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DBA 1601

MANAGEMENT CONCEPTS

MANAGEMENT CONCEPTS

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

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DBA 1601

MANAGEMENT CONCEPTS

UNIT - I

INTRODUCTION TO MANAGEMENT

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

1.1.1 DEFINITION OF MANAGEMENT There are different thoughts on the definition of management. Some are as follows: Management as an art of getting things done by others Management as a process Management as a group of Managers Management as a discipline
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DBA 1601

MANAGEMENT CONCEPTS

The above said views are taken closely for consideration to define management. Mary Parker Follet defined management as the art of getting things done by others. This definition was criticized for the smack of a manipulative character about the practice of a manager and also for treating the employees for mere means to certain ends. Management was redefined by a strong understanding that it is not only getting things done by others but there should be something more than that. This can be achieved by providing them good opportunities for growth and advancement. Harold Koontz defined management as the art of getting things done through formally organised groups. It is the art of creating an environment in which people can perform as individuals and yet cooperate towards attainment of group goals. G.R.Terry has viewed management as a process. Management is a distinct process consisting of planning, organizing, actuating and controlling, performed to determine and accomplish stated objectives by the use of human beings and other resources. According to McFarland, Management is defined as the process by which managers create, direct, maintain and operate purposive organizations through a systematic, coordinated and cooperative way. Though F.W. Taylor developed principles of management, credit goes to Henri Fayol, a French management theorist for advocating and publicizing certain principles (or laws) for the soundness and good working of the management. Henri Fayol warned that the principles of management should be : (i) Flexible and not absolute - must be usable regardless of changing conditions. (ii) Used with intelligence and with a sense of proportion, etc. Henri Fayol listed 14 principles that grew out of his experience. Kreitner defines management as A problem solving process of effectively achieving organizational objectives through the efficient use of scarce resources in changing environment.
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MANAGEMENT CONCEPTS

1.1.2 CHARACTERISTICS OF MANAGEMENT Management is a distinct activity having the following salient features or characteristics : 1. Economic Resource : Management is one of the factors of production together with land, labor and capital. As industrialization increases, the need for managers also increases. Efficient management is the most critical input in the success of any organized group activity as it is the force, which assembles and integrates other factors of production, namely, labor, capital and materials. Inputs of labor, capital and materials do not by themselves ensure production; they require the catalyst of management to produce goods and services required by the society. Thus, management is an essential ingredient of an organization. 2. Goal Oriented : Management is a purposeful activity. It coordinates the efforts of workers to achieve the goals of the organization. The success of management is measured by the extent to which the organizational goals are achieved. It is imperative that the organizational goals must be well-defined and properly understood by the managers at various levels. 3. Distinct Process : Management is a distinct process consisting of such functions as planning, organizing, staffing, directing and controlling. These functions are so interwoven that it is not possible to lay down exactly the sequence of various functions or their relative significance. In essence, the process of management involves decision-making and putting of decisions into practice. 4. Integrative Force : The essence of management is integration of human and other resources to achieve the desired objectives. All these resources are made available to those who manage. Managers apply knowledge, experience and management principles for getting the results from the workers by the use of non-human resources. Managers also seek to harmonize the individuals goals with the organizational goals. 5. System of Authority : Management as a team of managers represent a system of authority, a hierarchy of command and control. Managers at different levels process varying degrees of authority. Generally, as we move down in the managerial hierarchy, the degree of authority
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DBA 1601

MANAGEMENT CONCEPTS

gets gradually reduced. Authority enables the managers to perform their functions effectively. 6. Dynamic function : Management is a dynamic function of business organization. Its functions change from time to time depending upon the circumstance of the business, i.e., changes in economic, social, political, technological and human conditions. Management adjusts itself to the changing atmosphere making suitable forecasts and changes in the policies. 7. Social process : Management is a social process as it primarily deals with emotional, dynamic and sensitive human beings. The major achievement is to win their confidence and cooperation. Thus, it is difficult to precisely define the principles of management. Management principles are constantly influenced by social traditions, customs and regulations. 8. Management make things happen : Managerial ability is distinctly different from technical ability. Management is the art of getting things done through people. It implies that under a given set of constraints or problem boundaries, positive results can emerge, by taking welldefined actions. 9. Management is a multi-faceted discipline : Management has to deal with heterogeneous resources. Their performance depends upon the proper knowledge and skill of various disciplines. Management has grown as a body of discipline taking the help of so many social sciences like-Anthropology, Sociology, Psychology etc. Due to this, management is also known as a Behavioral Science. 10. Intangible force: Managerial ability is an intangible force; it is a social skill, which cannot be seen with the eyes but evidenced by the quality and level of an organization. 1.1.3 MANAGEMENT SCIENCE OR ART ? Science : An organized or systematized body of knowledge pertaining to a specific field of enquiry. Art : It is the application of knowledge and personal skills to achieve results. Profession : It is an
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occupation for which specialized knowledge, skills and training are required these skills are used for larger interests of the society and the success of these skills is not measured in monetary terms always.

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

Management is a social science : Management is a social science as it deals with human behavior about which little is known at present. As we all know, it is not possible to study human behavior under controlled laboratory conditions. Human behavior is unpredictable and therefore, defies experimentation. As a result, the principles of management cannot be accepted as absolute truths. They are still at a developing stage and evolutionary in nature. Management, at best, can be called as a soft science. Management is an inexact science : Management is not an exact science like physics, chemistry or biology. It does not offer absolute principles. It can offer only flexible guidelines that would be of use in solving problems. Management can never be an exact science because business is highly dynamic and business conditions change continually. Manager vs. scientist : A scientist can afford to wait until all the information (about a thing) is available. He can indulge in a series of experiments till the truth emerges clearly. However, a manager cannot afford to do that. He must take decisions based on inadequate information, insufficient knowledge and resources. He must make decisions today in order to survive in the future. Scientific management : When Taylor used the term scientific management , he was aware of the fact that experimentation and verification of facts is not possible in managing human resources. He had used the term scientific, as an organized body of knowledge as opposed to traditional rules and empirical dexterity. Over the years, the traditional hit-or-miss methods have yielded place to several systematic methods based on principles. No wonder, management is known as a sophisticated behavioral science these days. Thus, art and science are complementary and mutually supportive. Properties of Art Art is the application of knowledge and personal skills to achieve results. It is a way of living. Art is based on the knowledge of principles offered by science. A surgeon or a physician without the knowledge of medical science becomes a witch doctor, with the knowledge of science an artful doctor. Art is basically concerned with application of knowledge, how to do things creatively and skillfully. It can be improved through constant practice only. Terry has drawn the distinctions between science and art. Therefore :
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Management is basically an art as it involves the use of know-how and skills like any other art such as painting, sculpture, etc. The practical knowledge acquired in the areas of planning, decision making and motivating certainly help managers to tackle problems in a better way. The arguments in favour of management as an art run as follows: Use of knowledge : Just as a doctor uses the science of medicine while diagnosing and treating the patients, a manager uses the knowledge of management theory while performing the managerial functions. Thus he uses sound knowledge in place of hit-or-miss methods with a view to achieve results effectively. Creative art : Management is creative like any other art. It combines human and non-human resources in a useful way so as to achieve results. It tries to produce sweet music by combining the chords in an effective manner. It makes things happen by changing the behavior of human beings. Personalized : Like any other art, management is a personalized activity. Every manager has his own way of managing things and people, based on his knowledge and experience. As years roll by, managers learn the art of managing through a process of trial and error. Constant practice : Managers learn from mistakes. The application of managerial principle over a period of time enables them to tackle difficult problems with confidence. In other words, they develop their skills through constant practice just as artistic skills can be developed through training. Management is Science as well as Art Management is thus an art as well as a science. The art of management is as old as civilization. The science of management is young and developing. Both are complementary and mutually supporting. Managers need to acquire the knowledge of management principles and practice in order to be successful. They need to sharpen this knowledge through constant practice. The theoretical knowledge in management must be put to good use in a skilful way, while achieving results. As Drucker has pointed out, every organization has the same resources to work with. It is the quality of management that spells the difference between success and failure. Managers need to acquire knowledge systematically and put the same to good use, using intuition, judgement and experience. A successful manager is one who is able to visualize problems before they turn into
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emergencies. The ability to meet the problems head-on does not come by chance. It requires sound knowledge and constant practice. Managers therefore, have to fruitfully combine their scientific knowledge with artistic skills in order to emerge as winners, in a competitive environment. 1.2 EVOLUTION OF MANAGEMENT THOUGHTS More than 200 years ago, Adam Smith described the advantages of division and specialization. However, the study of management as a science began recently, especially after the Industrial Revolution. There has been a deluge of research during the last few decades on management. It has attracted the attention of psychologists, sociologists, anthropologists, mathematicians, political scientists, economists and so on. Unfortunately, the approaches by these scholars have created chaos and resulted in a confused and destructive warfare. Harold Koontz described the present state of management theory as a jungle . According to Koontz, Donnell and Weihrich there are eleven approaches for studying management. Stogdill has identified not less than eighteen approaches for studying management. Hutchinson has identified five approaches. Thus, different writers have provided different categorization schemes for studying management. In order to facilitate easy understanding, we can identify four broad approaches namely, the classical, neo-classical, behavioral and modern theory. (i) Classical School: It is the oldest school of management thought. The classical theorists concentrated on organization structure for the achievement of organizational goals and also developed certain principles of management. Many of the classical concepts and principles hold good even today. Classical thought can be studied und er t wo st reams namely (a) Scient ific Management (b) Bureaucracy (ii) Neo-Classical School : The neo-classical writers tried to remove the deficiencies of the classical school and suggested improvements for good human relations in the organization. Their propositions are based on human relations studies conducted at the Hawthorne Plant of General Electricals, U.S.A. That is why, they are also known as human relationists. (iii) Behavioral Sciences School : This approach emerged as a result of the contributions of psychologists, sociologists and anthropologists
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to the field of management. The behavioral science perspective believes that it is difficult to understand the sociology of a group, separate from the psychology of the individuals comprising it and the anthropology of the culture within which it exists. Thus, the behavioral sciences are transactional; they are concerned with all relevant aspects of human behavior including the interactions among all important factors. (iv) Modern School : The modern management thinkers define organization as a system and also consider the impact of environment on the effectiveness of the organization. As a result, two approaches have gained prominence after 1960s which are as follows: (a) Systems approach, and (b) Contingency approach. 1.2.1 SCIENTIFIC MANAGEMENT APPROACH The impetus for the scientific management approach came from the first industrial revolution. Because it brought about such an extraordinary mechanization of industry, this revolution necessitated the development of new management principles and practices. The main contributors to scientific management include Frederick Taylor, Henry L. Gantt, Frank Gilbreth, Lillian Gilbreth and Harrington Emerson and others. 1.2.1.1 Fredrick W. Taylors views on Scientific Management Taylor was the first person who insisted on the introduction of methods in management and it was he who, along with his associates, made the first systematic study of management. He launched a new management approach in 1910 which is known as Scientific Management. That is why Taylor is regarded as the father of scientific management. Taylor was born in 1856 in Philadelphia, U.S.A. He started his career as an apprentice in a small machine making shop in 1870 and rose to the position of a Chief Engineer of Midvale Steel Works in 1884 at the age of 28. Meaning of Scientific Management According to Taylor, Scientific Management is the substitution of exact scientific investigations and knowledge for the old individual judgment or opinion in all matters relating to the work done in the shop. It implies the application of science to the management of a business concern. It aims at replacement of traditional techniques by scientific techniques.
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Principles of Scientific Management Taylors contribution has two dimensions: (i) mechanical and (ii) philosophical. On the mechanical side, Taylor introduced time and motion studies. Standardization of tools, methods and working conditions, differential piece rate were considered for the payment of wages, etc. On the philosophical side, he tried to develop the science of management based on scientific investigation and experiment. Before studying the techniques or elements of scientific management, a proper understanding of Taylors philosophy is a must. Scientific management is based on the following five principles: 1. 2. Science, not rule of thumb. Harmony in group action, rather than discord.

3. Maximum output in the place of restricted output. 4. Scientific selection, training and placement of the workers. 5. Development of all workers to the fullest extent possible for their own and organizations highest prosperity. The above principles are discussed below : 1. Replacement of old rules of thumb method : Scientific investigation should be used for taking managerial decisions instead of basing decisions on opinion, intuition or rule of thumb. Under scientific management, decisions are made on the basis of facts as developed by the application of scientific method to the problem concerned. This is in contrast with the approach followed under traditional management according to which decisions are based on opinions, prejudices, or rule of thumb. 2. Scientific selection and training of workers : The procedure for selection of workers should be designed scientifically. The errors committed at the time of selection may prove to be very costly later on. If we do not have the right worker on the right job, the efficiency of the organization will be reduced. Therefore, every organization should follow a scientific system of selection. The selected workers are to be trained to avoid wrong methods of work. Management is responsible for their scientific education and training. 3. Co-operation between labour and management: There should be co-operation between the management and the workers. This
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requires change of mental attitudes of the workers and the management towards each other. Taylor called it a mental revolution. When this mental revolution takes place, workers and management turn their attention towards increasing profits. They do not quarrel about the distribution of profits. 4. Maximum output: The management and the workers should try to achieve maximum output, in place of restricted output. This will be beneficial to both the parties. Maximum output will also be in the interest of the society. 5. Equal division of responsibility: There must be equal division of responsibility between the managers and the workers. The management should assume responsibility for the work for which it is better suited. For instance, management should decide the method of work, working conditions, time for completion of work, etc. instead of leaving these to the discretion of workers. The management should be responsible for planning and organizing the work, whereas workers should be responsible for the execution of work as per instruction of the management. Techniques of Scientific Management To put the philosophy of scientific management into practice, Taylor and his associates have suggested the following techniques: 1. Scientific Task Setting : It is essential to set the standard task which an average worker should do during a working day. Taylor called it a fair days work. He emphasized the need for fixing a fair days work because it will prevent the workers from doing work much below their capacity. 2. Work Study: Work-study implies an organized, objective, systematic, analytical and critical assessment of the efficiency of various operations in an enterprise. It is a generic term used for those techniques which are used in the analysis of human work in its entire context and which lead systematically to the investigation of all factors, which affect the efficiency, and economy of operations. Work-study includes the following techniques: (i) Method study: This study is conducted to know the best method of doing a particular job. It helps in reducing the distance traveled by
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materials, and brings improvement in handling, transporting, inspection and storage of raw materials and goods. (ii) Motion study: It is the study of the movement of an operator or a machine. Its purpose is to eliminate useless motions and find out the best method of doing a particular job. By undertaking motion study, an attempt is made to know whether some elements of a job can be eliminated, combined or their sequence changed to achieve the necessary rhythm. (iii) Time study: Time study is the technique of observing and recording the time required to do each element of an industrial operation. Through time study, the precise time required for each element of a mans work is determined. It helps in fixing the standard time required to do a particular job. (iv) Fatigue study: Fatigue, (physical or mental) has an adverse effect on workers health and efficiency. Fatigue study helps in reducing fatigue among the workers. Fatigue is generally caused by long working hours without rest pauses, repetitive operations, excessive specialization and poor working conditions. The purpose of fatigue study is to maintain the operational efficiency of the workers. 3. Planning the Task: Taylor emphasized the need for planning work. He advocated that planning function should be separated. Workers should not be asked to choose their own methods and decide what they have to do. The planning department should do the detailed planning. The planning department should prepare detailed instructions for the workers as to the type, quality and quantity of the products to be used. 4. Standardization: Taylor advocated the standardization of tools, and equipments, cost system and several other items. Efforts should be made to provide standardized working environment and methods of production to the workers. Standardization would help to reduce spoilage and wastage of materials, improve quality of work, reduce cost of production and reduce fatigue among the workers. 5. Scientific Selection and Training: The management should design scientific selection procedure so that the right men are selected for the right jobs. The first step in scientific selection is determining the
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jobs for which workers are required. After that, the most appropriate qualification, training, experience and the level of efficiency for the requisite post are determined. Employees are selected according to predetermined standards in an impartial way. Workers should be specifically trained for the jobs they are appointed to, so that they can perform their jobs effectively. 6. Differential Piece-Wage Plan: Taylor suggested this plan to attract highly efficient workers. Under this plan, there are two-piece work rates, one is lower and another is higher. The standard of efficiency is determined either in terms of time or output based on time and motion study. If a worker finishes work within the standard time or produces more than standard output within the standard time, he will be given higher piece rate. On the other hand, if a worker is below the standard, he shall be given lower piece rate. 7. Specialization: Taylor advocated that specialization must be introduced in a factory. He advocated functional foremanship for this purpose. In his scheme, planning was separated from executing. He recommended eight foremen in all, to control the various aspects of production. He suggested four foremen in the planning department, namely, route clerk, instruction card clerk, time and cost clerk and shop disciplinarian. The four foremen recommended for getting the required performance from the workers include gang boss, speed boss, repair boss and inspector. Evaluation of Scientific Management Taylors scientific management was associated with many benefits to the industry. According to Gilberts, the main benefits of scientific management are conservation and savings, making an adequate use of every ones energy of any type that is expended . Scientific management leads to the following benefits: 1. Replacement of traditional rule of thumb method by scientific techniques for each element of a man at work. 2. Proper selection and training of the workers. 3. Establishment of harmonious relationship between the workers and the management. 4. Achievement of equal division of responsibilities between the workers and the management.
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5. Standardization of tools, equipment, materials and work methods. 6. Detailed instructions and constant guidance to the workers. 7. Incentive wages to the workers for higher production. 8. Elimination of wastes and rationalization of system of control. 9. Better utilization of various resources. 10. Satisfaction of the needs of the customers by providing higher quality products at lower prices. Criticism of Scientific Management: Taylors scientific management was criticized not only by the workers and managers but also by the psychologists, the general public, etc. The main grounds of criticism are given below: 1. The use of the word Scientific before Management was objected because what is actually meant by scientific management is nothing but a scientific approach to management. 2. It was argued that the principles of scientific management as advocated by Taylor were confined mostly to production management. He ignored certain other essential aspects of management like finance, marketing, accounting and personnel. 3. Taylor advocated the concept of functional foremanship to bring about specialization in the organization. But this is not feasible in practice as it violates the principle of unity of command. 4. Trade unionists regarded the principles of scientific management as the means to exploit labour because the wages of the workers were not increased in direct proportion to productivity. The other contributors to scientific management like Henri L. Gantt, Frank Gilbreth, Lillian Gilbreth and Harrington Emerson later remedied many of the above objections. Taylors theory is still being applied by the modern business undertakings. In short, it can be said that Taylor was the pioneer in introducing scientific reasoning to the discipline of management. Management process school is also called the traditional or universality school, as it believes that management principles are applicable to all kinds of group activities. Henri Fayol is regarded as the
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father of this school. Henri Fayol defined management in terms of certain functions and then laid down fourteen principles of management which according to him have universal applicability. 1.2.1.2 Henri Fayol-Theory of Management Fayol was born in 1841 and was appointed as an engineer of a French mining company in 1860. In 1880, he became the managing director of the same company. When he took charge, the company was on the verge of bankruptcy. When he retired in 1918, its financial position was very strong. Fayol attributed his success to his system of management which he emphasized could be both taught and learnt. Unlike Taylor, Fayol studied management from the board of directors down. Taylors approach to management dealt with specifics of job analysis, employees motion and time standards while Fayol viewed management as a teachable theory dealing with planning, organizing, commanding, coordinating and controlling. Fayols long practical experience is simply reflected in his written work. He tried to develop a theory of management. He discussed the principles of general management and argued that managerial ability can be acquired as any other technical ability. He not only recommended formal teaching in management but also practiced it by founding the Center for Administrative Studies in Paris. Thus, he was a pioneer in the field of management education. In brief, Fayols views on management is acceptable even today because they are much in tune with the requirements of the management in the present day world. He has been rightly called the father of general management. Fayols Theory of Management Fayol began by classifying all operations in business organizations under the following six categories: (i) Technical (production); (ii) Commercial (purchases and sales); (iii) Financial (funding and controlling capital); (iv) Security (protection); (v) Accounting (balance sheet, costing records); and (vi) Administrative or Managerial (planning, organizing, commanding, coordinating and controlling).
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Fayol pointed out that managerial activity deserved more attention. In his view, management is the process composed of five elements or functions: planning, organizing, commanding, coordination and control. Fayol observed : (i) To plan means to study the future and arrange the plan of operations; (ii) To organize means to build up the material and human organization of the business; (iii) To command means to make the staff do their work; (iv) To coordinate means to unite all activities; and (v) To control means to see that everything is done in accordance with the standards that have been laid down. Principles of Management Principles of Management implies a list of current management practices. Though F.W. Taylor developed principles of management, credit goes to Henri Fayol, a French management theorist for advocating and publishing certain principles (or laws) for the soundness and good working of the management. Henri Fayol warned that the principles of management should be, (i) Flexible and not absolute; must be usable regardless of changing conditions, (ii) Used with intelligence and with a sense of proportion, etc. Henri Fayol listed 14 principles which are briefed below: 1. Division of Work (or Labour) - Division of work means dividing the work on the principle that different workers (and different places) are best fitted for different jobs (or things) depending upon influences arising from geography, natural conditions, personal aptitude and skills. - Division of work leads to specialization. - Concept of division of labour can be applied to all kinds of work, managerial as well as technical. Advantages of Division of Labour : Since the same worker does the same work repeatedly, (i) He gains proficiency and skill on the jobs, (ii) Rate of production increases,
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(iii) Product quality improves, (iv) He is in a position to suggest changes in product, processing or methods of doing that work. Disadvantages of Division of Labour: (i) Division of labour gives rise to loss of craftsmanship; workers become machine-minders and no more, (ii) With the passage of time, the same job becomes dull and monotonous, (iii) Workers can not remain all-around and one cannot work in place of another if he is absent. 2. Authority and Responsibility Authority and Responsibility should go together, hand-in-hand and must be related. An executive can do justice with his responsibility only when he has the proper authority. Responsibility without Authority or vice versa is meaningless.

3. Discipline Discipline is absolutely necessary for efficient functioning of all enterprises. Discipline may be described as a respect for agreements that are directed at achieving obedience, application, and the outward marks of respect.

4. Unity of Command Unity of command means, employees should receive orders and instructions from one boss (or supervisor) only. In other words a worker should not be under the control of more than one supervisor. Unity of command avoids confusion, mistakes and delays in getting the work done.

5. Unity of Direction It is a broader concept than the unity of command. Unlike unity of command which concerns itself with the personnel, unity of direction deals with the functioning of the body corporate.
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Unity of direction implies that there should be one plan and one head for each group of activities having the same objective.

In other words, there should be one common plan for an enterprise as a whole. 6. Subordination of Individual to General Interest The interests of an individual person should be permitted to supersede or prevail upon the general interests of the enterprise. This is necessary to maintain unity and to avoid friction among the employees.

7. Remuneration Remuneration is the price paid to the employees for the services rendered by them for the enterprise. Remuneration should (i) be fair, and (ii) bring maximum satisfaction to both employees and the employer. 8. Centralization of Authority Centralization of authority means that the authority is in the hands of the center, i.e., the authority is not dispersed among different sections. In a business organization, authority should be centralized only to that degree or extent which is essential for the best overall performance. Degree of centralization is decided by keeping in view the nature, size and complexity of the (business) enterprise.

9. Scalar Chain Managers may be regarded as a chain of superiors. There should be an unbroken line of authority and command through all levels from the highest (i.e., general manager) to the lowest ranks (employee). The chain of superiors should be short circuited, when following it strictly will be detrimental to performance.

10. Order This promotes the idea that everything (e.g., materials) and everyone (human being) has his place in the organization. Materials and human beings should be arranged such that right material (things)/person are in the right place.
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11. Equity of Treatment - Manager should have equality of treatment for all his subordinates. - Manager should deal with his subordinates with kindness and justice. -This will make employees more loyal and devoted towards the management/enterprise. 12. Stability - Stable and secure work force is an asset to the enterprise, because unnecessary labour turnover is costly. - An average employee who stays with the concern is much better than outstanding employees who merely come and go. - Instability is the result of bad management. 13. Initiative - Initiative is one of the keenest satisfactions for an intelligent employee to experience. - Managers should sacrifice their personal vanity in order to permit their subordinates to exercise their own initiative. - A manger should encourage his subordinates to take initiative. 14. Esprit de Corps - This principle of management emphasizes the need for teamwork (harmony and proper understanding) among the employees and shows the importance of communications in obtaining such team work. FOLLOWERS OF TAYLOR Among the immediate disciples of Taylor were such outstanding pioneers as Henry L. Gantt and Frank and Lillian Gilbreth, to mention only a few. 1.2.1.3 Henry L. Gantts Contribution of Management Gantt like Taylor , a mechanical engineer joined Taylor at the Midvale Steel Company in 1887. He stayed with Taylor in his various assignments until 1901, when he formed his own consulting engineering firm. Although he strongly espoused Taylors ideas and did much consulting work on the scientific selection of workers and the development of incentive bonus systems, he was far more cautious than Taylor in selling and implementing
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his scientific management methods. Like Taylor, he emphasized the need for developing a mutuality of interests between management and labour, a harmonious cooperation. In doing this, he stressed the importance of teaching, developing an understanding of systems on both labour and management, and appreciating that in all problems of management the human element is the most important one. Gantt is perhaps best known for his development of graphic methods of describing plans and making possible better managerial control. He emphasized the importance of time, as well as cost, in planning and controlling work. This led eventually to the famous Gantt chart, which is in wide use today and was the forerunner of such modern techniques as the Program Evaluation and Review Technique (PERT). Some social historians regard the Gantt chart as the most important social invention of the twentieth century. 1.2.1.4 Frank and Lillian Gilbreth The ideas of Taylor were also strongly supported and developed by the famous husband and wife team of Frank and Lillian Gilbreth. Frank Gilbreth gave up going to the university to become a bricklayer at the age of 17 in 1885; he rose to the position of chief superintendent of a building contracting firm 10 years later and became a building contractor on his own shortly thereafter. During this period, and quite independently of Taylors work, he became interested in wasted motions in work. By reducing the number of bricklaying motions from 18 to 5, he made possible the doubling of a bricklayers productivity with no greater expenditure of effort. His contracting firm soon gave way largely to consulting on the improvement of human productivity. After meeting Taylor in 1907, he combined his ideas with Taylors to put scientific management into effect. Lillian Gilbreths interest in the human aspects of work and her husbands interest in efficiency search for the one best way of doing a given task, led to a rare combination of talents. It is therefore not surprising that Frank Gilberth long emphasized in applying scientific management principles; we must look at workers first and understand their personalities and needs. It is interesting too that the Gilbreths came to the conclusion that it is not the monotony of work that causes so much worker dissatisfaction but, rather, managements lack of interest in workers.
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Bureaucracy-Definition A Structure with highly routine operating tasks achieved through specialization, much formalized rules and regulations, tasks that are grouped into functional departments, centralized authority, narrow spans of control and decision making that follows the chain of command. Elements of Bureaucracy are: 1. Hierarchy 2. Division of work 3. Rules, regulations and procedures 4. Records 5. Impersonal Relationships 6. Administrative class Advantages of Bureaucracy: It is having the following qualities of distinction like Specialization Rationality Predictability Democracy

Disadvantages of Bureaucracy are as follows : Rigidity Impersonality Displacement of objectives Compartmentalization of activities Empire building Red tape

1.2.2 NEO-CLASSICAL APPROACH Theories resulted in work behavior and the researches tried to investigate the reasons for human behavior at work. They discovered that the real cause of human behavior is somewhat more than the physiological variable. These findings generated a new phenomenon about the organizational
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functioning and focused attention, on human beings in the organizations. These exercises were given new names such as behavioral theory of an organization , human view of an organization or human relations approach in an organization. The neoclassical approach was developed as a reaction to the classical approach, which attracted so many behaviorists to make further researches into the human behavior at work. Mayo and his associates at Hawthorne Plant of the Eastern Electric Company, Chicago started this movement in the late twenties, gained momentum and continued to dominate till the sixties. Douglas M. McGregor has given an impressive account of thinking of human relations in his book entitled The Human Side of Enterprise. The classical theory was the product of the time and the following reasons were responsible for its development: (i) The management thinking was showing signs of change because of the improved standards of living and education level. The technological changes were forcing the management to expand the size of the organization and complexities were increasing. This also led to the fact that the management be somewhat more sympathetic and considerate towards their workers. (ii) The trade union movement got momentum and made the workers conscious of their rights. It was no longer possible for the management to treat the human beings at work as givens. These were the two main reasons, which were responsible for the change of management behavior from autocratic to the custodial approach, which was based on offer of fringe benefits apart from wages to meet their security needs. Though neoclassical approach was developed as a reaction to the classical principles, it did not abandon the classical approach altogether, rather it pointed to the limitations of the classical approach and attempted to fill in the deficiencies through highlighting certain points which were not given due place in the classical approach. In this regard, there were two schools of thought. One school of thought with writers as Simon, Smith burg, and Thompson, pointed out the limitations of the classical approach to structural aspect only and the analysts called this group as neoclassicists.
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This school of thought suggested modifications to the classical principles but did not abandon the basic principles. The other school of thought which consisted of large number of writers focused on the human aspect neglected by the classicists. This group was called as human relationists or behaviorists. Both these schools were reactions to the classical theory but failed to suggest or develop any new theory except providing some points of criticism on varying counts. Both of them could be referred as neoclassicists. Neoclassicists endeavored to identify the weaknesses of classicists through empirical research and most of the criticisms of classical theory have emerged through researches. Hawthorne studies were the beginning of the series. The other contributors are Roethlisberger, Dickson, Whitehead, Lippitt and White, Coach and French Jr., etc. 1.2.3 HUMAN RELATIONS APPROACH The classical writers including Weber, Taylor and Fayol neglected the human relations aspect. The human relationists, (also known as neo-classicists) focused on the human aspect of industry. They modified the classical theory by emphasizing the fact that organization is a social system and the human factor is the most important element within it. They conducted some experiments (known as Hawthorne Experiments) and investigated informal groupings, informal relationships, patterns of communication, patterns of informal leadership, etc. Elton Mayo is generally recognized as the father of the Human Relations School. Other prominent contributors to this school include Roethlisberger, Dickson, Dewey, Lewin, etc. Hawthorne Studies In 1927, a group of researchers led by George Elton Mayo and Fritz J. Roethlisberger at the Harvard Business School were invited to join in the studies at the Hawthorne Works of Western Electric Company, Chicago. The experiment lasted up to 1932. Earlier, from 1924 to 1927, the National Research Council made a study in collaboration with the Western Electric Company to determine the effect of illumination and other conditions upon workers and their productivity.
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Illumination Experiment. This experiment was conducted to establish relationship between output and illumination. The output tended to increase every time as the intensity of light was improved. But the output again showed an upward trend when the illumination was brought down gradually from the normal level. Thus, it was found that there is no consistent relationship between output of workers and illumination in the factory. There were some other factors, which influenced the productivity of workers when the intensity of light was increased or decreased. Relay Assembly Room Experiment. In this experiment, a small homogeneous work-group of girls was constituted. Several new elements were introduced in the work atmosphere of this group. These included shorter working hours, rest pauses, improved physical conditions, friendly and informal supervision, free social interaction among group members, etc. Productivity and morale increased considerably during the period of the experiment.Morale and productivity were maintained even if improvements in working conditions were withdrawn. The researchers concluded that socio-psychological factors such as feeling of being important, recognition, attention, participation, cohesive work-group, and non-directive supervision held the key for higher productivity. Bank Wiring Observation Room Experiment. This experiment was conducted to study a group of workers under conditions, which were as close as possible to normal. This group comprised of 14 workers. After the experiment, the production records of this group were compared with their earlier production records. There were no significant changes in the two because of the maintenance of normal conditions. However, the researchers observed existence of informal cliques in the group and informal production norms. The findings of Bank Wiring Experiment included the following observations: 1. Each individual was restricting output. 2. The group had its own unofficial standards of performance. 3. Individual output remained fairly constant over a period of time. 4. Departmental records were distorted due to differences between actual and reported output or between standard and reported working time.
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Mass Interview Programme. The researchers interviewed a large number of workers with regard to their opinions on work, working conditions and supervision. Initially, managers and researchers used a direct approach whereby interviewers asked questions which are considered important. Later, this approach was replaced by an indirect technique where the interviewer simply listened to what the employees had to say. The findings confirmed the importance of social factors at work in the total work environment. Contributions of Human Relations Approach or Hawthorne Studies The human relationists proposed the following points as a result of their findings of the Hawthorne experiments: 1. The organization in general, is a social system composed of numerous interacting parts. The social system defines individual roles and establishes norms that may differ from those of the formal organization. The workers follow a social norm determined by their co-workers, which defines the proper amount of work, rather than try to achieve the targets, management thinks they can achieve, even though this would have helped them to earn as much as they physically can. 2. The social environment on the job affects the workers and is also affected by them. Management is not the only variable. 3. The informal organization does also exist within the framework of formal organization and it affects the formal organization. 4. At the workplace, the workers often do not act or react as individuals but as members of groups. A person who resists pressure to change his behavior as an individual often changes it quite readily if the group of which he is a member changes its behavior. The group plays an important role in determining the attitudes and performance of individual workers. 5. There is an emergence of informal leadership as against formal leadership and the informal leader sets and enforces group norms. He helps the workers to function as a social group and the formal leader is rendered ineffective unless he conforms to the norms of the group of which he is supposed to be in charge.
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6. Both way communication is necessary because it carries necessary information downward for the proper functioning of the organization and transmits upward the feelings and sentiments of people who work in the organization. 7. Money is only one of the motivators, but not the sole motivator of human behavior. Man is diversely motivated and socio-psychological factors act as important motivators. 8. Mans approach is not always rational. He may behave irrationally as far as rewards from the job are concerned. Appraisal of Neoclassical Theory Contribution The neoclassical theory provides various modifications and improvements over the earlier theory and offers a more humanistic view towards people at work. Neoclassicists have also introduced behavioral science in the study of organizational functioning which has helped managers quite a lot. This approach emphasized the micro-analysis of the human behavior. The theory has brought into light certain important factors which were altogether ignored by the classicists such as informal group, group norms, informal leader, non-economic rewards, etc. Thus, the approach gives evidence of accepting the classical doctrine though superimposing its modifications, resulting from individual behavior and the influence of the informal group. Criticism of Human Relations Approach The human relations approach has been criticized on the following grounds: (i) Lack of Scientific Validity : The human relationists drew conclusions from Hawthorne studies. These conclusions are based on clinical insight rather than on scientific evidence. The groups chosen for study were not representative in character. The findings based upon temporary groups do not apply to groups that have continuing relationship with one another. Moreover, the experiments focused on operative employees only. (ii) Limited Focus on Work : The human relations approach lacks adequate focus on work. It puts all the emphasis on interpersonal relations and on the informal group. It tends to overemphasize the psychological aspects at the cost of the structural and technical aspects.
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(iii) Over-emphasis on Group : The human relations approach over-emphasizes the group and group decision-making. But in practice, groups may create problems and collective decision-making may not be possible. (iv) Over-stretching of Human Relations : It is assumed that all organizational problems are amenable to solutions through human relations. This assumption does not hold good in practice. (v) Conflict between Organizational and Individual goals : It views conflict between the goals of the organization and those of individuals as destructive. The positive aspects of conflicts such as overcoming weaknesses and generation of innovative ideas are ignored. 1.2.4 BEHAVIOURAL SCIENCE APPROACH Under behavioural science approach, the knowledge drawn from behavioural sciences, namely, psychology, sociology and anthropology, is applied to explain and predict human behavior. It focuses on human behavior in organizations and seeks to promote verifiable propositions for scientific understanding of human behavior in organizations. It lays emphasis on the study of motivation, leadership, communication, group dynamics, participative management, etc. The essential characteristics of behavioural science approach are as under: (1) Data must be objectively collected and analyzed. (2) Findings must be presented so that the distinction between cause and effect, as opposed to chance occurrences, is clear. (3) Facts must be systematically related to one another within a systematic framework. Data collection alone does not constitute a science. (4) The findings of a study must always be open to further examination and question. The proponents of behavioural science approach made the following propositions : (i) An organization is a socio-technical system. (ii) Individuals differ with regard to attitudes, perceptions and value systems. As a result, they behave differently to different stimuli under different conditions.
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(iii) People working in the organization have their needs and goals, which may differ, from the organizational goals. Attempts should be made to achieve fusion between organizational goals and human needs. (iv) A wide range of factors influence inter-personal and group behavior of people in organizations. 1.2.5 SOCIAL SYSTEM APPROACH It was Chester I. Barnard who developed the concept of social system. He viewed organization as a social system that is composed of people who work in, cooperation. An organization comes into existence when (a) there are a number of persons in communication with each other, and (b) they are willing to cooperate for a common purpose. Barnard also recognized informal organization representing social interactions, which generally do not have a consciously coordinated joint purpose. The executives should encourage informal organizations to serve as a means of communication and group cohesiveness. Chester I. Barnard Contribution to Management Barnards treatment of management differed considerably from that of Taylor and Fayol. Taylor concentrated on improving the task efficiency of the individual. Fayol, on the other hand, moving to the totality concept of management directed his analysis to the operational side, i.e., principles and functions of management. But Barnard started with the individual, moved to cooperative organised endeavor and ended with executive functions. His publication The Functions of the Executive (1938) is a highly significant work. He wrote this book with two objectives: to set forth a theory of cooperation and organization, and to present a description of the executive process. The broad features of the Social System approach are as follows: (i) Organization is treated as a social system. That is why, this approach resembles the human relations approach. (ii) Relationships exist among the external and internal environment of the organization. (iii) Cooperation among group members is necessary for the achievement of organizational goals.
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(iv) For effective management, efforts should be made for establishing harmony between the goals of the organization and those of the various groups therein. Barnard identified the following functions of an executive: (a) the maintenance of organizational communication, (b) securing essential services from individuals in the organization, and (c) formulating and defining the purpose. By performing these functions, the executives can achieve good human relations in the organization. Barnard also developed a new concept of authority-known as acceptance authority. He suggested that a person will accept the communication as authoritative only when-four conditions are satisfied: (a) he can understand the communication, (b) he believes that it is consistent with organizational purpose, (c) he believes it to be compatible with his own personal interests, and (d) he is mentally and physically able to comply with it. Barnard is often remembered for his views on social responsibility of management. The philosophy of social responsibility of management emphasizes that management should consider itself as a provider of fair wages and security, and a creator of an atmosphere conducive to the growth and development of the worker as an employee and as a citizen. 1.2.6 SYSTEMS APPROACH TO AN ORGANIZATION We may look at the organization from two different angles: 1. We may consider the overall picture of the organization as a unit; or 2. We may consider the relationship between its various internal components. When we consider the overall picture of the organization, we consider all the elements-internal and external-and their effects on each offer simultaneously. This approach may be called the goalistic view because it tries to reach the goal of an organization by unifying the efforts of all the elements. For example, when we consider finance, workers and their attitude, technological developments, etc. we are following goalistic view. It serves as a mean-ends analysis, which in turn facilitates division of work and helps in judging the extent of success of comparing actual and targeted performance. But it does not answer many problems such as interdependence of elements, organizations environment, interface, etc. It gives a systematic view when we consider the second approach,
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i.e., we examine the relationship between each element of the organization and their interdependence. If we examine employer-employee, customer and organization, debtors-organization relationships, we follow systematic view. The systems approach focused attention on the following aspects: (i) It integrates all elements for the proper and smooth functioning of the organization. (ii) The organization overall goals can be achieved successfully because it considers all the aspects of the problems deeply and maintains a harmonious relationship between various elements so that they work untidily to achieve the goals. (iii) The approach helps in acquisition and maintenance of various resources, i.e., man, material, money, and machinery, etc. for pertaining the smooth functioning of the organization. (iv) It allows adaptation to internal - requirements and environmental changes in order to survive and grow. Definition and Characteristics of System 1. Definition of System: Kast and Rosenzweig define the system as an organised unitary whole composed of two or more interdependent parts, components or sub-systems defined by identifiable boundaries that form its environmental suprasystem. More simply, a system may be referred as units composed of several interdependent parts. System may be denoted as a grouping of parts and not simply an agglomeration of individual parts. Though each part performs its own functions, yet they work towards a common goal. The behavior of the entity is a joint function of the behaviors of the individual parts and their interactions. An organization is composed of a number of sub-systems such as internal organization, technological, psychological, structural, managerial and environmental etc., that are constantly changing and evolving. A change in one may affect the other. 2. Characteristics of System: From the analysis of foregoing definition and discussion following characteristics of a system emerge: 1. Interdependence of parts: A system has several parts. Each part is dynamic and affects all other parts. They are interrelated and
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interdependent. Interdependence of different parts is a must in an organization as a system, because of division of labour, specialization, sharing of limited resources, scheduling of activities, etc. The work of the organization is divided into various departments, sub-departments and so on, assigning each unit an independent specialized task, which on integration culminates into the accomplishment of overall organizational goals. These parts are interconnected in such a way that a change in one part may affect the other part and in this way, the whole organization. 2. Composition of several sub-systems: A system is composed of several sub-systems. For example, in a manufacturing organization, total manufacturing is one system, within which may exist a complete production system, which again may contain an inventory control system. Conversely, a system or sub-system may form part or container of other system. For example, an individual who may be a part of one system may also be a part or container for another physiological system. 3. Every system has its own norms: Every syst em may be distinguished from other systems in terms of objectives, processes, roles, structures, and norms of conduct. So, every system is unique. If anything happens in the organization, we regard it as an outcome of a particular system and we locate the fault in the system. 4. Systems influence and are influenced by other systems: As systems are open, they influence other systems in the environment depending upon its strengths and capacities in relation to other systems. Obviously, the influence of environment, in most cases is greater than the systems over all impact on the environment. Concept of Sub-system in an Organization In the previous section, we have suggested that a system is an integrated whole of various sub-systems. An organization, as a system can better be understood by identifying the various sub-systems within it. The levels of systems within a sub-system are called sub-systems and certain objectives, processes, role, structures and norms of conduct identify levels of systems within. A system is composed of various lower order sub-systems and is also a part of a super-system.
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The various sub-systems of the system constitute the mutually dependent parts of the large system, called organization. These sub-systems interact, and through interaction create new patterns of behavior that are separate from, but related to, the patterns specified by original system. The interdependence of different parts as characterized by Thompson, may be pooled, sequential, or reciprocal. When dependence is not direct, it is pooled interdependence. For example, an organization, having sales divisions in different cities making their own buying and selling, but drawing upon its common funds is an example of pooled interdependence. When one sub-system is directly dependent upon another, it is sequential interdependence. Such type of interdependence may be seen in production job or assembly line when output of one sub-system is the input for the other department or sub-system. Reciprocal interdependence refers to the situation where outputs of each unit become inputs for another such as in production and maintenance divisions. Thus, system behavior emerged as one, and since different variables are mutually interdependent, the true influence of alerting one aspect of the system cannot be determined by changing it alone. Classification of Sub-systems There are various ways of classifying sub-systems and one may support any of them. Each of the organization unit may be treated as a sub-system. In other words, each functional unit of an organization may be regarded as different sub-systems such as production sub-system, personnel or finance or sales sub-systems, etc. Seiler has classified four components in an organization, i.e., human inputs, technological inputs, organizational inputs and social structure and norms. From these inputs, he has derived the concept of socio-technical system, Kast and Rosenzweig have identified five subsystems, i.e., goal and values sub-system, technical sub-system, psychological sub-system, structural sub-system, and managerial sub-system. Katz and Kahn have, identified five sub-systems. These are: technical sub-system concerned with the work that gets done; supportive sub-system concerning with the procurement, disposal and institutional relations; maintenance sub-system for uniting people into their functional roles; adaptive sub-system concerned with organizational change; and managerial sub-system for direction, adjudication and control of many sub-systems and activities of the whole structure. Carzo and Yunouzas give three kinds of sub-systems in an organization as a system,
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i.e., technical, social and power sub-systems. We shall here discuss these three sub-systems. 1. Technical Sub-system: The technical sub-system may be referred to as the formal organization. It refers to the knowledge required for the performance of tasks including the techniques used in the transformation of inputs into outputs. Being a formal organization, it decides to make use of a particular technology; there is a given layout; policies, rules and regulations are framed; different hierarchical levels are developed; authority is given and responsibilities are fixed; and necessary technical engineering and efficiency consideration are laid down. The behavior in the organization cannot be explained fully by technical sub-system, also because there is a fundamental conflict between the individual , a part of the system and the system itself resulting from the expectancies of the organization and that of the people regarding the work he has to perform. It requires certain modifications in the behavior of the man through the social and power sub-systems (explained later). The objective of the technical sub-system is to make necessary imports from the environment, transform them into products or services and expert them back to the environment. For this purpose, it involves decisions, communications, action and balance processes. Through the decision process, three main problems of what to produce, for whom to produce and how to produce are resolved. Decisions are based on information gathered from various sources. Such informations are communicated through the communication process to action centres to implement them. Through balance process, an administrative balance is obtained so that all parts may be co-ordinated and no one part can dominate all other parts in the organization. These processes take place on the basis of roles assigned to people according to the requirements of the job. In order to handle the job properly, one is given authority from the superiors and is assigned a status matching with the importance of the job and the individuals ability to do the job. Norms of conduct are defined in the well-designed policies, norms, rules, procedures and description of the job. Thus, the arrangement of job in relation to each other, process and authority relations, etc. provide a structure to the technical sub-system.
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2. Social Sub-system: As we have explained earlier, there exists a conflict between an individual and the system itself because people differ very widely in abilities, capacities, attitudes and beliefs, likes and dislikes, etc. People find the formal set-up quite inadequate to satisfy all their needs especially social ones. Gradually they are seen interacting with each other and at times by cutting across the hierarchical and departmental lines, etc., on non-formal matters, and display their positive and negative sentiments towards each other. Another group of elements in social sub-system consists of status, role, norms and values. Status is a position determined as being important in the interpersonal relationship of the group. Thus, it is a social rank, prestige, sentiments and feelings of a person in comparison with a social system. Some members come to be more highly respected than others while some others born to be followers. Role is a pattern of action, expected of a person in his position involving others. Thus, it describes specific form of behavior and develops originally from the task-requirements. Different members have to play different roles assigned to them by the group. Norm is that the general expectation demands character for all role incumbents of a system or subsystem. The members of the group follow unwritten norms. Anybody not adhering to norms are reprimanded or punished. Value is the more generalized ideological justification and aspiration. Value guides the behavior of the members. 3. Power Sub-system: Power behavior of the people in an organization plays a very important role. As the organization starts functioning, people realize the importance of their job in relation to others in the organization; the benefits of their experience to the organization; the crucial location of their jobs and their personality characteristics; the fact of their access to the superior authority holder. In this way, they have acquired power to some degree or the others based on the source of their power that influences the decision-making and regulate others behavior. Individuals abilities to regulate the behavior of others vary. Some persons are more powerful and some others have powerful influence areas than others have. Consequently, a power differentiation based on the amount of power enjoyed (which is again a function of success achieved and attempts made to influence the behavior of others) develops in a power
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structure. It gives birth to politicking and people play opportunistic roles. Power minded people have no norms. Generally, the individuals interests and the opportunity of serving those interests decide norms and therefore, sheer expediency is the norm. The power holder enjoys the status in accordance with his abilities to influence the behavior of others in order to carry out his wishes. This part of the system is known as power subsystem Appraisal of Social System School Chester I. Barnard is regarded as the founding father of social system school. He studied the inter-relationships within the organization. His definition of formal organization is regarded to be a major contribution in the field of management. The main focus of the official system is to study different aspects of social systems. For the adherents of this school, organization is essentially a socio-cultural system composed of groups of people who work in cooperation. For achieving the goals of the organization, a cooperative system of management can be developed only by understanding the social behavior of groups and individuals. In other words, the socio-cultural environment and different types of pressures affect an organization as a social system. The concept of informal organization is also a contribution of the social system school. The analysis of social and group behavior in the context of social system has added to the knowledge of management. The supporters of this school advocate that efforts should be directed towards establishing harmony between the goals of the organization and the goals of the groups and individual members. 1.2.7 CONTINGENCY APPROACH Environmental change and uncertainty, work technology, and the size of a company are all identified as environmental factors impacting the effectiveness of different organizational forms. According to the contingency perspective, stable environments suggest mechanistic structures that emphasize centralization, formalization, standardization, and specialization to achieve efficiency and consistency. Certainty and predictability permit the use of policies, rules, and procedures to guide decision making for routine tasks and problems. Unstable environments suggest organic structures which emphasize decentralization to achieve flexibility and adaptability. Uncertainty and unpredictability require general
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problem solving methods for nonroutine tasks and problems. Paul Lawrence and Jay Lorsch suggest that organizational units operating in differing environments develop different internal unit characteristics, and that the greater the internal differences, the greater the need for coordination between units. Joan Woodward found that financially successful manufacturing organizations with different types of work technologies (such as unit or small batch; large-batch or mass-production; or continuous-process) differed in the number of management levels, span of management, and the degree of worker specialization. She linked differences in organization to firm performance and suggested that certain organizational forms were appropriate for certain types of work technologies. Organizational size is another contingency variable thought to impact the effectiveness of different organizational forms. Small organizations can behave informally while larger organizations tend to become more formalized. The owner of a small organization may directly control most things, but large organizations require more complex and indirect control mechanisms. Large organizations can have more specialized staff, units, and jobs. Hence, a divisional structure is not appropriate for a small organization but may be for a large organization. In addition to the contingencies identified above, customer diversity and the globalization of business may require product or service diversity, employee diversity, and even the creation of special units or divisions. Organizations operating within the United States may have to adapt to variations in local, state, and federal laws and regulations. Organizations operating internationally may have to adapt their organizational structures, managerial practices, and products or services to differing cultural values, expectations, and preferences. The availability of support institutions and the availability and cost of financial resources may influence an organizations decision to produce or purchase new products. Economic conditions can affect an organizations hiring and layoff practices as well as wage, salary, and incentive structures. Technological change can significantly affect an organization. The use of robotics affects the level and types of skills needed in employees. Modern information technology both permits and requires changes in communication and interaction patterns within and between organizations.
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1.3

THE OTHER MAJOR CONTRIBUTIONS BY LEADING MANAGEMENT THINKERS

1.3.1 MARRY FOLLETT (1868 - 1933) M.P.Follet is a social philosopher. Important contributions of Follett to management thought are: Constructive conflict Law of the situation Group ethic important Leadership Authority and responsibility Coordination principles

1.3.2 RENSIS LIKERT (1903 - 1972) According to Rensis Likert, Director of the Institute of Social Research, University of Michigan, the traditional job-centered supervision is mainly responsible for low productivity and poor morale of employees. He, therefore, advocated the employee-centered approach where maximum participation would be given to operatives while setting goals and making decisions. Likert is best known for his classifications of management styles into four categories: System 1 (exploitative autocratic): Leaders have no confidence or trust in subordinates. Subordinates are deprived of participation in decision-making. System 2 (benevolent autocratic): Management has condescending confidence in subordinates just as a master has towards a servant. System 3 (participative): Leaders have substantial but not total confidence in subordinates. Participation is meaningful and employees are permitted to participate in decision making. System 4 (democratic): Participation is meaningful, as leaders have complete confidence and trust in subordinates. According to Likert, system 4 is an ideal management style and is associated with high production, low costs and good labour relations. In an attempt to integrate individual and organizational Likert developed
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the concept of linking pin. In this approach, each work group is integrated to the rest of the organization by means of persons who are members of more than one group. Such overlapping membership is known as linking pin. 1.3.3 PETER F. DRUCKER Peter F. Drucker had revolutionalised management thinking in early 50s with his path breaking books, presentations. He came into prominence with the publication of The New Society. Drucker is often hailed as a genius who had pioneered several modern management concepts in the fields of innovation, creativity,problem solving, organization design, MBO etc. His major contributions include: Nature of Management Management is a dynamic, life-giving element in an organization. Management is a distinct, discipline and a social function. Managers should be creative and innovative in order to produce results. He opined that management is a great profession full of challenges. Mangers job Managers are known by their performance. They must set meaningful goals for the entire organization.

Business is inextricably interwoven with society. It has certain social obligations. Managers impact society through their actions. It is their duty to meet social expectations regarding quality, service, etc Drucker wanted business community to stand on their own. Profit is not the only goal always. He knew that a healthy business cannot exist in a sick society. Managers should realize that businesses survive and flourish only through the blessing, while meeting social expectations and enterprise objectives managers need to strike fine balance. He stressed the importance of setting goals, defining problems correctly motivating people. He wanted businesses to deliver want satisfying goods and services. The purpose of an enterprise is to create a customer. He wanted managers to set meaningful objectives in eight key areas of business. Market standing, innovation, productivity, physical and financial
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resources, profitability, manager performance and development, worker performance and social responsibility. The Highlight of the Druckers elements 1. MBO: Drucker stressed the importance of joint goal setting through a novel concept called Management By Objectives (MBO). He emphasized the importance of participative goals that are tangible, verifiable and measurable. He wanted managers to focus on what be accomplished (goals) rather than how it was to be accomplished (methods). 2. Decentralization: Drucker vehemently criticized the functional focus of managers, confirming their work to their own narrow specialized fields of study (such as marketing manager, finance manager, production manager, etc.). He wanted managers to create autonomous, self contained independent product divisions within a large undertaking, giving adequate and proportionate emphasis to various products. In place of task specialization, he advocated for decentralization. The federal structure, he felt, would make managers accountable for and allow them to grow steadily. 3. Structure: Drucker wanted managers to reduce the number of layers within the organization; the organization structure should be dynamic in nature. To realize this, he suggested concrete steps: activity analysis, decision analysis and relations analysis. Activity analysis: What is to be done, how it should be put together, how much emphasis to be put on each activity. 4. Decision analysis: The degree of futurity in the decision, the impact of a decision on activities, the various qualitative elements that enter the decision-making process, whether the decision is a recurring phenomenon or a rare one, etc. 5. Relations analysis: Helps in providing a concrete shape to the structure and manning structure properly. 6. Decision-making: According to Drucker, the life of a manager is a perpetual choice-making activity. Management is nothing but decision-making only. He wanted managers to understand the problems correctly before trying to find solutions. He wanted managers to look into the following questions carefully:
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What is the problem? Which problem to solve? What is the real, cause of the problem? (According to Drucker, critical factor analysis helps in identifying the causes properly) 1.4 MANAGERIAL FUNCTIONS Many authorities and scholars on management have discussed the functions of management. But there is no unanimity among them about the nomenclatures of the functions of management. Ralph Davis classified managerial functions into three categories, viz., organization, coordination and control. He was of the view that command and coordination facilitate control and, therefore, should be considered as parts of it. However some authors argue that co-ordination is not a separate function, the essence of management. Joseph Massie prescribed a list of seven functions of management, namely, making, organizing, staffing, planning, controlling, communicating and directing. G.R. Terry described managerial functions under four heads, which are: planning, organizing, actuating and controlling. Koontz and ODonnell have adopted the following classification: planning, organizing, directing and controlling. They have further said, In practice it is not always possible to place all managerial activities neatly into these categories since the functions tend to coalesce. Luther Gulick coined the word PODSCORB to describe the functions of management. This word is made up of the initials of the following functions, (i) planning, (ii) organizing, (iii) directing, (iv) staffing, (v) co-ordinating, (vi) reporting, and (vii) budgeting. Thus, we can say that there is no universally accepted classification of managerial functions. But at the same time it is significant to note that though there is disagreement over the grouping and classification of management functions, there is general agreement that certain functions exist. Henri Fayol gave for the first time a clear functional definition of management. According to him, To manage is to forecast and plan, to organize, to command, to coordinate and to control. Thus, Fayol has given following five functions of management: Forecasting and planning, Organizing, Commanding, Coordination and Control.
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The basic reason for so many classifications of functions of management is that different authors discussed them by studying different organizations. If we accept one of these classifications, it should be kept in mind that functions are not independent and they frequently overlap each other. According to C.S. George, the management process is not a series of separate functions, which can be performed independently; it is a composite process made up of these ingredients. He further said that no one function could be performed without involving the others. For the purpose of analysis of management process, we can divide the management functions into (1) Planning, (2) organizing, (3) staffing, (4) directing and (5) controlling. 1.4.1 Planning Planning is a mental process requiring the use of intellectual faculties, foresight and sound judgment. It is the determination of a course of action to achieve the desired result. It is the selecting and relating of facts and the making and using of assumptions regarding the future in the visualization and formation of proposed activities believed necessary to achieve desired results. It involves deciding in advance what to do, when to do it, where to do it, how to do it and who is to do it and how the results are to be evaluated. Thus, planning is the systematic thinking about the ways and means for the accomplishment of pre-determined objectives. Goals or objectives have to be clarified first before taking any other decision. Goals provide the basis for looking into the future and for evaluating the performance with the predetermined standards. Planning bridges the gap between where we are , to where we want to go. It is a prerequisite to doing anything. Systematic planning is necessary for any business activity; otherwise it will be done in a haphazard manner. Proper planning is a must to ensure effective utilization of human and non-human resources to achieve the desired goals. It has to be done at all levels of management. The process of planning involves the following steps: (i) Determination of goals or objectives of the enterprise, (ii) forecasting, (iii) search of alternative courses of action, (iv) evaluation of various alternatives and formulation of a plan. (v) Formulation of policies and procedures, (vi) preparation of schedules, programmes and budgets.
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1.4.2 Organizing Organizing is an important managerial activity by which management brings together the manpower and material resources for the achievement of pre-determined objectives. Organization is the process of establishing relationships among the members of the enterprise. The relationships are created in terms of authority and responsibility. Each member in the organization is assigned a specific responsibility or duty to perform and is granted the corresponding authority to perform his duty. In the words of Louis A. Allen, Organization involves identification and grouping the activities to be performed and dividing them among the individuals and creating authority and responsibility relationships among them for the accomplishment of organizational objectives. Thus, organizing involves the determination of activities to be performed, grouping them and assigning them to various individuals and creating a structure of authority and responsibility among the individuals to achieve the organizational goals. Organization involves the following steps: (1) Identification of activities required for the achievement of objectives and Implementation of plans. (2) Grouping of activities so as to create well-defined jobs (3) Assignment of jobs to employees (4) Delegation of authority to subordinates (5) Establishment of authority-responsibility relationships throughout the organization 1.4.3 Staffing The staffing function of management pertains to recruitment, selection, training, development and appraisal of personnel. There is a controversy whether staffing is a function of every manager in the organization as there is personnel department in every organization. Since every manager is concerned with management of human resources, he must perform the function. In fact, every manager is associated with the employment, training and appraisal of human resources. 1.4.4 Directing The term directing or direction is generally used in every walk of life. It has got a wide interpretation these days. It is no more restricted to
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commanding as viewed by Henri Fayol. In the words of Marshall, Directing , determining the course, giving orders and instructions and providing dynamic leadership. It relates to those activities, which deal directly with influencing, guiding, supervising and motivating subordinates in their jobs. This function does not cease with mere issuance of directives. According to A.Terry, Directing means moving to action and supplying stimulative power to group of persons. Thus, directing involves issuing instructions (or communication) to the subordinates, guiding, motivating and supervising These sub-functions of directing are discussed below: (a) Communication. Communication is the process of passing information and understanding from one person to another. This process is necessary making the subordinates understand what the management expects from him. A manager has always to tell the subordinates what to do, how to do it and when to do it. He has to create an understanding in their minds in regard to these things. Communication is a two way process. A manager to be successful must develop an effective system of communication so that he may issue instructions, receive the reactions of the subordinates and guide and motivate them. (b) Leadership. A manager must perform the function of leadership if he is to guide the people effectively for the achievement of organizational objectives. Leadership may be defined as the process by which a manager guides and influences the behavior of his subordinates. A manager must possess the leadership qualities if he has to get others to follow him and accept his directions. He should also build up confidence and zeal to work among the subordinates. (c) Motivation. A manager can get the desired results from the people working in the organization by providing them with proper stimulation or motivation. Motivation means inspiring the subordinates with zeal to do work for the accomplishment of organizational objectives. Motivation is the process of indoctrinating personnel with unity of purpose and the need to maintain continuous harmonious relationship. A successful manager makes appropriate use of motivation to actuate the subordinates to work harmoniously towards the achievement of organizational goals. Effective motivation is necessary for getting voluntary co-operation of the subordinates. Different types of rewards motivate
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different people. The manager should study the behavior of individuals working under him to provide them proper inducements. To some ,financial incentives are important while others are motivated by non pecuniary incentives like job security, job enlargement, freedom to work and recognition by peers and management. 1.4.5 Controlling The function of controlling deals with the measurement and correction of the performance of persons against the pre-determined standards. E.F.L. Brech defined control as the process of checking actual performance against standards to ensure satisfactory performance. Fayol viewed control as verifying whether everything occurs in conformity with the plan adopted, the instructions issued and principles established. Controlling leads to taking corrective action if the results do not conform to plans. The process of control involves the following steps: (i) Establishment of Standards. The management must establish Standards with which the actual performance of the subordinates will be compared. The standards of performance should be laid down in unambiguous terms and should be understood by everyone in the establishment. (ii) Measurement of Performance. After the performance is over, the actual performance has to be measured in terms of quantity, quality, cost and time. (iii) Appraisal of performance. The establishment of standards has no meaning unless they are used in actual practice. The management must compare the actual performance with the pre-established standards. The deviations from the standards should be recorded and brought to knowledge of the management. (iv) Taking Corrective Action. When the deviations from the standards are reported to the management, it must take corrective action so that such things do not occur again. While taking corrective steps, management should consider the improvement of plans and standards. 1.5. Managerial Skills The job of a manager demands a mixture of many types of skills, whether he belongs to business organization, an educational institution, a hospital
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or a club. A Manager is successful when he is able to make a smooth functioning team of people working under him. He is to reconcile, coordinate and appraise us viewpoints and talents of people working under him towards, the organization goals. He has also to plan and organize the operations of the enterprise so that the subordinates are able to use the material resources in the best possible manner. For this, he must use the various skills in appropriate degrees. We can broadly classify the skills required by managers into the following three categories: (i) Conceptual skills (ii) Human skills, and (iii) Technical skills. Technical skills deal with jobs, human skills with persons and conceptual skills with ideas. The three types of skills are interrelated and all managers require them. But the proportion or relative significance of these skills varies with the level of management. (i) Conceptual Skills Conceptual skill is the ability to see the organization as a whole, to recognize inter-relationships among different functions of the business and external forces and to guide effectively the organizational efforts. Conceptual skills are used for abstract thinking, and for the concept development involved in planning and strategy formulation. Conceptual skills involve the ability to understand how the parts of an organization depend on each other. A manager needs conceptual skills to recognize the interrelationships of various situational factors and, therefore, make decisions that will be in the best interests of the organization. (ii) Human Skills Human skills are the abilities needed to resolve conflicts, motivate, lead and communicate effectively with others. Because all work is done when people work together, human relations skills are equally important at all levels of management. (iii) Technical Skills Technical skills refer to specialized knowledge and proficiency in handling methods, processes and techniques of specific jobs. These skills are most important at lower levels of management and much less important at upper levels. A production supervisor in a manufacturing plant, for example, must know the processes used and be able to physically perform the tasks he supervises. A word processing supervisor must have
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specialized knowledge about computer software used in, the process. In most cases, technical skills are important at this level because supervisory managers must train their subordinates in the proper use of work-related tools, machines and equipment. 1.6 Levels of Management Management/Industrial Management has got the following activity levels. 1. Top Management. 2. Upper Middle Management. 3. Middle Management. 4. Lower Management 1.6.1 Top Management : It is the function of top management to watch, interpret, exploit of where necessary, and counter external influences with appropriate decisions and plans and to initiate the appropriate adjustment in the functional authority and status structures of the organization. It is the top managements duty to protect the integrity of the organization, so that it can survive for its own employees , the shareholders, suppliers and customers interests and for the general good of the social and economic system within which it operates. Top Management Functions are setting basic goals and objectives, Expanding or contracting activities, Establishing policies, Monitoring performance, Designing/Redesigning organization and system, and shouldering financial responsibilities, etc. Top Management includes (a) Board of Directors, (b) Managing Directors, (c) Chief Executives, (d) General Managers, (e) Owners, and (f) Shareholders and financiers. 1.6.2 Middle Management : The middle management level generally consists of divisional and departmental heads such as plant manager, production manager,
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marketing manager, personal directors etc. Their job is to interpret policies and directions set by the top level management into specific plans and guidelines for action. Their responsibility is to coordinate the working of their departments so that the set objectives can be achieved. They are concerned with short term goals and specific results. They spend more time on operational planning, information processing and day-today monitoring of their divisional activities. Middle Management Functions are running the details of the organization, cooperating to run organization smoothly, understanding interlocking of departments in major policies, achieving coordination between different parts of the organization, conducting training for employee development and building an efficient company team spirit. 1.6.3 Lower Management : This level of management consists of supervisors, superintendents, unit heads, foremen, chief clerks etc, their primary concern is with the mechanics of the job and they are responsible for coordinating the work of their employees. They must possess technical skills so that they can assist their subordinates when necessary. They plan day to day operations, assign personnel to specific job, oversee their activities, evaluate their performances, and become a link between the workers and the middle level management. Importance of Skills at Different Levels There are various levels of management; and the managers at various levels perform all the functions of management though in varying degrees. Thus, the level of skills required at different managerial levels will be different. Conceptual skills are critical in top executive positions whereas technical skills are very essential for lower level management. Technical skills can be learnt easily, but other skills cannot be learnt unless an individual has the potential and capacity and an inner urge to learn them. Conceptual skills are highly important for top management, which is responsible for formulating long-range plans and policies for the whole business. Human skills are important at all levels of management. 1.7 Roles of managers In1973, Henry Mintzberg conducted one of the first comprehensive studies of the nature of managerial work and gives us a complete picture
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of what a manager actually does. Based on his study of the activities of five practicing chief executives, Mintzberg generalized his description of the nature of managerial work in actual practice. He identified ten basic roles performed by managers and classified them under three heads. (i) Interpersonal, (ii) informational, and (iii) decisional. These roles-organized sets of behaviors belonging to a position-describe what managers actually do, whereas functions of managers had historically described what managers should do? The interpersonal roles are as follows: 1. A manager is a symbol, or a figurehead. This role is necessary because of the position occupied. It consists of such duties as signing certain documents required by law and officially receiving visitors. 2. A manager serves as a leader that is, hires, trains, encourages, remunerates, judges the subordinates. 3. A manager serves as a liaison between outside contacts such as the community, suppliers, and others and the organization. The informational roles found by Mintzberg are: 1. As monitors, managers gather information in order to be well informed. 2. Managers are disseminators of information flowing from both external and internal sources. 3. Managers are spokes-persons or representatives of the organization. They speak for subordinates to superiors and represent upper management to subordinates. Mintz bergs decisional roles are: 1. Managers as entrepreneurs are initiators, innovators, problem discoverers and designers of improvement projects that direct and control change in the organization. 2. As disturbance handlers, managers react to situations that are unexpected, such as mass absenteeism, resignation of subordinates, or losing of customers. 3. A third decisional role is that of resource allocator. 4. Finally, managers are negotiators. At times, this role can be partially delegated; however, managers assume it when conflicts arise.
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1.8

