the industry. The success of the company is mostly attributed to certain core values that the management cherishes even to date. Important among them are, product quality and customer service. The company all through made it a policy not to resort to price-cutting and instead chose to compete on quality and customer service. Even in the most difficult times the company stuck to the same policy and never yielded to the provocation of the competitors.

In the early 1990s, the consumer goods industry, because of the recession, had a very tough time. Unable to withstand the evil effects of the slump, many small and inefficient firms were almost all relegated to the oblivion. During 1991, one of the regional marketing managers of the Honesty Enterprises operating in the state of Tamil Nadu, to meet the targets in the most trying circumstances, authorised the local sales managers to allow price discounts on the products. The practice of offering discounts continued for some time till the middle of 1993. In the meantime, though price-cutting has never been the policy of the company, for all practical purposes an implied policy had emerged. Regional managers and lower level people in the marketing department operating in the various other markets also began to compete on price terms by offering different types of discounts to the customers.

It took some time for this unanticipated development to reach the top management. Some perceptible changes in the attitude of the customers towards the company products began to surface. The company was perceived to be compromising on the quality of the product. All this resulted in an erosion of the image of the company assiduously built over a period of twenty years.

Added to this, the management is also confronted with another problem relating to the technological upgradation. All along the company relied on the in-house research and development capabilities for product innovations. Now that advanced and more sophisticated technology is easily accessible, thanks to the liberalisation of the economy, many competitors are firming up collaboration agreements with internationally reputed companies. The management is at the cross roads. It is exploring the various possibilities to surmount the present crisis.


1. Summarise the problems that you have identified in the case and analyse their


2. Evaluate the external environment of the business in the case and discuss its impact

on the company.

3. Assuming that you were the consultant, how would you help the management to

overcome the crisis effectively?


1. Koontz, Harold and others,

1984. Management, McGraw-Hill, Tokyo.

2. Massie. Joseph L. 1971. Essentials of Management, Prentice-Hall, Englewood cliffs.


3. Terry. George R and Franklin, Stephen G. 1988, Principles of Management. All India

Traveller Bookseller (Indian Reprint), New Delhi.

4. Drucker, Peter F. 1954. The Practice of Management, Harper & Row, New York.

5. Barnard. Chester I. 1938. The Functions of the Executive, Harvard University Press,


6. Chandler, Alfred D. 1962. Strategy and Structure, MIT Press, Cambridge.

7. Ghreck, William F. 1972. Business Policy: Strategy Formulation and Management

Action, McGraw-Hill, New York.5. I.Chestner Barnard.

- End of Chapter -




After studying this lesson, you should be able to:

Appraise the different approaches to the study of organisations;

Distinguish between formal and informal organisations; and

Acquire a correct perspective of 'organising' as a managerial function.



Organisational Theories

Classical Organisational Theory

Neoclassical Organisational Theory

Modern Approaches to Organisational Theory

Formal and Informal Organisations

The need for Informal Organisation

Problems and Benefits with Informal Organisation

Managing the Informal Organisation


Review Questions

Further Readings


Organisations are made up of people. When people work together in groups to achieve the goals, everyone in the group must know what he is expected to do, with what resources, and what reporting relationship he has with others. Otherwise, activities of the people will tend to be directed in different ways resulting in the wastage of scarce resources. The managerial function of 'organising' aims at designing a structure where everyone knows who is to do what and who is responsible for what results. It helps in removing confusion and uncertainty by providing for adequate coordination between groups of people working in various departments or divisions.

Koontz and O'Donnell define organising as "the grouping of activities necessary to attain objectives, the assignment of each grouping to a manager with authority necessary to supervise it, and the provision for coordination horizontally and vertically in the enterprise structure". Thus organising is the process of creating a structure for the

organisation that will enable its people to work together effectively towards its objectives. However, the structure of the organisation has undergone considerable changes over the years in response to changes in the environment. Let us examine, in brief, the various approaches or theories of organisations.


There are three approaches to understand the organisational theory: Classical, Neoclassical and Modern. The assumptions about human beings and other variables that affect the organisational functioning vary from one approach to the other.

1. The Classical Organisation Theory

As discussed in lesson 2, the early management thinkers viewed the organisation as a machine and human beings as different parts of that machine. Organisation was viewed as a closed system. The influence of the external environment was ignored. The emphasis was more on increasing the output, and human element in the process received scant attention. Further, early writers' concern was mostly to find the 'one best way' to design the organisation which would suit all the situations.

Division of Labour, Scalar Principle, and Span of Control are the important principles on which enterprise activities were organised. Members of the organisation were guided by a sense of duty to the organisation and by a set of rules and regulations. Mason Haire has identified the chief characteristics of classical organisation theory as follows:

Human beings were assumed to be relatively homogeneous and unmodifiable; Organisation was perceived as a closed system with little interaction with the external environment; The emphasis was on detection of errors and their correction after they have happened; Authority was centralised and the integration of the system was achieved through exercise of authority and implementation of rules and regulations; Stability was the central theme in designing the structure.

Classical Organisation Theory, is thus, based on the contributions of scientific management by Taylor and others, administrative management by Fayol and bureaucratic system by Max Weber.

Appraisal of Classical Theory

March and Simon, Katz and Khan, Victor Thompson and a host of other writers have found the classical organisation theory inadequate in dealing with the complexities of modern organisations. The salient features of the classical theory may be summarised as follows:

i. Mechanistic structure : Organisations have been treated as closed systems with no environment and hence no interaction with the outside world. Classical thinkers

assumed two things - there is no impact of the environment on the organisation, and human beings are inert elements who can be manipulated. Once the structure is created, it was assumed that it would run smoothly with the rules and regulations.

ii. Organisation as a static concept : Classicists held the view that an organisation is a static concept. Once the structure is created, it will work forever. The need for change or structural adjustment was not given due consideration. The emphasis was more on stability in operations.

iii. Excessive reliance on principles : Principles like division of work, scalar chain, structural arrangement, order and span of control were taken as articles of faith. Too much reliance was placed on these classical management principles. Coordination by hierarchy, unity of command, line and staff relationships, discipline - all resulted in the creation of command and control structures.

Classical organisation theory has been criticised by many authors on the following grounds:

- It neglects the human aspects of organisation members, assuming that they are

motivated only by economic considerations. As educational levels, expectations and aspirations of people have been changing fast, this criticism has become more


- It does not suit the rapidly changing environments of today. Structures designed

to function effectively in static environments with an emphasis on stability, hardly

suit the changing requirements of modern businesses.

- It assumes that higher-level managers are respected by subordinates because of

their knowledge and skills. These days, young people at lower levels seem to be fully equipped with latest skills. At times they are found to be even outsmarting their superiors. As a result, some emotional conflicts between superiors and

subordinates have become quite common.

- As organisational procedures become more formalised and tasks more

specialised, people tend to lose sight of the bigger picture. They develop a narrow

perspective where they are obsessed with their own functional areas.