Managing in global environment Management fundamentals may be applicable in different countries. How ever the practice of carrying out the managerial function of planning, organizing, staffing, leading and controlling differs considerably in domestic and international enterprises. Planning Planning requires setting objectives and then selecting strategies, policies, programs and procedures for achieving them. A critically important activity for the MNC is the assessment of opportunities and threats in the external environment. This is a complex task even for a domestic enterprise, but it becomes much more intricate when many different, everchanging world markets must be scanned. External threats and opportunities must be matched with the internal strengths and weaknesses of the firm. For example, a poor educational system makes it difficult to find qualified personnel. Similarly, cultural orientation towards time will affect planning. Finally, political and economic instability in a country makes it difficult to forecast and will discourage long term commitment of resources. Each big MNC finds it difficult to face the competency in the world wide market. So they are grouping in to a form global strategic partnerships. American telephone corp. and telegraph comp. shares technology with Olivetti and Philips, both large MNCs in Europe. Organizing Objective of the organization is to achieve the corporate goals. One can choose the best among the variety of structures for them to suit. For example vice president at corporate head quarters may be responsible for the international division. Another alternative may be to organize according to geographic areas. For example managers may be put in charge of regions such as North America, Latin America, Europe, Africa and the Far East. Still another way of grouping organizational activities is according to product lines. For instance at corporate headquarters, managers may be put in charge of product line which is marketed worldwide. The truly MNC may integrate domestic and international business into a global structure which gives similar importance to domestic and foreign business activities. Each structure has advantages and
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limitations, as we have in the domestic management structure international organization structure may be of any one type or may be of mixed type depending on the environmental and task demand Staffing Staffing involves identifying the vacancy positions and filling up by the qualified persons. Managers of the MNC can be classified in three ways. First managers may be nationals selected from the country in which the headquarters is located .These expatriates are chosen to represent and manage the enterprise abroad. These managers because of their experience are usually familiar with the parent companys policies and operations. Second managers are those who are nationals of the host country. These managers are familiar with the countrys environment, its education system its culture its legal and political processes and its economic environment. They usually also know local customers, suppliers, government officials, behavioural characteristics of employees and the public in general. Third source of managerial personnel consists of third county nationals. These managers who have a nationality that is different from the parent company or the host country. Such managers may have gained experience by working at the company head quarters as well as in different countries. Thus, they would have developed behavioural flexibility that eases their adaptation to different cultures. These managers may by truly transcultural. Each of the three sources for managers has advantages and disadvantages and a firm may use a variety of combinations. A few factors that influence the trend in staffing MNCs are worth noting. First, the cost of sending U.S. dollar in the 1970s and in 1986. Second, people in the host countries are now better prepared to assume responsible managerial positions. Motivating and leading demand an understanding of employees and their cultural environment. For instance, participative management may work in one country but may cause confusion among employees in another country with tradition of autocratic rule. Communication is often a problem in multinational firms with subsidiaries and affiliates in countries where different languages are spoken. Even a firm with operations in a country where English is the primary language may encounter communication problems because of the distance between
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headquarters and subsidiary. But new communications technology has greatly improved the transmission of information. Still, a telephone call is not quite the same as a visit and a person to person discussion. Controlling in the Multinational Corporation The measurement and correction of performance to ensure that events conform to plans is an essential managerial function that is influenced by several environment factors unique to international enterprises. First, revenues, costs and profits are measured in different currencies. Second, the ratios between currencies are subject to considerable fluctuations. Third, accounting practices and financial reporting often differ from country to country. For example, accounting procedures may have to satisfy the demands of tax authorities of the host country as well as the government of the parent firm. The procedures must also satisfy stockholders in various countries, agencies in charge of regulating securities and banks. Procedures must also be suitable to meet the internal requirements of the firm. Developing a procedure that meets all these demands at the same time is extremely difficult. The complex nature of measurement of performance may delay detecting deviations from standard and initiating corrective action. Computers, however, have done much to speed up the process. In all, then, these few examples indicate that controlling the international corporation is considerably more difficult than monitoring a domestic operation. Summary Management is the process of planning, organizing, staffing, directing and controlling to accomplish objectives through the coordinated use of human and material resources. Management thinkers have tried to interpret the term in multifarious ways: as a noun, as a process, as a team, as a discipline, as an activity, as an economic resource, as a system of authority or as a distinct class in society having its own value system. Management is the life-blood of a business. It ensures optimum use of scarce resources, offers competent leadership, ensures peaceful industrial relations, achieves goals, improves standard of living and enables a company to manage change effectively. Management is being increasingly accepted as a soft science and also as a difficult and complex art, as it deals with human behavior, which is highly unpredictable. Management, from another standpoint, is also interpreted as a profession having a well-defined set of principles and
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practices capable of universal application. Professionalisation, no doubt, helps the discipline to acquire a distinct character and recognition of its own but trying to link and measure managerial success in terms of degrees may come in the way of developing creative entrepreneurs having brilliant ideas but not professional qualifications. Over the years, the subject of management has been written and re-written in terms of certain well-accepted principles and time-tested practices. These principles are the products of years of experience, research and analysis. They are not to be interpreted as absolute truths. When applied carefully, using discretion and judgement, they have proved to be quite successful in delivering results at various points of time all over the world. Management can be studied from various angles. The classical theory has three important branches. Bureaucracy prescribed that an organization be built around the work to be done. The work must be logically divided and assigned to subordinates, who are expected to report the progress to superiors at various levels. The whole system should have some well defined rules so that results can be obtained without friction. Scientific management emphasized the importance of work design and encouraged managers to find one best way to do things with minimum effort and cost. The classical school of thought, thus, focused attention on the technical and administrative aspect and ignored the contributions of human beings completely. The neo-classical theory tried to correct this deficiency by drawing rich inputs from various behavioural sciences and practical experiments carried out by Elton Mayo. The theory attempted creation of workforce with high morale through democratic means. The focus was on people, incentives, democratization of workplace, and social interactions. The human resources theory went a step ahead by suggesting that human beings are the most valuable assets in every organization. Every attempt must, therefore, be made to exploit the latent potential of human resources by emphasizing things such as self-direction, self-control and creativity. To improve the quality of decision-making, the quantitative approach has advocated the use of mathematics, statistics and computers extensively. The variables affecting each problem must be identified and measured in a definite way. This would help in solving issues in an objective manner, eliminating the subjective element in decision-making completely.
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The systems approach views the organization as a unified, purposeful entity, consisting of interrelated parts. While deciding things, executives must look at the totality of the situation and the resultant consequences carefully. They must strike a fine balance between the needs of various parts of the enterprise and the goals of the firm as a whole. According to the contingency approach there are no plans, organization structures, leadership styles, or controls that will fit all situations. There are few if any, universal truths, concepts and principles that can be applied under all conditions. Managers must find different ways that fit different situations. Their actions, in the final analysis, must be consistent with the requirements of internal as trial factors. Have you understood Questions : 1. Frequently visit any one of the organization on your choice and observe the management functions and skills which is characterized by variety, fragmentation, and record how do managers perform basic management functions such has planning, organizing, etc., keep reflected and analyzed of your study. 2. Observe any organization that how a manager can use tools and techniques from each of the major management perspectives in a contemporary manner. 3. Try to enroll your self as a trainee in any one of the organizations to find out whether the organization is practicing the management as in the style of art or science. 4. Regularly read the business and management magazines to a reasonable period to find out the professionalism practices and the development over in this practice. Review Questions : 1. Define management. 2. Is management science or art? Discuss. 3. State the Managerial functions. 4. What are skills required to a manager? 5. Describe different levels of management. 6. List the roles of managers. 7. Discuss the evolution of management thoughts.
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UNIT - II

PLANNING

LEARNING OBJECTIVES After reading this unit you should be able to understand what is managerial planning and why it is important. the various types of plans and show how they relate to one another. the logical steps in planning and see how these steps are essentially a rational approach to setting objectives and selecting the means of reaching them. the basic principle underlying the determination of how far in the future to plan and how to build desirable flexibility into plans to meet future uncertainties at the lowest cost. the importance of reviewing plans periodically to make sure that they are up to date in light of any new developments. decision making as a rational process, with special attention given to evaluating alternatives in light of the goals sought. alternative courses of action with due consideration of the limiting factor. select alternatives on the basis of experience and experimentation, as well as research and analysis. differentiate between programmed and non-programmed decisions, understand the differences between decisions made under conditions of certainty, uncertainty and risks.
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2.1

INTRODUCTION Planning is the systematic thinking about the ways and means for the accomplishment of predetermined objectives. Planning produces fundamental decisions and actions that shape and guide what an organization is, what it does, and why it does it. Planning bridges the gap between where we are and where we want to go. It requires broadscale information gathering, an exploration of alternatives, and an emphasis on the future implications of present decisions. Top level managers engage chiefly in strategic planning or long range planning. They answer such questions as What is the purpose of this organization? , What does this organization have to do in the future to remain competitive? Top level managers clarify the mission of the organization and set its goals. The output needed by top management for long range planning is summary reports about finances, operations, and the external environment. Goals or objectives have to be clarified first before taking any other decision. Goals provide the basis for looking into the future and for evaluating the performance with the predetermined standards. It is a prerequisite to doing anything. Systematic planning is necessary for any business activity, otherwise it will be done in a haphazard manner. Proper planning is a must to ensure effective utilization of human and non human resources to achieve the desired goals. It has to be done at all levels of management. The necessity for planning arises because of the fact that business organizations have to operate, survive and progress in a highly dynamic economy where change is the rule, not the exception. The change may be sudden and extensive, or it may be slow and almost imperceptible. Some of the important forces of change may be: changes in technology, changes in population and income distribution, changes in the tastes of consumers, changes in competition, changes in government policies etc. These changes often give rise to innumerable problems and throw countless challenges. Most of these changes are thrust on managers; thus, managers are forced to adjust their activities in order to take full advantage of favourable developments or to minimize the adverse effects of unfavourable ones. Successful managers try to visualize the problems before they turn into emergencies. As pointed out by Terry, successful managers deal with foreseen problems, and unsuccessful managers struggle with unforeseen problems. The difference lies in planning.
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Managers charged with the responsibility of achieving definite targets, do not wait for future. They make the future. They introduce original action by removing present difficulties, anticipating future problems, changing the goals to suit the internal and external changes, experiment with creative ideas and take the initiative, attempting to shape the future and create a more desirable environment. Top level managers engage chiefly in strategic planning or long range planning. They answer such questions as What is the purpose of this organization? What does this organization have to do in the future to remain competitive? Top level managers clarify the mission of the organization and set its goals. The output needed by top management for long range planning is summary reports about finances, operations, and the external environment. MEANING A plan is a forecast for accomplishment. It is a predetermined course of action. It is todays projection for tomorrows activity. In other words, to plan is to produce a scheme for future action, to bring about specified results at a specified cost, in a specified period of time. Management thinkers have defined the term, basically, in two ways: Based on futurity: Planning is a trap laid down to capture the future (Allen). Planning is deciding in advance what is to be done in future (Koontz). Planning is informed anticipation of future (Haimann). Planning is anticipatory decision-making (R.L. Ackoff). As a thinking function: Planning is a thinking process, an organised foresight, a vision based on fact and experience that is required for intelligent action (Afford and Beatty) Planning is deciding in advance what to do, how to do it, when to do it and who is to do it. (Koontz and ODonnel) It is deciding in the present, what is to be done in future? It is the process of thinking before doing. A plan is a specific, documented intention consisting of an objective and an action statement. The objective portion is the end, and the action statement represents the means to that end. Stated another way, objectives give management targets to shoot at, whereas action statements provide arrows for hitting the targets. Properly conceived plans tell what, where and how something is to done.
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Is Planning Really Necessary? Planning is an activity of a highly ubiquitous character. Every function of business is planned in most of the enterprises as is evident from the fact that there are production plans, sales plans, financial plans, purchase plans, research and development plans and so on. This is done because of the necessity to ensure proper utilization of human and material resources to achieve the objectives of the business. Without proper planning, the affairs of any enterprise are most likely to be haphazard. Less important task may be done ahead of more important one or different individuals using different procedures or methods may do the same piece of work. There may be unnecessary repetition of certain business operations leading to wastage of efforts and resources. In short, without plans, action must become merely random activity, producing nothing but chaos. Therefore planning is a must to achieve a consistent and coordinated structure of operations focused on desired objectives. Henri Fayol explained the importance of planning as a management function. According to him, Managing means looking ahead, gives some idea of the importance attached to planning in the business world, and it is true that if foresight is not the whole of management, at least it is an essential part of it. The plan of action is, at one and the same time, the result envisaged, the line of action to be followed, the stages to go through, and the methods to use. George Terry viewed planning as basic to the other managerial functions. Without the activities determined by planning, there would be nothing to organize, no -one to actuate and no need to control. This stresses the importance of planning in the management process. Thus, planning is a prerequisite to good management. Planning provides a rational approach to predetermined objectives, as it requires a lot of systematic mental exercise on the part of planners. Planning helps in selecting from among alternative future courses of action for the enterprise as a whole and for its every department. It lays down clearly what every segment of the enterprise should do to achieve the organizational objectives. No organization can achieve its objectives without proper planning because of certain obvious reasons. These reasons are as follows: (i) Growing complexities of modern business because of rapid technological changes and keen competition in the market.
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(ii) Rapid social, economic and political changes. (iii) Recognition of social responsibilities. (iv) Growth of trade unionism. (v) Uncertainties caused by trade cycles. (vi) Shortage of certain resources. (vii) Increasing government control over business. (viii) Need for research and development activities. These are the challenges before the managers of modern era, which can be dealt with effectively only through proper planning. Looking at the significance of planning, management of every organization should give due weightage to the planning function. Good planning is the foundation of efficient management. 2.2 FEATURES OF PLANNING Planning has a number of characteristics: (i) Planning is goal-oriented: All plans arise from objectives. Objectives provide the basic guide for planning activities. Planning has no meaning unless it contributes some positive achievement of predetermined goals. (ii) Planning is a primary function: Planning is the foundation of management. It is a parent exercise in management process. It is a preface to business activities. According to Koontz, Planning provides the basic foundation from which all future management functions arise. Terry also supported the view, that without planning there is nothing to organize, no one to motivate and no need to control. The idea of primacy of planning emphasizes the fact that planning takes precedence over other managerial functions like organizing, directing and controlling because none of these functions can come into being until there is a plan. (iii) Planning is all-pervasive: Planning is a function of all managers. It is needed and practiced at all managerial levels. Planning is inherent in everything a manager does. Managers have to plan before launching a new business. They have to plan whenever things change. Even when they decide to close down a plant, they have to plan meticulously to avoid problems from employees. The scope of planning, however, differs at different levels and among different departments.
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(iv) Planning is a mental exercise: Planning is a mental process involving imagination, foresight and sound judgement. Planning compels managers to abandon guesswork and wishful thinking. It makes them think in a logical and systematic manner. Plans arc based on a careful study of internal and external factors influencing business activities. (v) Planning is a continuous process: Planning is continuous. It is a never-ending activity. Once plans for a specific period are prepared, they are translated into action. At the end of that period, there is a need for a new plan to be drawn based on new situations and conditions. Planning is thus, an ongoing process of adjustment to change. There is always need for a new plan to be drawn on the basis of new demands and changes in the circumstances. (vi) Planning involves choice: Planning essentially involves choice among various alternative courses of action. If there is one way of doing something, there is no need for planning. The need for planning arises only when alternatives are available. Planning presupposes the existence of alternatives. From out of these alternatives, a manager would select the best alternative, after careful analysis and evaluation. (vii) Planning is forward looking: Planning means looking ahead and preparing for the future. It means peeping into the future, analyzing it and preparing for it. Managers plan today with a view to flourish tomorrow. Without planning, business becomes random in nature and decisions would become meaningless, adhoc choices. (viii) Planning is flexible: Planning is based on a forecast of future events. Since future is uncertain, plans should be reasonably flexible. The onset of colour television sets forced many a manufacturer in the West to abandon production of black and white television sets long back. When market conditions change, planners have to make necessary changes in the existing plans. (ix) Planning is the most basic of all management functions: Since managerial operations in organizing, staffing, leading, and controlling are designed to support the accomplishment of enterprise objectives, planning logically precedes the execution of all other managerial functions. (x) Planning is a pervasive function of management. Planning is a function of all managers, although the character and breadth of planning will vary with their authority and with the nature of policies and plans outlined by their superiors.
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Planning is a managerial process requiring the use of intellectual faculties, foresight and sound judgement. It is the determination of a course of action to achieve the desired result. It is selecting, relating of facts, making use of assumptions regarding the future in the visualization and formation of proposed activities believed necessary to achieve desired results. It involves deciding in advance what to do, when to do it, where to do it, how to do it and who is to do it and how the results are to be evaluated. Thus, planning is the systematic thinking about the ways and means for the accomplishment of pre determined objectives. Goals or objectives have to be clarified first before taking any other decision. Goals provide the basis for looking into the future and for evaluating the performance with the predetermined standards. 2.3 BENEFITS OF PLANNING Good planning will have the results in the following advantages: (i) Focuses Attention on Objectives. Since all planning is directed towards achieving enterprise objectives, the very act of planning focuses attention on these objectives. Laying down the objectives is the first step in planning. If the objectives are clearly laid down, the execution of plans will also be directed towards these objectives. (ii) Ensures Economical Operation. Planning involves a lot of mental exercise, which is directed towards achieving efficient operation in the enterprise. It substitutes joint directed effort for uncoordinated piecemeal activity, even flow of work for uneven flow, and deliberate decisions for snap judgements. This helps in better utilization of resources and thus minimizing costs. (iii) Reduces Uncertainty. Planning helps in reducing uncertainties of future because it involves anticipation of future events. Effective planning is the result of deliberate thinking based on facts and figures. It involves forecasting also. Planning gives an opportunity to a business manager to foresee various uncertainties, which may be caused by changes in technology, taste and fashion of the people, etc. Sufficient provision is made in the plans to offset these uncertainties. (iv) Facilitates Control. Planning helps the managers in performing their function of control. Planning and control are inseparable in the sense that unplanned action cannot be controlled because control involves keeping
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activities on the predetermined course by rectifying deviations from plans. Planning helps control by furnishing standards of control. It lays down objectives and standards of performance, which are essential for the performance of control function. (v) Encourages Innovation and Creativity. Planning is basically the deciding function of management. It helps innovative and creative thinking among the managers because many new ideas come to the mind of a manager when he is planning. It creates a forward-looking attitude among the managers. (vi) Improves Motivation. A good planning system ensures participation of all managers, which improves their motivation. It improves the motivation of workers also because they know clearly what is expected of them. Moreover, planning serves as a good training device for future managers. (vii) Improves Competitive Strength. Effective planning gives a competitive edge to the enterprise over other enterprises that do not have planning or have ineffective planning. This is because planning may involve expansion of capacity, changes in work methods, changes in quality, anticipation tastes and fashion of people and technological changes, etc. (viii) Achieves Better Coordination. Planning secures unity of direction towards the organizational objectives. All the activities are directed towards the common goals. There is an integrated effort throughout the organization. 2.4 LIMITATIONS OF PLANNING Sometimes, planning fails to achieve the expected results. There are many causes of failure of planning in practice. These are discussed below: 1. Lack of reliable data. There may be lack of reliable facts and figures over which plans may be based. Planning loses its value if reliable information is not available or if the planner fails to utilize the reliable information. In order to make planning successful, the planner must determine the reliability of facts and figures and must base his plans on reliable information only.
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2. Lack of initiative. Planning is a forward-looking process. If a manager has a tendency to follow rather than lead, he will not be able to make good plans. Therefore, the planner must take the required initiative. He should be an active planner and should take adequate follow up measures to see that plans are understood and implemented properly. 3. Costly process. Planning is time consuming and expensive process. This may delay action in certain cases. But it is also true that if sufficient time is not given to the planning process, the plans so produced may prove to be unrealistic. Similarly, planning involves costs of gathering and analyzing information and evaluation of various alternatives. If the management is not willing to spend on planning, the results may not be good. 4. Rigidity in organizational working. Internal inflexibility in the organization may compel the planners to make rigid plans. This may deter the managers from taking initiative and doing innovative thinking. So the planners must have sufficient discretion and flexibility in the enterprise. They should not always be required to follow the procedures rigidly. 5. Non-acceptability of change. Resistance to change is another factor, which puts limits on planning. It is a commonly experienced phenomenon in the business world. Sometimes, planners themselves do not like change and on other occasions they do not think it desirable to bring change as it makes the planning process ineffective. 6. External limitations. The effectiveness of planning is sometimes limited because of external factors, which are beyond the control of the planners. External stringencies are very difficult to predict. Sudden break-out of war, government control, natural havocs and many other factors are beyond the control of management. This makes the execution of plans very difficult. 7. Psychological barriers. Psychological factors also limit the scope of planning. Some people consider present more important than future because present is certain. Such persons are psychologically opposed to planning. But it should not be forgotten that dynamic managers always look ahead. Long-range well-being of the enterprise cannot be achieved unless proper planning is done for future
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Measures to Overcome Limitations of Planning Some people say that planning is a mere ritual in the fast changing environment. This is not a correct assessment of managerial planning. Planning may be associated with certain difficulties such as non-availability of data, lethargy on the part of planners, rigidity of procedures, resistance to change and changes in external environment. But these problems can be overcome by taking the following steps : 1. Setting Clear-cut Objectives. The existence of clear-cut objectives is necessary for efficient planning. Objectives should not only be understandable but rational also. The overall objectives of the enterprise must be the guiding pillars for determining the objectives of various departments. This would help in having coordinated planning in the enterprise. 2. Management Information System. An efficient system of management information should be installed so that all relevant facts and figures are made available to the managers before they perform the planning function. Availability of right type of information will help in overcoming the problems of complete understanding of the objectives and resistance to change on the part of the subordinates. 3. Careful Premising. The planning premises constitute a framework within which planning is done. They are the assumptions of what is likely to happen in future. Planning always requires some assumptions to be made regarding future happenings. In other words, it is a pre-requisite to determine future settings such as marketing, pricing, Government policy, tax structure, business cycle, etc. before giving the final shape to the overall business plan. The planning premises should be set up very carefully. Due weightage should be given to the relevant factors at the time of premising. It may be pointed out that the premises which may be of strategic significance to one enterprise may not be of equal significance to another because of size, nature of business, nature of market, etc. 4. Business Forecasting. Business is greatly influenced by economic, social, political and international environment. The management must have a mechanism of forecasting changes in such environment. Good forecasts will contribute to the effectiveness of planning. 5. Dynamic Managers. The persons concerned with the task of planning should be dynamic in outlook. They must take the required
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initiative to make business forecasts and develop planning premises. A manager should always keep in mind that planning is looking ahead and he is making plans for future, which is highly uncertain. 6. Flexibility. Some element of flexibility must be introduced in the planning process because modern business operates in an environment, which keeps on changing. For achieving effective results, there should always be a scope to make necessary addition, deletion, or alteration in the plans as is demanded by the circumstances. 7. Availability of Resources. Determination and evaluation of alternatives should be done in the light of resources available to the management. Alternatives are always present in any, decision making problem. But their relative plus and minus points are to be evaluated in the light of the resources available. The alternative which is chosen should not only be concerned with the objectives of the enterprise, but also capable of being accomplished with the help of the given resources. 8. Cost-Benefit Analysis. The planners must undertake cost-benefit analysis to ensure that the benefits of planning are more than the cost involved in it. This necessarily calls, for establishing measurable goals, clear insight to the alternative courses of action available, premising reasonably and formulation of derivative plans keeping in view the fact that environment is fast-changing. 2.5 PRINCIPLES OF PLANNING The important principles of planning are discussed below : 1. Principle of contribution to objectives. The purpose of plans and their components is to develop and facilitate the realization of organizational aims. Long-range plans should be interwoven with medium-range plans, which in turn, should be meshed with short-range ones in order to accomplish organizational objectives effectively and economically. 2. Principle of pervasiveness of planning. Planning is found at all levels of management. Strategic planning or long-range planning is related to top management, while intermediate and short-range planning are the concern of middle and operating management respectively. 3. Principle of limiting factors. Planning must take the limiting factors (manpower, money, machines, materials, and management) into account
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by concentrating on them, when developing alternative plans, strategies, policies, procedures, and standards. 4. Principle of flexibility. Flexibility should be built into organization plans. Possibility of error in forecasting and decision making and future uncertainties are the two common factors which call for flexibility in managerial planning. The principle of flexibility states that management should be able to change an existing plan because of change in environment without undue cost or delay so that activities keep moving towards established goals. Thus an unexpected slump in demand for a product will require change in sales plan as well as production plan. Changes in these plans can be introduced only when these possess the characteristic of flexibility. Adapting plans to suit future uncertainties or changing environment is easier if flexibility is an important consideration while planning. Both short-term and long-term plans need to have the element of flexibility. However, flexibility is more important in long-range plans. The reason is not difficult to trace. Possibility of error or uncertainty is much higher for long-term plans than for short-term plans. However, the management can have flexibility in planning only within limits. External and internal rigidities and pressures greatly limit flexibility in managerial planning. Thus, the existing pattern of human behavior, policy and procedure rigidities, union pressures, government policy and legal requirements are important inflexibilities greatly restricting adaptability of plans to changing environment. 5. Principle of navigational change. This principle requires that managers should periodically check on events and redraw plans to maintain a course towards the desired goal. It is the duty of the navigator to check constantly whether his ship is following the right direction in the vast ocean to reach the destination as scheduled. The navigator changes the path of the ship, in case it is not going on the right path. In the same way, a manager should check his plans to ensure that these are progressing as required. He should change the direction of his plans if he faces unexpected events. It is useful if plans contain an element of flexibility. But built-in flexibility in plans does not mean that plans get revised automatically. It is the responsibility of the manager to adapt and change direction of plans to meet the challenge of constantly changing
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environment that could not be foreseen. In this regard, the role of a manager is analogous to the role of the navigator of a ship to change its course, if it is not going on the right path. 2.6 KINDS OF PLANNING Planning can be classified on different bases, which are discussed below: 1.Strategic and Functional Planning In strategic or corporate planning, the top management determines the general objectives of the enterprise and the steps necessary to accomplish them in the light of resources currently available and likely to be available in the future. Functional planning, on the other hand, is planning that covers functional areas like production, marketing, finance and purchasing. 2. Long-range and Short-range Planning Long-range planning sets long-term goals for the enterprise and then proceeds to formulate specific plans for attaining these goals. It involves an attempt to anticipate, analyze and make decisions about basic problems and issues which have significance reaching well beyond the present operating horizon of the enterprise. Short-range planning, on the other hand, is concerned with the determination of short-term activities to accomplish long term objectives. Short-range planning relates to a relatively short period and has to be consistent with the long-range plans. Operational plans are generally related to short periods. 3. Ad hoc and Standing Planning Ad hoc planning committees may be constituted for certain specific matters, as for instance, project planning. But standing plans are designed to be used over and over again. They include organizational structure, standard procedures, standard methods, etc. 4. Administrative and Operational Planning Administrative planning is done by the middle level management, which provides the foundation for operative plans. The lower level managers to put the administrative plans into action, on the other hand, do operative planning. 5. Physical Planning It is concerned with the physical location and arrangement of building and equipment. City planning and regional planning are the illustrations of physical planning.
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6. Formal and Informal Planning Various types of planning discussed above are of formal nature. The management carries them on systematically. They specify in black and white, the specific goals and the steps to achieve them. They also facilitate the installation of internal control systems. Informal planning, on the other hand, is mere thinking by some individuals, which may become the basis of formal planning in future. 2.7 LEVELS OF PLANNING In management theory, it is usual to consider that there are three basic levels of planning, though in practice there may be more than three levels of management and to an extent there will be some overlapping of planning operations. The three levels of planning are discussed below : Top Level Planning. Also known as overall or strategic planning, by the top management, i.e., board of directors or governing body. It encompasses the long-range objectives and policies of organization and is concerned with corporate results rather than sectional objectives. Top level planning is entirely long-range and is inextricably linked with long-term objectives. It might be called the whatof planning. Second Level Panning. Also known as tactical planning, it is done by middle level managers or departmental heads. It is concerned with how of planning. It deals with deployment of resources to the best advantage. It is concerned mainly, but not exclusively, with long-range planning, but its nature is such that the time spans are usually shorter than those of strategic planning. This is because its attentions are usually devoted to the step-by-step attainment of the organizations main objectives. It is, in fact, oriented to functions and departments rather than to the organization as a whole. Third Level Planning. Also known as operational or activity planning, it is the concern of departmental managers and supervisors. It is confined to putting into effect the tactical or departmental plans. It is usually for a short term and may be revised quite often to be in tune with the tactical planning. Corporate Planning. Corporate planning is a new concept, which has gained popularity these days. It may be defined as a systematic and comprehensive process of long range planning taking account of the
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resources and capability of the organization and the environment within which it has to operate, and viewing the organization as a total, corporate unit Corporate planning is specifically strategic in nature as it takes the overall view of the organization. Its time span is normally over a minimum period of five years and frequently extends very much longer than this. A corporate plan must be frequently updated. Most organizations review performance at least once a year so that modifications may be made in the light of experience. 2.8 STEPS IN PLANNING It is difficult to specify the steps in the planning process for all organizations because of their differences in size and complexity. Nevertheless, it is possible to suggest some important steps for effective planning. The steps, which are applicable to the most types of plans are discussed below. (i) Establishing Objectives : Planning is an intellectual process, which an executive carries out before he does any job with the help of other people. But while planning, the question, which must arise in the mind of the executive, is what is the objective of doing that job? So the first step in planning is the determination of objectives. Objectives provide direction to various activities in the enterprise. Planning has no utility if it is not related to certain objectives. The establishment of objectives can, at times, be more important than the objectives themselves since their establishment emphasizes how various people and units fit into the overall organization framework. The formalization of this process can also be used to motivate individuals to achieve objectives, which they have helped to establish. Objectives clarify the tasks to be accomplished. Overall objectives define what is to be accomplished in general terms. The derivative objectives focus on more details; that is, what is to be accomplished, where action is to take place, who is to perform it, how it is to be undertaken, and when it is to be accomplished. (ii) Collection and Forecasting of Information : Sufficient information must be collected in order to make the plans and sub-plans; Necessary information includes the critical assessment of the
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current status of the organization together with a forward look at the environment that is anticipated. The collection and forecasting of information should be done in terms of external and internal environment. The assessment of external environment should include consideration of competition now and in the future. The assessment of internal environment may consider the strong and weak points of the organization. Collection of information and making forecasts serve as an important basis of planning. (iii) Development of Planning Premises : This step involves making assumptions concerning the behavior of internal and external factors mentioned in the second step. It is essential to identify the assumptions on which the plans will be based. Assumptions denote the expected environment in the future and are known as planning premises. Again, forecasting is important in premising. It helps in making realistic assumptions about sales, costs, prices, products, technological developments, etc. in the future. The assumptions along with the future forecasts provide a basis for the plans. Since future environment is so complex and uncertain, it would not be realistic to make assumptions in great details about every environment factor. It is advisable to limit premising to those factors, which are critical or strategic to the planning process. (iv) Search of Alternatives : Usually, there are several alternatives for any plan. The planner must try to find out all the possible alternatives. Without resorting to such a search, he is likely to be guided by his limited imagination. At the time of finding or developing alternatives, the planner should try to screen out the most unviable alternatives so that there are only a limited number of alternatives for detailed analysis. It may be noted that determination of alternative plans can be a time consuming task because objectives, which have been established initially, may be found to be inflexible. It is also possible that the assumptions need revision in the light of the changed circumstances. (v) Evaluation of Alternatives : Once alternative action plans have been determined, they must be evaluated with reference to considerations like cost, long-range objectives, limited resources, expected payback, risk, and many
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intangible factors to select the satisfactory course of action. Many quantitative techniques are available to evaluate alternatives. The manager may take the help of these techniques to reach the most objective result. The manager may choose the best possible alternative after detailed analysis. Sometimes, evaluation of available alternatives may disclose that two or more courses are advisable and so the concerned manager may decide to choose two or more alternatives and combine them to suit the requirements of the situation. (vi) Selection of Plan and Development of Derivative Plans : The final step in the planning process is to select the most feasible plan and develop its derivative plans. The plans must also include the feedback mechanism. The hierarchy of plans must be both integrated and flexible to meet the changing internal and external environment. Essential requirements of Planning An effective plan is one, which helps, in the better management of the enterprise. In order to be effective, a plan should possess the following characteristics : (1) The Plan should be Specific. The more specific it is, the less chance there is for it to be misinterpreted. Objectives should be clearly defined. The means for carrying out the plan should also be indicated in unambiguous terms. (2) The Plan should be Logical. The more facts it is based on, the better it is. If facts are not available, reasonable assumptions must be made about the future. (3) The Plan should be Complete and Integrated. A plan is said to be complete when it is comprehensive enough to cover all actions expected from the individuals and sections of the undertaking as a whole. It is said to be an integrated one when various administrative plans are so welded into one another that the whole undertaking operates at the peak of its efficiency. (4) The Plan should be Flexible. No plan is infallible nor can it cover all possible contingencies. Conditions under which a plan will be most effective change, as do the variables and factors on which the plan is formulated. Therefore, it is essential to introduce some flexibility in every plan.
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(5) The Plan should be Capable of being Controlled. Effective planning of business activities depends upon the ability-to foresee with utmost accuracy the nature and requirements of future events relating to industry in general and the business undertaking in particular. Therefore, the plan must distinguish between controllable and uncontrollable future environment for better administrative control.
Fig. Steps in Planning-Schematic Representation
Establishment of Objectives Firecasting demand Planning Premises

Appraisal of Plans

Developing Alternatives

Formulation of Derivative Plans

Selection of Best Alternative

Evaluation of Alternatives

2.9

FORMS OF PLANNING Even though the basic process of planning is the same for every manager, planning can take many forms and styles in practice. Planning may be undertaken in an elaborate way or done in a limited manner. A galaxy of intellectuals using modern forecasting techniques may do it or it may be undertaken in a seat-of-the-pants manner by a number of executives sharing their thoughts over a cup of tea. Planning may begin at the top with executives deciding on targets and passing them down for implementation; or it may be undertaken in a participative manner, inviting people designated at various levels to come forward with constructive ideas and useful suggestions. Thus, there are many forms and varieties of planning. The planning practices, further, are likely to differ from organization to organization. One useful way of looking at the whole aspect is to distinguish between long-range planning and short-range planning or strategic planning and operational planning. Other forms of distinction, that follow are outlined for academic purpose only. In actual practice, the distinctions suggested may not surface in such a neat and clear-cut manner. Long Range Planning (LRP) vs. Short-Range Planning (SRP) Long-range planning covers a relatively long period of time (anything over a five-year period), and affects many departments/divisions of the organization. It includes the formulation of overall broad objectives and the selection of appropriate means by which the objectives are to be
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achieved. LRP is quite common in stable industries such as steel, publicutilities and automobiles. In India, public sector companies generally adopt the national planning period of five years. LRP is the rest of a series of interrelated steps: (i) The first basic step is the estimation of the international, national and local situation. The possible future changes that might take place, in areas external to an organization are examined. (ii) The second step of LRP is defining the goals to be pursued by the organization and the philosophy to be adopted. (iii) The third step in LRP answers the simple question: where are we now? For this, an objective assessment of the degree of success in accomplishing goals, on a day-to-day basis, is made. (iv) In the fourth step, an attempt is made to find out the strong or weak spots in the companys programmes till date in the light of additional information on sales, selling expenses, production targets, capital inflow, etc. The deficiencies are rectified promptly. (v) Now, a full-blown programme of longer range planning is developed and approval is sought for its adoption. (vi) The last step is concerned with placing LRP into work, to reduce ambiguity and achieve some measure of specificity. LRP is divided into action plans, that is, intermediate and short-term plans for the sake of convenience and easy implementation. Features of a Long-Range Plan Covers a time period of 5 years or more. States what the organization wants to become in the long run. Tries to focus on organizations linkage with the external environment. Defines the mission of the organization, outlines major strategies and specifies action plans to realize targets. Involves a great deal of uncertainty Developed by top management.

Uncertainty- The Reason For Long-Range Planning Long-range planning is necessary precisely because we cannot forecast the uncertain future. It is essential even though the eventuality for which plans are prepared is not likely to occur. Is it not foolhardy to stop military
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planning simply because the planner must operate under conditions of uncertainty? This is doubly true in the case of business organizations, for a failure to plan may have serious consequences on its survival and growth in future. The business executives should not always sit back and wait for lightning to strike. Even in times of emergency and adversity, long-range planning is important. It is important because a planned contraction of operations is less costly and disruptive than a make-shift contraction. It is true, that accurate planning beyond one year is difficult and long-range plans are very likely to be changed before completion. Nevertheless, they definitely serve a purpose in setting up an orderly approach to the problems of long-range growth of the company. Example The consequences of taking a short-term perspective can be severe. The US automobile industry lost a large share of the market (28% by 1980) to imported cars because of an earlier failure to focus on the long-term need to develop fuel-efficient vehicles. Long-range planning helps in preparing in an orderly manner for future events. It opens up new avenues, new ways of doing things and reveals specific opportunities, previously unknown to the planner. It helps in seeking new opportunities actively, instead of merely reacting defensively to competition. In fact, a study by Ansof clearly shows that strategically planned companies outperformed the non-planners. Stagner studied 109 firms and found that those companies that used their top managers in long-range planning consistently obtained better results than those that did not have a strong planning activity. The evidence furnished in other studies is equally strong. There is a good reason for confidence in long range planning. And there is no substance in the argument that long range planning is useless in the face of uncertainties. Long-range planning. A plan that covers many years and affects many departments or divisions of an organization in a major way. Long-range planning is not forecasting. Forecasting is of little use to planners who seek to direct their organizations to the future. It does not provide an adequate basis even for purely adaptive behavior. The answer for this dilemma lies in long-range planning. Long range planning is much more than a mere projection of trends. It is that activity in a company,
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which sets long-range goals for the firm and then proceeds to formulate specific plans for attaining these goals. Long-range planning attempts typically to grapple with the question what must our company do, today to be ready for the uncertainties of tomorrow. It does not deal with future decisions. It deals with the futurity of present decisions. What an organization should do tomorrow is not important or relevant. What is more important is an answer to the question: What do we have to do today to be ready for an uncertain tomorrow? Thus, long-range planning is a risk-taking decision-making. There is no attempt to mastermind the future. Short Range Planning and Operational Planning Short-range planning: A plan that (is specific and detailed) generally covers a span of one year or less. Short-range planning covers a period of one to twelve months, depending on the nature of business, and the traditions prevailing in the industry. Short-range plans are otherwise called operational plans. They are usually made in a specific and detailed manner. The emphasis is on flexible budgets, on goals and targets, expressed in a clear and precise language. The primary concern is efficiency (doing things right) rather than effectiveness (doing the right things). To this end, short-range plans gather information, evaluate alternatives and select the most suitable course of action. Operative plans provide content and form to long-range plans. In fact, short-range planning is an extension of long-range corporate plans. Market plans, production plans and financial plans are typical examples of operational planning. Long-Range Planning vs. Short-Range Planning
Long-range Planning Point of Distinction 5 Years or more. Time factor Up to one year. Current operations of an organization.. Primary Focus Linkage with various parts of an organization. Impact Operates within the existing structure and resources. Short Range Meaning

Mission, Long-term goals and Deals with strategies. Organizations linkage with external factors. Demands changes in the structure, resource allocation.

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It goes too far into the future;

Uncertainty

The time horizon is limited and

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It goes too far into the future; the risk and uncertainty level is high. Uncertainty

MANAGEMENT CONCEPTS
The time horizon is limited and the risk associated with uncertainty level is low.

Top Management.

Prepared by

Lower level executives.

Long-range planning and short-range planning are expressions of the breadth of planning periods. The terms, short term and long term, sometimes present an erroneous picture because people generally associate short term with a narrow perspective and long term with a broad view. The time dimension of planning cannot be reduced to simplified expressions such as short term or long term. The time span varies usually depending on the factors like industry characteristics, market demand, availability of resources and skills, environmental complexities, etc. What may appear to be long-range planning, in the case of one company may turn out to be short-range planning in the cases of other companies. Operational Planning and Strategic Planning Strategic plan: A general plan outlining decisions of resource allocation, priorities and action steps necessary to reach strategic goals. Strategy refers to the ideas, plans and support that firms employ to compete successfully against their rivals. Strategy is meant to help firms achieve competitive advantage. Broadly speaking, competitive advantage is what allows a firm to gain an edge over its rivals (superior design skills, quality, distribution network, after sales service, low cost manufacturing etc.). Unlike short-term planning, strategic planning involves an extended time frame, the deployment of a substantial percentage of organizational resources, a wide spectrum of activities, and a major eventual impact. Basically, strategic planning is planning that is conceptually and functionally long-term, wide ranging and critical to organizational success, in terms of costs of the resources it affects and of the outcomes it envisions. The important features of operational and strategic plans are summarized through the following table.
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Characteristics of Strategic and Operational Plans Strategic plan: A general plan outlining decisions of resource allocation, priorities and action steps necessary to reach strategic goals.
Feature Time horizon Strategic (Long-range) Operational (Short-range) 5 years or more Adapt to external Purpose environment based on internal strengths Activity controlled Decision range Organizational level involved Basis for planning Predictability Anticipated accuracy Management functions involved Management control of outcomes Top management Primarily judgmental Uncertain. Within 25 per cent Planning and forecasting dominant Slight; contingency plans required Control primarily Almost complete single -option plans used Exact data and standards used Highly certain Within 2 or 3 per cent Total institutional performance Relatively enduring Internal tasks and operations Short-term Middle and lower management Implement internal goals Under I year

Tactical or Coordinative Planning Tactical plans are less detailed than the short range plans. They are concerned with implementation of strategic plans by coordinating the work of different departments in the organization. They try to integrate various organizational units and ensure commitment to strategic plans. Based on the results obtained by implementing short-range plans, a mid term review is undertaken. A moving average is usually obtained and the success or failure of operational plans is assessed and the need for readjustment is indicated. Coordinative planning, thus, helps in shifting the gears, whenever pitfalls occur while implementing the short-range or long-range plans. Formal and Informal planning Formal plan : A written record to what the organization intends to do, within a time frame. A formal plan is a well-documented plan. The record is made after a careful evaluation of all relevant factors that have a bearing on organizational functioning. Managers at various levels are deliberately involved in the formal plan formulation and implementation processes. It
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is systematic and rational. Informal planning does not offer a written record. It is carried out without any direction. Managerial thoughts, which do not find expression on, paper are informal plans. It encourages managers to evade responsibility. Unhealthy tendencies like carelessness in planning and implementation, haphazard actions, loss of memory and direction might creep in. It should be followed as an exception rather than a rule. Functional and corporate Planning Corporate plan : A comprehensive plan that outlines the broad objectives of a company as a whole and develops plans to achieve those objectives. Functional planning is unit planning. It deals with parts such as production, marketing, finance, manufacturing in an isolated manner. There is no unified focus. As a result, functional planners develop a parts mentality. They often fail to see the total big picture. The impact of internal as well as external factors may not be fully taken care of, in respect of functional planning. Corporate planning outlines the broad objectives of the company as a whole and develops plans designed to meet those objectives. It has both the micro, as well as macro focus. The various functional plans are integrated so as to meet the broad objectives of the organization. It is integrative in nature. It takes a long-term view. It tries to strike a balance between organizational resources and environmental challenges. In the process, tendencies like adhocism, parts-mentality, narrow functional outlook, and friction between units are kept under constant control. The focus is always on overall organizational performance. Proactive and Reactive Planning Proactive planning : In proactive planning managers challenge the future, anticipating future contingencies and get ready with alternative routes for unforeseen circumstances. Proactive planning is a way of thinking about managing the future risks and challenges. It tries to take care of all future contingencies and changes. Plans are often tied to a time-frame. Within this period (say 2 year period), many changes may occur and upset all projections and calculations. Proactive planning makes managers alert and sensitive to all such changes.
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They are forced to be dynamic, active and creative. Instead of reacting to events passively, managers are ready with alternate plans and actions, redefining and reshaping the future. It helps managers to challenge the future rather than accept the same meekly. It is chiefly concerned with initiating actions today so as to survive and grow tomorrow. Reactive planning: The organization merely reacts to events as and when they arise. In reactive planning, the organization merely reacts to external events. The organization is left to the vagaries of environmental forces. Automobile companies that found that fuel efficiency is going to be the most important demand of customers in eighties have registered consistent growth all these years whereas those companies that did not visualize this in advance are no more in existence in the market now (remember Fiat, Ambassador cars?). In a fast changing world, reactive planning may prove to be costly. Before we realize what has happened, we might be shown the door. Managers, as rightly pointed out by Drucker, should not wait for future. They have to make future by initiating original actions. Controlling: It is concerned with monitoring employees activities, keeping the organization on track towards its goals, and making corrections as required. Planning and Controlling: Relationship Planning involves selecting enterprise objectives and then finding ways to achieve them. Controlling is the process of assuring that actions are in line with planned results. The relationship between the two terms could be stated thus : Plans are the directions in which managers intend to lead the organization in order to achieve its objectives. Controls are needed to ensure that results are consistent with plans. Planning prescribes described behaviors and results. Controls can maintain or redirect actual behaviors and results. Managers cannot effectively plan without information about the past and current status of each department, product, etc. Much of this essential information is obtained through the control process, It provides valuable information derived from past experience and allows managers to plan effectively in future. It helps managers to learn from past mistakes and plan well.
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Managers cannot effectively control the organization unless there are plans to indicate the purpose to be served by the control process. Thus, the planning and control processes complement and support one another.

2.10 TYPES OF PLANS The plans were classified on the application basis in organization as follows:
Plans

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

Single Use Plans - Programmes - Budgets - Projects

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

Overall Objectives Divisional Objectives Departmental Objectives Individual Objectives

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

For example, the broad objective of customer oriented profitable growth can be achieved if the two divisions, plastics and metal products, work out their individual goals (for example, turning out quality products and developing new products) effectively. And if the production, marketing, and other departments accomplish their departmental objectives, they contribute to the achievement of divisional goals. Thus, the means-ends chain directs the behavior of every individual and every department towards the highest objective of the organization. If we observe the hierarchy of objectives ranging from top management to individual objectives, two things clearly emerge: the objectives at the lower level are more specific and they are tied to a time capsule. Objectives form a network. Objectives interlock in a network fashion. They are inter-related and inter-dependent. The concept of network of objectives implies that once objectives are established for every department and every individual in an organization, these subsidiary objectives should contribute to meet the basic objectives of the total organization. If the various objectives in an organization do not support one another, people may pursue goals that may be good for their own
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function but may be detrimental to the company as a whole. Managers have to trade off among the conflicting objectives and see that the components of the network fit one another. As rightly pointed out by Koontz et al., It is bad enough when goals do not support and interlock with one another. It may be catastrophic when they interfere with one another Multiplicity of objectives: Organizations pursue multifarious objectives. At every level in the hierarchy, goals are likely to be multiple. For example, the marketing division may have the objective of sale and distribution of products. This objective can be broken down into a group of objectives for managers of functional departments like product, advertising, research, and promotion. The advertising managers goals may include: designing product messages carefully, create a favorable image of the product in the market, etc. Similar goals can be set for others marketing managers. To describe the single, specific goal of an organization is to say very little about it. It turns out that there are several goals involved. This may be due to the fact that the enterprise has to meet internal as well as external challenges effectively. Internal problems may hover around profitability, survival, growth, government, society, stockholders, customers; etc may pose and so on external problems. In order to meet the conflicting demands from various internal and external groups, organizations generally pursue multiple objectives. Moreover, no single objective would place the organization on the path of prosperity and progress in the long run. According to Drucker, To emphasize profit, for instance, misdirects managers to the point where they may endanger the survival of the business. To obtain profit today, they tend to undermine the future. Where several goals are involved, maximizing one goal would usually be at the cost of another. Managers have to see that various goals exist in harmony and for this purpose they must assign a definite priority of 1, 2 or 3 depending on the importance of each objective. Such assignment of priorities helps to keep a perspective, especially when there are many goals for one position. Long and short-range objectives: Organizational objectives are usually related to time. Long range objectives extending over five or more years are the ultimate or dream objectives for the organization. They are abstractions of the entire hierarchy of objectives of the organization. For example, planning in India has got objectives like eradication of poverty;
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checking population growth through birth control etc., reflect certain ideals, which the government wishes to accomplish in the long run. Short-range objectives (one year goals) and medium-range objectives (two to four-year period goals) reflect immediate, attainable goals. The short-range and medium range objectives arc the means for achieving long-term goals and the long-term goals supply a framework within which the lower level goals are designed. Thus, all these goals reinforce each other in such a way that the total result is greater than the sum of the effects taken individually. That is why goal setting is called a synergistic process. In order to remain viable, every organization needs to set goals in all three time periods. Importance of Objectives Objectives are essential to organizations. Organizations produce and market economic products and services, universities provide teaching and research, governments provide welfare and security and so on. Organizations are instruments to attainment. Without some purpose, there is no need for the organization. All organizations are goal-seeking, that is, they exist for the purpose of achieving some goals efficiently and effectively. Objectives affect the size, shape, and design of the organization, and they are important in motivating and directing personnel. Objectives serve the following functions : 1.Legitimacy. Objectives describe the purpose of the organization, so that people know what it stands for and will accept its existence and continuance. Thus, Ford sells American transportation; Chrysler sells know-how and Godrej sells quality products. Objectives help to legitimize the presence of the organization in its environment. The organization can, and then emphasize its uniqueness and identity. 2. Direction: Objectives provide guidelines for organisational efforts. They keep attention focused on the common purpose. Once objectives are formulated, they become the Polar Star by which the voyage is navigated. Every activity is directed towards the objectives, every individual contributes to meet the goals. Without seeing the target, a manager would be like a blindfolded archer-expanding useless effort
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and creating havoc. 3. Coordination: Objectives keep activities on the right track. They make behavior in organizations; more rational, more coordinated and thus more effective, because everyone knows the accepted goals to work towards. In setting effective goals managers help members at all levels of the organization to understand how they can best achieve their own goals by directing their behavior toward the goals of the organization. 4. Benchmarks for success: Objectives serve as performance standards against which actual performance may be checked. They provide a benchmark for assessment. They help in the control of human effort in an organization. Motivation: Goals are motivators. The setting of a goal, that is both specific and challenging, leads to an increase in performance because it makes it clear to the individual what he is supposed to do. He can compare how well he is doing now versus how well he has done in the past and in some instances how well he is performing in comparison to others. Area Needing Objectives Peter Drucker, while working as a consultant for General Electric, identified eight key areas in which organizations establish objectives. (1) Market standing, (2) Innovation, (3) Productivity, (4) Physical and financial resources, (5) Managerial performance and development, (6) Worker performance and attitudes, (7) Profitability and (8) Public and social responsibility. 1. Market standing: Market standing and innovation are the foundation areas in management. Essentially, an organization exists to obtain results in these areas only. Market standing is an answer to the question regarding optimum market share, which the firm should try to capture ultimately. This requires a careful analysis of (i) customers and products or services; (ii) market segments (what groups are buying the product or service);
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and (iii) distribution channels (who is getting the product to the customers). 2. Innovation: In every business, there are three kinds of innovations: Innovation in product or service; innovation in market place, consumer behavior and value; and innovation in the various skills and activities needed to make the products and services and to bring them to the market. The chief problem in setting innovation objectives is the difficulty of measuring the importance of various innovations. Management must, first of all, anticipate the innovation goals needed to reach marketing goals. It must also find out the technological developments in all areas of business. For example, the survival of an insurance company depends on: the development of new forms of insurance, the modification of existing policies, finding out cheaper ways of selling policies and settling claims etc. Operating in a competitive world forces business firms to place emphasis on innovation goals. 3. Productivity. Productivity is the ratio of an organizations inputs to its outputs. All business will have the same resources to work with; it is the quality of management that differentiates one business from another. It must decide as to what inputs of labour, equipment and finances are necessary to produce the firms outputs. 4. Physical and financial resources: Every business must be able to attract resources-physical, financial and human and put them to productive use for effective performance. Resource mobilization is a two step process anticipating the needs of the business and planning to obtain the resources in an economical fashion. After mobilizing resources, one also has to say, This is what is available; what do we have to be, how we have to behave to get the fullest benefit? 5. Managerial performance and development: In order to stay in and remain profitable, every business needs strong, innovative managers. So, it is highly important, especially in the case of large organizations, to set objectives relating to the quality of management performance, the development of managers at various levels in the organization. 6. Worker performance and attitudes: Organizations must provide tangible benefits to the individuals working for its continued growth. Thus, workers want wages, managers want salaries, owners want profits. These are the inducements that an organization must provide, in order to obtain performance (contributions) from various groups. Operative level
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employees in every organization perform most of the routine or normal work. Unless goals arc established in terms of output per employee, quality of product etc. the organizational activities may be disrupted by labour strife, union problems etc. 7. Profitability: (i) Profit objectives are important for accomplishing other objectives like covering risks in the business; (ii) ensuring supply of future capital for modernization and expansion; and (iii) satisfying customer needs. A fundamental objective of the business firm is to produce and distribute products and services that the customer is willing to buy. Its reason for being is to create value. Utility must be created or consumers will spend their money elsewhere. Profits arc essential for the survival and growth of the firm. They arc the rewards for the effective utilization of resources in creating value for consumers. Instead of trying to maximize profits, the firm must try to create utilities for consumers. How to strike a happy balance between multiple and sometimes, conflicting goals? As rightly pointed out, by Drucker, to manage a business is to balance a variety of needs and goals. Most organization has a set of multiple goals. In order to accomplish these multiple, and sometimes conflicting goals, it is necessary to strike a happy balance between them. According to Haimann, the real difficulty is not so much in determining the goals and the objectives; the real difficulty is in deciding how to balance the various objectives. How to achieve the trade-off? First of all, management must determine the optimum balance or mix of the objectives. For example, shareholders may demand larger dividends, customers may clamour for better quality products at cheaper prices, workers may demand higher wages, society may expect high standards of social conduct, and government may seek compliance with tax policies and industrial regulations. While formulating overall goals, the business must do well to protect the interests of each group reasonably. This requires judgement. And, there is no magic formula to replace intuition and judgement. Managers have to achieve the equilibrium by assigning priorities and by differentiating between long-term goals and short-term goals. To ward off internal conflicts, it is necessary to clearly communicate the objectives of each department to other departments. If all the departments in the organization are able to see the big picture and their role in it, misunderstandings and conflicts can be minimized. The fundamental objective of the firm is to create value, and profit is the
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result of meeting that objective effectively. It must be understood that profit is to our private enterprise system as breathing is to life, but it is not the purpose of existence any more than breathing is the purpose of life. The term profit as is used in business should be taken as a catalytic agent in chemistry; it is the actuator and not the goal or end result. 8. Public and social responsibility: In recent years, social responsibility of business is to achieve the economic objective, a firm must produce the goods, the consumer wants. If a firm is not able to create economic value for society, it may not stay in business long enough to make a profit. 2.10.2 Projects A project may be defined as a complex cluster of related activities with a distinct objective and a definite completion time period. In some cases, major plans can be decomposed into a number of projects each with a clear cut set of objectives. Such projects can be isolated and taken up for completion as a package; a project may involve the introduction of large automatic plant, building of a dam or a building, or the introduction of a new product. The task of executing the project is put under the charge of a Project Manager. Project Manager is an expert in his area and he formulates various plans, programs and policies and takes ultimate decisions. He designs various budgets and authorizes expenditure on various items. However, he draws personnel and assistance from the functional departments of the organization like finance, marketing, engineering and production. People from various departments go back to their departments when their job is over. 2.10.3 Policies Policies are guidelines or general limits within which the members of an enterprise act. They are general statements or understandings, which guide thinking and action. Policies exist at various levels of the enterprise-corporate, divisional and departmental. They are valuable because they allow lower levels of management to handle problems without going to top management for a decision each time. Some examples of policies at various levels of the enterprise are given below:
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1. No employee will accept any gift from any supplier except for token gifts of purely nominal or advertising value. 2. Each employee will proceed on one weeks vacation each year. 3. No employee will accept any outside employment. Policies provide a broad guide as to how the objectives of a business are to be achieved. While objectives provide the ends which a manager should try to achieve, the policies provide the guidelines: which he should keep in view while achieving the ends, A policy is an established guiding canon premised on objective, devised to govern the activities of the business enterprise and from which the basic precepts of conduct are derived. A policy is devised to guide the organizational members to deal with a particular situation in a particular manner. It delimits the area within which a decision is to be made and assures that the decision will be consistent with and contributive to business objectives. Characteristics of a Policy Policies tend to predefine issues, avoid repeated analysis, and give a unified structure to other types of plans. Thus, policies are not simple statements, they have certain purpose behind them. A statement should have the following characteristics in order to be accepted as a policy. (i) Policy is an expression of intentions of Top Management. It should present the principle that will guide the organization actions. Most of the policy statements reflect a faith in the ethical value of the people. (ii) Policy is stated in Broad Terms. The purpose of a policy statement is to serve as a guide to practice now and in future; so it should be stated in the broadest possible terms. (iii) Policy is Long Lasting. A policy should be formulated after taking into account the long-range plans and needs of the organization. (iv) Policy is developed with the Active Participation of Top Management. Policy development calls for serious thinking and participation of all the top executives. Policies live longer than people who frame them. They are framed in such a manner that they apply to all members of the organization alike from top to bottom. The policies should also get approval of the highest authority in the organization.
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(v) Policy is in Writing. Policies take concrete shape when they are put in writing. This will ensure uniformity in application. In case of disagreement at lower levels, written policy serves as the final reference point. Written policies ensure continuity and greater conformity. Advantages of Policies A policy is a guide for repetitive action in major areas of activity. It is a statement of commonly accepted understanding of decision-making criteria. Policies are set up to achieve several benefits. By taking policy decisions on frequently occurring problems, the top management provides the guidelines to lower level managers. It will permit decisions to be made in similar situations without repeating the reasons and expensive analysis required initially to state the policy or make the decision. Policies help managers at various levels to act with confidence without the need of consulting the superiors every time. This will also ensure promptness of action. The benefits of policies are as follows (i) By making policy decisions on frequently recurring problems, the top management provides the guidelines to lower level managers. (ii) Policies help managers at various levels to act with confidence without the need for consulting the superiors every time. This also ensures promptness of action. (iii) Policies facilitate better administrative control. Policies provide the rational basis for evaluating the results. (iv) By setting up policies, the management ensures that decisions made will be consistent and in tune with the objectives, and interests of the enterprise. (v) Policies secure coordination and integration of efforts in accomplishing the organizational objectives. (vi) Policies save time and effort by pre-deciding problems in repetitive situations. They save the management from the botheration of repeating the expensive analysis required to take the policy decision every time.

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Limitations of Policies (i) Policies are repeatedly used plans and they bring about rigidity in operations. They leave no room for initiative by the subordinates. (ii) Policies do not cover all the problems. Sometimes, unforeseen situations arise which are not covered by the existing policies. (iii) Policies are no substitute for human judgment. Policies only delimit the area within which decisions are to be made. (iv) Policies are not ever lasting. Difference between Policies and Objectives
S.No. 1. Policies Policies are guidelines, which facilitate the achievement of predetermined objectives Policies determine how the work is to be done. Policies prescribe the mode and the manner in which objectives can be achieved. Policies are formulated at the top level, middle level ad lower level management. Objectives Objectives are the ends towards which all the activities of the enterprise are - directed. Objectives determine what is to be done. Objectives are the end points of planning Objectives are determined by the owners or top management of the business.

2. 3. 4.

Policy Formulation It is the responsibility of the top management to make policies or to take policy decisions. Policies involve standing decisions, which are used repetitively over a period of time by different levels in the organization. Policies are required in different functions of the enterprise. But the top executives may not have the total expertise to lay down policies for all functional areas in the organization. It is here that the contribution of functional and other line managers and staff officials assumes significance. Such participation will boost the morale of the participants and will ensure better acceptance of these policies. No policy will produce the desired result if it is not acceptable to those who are to use the policy. A policy represents a management decision. That means policy formulation involves various stages of decision making process, namely, defining the problem, analyzing the problem, collecting information, developing alternatives, selecting the best alternative, putting the decision into practice and follow up. These steps have been discussed in detail in
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the chapter entitled Decision Making. It is important to point out the difference between a policy decision and other decisions. A policy decision is a standing decision, which serves as a framework for taking other decisions. The task of formulation and revision of policies is generally entrusted to a committee of top executives. Before proceeding to formulate a policy, the executives must understand the environment under which the need of a policy for a specific purpose is felt. Various policy alternatives should be analyzed carefully and it is also important to examine the effect of alternatives on the value system of the organization. That policy alternative should be adopted which is expected to yield the best possible results in terms of achievement of objectives of the enterprise. The policies must be put into writing. There are two compelling reasons for this. Firstly, a policy will be vague unless it is written down. Secondly, if a policy is in writing, it will reveal exactly the intentions of the top management. Special skill is required to select and adhere to policy language, which will state and synthesize the general principles and the scope for discretion. As said earlier, the policy should be finalized after consulting the persons who are supposed to use the policy. The reaction of such people should be analyzed carefully. After a policy is framed, it must be properly communicated to the people who are expected to use it. It is also necessary to appraise the policies after a certain period of time to know their effectiveness. The policies, which have become outdated, should be discarded without any delay. Types of Policies The management should always be in search of areas where there may be a need for a policy. Policies must be set up in the key areas of the enterprise like production, purchase, finance, personnel and marketing. If this is done, the policies will be classified by major functions of the enterprise. Policies may also be classified on the basis of source of the policy, i.e., (i) external, (ii) internal, and (iii) appealed. External policies include those policies, which arise to meet the various controls and requests of forces outside the enterprise, such as government, trade unions and trade associations. Internal policies include those initiated by managers at various levels to guide the subordinates. Appealed policies come into existence from the appeal of an exceptional problem by a subordinate to
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his superior regarding how to handle the problem. They are formed since the existing policies are insufficient to solve the problem. G.R.Terry has given another classification of policies based on the organizational levels of managers. There may, be policies which are used primarily by the top managers, other principles by the middle managers and still other policies which are applicable chiefly to the first line managers. The policies at these three levels may be termed as basic, general and departmental policies, Basic policies affect and relate to the topmost level of managerial hierarchy. General policies affect the middle level managers and are more specific than the basic policies. Departmental policies are highly specific and are applicable at the lowest level of management to deal with the day-to-day problems in dealing with the people at work. 2.10.4 Procedures A procedure is a systematic way of handling regular events. It is stated in terms of steps to be followed in carrying out certain kinds of work. According to Terry, a procedure is a series of related tasks that make up the chronological sequence and the established way of performing the work to be accomplished. It is a list of systematic steps for handling events that occur regularly. Chronological sequence of required actions is the essence of any procedure. A procedure is a guide to action rather than to thinking, so it hardly leaves any room for judgment. Procedures involve planned sequence and consistency. For instance, there may be different procedures in an enterprise for processing an order, shipping the goods, handling claims, collection of payments, and so on. Procedures are operational guides to action as they routinise the way certain recurring jobs are to be performed. The establishment of various procedures tends to impart systematized order in place of confusion in the organization. They help in management by system. They serve as means by which decisions are implemented. Well-conceived procedures allow effective delegation and decentralization of authority without loss of control and coordination. A streamlined, simplified and sound procedure helps to expedite and accelerate clerical work without duplication and waste of efforts and resources. It will lubricate the channels of information and, thus, help top management in timely decision-making. Even the information flow can
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be procedural so that management gets information continuously in vital areas like sales performance, cash flow, inventory position and so on. However, procedures must be periodically reviewed and updated to keep pace with the changing requirements of the volume of work. This will lead to work simplification, rationalization, increased efficiency and reduced costs. Advantages of Procedures (i) Procedures minimize the burden of decision-making because the sequence of steps to be followed is standardized. (ii) Procedures often lead to simplification of workflow and elimination of unnecessary steps. (iii) Procedures ensure uniformity and consistency of action under recurring situations. (iv) Procedures are developed after careful analysis of various operations, which are necessary for bringing coordination in the organization. (v) Procedures are an important aid to communication because they communicate the steps to be followed to complete a, particular piece of work. (vi) Procedures serve as a medium of control by enabling the managers to evaluate the performance of their subordinates. Limitations of Procedures (i) Procedures bring about rigidity in the performance of operations. Thus, they discourage the search for any improvement. (ii) A procedure lays down the fixed way of doing a particular job and thus a more effective, way of doing a job may not be given proper attention. (iii) Procedures need to be reviewed and updated constantly because they become obsolete with the change in the nature of business operations. Distinction between Policies and Procedures Policies are specific guidelines and constraints for managerial thinking and action. They are planned expressions of the organizations official attitude towards certain issues. But procedures, on the other hand, are
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systematic ways of handling regular events. They involve chronological sequence of actions required to do particular tasks. They are operational guides to action and routinise the way certain recurring jobs are to be done. The other points of difference between policies and procedures are as follows: 1. Policies are guides to decision-making while procedures are guides to action. 2. Policies have some room for managerial thinking and discretion while procedures are generally detailed and rigid. 3. Policies form part of strategies of the organization while procedures are operational as tactical tools. 4. Policies are generally framed by the top management and procedures are laid down at somewhat low-level in the light of policies. 5. Policies serve as the bases on which different procedures are based. The difference between policies and procedures can be further explained by means of an example. An industrial concern may adopt a policy of centralized recruitment and selection through the labor department. The labor department may then chalk out the procedure of recruitment and selection. This procedure may consist of several steps like inviting applications, preliminary interview, aptitude and other tests, final interview, medical examination and issue of appointment letter. However, both policies and procedures can be termed as standing plans because they guide action. Moreover, both are time and labor-saving devices because they provide ready-made guidelines for dealing with the recurring situations. 2.10.5 Strategies The term strategy has been adapted from war and is being increasingly used in business to reflect broad overall objectives and policies of an enterprise. In the context of business, strategy refers to the firms overall plan for dealing with and existing in its environment. Strategies most often denote a general programme of action and deployment of emphasis and resources to attain comprehensive objectives. Strategies are plans made in the light of the plans of the competitors because a modern business institution operates in a competitive environment. They are a useful framework for guiding enterprise thinking and action. For instance, a
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company may follow a strategy of charging a lower price or using more sales force than competitors or advertising more heavily than competitors. The purpose of strategies is to determine and communicate through a system of major objectives and policies, a picture of what kind of enterprise is envisioned. They do not attempt to outline exactly how the enterprise is to accomplish its objectives since this is the task of countless major and minor supporting programmes. But they are a useful framework for guiding enterprise thinking and action. This usefulness in practice and importance in guiding planning do, however, justify their separation as a type of plan for purposes of analysis. Why Strategic Planning? No military officer would undertake to engage his enemy without a clear idea of strategy. No politician would undertake a campaign for a major office without a clear concept of his Likewise, no business firm can afford to get ahead without a clear map of why and where it go. Strategic planning provides the route map for the firm. Benefits of Strategic Planning It provides the road map for the firm; it shows the way for achieving targets. It helps the firm utilize its resources in the best possible manner. It allows more effective allocation of time and resources for identifying opportunities. The firm can respond to environmental changes in a better way by exploiting opportunities to its advantages and avoiding costly mistakes in investment decisions. It minimizes the chances of mistakes and unpleasant surprises. It creates a framework for internal communication among personnel. It helps to integrate the behavior into a total effort. It provides a basis for the clarification of individual responsibilities. It gives encouragement to thinking. It encourages a favorable attitude toward change. It provides a cooperative, integrated and approach to tackling problems and opportunities.
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It serves as a comprehensive guide. It provides the big picture for all employees of an organization

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

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

All strategies are subject to change because the environment in which they operate is changing. The Process of Strategy Formulation Important steps in the strategy formulation process are given below.
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1. Mission and objectives: The strategic management process begins by spelling out the firms mission and objectives. The mission of a firm is the unique purpose that sets it apart from other companies of its type and identifies the scope of its operations. A company mission is designed to accomplish several outcomes? To ensure unanimity of purpose within the organization. To provide a basis for motivating the use of the organizations resources. To develop a basis, or standard, for allocating organizational resources. To establish a general tone or organizational climate; for example, to suggest a business like operation. To serve as a focal point, for those who can identify with the organizations purpose and direction as well deter those who cannot do so, from participating further in its activities. To facilitate the translation of objectives and goals into a work structure, involving the assignment of tasks to responsible elements within the organization. To specify organizational purposes and. the translation of these purposes in such a way that cost, time and performance parameters can be assessed and controlled (King and Cleiand).

Mission is a broad term and it reflects considerable idealism. We therefore, require specific or objectives to be achieved within a time frame, which would help us, compare with its rivals. Objective is an end result, the end point, something that you aim for and to reach. It is a kind of desired result towards which behavior is directed in the organization. To achieve long-term prosperity, managers generally establish long-term objectives in certain areas (Pears and Robinson), namely: Profitability: How much can the firm earn that is an acceptable level of profit stay in the business and get ahead? Productivity: Whether the firm can improve the input-output relationship in a sustained way, in terms of number of items produced or the number of services rendered per unit of input.
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Competitive position: This is usually expressed in terms of increasing total sales or market share when compared to rivals in the field. Employee development and employee relations: Employees value growth and career opportunities. Providing such stimulating opportunities increase productivity and decrease turnover. Therefore, employee development becomes a key issue in every firms long term plan- Improving employee relations (union-workers-employers) also, is an important issue because poor industrial relations could upset all the calculations of managers regarding growth, profitability, etc.

2. External Analysis: The External Environment needs to be analyzed to find the firms opportunities or to minimize the threats. 3. Internal Analysis: After taking note of the opportunities present in the environment, the firm has to identify the key areas where it wants to focus its energies based on its own strength and weakness. 4. Formulate Strategies: The situation analysis will give the lead to the explicit strategic plans at three levels; corporate, business and functional. Appropriateness of Business Strategy A business strategy is a pragmatic plan of action to achieve certain objectives. To evaluate its appropriateness requires certain criteria. We may identify six criteria to measure the appropriateness of a business strategy 1. Internal Consistency. A business strategy in a particular area of business should be consistent with strategies in other areas and objectives and policies of business. Internal inconsistency in any strategy will create problem in its implementation. 2. Consistency with Environment. A strategy is basically an enterprises response to cope with external environmental. Therefore, it should aim at meeting the threats and pressures of external forces. 3. Appropriateness in the light of available resources. Formulation of a strategy requires a realistic assessment of the resources of the enterprise men, money and materials both existing resources and the resources it can command. The resources of an enterprise also include the skills of management and other manpower, command over sources
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of scarce raw materials, production facilities, technology, marketing capabilities and public image, and so on. It is desirable that every enterprise formulates its strategy within the limitations imposed by its resources. The objective is to ensure that the enterprises resources are not over-stretched or over-strained on the one hand and to utilize the existing and commendable resources in the best possible manner on the other. 4. Acceptable degree of risk. Any major strategy carries with it certain element of risk and uncertainty because it covers a long future horizon and because it seeks to cope with complex environment. The degree of risk inherent in a strategy should be within the bearable capability of the enterprise. Resources should not be committed irrevocably, nor should they be concentrated on a single or narrow range of ventures. Also, there should be match between risk and returns, financial and otherwise. 5. Appropriate Time Horizon. Time is the essence of any strategy. While a reasonably long time span imparts some flexibility, the problem of forecasting is ever present. How far in the future can top management predict with credibility is a measure of its capability. An optimal time span cannot be mathematically determined; it is a matter of environmental conditions, the objectives to be sought and the judgment of management. 6. Workability. A strategy should be feasible and produce desired results within the constraints and parameters known to management. It should be realistic and capable of implementation. Certain quantitative measures like volume of sales and profit, growth rate, asset formation, market share, introduction of new products and so on, are to be set. These are to be combined with qualitative criteria like the degree of confidence with which managers implement the strategy, the extent to which major areas of decision situations are handled by reference to the criteria embedded in the strategy, the extent to which opportunities are exploited, threats averted, resources mobilized, and environmental control gained. 2.10.6 Methods There is a method for accomplishing each phase of work within a procedure. A method is the manual or mechanical means by which each operation is performed. It means an established manner of doing an operation, thus, a method is more limited in scope than procedure because
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it deals with a task that is only one step of a procedure. For instance, in the procedure for processing order, there are methods for acknowledging the incoming order, checking the credit status of the customer, preparing the sales invoice and distributing the copies of the invoice. 2.10.7 Programmes A programme involves planning for future events and establishing a sequence of required actions. For instance, it might include such general activities as locating new suppliers as a source of additional raw materials, purchasing new machines that will enable to increase output, changing over some existing machines to meet new demands or hiring new people to operate new equipment. Thus, a programme is a complex of objectives, policies, procedures, task assignments, steps to be taken, resources to be employed and other elements necessary to carry out a given course of action. A programme may be as major as to start a new factory or may be as minor as a scheme formulated by a foreman to improve the morale of the workers. 2.10.8 Budgets Budgets are plans for using money and materials. Budgeting is an important part of overall planning as different kinds of budgets are prepared to utilize scarce resources in the best possible manner. A budget is a statement of expected results expressed in numerical terms like rupees, product units, or man hours. Since it is a statement of expected results, it is also used as an instrument of managerial control. It provides a standard by which actual operations can be measured and variations can be checked. But it should not be forgotten that making a budget is clearly planning. A budget forces an enterprise to make in advance a numerical compilation of expected cash flow, expenses and revenues, capital outlays, man or machine-hour utilization etc. Budgeting is essential for control, but it cannot serve as a control mechanism unless it reflects plans. As a means of effective planning, the process of budgeting may involve the preparation of budgets of sales, purchase, materials, labor, manufacturing expenses, etc. Budgeting is a key managerial process and is important for coordinating the activities of various departments. It coordinates by adjusting every departmental budget into the master budget. Every departmental head is forced to conscious plan the future operations of his department in tangible terms.
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Since budgets portray verifiable and measurable goals to be reached within a period of one year, they inject a sense of clarity, direction and purpose in the activities of the organization. However, to be effective means of planning, budgets should have functional flexibility. They should not be rigid instruments. They should be able to cope with the unforeseen circumstances within a predictable range of activities. The budgets should be drafted carefully and should not represent a mere projection on the basis of the past performance. They should be forward looking documents. 2.10.9. Rules Every organization attempts to operate in an orderly way by laying down certain rules. Rules are the simplest and the most specific type of standing plans. They are used for guiding what may or may not be done. A rule demands a specific action. It is more rigid than a policy. Rules generally pertain to the administrative area of a procedure. A rule may not be apart of any procedure. For example, a rule like No smoking is not related to any procedure. Rules demand strict compliance. Their violation is generally associated with some sort of disciplinary action. Significance of Standing Plans like budget Standing plans are formulated to achieve unity and uniformity of efforts in meeting repetitive situations arising at various levels of the enterprise. They act as ready guides to deal with recurring problems. They help in the effective management of a business enterprise in several respects as stated below: (i) Standing plans facilitate delegation of authority to lower levels without abdication of accountability at successively higher levels. (ii) They are effective means of achieving the goals of the enterprise. Goals tend to be vague, complex, multi dimensional and, sometimes, conflicting with one another in the absence of standing plans. In order to overcome such difficulties, it is essential to develop a hierarchy of policies, methods, procedures and rules to serve as ready frames of reference whenever there is some difficulty in taking a managerial decision. (iii) Standing plans help in achieving co-ordination in the enterprise. They tend to achieve consistency, uniformity and unity of efforts in the enterprise.
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(iv) Standing plans ensure quick action whenever need arises because there is no need to repeat the reasoning and analysis required initially to design a standing plan whenever a similar situation arises. Thus, they are great labor saving devices as they provide frames of reference for tackling recurring situations. (v) Standing plans facilitate better administrative control. They provide the rational bases of evaluating the results of efforts of persons working at the various levels in the enterprise. 2.11 DECISION MAKING Introduction Decision-making is an important part of management process. It covers every part of an enterprise. In fact, whatever a manager does, and he does through decision-making only. For example, a manager has to decide (i) What are the long-term objectives of the organization; how to achieve these objectives, what strategies, policies, procedures to be adopted (planning); (ii) How the jobs should be structured what type of structure, how to match jobs with individuals (organizing); (iii) How to motivate people to peak performance, which leadership style should be used, how to integrate effort and resolve conflicts (leading); (iv) What activities should be controlled, how to control them, (controlling) decision-making is a central, important part of the process of managing? Managers are essentially decision makers only. Almost everything managers do involves decision-making. Managers scout for problems, make decisions for solving them and monitor the consequences to see whether additional decisions are required. Good decision-making is a vital element of good management because decisions determine how the organization solves its problems, allocates its resources and accomplishes its goals. However, decision-making is not easy it must be done amid ever-changing factors, unclear information and conflicting points of view. A decision is a choice made from available alternatives. Decision-making is the process by which individuals select a course of action among several alternatives, to produce a desired result.
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Characteristics of Decision-Making The important characteristics of decision-making may be listed thus: 1. Goal-oriented: Decision-making is a goal-oriented process. Decisions are usually made to achieve some purpose or goal. The intention is to move toward some desired state of affairs. 2.Alternatives: A decision should be viewed as a point reached in a stream of action. It is characterized by two activities : search and choice. The manager searches for opportunities to arrive at decisions and for alternative solutions, so that action may take place. Choice leads to decision; it is the selection of a course of action needed to solve a problem. When there is no choice of action, no decision is required. The need for decision-making arises only when some uncertainty, as to outcome exists. 3. Analytical-intellectual: Decision-making is not a purely intellectual process. It has both the intuitive and deductive logic; it contains conscious and unconscious aspects. Part of it can be learned, but part of it depends upon the personal characteristics of the decision maker. Decision-making cannot be completely quantified; nor is it based mainly on reason or intuition. Many decisions are based on emotions or instincts. A decision represents a judgment; a final resolution of a conflict of needs, means or goals; and a commitment to action made in the face of uncertainty, complexity, and even irrationality. Decision implies freedom to the decision maker regarding the final choice; it is uniquely human and is the product of deliberation, evaluation and thought. 4. Dynamic process: Decision-making is characterized as a process, rather than as, one static entity. It is a process of using inputs effectively in the solution of selected problems and the creation of outputs that a course of action among has utility. Moreover, it is a process concerned with identifying worthwhile things to do in a dynamic setting. A manager for example, may hire people based on merit regularly and also pick up candidates recommended by an influential party, at times. Depending on the situational requirements, managers take suitable decisions using discretion and judgment. 5. Pervasive function: Decision-making permeates all management and covers every part of an enterprise. In fact, whatever a manager does, he does through decision-making only; the end products of a managers
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work are decisions and actions. Decision-making is the substance of a managers job. 6. Continuous activity: The life of a manager is a perpetual choice making activity. He decides things on a continual and regular basis. It is not a one shot deal. 7. Commitment of time, effort and money: Decision-making implies commitment of time, effort and money. The commitment may be for-short term or long-term depending on the type of decision (e.g. strategic, tactical or operating). Once a decision is made, the organization moves in a specific direction, in order to achieve the goals. 8. Human and social process: Decision-making is a human and social process involving intellectual abilities, intuition and judgment. The human as well as social imparts of a decision are usually taken into account while making the choice from several alternatives. For example, in a labor surplus, capital-hungry country like India managers cannot suddenly shut down plants, lop off divisions and extend the golden handshake to thousands of workers, in the face of intense competition. 9. Integral part of planning: As Koontz indicated, decision making is the core of planning. Both are intellectual processes, demanding discretion and judgment. Both aim at achieving goals. Both are situational in nature. Both involve choice among alternative courses of action. Both are based on forecasts and assumptions about future risk and uncertainty. 2.11.1 TYPES OF DECISIONS Decisions may be classified according to different bases, which are discussed below: (i) Routine and Strategic Decisions. Tactical or routine decisions are made repetitively following certain established rules, procedures and policies. They neither require collection of new data nor conferring with people. Thus they can be taken without much deliberation. They may be complicated but are always one-dimensional. They do not require any special effort by the manager. The managers at the middle and lower management level generally take such decisions. Strategic or basic decisions, on the other hand, are more important and so the top management and middle management take them generally. The higher the level of a manager, the more strategic decisions he is required to
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take. The strategic decisions relate to policy matters and so require a thorough fact finding and analysis of the possible alternatives. Finding the correct problem in such decisions assumes great importance. The managers are more serious about such decisions as they influence decision-making at the lower levels. (ii) Policy and Operating Decisions. Policy decisions are of vital importance and are taken by the top management. They affect the entire enterprise. But operating decisions are taken by the lower management in order to put into action the policy decisions. For instance, the bonus issue is a policy matter that is to be decided by the top management, and calculation of bonus is an operating decision, which is taken at the lower levels to execute the policy decision. (iii) Organizational and Personal Decisions. Organizational decisions are those, which a manager takes in his official capacity. Such decisions can be delegated. But personal decisions, which relate to the manager as an individual, and not as a member of the organization, cannot be delegated. (iv) Programmed and Non-programmed Decisions. The programmed decisions are of a routine and repetitive nature, which are to be dealt with according to specific procedures. But the non-programmed decisions arise because of unstructured problems. There is no standard procedure for handling such problems. For instance, if an employee absents himself from his work for a long time without any intimation, the supervisor need not refer this matter to the chief executive. He can deal with such an employee according to the standard procedure, which may include charge sheet, suspension, etc. But if a large number of employees absent themselves from work without any information such a problem cannot be dealt in a routine manner. It has to be dealt with as an unstructured pro blem and t he chief executive sho uld take t he decision. Non-programmed decisions require thorough study of the problem and scientific analysis of the situational factors. There has to be adequate probing and analysis of various alternatives before taking such decisions. (v) Individual and Group Decisions. When an individual in the organization takes a decision, it is known as individual decision. Such decisions are generally taken in small organizations and in those organizations where autocratic style of management prevails. Groups or
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collective decisions refer to the decisions, which are taken by a group of organizational members, say Board of Directors or a committee. 2.11.2 DIFFICULTIES IN DECISION MAKING A business manager can make decisions by intuition, i, e., without considering carefully all the alternatives. Practically, every one takes decisions in this way because of the feeling that the particular course of action is the best one. This kind of feeling may have no logic behind it. Moreover, it is difficult to explain why one is feeling a particular way. Psychologists emphasize that there are forces other than reason within a person, which influence and shape a decision. Decisions based on intuition are subjective and are taken without any conscious effort to weigh the advantages and disadvantages of various alternatives. Effective decision-making requires a rational choice of a course of action. There is a need to define the term rational here. Rationality is the ability to follow a systematical, logical, thorough approach in decision-making. Thus, if a decision is taken after thorough analysis and reasoning and weighing the consequences of various alternatives, such a decision will be called an objective or rational decision. In actual practice, each person takes a decision, which involves a combination of intuition and rational thinking. A person who depends much upon intuition is more subjective and a person who depends much upon logical thinking is more objective. This is what Herbert Simon has called the principle of bounded rationality. Simon emphasized that a person makes decisions not only on absolutely logical analysis of facts but also on his intuition, value system and way of thinking, which are subjective in nature. The subjectivity in decision-making arises because: (i) The individual does not want to study and analyze the problem because of his perception. (ii) The individual does not have the full knowledge of the alternatives and/or their consequences. (iii) The individual interprets the organizational goals in his own way. He may adopt a course of action, which according to him will meet the goals effectively. (iv) The individual is careless in taking the decision. He may be indifferent towards the consequences of his decision.
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The rationality of the individuals is generally affected by the above limitations. The concept of bounded rationality explains the behavior of people in practice. It recognizes that a man cannot be expected to have full knowledge and information and his capacity to perceive, retain and retrieve information is not unlimited. Human goals are multiple and conflicting. The traditional theory of complete rational and economic man cannot work in practice. Rationality is the ability to follow a systematic, logical and thorough approach in decision-making process. Gross suggested three dimensions to determine rationality: (i) the extent to which a given action satisfies human interests; (ii) feasibility of means to the given end; and (iii) consistency. Rationality requires complete knowledge of the consequences that will follow each choice. But it is not always possible. Rationality further requires a choice among all possible alternatives. But every individual has his limitations. He may not be able to perceive all possible alternatives. Moreover, decision-making relates to future. This requires some degree of imagination. One may not be able to imagine objectively because of his frame of mind. From this, we can say that a man cannot be completely rational. As said by Simon, a man has only bounded rationality because there are certain limitations to complete rationality. Thus, Simons point of view is highly realistic as it helps in understanding the actual behavior of the decision maker. It also modifies substantially the traditional theory of decision-making based on complete rational man. Subjective factors are bound to affect a persons decisions even though he is otherwise rational. 2.11.3 Steps in Rational Decision Making The decision making process can be explained by studying the following steps: (i) Diagnosing and Defining the problem (ii) Analyzing the problem. (iii) Collecting of data. (iv) Developing alternatives. (v) Review of key factors.
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(vi) Selecting the best alternative. (vii) Putting the decision into practice. (viii) Follow up. (i) Diagnosing and Defining the Problem It is true to a large extent that a problem well defined is half solved. A lot of bad decisions are made because the person making the decision does not have a good grasp of the problem. Too often what managers consider, as problems are really symptoms of problems. For instance, a company is losing money. Its problem cant be stated as How can we stop losing money? That is only a symptom. The real problem is to identify what business practices are causing the company to incur losses. Are the prices too low or expenses too high? Therefore, it is essential for the decision maker to find and define the problem before he takes any decision.
Objectives Decision of Alternatives

Problem

fact finding

Alternatives Evaluation

information

Testing

Selections

Implementation

Feedback information

Figure - Decision-making Process.

Sufficient time should be spent on defining the problem, as it is not always easy to define the problem and to see the fundamental thing that is causing the trouble and that needs correction. Practically, no problem ever presents itself in a manner that an immediate decision may be taken. It is therefore, essential to define the problem before any action is taken, otherwise the manager will answer the wrong question rather than the core problem. Clear definition of the problem is very important as the right answer can be found only to a right question.
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(ii) Analyzing the Problem After clearly recognizing the problem, the next phase of decision-making is the analysis of problem, which involves classifying the problem and gathering information. Classification is necessary in order to know who should take the decision and who should be consulted in taking it. Without proper classification, the effectiveness of the decision may be jeopardized. The problem should be classified keeping in view the following factors: (i) The nature of the decision, i.e., whether it is strategic or it is routine, (ii) The impact of the decision on other functions, (iii) The futurity of the decision, (iv) The periodicity of the decision, and (v) The limiting or strategic factor relevant to the decision. (iii) Collection of Data A lot of information is required to classify any problem. So long as the required information is not available, any classification would be misleading. This will also have an adverse impact on the quality of the decision. Trying to analyze without facts is like guessing directions at a crossing without reading the highway signboards, Thus collection of right type of information is very important in decision making. It would not be an exaggeration to say that a decision is as good as the information on which it is based. Collection of facts and figures also requires certain decisions on the part of the manager. He must decide what type of information he requires and how he can obtain this. Before gathering the information, one must be clear as to how much time and money he can spend in gathering the information he needs. It is also important to note that when one gathers the facts to analyze a problem, he wants facts that relate to alternative courses of action. So one must know what the several alternatives are and then should collect information that will help in comparing the alternatives. Needless to say, collection of information is not sufficient; the manager must also know how to use it. It is not always possible to get all the information that is needed for defining and classifying the problem. In such circumstances, a manager
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has to judge how much risk the decision involves as well as the degree of precision and rigidity that the proposed course of action can afford. It should also be noted that fact finding for the purpose of decision should be solution oriented. The manager must lay down the various alternatives first and then proceed to collect facts, which will help in comparing alternatives. (iv) Developing Alternatives After defining and analyzing the problem the next step in the decision making process is the development of alternative courses of action. Without resorting to the process of developing alternatives, a manager is likely to be guided by his limited imagination. It is rare for alternatives to be lacking for any course of action. But, sometimes, a manager assumes that there is only one way of doing a thing. In such a case, what the manager has probably not done is to force himself consider other alternatives. Unless he does so, he cannot reach the decision, which is the best possible. From this can be derived a key planning principle which may be termed as the principle of alternatives. Alternatives exist for every decision problem. Effective planning, involves a search for the alternatives towards the desired goal. (v) Review of Key Factors While developing alternatives, the principle of limiting factor has to be taken care of. A limiting factor is one, which stands in the way of accomplishing the desired goal. It is a key factor in decision-making. If such factors are properly identified, manager can confine his search for alternatives to those, which will overcome the limiting factors. In choosing from among alternatives, the more an individual can recognize those factors which are limiting or critical to the attainment of the desired goal, the more clearly and accurately he or she can select the most favorable alternativesgenerally use. It should also be noted that development of alternatives is no guarantee of finding the best possible decision, but it certainly helps in weighing one alternative against others and, thus, minimizing uncertainties. It is not always necessary that the alternative solutions should lead to taking some action. To decide to take no action is also a decision as much as to take a specific action. It is imperative in all organizational
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problems that the alternative of taking no action is being considered. For instance, if there is an unnecessary post in a department, the alternative not to fill it will be the best one. The ability to develop alternatives is often as important as making a right decision among the alternatives. The development of alternatives, if thorough, will often unearth so many choices that the manager cannot possibly consider them all. He will have to take the help of certain mathematical techniques and electronic computers to make a choice among the alternatives. (vi) Selecting the Best Alternative In order to make the final choice of the best alternative, one will have to evaluate all the possible alternatives. There are various ways to evaluate alternatives. The most common method is through intuition, i.e., choosing a solution that seems to be good at that time. There is an inherent danger in this process because a managers intuition may be wrong on several occasions. The second way to choose the best alternative is to weigh the consequences of one against those of the others. Peter Drucker has laid down four criteria in order to weigh the consequences of various alternatives. They are: (a) Risk. A manager should weigh the risks of each course of action against the expected gains. As a matter a fact, risks are involved in all the solutions. What matters is the intensity of different types of risks in various solutions. (b) Economy of Effort. The best manager is one who can mobilize the resources for the achievement of results with the minimum of efforts. The decision to be chosen should ensure the maximum possible economy of efforts, money and time. (c) Situation or Timing. The choice of a course of action will depend upon the situation prevailing at a particular point of time. If the situation has great urgency, the preferable course of action is one that alarms the organization that something important is happening. If a long and consistent effort is needed, a slow start gathers momentum approach may be preferable. (d) Limitation of Resources. In choosing among the alternatives, primary attention must be given to those factors that are limiting or strategic to the decision involved. The search for limiting factors in
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decision-making should be a never-ending process. Discovery of the limiting factor lies at the basis of selection from the alternatives and hence of planning and decision-making. Koontz and ODonnell have suggested three bases, which should be followed by a manager for selecting among the alternatives, these are experience, experimentation and research and analysis, which are discussed below : (i) Experience: In making a choice, a manager is influenced to a great extent by his past experience. Sometimes, he may give undue importance to past experience. He should compare both the situations. However, he can give more reliance to past experience in case of routine decisions; but in case of strategic decisions, he should not rely fully on his past experience to reach at a rational decision. (ii) Experimentation: Under this approach, the manager tests the solution under actual or simulated conditions. This approach has proved to be of considerable help in many cases in test marketing of a new product. But it is not always possible to put this technique into practice because it is very expensive. It is utilized as the last resort after all other techniques of decision making have been tried. It can be utilized on a small scale to test the effectiveness of the decision. For instance, a company may test a new product in a certain territory before expanding its sale nationwide. (iii) Research and Analysis: It is considered to be the most effective technique of selecting among alternatives where a major decision is involved. It involves a search for relationships among the more critical variables, constraints and premises that bear upon the goal sought. In a real sense, it is the pencil and paper approach to decision making. It weighs various alternatives by making models. It takes the help of computers and certain mathematical techniques. This makes the choice of the alternative more rational and objective. (vii) Putting the Decision into Practice The choice of an alternative will not serve any purpose if it is not put into practice. The manager is not only concerned with taking a decision, but also with its implementation. He should try to ensure that systematic steps are taken to implement the decision. The main problem which the manager may face at the implementation stage is the resistance by the subordinates who are affected by the decision. If the manager is unable
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to overcome this resistance, the energy and efforts consumed in decisionmaking will go waste. In order to make the decision acceptable, it is necessary for the manager to make the people understand what the decision involves, what is expected of them and what they should expect from the management. The principle of slow and steady progress should be followed to bring about a change in the behavior of the subordinates. In order to make the subordinates committed to the decision, it is essential that they should be allowed to participate in the decision making process. The managers, who discuss problems with their subordinates and give them opportunities to ask questions and make suggestions, find more support for their decisions than the managers who dont let the subordinates participate. Now the question arises at what level of the decision-making process the subordinates should participate. The subordinates should not participate at the stage of defining the problem because the manager himself is not certain as to whom the decision will affect. The area where the subordinates should participate is the development of alternatives. They should be encouraged to suggest alternatives. This may bring to surface certain alternatives, which may not be thought of by the manager, moreover, they will feel attached to the decision. At the same time, there is also a danger that a group decision may be poorer than the one-man decision. Group participation does not necessarily improve the quality of the decision, but sometimes impairs it. Someone has described group decision like a train in which every passenger has a brake. It has also been pointed out that all employees are unable to participate in decisionmaking. Nevertheless,, it is desirable if a manager consults his subordinates while making decision. Participative management is more successful than the other styles of management. It will help in the effective implementation of the decision. (viii) Follow Up It is better to check the results after putting the decision into practice. The reasons for following up of decisions are as follows: (i) If the decision is a good one, one will know what to do if faced with the similar problem again. (ii) If the decision is a bad one, one will know what not to do the next time.
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(iii) If the decision is bad and one follows up soon enough, corrective action may still be possible. In order to achieve proper follow up, the management should devise an efficient system of feedback information. This information will be very useful in taking the corrective measures and in taking right decisions in the future. 2.11.4.1 Quantitative Techniques in Decision Making The process of managerial decision-making has become very cumbersome. In order to evaluate the alternatives, certain quantitative techniques have been developed which facilitate making objective decisions. Some of these techniques are discussed below: (i) Marginal Analysis This technique is also known as marginal costing as under it the additional revenues from additional costs are compared. The profits are maximum at the level where marginal revenues and marginal costs are equal. Marginal analysis can also be used in comparing factors other than costs and revenues. For instance, in order to find the optimum output of a machine. one can vary inputs against output until the additional inputs equal the additional output. This would be the point of maximum efficiency of the machine. Break-even analysis is the modification of this technique, which tells the management the point of production where there is no profit and no loss. (ii) Cost-Benefit Analysis It is a technique of weighing alternatives where the optimum solution cannot be conveniently reduced to monetary terms as in the case of marginal cost analysis. It is used for choosing among alternatives to identify a preferred choice when objectives are far less specific than those expressed by such clear quantities as sales, costs or profits. For instance, social objectives may be to reduce pollution of air and water, which lacks precision. Cost models may be developed to show cost estimates for each alternative and benefit models to show the relationship between each alternative and its effectiveness. Then, synthesizing models, combining these results, may be made to show the relationships of costs and effectiveness for each alternative.
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(iii) Operations Research Operations Research has been defined as the scientific method of analysis of decision problems to provide the executive the needed quantitative information in making these decisions. The object of operations research is to provide the managers with a scientific basis for solving organizational problems involving the interaction of components of the organization. In days gone by, executive decisions used to be taken on the basis of intuition, subjectivity or past experience even in big organizations. Operations research seeks to replace this process by an analytic, objective and quantitative basis based on information supplied by the system in operation and possibly without disturbing the operation. Operations research is widely used in modern business organizations. For instance, inventory models are used to control the level of inventory. Linear programming is useful for allocation of work among individuals in the organization. Sequencing theory helps the management to determine the sequence of particular operations. In addition to these, there are other techniques like queuing theory, games theory, reliability theory and marketing theory, which are important tools of operations research, which can be used by the management to analyze the problems and take decisions. (iv) Linear Programming Linear programming is a technique devised for determining the optimum combination of limited resources to achieve a given objective. It is based on the assumption that there exists a linear relationship between variables and that the limits of variations could be ascertained. It is particularly helpful where input data can be quantified and objectives are subject to definite measurement. It is applicable in such problem areas as production planning, transportation, warehouse location and utilization of production and warehousing facilities at an overall minimum cost. Linear programming involves maximization or minimization of a linear function of several primary variables known as objective function subject to a set of some real or assumed restrictions known as constraints. 2.11.4.2 Qualitative Decision making: Decision making is extremely involved and emphasizes detailed application of operations research techniques. These techniques are especially useful
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in this era of increasingly complex problems. Only initial, brief and simple aspects will be explained here. Israel Brosch has explained the quantitative approach to decision making as follows: The quantitative approach is based on data, facts, information and logic. It consists of an orderly and systematic framework of defining, analyzing and solving problems in an objective and scientific manner. The quantitative approach is not intended to replace perception, good judgement and common sense, the fundamental decision making tools of competent managers. It is intended to improve managers decision making ability and to provide them an accountable means for justifying and evaluating their own managerial performance. While the ultimate responsibility for making decisions rests on the managerial judgement quantitative analysis of the situation provides an excellent tool for managerial appraisal of available alternatives. This tool is in the form of a mathematical model, which in a way is a powerful extension of thinking. It consists of a symbolic representation of the situation of the real world. This model may simply describe and explain the actual behaviour of the system with relevant variables interconnected in such a manner so that the interdependence of actual variables in the situation. The model can be formulated in such a manner that changes in the input variables would reflect changes in the output of the system. In general, a mathematical model consists of three basic components. These are: Decision variables: These are controllable variables which are within the domain of the decision maker and can be changed and manipulated by him. Different values assigned to decision variables would give the manager different courses of action to choose from. A specific set of values of these variables would determine a specific solution or a specific course of action. For example, in the case of making an investment, the decision variables would be different areas in which the investment can be made, the amount that the decision maker wants to invest and the timing of such investment. Uncontrollable variables: The uncontrollable variables are all those factors whose effect on the situation is beyond the control of the manager. The factors or parameters may be legal, social, economic or political in
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nature, and might include inflation, prices of competitors, costs of raw material etc. For example, in the decision to make an investment, the uncontrollable variables may be the prime rate, risk level etc. Output variables: Output variables are the results of efforts and are known as measures of effectiveness or the objective function. The objective function in the case of investment decision would be rate of return on investment or the total net profit. In other words, the total profit in the case of producing an item would depend upon such decision variables as what to produce, when to produce and how much to produce; and upon such uncontrollable variables as demand, disposable income, state of the economy etc. The decision makers primary concern is to maximize the value of the output variable which would give him the best solution. The following is the appropriate sequence of steps that the decision maker would follow in order to formulate the mathematical model and find the best solution. Define the objective function: The objective function is a measurable characteristic which defines the particular goal to be met. It is expressed in a mathematical equation and is a function of decision variables. By substituting a set of values for the decision variables, a clear understanding of the level of achievement can be obtained. Isolate all the decision variables that are pertinent to the attainment of the objective. For example, if an oil refinery is purchasing oil from three different countries then the quantities decided to be purchased from each country would become the decision variables, since the values of these variables become the domain of the decision maker. These are also known as independent variables. Develop the relationships that exist between these independent variables. Isolate the non-controllable variables which are beyond the control of the decision maker. These may be defined as states of nature or unknown strategies of the competitors, left the energy users quite unprepared. Similarly a competitor may come up with a better substitute for your product, taking away your market share. These uncontrollable variables must be distinguished from controllable variables which are parts of strategies of the decision maker. Develop forecasts for the values of non-controllable variables and determine whether these forecasts are based upon stable processes. This
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determination can be intuitive or the concept of probability or some other statistical methods can be used to establish these forecasts. For example, to take an umbrella with you when go out will depend upon the forecast about the weather and the accuracy of such a forecast. Since this is a state of nature and beyond the control of the decision maker, the more accurate and reliable the forecast be, the more success of the decision. Develop the function that relates the output variables to the decision variables. This would describe the relationship between the objective function which is a dependent variable and the independent variables. For example, in the case of oil refinery, the cost function would be the dependent variable and the number of barrels purchased from different countries would be the independent variables. The combination of costs of purchasing oil from these countries would constitute the objective function. Identify and state the constraints that put a limitation on the values of controllable variables. These are the special requirements that restrict the attainment oft the goals. These constraints may be in the form of scarce resources, saturation of market, governmental regulations, contractual agreements etc. for example, the oil refinery may be allotted a set quantity of oil from one or more of these countries. Find and choose optimal solution. An optimal solution is the one which is feasible and gives the best value of the objective function. In other words, such strategy should be chosen which maximizes the degree of attainment of our objective within the constraints that have been established. It is possible that there may be more than one optimal solution, in which case the manager would have the flexibility in implementing a desired strategy. Since all quantitative decisions involve knowledge of probability theory, a brief exposure to the probability concept is necessary. Probability Theory Probability refers to a chance that a particular event will occur. Informally, the word chance or probability is commonly used in our day- to day routine. Whether we should take an umbrella when we go out in the morning would depend upon the likelihood of rain for that day. We are living in a world where there are so many uncertainties, that in order for us to make some intelligent decisions and function effectively, we must
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have some ideas of events that are most likely to occur, those that are not likely to occur at all and others that are in between. Only then we can plan our life. For example, if we take a train to go to our work, we are practically sure that it will reach our destination at a particular time so that we can start our journey at a particular time. However, if we have some doubts that it may break down on the way, we may leave the home earlier in order to accommodate and absorb such delay. Similarly, when we drive in our car, we have only one spare tyre in the trunk of our car because it is extremely unlikely that we will have more than one flat tyre within a given period of time. This likelihood of an event occurring or the probability of such an event gives us some confidence or a degree of assurance that a particular event will occur. The probability can only be assigned to events that occur at random and are only affected by chance and not by design. The interest is centered on the probility of an outcome or success where success simply identifies the desirability of the outcome. The probability of success is defined as the number of successful outcomes divided by the total number of outcomes. In other words the probability of an event is infinitely long series of identical sampling experiments. This means, for example, that the probability of a head in tossing of a fair coin is because a great number of tosses will produce about 50 percent heads. Accordingly, the probability (p) is equal to (s/n) where s = the number of successful outcomes. It must be understood though that all possible outcomes are equally likely to occur. As discussed earlier, the probability of a head occurring as an outcome of tossing a fair coin is since there are only two possible outcomes in the tossing of coin, with each outcome being equally likely to occur and one of these is the outcome of a head. It must be noted, however that the coin is fair and the experiment of tossing the coin is random in that a number of causes contribute to produce the final outcome. In this particular case, the outcome of tossing the coin is affected by many forces such as the force of tossing , the amount of spin, air movements and the position of the hand at the time catching the coin. Since all these factors are chance elements, the probability of the desired outcome (head) is the percentage of times in which this outcome will occur if the event was repeated many times. It is not difficult to deduce that this would happen 50 percent of the times. The probability can be subjective or objective in nature. The subjective
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probability measures the degree of belief in the likelihood of occurrence of a given outcome. The objective probability, on the other hand is a measurable and observable fact relating to long run frequencies of occurance. In our discussion on quantitative methods in decision making, we are only concerned with objective brobability. Expected value: it is simply an arithmetic average of probability distribution where the probability distriburion is the distribution of probabilities assigned to the likelihood of each and all outcomes of an event such that all these probabilities add up to 1. As an illustration let x1,x2,x3,.. and so on represent the possible outcomes with numerical values assigned to these outcomes , and p1,p2,p3, etc represent the respective probabilities that each of these outcomes will occur , so that p1+p2+p3will all add upto 1. If we assume that there are only three possible outcomes x1,x2 and x3 with respective probabilities of occurrence p1,p2 and p3 then the expected value of this probability distribution is given as below: Expected value (EV)=p1x1+p2x2+p3x3 Generalizing this relationship for n number of outcomes we can express EV=p1x1+p2x2+p3x3+pnxn = i=1 i=n p i x i Where (Sigma) represents the symbol of summation and is an instruction to add up what follows this symbol. In this case, it is all the terms of the form p i x i with i starting at the value of 1 and ends at the value of an increment of unit of 1 in the value of i at each addition. The numerical values of x1 can either be positive or negative. In gambling, for example, a positive value will show a profit and a negative value will represent a loss. The expected value has many uses. In the gambling game, for example, it tells us what our average loss per play in the long run will be. In investment problems and inventory problems where there are a number of strategies (decision and controllable variables) and a number of possible outcomes (states of nature and uncontrollable variables), the expected value of the outcome for each strategy will determine as to which strategy should be used. The Analysis of decisions. Basically, there are three types of circumstances in which the decisions are to be made, These are:
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1. Decisions under certainty. 2. Decisions under risk. 3. Decisions under uncertainty. We shall take each of these conditions separately. 1. Decisions under certainty. This is the simplest form of decision making. The condition of certainty exists when there is no doubt about the factual basis of a particular decision and its outcome can be predicted accurately. There is just one state of nature for each alternative course of action and there is complete and accurate knowledge about the outcome of each alternative. We would simply select the alternative with the best outcome. If the number of alternatives is relatively small then the outcomes can be compared with each other, either all at once and then picking the best or two at a time, comparing the two and discarding the inferior alternative and the better one of the two is compared with the next one and the inferior alternative discarded and so on until all outcomes have been compared and the best one identified. However, if the number of alternative is large then some mathematical tools such as linear programming and deterministic inventory models are available to identify the best alternative. Some situations of decision making under certainty include the allocation of resources to various product line where the manager knows the relationship of resources to the finished goods and their values. The alternatives are evaluated by conducting cost studies of each alternative and then choosing the one which optimizes the utility of these resources. In the area of quantitative methods, problems relating to linear programming techniques which deal with the problems of using limited resources of a business to obtain a particular objective within given conditions or constraints: transportation problems where certain transporting vehicles are dispatched to certain destinations in order to minimize the total costs of entire transportation operation; assignment problems where certain jobs are assigned to certain machines in order to minimize the total costs, are all examples or decision making under conditions of certainty.
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Another example would be buying a new car. Once the decision to buy the car has been made, there are a number of alternatives in which the payment for the car can be made. These alternatives are paying with all cash, part cash and part loan, all loan so that you can put your own money to other quantifiable uses or lease the car for monthly or yearly rental. It is possible to calculate the total cost of each of these alternatives and choose the one which gives you the lowest cost. 2. Decisions under risk. A condition of risk exists when a decision must be made on the basis of incomplete but reliable information. Here, there is no longer just one outcome for each strategy but a number of possible outcomes, one for each possible state of nature where the probability of each outcome is known and calculated or assigned and an expected value for each alternative or strategy is obtained. The strategy that yields the best expected value is selected as a decision. The decision problem is put in the form of a matrix. A matrix is simply a two-dimensional array of figures arranged in rows and columns. The rows represent the available strategies or courses of action available to the decision maker (one row for each strategy) and the columns represent the states of nature (one column for each state of nature). The matrix could be in the form of a payoff matrix or in the form of an opportunity cost matrix. In the case of the payoff matrix the entry at the intersection of each row and column represents the payoff or profit for a given strategy and its corresponding stage of nature. Each state of nature is assigned a probability which identifies the odds that such a state of nature would prevail. Typically, in many organizational problems, the probabilities of various states of nature are known by virtue of determining as to how frequently they occurred in the past. A condition of risk exists for assumptions: Some of the assumptions that are required for the formulation and solution of the decision matrix are: 1. The number of feasible alternative courses of action or strategies is limited and finite. 2. The number of possible state of nature are also limited and the probabilities assigned to all states of nature must add up to 1. 3. Each state of nature is independent of the other so that only one
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event will occur for any given strategy. 4. The outcome for each combination of a strategy and its corresponding states of nature are known and are considered stable and constant for a given situation. 5. The objective of the decision maker is single and identified, either to maximize or to minimize a given objective function, which is expressed either in terms of expected payoff or cost of opportunity or loss. 6. There are no constraints imposed upon the problem. A simple illustration of using the payoff matrix in a decision problem is given by Alex at the Falls situation. Alex is a vendor who has a choice to take either ice cream or coffee at the falls to sell and the choice will depend upon the weather for a given day. Assume that he has determined from his past experience that if he takes ice cream and the day is sunny, he makes $50.00. However, if he takes ice cream and the day is rainy, then he makes $ 20.00. On the other hand, if he takes coffee and the day is sunny, he makes $ 30.00 and he makes $ 60.00 if he takes coffee and it happens to be a rainy day. These amounts represent net profits and the day can only be either sunny or rainy. Depending upon the probability or being sunny or rainy, a decision has to be made whether to take ice cream or coffee to the falls. Let us put this information in the form of payoff matrix. States of nature
Ice Cream 50 20 EV = (50 x .6) + (20 x .4) = $ 38.00

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

Assume that on a given day, the reliable forecast is 60 per cent chance of being sunny or the probability of the day being sunny is 0.6, so that the probability of the day being rainy become 0.4. These probabilities are recorded along with the states of nature of sunny and rainy in the above table. The strategies or alternatives or courses of action available to Alex
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represent his choices and are within his control. The states of nature are uncontrollable variables and can best be predicted by the probabilities of occurrence assigned to each state of nature. The expected value (or expected profit) can be calculated for each of these courses of action by using the expected value relationship as discussed earlier, as follows: EV = p1x 1+ p2x1 In the particular case: For ice cream : EV = (50 x .6) + (20 x .4) = $ 38.00 For coffee : EV = (30 x .6) + (6 x .4) = $ 42.00 Given these factors of the situation, Alex would decide to take coffee to the falls since he expects to make more money ($ 42.00) as against taking ice cream in which case he expects to make only $ 38.00. These decisions are frequently made in the area of investments where investments in different areas would bring in different amounts of payoffs over a given period of time depending upon the different states of the economy, or in the area of inventories in which decision is to be made in determining the level of inventory of a particular item to be kept in the store or the warehouse depending upon the demand for the item and the probability for such a demand. We will take up a problem of inventory and follow it through. Suppose that there is a vendor who sells strawberry cakes. He has 4 fixed customers who buy a cake each every day, so that the vendor is assumed of selling at least 4 cakes every day. He also found from his past experience that he never sold more than 8 cakes on any day. Also based upon his past sales experience, he found that 10% of the days he sells only 4 cakes. 20% of the days he sells 5 cakes. 40% of the time, he sells 6 cakes, 20% of days he sells 7 cakes and the balance 10% of the days he sells 8 cakes. The cake costs $ 3.00 each and he sells it for $ 8.00 each so that his net profit per cake is $ 5.00. If any of the cakes not sold at the end of the day, it has to be thrown out and there is no salvage value. The decision is, how many cakes he should stock each day in order to maximize his total profit in the long run? This problem can be solved by two types of matrices. One is the payoff matrix and the other is the opportunity cost matrix. In the first method, the objective
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is to maximize the payoff and in the second method, the objective is to maximize the cost or the opportunity cost and both these methods should give the same conclusion. The problem stated above can be formulated as follows:
Demand 4 5 6 7 8 % of days 10 20 40 20 10 Problem of demand/day .1 .2 .4 .2 .1

Cost per cake Sale price per cake Net Profit per cake Salvage Value Pay-off matrix
States of nature (.1) 4 Row (1) 4 (.2) 5 (.4) 6 (.2) 7

= = = =

$ 3.00 $ 8.00 $ 5.00 0

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

(.1) 8

Prob.of demand demand

(2) 5

(3) 6

(4) 7

(5) 8

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Cakes to stock or Courses of action

Column

(1)

(2)

(3)

(4)

(5)

The payoff matrix is constructed as follows: Starting from row 1 across: Row 1: - If we stock 4 cakes and the demand is for 4 cakes then the pay off is $ 20.00. - If we stock 4 cakes and the demand is for 5 cakes, the payoff is still only $ 20.00 since we can only sell 4 cakes and the subsequent customers will have to be turned away. Row 2 : - If we stock 5 cakes and the demand is for only 4 cakes then we make $ 20.00 on the 4 cakes that we sell and we lose $ 3.00 (our cost) on the 1 cake left that we are unable to sell and hence our profit is $ 17.00.. - If we stock 5 cakes and the demand is also for 5 cakes then we sell them all and make $ 25.00 - If we stock is 5 cakes and the demand is for 6 or more cakes, we can still make only $ 25.00 since we do not have any cakes left over 5 to sell. Row 3: - If we have 6 cakes in stock and there is a demand for only 4, then we make a net profit of $ 14.00 (we make $ 20.00 on the 4 cakes that we sell and we lose $ 6.00 on the 2 cakes that we do not sell).
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- If we have 6 cakes in stock and there is a demand for 5 cakes, then we make $ 25.00 on the 5 that we sell and we lose $ 3.00 on the 1 which we do not sell, giving us a net profit of $ 22.00. - If we have 6 cakes in stock and there is a demand for 6 cakes, then we sell them all, giving us $ 30.00 net profit. - If we have 6 cakes in stock and there is a demand for 7, we still make only $ 30.00 on sale of 6 cakes. By this reasoning, we develop the entire matrix. The expected value for each course of action is evaluated by using the expected value formula discussed earlier. For each row or for each course of action, the numerical payoff corresponding to each state of nature in that row is multiplied by its probability, and all values obtained by such multiplications are added up to obtain the expected value for that course of action. Thus we obtain an expected value for each course of action. Mathematically speaking, if there are m alternatives or courses of action and n states of nature then for each alternative a i the expected profit z i can be calculated as: n Expected profit = occurs] j=1 Or Where : a i = alternative i = 1,2 .m sj.= state of nature, j = 1,2 n p i = probability that state of nature s will occur. uij= numerical outcome as result of choosing alternative a and the occurrence of state of nature s j. After all the expected values for each course of action have been calculated then we select the alternative which results in the highest expected value, which would give us the number of cakes to stock for optimum benefit. This would be the optimum stocking policy. The expected value for each course of action of stocking 4, 5, 6, 7 and 8 cakes is calculated as follows:
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EV (4) = (20 x .1) + (20 x 0.2) + (20 x .4) + (20 x .2) + (20 x .1) = $ 20.00 EV (5) = (17 x .1) + (25 x 0.2) + (25 x .4) + (25 x .2) + (25 x .1) = $ 24.20 EV (6) = (14 x .1) + (22 x 0.2) + (30 x .4) + (30 x .2) + (30 x .1) = $ 26.80 EV (7) = (11 x .1) + (19 x 0.2) + (27 x .4) + (35 x .2) + (35 x .1) = $ 24.30 EV (8) = (8 x .1) + (16 x 0.2) + (24 x .4) + (32 x .2) + (40 x .1) = $ 24.00 The problem is solved above and in this particular case, the maximum profit of $ 26.80 is obtained by stocking 6 cakes each day. This solution assumes that the process is stable and that probabilities for all states of nature remain constant and the values for all other variables remain the same. Opportunities cost matrix: The same problem can be solved by using the opportunity cost matrix. The objective is to minimize the expected opportunity loss and for the same problem, it should give us the same solution. This means that the policy maximizes the expected opportunity cost. The idea is based upon the concept of regret which can be defined as the difference between the best outcome that can be achieved for a given state of nature and the actual outcome resulting from a selected course of action. If this difference is zero then that would be the best decision that the decision maker could make and hence his regret value is zero. This means that he has no regret for making that decision. The greater the difference between the actual outcome and the best outcome of a given alternative, the greater the regret. The objective of the decision maker is to minimize the long run opportunity losses. Continuing our earlier problem for which the demand structure and the probability distribution remains the same where the demand is for 4, 5, 6, 7 and 8 cakes and their respective probabilities are .1, .2,.4, .2 and .1. The opportunity cost matrix for this problem is shown below: Opportunity Cost matrix

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States of nature (.1) (.2) (.4) (.2) (.1)

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Prob. of demand

4 Row (1) 4 0

Demand

10

15

20

(2) 5 Courses of action

10

15

(3) 6

10

(4) 7

(5) 8

12

Column

(1)

(2)

(3)

(4)

(5)

The matrix and the expected value for each course of action are developed. Starting from the North-West corner of the first row, the reasoning would be as follows: Row 1: - If we have 4 units in stock and the demand is also 4, then this would be the right decision and no other alternative would give us better results. Hence the opportunity cost for this decision is zero. - If we have 4 cakes in stock and the demand is for 5 cakes, we wish that we had an additional cake is stock, for which we could have made additional $ 5.00. Hence by choosing the alternative to stock 4 cakes instead of alternative of stocking 5 cakes, incurred the opportunity cost of $ 5.00. That is the cost of losing the opportunity of stocking 5 cakes instead of 4. - Similarly, if the demand is for 6 cakes and we stock only 4, we choose the wrong alternative and hence we lost $ 10.00, and so on. Row 2: - If we have 5 cakes in stock and the demand is only 4, we wish we did not have the 5th cake. It cost us $ 3.00 to have this additional cake. Hence the lost opportunity of stocking only 4 cakes instead of 5, cost us $ 3.00. - If there are 5 cakes in stock and there is a demand for 5 cakes, then it was the right decision and hence the opportunity cost is 0.
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- If there is a demand for 6 and we have 5 in stock, then with the same reasoning as above, the cost of lost opportunity of stocking only 5 instead of 6 is $ 5.00, and so on. By this reasoning, we can complete the entire opportunity cost table with the actual cost values or opportunity cost values, which are the costs incurred by choosing an alternative, other than the best. The expected value of the opportunity loss for each alternative can be calculated in the similar manner as for payoff matrix and is given below: EV (4) = (0 x .1) + (5 x 0.2) + (10 x .4) + (15 x .2) + (20 x .1) = $ 10.00 EV (5) = (3 x .1) + (0 x 0.2) + (5 x .4) + (10 x .2) + (15 x .1) = $ 5.8 EV (6) = (6 x .1) + (3 x 0.2) + (0 x .4) + (5 x .2) + (10 x .1) = $ 3.2 EV (7) = (9 x .1) + (6 x 0.2) + (3 x .4) + (0 x .2) + (5 x .1) = $ 3.8 EV (8) = (12 x .1) + (9 x 0.2) + (6 x .4) + (3 x .2) + (0 x .1) = $ 6.0 The lowest cost is $ 3.2 for the strategy of stocking 6 cakes, which is the same as was determined by using the pay-off matrix. 3. Decision Making under Uncertainty. The conditions of uncertainty make the decision making process much more complicated. The decision maker has no idea or knowledge about the probabilities of the various states of nature and hence the expected values of various alternatives cannot be calculated. Such problems arise wherever there is no basis in the past experience for estimating such probabilities. For example, in the case of marketing a new product, it is difficult to make judgments as to how much this product will sell in different geographical areas or about probabilities of selling certain predetermined quantities in these areas in order to a make profit. In such situations there is no single best criterion for selecting a strategy. However, there are a number or a criterion each justified by rationale and is a function primarily of the organization policies and the attitude of the decision maker. The selection of strategy would depend upon the criteria to be used. Some of these criteria are discussed below. We are still following the same problem except that now the demand probabilities are not known. However, it is established that the 4 customers are still definite and the maximum demand cannot be more than 8 cakes. Criteria of pessimism : Suggested by Abraham Wald, it is also known as Wald criterion or a max-min principle for it tries to maximize the minimum pay off. This a
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conservative approach to an intrinsically difficult situation and the decision maker assumes that whatever alternative is chosen, the worst will happen. For each pay off of each course of action, under each state of nature (the probabilities of states of nature are not known) the decision maker picks the worst payoff so that there will be a value of the worst payoff for each course of action and the decision maker will pick the highest value among these.
Coming back to our example the payoff table is given below: 4 20 4 Courses of action 5 20 6 20 7 20 8 20 Worst pay off

20

17

25

25

25

25

17

14

22

30

30

30

14

11

19

27

35

35

11

16

24

32

40

From these worst payoffs, we select the maximum payoff which is $ 20.00, for stocking 4 cakes. This means that given the situation of the problems, the decision maker, who is a total pessimist, will not take any chances and go for the sure thing by stocking only 4 cakes. Criterion of optimism : Suggested by Leonid Hurwicz, to guide a complete optimist, it is also known as Hurwicz criterion and is based upon maxi-max principle, which is maximizing the maximum payoff for each alternative. The decision maker assumes that for each course of action, the best state of nature will prevail, giving him the best of each strategy so that he can choose the best of these bests. In the payoff matrix above: - For stocking 4 cakes, the best payoff is $ 20.00 - For stocking 5 cakes, the best payoff is $ 25.00 - For stocking 6 cakes, the best payoff is $ 30.00 - For stocking 7 cakes, the best payoff is $ 35.00 - For stocking 8 cakes, the best payoff is $ 40.00
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The total optimist always expects the best to happen. Hence he will choose the strategy of stocking 8 cakes which would give him the best of the best payoffs of $ 40.00. However, a rational decision maker cannot always be totally optimist under all situations. To overcome this difficulty, Hurwicz introduced the idea of degree of optimism or coefficient of optimism, the value of which is determined by the attitude of the decision maker. He called this coefficient (Alpha) and it is measured on 0 to 1 scale. Its value is 1 for a complete optimist and 0 for a complete pessimist. For a person who is neither a complete pessimist nor a complete optimist, the value of will have different values between 0 and 1, depending upon the degree of optimism. For example, a person with a degree of optimism of = .4 is more pessimistic than optimistic while a person with = .7 is more optimistic than pessimistic. For all values of , except for the values of 0 and 1, the expected value of each course of action, in a payoff table can be calculated as follows: Expected value = ( Max. payoff x ) + Min. payoff (1- ). For example, assume that the decision maker is 60 percent optimist, that means that his coefficient of optimism = 6. The expected value of each course of action in our payoff table would be given as :
Stock 4 5 6 7 8 Max. payoff 20 25 30 35 40 Min. Payoff 20 17 14 11 8

Then EV(4) = (20 x .6) + (20 x .4) = $ 20.00 EV(5) = (25 x .6) + (17 x .4) = $ 21.80 EV(6) = (30 x .6) + (14 x .4) = $ 23.60 EV(7) = (35 x .6) + (11 x .4) = $ 25.40 EV(8) = (40 x .6) + (8 x .4) = $ 27.20 In this example, the decision, maker who is 60 per cent optimist would choose the alternative of stocking 8 cakes, for this strategy gives him the most benefit of $ 27.20. (c) Criterion of regret: It is also known as Savage criterion, and it minimizes the maximum regret
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of not making the right decision and uses the opportunity cost matrix to make the decision. For each course of action, there are costs involved in choosing the opportunity of having a different course of action after states of nature have been known. These costs are really regrets of not choosing the best course of action. Out of the maximum regret for each course of action, we choose the minimum regret and the corresponding course of action. Taking our previous example, the opportunity cost matrix is restated as follows:
STATE OF NATURE Regret 4 0 5 3 6 Courses of action 6 7 9 8 12 9 6 3 0 12 6 3 0 5 9 3 0 0 10 10 0 5 10 15 15 5 10 15 20 20 4 5 6 7 8 Max.

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

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Then the procedure for calculating the expected value and choosing the largest expected value is the same as in the original payoff matrix or the minimum expected value in the opportunity cost matrix method. In the problem that we have undertaken, we have assumed that there is no salvage value of the cake if it is not sold by the end of the day. However, in case there is a salvage value, then this salvage value must be deducted from the cost of the unsold cake before computing the net profit. For example, if the cake at the end of the day could be given for $ 1.00 as a salvage value then the net loss for the unsold cake would be $ 2.00 per cake, instead of the $ 3.00 per cake previously computed into the payoff matrix and the opportunity cost matrix. Bays Decision Approach The decision making under uncertainty, as we have discussed previously, assumes that there is absolutely no knowledge about the probabilities of state of nature. No rational decision maker would go into any business without any prior knowledge about the states of nature. The degree of optimism as well as pessimism takes into consideration only the best and the worst outcomes and does not involve states of nature in between. Similarly using Laplace strategy may not be the logical solution since it is highly unlikely that all states of nature would be equally likely to occur. Hence a rational decision maker would like to have a more definite idea about each state of nature. This idea was suggested by Thomas Bays, an 18th century philosopher who investigated the notion of inverse probability or subjective probability. The contributors to Baysian school regard probability an a measure of the degree of personal belief, as against objective probability which relates to long run relative frequency of occurrences of a given outcome The subjective probability is a function of the decisions makers experience, past performance in similar situation, intuitive judgement etc. Based upon these characteristics, the decision maker is able to assign probabilities to each state of nature, depending upon the strength of his belief regarding the likelihood of occurrence of various state of nature. These subjective probabilities assigned by the decision maker are called prior probabilities. Based upon these prior probabilities, the expected value of the payoff or the opportunity cost can be computed as discussed previously and the highest expected value or the lowest opportunity cost is selected with the corresponding course of action.
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The prior probabilities are based upon the current information available to the decision maker as well as his assessment of the environment. However, the decision maker must decide whether these prior probabilities are adequate or whether additional information is needed to revise these values. The cost of collecting additional information through sampling and other means must be weighted against the benefits derived from improved assignment of probabilities to the various states of nature. This additional information, if justified, is combined with prior information in order to make the degree of belief regarding the states of nature stronger. Based on this information, the prior probabilities are adjusted or revised and these revised probabilities are called posterior probabilities. This revision can be accomplished through Bays Theorm, which calculates probabilities of causes based upon the observed effects. These posterior probabilities are then used to calculate the expected payoffs or expected opportunity costs in the same manner as before and the optimum strategy selected. Decision under Conflict: So far, in the decision making strategies that we have discussed, all decisions have been against nature, over which the decision maker has no control and the state of nature that will occur will be independent of the strategy of the decision maker. However, there are situations in which a manager is involved with a rational opponent whose strategies are carefully considered by the manager before making his own move. These decisions are known as decisions under conflict and form a basis of game theory. The games with complete conflict of interest are known as zero-sum games, in which the gain of the decision maker equals the loss of the opponent. For example, if the marketing manager of a company wants to increase the market share of his product, it will be at the expense of the market share of his competitors. As an example and for simplicity, let us assume that a manager wants to increase his share of the market against only one opponent. It is also assumed that both the manager and the opponent are rational strategists and if any one of the two shows irrational behavior, he can only suffer as a result of it. It is also assumed that the possible results of the strategies
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of both competitors are either known or predictable. These outcomes are presented in a payoff matrix form excect that the states of nature are replaced by the opponents strategies. The matrix is given in the case of increasing the market share. Opponents Strategies Y1 Managers Strategies X1 X2 X3 : : : Y2 3 1.5 -2 Y3 -.7 1.0 2.5 .8 .9 -1.5

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

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Similarly the opponent is trying to minimize his maximum loss as follows Strategy Maximum loss Y1 Y2 Y3 3 2.5 .9

The competition will employ strategy Y3 in order to minimize his maximum loss from each strategy. This is the simplest case of decisions under complete conflict where the strategies of the opponents and their outcomes are known. Decisions Trees : The payoff and opportunities cost tables are useful and convenient when a single decision needs to be made in a single time period so that the decision is made at the beginning of a given period and the outcomes of the decisions are only estimated ones. However, most decisions are time dependent and are sequential in nature so that each decision has an impact on the successive decisions. The decision trees satisfy this complex need where a series of decisions are to be made simultaneously. A decision tree is a graphical method to display various parts of the decision process including courses of action, risks involved and likely outcomes. It enables the decision makers to consider alternative solutions, assign financial values to them, estimate the probability of a given outcome for each alternative, make comparisons and choose the best alternative. Barry Shore has proposed the following procedure to solve a problem by the decision tree method. 1. The problem is illustrated by developing a decision tree diagram. Each course of action is represented by a separate emerging branch. 2. Each outcome for each course of action is assigned a probability, which is the most likely chance of that particular outcome occurring. 3. Determine the financial results of each outcome. 4. The expected value for each outcome is calculated and the alternative which will yield the highest expected value is chosen. The best way to explain the use of a decision tree method is to illustrate by an example. Let us assume that a company has two products to introduce. Let these products be X and Y. The company has decided that it would be too
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expensive to introduce both products at the same time. So, a decision has been made to introduce only one product to start with, and depending upon the degree of success generated by this first product and the funds obtained by the sales of this product, such funds could be used either to expand the production and marketing efforts for the same product or to use these funds to introduce the second product. Assume that the company introduces product X first. Our surveys have shown that the chances are 70 per cent that the product will succeed, meaning that there are only 30 per cent chances that product will fail. Even if the product fails and less funds are generated, product Y could still be introduced, but product X will not be expanded. The terminal expected payoff for each alternative can be calculated statistically from surveys or pilot studies. This process in the form of a decision tree would diagrammatically be as follows:

Expected Payoff
d pan Ex X

$ 70.000

Decision

Introduce X

ble fita .7 o r P b= Pro Un p rofi tabl Pro e b= .3

Intro duce Y

$ 60.000

Expand

Impractival

Intro duce Y

$ 20.000

We could also introduce product Y first instead of product X, by the same reasoning as above. According to our decision tree, the most profitable sequence of actions would be to introduce product X first and later expand the same product, for that decision would give us the highest estimated profit of $ 70.000. This technique can be equally used for more complex situations and has been successfully used in the areas of marketing, investment, equipment purchases, new venture analysis etc. The essence of the process is to isolate all relevant decisions and assign realistic probabilities to all possible outcomes.
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Expected profit
X nd pa Ex
bl e fit a .7 Pro b. = Pro

$ 70.000

Introd uce
dX

$ 60.000 Impractical

eX uc rod Int

Unprofitable Prob .= .3

an Exp

Introd uce

$ 20.000 $ 50.000

Decision

Introduce both
Int rod

Not feasible
Y nd pa Ex

uc eY

Profitable Prob. = .6 Unp rof it ab Pr ob . = .4 le

In trod

uce X

$ 40.000 Impractical

Y Expand
Introd u ce X

$ 25.000
Action Outcome Action Outcome

2.12 DECISION MAKING WITH BREAK-EVEN ANALYSIS Break-even analysis can be a very useful and relatively simple tool for management to use in making decisions. It can be used for dealing with unknown variables such as demand. By specifying the levels of known variables such as cost or profit, a required or minimum level can be found for the unknown variable. Any problem requiring income estimation can be set up so that the most difficult variable to estimate is isolated for solution. Break-even analysis can be applied to sales, profits, and costs. It also illustrates how it can be used to help make sound decisions for your business such as employing idle plant capacity, planning advertising, granting credit, and expanding production. Break-even analysis is not a universal remedy. It is only one of the many tools available to the business decision maker. In your business planning, have you ever asked: How much do I have to sell to reach my profit goal? How will a change in my fixed costs affect my net income? How much do my sales need to increase in order to cover a planned increase in advertising costs? What price should I charge to cover my costs and allow for a planned amount of profit? These are some of the questions that you can easily answer by using simple break-even analysis. You will learn break-even analysis through
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the examples of how the technique works in manufacturing, retailing, and service businesses and find out how to use it in your own business planning. Break-even analysis is a very useful tool because it can help you understand the sources of profit in your business. Definitions Break-even analysis is simple to use. Mathematical formula to determine the sales level at which the business neither incurs a loss nor makes a profit. The break-even point, in mathematical terms, is simply the point where: Total Expenses = Net Sales Revenue The amount of sales revenue should be readily available on your income statement as net sales. Net sales revenue is all sales revenue (often called Gross Revenue) less any returns and allowances. If your business is brand new and you have no income statement yet, you will need to use a projected sales figure. This will work for any of the calculations outlined here. Total expenses also appear on your income statement (or projections). You will find most expenses listed under the heading Operating Expenses or General and Administrative Expenses. Additional expenses to include in your analysis are found on the line labeled Cost of Goods Sold, which appears on income statements for retailers and manufacturers. To use the break-even technique, you need to do further analysis of your expenses so that you can classify them as either fixed or variable. Total expenses consist of two cost components: fixed costs and variable costs. Fixed Costs. are those expense items which generally do not change in the short run, regardless of how much you produce or sell. These costs are typically the expenses you pay out regularly that do not go up or down with your sales level. Examples of fixed costs include general office expenses, rent, depreciation, utilities, telephone, property tax, and the like. Obviously, all expenses vary over the long run. For example, rent and property taxes increase every year. In break-even analysis though, our calculations are based upon short-run information in order to reveal the current profit structure of the business. Variable Costs. are those expenses that change with the unit level of either production or sales. Generally, these costs increase with increased
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production or sales because they are directly involved in either making the product or making the sale. Examples of variable costs for manufacturing firms include direct materials and direct labor. In retail firms, variable costs include the cost of goods, sales commissions, and billing costs. These are only a few of the many kinds of variable costs you will encounter. Typically, service businesses do not have large variable costs, except for labour. For example, a travel agencys only variable cost may be the expense of billing its clients. Other expenses that may be variable costs for service businesses include: materials routinely given to clients, materials used to offer their service, the cost of hourly labor to provide the service, and commissions paid to individuals who sell the service. Some Shortcomings of Break-even Analysis The major problem with break-even analysis is that no project really exists in isolation. There are alternative uses for the firms funds in every case.Forexample,inamanufacturerscase,avacantplantcouldbe leased to another company for some return. It could also be used for another product. We must, therefore, always consider not only the value of an individual project, but how it compares to other uses of the funds and facilities. Another shortcoming of break-even analysis is that it does not permit proper examination of cash flows. It is generally accepted in basic financial theory that the appropriate way to make investment or capital decisions is to consider the value of a proposed projects anticipated cash flows. If the discounted value of the cash flows exceeds the required investment outlay in cash, then the project is acceptable. There are other objections. Break-even analysis makes many restrictive assumptions about cost-revenue relationships; in normal use, its basically a negative technique, defining constraints rather than looking at benefits; and its essentially a static tool for analyzing a single period. What all this theory boils down to is that break-even analysis is too simplistic a technique to be used to make final investment decisions on its own. Break-even Applied to Uncertainty Break-even analysis is a management control that approximates how much you must sell in order to cover your costs with NO profit and NO loss. Profit comes after break-even.
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The following formula will help in the calculation of your break-even sales volume level: Break-even = = = Fixed Costs * / Contribution Margin %** $250,000 / 15% $1,666,667

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

If this was a small manufacturing company and you wanted to calculate how many unit sales you need to break-even, you could divide the breakeven sales volume by the unit selling price. For example, if the unit sells for $10, the break-even unit sales before a profit is allowed for is 166,667 units and after a profit is allowed for it is 266,667 units. Limitations of Break-Even Analysis Break-even analysis has four important limitations. First, break-even analysis requires estimated projections of expected sales, fixed costs, variable costs, and any costs that have both fixed and variable
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characteristics. You must not be lulled into a false sense of security regarding your mathematically-sound results which are, after all, based upon projections. Second, break-even analysis is useful only over a limited range of sales volume extending not too far from the expected level of sales. Moving much beyond that range will require additional capital expenditures for more floor space, more machinery, or more sales people, which will distort the estimates of fixed and variable costs. Third, it is generally accepted in basic financial theory that the appropriate way to make investment or capital decisions is to consider the discounted value of the cash flows of a proposed project. Such an analysis focuses on the time value of money to better describe the true value of an investment. Break-even analysis does not focus on the time value of money. Nor does it focus on opportunity costs. Opportunity costs relate to the best alternative use of your money. There are always alternative uses for funds that may be more profitable than the project or expansion under consideration. Break-even analysis views every project in isolation. Finally, break-even analysis assumes that the cost-revenue relationship is linear. This may or may not be the case for any particular business. For example, many businesses experience a reduction in fixed and variable costs per unit as the overall scale of the business increases. This is referred to as economies of scale. Most very small businesses do not experience significant economies of scale. Despite its limitations, break-even analysis is a very useful tool with which to approach a variety of decision problems. Such questions as the costs of expansion, evaluation of sales or profit performance, estimation of the impact of various expenses on profit, setting prices, and financial analysis in general are appropriately addressed using break-even analysis. But it is not a panacea. It is only one of the many tools available to the decision maker. It is best used in conjunction with other financial analysis techniques or as a screening device to determine whether more study is needed. In any case, familiarity with break-even analysis is essential for any business owner. Break-even analysis requires above all, realistic definition of costs, both in amount and type. For many small businesses, break-even analysis can be a very useful management tool. At the same time, it is not a panacea,
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and should be used along with other management tools when making a decision. Summary Planning is essential to survive and grow in a fast changing environment. A plan helps a firm take an advantageous position in the market, in line with its internal capabilities. To be useful, planning has to be carried out in a systematic way outlining objectives, developing premises, evaluating options, formulating derivative plans, securing commitment from people and ensuring a suitable follow up. While doing so, one can adopt a top-down approach, a bottom-up approach or a combination of both. Planning helps a firm achieve its goals. It reduces the risks of uncertainty and improves the quality of decisions. It has a healthy impact on people, too. On the negative side, planning puts enterprise activities in a rigid framework. It may prove to be a costly and time-consuming exercise. To be effective, plans must receive support from people at all levels. They should also know the payoffs from planning well in advance. Learning organizations offer a stimulating environment, for even ordinary people to work with zeal and enthusiasm and come out with extra ordinary results. Planning can take many forms and styles in practice. Both long-range and short-range plans have to be combined effectively to produce results. Also, there must be effective monitoring to see whether everything is on track or not. Forecasting is used to predict future environmental happenings that will influence the operations of an organization. Forecasting improves the quality of planning by supplying vital facts and pertinent information about major environmental factors. Several deterministic, symptomatic and systematic techniques are pressed into service in order to collect data in an objective manner. To process work in a systematic and methodical way, standing plans and single use plans are used in every organization. Policies guide executive thinking and action by setting certain broad behavioral limits. They in fact convert objectives into a workable form. To avoid loose interpretation, policies need to be expressed in writing. Policy formulation requires foresight, imagination and a careful evaluation of all relevant factors impacting organizational work. Once a policy is formulated, it must be communicated to lower level people in a proper
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way. Everyone should be motivated to apply the policies in a consistent manner. When circumstances change, one should not hesitate to change the policies. Establishing successful policies in a fast changing environment is a tough job. First, it is not easy to express policies in a simple language. Second, expressed policies may come in the way of implied policies. Third, policies may not be consistent with the overall philosophy of an organization. Fourth, there is the danger of not communicating the policies in a understandable format. Finally, it may be difficult to interpret policies correctly using sound judgment. To overcome these difficulties, policies must be formulated and implemented with utmost care and caution. Apart from policies, other standing plane such as procedures, methods and rules are designed to carry out a course of action that is likely to be repeated several times. Single use plans such as programmes, schedules, projects and budgets are non-recurring in nature and deal with problems that probably will not be repeated in the same form in future. Have you understood questions. 1. Taking a planning problem that is now facing you, proceed to deal with it in accordance with the planning steps outlined in this Section. 2. Interview a manager in your area, and ask about the planning process (i.e., the steps in planning). 3. Read two articles in magazines such as Fortune or Business Week that deal with strategy. List the strength and weakness of the company as well as the opportunities and threats faced by the firm. 4. Take a major decision problem facing you, and outline the critical planning premises surrounding it. How many of these are matters of knowledge, and how many are matters of forecast? How many are qualitative, and how many are quantitative? How many are within your control? 5. Assume that your boss offers you a promotion to a position in a location your family does not like. Make the necessary assumptions and then state how and what you would decide. 6. Interview a manager in any company and obtain information about the decision making process in his / her organization.
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Review questions. 1. Define planning. 2. List the benefits of planning. 3. State the principles of planning. 4. List the levels of planning. 5. Describe steps in planning. Illustrate with suitable examples. 6. Distinguish the different type of plans. 7. What do you mean by decision making? State different types of decisions used in an organization. 8. What are all the difficulties faced by a manager in decision making? 9. Discuss decision making with break-even analysis. 10. Describe the steps in rational decision making with a suitable example.