It should not, however, be construed from the foregoing analysis, that the classical theory of organisation is completely irrelevant. The contributions of the early thinkers which ensured proper systems and order in the organisational functioning cannot be undermined. Classical organisation theory has strengths as well as weaknesses. For example, classical structure provides much task support. At the same time it is weak in psychological support. What is needed is an organisational system that provides both task and psychological support.

2. Neoclassical Organisation Theory

The classical thinkers with their obsession with economic effectiveness neglected employee satisfaction. They failed to recognise the significance of the impact of human element. Neoclassical theory, on the other hand, which revolves around the contributions of behavioural and social scientists, aims at complementing for some of the deficiencies in classical theory. The initial impetus was provided by Elton Mayo's Hawthorne studies. Neoclassical theorists did not totally reject the classical model, but only tried to modify it. Important among them are Douglas McGregor, Chris Argyris and Rensis Likert, whose contributions to the development of management thought have already been discussed in detail in lesson 2. The main propositions of neoclassical theory are as follows:

i. In every organisation, in addition to the technical system, there exists a social system;

ii. Along with the formal organisation structure, there also exists an informal


iii. Human beings have diverse motivational patterns and try to fulfill different types of needs;

iv. Quite often there exists a conflict between individual and organisational objectives. Hence the need for integration between the two; and

v. Cooperation among people is not automatic but has to be achieved through

appropriate behavioural interventions.

Appraisal of Neoclassical Theory

Neoclassical theory of organisations marked a significant departure from the classical theory, in that, it raised several new concepts like informal organisation, group norms, non-economic motivators, irrational behaviour, etc.

Consequent to the findings of Hawthorne studies and the writings of behavioural scientists, concepts like flat structure, decentralisation and informal organisation have found increased usage in the design of the organisation structure. In the place of the traditional tall structures which are bureaucratic in their functioning, flat structures are emphasised. As against delays in decision-making, hierarchical controls and communication bottlenecks in the tall structures, flat structures with wide span of control are found suitable to motivate human beings.

Another postulate of the neoclassical theory is decentralisation closely related to flat structure. Decentralised structure offers autonomy and freedom to people in decision- making. It assures operational freedom. The existence of informal organisation in the formal organisation is by far a significant breakthrough of the neoclassical theory. While normal organisation is a deliberate creation of the management, informal organisation is the spontaneous outcome of the people to satisfy their social and psychological needs. Various aspects relating to informal organisation are discussed in the subsequent section of this lesson.

The neoclassical theory to organisational design compensates for some limitations in the traditional classical model. But it too has been criticized on the following grounds:

- The neoclassicists share the classical assumptions that there is "one best way" to design an organization. They overlook environmental, technological, and other variables that might affect an organization's design;

- The neoclassicists oversimplify human motivation. Not everyone is motivated by the non-monetary aspects of work, nor can all work be made intrinsically challenging and rewarding; and

- The coordination of decentralized, fragmented groups to achieve organizational

goals may be more difficult than the neoclassicists suggest, particularly when the objectives of lower-level employees are not consistent with the goals of upper-level managers.

3. Modern Approaches to Organisational Design

As discussed in the preceding sections, hierarchical organisational structures are centralised. Information flows slowly, so also the decisions. Modern approaches to organisational design take into account business environment, technology and people. As such, while designing the structure, an understanding of the environment is essential.

i. Environment

Business environment may be classified into stable, dynamic and turbulent. Stable environment is one with no unexpected or sudden change. Changes in technology, market demand, and socio-economic and political conditions occur infrequently and modifications can be planned in advance. But these days, stable business environments are hard to find.

As against stable environment where changes are infrequent, dynamic environment is characterised by frequent changes. These changes, to a certain extent, can be predicted. Trends are likely to be apparent and organisations can easily try to adjust. However, the rate of change in the environment may be high in some industries while it is low in some other industries. It is also quite possible that the once stable environment may become a dynamic one. For example, the environment of many businesses in India till a few years ago was quite stable. But as the economy is opened up, unprecedented changes are taking place in the Indian economy.

Turbulent environment, on the other hand, is characterised by unexpected changes and surprises. As Peter Drucker has described the present age as "the age of discontinuity", managements are taken by surprises. Spectacular breakthroughs in technology, sudden changes in the market preferences, political uncertainties, etc., make the environment very turbulent.

In the light of the changes in the environment, whether they are predictable or unpredictable, the organisational structure has to be designed in such a way that it matches with the environment. Burns and Stalker on the basis of their extensive research classified organisational systems into 'mechanistic' and 'organic' structures. In a stable environment mechanistic structures would do well because the emphasis in such systems is on achieving excellence in the routine tasks, whereas organic systems are preferable in a dynamic or turbulent environment. Some combinations of the two systems may also be used.

ii. Technology and Structure

Apart from the environment, technology also influences the structure. By technology we mean the task related. Management researcher Woodward had studied about 100 British manufacturing firms and established relationship between technology and structure. He classified technology into Unit production, Batch or Mass production and Process production.

Unit production refers to the production of individual items tailored to customer's specifications. The technology used is not very complex and output is produced largely by individual crafts people.

Mass production refers to the manufacture of large quantities of products, mostly on an assembly line.

Process production refers to the production of materials that are sold by weight or volume such as chemicals, sugar, cement etc.

The following are the findings of the Woodward's study on the relationship between technology and organisation structure:

The more complex the technology, the greater is the number of managers and management levels. In other words, complex technologies require greater degree of supervision and coordination; The span of management increases from unit production to mass production and then decreases from mass production to process production. Lower level employees in both unit and process production firms tend to do highly skilled work. As a result, narrow span becomes inevitable. In mass production, on the other hand, assembly line workers perform mostly routine tasks. Large number of such workers can be supervised by one manager; The greater the technology complexity of the firm, the larger is the clerical and administrative staff.

The foregoing analysis shows that all these variations in technology will influence the organisation structure, which in turn will affect the performance. Successful firms are those that design the structure in accordance with the technological requirements of the firm.

iii. Aspirations of the People

Along with the environment and technology, the attitudes and aspirations of the people need due consideration in designing the structure. Unlike in the past, where classical theorists’ assumptions about human beings were held good, there has been a sea change in the attitudes and aspirations of the people in the recent years. Peter Drucker has rightly described the present day workers as "knowledge workers". They want more challenging jobs and participation in the decision-making process. They are self- motivated and direct their activities themselves.

In view of such raising aspirations and expectations, organisational structures have to be designed in such a way that their aspirations are taken care of. The structure has to provide an environment where individuals have freedom and autonomy. That is why, these days there is lot of talk about flexible systems and loose controls in the organisations. The objective behind all these structural changes is to identify and encourage creative people. In a competitive environment as of today, in the final analysis, it is the quality of human resource which makes a difference when all the other things are equal. In the place of rigid and bureaucratic systems which stifle the innovative abilities of people, the emphasis at present is towards flexible systems. As such the structure should facilitate to satisfy the ego needs of the people.


Much of what is discussed and understood about organizations in general, relate to the formal organisation. In many organisation structures, authority-responsibility relationships among people are clearly visible. Information flows from one level to another or from one individual to another in a formal way. All the relationships find a place in the organisation chart. The roles of the people are clearly defined and they are expected to perform the roles as stipulated to achieve the goals. Thus formal organisation is a deliberately created entity to achieve certain specific objectives.

Informal organisation, on the other hand, refers to the network of personal and social relations not established by formal authority but arising spontaneously as people associate with one another. The emphasis within informal organisation is on people and their relationships, whereas formal organisation emphasizes official positions in terms of authority and responsibility. Thus, informal organisation refers to unofficial relationships that inevitably occur between individuals or groups within the formal organisation.

As such in any organisation, both formal and informal organisations exist. Both are not mutually exclusive, but are complementary. The actual organisation structure is the result of both formal and informal relationships. The existence of informal organisation within the formal organisation can easily be seen in any formal system, be it a business enterprise, educational institution, or a voluntary organisation.

The need for Informal Organisation

The inadequacy of the formal organisation to meet certain social and psychological needs is the basic reason behind the emergence of informal organisation. Because the formal organisation does not provide for all the social interactions, members try to find out alternative ways of association. As the Hawthorne experiments revealed, membership in informal groups give people psychological benefits in every respect as important as the salary paid to them by the employer. The following are some of the major reasons for the emergence of informal organisation.

i. The desire to socialise with others - Keith Davis observes that "along with men's technical imperative, there is also a social imperative to work together. Man is a social being. He wants to belong, to associate with others rather to work in isolated loneliness. Out of this basic drive of man, the informal organisation arises". It is, therefore, quite natural when people work together in groups, they tend to socialise with fellow employees to satisfy their own social and ego needs. These needs are not normally satisfied by the formal organisation. Informal organisation, on the other hand, provides them opportunity to interact with people of their liking based on so many personality factors. We can easily observe in any formal organisation, like minded people coming together and forming groups.

ii. Disillusionment with the routine - Excessive specialisation these days in a way contributes for the employee aloofness. People become bored with the routineness in tasks and feel psychological fatigue. They don't get the pride or satisfaction, as what they perform constitutes only a small portion in the total task. People try to overcome this boredom through interactions with others. Such informal interactions, which encompass a whole gamut of issues both related to job and personal life, help in releasing the tension created on the job. Informal organisation thus helps in filling up the psychological vacuum created by dull, boring and monotonous jobs.

iii. Hierarchical command and control - Commands and controls characterise

formal organisation. Wherever there is hierarchy, it goes without saying that things happen in a formal way. Reporting relationships are clear. Information flows along the formal lines of authority and responsibility of the people. There exists a superior- subordinate relationship where superiors tend to exercise control which may not be liked by subordinates. While the subordinate cannot defy the superior, to compensate for the inner conflict, he tries to find out an association where he does not face any such control. Thus informal organisation provides him the necessary forum where he gets full psychological relief and solace by sharing his agony with others.

iv. Protection of interest - In addition to the above factors, informal organisation

strives to protect the interests of its members by working as a regulatory device. At times individual grievances are also redressed in organisations by informal groups. The opinions and viewpoints of the people are channelised through the informal bodies. Many limitations which otherwise would be faced by a member as an individual

overcome because the informal organisation takes care of the interests of the members.

v. Need for assistance - Formal organisation provides for subordinates' consultation with the superior for advice when confronted with work related problems. But many

people hesitate for fear of criticism. Furthermore, every organisation has a large number of rules governing procedures. Therefore, people often prefer to resolve their needs for assistance through peers. We often find in organisations employees consulting their colleagues rather than their superiors for many work-related problems.

vi. Communication - People like to know what is going on around them, especially if it affects them. It may take some time for people to get information through formal channels. Sometimes, superiors may deliberately withhold certain information from subordinates. Therefore, an important reason for joining informal organisation is to get information through informal channels. It satisfies individual's need for psychological security and affiliation as well as provide him with much faster access to job-related information. The informal communication, often called 'grapevine' also carries social gossip.

Problems and Benefits with Informal Organisations

Though the existence of informal organisation is a natural outcome in any organisation, many managers perceive them as bad. Some managers even carry an erroneous notion that informal organisation is a reflection of ineffective management. They therefore try to either suppress them or ignore their impact. In the process, they fail to take advantage of the informal organisation by overreacting to the negative aspects and disregarding the positive aspects.

Problems with informal organisations

It is true that in some cases, informal organisations may function in ways that are counter-productive. They may stand in the way of organisation's achieving the objectives. For instance, one of the consequences of informal organisation is the spread of rumours. All of us are familiar with how the grapevine in organisations spread rumours that are false and lead to negative attitudes towards management. The informal groups may set norms for productivity. The work-to-rule and slow-down techniques often accepted by workers in many instances are the result of the dictates of the informal organisation. Individuals often tend to conform themselves to the group standards or pressures which may cause performance to be below the standards set by management.

Another evil effect of the informal organisation is the tendency to resist change. Such an attitude often impedes the much needed innovation and adoption of changes as demanded by the exigencies of the environment. However, such counter-productive behaviour is often a reaction to the groups perception of how management is treating them. Group members perceive that they are being treated unfairly and respond as any individual would in such a situation.

Benefits of informal organisations

Since group membership is contingent on working for the organisation, loyalty to the group may translate into loyalty to the organisation. For instance, many people refuse

higher paying jobs with other companies because they are reluctant to give up the solid ties developed at the present company. It is possible for groups' objectives to be compatible with those of the organisation. At times, the performance norms of informal organisation may be higher than those of the the formal organisation. For example, the intense team spirit characteristic of some organisations, which results in a strong drive to succeed is often an outgrowth of informal relationships. Similarly, the grapevine may help the formal organisation by supplementing the formal communication network.

By failing to work effectively with them, or engaging in actions to deliberately suppress informal organisations, managers often become unable to harness these potential benefits. In any event, whether a particular informal organisation is harmful or beneficial, one thing is certain that it exists and must be dealt with. Therefore, as a manager, you must learn to cope effectively with informal organisation.

must learn to cope effectively with informal organisation. Please use headphones Managing the Informal Organisation

Please use headphones

Managing the Informal Organisation

Management writers have fully realised the importance of handling informal organisations to help the formal organisation attain its objectives. Scott and Davis offer the following suggestions:

Recognize that the informal organisation exists, and nothing can destroy it

completely without also destroying the formal organisation. Therefore, management should accept it, work with it, and not threaten its existence; Listen to the opinions of informal leaders and group members;

Consider possible negative effects on the informal organisation before taking any

action; Decrease resistance to change by allowing the group to participate in decision-

making; and Control the grapevine by promptly releasing accurate information.


Different approaches have been developed over the years to explain the process of organisations. The classical theory which emphasised technical and other operational aspects of the job; the neo-classical theory which emphasized human element in the organisations with due recognition to the existence of a social system along with the

technical system; and the modem approach where organisation structure has to be designed in tune with the environmental demands have been discussed in this lesson. Besides, the distinction between the formal and informal organisations and how informal organisations come into being in the formal systems - the reasons thereof, the problems, and benefits have also been presented in detail.