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UNIT - III

ORGANIZING

LEARNING OBJECTIVES After reading this unit you should be able to understand the purpose of the organization the meaning of organizing and organization. the organization structure and their levels. departmentalization and span of control. the nature of authority and power. the nature of relationship between the line and staff. the scope of centralization and decentralization. the importance of obtaining balance in the degree of delegation of authority.

3.1

INTRODUCTION It is often said that good people can make any organization pattern work. Some even assert that vagueness in organization is a good thing in that it forces teamwork, since people know that they must cooperate to get anything done. However, there can be no doubt that good people and those who want to cooperate will work together most effectively if they know the parts they are to play in any team operation and the way their roles relate to one another. This is as true in business or government as it is in football or in a symphony orchestra. Designing and maintaining these systems of roles is basically the managerial function of organizing.

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It is in this sense that we think of organizing as (1) the identification and classification of required activities, (2) the grouping of activities necessary to attain objectives, (3) the assignment of each grouping to a manager with the authority (delegation) necessary to supervise it, and (4) the provision for coordination horizontally (on the same or a similar organizational level) and vertically (for example: corporate headquarters, division, and department) in the organization structure. An organization structure should be designed to clarify who is to do what tasks and who is responsible for what results, to remove obstacles to performance caused by confusion and uncertainty of assignment, and to furnish decision making and communications networks, reflecting and supporting enterprise objectives. Organization is a word many people use loosely. Some would say it includes all the behavior of all participants. Others would equate it with the total system of social and cultural relationships. Still others refer to an enterprise, such as United States Steel Corporation or the Department of Defense, as an organization. But for most practicing managers, the term organization implies a formalized intentional structure of roles or positions. In this book, the term is generally used in reference to a formalized structure of roles, although it is sometimes used to denote an enterprise. 3.2 DEFINITION OF ORGANIZATION The term organization connotes different things to different people. Many writers have attempted to state the nature, characteristics and principles of organization in their own way. For instance, to the sociologist organization means a study of the interactions of the people, classes, or the hierarchy of an enterprise; to the psychologist organization means any attempt to explain, predict and influence behavior of individuals in an enterprise; to a top executive it may mean the weaving together of functional components in the best possible combination so that an enterprise can achieve its goals. The word organization is also used widely to connote a group of people and the structure of relationships. The term organization is used in many ways. It means different thing to different people. Currently the following uses of the term are popular
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A group of people united by a common purpose. An entity, an ongoing, business unit engaged in utilizing resources to create a result. A structure of relationships between various positions in an enterprise. A process by which employees, facilities and tasks are related, to each other, with a view to achieve specific goals.

Group of Persons Organization is very often viewed as a group of persons contributing their efforts towards certain goals. The evolution of organization dates back to the early stages of human civilization when two or more persons began to cooperate and combine together for fulfilling their basic needs of food, clothing, shelter and protection of life. Organization begins when people combine their efforts for some common purpose. It is a universal truth that an individual is unable to fulfill his needs and desires alone because he lacks strength, ability and resources. So he seeks the cooperation of other people who have similarity of goals. Organizations are not a new invention. People have always formed organizations to pool their efforts for the accomplishment of their common objectives. The Pharaohs used organizations to build pyramids. The Emperors of China used organizations more than a thousand years ago to construct irrigation systems. And the first Popes created a universal church to serve a world religion. Modern society, however, has more organizations; these fulfilling a greater variety of societal and personal needs, involving a greater proportion of its citizens, and affecting, a large segment of their lives. Barnard defined organization as an identifiable group of people contributing their efforts towards the attainment of goals. An organization comes into existence when there are a number of persons in communication and relationship to each other and are willing to contribute towards a common endeavor. People form groups or organizations and pool their efforts by defining and dividing various activities, responsibility and authority. As such an organization has the following characteristics: 1. Communication. 2. Cooperative efforts. 3. Common objectives. 4. Rules and regulations.
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Structure of Relationships Some people view organization in a very narrow sense by defining it as a framework of duties and responsibilities through which an undertaking functions. If organization is merely recognized as a structure, it will be viewed as a static thing used to explain formal relationships. But an organization is a dynamic entity consisting of individuals, means, objectives and relationships among the individuals. An organization is certainly more than a chart. It is the mechanism through which management directs, coordinates and controls the activities of the enterprise. Function of Management Organization is one of the basic functions of management. It involves the determination and provision of whatever capital, materials, equipment and personnel may be required for the achievement of certain predetermined goals. By performing this function, management brings together human and non-human resources to form a manageable unit (which is also identified as an organization). Thus, organization is a process of integrating and coordinating the efforts of manpower and material resources for the accomplishment of certain objectives. Just as planning is applied to every other managerial function, the process of organization is also used in every aspect of management. For instance, organization of the planning department is essential for the formulation of plans and policies. Similarly, organization of other managerial functions is also necessary. Organization as a Process Organization is the process of establishing relationships among the members of the enterprise. The relationships are created in terms of authority and responsibility. Each member in the organization is assigned a specific responsibility or duty to perform and is granted the corresponding authority to perform his duty. According to Louis A. Allen, organization involves identification and grouping the activities to be performed and dividing them among the individuals and creating authority and responsibility relationships among them for the accomplishment of organizational objectives. 3.3 STEPS IN ORGANIZING Organizing involves the following interrelated steps :
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(i) Determination of Objectives. Organization is always related to certain objectives. Therefore, it is essential for the management to identify the objectives before starting any activity. It will help the management in the choice of men and materials with the help of which it can achieve its objectives. Objectives also serve as the guidelines for the management and the workers. They bring about unity of direction in the organization. (ii) Identification and Grouping of Activities. If the members of the group are to pool their efforts effectively, there must be proper division of the major activities. Each job should be properly classified and grouped. This will enable the people to know what is expected of them as members of the group and will help in avoiding duplication of efforts. For instance, the total activities of an industrial organization may be divided into major functions like production, purchasing, marketing, financing, etc. and each such function is further subdivided into various jobs. The jobs, then, can be classified and grouped to ensure the effective implementation of the other steps. (iii) Assignment of Duties. After classifying and grouping the activities into various jobs, they should be allotted to the individuals so that there are round pegs in round holes. Each individual should be given a specific job to do according to his ability and made responsible for that. He should also be given the adequate authority to do the job assigned to him. (iv) Developing Authority, Responsibility and Relationships. Since so many individuals work in the same organization, it is the responsibility of management to lay down structure of relationships in the organization. Everybody should clearly know to whom he is accountable. This will help in the smooth working of the enterprise by facilitating delegation of responsibility and authority. 3.4 IMPORTANCE OF SOUND ORGANIZATION Organization is the backbone of management. Without efficient organization, no management can perform its functions smoothly. Sound organization contributes greatly to the continuity and success of the enterprise. Once A. Carnegie, an American industrialist, said, Take away our factories, take away our trade, our avenues of transportation, and our money. Leave nothing but our organization, and in four years we
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shall have re-established ourselves. That shows the significance of managerial skills and organization. However, good organization structure does not by itself produce good performance - just as a good constitution does not guarantee great presidents, or good laws a moral society. But a poor organization structure makes good performance impossible, no matter how good the individuals may be. The right organizational structure is the necessary foundation; without it the best performance in all other areas of management will be ineffectual and frustrated. Sound organization brings about the following advantages : 1. Facilitates attainment of the objectives of the enterprise. 2. Facilitates optimum use of resources and new technological developments. 3. Facilitates growth and diversification. 4. Stimulates creativity and innovation. 5. Facilitates effective communication. 6. Encourages better relations between the labor and the management. 7. Increases employee satisfaction and decreases employee turnover. Sound organization is an essential prerequisite of efficient management. It helps an organization in the following ways: 1. Enlarges abilities: It helps individuals to enlarge their capabilities. Division of work enables an individual to specialize in the job in which he is proficient, leading to better utilization of resources and talents. 2. Facilitates administration: It facilitates administration by avoiding waste motions, overlapping work and duplication of effort. Departmentation enables proper planning of work. Confusion and misunderstanding, over who is to perform what work, is avoided by specifying the role of managers clearly. Proportionate and balanced emphasis is put on various activities. 3. Facilitates growth and diversification: Sound organization helps in keeping activities under constant vigil and control. The organization can undertake more activities without dislocation. Talents and resources are put to good use. Opportunities are seized quickly and exploited fully, which ultimately pave way for growth and diversification.
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4. Permits optimum use of resources: Human, technical and material resources are put to good use. Right persons are given right jobs. There is proper allocation of work. People know that they are supposed to do, well in advance. Necessary functions are determined and assigned, so that personnel and physical facilities are utilized effectively. 5. Stimulates creativity. It offers stimulating opportunities to people at all levels, to use their skills on jobs best suited to their nature. Delegation helps people at lower levels to do more challenging work. The higher ups, in turn, can concentrate on strategic issues putting their creative abilities to good use. 6. Facilitates coordination: Organization is an important way of achieving coordination among different departments of an enterprise. Clear authority relationships and proper assignment of work facilitates the task of achieving coordination at all levels. Poor organization leads to improper arrangement of duties and responsibilities. As a result, unimportant and trivial issues are given top priority. Activities that should be integrated or centralized are spread out and put to improper supervision. Incompetent individuals are overused while talented people are under utilized. Delays, duplications and waste motions occur with frustrating regularity. Expenses mount up. These would create utter confusion, chaos and conflict. Poor organization may mean improper arrangement of facilities and failure to achieve goals. PRINCIPLES OF ORGANIZATION As a tool of management, organization is expected to facilitate the achievement of certain objectives. In order to facilitate the achievement of objectives, management thinkers have laid down certain statements from time to time, from certain generally accepted understandings, which may be called the principles of organization. The principles are guidelines for planning an efficient organization structure. Therefore, a thorough understanding of the principles of organization is essential for good organization. The important principles of organization are discussed below: 1. Consideration of Objectives. An enterprise strives to accomplish certain objectives. Organization serves as a tool to attain these objectives. The objectives must be stated in clear terms as they play
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an important role in determining the type of structure, which should be developed. The principle of consideration of objectives states that only after the objectives have been stated, an organization structure should be developed to achieve them. 2. Division of Work and Specialization. The entire work in the organization should be divided into various parts so that every individual is confined to the performance of a single job, as far as possible, according to his ability and aptitudes. This is also called the principle of specialization. More a person continues on a particular job, the better will be his performance. 3. Definition of Jobs. Every position in the organization should be clearly defined in relation to other positions in the organization. The duties and responsibilities assigned to every position and its relationship with other positions should be clearly defined so that there may not be any overlapping of functions. 4. Separation of Line and Staff Functions. Whenever possible, line functions should be separated from staff activities. Line functions are those, which accomplish the main objectives of the company. In many manufacturing companies, the manufacturing and marketing departments are considered to be accomplishing the main objectives of the business and so are called the line functions and other functions like personnel, plant maintenance, financing and legal are considered as staff functions. 5. Chain of Command. There must be clear lines of authority running from the top to the bottom of the organization. Authority is the right to decide, direct and coordinate. The organization structure should facilitate delegation of authority. Clarity is achieved through delegation by steps or levels from the top position to the operating level. From the chief executive, a line of authority may proceed to departmental managers, to supervisors or foremen and finally to workers. This chain of command is also known as scalar principle of organization. 6. Parity of Authority and Responsibility. Responsibility should always be coupled with corresponding authority. Each subordinate must have sufficient authority to discharge the responsibility entrusted to him. This principle suggests that if a plant manager in a multi-plant organization is held accountable for all activities in his plant, he should
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not be subject to orders from company headquarters specifying the quantity of raw materials he should buy or from whom he should purchase raw materials. If a supervisor is responsible for the quality of work of his department, he should not be asked to accept as a member of his workforce an employee who has been hired without consulting him. 7. Unity of Command . No one in the organization should report to more than one supervisor. Everyone in the organization should know to whom he reports and who reports to him. Stated simply, everyone should have only one boss. Receiving directions from several supervisors may result in confusion, chaos, conflicts and lack of action. So each member of the organization should receive directions from and report to one superior only. This will avoid conflict of command and help in fixing responsibilities. 8. Exceptional Matters. This principle requires that organization structure should be so designed that managers are required to go through the exceptional matters only. The subordinates should take all the routine decisions, whereas problems involving unusual matters and policy decisions should be referred to higher levels. 9. Span of Supervision. The span of supervision means the number of persons a manager or a supervisor can direct. If too less number of employees are reporting to a supervisor, his time will not be utilized properly. But, on the other hand, there is a limit to the number of subordinates that can be efficiently supervised by an executive. Both these points should be kept in mind while grouping and allocating the activities to various departments. It is difficult to give a definite number of persons a manager can direct. It will depend upon the nature of the work and a number of other factors. 10. Balance of Various Factors. There should be proper balance in the formal structure of the organization in regard to factors having conflicting claims, e.g., between centralization and decentralization, span of supervision and lines of communication and authority allocated to departments and personnel at various levels. 11. Communication. A good communication network is essential to achieve the objectives of an organization. No doubt the line of authority provides readymade channels of communication downward
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and upward, still some blocks in communication occur in many organizations. The confidence of the superior in his subordinates and two-way communication are the factors that unite an organization into an effectively operating system. 12. Flexibility. The organization structure should be flexible so that it can be easily and economically adapted to the changes in the nature of business as well as technical innovations. Flexibility of organization structure ensures the ability to change with the environment before something serious may occur. So the organization structure should be such that it permits expansion and contraction without disrupting the basic activities. 13. Continuity. Change is the law of nature. Many changes take place outside the organization. These changes must be reflected in the organization. For this, the form of organization structure must be able to serve the enterprise and to attain its objectives for a long period of time. 3.5 TYPES OF ORGANIZATION

3.5.1 According to Talcott Parson Scheme, organizations can be classified primarily into four categories based on functions (a) Economic Organizations: Economic organizations are primarily concerned with producing something of value to the society. They are wedded to a philosophy of generating surplus / profit. Industrial, commercial and trading concerns are included in this category. (b) Political organizations: Political organizations survive on the basis of service to society. They help in achieving the basic values cherished by the society. They collect resources from the society, employ them judiciously, and help in maintaining peace and stability in the society. All governmental agencies are included in this category. (c) Integrative organizations: Integrative organization are tied with social, control and maintenance. Police departments and other protective organizations (courts etc.) are included in this category.
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(d) Pattern maintenance organizations: Pattern maintenance organizations, like, educational institutions, research institutions, religious organizations, clubs etc. are primarily concerned with long-term interests of society, culture, knowledge values, etc., 3.5.2 According to Blau and Scott an organization survives on the basis of the services tendered to the society. Its success depends on how best it is able to serve the interests of its members, owners or managers, clients and the society. 1. Mutual benefits associations: Mutual benefit association like trade unions, political parties, professional, bodies etc., crop up to serve the interests of members. It is not always possible for these associations to achieve the seemingly easy objective because of two problems : membership apathy and oligarchical control. Membership in mutual benefit associations may be exciting initially but after a time it becomes a monotonous feature. Members lose interest and develop apathy toward the associations activities. Consequently, control passes into hands of a selected few; oligarchial control replaces the internal democratic character of the association. 2. Business organizations: Owners are the primary beneficiaries in business organization. They are mainly concerned with maintaining operational efficiency that is achieving maximum gain at minimum cost. It is true that other groups like employees, customers, society etc. receive benefits simultaneously from business organizations but in the final analysis, the survival of such institutions depends on how effectively the owners are rewarded for the risks undertaken. 3. Service organizations: In service organizations like hospitals, educational institutions, social welfare agencies etc. public are primary beneficiaries. In order to tender effective service to the clients, the professionals looking after these organizations must emphasize two things : service is more important than observing procedures and the nature of service is to be decided.
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3.5.3 According to Samuel Deeps Classification Scheme 1. For profit organizations: These organizations provide goods and services at a profit. Companies, partnership firms, sole proprietorship firms are organised, along these lines and they generate profit for survival and continuance in the market. 2. Government organizations: These organizations satisfy the public need for order and provide a means for people to exercise some measure of control over their environment. 3. Protective organizations: They shield citizens from danger police, and military services etc. 4. Service organizations: They act in the interest of the general public without always receiving payments in full for services rendered. 5. Political organizations: They seek to influence legislation by electing a member of their group to public office (political parties, groups and associations). 6. Religious organizations: They provide for the spiritual needs of members and try to enlist nonbelievers into their fold (churches, sects, orders etc.). 7. Social organizations: They satisfy the needs of persons to make friendships and to have contact with others who have contact with others who have compatible interests (clubs, teams, fraternities). 3.5.4 Types of Organization Based on Authority, Responsibility and Accountability Formal Organization and Informal Organization Formal organization, which refers to the structure of well-defined jobs, each bearing a definite measure of authority, responsibility and accountability, is not capable of accomplishing organizational objectives all alone. It needs the help of informal organization for this purpose. In other words, informal organization, which does not appear on the
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organization chart, supplements the formal organization in achieving organizational goals effectively and efficiently. The working of informal groups and leaders is not as simple as it may appear to be. Therefore, it is obligatory for every manager to study thoroughly the working pattern of informal relationships in the organization and to use them for achieving organizational objectives. In this chapter, an attempt has been made to study the behavior of informal groups, which develop automatically along with the formal organization. 3.5.4.1 FORMAL ORGANIZATION Chester 1. Barnard defined formal organization as a system of consciously coordinated activities or forces of two or more persons. A formal organization is deliberately designed to achieve some particular objectives. It refers to the structure of well-defined jobs, each bearing a definite measure of authority, responsibility and accountability. The structure is consciously designed to enable the organizational members to work together for accomplishing common objectives. The individual must adjust to the formal organization. It tells him to do certain things in a specified manner, to obey orders from designated individuals and to cooperate with others. Co-ordination also proceeds according to a prescribed pattern in the formal organization structure. The formal organization is built around four key pillars; namely, (i) division of labor, (ii) scalar and functional processes, (iii) structure, and (iv) span of control. These may also be called the principles of formal organization. Division of labor and specialization is the basic principle of formal organization. The whole work is divided into a number of small operations and a different person performs each operation so that there is maximum specialization. The scalar and functional processes imply the growth of the organization both vertically and horizontally. The structure of the organization refers to the overall arrangement in the organization which ensures proper balance between different parts of the organization and secures the execution of all operations and the achievement of organizational objectives. The span of control refers to the number of subordinates directly reporting and accountable to one superior. CHARACTERISTICS OF FORMAL ORGANIZATION The basic characteristics of formal organization are as follows: (i) Organization structure is laid down by the top management to achieve organizational goals.
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(ii) Organization structure is based on division of labor and specialization to achieve efficiency in operations. (iii) Organization structure concentrates on the jobs to be performed and not the individuals who are to perform jobs. (iv) The organization does not take into consideration the sentiments of organizational members. (v) The authority and responsibility relationships created by the organization structure are to be honoured by everyone. The position in the organization hierarchy determines the relative status of the incumbent. 3.5.4.2 INFORMAL ORGANIZATION Informal organization refers to the relationship between people in the organization based on personal attitudes, emotions, prejudices, likes, dislikes, etc. These relations are not developed according to procedures and regulations laid down in the formal organization structure. Generally, large formal groups give rise to small informal or social groups. These groups may be based on common taste, language, culture or some other factor. These groups are not preplanned. They develop automatically within the organization according to the environment in the organization. The salient features of informal organization are as follows: (i) Informal relations are unplanned. They arise spontaneously. (ii) Formation of informal organizations is a natural process. (iii) Informal organization reflects human relationships. (iv) Informal organizations are based on common tastes, problems, languages, religions, culture, etc. (v) The membership of informal organizations is voluntary. At the same time, a person may be a member of a number of informal groups. Thus, there can be overlapping in these groups. Significance of Informal Organization The importance of informal organization arises from the functions performed by informal groups. The important functions of informal organization are as under: (i) It serves as a very useful channel of communication in the organization. The informal communication is very fast.
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(ii) It blends with the formal organization to make it more effective. It gives support to the formal organization. (iii) The informal leader lightens the burden of the formal manager and tries to fill in the gaps in the managers abilities. (iv) Informal organization gives psychological satisfaction to the members. They get a platform to express their feelings. (v) The presence of informal organization encourages the manager to plan and act carefully. Thus, informal organizations support and supplement the formal organization. There are certain disadvantages of informal organizations. They put up resistance to change and conform to old practices. The communication in informal organization is very fast; sometimes, it creates rumors, which may prove dangerous to the enterprise. Managements Attitude towards Informal Organization Modern authors on organization behavior view organization as consisting of both types of relationships, i.e., formal and informal. It is true that while laying down an organizational plan, management can only develop formal structure of relationships, but organization is not only a formal chart or structure of relationships. Formal organization, no doubt it is an important part of the organization. But informal organization is also not less important. If handled properly, it will help in performing the activities of the organization very efficiently and effectively. In short, informal relations are complementary to formal relations and procedures laid down in the organization structure. Both formal and informal organizations are necessary for any group action just as two blades are essential to make a pair of scissors workable. The management should not look down upon the informal organization as it arises spontaneously along with the formal organization and fills in some of the vital gaps in the formal organization. It may be noted that formal organization is unable to meet all the needs (e.g., affiliation, affection; esteem, etc.) of its members. Management can fulfill these needs of the workers by encouraging healthy interaction among informal groups and their members. Also, informal organization provides a buffer to absorb the shock of tensions and frustrations among the members as a result of formal organizational pinpricks.
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Informal organization may act to fill in gaps in a managers abilities. For instance, if a manager is weak in planning, one of his subordinates may informally help him in such a situation. Management may also make use of informal group leaders by taking them into confidence to mediate as bridges of understanding between the management and the employees. Shartle has rightly said, Informal structure is one index of the dynamics of getting work done and it appears that, for efficiency, it will necessarily deviate from the formal structure. Therefore, management should adopt a positive attitude towards informal organization. It should use it along with formal structure to make a workable system for achieving the organizational objectives. 3.5.4.3 COMPARATIVE STUDY OF FORMAL AND INFORMAL ORGANIZATION The formal and informal organizations differ from each other in the following respects: (i) Origin. The reasons and circumstances of origin of both formal and informal organizations are totally different. Formal organizations are created by conscious managerial decisions. But informal organizations arise naturally within the formal organization because of the tendency of individuals to associate and interact. Management has no hand either in emergence or in abolition of informal groups. (ii) Purpose. Formal organizations are created for realizing certain welldefined objectives. But informal groups are created by organizational members for their social and psychological satisfaction. There may be a conflict between the goals of the formal organization and those of the informal groups. (iii) Activities. Activities in case of formal organization are differentiated and integrated around the objectives of the enterprise and are formalized into work units or departments on a horizontal basis. Individuals are fitted into jobs and positions and work groups as a result of managerial decisions. In case of informal organization, there are no specific activities. They arise from time to time as a result of interactions and sentiments of the individuals. Informal groups may be based on common taste, language, culture or some other factor. The following table summarizes the differences between formal and informal organizations:
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Point Formal organization Deliberately created; reflects organizational goals. Basic purpose is to achieve organization goals. Informal organization Arises spontaneously; reflects individual and group goals. Basic purpose is to improve human relations. Structure less, organization chart built around people.

Origin and goals

Structure

It has a definite structure and is reflected in an organization chart built around group positions.

Integrating Mechanisms

Formal organization is held together by rules, regulations, and procedures.

Held together by feelings of friendship, mutual help and trust, and so on; it has unwritten rules and is bound by group norms rather than organizational goals.

Communication

Formal organization depends on formal, official channels of communication to sell the ideas of management to the organization; communication is a one-way traffic.

The informal organization designs its own. Communication popularly known as grapevine, for both organizational and social communication process; communication is a two-way traffic. Tends to be small and manageable.

Size

Tends to be large in size, generally unwieldy and unmanageable.

Durability Orientation

Tends to be permanent and stable. It is more or less, an impersonal and arbitrary structure, to which individuals must adjust.

Characterized by instability. A highly flexible structure designed to satisfy social and psychological needs of individuals.

(iv) Structure. Formal organization is hierarchical, pyramid shaped and bureaucratic in structure with well defined positions, rigid delineation of roles and superior subordinate relationships on impersonal basis, enforcement of organizational order through a set of policies, procedures, and rules, conscious emphasis on status, differential based on authority, narrow and downward oriented communication system, etc. On the other hand, informal organization is uncharitable; it looks like a complicated and common social network of interpersonal relationships. Informal organization is loosely structured, with only unwritten norms of behavior enforced by consent. Communication is informal and multidirectional. There are no rigid status differentials.
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(v) Membership. In a formal organization, every individual belongs to one work group only and works under one superior. But in case of informal organization, one person can be a member of more than one group, according to his choice. He may be a leader in one group and follower in another. There is no rigidity about group membership. (vi) Orientation. In case of formal organization, values, goals and tasks are dominantly economic and technical and they concern productivity, profitability, efficiency, survival and growth. But in case of informal organization, values, goals and tasks are dominantly psycho-social, setting around individual and group satisfaction, affiliation, cohesiveness and friendship. (vii) Norms of Behavior. In a formal organization, individuals are required to behave in the prescribed manner in their work situations. They are expected to behave in a rational manner. Deviations from the standard norms are dealt with according to the processes of organizational law and order. There is also a system of rewards and punishments. But in case of informal organization, individual behavior and group behavior influence each other. Behavior is more natural and social. Interactions cut across formally established positions and relationships and there is free exchange of feelings and ideas. An informal organization develops its own norms of behavior and a system of rewards and punishments to ensure adherence of group norms. 3.6 GROUP DYNAMICS Informal organization does not last so long informal organization reflects human aspect. It is based on the attitudes, likes and dislikes, tastes, language, etc. of people. It is loosely structured. It is highly flexible in nature. The group members choose informal leaders. Social needs are among the most powerful and compelling on-the-job motivating forces. In order to fulfill their social needs, workers form small groups on the job itself. It was shown by Hawthorne experiments that people behave as members of group and their membership of group helps shape their work-behavior and attitudes towards the organization. Management can use groups successfully for the accomplishment of organizational objectives. According to Likert, an organization will function best when its personnel function not as individuals but as members of highly effective work-groups with high performance goals.
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The social process by which people interact face-to-face in small groups is called group dynamics. Group dynamics is concerned with the interaction of individuals in a face-to-face relationship. It focuses on teamwork wherein small groups are constantly in contact with each other and share their ideas to accomplish the given tasks. The group develops its goals clearly and furnishes suggestions to its members for the accomplishment of goals. Every group chooses its leader (who may be called informal leader as he is not recognized in the formal organizational structure) who may effectively coordinate the group efforts towards the accomplishment of its objectives. 3.7 ORGANIZATION STRUCTURE An organization structure shows the authority and responsibility relationships between the various positions in the organization by showing who reports to whom. It is a set of planned relationships between groups of related functions and between physical factors and personnel required for the achievement of organizational goals. Organization involves establishing an appropriate structure for the goal seeking activities. The structure of an organization is generally shown on an organization chart or a job task pyramid. It shows the authority and responsibility relationships between various positions in the organization. It is significant to note that the organization structure is directly related to the attainment of the organization objectives. For instance, if an undertaking is in production line, the dominant element in its organization chart would be manufacturing and assembling. A good organization structure should not be static but dynamic. It should be subject to change from time to time in the light of the changes in the business environment. While designing the organization structure, due attention should be given to the principles of sound organization. 3.7.1 SIGNIFICANCE OF ORGANIZATION STRUCTURE Organization structure contributes in the following ways to the efficient functioning of organizations: 1. Clear-cut Authority Relationships . Organization structure allocates authority and responsibility. It specifies who is to direct whom and who is accountable for what results. The structure helps an organization member to know what his role is and how it relates to other roles.
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2. Pattern of Communication. Organization structure provides the patterns of communication and co-ordination. By grouping activities and people, structure facilitates communication between people centered on their job activities. People who have joint problems to solve often need to share information. 3. Location of Decision Centers. Organization structure determines the location of decision-making in the organization. A departmental store, for instance, may follow a structure that leaves pricing, sales promotion and other matters largely up to individual departments to ensure that varied departmental conditions are considered. In contrast, an oil refinery may concentrate on production, scheduling and maint enance decisio ns at to p levels t o ensure t hat interdependencies along the flow of work are considered. 4. Proper Balancing. Organization structure creates the proper balance and emphasis of activities. Those more critical to the enterprises success might be placed higher in the organization. Research in a pharmaceutical company, for instance, might be singled out for reporting to the general manager or the managing director of the company. Activities of comparable importance might be given roughly equal levels in the structure to give them equal emphasis. 5. Stimulating Creativity. Sound organization structure stimulates creative thinking and initiative among organizational members by providing well defined patterns of authority. Everybody knows the area where he specializes and where his efforts will be appreciated. 6. Encouraging Growth. An organization structure provides the framework within which an enterprise functions. If it is flexible, it will help in meeting challenges and creating opportunities for growth. A sound organization structure facilitates growth of enterprise by increasing its capacity to handle increased level of activity. 7. Making Use of Technological Improvements. A sound organization structure, which is adaptable to changes, can make the best possible use of latest technology. It will modify the existing pattern of authority, responsibility and relationships in the wake of technological improvements. In short, existence of a good organization structure is essential for better management. Properly designed organization can help improve teamwork
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and productivity by providing a framework within which the people can work together most effectively. While building the organization structure, it is essential to relate the people to design. The organization structure, which has technical excellence, may be quite useless for practical purposes because it is not suited to the needs of the people. Thus, an organization structure should be developed according to the needs of the people in the organization. 3.7.2 DEVELOPING THE ORGANIZATION STRUCTURE There are two types of structural variables : namely, basic structure and operating mechanism. Designing of basic structure involves such central issues as how the work of the organization will be divided and assigned among positions, groups, departments, divisions, etc. and how the coordination necessary to achieve organizational objectives will be brought about. But operating mechanism, on the other hand, includes such factors as information system, control procedures, rules and regulations, system of reward and punishment, etc. The development of organization structure deals with two facets which are : the functions to be performed, and the form of structure. The first facet requires the determination of activities, the organization needs and division of these activities keeping in mind degree of specialization it can afford. The second facet that is form of structure requires a detailed study and application of many organizational principles and practices. Organization structure establishes formal relationships among various positions in the enterprise. The formal relations may be classified into the following categories : (i) Relations between the senior and the subordinates and vice versa; (ii) Relations between the specialist positions and the line positions; (iii) Staff relations and (iv) Lateral relations. The formal relations in an organization arise from the patterns of responsibilities that are created by the management. They are static in nature, but afford the framework for dynamic action. As soon as the management action starts, the formal relations are absorbed or overplayed by the personal attitudes and behavior patterns of the individuals in the organization. The latter are generally described as
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informal relations. Such relations must also be kept in mind while developing the organization structure. If the formal relations are rigid and lay down long procedures, the individuals will develop certain short-cuts to perform their responsibilities in a better way. 3.7.3 NEED FOR DIFFERENTIATION AND INTEGRATION OF ACTIVITIES Differentiation and integration of activities and authority relationships are very important considerations in organization designing. Differentiation may be defined as the differences in cognitive and emotional orientations among managers in different functional departments and the differences in formal structure among these departments. Integration, on the other hand, refers to the quality of the state of collaboration that is required to achieve unity of effort. System approach suggests that since various departments are integral part of the whole system, they should not be considered in isolation of others. But since each department is interacting with the environment in a different way, various departments are likely to develop some degree of differentiation depending upon the nature of environment. Therefore, designing of the structure of one department may be different from that of the other. But the overall objective of organizational designing should be integration of activities and authority roles and relationships existing in different departments. 3.7.4 DETERMINING THE KIND OF STRUCTURE Organization structure is an indispensable means towards business objectives. Wrong structure will seriously deter the enterprise from achieving its objectives. Thus, it is essential that a great deal of care should be taken while determining the organization structure. Peter Drucker has pointed out three specific ways to find out what kind of structure is needed to attain the objectives of a specific business, which are discussed below: 1. Activities Analysis. It is the first stage in building an organization structure, which involves finding out what activities are needed to attain the objectives of the enterprise. Each business undertaking has a set of functions to perform such as manufacturing, purchasing, marketing, personnel, accounting, etc. These functions can be identified after proper analysis. It may be pointed out that in every organization one or two functional areas of business dominate. For
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instance, printing is an important function of a printing firm and designing is an important activity of the readymade garments manufacturer. After the activities have been identified and classified into functional areas, they should be listed in the order of importance. It is advisable to divide and subdivide the whole work into smaller homogeneous units so that the same may be assigned to different individuals. For instance, the Chief Executive may divide the whole activities into various functional departments and delegate authority to the departmental managers. Deputy managers, assistant managers and so on, may assist the departmental managers. It should be remembered that the job constitutes the basic building block in designing an organization structure. 2. Decision Analysis. What decisions are needed to obtain the performance necessary to attain objectives? What kind of decisions are they? On what level of the organization should they be made? What activities are involved in or affected by them? Which managers must therefore participate in the decisions? Though it is difficult to predict the content (kind) of decision problems, which will arise in future, yet the subject matter has a high degree of predictability. Analysis of the foreseeable decisions shows the structure of top management the enterprise needs and the nature of authority and responsibility different levels of operating management should have. Peter Drucker has emphasized four basic characteristics, viz., (i) the decision is the degree of futurity in the decision (ii) the impact that decision has on other functions; (iii) the character of the decision as determined by a number of qualitative factors, such as basic principles of conduct, ethical values, social and political beliefs, etc. and (iv) whether the decisions are periodically recurrent or rare as recurrent decisions may require general guidelines whereas a rare decision is to be treated as a distinctive event. 3. Relations Analysis. With whom will a manager-in-charge of an activity have to work? Such other questions of relations, e.g., line and staff relations, relations between subordinates and superior will also help in deciding the structure of the organization. As said earlier, downward, upward and side-ways relations must be analyzed to determine the organization structure.
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3.8. AUTHORITY AND RESPONSIBILITY Authority is defined as the right to give orders and the power to get obedience. In the context of an organization, authority might be termed as institutionalized power. A person in an organization, is an authority by virtue of the requirements is the role held by him. Authority resides in a person and arises out of the demands of position in organizations. Responsibility is the obligation of a subordinate to perform the duty as required by the superior. There should be parity between authority and responsibilities. This means that the subordinate must have been delegated enough authority to undertake all the duties which have been assigned to him and for which he has accepted responsibility. Authority without responsibility is liable to be abused; responsibility without authority is frustrating. Thus, inequity between delegated authority and responsibility produces undesirable results. 3.8.1. Challenges to the Traditional View of Organizations : The classical writers recommendations for organizing and managing do not work in all situations. Prescriptions for machine like efficiency that works in military organizations and simple operations often fail to produce results in complex organizations. Fayols principles do not guarantee success. Experience proves that organizing is more than just the strict compliance of rules that Taylor had stressed. Webers efficient organizational formula fails to offer any benefits in actual practice. Bureaucracy, in fact, highlights the epitome of inefficiency. Additional challenges emerge from two other sources: (a) Bottom-up authority: Traditionalists favored flow of authority from top to bottom in an uninterrupted fashion. Owners preferred to exercise their authority over those who are cut off by distance, through this route, much to the resentment of those working at lower levels. (b) Chester L Barnard, instead, described organizations as cooperative systems. He felt that a leaders authority is eventually determined by the willingness of subordinates to follow commands. Barnards acceptance theory opened the door for a whole set of new ideas such upward communication and the informal communication that is based on friendship than work rules.
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3.8.2 Open systems theory (the modern approach) : The traditional concept of the organizing process is task-oriented and emphasizes the work to be performed by individuals, who are part of organization. The organization is viewed as a closed system, enclosed and sealed off from outside world. The organization has all the energy it needs and there is no need to look into the environmental changes. The environment, it is assumed, would be stable, predictable and would not pose problems.
Table : Comparison of Traditional and Modern Approaches
Classical organizations Closed system. Stable environment. Division of labor and specialization. Centralization. Use of authority to achieve coordination. Authority. Rigid rules, precise role requirements. Command to exact obedience. Communication: one-way street. Maintenance needs. Tight control; emphasis on positions to achieve goals. Autocratic approach. Negative environment: robs employees of freedom and motivation to work. Modern organizations Open system. Dynamic Environment. Job enlargement and job enrichment. Decentralization. Free from Organization structures. Consensus. Flexibility and adaptability. Participation to achieve ends. Communication: open and multidirectional. Motivational needs. Emphasis on goals; management by objectives. Democratic approach. Positive work environment: supportive of the feelings, beliefs and values of people.

Sources: Adapted from H.G. Hicks and C.R. Gullet, Organizations: Theory and Behavior, Tokyo, McGraw-Hill, 1975. The essential objective of management should be to provide a sound organization structure that promises efficient goal accomplishment. To this end, managers must try to find out ways for increasing internal efficiency; the task should be made as simple as possible by ignoring factors that increase uncertainty. People in an organization are viewed as inert instruments in the production process, as parts of a complex organizational machine. Recognizing the inadequacies in the traditional approach, Thompson suggested the open-systems view, in order to develop an accurate picture
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of organizational life. The open-systems view accepts the environment as an integral part of organizational reality. Organizations are complex, goal-seeking social units. In addition to the penultimate task of accomplishing goals, they must adapt to and shape the external environment. The open-systems view conceives of the organizational system as a set of interrelated elements that acquires inputs, transforms them and delivers outputs to the external environment. Thus, an organization is a social system composed of a number of sub-systems, all of which are independent and interrelated. It is open and dynamic having inputs, outputs, operations and feedback. 3.9 C O N TI NG EN CY T H E O RY A ND O RG AN IZAT IO N STRUCTURE The contingency theory puts the stress of organizing on a number of variables. The theory supports the idea that there is no best way to organize, there is no one pattern of organization style that is universally appropriate. The design is conditional. The organization structure may be contingent upon many factors; it is a product of many forces: internal as well as external. These factors, it should be remembered, do not determine structure; rather they establish the parameters within which management choices are made. Strategy and Structure Strategy is a contingency variable. It refers to the long-term decisions adopted by managers to achieve organizational goals. Top managers generally formulate strategy after a careful analysis of opportunities in the environment and after evaluating strengths and weakness of the organization. Managers decide at the start, what industry the organization will enter, how it will compete, where it will be located, and the kind of organization it will be, who will be the top managers, and who will directly influence the organization structure. Alfred Chandler has clearly shown the close relationship between the strategy which a business adopts, and the structure of its organization. After carrying out intensive case studies of four of the largest American companies (Sears Roebuck, General Motors, Standard Oil and Du Pont), he concluded that changes in corporate strategy would precede and cause changes in the organization structure. He found that all the companies studied had shifted their designs from a simple centralized pattern, to a
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more elaborate divisionalised pattern following changes in population, national income, technological innovations, expanding product lines etc. The strategy chosen by the manager is the primary explanatory variable for organizational structure, in all the cases. The influence of strategy on structure may be expressed thus: Strategy determines organizational tasks. Strategy influences the choice of technology and people, appropriate for accomplishment of such organizational tasks and in turn, these influence the appropriate structure. Strategy determines the specific environment, within which the organization will operate.

Size and Structure How important is size in determining structure, remains a controversial question. Opinions vary from size is the most important condition affecting the structure of organization to size is irrelevant. Peter Blau and Richard Schoenherr concluded that size is the most important condition affecting the structure of organizations. Size determines structure. Size provides a greater opportunity to utilize the economies of specialization. As an organization grows in size, there is a tendency to assign more and more persons to specialized services. The numbers of subunits increases, more levels are created in the hierarchy, impersonal rules, procedures and control increase formalization and the organization will become more and more structured. The Aston Group also found (46 organizations studied) that increased size promotes greater specialization and formalization. The effects of size do not seem to be all-pervasive. In the words of Jackson and Morgan, Taken as a whole, size may be the most important contextual variable in predicting some dimensions of structure, but it is difficult to conclude that it dictates all of an organizations structure. Hall and his associates studied seventy-five highly diverse organizations and concluded that all aspects of structure cannot be predicted from size. It is not easy to assimilate the bundle of information and establish a clear-cut relationship between the size and structure of an organization. Research evidence, however, indicates that size has a significant influence on vertical differentiation.
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Technology and Structure Technology is an important variable in the design of organization structure. To achieve satisfactory performance, managers must create an organization design with the proper mix of technology, structure and human behavior. Technology, in simple terms, is the organizations transformation process. It is the combination of skills, equipment and relevant technical knowledge needed to bring about desired transformation in materials, information and people. Technology looks at how the inputs are transformed into outputs. Broadly speaking, it is the application of knowledge to actual performance. 3.10 COMPONENTS OF ORGANIZATION STRUCTURE Within the framework of the formal organization, there are three basic organizational relationships, namely, (i) responsibility (ii) authority, and (iii) accountability. These relationships are designated as formal because they are predetermined by the management as a way of relating and combining the diverse functions of the enterprise. This section aims at providing an insight into these relationships. 3.10.1 RESPONSIBILITY By responsibility we mean the work or duties assigned to a person by virtue of his position in the organization. It refers to the mental and physical activities, which must be performed to carry out a task or duty. That means every person who performs any kind of mental or physical effort as an assigned task has responsibility. In order to enable the subordinate to perform his responsibility well, the superior must clearly tell the former as to what is expected of him. In other words, the delegant must determine clearly the task or duty that is assigned to the delegate. The duty must be expressed either in terms of functions or of objectives. If a subordinate is asked to control the operations of a machine, the duty is in terms of function. But if he is asked to produce a particular number of pieces of a product, the duty is in terms of target or objective. Determination of duties in terms of objectives will enable the subordinate to know by what standards his performance will be evaluated. 3.10.2 AUTHORITY Authority is a derivative of responsibility. It is the right to order or command and is delegated from the superior to the subordinate to
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discharge his responsibilities. Right to procure or use raw materials, to spend money or ask for the allotment of money, to hire or fire people, etc. has to be delegated to the individuals to whom the work has been assigned. For instance, if the chief executive of a plant assigns the production manager with the production of particular types of goods and services, he should also grant him the authority to use raw materials, money and machinery, hire workers and so on to fulfill the production schedules prescribed as his duty. A superior delegating the authority should also determine what types of authority are to be delegated. Authority should not be confused with unlimited authority. The amount of authority delegated should be commensurate with the responsibilities or duties assigned. In other words, there must be a balance between responsibility and authority. However, in practice, the powers or rights necessary to perform a given responsibility may vary from one situation to another. 3.10.3 ACCOUNTABILITY Accountability is the obligation to carry out responsibility and exercise authority in terms of performance standards established by the superior. Creation of accountability is the process of justifying the granting of authority to a subordinate for the accomplishment of a particular task. In order to make this process effective, the standards of performance should be determined before assigning a task and should be accepted by the subordinate. An important principle of management governing this basic relationship is that of single accountability. An individual should be answerable to only one immediate superior and no more. Power The term power may be defined as the ability to exert influence. If a person has power, it means that he is able to change the behavior or attitudes of other individuals. In-ones role as a supervisor, a managers power may be seen as the ability to cause subordinates to do what the manager wishes him to do. A managers power may be measured in terms of the ability to (1) Give rewards, (2) Promise rewards, (3) Threaten to withdraw current rewards,
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(4) Withdraw current rewards, (5) Threaten punishment, and (6) Punish. The term authority, on the other hand, denotes the right of a manager to decide and command. For example, a manager has a right to assign tasks to subordinates and expect and require satisfactory performance from them. But the manager may not have the means (or power) available to enforce this right. Thus, whether a manager can enforce his rights is a question of power. Similarly, there may be a situation where a person has a power to do something, but lacks authority to do it. Such situations may cause conflicts in organizations. Therefore, for organizational stability, power and right to do things should be equated. When power and authority for a given person or position are roughly equated, we have a condition we may call legitimate power. Distinction between authority and power The terms authority and power are generally used inter-changeably in practice, but there is a clear-cut distinction between the two. Whereas authority is the right to command; power is the ability to exercise influence. Authority usually resides in the position in the organization, but the person exercises power. Authority includes the rights to command, which have been institutionalized. Thus, authority is always positional and legitimate and is conferred on the position. But power is not institutional, rather it is personal. It is acquired by people in various ways and exercised upon others. It is acquired through political means or by having certain personal attributes. Authority increases as one goes up the organizational hierarchy. But ii need not necessarily be accompanied by more power. In actual practice, the power centers may be located at the lower levels in the organization. Thus, one cannot get any idea of power centers in an organization by merely looking at its organization chart. The formal structure of an organization merely shows its authority relationships. It is in practice modified by power politics in the organization, some individuals may have more power and less authority or more authority and less power. It is the operating mechanism of the organization, which is relevant for studying organizational behavior.
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Authority is a downward flowing concept whereas power flows in all directions. Authority can be delegated to the lower levels in the organization. The lower we go down the hierarchy, the lesser is the authority. But it is not so in case of power which has been defined as the ability or capacity to influence the behavior of others. If a worker succeeds to influence the behavior of a departmental manager, it is implied that the worker has exercised power over the departmental manager. Similarly, the departmental manager may be able to influence the behavior of his superior, peers and subordinates. Thus power flows in all directions. Sources of power John French and Bertram Raven have identified five sources or bases of power which may occur at all levels of the organization. These are discussed below : (i) Reward Power. It is based on the influencer having the ability to reward the influencee for carrying out orders. (ii) Coercive Power. It is based on the influencers ability to punish the influencee for not carrying out orders or for not meeting requirements. (iii) Legitimate Power. It corresponds to the term authority. It exists when an influencee acknowledges that the influencer is lawfully entitled to exert influence. It is also implied that the influencee has an obligation to accept this power. (iv) Expert Power. It is based on the perception or belief that the influencer has some expertise or special knowledge that the influecee does not have. For example, a doctor has expert power on his patients. (v) Referent Power. It is based on the influencees desire to identify with or imitate the influencer. For example, a manager will have referent power over the subordinates if they are motivated to emulate his work habits. . These are potential sources of power only. Possession of some or all of them does not guarantee the ability to influence particular individuals in specific ways. The role of the influencee in accepting or rejecting the attempted influence is very important. It may also be noted that, normally, each of the five power bases is potentially inherent in a managers position.
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Sources of authority Management scholars are divided on whether authority originates at the top and flows down in traditional fashion or whether it originates at the bottom as a kind of consent of the subordinates. We can classify the views of various management writers under the three headings, namely, formal authority theory, acceptance theory and competence theory. These viewpoints are discussed below: (i) Formal Authority Theory: According to this theory, authority is viewed as originating at the top of an organization hierarchy and flowing downward through the process of delegation. The ultimate authority in a company lies with the shareholders who are its owners. The shareholders entrust the management of the company to the Board of Directors and delegate to it most of their authority. The Board of Directors delegates authority to the Chief Executive and the Chief Executive in turn to the departmental heads and so on. Every manager in the organization has some authority because of his organizational position. That is why, the authority is known as formal authority. Subordinates accept the authority of a superior because of his formal position in the organization. A manager in the organization has only that much of authority which is delegated to him by his superior. The shareholders of a company have authority over the company because of the institution of private property in the society. Various social factors, laws, political and ethical considerations, and economic factors put certain limits on their authority and the organization has to function within these limits. In fact, the basic sources of authority can rest in the social institutions themselves. In a society, where private property does not exist as in the case of socialist economies, the origin of authority can be traced to the elements of basic group behavior. The concept of authority as being a right transmitted from the public through social institutions to business managers is the central theme of the formal authority theory. (ii) Acceptance Theory. According to this theory, the authority is the power which is accepted by others. Formal authority has no significance unless the subordinates accept it. The degree of effective
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authority assessed by a manager is measured by the willingness of the subordinates who accept it. An individual will accept an exercise of authority if the advantages accruing to him from accepting plus the disadvantages accruing to him from not exceed the advantages accruing to him from not accepting plus the disadvantages accruing to him from accepting; and conversely, he will not accept an exercise of authority if the latter factors exceed the former. Thus, the acceptability of an order will depend upon relative consequences, both positive and negative. Many orders may be fully acceptable, many fully unacceptable, and others only partially acceptable. Barnard maintains that a subordinate will accept a order if he understands it well, if he believes it is consistent with the organization objectives and compatible with his own interest. The acceptance theory of authority has certain limitations. According to it, a manager has authority if he gets obedience from the subordinates. But a manager is not able to know whether his subordinates will obey his order unless the order is carried out or disobeyed by them. (iii) Competence Theory. According to this theory, an individual derives authority because of his personal competence. Urwick identified formal authority as being conferred by organization, technical authority as being implicit in a special knowledge or skill, personal authority as being conferred by seniority or popularity. Thus, a person may get his order or advice accepted not because he is having any formal authority, but because of his personal qualities. These qualities may be technical competence and social prestige in the organization. For example, a person is expert in a particular field and other people go to him for guidance and follow his advice as if that were an order. Limits of authority The authority of an organization is not absolute. It is subject to various economic, social, political and other factors. Similarly, the authority of a manager is restricted by various factors, such as: (i) Physical limitations. Physical laws, climate, geographical factors, etc. restrict managerial authority to a great extent. Thus, an order to make silver from aluminum would be meaningless.
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(ii) Economic constraints. The authority of an executive is restricted by economic constraints. The chief executive would not like to ask his sales personnel to sell products at a high price in a highly competitive market or to ask the purchase department to procure raw materials for use in the next twelve months when capital and storage space are not available for this purpose. (iii) Social constraints. The use of managerial authority is also subject to many social limitations. Thus, the task assigned to employees must conform to the groups fundamental social beliefs, habits and codes of ethics. (iv) Legal constraints. Various acts of the Central and Slate Governments also impose restrictions on the exercise of authority by a manager. For instance, a manager cant ask the workers not to form or join a union. (v) Biological limitations. A manager cannot command a subordinate to do something, which he is, not capable of doing. For example, a manager cannot ask a subordinate to climb the side-wall of a building. (vi) Internal constraints. A managers authority is limited by the objectives and policies laid down by the top management of the organization. He cant go against the internal policies and rules of the organization. 3.11 DELEGATION OF AUTHORITY Delegation is the essence of good organization. It is an important process to manage the affairs of an enterprise satisfactorily. Delegation of authority means conferring authority to another to accomplish a particular assignment. That means a manager can get things done through others by sharing authority with them. Delegation stands for calling others to render help in accomplishing a job. 3.11.1 DEFINITION Delegation means devolution of authority on subordinates to make them perform the assigned duties or tasks. It is that part of the process of organization by which managers make it possible for others to share the work of accomplishing organizational objectives. Delegation consists of granting authority or the right to decision-making in certain defined areas
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and charging the subordinate with responsibility for carrying through the assigned task. Delegation refers to the assignment of work to others and confer them the requisite authority to accomplish the job assigned. It enables the managers to distribute their load of work to others and concentrate on more important functions, which they can perform better because of their position in the organization. Allen has rightly said, Delegation is the dynamics of management; it is the process a manager follows in dividing the work assigned to him so that he performs that part which only he, because of his unique organizational placement, can perform effectively and so that he can get others to help him with what remains. Thus, delegation is the ability of a manager to share his burden with others, how can he best share his burden? First, he must entrust to others the performance of a part of the work he would otherwise have to do himself, secondly, he must provide a means of checking up on the work that is done for him to ensure that it is done as he wishes. So far we have talked about downward delegation, i.e., delegation from superior to subordinate. Delegation may also be upward or sideways. A federating government may delegate its power to make laws to the federal government. This is called upward delegation. Sideways delegation is generally found in religious organizations or trusts which may delegate authority other religious organizations or trusts. 3.11.2 SIGNIFICANCE OF DELEGATION Delegation of authority is the key to organization. An executive confers authority on the subordinates to accomplish specific tasks which he may not be able to do alone. That means a manager can get things done through others by sharing authority with them. A manager has to resort to delegation because in a big enterprise it is not possible for one person to exercise all the authority for taking decisions. Moreover, there is a limit to the number of persons which a manager can effectively supervise and for whom he can take decisions. Once this limit is exceeded, authority must be delegated to the subordinates who will make decisions within the area of their assigned duties. Delegation of authority is widely recognized as one of the best methods of getting better results through the subordinates. It is a must for better management. Once a mans job grows beyond his personal capacity, his
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success lies in his ability to multiply himself through other people. How well he delegates determines how well he can manage. Andrew Carnagie, a leading industrialist of America remarked, When a man realizes he can call others in to help him to do the job better than he can do it alone, he has taken a big step in his life. Delegation lightens the burden of the executive by relieving him of the botheration of taking routine decisions which others can also take efficiently. This will help him in concentrating on vital aspects of management. Delegation will enable quick decisions relating to various matters because the authority of decision-making has been shared with others. Granting of authority to subordinates motivates them to perform their duties well. If they are not given adequate authority, they will be reluctant to accept the assignments as they will be required to approach the boss every time whenever a need arises to take a decision. Delegation helps in maintaining healthy relationship between the executive and his subordinates by clearly defining the authority and responsibility of the subordinates. According to Douglas C. Basil, Delegation can be one of managements best techniques for satisfying needs and for motivating subordinates to better performance. In terms of technical aspect of business, delegation, through task assignment, can achieve faster decisions and eliminate cumbersome information system. In terms of behavioral aspects, delegation can satisfy mans demands for responsibility, recognition and the opportunity to exercise authority. Delegation of authority is an art of higher order. Every manager should be proficient in this art. Louis A. Allen has rightly remarked, How well one delegate determines how well one manages. Delegation of authority facilitates the job of managing by offering the following advantages: (i) Delegation lightens the burden of key executives in tackling routine matters and enables them to concentrate on vital aspects of management. (ii) Delegation enables taking of quick decisions at all levels within the policy framework provided by the top1evel management. (iii) Delegation of authority is an important tool to motivate the subordinates to contribute their best for the achievement of enterprise objectives.
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(iv) Delegation helps in maintaining healthy relationship between the managers and their subordinates by clearly laying down their authority and responsibility. (v) Delegation helps in developing managerial personnel for the future. (vi) Delegation improves work performance because responsibility is given to the subordinates on the basis of specialization. 3.11.3 What can be delegated? Authority is delegated when a superior grants some organization discretion to a subordinate. Superiors can neither delegate authority they do not have and nor they can delegate all their authority without, in effect, passing on their position to their subordinates. The authority of a top executive can be divided into three broad categories: (i) Authority, which must be delegated such as authority to take routine decisions for the accomplishment of tasks (ii) Authority which can be delegated such as implementation of policies; and (iii) Authority, which cannot be delegated at all such as authority to take policy decisions. A manager must delegate the authority to do the routine work, which does not involve any policy decision. A part of work in every management position consists of activities, which are subsidiary to primary task of the position itself. The power to perform subsidiary activities must be delegated to others so that, they may do the subsidiary activities well. For instance, the sales manager of a concern is responsible for selling its products. In order to sell the products, the sales manager has to perform many functions like market research, employment of sales-force, training of sales-force, development of means of sale promotion and so on. The sales manager cannot perform all these functions in a better way himself. So he can entrust certain operations to his subordinates and give them authority to perform them. There are certain other activities, which a manager can entrust to his subordinates, provided the manager has the necessary skill to delegate and the subordinates have been educated to accept these assignments. These activities relate to execution of policies. The manager can keep
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the control mechanism in his hands and let others execute the policy decisions. However, he cannot delegate the authority to take policy decisions, develop plans and establish appropriate organization for the execution of plans. These are managerial functions of higher order on which the manager must concentrate, himself. Similarly, control function is also to be performed by the manager himself. A manager who delegates his authority to others must keep the authority to control their activities with himself. He should evaluate the functioning of various individuals himself and take necessary action wherever necessary. 3.11.4 ELEMENTS OF DELEGATION OF AUTHORITY The process of delegation involves three essential elements or aspects: (i) Entrustment of responsibility (duties or work) to another for performance; (ii) Granting of authority to make use of resources, take necessary decisions and so on for carrying out the responsibility; and (iii) Creation of an obligation or accountability on the part of the person accepting the delegation to perform in terms of the standards established. If an executive wants others to help him, he must first divide his work and determine what portion of work can be assigned to others. If he requires the subordinate to do the work as he would have done it himself, he must entrust him with sufficient authority which otherwise would have been exercised by him to do that work. That means if the subordinate needs to spend money, engage people, and use materials or equipment, the superior must permit him to do so. Merely assignment of work or duty and granting of authority are not sufficient, the manager must have some means of checking up to make sure that the work is done in the way he wants. He must create an obligation on the part of person accepting the responsibility to perform the work assigned to him in terms of certain standards of performance. Different authors have used different terms to explain the process of delegation. We have used the terms responsibility, authority and accountability. These terms have also been used by Louis A. Allen who says that the terms must be clearly distinguished for proper understanding of the process of delegation. It is important to point out that these three
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elements are inseparable parts of the process of delegation. A brief explanation of the components of delegation is given below: (i) Entrustment of Responsibility or Duty Responsibility means the work or duties assigned to a person by virtue of his position in the organization. In order to enable the subordinate to perform his responsibility well, the superior must clearly tell the former as to what is expected of him. In other words, the superior must determine clearly the task or duty to be assigned to the subordinate. The duty must be expressed either in terms of functions or in terms of objectives. If a subordinate is asked to control the operations of a machine, the duty is in terms of function. But if he is asked to produce a number of pieces of a product, the duty is in terms of target or objectives. Determination of duties in terms of objectives will enable the subordinate to know by what standards his performance will be evaluated. (ii) Granting of Authority Authority is the right or power granted to an individual to make possible the performance of work assigned. Power to produce or use raw materials, spend money, or ask for allotment of money, to hire and fire people, etc. has to be delegated to individuals to whom the work is assigned. For instance, if the General Manager of a plant assigns to the Production Manager the production of particular goods and services, he will also grant him the authority to use materials, money, and machinery, hire workers and so on to fulfill the production schedule prescribed as his duty. (iii) Creation of Obligation or Accountability According to Louis A. Allen, Accountability is the obligation to carry out responsibility and exercise authority in terms of performance standards established. It means holding an individual answerable for final results. The subordinate is held accountable to the superior. Accountability originates because the manager has a right to require an accounting for the authority delegated and task assigned to a subordinate. The process of delegation of authority is incomplete unless accountability is created. The term accountability should not be confused with responsibility.
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Responsibility denotes the work to be done; it can be assigned to the subordinates. A subordinate will perform his responsibility well if he is given sufficient authority along with it. When the subordinate accepts the authority he commits himself to account for the use of authority. Thus, accountability is the obligation for the performance of work assigned and authority delegated. Authority can be delegated but accountability (responsibility to account for results) cannot be delegated. When a senior executive assigns some duties to a junior executive, he has to delegate corresponding authority also. The junior executive may, in turn, take the help of a foreman working under him in performing the work assigned. But the junior executive will continue to be accountable for performance to the senior executive. For example, if the worker does not do the job properly, it is the junior executive who is responsible to the senior executive. Thus, accountability cant be delegated, it always moves upward. In simple words, an executive cannot escape the responsibility (or answerability) for the performance of tasks assigned to him by delegating authority to his subordinates. However, he can take action against the subordinate for his carelessness or negligence in doing the job. Accountability moves upward because a person who is delegated the authority is always accountable to the person who delegated him the authority. However, as is obvious from the mechanism of the delegation process, responsibility and authority move downward. What is the Extent of Accountability? The extent of accountability depends upon the extent of delegation of authority and responsibility. A person cannot be held answerable for the acts not assigned to him by his superior. For instance, if the production manager is given responsibility and authority to produce a specified quantity and quality of certain product and the personnel department is given responsibility and authority for the development of workforce, the production manager cannot be held accountable for the development of workforce, Accountability is, by the act which creates it, of the same quality and weight as the accompanying responsibility and authority.
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3.11.5. PRINCIPLES OF DELEGATION The following principles are guides to successful delegation. Unless carefully recognized in practice, delegation may be ineffective, organization may fail and the managerial process may be seriously impeded. 1. Assignment of Duties in terms of Results. Delegation by results expected implies that goals or objectives have being set and plans made and are understood and accepted by the subordinates and that jobs have been designed to fit in with them. The subordinates must understand clearly what activities they must undertake and what results they must show. This will enable them to know by what standards their performance will be judged and will direct their efforts for the achievement of those results. 2. Functional Definitions. According to Koontz and ODonnell, the more a position or a department has clear definitions of results expected, activities to be undertaken, organization authority delegated, and authority and informational relationship with other positions understood, the more adequately the individuals responsible can contribute toward accomplishing enterprise objective. To do otherwise is to risk confusion as to what is expected of whom. This principle although simple in concept, is often difficult to apply. To define a job and delegate authority to do it requires, in most cases, patience, intelligence and clarity of objectives and plans. It is obviously difficult to define a job if the superior does not know what results are desired. 3. Parity of Authority and Responsibility. Authority and responsibility should bear logical relation to each other. So much authority should be granted which is sufficient to fulfill the responsibility. This parity is not mathematical, but rather coextensive, because both relate to the same assignment. Authority can never be delegated equal to responsibility as both are different things. Responsibility is the work assigned to a position and is related to objectives, whereas authority is related to the rights given to perform the work assigned. There is no common denominator for measuring equality between these. However, authority should be delegated commensurate with responsibility. For instance, if a manager tries to hold subordinates accountable for duties for which they do not have the requisite
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authority, it will be unfair. It is also not proper if the subordinates are given sufficient authority, but are not held accountable for its proper use. 4. Clarification of Limits of Authority. Limits of authority must be clarified to the subordinates so that they may not assume excessive authority than desired. Clear limits of authority will allow subordi nates to exercise initiative, develop themselves through freedom of action and to know their area of operation. This will also avoid misuse of authority. 5. Absoluteness of Accountability. Accountability, being an obligation owed, cannot be delegated. No superior can escape accountability for the activities of his subordinates, as it is the superior who has delegated authority and assigned duties. The superior cannot pass on his obligation to account for to his superior to the subordinates along with hit authority. Likewise, the accountability of the subordinates to their superior for the performance of assigned tasks is absolute.