1. What are the basic tenets of the classical organisation theory? Is this theory relevant

to the design of the present day organisation structures?

2. Why should the environmental force be taken into account while creating an

organisation structure? Examine a few important variables that affect the structure.

3. Neo-classical theory is just a modification of the classical organisation theory - Do

you accept? Substantiate your answer with appropriate reasons.

4. Discuss some of the problems and benefits of informal organisations.

5. Have you ever been in a situation where informal group norms put you in role

conflict with formal organisation standards? If so, present such situations in detail.


Burns, Tom and Stalker.G.M. 1961. The Management of Innovation,Tavistock, London.

Woodward, Joan, 1965. Industrial Organisation, Oxford University Press, London.

Thompson, Victor .A. 1961. Modern Organisation, Alfred A.Knoof. New York.

Lawrence, Paul R and Lorsh, Jay.W. 1967. Organisation and Environment, Richard D.Irwin, Homewood.

Davis, Reith, 1993. Human Behaviour at Work, Tata McGraw-Hill, New Delhi.

Drucker, Peter.F. 1969. The Age of Discontinuity, Harper & Row, New York.

Stoner, James A.F. and Freeman.E.R.1989. Management, Prentice-Hall of India, New Delhi.

- End of Chapter -




After studying this lesson, you should be able to:

Understand the process of departmentation; Familiarise yourself with various methods of departmentation; and Acquire the necessary skills to design the appropriate structure which serves the need of the company.



Steps in Designing Organisation Structure


Product / Market Departmentation

Product Departmentation

Customer Departmentation

Territorial Departmentation

Project Organisation

The Matrix Structure

Contingency Organisation Design


Review Questions

Case: Confusion in Auto Parts Limited

Further Readings


The managerial function 'organising' involves the creation of a structure most appropriate for the organisation's objectives and other internal and external factors. The best structure is the one that enables the organisation to interact effectively with its environment, to efficiently channel the efforts of its people, to make efficient use of its resources and thereby to meet the needs of its customers and attain its objectives.


Ernest Dale describes organising as a multi-step process. According to him, it involves:

Detailing all the work that must be done to attain the objectives; Dividing the total work load into activities that can logically and comfortably be performed by one person or by a group of persons; Grouping the related tasks in a logical manner (this activity is known as departmentation); Setting up a mechanism to coordinate the work of members into a unified way by establishing authority-responsibility, relationships and Monitoring the effectiveness of the organisation and making adjustments to maintain or increase effectiveness.

It is important to remember that the resulting structure is not a static form like the structure of a building. Since structure is based on plans, a major revision of plans may necessitate a corresponding modification of structure. As such, organising and reorganising are ongoing processes. Successful organisations continuously assess the appropriateness of their structure and change it in accordance with the dictates of the environment. It is anybody's knowledge that these days every issue of leading business magazines widely reports news relating to reorganisation underway in some large company or the other.


Although organisations have much in common with one another, they also differ in many ways. Some organisations are large, some are small and some operate in only one product area like Tata Iron and Steel Company (TISCO). Others like Larsen and Toubro (L&T) and ITC operate in many diversified areas. “Some operate in a small geographic area, whereas others like Coca-Cola, Procter and Gamble, and IBM, for instance, do business in many countries of the world. To cope with these differences in objectives, strategies and situations, managers use various systems of departmentation.

Departmentation is the process of dividing the organisation into manageable sub-units. The sub-units are often referred to as departments, divisions, or sections. By whatever name the units are called, the process is known as departmentation.

Functional Departmentation

This is perhaps the most logical and basic form of departmentation. Functional departmentation is the process of dividing the organisation into units on the basis of the firm's major activities. It involves grouping employees according to broad tasks they perform. Normally separate departments are created for all the key activities of the business. For example, in a manufacturing company, the activities essential to the existence of the company are production, marketing, and finance. However, in non- manufacturing concerns these functions differ. In a transport company, the key areas

may be operations, sales and finance. Thus, public utility concerns like electricity, transport, banking, insurance and hospitals have their own distinct key functional areas. In all these cases, under functional departmentation, major or primary departments are created along the key functional areas of the respective businesses.

If the organisation or given department is large, or in other words, as the organisation grows, major departments can be subdivided. These sub-divisions are called derivative departments. The essential idea is to make increased use of specialisation. A typical functional organisation with major functions and derivative functions are shown in the following Exhibit 1.



The following are the advantages and disadvantages of functional departmentation.


It is the most logical and simplest form of departmentation.

It makes efficient use of specialised resources and skills.

It makes supervision easier, since each manager has to be an expert in only his

functional area of operation; It fosters development of expertise in specialised areas.


Functional departmentation is often found to be inadequate to meet the growing needs of the business, particularly as the organisation expands or diversifies its activities; Further, decision-making becomes slow as the functional managers have to get the approval of the headquarters; It is also difficult to determine accountability in a functional structure. If a product fails, the question as to who is responsible cannot be easily answered; and Functional managers tend to develop narrow perspective and lose sight of the bigger picture. Members of each department feel isolated from those in other departments. For example, manufacturing department may be obsessed with cost reduction and meeting the delivery dates, neglecting the quality control. As a result, marketing department may be flooded with complaints.


As the organisation grows, either by broadening its product line, or by expanding geographically, some of the disadvantages of functional structure begin to be more

apparent. In such a case, management will create semi-autonomous divisions for each product or market. Three patterns are adopted generally by organisations depending on the specific requirements to overcome the limitations of functional structure. They are product, territorial and customer departmentation.

i. Product Departmentation

One of the most common ways in which businesses grow is by increasing the number of products they make and sell. If the organisation is successful, several product lines may attain such high sales that they require a separate division. Large organisations like Shaw Wallace, Kirloskar, Voltas, ITC, Hindustan Lever, have coped with the expansion of their product lines by creating separate departments or divisions for the various products they make. Under product departmentation, a single manager often referred to as the brand or product manager is a delegated authority over all activities required to produce and market that product. As against functions in the functional departmentation, basic products or services become the primary or major departments in the product departmentation, as shown in exhibit-2.



Product departmentation places attention and effort on the basic products, the success of which is critical to the survival of the organisation; Since all revenues and costs are assigned to a particular product, cost centres can be established, high profit areas can be encouraged, and unprofitable product lines can be dropped. Thus responsibility for cost reduction and profits can be established at the division level; Proper coordination of all functional areas can be achieved as all the functional managers work as a team under close supervision of the product manager. Since the department or division is multifunctional, it often operates like a complete company. Enables quick response to changes in environment as compared with functionally organised firm; Provides managers a training ground in general management which is useful in overcoming narrowness of interest; Expansion and diversification of activities is made easy by creating new departments for the new products that are added to the existing ones.


Requires more persons with general management abilities as more and more departments are created for the various products; The product departments may try to become too autonomous, thereby presenting top management with a control problem;

It is also common to find product departments engaged in the duplication of efforts. Each product unit has its own functional departments. These may not be sufficiently large to make maximum use of facilities. Thus product departmentation becomes an expensive organisational form.

ii. Customer Departmentation

Some organisations sell a wide variety of goods or services that appeal to different groups of customers, each of which has distinguished needs. In such a case, departments are created around customer groups. Customers are the key to the way activities are grouped. For instance, commercial banks organise their activities around customer groups to cater to their specific needs. As such, we find separate departments or divisions for agricultural, industrial and merchant banking operations. Similarly, we find Blue Star Company organising its air-conditioning business around domestic and industrial air-conditioning units illustrates a typical customer departmentation in a large bank.


Customer departmentation facilitates concentration on customer needs. This is

almost all in line with the customer orientation professed by many organisations these days. Customers feel that they have an understanding supplier. For example, the manufacturer may sell to wholesalers and industrial buyers; wholesaler requires


product of dependable quality with assured supplies; the industrial buyer wants

product of high quality plus a service that includes installation and repair of the product and the specific training of employees. Helps the organisation to get the correct feel of the market dynamics in terms of preferences of the customers, competitor's strategies, etc.



Difficult to coordinate operations between competing customer's demands;

Requires considerable expertise on the part of managers in understanding

customer's problems and specific needs; There is a possibility of under-utilisation of facilities and employees specialised in terms of customer groups. Small organisations particularly cannot afford the expenditure involved because some amount of duplication of the facilities is inevitable.

iii. Territorial Departmentation

When an organisation operates in different geographical areas, each with distinct needs, it is desirable to create the departments along geographical lines, as illustrated in Exhibit-4. The process of creating departments along the geographical lines is termed

territorial departmentation. This type of organisation makes it easier for the organisation to cope with variations in laws, local customs and customer needs. Public utilities like transport companies, insurance companies, etc. adopt territorial departmentation. Similarly, a large scale organisation operating both in domestic and international markets may have separate departments for both the markets. Again, different departments or divisions may be created for different regions of the world. Many multinational companies organise their global activities with regional headquarters in different regions of the world.


Territorial departmentation makes possible concentration on markets and marketing channels in different geographical areas; Develops opportunities for more efficient marketing activities because of better face-to-face communication with local interests; and Effective utilisation of locally available resources besides being able to cater to the region-specific variations in terms of preferences and sentiments of the people is made possible.


In this type of departmentation, there are problems in training people to think in

terms of markets rather than products; Requires more persons with general management abilities; and

Increases problem of top management control because of the distance between the corporate headquarters and the regional offices.

The three patterns of departmentation discussed above - product, customer and territorial departmentation - broadly characterise the divisional structure. All the three patterns have advantages and disadvantages. The variations in the patterns are in response to the specific factors in the environment. The choice of any of these structures, therefore, would be based on which of the factors management judges to be more important and critical in the light of the strategies and objectives.

Please use headphones PROJECT ORGANISATION The use of the project organisation has increased in the

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The use of the project organisation has increased in the last few years. It is currently being employed in numerous undertakings engaged in the execution of construction activities, turn-key projects and research and development projects. The project organisation can take various forms, but the important characteristic that distinguishes it from other forms is that once the project is completed, the organisation is disbanded or phased out. By definition, project management involves "the gathering of the best available talent to accomplish a specific and complex undertaking within time, cost and quality parameters, followed by the disbanding of the team upon completion of the undertaking". The group members then go on to another project, return to their permanent home department in the organisation, are given jobs elsewhere in the organisation, or, in some cases, are phased entirely out of the firm.


The matrix structure is a hybrid organisational form, containing characteristics of both project and functional structures. In consumer goods industries, it could contain the characteristics of both product and functional departments. This structure allows operational responsibilities to be divided into two parts. One part contains all the responsibilities associated with the management of an independent business and is

given to an individual who is called 'business manager' or 'product manager'. The other part contains all the responsibilities related to the management of resources needed to get the job done. The person responsible for these is the usual 'functional manager' or 'resource manager' in charge of the functions like production, marketing, finance, personnel and so on.

The matrix is built around a cooperative relationship between the project / product manager and the functional / resource manager. Thus, project staff members in a matrix structure have a dual responsibility. First, they are responsible to the head of their functional department, the person who has assigned them to the project. The functional department head is their line superior and will continue to be so. But the project manager exercises what is called project authority over the project staff. Exhibit 5 presents these dual responsibilities in a matrix form of organisation.

Functional Authority

---------- Project Authority

When the concepts of functional and project authority are brought together, the result is an organisation structure that is both vertical and horizontal. The vertical pattern is brought about by the typical line authority flowing down from superior to subordinate. The horizontal authority flow is caused by the fact that both the scalar principle and unity of command principle are violated.

Companies like Larsen & Toubro (L&T), Western India group, U P Construction Corporation, Afcons-Pauling, etc., adopt this structure for the execution of various projects. For instance, L&T's construction of Jawaharlal Football Stadium in Madras and Afcons-Pauling's laying the East Coast Road are big projects by themselves. The execution of such projects is entrusted to a team drawn from the functional departments of the headquarters. The overall responsibility for the project lies with the project manager. The people that work in the project are responsible to the project manager as well as their functional head from whom they are drawn. Similarly, in the multi-product consumer goods industries, as in the case of projects, responsibility for different products may be placed on product managers as could be seen in the exhibit. The matrix may be temporary or permanent. In construction and turnkey activities, project is disbanded after the execution, where as it may take a permanent form in the case of a consumer goods company.


David I. Cleland and William R. King identify the advantages as follows:

Utilisation of manpower can be flexible because a reservoir of specialists is maintained in functional departments. These specialists can be deployed to the various projects for optimum use of their services;

Responsibility for the overall execution, management, and profit is with the

project manager who acts like a chief executive; Specialised knowledge is available to all projects or products on an equal basis.

Knowledge and experience can be transferred from one project to another; Project people have a functional home when they are no longer needed on a given

project; A better balance between time, cost and performance can be obtained through the built-in checks and balances and the continuous negotiations carried on between the project and the functional organisations.


Many of the drawbacks mentioned below of the matrix structure cannot be avoided. Managers have to learn to deal effectively with them.

The major disadvantage relates to power struggles. Since use of the matrix means use of dual command, managers often end up in conflicts; Matrix entails wide use of group decision making because group cooperation is required for success. The inevitability of group cooperation at times delays decision making; If the organisation has too many projects, the result may be severe layering of matrixes. Uncontrolled growth of matrix structures often results in power struggles between managers; Matrix structure may be expensive. The dual chain of command may cause management costs to double.

When there is an economic crunch and the organisation has to cut back, matrix structures are the first to go. Despite the drawbacks, the use of matrix structure has spread to many industries. In addition to construction and engineering, consumer goods, banking, insurance computer companies are now using it. Variations of matrix are also used by hospitals and other professional organisations.


The contingency approach to organisational design suggests using whatever approach is most effective. Accordingly, so many flexible structures are adopted these days to meet the specific needs of the organisations. The idea is that the internal functioning of organisations must be consistent with the demands of the organisation's task, technology, external environment, and the needs of its members if the organisation is to be effective. This approach basically implies the development of a contingency theory of organisation. The approach is based on the exigencies of the situation.