6. Unity of Command. This principle states that accountability is unitary. Each person should be accountable only to one superior for delegated authority, as he cannot serve two masters well. If a person report to two superiors for the same duty, confusion and friction will result. He will find himself frequently receiving conflicting instructions. When this is the case, his only hope is to get either his two bosses or to run the risk of displeasing either or both. Therefore, as far as possible, dual subordination should be avoided. 3.11.6. TYPES OF DELEGATION Delegation of authority may be specific or general, written or unwritten, precise or vague. In general delegation, the superior tells his subordinate to do whatever the latter feels necessary. This is a case of unclear delegation under which the subordinate does not fully understand the nature of duties and limits of authority. Actually, the usefulness of delegation will be lost in such cases. There will be overlapping of activities and misunderstanding among the people. On the other hand, if delegation is specific i.e., precise and clear, there will be no need for the subordinates to wonder how far their authority goes and to experiment by hit or miss. It will also help the boss to hold the subordinates accountable. Therefore,
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it is advisable that delegations of authority should be precise and clear and it would be better if they were in writing. Some people suggest that especially in the upper levels of management if the authority delegations are specific and written, they will bring rigidity in the organization. Sometimes, particularly for new jobs at the top, delegation cannot be very specific, at least at the outset. But this situation can remedied with the passage of time. If the delegations are not specific, it could lead to organizational frictions, unnecessary meetings and negotiations and overlapping of activities. Therefore, delegations should be specific as far as possible. The fear that specific delegations will result in inflexibility can be best met by developing a tradition of flexibility in the organization. Shared and Splintered Authority Authority is shared when it is delegated to two or more persons together. These persons are responsible for making decisions without following the chain of command. For instance, the chief executive of a company may delegate his authority to production manager, marketing manager, and finance manager for diversification of companys products. In such a case, three persons who will take the decisions jointly for diversification of companys products share the authority. Splintered authority exists wherever a problem cannot be solved without pooling the authority delegations of two or more persons. For instance, if the in-charge of Plant A thinks that costs can be reduced through minor modifications in procedures in Plant B, he cannot bring about this change. He will have to contact the in charge of Plant B for taking any decision; the change will take place if they pool their authority. Individually, their authority is said to be splintered. It should also be noted that their boss could also take the same decision. Such practice should not be encouraged, as the superior will be over burdened. The managers in charge of both the plants who have splintered authority can meet and pools their authority delegated and can quickly take the decision jointly. 3.11.7. WEAKNESS OF DELEGATION IN PRACTICE Though delegation appears to be a simple process, many difficulties come in the way of effective delegation. Either one or more of the followings may cause these difficulties:
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(a) Superior; (b) Subordinate; and (c) Organization. 3.11.7. 1. Difficulties on the Part of Superior Managerial failure in delegation arises because of the absence of one or more of the following factors: (i) Receptiveness. The manager must be willing to give other peoples ideas a chance. But when a manager feels that he can do the job better himself, he will be reluctant to delegate authority I can do it better myself fallacy obstructs delegation of authority. (ii) Ability to direct. Lack of ability of a manager to correctly plan and issue suitable directions in guiding the subordinates, though he is willing to delegate, creates hurdles in effective delegation. (iii) Willingness to let go . The manager who wishes to delegate effectively must be willing to release the right to make decisions to the subordinates. The desire of dominance over the work of subordinates at each step hampers the process of delegation. Moreover, a manager may be afraid that if he lets the subordinate make decisions, he may outshine him. (iv) Willingness to trust subordinates and let them make mistakes. Delegation implies a trustful attitude between the superior and the subordinate. Lack of confidence in the capacity, ability and dependability of the subordinates obstructs the superior to delegate authority. The superior may distrust the subordinates because of inability of the subordinates or because he does not wish to let go, does not delegate wisely or does not know how to set up controls to assure proper use of authority. Since a manager lacks confidence in the subordinate he will not delegate authority to give them any chance to make mistakes and learn how to take correct decisions. (v) Establishment of controls. While delegating authority, the superior must find means of assuring himself that the authority is being used to accomplish the given assignments. Where the manager does not set up adequate controls or has no means of knowing the proper use a authority, he may hesitate to delegate the authority.
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3.11.7. 2. Difficulties on the Part of Subordinate Delegation of authority may fail because the subordinates want to avoid shouldering responsibilities even though there is no fault on the part of the superior. The subordinates may be reluctant to accept authority because of following reasons: (i) Lack of self-confidence. (ii) Desire to play safe by depending on the boss for all decisions. (iii) Fear of committing mistakes and being criticized by the boss. (iv) Lack of incentives. Overburdening with duties. (v) Inadequacy of authority, information and working facilities for performing the duties. 3.11.7. 3. Difficulties on the Part of Organization The faults contributing to the weakness of delegation in practice may lie with the organization. They may include the following: (i) Defective organization structure and non-clarity of authority responsibility relationships. (ii) Inadequate planning. (iii) Splintered authority. (iv) Infringement of the principle of unity of command. (v) Lack of effective control mechanism. 3.11.8. GUIDELINES FOR EFFECTIVE DELEGATION We have discussed above the causes of weakness of delegation in practice. If these causes are remedied, delegation will become effective. Thus, in order to achieve better delegation, consideration should be given to the following guidelines: 1. Assignments should be clearly defined in terms of goals or results expected the subordinate should be given the adequate authority to do the work assigned. The limits of authority should also be well defined. 2. Selection of persons should be done in the light of the jobs to be done. Appointments should not be made arbitrarily as it will lead to square pigeons in round holes and vice versa. Only proper selection is not sufficient for better delegation. The persons selected must also
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be given necessary training to accept assignments and authority. The superior must (a) coach the subordinate; (b) review his performance on the basis of predetermined standards; and (c) counsel him for improvement. 3. Motivation of subordinates through incentives of various kinds for their excellent performance is also essential for better delegation. An important incentive for some subordinates is to allow them to function with a measure of freedom. 4. Lines of communication must be kept open from superior to subordinate and vice versa for delegation to be meaningful. The subordinate should feel free to get in touch with the superior as and when necessary to seek clarification and guidance from the latter. The boss should also pass on all relevant information to the subordinate promptly. 5. Proper controls should be established to provide means of information regarding use of authority. The delegant must set up standards to measure the performance of the subordinates in the light of authority granted to the latter. Broad based controls and frequent reviewing in respect of the use of authority by the subordinates to perform the duties assigned make delegation of authority fruitful. 6. Strict adherence to the principles of delegation like parity of authority and responsibility, unity of command and absoluteness of accountability is most essential for achieving better delegation. 3.12. CENTRALIZATION OF AUTHORITY Centralization of authority means concentration of decision-making power at the top hierarchy of management. Centralization is the systematic and consistent reservation of authority at central points within the organization. Under centralization, all important decisions are taken by the top executives; operative decisions and actions at lower levels in the organization are subject to the close supervision of the top executives. Thus, centralization denotes that most of the decisions are taken not at a point where work is being done but at a point higher in the organization.
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As Fayol put it, Everything that goes to increase the importance of the subordinates role is decentralization; everything which goes to reduce it is centralization. 3.12. 1.What Factors Dictate Centralization? Centralization represents certain attitude and approach which the management follows. The major implication of centralization is the reservation of decision-making power in regard to planning, organizing, directing, and control at the top level. The other implications will depend on the philosophy of management for instance, in a company where the top management is very particular about the use of authority; it will make all the operations and decisions at lower levels subject to its approval. The top management of a company may prefer to reserve maximum authority with itself for the following reasons: (i) To Facilitate Personal Leadership . Personal leadership is an important factor for the success of small enterprises. Personal leadership is also important during the early stages of big enterprises. In both the cases, the operation is relatively on a small scale and the top manager can concentrate entire authority with himself. This will result in quick decisions and enterprising and imaginative action, which are essential for the success of the business. (ii) To Promote Uniformity of Action. Where a company wishes all operative units to do the same things in the same way and at the same time there must be centralization of appropriate decision making. Only the top management having central authority to make decisions can bring uniformity of action by the operating units. (iii) To Provide for Integration . A certain degree of centralization of authority is necessary to unite and integrate the total operations of the enterprise. This is the coordination function of management. If the management has to perform this function better, it must reserve some authority with it, yet centralized control is needed to keep all the parts of the enterprise moving harmoniously towards a common objective. (iv) To Handle Emergencies. Centralization of decision - making essential when the business conditions are uncertain. There are chances that emergency conditions may develop to endanger the
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very existence of a company. Centralization will help in taking rational decisions from both short as well as long-term perspectives to meet such uncertainties. 3.12. 2. Decentralization of Authority Decentralization means dispersal of decision-making power to the low levels of the organization. McFarland has defined it as a situation in which ultimate authority to command and ultimate responsibility for results is localized as far down in the organization as efficient management of the organization permit. According to Allen, Decentralization refers to the systematic effort to delegate to the lowest levels all authority except that which can only be exercised at central points. Thus, decentralization means reservation of some authority (power to plan, organize, direct and control) at the top level and delegation of authority to make decisions at points as near as possible to where actions take place. 3.12. 3. What factors bring about decentralization? The important factors that cause decentralization of authority are as follows: Decentralization is facilitated when need is realized to take quick and appropriate decision on the spot at a level at which it is really required, with a view to cash on the opportunity present. When the top management wants to reduce communication, decentralization is preferred. (i) The nature of the companys products or markets may require decentralization of decision - making to provide special emphasis on a product line or a market. Technological changes may also create conditions favorable to decentralization. (ii) Growth and diversification of activities of the company may make decentralization necessary to introduce flexibility in operation, facilitate good direction and to relieve the top executives of the burden of extra work. (iii) Physical dispersion of activities of the company may require decentralization of authority for better results. 3.12. 4. Degree of Decentralization Some degree of decentralization is usually found in every big enterprise. Allen has given three criteria to judge the degree of decentralization. They are:
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(i) What kind of authority is delegated? (ii) How far down in the organization is it delegated? (iii) How consistently is it delegated? These three criteria may be applied to know the degree of decentralization in different areas like appointment of employees, promotion of employees, acquisition of capital equipment, approval of travel expenses, procurement of raw materials, etc. Ernest Dale has given four tests to know the degree of decentralization in an organization. The degree of decentralization of authority is greater when: (i) The number of decisions made lower down the management hierarchy is greater. (ii) The more important decisions are made lower down the management hierarchy. For example, the greater the sum of capital expenditure that can be approved by the plant manager without consulting any one else, the greater the degree of decentralization in this field. (iii) More functions are affected by decisions made at lower levels. Thus, companies, which permit only operational decisions to be made at different plants are less decentralized than those which also permit financial and other decisions at the plant level. (iv) There is less checking on the decisions taken at the lower levels. Decentralization is greater when no check at all must be made; less when superiors have to be informed of the decision after it has been made; still less if superiors have to be consulted before decision is made. The fewer the people to be consulted, and the lower they are on managerial hierarchy, the greater the degree of decentralization. 3.12. 5. Decentralization is Extension of Delegation Decentralization is not the same thing as delegation. It is something more than delegation. Delegation means entrustment of responsibility and authority from one individual to another. But decentralization means scattering of authority throughout the organization. It is the diffusion of authority within the entire enterprise. Delegation can take place from one person to another and be a complete process. But decentralization is completed only when the fullest possible delegation is made to all or
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most of the people. Under delegation, control rests entirely with the delegant, but under decentralization, the top management may exercise minimum control and delegate the authority of controlling to the departmental managers. It should be noted that complete decentralization may not be possible or desirable but it certainly involves more than one level in the organization. 3.12. 6. Distinction between Delegation and Decentralization Decentralization is the result of delegation. It is a management philosophy whereby the centers of decision-making are dispersed at various levels in the organization. The points of distinction between delegation and decentralization are given below: 1. Delegation is a process of devolution of authority whereas decentralization is the end-result, which is achieved when delegation of authority is exercised at more than one level. 2. Delegation takes place between a superior and a subordinate and is a complete process. It may consist of certain tasks alone. But decentralization involves spreading out the total decision-making power throughout the organization. 3. In delegation, control rests entirely with the superior but in decentralization, the top management may exercise control only in a general manner and delegate the authority for control to the departmental managers. 4. Delegation is a must for management. Subordinates must be given sufficient authority to perform their assignments otherwise they will come to the superior time and again even for minor decisions. However, decentralization is optional in the sense that the top management may or may not decide to disperse authority. 3.12. 7. The advantages of decentralization are discussed hereunder: (i) Reduction in the Burden of Chief Executive. When there is centralization of authority in an enterprise, the chief executive alone has to bear the entire burden of decision-making. This diminishes the time at his disposal to concentrate on important managerial functions. Decentralization of authority reduces his burden as he delegates a major part of his authority to his subordinates and this will enable him to devote more time on important functions.
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(ii) Quick Decisions. Decentralization avoids red-tapism in making decisions as it places responsibility for decision-making as near as possible with the place where actions take place. Those closest to the work situation can make reasonably quick and accurate decisions; because they are well aware of the realities of the situation. Decentralization also minimizes the delay in transmitting information from and to the workplace. (iii) Diversification of Activities. With the addition of new product lines, an organization may grow complex and pose a challenge to the top executives. The challenge can be met effectively by decentralizing the authority under the overall coordinating purview of the top management. (iv) Development of Managerial Personnel. When authority is decentralized, the subordinates get the opportunity of taking initiative to develop their talents and to enable them to develop qualities for managerial positions. They learn how to decide and depend on their own judgment and how to manage. This will lay down the foundation for the growth of prospective managerial personnel. (v) Effective Control and Supervision. The greater the degree of decentralization, more effective is the span of control. It leads to effective supervision as managers at the lower levels have complete authority to make changes in work assignment, to change production schedules, to recommend promotions and to take disciplinary actions. (vi) Effective Coordination. Under decentralization, coordinated efforts are required o nly at t he levels of segment s created by decentralization. This makes coordination more effective. (vii) Improvement of Motivation and Morale. Decentralization of authority fulfils the human needs of power, independence and status. It gives the local executives an opportunity to take initiative and to try new ideas. This improves their motivation and heightens their morale. This will also foster team spirit and group cohesiveness among the subordinates. (viii) Miscellaneous Economies. In addition to the above advantages, decentralization also achieves several internal and external economies. Internal economies include speedier communication, better utilization of lower level and middle level executives, greater
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incentive to work and greater opportunities for training. These make it possible for the management to reduce the cost of production and meet competition effectively. 3.12. 8. Limitations of Decentralization There are certain disadvantages and limitations of decentralization which are discussed below: 1. Decentralization increases the administrative expenses because it requires the employment of trained personnel to accept authority. The services of such highly paid personnel may not be fully utilized particularly in small organizations. 2. Decentralization requires the product lines of the concern to be broad enough to allow creation of autonomous units, which is not possible in small concerns. 3. Decentralization of authority may create problems in bringing coordination among the various units. 4. Decentralization may not be possible because of external factors. If a company is subject to uncertainties, it will not be able to meet these under decentralization. 5. Decentralization may bring about inconsistencies in the company. For instance, uniform procedures may not be followed for the same type of work in various divisions. From the above discussion, we can say that decentralization requires a balance of necessary centralization of important managerial functions and creation of certain facilities. Firstly, managers capable of undertaking the operations of the autonomous business units must be developed. Secondly, provision must be made for coordination and communication between various units. Finally, effective decentralization requires adequate controls. Unless the top managers have a well established system for measuring the operating results, it is very difficult to achieve the benefits of effective decentralization. 3.12. 9. Centralization vs. Decentralization When a firm establishes divisions or departments, when the departmental managers are given considerable freedom or autonomy in decision-making
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and when there are reasonably effective ways of evaluating the performance of each division, the firm is considered to be decentralized. To the extent that an organization does not delegate a large part of responsibility and authority in decision-making, the organization is considered to be centralized. Centralization and decentralization are the opposite ends of the organization continuum. On the one hand, centralization produces uniformity of policy and action, utilizes the skills of centralized and specialized staff, and enables closer control over operating units. And on the other hand, decentralization tends to effect faster decision-making and action on the spot without consulting higher levels. Decentralization has the effect of motivating the subordinates since they get a greater share in management decision-making. 3.12. 10. Balance between Centralization and Decentralization Centralization and decentralization are the opposite ends of an organization continuum. In practice, there is neither complete centralization nor complete decentralization. Both are relative concepts because every organization structure contains both features in different degrees. Absolute centralization is not found in practice because it would mean taking of all decisions by the top management, which may lead to considerable cost and delay. Absolute decentralization is also not feasible because in that case entire authority will be delegated to the lower levels and the top management will be left with no authority at all. Even in a highly decentralized structure, some authority is reserved at the center. Unless the top management (central authority) does the work of overall planning, organization, direction and control and takes the policy decisions necessary to coordinate the affairs of different units or divisions, the company will disintegrate. Many organizations find difficulties in deciding the appropriate mix of centralization and decentralization, which would be most appropriate for achieving the organization objectives. Let us take the case of an organization with a highly centralized organization structure. In this case, the top management is concerned in detail with the ongoing operations. This requires a mass of detailed information. A time may come when the volume of information grows to exceed the capacity of the top management to handle and use it. This may compel the top management
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to think of reducing the degree of centralization and increasing the degree of decentralization. It may be pointed out that when there is a high degree of centralization, the operating managers become frustrated, as they cant take quick decisions. Moreover, an operative decision made at the top may not be fully effective. If the degree of decentralization practiced is quite high, the activities of various divisions may tend to become uncoordinated and conflicting. This may impel the organization structure towards recentralisation. But the management would certainly be interested in finding the ways to overcome the problem of oscillating between two organization structures. The important factors which should be considered to determine the relative degree of centralization and decentralization required are discussed below: (i) Size and Complexity of Organization. The larger the size of the organization, the more authority and responsibility should be delegated to the subordinates. If the operations of the organization are not complex, there is higher need of decentralization. On the other hand, if the firm is relatively small and carries on simple operations, centralization of authority should be advocated. (ii) Competence of Personnel. If personnel capable of making intelligent decisions at the lower levels are available, it is advisable for the firm to move towards decentralization. If the management personnel are followers and lack initiative, the firm should follow a highly centralized structure. (iii) Effectiveness of Communication System. The existence of an adequate and effective communication system will favor centralization of authority because it would be easier to control the operational units. The advent of computerized management information system has increased the capacity of managers to take effective decisions. If the communication system is ineffective, decentralization should be advocated. (iv) Dispersion of Organization Units or Plants. If the firm is having a number of plants, which are located at different places, decentralization is more beneficial. However, the finance function should be centrally controlled in order to ensure effective control over the assets and capital expenditure of the organization.
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(v) Degree of Standardization. The great er the degree of standardization in the organization, the greater is the degree of centralization. Control becomes easier if uniformity of operations can be introduced. Only the centralized structure can bring uniformity of actions at the operative levels. (vi) Complexities of Situation. The situational factors also influence the degree of centralization required for the organization. For instance, when the business conditions are highly uncertain and there is every chance that some conditions may develop to endanger the very existence of the organization, centralization should be advocated to deal with such situations in the future. Centralization will help in taking rational decisions from both short as well as long-term perspectives to meet such challenges. 3.13. SPAN OF MANAGEMENT OR SPAN OF CONTROL The term span of management is also known as span of control, span of supervision and span of authority. It represents a numerical limit of subordinates to be supervised and controlled by a manager. It is an important principle of sound organization. This principle is based on the theory of relationships propounded by V.A.Graicunas, a French management consultant. Graicunas analyzed superior-subordinate relationships and developed a mathematical formula based on the geometric increase in complexities of managing as the number of subordinates increases. 3.13. 1. SPAN OF CONTROL According to the principle of the span of control (also called span of management/supervision) there is a limit to the number of subordinates which a manager can effectively supervise. It states that a single executive should have more people looking towards him for guidance and leadership than he can reasonably be expected to serve. Because of personal limitations arising from lack of complete and sufficient knowledge, limited time, limited finance, a manager has to delegate work to as many subordinators working in various departments as he can effectively manage. Thus, the principle of span of management presupposes departmentation and delegation of authority. The ideal ratio was considered to be 15 to 25 subordinates for first level supervision and 5 to 8 subordinates in executive spans.
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3.13. 2. IMPACT OF SPAN OF SUPERVISION The number of persons an executive supervises has an important influence on the nature of organization structure. If the span is large, it means that fewer levels are needed in the organization. The structure would tend to be flat and wide. Presumably the possibility of communication blockages would be minimized because more people report directly to the top executive. If the span is small, the structure would be narrow and deep. There would be more levels in the organization. More people will have to communicate to the top manager through intervening layers of executives. The possibility of communication blockages and distortions would increase. 3.13. 3. WIDE SPAN OF SUPERVISION When the span of supervision is wider, the number of executives needed to supervise the workers will be less. This will make the organization structure wide. Such a structure would be less expensive because of less overhead costs of supervision. Since the number of levels is less, there will be better communication between the worker and the management and better coordination. However, the quality of performance is likely to deteriorate because one executive cannot effectively supervise a large number of subordinates. Supervisor will not be able to devote sufficient time in directing each and every subordinate. For instance, if there are 256 persons in an organization and all are reporting to one executive, there will be one level of management. If it is thought that only four subordinates should directly report to the chief executive, then the number of management levels will increase to two as four executives directly report to the top executive and each executive controls 64 persons as shown in Fig.1
Chief Executive-1

II Level Executives=4

Workers = 256 64W 64W 64W 64W

Fig 1- Flat Structure (Span of control=64)


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II Level Executives=4

III Level Executives=16

Tall Structure (Span of control=4workers)

Fig 2-Tall Structure (Span of control=4workers) This structure is flat as the span of control is very large at the lowest level and there are only two layers of management. If it is thought that an executive can manage only 4 subordinates effectively, the number of managerial levels will increase to four as shown in Fig. 2. This will make the organization structure look like a tall pyramid. 3.13. 4. NARROW SPAN OF SUPERVISION The narrow span of supervision will lead to a tall structure and to an increase in the executive payroll as compared to the flat structure. Another drawback is that the additional layers of supervisors will complicate communication from the chief executive down to operative employees and back up the line. There will also be a problem of effective coordination of the activities of different persons in the organization because of more levels of executives. However, the narrow span of supervision has the benefit of better personal contacts between the supervisors and the subordinates. It facilitates tight control and close supervision. Tall organization structure gives sufficient control to an executive for developing relations with the subordinates. In recent years, there has been a controversy around the significance of the concept of span of control. The transformation in the style of decisionmaking has had an inevitable bearing on question relating to the number of people an executive can supervise. Moreover, the use of delegation and decentralization is highly advocated these days. It is realized that narrow span of control is an effective means of forcing the executives to delegate. It is also argued that if an executive has enough number of subordinates to supervise, there is a point beyond which intimate control becomes very difficult. But how this point should be determined is the main question.
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3.13. 5. FACTORS DETERMINING SPAN OF SUPERVISION The span of control varies from individual to individual, time to time and place to place. The factors which determine the span of control are discussed below: 1. Ability of the Managers. Individuals differ in various qualities like leadership, decision-making and communication. The span may be wider if the manager possesses these skills in greater degree as compared to others. 2. Time available for Supervision. The span should be narrow at the higher levels because top managers have less time available for supervision. They have to devote the major portion of their time to planning, organizing, directing, and controlling. Each top manager will delegate the task of supervision to his subordinates who have to devote comparatively less time on the important functions of management. 3. Nature of Work. When the spans are narrowed, the levels in the organization increase. This involves delegation of authority and responsibility. If the work is of a routine and repetitive nature, it can easily be delegated to the subordinates. 4. Capacity of Subordinates. If the subordinates are skilled, efficient and knowledgeable they will require less supervision. In such a case, the superior may go in for a wider span. 5. Degree of Decentralization. Under decentralization the power to make decisions is delegated to the lower levels. The span of management will be narrow in such cases so as to exercise more and more control. 6. Effectiveness of Communication. An effective system of communication in the organization favors large number of levels because there will be no difficulty in transmission of information in spite of a large number of intervening layers. 7. Control Mechanism. The span of control also depends upon the control mechanism being followed. Control may be followed either through personal supervision or through reporting. The former favors narrow span and the latter favors a wide span.
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To sum up, it can be said that an executive should be expected to supervise a reasonable number of subordinates. What is reasonable depends on a variety of factors like individual differences in executives, number and capacity of subordinates, the nature of work, availability of time, ease of communication, internal checks and controls and degree of delegation in the organization. If the span of control is narrow, there will be more organizational levels, which in turn may impede communication. If the number of levels is reduced and the span of control is widened, the supervisory load may become too heavy. Sound management requires a proper balance between supervisory load and organization levels. 3.14. ORGANIZATION CHARTS A major reason why conflicts occur in organizations is that people do not understand their assignments and those of their coworkers. No matter how well conceived an organization structure might be, people must understand in order to make it work. Understanding is aided to a great extent by the proper use of organization charts. Every organization structure can be charted, even a poor one, for a chart merely indicates how departments are tied together along the principal lines of authority. Organizational charts range from simple drawings, which merely outline the structure of major units to very complex drawings, which attempt to include all minor units as well and which purport to show minor variations to level of authority, cross - relationships among departments, and sometimes other features. 3.14. 1. DEFINITION An organization chart is a diagrammatical form, which shows important aspects of an organization including the major functions and their respective relationships. In other words, it is a graphic portrayal of positions in the enterprise and of the formal lines of communication among them. It provides a birds eye view of the relationships between different departments or divisions of an enterprise as well as the relationships between the executives and subordinates at various levels. It enables each executive and employee to understand his position in the organization and to know to whom he is accountable. Thus, it is obvious that an organization chart has the following characteristics: 1. It is a diagrammatical presentation. 2. It shows principal lines of authority in the organization.
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3. It shows the interplay of various functions and relationships. 4. It indicates the channels of communication. The organization chart should not be confused with the organization structure. An organization chart is merely a type of record showing the formal organizational relationships which management intends should prevail. It is primarily a technique of presentation. It presents diagrammatically the lines of authority and responsibility among different individuals and positions. It may be either personnel or functional. Personnel organization chart depicts the relationship between positions held by different persons. Functional organization chart depicts the functions or activities of each unit and subunit in the organization. Master and Supplementary Charts Master chart shows the whole structure of the enterprise portraying all positions and relationships. It provides a clear picture of the entire organization structure. Supplementary charts are used to separately show department wise structure portraying the positions and relationships within each department. Such charts are popular in big organizations where it is difficult to show the necessary details through the master chart. Advantages of Oganization Chart Following are the advantages of an organization chart: (i) It is a tool of administration to tell the employees how their positions fit into the total organization and how they relate to others. (ii) It shows at a glance the lines of authority and responsibility. It is a reliable blueprint of how the positions are arranged. From it, the individuals can sense the limits of their authority, and can see who their associates are, to whom they report and from whom they get instructions. (iii) It serves as a valuable guide to the new personnel in understanding the organization and for their training. (iv) It provides a frame-work of personnel classification and evaluation systems. (v) It plays a significant part in organization improvement by pointing out inconsistencies and deficiencies in certain relationships, when management sees how its organization structure actually looks, it may discover some unintended relationships.
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Limitations of Organization Chart While the organization chart is an important tool of management, its mere existence does not ensure effective organization because of the following limitations: (i) Organization chart shows only the formal relationships and fails to show the informal relations within the organization. In modern enterprises, informal relationships exert important influence on various decisions. (ii) It shows the lines of authority, but is not able to answer the questions like how much authority can be exercised by a particular executive, how far he is responsible for his functions and to what extent he is accountable. (iii) It shows a static state of affairs and does not represent flexibility, which usually exists in the structure of a dynamic organization. (iv) It introduces rigidity in the relationships. Updating is not possible without disturbing the entire set-up. (v) Faulty organization chart may cause confusion and misunderstanding among the organizational members. Moreover, it gives rise to a feeling of superiority and inferiority, which causes conflicts in the organization. (vi) It does not show the relationships, which exist actually in the organization, but shows only the supposed to relationships. Despite these limitations, an organization chart is a must for all enterprises. It can serve as a useful tool of management. It is a reliable blueprint of how positions are related to each other. It shows the employees how their positions fit into the organization and how they relate to others. It is a must to create a proper understanding about the organization structure. 3.15. TYPES OF ORGANIZATION CHARTS There are three types of organization charts, viz., (a) Vertical that is from top down; (b) Horizontal that is from left to right; and (c) Circular or concentric. These are briefly discussed below: (a) Vertical Chart: Most organizations use this type of chart which presents the different levels of organization in the form of a pyramid
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with senior executive at the top of the chart and successive levels of management depicted vertically below that. Thus, lines of command proceed from top to bottom in vertical lines as shown in Fig.

Fig -Vertical Chart (b) Horizontal Chart. Horizontal charts, which read from left to right, are occasionally used. The pyramid lies horizontally instead of standing in the vertical position. The line of command proceeds horizontally, i.e., from left to right showing top level at the left and each successive level extending to the right as shown in Fig.

However, this chart does not decrease the importance of levels. But it is feared that some people may make erroneous inferences about differences in status and importance of various echelons. (c) Circular Chart. In this chart, top positions are located in the center of the concentric circle. Positions of successive echelons extend in all directions outward from the center. Positions of equal status lie at the same distance from the center on the same concentric circle. This chart shows the flow of formal authority from the chief executive
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in many directions. The main weakness of this chart is that it is often confusing. 3.16. LINE AND STAFF ORGANIZATION The question of how to establish the right organization structure confronts every manager. A small organization may have a simple structure that is easily understood. It may even be informal and can be subjected to sudden and frequent changes. By contrast, large and complex organizations usually have a highly rigid, formalized structure. Determining the most appropriate organization structure is a difficult job. Three organization structures namely, line, functional, line and staff are commonly employed. Each structural pattern has distinct advantages and disadvantages. Line Organization The line, or military organization, is the simplest and the oldest form of organization. Line structures are more common in small-scale units. Authority flows in a direct line from superiors to subordinates. Each employee knows who his superior is and who has authority to issue orders. The one-man one boss principle is strictly applied. Managers have full authority in their own areas of operation and are responsible for final results. Similarly, each subordinate is directly responsible for the performance of assigned duties. If the subordinates fail to carry out reasonable orders or directives, the superior has the right to take disciplinary action. Thus, authority flows downward and responsibility flows upward, throughout the organization. The essential characteristics of line organization is the flow of authority that is straight and vertical. In line organization, every superior enjoys line authority. This is often referred to as direct authority because it is directly associated with the attainment of the primary objectives of the organization. In other words, line authority implies the right to give orders and to have decisions implemented. For example, in a military organization, the General has line authority over the Colonel, who has line authority over the Major, and so on down the hierarchy. Figure provides an illustration of a line Chief .

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Chief Executive

Sales

Production

Finance

Foreman A

Foreman B

Foreman C

Workers

Workers
Figure - Line Organisation

Workers

Advantages and Disadvantages of Line Organization Advantages The advantages of line organization include the following: (i) Simplicity: A line organization is simple to establish and easy to explain to employees. It is easy to understand and follow. (ii) Fixed responsibility: Responsibility is fixed. Each employee knows who his superior is and who has authority to issue orders. Each employee knows to whom he is responsible and who is or are, in turn, responsible to him. This facilitates the fixing of accountability for non-performance. (iii) Quick decisions: In a line organization, one executive controls all the activities affecting one department. He is in complete charge of all operations in the department. Direct lines of authority eliminate a considerable amount of bureaucratic buck-passing, thus the line organization enables a manager to take quick decisions. (iv) Develops managers: The line manager is responsible for results. He is charged with getting things done properly. Non-performance may mean demotion and loss of prestige. To survive and succeed, he has to accomplish tasks, thus utilizing his potential fully. It can be concluded then that a line organization encourages and forces managers to grow.
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(v) Flexibility: Each executive has full freedom to make decisions in his area of command. This enables him to adjust policies and procedures to the changing needs. (vi) Economical: A line organization is economical for a small business, as no specialists are needed, and a limited number of executives are employed. Quick decisions, better coordination and prompt actions contribute greatly to organizational success. Disadvantages The line organization is not free from limitations. As organizations begin to grow in size, the line organization becomes unwieldy and unsuitable. The disadvantages may be catalogued thus: (i) Lack of specialization: With growth and diversification, organizational problems multiply in number. Factors like changing economic conditions, technological innovations, and ever growing competition turn administration into a funnel where the executives may find it extremely difficult to process bundles of data and take appropriate decisions. (ii) Scarce talent: Capable line executives who can look after such diverse activities like planning activities, office operations, research activities, personnel policies, etc., are rarely available. With growth, the managers duties, too, continue to expand. Working under time and cost constraints, managers may overlook or ignore important activities and are forced to grapple with trivial issues. (iii) Arbitrary actions: Line organization is based on the one-man management principles. The evils are well known. Work may be divided arbitrarily and assigned to incompetent individuals. Nepotism and favoritism may prevail in the selection, recruitment, and training of operatives. Line and Staff Organization The line and staff organization combines the good features of both the line organization and functional organization. The staff specialists provide advice and support to the line managers in getting the work done. Staff specialists concentrate on a narrow portion of the firms activities. However, their authority is purely advisory, not functional. Thus, when
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the staff organization is superimposed on the line organization, the result is a line-staff organization. The line organization is paramount and the staff organization is created to service it. The role of staff is considered a service to managers. Two features characterize it: it provides service to the line and it is devoid of the right to command. The staff man advises, but his sole authority lies in the authority of ideas. On the other hand, two important features, the rights to decide and right to direct characterize line authority. Line elements have a direct responsibility for the accomplishment of the objective of an enterprise. They have the ultimate authority to command, act, decide, approve or disapprove of all the organizational activities. Both line and staff department managers exercise line authority over their immediate subordinates. In fact, all managers exercise line authority over their subordinates. Advantages of Line and Staff Organization Important advantages of line and staff organization may be listed thus: Table - Differences between Line organization, Line and Staff organization and Functional Organization

Line organization This is suitable for small enterprises, where the work is simple and routine in nature. It is simple to understand. The organization does not require the employment of specialists and experts as staff assistants. The extra expenditure in employment is saved. The principle of unity of command is followed because authority flows vertically.

Suitability

Line and Staff Organization Line and Staff organization is suitable for medium and large enterprises. This is also very complex. Experts and specialists demand high wages. This increases the cost of administration inevitably.

Functional Organization Suitable for large enterprises.

The relationships are complex. Functional organization is also expensive because of division of activities.

Simplicity and Economy

Unity of command

The principle of unity of command is not followed because advice is sought from specialists.

Principle of unity of command is not followed because employees get instructions from more than one superior.

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Lack of Managers are Specializati responsible for all the on activities of their departments. Hence, specialization in one area is not possible. Discipline There is strict discipline. It is because of well-defined chain of command.

There is specialization and division of labor. Experts and specialists are appointed to give advice to line executives.

There is complete specialization and more importance is attached to specialists working at various levels.

There is loose discipline There is loose discipline because authority and because authority relationships responsibilities of are not clearly defined. position holders are not clearly defined.

Division of The workload of a The workload of work manager increases managers is relatively because he has to less. perform a wide variety of functions.

Workload of managers is uneven. This is because some managers have only line or staff authority while others have functional authority.

(i) Planned Specialization- As business grows, the pure line organization may overburden the line managers with complex problems, and the need for staff assistance would be felt acutely. The primary advantage of line and staff organization is that it uses the expertise of specialists, i.e., it brings expert knowledge to bear upon managerial and operational problems. Line executive can then plan effectively and be responsible for proper execution while the staff specializes to assist as and when needed. (ii) Scientific actions: The actions of a line manager can become more scientific by means of concentrated and skilful examination of business problems. Expert advice definitely helps line executives in arriving at a sound decision. (iii) Definiteness: In a line-staff organization, authority and responsibility are fixed. The unity of command principle is honored as each individual reports to only one superior, while specialized help is available as and when needed. In addition, accountability is definite. Only line executives are accountable for the results of their divisions or departments. Undivided responsibility compels line executives to enforce discipline strictly. Control and coordination are effective.
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(iv) Training ground for developing people: As everyone is expected to concentrate on one area, ones training needs can be expressed easily. Line managers can improve their problem-solving abilities by observing staff specialists work on complex problems. Similarly, working with line people, staff specialists can try to overcome their parts mentality and begin to view problems more rationally and objectively. Line and Staff Authority Classical writers ( Taylor, Fayol, Weber) based their explanations of line authority on simplistic assumptions. It is said that line authority is the ultimate authority to command, act, decide, approve or disapprove all the activities. It is quite possible to classify finance or personnel as a staff function, but it is a serious mistake to assume that either is insignificant. Statements that line is associated with the final objectives or organization, or line elements are income-producing components of the organization create an erroneous impression that staff functions are of secondary importance and unimportant. Efforts to classify such functions, like product research and development, production processes as staff and line, proved useless in the past. The customer pays for a product whose qualities are determined by design as well as manufacturing. Designating one function as highly important contributes to the overall objectives of the organization and relegating the other as an unimportant level appears to be a superficial exercise. Who is Staff? Staff authority is advisory, which means that the staff is a supporting unit that recommends action or alternative actions to the line manager. Catch phrases like: staff have the authority of ideas, lines have the authority of command staffs think, lines do; staffs advise, lines work have gained wide currency over the years. However, staff authority is not confined to mere advisory roles of recommending activities only. According to McFarland a staff manager helps, serves, investigates, plans, solves special problems, supports line efforts, and provides ideas and special expertise. The above functions are supporting functions; functions that help in some way the accomplishment of the primary objectives of the line departments. One distinguishing feature of staff
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functions is regarding the right to command, and direct others. Staff positions are devoid of the right to command, staff work is essentially an intellectual process consisting of such activities like planning, thinking, studying, informing, recommending, persuading and suggesting, and so on. Even the above seemingly sensible explanations fail to answer certain questions associated with classification of organizational function in a university, teachers are line. But what about people who are wedded to research activities? In a hospital, do nurses have line or staff authority? Experts are not always in agreement on these issues. Such borderline functions defy clear-cut classification. Many functions are obviously line or obviously staff (Brech). Peculiarities of Line and Staff Relationship The principles enunciated by the traditional theorist have been under attack for years either because they are too general or too specific for organizational application. In this section, we will examine peculiarities of line-staff relationship. One Center of Authority (Etzioni): It is one of the basic features of classical organization structures to have one and only one center of authority. This is often vested in the role of the head (line manager) of the organization. He is the ultimate authority in the internal structure and is finally responsible for organizational activity. As such, it is believed that line people are more committed or loyal to the organizational goals. Staff experts are more oriented towards their professional reference and membership groups. They are thought to make a narrower, occupational view of the firms problems. Peculiar Subordinate Relationship (Dubin): It is the leader who has the power to make decisions that guides the actions of all including staff officers. But at the same time there enters into this very decision making process the contribution of the staff specialist in their area of competence. The president of a company, for example, may issue orders regarding the production schedule which becomes binding on the operating departments but before the schedule is validated by the president and issued as a directive, the staff specialists in marketing, production,
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purchasing, etc., may have influenced the contents in the schedule. The concept of extending the personality of the line executive by advice, counsel appears to be the keystone of the staff idea. (Inffiner and Shertmod) Staff Obedient to an Impersonal Body of Rules: In all bureaucratic organizations, authority is delegated to lower levels. The leader has the maximum authority by virtue of his position in the organization. The leader may change, retire or die but the office of the leader retains the authority that goes with it. Staff obedience to the leader and to the organization is in terms of impersonal body of rules that establish the governmental framework of the organization. (Dubin) False Assumptions (Carzo): The line and staff structure seems to suffer from some false assumptions: (a) Staff specialists are able and willing to operate without formal authority. They would be reasonably content to function without a measure of formal authority. (b) Their advice, suggestions and recommendations will be readily accepted and applied by the line officials. (c) A clear delineation of line responsibilities is possible and is essential to minimize jurisdictional conflict. 3.17. Committee Committees exist both in business and non-business organizations. It is difficult to give a precise definition of the term Committee. Because there are many different kinds of committees and the concept of committee varies widely from one organization to another. In many organizations, committees constitute an important part of the organization structure. Committees are usually relatively formal bodies with a definite structure. They have their own organization. To them are entrusted definite responsibility and authority. A committee may review budgets, formulate plans for new products or make policy decisions. Or the committee may only have a power to make recommendations and suggestions to a designated official. According to Louis A. Allen, A committee is a body of persons appointed or elected to meet on an organised basis for the consideration of matters brought before it. A committee is a group of persons performing a group task with the object of solving certain problems. The area of operation of a committee is determined by its constitution. A committee may
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formulate plans, make policy decisions or review the performance of certain units. In some cases, it may only have the power to make recommendations to a designated official. Whatever may be the scope of their activities, committees have come to be recognized as an important instrument in modern business as well as non-business organizations. They help in taking collective decisions, coordinating the affairs of different departments and meeting communication requirements in the organization. Generally, committees are constituted to achieve one or more of the following objectives (i) to have consultation with various persons to secure their view-points on different aspects of business. (ii) to give participation to various groups of people. (iii) to secure cooperation of different departments. (iv) to coordinate the functioning of different departments and individuals by bringing about unity of direction. Types of Committee According to the nature of their constitution and functions, committees can be classified as follows: (i) Line and Staff Committees. If a committee is vested with the authority and responsibility to decide and whose decision is implemented invariably, it is known as a line committee. For example, board of directors of a company is a line committee of the representatives of its members, which is authorized to take and implement, policy decisions. On the other hand, if a committee is appointed merely to counsel and advise, it is known as a staff committee. For instance, a committee composed of the heads of various departments may meet at periodical intervals to counsel the chief executive. (ii) Formal and Informal Committees. When a committee is constituted as a part of the organization structure and has clear-cut jurisdiction, it is a formal committee. But an informal committee is formed to advise on certain complicated matters on which the management does not want to set up formal committee, which is a costly device. Informal committees do not form part of the organization structure.
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(iii) Standing and Ad hoc Committees. Formal committees, which are of permanent character, are known as standing committees. Ad hoc committees are temporary bodies, which may be formal or informal. An ad hoc committee is appointed to deal with some special problem and stops functioning after its job are over. (iv) Executive Committee. It is a committee which has power to administer the affairs of the business. (v) Coordinating Committee. Such a committee is generally constituted to coordinate the functioning of different departments. It consists of the representatives of different departments who meet periodically to discuss their common problems. In addition, a business enterprise may have other committees like (a) Finance Committee, (b) Planning Committee, (c) Production Committee, (d) Workers Welfare Committee, and so on. Why are Committees Used? A committee is used almost invariably to carry out responsibilities, which cannot be undertaken by a single person. Committees have certain inherent advantages because people in groups react differently from people as individuals. The advantages or merits are discussed below: 1. Pooled Knowledge and Experience. A committee is an effective method of bringing together the collective knowledge and experience of a number of persons to solve many intricate problems that are beyond the reach of a single person. In a committee, such members may be taken who are experts in their fields. This will help in concentrating knowledge and judgment of experts for the solution of the intricate problems.

2. Enforces Participation. A committee tends to enforce participation by different people in the organization. A major source of resistance to new policies and plans by those who are asked to carry them out is lack of participation on their part at the planning stage. The management can give representation to the employees in various committees. This will motivate the employees for better performance as they feel that they have a say in the affairs of the organization. 3. Facilitates Coordination. When it is necessary to integrate varying points of view, which cannot conveniently be coordinated by
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individuals, the committee may be used to bring about coordination. A committee consists of representatives of different departments or persons who represent different points of view, who will sit around a table and discuss their common problems. The direct contact among various individuals will bring about proper understanding and coordination in the activities of various departments and individuals. 4 Overcoming Resistances. The committee is an important means of cooling off agitation and temper on the part of affected people. Establishment of a committee is recognized as a strategy for overcoming resistance, opposition or pressure from the affected parties. For purposes of strategy, committees have a wider application in Government, educational, and other non-business institutions. Checks against Misuse of Powers. It acts as a check and safeguard against the abuse and misuse of powers. The Governments of all nations establish numerous boards and commissions to circumscribe the executive authority and to hold it in balance. Plural executives in the form of committees are more common in non-business organizations than in business organizations.

Limitations of Committees. Some people consider committee as an organised means of passing the buck. A committee is created when some top people cant make up their minds and they want a committee to do it for them. Though use of committees brings about certain advantages, they have certain inherent drawbacks also which are discussed below: 1. Evasion of Decision-making Responsibilities. If a manager has an opportunity to carry a problem to a committee, he may take it as a means of avoiding decision-making or to escape the consequences of an unpopular decision. Thus, managers, who want to avoid the laborious and difficult process of logical thinking that leads to a sound decision and to escape responsibility, take resort to committee device. 2. Slow Decision-making. Committees take more time in procedural matters before any decision is taken. In some cases, slowness seriously handicaps the administration of the organization. The delay
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in decision-making often reduces the usefulness of the decisions. The delay is caused by many factors like giving sufficient membership and lack of preparation, before meeting. That is why committees are sometimes used by managements to cool off agitation by their employees, which may create difficulties in the long-run. 3. Costly Device. Committees are an expensive device both in terms of cost and time. Committee meetings take too much time, which absorbs the sum total of the salary of its members for that time. Sometimes, committee members deliberately tend to pass time in order to show that they have taken pains in reaching the decision. 4. Lack of Definite Decision. When the committee findings represent a compromise of different viewpoints, they may be found weak and indecisive. They may cloud the real issues and get extraneous matters involved in decision making. In case of committee decisions, it is very difficult to fix responsibility on a particular person. So the committee members are apt to be irresponsible and indifferent. 5. Incompetent Membership. When a committee is formed, it is implied that the individual members of the committee will exert pressure on the ideas, suggestions, comments and judgments of other members, but this may not happen in practice. The chairman or any strong member of the committee may not force the committee to come to a foregone conclusion on the basis of his own thinking and the incompetent members may keep silent. Thus, the decision may be overshadowed by the force of strong personality.

6. Source of Misunderstanding. The committee meeting may prove to be a source of misunderstanding instead of providing a forum for teamwork and settlement of problems. The chairman of the meeting may not be effective in bringing about reconciliation of ideas of different individuals. Moreover, committee actions are characterized by voting and dissenting practices, which may leave behind a legacy of bitterness, discontent and frustration. Making Better Use of Committees Notwithstanding the dangers of committees mentioned above, committees are used by most organizations because their advantages far outweigh their disadvantages.
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1. Management can make committees a useful agency of administration rather than a doubtful and much bedeviled administrative gimmick. For the successful operation of the committees, the management should keep in mind the following points: 2. Members of the committee should be carefully selected. This is an important factor for the success of the committee. The members must be capable of understanding the real issues entrusted to the committee and taking part in the discussion. As far as practicable, members of the committee should be of similar organizational rank if they are expected to discuss and contribute on an equal basis. The choice of committee members requires a nice judgment as to personality differences, ability in expression as well as their status. 3. The committee should be of proper size. The group should not be too large. If it is too large, many of its members will not have adequate opportunity to express their viewpoints. It may become chaotic if there are many vocal members. But if the group is too small, it is difficult to secure a well-rounded viewpoint. The size of committee should depend on the purpose of forming it and the need to give representation to different viewpoints. 4. The committee should have a capable chairman. The chairman of the committee has to conduct the proceedings of the committee meeting. He should understand his proper role. His job is to encourage others to express themselves, to settle differences and to add a touch of humor when the going is tough. He is an arbiter, a peacemaker and an expediter. He should not be an advocate of one point of view. His job is to get members of the group to think and not to think for them. 5. There should be adequate preparation for the committee meeting. The major cause of not reaching any decision by the committee is lack of preparation by the committee members and the office. The office should keep all the details ready for use by the committee. The chairman should be provided with adequate clerical and staff assistance so that he can furnish all available factual data for each member before the meeting takes place. The agenda of the meeting and the concerned data, reports and notes should be circulated among the members of the committee well ahead in time so that they get raw material for discussion in the meeting.
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6. There should be adequate follow up. In order to encourage the proper functioning of committees, the management should take adequate follow up measures to implement the intent of the committee. Minutes of the committee meeting should be prepared and distributed to each member and also to the top management so that it may evaluate the work done by the committee. Summary Formal organization is the intentional structure of roles. Informal organization is a network of personal and social relations neither established nor required by formal authority but arising spontaneously. The term span of management refers to the number of people a manager can effectively supervise. A wide span of management results in few organizational levels and a narrow span results in many levels. The organizing steps are Formulating objectives to achieve the end, Identifying and classifying activities, Grouping these activities, Delegating authority and Coordinating authority as well as information relationships. Organizing involves developing an intentional structure of roles for effective performance. Many mistakes in organizing can be avoided by first planning the ideal organization for goal achievement and then making modifications for the human or other situational factors. An effective organization remains flexible and adjusts for changes in the environment. Have you understood questions. 1. Select a company and identify the departmentation pattern used by the enterprise. Draw an organization chart for the firm. Why do you think the company selected the type of departmentation it did? Would do you recommend a different departmentation arrangement? State your recommendation. 2. Interview a line manager and a staff person at a local company. Ask them what they like and dislike about their jobs. Reflect on the interviews, and ask yourself whether a line position or a staff one is the major aim of your career plan.
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3. Interview two line managers about their views on delegation. Do they think that their superior delegates sufficient authority to them? Also inquire how they feel about delegating authority to their subordinates. 4. Visit a company in your area that is considered a model of effective management. Get any information on this company that gives you some insight into its operation. What makes this organization excellent? Would you like to work for this enterprise? Why or why not? Review questions. 1. What do you mean by organization? 2. Write the steps in organizing. 3. Describe the types of organization with suitable example. 4. Distinguish authority and responsibility. 5. Illustrate the components of organization structure. 6. Define delegation of authority. 7. Explain the types of delegation in an organization. 8. What are the limitations of decentralization? Differentiate decentralization with centralization. 9. Define span of control. 10. Define Organization charts. 11. Illustrate the types of organization charts with suitable example.

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UNIT - IV

STAFFING

LEARNING OBJECTIVES After reading this unit you should able to understand the managerial function of staffing and what it means to be a manager. the management inventory and the factors in the external and internal environment affecting staffing. the policy of open competition and ways to make staffing more effective. the orientation and socialization process for new employees. about the sources of recruitment process. the selection process in recruitment. the training process and methods. the concepts of leading and leadership about the nature and purpose of directing about the communication process and barriers of communication

4.1. AN INTRODUCTION Staffing is now recognized as a separate management function. Previously, it was considered to be a part of organization function of management. The reason for separating the staffing from organizing is to give proper emphasis to the actual manning of organizational roles. The staffing function has assumed greater importance these days because of rapid
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advancement of technology, increasing size of organizations and complex behavior of human-beings. The management of an enterprise must give due importance to human resource planning, recruitment and selection, training, appraisal and remuneration of workers. Definition Staffing is concerned with manning various positions in the organization. In the words of Koontz, ODonnell, and Weihrich, The managerial function of staffing involves manning the organizational structure through proper and effective selection, appraisal, and development of personnel to fill the role designed into the structure. Staffing involves the determination of manpower requirements of the enterprise and providing it with adequate competent people at all levels. Thus, manpower planning, procurement (i.e., selection and placement), training and development, appraisal and remuneration of workers are included in staffing. The staffing function of management pertains to recruitment, selection, training, development, appraisal and remuneration of personnel. It is the duty of every manager to perform these activities. It is the tendency in modern enterprises to create a separate department known as Personnel Department to perform the staffing function. But it does not mean that the line managers do not have the responsibility for staffing. The Personnel Department is created to provide the necessary help to the managers in performing the staffing or personnel function. 4.2. NATURE AND SCOPE OF STAFFING FUNCTION The staffing function has assumed greater significance these days because of a number of factors. Almost all the big organizations have a separate personnel department to look after this function. This does not mean that the managers of other departments are not required to perform the staffing function. In fact, staffing is also a pervasive function of management. The chief executive, middle level managers and first line mangers, all are engaged in performing the staffing function when they participate in selecting, training, and evaluating their subordinates. The various reasons, which have increased the significance of staffing function of management, are discussed below:
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(i) Advancement of Technology. Many significant changes are taking place in technology. In order to make use of the latest technology, the appointment of right type of persons is necessary. The personnel can be fitted into new jobs properly only if the management performs its staffing function satisfactorily. (ii) Increasing Size of Organizations. Advancement in science and technology has given rise to large-scale companies employing thousands of workers. The performance of the company depends on the quality and character of the people employed. This has increased the significance of staffing. (iii) Long-range Needs for Manpower. In some industries, labor turnover is very high. The management is required to determine the manpower requirements well in advance. It has also to develop the existing personnel for future promotion. The role of staffing function has also increased because of the shortage of really good managerial talent in the country. (iv) High Wage Bill. The outlay of big concerns on its personnel is quite high. Management has to spend money on recruitment and selection, training, wages and salaries, etc. In order to get the optimum output from the personnel, it is essential that the staffing function be performed in an efficient manner. For instance, if the right type of person is not appointed, the management will have to pay wages even though the quality of work is very low. (v) Recognition of Human Relations. The behavior of individuals has become very complicated. That is why, the human aspect of organization has become very important. The workers are to be motivated properly by employing financial and non-financial incentives. Right type of atmosphere should also be created for the workers to contribute to the achievement of organizational objectives. By performing the staffing function, management can show the significance it attaches to the manpower working in the enterprise. The managers can also use their knowledge in moulding the behavior of workers to the maximum advantage of the concern. In short, the management of human resource is very important in any modern organization because management can achieve the organizational objectives only with the cooperation of the people working in the
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organization. It does not matter how perfect the planning and organization and sophisticated machines are. If the people do not want to work, the management will not be able to accomplish the desired objectives. Therefore, in order to build a team of cooperative workforce, it is essential to manage the workforce efficiently. Since personnel department does so much personnel work, it is often assumed to be personnel management. While the contributions of this department may be great, its role must be that of a companion to the line managers. It should not be assumed that personnel function is the sole responsibility of personnel department. Personnel management is inherent in the process of management and, as a consequence, this function is performed by all the line managers throughout the organization rather than only by the in charge of personnel department. If a line manager is to get the best of his people, he must perform this function. He must undertake the basic responsibility of selecting people who would work under him and to develop, motivate and integrate them and to build up their morale. Thus, personnel function is the prime responsibility of every line manager. The personnel department can do a great deal by assisting them in discharging this responsibility. Personnel management is a responsibility of all those who manage people as well as being a description of the work of those who are employed as specialists. It is that part of management which is concerned with people at work and with their relationships within an enterprise. Objectives of Staffing The general objective of staffing is to contribute towards the accomplishment of the goals of an enterprise. However, the staffing in any working organization should have the following specific objectives: (i) To attain maximum individual development; (ii) To establish desirable working relationship between employers and employees and between groups of employees; (iii) To mould the human resources effectively ; (iv) To ensure satisfaction of the workers so that they are ready to work; (v) To provide fair wages, good working conditions and service benefits to the workers; (vi) To ensure that every employee makes his maximum contribution to the success of the enterprise.
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Functions of Staffing Department of Human Resource Management specially looks after various problems and issues relating to workforce. Normally, the scope of its activities includes the following functions: 1. Employment . The responsibility for employment consists of appointing the best possible talents suitable to the requirements of the enterprise. This function includes various activities like job analysis, manpower demand analysis, recruitment, selection and placement. Before appointing the people, manpower requirements are estimated both in terms of number and quality. After this, different sources of manpower supply are tapped. The applications of various applicants are screened and the selected applicants are required to take certain tests and appear in the final interview. The employment function is complete when the workers join the organization and are placed on the right jobs. 2. Training and Development. Training and development of personnel is a follow up of selection. It is a duty of management to train each employee and also to develop him for the higher jobs in the organization. Proper development of personnel is necessary to increase their skills in doing their jobs and in satisfying their growth need. For this purpose, the personnel department will devise appropriate training programmes. There are several on the job and off the job methods available for training purposes. A good training programme should include a mixture of both types of methods. It is important to point out that personnel department arranges for training not only of new employees but also of old employees to update their knowledge in the use of latest techniques of production. 3. Compensation. This function is concerned with the determination of adequate and equitable remuneration of the employees in the organization for their contribution to the organizational goals. The personnel can be compensated both in terms of monetary as well as non-monetary rewards. Factors which must be borne in mind while fixing the remuneration of personnel are their basic needs, requirements of jobs, legal provisions regarding minimum wage levels afforded by competitors, etc. For fixing the wage levels, the personnel department can make use of certain techniques like job evaluation and performance evaluation.
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4.

Integration. This function aims to achieve a reasonable reconciliation of the interests of the personnel with those of the organization. The important problem related to integration is communication. The personnel manager must provide an efficient system of communication to ensure two-way traffic of personnel programmes and policies because many a time industrial disputes arise because of poor communication. The personnel manager should always keep himself in contact with the trade unions to understand their grievances and remove the same so that harmony is maintained in the organization.

5. Working Conditions. Mere appointment and training of employees is not sufficient, they must be provided with good working conditions so that they may like their work and work-place and maintain their efficiency. Working conditions certainly influence the motivation and morale of the employees. These include the measures to be taken for health and safety of the employees. 6. Welfare Services. The department provides for various welfare services, which relate to the physical and social well-being of the employees. They may include provision for cafeterias, rest-rooms, counseling, group insurance, education of children of employees, recreational facilities, etc. 7. Personnel Records. The HR department maintains the personal records of the employees working in the enterprise. It keeps full records about their training, achievements, transfer, promotion, etc. It also preserves many other records relating to the behavior of personnel like absenteeism and labor turnover and the personnel programme and policies of organization. 8. Industrial Relations. These days, the personnel managers mainly discharge the responsibility of industrial relations. Personnel managers help in collective bargaining, joint consultation and settlement of disputes, if they arise. This is because personnel manager is in possession of full information relating to personnel and he possesses the working knowledge of various labor enactments. It is important to point out that the responsibility of fulfilling the requirements of various labor laws like Factories Act, Industrial Disputes Act, etc., rests with the personnel department. The personnel manager can do a great deal in maintaining industrial peace in the organization as he
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is responsible for setting various committees on discipline, labour welfare, safety, grievance, etc. He helps in laying down the grievance procedure to redress the grievances of the employees. He also gives authentic information to the trade union leaders and tries to convey to them the personnel policies and programmes of the enterprise. Significance of Staffing The Staffing function of management deals with the proper handling of personnel in the organization. If people working in the organization are not handled or managed properly, good industrial relations will not develop in the enterprise, which will jeopardize the survival of the enterprise. It is not possible to achieve the organizational goals without active cooperation of the personnel. The significance of personnel management has increased with the growth of industrial undertakings. Now it is recognized that personnel management is not only the responsibility of personnel manager, but also of all managers in the enterprise. The various aspects of personnel function are procurement, development, compensation and motivation of the personnel. Every manager has some responsibility towards these areas, but now it has been recognized that these functions cannot be the specialty of every line manager. So it is very common to create the personnel department under a Personnel Director or Personnel Manager. Though personnel department does not produce anything, which is tangible, yet it helps the other departments to contribute towards organizational objectives. Personnel function has become a specialized task and so it is entrusted to the person who is well conversant with the principles of personnel management. The personnel manager organizes the personnel department to carry out the functions entrusted to him. Personnel department develops the sources of recruitment, selects the people and help the line manager in rectifying placements by devising a suitable transfer policy. Personnel department keep the record of every person in the organization and provides important information to departmental heads in taking decisions about promotion and transfers. Personnel department is also responsible for training and development of the employees. It develops various programmes for increasing the
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knowledge and skills of the employees in consultation with line managers. Personnel department also helps the other departments in evaluating the performance of the employees for future reference by developing a suitable system of merit rating or performance appraisal. Determining the wages and salaries to be paid to different categories of employees in the organization is another important function of the personnel department. Personnel department looks after the wage and salary administration in the organization and devises suitable incentives to reward the efficient workers to motivate them. Personnel department also undertakes research of human behavior by conducting attitude and morale surveys. Every manager can utilize those morale surveys to understand the behavior of his subordinates. 4.3. MANPOWER PLANNING Manpower may be regarded as the quantitative and qualitative measurement of labor force required in an organization and planning in relation to manpower may be regarded as establishing objectives to develop human resources in line with broad objectives of the organization quote Chhabra, Ahuja and Jain. Manpower planning may be expressed as a process by which the management ensures the right number of people and right kind of people, at the right place, at the right time doing the right things. It is a two phased process by which management can project the future manpower requirements and develop manpower action-plans to accommodate the implications of projections. Thus, we can say that, manpower planning is the process of developing and determining objectives, policies and programmes that will develop, utilize and distribute manpower so as to achieve the goals of the organization. Manpower or Human Resource Planning aims at ascertaining the manpower needs of the organization both in right number and of right kind. It further aims at the continuous supply of right kind of personnel to man various positions in the organization. Human Resource Planning is a process of determining and assuring that the organization will have an adequate number of qualified persons, available at the proper times, performing jobs which meet the needs of the enterprise and which provide satisfaction for the individuals involved. Significance of Manpower Planning There is no doubt about the fact that failure in planning for developing personnel will prove to be a limiting factor in achieving the organization
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objectives. If the number of persons in an organization is less than the number of persons required for carrying out the organizational plans, there will be disruptions in the flow of work and the pace of production, will also be low. But if, on the other hand, some persons are surplus in the organization, they will have to be paid remuneration if they are retained or compensated if their services are terminated. A sound personnel policy requires that there should be adequate number of persons of the right type to attain the organizational objectives. For this, the manpower planner should be concerned with the timing and scheduling of planning of personnel and persuading the management to use the results of manpower planning studies, in the conduct of the business. Manpower planning can prove to be an important aid to frame the training and development programmes for the personnel because it takes into account the effects of anticipated changes in technology, markets and products on manpower requirements and educational and training programme requirements. Manpower planning helps in formulating managerial succession plans as a part of the replacement planning process. It provides enough opportunity for identifying and developing managers to move up the corporate ladder. Man-power planning is not an isolated activity. It is a part of the overall planning process. Viewed from this angle, manpower planning will help better management of the organization. Process of Man Power Planning The manpower planning process encompasses the following steps 1. Job Analysis. 2. Skill Inventory. 3. Personnel Forecasting. 4. Employment Plan. 5. Training and Development of Personnel. Manpower planning is a continuous process. The manager responsible for manpower planning has to be concerned doing some exercise in this regard every time. He may have to revise employment plan and training and development programme from time to time depending upon the changes in circumstances such as sudden changes in the volume of production, unexpected high rate of labor turnover, obsolescence of existing skills and so on. A brief explanation of the steps of the manpower planning process in given below:
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1. Job Analysis Job analysis is the qualitative aspect of manpower requirements since it determines the demands of a job in terms of responsibilities and duties and, then translates these demands in terms of skills, qualities and other human attributes. It helps in determining the number and kinds of jobs and qualifications needed to fill these jobs. With the help of job analysis it is known what is the quantum of work, that an average person can do on a job in a day. It facilitates the division of work into different jobs. Thus, it is an essential element of effective manpower planning. At managerial levels, accurate job descriptions help in preparation of inventories of executive talent. Job analysis may be defined as a process of discovering and identifying the pertinent information relating to the nature of a specific job. It is the determination of the tasks, which comprise the job, and of the skills, knowledge, abilities and responsibilities required of the worker for successful performance of the job. The process of job analysis is essentially one of data collection and then analyzing that data. It provides the analyst with basic data pertaining to specific jobs in terms of duties, responsibilities, skills, knowledge, etc. This data may be classified as follows (a) Job identification. (b) Nature of the job. (c) Operations involved in doing the job. (d) Materials and equipment to be used in doing the job. (e) Personal attributes required to do the job, e.g., education, training, physical strength, mental capabilities, etc. (f) Relation with the other jobs. The information relating to a job, which is thus classified, if examined carefully, would suggest that some information relates to the job and some concerns the individual doing the job. The requirements of a job are known as job description and the qualities demanded from the jobholder are termed as Job Specification. Thus, job description and job specification are the immediate products of job analysis. 2. Skill Inventory The scarcity of talent, difficulty of discovering it and the time required to
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develop it fully have forced big organizations to think about their manpower in a systematic way. They attempt to know the inventory of manpower resources, develop and appraise their executives, draw up management succession plans and calculate the replacements that will be needed because of retirements and other causes. To understand the nature of the recruitment and development problems, it is necessary to determine the inventory of different skills and talents existing in the organization. The management must try to develop in advance the talented employees to occupy the managerial positions in the future. It can no longer rely upon finding talented manpower just when it is needed. Systematic steps must be taken in order to ensure that a reservoir of talent within the organization must be continuous. Thus, the identification of manpower potential within the organization is a critical factor for the long-range success of any organization. 3. Personnel (Manpower) Forecasting In order to forecast the number of personnel required at a particular plant, the work-load analysis will have to be done; and on the basis of work-load of the plant, work-force analysis will have to be carried out. Work-load Analysis. In work-load analysis, the manpower planning expert needs to find out sales forecasts, work schedules and thus determine the manpower required per unit of product. The sales forecasts are translated into work performance for the various departments of the enterprise. In a manufacturing enterprise, one shall first find out the master schedule and then departmental schedules. The departmental work-loads are converted into man - hours in terms of different skills required. Workload analysis is used to determine how many employees of various types are required to achieve total production targets. Similarly, plans are made concerning the amount of work that each other part (marketing department, purchase department, etc.) of the organization is expected to accomplish during the coming year. It is essential to determine the work-load in some tangible units so that they may be translated into man-hours required per unit. Past experience can, of course, be utilized for translating work-loads into man-hours required. To take an illustration, let us assume that the annual production budget of a company is 1,80,000 units. The standard man-hours required to complete a unit of the product are 2 hours. The past experience reveals that a worker on an average can contribute about 2,000 hours per year. The work-load may be calculated as under:
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(a) Annual Production Budget (b) Standard Man-hours required per unit (c) Planned Man-hours for the year (axb) (d) Annual contribution of a Worker (e) No. of Workers required ( c/d )

= 1,80,000 units. = 2hrs. = 3,60,000hrs. = 2,000 hrs. = 180.

Thus, 180 workers are needed throughout the year to meet the production target of 1,80,000 units. But this figure cannot be relied upon fully as the actual production is influenced by many other factors such as availability of inputs and power, breakdown of machinery, strike, lockout, etc. Nonetheless, work-load analysis is quite suitable for short-term projections of manpower requirements. Long-term projections can be made with the help of workforce analysis. Work-force Analysis. In the above illustration, we came to the conclusion that 180 workers are required to make 1,80,000 units in a year. Assuming that all other factors are favorable, this conclusion is illusory because it is almost certain that all the 180 workers will not be available on all working days because of the two major problems: (i) Absenteeism, and (ii) Labor Turnover. Both these factors operate to reduce the number of workers available. Therefore, it is essential to do the analysis of work-force in the light of these major problems, which have been discussed later in this chapter. In other words, it is necessary to keep a sufficient margin for absenteeism, labor turnover and idle time on the basis of past experience. It is essential to keep a margin of 20% of the manpower required as per work-load analysis, the company must ensure that it has at least 216 workers on its payroll to meet the annual production target. 4. Employment Plan This phase deals with planning how the organization can obtain the required number of right types of personnel as reflected by the personnel forecasting. In other words, there is a need to prepare programme of recruitment, selection, training, transfer and promotion so that personnel needs of various departments of the organization are met.
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5.Training and Development of Personnel The preparation of skill inventory helps in identifying the training and development needs of the organization. Training for learning new skills and for refreshing the memory is necessary not only for new employees but also for old employees. Executive development programmes have to be devised for the development of managerial personnel. Absenteeism Absenteeism is said to be there when an employee fails to come to work when he is scheduled to work. It is an important problem in many enterprises. Excessive absenteeism involves a considerable loss to the enterprise because work schedules are upset and delayed and management has to give overtime wages to meet the delivery dates. The rates of overtime wages are double than the normal rates of wages. Therefore, study of causes of absenteeism is essential to deal with the problem. The rate of absenteeism can be calculated by the following formula Man-days lost during a period x 100 ---------------------------------------------Average number of workers x No. Of working days Personnel researchers have found that generally a small percentage of employees (15%) account for a large percentage of absenteeism (70%). These employees are likely to have low interest in their tasks and to be physically below par. Research studies have further revealed that 1. The days before and after a holiday are liable to higher rate of absenteeism. 2. Women are absent more often than men.

3. Bad weather increases absenteeism, especially among employees who live at distant places. 4. Employees under the age of 25 years and above the age of 55 years are absent more often than those in the age group of 26 to 55 years. 5. Operative employees are absent more frequently than their supervisors. Causes of Absenteeism. The important causes of absenteeism are discussed below:
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1. Sickness is high on the list of causes of absenteeism running as high as 50% of the absenteeism in some cases. 2. Industrial accidents and occupational diseases bring about absenteeism, depending upon the nature of the process and machinery used. 3. Poor production and material control can result in absenteeism. Unless the flow of work between departments is balanced and continuous workers may stay away from their jobs because they lose their interest in the work and also lose the feeling of the importance of being dependable. 4. Lack of interest and worthwhileness are fundamental causes of absenteeism. 5. After pay-day, sickness and hangovers contribute to absenteeism, particularly when combined with poor working conditions, lack of interest in work and high wages. 6. Attitude of mind caused by environmental and sociological factors may condition some people to develop a feeling of irresponsibility about going to work. 7. A miscellaneous group of causes includes such facts as bad weather, lack of transportation, search for another job, personal business and friends visiting from distant locations. Measures to Control Absenteeism. The management may use the following measures to control absenteeism: 1 The new employees should be inducted in such a way that their critical attitude is reduced as quickly as possible to avoid absenteeism due to this cause. The management should properly analyze the various causes of absenteeism and classify the chronic offenders.