William F. Glueck, offers the following guidelines for contingency design:

When low cost and efficiency are the keys to successful goal achievement, organisations should use functional departmentation; When the environment is complex, matrix structure is effective;

If the organisation is large and operates in a stable environment, it can afford to formalise the structure; The greater the intensity of competition, the greater will be the degree of decentralisation; The greater the volatility of the environment, the more decentralised and flexible the organisation has to be; and Companies that implement the organisational style appropriate to their strategy will be more effective than those that use an in appropriate style.


The managerial function 'organising' is the process of identifying the important activities to be performed to achieve the objectives, grouping of related activities, assigning such groups of activities to people and providing for coordination by establishing authority-responsibility relationships among people. Creation of departments within the organisation - the process known as departmentation, resulting in the design of a structure is an important task in organising. Different patterns of departmentation are used by organisations depending on their specific requirements. Important among them are functional, product, customer, and territorial departmentation. Matrix organisation which is a hybrid form of both functional and project/product departmentation is also being increasingly used by organisations operating in highly competitive markets. The question of what kind of structure is best, has no single right answer; it depends on the situation. Some firms need stable systems while some others need flexible systems. The nature of the task, technology, environment and the needs of the organisational members are some of the factors that influence the design of the structure.


1. What are the basic characteristics of functional departmentation? Analyse its merits

and demerits.

2. Suggest a method of departmentation for a large multi-product organisation with a

huge market spread over the whole country. Explain the reasons for your suggestion

3. Explain the statement: "A matrix structure is a hybrid form of organisation,

containing characteristics of both product and functional structure".

4. Do you agree with the view that there is no one best way of departmentation

applicable to all organisations? Substantiate your answer and explain what factors

influence departmentation.


Auto Parts Limited, a medium-size company engaged in the manufacture of automobile components was started by Mr. Reddy, a technocrat, in 1988. Things went on well for a couple of years. Problems began to surface in the early nineties because of the recession

in general in the automobile industry. Since the demand for the company's products is a derived one, the company could not insulate itself from the fluctuating fortunes of the automobile industry. As the parent industry began to cross the recession, happy days were once again there for Auto Parts Limited. Because of the quality products that the company was known for, several internationally reputed automobile companies also became eager to source their requirements for components from Auto Parts Limited.

All these developments should naturally make Mr. Reddy, a happy man these days. But he is concerned with certain organisational problems and is wondering as to how to organise the company in the light of tremendous potential for growth. He is particularly tired of being the only one in the company responsible for profits. The company, since inception has been organised on functional lines. He has good managers heading the functions departments like manufacturing, finance, sales, advertising and product research, but none of them could be held responsible for profits. He often finds it difficult even to hold them responsible for the contribution of their respective areas to company profits. Besides, each manager began to complain against the other. For instance, sales manager, the other day, complained that he could not be fully responsible for sales when advertising was ineffective, when the products wanted in the market were not readily available from manufacturing department. He further complained that the manufacturing department did not heed to their suggestions regarding certain modifications in the products. In turn, the manager in charge of manufacturing argued that financial controls did not allow his department to carry a large inventory of everything and he was obsessed with cutting down the costs.

Mr. Reddy is really fed-up of these internal squabbles among the functional heads and is seriously considering the idea of breaking the company down into six or seven product divisions with a manager for each, with complete responsibility over the product including the profit. But he feels that this would not be economical since many of the products are produced with the same equipment and raw materials. Further, a sales person calling on a customer (the automobile company or the spare parts dealers in the market) could far more economically handle a number of related products than one or a few.

Confronted with the above dilemma, Mr. Reddy came to the conclusion that the best thing to do is to set up six product managers reporting to a product marketing manager. Each product manager would be given responsibility for one or a few products and would oversee all aspects of manufacturing, product research, sales and advertising. Thus, in essence each product manager would be responsible for the performance and profits of the products assigned to him.

Mr. Reddy is bent on reorganising the company on the lines presented above and hopes for the best. But he is still not clear about his thoughts and has some confusion about the new reporting relationships that would emerge after the proposed reorganisation exercise is over.



What is the exact problem in the case? Do you view the problem very serious, or is Mr.

Reddy over-reacting?

2. What are your comments on the scheme of things that Mr. Reddy proposes in order to


3. What would you do to remove confusion and help the company achieve its ambitious

goal of emerging as a leader in the auto components industry?


Miner, John B. 1978. The Management Process, Macmillan, New York.

Naisbitt, John. 1982. Megatrends Warner Books. New York, Glueck, William F. 1984. Management, Dryden Press, Hinsdale. Lorsch, Jay W and Lawrence, P.R. 1970. Studies in Organisation.

Design, Richard D. Irwin, Homewood. Hodgets, Richard. M. 1986, Management, Academic Press, New York.

- End of Chapter -




After studying this lesson, you should be able to:

Understand what an organisation chart is and what it explains;

Describe the concept of span of control; and

Appreciate the traditional as well as the current thinking on span of control.



Organisation Chart

Chain of Command Unity of Command

Span of Control

Classical thinking on span of control

Current thinking on span of control

Factors influencing span of control


Review Questions

Further Readings


Organisations must continually adopt to meet competition. Consequently, their structures must be modified periodically. Management expert Tom Peters estimates that about 50 percent of organisation problems arise from inappropriate organisation structure. As discussed in the previous lesson, organising is the process of dividing work among individuals and groups and coordinating their activities to accomplish goals. The process, obviously, results in the creation of a structure. The different patterns adopted by organisations to create such structure have also been examined in the previous lesson.

Whatever an organisation's goal is, its structure should facilitate the most effective and efficient use of available resources. Because adaptation is a key to competitive survival, the 'right' structure for an organisation is determined by numerous factors. For this reason, selecting an organisation structure might best be described as an evolutionary, trial-and-error process. That is why, we find numerous organisations constantly modifying their structures to adapt to the needs of the environment.

A look at the organisation chart of any company provides an understanding as to the pattern used to divide the organisation into manageable units and the corresponding authority-responsibility relationships among people working in the various departments.


An organisation chart is simply a diagram of all the positions in an organisation and their formal relationships to one another. The important purpose referred by an organisation chart is that it illustrates an organisation's overall shape and the levels of management in a comprehensible manner. The organisation chart of a typical company organised on functional basis is present in exhibit-1.

As seen in exhibit 1, an organisation chart shows:

- The hierarchical structure that is typical of most organisations;

- The number of management layers or levels;

- Degrees of authority and status of the individuals as indicated by the location of their positions in relation to other positions;

- How an organisation's activities are divided in terms of departments (whether by function, by product, by territory and so on);

- The work being done in each position (indicated by the labels in the boxes);

- Interaction of people as indicated by the horizontal and vertical lines connecting various positions/departments;

- Relations between superiors and subordinates - who reports to whom, i.e., the chain of command;

- How many subordinates report directly to each manager, that is, the span of control;

- Career progression - routes to the higher levels; and

- Formal channels of communication (indicated by the connecting lines).

However, an organisation chart does not show:

- The ongoing dynamics of workplace behaviour; in a way, organisation charts are static;

- Interactions between people who have no official reporting relationships, i.e., the informal organisation;

- Personal preferences and coalitions;

- Informal communication channels, i.e., the grapevine; and

- Interference by outsiders.

The organisation chart of any company enables one to understand easily three classical principles of organising, viz., chain of command, unity of command, and span of control.

1. Chain of Command

As an organisation's activities are divided into departments, co-ordination becomes necessary for integrating individual and group efforts so as to achieve the goals. Such co- ordination is achieved through a systematic placement of positions and duties. This type of arrangement of various positions in an orderly way is termed 'scalar chain' or 'chain of command'. The chain of command exists whenever one individual is made

subordinate to another. Since ancient times, it has been recognised that the only way to structure unified systems involving large number of people is through a chain of command. The resulting hierarchy is found in every company or in any human system including a family. Exhibit - 2 depicts the chain of command in a typical manufacturing company.

In addition to defining different degrees of authority on people, the Chain of Command also suggests the routes through which information flows within an organisation.

2. Unity of Command

The Chain of Command principle implies another feature of organising "one subordinate - one boss". If the efforts of subordinates are to be effectively coordinated, it is necessary that they must have a reporting relationship with only one superior. Unity of Command principle avoids the confusion as to who should report to whom and who should issue orders to whom. However, the truth of the matter is that unity of command is violated in varying degrees in almost every organisation. As understood earlier (in chapter 7), it has been especially undermined by the emergence of matrix organisation structure.

3. Span of Control

We shall understand Span of Control in detail below.


Whereas chain of command and unity of command relate to the vertical structure of an organisation, span of control relates to the horizontal structure. Just as a growing organisation ultimately reaches a point at which it is impossible for one person to handle all the work, there is a limit to the number of subordinates that a manager can effectively supervise. But for this limit, organisations would have not taken the pyramid shape. Span of control refers to the number of subordinates that report directly to a supervisor.

In the olden days, a great deal of attention was directed to the issue of span of control. The thinking then was that an effective span of control involved some definite number of subordinates. Often, one of the first things done by an organisational analyst or consultant was to count the number of subordinates reporting to each manager. In each instance, when the number exceeded a definite figure, say - six or eight, there would be a recommendation to narrow the span. Thus, the thinking of the classical theorists about the span revolved around a definite number. For example, Lyndall Urwick found the ideal number of subordinates for all superior positions to be four, and at the lower level of organisation, the number may be eight to twelve. But empirical research subsequently found the actual practices among companies regarding span to be widely varying.

The span of control, also called 'span of management', has gained importance as a principle of organising because of the limitation on the part of a manager to manage an infinite number of subordinates. This obviously results in the levels in the organisation. Thus, an inverse relationship generally exists between the span of control and number of management levels. That is, if an organisation has wide horizontal spans, the resulting structure will be flat, with few vertical levels of management. Conversely, if an organisation has narrow horizontal spans, the structure will be tall, with many vertical management levels. Both the situations of flat as well as narrow spans, and the resulting flat and tall structures, are shown in exhibits 3 and 4.

DH = Department Head

S = Subordinate

Exhibit 3

As the above exhibit clearly show, in company A, each supervisor's span of control

covers four subordinates, and four department heads report to the chairman. There are

a total of 21 managers, arranged in four management levels.

Exhibit 4

In contrast, in company B, each of the eight supervisors exercise control over eight subordinates. As a result, there exists only three layers. In this case, by increasing the span of control from four to eight, one layer of management is eliminated.

Problems with levels

Creation of too many levels has certain problems relating to communication and managerial control, in addition to the costs involved

i. Communication: Experience shows that the greater the number of management levels a message must pass through, the longer it will take to reach its destination. More often, the information also loses clarity. In effect, successive layers of management act as communication filters distorting the transmission of information. Thus, communication of organisational objectives, plans, and policies becomes difficult. Omissions and misinterpretations usually occur as information passes through too many levels in the scalar chain.

ii. Managerial control: The distance between the top and bottom levels of an organisation also affects control. For example, even the best of the plans which are definite and complete at the top level, lose clarity as the plans are sub-divided and

elaborated at lower levels. Consequently, at the implementation stage of the plans, control becomes difficult.

iii. Costs: Too many levels involve lot of expenditure. Additional facilities in terms of secretarial staff have to be provided besides the pay differentials in the compensation package. In many organisations substantial expenditure has been saved by increasing the span.

expenditure has been saved by increasing the span. Please use headphones 1. Classical Thinking on Span

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1. Classical Thinking on Span of Control

The traditional theory of management was much concerned with the specific number of subordinates that could be supervised by a manager. For instance, Lyndall Urwick suggests that no executive should attempt to supervise directly more than five. Different thinkers suggested different spans both at the top and lower levels of organisation.

The contribution of U.A. Graicunas was however, significant to the span of management theory. According to him, in deciding the span, managers should consider not only the direct one-to-one relationships with their subordinates, but also two other kinds of relationships, namely, 'direct group relationships' and 'cross-relationships'. As such, if A has two subordinates B and C, the following relationships would emerge.

i. Direct one-to-one relationships: These relationships relate the superior directly with his subordinates. A, in this case will have two direct relationships with B and C, viz. A to B and A to C.

ii. Direct group relationships: This type refers to the superior relationship with the various possible combinations of subordinates. In the above example, A may interact with B in the presence of C or with C in the presence of B. Graicunas argues that though the individuals are same, the two situations have different implications.

iii. Cross-relationships: These types of relationships are created when subordinates consult one another. In our example, the two cross-relationships are B with C and C with B.

Graicunas gave a formula to ascertain the number of all three kinds of relationships:

Number of relationships = n [2 n /2 + n - 1]

where, n stands for the number of subordinates. One can easily ascertain how the number of relationships increases as the number of subordinates rises by applying this

formula. With four subordinates (n=4), the total relationships go up to 44 {4 x [2 4 /2 + 4

- 1] = 4 x [16/2 + 4 -1] = 4 x 11 = 44}, with five subordinates to 100, with six subordinates to 222, and with 10 subordinates to 5,210.

Though Graicunas' formula explains the complexities involved as the number of subordinates increase, it suffers from the following inadequacies. a) The formula ignores the frequency and importance of relationships, and b) Several other factors which have a bearing on the superior-subordinate relationships have not been taken into consideration while framing the formula.