3. The chronic offenders may be ridiculed by publicizing their names. 4. The chronic offenders may be disciplined by lay-offs, discharges and loss of promotion and other privileges. 5. All absent workers should be interviewed on their return to determine causes and to impress upon them the seriousness of their absence.
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Labor Turnover In every organization, employees constantly join and leave the organization for one reason or the other. The relation between the number of persons joining the organization and leaving due to resignation, retirement or retrenchment to the average number on the pay-roll is called labour turnover. The rate of labor turnover may be calculated by the following formula: Number of workers joined and left ____________________________________ Average number of workers on the payroll In order to exercise control over high rate of labor turnover, it is important to consider the causes for which persons leave the enterprise. The management should try to keep the rate of labor turnover as low as possible because it involves huge costs. The management spends money on recruitment, selection and training of new employees. If an employee leaves the enterprise, the expenditure incurred on his employment, training, etc. will go waste. Separation by personnel also results in a fall in production because it takes time to get substitutes. The new employees may be inexperienced and take time to reach the desired level of efficiency. There may be many causes of high labor turnover. Either employee leaves the enterprise on his or her own accord or they are discharged. The causes of resignations and dismissals may be either avoidable or unavoidable. Management may discharge the employees because of fall in work-load, shortage of materials, etc. Such a situation should not be allowed to occur. Workers may leave the enterprise because of job dissatisfaction, poor relations, and bad working conditions and low remuneration, which can be avoided. The unavoidable causes of dismissals may be misconduct by an employee. The employees may resign from the enterprise because of getting better jobs, domestic affairs, and illness etc. Separations also occur because of death and recruitment. Such causes cannot be avoided. Management can control high rate of labor turnover by reducing the avoidable causes of turnover. It should provide better working conditions to the workers, introduce a satisfactory wage and incentive plan, adopt a sound selection policy, set up procedure for handling grievances and provide counseling to the employees over their personal problems. Retirement benefits should also be provided to maintain the workers in the enterprise.
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4.4. RECRUITMENT Recruitment is shortly defined as discovering of potential applicants for actual or anticipated organizational vacancies. The human resources are the most important assets of an organization. The success or failure of an organization is largely dependent on the caliber of the people working therein. Without positive and creative contributions from people, organizations cannot progress or prosper. In order to achieve the goals or the activities of an organization therefore, we need to recruit people with requisite skills, qualifications, and experience. While doing so, we have to keep the present as well as the forth coming requirements of the organization in mind. Recruitment is a linking process; joining together those with jobs to fill and those seeking jobs. It is a joining process to bring together job seekers and employers with a view to encourage the former to apply for a job with the letter. The basic purpose of recruiting is to develop a group of potentially qualified people. To this end the organization must communicate the position in such a way that job seekers respond. To be cost effective, the recruitment process should attract qualified applicants and provide enough information for unqualified persons to self-select themselves out. The sources of recruitment may be broadly divided into two categories: internal sources and external sources: These sources include the employees already on the payroll i.e., present force. Whenever any new vacancy arises, people from within the organization will be promoted, transferred or demoted. The process of filling job openings by selecting from the pool of present workforce can be implemented by the following methods: Sources of Recruitment The sources of recruitment may be broadly into two categories: internal sources and external sources. Internal Sources: These sources include the employees already on the payroll i.e., present work force. Reviewing the personnel records. Job posting and job bidding. Inside moonlighting and employees friends.
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Review of the personnel records and skills inventory provides adequate information for the personnel director to find suitable candidates for a particular position. Under job posting and bidding system, the organization notifies its present employees of openings, using bulletin boards, and company publications, etc. This is a more open approach where everyone gets the same right to apply for a job and bid for the same. If the labor shortage is of short term and great amount of additional labor is not necessary, then organization employs inside moonlighting. It is a technique where organization pays bonuses of various types to people on a time payroll. Overtime procedures are, in many organizations, developed for those on time payroll. Furthermore, before going outside to recruit many organizations ask the present employees to encourage friends and relatives to apply. External Sources: External sources lie outside an organization. Here the organization can have the services of: (a) employees working in other organizations; (b) job aspirants registered with employment exchanges; (c) students from reputed educational institutions; (d) candidates referred by unions, friends, relatives and existing employees; (e) candidates forwarded by search firms and contractors; (f) candidates responding to the advertisements, issued by the organization; and (g) unstructured applications/walk-ins. Methods of Recruitment Transfer: A lateral movement within the same grade, from one job to another. The following are the most commonly used methods of recruiting people: (i) Promotions and transfers: This is a method of filling vacancies from within through transfers and promotions. A transfer is a lateral movement within the same grade, from one job to another. It may lead to changes, in duties and responsibilities, working conditions, etc., but not necessarily salary. Promotion, on the other hand, involves movement of employee from a lower level position to a higher-level position accompanied by (usually) changes in duties, responsibilities, status and value. Organizations generally prepare lists of a central pool of persons from which vacancies can be filled for manual jobs. Such persons are usually passed on to various departments,
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depending on internal requirements. If a person remains on such rolls for 240 days or more, he gets the status of a permanent employee as per the Industrial Disputes Act and is, therefore, entitled to all relevant benefits, including provident fund, gratuity, retrenchment and compensation. (ii) Job posting: Job posting is another way of hiring people from within. In this method, the organization publicizes job openings on bulletin boards, electronic media and similar outlets. One of the important advantages of this method is that it offers a chance to highly qualified applicants working within the company to look for growth opportunities within the company without looking for greener pastures outside. (iii) Employee referrals: Employee referral means using personal contacts to locate job opportunities. It is a recommendation from a current employee regarding a job applicant. The logic behind employee referral is that it takes one to know one. Employees working in the organization, in this case, are encouraged to recommend the names of their friends working in other organizations for a possible vacancy in the near future. (iv) Campus recruitment: It is a method of recruiting by visiting and participating in college campuses and their placement centers. Here, the recruiters visit reputed educational institutions such as IITs, IlMs, colleges and universities with a view to pick up job aspirants having requisite technical or professional skills. Job seekers are provided information about the jobs and the recruiters, in turn, get a snapshot of job seekers through constant interchange of information with respective institutions. A preliminary screening is done within the campus and the short listed students are then subjected to the remainder of the selection process. In view of the growing demand for young managers, most reputed organizations (such as Hindustan Lever Ltd, Procter & Gamble, Citibank, State Bank of India, Tata and Birla group companies) visit IIMs and IIT regularly and even sponsor certain popular campus activities with a view to earn goodwill in the job market. Advantages of this method include: the placement center helps locate applicant and provides resumes to organizations; applicants can be prescreened; applicants will not have to be lured away from a current job and lower salary expectations. On the
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negative front, campus recruiting means hiring people with little or no work experience. The organization will have to offer some kind of training to the applicant almost immediately after hiring. It demands careful advance planning, looking to the placement weeks of various institutions in different parts of the country. Further campus recruiting can be costly for organizations situated in another city (airfare, boarding and lodging expenses of recruiters, site visit for applicants if allowed, etc.). (v) Advertisements: These include advertisements in newspapers, trade, professional and technical journals, radio and television, etc. In recent times, this medium has become just as colorful, lively and imaginative as consumer advertising. The ads generally give a brief outline of the job responsibilities, compensation package, prospects in the organization, etc. This method is appropriate when (a) the organization intends to reach a large target group and (b) the organization wants a fairly good number of talented people - who are geographically spread out to apply for the advertised vacancies. Let us briefly examine the wide variety of alternatives available to a company as far as ads are concerned. (vi) Private Employment Search Firms: A search firm is a private employment agency that maintains computerized lists of qualified applicants and supplies these to employers willing to hire people from the list for a fee. Firms like Arthur Anderson, Noble and Hewitt, ABC consultants, SR Billimoria, KPMG, Ferguson Associates offer specialized employment related services to corporate houses for a fee, especially for top and middle level executive vacancies. At the lower end, a number of search firms operate providing multifarious services to both recruiters and the recruitees. (vii) Employment Exchanges: As a statutory requirement, companies are also expected to notify (wherever the Employment Exchanges Act, 1959, applies) their vacancies through the respective employment exchanges, created all over India for helping unemployed youth, displaced persons, ex-military personnel, physically handicapped etc. As per the Act, all employers are supposed to notify the vacancies arising in their establishment with certain exemptions to the prescribed employment exchanges before they
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are filled. The Act covers all establishments in public sector and nonagricultural establishments employing 25 or more workers in the private sector. However, in view of the practical difficulties involved in implementing the provisions of the Act (such as filling a quarterly return in respect of their staff strength, vacancies and shortages, returns showing occupational distribution of their employees, etc.) many organizations have successfully fought court battles when they were asked to pick up candidates from among those sponsored by the employment exchanges. (viii) Gate Hiring and Contractors: Gate hiring is a process where job seekers (where job seekers, generally blue collar employees, present themselves at the factory gate and offer their services on a daily basis), hiring through contractors, recruiting through word-of-mouth publicity are still in use despite the many possibilities for their misuse in the small scale sector in India. (ix) Unsolicited applicants/walk-ins: Companies generally receive unsolicited applications from job seekers at various points of time. The number of such applications depends on economic conditions, the image of the company and the job seekers perception of the types of jobs that might be available, etc. Such applications are generally kept in a data bank and whenever a suitable vacancy arises, the company would intimate the candidate to apply through a formal channel. One important problem with this method is that job seekers generally apply to a number of organizations and when they are actually required by the organization, either they are already employed in other organizations or are not simply interested in the position. (x) e-hiring: The first step in e-hiring is to get a URL (Universal Resource Locator) that people can conveniently guess and thus, not have to use a search engine. There is no point in being a famous company if people cannot find you without trouble on the net. Step two is to put out detailed job postings spelling out your exact requirements. A separate web page would help potential applicants to find whether they fit into the announced job openings or not. You are likely to get a lot of surf-ins if the details of openings are listed category-wise. Allow people to apply on-line. Create an e-form which can be filled up on line, and then, you do the calling-up. Finally, ask HR to maintain
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a database on all applications. You may not have an opening today. But, remember tomorrow may be another desperate day for you to look for people with requisite skills, qualifications and experience. 4.5. SELECTION To select means to choose. Selection is the process of picking individuals who have relevant qualifications to fill jobs in an organization. The basic purpose is to choose the individual who can most successfully perform the job from a pool of qualified candidates. The purpose of selection is to pick up the most suitable candidate who would meet the requirements of the job and the organization best and to find out which job applicant will be successful if hired. To meet this goal, the company obtains and assesses information about the applications in terms of age, qualifications, skills, experience, etc. The needs of the job are matched with the profile of candidates. The most suitable person is then picked up after eliminating the unsuitable applicants through successive stages of selection process. How well an employee is matched to a job is very important because it directly affects the amount and quality of employees work. Any mismatch in this regard can cost an organization a great deal of money, time and trouble, especially, in terms of training and operating costs. In course of time, the employee may find the job distasteful and frustrating. He may even circulate hot news and juicy bits of negative information about company, causing incalculable harm in the long run. Effective selection, therefore, demands monitoring the fit between person and the job. 4.5.1. THE PROCESS OF SELECTION Selection is usually a series of hurdles or steps. Each one must be successfully cleared before applicant proceeds to the next. The following figure outlines the important steps in the selection process of typical organization. The time and emphasis placed on each step will, of course, vary from organization to organization and indeed, from job to job within the same organization. The sequence of steps may also vary from job to job and organization to organization. 1. Reception: A company is known by the people it employs. In order to attract people with talents, skills and experience a company has to create a favorable impression on the applicants right from the
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stage of reception. Whoever meets the applicant initially should be tactful and able to extend help in a friendly and courteous way. Employment possibilities must be presented honestly and clearly. If no jobs are available at that point of time, the applicant may be asked to call back the personnel department after some time. 2. Screening Interview: A preliminary interview is generally planned by large organizations to cut the costs of selection by allowing only eligible candidates to go through the further stages in selection. A junior executive from the Personnel Department may elicit responses from applicants on important items determining the suitability of an applicant for a job such as age, educational experience, pay expectations, aptitude, location, choice etc. This courtesy interview, as it often called, helps the department screen out obvious misfits. If the department finds candidate suitable, a prescribed application form is given to the applicants to fill and submit. Fig Steps in selection process Hiring Decision Reference Checks Medical Examination Selection Interview Selection Tests Application Blank Screening Interview Reception Step 8 Step 7 Step 6 Step 5 Step 4 Step 3 Step 2 Step 1

3. Application Blank: Application blank or form is one of the most common methods used to collect information on various aspects of the applicants academic, social, demographic, work-related background and references. It is a brief history sheet of an employees background, usually containing the following things:
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Contents of Application Blanks Personal data (address, sex, identification marks) Marital data (single or married, children, dependents) Physical data (height, weight, health condition) Educational data (levels of formal education, marks, distinctions) Employment data (past experience, promotions, nature of duties, reasons for leaving previous jobs; salary drawn, etc.) Extra-curricular activities data (sports/games, NSS, NCC, prizes won, leisure-time activities) References (names of two or more people who certify the suitability of an applicant to the advertised position)

Weighted Application Blanks (WABs): To make the application form more job-related, some organizations assign numeric values or weights to responses provided by applicants. Generally, the items that have a strong relationship to job performance are given high scores. For example, for a medical representatives position items such as previous selling experience, martial status, age, commission earned on sales previously, etc, may be given high scores when compared to other items such as religion, sex, language, place of birth, etc. The total score of each applicant is obtained by summing the weights of the individual item responses. The resulting scores are then used in the selection decision. The WAB is best suited for jobs where there are many workers, especially for sales and technical jobs and it is particularly useful in reducing labour turnover. There are, however, several problems associated with WABs. It takes time to develop such a form. The cost of developing a WAB could be prohibitive if the organization has several operating levels with unique features. The WAB must be updated every few years to ensure that the factors previously identified are still valid predictors of job success. And finally, the organization should be careful not to depend on weights of a few items while selecting an employee. 4. Selection Testing: A test is a standardized, objective measure of a persons behavior, performance or attitude. It is standardized because the way the test is carried out, the environment in the test is administered and the ways the individual scores are calculated are uniformly applied. It is objective in that it tries to measure individual
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differences in a scientific way, giving very little room for individual bias and interpretation. Over the years, employment tests have not only gained importance but also a certain amount of inevitability in employment decisions. Since they try to objectively determine how well an applicant meets job requirements, most companies do not hesitate to invest their time and money in selection testing in a big way. Some of the commonly used employment tests are: (a) Intelligence tests: These are mental ability tests. They measure the incumbents learning ability and also the ability to understand instructions and make judgments. The basic objective of intelligence tests is to pick up employees who are alert and quick at learning things so that they can be offered adequate training to improve their skills for the benefit of the organization. Intelligence tests measure not a single trait, but rather several abilities such as memory, vocabulary, verbal fluency, numerical ability, perception, spatial visualization, etc. Stanford-Binet test, Binet-Simon test, Wechsler Adult Intelligence scale are examples of standard intelligence tests. Some of these tests are increasingly used in competitive examinations while recruiting graduates and postgraduates at entry management positions in banking, insurance and other financial services sectors. (b) Aptitude tests: Aptitude tests measure an individuals potential to learn certain skills, clerical, mechanical, mathematical, etc. These tests indicate whether or not an individual has the ability to learn a given job quickly and efficiently. In order to recruit efficient office staff, aptitude tests are necessary. Clerical tests, for example, may measure the incumbents ability to take notes, perceive things correctly and quickly locate things, ensure proper movement of files, etc. Aptitude tests, unfortunately, do not measure on the job motivation. That is why the aptitude test is administered in combination with other tests like, intelligence and personality tests. (c) Personality tests: Of all the tests required for selection, personality tests have generated lot of heat and controversy. The definition of personality, method of measuring personality factors and the relationship between personality factors and actual job criteria has been the subject of much discussion. Researchers have also
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questioned whether applicants answer all the items truthfully or whether they try to respond in a socially desirable manner. Regardless of these objections, many people still consider personality as an important component of job success. (d) Achievement tests: These are designed to measure what the applicant can do on the job currently, i.e., whether the testee actually knows what he or she claims to know. A typing test shows typing proficiency, a short hand test measures the testees ability to take dictation and transcribe, etc., Such proficiency tests are also known as work sampling tests. Work sampling is a selection test wherein the job applicants ability to do a small portion of the job is tested. These tests are of two types; Motor, involving physical manipulation of things e.g., trade tests for carpenters, plumbers, electricians or Verbal, invo lving pro blem sit uatio ns t hat are primarily language-oriented-or people oriented (e.g., situational tests for supervisory jobs). (e) Simulation tests: Simulation exercise is a test, which duplicates many of the activities and problems an employee faces while at work. Such exercises are commonly used for hiring managers at various levels in an organization. To assess the potential of a candidate for managerial positions, assessment centers are commonly used. (f) Assessment center: An assessment center is an extended work sample. It uses procedures that incorporate group and individual exercises. These exercises are designed to simulate the type of work, which the candidate will be expected to do. Initially, a small batch of applicants comes to the assessment center (a separate room). Their performance in the situational exercises is observed and evaluated by a team of 6 to 8 trained assessors. The assessors judgments on each exercise are compiled and combined to have a summary rating for each candidate being assessed. Initially, a small batch of applicants comes to the assessment centre (a separate room). The examples of the real-life but simulated exercises included in a typical assessment centre are as follows: a. The in-basket. Here the candidate is faced with an accumulation of reports, memos, letters and other materials collected in the in-basket
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of the simulated job he is supposed to take over .The candidate is asked to take necessary action on each of these materials, say, by writing letters, notes, agendas for meetings, etc. The results of the applicants actions are then reviewed by the evaluators. b. The leaderless group discussion : In this exercise, a leaderless group is given a discussion question and asked to arrive at a group decision. The evaluators then evaluate each participants interpersonal skills, acceptance by the group, leadership and individual influence, etc. c. Business games: Here participants try to solve a problem, usually as members of two or more simulated companies that are competing in the market place. Decisions might include how to advertise the product, how to penetrate the market, how much to keep in stock, etc. Participants thereby exhibit planning and organizational abilities, interpersonal skills and leadership abilities. Business games have several merits: they reduce time, events that might not take place for months or years are made to occur in a matter of hours. They are realistic and competitive in nature. They offer immediate feedback also. d. Individual presentations: A participants communication skills are evaluated by having the person make an oral presentation of a given topic. e. Structured interview: Evaluators ask a series of questions aimed at the participants level of achievement, motivation, potential for being a self-starter and commitment to the company. g. Graphology Tests: Graphology involves a trained evaluator to examine the lines, loops, hooks, strokes, curves and flourishes in a persons handwriting to assess the persons personality and emotional make-up. The recruiting company may, for example, ask applicants to complete application forms and write about why they want a job. These samples may be finally sent to a graphologist for analysis and the results may be put to use while selecting a person. The use of graphology, however, is dependent on the training and expertise of the person doing the analysis. In actual practice, questions of validity and just plain skepticism have limited its use.
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h. Polygraph (Lie-detector) tests. The polygraph records physical changes in the body as the test subject answers a series of questions. It records fluctuations in respiration, blood pressure and perspiration on a moving roll of graph paper. The polygraph operator form a judgment as to whether the subjects response was truthful or deceptive by examining the biological movements recorded on the paper. Polygraphs, despite strong resistance by many applicants, are increasingly being used by companies, which have problems with inventory and security of funds. Government agencies have begun to use the polygraph, especially for filling security, police, fire and health positions. Critics, however, question the appropriateness of polygraphs in establishing the truth about an applicants behavior. The fact is that polygraph records biological reaction in response to stress and does not record lying or even the conditions necessarily accompanying lying. Is it possible to prove that the responses recorded by the polygraph occur only because a lie has been told? What about those situations in which a person lies without guilt (a pathological liar) or lies believing the response to be true? The fact of the matter is that polygraphs are neither reliable nor valid. Since they invade the privacy of those tested, many applicants vehemently oppose the use of polygraph as a selection tool. i. Integrity tests: These are designed to measure employees honesty to predict those who are more likely to steal from an employer or otherwise act in a manner unacceptable to the organization.

5. Selection Interview: Interview is the oral examination of candidates This is the most essential step in the selection process. In this step the interviewer matches the information obtained about the candidate through various means to the job requirements. 6. Medical Examination: Certain jobs require certain physical qualities like clear vision, perfect hearing, unusual stamina, tolerance of hard working conditions, clear tone, etc. Medical examination reveals whether or not a candidate possesses these qualities. Medical examination can give the following information: Whether the applicant is medically suitable for the specified job or not. Whether the applicant has health problems or psychological attitudes likely to interfere with work efficiency or future attendance.
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Whether the applicant suffers from bad health, which should be corrected before he can work satisfactorily (such as the need for spectacles). Whether the applicants physical measurements are in accordance with job requirements or not.

7. Reference Checks: Once the interview and medical examination of the candidate is over, the Personnel Department will engage in checking references. Candidates are required to give the names of two or three references in their application forms. These references may be from the individuals who are familiar with the candidates academic achievements or from the applicants previous employer, who is well versed with the applicants job performance and sometimes from co-workers. In case the reference check is from the previous employer, information in the following areas may be obtained. They are job title, job description, period of employment, pay and allowances, gross emoluments, benefits provided, rate of absence, willingness of the previous employer to employ the candidate again, etc. Further, information regarding candidates regularity at work, character, progress, etc., can be obtained. Often a telephone call is much quicker. The method of mail query provides detailed information about the candidates performance, character and behavior. However, a personal visit is superior to the mail and telephone methods and is used where it is highly essential to get detailed, first-hand information, which can also be secured by observation. Reference checks are taken as a matter of routine and treated casually or omitted entirely in many organizations. But a good reference check, when used sincerely will fetch useful and reliable information to the organization. 8. Hiring decision: The line manager concerned has to make the final decision now whether to select or reject a candidate after soliciting the required information through different methods discussed earlier. The line manager has to take adequate care in taking the final decision because of economic, behavioral and social implications of the selection decisions. A careless decision of rejecting a candidate would impair the morale of the people and they are likely suspected the
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selection procedure and the very basis of selection of a particular organization. A true understanding between line managers and personnel managers should be established so as to facilitate good selection decisions. After taking the final decision, the organization has to intimate this decision to the successful as well as unsuccessful candidates. The organization sends the appointment order to the successful candidates either immediately or after sometime depending upon its time schedule. Placement After selecting a candidate, he should be placed on a suitable job. Placement is the actual posting of an employee to a specific job. It involves assigning a specific rank and responsibility to an employee. The line manager takes the placement decisions after matching the requirements of a job with the qualification of a candidate. Most organizations put new recruits on probation for a given period of time, after which their services are confirmed. During this period, the performance of probationer is closely monitored. If the new recruit fails to adjust himself to the job and turns out poor performance, the organization may consider his name for placement elsewhere. Such as placement is called differential placement. Usually the employees supervisor, in consultation with the higher levels of line management, takes decisions regarding the future placement of each employee. Placement is an important human resource activity. If neglected, it may create employee adjustment problems leading to absenteeism, labour turnover, accidents, poor performance, etc. The employee will also suffer seriously. He may quit the organization in frustration, complaining bitterly about everything. Proper placement is therefore, important to both the employee and the organization. Induction/Orientation Induction or orientation is the process through which a new employee is introduced to the job and the organization. In the words of Armstrong, induction is the process of receiving and welcoming an employee when he first joins a companyto the job and giving him the basic information he needs to settle down quickly and start work.
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Induction serves the following purposes: (a) Removes fears: A newcomer steps into an organization as a stranger. He is new to the workplace and work environment. He is not very sure about to do what he is supposed to. Induction helps a new employee overcome such fears and perform better on the job. (b) Creates a good impression: Another purpose of induction is to make the newcomer feel at home and develop a sense of pride in the organization. Induction helps him to: Adjust and adapt to new demands of the job. Get along with people. Get off to a good start.

Through induction, a new recruit is able to see more clearly as to what he is supposed to do, how good the colleagues are, how important is the job, etc. He can pose questions and seek clarifications on issues relating to his job. Induction is a positive step, in the sense, it leaves a good impression about the company and the people working there in the minds of new recruits. They begin to take pride in their work and are more committed to their jobs. (c) Acts as a valuable source of information: Induction serves as a valuable source of information to new recruits. It. clarifies many things through employee manuals/handbook. Informal discussions with colleagues may also clear the fog surrounding certain issues. The basic purpose of induction is to communicate specific job requirements to the employee, put him at ease and make him feel confident about his abilities. Induction Programme Steps: (a) Introduction: Induction training tries to put the new recruits at ease. Each new employee is usually taken on a formal tour of the facilities, introduced to key personnel and informed about company policies, procedures and benefits. The training opportunities and career prospects are also explained clearly. Every attempt is made to clarify the doubts of the new recruits. They are encouraged, in fact, to come out with questions on various issues confronting their working lives. The companys manual is also handed over at the end of the programme.
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(b) Socialization: Socialization is a process through which a new recruit begins to understand and accept the values, norms and beliefs held by others in the organization. HR department representatives help new recruit to Internalize the way things are done in the organization. Orientation helps the newcomers to interact freely with employees working at various levels and learn behaviors that are acceptable. Through such formal and informal interaction and discussion, newcomers begin to understand how the department/ company is run, who holds power and who does not, who is politically active within in the department, how to-behave in the company, what is expected of them and so on. ( c) Follow-up: Despite the best efforts of supervisors, certain dark areas may still remain in the orientation programme. New hires may not have understood certain things. The supervisior while covering a large ground may have ignored certain important matters. To overcome the resultant communication gaps, it is better to use a supervisory checklist and find out whether all aspects have been covered or not (covering organizational issues, employee benefits, job duties, introduction to supervisors and co-workers, etc). Follow up meetings could be held at fixed intervals, say after every three or six months on a face-to-face basis. The basic purpose such follow-up orientations is to offer guidance to employees on various general as well as job related matters without leaving anything to chance. 4.6. TRAINING AND DEVELOPMENT Training is a process of learning a sequence of programmed behavior. It is application of knowledge. It gives people an awareness of the rules and procedures to guide their behavior. It attempts to improve their performance on the current job or prepare them for an intended job. Development is a related process, it covers not only those activities which improve job performance, but also those which bring about growth of the personality; help individuals in the progress towards maturity and actualization of their potential capacities so that they become not only good employees but better men and women. Difference between Training and Development Training is short-term process utilizing a systematic and organised procedure by which non-managerial personnel learn technical knowledge
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and skills for a definite purpose. Development is a long-term educational process utilizing a systematic and organised procedure by which managerial personnel learn conceptual and theoretical knowledge for general purpose. Training refers only to instruction in technical and mechanical operations, while development refers to philosophical and theoretical educational concepts. Training is designed for non-managers, while development involves managerial personnel. In the words of Campbell, training courses are typically designed for a short-term, stated set purpose, such as the operation of some piece(s) of machinery, while development involves a broader education for long-term purposes. Training and development differ in four ways: (a) What is learned; (b) Who is learning; (c) Why such learning takes place; and (d) When learning occurs. Learning Principles The outcomes and process of learning The previous section concluded that human resource managers needed to understand the processes and nature of learning and development. This section will, therefore, examine the following: The outcomes of learning: Skill Competence know-how and tacit knowledge hierarchies of cognitive and other skills; the process of learning; theories of the process of learning elements in the process of learning the stages of learning cyclical models of learning, learning styles.
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Need for Basic Purposes of Training The need for the training of employees would be clear from the observations made by the different authorities. (i) To increase productivity by the performance. (ii) To improve quality by good relationship between employer and employee. (iii) To help a company fulfill its future personnel needs. (iv) To improve organizational climate. (v) To improve health and safety. (vi) Obsolescence prevention. (vii) Personal growth. Need for training arises from more than one reason like: (i) An increased use of technology in production; (ii) Labor turnover arising from normal separations due to death or physical incapacity, for accidents, disease, super-annuation voluntary retirement, promotion within the organization and change of occupation or job; (iii) Need for additional hands to cope with an increased production of goods and services; (iv) Employment of inexperienced, new labor requires detailed instruction for an effective performance of a job; (v) Old employees need training to enable them to keep abreast of the changing methods, techniques and use of sophisticated tools and equipment; (vi) Need for enabling employees to do the work in a more effective way, to reduce learning time, reduce supervision time, reduce waste and spoilage of raw material and produce quality goods, and develop their potential. (viii) Need for reducing grievances and minimizing accident rates; (ix) Need for maintaining the validity of an organization as a whole and raising the morale of its employees.
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Importance of Training Training is the corner stone of sound management, for it makes employees more effective and productive. It is actively and intimately connected with all the personnel or managerial activities. It is an integral part of the whole management programme, with all its many activities functionally interrelated. Training is a practical and vital necessity because apart from the other advantages mentioned above it enables employees to develop and rise within the organization, and increase their market value, earning power and job security. It enables management to resolve sources of friction arising from parochialism, to bring home to the employees the fact that the management is not divisible. It moulds the employees attitudes and helps them to achieve a better with the company and a greater loyalty towards it. The management is benefited in the sense that higher standards of quality are achieved; a satisfactory organisational structure is built up; authority can be delegated and stimulus for progress applied to employees. Training, moreover, heightens the morale of the employees, for it helps in reducing dissatisfaction, complaints, grievances and absenteeism, reduces the rate of turnover. Further, trained employees make better and economical use of materials and equipment; therefore, wastage and spoilage are lessened, and the need for constant supervision is reduced. The importance of training has been expressed in these words: Training is a widely accepted problem-solving device. Indeed, our national superiority in manpower productivity can be attributed in no small measure to the success of our educational and industrial training programmes. This success has been achieved by a tendency in many quarters to regard training as a panacea. Responsibility for Training Training is the responsibility of four main groups: (a) The top management, which frames the training policy; (b) The personnel department, which plans, establishes and evaluates instructional programmes; (c) Supervisors, who implement and apply developmental procedure; and
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(d) Employees, who provide feedback, revision and suggestions for corporate educational endeavors. Creation of a Desire for Training The employees can be persuaded to be interested in training programmes in one of the following three ways: 1. They will respond to programmes involving changed behavior if they believe that the resulting modification in the behaviour is in their own interest, that they will receive personal benefits as a result of their new behaviour. 2. Trainees will change their behaviour if they became aware of better ways of performing (more productive or otherwise more satisfactory ways) and gain experience in the new pattern of behaviour so that it becomes their normal manner of operation. 3. A trainee may change his behaviour in compliance with the forced demands of his superiors or others with more power than the trainee possesses. Principles or Concepts of Training Since training is a continous process and not a one shot affair, and since it consumes time and entails much expenditure, it is necessary that a training programme or policy should be prepared with great thought and care, for it should serve the purposes of the establishment as well as the needs of employees. A successful training programme presumes that sufficient care has been taken to discover areas in which it is needed most and to create the necessary environment for its conduct. The selected trainer should be one who clearly understands his job and has professional expertise, has an aptitude and ability for teaching, possesses a pleasing personality and a capacity for leadership, is well-versed in the principles and methods of training, and is able to appreciate the value of training in relation to an enterprise. Certain general principles need be considered while organizing a training programme. For example : 1. Trainees in work organizations tend to be most responsive to training programmes. When they feel the need to learn, i.e., the trainee will be more eager to learn training, if training promises answers to
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problems or needs he has. The individual who perceives training as the solution to problems will be more willing to enter into a training programme than will the individual who is satisfied with his present performance abilities. 2. Learning is more effective where there is reinforcement in the form of rewards and punishments, i.e., individuals do things that give pleasure and avoid things that give pain. In other words, after an action, if satisfaction is received, the action will be repeated. If no satisfaction is received, the action will not be repeated. 3. In the long run, awards tend to be more effective for changing behaviour and increasing ones learning than punishments. 4. Rewards for the application of learned behaviour are most useful when they quickly follow the desired performance. 5. The larger the reward for good performance following the implementation of learned behaviour; the greater will be the reinforcement of the new behaviour. 6. Negative reinforcement, through application of penalties and heavy criticism following inadequate performance, may have a disruptive effect upon the learning experience of the trainee than positive reinforcement. 7. Training that requests the trainee to make changes in his values, attitudes, and social beliefs, usually achieves better results if the trainee is encouraged to participate, discuss and discover new, desirable behaviour norms. 8. The trainee should be provided with feedback on the progress he is making in utilizing the training he has received. As Miller has stated, If a person with the required abilities is to improve his performance, he must (i) know what aspect of his performance is not up to par; (ii) know precisely what corrective actions he must take to improve his performance. The feedback should be fast and frequent, especially for the lower level jobs, which are often routine and quickly completed. 9. The development of new behaviour norms and skills is facilitated through practice and repetition. Skills that are practiced often are better learned and less easily forgotten.
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10. The training material should be made as meaningful as possible, because if the trainee understands the general principles underlying what is being taught, he will probably understand it better than if he were just asked to memorize a series of isolated steps. Training Programmes Training programmes are a costly affair, and a time consuming process. Therefore, they need to be drafted very carefully. Usually in the organisation of training programmes, the following steps are considered necessary: 1. Discovering or identifying the training needs. 2. Getting ready for the job. 3. Preparation of the learner. 4. Presentation of operations and knowledge. 5. Performance try-out. 6. Follow-up and evaluation of the programme. The training needs have been identified to solve the specific problems as follows: (i) Identifying Specific Problems: Such problems are productivity, high costs, poor material control, poor quality, excessive scrap and waste, excessive labour-management troubles, excessive grievances, excessive violation of rules of conduct, poor discipline, high employee turnover and transfers, excessive absenteeism, accidents, excessive fatigue, fumbling discouragement, struggling with the job; standards of work performance not being met, bottlenecks in production, deadlines not being met, and delayed production. Problems like these suggest that training may be necessary. For this task, the workers should be closely observed and the difficulties found out. (ii) Anticipating Impending and Future Problems: Bearing on the expansion of business, the introduction of new products, new services, new designs, new plant, new technology and of organisational changes concerned with manpower inventory, present and future needs.
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(iii)Management Requests: The supervisors and managers make specific request for setting training programmes. Though this method is simple and a correct evaluation of the employees performance deficiencies can be made, but often such recommendations may be built on faulty assumptions and requests may not coincide with each other or organisational goals. (iv)Interviewing and Observing the Personnel on the Job: Interviewing personnel and direct questioning and observation of the employee by his superiors may also reveal training needs. (v) Performance Appraisal: An analysis of the past performance records of the perspective trainee and comparing his actual performance with the target performance may provide clues to specific interpersonal skills that may need development. (vi) Questionnaires: Questionnaires may be used for eliciting opinions of the employees on topics like communication, satisfaction, job characteristics, their attitude towards working conditions, pay, promotion policies etc. These will reveal much information about where an employees skills and knowledge are deficient. (vii) Checklist: The use of checklist is a useful supplement to interviews and observations. Through it, more reliable information can be obtained and the data got are quantifiable. This facility evaluates the training programmes effectiveness. (viii) Morale and Attitude Surveys: An occasional personnel survey may be conducted to forecast future promotions, skill requirements, and merit rating, to initiate informal discussions and an examination of records and statistics regarding personnel, production, cost, rejects and wastages. All these generally reveal the potential problems to be tackled through training programmes. In addition, tests of the interpersonal skills through handling of posed cases and incidents may also reveal training needs. Support Material for Training A variety of tools and equipment are utilized to impart effective training. These are: (a) Lectures (learning by hearing supplemented by reading assignments); conferences, seminars and staff-meetings (learning by participation);
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demonstrations (learning by seeing); and short courses, through coaching. (b) Role-playing (learning by doing) and job rotation (learning by experience). (c) Case or Project studies and problem-solving sessions (learning by personal investigation). (d) Use of pamphlets, charts, brochures, booklets, handbooks, manuals, etc. (e) Graphs, pictures, books, slides, movie projectors, filmstrips, tape recorders, etc. (f) Posters, displays, notice and bulletin boards. (g) Reading rooms and libraries where specified books and journals are maintained for reference and use. (h) Under-study and visits to plants. (i) Correspondence courses under which knowledge about business law, statistics, industrial management, marketing, office procedures, retailing and many other similar subjects may be imparted. (j) Teaching machines. (k) Membership of professional or trade associations, which offer new techniques and ideas to their members. Training Methods / Techniques The forms and types of employee training methods are inter-related. It is difficult, if not impossible, to say which of the methods or combination of methods is more useful than the other. In fact, methods are multi- faceted in scope and dimension, and each is suitable for a particular situation. The methods of training as follows On-the-Job-Training (OJT) Job Instruction Training (JIT) Vestibule Training Training by experienced workmen Classroom or Off-the-Job-Training like ,
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lecture conferences group discussion case studies role playing programme instruction T-group training

On-the-Job-Training (OJT) There are a variety of OJT methods, such as : 1. coaching 2. under study 3. job rotation 4. internship 5. apprenticeship Merits of On-the-Job-Training Firstly, trainee learns on the actual equipment in use and in the true environment of his job. Secondly, it is highly economical since no additional personnel or facilities are required for training. Thirdly, the trainee learns the rules, regulations and procedures by observing their day-to-day applications. The management can therefore, easily size him up. Fourthly, this type of training is a suitable alternative for a company in which there is almost as many jobs as there are employees. Finally, it is most appropriate for teaching the knowledge and skills, which can be acquired in a relatively short period, say, a few days or weeks. Demerits of On-the-Job-Training Instruction is often highly disorganized. Job Instruction Training (JIT) This method is very popular in the United States for preparing supervisors to train operatives. The JIT method requires skilled trainers, extensive
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job analysis, training schedules, and prior assessment of the trainees job knowledge. This method is also known as training through step-bystep learning. It involves listing all necessary steps in the job, each in proper sequence. These steps show what is to be done. Along side each step is also listed a corresponding Key point, which shows how it is to be done and why. The job instruction training process is in four steps: (i) the preparation of the trainee for instruction. This includes putting him at ease, emphasizing the importance of the task and giving a general description of job duties and responsibilities; (ii) presentation of the instructions, giving essential information in a clear manner. This includes positioning the trainee at work site, telling and showing him each step of the job, stressing why and how each step is carried out as it is shown; (iii) having the trainee try out the job to show that he has understood the instructions, if there are any errors they are corrected; and (iv) encouraging the question and allowing the trainee to work along and the trainer follows up regularly. The JIT method provides immediate feedback on results, quick correction of errors, and provision of extra practice when required. However, it demands a skilled trainer and can interfere with production and quality. Vestibule Training (or Training-Center Training) It is a classroom training, is often imparted with the help of the equipment, and machines, which are identical with those in use in the place of work. This technique enables the trainee to concentrate on learning the new rather than on performing an actual job. It is a very efficient method of training semi-skilled personnel, particularly when many employees have to be simultaneously trained for the same kind of training at the same time. Training is generally given in the form of lectures, conferences, case studies, role-playing and discussion. Merits of the Vestibule Training Training is given in a separate room, distractions are minimized.
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Trained instructor, who knows how to teach, can be more effectively utilized. The correct method can be taught without interrupting production. It permits the trainee to practice without the fear of supervisors/ co-workers observation and their possible ridicule.

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

Class room or Off-the-Job Methods Off-the-job-training simply means that training is not a part of everyday job activity. The actual location may be in the company classrooms or in places, which are owned by the company, or in universities, or associations, which have no connection with the company. These methods consist of : 1. Lectures 2. Conferences 3. Group Discussions 4. Case Studies 5. Role-playing 6. Programme Instruction 7. T-Group Training. 1. Lectures (or Class-Room Instruction): Lectures are regarded as one of the simplest ways of imparting knowledge to the trainees, especially when facts, concepts, or principles, attitudes, theories and problem-solving abilities are to be taught. Lectures are formal organised talks by the training specialist, the formal superior or other
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individual on specific topics. The lecture method can be used for very large groups, which are to be trained within a short time, thus reducing the cost per trainee. In training, the most important uses of lectures include: Reducing anxiety about upcoming training programmes or organisational changes by explaining their purposes. Introducing a subject and presenting an overview of its scope. Presenting basic material that will provide a common background for subsequent activities. Illustrating the application of rules, principles; reviewing, clarifying and summarizing.

Limitations of the Lecture System (i) The learners are passive instead of active participants. The lecture method violates the principle of learning by doing. (ii) A clear and vigorous verbal presentation requires a great deal of preparation for which management personnel often lack the time. (iii) The attention span of even a well-motivated and adequately informed listener is only from 15 minutes to 20 minutes so that, in the course of an hour, the attention of listeners drifts. (iv) It is difficult to stimulate discussion following a lecture, particularly if the listener is uninformed or awestruck by the lecturer. (v) The untrained lecturer either rambles or packs far too much information in the lecture, which often becomes unpalatable to the listener. (vi) The presentation of material should be geared to a common level of knowledge. (vii) It tends to emphasize the accumulation and memorization of facts and figures and does not lay stress on the application of knowledge. (viii) Though a skilful lecturer can adapt his material to the specific group, he finds it difficult to adjust it for individual differences within a group. 2. The Conference Method: In this method, the participating individuals confer to discuss points of common interest to each
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other. A conference is basic to most participative group-centered methods of development. It is a formal meeting, conducted in accordance with an organised plan, in which the leader seeks to develop knowledge and understanding by obtaining a considerable amount of oral participation of the trainees. Three types of conferences are Directed discussion Training conference Seminar conference

3. Seminar or Team Discussion : This is an established method for training. A seminar is conducted in many ways: (i) It may be based on a paper prepared by one or more trainees on a subject selected in consultation with the person in charge of the seminar. It may be a part of a study or related to theoretical studies or practical problems. The trainees read their papers, and this is followed by a critical discussion. The chairman of the seminar summarizes the contents of the papers and the discussions, which follow their reading. (ii) It may be based on the statement made by the person in charge of the seminar or on a document prepared by an expert, who is invited to participate in the discussion. (iii) The person in charge of the seminar distributes in advance the material to be analyzed in the form of required readings. The seminar compares the reactions of trainees, encourages discussion, defines the general trends and guides the participants to certain conclusions. (iv) Valuable working material may be provided to the trainees by actual files. The trainees may consult the files and bring these to the seminar where they may study in detail the various aspects, ramifications and complexities of a particular job or work or task. 4. Case Studies (or Learning by Doing): This method was first developed in the 1880s by Christopher Langdell at the Harvard Law School to help students to learn for themselves by independent thinking and by discovering in the ever tangled scene of human affairs, principles and ideas which have lasting validity and general
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applicability. A collateral object is to help them develop skills in using their knowledge. In case study method the trainee is expected to: Master the facts and become acquainted with the content of the case; Define the objectives sought in dealing with the issues in the case, Identify the problems in the case and uncover their probable causes; Develop alternative course of action; Screen the alternatives using the objectives as the criteria; Select the alternative that is most in keeping with the stated objectives. Define the controls needed to make the action effective and To role play the action to test its effectiveness and find conditions that may limit it.

5. Role-playing: This method was developed by Moreno, a Venetian psychiatrist. He coined the terms role-playing, role-reversal, socio-drama, psychodrama, and a variety of specialized terms, with emphasis on learning human relations skills through practice and insight into ones own behaviour and its effect upon others. It has been defined as a method of human interaction which involves realistic behaviour in the imaginary situations. Merits of the role playing method are: Learning by doing is emphasized; Human sensitivity and interactions are stressed; The knowledge of results is immediate; Trainee interest and involvement tend to be high; It is a useful method to project the living conditions between learning in the classroom and working on a job and creating a live business situation in the classroom; It develops skills and ability to apply knowledge, particularly in areas like human relations and It brings about desired changes in behaviour and attitudes.

6. Programmed Instruction (or Teaching by the Machine


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Method): Programmed instruction involves a sequence of steps, which is often set up through the central panel of an electronic computer as guides in the performance of a desired operation or series of operation. It incorporates a pre-arranged, proposed, or desired course of proceedings pertaining to the learning or acquisition of some specific skills or general knowledge. The merits of the methods are: Trainees learn at their own pace; Instructors are not a key part in learning; The materials to be learned are broken down into small units; Immediate feedback is available; Active learner participation takes place at each step in the programme; Individual differences can be taken into account; Training can be imparted at odd times and in odd places; and There is a high level of learner motivation.

Demerits of the methods are: The impersonality of instructional setting; An advanced study is not possible until preliminary information has been acquired; Only factual subject matters can be programmed; Philosophical and attitudinal concepts and motor skills cannot be taught by this method and The cost of creating any such programme is very great.

7. T-Group Training: This method of training is a technique of composition of audio visual aids and planned reading programmes. Audio-visual aids, records, tapes, and films are generally used in conjunction with other conventional teaching methods. Retraining Retraining programmes are generally arranged for employees who have long been in the service of an organisation. The retraining programme may be necessitated by the following facts:
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Some employees are engaged in a confined phase of a particular task and lose their all round skills in a particular trade. Hence, to keep them active in all-round skills, such training is needed. During prolonged lay-off periods, employees on certain highly skilled jobs are given retraining when they are called back to work. Technological changes may make a particular job, on which an employee is working unnecessary and the company may desire to retrain him rather than discharge him. An employee, because of illness, accident or incapacity due to age, may no longer be able to do his share of the work that performed when he was in normal health. Economic depression or cyclical variations in production create conditions in which employment stabilization may be achieved by having a versatile workforce capable or performing more than one job.

Steps to improve Effectiveness of Training The training programmes can be made effective and successful if the following hints are considered: 1. Specific training objectives should be outlined on the basis of the type of performance required to achieve organisational goals and objectives. An audit of personal needs compared with operational requirements will help to determine the specific training needs of individual employees. This evaluation should form a well-defined set of performance standards toward which each trainee should be directed. 2. Attempt should be made to determine if the trainee has the intelligence, maturity, and motivation to successfully complete the training programmes. If deficiencies are noted in these respects, the training may be postponed or cancelled till improvements are visible. 3. The trainee should be helped to see the need for training by making him aware of the personal benefits he can achieve through better performance. He should be helped to discover the rewards and satisfactions that might be available to him through changes in behaviour.
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4. The training programme should be planned so that it is related to the trainees previous experiences and background. This background should be used as a foundation for new development and new behaviour. 5. Attempts should be made to create organisational conditions that are conducive to a good learning environment. It should be made clear why changes are needed. Any distractions, in the way of training environment, should be removed. The support of the upper levels of management should be obtained before applying training at lower levels. 6. If necessary, a combination of training methods should be selected so that variety is permitted and as many of the senses as possible are utilized. 7. It should be recognized that all the trainees do not progress at the same rate. Therefore, flexibility should be allowed in judging the rates of progress in the training programme. 8. If possible, the personal involvement or active part of the trainee should be got in the training programmes. He should be provided with opportunity to practice the newly needed behaviour norms. 9. As a trainee acquires new knowledge, skills or attitudes and applies them in job situations, he should be significantly rewarded for his efforts. 10. The trainee should be provided with regular, constructive feedback. 11. The trainee should be provided with personal assistance when he encounters learning obstacles. Designs for Evaluating Training After deciding on the criteria to use in evaluating a training program, the HR professional should choose an experimental design. The design is used to answer two primary questions: (1) whether or not a change has occurred in the criteria (e.g., learning, behavior, organizational results) and (2) whether or not the change can he attributed to the training program. Designs employ two possible strategies to answer these questions. The first is to compare trainees performance before and after participation
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in training. This is done to determine what changes may have occurred in learning, behavior, or organizational results. While this is important for answering the question of whether a change has taken place, it is deficient in answering the question of whether the change can be attributed to the training program, since the criteria may have changed for any number of reasons. What is needed to answer the second question is a design comparing the changes which took place in the trainees with changes that occurred in another group of employees who did not receive the training (e.g., a control group), yet who are similar to the training group in important ways (e.g., in that they have similar job titles and ranks and are in the same geographical location). The most effective experimental designs use both strategies (i.e., before-after measures and a control group) and are thus able to answer both questions. Some of the more commonly used designs for training evaluation are described below. One Shot Post Test only Design: In many organizations, training is designed and conducted with no prior thought given to evaluation. For example, a sales manager may decide to put all his or her sales personnel through a course entitled Effective Customer Relations. After the course is completed, the sales manager decides to evaluate it. This design looks like the one shown here. TRAINING MEASURE Any of the four types of criteria (e.g., reactions, learning, behavior, and organizational results) could be used as the after measures. It would be difficult, however, to know what, if any, changes occurred since no before measure (e.g., no pretest) was made. In addition, since the results may not be compared with those of another group who did not receive training, it would not be possible to say whether any change was due to the training. As a result, this design is not recommended. One Group Pretest Post Test Design: Another design for evaluating the training group on the criteria of interest is to measure the group before and after the training. This design is as follows: MEASURE TRAINING MEASURE This design is able to assess whether a change has occurred for the
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training group in the criteria (e.g., learning, behavior). Unfortunately, it is not able to tell whether or not the change is due to training, since there is no control group. A change that is detected could have been caused by the introduction of new equipment or a new manager, or by any number of other reasons. Thus, this design is not extremely useful and is not recommended. Post Test only Control Group Design: A much stronger design for assessing the effectiveness of a training program is shown here. GROUP 1R: TRAINING MEASURE GROUP 2R: NO TRAINING MEASURE In this design, two groups are used and individuals are randomly assigned (R) to either group (i.e., an individual has an equal chance of being put in either group 1, the training group, or group 2, the control group). The use of random assignment helps to initially equalize the two groups. This is important to ensure that any differences between the two groups after training are not simply caused by differences in ability, motivation, or experience. The post test only control group design is useful when it is difficult to collect criteria measures on individuals prior to offering them the training. (For example, an HR professional may believe that giving individuals a pretest, such as a learning test might overly influence their scores on the post test, which might he the same learning measure. Another HR professional may not have time to give tests.) Individuals are randomly assigned to the two groups, and their scores on the post test are compared. Any differences on the post test can be attributed to the training program, since it is assumed that the two groups were somewhat equal prior to training. From the organizations standpoint, it would be beneficial to make sure the employees from the control group are placed in a training program at a later time. Pre Test Post Test Control Group Design: Another powerful design that is recommended for use in training evaluation is as follows: GROUP 1 R: MEASURE-TRAININGMEASURE GROUP 2R: MEASURENO TRAININGMEASURE
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Individuals are randomly assigned to the two groups. Criteria measures are collected on both groups before and after the training program is offered, yet only one group actually receives the training. Comparisons are made of the changes detected in both groups. If the change in-group1 is significantly different from the change in group 2, we can be somewhat certain that it was caused by the training. Since many organizations will want all the employees in both groups to receive the training, the training can be offered to group 2 at a later time. Multiple Time Series Design: Another design recommended for use in training evaluation is shown below. GROUP 1R: MEASUREMEASURE-MEASURE- TRAINING MEASURE - MEASURE MEASURE GROUP 2R; MEASURE - MEASURE - MEASURE NO TRAININGMEASURE-MEASURE- MEASURE In this design, individuals are randomly assigned to two groups, and the criteria measures are collected at several times before and after the training have been offered. This design allows the HR professional to observe any changes between the two groups over time. If the effects of training held up over several months, this design would offer stronger support for the program. Assessing the Costs and Benefits of Training To conduct a thorough evaluation of a training program, it is important to assess the costs and benefits associated with the program. This is difficult to do but may be important for showing top management the value of training for the organization. For example, in one case, the net return of a training program for bank supervisors was calculated to be $148,400 over a 5-year period. Generally, a utility model would be used to estimate the value of training (benefits minus costs). Some of the costs that should be measured for a training program include needs assessment costs, salaries of training designers, purchase of equipment (computers, videos, handouts), program development costs, evaluation costs, trainers costs (e.g., salaries, travel, lodging, meals), facilities rental, trainee wages during training, and other trainee costs (e.g., travel, lodging, meals).
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It is important to compare the benefits of the training program with its costs. One benefit that should be estimated is the dollar payback associated with the improvement in trainees performance after receiving training. Since the results of the experimental design will indicate any differences in behavior between those trained and those untrained, the HR professional can estimate for that particular group of employees (e.g., managers, engineers) what this difference is worth in terms of the salaries of those employees. Another factor that should be considered when estimating the benefits of training is the duration of the trainings impact that is, the length of time during which the improved performance will be maintained. While probably no programs will show benefits forever, those that do incur longer term improved performance will have greater value to the organization. 4.7 DIRECTING Direction represents one of the essential functions of management because it deals with human relations. Once the organizational plans have been laid down, the structure being designed, and competent people brought in to fill various positions in organization, direction starts. Direction is the managerial function of guiding, motivating, leading and supervising the subordinates to accomplish desired objectives. Acquiring physical and human assets and suitably placing them will not suffice; what is more important is that people must be directed toward organizational goals. Without redirection and supervision, employees become inactive, dull and inefficient and consequently the physical assets like machinery and plant will be put to ineffective use. Direction is an important managerial function that initiates organizers action. It is a connecting and activating link between various functions of management. It is essentially concerned with mobilizing and synthesizing human resources and efforts to accomplish the goals of the organization. A managers most important job is to direct the efforts of employees. Direction phase of management is the heart of management-in-action. It provides necessary guidance and inspiration to people at work in order to carry out their assigned duties. Direction is the essence of operations. It is a continuous function. A manager never ceases to direct, guide, teach, watch, and supervise his subordinate employees.
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4.7.1 Meaning According to Dale, direction is telling people what to do and seeing that they do it to the best of their ability. It is through directing that managers get the work done through people. It consists of: Issuing orders and instructions by a superior to his subordinates (Communication). Guiding, advising and helping subordinates in the proper methods of work (Leadership). Motivating them to achieve goals by providing incentives, good working environment, etc. (Motivation). Supervising subordinates to ensure compliance with plans (Supervision).

Thus, the scope of direction is very wide. It includes all those activities, which a manager undertakes to influence the actions of his subordinates and achieve goals. (Koontz and ODonnell). 4.7.2 Features Direction is the process of guiding, inspiring, supervising and commanding subordinates towards the accomplishment of goals. It has the following features: Deals with people: Direction deals with people. It is the process of inspiring people to achieve goals. To this end, it seeks to create harmonious relationships between people. However, this is not an easy affair. People are not primarily interested in enterprise objectives, they have objectives of their own (Koontz and ODonnell). Directing is, therefore, a complex function, as managers have to deal with people having diverse goals. Seeks performance: Direction makes things happen. It translates plans into action. It makes people goal-oriented. To obtain results, managers not only issue orders but also supervise the performance of subordinates. They also try to integrate effort at various levels. This helps in securing desired performance at minimum cost. Provides a link: Direction is the function of management, which follows planning, organizing and staffing. It lends meaning to them by ensuring accomplishment of goals. It provides an important link between different
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functions in an organization. Without direction, the individual goals and organisational goals would never intermesh. Pervasive: All managers at all levels of an organization perform direction. Every manager is expected to supervise, motivate, lead and communicate with his subordinates to get the results. However, the time spent on these activities decreases at higher levels of authority. Dynamic and continuous: Direction is a dynamic and continuing activity of managers. Whenever plans change, the techniques of direction also change. A manager has to suitably modify the techniques of direction in order to keep pace with changing times. Further, a manager needs to direct, guide, teach, motivate and lead his subordinates on a continuous basis. It is an ongoing activity of managers. 4.7.3 Nature and Purpose Direction is a vital managerial function. Planning, organizing and staffing are preparatory functions. It is through direction that managers get things done. Hence, it is also called management in action. The importance of directing function in the process of management may be discussed under the following heads : Initiates action : Direction lends meaning to other managerial functions such as planning, organizing and staffing. It is through direction, managers seek to achieve goals. In most systematic planning, sound organization and staffing do not ensure accomplishment along with these functions. Managers must initiate action by: (i) issuing instructions, (ii) providing guidance, (iii) supervising work, and (iv) motivating subordinates to realize goals. Without direction, other functions of management remain ineffective. Direction makes happen. Achieves integration: Direction creates harmony and cooperation among the members of a group. In an organization, different people at different levels perform the total work. Unless managers supervise the work in a proper way, things do not move in a desired direction. Direction secures the whole-hearted cooperation of people at all levels through
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good communication, people-oriented supervision and motivation. It tries to integrate the efforts of individuals in a proper way. Motivates people: Direction motivates employees to achieve superior performance. To this end, attractive incentives, healthy work climate, guidance and counseling etc., are provided to employees. Employees are made to realize that their performance alone guarantees the organizations success. Unless they contribute in a real way, there is no future. This ultimately helps in getting superior performance from employees. Direction, thus, makes common men do uncommon things. Facilitates changes: Direction facilitates necessary changes in an organization. It helps an organization to introduce changes smoothly. For example, employees often resist introduction of computers and robots in manufacturing operations, fearing loss of employment. Managers can remove such doubts by emphasizing the fact that automation and computerization will ultimately help the organization to achieve growth and thereby, provide attractive incentives to employees. Through persuasive leadership and proper communication managers can secure the cooperation of employees. They can introduce changes in a smooth way. Attains balance and stability: Direction helps an organization to strike a harmonious balance between individual needs and organisational demands. People are made to work hard in an attempt to realize organisational goals and thereby earn their rewards. They are compelled to use resources judiciously and achieve steady progress. In the Words of Dimock, The heart of administration is the direction function which involves determining the scope, giving orders and instructions and providing dynamic leadership. Direction converts plans into action. It is the nucleus around which the practice of management is built. Without proper direction, people do not work to their full capacity, and goals may remain as dreams. By putting everything on the right track continuously, direction ensures stability to an organization. 4.7.4 Principles of Direction Important principles of direction may be summarized thus: (a) Principle of harmony of objectives: Direction function must first of all resolve the conflict between individual goals and organisational objectives. A manager must try to bring harmony and fusion between
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individual employees, groups, and organization. A manager should foster the sense of belonging to the organization among the individuals so that they can identify themselves with the company. When both the interests are integrated, contribution of subordinates to the company will be maximum. It leads to efficiency and effectiveness. (b) Principle of unity of command: A sound principle of direction is that the subordinates should receive orders from one and only one superior. That means to say there should not be dual subordination. Dual subordination brings disorder, confusion, chaos, and undermines the authority of a superior. Any violation of this principle may be catastrophic to the organization. (c) Principle of direct supervision: Since direction involves motivating the employees towards work, it is almost essential for the manager concerned to have a personal touch with the subordinates and involve in face-to-face communication regarding work-related matters. He should also develop informal relationships with his employees. Direct supervision makes the subordinates happy and boosts their morale. It also ensures quick feedback of necessary information. (d) Appropriate techniques: The technique used for direction should be appropriate to the people, the task and the situation. Democratic style may work in some cases but autocratic style may produce results in certain other cases especially where subordinates are incapable of doing things on their own. (e) Managerial communication: Two-way communication is an important part of direction. The manager should explain the policies and practices to subordinates and the results expected of them. Proper feedback should come through upward communication. The manager should actively encourage subordinates to express their views freely and fearlessly. (f) Informal organisation: Managers should make use of informal groups to supplement, support and strengthen the formal structure. The cooperation of informal leaders will go a long way in putting the house in order. (g) Principle of maximum individual contribution: Performance improves greatly when every employee gives his best to the organization. The manager, therefore, should inspire the subordinates
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in such a way that they contribute their maximum while realizing organisational objectives. (h) Use of motivation techniques: A manager should know how to motivate and inspire the employees. A manager should develop selective motivation techniques such as money, pay, status, job enrichment, etc., so that the productivity and the quality of the commodity produced increases. Motivation almost always leads to higher job satisfaction. To properly direct and motivate the employees, an executive must have insight into how his personality works, how employees perceive the work environment, the attitudes of employees, etc. Understanding others and self are important for this. Understanding self is important for understanding others; understanding others is necessary for motivating them effectively. (i) Principle of follow-up: Successful direction is a never-ending activity. It involves constant continuous supervision, coaching, advice, counseling and helping the employees in their respective activities. Direction is also concerned with ensuring that people do what they are told to do. This requires continuous feedback. Feedback is essential to turn or stop or adjust the wheel of management-in-action. 4.7.5 Elements of Direction The directing function of management consists of the following elements (Newman): (a) issuing orders and instructions to subordinates, (b) follow-up of instructions, (c) standard practice and indoctrination, (d) explanations, (e) consultative direction. (a) Good instructions: As William Newman has rightly pointed out, every instruction given by the manager in the process of directing the employees must be reasonable, complete, and clear. The instructions must be in writing. Written instructions are desirable when several individuals are subject to or are directly affected by instructions, and execution of the instructions will extend over a considerable period of time and the matter is of such importance that steps to avoid the possibility of misunderstanding are needed.
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(b) Follow-up of instruction: Another well recognized principle is that once the orders are issued, they should be followed up to see whether they are executed properly or the instructions should be countermanded. If the executive is indifferent in follow-up, it will lead to administrative lax, time schedules become insignificant and will result in inefficiency. Insistence on execution of instructions is essential to ensure efficiency in direction. (c) Standard practice and indoctrination : The use of standard operating procedures and customary ways of doing things is an essential part of direction. Standard practice simplified the instruction to be given by manager. Unfortunately, a large part of inadequate direction can be traced the misunderstanding about standard practice. Another associated aspect of standard practice is the indoctrination. Indoctrination means instilling in the subordinates a set of beliefs and attitudes so that they look at an operating situation in a desirable way. (d) Explanations: While issuing instructions, the manager should explain why the order is given. (e) Consultative direction: Before an order is issued, the people responsible for executing it will be consulted about its feasibility, workability and better ways of accomplishing the results. Characteristics of a Good Order 1. The order should be clear and easily understandable. 2. It should be reasonable and attainable. 3. It must be complete in all respects leaving no doubt in the minds of subordinates as to what is expected of them. 4. It should be compatible with the overall objectives of the organization. 5. It must indicate the time period within which it should be carried out and completed. 6. The tone of the order should be appropriate and should stimulate ready acceptance. 7. It should preferably be in writing. This helps in ensuring uniform actions everywhere. 8. All orders should follow the chain of command.
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9. When issuing the order, the manager should explain the purpose behind it. i.e., why it is being given. 10. The order should be regularly followed up and suggestions given by subordinates should be incorporated when it is reissued. 4.8 Supervision Need for Supervision There is no universally agreed definition of leading. Supervisory jobs differ widely in content, scope and implementation. Some supervisors manage their departments completely; others have authority in limited areas only, while others take marching orders from somebody else. Generally, supervisors deal with workers directly and are sometimes called first-line managers. In the words of G.R. Terry, Supervision is the achieving of desired results by means of the intelligent utilization of human talents and facilitating resources in a manager that provides the greatest challenge and interest to human talents. This definition implies that supervision includes: Overseeing employees at work. Intelligent utilization of human talents. Motivating employees to peak performance. Maintenance of good human relations.

These days most employees complain of monotonous, dull and uninteresting jobs. When organizational jobs do not provide any challenge to employees, frustration, resentment and antagonism are the expected byproducts. No wonder then that employees are somewhat antagonistic toward the organization in which they are working and its leaders. Consequently, their morale is low. Managers, in turn are at a loss to understand why employees do not take interest in their work. How to maintain good personnel relations happens to be one of the major contemporary puzzles of the business world. A good supervisor fills the vacuum in such cases. He assists employees in doing a good job. He translates the foggy management directives to workers in an understandable language. He finds better ways to achieve results, inspires good team effort and achieves the targets within a reasonable time and at a reasonable cost. In other words, a supervisor not only helps in
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developing wholesome attitudes toward managerial actions, but also exercises tremendous influence in securing full support and cooperation from employees. He is extremely influential in motivating employees, in developing them, and in building teams which carry out specific duties. An organization has the greatest chance of being successful when all of the employees work toward achieving its goals. Since leadership involves the exercise of influence by one person over others, the quality of leadership exhibited by supervisors is a critical determinant of organizational success. Thus, supervisors study leadership in order to influence the actions of employees toward the achievement of the goals of the organization. Supervisors can learn about leadership through research. Leadership studies can be classified as trait, behavioral, contingency, and transformational. Earliest theories assumed that the primary source of leadership effectiveness lay in the personal traits of the leaders themselves. Yet, traits alone cannot explain leadership effectiveness. Thus, later research focused on what the leader actually did when dealing with employees. These behavioral theories of leadership sought to explain the relationship between what the leaders did and how the employees reacted, both emotionally and behaviorally. Yet, behavior cant always account for leadership in different situations. Thus, contingency theories of leadership studied leadership style in different environments. Transactional leaders, such as those identified in contingency theories, clarify role and task requirements for employees. Yet, contingency cant account for the inspiration and innovation that leaders need to compete in todays global marketplace. Newer transformational leadership studies have shown that leaders, who are charismatic and visionary, can inspire followers to transcend their own self-interest for the good of the organization. The Skills of a Supervisor : To perform his job effectively, the supervisor must possess certain skills. According to Prof Robert Kahn these may be classified into three categories: human skills, technical skills, and conceptual skills. Effective supervision should give equal emphasis and attention to all three roles. As the demands of their jobs change, supervisors must switch roles continually. Sometimes, they may have to use their human skills, and at other times they need their technical expertise.
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Human skills : Working with people, perhaps, poses the greatest challenge to the supervisor. Human skills do not come easily. The ability to create an atmosphere of goodwill, confidence and trust must become a natural part of supervisory life. The supervisor must try to understand the problems of the operatives and provide workable solutions, which not only solve the problem on hand but also satisfy the operatives to some extent. As rightly summarized by Terry and Stallard, The supervisor must always be objective, find out and review both sides of problems or disputes, refrain from jumping to conclusions, and solve issues fairly without playing favorites. He must be impartial in his dealings with management and workers. The following human relations guidelines may help supervisors acquire or improve their human skills: Try to look at the positive side of the coin first. Judge each group member by his good qualities. Analyze the behavior of those above you and at par with you before analyzing the behavior of your subordinates. Develop helpful and constructive contacts with group members, to bring out the best in them. Invite group members to participate in your schemes. Work on common motives and try to improve teamwork. Think through a problem objectively, patiently and carefully before determining what action to take. Spot the key figures of each informal group and seek their cooperation. Give instructions clearly. Provide sufficient details. Realize the difficulty of introducing any change to individuals rather than to groups. Request and explain; dont demand. Be persuasive, not coercive.