2. Current Thinking in Span of Control

In contrast to the traditional thinking on the span of control, modern management theories emphasise that there are too many variables that influence the span. Thus, the emphasis has shifted to the variables in the situation. While the fact that there is a limit to the number of subordinates that can be effectively managed cannot be disputed, the exact number will depend upon various factors

3. Factors Influencing Span of Control

i. Manager's personality: If managers share a strong need for power, they may prefer

a wider span of control. On the other hand, some managers feel threatened because they

cannot oversee the activities of too many people. Such managers would naturally prefer

a narrow span.

ii. Manager's capability: An experienced, well trained and knowledgeable manager

is normally able to handle a relatively wider span than a lesser capable manager.

iii. Subordinates capabilities: Experienced and well-trained subordinates will be able to resolve the difficulties themselves. They do not take much of the time of the superior. The need for frequent contacts is also obviously lesser.

iv. Fatigue tolerance: Physical and mental fatigue may limit a manager's capacity for control. There are only so many hours in a day, and only so many things can be done at once. Consequently, the greater the physical or mental demands of a job, the narrower the span of control.

v. Activity level: The pace and pattern of work in an engineering firm, an investment

firm, and a university differ in many respects. Moreover, there also exist differences between the various units of an organisation. For example, production compared to public relations. Thus, the more active the pace and pattern of a manager's work, the narrower the appropriate span of control.

vi. Non-supervisory activities: If the manager spends more time on non- supervisory activities like long-range planning and outside assignments, he tends to have lesser time to supervise the subordinates. This obviously limits the span.

vii. Similarity of activities supervised: If the nature of activities performed by the subordinates is routine, the superior can manage many subordinates. On the other hand, if it is unique and non-routine problems, and more frequent, the span should be limited.

viii. Complexity of work: Simpler job assignments are usually easier to supervise than more complex ones. The problems that arise are generally less demanding and take less of the superior's time. Thus, less supervision will be necessary, contributing for a wider span.

ix. Availability of sophisticated facilities: Availability of more advanced and sophisticated facilities like high speed telecommunication devices, modern office equipment, etc. will help the manager in managing a relatively wider span.

x. Location: If subordinates are physically dispersed, a manager will need to spend more time in traveling and communicating. The span of control in such a case will be narrower.

To conclude, it has to be remembered that despite the desirability of flat structures, the span of control may be limited by certain factors. As an enterprise grows, the increase in organisation levels cannot be completely avoided. What is required is a precise balancing of all the factors in a given situation. Widening spans and reducing levels may be the answer in some cases, while the opposite may be true in others. One must balance all the advantages and disadvantages.


The organisational chart of a typical company and the important aspects that it explains such as chain of command, unity of command, and span of control, have been discussed in this lesson. Span of control, one of the important principles of organising has been analysed in detail. It refers to the number of subordinates that a superior can effectively manage. The principle suggests that there is a limit on the number of subordinates that can be managed by a superior. This limitation gives rise to the levels in the organisation. If the span is wide, it would result in a flat structure. Conversely, if it is narrow, the result would be a tall structure. Both the types of structures have merits and demerits. The classical thinkers' view point regarding the span vis-a-vis the modern view as to how span is influenced by various factors of the situation, like the capabilities of superiors and subordinates, nature of the task, environment, etc. have been examined in detail.



Calling upon your personal experience as a student of management, give a few

examples of chain of command.

2. "Organisation chart provides a broad picture of positions of authority and their

relationships in the organisation structure". Examine this statement.

3. What do you understand by levels in the organisation? Examine the implications of

too few and too many levels.

4. How does a tall organisational structure differ from a flat one? Give an example of


5. What do you mean by span of control? Examine the traditional as well as modern

viewpoints on the span of control.


Dale, Ernest, 1960. The Great Organisers, McGraw-Hill, New York.

Drucker, Peter. F, 1974. Management: Tasks, Responsibilities, Practices. Harper & Row, New York.

Cleland, David. I, and William. R. King, 1975. Systems Analysis and Project Management, McGraw-Hill, New York.

KastF.E., and J.E.Rserizweig, 1973. Organisation and Management: A systems Approach, Mc-Graw-Hill, New York.

Hodgets, Richard. M, 1988. Management, Academic Press, New York.

Koontz, Harold and Others, 1984. Management, McGraw-Hill, Tokyo.

- End of Chapter -




After studying this lesson, you should be able to:

Understand the concepts of 'authority' and 'power'; Explain the sources of 'authority' and 'power' in the organisational context; Describe the process of delegation and the barriers to effective delegation; and Know the factors influencing decentralisation of authority.



Classical Theory of Authority

Acceptance Theory of Authority


Delegation of Authority

Barriers to Effective Delegation

Overcoming the Barriers

Decentralisation of Authority

Factors Influencing Decentralisation


Review questions


Further Readings


Authority is the right to command. It is the discretion power vested with a manager to use the organisational resources. Managers acquire authority by virtue of the rank or title associated with their positions.

There are two principal views regarding the source of authority. The classical view holds that authority passes from the "top down". In contrast, the acceptance view contends that authority flows from the "bottom up" (see exhibit-1)


According to this theory of authority, managers derive their authority from the right of private property, which is guaranteed by the constitution and the concerned laws of the country. Thus, the right to own the property and to manage it without violating the rights of others is conferred on the individuals by the constitution. In most of the large scale organisations, shareholders who are the real owners of the company transfer their ownership rights to Board of Directors, which in turn, may, appoint a Chairman (Chief Executive Officer) to manage the organisation's day-to-day operations. Likewise, the CEO may appoint a Managing Director who in turn may appoint several managers down the line. Formal authority thus is transferred from top to the down in the organisation. The authority thus possessed by the managers by virtue of their position in the organisation is known as formal authority.


The acceptance theory of authority was popularised by management thinker Chester I. Barnard. According to this theory, authority stems from below because subordinates can always reject a directive. It is only by accepting an order that a subordinate affirms the right of a manager to issue the orders or commands.

Barnard contends that subordinates will accept orders given by their superiors provided that the orders meet four conditions. These conditions define what is acceptable to a subordinate and, thus, create a zone of acceptance within which authority may be exercised. A subordinate will accept an order and comply with authority under the following four conditions:

1. The subordinate understands the order.

2. The subordinate believes the order is consistent with organisation goals.

3. The subordinate believes the order is compatible with his or her personal interests.

4. The subordinate is mentally and physically able to comply with the order.

Effective managers make certain that their orders fall within their subordinates 'zones of acceptance'.


The terms authority and power are often confused. Authority as described above is the right to command or issue orders. Power, on the other hand, is the capacity to influence others. All managers have power by virtue of the positions they occupy. Power, however, does not necessarily stem from authority. In other words, people with authority may have power. But, interestingly in some systems, people may exercise tremendous power though they have no formal authority. Thus, we find people at lower levels also without any authority sanctioned to them by the formal system, enjoying captivating power over the colleagues and at times may influence even the superiors.

John R.P. French and Bertram Ravan have identified five basic types of power. The first three types - reward, coercive, and legitimate - generally are associated with a manager's position. The last two - referent and expert - are part of the person, not the position.

1. Reward power is based on a manager's ability to provide various, kinds of rewards

for complying with orders. The rewards generally include salary increases, promotions,

favourable job assignments, praise and recognition.

2. Coercive power is based on a manager's ability to punish for not complying with

orders. Coercion may take the form of verbal reprimands, disciplinary actions like fines,

demotions and threats of suspension or termination.