Technical skills: The supervisor should have a thorough knowledge of the work he is supervising. He must be able to staff adequately and distribute the workload properly. Adequate knowledge of systems,
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procedures, materials, office forms, equipment, and the way the results have to be achieved enables a supervisor to be a good leader and obtain satisfactory results. Conceptual skills: The supervisor should have the ability to see the total picture. He should visualize how the various functions of the organization depend on one another and how changes in one department affect the organization as a whole. The dangers of extreme specialization like parts mentality, tunnel vision, and inability to look beyond the confines of ones specialty should be avoided. Ability to look at the whole picture, broad vision, and friendly attitude are the hallmarks of effective supervisors. Supervisors should have the conceptual skills to unify and coordinate the various components of the organization. Supervisory Roles What is the role of a supervisor in an organization? A person caught in the middle? A buffer between management and workers taking the blows? Is he a friend or a foe? Over the years, the role of the supervisor in organizations has undergone a tremendous change. Till the 60s, supervisors were treated as members of the management, enjoying the respect, loyalty and cooperation of workers. With the advent of giant corporations, the job of the supervisor has become very complex and confusing. He is expected to be a clerk shuffling papers and filling out forms. He is to be the master technician or the master craftsman of his group. He is to be an expert on tools and equipment. He is to be a leader of people. To make the confusion worse, he is expected to perform every one of these jobs to perfection. Such highly conflicting and confusing jobs have resulted in his role that is shrinking in status, in importance and in esteem. He has become a buffer between management, union and workers, continually receiving the arrows of criticism, justified as well as unjustified. He has become highly vulnerable like a pawn in the game of chess. He is being branded increasingly as an enemy. He is separated from the men he supervises by an ever higher wall of hostility, suspicion and resentment. On the other hand, he is also separated from management by his lack of managerial knowledge. Workers expect the supervisor to be fair and impartial, open minded and friendly. Management expects the supervisor to have a complete knowledge of his work, genuine interest in his work, curiosity to
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constantly update his job knowledge; and the ability to meet deadlines. Over the years, the job of a supervisor has become a hybrid. It is no wonder that the supervisor is being rejected by both, by his subordinates because he is no longer truly a scientist or an expert but has sold out to management, and by management because he is parochial, departmentalized and one sided. In this heated atmosphere it is easy to provoke controversy and promote a spirited discussion. Lets briefly dwell on the roles performed by supervisors over the years before suggesting a contingency framework. 1. Scientific management roles: Every supervisor needs to appreciate the importance of scientific management under certain conditions. There is only one best way to do a job and it is the primary duty of a supervisor to study and analyze the jobs carefully and suggest suitable work procedures and methods. According to the scientific management approach, the supervisor is expected to assume the following types of roles: (a) Technician: Supervisors should possess a sound knowledge of the jobs entrusted to them. They must be able to solve the technical problems posed to them by the employees. (b) Analyst: Most of the jobs in an organization can be efficiently and effectively performed in the right way . It is the job of a supervisor to find out better and improved ways of performing jobs. (c) Controller: It is the job of a supervisor to provide rewards to productive workers and punishments to unproductive workers. 2. Human relations roles: Under the scientific management approach, workers are assigned mechanical roles. They are expected to perform watch dog functions. The emphasis on finding out appropriate work procedures and gearing employees to work schedules has unfortunately produced negative results. It was realized that, to improve performance, the needs of the employees must be recognized, and must be met adequately. Under the human relations approach, the supervisors are expected to be sensitive to employee needs and to help them to integrate the goals of the organization. As a result of this viewpoint, supervisors are expected to do the following roles:
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(a) Counselor: Superviso rs must be pro blem- so lvers, no t problem-creators. They must listen to employee grievances sympathetically and try to solve them. They should not try to chisel on just complaints. In case of trouble, they must investigate thoroughly and give workers a chance to explain their side of the story. Everyone should be a given a fair hearing. (b) Linking pin: The primary duty of a supervisor is to get the job done, at the right time and in the right way. As a group leader he must be fair, just and dependable. As a management member, he must meet the deadlines and show good performance. He must use resources well, maintain good personal relations and allow employees to use their potential fully. (c) Human relations expert: A supervisor must possess good interpersonal skills. He must be able to communicate the needs, problems and concerns of the employees to management. As pointed out by H. L. Wylie, a good supervisor takes a personal interest in employees, he is willing to help, willing to take responsibility; does not pass the buck; willing to go all the way up the line for employees when necessary. In order to exercise human relations skills, supervisors must possess a genuine interest in people and a deep desire to get along with them. (d) The person caught in the middle: The supervisory position is a lonely occupation. Top management treats a supervisor as an operative and workers, in turn, view him as a representative of the management. He is on the fringe of both, management and employee groups, and implying less than full acceptance by both. Supervisors, thus, are forced to perform a tight rope walk in their daily life. To walk a fine line and to gain acceptance from both management and employees, a supervisor should possess good conceptual and interpersonal skills. (e) Motivator: Successful supervisors pay adequate attention to employee needs and appreciate the importance of fulfilling these needs while realizing organizational goals. To elicit effective performance from employees, it is necessary to listen to their grievances and provide a satisfactory work climate. Good performance should be recognized and adequately rewarded. Employees should also be
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motivated to assume additional responsibilities. Jobs should be made more stimulating. Opportunities must be provided to employees to utilize their mental faculties fully. (f) Trainer: A good supervisor lets each employee know where he stands. He is aware of the differences among employees and is capable of responding to each employee as an individual. He assigns work fairly so that the right man is placed on the right job. He provides necessary training and coaching to employees and makes them more productive. 3. Functional roles: According to the Universal principles approach (as propagated by Henry L Fayol and others), the supervisor should have a broad perspective while getting things done through others. He must be able to organize and coordinate the departments human and physical assets to achieve the overall goals of the organization. According to the functional approach, a supervisor is expected to assume the following roles: (a) Leader: A good supervisor must demonstrate good leadership qualities. Giving orders and instructions does not make him a leader. Research studies have shown that employees react negatively to orders and commands issued by leaders. Task oriented styles, emphasizing work and its components, make employees unhappy and bring frustration and resentment among them. The feelings and concerns of workers should be given importance while getting things done through them. Therefore, effective supervisors adopt a people-oriented style where the results are achieved by satisfying subordinates needs. (b) Organizer: A supervisor is much like the conductor of a symphony orchestra bringing into play each of the instruments at just the right moment to produce beautiful music. A supervisor is expected to establish the proper relationships between people, task and resources. He has to convert the disorganized resources of men, machines and materials into a useful, productive organization. He has to maintain an effective manpower system for achieving established plans. To meet these purposes, the work must be divided, properly allocated and placed under the charge of responsible and competent individuals. A suitable work climate must be provided to make subordinates productive and efficient.
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(c) Planner: A supervisor should educate subordinates regarding the overall objectives of the organization and the importance of realizing these objectives against a time schedule. He must allow the subordinates to see the big picture. The work group must know in advance what they are doing and how they contribute to the success of the organization by performing assigned tasks effectively. A good supervisor must provide a convenient break up of major, overall objectives for subordinates and guide them in accomplishing the goals. He should point out the way by planning step by step and determining how to get there from them. (d) Decision-maker: Supervisors have direct access to the information on which most operational decisions are taken. By virtue of their crucial position in the organisation, supervisors are most likely to be the first to identify potential problem areas, and provide the necessary warning signals. Exposure to day-to-day problems enables them to come out with appropriate solutions to such problems quickly. Additionally, they can also implement the decision and monitor performance along desired channels. By serving as critical link between management and subordinates, supervisors make many decisions needed for the successful day-to-day functioning of modern organizations. How to Supervise Effectively The question of how to supervise effectively has been widely and thoroughly discussed in management. Most of these prescriptions are somewhat idealistic and academic. However, Terry and Stallards guidelines appear to be sound enough for implementation. After surveying the ever growing literature on this subject, they have provided the following recommendations for achieving effective supervision: 1. Practice participation: Supervisors should allow employees to air their feelings about organizational policies and procedures openly. Employees should be given an opportunity to ventilate their grievances freely. Even if an employee is wrong, the supervisor should listen to him, because this can be a means to relieve tension and establish mutual support. To ensure commitment and loyalty, it is better to involve employees in the goal setting process.
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2. Be aware of the resources available to accomplish the prescribed work: Supervisors should be able to manage resource flows properly. However, striking a fine balance between human and non-human resources is not easy. This requires information that is usually found in schedules, budgets, etc. Since supervisors are accountable for the effective deployment of resources, it is better to involve them in the initial stages. 3. Know and enforce policies and rules: Policies define the boundaries of supervisory action. They guide the current and future operations of an organisation. In cases where rules violated and policies are not enforced rigorously, rectification steps should be taken without delay. Side stepping issues, by-passing grievance cases, overlooking infringements of regulations, all are indications of supervisory weakness. If corrective action is necessary, a supervisor must take it promptly. In order to enforce policies, rules and regulations, a supervisor must be equipped with facts; he must have the ability to interpret the facts intelligently and act quickly. Prompt action on his part will often prevent minor irritations from becoming major problems. 4. Find out the existing relationships inside and outside the immediate department being supervised: To show good performance, supervisors should understand the network of organisational relationships that exist between various departments. They should know the importance of these relationships. They should also know how each department contributes to the realization of overall goals. This means knowing the organisation and being able to grasp how a particular project or way of doing something fits into the total picture. Understanding these relationships enables supervisors to manage employees effectively. 5. Watch waste-material loss and time loss: Supervisors should view time as a vital and precious possession, which must always be used wisely. They must be able to get the most out of their working hours. This requires that they must clearly define the long-and short-term objectives and outline the priorities properly. The problem is not just cutting activities and doing things more quickly but also spending additional time in selected activities. Some time of each day should be devoted to planning, in a similar way, supervisors
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should guard against waste of all types affecting organisational performance. 6. Measure performance to aid in having a fair wage plan: Supervisors should establish performance standards for employees. Each employee has a right to know what performance standards are expected of him and how such standards are determined. He must be able to assess his own performance and keep his scorecard up-to-date. The employee should know in what respects he is considered weak and where he shines. However, while fixing performances standards care should be taken to keep them at reasonably attainable level. The standards fixed should neither be too high nor too low. High standards breed frustration and resentment and low standards make employees docile and unproductive. Moreover, the standards fixed must be same for all employees performing similar jobs. 7. Secure employees opinions regarding supervision: Supervisors sho uld t alk t o emp lo yees frequ ent ly, in a simp le and easy-to-understand language. Talking reveals much about how the policies, rules and regulations are interpreted by the work group. It also reveals a lot about how the supervisory actions are received. It helps in finding out what is bothering the employees and what gripes are developing. Attitude surveys, spot interviews, casual conversations help in testing the pulse of the employees from time to time. While establishing two-way communication with the employees, care should be taken to use words carefully. Dont let your feelings run away with your words, whether it is words of reproof or words of commendation. It may be hard to live up to hasty promises of reward, and it might be equally difficult to fulfill angry threats. 8. Develop capable assistants: Supervisors should develop capable assistants. They must encourage potential supervisors to exploit their capacities fully. When potential supervisor and managerial material has been located, supervisors should encourage these people to study further, to acquire new skills and information that will make them more valuable members of the company. Obviously, a supervisor cannot aspire for promotion without developing competent understudies.
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9. Know from whom help is supplied when it is requested or needed: Supervisors should know which supervisors and qualified staff personnel to turn to for help from time to time. Without the blessings from the top management and staff personnel, it may not be possible to show good results. 10. Inform top and middle management members what supervisory action is taking place and why: Supervisors should keep management in touch with organisational activities and trends. Information regarding absenteeism, employee turnover, volume of work produced, condition of office equipment, budget requirements, trends, bottlenecks and the like, should be provided to management periodically. Traditional vs. Developmental Supervision The basic objective of supervision is to see that the worker does what he is supposed to do through: (i) Proper understanding of the needs of the workers, (ii) Observing, guiding and evaluating this work and (iii) Rewarding the workers whenever they accomplish something. Over the years, the concept of supervision has undergone significant changes. 4.9 A Definition of Leadership A traditional definition of leadership: Leadership is an interpersonal influence directed toward the achievement of a goal or goals. Three important parts of this definition are the terms interpersonal, influence, and goal. Interpersonal means between persons. Thus, a leader has more than one person (group) to lead. Influence is the power to affect others. Goal is the end one strives to attain.

Basically, this traditional definition of leadership says that a leader influences more than one person toward a goal. Another definition of leadership follows :
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LEADERSHIP is a dynamic relationship based on mutual influence and common purpose between leaders and collaborators in which both are moved to higher levels of motivation and moral development as they affect real, intended change. (Kevin Freiberg and Jackie Freiberg, NUTS! Southwest Airlines Crazy Recipe for Business and Personal Success, Bard Press, 1996, p. 298) Three important parts of this definition are the terms relationship, mutual, and collaborators. Relationship is the connection between people. Mutual means shared in common. Collaborators cooperate or work together. This definition of leadership says that the leader is influenced by the collaborators while they work together to achieve an important goal. Leadership versus Management A leader can be a manager, but a manager is not necessarily a leader. The leader of the work group may emerge informally as the choice of the group. If a manager is able to influence people to achieve the goals of the organization, without using his or her formal authority to do so, then the manager is demonstrating leadership. According to John P. Kotter in his book, A Force for Change: How Leadership Differs From Management (The Free Press, 1990), managers must know how to lead as well as manage. Without leading as well as managing, todays organizations face the threat of extinction. Management is the process of setting and achieving the goals of the organization through the functions of management: planning, organizing, directing (or leading), and controlling. A manager is hired by the organization and is given formal authority to direct the activity of others in fulfilling organization goals. Thus, leading is a major part of a managers job. Yet a manager must also plan, organize, and control. Generally speaking, leadership deals with the interpersonal aspects of a managers job, whereas planning, organizing, and controlling deal with the administrative aspects. Leadership deals with change, inspiration, motivation, and influence. Management deals more with carrying out the organizations goals and maintaining equilibrium. The key point in differentiating between leadership and management is the idea that employees willingly follow leaders because they want to, not because they have to. Leaders may not possess the formal power to
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reward or sanction performance. However, employees give the leader power by complying with what he or she requests. On the other hand, managers may have to rely on formal authority to get employees to accomplish goals. 4.10 THEORIES OF LEADERSHIP

4.10.1 Trait Theories In the 1920s and 1930s, leadership research focused on trying to identify the traits that differentiated leaders from non-leaders. These early leadership theories were content theories, focusing on what an effective leader is, not on how to effectively lead. The trait approach to understanding leadership assumes that certain physical, social, and personal characteristics are inherent in leaders. Sets of traits and characteristics were identified to assist in selecting the right people to become leaders. Physical traits include being young to middle-aged, energetic, tall, and handsome. Social background traits include being educated at the right schools and being socially prominent or upwardly mobile. Social characteristics include being charismatic, charming, tactful, popular, cooperative, and diplomatic. Personality traits include being selfconfident, adaptable, assertive, and emotionally stable. Task-related characteristics include being driven to excel, accepting of responsibility, having initiative, and being results-oriented. Trait theories intended to identify traits to assist in selecting leaders since traits are related to leadership effectiveness in many situations. The trait approach to understanding leadership supports the use of tests and interviews in the selection of managers. The interviewer is typically attempting to match the traits and characteristics of the applicant to the position. For example, most interviewers attempt to evaluate how well the applicant can work with people. Trait theory has not been able to identify a set of traits that will consistently distinguish leaders from followers. Trait theory positions key traits for successful leadership (drive, desire to lead, integrity, self-confidence, intelligence, and job-relevant knowledge). Yet the theory does not make a judgment as to whether these traits are inherent to individuals or whether they can be developed through training and education. No two leaders are alike. Furthermore, no leader possesses all of the traits. Comparing
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leaders in different situations suggests that the traits of leaders depend on the situation. Thus, traits were de-emphasized to take into account situational conditions (contingency perspective). 4.10.2 Behavioral Theories The behavioral theorists identified determinants of leadership so that people could be trained to be leaders. They developed training programs to change managers leadership behaviors and assumed that the best styles of leadership could be learned. Theory X and Theory Y Douglas McGregor described Theory X and Theory Y in his book, The Human Side of Enterprise . Theory X and Theory Y each represent different ways in which leaders view employees. Theory X managers believe that employees are motivated mainly by money, are lazy, uncooperative, and have poor work habits. Theory Y managers believe that subordinates work hard, are cooperative, and have positive attitudes. Theory X is the traditional view of direction and control by managers. 1. The average human being has an inherent dislike of work and will avoid it if he or she can. 2. Because of this human characteristic of dislike of work, most people must be controlled, directed, and threatened with punishment to get them to put forth adequate effort toward the achievement of organizational objectives. 3. The average human being prefers to be directed, wishes to avoid responsibility, and has relatively little ambition, wants security above all. Theory X leads naturally to an emphasis on the tactics of control to procedures and techniques for telling people what to do, for determining whether they are doing it, and for administering rewards and punishment. Theory X explains the consequences of a particular managerial strategy. Because its assumptions are so unnecessarily limiting, it prevents managers from seeing the possibilities inherent in other managerial strategies. As long as the assumptions of Theory X influence managerial strategy, organizations will fail to discover, let alone utilize, the potentialities of the average human being.
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Theory Y is the view that individual and organizational goals can be integrated. 1. The expenditures of physical and mental effort in work are as natural as play or rest. 2. External control and the threat of punishment are not the only means for bringing out effort toward organizational objectives. 3. Commitment to objectives is a function of the rewards associated with their achievement. 4. The average human being learns, under proper conditions, not only to accept but also to seek responsibility. 5. The capacity to exercise a relatively high degree of imagination, ingenuity, and creativity in the solution of organizational problems is widely, not narrowly, distributed in the population. 6. Under the condition of modern industrial life, the intellectual potentialities of the average human being are only partially utilized. Theory Ys purpose is to encourage integration, to create a situation in which an employee can achieve his or her own goals best by directing his or her efforts toward the objectives of the organization. It is a deliberate attempt to link improvement in managerial competence with the satisfaction of higher-level ego and self-actualization needs. Theory Y leads to a preoccupation with the nature of relationships, with the creation of an environment which will encourage commitment to organizational objectives and which will provide opportunities for the maximum exercise of initiative, ingenuity, and self-direction in achieving them. University of Iowa Another approach to leader behavior focused on identifying the best leadership styles. Work at the University of Iowa identified democratic (participation and delegation), autocratic (dictating and centralized) and laissez-faire styles (group freedom in decision making). Research findings were also inconclusive. 4.10.3 The Managerial Grid The dimensions identified at the University of Michigan provided the basis for the development of the managerial grid model developed by Robert Blake and Jane Mouton. It identifies five various leadership styles
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that represent different combinations of concern for people and concern for production. Managers who scored high on both these dimensions simultaneously (labeled team management) performed best. The five leadership styles of the managerial grid include impoverished, country club, produce or perish, middle-of-the road, and team. The impoverished style is located at the lower left-hand corner of the grid, point (1, 1). It is characterized by low concern for both people and production. The primary objective of the impoverished style is for managers to stay out of trouble. The country club style is located at the upper left-hand corner of the grid, point (1, 9). It is characterized as a high concern for people and a low concern for production. The primary objective of the country club style is to create a secure and comfortable atmosphere and trust that subordinates will respond positively. The produce or perish style is located at the lower right-hand corner of the grid, point (9,1). A high concern for production and a low concern for people characterize it. The primary objective of the produce or perish style is to achieve the organizations goals. To accomplish the organizations goals, it is not necessary to consider employees needs as relevant. The middle-of-the-road style is located at the middle of the grid, point (5, 5). A balance between workers needs and the organizations productivity goals characterize it. The primary objective of the middle-of-the-road style is to maintain employee morale at a level sufficient to get the organizations work done. The team style is located at the upper righthand of the grid, point (9, 9). It is characterized by a high concern for people and production. The primary objective of the team style is to establish cohesion and foster a feeling of commitment among workers. 4.10.4 Contingency Theories Successful leaders must be able to identify clues in an environment and adapt their leadership behavior to meet the needs of their followers and of the particular situation. Even with good diagnostic skills, leaders may not be effective unless they can adapt their leadership style to meet the demands of their environment. 4.10.4.1 Fiedlers Contingency Model Leadership Theory and Research: Perspectives and Directions (Academic Press Inc (HBJ), 1993) was a tribute to Fred Fiedlers 40 year study of leadership and organizational effectiveness. The editors,
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Martin M. Chemers and Roya Ayman, write of Fiedlers contribution: The realization that leadership effectiveness depends on the interaction of qualities of the leader with demands of the situation in which the leader functions, made the simplistic one best way approach of earlier eras obsolete. Fred E. Fiedlers contingency theory postulates that there is no best way for managers to lead. Situations will create different leadership style requirements for a manager. The solution to a managerial situation is contingent on the factors that impinge on the situation. For example, in a highly routinized (mechanistic) environment where repetitive tasks are the norm, a certain leadership style may result in the best performance. The same leadership style may not work in a very dynamic environment. Fiedler looked at three situations that could define the condition of a managerial task: 1. Leader member relations: How well do the manager and the employees get along? 2. The task structure: Is the job highly structured, fairly unstructured, or somewhere in between? 3. Position power: How much authority does the manager possess? Managers were rated as to whether they were relationship oriented or task oriented. Task oriented managers tend to do better in situations that have good leader-member relationships, structured tasks, and either weak or strong position power. They do well when the task is unstructured but position power is strong. Also, they did well at the other end of the spectrum when the leader member relations were moderate to poor and the task was unstructured. Relationship oriented managers do better in all other situations. Thus, a given situation might call for a manager with a different style or a manager who could take on a different style for a different situation. These environmental variables are combined in a weighted sum that is termed Favorable at one end and unfavorable at the other. Task oriented style is preferable at the clearly defined extremes of favorable and unfavorable environments, but relationship orientation excels in the middle ground. Managers could attempt to reshape the environment variables to match their style.
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Another aspect of the contingency model theory is that the leader-member relations, task structure, and position power dictate a leaders situational control. Leader-member relations are the amount of loyalty, dependability, and support that the leader receives from employees. It is a measure of how the manager perceives him or her and the group of employees is getting along together. In a favorable relationship the manager has a high task structure and is able to reward and or punish employees without any problems. In an unfavorable relationship the task is usually unstructured and the leader possesses limited authority. The spelling out in detail (favorable) of what is required of subordinates affects task structure. Positioning power measures the amount of power or authority the manager perceives the organization has given him or her for the purpose of directing, rewarding, and punishing subordinates. Positioning power of managers depends on the taking away (favorable) or increasing (unfavorable) the decision-making power of employees. The task-motivated style leader experiences pride and satisfaction in the task accomplishment for the organization, while the relationship-motivated style seeks to build interpersonal relations and extend extra help for the team development in the organization. There is no good or bad leadership style. Each person has his or her own preferences for leadership. Taskmotivated leaders are at their best when the group performs successfully such as achieving a new sales record or outperforming the major competitor. Relationship-oriented leaders are at their best when greater customer satisfaction is gained and a positive company image is established. 4.10.4.2 Hersey-Blanchard Situational Leadership The Hersey-Blanchard Situational Leadership theory is based on the amount of direction (task behavior) and amount of socio-emotional support (relationship behavior) a leader must provide given the situation and the level of maturity of the followers. Task behavior is the extent to which the leader engages in spelling out the duties and responsibilities to an individual or group. This behavior includes telling people what to do, how to do it, when to do it, where to do it, and who is to do it. In task behavior the leader engages in one-way communication. Relationship behavior is the extent to which the leader engages in two-way or multiway communications. This includes listening, facilitating, and supportive
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behaviors. In relationship behavior the leader engages in two-way communication by providing socio-emotional support. Maturity is the willingness and ability of a person to take responsibility for directing his or her own behavior. People tend to have varying degrees of maturity, depending on the specific task, function, or objective that a leader is attempting to accomplish through their efforts. To determine the appropriate leadership style to use in a given situation, the leader must first determine the maturity level of the followers in relation to the specific task that the leader is attempting to accomplish through the effort of the followers. As the level of followers maturity increases, the leader should begin to reduce his or her task behavior and increase relationship behavior until the followers reach a moderate level of maturity. As the followers begin to move into an above average level of maturity, the leader should decrease not only task behavior but also relationship behavior. Once the maturity level is identified, the appropriate leadership style can be determined. The four leadership styles are telling, selling, participating, and delegating. High task/low relationship behavior (S1) is referred to as telling. The leader provides clear instructions and specific direction. Telling style is best matched with a low follower readiness level. High task/high relationship behavior (S2) is referred to as selling. The leader encourages two-way communication and helps build confidence and motivation on the part of the employee, although the leader still has responsibility and controls decision making. Selling style is best matched with a moderate follower readiness level. High relationship/low task behavior (S3) is referred to as participating. With this style, the leader and followers share decision making and no longer need or expect the relationship to be directive. Participating style is best matched with a moderate follower readiness level. Low relationship/low task behavior (S4) is labeled delegating. This style is appropriate for leaders whose followers are ready to accomplish a particular task and are both competent and motivated to take full responsibility. Delegating style is best matched with a high follower readiness level. 4.10.4.3 Houses Path-Goal Model The path-goal theory developed by Robert House is based on the expectancy theory of motivation. The managers job is viewed as coaching
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or guiding workers to choose the best paths for reaching their goals. Best is judged by the accompanying achievement of organizational goals. It is based on the precepts of goal setting theory and argues that leaders will have to engage in different types of leadership behavior depending on the nature and demands of the particular situation. Its the leaders job to assist followers in attaining goals and to provide direction and support needed to ensure that their goals are compatible with the organizations. A leaders behavior is acceptable to subordinates when viewed as a source of satisfaction and motivation. Satisfaction is contingent on performance, and the leader facilitates, coaches and rewards effective performance. Path goal theory identifies achievement-oriented, directive, participative and supportive leadership styles. In achievement-oriented leadership, the leader sets challenging goals for followers, expects them to perform at their highest level, and shows confidence in their ability to meet this expectation. This style is appropriate when the follower suffers from a lack of job challenge. In directive leadership, the leader lets followers know what is expected of them and tells them how to perform their tasks. This style is appropriate when the follower has an ambiguous job. Participative leadership involves leaders consulting with followers and asking for their suggestions before making a decision. This style is appropriate when the follower is using improper procedures or is making poor decisions. In supportive leadership, the leader is friendly and approachable. He or she shows concern for followers psychological well being. This style is appropriate when the followers lack confidence. Path-Goal theory assumes that leaders are flexible and that they can change their style, as situations require. The theory proposes two contingency variables (environment and follower characteristics) that moderate the leader behavior-outcome relationship. Environment is outside the control of followers-task structure, authority system, and work group. Environmental factors determine the type of leader behavior required if follower outcomes are to be maximized. Follower characteristics are the locus of control, experience, and perceived ability. Personal characteristics of subordinates determine how the environment and leader are interpreted. Effective leaders clarify the path to help their followers achieve their goals and make the journey easier by reducing roadblocks and pitfalls. Research demonstrates that employee
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performance and satisfaction are positively influenced when the leader compensates for the shortcomings in either the employee or the work setting. 4.10.4.4 Vroom, Yetton, Jago Leader-Participation Model The Vroom, Yetton, Jago leader-participation model relates leadership behavior and participation to decision making. The model provides a set of sequential rules to determine the form and amount of participative decision making in different situations. It is a decision tree, requiring yes and no answers incorporating contingencies about task structure and alternative styles. The following contingency questions must be answered to determine the appropriate leadership style in the leader-participation model. Quality Requirement: How important is the technical quality of this decision? Commitment Requirement: How important is subordinate commitment to the decision? Leaders Information: Do you have sufficient information to make a high-quality decision? Problem Structure: Is the problem well structured? Commitment Probability: If you were to make the decision yourself, are you reasonably certain that your subordinates would be committed to the decision? Goal Congruence: Do subordinates share the organizational goals to be attained in solving this problem? Subordinate Conflict: Is conflict among subordinates over preferred solutions likely? Subordinate Information: Do subordinates have sufficient information to make a high-quality decision?

4.10.4.5 Transformational Leadership Transformational leadership blends the behavioral theories with a little dab of trait theories. Transactional leaders, such as those identified in contingency theories, guide followers in the direction of established goals by clarifying role and task requirements. However, transformational
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leaders, who are charismatic and visionary, can inspire followers to transcend their own self-interest for the good of the organization. Transformational leaders appeal to followers ideals and moral values and inspire them to think about problems in new or different ways. Leader behaviors used to influence followers include vision, framing, and impression management. Vision is the ability of the leader to bind people together with an idea. Framing is the process whereby leaders define the purpose of their movement in highly meaningful terms. Impression management is a leaders attempt to control the impressions that others form about the leader by practicing behaviors that make the leader more att ract ive and appealing to o t hers. Research indicat es t hat transformational, as compared to transactional, leadership is more strongly correlated with lower turnover rates, higher productivity, and higher employee satisfaction. A transformational leader instills feelings of confidence, admiration and commitment in the followers. He or she is charismatic, creating a special bond with followers, articulating a vision with which the followers identify and for which they are willing to work. Each follower is coached, advised, and delegated some authority. The transformational leader stimulates followers intellectually, arousing them to develop new ways to think about problems. The leader uses contingent rewards to positively reinforce performances that are consistent with the leaders wishes. Management is by exception. The leader takes initiative only when there are problems and is not actively involved when things are going well. The transformational leader commits people to action and converts followers into leaders. Transformational leaders are relevant to todays workplace because they are flexible and innovative. While it is important to have leaders with the appropriate orientation defining tasks and managing interrelationships, it is even more important to have leaders who can bring organizations into futures they have not yet imagined. Transformational leadership is the essence of creating and sustaining competitive advantage. 4.11 MOTIVATION Motivation is the set of processes that moves a person toward a goal. Thus, motivated behaviors are voluntary choices controlled by the individual employee. The supervisor (motivator) wants to influence the
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factors that motivate employees to higher levels of productivity. Since motivation influences productivity, supervisors need to understand what motivates employees to reach peak performance. It is not an easy task to increase employee motivation because employees respond in different ways to their jobs and their organizations practices. Factors that affect work motivation include individual differences, job characteristics, and organizational practices. Individual differences are the personal needs, values, and attitudes, interests and abilities that people bring to their jobs. Job characteristics are the aspects of the position that determine its limitations and challenges. Organizational practices are the rules, human resources policies, managerial practices, and rewards systems of an organization. Supervisors must consider how these factors interact to affect employee job performance. Simple Model of Motivation The purpose of behavior is to satisfy needs. A need is anything that is required, desired, or useful. A want is a conscious recognition of a need. A need arises when there is a difference in self-concept (the way I see myself) and perception (the way I see the world around me). The presence of an active need is expressed as an inner state of tension from which the individual seeks relief. 4.11.1 Theories of Motivation Many methods of employee motivation have been developed. The study of work motivation has focused on the motivator (supervisor) as well as the motivatee (employee). Motivation theories are important to supervisors attempting to be effective leaders. Two primary approaches to motivation are content and process. The content approach to motivation focuses on the assumption that individuals are motivated by the desire to fulfill inner needs. Content theories focus on the needs that motivate people. 4.11.2. Maslows Hierarchy of Needs Identifies five levels of needs, which are best seen as a hierarchy with the most basic need emerging first and the most sophisticated need last. People move up the hierarchy one level at a time. Gratified needs lose their strength and the next level of needs is activated. As basic or lowerAnna Universtiy Chennai
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level needs are satisfied, higher-level needs become operative. A satisfied need is not a motivator. The most powerful employee need is the one that has not been satisfied. Abraham Maslow first presented the five-tier hierarchy in 1942 to a psychoanalytic society and published it in 1954 in Motivation and Personality (New York: Harper and Row).

Self-Actualization
Need to do the work we like

Esteem
Need to feel worthy and respected

Social
Need for love, to be a member of a group

Safety
Need to feel safe and secure

Need to stay alive, to breathe, to eat, to drink, to sleep

Level I - Physiological needs are the most basic human needs. They include food, water, and comfort. The organization helps to satisfy employees physiological needs by a paycheck. Level II - Safety needs are the desires for security and stability, to feel safe from harm. The organization helps to satisfy employees safety needs by benefits. Level III - Social needs are the desires for affiliation. They include friendship and belonging. The organization helps to satisfy employees social needs through sports teams, parties, and celebrations. The supervisor can help fulfill social needs by showing direct care and concern for employees. Level IV - Esteem needs are the desires for self-respect and respect or recognition from others. The organization helps to satisfy employees
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esteem needs by matching the skills and abilities of the employee to the job. The supervisor can help fulfill esteem needs by showing workers that their work is appreciated. Level V - Self-actualization needs are the desires for self-fulfillment and the realization of the individuals full potential. The supervisor can help fulfill self-actualization needs by assigning tasks that challenge employees minds while drawing on their aptitude and training. 4.11.3 Alderfers ERG : Identified three categories of needs. The most important contribution of the ERG model is the addition of the frustration-regression hypothesis, which holds that when individuals are frustrated in meeting higher level needs, the next lower level needs reemerge. Existence needs are the desires for material and physical well being. These needs are satisfied with food, water, air, shelter, working conditions, pay, and fringe benefits. Relatedness needs are the desires to establish and maintain interpersonal relationships. These needs are satisfied with relationships with family, friends, supervisors, subordinates, and co-workers. Growth needs are the desires to be creative, to make useful and productive contributions and to have opportunities for personal development. 4.11.4 McClellands Learned Needs divides motivation into needs for power, affiliation, and achievement. Achievement motivated people thrive on pursuing and attaining goals. They like to be able to control the situations in which they are involved. They take moderate risks. They like to get immediate feedback on how they have done. They tend to be preoccupied with a task-orientation towards the job to be done. Power motivated individuals see almost every situation as an opportunity to seize control or dominate others. They love to influence others. They like to change situations whether or not it is needed. They are willing to assert themselves when a decision needs to be made. Affiliation motivated people are usually friendly and like to socialize with others. This may distract them from their performance requirements. They will usually respond to an appeal for cooperation.
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4.11.5 Herzbergs Two-Factor Theory describes needs in terms of satisfaction and dissatisfaction. Frederick Herzberg examined motivation in the light of job content and contest. (See Work and the Nature of Man, Crowell Publications, 1966.) Motivating employees is a two-step process. First provide hygienes and then motivators. One continuum ranges from no satisfaction to satisfaction. The other continuum ranges from dissatisfaction to no dissatisfaction. Satisfaction comes from motivators that are intrinsic or job content, such as achievement, recognition, advancement, responsibility, the work itself, and growth possibilities. Herzberg uses the term motivators for job satisfiers since they involve job content and the satisfaction that results from them. Motivators are considered job turn-ons. They are necessary for substantial improvements in work performance and move the employee beyond satisfaction to superior performance. Motivators correspond to Maslows higher-level needs of esteem and self-actualization. Dissatisfaction occurs when the following hygiene factors, extrinsic or job context, are not present on the job: pay, status, job security, working conditions, company policy, peer relations, and supervision. Herzberg uses the term hygiene for these factors because they are preventive in nature. They will not produce motivation, but they can prevent motivation from occurring. Hygiene factors can be considered job stay-ons because they encourage an employee to stay on a job. Once these factors are provided, they do not necessarily promote motivation; but their absence can create employee dissatisfaction. Hygiene factors correspond to Maslows physiological, safety, and social needs in that they are extrinsic, or peripheral, to the job. They are present in the work environment or job context. Motivation comes from the employees feelings of accomplishment or job content rather than from the environmental factors or job context. Motivators encourage an employee to strive to do his or her best. Job enrichment can be used to meet higher-level needs. To enrich a job, a supervisor can introduce new or more difficult tasks, assign individuals specialized tasks that enable them to become experts, or grant additional authority to employees. The process approach emphasizes how and why people choose certain behaviors in order to meet their personal goals. Process theories focus
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on external influences or behaviors that people choose to meet their needs. External influences are often readily accessible to supervisors.

4.11.6 Vrooms Expectancy Model suggests that people choose among alternative behaviors because they anticipate that particular behaviors will lead to one or more desired outcomes and that other behaviors will lead to undesirable outcomes. Expectancy is the belief that effort will lead to first-order outcomes, any work related behavior that is the direct result of the effort an employee expends on a job. 4.11.7 Equity is the perception of fairness involved in rewards given. A fair or equitable situation is one in which people with similar inputs experience similar outcomes. Employees will compare their rewards with the rewards received by others for their efforts. If employees perceive that an inequity exists, they are likely to withhold some of their contributions, either consciously or unconsciously, to bring a situation into better balance. For example, if someone thinks he or she is not getting enough pay (output) for his or her work (input), he or she will try to get that pay increased or reduce the amount of work he or she is doing. On the other hand, when
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a worker thinks he or she is being paid too much for the work he or she is doing, he or she tends to increase the amount of work. Not only do workers compare their own inputs and outputs; they compare their input/ output ratio with the input/output ratio of other workers. If one work team believes they are doing more work than a similar team for the same pay, their sense of fairness will be violated and they will tend to reduce the amount of work they are doing. It is a normal human inclination to want things to be fair. Bowditch and Buono note (see Bowditch, James L. and Anthony F. Buono, A Primer on Organizational Behavior, 4th, John Wiley & Sons, 1997) that while equity theory was originally concerned with differences in pay, it may be applied to other forms of tangible and intangible rewards in the workplace. That is, if any input is not balanced with some fair output, the motivation process will be difficult. Supervisors must manage the perception of fairness in the mind of each employee. If subordinates think they are not being treated fairly, it is difficult to motivate them.

4.11.8 Reinforcement involves four types of consequence. Positive reinforcement creates a pleasant consequence by using rewards to increase the likelihood that a behavior will be repeated. Negative reinforcement occurs when a person engages in behavior to avoid unpleasant consequences or to escape from existing unpleasant consequences. Punishment is an attempt to discourage a target behavior by the application of negative outcomes whenever it is possible. Extinction is the absence of any reinforcement, either positive or negative, following the occurrence of a target behavior. Employees
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have questions about their jobs. Can I do what the management is asking me to do? If I do the job, will I be rewarded? Will the reward I receive be satisfactory to me? Reinforcement is based primarily on the work of B.F. Skinner, a psychologist, who experimented with the theories of operant conditioning. Skinners work shows that many behaviors can be controlled through the use of rewards. In fact, a person might be influenced to change his or her behavior by giving him or her rewards.

Employees who do an exceptionally good job on a particular project should be rewarded for that performance. It will motivate them to try to do an exceptional job on their next project. Employees must associate the reward with the behavior. In other words, the employee must know for what specifically he or she is being rewarded. The reward should come as quickly as possible after the behavior. The reward can be almost anything, but it must be something desired by the employee. Some of the most powerful rewards are symbolic; things that cost very little but mean a lot to the people who get them. Examples of symbolic rewards are things like plaques or certificates. 4.12 COMMUNICATION 4.12.1 Significance of Communication Communication is an indispensable activity in all organizations. No organization can think of its existence without effective communication. Communication is a managerial skill, which is essential for effective direction of people at work. A manager who is in a position to communicate well will perform the direction function successfully, i.e.,
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he will be able to get the subordinates involved towards the objectives of the organization. The success of a manager depends on how clear he is in his mind about his basic functions and how effectively he can transfer this clarity of thought to others. This involves a skill of helping others to understand the manager and to be understood by him. Thus, the need for better mutual understanding between labor and management in industry cannot be over emphasized as a pre-requisite of suitable congenial climate necessary for the overall advancement and productivity. The importance of communication in management for getting the work done may also be seen from the estimate of time, which is spent by a manager in communication- verbal or written, in conferences or meetings, giving directions or receiving information. Most of the managers spend more than 60% of their time in communication with others. The performance of all other managerial functions depends on successful communication by the managers at various levels. Planning which is one of the most important functions of management requires extensive communication among the executives and other personnel. Moreover, effective communication is important in executing a plan or a programme and then controlling the activities with the help of feedback information. Information about subordinates performance is necessary to determine whether the planned objectives are being realized. Communication is of utmost importance in organizing. It is an important aid in directing the employees of the organization. In short, communication is quite indispensable for the management in getting the things done by other personnel in the organization. That is why, Chester Barnard remarked, The first executive function is to develop and maintain a system of communication. Majority of the complex problems, which the managers generally face, are people centered. These have their roots in lack of understanding which cause hostile attitudes among the subordinates. Such problems can be solved through effective communication. The concept of democratic leadership places a high premium on communication. It is only through communication that executives can attempt to mould the attitudes of persons within the organization, and subordinates to carry out certain functions, fulfill a leadership role, and coordinate the efforts of people within the organization.
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One of the important aspects concerning the management of resources relates to development of effective communication system among people in an organization. People are subjected to continuously changing patterns of motives, aspirations and attitudes and they significantly differ with others in ability. In the process of assigning specific responsibilities, a situation is reached where facts and ideas must pass from person to person, group to group and level to level. The success and effectiveness of operations of the organization would depend on how timely, adequate and appropriate the flow of information is. An effective communication system is essential to pass messages, ideas and information for explaining objectives and plans, controlling performance, and taking corrective action. From the above discussion, we can say that communication is an indispensable process for effective management. The role of communication is summarized in the following points: (i) Communication helps the management in making the employees understand the objectives, plans and policies of the enterprise. (ii) Communication develops understanding between the superiors and the subordinates. It leads to congenial human relations in the organization. (iii) Communication helps in controlling the performances of different individuals and departments of the enterprise. (iv) Communication facilitates decision making by providing necessary information in time. (v) Communication provides unity of direction to various activities of the enterprise. (vi) Communication is an effective device for achieving participation by the workers. Management can consult the workers and receive their grievances, complaints and suggestions. (vii) Communication facilitates change on the part of employees by modifying their behavior. Meaning and Nature of Communication The word communication is derived from the Latin word communis that means common. If a person affects a communication, he has
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established a common ground of understanding. Thus, communication involves imparting a common idea and covers all types of behavior resulting there from. This indicates that various factors enter into the process of communication. These are the communicator or source of information, the receptor or receiver of information, the content of communication and the manner of communication. Communication in its broad sense means both the act of communicating something and the manner of communication such as letter, notice or circular. The act of communicating does not necessarily require a reaction on the part of the receiver. According to Hudson, Communication in its simplest form is conveying of information from one person to another. In the words of Alien, Communication is the sum of all the things one person does when he wants to create understanding in the mind of another. It is a bridge of meaning. It involves a systematic and continuous process of telling, listening and understanding. Thus, communication may be defined as interchange of thought or information, to bring about mutual understanding and confidence. It is the information intercourse by words, letters, symbols or messages. It is the exchange of facts, ideas and viewpoints, which bring about commonness of interest, purpose and efforts. Communication is an attempt to share understanding by two or more persons. It is a two way process and is completed when there is some response from the receiver of information. It has two basic objectives: 1. To transmit message, ideas, or opinions; 2. To create an impression or understanding in the mind of the receiver of information. The success of a manager depends to a great extent on his ability to communicate. Theo Haimann regards communication as fundamental and vital to all managerial functions. Communication is the process of passing information and understanding from one person to another. It is the process of imparting ideas and making oneself understood by others. Communication is an attempt to affect a transfer of messages, ideas or opinions between minds. The word transfer tell us that communication is essentially a two way process, involving a sender and a receiver. It could be a mechanical piece of equipment like computer, a writer and a
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reader, and a speaker and a hearer. Thus, communication always involves at least two-persons : a sender and a receiver. One person alone cannot communicate. Only the receiver can complete the communication act. There is no communication until the message sent by the communicator is received by the receiver. It should also be noted that communication is not effective if it does not produce the desired response. It is not enough for a manager to give an order; he must also see that it is correctly received, understood and carried out by the receiver. We are not all perfect, so the word attempt becomes significant when we consider the media by which the communication is effected. Understanding means that the receiver should interpret the message exactly as the sender intends. But this is not always the case. If the sender transmits the idea of a rectangle but the receiver sees a square, this is a case of poor or ineffective communication. 4.12.2 Process of Communication A simple model of the communication process is illustrated in the Fig.. The major elements of the communication process are discussed below: (i) Sender. The person who initiates the communication process is known as the sender, source or communicator. The sender has some information, which wants to communicate to some other person to achieve some purpose. By initiating the message, the sender attempts to achieve understanding and change in the behavior of the receiver.

(ii) Encoding or Communication Symbol. The sender of information organizes his idea into a series of symbols (words, signs, etc.), which, he feels, will communicate to the intended receiver or receivers. This is known as encoding of message, i.e., converting ideas into communicable codes which the receiver of the message will understand. (iii) Message. The message is the physical form into which the sender encodes the information. The message may be in any form that could be experienced and understood by one or more of the senses of the receiver.
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Speech may be heard, written words may be read and gestures may be seen or felt. Thus, a message may take any of the three forms, viz., oral, written or gestural. (iv) Communication Channel. After encoding the message, the sender chooses the mode of transmission (such as air for spoken words and paper for letters). The mode of transmission is often inseparable from the message. The channel is the link that connects the sender and the receiver. Air is the important communication channels. The receiver must be careful while selecting a channel. Some people respond better to formal letters or communications, others to the informally spoken words. The channels of communication, which are officially recognized by the organization, are known as formal channels. (v) Receiver. The person who receives the message is called receiver. The communication process is incomplete without the existence of receiver of the message. It is the receiver who receives and tries to understand the message. If the message does not reach the receiver, communication cannot be said to have taken place. (vi) Decoding. Decoding is the process by which the receiver draws meanings from the symbols encoded by the sender. The receivers past experience, education, perception, expectations, and mutuality of meaning affects it with the sender. (vii) Feedback. After receiving the message, the receiver will take necessary action and send feedback information to the communicator. Feedback is a reversal of the communication process in which a reaction to the senders message is expressed. The receiver becomes the sender and feedback goes through the same steps as the original communication. It may be noted that the dotted line in the Figure. suggests that feedback is optional and may exist in any degree (from minimal to complete) in any given situation. Generally, greater the feedback, the more effective the communication process is likely to be. For instance, early feedback will enable the manager (sender) to know if his instructions have been properly understood and carried out. Importance of Feedback in Communication Two way communication takes place when the receiver provides feedback to the sender. For instance, giving an instruction to a subordinate and receiving its acceptance is an example of two way communication.
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On the other hand, in case of one way communication, feedback is totally absent. Here the sender communicates without expecting or getting feedback from the receiver. A policy statement from the chief executive is an example of one way communication. One way communication takes less time than two way communication. In certain situations, one way communication is more effective to get work done from the subordinates. Two way communication is superior to one way communication in the following respects: (i) Two way communication is more accurate than one way communication. The feedback allows the sender to refine his communication so that it becomes more precise and accurate. (ii) Receivers self confidence is higher in case of two way communication as they are permitted to ask questions and seek clarification from the senders. However, in case of two way communication, the sender may feel embarrassed when the receiver draws his attention to senders mistakes and ambiguities. 4.12.3 Purpose of Communication The basic purpose of communication is to give and receive information, which is of interest both to the communicator and the receiver of information. A good communicator always attempts to transmit his ideas or information to create favorable impression in the mind of the receiver. Effective communication involves more than a mere receipt of message by the receiver, it creates understanding, acceptance and action. Understanding of the message by the receiver is a very important part of a good communication system. A communicator may make others listen to him, but he may not be able to make them understand what he says. Many executives forget this while giving instructions to their subordinates. Experience shows that one is very often misled by the wrong image of the other in ones mind. The words are empty vessels and the receiver pours meaning into them very frequently on the basis of the image, which he carries in his mind of the communicator. A skilful communicator has to find the suitable words and expressions so as to make the receiver understand what he wants. Thus, both transmitting ideas and creating the desired impression have important roles to play in proper understanding.
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In an industrial organization, the communication system is conceived to lead ultimately to better industrial relations through the existence of wellinformed workforce, greater degree of consultation at every level and an atmosphere of mutual confidence. Through effective communication, skill to work is brought into touch with will to work and both combined together lead to team spirit in the organization. Advantages of effective communication are sense of motivation, clarity of thoughts and orders, non distorted information and consequent increase in the productivity and morale of employees. In an organization where mutual trust between the management and the workers exists, it is easy to communicate effectively. But it must be remembered that a good communication system is not a panacea for the ills of an organization, nor it is a substitute for other techniques of management. However, if thoughtfully planned and systematically applied, a good system of communication can go a long way towards achieving greater acceptance of new ideas and reducing resistance to change. Glover has mentioned the following important purposes of communication: (i) To keep employees informed of companys progress. (ii) To provide employees with orders and instructions in connection with their duties. (iii) To solicit information from the employees, which may aid management. (iv) To make each employee interested in his respective job and in the work of company as a whole. (v) To express managements interest in its personnel. (vi) To reduce or prevent labor turnover. (vii) To indoctrinate employees with the will to work and the benefits derived from their association with the company. (viii) To instil each employee with personal pride in being a member of the company. 4.12.4 Communication Networks A network of communication represents the pattern of contacts among the members of an organization. It mainly depends upon the nature of channels of communication and the number of persons involved in the
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communication process. There may be three types of communication networks in the organization, viz., and wheel, circular and free flow. The channels are discussed below: (i) Wheel Communication Network. As shown in the figure below, the wheel network represents the communication pattern under which the subordinates can communicate with and through one manager. It is called a wheel network since all communications pass through the manager who acts as a central authority like the hub of a wheel. All the workers receive instructions and guidance from one person.

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

Channel

Direction

Method

Formal Informal

(1) DownWard (2) Upward (3) Horizontal

(1) Oral (2) Written (3) Gestural

4.12.5 Channels of Communication A channel of communication is a path through which messages are transmitted from the sender to the receiver. Channels of communication may be either formal or informal. These are discussed below:
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Formal Communication The paths of communication, which are institutionally determined by the management, are called formal channels of communication. They are associated with the status or position of the communicator and the receiver. Formal communication enforces a relationship between different positions. It derives its support from scalar chain of organization. It generally adopts three directions: (i) Downward (ii) Upward and (iii) Horizontal. These channels are used for different purposes, which are discussed later. It is significant to point out the first two channels are vertical in nature. Significance of Formal Communication Downward communication is used for giving orders and instructions, providing information, or for influencing attitudes and behavior of the subordinates. Upward communication is used for reporting, informing, requesting and suggesting. It is also used to influence decisions and to protest against certain actions or decisions of the management. Horizontal channels are used for informing and coordinating. All these channels are equally important for the proper functioning of any organization. In a well-organised communication system, upward communication is given as much importance as downward communication. This is because one of the most crucial factors in the process of communication is information, about how people feel about things in the organization. Unless upward communication is encouraged and taken note of, downward communication is not fully effective. Upward communication gives an opportunity to the workforce to inform management about their feelings and to suggest improvements in the methods of work and also enables management to locate problem areas in the organization. Informal Communication or Grapevine When the employees are unable to communicate the required information to higher authorities because of communication barriers, they may resort to informal channels of communication. Distortions may appear in the transmission of such messages through grapevine in the form of rumors and gossips. The managers may resort to such informal channels when they find that it is not possible to gather information through the established channels in the formal communication system of the organization.
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The important point which we must recognize is that grapevine is a natural and normal activity. It is because of the desire of people to communicate without following the formal channels in the organization. It is an essential part of the total human environment. There is nothing inherently bad about grapevine. It, as a matter of fact, fills in the gaps existing in the formal communication system. If it does not exist in the organization, the ability of a manager to build team work, motivate people and create identification with the organization would be severely restricted. Grapevine generally operates like a cluster chain. For instance, A tells three or four selected persons. Only one or two of these receivers will then pass on the information and, again, they will usually tell more than one person. As the information becomes older and the number of those knowing it grows larger, and it gradually dies out because those who receive it do not repeat it. This process is called a cluster chain because each link in the chain tends to inform a cluster of other people instead of only one person. Grapevine may also move in the fashion of a long chain in which A tells B, who tells C, who in turn tells D and so on. But this is rarely the case. If we accept the idea that cluster chain is predominant, then we can conclude that only a few persons are active communicators on the grapevine for any particular piece of information. The persons who keep the grapevine active are called liaison individuals. The liaison agents are generally different in each case because people tend to be active on the grapevine when they have a cause to be. This means that they act partly in a predictable manner. This element of predictability offers management a chance to influence the grapevine. People are also active on the grapevine when their friends and associates are involved. This means if M is to be discharged, the other employees should be told the full story by the management as soon as possible. If they are not informed, they will fill in the gap with their own conclusions and thus rumors will start. Another marked feature of grapevine is the speed with which it functions. The cluster chain makes it easy for a few people to convey too many others in a short period of time. The grapevine exists largely through words of mouth. Through modern networks of communication, it is possible for the grape vine to leap hundreds of kilometers very quickly.
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If there exist procedures which regularly bring people in contact, we can expect these people to have an active grapevine or informal communication. Merits of Informal Communication The Informal communication has the following advantages: It helps in achieving better human relations in the organization. It links even those people who do not fall in the official chain of command. Its speed is very fast as it is free from all barriers. It serves to fill the possible gaps in the formal communication.

Demerits of Informal Communication The demerits of informal communication are as follows: Informal communication is not authentic. The message may be distorted. It may lead to generation of rumors in the organization. Informal channels may not always be active. So informal communication is not dependable. It may lead to the leakage of confidential information.

Rumor It is the most undesirable feature of the grapevine and it has given the grapevine a bad reputation. That is why, to some people, grapevine means rumor. But rumor is grapevine information, which is communicated without authentic standards of evidence being present. It is thus an untrue part of grapevine. It can by chance be correct, but generally is incorrect; so it is presumed to be undesirable. Rumor originates for a number of reasons. One cause is plain maliciousness, but it is probably not the most important. A more frequent cause is employees anxiety and insecurity because of poor communication in the organization. Rumor also serves as a means of wish fulfillment or applying pressure upon the management. Rumor largely depends on the interest and ambiguity perceived by each person; it tends to change as it passes from person to person. Its general theme may be maintained, but not its details. The rumor gets twisted and
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distorted when it passes from one mouth to another. The message gets its own head, tail and wings on its journey and swells unproportionately to an exaggerated shape. Generally, each person chooses details in the rumor to fit his particular focus on reality. Thus, the details given at the beginning of a rumor are lost after a few transmissions because people reduce it to a rememberable number of details about items of interest to them. A major outbreak of a rumor can be a devastating epidemic that sweeps through an organization as fast as a summer storm and usually with as much damage. Therefore, the most important problem before the management is how to deal with rumors. Dealing with Rumor The best approach in dealing with rumor is to get at its causes, rather than try to kill it after it has started. When causes are known, it should be stopped as early as possible because once a rumors theme is known and accepted, employees distort future happenings to conform to the rumor. So the management must pass on the correct message in time. Once a rumour has been spread, it is difficult to erase it from the minds of the people. The only solution is to get the facts across before misconceptions have a chance to gain a foothold. Usually, fact to face supply of facts is the most effective way because it helps answer the particular ambiguities in each individuals mind. The oral message may be repeated clearly. The message must contain facts and not the opinions. Neither it should contain the rumor. The message should not be exaggerated. The message should be confirmed by the written message and it should be circulated quickly. Management may also take the help of union leaders in combating the rumor, which is not in the interest of workers and the organization. 4.12.6 Direction of Communication From the point of view of direction, communication may be either vertical or horizontal. Vertical communication may move both downward as well as upward. Horizontal communication is also known as sideward communication. Downward Communication. It represents the flow of information from the top level to the lower level of the organization. The purpose of downward communication is to communicate policies, procedures,
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programmes and objectives, and to issue orders and instructions to the subordinates. A major part of the formal communication takes the form of downward communication. Downward communication can take place through verbal or written orders and instructions, notices, circulars, letters, memos, posters, periodicals, publications, group meetings, etc. Downward communication is needed: to get the things done to prepare for changes to discourage misinformation and suspicion; and to let the people feel the pride of being well informed.

Upward communication. Feedback to the higher authorities by the lower levels is vertical upward communication. The examples of upward communication are: (a) activity reports on subjects like raw materials, production, distribution, manhours, etc.; (b) opinions, ideas and suggestions; and complaints and grievances. Upward communication is needed: to create receptiveness of communication; to create a feeling of belongingness through participation; to evaluate communication; and to demonstrate a concern for the ideas of each employee.

Horizontal Communication. It refers to transmission of information among positions of the same level. The importance of horizontal communication is undermined due to three reasons. Firstly, it is largely a by product of communication. Secondly, with increasing size and specialization, the opportunities for cross talks are cut down, and thirdly, in relative terms, lateral communication poses fewer difficulties than upward or downward communication because it has fewer implications of authority and status. To secure coordination and cooperation of employees at horizontal level, the problems are generally handled through informal contacts. Horizontal communication is more of an informal nature. If a departmental head needs some information from another departmental head, he may get this by ringing him up directly. Inspite of presence of hierarchy in any large industrial organization, it is possible to accelerate exchange of information if the management recognizes and encourages cross contacts
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which cut across the organizational lines. Such, contacts may take place between individuals and groups, not only in their levels but also with other echelons of management. The crosswise communication can be effective when a proper understanding exists among the superiors or these points. The subordinates should refrain from making communication beyond their authority and should keep their superiors informed of their inter departmental activities. 4.12.7 Methods of Expression Oral Communication Communication with the help of spoken words is known as oral communication. Oral communication may take place: (a) by face to face conversation, and (b) through mechanical devices. Face to face conversation is the most natural way of transmitting message. It is the best means of securing cooperation and resolving problems. Various studies have shown that face to face communication carries the message bett er than any ot her media. It avoids misunderstanding between the persons talking face to face. It is because by having face to face conservation, one can convey the message both by words and expressions or gestures. Sometimes, it is desirable to have face to face communication because of confidential nature of the message. Mechanical devices which are used for oral communication in most organizations include signals, telephones, intercom systems, electric paging systems and dictating machines. Both the methods of oral communication are frequently used in organizations for downward and upward communication. Every executive makes use of oral communication by instructing, lecturing, counseling and so on. Oral communication is also used for attending to the suggestions and grievances of the workers. The greatest benefit of oral communication is that it saves time as it provides an immediate response and feedback. It fosters a friendly and cooperative spirit. It permits personalized contacts and develops a sense of belongingness. Nonetheless, oral communication is not free from drawbacks. It may be time consuming because for having direct talks, the individuals concerned have to move back and forth to and from their workplaces. It may not be specific and so may be misunderstood. It may also create legal difficulties if no written record of conversation is preserved.
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Written Communication Comprehensive devices for written communication in the form of circulars, bulletins, manuals, handbooks, notes, orders, instructions, etc., are widely used in modem organizations. Howsoever elaborate a communication system may be, it cannot be composed of verbal communication only. The objectives of written communication may be: to give information; to receive information; to record recommendations and decisions of a meeting; to give orders and instructions.

Written communication can be conveyed to the workers through house magazines, notice boards, employee handbooks and memoranda. Workers can communicate upward through writing their suggestions and grievances. Upward communication in written form is generally discouraged as the workers are reluctant to use it to express their opinions. Management should encourage it by installing a suggestion system in the organization. Written communication serves as a permanent reference for future. It is formal and carries weight. It is not possible to change the contents of written message by receivers. Written messages are more clear and specific as they are carefully drafted.Written communication serves as a reliable record for future reference and can be used as evidence in legal proceedings. Response to written communication is generally well thought out since the receiver gets to evaluate and understand the message. In many cases, written communication is even more effective that the oral communication. Written communication is slow as compared to oral communication. It may also become a source of dispute as once a written message is sent, it is difficult to withdraw it. Written messages may give rise to queries for clarification and elaboration which lead to loss of time. Written communication is generally formal in nature and may be blocked due to bureaucratic procedures in the organization. Therefore, the management should take proper step to ensure that written communication does not lose its effectiveness. Gestural Communication Communication through gestures or postures is often used as a means to supplement verbal communication. If there is a face-to-face conversation
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between two persons, they can better understand the feelings, attitudes and emotions of each other. Gestural communication is very much helpful to motivate the subordinates, as for instance, handshake with the subordinate or a pat on the back of the subordinate. Similarly, gestures taken by the listeners can help the communicator to know their reactions. Oral vs. Written Communication Oral Communication 1. Communication is expressed through spoken words. 2. It may not be precise. 3. Oral communication may not be complete. It may be difficult to understand it. 4. It is generally informal in nature. 5. It may not be taken seriously. 6. Oral message may not be verifiable. Written Communication 1. Communication is expressed in writing. 2. It can be very precise. 3. It is not difficult to understand written communication if it is expressed in unambiguous terms. 4. It is generally formal in nature. 5. It is generally taken seriously. 6. Written message is verifiable from the records. Choice of Method of Communication It is very difficult to predict which method of communication will be used in a particular organization. In practice, all the three methods of expression are used in varying degrees under different circumstances. Postural communication is frequently used, to supplement oral communication. Oral communication is very much useful for discussing problems in groups. It is very much helpful when the time available is very short. It also helps in knowing the reactions of the receivers quickly. Nonetheless, written communication has its own value. It is frequently
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used for exchanging lengthy messages. Written communication constitutes reliable records for future reference and action. Oral communication is used effectively in the following situations: (i) Executives use oral communication for instructing and counseling their subordinates. (ii) Executives use oral communication while dealing with the trade union leaders. (iii) Workers use oral communication to convey their grievances and suggestions to the management. (iv) Workers use oral communication to give feedback to the management. Written communication has been found to be effective in the following situations: (i) Executives give written instructions where the assignment is important and it is necessary to fix responsibility. (ii) Written communication serves the purpose of a record for future reference. (iii) Workers and trade unions make use of written communication to communicate with the management formally and to get a formal response from the management. 4.12.8 Barriers or Gateways to Communication Barriers or obstacles to communication cause break downs, distortions and inaccurate rumors. They plague the daily life of the managers who must depend upon the accurate transmission of the orders and information for efficient operations. Whenever a communication is made, there is always a tendency on the part of the receiver to evaluate the message received and then decide to approve or disapprove the same. Another important barrier to communication lies in the layers and spans of management. In large organizations, there are a number of obstacles which make transmission of message more difficult. In both upward and downward communications, it may happen that some of the persons in the intermediate layers withhold the whole or part of the information, because
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they may feel that by withholding the information they will be better informed than those whom they lead. It should be noted that although there is no such thing as perfect communication, considerable degree of perfection could be achieved in communication if the barriers to communication are overcome. The main barriers to communication are discussed below : 1. Barriers due to Organization Structure. The breakdown or distortion in communication, sometimes, arises due to: (i) Several layers of management; (ii) Long lines of communication; (iii) Long distance of subordinates from top management; (iv) Lack of instructions for passing information to the subordinates; and (v) Heavy pressure of work on certain levels of authority. 2. Barriers due to Status and Position. (i) The temper and attitude exhibited by the supervisor is sometimes a hurdle in two way communication. One common illustration is non-listening habit. A supervisor may guard information for: (a) Consideration of prestige, ego and strategy. (b) Under - rating the understanding and intelligence of subordinates. (c) Deriving satisfaction in being the store house of information and seeing people dance around him for information. (ii) Prejudices among the supervisors and subordinates may stand in the way of free flow of information and understanding. (iii) The supervisors particularly at the middle level may sometimes like to be in good books of top management by : (a) not seeking clarification on instructions which are subject to different interpretations; and (b) acting as a screen for passing only such information which may please the boss. 3. Semantic Barriers. Semantic is the science of meaning. Words seldom mean the same thing to two persons. Symbols or words usually have a variety of meanings. The sender and the receiver have
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to choose one meaning from among many. If both of them choose the same meaning, the communication will be perfect. But this is not so always because of differences in formal education and specific situations of the people. Strictly one cannot convey meaning, all one can do is to convey words. But the same words may suggest quite different meanings to different people, e.g., Profits may mean to management efficiency and growth, whereas to employees it may suggest excess funds piled up through paying inadequate wages and benefits. 4. Tendency to Evaluate. A major barrier to communication is the natural tendency to judge the statement of the person of the other group. Every one tries to evaluate it from his point of view or experience. Communication requires an open mind and willingness to see things through the eyes of others. 5. Heightened Emotions. Barriers may also arise due to specific situations, e.g., emotional reaction, physical conditions like noise or insufficient light, past experience, etc. When emotions are strong, it is very difficult to know the frame of mind of the other person or group. 6. Lack of Ability to Communicate. All persons do not have the skill to communicate. Skill in communication may come naturally to some, but an average man may need some sort of training and practice by way of interviewing, public speaking, etc. 7. Inattention. The simple failure to read bulletins, notices, minutes and reports is a common feature. With regard to failure to listen to oral communications, it has been seen that nonlisteners are often turned off while they are preoccupied with other affairs or their family problems. In any case, the efforts to communicate with someone not listening will fail. 8. Unclarified Assumptions. This point can be clarified by an illustration. A customer sends a message that he will visit a vendors plant at a particular time on some particular date. Then he may assume that the vendor will receive him and arrange for his lunch, etc. Whereas vendor may assume that the customer was arriving in the city to attend some personal work and would make a routine call at the plant. This is an unqualified assumption with possible loss of goodwill.
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9.

Closed Minds. Certain people, who think that they know everything about a particular subject, also create obstacles in the way of effective communication. Persons suffering from the mirage of too much knowledge become rigid and dogmatic in their attitude. They close their minds tightly to new ideas that are brought to them,

10. Resistance to Change. It is general tendency of human beings to maintain status quo. When new ideas are being communicated, the listening apparatus may act as a filter in rejecting new ideas. Thus, resistance to change is an important obstacle to effective communication. Sometimes, organizations announce changes which seriously affect the employees, e.g., changes in timings, place and order of work, installation of new plant, etc. Changes affect people in different ways and it may take some time to think through the full meaning on the message. Hence, it is important for the management not to force changes before people are in a position to adjust to their implications. These are the problems or barriers to effective communication. Communication will not be perfectly effective if transmission of the message is faulty. The above barriers should be removed to achieve effective communication in the organization. Communication Gap The top management of an organization prepares a broad set of policies to act as guideline and a framework within which the managers and supervisors can operate to achieve the goals of the organization. The communication up to the foreman level is generally quite smooth. But the difficulty arises in communicating the managements policies and guidelines to the workers because an average worker has difficulty in learning the corporate policies and has much less capacity in understanding them. This creates the problems of communication gap. The communication gap lies where: 1. The worker does not know what is expected of him because he is not told. 2. He cannot achieve it if he does not know. 3. He does not know how important his work is in producing the final product.
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4. He does not know how well he is doing and how far he is in the queue for promotion. 5. He does not know how much skill he should acquire and what are the basic requirements for his next grade promotion. The worker must know the above mentioned information to ensure that he produces a good quality product and is motivated to produce more. He must be aware what his mistakes will cost in terms of time and money to the organization and he must be motivated to reduce waste and to follow safe procedures. 4.12.9 Steps to Overcome Barriers to Communication The following steps are required to be followed to overcome barriers to effective communication: (i) Clarity of Information. Subordinates should be kept informed on policy matters that affect them on a regular basis. Clear cut instructions should be issued and followup measures should be taken to ensure that the instructions are thoroughly understood and are being implemented. (ii) Prompt Information. The management should make a practice of passing along the information promptly to everyone concerned so that action, where required, is not delayed. (iii) Creation of Proper Atmosphere. In particular cases, as for instance, when a boss is talking to his subordinate, the atmosphere must be peaceful so that there is effective communication of instructions and suggestions. (iv) Effective Listening. The sender must listen to the receivers words attentively so that the receiver may also listen to the sender at the same time. (v) Feedback. Communication should be a two way traffic. There should be some system by which the workers should be able to convey their suggestions and grievances to the top management. Two way communication is also necessary for feedback for the purpose of control. (vi) Efficient Channels. Management should try to cut the root of the rumors. If the communication channel is well maintained, there will
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be no room for rumours, lies, guesses and misconceptions. Workers should get open doors for any clarification or consideration at all times. This will also increase the morale of the employees. 4.12.10 Building Effective Communication With the advancement of technology, changes have become a regular feature in any industrial organization. An effective communication system is an essential part of good labor management relations. The prime objective of setting up a communication system is to exchange facts and information in a manner, which is acceptable to all concerned and which will lead to cooperative action by all concerned. Problems of passing information from management to workers are very complicated and many techniques are applied to encourage an easy two way flow of facts, ideas and opinions. But attitude of the persons involved in communication is equally important for better communication, which will ultimately lead to better productivity and an atmosphere of mutual trust and confidence among the workers and the managers. If the communication system is carefully planned and applied, it will reduce workers resistance to new ideas and changes. Communication problems are more complex in large organizations. Managers face difficulty in maintaining effective communications to pass messages accurately without distortion to their subordinates. Effective communication is a broader process than merely passing orders and keeping oneself informed about the activities going on in various divisions of the organization. Organizational communications should satisfy the needs of organization and its members. In order to achieve effective communication in the organization, the following principles or guidelines must be followed: 1. Principle of Clarity. The beginning of all communication is some message. The message must be as clear as possible. No ambiguity should creep into it. The message can be conveyed properly only if it is clearly formulated in the communicator. 2. Principle of Objective. The communicator must clearly know the purpose of communication before actually transmitting the message. The objective may be to obtain information, give information, initiate action, change another persons attitude and so on. If the purpose of communication is clear it will help in the choice of mode of communication.
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3. Principle of Understanding the Receiver. Understanding is the main aim of any communication. The communication must create proper understanding in the mind of the receiver. Killian advised, Communicate with an awareness of the total physical and human setting in which the information will be received. Picture the place of work; determine the receptivity and understanding levels of the receivers; be aware of social climate and customs; question the informations timeliness. Ask what, when and in what manner you would like to be communicated with if you were in a similar environment and position. 4. Principle of Consistency.The message to be communicated should be consistent with the plans, policies, programmmes and goals of the enterprise. The message should not be conflicting with previous communication and should not create confusion and chaos in the organization. 5. Principle of Completeness. The message to be communicated must be adequate and complete; otherwise the receiver will misunderstand it. Inadequate communication delays action, spoils good relations and affects the efficiency of the parties to communication. 6. Principle of feedback . This principle calls fo r making communication a two way process and providing opportunity for suggestion and criticism. Since the receiver is to accept and carry out the instructions, the sender of message must know his reactions. The latter must consider the suggestion and criticism of the receiver of information. But feedback principle is often given a back seat by most managers, which defeats the very purpose of communication. 7. Principle of Time. Information should be communicated at the right time. The communicator must consider the timing of communication so that the desired response is created in the minds of the receivers. Characteristics or a Good Communication System A good system of communication has certain essential characteristics, which are explained below: (i) Two way Channel. Communication involves two parties, the sender or transmitter and the receiver of the message. Mere transmission of facts, ideas, information, etc. does not make any communication
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effective and meaningful. It is essential to keep the channel open for sending the receivers views, understanding and opinion about the communication. Therefore, a good communication should be like a two way traffic. Transfer of information should take place from the senders to receivers and vice-versa without any interruption. (ii) Clarity of Message. The message must be as clear as possible. No ambiguity should creep into it, the message can be conveyed properly only if it is clearly formulated in the mind of the communicator. The message should be encoded in direct and simple language so that the receiver is able to understand it without much difficulty. (iii) Credibility of Message. Credibility of the message is an important factor, which promotes understanding and cohesiveness among organizational members. It depends to a large extent on the rapport between the parties concerned. A related characteristic is timeliness of communication, which contributes to its credibility. The message should be complete also. Inadequate message delays action, spoils good relations and affects the efficiency of the parties to communication adversely. (iv) Speed of Transmission. A good system of communication has short lines of information flows, which help to minimize distortion and dilution of the messages transmitted. It should give considerable importance to the speed of transmission of message. However, speed of communication should not impair the accuracy of the information to be transmitted. (v) Mutual Understanding. A good communication system should achieve better relations between the parties to communication. Transfer of information or knowledge should take place in a cordial atmosphere. Absence of mutual understanding signifies the lacuna in the system in the sense that communication becomes a one sided affair. Mutual trust, belief and reliance should be the goals of any communication system. (vi) Flexibility. A good system is flexible enough to adjust to the changing requirements. It should carry extra loads of information without much strain. It should absorb new techniques of communication with little resistance. Use of a wide range of media such as oral and written messages, face to face contacts, telephonic calls, group meetings, etc. should be encouraged without any hesitation.
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(vii) Reliance on Feedback. Feedback refers to transmission of information concerning the effect of any act of communication. Summary Staffing is the process of attracting, developing, evaluating and compensating people at work. It is an integral part of the management process and is performed by every manager on a continuous basis. Human resource management is concerned with the most effective use of people to achieve organizational and individual goals. It tries to secure the best from people by winning their wholehearted cooperation. Good HRM practices can help in attracting and retaining the best people in the organization. Personnel management is concerned with people at work and their relationships with each other. It covers three important aspects basically: personnel aspect (recruitment, selection, placement training, appraisal, compensation, etc.), welfare aspect (working conditions, amenities, facilities, benefits), and industrial relations aspect (union management relations, disputes settlement, grievance handling, discipline, collective bargaining). Human resource development aims at helping people to acquire competencies required to perform all the functions effectively. It is a development oriented, proactive function. It aims at overall development of human resources in order to contribute to the well being of employees, organization and the society at large. Human resource planning is a system of matching the supply of people with openings that the organization expects over a given time frame. It tries to assess manpower requirements in advance keeping the production schedules, market fluctuations, demand forecasts etc. in the background. In order to develop a human resource plan, HR professionals typically follow a three step process: (i) workforce analysis (assessing manpower supply) (ii) work load analysis (finding actual requirement for manpower based on work load) (iii) job analysis (find out the abilities and skills needed to undertake the jobs in question in an effective way). Staffing is to determine the people available by making a management inventory. Using an inventory chart can do this. Staffing does not take place in a vacuum; one must consider many situational factors, both internal and external. Staffing requires adherence
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to Equal Employment Opportunity (EEO) laws so that practices do not discriminate, for example against minorities or women. Also, one must evaluate the pros and cons of promoting people from within the organization or selecting people from the outside. In the systems model for selection, the comprehensive managerial requirements plan is the basis for position requirements. In designing jobs, the enterprise must see that the scope of the job is appropriate; that the position involves a full time, challenging job; and that it reflects required skills. The job structure must be appropriate in terms of content, function, and relationships. The jobs can be designed for individuals or work teams. The importance of technical, human, conceptual and design skills varies with the level in the organizational hierarchy. The position requirements are matched with the various skills and characteristics of individuals, the matching is important in recruitment, selection, placement, and promotion. Errors in selection can lead to actualization of the Peter Principle, which states that managers tend to be promoted to the level of their incompetence. Although the advice of several people should be sought, the selection decision should generally rest with the immediate superior of the candidate for the position. The selection process may include interviews, various tests, and the assessment centers. To avoid dissatisfaction and employee turnover, the management must ensure that new employees are introduced to and integrated with persons in the organization. Direction is the process of guiding, motivating, leading and supervising the subordinates to accomplish desired objectives. It is an important managerial function because it is through direction, managers get things done. Proper direction helps employees show superior performance. To be effective, direction should be based on certain well established principles, e.g., in line with overall goals, command flowing from one individual, two way communication, and appropriate technique to suit situational needs, etc. Clear instructions followed by appropriate counseling help employees remain on track and achieve results without wasting resources. A supervisor acts as a buffer between management and workers. He helps employees in doing a good job, using human, technical and
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conceptual skills in an appropriate manner. He plays many roles and changes many hats while at work. Important roles played by a supervisor are well documented in management literature, i.e., as a technician, analyst, controller, counselor, linking pin, human relations expert, motivator, trainer, leader, organizer, planner, decision maker, etc. Depending on the situation, the supervisor is expected to enact a particular role to the best of his abilities. To achieve results, supervisors have to keep certain things in mind. They must encourage workers to participate in organizational matters. Resources should be put to good use. Rules and regulation must be adhered to. Wastages of various kinds must be avoided. They must set an acceptable standard for evaluating workers performance, develop capable assistants and offer help whenever it is requested. Communication is the process of passing information and understanding from one person to other. It is important to all managers and is needed by all employees. It is the basis of action and people to give their best to the organization. The process of communication involves several steps. There are basically two types of channels formal and informal. Formal communication channel moves along the routes specified by management either downward, upward or horizontal. Informal communication channels do not adhere to the organizations hierarchy. Here, there is no prescribed direction for the flow of messages. Grapevine, generally, emanates from two sources : gossip chain and cluster chain. There are three main types of communication media, namely oral, written and non-verbal communication. Oral communication takes place on a face to face basis. Written communication transmitted through written words in the form of letters, circulars, memos, reports, manuals, etc. Communication that takes place through facial expressions, body position, eye contact and other physical gestures is known as non verbal communication (NVC). NVC plays a great role in improving interpersonal relations in an organization. A communication network is the pattern through which the members of a group communicate. It may take five different shapes in an organization, namely the wheel, Y pattern, chain, circle and star. Several semantic, structural and interpersonal barriers come in the way of effective communication. The same word, for example, may convey a
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different meaning to different people. Some people cant express properly. Information gets distorted as messages travel a distance. Status differences compel people to hide their true feelings and emotions. To communicate effectively, a manager has to improve his listening skills. He must think and plan before communicating. The timing of the message must also be appropriate. People must actively participate in developing appropriate messages. Simple words must be used to improve clarity and understanding. More importantly, the manager must encourage subordinates to give their feedback openly and fearlessly. Have you understood questions. 1. Select an organization you know, and evaluate the effectiveness of the enterprises recruitment and selection of people. How systematically are these and other staffing activities carried out? 2. Interview two managers. Ask them what criteria are used for their performance appraisal. Are the criteria verifiable? Do these managers think that the performance evaluation measures their performance in a proper manner? 3. Develop a career plan for yourself. Identify a personal profile for yourself and state your long range personal and professional goals. What are your strengths and weaknesses? Follow the steps explained in this chapter to develop a comprehensive strategic career plan for you. Review questions. 1. Define staffing. 2. What do you mean by recruitment? 3. What is selection? Explain the process of selection. 4. Define directing. Illustrate the elements of direction 5. What is motivation? Describe theories of motivation. 6. Define leadership. Describe different theoretical approaches to leadership. 7. What is communication? State the barriers to communication. Illustrate the steps to overcome barriers to communication. 8. Elucidate the way of building effective communication.
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UNIT - V

CONTROLLING

LEARNING OBJECTIVES After reading this unit you should be able to understand 5.1 the steps in the basic control process. the critical control points and standards. application of the feedback system. feedforward control system. list of the requirements for effective controls. the nature of budgeting and types of budgets. modern techniques of budgeting, including variable budgeting and zero base budgeting. the non budgetary control devices. the nature and problems of program budgeting. the special need for effective procedures planning and control.

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

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process through which standards for performance of people and processes are set, communicated, and applied. Effective control systems use mechanisms to monitor activities and take corrective action, if necessary. The supervisor observes what happens and compares that with what was supposed to happen. He or she must correct conditions below standard and bring results up to expectations. Effective control systems allow supervisors to know how well implementation is going. Control facilitates delegating activities to employees. Since supervisors are ultimately held accountable for their employees performance, timely feedback on employee activity is necessary. Control is an important function of management. In an undertaking, control consists in verifying whether everything occurs in conformity with the plan adopted, the instructions issued and the principles established. It has to point out weaknesses and errors in order to rectify them and prevent recurrence. It operates on everything : things, people and action. A great deal of misunderstanding has arisen about the term control because of confusing it with other terms like management, objectives, plans, policy statements, etc. It is important that the managers should have a clear understanding of this concept because a manager who does not understand control cannot be expected to exercise it in the most efficient and effective manner. The manager who believes managing and controlling is the same thing, has wasted one word and needs a second to be invented. And one who believes he has provided for control when he has established objectives, plans, policies, organization charts and so forth, has made himself vulnerable to really serious consequences. A clear understanding of control is, therefore, indispensable for an effective manager. The modern concept of control envisages a system that not only provides a historical record of what has happened to the business as a whole but also pinpoints the reasons why it has happened and provides data that enable the chief executive or the departmental head to take corrective steps if he finds he is on the wrong track. Definition of Control Control is a basic managerial function, which implies measurement and correction of performance of subordinates to ensure that the pre determined objectives are accomplished. E.F.L. Breach has defined
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control as follows: Control is the process of checking actual performance against the agreed, standards or plans with a view to ensuring adequate progress and satisfactory performance. In other words, controlling consists of those activities, which are necessary to ensure that performance takes place in accordance with the targets laid down by the management. It also involves taking corrective actions in case the performance is not satisfactory. According to Koontz and Weihrich, The managerial function of controlling is the measurement and correction of the performance in order to make sure that enterprise objectives and the plan devised to attain them are accomplished. Thus, managerial function of control implies measurement of actual performance, comparing it with the standards set by plans and correction of deviations to assure attainment of objectives according to plans. Characteristics of Control The process of control has the following characteristics: 1. Pervasive Function. Control is a function of every manager who is performing other managerial functions like planning, organizing, staffing and directing. It is, in fact, a follow up action to other functions of management. Managers at all levels have to perform this function to contribute to the achievement of orgartisational objectives. 2. Review of Past Events. Control leads to appraisal of past activities. Thus, it is looking back, the deviations in the past are revealed by the control process. This is also known as feedback information. It will help in knowing the reasons of poor performance. Corrective actions can be initiated accordingly. 3. Forward Looking. Control is linked with future, as past cannot be controlled. A manager can take corrective action only in regard to future operations. Control is usually preventive, as presence of control system tends to minimize wastages, losses and deviations from standards. 4. Action Oriented. Control implies taking corrective measures. Action is the essence of control. The purpose of control is achieved only when corrective action is taken on the basis of feedback information. It is only action, which adjusts performance to predetermined standards whenever deviations occur. A good system of control
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facilitates timely action so that there is minimum waste of time and energy. 5. Continuous Process. Just like other functions of management, control is also a continuous activity. It involves constant analysis of validity of standards, policies, procedures, etc. It also suggests corrective actions in various processes. It does not stop anywhere. A manager has to perform this function continuously along with other functions. 6. Dynamic Process. Control is a dynamic process. It is flexible and not rigid. Control involves continuous review of standards of performance and results in corrective action, which may lead to change in the performance of other functions of management. Since management is managing a business entity, which keeps on changing, managerial control is also dynamic. Management will be failing in its duty if its approach is not dynamic. 7. Control does not curtail the rights of individuals. To some people, control is opposite of freedom. It is not so. It is a preventive action so that losses may be avoided in future. It is, in fact, an act of guidance. Control in an enterprise is based on facts and figures and not on the whims of managers. Its purpose is to achieve and maintain acceptable productivity from all the resources of an enterprise. Relationship between controlling and planning Planning and controlling are closely related to each other as shown in the following figure. After a plan becomes operational, control is necessary to measure progress, to uncover deviations from the targets and to take corrective steps. It is also not possible to think of an effective system of control without the existence of good plans. Billy E. Geotz has explained the relationship between planning and controlling in the following words, Managerial planning seeks consistent, integrated and articulated programmes, while management control seeks to compelete events conform to plans.

PLANNING

PERFORMANCE

CONTROL

Fig. Relationship between Planning and Control.


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Control is always based on planning. It is also true that in running a enterprise planning depends upon controlling. Every manager uses certain standards for measuring and appraising performance, which are laid down by planning. The control process, in turn, may reveal the deficiency of plans and may lead to the revision of planning. It may also lead to setting of new goals, improving staffing and making changes in the techniques of supervision, motivation and leadership. Planning without control is meaningless and control without planning is blind. Planning is an empty exercise without controlling. A good plan will not bring any concrete result if the management is lacking in controlling. Planning identifies the goals and determines the ways of achieving them. It is control which ensures attainment of goals by evaluating performance and taking corrective action. Control presupposes the existence of standards with which the actual performance is to be compared. If the standards of performance are not set in advance, the manager will have no idea of what is control. Thus, planning must be done before the actual operation and control should follow plans during and after the actual operation. The experience gained in controlling will help improve the process of planning. Relation between Control and Coordination Control and coordination are the twins of management. Control is an important element in the process of management, whereas coordination is the essence of management itself. Control is a function of management like planning, organizing, staffing and directing. But coordination is an all inclusive function. Each of the managerial functions including control is an exercise in coordination. Thus, control is a facilitative function that promotes coordination in the organization. If control does not aim at achieving coordination, it will not be performed effectively and the basic purpose of control will be lost. Control and coordination are closely related in many ways. Firstly, authority is the basis of both the processes. Secondly, the managers at all levels perform both. Thirdly, both are aimed at achieving organizational goals. Fourthly, both are necessary for achieving stability, continuity and growth of the organization and consistency, precision and discipline in the organization. Lastly, both control and coordination are rational concepts in the sense that they seek to relate organizational means with organizational ends or goals. They strive to maintain organizations as rational systems, relatively free from conflict, confusion and chaos.
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5.1.1 Significance of Controlling Controlling is an important function of management. Without control, a manager cannot complete his job. All other managerial functions are only preparatory steps for getting the work done, and controlling is concerned with making sure that there is proper execution of these functions. Control is necessary whenever a manager assigns duties and delegates authority to his subordinates. He must exercise control over the actions of his subordinates so that the delegated authority is used properly. The road signals at a road crossing appropriately illustrate the significance of control. Just as road signals are essential to ensure accident free and smooth traffic, management controls are necessary in any organization for its smooth functioning. By controlling, the manager ensures that resources are obtained and used economically and efficiently for the achievement of organizational objectives. A good control system provides timely information to the manager, which is very much useful for taking various decisions. Control simplifies supervision by pointing out the significant deviations from the standards of performance. It keeps the subordinates under check and brings discipline among them. An effective system of control will help in achieving the following benefits: 1. Coordination. The size of modem business organizations is quite large. A large amount of capital and large number of people are employed in them. This complicates the problem of control as there are many units producing and distributing different products. In order to coordinate their activities, an efficient system of control is necessary. 2. Corrective Action. An efficient system of control provides the basis for future action. Taking corrective action may lead to modification of planning, organizing and directing. Control will also check the mistakes being repeated in future. 3. Decision making. Control is basic to decision making. The process of control is complete when corrective actions are taken. This involves making a right decision as to what type of follow up action is to be taken. This will lead to accomplishment of organization objectives. According to W.T. lerome, Control is needed both to simplify the making of subsequent decisions and to ensure the
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realization of the objectives implicit in the original long range policy decisions. 4. Better Planning. Control is the only means to ensure that the plans are being implemented in real sense. It points out the shortcomings of planning by comparing the actual performance with the planned standard and suggests steps to improve planning. 5. Decentralization of Authority. The modern trend of business enterprises towards decentralization calls for a systematic attempt for controlling. Under decentralization, the authority of decision making is dispersed throughout the organization. Management must keep control in its hands to know whether the authority is being used properly. Without adequate controls, decentralization cannot succeed. 6. Effective Supervision. Control facilitates effective supervision by pointing out significant deviations. It keeps the subordinates under check. While control cannot cure habitual dishonesty in all cases, management is irresponsible if it does not make a reasonable effort to provide order and discipline among its employees through effective control processes. A good system of control detects the weak points very quickly. This enables the expansion of span of control at all levels in the organization. Limitations of Control A control system may be faced with the following limitations: 1. An enterprise cannot control the external factors such as government policies, technological changes, fashion changes, social changes, etc. 2. Control is an expensive process because the management to observe the performance of the subordinates. This requires expenditure of a lot of time and effort. 3. Control system loses its effectiveness when standards of performance cannot be defined in quantitative terms. For instance, it is very difficult to measure human behavior and employee morale. 4. The effectiveness of controls mainly depends on their acceptance by the subordinates. They may resist controls if they feel that these will reduce or curtail their freedom. Control also loses its significance when it is not possible to fix the accountability of the subordinates.
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In order to achieve effective controlling in an enterprise, the following steps may be taken: 1. Every manager should be conscious of the need of control while performing any managerial task. 2. Standards of performance must be laid down for their use in appraising the results of various operations. 3. Standards of performance should be laid down in consultation with the subordinates. They must be put in writing wherever possible. It should also be ensured that the concerned persons in the organization properly understand them. 4. Standards of performance should not be too high. They must be capable of being achieved by the average workers. Elements of Control The essential elements of any control system are: (1) Establishment of standards (2) Measurement of performance (3) Comparing performance with the standards and (4) Taking corrective action These steps are discussed below: 1. Establishment of Standards The first step in control process is the setting up of standards of measurement. Standards represent criteria for performance. A standard acts as a reference, line or a basis of appraisal of actual performance. Standards should be set precisely and preferably in quantitative terms. It should be noted that setting standard is also closely linked with and is an integral part of the planning process. Standards are used as the criteria or benchmarks by which performance is measured in the control process. Different standards of performance are set up for various operations at the planning stage. As a matter of fact, planning is the basis of control. Establishment of standards in terms of quantity, quality and time is necessary for effective control because it is essential to determine how the performance is going to be appraised. The second step in the control process i.e., measurement of performance, has no sense unless it can be
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compared with some predetermined standards. Standards should be accurate, precise, acceptable and workable. Standards should be flexible, i.e., capable of being changed when the circumstances require so. Standard is bound to fail if it is based on records of past performance, which show either too high or too low achievement. 2. Measurement of Performance After establishing the standards, the second step is to measure actual performance of various individuals, groups or units. Management should not depend upon the guess that standards are being met. It should measure the performance and compare it with the standards. The quantitative measurement should be done in cases where standards have been set in numerical terms. This will make evaluation easy and simple. In all other cases, the performance should be measured in terms of qualitative factors as in case of performance of industrial relations manager. His performance can be measured in terms of attitude of workers, frequency of strikes and morale of workers. Again, attitude and morale of workers are not capable of being measured quantitatively. They have to be measured qualitatively. 3. Comparing Performance with Standards Appraisal of performance or comparing of actual performance with predetermined standards is an important step in control process. Comparison is easy where standards have been set quantitatively as in production and marketing. In other cases, where results are intangible and cannot be measured quantitatively, direct personal observation, inspection and reports are a few methods, which can be used for evaluation. The evaluation will reveal some deviations from the set standards. The evaluator should point out the defects or deficiencies in performance and investigate the causes responsible for these. All deviations need not be brought to the notice of top management. Deviations should be brought to the notice of top management when they are too high. A range of deviations should be established beyond which the attention of top management is warranted. Only such cases should be reported up which pinpoint exceptional situations. This is what is known as management by exception. According to Dale, the control reports should meet three criteria. Firstly, control reports must produce
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figures that are truly comparable from one period to another and from one section of the business to another. Secondly, they must be coordinated so that they not only portray the results in different sections of the business, but also make plain the reasons why the business is or is not doing so well as could be expected. Finally, they must be presented in such form that the manager can get the birds eye-view. 4. Taking Corrective Action The final step in the control process is taking corrective action so that deviations may not occur again and the objectives of the organization are achieved. This will involve taking certain decisions by the management like replanning or redrawing of goals or standards, reassignment or clarification of duties. It may also necessitate reforming the process of selection and training of workers. Thus, control function may require change in all other managerial functions. If the standards are found to be defective, they will be set up again in the light of observations. Joseph Massie has pointed out that a manager may commit two types of mistakes at this stage: (1) taking action when no action is needed, and (2) failing to take action when some corrective action is needed. A good control system should provide some basis for helping the manager estimate the risks of making either of these types of errors. Of course, the final test of a control system is whether correct action is taken at the correct time. Principles or Requirements of a Good Control System For having an effective control system, certain prerequisites are enumerated below: 1. Emphasis on Objectives. Before planning a control system, it is essential to know the objectives of the organization clearly. The control system must be directed towards the potential or actual deviations from plans early enough to permit effective corrective action. 2. Efficiency of Control Techniques. Control techniques and approaches are efficient when they detect deviations from plans and make possible corrective action with the minimum of unsought consequences. 3. Responsibility for Control. The main responsibility for the exercise of control should rest in the manager charged with the implementation of plans.
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4. Direct Control. Any control system should be designed to maintain direct contact between the controllers and controlled. Even when there are a number of control systems provided by staff specialists, the foreman at the first level is still important because he has direct knowledge of performance. 5. Suitability. Controls should be tailored to fit the needs of the organization. The flow of information concerning current performance should correspond with the organizational structure employed. If a superior is to be able to control overall operations, he must find a pattern that will provide control for individual parts. Budgets, quotas and other techniques may be useful in controlling separate departments. 6. Flexibility. A good control system must keep pace with the continuously changing pattern of a dynamic business world. It must be responsive to changing conditions. It should be adaptable to new developments including the failure of the control system itself. Plans may call for an automatic system to be backed up by a human system that would operate in an emergency likewise an automatic system may back up a human system. 7. Self Control. Units may be planned to control themselves. If a department can have its own goals and control system, much of the detailed controls can be handled within the department. These subsystems of self-control can then be tied together by the overall control system. 8. Controls by Exception. This is known as management exception. According to this principle, only significant deviations from standards, whether positive or negative, require managements attention, as they constitute exceptions. An attempt to go through all deviations tends to increase unnecessary work and decrease attention on important problems. In practice, it is not possible for a manager to check each and every item being produced because of limited time available with him. An attempt to control everything may prove to be a futile exercise. Therefore, the control system should be designed in such a manner that only significant deviations from the standard performance are reported to the higher level managers. This will ensure effective action by the manager.
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9. Strategic Point Control. It is not sufficient merely to look at exceptions. Some deviations from standards have rather little impact and others have a great deal. Small deviations in certain areas may have greater significance than larger in other areas. For example, deviation of 5 per cent in budgeted labor cost may be more troublesome to a manager than a deviation of 20 per cent in budgeted postal charges. Therefore, the principle of exception must be accompanied by the principle of strategic point control, which states that effective control can be achieved if critical, key or strategic points can be identified, and close attention directed to adjustment at those points. It is not enough just to look for exceptions; a manager must look for exceptions at critical points. 10. Corrective Action. Merely pointing of deviations is not sufficient in a good control system. It must lead to corrective action to be taken to check deviations from standards through appropriate planning, organizing and directing. 11. Forward looking Control. The control system should be directed towards future. It should report all the deviations from the standards quickly in order to safeguard the future. If the control reports are not directed at the future, they are of no use as they will not be able to suggest the types of measures to be taken to rectify the past deviations. 12. Human Factor. A good system of control should find the persons accountable for results, whenever large deviations take place. They must be guided and directed, if necessary. Thus, human factor must be given proper attention while controlling. The use of controls should not be resisted by the employees. A technically well designed control system may fail because human beings may react unfavorably to the system. 13. Economical. The systems of control must be worth their costs. They must justify the expenses involved. A control system is justifiable if the savings anticipated from it exceed the expected costs in its working. Small-scale production units cannot afford elaborate and expensive control systems. 14. Objective Standards. As far as possible, standards should be objective. If they are subjective, a managers or a subordinates
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personality may influence judgments of performance. Effective control requires objective, accurate and suitable standards. Objective standards may be quantitative or qualitative. However, in either case, the standard should be determinable and verifiable. From the analysis of the requirements of a good control system, it is quite obvious that planning is the basis of control, action its essence, delegation its key, and information its guide. As far as planning is concerned, control has an important relation with planning. Planning refers to visualization of the firms future position over a specified period of time and the determination of the required course of action to enable the firm to reach that position. Often, it is regarded the first stage of the management process over which the subsequent stages are developed. Planning lays down the objectives of various activities and determines the standards of performance to evaluate the performance of various individuals and departments. This serves as the basis of the control process, which is concerned with ensuring that events conform to the standards laid down in advance. Without planning, there is nothing to control. Basic plans, derivative sub plans and standards provide the benchmarks to monitor, measure, evaluate and regulate actual performance as it takes place. To quote Robert Anthony, Management control is a process carried on within the guidelines established by planning. The process is intended to make possible the achievement of planned objectives effectively and efficiently. Action is the essence of control. There is no use of developing control on mechanisms, if no action is to be taken afterwards. The comparison of actual performance against the standards reveals the deviations, which serve as a guide for future action. This may lead to improvement of planning, organizing, staffing and directing. It may be pointed out that top managers cannot perform the control function minutely themselves. They have to delegate a portion of their authority of controlling. The task of regulation of operational action plans can be delegated to the middle level managers and first line managers. They may be asked to report only exceptional matters to the top management. Thus, delegation is a key to effective controlling. The effectiveness of planning and controlling is influenced to a great extent by the accuracy of the information on which these are based. Information
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is a guide to controlling, Therefore, it is necessary that sufficient information of the right type is available to the management for taking corrective steps time. The control mechanism should provide for timely information to the management. If a control mechanism does not transmit the important information to the management, it is not going to last long. Therefore, there must a provision for feedback in any good system of controlling. Control By Exception Management by exception is an important principle of organization. This principle holds that only significant deviations (exceptions) from standards of performance should be brought to the managements attention. If actual performance is according to the planned performance (i.e., standards already laid down), it need not be brought to the attention of the concerned managers as no follow-up action is necessary. But if there is a major deviation from the standard, it should be reported to the manager. For example, a manager establishes a quality control standard, which says five defects per 100 units produced are permissible. Under the management by exception principle, only significant deviations from this standard : six of more defects per 100 units (in this case) should be brought to the notice of the manager. The exception principle has been devised to conserve managerial time, effort and talent and apply these in more important areas. It is a technique of separating important information from the unimportant information. Only such information, which is critical for management control, is sent to the management. This facilitates the installing of an effective control system. Management by exception recognizes an old saying that an attempt to control everything may end up in controlling nothing. An executive who wants to have an eye on each and every minor problem will prove to be ineffective. He will not be able to devote much time to the critical problems. The principle of control by exception suggests that managers attention should be drawn, only when there are significant deviations in performance in the critical areas of business. It will ensure better control in the organization. It will also facilitate delegation of authority. 5.2 Control Process The control process is a continuous flow between measuring, comparing
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and action. There are four steps in the control process: establishing performance standards, measuring actual performance, comparing measured performance against established standards, and taking corrective action. An example of the control process is a thermostat. Standard: The room thermostat is set at 68 degrees. Measurement: The temperature is measured. Corrective Action: If the room is too cold, the heat comes on. If the room is too hot, the heat goes off. Step 1. Establish Performance Standards. Standards are created when objectives are set during the planning process. A standard is any guideline established as the basis for measurement. It is a precise, explicit statement of expected results from a product, service, machine, individual, or organizational unit. It is usually expressed numerically and is set for quality, quantity, and time. Tolerance is the permissible deviation from the standard. What is expected? How much deviation can be tolerated? Step 2. Measure Actual Performance. Supervisors collect data to measure actual performance to determine variation from standard. Written data might include time cards, production tallies, inspection reports, and sales tickets. Personal observation, statistical reports, oral reports and written reports can be used to measure performance. Management by walking around , or observation of employees working, provides unfiltered information, extensive coverage, and the ability to read between the lines. While providing insight, this method might be misinterpreted by employees as mistrust. Oral reports allow for fast and extensive feedback. Computers give supervisors direct access to real time, unaltered data, and information. Online systems enable supervisors to identify problems as they occur. Database programs allow supervisors to query, spend less time gathering facts, and be less dependent on other people. Supervisors have access to information at their fingertips. Employees can supply progress reports through the use of networks and electronic mail. Statistical reports are easy to visualize and effective at demonstrating relationships. Written reports provide comprehensive feedback that can
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be easily filed and referenced. Computers are important tools for measuring performance. In fact, many operating processes depend on automatic or computer-driven control systems. Impersonal measurements can count, time, and record employee performance. Step 3. Compare Measured Performance Against Established Standards. Comparing results with standards determines variation. Some variation can be expected in all activities and the range of variation - the acceptable variance - has to be established. Management by exception lets operations continue as long as they fall within the prescribed control limits. Deviations or differences that exceed this range would alert the supervisor to a problem. Step 4. Take Corrective Action. The supervisor must find the cause of deviation from standard. Then, he or she takes action to remove or minimize the cause. If the source of variation in work performance is from a deficit in activity, then a supervisor can take immediate corrective action and get performance back on track. Also, the supervisors can opt to take basic corrective action, which would determine how and why performance has deviated and correct the source of the deviation. Immediate corrective action is more efficient; however basic corrective action is more effective. Kinds of Controls Three kinds of control systems are used by the modern organizations, namely, (i) historical or feedback control, (ii) concurrent control, and (iii) predictive or feed forward control. The details of these controls are discussed below. Feedback Control Feedback or Post action control measures results from a completed action. The causes of deviations from the standards are determined and corrective steps are taken so that such deviations do not occur again. In all physical and biological systems, some message is transmitted in the form of mechanical transfer of energy, a chemical reaction, or any other means, which is known as cybernetics. In social systems also, some information is sent back to exercise control. Any good managerial system controls itself by information feedback, which discloses errors in accomplishing goals and initiates corrective action. Feedback is the
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process of adjusting future action based upon information about past performance. Though feedback is after the fact, it is still vital to the control process. Sometimes, input variables are immeasurable (e.g. the values an employee brings to the job) or are not detected at the feed forward control point. Feedback is necessary in any continuous activity as it enables to take corrective action, which is essential for the accomplishment of goals of the system; a simple feedback system is shown in Figure. The concept of feedback is important to the development of an effective control system in any organization. Managerial control is somewhat akin to the thermostat system of a refrigerator. Thermostat is a control device of closed loop type that makes control instantaneous. In a refrigerator, the thermostat records the actual temperature inside the refrigerator, compares it with the required temperature and instantaneously initiates corrective action to bring the actual temperature to what is required. Similarly in an organization, management needs continuous flow of information about actual performance so that deviations are promptly corrected. Information, which the management receives, is nothing but feedback. Feedback information may be received formally or informally. Formal feedback involves all written information about actual performance, reports, financial statements, etc. But informal feedback, on the other hand, is through personal observations, personal contacts and informal discussions.
Feed Forward Controls Concurrent Controls
Flow of Information Coercive Action

Inputs

Processing

Output

Feed Back Controls


Fig. Types of Conrols

Managerial control cannot be so instantaneous or self-correcting as thermostat system or way other mechanical or electronic system. There always exists a time lag between recording deviations and taking corrective actions even when sophisticated system of information collection is used. The collected information needs to be analyzed properly before suggesting any corrective action.
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Concurrent controls It is also known as real time or steering control. It provides for taking corrective action or making adjustments while programme is still in operation and before any major damage is done. For instance, the navigator of a ship adjusts its movements continuously or the driver of a car adjusts its steering continuously depending upon the direction of destination, obstacles and other factors. In a factory, control chart is an example of concurrent control. Safety check is another illustration in this regard. Concurrent control occurs while an activity is still taking place. Feed forward Control Feed forward control involves evaluation of inputs and taking corrective measures before a particular sequence of operations is completed. It is based on the timely and accurate information about changes in the environment. If right information is not available in time, feed forward control is likely to be imperfect. Feed forward follows the simple principle that an organization is stronger than its weakest link. For instance, if a machine is not functioning properly, the operator will look for certain critical components to see whether they are working well or not. The same logic applies to feed forward control; it is essential to determine and monitor the critical inputs into any operating system. Preventive maintenance programme is an important example of feed forward control. It is employed to prevent a breakdown in machinery. Another example of feed forward control is formulation of policies to prevent critical problems from occurring. For instance, a policy on absenteeism may be communicated to new employees to help prevent potential problems created by absenteeism. Feed forward control may be used with great advantages if the following guidelines are followed: 1. Thorough planning and analysis must be done. 2. Careful discrimination must be applied in selecting input variables. 3. Data on input variables must be regularly collected and assessed. 4. The feed forward control system must be kept dynamic. 5. Corrective action must be taken as suggested by feed forward control.
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Areas of Control It is very difficult to prescribe a precise list of areas where control should be exercised. However, it may be safely suggested that any activity that affects the survival and growth of the organization should be taken as the critical area of control and dealt with effectively. According to Peter F. Drucker, there are key result areas where objectives should be set and controls should be exercised. These are: (i) marketing; (ii) innovation, (iii) productivity, (iv) human organization, (v) financial resources, (vi) physical resources, (vii) profitability, and (viii) social responsibilities. Holden and others have identified the following thirteen areas where control should be exercised: (i) policies, (ii) organization, (iii) personnel, (iv) wages and salaries, (v) costs, (vi) methods and manpower, (vii) capital expenditure, (viii) service department efforts, (ix) line of products, (x) research and development, (xi) foreign operations, (xii) external relations, and (xiii) overall control. Effective control requires that areas of control must be clearly identified first of all. Every organization should list the key areas on which its survival and growth depend and devise suitable techniques of control in each area. This will help in effective delegation of authority and fixing up of responsibility. Time controls relate to deadlines and time constraints. Material controls relate to inventory and material yield controls. Equipment controls are built into the machinery, imposed on the operator to protect the equipment or the process. Cost controls help ensure cost standards are met. Employee performance controls focus on actions and behaviors of individuals and groups of employees. Examples include absences, tardiness, accidents, quality and quantity of work. Budgets control cost or expense related standards. They identify quantity of materials used and units to be produced. Financial controls facilitate achieving the organizations profit motive. One method of financial controls is budgets. Budgets allocate resources to important activities and provide supervisors with quantitative standards against which to compare resource consumption. They become control tools by pointing out deviations between the standard and actual consumption.
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Operations control methods assess how efficiently and effectively an organizations transformation processes create goods and services. Methods of transformation controls include Total Quality Management (TQM), statistical process control and the inventory management control. Statistical process control is the use of statistical methods and procedures to determine whether production operations are being performed correctly, to detect any deviations, and to find and eliminate their causes. A control chart displays the results of measurements over time and provides a visual means of determining whether a specific process is staying within predefined limits. As long as the process variables fall within the acceptable range, the system is in control. Measurements outside the limits are unacceptable or out of control. Improvements in quality eliminate common causes of variation by adjusting the system or redesigning the system. Inventory is a large cost for many organizations. The appropriate amount to order and how often to order impact the firms bottom line. The economic order quantity model (EOQ) is a mathematical model for deriving the optimal purchase quantity. The EOQ model seeks to minimize total carrying and ordering costs by balancing purchase costs, ordering costs, carrying costs and stock out costs. In order to compute the economic order quantity, the supervisor needs the following information: forecasted demand during a period, cost of placing the order, value of the purchase price, and the carrying cost for maintaining the total inventory. The just-in-time (JIT) system is the delivery of finished goods just in time to be sold, subassemblies just in time to be assembled into finished goods, parts just in time to go into subassemblies, and purchased materials just in time to be transformed into parts. Communication, coordination, and cooperation are required from supervisors and employees to deliver the smallest possible quantities at the latest possible date at all stages of the transformation process in order to minimize inventory costs. Control of Human Element Recognition of human element is a significant factor while designing any control system. The management must try to know the reactions of subordinates for various types of controls imposed on them. Subordinates often resist controls, which are likely to restrict their freedom and obstruct the achievement of their personal goals.
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The control of human behavior has always been unpopular. Any undisguised effort to control usually arouses emotional reactions. We hesitate to admit, even to ourselves, that we are engaged in control, and we may refuse a control, even when this would be helpful, for fear of criticism. Control creates problems not only for the subordinates but for the superiors also. Subordinates resist controls because they restrict their freedom and some managers may not like to impose controls on their subordinates due to fear of criticism. It is also important to note that many people frequently try to reap the rewards of good performance and tactfully shift the blame for poor results to others. Whatever may be the behavioral implications of controls, controls are very important as they create predictability in the behavior of employees. From the organizations point of view, controls are almost indispensable to ensure that the employees work as per rules, procedures, standards and norms of the organization. Thus, controls are necessary to regulate the behavior of organizational members and to increase organizational effectiveness. Exercise of control may have some serious behavioral implications for the management. Generally, management uses both planned and unplanned controls to regulate the behavior of employees. The employees against both types of controls generally offer some sort of resistance. But there might be serious repercussions of unplanned controls because they are unplanned and the subordinates are not mentally prepared to accept them. Behaviorists consider this as an evidence of ineffective management. But it is difficult to rule out the use of unplanned controls in modern organizations for meeting competition, reducing costs, or increasing productivity. Whatever may be the situation, management should try to foresee the behavioral implications of control beforehand if it is to exercise control effectively. But it is not always possible to recognize behavioral dysfunctions of controls because of the following reasons: (i) Sometimes, human behavior is unpredictable. It is difficult to analyze unexpected and unconventional responses from the employees. (ii) Many a time, there is a time lag between exercise of control and surfacing of negative reactions of the people. Relating of slow reactions with a particular type of managerial behavior may be a difficult task.
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(iii) Information system in an organization might not be able to sense or isolate factors, which cause resistance to controls on the part of the workers. (iv) Controls may slowly lead to deterioration of organizational relationships and performance, and these occurrences may not come to the knowledge of the management. Impact of Controls Behavioral opposition to control may be caused by disagreement with standards, reporting procedures, cost allocation and pertaining to the control, systems and in some cases the need for control, The reaction of different employees to standards, performance appraisal and corrective actions will, differ depending upon the situation and the organizational position of the members. The findings of Tannenbaum concerning the impact of controls upon individuals are as follows: Control has both rational and symbolic implications. It tells what an individual must or must not do. It also implies something about the persons importance and freedom in the organization. (i) Most persons prefer to exercise control over themselves and their surroundings. They usually experience greater satisfaction when they are able to exercise self control. (ii) When one can exercise some control, one is more likely to identify with and support the organizations objectives. (iii) Persons who are unable to exercise control tend to be less satisfied with their work and to be apathetic and alienated. Such persons lack the personal involvement of those who exercise control. (iv) Those who exercise control may more willingly accept controls upon themselves. Due to greater involvement and loyalty, such persons might submit to control more readily. Reasons for Human Resistance to Controls The above discussion reveals that controls imply and involve a continuous check on the performance and behavior of individuals. Some individuals adjust with controls, whereas others resist controls in one-way or the other. People dislike and resist controls because of the following reasons:
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(i) The controls may be perceived as curbs to freedom of individuals and as instruments of oppression. (ii) The controls may suppress the creative and innovative urges and abilities of the people. (iii) The standards of performance may be imposed from the top and the subordinates may have no say in their determination. The standards of performance may be rigid and unrealistic. The performance appraised may concentrate on witch hunting and fault finding rather than guiding the people for better action. (v) There may be no place for self control even for intelligent and responsible people. Controls may be based on the assumption that people are basically lazy, they shirk work and they need to be supervised closely and strictly. (vi) The controls may be administered in a discriminatory, arbitrary and whimsical manner. Measures to overcome Resistance to Controls The organizations should take up the following measures to overcome resistance to controls: The controls should be realistic and flexible. They should make allowance for general human behavior. The controls should give adequate emphasis to self direction and self control of people. They should allow the people to make use of their creativity. They should not operate to suppress the genuine aspirations of people for self expression and for development. The people whose behavior and performance are to be controlled must have a say in the determination of standards and administration of controls. The management should have faith in the ability and capacity of the subordinates and should follow selective control only. Control by exception should be the rule where subordinates are responsible and can be depended upon.
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The reward system in the organization should be integrated with the various kinds of controls. The subordinates should be offered rewards for acceptable performance and behavior so that they may get positive reinforcement. There should be consistent operation of various kinds of controls. They should not give undue power to the superiors to discriminate between individuals. There should be two - way communication in the organization. The employees should be free to send their reactions and suggestions to the top management. The managers at various levels should be persuasive; they should tell their subordinates that controls are directed to achieve the goals of the organization and not to curb the freedom of individuals.

Process and Techniques of Control Modern business enterprises use a large number of techniques of managerial control. These may be grouped into two categories as follows: 1. Traditional or conventional techniques such as budgetary control, statistical data and reports, marginal costing, break even analysis, standard costing, etc. 2. Modern or contemporary techniques such as Management Audit, PERT, CPM and Management Information System. It may be noted that some of the control techniques are partial in nature in the sense that the standards on which they are based relate to the specific areas. For instance, BEP, PERT and CPM are the techniques of production control. On the other hand, there are techniques such as Budget Summaries, Profit and Loss Statements, Ratio Analysis, Management Audit, etc. which are used for the control of overall performance of the organization. The rationale of measurement of overall performance is explained below: (i) Every enterprise has its overall objectives, which stand above the sectional objectives. (ii) Overall control of activities signifies the need for coordination between different divisions of the enterprise. (iii) Competence of top management can be measured by the techniques of overall control.
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A brief description of the commonly used management control devices is given below : 1. Written Reports. Each manager prepares reports on the performance of his subordinates and submits them to his higher authority. In this way, departmental managers submit reports to the general manager. Ultimately, the Board of Directors has to submit an Annual Report to the members of the company, the virtual owners and the highest authority. 2. Budgets. The budget, which is a component of planning, is also used as a tool of control. The budget predetermines the extent of expenditure, which cannot be normally exceeded. A budget means projected results, which are expected to be achieved. Budgetary control is accepted to be one of the most common tools of control. Several kinds of budgets are used for controlling expenditure, which have been discussed later in the chapter. 3. Key Ratios. Control of overall performance can be exercised through some key ratios of which Return on Investment (ROI) is very common. There are some expected returns on certain categories of investments. Those percentages must be achieved. Ratios between current assets and current liabilities, between, turnover and investment etc. are the other kinds of key ratios. 4. Accounting Techniques. Various kinds of audit like cost audit, management audit are nowadays being used for better control. Management accounting, which is not merely based on double entry book keeping but also concerned with resource utilization as a whole, is a powerful tool of control. 5. Internal Audit . Internal audit, also called the operation audit, has become one of the important tools of management control. Internal auditing evolved as a branch of accounting and its scope was limited to the verification of accounting transaction. But now the scope of internal auditing has been enlarged and is considered to be associated closely but objectively with every activity of the enterprise, which contributes to its profitability. According to Koontz and ODonnell, Operation auditing in its broadest sense is the regular and independent appraisal, by a staff of internal auditors of the accounting, financial, and other operations of the business.
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Although limited to the auditing of accounts, in its most useful, aspect, operational auditing involves appraisal of operations generally, weighing actual results in the light of planned results. Thus, internal auditing control is not only concerned with the effectiveness of the accounts department, but it also concerns itself with all the departments such as purchasing, marketing, production and personnel. The functions of internal auditing control vary considerably from organization to organization depending upon its size and nature. However, the internal auditor must be independent of all those departments, which come under his purview. 5.3. Budgetary Control Budgetary control is the oldest technique of control, which is still being used by business enterprises. According to Walter W. Bigg, The term budgetary control is applied to a system of management and accounting control by which all operations and output are forecast as far ahead as possible and the actual results, when known, are compared with the budget estimates. Budgetary control involves the use of budgets to plan, coordinate and control day to day operations of business in accordance with the overall objectives of business. Before we discuss the nature, objectives, merits and limitations of budgetary control, it is appropriate to discuss the nature, purposes, significance and types of budgets are not only tools of control, but also of planning. This has been made quite clear in the chapter on planning. Definition of Budget A budget is an estimate of future needs, arranged according to an orderly basis covering some or all the activities of an enterprise for a definite period of time. The Institute of Cost and Management Accountants of England has defined budget as financial and/or a quantitative statement prepared prior to a definite period of time of the policy to be pursued during that period for the purpose of obtaining a given objective. A budget is an important device managerial control. It provides a standard by which actual operations can be evaluated to know variations from the planned expenditures. A budget has the following characteristics : (a) It is prepared in advance and is based on a future plan of actions.
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(b) It relates to a future period and is based on objectives to be attained. (c) It is a statement expressed in monetary and/or physical units prepared for the implementation of policy framed by the top management. Definition of Budgetary Control Budgetary control may be defined as the establishment of budgets relating to the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy or to provide a basis for its revision. Thus, budgetary control involves the following three steps : (i) Preparation of budgets (ii) Continuous comparison of actual results with the planned ones and (iii) Revision of plans or budgets, in the light of changed circumstances. Budgetary control is a useful technique of management control, which brings efficiency and economy in the working of a business enterprise. It facilitates control by establishing budgets in respect of each function and assigning responsibilities for achieving budgetary objectives. It imposes control by assigning responsibilities for control of actual performance and, thus, prevents backpassing when the budget figures are not met. It coordinates the working of various divisions of a business and makes delegation and decentralization of authority possible. Objectives or Budgetary Control The objectives of budgetary control are described as under: (i) Determination of Goals. Budgets are sub-plans for a specific period. They serve as goals for certain individuals. They are specific action programmes, which are amenable to implementation through the various activity centers of the enterprise. (ii) Rationalization of Activities. Budgetary control is intended to impart precision, discipline, direction and predictability to the day to day activities of the enterprises. (iii) Coordination. Budgets aim at coordination and integration of enterprise functions and operations performed by various departments. They highlight the interdependent nature of enterprise
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functions and operations as also the need for consistency in operations. Budgetary control involves the preparation of a master budget, which helps in bringing effective coordination of different departments of the business. (iv) Participation. Budgetary control provides participation to the subordinates. The subordinates can make their suggestions and comments on the budgets estimates. Thus, budget making provides an opportunity for cooperation and commitment of common goals. (v) Efficiency in Operations. A budget lays down sufficient and satisfactory norms of performance over various activities. It ensures efficient utilization of various resources of the enterprise. The activity units are also anxious to keep the overhead budgets. (vi) Control of Activities. Budgetary control is an important instrument of managerial control in any enterprise. It helps in comparing the performance of various individuals and departments with the predetermined standards laid down in various budgets. It reports the significant variations from the budgets to the top management. Since separate budgets are prepared for each department, this helps in keeping down the cost of operations of different departments. It becomes easier to determine the weak points and the sources of waste of time, money and resources. Budget : A Tool of Planning or Control? Some people doubt whether budgets are a means of control. This is because budgets perform more than one function. First, they represent the objectives, plans and programmes of the enterprise and express them in financial and/or quantitative terms. Second, they help in reporting the progress of actual performance against the predetermined objectives, plans and programmes, and finally, like job descriptions, they define the assignments, which have flowed down from the chief executive. A budget is a kind of business plan for a particular period of time. Formulation of budget forces an enterprise to make in advance a numerical calculation of cash flow, expenses and revenues, capital outlays and machine hour utilization. It represents the planned expenditure on certain items and expected revenues from various sources. Preparation of budget requires the same process as is required to make any other type of plan.
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It is made well in advance and is based on scientific forecasts. Without sufficient budgeting, it may not be possible to control the expenditures. As a plan, it shows clearly the targets to be achieved in financial and /or physical terms. A budget is a tool of control. Since it is a statement of expected result, it also serves as an effective instrument of control. It provides the standards against which the performance of different departments will be judged. Comparison of actual results with the budgeted figures will help in detecting sources of deviations and taking corrective steps, which is the essence of control process. This will bring efficiency in the organization. Economy will be achieved because of minimizing wastages of various kinds. Budget also helps in fixing the responsibility of persons for unauthorized and uncalled for expenditures. Budgeting is also a tool of coordination. In preparation of various budgets, knowledge, skills and experience of many executives are combined and business plans are reduced to proper co-ordination of the efforts of various departments of the enterprise. Benefits of Budgeting The following benefits may be achieved from an effective system of budgetary control : (i) Budgets provide management an overall view of the activities of enterprise. They serve as a valuable aid to management through planning coordination and control. They provide standards against which actual performance is measured. This helps in taking corrective actions in time. (ii) Budgets are based on well defined plans. In preparation of various budgets, knowledge, skills and experience of many managers are combined and the plans of the enterprise are reduced into concrete numerical term and budgets enable the various departmental heads to know what is expected of them. They know the amount that they are entitled to spend and the income they are expected to earn. Thus, budgeting introduces an element of definiteness in planning. (iii) Budgeting helps in eliminating unproductive activities and minimizing waste, because preparation of budgets involves a very careful analysis of various phases of business. All those who have to bear the
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responsibility of executing the plans participate in the formulation of plans. They are fully aware of the aims and objectives to be followed. Differences of opinion can be more easily reconciled through budgeting. (iv) Budgeting coordinates effectively the activities of different departments and develops a sound communication system through meetings and discussions on budgeting and efficient system of reporting. (v) Budgetary control assists the top management in measuring the efficiency of departments and individuals and taking corrective actions. Thus budgeting is an important technique of control. (vi) Budgetary control facilitates control by exception; it helps in focusing the time and effort of the managers upon areas which are most important for the survival of the organization. Dangers in Budgeting or Limitations of Budgetary Control Budgets are widely used as a tool of planning and control. There are certain dangers of budgeting, which are as follows: (i) In some companies, budgetary control programmes are so detailed that they become cumbersome, meaningless and unduly expensive. There is a danger in over - budgeting as it may bring rigidity in the enterprise, which may deprive the managers of the needed freedom in managing their departments. For instance, if the sales budget lays down the expenditure on office stationery and supplies, the sales manager may not be able to carry out his sales promotion programme fully because he will be held responsible for overspending on office supplies. (ii) Budgets are usually based on historical trends, which may not repeat. They may also be influenced by what top management would like to happen. Naturally, top management is interested in larger profits, lower costs and greater market share and may make budgets to achieve these aims, which may not be possible in actual practice. (iii) Another danger lies in allowing budgetary goals to supersede enterprise goals. In their effort to keep within budget limits, the managers may forget that budgets are only means to enterprise goals. Top management may also be reluctant to excuse deviations from
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the budget estimates even though the causes of deviations may be justified. This sort of over control will obstruct the achievement of enterprise goals. (iv) Sometimes, budgets may be used to hide inefficiencies. A department may be inefficient even though its expenses are within the budget limits. Moreover, budgets are based on the past years figures and a certain expenditure incurred in the past may become an evidence to cut down the budget proposals sent by various departments. This naturally leads to inflation of figures by various departments. Unless budget making is secured by constant evaluation of standards and conversion factors by which planning is translated into numerical terms, budgeting may become an umbrella for hiding inefficiencies of management. (v) There may be psychological problems with the people supposed to work within the budget framework. While, on the one hand, people, like to know what they are working for and how they will be judged, on the other, many of them are resentful of budget restrictions. The resentment is caused by the fear of inflexibility, which may be brought about by the budgets. When a budget is made in great detail, it will restrict the freedom of the persons concerned to spend money. They may be more worried for being within budget limits rather than achieving organizational objectives. Precautions in the Use of Budgets The following precautions should be taken while preparing and using budgets for the purpose of managerial planning and control : 1. Estimates are not too high to be attained. 2. Budgets are not prepared and installed hurriedly. 3. Administration and supervision of the operations are not ineffective 4. Organizational structure is not defective. 5. Accounting and cost systems are not inadequate. 6. Statistics of past operations are not inadequate and unreliable. 7. Results are not expected in too short a period.
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Requirements of Effective Budgetary Control The requirements of a good system of budgetary control are discussed below: (i) Quick Reporting. A good system of budgetary control requires the establishment of such procedures, which will provide reports on the performance of various operations. The reports should reach the persons concerned with the implementation of budgets without any delay so that quick actions may be taken whenever necessary. (ii) Sound Organization Structure. There should be a sound organization structure with precisely defined authorities, responsibilities and lines of communication so that everybody in the organization understands his role in the process of budgetary control. (iii) Frequent Comparison. There should be frequent comparison between budget estimates and operating results. Alford and Beatty are of the opinion that careful analysis of both operating results and budget estimates is the essence of budgetary control. (iv) Definite Plan. There should be comprehensive planning in the enterprise. All the operations should be planned in clear terms. The administration of the budgets should also be properly planned. It must be predetermined who is to be held responsible for the implementation of budgets. (v) Participation. The purpose of budgetary control is to achieve coordination of various functions of the business. Therefore, it is essential that participation upon the lowest level in the enterprise be ensured to make the people committed to the budgets. Everybody should understand his role in achieving the budgeted targets. (vi) Flexibility. Budgets should not be rigid, but flexible enough to allow alteration or remodeling in the light of any change in circumstances. Budgets are a means to an end. They must be flexible to achieve the desired objectives. A good system of budgetary control allows sufficient flexibility to the persons concerned with the implementation of the budgets. (vii) Support of Top Management. The top management should support a good system of budgetary control. Top management should take the preparation of budgets and their implementation seriously in order to achieve the objectives of the enterprise.
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Types of Budgets A business enterprise can use various types of budgets for various purposes. A brief discussion of the budgets used in business is given below 1. Sales Budget. It includes a forecast of total sales during a period expressed in money and/or quantities. The forecast relates to the total volume of sales and also its break up product wise and area wise. The responsibility for making sales budget lies with the sales manager, Preparation of sales budget is the key factor in any business enterprise. All other budgets are based on the sales budget. Sales budget sets the tone for production, finance and personnel budgets. The following factors are relevant for preparing the sales budget : (i) Past figures and trend; (ii) Salesmens estimates; (iii) General economic conditions; (iv) Orders on hand; (v) Seasonal fluctuations; (vi) Competition and (vii) Governments control and policy. 2. Productions or Output Budget. It includes a forecast of the output for a period analyzed according to (a) products ;(b) manufacturing departments and (c) periods of production. It is generally based on the sales budget as it is the responsibility of the production department to schedule its production according to sales forecast. The production manager prepares it by taking into account the following major factors : (i) The sales budget. (ii) Plant capacity. (iii) Inventory policy. (iv) Availability of raw materials, labor, power, etc. 3. Materials Budget. Materials may be of two types, direct and indirect. The materials budget generally deals with the direct materials
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for budgeted output. It is based on the production budget. Materials requirement for a unit of production is determined and is multiplied by budgeted output to arrive at total quantity of direct materials required. Materials budget helps in scheduling the purchase of materials to produce a given volume of output during a particular period to meet the requirements of customers during the period. 4. Labour Budget. It reveals the estimates of direct labor requirements essential for carrying out the budgeted output. Labor of different grades required for a job or a product or a process is determined in terms of man hours and is multiplied by wage rate per hour to determine the total expenses on direct labor for budgeted production. 5. Factory Overhead Budget. It includes the estimated costs of indirect materials; indirect labor and indirect factory expenses required during the budget period for the achievement of budgeted production targets. The budget is prepared on departmental basis for effective control over costs. The factory or manufacturing overheads may be classified into three categories: (i) fixed, (ii) variable, and (iii) semi variable expenses. This classification facilitates the preparation of overhead budgets for each department. 6. Personnel Budget. It sets out manpower requirements of all departments for the budget period. It expresses labor requirements in terms of labor hours, cost and grade of workers. It helps the personnel manager in providing required labor to the departments either by transfers or by new appointments. 7. Administrative Overhead Budget. It includes the estimates of administrative expenses like expenses of all offices and salaries of managerial personnel. Such expenses form a significant part of the total cost of production. Preparation of this budget will help in keeping the administrative costs under control. 8. Selling and Distribution Expenses Budget. This budget includes the estimates of all items of expenditure and promotion, maintenance and distribution of finished products. The costs are divided into fixed, variable and semi variable categories and estimated on the basis of past experience. The various items of expenditure include sales office rent, salaries, depreciation and miscellaneous expenses, advertising, commission, bad debts, traveling expenses, etc.
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9. Cash Budget. The cash budget usually consists of two parts giving detailed estimates of (a) cash receipts, and (b) cash disbursements for the budget period. It is prepared: (i) to ensure that cash is available in time for meeting the financial commitments; and (ii) to use cash available in the best possible manner. It is prepared by the controller of finance considering the following points : (a) Cash receipts expected from cash sales, credit sales having regard to credit collection policy, interest, etc., dividend and rent receivable, (b) Estimated payments for purchases and expenses as set out in different budgets. 10. Master Budget. The Institute of Cost and Management Accountants, England has defined master budget as the summary budget incorporating its component functional budgets, which is finally approved, adopted and employed. Thus, a master budget is prepared to incorporate all functional budgets. It projects a comprehensive picture of the proposed activities and anticipated results during the budget period. The top management of the enterprise must approve it. Fixed and Flexible Budgets Fixed budget is a budget, which is designed to remain, unchanged irrespective of the level of activity actually attained. The main purpose of fixed budgeting is coordinating sectional activities to attain the enterprise objectives. It is prepared for a given level of production and does not take into account the changes in circumstances. It becomes a rigid and unrealistic measuring rod in case the level of production actually accomplished does not conform to the one assumed for the purpose of fixed budgeting. A flexible budget is prepared in a manner that it gives the budgeted cost for different levels of activity. Thus, it facilitates comparison of actual performance with budgeted performance at different volumes of activity. Such a budget is prepared after considering the fixed and variable elements of cost and the changes that may be expected for each item at various levels of activity. Flexible budgeting is of great help where it is not possible to predict accurately the sales forecast and where the level of production depends upon the availability of a factor, which is in limited supply.

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Zero Base Budgeting The concept of zero base budgeting is based on the premise that the future is not a mere projection of the past. The likely behavior of future events is to be forecast systematically as the environments are changing fast. Organizations have to adapt to such changes with as much care as possible. Goals, activities, efforts and resources need to be recast, not in a casual incremental manner, but in a logical, reasoned and optimal manner. Zero base budgeting represents a radical departure from traditional budgeting to the extent that it advocates comprehensive analysis and review of budget proposals, every time such proposals are made. In traditional budgeting, the normal practice is to take the current years budget as the base for consideration and finalization of budget proposals for the next year. More often, budget for the next year is just a projection of the current years budget with marginal changes made here and there. In zero base budgeting, the current years budget is not taken as the base. Rather all budget proposals (which may be called possible decision packages) whether for existing programmes or new programmes, are considered from the ground up, almost from scratch, as if all proposals were absolutely new. The advocates of zero base budgeting assert that it permits management a great degree of freedom and flexibility in allocating resources for organizational activities, from year to year. There is nothing sacred in organization goals, activities, resource allocations and programmes. They are all to be exposed to searching examination at periodic intervals to test their legitimacy, validity and effectiveness. Such tests take the form of thorough, rational, and judicious analysis and appraisal of previous budget commitments and fresh budget proposals in the light of actual performance and changed circumstances. Performance Budgeting Administrative Reforms Commission suggested the use of Performance Budgeting by the Government. A performance budget is an input - output budget. It considers both costs and results. It shows expenses as under the traditional budgeting. In other words, it highlights the end results to be achieved rather than money to be spent. It helps in knowing whether
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the organization is getting adequate results for the money spent. The steps involved in performance budgeting include the following (i) Identification of goals, results or end output of the performing department or enterprise. (ii) Preparation of schedule of performance leading to the goals. (iii) Linking of all expenses to performance heads. (iv) Developing of standards of performance for the purpose of control. The possible benefits of performance budgeting are as follows: (i) It correlates the physical and financial aspects of every programme or activity. (ii) It improves budget formulation, review and decision making at all levels of department or, undertaking. (iii) It facilitates better appreciation and review of performance. (iv) It makes effective performance possible. (v) It measures progress towards long term objectives. (vi) It brings annual budgets and development plans of the Government closely together. Performance budgeting suffers from the following limitations (i) It is difficult to set performance goals and measure actual performance where the output is intangible as in case of education, research, training, health, etc. (ii) Performance budgeting is likely to fail if planning in the organization is ineffective. (iii) Subordinates often do not like the idea of performance budgeting. They resist its implementation. Organization of Budgetary Control The procedure of introducing budgetary control system in a business enterprise involves the following steps: 1. Responsibility for Budgeting. The responsibility for budgeting is entrusted to a Budget Committee under the inchargeship of Budget Officer. The Budget Committee consists of heads of various
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departments in addition to the Budget Officer. The Budget Officer acts as the convener of the Budget Committee. The Budget Committee formulates a general programme of budgeting; discusses departmental budgets and brings co ordination among them. The Officer is an expert in accounting and finance and plays an important sale in preparing and implementation of budget. He advises the chief executive and departmental heads on budgetary matters. He acts as a coordinating link between various departmental heads. He ensures proper communication of budgets at all levels. He supervises execution of budgets, analyses varying performance and suggests suitable actions to the concerned persons. He revises budgets in accordance with the recommendations of the Budget Committee. 2. Extent of Budgeting. The people working in the enterprise should introduce budgetary control in phases, so that there is least resistance to it. It should be gradually introduced in other parts of the enterprise after it functions well in one part. Rigidities in budgetary control should be avoided. The budgets should provide for some degree of flexibility to executives implementing them. The extent of budgetary control differs from one firm to another. 3. Period of Budgeting. Budget is prepared for a certain period of time. The length of the budget period depends upon: (i) nature of the business; (ii) the degree of control required; (iii) production period; and (iv) timings of availability of finance. For instance, companies with huge capital expenditure require long term budgeting, whereas seasonal firms require short period budgeting. When the business conditions are changing fast, the preparation of budgets for a longer period will prove to be meaningless. Budgeted estimates may not hold well due to these changes. Therefore, the length of the budget period should be restricted to such a span of time for which an accurate forecast can be made. 4. Key or Limiting Factor. It is that factor which influences the functional budgets. It is also known as Principal Budget or Governing factor. It is the factor the extent of whose influence must first be assessed in order to ensure that the functional budgets are reasonably capable of fulfillment. Key factor may be raw materials, labor, plant capacity, sales or government restrictions; for instance,
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shortage of power supply leads to under utilization of plant capacity. So industrial undertakings prepare first plant utilization budgeting and view the availability of power then other budgets like sale and production. 5. Preparation of Budgets. Most of the budgets are based on sales forecasts, which are made by the sales manager. If there is any other key factor, the budget estimate of such factor may be prepared first. Budget Committee discusses these estimates and gives its approval tentatively. After that, all the departments make their budgets on these estimates and submit them to the budget committee. Cash budget is prepared on the basis of sales and other budgets. The Budget Committee discusses these budgets and makes modifications wherever necessary and then incorporates all budgets into a Master Budget, which is sent to the top management for approval. Statistical Data and Reports Statistical data are being widely used for the purpose of managerial control. Statistical data may be presented in the form of statistical tables, graphical charts or special reports. The quality of presentation of essential data will determine their efficiency for the purpose of managerial control. A report is a form of systematic presentation of information and statistical data relating to some aspect of business. It may arise out of available factual data, thorough enquiry, investigation or experiment. The information provided by the report may be used for the purpose of managerial control. It will help in knowing whether the policies of the management are being followed and if not, what steps should be taken to implement them. The task of making reports is generally entrusted to certain specialist who will collect the desired information and present the same in the form of a report. Marginal Costing Marginal costing is a very useful technique, which guides management in pricing, decisions making and assessment of profitability. According to Institute of Cost and Management Accountants, London, marginal costing is the ascertainment of marginal cost and of the effect on profit of changes in volume or type of output by differentiating between fixed and variable costs. Fixed costs remain unchanged up to a certain level of production,
Anna Universtiy Chennai
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but variable costs change with the changes in the volume of production. Marginal cost is the amount of money at any given volume of output by which aggregate cost is changed, if the volume of output is increased or decreased by one unit. Suppose, a factory produces 1,000 units of product X per month. The variable cost per unit is Rs. 25 and the fixed expenses per month are Rs. 10,000. The cost statement of 1,000 units of X will be as follows:
Rs. Variable cost (1,000 x 25) Fixed cost Total cost If one unit increases the production, the cost statement will be as Variable cost (1,001 x 25) Fixed cost Total cost 25,025 10,000 35,025 25,000 10,000 35,000

Marginal cost is the total cost of producing 1,001 units minus total cost of producing 1,000 units. It comes to Rs. 25 (i.e., Rs. 35,025 - 35,000), which is the variable cost of one unit. So long as the fixed cost does not change, production can be increased and marginal cost for every extra unit of production will be the variable cost. Until the production at the full capacity is achieved, the fixed costs are irrelevant for managerial decisions and control. All the decisions are based on the variable costs of producing additional units. It is relevant here to define contribution. Contribution is the balance left by defecting total variable costs from the sales revenue. It is called contribution because it enables to meet fixed costs and contributes to the profit. Profit Volume Ratio. It is the ratio of contribution to sales. It is also called contribution ratio or marginal ratio. It can be expressed in percentage by the following formula: P/V Ratio = Contribution x 100 ______________ Sales The P/V ratio is used for appraising profitability of alternative products, operations and decisions. A higher ratio reflects greater profitability and lower ratio indicates lower profitability. Management tries to achieve
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Anna Universtiy Chennai

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MANAGEMENT CONCEPTS

higher P/V ratio by reducing variable cost or by increasing the sale price. In most of the cases, it is not possible to increase the sale price, so management concentrates on decreasing the variable costs. Usefulness of Marginal Costing Marginal Costing is an important tool in the hands of management for exercising cost control. Since marginal costing is based on variable costs, the responsibility for controlling variable costs can be assigned to various departments. The reports by various cost centers include only those costs which can be controlled by them. The control of fixed costs is the responsibility of the higher-level managers. Marginal costing facilitates management by exception by focusing attention of the management on results, which are moving out of control significantly. It also helps the management in evaluating the performance of individuals responsible for variable costs. The impact of fixed costs is conveyed to management in a more meaningful way under marginal costing. This helps management to ensure better utilization of items, which involve fixed expenditure such as plant and machinery, furniture, installations, etc. Finally, marginal costing helps the management in understanding the relationship between profit and major factors affecting profit so that it may exercise control over these factors to achieve higher profits. Cost Volume Profit Analysis Cost volume profit analysis is an attempt to determine the effect of a change in volume, cost, price or product mix on profits. It assists management in ascertaining which product is most profitable, what effect a reduction in sales price will have on final profit, what effect a change in volume or product mix will have on production costs and profits, what effect will be on costs, profits and sales volume if there is a change in the plant capacity and so forth. The important feature of this analysis is that it calls for separation of variable costs from fixed costs with a view to understand the anatomy and structure of profit of an enterprise. One of the most important determinants of cost is the volume of operations. The relationship between cost and volume is seldom simple as neither cost nor volume is homogeneous. Moreover, they depend on different factors. Cost is an aggregate of labor and material costs, supervision,
Anna Universtiy Chennai
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maintenance and other costs including on selling and administration. Volume is made up of many products each with its own specifications and cost characteristics. Aggregate costs seldom, if ever, vary in direct proportion to changes in composite volume. That is true even if volume consists of a single product, which can be physically measured. The reason for lack of proportionality between cost and volume is the existence of Fixed Costs. The starting point in the cost volume profit analysis is the classification of all costs into fixed and variable costs. Fixed cost is that which remains constant irrespective of volume of output produced. On the other hand, a variable cost is one that changes in total as a result of change in the volume of activity. The second step in cost volume profit analysis is to determine the ratio of variable costs to volume of sales. It is important to point out that profit is the function of the inter play of costs, prices and volume of production. The important technique of cost volume profit analysis is the Break Even Analysis. Break Even Analysis Break even analysis determines the probable profit or loss at different levels of activity. It establishes relationship among cost of production, volume of production, profit and sales and, that is why, it is also known as cost volume profit analysis. This technique is employed by the management for exercising broad control over the functioning of the enterprise. Management is interested in determining the volume of sale at which costs are fully covered and beyond which profits emerge. This analysis of cost behavior in relation to changing volume of sale and its impact on profit is known as break even analysis. The volume of sale at which there is no profit, no loss is known as Break even point. Break Even Point The break even point is defined as that volume of sale at which revenue exactly equals total cost. It is that point where operations pass from being profitable to a loss or vice versa as shown in the figure. The vertical scale in the figure represents cost and revenue and the horizontal scale reflects the sales.

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Cost and Revenue Total Revenue

MANAGEMENT CONCEPTS

Total Cost

Variable Cost

Fixed Cost Sales Volume

Break even analysis helps the management in knowing the relationship between cost, volume of production and profits or losses. By dividing the total costs into fixed and variable, the management can determine the point up to which it must carry on production to cover fixed cost. It can exercise cost control at various levels of sale. This will also enable the management to accept orders during depression or off season at lower prices which is more than the variable costs. The excess of price over the variable costs will lead to reduction of losses, which will result if no production is carried on. Fixed costs remain unchanged whether there is produc